voting machines

 

voting machinesApril 29, 2022

Folks, there is a massive sale on Wall Street but nobody is showing up. There is a market phenomenon that when the stock market goes on sale, everyone runs the other way.  Of course, you need to own the right companies, but this is nothing more than a temporary resetting of prices before we head onward and upward. You must be patient through these difficult times- more on this subject later in the newsletter.

This brings me to being patient, or in my mom’s case, being a “patient.” Earlier this week, we had to rush my mother to the emergency room since she was experiencing intense pain.  Not to share too much, but after arriving around 11 p.m. she did not see an ER doctor for over five hours and, in the end, all she received was one pain pill. You must be kidding me! This was the most unorganized mess I had ever seen. Nobody was in charge, as people who were deathly ill were left unattended for at least four hours before they left with nowhere to go and no one to help. We must be a more compassionate society. The executive director and other executives of that hospital should be forced to experience the same humiliation and lack of compassion. In my business and many others, we don’t go home until the job is done. If they can’t find help, why don’t these executives pull a shift or two and have a pinky’s worth of dignity to assist the staff?

The experience made me think of these poor immigrants crossing the southern border that are left out in the cold. How can our government allow such a travesty to happen in plain sight? Our health care system is currently overtaxed, and we are going to introduce millions of more people? I ask myself, what is to be gained by having millions of people who have given up everything to come to this country and have nowhere to go- no money, no job, no healthcare, and no roof over their head? We should throw all the bums out of Congress and start over again. Is this just for votes? Oh that’s right, it is an election year.

Now that Elon has bought Twitter, there is news this week that the Department of Homeland Security will focus on countering misinformation and disinformation. You must be joking! For God’s sake, what country do we live in? Wake up folks, the government is now going to decide what we can and cannot say! Remember when they said Hunter Biden’s laptop wasn’t real, and now look. Moving forward, you decide who we are: Russia, China, Cuba or Venezuela. Till next time, happy shopping.

Three Market Drivers

voting machinesWe focus on three market drivers that lead to notable movements in the stock market: economic fundamentals, technical environment, and investor sentiment.

Our fundamental indicator follows 19 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 U.S. economy and the stock market. Between our own polling and professional surveys like the American Association of Individual Investors (AAII) Investment Sentiment Survey and Citigroup’s Panic/Euphoria Model, we track the two most dangerous emotions for investors: fear and greed.

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

U.S. real GDP for the first quarter came in at –1.4%, which is the first negative quarter of growth since the COVID lockdowns. Eyes remain on the Fed to see whether they will stick to their original plan for raising rates, or if slowly economic growth will cause a new, dovish approach.

All three major indices (Dow Jones Industrial Average, S&P 500, and Nasdaq-100) are now below both their 200-day and 50-day moving averages. Until we see some semblance of these indices recapturing these moving averages, the trend for these indices remains negative.

The U.S. Index of Consumer Sentiment by the University of Michigan reported a level of 65.2 for April, which is a considerable rebound from the 11-year low of 59.4 from March. The index remains notably lower than last April’s level of 88.3.

voting machines

GDP AND MEASURING ECONOMIC HEALTH

voting machinesWith unexpectedly negative real GDP (Gross Domestic Product) data being released yesterday morning, we have tangible evidence of the negative economic effects of inflation, supply chain disruption, and the Russian invasion of Ukraine. Today we’d like to look into what GDP actually is, and what components are involved in its calculation.

To put it simply, GDP is the value of everything produced within a country’s borders. By only considering what is produced within the country, it helps to avoid two countries double counting the same product. GDP is divided into four subcategories that include Personal Consumption, Business Investment, Government Spending, and Net Exports.

Personal Consumption makes up roughly two-thirds of U.S. GDP and is exactly as it sounds; it involves all the goods and services purchased. The goods involved in Personal Consumption include two types: durable and non-durable goods. Durable goods are goods that are meant to be a long-term investment and generally should last at least three years, like vehicles or home appliances. On the other hand, non-durable goods are much more temporary, such as food or fuel. Services are self-explanatory and include anything from financial services to healthcare.

Business Investment is the value of the purchases made to help to produce goods and services. Examples of these purchases manufacturing equipment and software created to assist in the creation of new goods and services. Business Investment also includes the construction of both residential and commercial real estate. Inventory levels are the last component of Business Investment, as companies will try their best to keep a healthy level of inventory on hand to meet consumer demand

Government Spending involves all federal, state, and local spending. On the federal level, this includes anything from programs such as Social Security and Medicare to defense spending. State and local levels can include more targeted investment into local infrastructure and schools.

Net Exports include the net difference of the amount of goods and services imported into the U.S. versus the amount of goods and services exported from the U.S. to other nations. Unsurprisingly, the U.S. is far and away the largest net importer in the world, even when accounting for the number of luxury goods produced and exported from the U.S.

By combining these four subcategories, economists are able to determine the health of the U.S. economy. Historically, economists have preferred GDP growth to remain between 2-to-3%, as this rate of growth (in theory) allows for continuous economic growth without the threat of inflation or asset bubbles appearing. On the other hand, negative GDP growth implies that the economy is beginning to contract. By definition, a recession occurs when GDP growth is negative for two consecutive quarters. With the knowledge of what goes into GDP, investors can strive to be better informed about what goes into measuring the health of the economy.

Market indices

Year-to-date returns

 

Large  Cap indices

S&P 500:                                       -10.04%

Dow Jones Industrial Average:   -6.66%

Nasdaq-100:                     -17.55%

 

Mid and Small Cap indices

S&P 400 (Mid Cap):                       -9.57%

S&P 600: (Small Cap):                 -11.04%

Russell 2000:                  -14.58%

International indices

MSCI EAFE Developed Index:   -13.85%

MSCI Emerging Markets:           -14.46%

MSCI ACWI ex-US:                     -13.18%

 

Economic sector indices

Basic Materials:                               -4.38%

Communication Services:          -23.22%

Consumer Discretionary:          -16.05%

Consumer Staples:                            3.49%

Energy:                                            38.84%

Financials:                                       -8.63%

Healthcare:                         -5.29%

Industrials:                         -7.68%

Real Estate:                        -5.66%

Technology:                     -15.40%

Utilities:                                             2.58%

 

 The Voting and Weighing Machines

In difficult market environments, it pays to have the mindset of a long-term investor. Famed investor Benjamin Graham is famously attributed with saying, “in the short-term, the stock market is a voting machine; in the long-term, it’s a weighing machine.” We’d like to explore what Graham meant by this, as well as how it applies to the current market environment.

A voting machine and weighing machine simply refer to what is driving current stock prices. A voting machine refers to short-term movements in the stock price, which can be driven by short-term reactions (both positive and negative) to temporary or one-time events. On the other hand, the weighing machine refers to long-term movements in the stock price, which is where investors should focus their attention. In the long run, stock price action depends less on their popularity and more on the substance of their company; by substance, this can refer to revenue growth, earnings growth, profitability, and other fundamental measures of a company.

Let’s look at a real-world example of the voting machine versus the weighing machine. In 2000, Jeff Bezos released a letter to all Amazon shareholders in which he addressed the stock’s recent price action. For context, Amazon’s stock price had risen 3,786% since it went public in 1997, clearly benefitting from the popularity of the “voting machine” during the Dot-Com craze. However, once internet companies began to crash, Amazon was now on the other side of the “voting machine”, with the stock price down over 80% at the time of Bezos’ writing. In the letter, Bezos mentions how Amazon’s fundamentals had improved in 2000: number of customers served had increased by 43%, revenue had increased by 68%, and gross profit had increased by 125% compared to 1999. Sure enough, a company like Amazon who had the fundamentals for the “weighing machine” to observe responded with strength following the Dot-Com Bubble.

While the Dot-Com Bubble may be a unique circumstance, significant drawdowns in stocks with quality fundamentals is a regular and healthy occurrence. In the table below, we looked back at the top five megacap tech names that make up FAAMG: Meta Platforms (Facebook), Apple, Amazon, Microsoft, and Alphabet (Google). We decided to observe the number of instances that each of these stocks had experienced a -20% or worse drawdown from its 52-week high. As you can see, these sizable drawdowns have been a relatively frequent occurrence in their history. In fact, Amazon investors have experienced a -20% or greater drawdown nearly every year in its 25-year history. However, even with these frequent drawdowns, Amazon has still averaged a historic annualized return of roughly 34%. When you look at the other companies, it is the same story: even with frequent sizable drawdowns, the upside performance has more than made up for these drawdowns due to their strong fundamentals. Even if uncomfortable, sizable drawdowns come with the territory of owning individual companies, which is why it is important to “weigh” how the underlying business is performing- buy and do your homework.

In drawdowns like the one we are currently experiencing, it is normal to see stocks across all asset classes correlate, regardless of how the underlying company is performing; in a market drawdown, the “voting machine” can deem all stocks as unpopular. It may be impossible to know which companies will be the next megacaps, but investors can still track the fundamentals of companies to try and find companies that the “weighing machine” will approve. In short, while it is important to track stock prices, they can be irrational in the short-term. To be a successful long-term investor, it is imperative to track the underlying business to ensure that the stock has substance underneath the surface. In simpler terms, long-term investors should watch the business- not the stock price.

voting machines

Source: YCharts (data as of 4/26/2022)

 

 

investing- retirement

 

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

 

mortgage rates

 

 

mortgage ratesGood Friday is always a market holiday, and as we begin our long weekend, I am reminded that the Easter season is the holiest time of year for Christians. Holy Thursday, which commemorates the Last Supper, is just the beginning.  Maybe this is what we all need in our lives today- a little faith.  Last year, U.S church membership fell below the majority for the first time in our country’s history. This is disappointing, as I’ve always believed that “being for something is more powerful than being against something.”

I’m a bit confused at to why we are extending the student loan repayment moratorium with inflation hitting its highest percentage in over 40 years, gas at over $4 per gallon nationally, unemployment at 3.6% and 10 million jobs openings, (i.e. more job openings vs people looking for jobs), and mortgage rates over 5% for the first time since 2011. Mortgage rate consequences are covered in more detail later in this issue. Why on God’s green earth would we extend these repayments? Myself and millions of others have paid off their loans, so if you want us all to get along maybe you should pay your obligations just like the rest of us did? Just my personal opinion.

In March 2020, Centers for Disease Control and Prevention (CDC) Director Robert Redfield invoked a WWII-era public health law to authorize U.S. border officials to promptly deport migrants. The law, found in Title 42 of the U.S. code, grants the government the “power to prohibit, in whole or in part, the introduction of persons and property” to stop a contagious disease from spreading in the U.S. Now, the Biden Administration and his handlers are winding down Title 42. Clearly, the U.S. is in no position to handle the potential unprecedented spike in migrant apprehensions along the southern border that this will cause.

Which brings me to Elon Musk. I would have thought as CEO of Tesla and SpaceX he would have had his hands full, but I guess he still has time to save the First Amendment and take on Twitter. Facebook and Twitter are perfect examples of socialism: you get it for free and you have no say in how it works. The guy who runs it is rich. They control your access to information. You have no privacy, and if you say anything they don’t like, they shut you down. Seriously, I wish we could go back when social media didn’t exist.

Next week, I am going to attend a Kenny Chesney concert. I have been holding onto these tickets for two and half years.  This concert has been rescheduled twice since 2020. Our current times remind me of one of his number one hits “Get Along”. Can’t we all just get along? Happy Easter!

