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Picture1September 15, 2021

Wow, I just got back from my first in person conference in over two years. I attended the National Association of Plan Advisors National Summit in Las Vegas, where I am part of the leadership council. This position is an honor, and I was nominated by my peers where, over the next three years, I will advocate for 401(k) Plan Sponsors and Plan Participants to our legislators in Washington D.C. I will keep you informed of the many changes in the retirement plan industry that are currently being proposed in the U.S. House and Senate. You might not know, but only 50 percent of the businesses in the United States have a 401(k)/403(b) plan. A major part of the retirement crisis in the U.S. is the lack of access for potential participants. Once you break down the demographics, it’s much more difficult for people of color to have access. You can expect that Congress will make a major push for access, and they already have a proposal on the table that potentially could add 62 million participants and $7 trillion in assets to the retirement system over the next 10 years.

On a lighter note, my time in Las Vegas opened my eyes to what can only be described as a football
coma. While living my entire life on the East Coast, I wondered what it would be like to watch foot-
ball on a weekend on the West Coast. The five states that make up the Pacific Time Zone contain 55
million people, or about 14 percent of the U.S. population. This small group starts watching college
football as early as 8am on Saturday, but if they want to watch ESPN’s College Game Day, they have
to be up by 6am. On Sunday, the NFL starts at 10am and ends after 9pm. Even better is Monday
Night Football, which starts at 5:15pm. How does anyone even tailgate? My hotel was across the
street from the new Allegiant Stadium, and it’s the first time the Las Vegas Raiders have played in
their new stadium in front of fans. Also, if you didn’t know, you can bet on almost anything in Vegas
related to football, such has how long it will take to sing The National Anthem. With this crazy
schedule, how does anyone get anything done on a weekend? Maybe this why the September stock
market tends to be weak and how I can place the blame on those on the Left Coast. See ya soon.

Three Market Drivers

Here at Chairvolotti Financial, we focus on three market drivers that lead to notable movements
in the stock market: market economic fundamentals, technical environment, and investor senti-
ment.

Our fundamental indicator follows 19 points economic data points that track the underlying
health of the US economy. From unemployment to home building, changes in these economic
data points tend to confirm recession or recovery after the technical and sentiment indicators
have already reversed.

Dynamic Asset Level Investing, or D.A.L.I., is a technical indicator that compares each of the ma-
jor asset classes, sectors, and sizes and styles against each other to discover emerging trends in
the market. D.A.L.I. compares daily price action of each of these elements on a point-and-figure
chart to illustrate momentum. The chart at the bottom of this page shows the current leadership
in D.A.L.I.

Our sentiment indicator tracks how everyday investors currently feel towards the US economy
and the stock market. Between Chairvolotti Financial’s own polling and professional surveys like
the American Association of Individual Investors (AAII) Investment Sentiment Survey and
Citigroup’s Panic/Euphoria Model, Chairvolotti Financial tracks the two most dangerous emotions
for investors: fear and greed.

Here is a breakdown of where each market driver currently sits:

The Logistics Managers’ Index, or LMI, remains at an elevated level of 73.8 out of 100. Inventory
costs, warehousing costs, and transportation costs all remain at or near the index’s all-time high.

The major market indices have shown increasingly narrow breadth, with nearly half of the stocks
in the S&P 500 at least 10% off their 52-week high, as well as 80% of stocks in the Russell 2000.

The AAII Investor Sentiment Survey found nearly 73% of investors feel the stock market will be
bullish or neutral in the next six months, an elevated level for this contrarian indicator.

A History of Market Corrections

With the market entering the historically weak and uncertain months of September and October,
respectively, we think it is worth revisiting the history of market corrections. In the same way a
car’s engine can overheat, the stock market can overheat after periods of sustained and, more
often than not, rapid growth. At the peak of these growth periods, stocks prices may have even
increased faster than their actual underlying value. In these instances, the stock market typically
enters a market correction. To put it simply, a market correction is a temporary resetting of mar-
ket prices. Market corrections typically involve the market falling at least 10%, but it can even fall
as much as 20%. While no investor wants to see their account down 10%, market corrections
help to ensure our stock market is at a healthy level and valuation.

While certain asset classes and sectors of the economy can go through isolated corrections, a
market correction tends to affect all areas of the market at once. Once the market has seen a
broad pullback amongst the sectors of the economy, stocks will once again continue their growth
at their newfound prices.

Unfortunately, there is no crystal ball for predicting market corrections. However, we can look at
history to create realistic expectations. In the table above, you will find the frequency of pull-
backs in the S&P 500. You will notice that pullbacks in the market are frequent throughout histo-
ry. In fact, the S&P 500 historically has a 10% or worse correction every 8 months on average! For
perspective, the market has not had a correction of at least 10% since the end the crash last year,
meaning that, if history is to be our guide, we have been overdue for a correction.

Finally, the burning question on everyone’s mind: what should I do? Due to the way 401(k) is
structured, participants are uniquely capable of taking advantage of these draw downs. 401(k)
contributions are made through a process called dollar-cost averaging, a phenomenon we cov-
ered last week. To recap, dollar-cost averaging simply means investing a consistent dollar
amount on a scheduled basis. Dollar-cost averaging helps investors to avoid the two dangerous
emotions of investing: greed and fear. Through dollar-cost averaging, 401(k) participants can
consistently buy shares of their investments at the new, cheaper prices set during a correction.
Once these shares increase in value during the correction’s recovery, you will own even more of
these shares, taking advantage of the eventual rebound.

