23 Jun 2021
Sentiment is running a bit high
As we near the end of the month, growth stocks and long-term Treasuries are somewhat surprisingly vying for the lead, with returns of 3.5% (Russell 1000 Growth) and 3.1% (Bloomberg Barclays U.S. Treasury 20+ Year), respectively through June 21st. The reflation trade is indeed on pause (more on that in a minute) with commodities, small-cap stocks, and value stocks more generally all sitting on losses month-to-date. Further, the dollar’s strength has sapped the life out of international and emerging market stocks, at least for U.S. based investors.
The proximate cause of the reversal of fortunes for growth and value stocks was, in part, all the news out of the Fed last week. On Wednesday, the Fed added two rate hikes to their 2023 forecast and seven of 18 officials on the Open Markets Committee stated that rates at the end of 2022 will need to be higher than where they are today. Then on Friday, James Bullard of the St. Louis Federal Reserve opined on CNBC that rates would probably need to start rising next year, and that sent stocks and commodities in a downward spiral. With this newly expressed hawkishness, the bond market celebrated and pushed yields lower, with the yield on the 30-year falling by 19 basis points in two days.
The other data point that grabbed attention last week was the release of average weekly earnings, which according to the Labor Department increased by about 8% overall since February, with leisure and hospitality jobs seeing a 10.4% increase. Lower wage jobs are benefitting the most from fierce competition for a limited supply of labor, and more firms are offering signing and retention bonuses, bigger raises, and better benefits; the latter items will be particularly difficult to roll back. According to Morgan Stanley and data from the NFIB (National Federation of Independent Business), quality of labor is the number one concern of small businesses at present, with 26% of respondents citing that issue, well above concerns over the cost of labor (8%), and poor sales (5%).
While tech stocks are back in the driver’s seat for the moment, there is increasing speculation about the impact that the new chair of the Federal Trade Commission – Columbia law professor Lina Khan, who has been a vocal critic of big tech – will have on the sector. She was confirmed by a large, bi-partisan margin, 69-28, as both Democrats and Republicans have axes to grind with our tech overlords, albeit for different reasons.
Back to the markets, Bloomberg Intelligence recently reported on the increasing impact of individual investors, who in the first quarter accounted for almost 25% of equity trading volume, up from just over 10% a decade ago. There is indeed a power shift, but where investors are getting the funds to invest is a bit troubling. In a survey conducted by MagnifyMoney at the beginning of April, 80% of Gen Z investors and 60% of Millennials had taken on debt to invest, and we aren’t just talking margin debt. Of all investors who took on debt, 38% took out personal loans, 23% borrowed from friends or family, and 14% used their credit cards. Sentiment may be running a bit high shall we say.
And that sentiment is evident in other areas as well. Real yields on junk bonds, as measured by the Bloomberg Barclays U.S. Corporate High Yield Index, recently turned negative for the first time ever. Investors are willing to take not-insignificant default risk to earn a negative real yield. Wow. Further, corporations have announced a record $567 billion of buyback authorizations through June 11th, according to Goldman Sachs, at a time when we are near all-time highs on most valuation metrics. Kind of makes you wonder what that signals about organic growth opportunities for those companies.
Yes, for the moment being bullish is still paying off, but our work would suggest that investors should greatly temper their expectations going forward. It likely won’t be this easy forever.
Past performance is no guarantee of future returns. Performance discussed represents total returns that include income, realized and unrealized gains and losses, but gross of advisory fees. Nothing presented herein is or is intended to constitute investment advice or recommendations to buy or sell any types of securities and no investment decision should be made based solely on information provided herein. There is a risk of loss from an investment in securities, including the risk of loss of principal. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for an s investor’s financial situation or risk tolerance. Diversification and asset allocation do not ensure a profit or protect against a loss. All performance results should be considered in light of the market and economic conditions that prevailed at the time those results were generated. Before investing, consider investment objectives, risks, fees and expenses. Frontier may modify its process, opinions and assumptions at any time without notice as data is analyzed.
Information provided herein reflects Frontier’s views as of the date of this newsletter and can change at any time without notice. Frontier obtained some of the information provided herein from third party sources believed to be reliable, but it is not guaranteed, and Frontier does not warrant or guarantee the accuracy or completeness of such information. The use of such sources does not constitute an endorsement. Frontier’s use of external articles should in no way be considered a validation. The views and opinions of these authors are theirs alone. Reader accesses the links or websites at their own risk. Frontier is not responsible for any adverse outcomes from references provided and cannot guarantee their safety. Frontier does not have a position on the contents of these articles. Frontier does not have an affiliation with any author, company or security noted within. Frontier reserves the right to remove these links at any time without notice.
Exclusive reliance on the information herein is not advised. This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Assumptions, opinions and estimates are provided for illustrative purposes only. They should not be relied upon as recommendations to buy or sell any securities, commodities, treasuries or financial instruments of any kind. This material has been prepared for information purposes only and is not intended to provide, and should not be relied on for, accounting, legal, investment or tax advice. Frontier does not directly use economic data as a part of its investment process.
In reviewing the performance information presented here, we recommend that you consider both the returns generated and the level of risk that was assumed in generating those results. We believe that performance information cannot be properly assessed without understanding the amount of risk that was taken in delivering that performance.
Frontier provides model strategies to various investment advisory firms and does not manage those models on a discretionary basis. The performance and holdings of model strategies may vary from strategies managed by Frontier.
© Morningstar 2021. All rights reserved. Use of this content requires expert knowledge. It is to be used by specialist institutions only. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied, adapted or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information, except where such damages or losses cannot be limited or excluded by law in your jurisdiction. Past financial performance is no guarantee of future results.
Frontier’s ADV Brochure and Form CRS are available at no charge by request at info@frontierasset.com or 307.673.5675 and is available on our website www.frontierasset.com.
It is generally not possible to invest directly in an index. Exposure to an asset class or trading strategy or other category represented by an index is only available through third party investable instruments (if any) based on that index.
INDEX |
INDEX DESCRIPTION |
Russell 1000 |
Measures the performance of the largest 1000 stocks by market capitalization in the Russell 3000 Index |
Bloomberg Barclays U.S. Treasury 20+ Year |
Measures US dollar-denominated, fixed-rate, nominal debt issued by the US Treasury with 20+ years to maturity. |
Bloomberg Barclays U.S. Corporate High Yield |
Measures the USD-denominated, high yield, fixed-rate corporate bond market. |
Russell 2000 |
Measures the performance of the small-cap segment of the U.S. equity universe. |
Russell 2000 Growth |
Measures the performance of the small-cap growth segment of the U.S. equity universe. |
Russell 2000 Value |
Measures the performance of the small-cap growth segment of the U.S. equity universe. |
Bloomberg Commodity |
This is a broadly diversified index that allows investors to track commodity futures through a single, simple measure. The DJ-UBSCISM is composed of futures contracts on physical commodities. |