 

Three Market Drivers

mortgage ratesWe focus on three market drivers that lead to notable movements in the stock market: economic fundamentals, technical environment, and investor sentiment.

Our fundamental indicator follows 19 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 U.S. economy and the stock market. Between our own polling and professional surveys like the American Association of Individual Investors (AAII) Investment Sentiment Survey and Citigroup’s Panic/Euphoria Model, we track the two most dangerous emotions for investors: fear and greed.

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

U.S. Inflation came in at 8.5%, which is the highest level since December 1981. In response, the Federal Reserve has begun to publicly float the idea of a 0.50% rate hike around. We will have to see if the Fed commits to this idea at the next Fed meeting, which takes place at the beginning of May.

The Nasdaq-100 was unable to reclaim its 200-day moving average, and now finds itself below its 50-day moving average. The S&P 500 also lost support from its 200-day moving average, but remains above its 50-day moving average. Recapturing these major averages will go a long way towards rebuilding support.

The AAII Investment Sentiment Survey found that only 15.8% of investors feel bullish about the next six months in the market, which is the lowest weekly bullish sentiment since September 1992.

 

Earnings Season: How it works

04182022 picture newsletterAs we leave a tumultuous first quarter behind us and enter earnings season, it is time to review where and how the stock market and economy intersect. While it can seem crazy to see the stock market demonstrate strength since 2020 given the current economic environment of rampant inflation and mixed economic data, understanding what the stock market actually follows helps to explain this disconnect.

In the same way home values are determined by the income you could generate by renting, the valuation of the stock market is driven by corporate earnings. Every three months, companies must publicly disclose their corporate earnings for the quarter so that investors can remain informed on the health and success of the company. Conveniently, the majority of companies report this financial information around the same timeframe; this is known as “earnings season.”

During earnings season, there are two main financial measures that investors focus on: revenue growth (also known as sales growth), and earnings (net income) that are measured as earnings-per-share, or EPS. Generally speaking, earnings tend to be the most important measure, as it is a measure of the true profitability of a company. For example, a company can have positive sales growth and negative earnings if the company’s expenses are high enough. By observing earnings, investors are able to view how efficient a company is with its revenue and expenses.

While negative earnings are typically a bad thing, there are exceptions. For example, companies that are in their growth stage tend to reinvest most of their revenue back into the company to promote growth, innovation, increased market presence, etc. By reinvesting this money into the company, these growth companies may have both astronomical sales growth and negative earnings. In this situation, negative earnings would not be as strong of a deterrent as it typically is, as investors would understand that the company is currently more focused on maximizing its growth than its profitability. In short, both sales growth and earnings are invaluable for understanding a company’s financial health in their own, unique ways.

Now that we know which financial measures are important, you may be wondering why earnings season tends to see such violent and volatile swings in stock prices in either direction. In between earnings seasons, Wall Street analysts track companies and create estimates for their upcoming earnings releases, which is where the idea that a company “beats” or “misses” on earnings and revenue comes from. If a company significantly misses these estimates, this is typically when you will see steep, one-day drawdowns. Likewise, companies who blow out Wall Street estimates are typically the situations where you will see a stock’s price skyrocket overnight.

By understanding the impact corporate earnings has on stock prices, you can now see how the stock market has much more to do with a company’s financial information than macroeconomic data like unemployment and jobless claims. As such, it should now be easier to understand why some companies held up relatively well during the crash in 2020; while certain industries had to shut down entirely, companies who were able to manage the lockdowns through an online presence continued to see positive financial data despite the economic shutdown. If there was ever a lesson to be gained from 2020, it is another reminder of the reality mentioned at the top: the stock market is not the economy.

 

Market indices

Year-to-date returns

Large Cap indices

S&P 500:                                          -6.71%

Dow Jones Industrial Average:   -4.88%

Nasdaq-100:                                 -12.88%

Mid and Small Cap indices

S&P 400 (Mid Cap):                      -6.97%

S&P 600: (Small Cap):                  -7.75%

Russell 2000:                                  -9.81%

International indices

MSCI EAFE Developed Index:      -9.51%

MSCI Emerging Markets:             -9.15%

MSCI ACWI ex-US:                        -8.52%

Economic sector indices

Basic Materials:                             -1.49%

Communication Services:          -14.77%

Consumer Discretionary:          -11.30%

Consumer Staples:                          2.52%

Energy:                                            43.14%

Financials:                                        -4.65%

Healthcare:                                     -1.25%

Industrials:                                      -5.54%

Real Estate:                                     -5.51%

Technology:                                  -13.62%

Utilities:                                              6.25%

 

Are Rising Mortgage Rates a Concern?

To put it mildly, the real estate market has been on fire as of late. In spite of this, we believe it is worth keeping diligent eye on the housing market, as we are seeing some historic movement in mortgage rates. As of this writing, the average rate on a 30-year fixed-rate mortgage is roughly 5%; this is the first time since February 2011 that the average rate has reached 5%. For perspective, the average rate a year ago was just over 3%. However, it’s not just the average rate that has been a notable increase, but also the speed at which these rates have increased.

The average 30-year fixed-rate mortgage at the end of 2021 came in around 3.11%, whereas the first quarter of 2022 ended with an average rate of 4.67%, or a difference of 1.56%. That quarter-over-quarter (QoQ) increase is the third-largest increase since at least 1970, with only Q1 1980 and Q3 1981 having a larger QoQ change. With an increase of this size, we believe it is worth looking into what could be the possible consequences of a rapid ascent in mortgage rates.

Even prior to COVID and the inflation we are seeing today, homeownership had become less achievable for the average American. A recent study by the National Association of Realtors found that the median age of home buyers in 2021 was 45 compared to the median age of 31 in 1981. While there are multiple variables involved, a notable one is economic constraints such as student loan debt that have been felt by younger generations, particularly millennials as they enter into middle age. Add in higher mortgage rates and inflated home prices, and the prospects of homeownership may become even more difficult.

However, even with an average mortgage rate of 5%, there is still one silver lining for the unique economic environment we find ourselves in: negative real mortgage rates. Real mortgage rates are simply mortgage rates minus the current inflation rate. With inflation coming in at -8.5% and the average 30-year fixed-rate mortgage around 5%, this means that real mortgage rates are currently around -3.5%. As strange as it sounds, a negative real mortgage rate means that homeowners are essentially getting paid to borrow money. This phenomenon has been rare in U.S. history, as the most recent occurrence was for a few months between 1979 and 1980.

One other factor to consider is home construction. U.S. housing starts have historically needed to maintain an annualized pace of 1.5 million per year to keep pace with population growth, immigration, and net scrappage. For the past decade, however, the U.S. has been notably underbuilt in housing. While rising interest rates will impact the costs of construction and developers taking on loans to finance these projects, home construction may be necessary to make up for housing starts lagging the pace of population growth. In short, regardless of higher interest rates, the U.S. needs new homes.

While negative real mortgage rates and the U.S. being underbuilt may provide tailwinds in the short term, it is still worth being mindful of potential headwinds. The pace of rising mortgage rates has been the highest in at least 40 years, and it doesn’t seem to be slowing down anytime soon. Also, if a combination of further rate hikes and decreased consumer spending occurs, inflation may fall low enough to make real mortgage rates positive again, removing a notable incentive for home buyers. Likewise, saving for a home has already been a notable struggle for current generations, and higher mortgage rates and home prices may continue to price out these prospective home buyers. While we can’t know for certain which scenario will play out, we do believe it is prudent to keep an eye on mortgage rates and their movement moving forward.

 

investing- retirement

 

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

MANGO FANG

 

 

MANGO FANGAs the first quarter of 2022 comes to a close, we have had a major increase in market volatility, as well as geopolitical volatility– more in-depth analysis of market volatility can be found later in this newsletter. Did you see the interview this week with CNN+ anchor Chris Wallace on the Stephen Colbert Show, where he blamed his dad, Mike Wallace, and the news program 60 Minutes for the current state of distrust in the news media? You must be kidding me. 60 Minutes has always been a great news program. It’s not perfect, but better than most.

Sorry Chris, are you sure that this is the issue with the news media? Honestly, the problem is you and your cohorts. 60 Minutes made money, and somehow you blame your father for that. The poor man died 10 years ago! Let him rest in peace. The problem is the media has turned into a circus, and you are the head clown- or should I say celebrity. You have made millions of dollars over your career, but all you had to do was report the news. No, you and your celebrity friends are the news.  You actually believe that you can have any credibility by simply switching from Fox News To CNN+?

I love to read and use the SmartNews app early in the morning when I can’t sleep. It aggregates all local and national news from multiple sources. However, what I read this week disgusted me. In Florida, we seem to have passed a controversial bill, HB 1557, by the State of Florida Legislature and signed by Governor DeSantis. Now that I can’t trust the media, I decided to read the bill myself. HB 1557 is seven pages long in total- I read articles on it that pedaled fake news that were longer than the entire bill! The media is complicit in their own distrust. If you don’t believe me, go read the bill yourself.

Now it takes me more time to research an article than to read the entire of length of the story. I would not have known that the Oscars were on TV the other night except that the news won’t stop talking about  some slap in the face, which I personally believe was fake? All that to say, Chris Wallace might be right about one thing — how on God’s green earth do we pay people $25 million to read the news? By the way, where the heck is Hunter’s laptop?

 

Three Market Drivers

MANGO FANGWe focus on three market drivers that lead to notable movements in the stock market: economic fundamentals, technical environment, and investor sentiment.

Our fundamental indicator follows 19 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 U.S. economy and the stock market. Between our own polling and professional surveys like the American Association of Individual Investors (AAII) Investment Sentiment Survey and Citigroup’s Panic/Euphoria Model, we track the two most dangerous emotions for investors: fear and greed.

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

As expected, the Federal Reserve raised the federal funds rate by 0.25% and announced that they anticipate seven additional rate hikes throughout the rest of 2022. Also, the Fed expects GDP growth of 2.8% and inflation of 4.3% in 2022.

Both the S&P 500 and Dow Jones Industrial Average have recovered their 50-day and 200-day moving averages, which are known as support levels. The Nasdaq-100 has recovered its 50-day moving average and is currently just below its 200-day moving average.

Despite a strong week in the market, the AAII Investment Sentiment Survey did not see the percentage of bullish investors increase, as it remained at 32%. However, the percentage of bearish investors did decrease from 35% to 28%, with those bears moving into the neutral category.

 Outside Days: Measuring Volatility

source: YCharts

MANGO FANGIn volatile markets like the one we are currently experiencing; it is easy to wonder whether today’s market environment is normal when compared to the history of the stock market. One way to measure market volatility is by measuring Outside Days. Outside Days are simply days in which the market, particularly the S&P 500, experiences a return that is either greater than a gain of 1% or a decline lower than -1%; in layman’s terms, they are simply volatile days in the stock market.

Historically speaking, an average of 24% of trading days each year in the S&P 500 are Outside Days. By knowing this historic average, we are able to categorize years into two categories: Outside Years and Inside Years. Outside Years, or volatile years, are years in which more than 24% of trading days are Outside Days. Inside Years, or calm years, are years in which less than 24% of trading days are Outside Days. While seemingly insignificant, there is a clear dispersion in how Outside Years perform versus Inside Years.