While it is much easier said than done to stay the course during a correction, it is important to
remember that we are long-term investors for retirement. Our best advice is to remain calm,
continue to contribute, and stay informed. While we cannot know for certain what size this pull-
back will be, we know that history shows us that corrections are a natural, healthy, and relatively
frequent occurrence in our markets.

Market Indices Year-to-Date

LARGE CAP INDICES
S&P 500: 18.29%
Dow Jones Industrial Average: 12.97%
Nasdaq-100: 19.36%

MID AND SMALL CAP INDICES
S&P 400 (Mid Cap): 15.89%
S&P 600: (Small Cap): 17.90%
Russell 2000: 11.91%

INTERNATIONAL INDICES
MSCI EAFE Developed Index: 11.30%
MSCI Emerging Markets: 0.38%
MSCI ACWI ex-US: 8.30%

ECONOMIC SECTOR INDICES
Basic Materials: 13.99%
Communication Services: 27.05%
Consumer Discretionary: 12.02%
Consumer Staples: 6.50%
Energy: 26.58%
Financials: 26.71%
Healthcare: 16.16%
Industrials: 13.58%
Real Estate: 28.53%
Technology: 19.74%
Utilities: 7.76%

Breadth: A Market Health Checkup

As a follow-up to the earlier article in this newsletter addressing market corrections, we also want
to address a related financial term you may hear: breadth. While phrases such as “market correc-
tions” typically are referring to a major market index like the S&P 500 or the Dow Jones Industrial
Average, breadth is more concerned with what is actually happening under the hood of these
indices.

When you hear the term “market breadth,” the best way to think about it is to view it as a meas-
ure of the number of stocks actively participating in the index’s performance. For example, when
market breadth is high, this means that many stocks are contributing to the index’s performance;
we would consider this a healthy market environment. On the flip side, a market that is rising but
has fewer and fewer stocks participating in the index’s performance is considered a narrow (or top
heavy) market. When an index is narrow and only a handful of stocks are keeping the index afloat,
this is considered an unhealthy market that has the potential to be vulnerable to additional draw-
downs.

Now, the reason that we bring up market breadth is that we are currently experiencing a narrow
market breadth environment. From a “market correction” standpoint, we are far from the typical
correction benchmark of at least a 10% decline. However, our market’s current breadth tells a
different story. As of yesterday’s close, the S&P 500 currently sits a little over 2% below its 52-
week high. However, roughly 46% of stocks in the S&P 500 are already at least 10% below their 52-
week highs, meaning that roughly half of the stocks inside the index are already experiencing cor-
rections.

From a small cap perspective, the breadth weakness is even more apparent. As of yesterday’s
close, the Russell 2000 index, an index of small cap U.S. stocks, was roughly 6% off its 52-week
high. In contrast, over 80% of the stocks in the Russell 2000 are already in the middle of a correc-
tion, indicating increased weakness in smaller stocks.

Historically, larger blue-chip companies have a tendency to participate in broad market pullbacks
later than smaller companies; one could assume it is because they are viewed as a “safe haven”
compared to the riskier, small cap companies. However, this would not be the first time that we
have seen pockets of the market experience a correction while the broad market indices do not.
For example, earlier this year the Nasdaq-100 experienced a correction in March, with growth
stocks and technology stocks in particular being hit the hardest. The S&P 500, however, was only
down about 4% during the same timeframe.

It’s too early to know whether this underlying weakness in market breadth is the precursor to the
“correction” that has been overdue, and if the mega cap names will eventually join the pullback.
Likewise, as we mentioned in our previous article, corrections are a healthy and vital aspect to
investing in the stock market. While it may be impossible to predict corrections, being aware of the
market’s current breadth is a convenient way to remain informed about the market’s underlying
health.

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July 31, 2021

Here we go again: wash, rinse, repeat. I really thought we would have been at heard immunity already, as it looked like the economy was wide open. Hopefully the scientists are correct, and we will be on the other side of the Delta Variant in the next couple of weeks.

Now that we are in the middle of the Summer Tokyo Olympics, apparently this year will be remembered for two things: the least watched Olympics in years, and the “twisties.” The cute-sounding term, well-known in the gymnastics community, describes a frightening predicament. When gymnasts have the “twisties,” they lose control of their bodies as they spin through the air. In golf, this would be known as the “yips.” The only difference is with the yips, you don’t have the chance of severely hurting yourself. Speaking of the Olympics, I watched the US Women’s team play the Netherlands this morning, and Soccer has a really strange rule called “offsides.” You can’t breakaway from your opponent and try to score if you have to wait or them to catch up! There would be way more scoring and exciting games if they just got rid of that silly rule.

Today, the Federal Reserve’s preferred inflation measure accelerated in June by the largest percentage on an annual basis since July of 1991. Core personal consumption expenditures increased by 3.5%, excluding food and energy. You don’t need me to tell you that, though; we have all seen the prices at the grocery store and gas pump lately. Let’s just hope the Fed doesn’t have the “twisties.”

I want to take the rest of this edition to wish my mom a very happy 92nd birthday. I’ve been so blessed to have a mother who taught me so many things in life, and one lesson in particular is that its Better to Stand for Something than to be Against Something. She was born into the Depression in 1929, and she has shared so much about how great this country is and how many things we have overcome. I hope our younger generations have the good fortunes that we have had from the greatness of our past generations. As mom always likes to say, if we don’t remember history, we are doomed to repeat it.

