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A Bird’s-Eye View

The market’s year-to-date returns are impressive, no doubt about it.  For the month of August, stock prices advanced 2.9% (as measured by the S&P 500) and are now up 21.6% year to date.  Stock prices have been positive for seven straight months.  To a degree, I think the stock market is an effective leading indicator of its future price level; at the same time prices will eventually correct and fear will emerge – and it’s a fool’s game to attempt to guess when that might happen. 

The greater forces effecting prices are, in many ways, unique this year.  The gamification of trading financial assets has attracted many new participants.  Robinhood Markets, Inc. and other low/no commission trading platforms give people the impression that because they can trade, they will make money.  That is a dangerous misperception.  According to Bloomberg, 37% of Robinhood’s Q2 ’21 transaction-based revenue was from options trading, and an eye popping 52% was from users trading cryptocurrencies.  Financial news and social media meme platforms such as Reddit and Twitter actively promote casino-like trading.

This type of highly speculative trading is vastly different than long-term investing.  Investing in financial assets has historically improved people’s financial condition over time.  For example, Bespoke Research recently produced data showing the S&P 500 has generated a positive total return over every rolling 2-year period dating back to 1928 in excess of 82% of the time, no matter when the measurement period began.  While daily returns to stocks are more or less a coin toss, stocks stand a very good chance of making you money in the long term.  The day-to-day attribution of current events to the behavior of the stock market can often be interesting, but not necessarily important in the long run. 

There are several macro shifts in the greater playing field that I think merit some attention in how we invest your portfolios.  One significant and obvious one is climate change:  we have wildfires in the west and floods in the east and EV’s and green energy are here to stay.  China is a large and important player in the global economy and its recent transition (or return) to “common prosperity” may confuse the rest of an otherwise capitalist-ish global playing field.  Not new, but growing in importance, are crypto currencies, decentralized finance (DeFi) and the move toward central bank digital currencies.  Finally, the virus and lacking public health have spotlighted dire need across the globe.  The virus will have long lasting effects on everything and is fueling a cultural war based on entrenched beliefs. 

Our goal is to generate positive returns in a complex and competitive market place.  We nuance our portfolios to align them with the best performing factors and style characteristics at that moment.  Currently, quality stocks (blue chips), dividend payers and stocks with somewhat long durations (stocks that are valued largely on strong future cash flow expectations) are in vogue.  I think crypto assets and technology are here for the long run and reflect a transformation in both emerging finance and the smart contract capabilities of blockchain technology.  I don’t think this reflects a bubble, as many old guard investors have opined.  I do think there are multiple aspects of the old regime that are transforming quickly, leading to a somewhat precarious crossroads between the old and the new. 

It is easy to get too close to something, so close we cannot see it with true clarity.  Stepping back can often generate a degree of perspective that seems to change everything.  With the stock market making regular all-time highs, there is considerable hand wringing.  The simplest solution is to take some profits and feel good about the market having done some true work on our behalf.  We cannot guess when the next downturn will occur, and attempting to hedge a portfolio is expensive.    I think we need to factor in higher capital gains taxes in the future, so taking some profits now is reasonable. 

Please feel free to check in with us if you would like to schedule time to review your portfolio in greater detail.  We always look forward to connecting with you.  Be safe out there.

Bruce Hotaling, CFA
Managing Partner

Disclaimer:
The views and opinions stated herein are those of Bruce Hotaling, are of this date, and are subject to change without notice.   Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed.  Investments are subject to market risk, including the possibility of loss of principal.  Past performance does not guarantee future results.  The S & P500 is an unmanaged index of 500 widely held stocks.    Investors cannot invest directly in an index.   The PE ratio (price/earnings) is a common measure of relative stock valuation.

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