From 1928 to 2021, the S&P 500 has experienced 54 Inside Years and 40 Outside Years. Inside Years have an average return of 12% and have a positive return 80% of the time; in fact, the S&P 500 has only had one negative Inside Year in the past 40 years (1994). Positive Inside Years historically average an annual return of 17%, whereas negative Inside Years have averaged -9%. If history is to be our guide, Inside Years and their calmer, steadier nature have been very friendly to investors. Notable examples of Inside Years include 2021, 2019, and 2017.

On the other hand, Outside Years have been a coin flip. Of the 40 Outside Years since 1928, only 53% of them have had a positive return. Outside Years have historically had very strong moves in both directions, which cancel out to create an average annual return of just 3%. Positive Outside Years have historically averaged 21% for the year, while negative Outside Years average an annual return of -17%. Notable examples of Outside Years include 2020, 2018, 2009, and 2008.

It may be impossible to know whether a year will end up as an Inside Year or Outside Year before it is finished, but tracking Outside Days throughout the year can help us to know what to expect. For perspective, 2022 is currently considered an Outside Year, with over 50% of trading days being Outside Days; if this pace continues, it would be the most volatile year since 2008. While Outside Years are not inherently negative (2003, 2009, and 2020 are recent examples of strong Outside Years), they do hint to investors that, even if the year does end with strong performance, it may be a bumpy ride.

Market indices

Year-to-date returns

 

Large  Cap indices

S&P 500:                                          -3.44%

Dow Jones Industrial Average:   -3.05%

Nasdaq-100:                                   -7.65%

 

Mid and Small Cap indices

S&P 400 (Mid Cap):                      -3.85%

S&P 600: (Small Cap):                  -4.95%

Russell 2000:                                  -6.87%

International indices

MSCI EAFE Developed Index:      -5.65%

MSCI Emerging Markets:             -6.71%

MSCI ACWI ex-US:                        -5.13%

 

Economic sector indices

Basic Materials:                              -1.51%

Communication Services:          -10.30%

Consumer Discretionary:             -7.39%

Consumer Staples:                         -1.21%

Energy:                                             39.60%

Financials:                                          0.42%

Healthcare:                                      -1.83%

Industrials:                                       -1.19%

Real Estate:                                      -5.77%

Technology:                                     -7.07%

Utilities:                                              4.14%

 

MANGO : The New FAANG?

When it comes to investing, one of the most prominent phrases used is the acronym FAANG, which is a simple way to refer to five of the largest U.S. companies: Facebook, Apple, Amazon, Netflix, and Google. While this acronym has been popular since 2013, Bank of America turned heads last week when they announced a new acronym that they have their eye on: MANGO. Analyst Vivek Arya coined the term MANGO as a way of grouping together companies that he believes will lead the way moving forward: Marvell Technology, Advanced Micro Devices, NVIDIA, GlobalFoundries, and onsemi. However, what makes Arya’s acronym unique is that it focuses entirely on a specific industry: semiconductors. Today, we’d like to dive into the sector to understand their impact on today and the future.

Semiconductors, better known as “chips”, are a vital component of electronics that allows electricity to conduct between conductors and insulators. While this may sound “jargony” or boring, the different types of chips and their various functions are already impacting your everyday life. For example, analog chips are used in “real world” devices that focus on a basic function, ranging from medical devices to thermostats. Digital chips, on the other hand, focus on the ability to compute. While digital chips have already become commonplace in computers and smartphones, analysts such as Arya believe that digital chips may still be in their infancy.

Regarding digital chips, there are two main types of chips: CPUs and GPUs. CPUs (Central Processing Units) are best known as the “brain” of a computer, as it processes all of the commands required to allow programs to run. The benefit of CPUs is their ability to process multiple types of programs quickly and effectively. GPUs (Graphics Processing Units), as the name suggests, specializes in tasks that require rendering 3D images and graphics; when you think about how much the quality of images has improved in videos and gaming, GPUs are responsible. However, while GPUs got their start in gaming, they may be integral to other parts of the future economy.

For a vehicle to be autonomous, there are two key components to its success: the ability to visualize the world around it, and the ability to make split-second decisions based on this available information. NVIDIA’s DRIVE, a computer platform specifically designed for autonomous vehicles, is meant to use both CPUs and GPUs to teach vehicles how to react in various situations by balancing a CPU’s ability to multitask with the GPU’s ability to project these potential scenarios. How soon after a car can be taught how to drive itself will other machinery be able to demonstrate full artificial intelligence? Only time will tell, but fully functioning A.I. may be here sooner that we think.

While semiconductors are already used in everyday devices such as gaming consoles and smartphones, it is the continued development of chips specialized for artificial intelligence that has analysts like Vivek Arya intrigued. While it is too early to know whether Arya’s MANGO acronym will stick, it does show that Wall Street continues to demonstrate an interest in the semiconductor industry and its impact on the future of our world.

 

investing- retirement

 

 

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

 

401karat

401karat

March 15, 2022

Two weeks ago, I did something I haven’t done in two years: I went on vacation! The funny thing is that the ship we were on, the Norwegian Cruise Line Escape, just ran aground off the coast of the Dominican Republic on Monday afternoon. The picture below is from my iPhone in Puerta Plata just a mere two weeks ago. I recommend everyone go on vacation now and get away for a week or two from this crazy world we live in. Do it now, before the cruise industry gets back up to full speed. What a deal we had, as this ship that typically holds 4,200 passengers only had 1,800 passengers on board. They said there was about 1,500 crewmembers, and the service was impeccable. These deals aren’t going to last forever!

Did you notice the smoke coming out of the stack on the ship? Do you know that a large cruise ship can use up to 250 tons of fuel per day, which is around 80,000 gallons? So, this brings me to a question: how do we turn certain industries green? What about large construction equipment, planes, trains, cargo ships, and spacecraft? We all know the White House only talks about electric vehicles (EVs) in terms of automobiles, but why are all the auto manufacturers all in on EVs? If the last two weeks of geopolitical war and tension haven’t taught us a lesson about our energy independence, then we deserve what we get. Wake up folks.

Also, have you seen that Ford and General Motors are going to fix California’s power grid and brown outs by providing bidirectional charging with EVs? So, this is how it’s going to work: you charge your EV at night, and during the day when there is high usage you can use your EV to send the power back to California’s power grid. Are we nuts? Why don’t we just fix California’s power grid? Are we such a rich, arrogant country that we can waste money on new technologies to put a big band aid on California’s power grid? We have so many other issues that need our attention in this country, and, again, common sense is not so common. Anyway, like I said in the beginning, please go on vacation! Until next time.

 

Three Market Makers

EvsWe focus on three market drivers that lead to notable movements in the stock market: economic fundamentals, technical environment, and investor sentiment.

Our fundamental indicator follows 19 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 U.S. economy and the stock market. Between our own polling and professional surveys like the American Association of Individual Investors (AAII) Investment Sentiment Survey and Citigroup’s Panic/Euphoria Model, we track the two most dangerous emotions for investors: fear and greed.

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

U.S. inflation came in at 7.87%, the highest level since January 1982. With the Federal Reserve meeting today and tomorrow, expect the Fed’s first rate hike to be announced tomorrow. Most experts are anticipating a raise of 0.25% to the federal funds rate.

All three major indices (S&P 500, Nasdaq-100, and Dow Jones Industrial Average) have experienced a “death cross.” A death cross is when their 50-day moving average falls below their 200-day moving average. Despite its morbid name, returns have historically skewed positive following a death cross, as the market boasts positive returns one year after a death cross roughly two-thirds of the time (Fundstrat).

The University of Michigan consumer sentiment survey came in at 59.7, below February’s reading of 62.8. Those surveyed pointed to newfound fears regarding fuel prices and other inflation in the economy. In fact, the year-end expected inflation rate came in at its highest level since 1981.

 

 

This is a hypothetical example for illustrative purposes only.

The Case for Dollar-Cost Averaging

This is a hypothetical example for illustrative purposes only.

EvsIn this era of instant gratification, investors have become increasingly gambler-like in the pursuit of immediate rewards; this is why many people gambled on “meme” stocks like GameStop and AMC Entertainment last year and are now focusing on cryptocurrencies and non-fungible tokens, or NFTs. Investors especially lose patience with traditional investing during market drawdowns, like the one we are currently experiencing.

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) contributions. 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) 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.

Dollar-cost averaging involves investing a constant dollar amount consistently for an extended period. You may not realize it, but your 401(k) already employs the dollar-cost averaging strategy every pay period. Since the prices of the investments in your 401(k) fluctuate daily, your contributions buy a different number of shares each pay period based on the current price.

Dollar-cost averaging allows people to avoid the two most dangerous emotions of investing: fear and greed. When the stock market is down and investors become fearful, dollar-cost averaging automatically helps to avoid fear by buying a greater amount of shares at these lower prices. On the flip side, when the stock market is soaring and investors become greedy, dollar-cost averaging automatically buys less shares at these potential market peaks. In short, when you dollar-cost average, you avoid investing too much during market peaks and too little in market downturns, like the one we are currently experiencing.

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) 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.

 

Market indices

Year-to-date returns

Large  Cap indices

S&P 500:                                        -12.44%

Dow Jones Industrial Average:   -9.34%

Nasdaq-100:                                 -20.06%

 

Mid and Small Cap indices

S&P 400 (Mid Cap):                    -10.37%

S&P 600: (Small Cap):                  -9.42%

Russell 2000:                                -13.52%

International indices

MSCI EAFE Developed Index:    -11.90%

MSCI Emerging Markets:           -14.37%

MSCI ACWI ex-US:                      -11.84%

 

Economic sector indicesEvs

Basic Materials:                            -10.14%

Communication Services:          -19.39%

Consumer Discretionary:           -19.75%

Consumer Staples:                         -6.93%

Energy:                                             33.36%

Financials:                                         -5.94%

Healthcare:                                      -8.14%

Industrials:                                       -7.41%

Real Estate:                                    -12.37%

Technology:                                   -18.96%

Utilities:                                             -2.30%

 

Bidirectional Charging: Slow your roll

Recently, both Ford and GM announced that they will work with PG&E to test bidirectional charging of their electric vehicles, or EVs. Bidirectional charging simply refers to an EV’s ability to not only receive electricity from a public or home charging station, but also provide energy to the grid and the driver’s home. While bidirectional charging could be the latest innovation in EVs, we wanted to discuss both the potential benefits and current obstacles facing this technology.

Vehicle to Grid charging, or V2G, is a method in which an EV’s battery could be plugged into a public charger as a means to provide energy to the power grid. While V2G charging sounds simple, the full vision of V2G’s capabilities is much more ambitious. Advocates for V2G technology believe that EVs could assist the power grid in managing energy needs. When drivers plug in their EV for the workday, charging station software would communicate with the power grid to redirect energy to the areas that need it the most. Basically, advocates believe V2G would allow vehicles that are parked or idle to continuously assist the power grid with supplemental energy.

Vehicle to Home charging, or V2H, is also self-explanatory. While V2G provides energy to the broad power grid, V2H will provide energy directly to a driver’s home. With V2H charging, a home’s CT meter would be able to detect whenever the home begins to pull energy from the power grid and instead will pull an equal amount of energy from the plugged-in EV to offset the grid power. Also, in areas where natural disasters or blackouts are prevalent, an EV could act as a generator for a driver’s home to provide supplemental energy until the disaster is over.

For V2G to become plausible for society, there are plenty of obstacles that still need addressing. It goes without saying that V2G would require an amount of EVs that is currently not owned by the public. Also, V2G would require EV charging stations in the majority of public or employer parking lots; with the infrastructure bill providing only $7.5 billion towards the construction of EV charging stations, significantly higher future investment would be required to reach this goal.