Mom, I love you so much, and I hope you have a great time during your special day.

Love, Ed.

 

Three Market Drivers

Here at 401karat, we focus on three market drivers that lead to notable movements in the stock market: market economic fundamentals, technical environment, and investor sentiment.

Our fundamental indicator follows 19 points economic datapoints that track the underlying health of the US economy. From unemployment to homebuilding, changes in these economic datapoints tend to confirm recession or recovery after the technical and sentiment indicators have already reversed.

Dynamic Asset Level Investing, or D.A.L.I., is a technical indicator that compares each of the major asset classes, sectors, and sizes and styles against each other to discover emerging trends in the market. D.A.L.I. compares daily price action of each of these elements on a point-and-figure chart to illustrate momentum. The chart at the bottom of this page shows the current leadership in D.A.L.I.

Our sentiment indicator tracks how everyday investors currently feel towards the US economy and the stock market. Between 401karat’s own polling and professional surveys like the American Association of Individual Investors (AAII) Investment Sentiment Survey and Citigroup’s Panic/ Euphoria Model, 401karat tracks the two most dangerous emotions for investors: fear and greed.

Here is a breakdown of where each market driver currently sits:

The M2 Money Supply increased by its lowest amount since COVID began this past month, with June posting an increase of only $20 billion. Increasing M2 Money Supply tends to be a positive for capital markets, so it is worth keeping an eye on this growth rate moving forward.

On a technical basis, many of the short-term measures of market overbought levels have returned to normalized levels, although most of this return to normal is simply due to lesser participation by smaller stocks in the market as of late.

Even with a strong year in the broad indices, Americans still have nearly double the historic average of assets in risk-free money market funds, indicating that we have dry powder available and have yet to reach a level of euphoria in the market.

 

The Covid Hangover

With Amazon having its worst day in over a year today, we believe it’s time to face a phenomena other companies are experiencing during this earnings season: the COVID hangover. To better explain the COVID hangover, we first need to provide a quick reminder of how earnings season works.

As we mentioned in our previous newsletter, earnings season has two main components that analysts and investors observe: revenue (sales growth) and earnings (EPS, or earnings per share). However, there is another element that investors look at: forward guidance. In short, forward guidance is an estimate that companies give for what analysts and investors can expect in the near future, whether it be the next quarter or the next year. As a general rule of thumb, when you see a company beat analysts’ expectations for revenue and earnings and its stock price still significantly drops the next trading day, pessimistic forward guidance is a likely culprit.

This time last year, companies that benefitted the most from the COVID lockdowns were having the opposite of a COVID hangover. Time and time again, these companies were blowing analysts’ estimates out of the water in spite of the lockdown headwinds the world was facing. Also, these companies provided forward guidance that was, if not optimistic, much less pessimistic than most analysts and investors had anticipated. As such, many of these companies enjoyed generational returns based on these earnings beats and positive guidance.

A year later, many of these companies that benefited dramatically from the lockdowns are now beginning to feel the hangover of these lockdown-inflated numbers. For example, Pinterest reported that its monthly active users, or MAU, had dropped 5% in the second quarter of 2021 and that this drop-off has continued into July. As a result, Pinterest stock was down nearly 20% at one point today, with investors and analysts viewing declining MAU as a red flag. However, this decline in users requires context. Consider that, as the world continues to reopen and make vaccine progress, there are less people staying at home and using social media all day and night. Now, people are beginning to go out at night, shop in traditional retail stores, and other activities that keep them from being on their phone screen all day. In short, it shouldn’t be a surprise to analysts or investors that Pinterest can’t maintain that level of MAU momentum with lockdowns ending.

That last point brings me back to Amazon, who has been hammered today as well. Amazon beat analysts’ estimates for earnings but missed on revenue estimates by 1.7%. An earnings beat and a slight miss on revenue aren’t what caused Amazon to fall so dramatically today; the issue is its forward guidance. Amazon expects revenue in the range of $106 billion to $112 billion in the third quarter, well below analysts’ expectations of $118 billion. It seems nonsensical to penalize these lockdown beneficiaries for being unable to maintain unsustainable, astronomical growth brought on by the COVID lockdowns, but then again, we are living in a nonsensical time.

 

ROBINHOOD IPO: A BUST?

On Thursday morning, the infamous Robinhood Markets Inc. went public through an initial public offering, or IPO. As a way to promote its image as being a company of “the people”, Robinhood’s IPO had the greatest percentage of shares made available for retail investors compared to its institutional investors since Facebook’s IPO in 2012. Unfortunately for them, Robinhood had the worst IPO debut on record for a company that had at least raised as much cash as Robinhood had, ending the day -8.4% off its debut price of $38. While Robinhood is best known as being the fuel behind the meme stock revolution we saw begin last year, we wanted to breakdown its business model and what investors can expect moving forward.

Known for its commission-free trading, there has always been the question of how Robinhood actually makes money if it doesn’t receive trade commissions. The answer lies behind something known as payment for order flows, or PFOF. When a Robinhood user makes a trade, Robinhood submits this order to groups known as market makers to execute these trades. The largest market makers in the industry are familiar names to the average investor: Morgan Stanley, Deutsche, and more, with Citadel Securities being the largest customer for Robinhood. To put it in simple terms, market makers compete amongst each other by offering rebates to Robinhood and, in turn, the best prices to Robinhood’s users. In Q4 2020, Robinhood earned roughly $0.0023 per share traded on its system, better visualizing how PFOF is a numbers game regarding making money.