For V2H, the issues are much more cost related. Each home using bidirectional charging would require a CT meter dedicated to the home EV bidirectional charging station, as the meter would regulate and manage the amount of energy drawn from the EV. Also, each EV owner would need a home EV bidirectional charging station installed, which requires professional installation on top of the cost of the actual charging station; for perspective, home bidirectional charging costs for the station and its installation are currently around $4,000. Finally, unless the drivers had charged their EV for free in public, there are still the costs of charging, regardless of whether the energy ends up being used by the EV or their home. While costs could potentially be saved in the future, EV owners would need to make a significant investment upfront to achieve V2H charging.

While Ford and GM exploring these innovative technologies is ambitious, there are still plenty of other issues that need to be addressed, such as the affordability and efficiency of EVs. Once EVs have become prevalent and charging stations are convenient and commonplace, then V2G and V2H can become the topic of discussion. For now, however, we want to make sure that society doesn’t put the cart before the horse when it comes to EVs and clean energy infrastructure.

401karat

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

economy rates fed

 

economy rates fedFebruary 28, 2022

Russia, Russia, Russia. Wow, what an evil man Putin is! We now have experienced a major history lesson. Being energy independent is more about the safety of the free world than the evils of Climate Change. Don’t get me wrong, woke left, everyone wants a cleaner earth, but we can now see that whoever has the energy controls the safety of the rest of the world. Let me explain: we now have a war in Ukraine for no reason other than Putin wanting to place his stamp on history. Did you read the news last week that Russia and China have agreed on a new deal that will see Russia supply 100 tons of coal to China in the coming years? John Kerry said last week, “let’s not get distracted by this Russian Invasion of Ukraine and forget about climate change.” Are you kidding me? While you fly around the world on your private jet, innocent people are being killed, and your take is that we can’t lose focus on our climate goal? Seriously, how tone deaf. Who’s next, Taiwan?

What we need in the United States is a comprehensive energy strategy, not just a political ideology. It is ludicrous to have $100 barrels of oil in our country. We just achieved energy independence for the first time since the 1950’s, and the world seemed to be a safer place. In my opinion, the current administration wanted gasoline of $4 per gallon to justify the move to renewable energy. Congratulations, you achieved that goal in about a year! Even as an optimist, I didn’t think that was possible. But now we see this invasion isn’t just about energy, but about controlling others. Wouldn’t it be better if we were an alternate energy supplier for Germany so that they would not be beholden to Putin and his evil ways?

I’m sure there are some really intelligent people in the current administration who can figure this out. We need to continue to develop innovative technologies to bring down the cost of renewable energy sources such as solar and wind while still maintaining our energy independence. Once we have created enough renewable energy infrastructure and capacity, then we can flip the switch. Until that time, use your noggins. Sorry AOC, but this past weekend I just watched the Great American Race, better known as the Daytona 500. Can you imagine the excitement from the crowd of over 101,000 spectators in the future when the Grand Marshall bellows out the most famous words in motorsports: Drivers, flip the switch on your electric race cars! Thank God we live in the great USA! Until next time, please pray for Ukraine and stay safe.

economy rates fed

Three Market Drivers

We focus on three market drivers that lead to notable movements in the stock market: economic fundamentals, technical environment, and investor sentiment.

Our fundamental indicator follows 19 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 U.S. economy and the stock market. Between our own polling and professional surveys like the American Association of Individual Investors (AAII) Investment Sentiment Survey and Citigroup’s Panic/Euphoria Model, we track the two most dangerous emotions for investors: fear and greed.

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

Q4 GDP was revised to a level of 7.0%, meaning the economy grew at a rate of 5.7% in 2021, the strongest year since 1984. Initial jobless claims have returned to pre-pandemic levels, while continuing claims are at their lowest level since 1970. It remains to be seen what the economic fallout from Russia’s invasion of Ukraine will be for the U.S.

The majority of stocks in all three major indices (S&P 500, Nasdaq-100, and Dow Jones Industrial Average) remain below both their 50-day moving average and 200-day moving average, levels that we would like to see these stocks regain as a semblance of support for the market.

The majority of investors in the AAII Sentiment Survey have become bearish again, with nearly 54% of investors feeling bearish about the next six months in the market. Consumer sentiment is typically a contrarian indicator.

economy rates fed

A History of Market Corrections

Source: First Trust

economy rates fed

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 market 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 remains at a healthy 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 and healthier valuations.

Unfortunately, there is no crystal ball for predicting market corrections. However, we can look back in history to create realistic expectations. Since 1942, the S&P 500 historically has had a 10% or worse correction every 16 months on average. For perspective, this current pullback is the first 10% or greater pullback in the market since the crash that began in February 2020, meaning that, if history is to be our guide, we had been long overdue for a correction.

Finally, the burning question on everyone’s mind: what should I do? Whether you are a 401(k) participant or an individual investor, the best course of action is to stay the course during market corrections. In fact, 401(k) participants in particular are uniquely capable of taking advantage of these drawdowns. 401(k) contributions are made through a process called dollar-cost averaging, which 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 and stay informed. While we cannot know for certain what size this pullback 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 returns

Large  Cap indices

S&P 500:                                          -8.00%

Dow Jones Industrial Average:   -6.27%

Nasdaq-100:                                 -13.06%

 

Mid and Small Cap indices

S&P 400 (Mid Cap):                      -6.35%

S&P 600: (Small Cap):                  -6.49%

Russell 2000:                                  -9.10%

International indices

MSCI EAFE Developed Index:      -6.78%

MSCI Emerging Markets:             -4.87%

MSCI ACWI ex-US:                         -5.83%

 

Economic sector indiceseconomy rates fed

Basic Materials:                              -7.09%

Communication Services:          -12.92%

Consumer Discretionary:           -13.89%

Consumer Staples:                         -1.70%

Energy:                                             23.37%

Financials:                                         -0.12%

Healthcare:                                      -7.25%

Industrials:                                       -6.49%

Real Estate:                                    -11.63%

Technology:                                   -11.45%

Utilities:                                             -5.96%

 

The Fed and Rates: What to watch for

When it comes to the stock market, there is one event that investors are keeping a watchful eye on: The March FOMC (Federal Open Market Committee) meeting from March 15-16. At this meeting, it is expected that the Federal Reserve will announce their first federal funds rate hike since the pandemic began. This rate hike will not only be the Fed’s tool to combat inflation, but the size and frequency of these rate hikes may have an effect on the market, good or bad. However, some questions we have heard recently echo two main sentiments: what exactly is the federal funds rate, and what is its significance? Today, we’d like to explore both of these questions.

When you hear in the news about rate hikes, they are referring to the federal funds rate. The federal funds rate is simply the interest rate that banks pay to borrow from each other overnight. While that may not sound significant, the federal funds rate, or FFR, has a ripple effect on all aspects of the global economy. Other domestic interest rates are heavily influenced by the FFR, including mortgage loans and credit cards.

The FFR also influences the value of the U.S. dollar. Yield-hungry international investors are more likely to invest in economies offering higher yields, causing the U.S. dollar to rise in value. Add in the fact that roughly 60% of the global central bank currency reserves are held in U.S. dollars, and the majority of the world’s currency reserves have their value directly tied to the FFR. The effect on the U.S. dollar alone makes the FFR one of the most important interest rates in the world.

Now, what decision will the Fed be making at their March meeting? At this point, it is a foregone conclusion amongst investors that rates will be raised in an effort to combat the rampant inflation that I’m sure everyone has felt. However, there are two important aspects that investors are watching keenly: the size of the rate hike, and the frequency of future rate hikes.

Regarding size, analysts seem to be projecting two potential outcomes: a 0.25% raise, or a 0.50% raise. The 0.50% raise is the one that investors are watching closely, as it would imply that the Fed feels a need to speed up the rate hiking process by making larger increases. On the flip side, the 0.25% raise may indicate that the Fed still feels comfortable with their initial plan, and that they don’t believe inflation to become much more severe. When it comes to the frequency of the hikes, there are also some potential conclusions to be drawn. Investors may view frequent 0.25% rate hikes as a happy middle, as the Fed wouldn’t spook the market with a substantial 0.50% raise all at once, while also still acknowledging that they need to make a greater effort to raise rates than previously anticipated to combat higher inflation numbers.

Regardless of how the Fed meeting goes, the change in FFR will be felt on a global scale. While rising rates are not historically a death knell for stocks, there are certainly areas of the market that are more sensitive to interest rate changes than others (energy, financials, utilities, and technology to name a few). While we can’t know for certain what actions the Fed will take in two weeks, we do know that the actions taken in March will give the market a better glimpse into what the Fed is currently thinking regarding the risk of inflation and the health of the U.S. economy.

economy rates fed

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

 

Market Survivorship

 

market investorFebruary 15, 2022

Welcome to the 2022 Winter Olympics. What kind of joke is this? The NBC television coverage is the worst I have ever seen or can remember for an Olympics. It looks like they are shooting the television coverage with one iPhone! I try to tune in and watch some events every night, but they constantly jump around from venue to venue. I have no idea what’s coming up next and whether it’s a heat or a final. I still remember where I was when I watched the Miracle on Ice, when the U.S. Olympics men’s hockey team was victorious over the Soviet Union in 1980.

Also, what kind of political hack job is this that the 2022 Winter Olympics are held in Beijing, China, which historically averages about one inch of precipitation in February? During China’s bid for these games, they estimated that they would need about 49 million gallons of water to blanket the Olympic slopes in snow. However, a geographer interviewed by Bloomberg estimated that they probably need closer to 528 million gallons of water. Meanwhile, is currently one of the most water-stressed regions in the country. This bid must have been motivated by politics and not the environment. It’s been fascinating to listen to the commentators mention how many skiers have gone off the course or fallen down- I don’t know about you, but have you ever tried to ski on fake snow or ice?

On a lighter note, this brings me to what I believe has truly fundamentally changed in the past two years: streaming and subscription services, also known as cutting the cord. How many streaming services exist today versus two years ago that contain thousands of new movies and series? Everybody is getting into the streaming game: Apple with Apple TV+, Disney with Disney+ and ESPN+, Google with YouTube TV and Amazon with Prime, including deliveries and unlimited music on top of their original content streaming on Prime Video. Between Pandora, Spotify, Sirius and more, how many music streaming services are there now? Even in the world of gaming, you don’t need to go to GameStop anymore to trade in a game; you can just get a subscription to PlayStation Now for $4.99 a month and have thousands of video games at your fingertips.

Time for the participation portion of this Ed’s Take: I want to know what your current favorite shows are on streaming, and what service are you using to listen to music today. My new favorite show on streaming in the drama category is Yellowstone on Paramount+, and my favorite comedy is Ted Lasso on Apple TV+. I have also spent a lot of time listening to No Shoes Radio on SiriusXM while “chillaxing.” Let me know how you prefer to use streaming. Till next time.

market investor

Three Market Drivers

We focus on three market drivers that lead to notable movements in the stock market: economic fundamentals, technical environment, and investor sentiment.
Our fundamental indicator follows 19 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 U.S. economy and the stock market. Between our own polling and professional surveys like the American Association of Individual Investors (AAII) Investment Sentiment Survey and Citigroup’s Panic/Euphoria Model, we track the two most dangerous emotions for investors: fear and greed.

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

The U.S. Inflation Rate came in at 7.48%, its highest reading since February 1982. Between this new inflation data and comments made by Federal Reserve members, it remains to be seen how aggressive the Fed will be with their rate hikes in March and the rest of the year.
Stocks continue to struggle to find direction in anticipation of the March Fed meeting, as nearly two-thirds of stocks in the S&P 500 and nearly 80% of stocks in the Nasdaq-100 remain below their 50-day moving average, a key support level for the major indices.
The University of Michigan’s Consumer Sentiment Survey for February 2022 came in at 61.7, its lowest level in over a decade. The new reading was largely due to consumers having an increasingly pessimistic view on rising inflation and the economic policies enacted by the government to combat it.

market investor

ROTH VS TRADITIONAL: WHICH TO PICK

This is a hypothetical example for illustrative purposes only.

market investorWith the 2022 tax season now underway, it is important for investors to understand the relationship between taxes and their investments. Whether you are opening an Individual Retirement Account (IRA) or participating in an employer’s 401(k), most investors will have the option between two main contribution types: traditional and Roth. While the decision can seem obvious at times, it may not be as cut-and-dry as you think.
Traditional contributions, also known as pre-tax contributions, are those in which salary deferrals enter your retirement account without taxes being taken out. When you withdraw from your retirement account in the future, however, you will then pay the taxes at that time. Roth contributions, also known as post-tax contributions, are the exact opposite. While your salary deferrals have the taxes taken out today, any withdrawals that you make in the future will be tax-free, since the taxes were paid upfront. In short, traditional contributions pay the taxes later, while Roth contributions pay the taxes today.
When deciding which type of contributions to make, the main factors to consider are your future earning potential and future tax rates. Those who are currently mid-career or experiencing their highest earnings may want to consider traditional contributions, as their tax rate near the end of their career may be considerably lower than their current tax rate. Likewise, if you believe taxes will be lower in the future in general, traditional contributions may be the better choice. On the flip side, if you believe that you will be making significantly more in the future, it may be better to do Roth contributions so that you are paying taxes at your current, lower tax rate. Also, if you think tax rates may rise in the future, Roth contributions would be the better option.
While future earning potential and future tax rates are the main determinants for what type of contributions to make, there are some caveats. For example, if by some miracle your tax rate remains the same during your working years and after you retire, there is no difference between choosing traditional versus Roth. Also, it is impossible to truly know how the future will be regarding your earning potential and tax rates. While it is a safe bet for younger people to assume that they will earn more in the future, it is not a given. Likewise, it is impossible to know how legislators will affect tax rates in the near and distant future, so there is a bit of guesswork involved there as well. However, investors should be able to make an educated guess based on these two aspects in an attempt to be more tax efficient regarding their retirement.

Market indices
Year-to-date returns

Large Cap indices
S&P 500: -7.65%
Dow Jones Industrial Average: -4.88%
Nasdaq-100: -12.57%

Mid and Small Cap indices
S&P 400 (Mid Cap): -7.23%
S&P 600: (Small Cap): -7.50%
Russell 2000: -10.00%

International indices
MSCI EAFE Developed Index: -4.52%
MSCI Emerging Markets: -0.94%
MSCI ACWI ex-US: -3.16%

Economic sector indicesmarket investor
Basic Materials: -8.12%
Communication Services: -12.04%
Consumer Discretionary: -11.11%
Consumer Staples: -2.76%
Energy: 23.64%
Financials: 1.85%
Healthcare: -8.65%
Industrials: -6.50%
Real Estate: -13.26%
Technology: -11.09%
Utilities: -7.25%

 

Survivorship Bias in the Market

Whether you are a newcomer or a seasoned investor, odds are you have heard the phrase “index funds” when it comes to investing for retirement. Today, we’d like to look “under the hood” of the stock market to find why there seems to be such a consistent bias to the upside for the major indices throughout history. While many will point to the diversification of the major indices, there is another aspect that we believe has an equal-if-not-greater impact on this upside bias: survivorship bias.
Of the three major indices, both the S&P 500 and the Nasdaq-100 are what is known as cap-weighted indices. As a refresher, a cap-weighted index determines a stock’s weight by multiplying its current share price by the number of shares outstanding; in short, the more a stock’s price increases, the greater the weight a stock will have in the index. While this seems straightforward, not every index follows this methodology, most notably the price-weighted Dow Jones Industrial Average. Through cap-weighting, both the S&P 500 and Nasdaq-100 follow a process that resembles a momentum strategy: let your winners run and cut your losers quick. For example, if the next Amazon appears, cap-weighted indices will allow that new company to gradually increase its weight in the index through its improving stock price. On the flip side, if a company is past its prime and on the decline, a cap-weighted index will allow these outdated companies to shrink and fall out of the index.
One way to better understand this phenomenon is to compare where the S&P 500 stands today versus its history. In 1972, the S&P 500 contained 157 companies that fell under the industrials sector; consumer discretionary, consumer staples, energy, and utilities rounded out the rest of the top five sectors in terms of the number of companies within the index. On the flip side, there were only 15 technology stocks within the index. In the following 50 years, however, there has been rapid change and innovation. Today, the technology sector leads the S&P 500 with 73 companies, while the industrial, financial, healthcare, and consumer discretionary sectors round out the top five sectors. In fact, the number of industrial stocks in the S&P 500 has fallen from 157 to 72 since 1972, while the healthcare sector has increased from 20 stocks in 1972 to 65 stocks today. The technology and healthcare sectors have seen some of if not the most innovation in the past 50 years, and cap-weighted indices such as the S&P 500 and Nasdaq-100 were uniquely capable of taking advantage of that innovation.
In short, cap-weighted indices such as the S&P 500 and Nasdaq-100 follow the momentum of economic innovation. When companies become mature or obsolete, their share price suffers, which in turn decreases its weight in the index and potentially causes it to be removed from the index entirely. On the other hand, innovative companies such as the megacap tech companies were allowed to grow and thrive in the index, to the point where they now make up over a fifth of the S&P 500 and roughly 40% of the Nasdaq-100. Through this momentum aspect, we hope investors can now see an additional reason for why the major indices have historically had a bias to the upside.

401karat rabbit

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

journalism market

 

journalism marketJanuary 31, 2022

I was reading my news app the other day, and I knew the story I was reading wasn’t true. I was shocked how this story was published without any facts! So, I put on my Dick Tracy hat to investigate.  Did you know the first known use of the term “fact check” was in 1973 during the Watergate Scandal? It was the journalists at the time who were most concerned with verifying that the story was true. These days, you need to be on the lookout for fake news written by bots posing as humans. These bots are not just writing the headline, they are actually writing the entire article– see more about this on the back cover.

A question that I always have is, “What are we going to learn from the current pandemic?”  A few years ago, Laura Spinney wrote a book called “Pale Rider: The Spanish Flu of 1918 and How It Changed The World”. It’s fascinating how little we know about this past event in our country’s history compared to other significant events in the past, such as World War I and II. I’m sure with the invention of the “interweb” (another Ed-ism) and flip phone- I mean internet and smart phone- we won’t soon forget this one. So, how has the pandemic changed us as a society? The first thing that comes to mind is e-commerce adoption has increased from 10% to 13% of total retail sales. While that doesn’t seem significant, it is worth noting that it previously took five years to increase from 7% to 10% of total retail sales. In short, there’s plenty of runway left.

From my perspective, I believe the next big change is coming in subscription video and music streaming services. The cable companies have been ripping the consumer off for years. At some point, there will be a consolidation of streaming companies, but for the time being it’s a free for all. I think I currently have seven streaming subscription services, ranging from ESPN+, Netflix, Prime, HBOmax, Hulu, Paramount, and Apple+. Now, I might have to get a subscription to Spotify. I know who Neil Young is because I was born in the 60’s, but I would guess most people didn’t know he was still around. Who is he, the head of cancel culture? You mean to tell me we can’t have different and varying opinions, or a debate about the issues? I personally don’t care what either Joe Rogan or Neil Young thinks, but I hear The Joe Rogan Experience is pretty entertaining. Hey Neil, if you don’t like what Joe Rogan is saying, just do what I do and turn it off. Who died and made you the leading authority over what people get to listen to? Wasn’t one of your famous songs titled, “Keep on Rockin in the Free World”?  What happened to that world? Until next time. Enjoy the Super Bowl!

journalism market

THREE MARKET DRIVERS

We focus on three market drivers that lead to notable movements in the stock market: economic fundamentals, technical environment, and investor sentiment.

Our fundamental indicator follows 19 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 U.S. economy and the stock market. Between our own polling and professional surveys like the American Association of Individual Investors (AAII) Investment Sentiment Survey and Citigroup’s Panic/Euphoria Model, we track the two most dangerous emotions for investors: fear and greed.

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

Q4 GDP came in at 6.9%, notably higher than economists’ expectations; Dow Jones found that the average estimate was 5.5% amongst economists. The gain was driven by companies investing in inventory to prepare for the holiday season and increased personal consumption.

The percentage of stocks above their 50-day moving averages has now reached a washed-out level, with the NYSE and Nasdaq-100 having only 28% and 23% of their stocks above their 50-day moving average, respectively.

The AAII Sentiment Survey found nearly 53% of investors currently feel bearish about the next six months in the stock market, the highest bearish reading for the survey since 2013. Individual investor sentiment has historically been a contrarian indicator for the market.

journalism market

THE STOCK MARKET IS NOT THE ECONOMY

journalism marketAs we leave the fourth quarter behind us and enter earnings season, it is time to review where and how the stock market and economy intersect. While it can seem crazy to see the stock market demonstrate strength since 2020 given the current economic environment of rising inflation and mixed economic data, understanding what the stock market actually follows helps to explain this disconnect.

In the same way home values are determined by the income you could generate by renting, the valuation of the stock market is driven by corporate earnings. Every three months, companies must publicly disclose their corporate earnings for the quarter so that investors can remain informed on the health and success of the company. Conveniently, the majority of companies report this financial information around the same timeframe; this is known as “earnings season.”

During earnings season, there are two main financial measures that investors focus on: revenue growth (also known as sales growth), and earnings (net income) that are measured as earnings-per-share, or EPS. Generally speaking, earnings tend to be the most important measure, as it is a measure of the true profitability of a company. For example, a company can have positive sales growth and negative earnings if the company’s expenses are high enough. By observing earnings, investors are able to view how efficient a company is with its revenue and expenses.

While negative earnings are typically a bad thing, there are exceptions. For example, companies that are in their growth stage tend to reinvest most of their revenue back into the company to promote growth, innovation, increased market presence, etc. By reinvesting this money into the company, these growth companies may have both astronomical sales growth and negative earnings. In this situation, negative earnings would not be as strong of a deterrent as it typically is, as investors would understand that the company is currently more focused on maximizing its growth than its profitability. In short, both sales growth and earnings are invaluable for understanding a company’s financial health in their own, unique ways.

Now that we know which financial measures are important, you may be wondering why earnings season tends to see such violent and volatile swings in stock prices in either direction. In between earnings seasons, Wall Street analysts track companies and create estimates for their upcoming earnings releases, which is where the idea that a company “beats” or “misses” on earnings and revenue comes from. If a company significantly misses these estimates, this is typically when you will see steep, one-day drawdowns. Likewise, companies who blow out Wall Street estimates are typically the situations where you will see a stock’s price skyrocket overnight.