As a means to avoid a conflict of interest, Robinhood has a fixed percentage that they receive from any market maker as a rebate, meaning that there is no financial incentive for Robinhood to choose a specific market maker. However, there is another potential conflict of interest that Robin[1]hood has been facing lately: options. Robinhood and other retail brokers make a notably larger amount on rebates for option trades. As such, there is a greater incentive to guide users towards purchasing options, even if they aren’t sophisticated enough of an investor to deal with options.

Now that we have a greater understanding of Robinhood’s business model, the real question is: what will happen with the IPO moving forward? If history is to be our guide, the IPO crystal ball doesn’t seem very optimistic. A study done by UBS analytics on data from Jay Ritter of the University of Florida found that, of the 7,713 IPOs that occurred between 1975 and 2011, over 60% of them had negative returns five years after their IPO. In fact, only a little more than 19% of these companies had five-year returns of greater than 100%, indicating a significant lag in an IPO’s first few years being public.

Between the vitriol Robinhood has faced after it infamously froze trading during the GameStop bubble in January and the lagging that IPOs have historically experienced during their first five years, Robinhood stock may have some headwinds to face moving forward.

 

Chairvolotti Financial, Inc. dba 401karat is a Registered Investment Advisor

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August 13,2021

Today is Friday the 13th or Triskaidekaphobia Day. So, why is the number 13 so unlucky? Triskaidekaphobia is the extreme superstition of the number 13. The history states that one of the culprits was from 1907, when businessman and author Thomas Lawson published a novel entitled Friday, the Thirteenth about a rogue broker who chose that date to destroy the stock market. Somehow, Wall Street or Washington D.C. is behind all of these shenanigans.

Speaking of Wall Street, why is BlackRock buying the new inventory of single-family homes? The median price of an American house has increased by 28% over the last two years, as pandemic driven demand and long-term demographic changes sent buyers into crazed bidding wars. The Wall Street Journal reported in April that an investment firm won a bidding war to purchase an entire neighborhood’s worth of single-family homes in Texas. Now, analysts have reassured us that big investors like BlackRock remain insignificant players in the housing market. Doesn’t BlackRock have enough money? Yet now they want to spoil the American Dream for first-time home buyers. Something smells fishy here. Stay tuned for how this turns out– all I know is that it won’t end well.

Summer is coming to an end, as kids went back to school this past week. This makes me both happy and sad at the same time. The happy part is that football season is here, and the nasty thunder[1]storms with thankfully stop. At the very least, MooShoo won’t have to hide in the closet until New Year’s Eve now. The sad part for us is that August and September have been historically two of the weakest months of the year for the stock market. We all know that October is known for large market drawdowns, but historically we have four or more 5% market drawdowns annually. Folks, we are long overdue for a pullback, so don’t be surprised if we see one in the next 60 days.

Finally, next week would have been my dad’s 101st birthday. I lost my father on Christmas Day when I was 11 years old. Just like Field of Dreams, what I wouldn’t give to spend just one more hour with him! So, for anyone that’s lost a parent, just remember how precious life is and, as I like to say, “the days are long, but the years are short.” I sure hope my dad would be proud of me, and at least I can say I haven’t lost any laptops in my life. Be safe and see you in a couple of weeks.

 

 

Three Market Drivers

Here at 401karat, we focus on three market drivers that lead to notable movements in the stock market: market economic fundamentals, technical environment, and investor sentiment.

Our fundamental indicator follows 19 points economic datapoints that track the underlying health of the US economy. From unemployment to homebuilding, changes in these economic datapoints tend to confirm recession or recovery after the technical and sentiment indicators have already reversed. Dynamic Asset Level Investing, or D.A.L.I., is a technical indicator that compares each of the major asset classes, sectors, and sizes and styles against each other to discover emerging trends in the market. D.A.L.I. compares daily price action of each of these elements on a point-and-figure chart to illustrate momentum. The chart at the bottom of this page shows the current leadership in D.A.L.I. Our sentiment indicator tracks how everyday investors currently feel towards the US economy and the stock market. Between 401karat’s own polling and professional surveys like the American Association of Individual Investors (AAII) Investment Sentiment Survey and Citigroup’s Panic/ Euphoria Model, 401karat tracks the two most dangerous emotions for investors: fear and greed.

Here is a breakdown of where each market driver currently sits:

July’s inflation numbers came in at 5.37%, almost identical to last month’s level of 5.39%.

On a technical basis, the market remains top-heavy, with the S&P 500 ranking third out of 135 asset classes on a relative strength basis. However, we have begun to see strength return to the growth areas of the market following their double dip pullback earlier this year.

The University of Michigan’s Consumer Sentiment Survey saw a preliminary August reading of 70.2, a sharp decline from the July reading of 81.2. This month-over-month decline was the sixth[1]largest in the survey’s history. Most respondents to the survey cited fears of the Delta variant delaying the pandemic’s ending as the reason for their decline in sentiment.

Stagflation Fears

Between July reporting the fourth-highest inflation reading since the turn of the century and concern about the Delta variant slowing down our economic reopening, there is newfound fear of stagflation. Stagflation is known as an economic death knell in which inflation rises sharply while economic growth lags or declines. This term is most commonly associated with the 1970s, in which skyrocketing energy prices caused runaway inflation while the country’s economic growth began to slow. While talking heads in the financial media have begun to reiterate these concerns, we wanted to provide some context.

What makes stagnation so dangerous is that, while people are unemployed and already scraping by, prices continue to rise, further weakening their purchasing power as a consumer. One popular way to gauge stagflation is to use a measure known as the Misery Index. In short, the Misery Index simply combines the current inflation rate with the current unemployment rate; if this number is extremely elevated, it implies stagflation. Since 1970, the Misery Index has had an average level of roughly 10%. The stagflation of the 1970s culminated in a peak in the Misery Index of 22% in June of 1980, and the index didn’t return to the historic average of 10% until the beginning of 1985.

Now, how does today compare to the 1970s peak in the Misery Index? So far, the Misery Index during COVID-19 peaked in April 2020 at 15.1%. However, it is worth noting that 14.8% of that number was strictly due to the unemployment rate, as April and May were when inflation cratered. Today, however, the Misery Index finds itself at 10.8%, higher than the 6.9% we experienced in November 2020 but lower than the peak in April 2020. In fact, as we mentioned above, the Misery Index today is only slightly above the historic average of 10%.

The main difference between the 1970s and today is that many of the inflationary pressures on the economy today are assumed to be transitory, or temporary, in nature. Supply chain bottlenecks and shortages of materials have been arguably the greatest catalyst for this transitory pressure, ranging from lumber to semiconductor chips. When these materials and products experience a shortage, prices are increased and passed on to the consumer, causing inflation. Once these shortages are solved, prices are expected to return to a more normalized level.

While we have yet to see the light at the end of the inflation tunnel, continued improvement to these supply chains in the coming months should help to alleviate the majority of the inflationary pressures on the economy. Also, expiring unemployment benefits coupled with companies increasing salaries for open positions should help to chip away at the unemployment rate. With both halves of the Misery Index hopefully beginning to improve in the coming months, it seems that we are much closer to “normal” than to anything resembling the stagflation of the 1970.

The Weak Season

To this point, 2021 has had a strong (if not wild) year in the market so far. Even with the sector oscillation we have seen this year, the S&P 500 has put together an extremely strong year so far, with the S&P 500 already having been up over 10% by the middle of the year. However, these next two months may fare differently.

Historically speaking, August and September have been two of the worst months for the stock market, with September being the worst performer and August being the third-worst month. Since 1950, August has averaged a return of 0.03%, while September has averaged a return of -0.48%. As an example in recent history, remember that the 2018 correction that saw the S&P 500 decline nearly 20% began in September, as well as last year’s pullback of over 9%. While these months historically have shown weakness, this seasonal weakness is even more apparent following an election.

Following a presidential election, August and September show greater weakness, with August averaging a return of -1.43%, while September averages a return of -0.46%. Also, the consistent timeframe of this weakness may be intriguing for investors. Post-election years historically see the market peak on August 3 and bottom on September 24. Despite this, post-election years tend to see the market rally in the fourth quarter following this weakness.

Historically speaking, the S&P 500 has had a 10% or greater correction every eight months on average; we have not experienced a decline of that size in the market since the crash that occurred early last year. This top-heavy market coupled with newfound consumer fears towards the Delta variant and elevated inflation levels may be the catalyst for this overdue decline. However, as we have seen since March 2020, this market has been extremely resilient, particularly towards healthy pullbacks. Only time will tell if this resilience is strong enough to power through this seasonally weak period.

 

 

Chairvolotti Financial, Inc. dba 401karat is a Registered Investment Advisor.

 

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August 31,2021

Here in Florida we like to refer to our 3 seasons as Summer, Summer and More Summer. Well, as Summer comes to a close, we have a ton to be thankful for. Number one, over the last few days COVID deaths and hospitalizations have declined– hopefully this trend continues. Also, this upcoming weekend is Labor Day. This brings to mind how, this year more than ever, we need to honor our workers, especially our first responders and our military. Labor Day also brings the start of football season, particularly college football. Here in Florida ,that also brings us to the start of our last season of the year, More Summer. This year, we will finally see people back in the stands. However, change may be in the future with the NCAA changing their rules regarding athlete compensation. You may have seen the term NIL, which stands for “name, image, and likeness.”  Rule changes will allow college athletes at every level to monetize their success with the use of their name, image and likeness. While changes are needed, I’m cautious how this will impact the locker room and the team when one player might be paid a million dollars a year while the rest of the team makes nothing! And to boot, some players have mentioned wanting to be paid in cryptocurrency. Stay tuned to see how this works out and more about new risks around the latter in the newsletter.

Honoring our first responders and our military hits home even more this year, as we have just vacated Afghanistan after a 20-year war. On top of this, we are now approaching the 20th anniversary of 9/11. Most of us will never forget that day, and it remains probably the most significant memory of our nation’s history in my personal life. We all have friends or family that were personally involved, and it was profound how we came together as one united country, with is something I think we need today more than ever before. As you are enjoying your Labor Day weekend, take time to reflect on the meaning of Labor Day and specifically the lives lost and the heroism of our first responders, military and our veterans that have sacrificed so much for us for our country’s freedom. There is no way that we can ever pay them back, and we all should know by now that freedom isn’t free. So, take the time to thank first responders and military members for their service. Have a safe and free Labor Day. God bless you, and God Bless America.