By understanding the impact corporate earnings has on stock prices, you can now see how the stock market has much more to do with a company’s financial information than macroeconomic data like unemployment and jobless claims. As such, it should now be easier to understand why some companies held up relatively well during the crash in 2020; while certain industries had to shut down entirely, companies who were able to manage the lockdowns through an online presence continued to see positive financial data despite the economic shutdown. If there was ever a lesson to be gained from 2020, it is another reminder of the reality mentioned at the top: the stock market is not the economy.

 

Market indices

Year-to-date returns
Large Cap indices

S&P 500:                                           -7.01%

Dow Jones Industrial Average:    -4.44%

Nasdaq-100:                                  -11.43%

Mid and Small Cap indices

S&P 400 (Mid Cap):                       -9.28%

S&P 600: (Small Cap):                   -9.26%

Russell 2000:                                 -12.33%

International indices

MSCI EAFE Developed Index:      -5.76%

MSCI Emerging Markets:             -3.32%

MSCI ACWI ex-US:                         -4.86%

Economic sector indices111111111111111111111111111111111111111111111111111111

Basic Materials:                              -8.18%

Communication Services:            -8.57%

Consumer Discretionary:           -13.02%

Consumer Staples:                         -1.99%

Energy:                                             18.45%

Financials:                                         -0.97%

Healthcare:                                      -7.52%

Industrials:                                       -5.80%

Real Estate:                                      -9.67%

Technology:                                     -9.36%

Utilities:                                             -5.07%

 

NEW AGE OF JOURNALISM

It goes without saying that we have experienced exponential technological innovation in our lifetimes. For the most part, these innovations have been a net positive, like advancements in medical devices. However, like social media, there are some technological innovations that are not a clear-cut positive; innovation is not synonymous with improvement. In fact, one of these new innovations may be affecting your everyday life more than you realize: AI in journalism.

In an attempt to take advantage of modern technology, news media has tried to simplify the process of journalism by utilizing machine learning in the creation of news articles. From Forbes’ “Bertie” to Bloomberg’s “Cyborg,” these “bots” are able to compile financial data for articles, effectively creating a first draft for journalists. However, these bot-assisted articles aren’t limited to financial news, as the LA Times also uses AI to report on earthquake activity, for example.

One of the main arguments in favor of the use of AI in journalism is that journalists can spend more time on their voice and storytelling while the bot compiles the relevant data in a convenient manner. Also, AI can be used to track real-time data, which in turn can alert journalists to potential news stories when there are changes to the data being tracked. While this constant tracking and generating of data can simplify the process for journalists, it is not without its own drawbacks, particularly in the financial space.

In the investing world, you may hear about “algo-trading” simply known as “algos.” Algos refer to computer programs that utilize specific formulas and rules to place trades in the stock market. Due to their nature as a computer algorithm, algos tend to trade at a speed and frequency that human traders are unable to achieve. From specific words that Fed Chair Jerome Powell uses in his press conferences to new economic data, algos can be built around virtually anything related to the stock market. Unfortunately, this can also include news articles.

Bot-generated articles or headlines that discuss the stock market or recap new economic data can be included in algo formulas, meaning that journalists should be aware of what specific words or tone they use in their articles. However, a bot does not realize this phenomenon exists, and may write a headline that can trigger algo-trading in either direction simply based on the words and tone used. On both sides of that scenario, the stock market would be at the mercy of advancements in technology.

On the non-financial side of things, AI writing articles is an even more complicated issue in this era of misinformation and “fake news.” With people either unable or uninterested in fact checking what they read, bots may independently create narratives around data they are tracking, helping to guide people towards an opinion without checking if the information is true. On the flip side, bots could be programmed by journalists to intentionally skew articles and headlines about certain topics towards a specific mindset, potentially influencing others. In short, we want to give people who come across AI-generated articles the same adage that we give investors: stay calm, and do your homework.

 

journalism market

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

 

market inflation economy

market inflation economyJanuary 15, 2022

Good morning, Vietnam! This has always been one of my favorite ways of greeting my friends. If you remember from the movie of the same title, Robin Williams played the role of DJ Adrian Cronauer, set in Saigon in 1965 during the Vietnam War. This is how I feel about the start of 2022…Chaos. 2022 welcomed our team with a boom. COVID has ravaged the office, the market is down, and my cruise vacation just got cancelled. I haven’t taken a formal vacation in two years and was really looking forward to taking my 92-year-old mother back to the Virgin Islands. I’ve decided I’m getting back to life, as I’m tired of feeling locked down. As MLK said, “I have a Dream” and so do I, as I have already re-booked our cruise for six weeks from now.

I actually don’t want to talk about COVID anymore, so I promise this might be the last time- I feel so intimate with the virus now I just can’t help myself. It took the medical experts less than a year to develop a vaccine, but almost two years later we don’t seem to have readily available therapies. Shouldn’t our medical experts have been working feverishly (no pun intended) to develop remedies like we do with the annual flu? We all know that it’s common knowledge that viruses mutate, but somehow, we were caught off guard by “Captain Omicron.”

Also, why does the media continue to cover so-called experts talking about this virus when almost two years later we still know nothing? I have experienced people in my inner circle, both vaccinated and unvaccinated, catch this bug with astoundingly different results. You would have expected the results clearly in the other direction as said by these experts. For me, today is “goodbye COVID.”

As we try to move on, did you see in Washington D.C. starting on January 15, they are requiring people to show proof of vaccination to enter a restaurant, indoor entertainment, or gym? What country do we actually live in? This is ludicrous— you mean to tell me we now want to divide the country by vaccination status? Let’s unpack this: You travel to D.C. for meetings or vacation, and you want to go grab lunch. The restaurant tells you to show your vaccination status, which also means you are going to have to present them with your ID. Yet in New York City, you can vote without showing proof of citizenship, and in most places, you don’t have to show ID at all. Trust me, I believe in voting rights, but this makes no sense. Shouldn’t the administration today be working on fixing the supply chain issues and lowering energy and food prices? No, our politicians are only worried about the next election. Wake up folks, we are the next Manchurian Candidate.

market inflation economy

Three Market Drivers

We focus on three market drivers that lead to notable movements in the stock market: economic fundamentals, technical environment, and investor sentiment.

Our fundamental indicator follows 19 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 U.S. economy and the stock market. Between our own polling and professional surveys like the American Association of Individual Investors (AAII) Investment Sentiment Survey and Citigroup’s Panic/Euphoria Model, we track the two most dangerous emotions for investors: fear and greed.

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

December’s U.S. inflation data came in at 7.04%, the highest level since June 1982. This high of a reading will continue to force the Fed’s hand regarding raising rates to combat inflation.

An increasing number of stocks in the three major indices have begun to fall below their 50-day moving average, a key technical level of support. This may imply short-term weakness within these indices.

The AAII Sentiment Survey found only 24.9% of investors to feel bullish about the next six months for the stock market, the lowest reading since the week of September 15.

The One Percent Difference

market inflation economyResults matter. In the age of fee compression, pundits continue to push for investors to invest in low-cost, passive index funds and hope for the best. However, to advise individuals to simply invest in the cheapest funds and cross your fingers because “there is no science to the stock market” is not only irresponsible but can also have long-lasting impacts on their financial futures.

A prevalent obstacle to the average investor is not having any context for their returns. A 2017 Dalbar study titled Quantitative Analysis of Investment Behavior found that the average investor underperformed the market by 4.7%, earning 7.26% versus the market’s return of 11.96%. Now, most investors wouldn’t flinch at a return of 7.26%; it means their investments are growing and beating inflation. However, leaving even one percent return on the table can affect your retirement plans.

In “Results Matter: Even a Small Increase in Returns Can Dramatically Improve Outcomes,” an American Funds analysis from May 2017, a hypothetical scenario using Capital Group as its source was created to discover what the effect of gaining an additional one percent return would have on the average individual’s retirement. In this analysis, it observed how much a 25-year-old investor’s investments would increase by the time they retired at 65, as well as how long it would take for them to run out of money during retirement. It then compared three scenarios of returns pre-retirement and during retirement to see how a half-percent and one percent return difference impacts the growth of the investments.

By having a single percentage point better return, the investor saw over $227,000 in additional retirement savings and 12 additional years of retirement spending before their money ran out. Keep in mind, that is just an average difference using the previously-stated assumptions. An individual that contributes a greater percent, sees larger salary increases, retires later, etc. will see an even larger impact for achieving that extra percentage of return.

While the strategy of “set it and forget it” with cheap, passive index funds can be effective, it leaves potential results on the table, as illustrated by the previously-stated analysis. 401karat believes that it is not about “timing the market, but time in the market.” However, while time in the market is half the battle, being in the correct areas of the market at the right time is critical to the pursuit of that extra percentage point. That is why we observe trends in the market, whether it be sector trends like technology and real estate or style trends like growth versus value.

While the stock market is not an exact science, and corrections can feel as if they appear out of thin air, aspects of it like sector rotation and style trends can be analyzed in a scientific manner. Through our prudent process of investment selection and performance monitoring, we can work towards achieving results for our participants. And, as we know, results matter.

MARKET INDICES

YEAR-TO-DATE RETURNS

LARGE CAP INDICES

S&P 500: -2.25%

Dow Jones Industrial Average: -0.62%

Nasdaq-100: -5.05%

 

MID AND SMALL CAP INDICES

S&P 400 (Mid Cap): -1.77%

S&P 600: (Small Cap): -1.40%

Russell 2000: -3.82%

INTERNATIONAL INDICES

MSCI EAFE Developed Index: 1.01%

MSCI Emerging Markets: 2.54%

MSCI ACWI ex-US: 1.51%

 

ECONOMIC SECTOR INDICESmarket inflation economy

Basic Materials: -1.24%

Communication Services: -2.70%

Consumer Discretionary: -3.59%

Consumer Staples: -0.23%

Energy: 13.60%

Financials: 5.54%

Healthcare: -4.76%

Industrials: 0.60%

Real Estate: -5.71%

Technology: -5.59%

Utilities: -2.36%

 

2021: THE “STOP-AND-GO” MARKET

Between COVID variants, rampant inflation, and rising interest rate speculation, 2021 once again saw a disconnect between the macroeconomy and the stock market. However, before we put 2021 in the rearview mirror, let’s take a look into what Nasdaq Dorsey Wright nicknamed the year of the “stop-and-go” stock market.

“Stop-and-go” refers to 2021’s tendency to have rollercoaster-like shifts in sector performance based on new COVID and economic data that was continuously released. The “stop” refers to the areas of the stock market that were either resilient or directly benefitted from the lockdowns back in 2020; these areas typically include growth stocks and technology stocks. The “go” refers to the areas of the market that were considered part of the reopening trade, such as retail, energy, and value stocks. The “go” also refers to the areas of the market that are expected to benefit from a rise in interest rates, like banks.

The first quarter saw a dramatic shift into the “go” trade, as rising treasury yields hurt the growth leaders from 2020. In fact, the tech-heavy Nasdaq-100 experienced a -10% pullback during the quarter in response to the rising yields. The top three sectors in Q1 were energy, financials, and industrials. In the second quarter, however, falling yields led to technology outperforming once again, with real estate and energy joining it in the top three for Q2. The third and fourth quarter saw a virtual repeat of the first two quarters, with financials leading the way in Q3 and technology and real estate leading the way in Q4. In short, 2021’s shifts between the “stop” periods and “go” periods were like clockwork, and almost perfectly coincided with the change in quarters.