Three Market Indicators

Here at 401karat, we focus on three market drivers that lead to notable movements in the stock market: market economic fundamentals, technical environment, and investor sentiment.

Our fundamental indicator follows 19 points economic datapoints that track the underlying health of the US economy. From unemployment to homebuilding, changes in these economic datapoints tend to confirm recession or recovery after the technical and sentiment indicators have already reversed.

Dynamic Asset Level Investing, or D.A.L.I., is a technical indicator that compares each of the major asset classes, sectors, and sizes and styles against each other to discover emerging trends in the market. D.A.L.I. compares daily price action of each of these elements on a point-and-figure chart to illustrate momentum. The chart at the bottom of this page shows the current leadership in D.A.L.I.

Our sentiment indicator tracks how everyday investors currently feel towards the US economy and the stock market. Between 401karat’s own polling and professional surveys like the American Association of Individual Investors (AAII) Investment Sentiment Survey and Citigroup’s Panic/Euphoria Model, 401karat tracks the two most dangerous emotions for investors: fear and greed.

Here is a breakdown of where each market driver currently sits:

Second quarter GDP came in at 6.6%, higher than analysts’ expectations.

The S&P 500 remains third out of 135 asset classes in our relative strength rankings. However, niche areas of the market like large and mid caps and growth stocks have shown some improvements in the near-term.

The AAII Investor Sentiment Survey reported over 39% of investors as feeling bullish, a level higher than the historic average and the highest level since the beginning of July.

 

 

Active vs Passive: When to Pay

Before we get into the breakdown, first we need to understand the difference between active and passive funds. An active fund refers to a fund in which there is a manager that chooses the underlying investments inside of it; in short, the manager is handpicking the holdings of the fund based off their own analysis and research. In contrast, a passive fund is an investment that is meant to directly match an index, such as the S&P 500 or the Dow Jones Industrial Average. Passive indices utilize a momentum strategy in their own way, as companies fall out of the index and are replaced by new up-and-coming companies; a recent example of this is when Tesla was added to the S&P 500 at the end of 2020.“You can’t beat the index.” Nowadays, you’ll be lucky to find someone who won’t simply recommend a low-cost index fund as their preferred investment choice, and who can blame them? With investors increasingly more conscientious of fees and managers struggling the keep pace with the S&P 500 as of late, the choice between active and passive management seems simple and decisive. However, we’d like to break down if there are certain areas of the market that require active management, and if so, which areas in particular.

Now that we understand the difference between active and passive management, it’s time to address the elephant in the room: is there ever a justified reason to have active management? At the top of this page, you will see a comparison of two asset classes to their respective indices: small cap growth and large cap value. In the tables, you will notice that the top small cap growth managers regularly and significantly outperform both of their indices even with fees, while the top large cap value managers simply keep pace with their indices. Part of the reason that small cap growth managers outperform is that managers can more easily focus on the top performers, as not every small cap company breaks out and becomes a mid cap or large cap company. In contrast, large value companies are staples of our economy, which makes differentiation more difficult for a manager. In short, specific asset classes historically benefit greatly from active management, notably outpacing their respective indices even with the increased costs.

While we have focused on equities, bonds also benefit from active management. For equities, a cap-weighted index like the S&P 500 rewards larger companies; the larger a company’s market cap, the larger the weight in the index. On the flip side, a bond index gives the companies issuing the most debt the largest weights in the index. With this overweight to the companies with the largest debt leverage, bond indices tend to increase their risk exposure over time. However, an active bond manager can pick and choose the quality of the bonds that they wish to include in their fund in an attempt to reduce any significant exposure risks.

While there are absolutely instances in which it is better to own a low-cost index fund, there are certain asset classes in the market that benefit greatly from active management, including small cap growth and fixed income. Now that we are aware of these instances in which active management more than pays for itself with outperformance or risk mitigation, remember this the next time you base your investment decisions solely off of expense ratios.

 

 

Crypto: At a Regulatory Crossroads

Chances are you’ve had a better week than Coinbase. Yesterday, Coinbase’s security system sent a message to over 125,000 users that their two-factor authentication had changed, only a week after CNBC ran a piece detailing Coinbase’s ineffective responses to users’ accounts being hacked. One couple mentioned in the article shared how they had their Coinbase account of nearly $170,000 in cryptocurrency drained overnight by a hacker. Another user shared how, after having his account hacked, Coinbase replied to his concerned email by saying that, “… Coinbase is unable to reimburse you for your alleged losses.” While crypto enthusiasts tout the unregulated aspects of crypto as a positive, these examples highlight the flip side of that coin: the lack of user protection.
Major broker dealers and other financial institutions carry a federally mandated form of insurance known as SIPC. By being a member of SIPC, these institutions ensure that their customers have their securities and cash insured for up to $500,000. If that previously mentioned couple had been invested in traditional securities and held those funds on an insured platform, they would have been reimbursed for the full $170,000. In contrast, cryptocurrency’s unregulated market means that it is truly a free-for-all regarding account hacking. In fact, the problem has been so pronounced that over 11,000 complaints have been filed by Coinbase users with the Federal Trade Commission and Consumer Financial Protection Bureau.
This lack of protection isn’t limited to Coinbase, however. Robinhood is an SIPC member for its normal investment accounts, no different than other major investment platforms. However, cryptocurrency investments held at Robinhood have no protection, as Robinhood Crypto is not protected by SIPC. In short, this is how all cryptocurrency platforms operate today, as there is no regulation regarding user protection. While Robinhood and Coinbase are publicly traded companies, they are not immune to this inherent risk in having a crypto account. With the hacking becoming more commonplace as crypto continues to become more mainstream, more and more crypto investors are being faced with the harsh reality of investing in a wholly unregulated market. The ironic aspect of this situation is that the poster child of cryptocurrency is Gen Z, a group that generally is skeptical of Wall Street and losing money in the stock market after seeing their parents experience 2008. However, we don’t believe that their trust in crypto and distrust in traditional investments is hypocritical; rather, it is a lack of understanding about the inherent risks of investing in an unregulated market like cryptocurrency.
Now, the big question: what does this risk mean for the future of cryptocurrency? We believe there are two paths forward, with one significantly more likely. The first path is that the unregulated market cannibalizes itself through hacking and shady dealings, becoming what famous investor John Paulson refers to as a “limited supply of nothing.” On the flip side, the most likely scenario is that regulatory oversight is established; while this would defeat one of the initial purposes of cryptocurrency, it would provide some semblance of a safety net for crypto investors. In fact, the new SEC chairman, Gary Gensler, taught a course on cryptocurrency at MIT before accepting this position, meaning that the SEC has new insight into this area of the market. In short, if the hacking of crypto accounts continues to accelerate and users continue to file complaints, regulatory provisions may be enacted sooner than later.

 

Chairvolotti Financial, Inc. dba 401karat is a Registered Investment Advisor

Investors making a deal

What is a SPAC?

As one of the hot investment ideas in the current market, you may have heard the acronym SPAC lately. A SPAC, or Special Purpose Acquisition Company, is a back door, formally out of favor investment approach to buying new Initial Public Offerings or IPOs. Basically, SPACs are a publicly traded firm that has no operations, no assets other than a pile of cash, and just one stated business plan— to eventually buy another company.

SPACs are created with the sole intent to merge with or acquire another business as a means to take it public. Companies may pursue this route since it’s a cheaper and faster way to an IPO. Investors essentially write blank checks to SPACs, while the SPAC can take up to two years to target and buy another firm. In simple terms, SPACs offer individual investors the chance to get in on the ground floor of a potential hot stock, but they are also risky.

A lot of individuals would love to get in early on an IPO when a company first launches on the stock exchange. However, institutional investors and pension funds typically get to have the first shot at these stocks before they become available to the retail investor.

Group of investors

SPAC’s Are Becoming More Popular

If a SPAC sounds like a situation where abuse can happen, it’s probably because it once was. A lot of fraud surrounded these blank check companies in the 1980s. However, the SEC has tightened regulations and the procedures for these ventures. SPACs now have to register with the SEC, even if they have assets under $1 Million. Basically, investors have to trust that the management of the SPAC will fulfill their intentions. Also, SPACs tend to start cheap, starting at $10 per share. Today, there are hundreds of SPACs available. Now, individual investors have access to SPACs in many of the hot areas of the current market, including technology, healthcare, and more.

An example of a recent SPAC is 23andMe, a consumer genetics company that is going public via a merger with Richard Branson’s SPAC VG acquisition. This deal is said to be valued at over $3.5 billion. However, as we said before, SPACs are a blank check that relies on management to fulfill their promise to the investor. While it can be a quick way to gain access to up-and-coming companies, investors have to keep these risks in mind. In short, buyers beware.
While most retirement investment strategies exclusively include mutual funds, ETFs have become more common in recent years. Each one of these funds will have pros and cons for investing. They all come with their share of risk as well. If you ever have questions about investing for your retirement, you can always consult a financial advisor to see how you can maximize your returns.

If you don’t know where to start with investing or if you want to kick your savings into high gear, a financial advisor can guide you onto the right path to retirement. At 401karat, we combine expertise with technology to help you make data-driven decisions for your 401(k) to help you maximize your returns. For just $50, you can get started and start saving more, speak to a 401karat advisor today!

 

two men looking at laptop computer together

In this era of instant gratification, investors have become increasingly gambler-like in the pursuit of immediate rewards; this is why many people recently gambled on “meme” stocks like GameStop and AMC Entertainment. Those who got lucky experienced a dramatic gain, while others have experienced a significant decline in these stocks as the hype has begun to fade.

Investing Money Today to Use as Retirement Income Tomorrow

Unfortunately for many of these modern investors, there simply isn’t an immediate reward for saving for retirement. While a new TV or car can be enjoyed immediately, it can take decades for you to realize any semblance of a reward for your diligent 401(k) or 403(b) contributions. Retirement financial planning takes a lot of patience but is all worth it in the end.
“ Maybe you don’t view retirement as a purchase in the same lens that you would view a new TV or car. Yet that is exactly what you do when you participate in a 401(k) or 403(b) plan; you are investing money today to use as retirement income tomorrow. Thanks to dollar-cost averaging, you can strive to retire on your own terms by simply investing a little bit all the time. ”

The Dollar-Cost Averaging Strategy

Dollar-cost averaging involves investing a constant dollar amount consistently for an extended period. You may not realize it, but your 401(k) or 403(b) already employs the dollar-cost averaging strategy every pay period. Since the prices of the investments in your 401(k) or 403(b) fluctuate daily, your contributions buy a different number of shares each pay period based on the current price. When shares are most expensive, you will buy fewer shares. In contrast, when the shares have decreased in price, you will buy more of them.