The shifts in quarters were so pronounced that, other than energy being in first place in Q1 and third place in Q2, there wasn’t a sector that repeated being in the top three in consecutive quarters. This constant shifting of what was outperforming during the year made it difficult for many strategies, as investors who went all-in on the “stop” trade were hit hard in the first and third quarters, while investors who went all-in on the “go” trade were hit in the second quarter and faced more uncertainty in the fourth quarter with the emergence of Omicron. Likewise, the “stop-and-go” environment also affected momentum strategies, as investors who traditionally saw trends in the sectors of the economy last for six to 18 months ended up witnessing trends that only lasted six to 18 weeks.

As we enter into 2022, the story unfortunately doesn’t look much different regarding the economic outlook; there remains plenty of uncertainty regarding the “stop-and-go” economy we are living in. Continued reopening and the Federal Reserve raising interest rates may become a tailwind for the “go” trade, whereas concerns about Omicron and our economy’s ability to withstand infections on this scale may become a tailwind for the “stop” trade. No matter how 2022 will end up, this much is clear: investors will need to remain light on their feet and willing to adapt to the everchanging environment we find ourselves in today.

 

market inflation economy

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

January  effect

January  effectDecember 15, 2021

I start this episode with a heavy heart: our beloved Mooshoo has crossed the rainbow bridge. He came to us from the Bullpen Rescue of Georgia 38 months ago. He was blind, underweight, and suffering from diabetes insipidus. I promise you he spent his last 38 months living his best life! He came to work every day with no complaints, although he demanded that he take the staff with him on his daily walks. He will be missed but never forgotten. He did have one last big request from me: if I could be a little more political on my bi-monthly newsletters. So here goes:

As Janet Yellen was testifying that the U.S. debt ceiling was about to be breached, I realized I did not have a conversation with anyone about fears regarding the debt ceiling being in jeopardy. I feel like I am in the middle of a Rod Serling episode of Twilight Zone. The Twilight Zone is the mental state between reality and fantasy. According to Rod, there is a fifth dimension beyond that which is known to man. It is a dimension as vast as space and as timeless as infinity. Have we lost our minds? The market didn’t even react to the possibility that the U.S. would potentially default on their debt. We know that elections have consequences, and this is what our politicians always do- nothing! Remember, Republicans will be next in line to do the same thing and then blame the Democrats. We just continue to kick the can down the road. Term limits for everyone!

This brings me to Senator Karen and the Squad. Senator, you don’t look very good in green. Elon Musk is not the problem in Washington. You have had a hundred years to change the tax code. Quit complaining and placing blame, and actually do something about it. The Squad wants to now cancel student loan debt after already postponing payments for the last couple of years- over my dead body! I paid back my loans that I willfully borrowed, and I’m not about to pay yours. Additionally, in New York City you now don’t have to be a citizen to vote in local elections; I was always told that membership has privileges. It seems I have answered my own question- we have lost our minds.

As a good Catholic boy, I went to confession last night. I’ll probably have to go again next week, but I leave you with this: what’s the difference between the Titanic and CNN? The Titanic had all of its anchors on board when it went down! Farewell, Mooshoo- my best friend. Merry Christmas to all.

January  effect January  effect January  effect

Three Market Drivers

We focus on three market drivers that lead to notable movements in the stock market: economic fundamentals, technical environment, and investor sentiment.

Our fundamental indicator follows 19 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 U.S. economy and the stock market. Between our own polling and professional surveys like the American Association of Individual Investors (AAII) Investment Sentiment Survey and Citigroup’s Panic/Euphoria Model, we track the two most dangerous emotions for investors: fear and greed.

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

Yesterday it was announced that the U.S. Producer Price Index, a measure of cost changes from the seller’s perspective, rose 9.62% year-over-year in November, the highest number on record. It will be interesting to see if today’s Federal Reserve meeting takes a dovish stance to ease recent market fears or a hawkish stance to calm fears about new inflation data.

The S&P 500’s 50-day moving average once again served as support earlier this month, following a pattern we have seen throughout this year outside of September’s drawdown.

The most recent AAII Investor Sentiment Survey found that roughly 40% of investors felt neutral about market returns six months from now. A neutral majority has historically led to the strongest returns over the next six months when compared to bullish or bearish sentiment.

January  effect

Sector Rotation

January  effect“You can’t beat the market.” Time and time again, this phrase is repeated in social circles. While the majority of those in the investing world continue to utilize strategies from the 1950s like Modern Portfolio Theory that encourage owning everything, Chairvolotti Financial believes that owning everything has plenty of drawbacks.

The funds in your 401(k)’s lineup rotate in and out of favor like produce in a grocery store; while they all may be objectively good investment options; it does not mean that every fund is in favor at all times. Chairvolotti Financial finds it counterintuitive to own these “out of favor” sectors as a hedge against downturns in the “favored” sectors. A prime example of this occurred last year: the technology sector saw a return of over 42%, while the energy sector saw a decline of roughly -37%. If you had owned both to hedge your bets, you would have had an average return of around 2.4%. However, if you simply avoided investing in the weakest areas of the market (like energy last year), you would have seen substantial improvement in your portfolio’s performance.

In order to find these “favored” sectors, Chairvolotti Financial utilizes modern investment technology to view which asset classes and sectors exhibiting relative strength. Relative strength simply refers to specific sectors or asset classes that have stronger performance than a broad market index, like the S&P 500. The objective of this strategy is to invest in sectors of the market with relative strength, and to avoid sectors with weak relative strength. One of the easiest ways to envision this strategy is to think of it as a relay race; as soon as a sector loses steam, we pass the baton to a sector that is just beginning to take off. This investment strategy is known as Sector Rotation.

In short, while everyone continues to invest the same way they have for decades, Chairvolotti Financial believes there is a better and smarter way to invest for your retirement. By diversifying amongst “favored” funds in your lineup and avoiding the “out of favor” funds, it is possible to outperform while still being diligent about your retirement allocation. While it may be difficult at times for leadership to appear in the short-term, long-term investors will be able to see these rotations play out amongst the sectors. Paired with modern investment technology, Sector Rotation sheds light on a commonly overlooked fact about investing: it’s not about what you own, it’s about what you don’t own.

Market Indices

Year-to-date returns

Large Cap Indices

S&P 500:                                           23.38%

Dow Jones Industrial Average:    16.13%

Nasdaq-100:                                    23.48%

Mid and Small Cap Indices

S&P 400 (Mid Cap):                       18.70%

S&P 600: (Small Cap):                   20.30%

Russell 2000:                                     9.36%

International Indices

MSCI EAFE Developed Index:         5.36%

MSCI Emerging Markets:               -5.36%

MSCI ACWI ex-US:                            2.79%

Economic Sector IndicesJanuary  effect

Basic Materials:                              20.37%

Communication Services:            18.49%

Consumer Discretionary:             20.21%

Consumer Staples:                         12.02%

Energy:                                              45.76%

Financials:                                         31.40%

Healthcare:                                      18.75%

Industrials:                                       16.17%

Real Estate:                                      34.62%

Technology:                                     29.60%

Utilities:                                             10.10%

 

The January Effect

January  effectBuilding off of the Santa Claus Rally from last newsletter, there is another winter phenomenon in the stock market that deserves review: the January Effect. Like the name suggests, the January Effect simply refers to January’s ability to imply how the year will go for stocks. Does a strong January mean a year of robust returns? Does a weak January signal doom and gloom for the next 12 months? Let’s find out.

For our analysis, we looked back from 1950 to 2020 to observe how each January and year performed over that timeframe. Since 1950, the S&P 500 has had a positive January roughly 60% of the time. In these years in which January has had

Source: Ycharts

a positive gain, the S&P 500 ended the year with an average return of 16.60%, notably higher than the stock market’s historic average. Likewise, years with a positive January ended the year with a positive return over 88% of the time, indicating a significant likelihood of ending the year with a positive return.

Conversely, negative Januarys have been a mixed bag. Since 1950, years with a negative January have finished with an average return of -2.14%, significantly lower than years with a positive January. Also, years with a negative January have ended with a positive return only 50% of the time, making negative January years a virtual coin flip regarding how the year will finish.

There have been many theories as to why the January Effect exists. Some investors believe that the January Effect is due to investors selling winners in December and employing this cash into new investments at the start of the new year. Likewise, it is also proposed that some investors may put their year-end bonus money into the market. Other investors believe the explanation is simply due to psychology, as investors may see the start of a new year as a fresh start and a time to implement a new investment strategy or idea.

Regardless of the root cause, the January Effect has been a consistent phenomenon in stock market history. While a negative January doesn’t necessarily mean the rest of the year will be pessimistic, a positive January has historically provided a reliable indication of a strong year of market returns.

 

401karat rabbit

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

santa claus rally

 

santa claus rallyNovember 30, 2021

As we round out 2021, we have now entered my favorite time of the year: the silly season of Congress, College, and Professional Sports- and you thought I was going to be talking about Christmas!

Have you read the article recently published by the Penn Wharton Budget Model (PWBM) Staff? PWBM estimates that the Build Back Better Act (H.R. 5376) would increase spending by $2.1 trillion over the 10-year budget window while increasing revenue by $1.8 trillion, for a 10-year total deficit of $274 billion. By 2050, the proposal would decrease GDP by 0.2 percent, relative to current law. In an alternative, illustrative scenario in which all temporary provisions in the bill are made permanent, spending would total $4.6 trillion over the 10-year budget window. In this scenario, by 2050 the federal debt would increase by 24.4 percent and GDP would fall by 2.9 percent relative to current law. So, where did I hear this bill is free and won’t raise taxes? The rich will be getting a tax break when we bring back the State and Local Tax (SALT) write offs. This of course isn’t going to put any more pressure on inflation, is it? (sarcasm, if you can’t tell) Come on, man!

Continuing with inflation, did you see that Dollar Tree has officially announced that they have raised prices to $1.25? Well, that kind of seemed inevitable, but they say they can bring in better merchandise. We will see! I’m curious to see what the difference is between $1 merchandise and $1.25 merchandise- that seems kind of silly, huh?

Speaking of silly costs, did you see how much they pay college coaches just to go away, and the new contracts thrown around in the Coaching Carousel? USC is paying their new coach $100 million, while LSU is paying theirs $95 million. All this does is give the Alabama coach another automatic raise- who ever said playing a game doesn’t pay!

These colleges throw around millions of dollars as if we have an unlimited supply. I’m sure these are all wonderful people, getting paid a ridiculous amount for not even winning. Does it make sense that none of these people have cured cancer or heart disease? When are we as a country going to get our values and priorities straight? I will never understand how we can pay millions of dollars to coaches, athletes, Hollywood, and musicians and get so little in return other than higher inflated ticket prices. There are way more deserving workers in our country, such as first responders and teachers, that have done more for society than these people ever will. Stay safe, and see you soon.

 

Three Market Drivers

We focus on three market drivers that lead to notable movements in the stock market: economic fundamentals, technical environment, and investor sentiment.

Our fundamental indicator follows 19 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 U.S. economy and the stock market. Between our own polling and professional surveys like the American Association of Individual Investors (AAII) Investment Sentiment Survey and Citigroup’s Panic/Euphoria Model, we track the two most dangerous emotions for investors: fear and greed.

Source: Ycharts

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

It remains to be seen whether the Omicron variant will have a tangible effect on economic fundamentals, but the Federal Reserve meeting in mid-December should shed light on whether the variant will effect the Fed’s tapering timeline.