Dollar-cost averaging allows people to avoid the two most dangerous emotions of investing: fear and greed. When the stock market is down, investors become fearful and sell their investments while they are cheap. On the flip side, when the stock market is soaring, investors become greedy and rush in to purchase investments at or near their peak price. When you dollar-cost average, you avoid investing too much during market peaks and too little in market downturns.

Dollar-Cost Averaging StrategyTable

We have included a table that helps to illustrate dollar-cost averaging in action. Note that in this example, even though the stock’s price was lower in December than it was in January, the account still had a positive return for the year due to dollar-cost averaging.

While investors can treat the market like Vegas and gamble away, investing a specific amount of money on a consistent basis into the stocks of quality companies or quality investment options in your 401(k) or 403(b) tends to be a more reliable strategy in the long run. The savings process can take decades, and a small deferral amount today may seem trivial, but dollar-cost averaging mixed with compound interest can help turn decades of small but consistent contributions into a significant nest egg at retirement.

Expert 401(k) and 403(b) Advisors

Today, the burden of preparing for retirement has been placed on the individual, making saving for it more important than ever. But between balancing all other aspects of their lives, the average American doesn’t have time to add managing their retirement account to their to-do list. At 401karat, our expert 401(k) and 403(b) advisors do the heavy lifting for you, providing quarterly allocation recommendations based on your employer’s 401(k) options. If you’re interested in learning more, schedule a consultation with 401karat today.

Business investor analyst - 401(k) training for employees

The market seems to be taking a bit of a breather after all of the trading frenzies with GameStop and other “meme” stocks at the beginning of the year. The Reddit traders have seemed to move on to cannabis, as many cannabis stocks reached new highs in recent months. There is a lot to unpack with marijuana concerning federal regulations and the legalization of marijuana nationwide, but we will see how long this new ride lasts.

“It’s been a nice change of pace to the beginning of the year to watch all of the activity concerning the online trading craze, a craze we call the Robinhood Effect.”

This Robinhood effect has led to many young investors going it alone with just automated robo-advisors. By going that route, they’re are missing out on the full scope of strategies and advice they could have from top financial experts in the field. 401karat combines modern investment analysis with access to a real, professional financial advisor. With a real advisor, you can get 401(k) training to go along with all the other investment knowledge that you’ll never get with robo-platforms. 401(k) participants and investors should be able to discuss their financial questions or fears with a real person!

The Online Trading Craze

Most people didn’t have access to online trading back in the day, but nowadays people opening trading accounts online and picking individual stocks has become commonplace. On the positive side, it is fantastic to see all of these people get their feet wet so young when it comes to investing. However, the concern is that they are a bit more focused on greed and getting rich than they are on investing. As fiduciary to our clients, we must do what is in their best interests first and foremost. 

As a result, buying a “dinosaur” would not make the grade for our clients. A better strategy for these new investors would be to focus on buying quality, fundamentally sound companies with a strong future through dollar-cost averaging.

“Bäume wachsen nicht in den Himmel”  a German proverb that translates to “trees don’t grow to the sky. “  

This proverb suggests that there are natural limits to growth and improvement, and this includes investments. The proverb trees don’t grow to the sky is often used by bankers to describe the dangers of maturing companies with a high growth rate. In short, while we love the enthusiasm of these new investors, we hope they will begin to adopt sound investment strategies as they get their feet wet with these “meme” stocks.

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Three Market Drivers 

Here at 401karat, we focus on three market drivers that lead to notable movements in the stock market: market economic fundamentals, technical environment, and investor sentiment.

  • Our fundamental indicator follows 19 economic data points that track the underlying health of the US economy. From unemployment to homebuilding, changes in these economic data points tend to confirm recession or recovery after the technical and sentiment indicators have already reversed.
  • Our technical indicator measures the current strength of US stocks through methods such as comparing US stocks to bonds and cash, charting, and more. The technical indicator focuses strictly on math, making it the most objective of the three indicators. While it does not act as a leading indicator, the technical indicator historically only turns negative in significant market downturns, correctly ignoring healthy market pullbacks like in the fourth quarter of 2018.
  • Our sentiment indicator tracks how everyday investors currently feel towards the US economy and the stock market. Between 401karat’s own polling and professional surveys like the American Association of Individual Investors (AAII) Investment Sentiment Survey and Citigroup’s Panic/ Euphoria Model, 401karat tracks the two most dangerous emotions for investors: fear and greed.

Current Market Status 

From a technical standpoint, the pullback at the end of January helped to normalize most of the overbought levels we saw to begin the year. International equities and small cap stocks have also begun to join and, in some instances, surpass large cap stocks in the upper tier.

Despite the slight pullback we saw in the first quarter, investor sentiment remains greedy. The AAII Investor Sentiment Survey has over 44% of investors as bullish on stocks, which is a euphoric level based on levels from surveys in previous years. Citigroup’s Panic/Euphoria Model also continues to show euphoric emotions towards the market.

401(k) Training From a Top Financial Advisor 

Unlike automated robo-advisors that use the same investment strategies as they did in the 1950s, 401karat combines modern investment analysis with access to a real, professional financial advisor. 

If you’re facing challenges like company morale, productivity, getting 401(k) training for employees, staying competitive in the job market, or bringing in new talent, 401Karat can help you empower your employees to take control of their retirement. Take your employee benefits further by offering participant advice with quarterly modeling and financial education. If you’re interested in making sure you have the best employee benefits to stay competitive, schedule a consultation with  401karat.