The RSI, or Relative Strength Index, measures recent price changes to determine undersold and oversold conditions. While the major market indices have seen their RSIs remain at healthy levels, many high-growth areas of the market have already reached oversold conditions.

Friday’s CBOE Equity Put/Call Ratio reached its highest level since October 4, the bottom of the previous 5% pullback in the major indices. This reading may indicate that investors are beginning to become less complacent in conjunction with the Omicron variant announcement.

santa claus rally

Tapering: Right or Wrong

 

santa claus rallyWith inflation and a historically expensive market in the news, there has been constant debate in financial news around two familiar concepts: quantitative easing and tapering. Also, with the Federal Reserve’s December meeting coming up, these concepts are front and center once again. However, even though these phrases first rose to prominence back in 2008, many still do not understand what they actually mean.

Source: Ycharts

We would like to breakdown what these financial terms mean, and what kind of impact they have on the economy and stock market.

Before we can tackle the Fed’s current situation regarding tapering, we have to explain what quantitative easing actually entails. In layman’s terms, quantitative easing, or QE, is a program in which the Fed purchases financial assets, like bonds or stock, to inject money into the economy. This increase in money circulating in the economy typically helps to lower longer-term interest rates. These lower borrowing

 

costs are then expected encourage economic growth, which would then speed up an economic recovery. While QE was used both in 2008 and in 2020, there is not a consistent consensus amongst economists on the success of the program, or whether the program has negative or positive economic consequences.

One of the greatest fears associate with QE is hyperinflation, or out-of-control price increases throughout the economy. However, after 2008, the U.S. economy never experienced this anticipated hyperinflation, as most of the money injected into the economy was retained by banks to improve their balance sheets. However, with 2020’s crisis less contained to specific sectors of the economy, there is fear that there may not be the same outcome this time, with some inflation measures reaching 30-year highs as of late. Due to the unknown consequences of QE, discussions after the program have centered around another financial phrase in the news: tapering.

In short, tapering is the reversal of QE, including the slowdown and eventual reversal of the Fed’s financial asset purchases. Tapering is typically reserved for the point in which the Fed is confident that the economy is able to be self-sustained again; think of tapering like taking the training wheels (QE) off of the U.S. economy. While tapering is viewed as a necessary step to stabilize the economy after QE, there is not a significant track record of how the markets will react. A recent example in history is 2013, in which the U.S. announced plans to begin tapering following the Great Financial Crisis. As a result, the bond market droves yields higher, fearing that tapering would cause the economic collapse that QE was meant to prevent. However, after a few months, bond yields began to normalize as economic data began to be increasingly positive. Conversely, when the Fed began to actually reverse QE and raise rates, markets did not like the idea, as this was a contributing factor to the nearly 20% correction in the S&P 500 at the end of 2018. As a result, the Fed reversed course and ended its tapering prior to 2020.

Today, the Fed finds itself in a similar situation as 2013. While many economic indicators have yet to fully recover, many are improving, and the high consumer demand that has been highlighted by the supply chain bottlenecks indicates an economy primed to takeoff once it is in the clear. However, news of the Omicron variant may alter the Fed’s original tapering timeline, as they may anticipate further economic shocks from continued variant emergence. Either way, the stock market may find itself once again at odds with the Fed regarding the timeframe for tapering. Will the bond and stock market have strong volatility like it did following 2013’s announcement? Will QE once again have little to no impact on inflation, or will the money injected into the system circulate through the economy more freely this time? It’s hard to say, but it is worth paying attention to as more information comes out regarding inflation and future variants.

 

Market indices

Year-to-date returns

Large Cap indices

S&P 500:                                           23.94%

Dow Jones Industrial Average:    14.80%

Nasdaq-100:                                    27.24%

Mid and Small Cap indices

S&P 400 (Mid Cap):                       20.60%

S&P 600: (Small Cap):                   22.66%

Russell 2000:                                   13.53%

International indices

MSCI EAFE Developed Index:         4.64%

MSCI Emerging Markets:               -5.60%

MSCI ACWI ex-US:                            2.46%

Economic sector indicessanta claus rally

Basic Materials:                              19.42%

Communication Services:            21.20%

Consumer Discretionary:             25.84%

Consumer Staples:                           8.04%

Energy:                                              47.21%

Financials:                                         31.71%

Healthcare:                                      16.32%

Industrials:                                       16.45%

Real Estate:                                      32.66%

Technology:                                     30.29%

Utilities:                                               7.37%

 

Santa Claus Rally: Does it Exist?

santa claus rallyEvery December, you may hear financial news outlets beginning to sound awfully similar to a Hallmark movie, consistently using the phrase “Santa Claus Rally.” Today we’d like to observe not only what the Santa Claus Rally is, but also whether there is any insight we can take away

Source: Ycharts

from their performance.

The Santa Claus Rally refers to a phenomena in the market in which the period consisting of the final five trading days of the year and the first two trading days of the new year historically exhibits robust returns. In fact, the Santa Claus Rally has averaged a return of 1.28% over the past 50 years. Which this seasonal phenomena has been a regular occurrence in market history, there is no specific reason that has been pinpointed for its existence. Some have theorized that the strong market is due to investors piling into the market at the end of the year in anticipation of a strong January and new year, while others have

suggested that the light trading volume during the holidays makes it easier for the market to ascend. Whatever the true cause of the Santa Claus Rally may be, its historic track record speaks for itself, as the Santa Claus Rally has had a positive return over 75% of the time since 1970.

Now, the question regarding the Santa Claus Rally is whether there is any insight to be gained from its performance. In the chart above, we looked at years in which the market had a positive Santa Claus Rally and years in which the market had a negative Santa Claus Rally. From this distinction, we then decided to look at two timeframes: how did the following January perform, and how did the following year in the stock market perform?

In the years with a positive Santa Claus Rally, the following Januarys were overwhelming positive, with nearly two-thirds of Januarys posting a positive gain. In the following year, the chance of a positive return was even greater, with years following a positive Santa Claus Rally having a positive return nearly 80% of the time. On the flip side, negative Santa Claus Rallies tended to have a negative effect on the following January, with only 42% of Januarys being positive following a negative rally. On the flip side, while negative Santa Claus Rallies didn’t lead to an 80% chance of a positive return the following year, they still had a significant chance of positive returns, with roughly two-thirds of years following a negative Santa Claus Rally still posting a positive gain.

In short, while a negative Santa Claus Rally may not lead to a strong January, the following year still has a solid chance of being positive. On the flip side, a positive Santa Claus Rally has overwhelmingly led to strong Januarys and strong years following the rally. While the Santa Claus Rally is just another one of the many inexplicable phenomena in the stock market, it’s worth tracking if history is to be our guide.

 

401karat rabbit

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

 

infrastructure bill

 

infrastructure billNovember 15, 2021

My favorite holiday is coming up next week, and that’s Thanksgiving. Wow! This year has flown by and as I like to say, “the days are long, and the years are short.” What I love most about Thanksgiving is that it’s a time for family, food, and fellowship. Thanksgiving gives us a chance to reflect on how great we have it here in the United States, and a time to be grateful for all of the blessings bestowed on us as individuals and as a country. With that being said, I have a bone to pick, and I’m not talking about a turkey bone.

I have a silly question: why don’t we just stay with Daylight Savings Time vs Eastern Standard Time? I would rather have more daylight in the evening than in the morning. What this nonsensical time change instruction brings up every year is why can’t we build products and create instructions that a normal human being can understand? I have a master’s degree, but I doubt highly that even a Rocket Scientist with a PHD can figure out how to change the clock on my mother’s wall oven. For my questions, I actually know this answer- it’s that we don’t build these products here in the U.S. and the instructions, or what I like to call “destructions”, are more than likely written by someone who is not a native English speaker. When people create instruction manuals, why don’t they just use pictures like IKEA?

Moving forward, what scares me more than inflation today is the Great Resignation. The Great Resignation is an informal name for the widespread trend of a significant number of workers leaving their jobs during the COVID-19 pandemic; it’s also called the Big Quit. The Great Resignation is typically discussed in relation to the U.S. workforce, but the phenomenon is international.  We had 4.3 million Americans quit their jobs in September, and an additional 4.4 million in October. Millions of workers voted with their feet and walked out of their jobs—many without having another position already lined up.

All of that said, I hope that everyone takes some time during this Thanksgiving season to be thankful for our many blessings in the United States. Have fun, stay safe, and we’ll talk soon.

Three Market Drivers

We focus on three market drivers that lead to notable movements in the stock market: economic fundamentals, technical environment, and investor sentiment.

Our fundamental indicator follows 19 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 U.S. economy and the stock market. Between our own polling and professional surveys like the American Association of Individual Investors (AAII) Investment Sentiment Survey and Citigroup’s Panic/Euphoria Model, we track the two most dangerous emotions for investors: fear and greed.

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

The U.S. inflation rate came in at 6.22% for October, the highest level since November 1990. While the year-over-year data comparisons are still reflecting a pre-vaccine world, it remains to be seen if the Federal Reserve will eventually be correct in their assessment that the majority of this inflation is transitory.

The RSI, or Relative Strength Index, measures recent price changes to determine undersold and oversold conditions. Unsurprisingly, the S&P 500 and Nasdaq-100 both pulled back slightly after reaching RSI levels greater than 70, implying an overheated market.

The University of Michigan’s Consumer Sentiment survey registered a reading of 66.80 for November, the lowest level in the past 10 years. While put/call ratios show investors incredibly confident in the stock market, consumers seem much less enthused about our current economic conditions as a whole.

infrastructure bill

 

Inflation and The Stock Market

 

infrastructure bill

If you have been to a gas station or grocery store lately, you may have noticed some intimidating price increases. These price increases throughout the sectors of the economy are known as inflation. Last Wednesday, it was announced that inflation in October had registered a reading of 6.22%, which is the highest level in over 30 years. Despite this, many in the Federal Reserve continue to claim that this current spike in inflation is “transitory,” or temporary. While these increases in inflation are never fun for consumers’ wallets, the main question on investors’ minds is how inflation historically has impacted the stock market.

As we mentioned in a previous newsletter, interest rate changes are used as a response to inflation- when inflation is increasing, interest rates tend to rise, and vice-versa. However, when inflation remains in check and relatively low, there is little incentive to increase interest rates, which is the type of environment the U.S. economy has been in ever since the 2008 Financial Crisis. This low interest rate economic environment is why we saw growth stocks outperform value stocks significantly over the past decade-plus, as growth stock valuations are heavily weighted towards future potential earnings that are discounted at these current interest rates. In contrast, when interest rates and inflation rise, these future earnings projections are reduced, hurting growth stock valuations and making present-day earnings much more valuable. As such, this emphasis on present-day earnings is why value stocks tend to outperform growth stocks in rising rate environments, as they did between the Dot-Com Bubble and the 2008 Financial Crisis.

While there is a relationship between inflation and stock styles, there is also a relationship between inflation and economic sectors. Four sectors that have historically outperformed during periods of inflation are energy, financials, industrials, and materials. Energy prices, such as the prices of oil and gas, are a common part of inflation indices, so the positive correlation between the energy sector and inflation should be obvious. Financial stocks, such as banks and insurance companies, see their profit margins benefit greatly from rising interest rates that result from inflation. Finally, inflation tends to imply that an economy is heating up, meaning that there is greater demand for production in both the industrial and material industries.

While the stock market typically has positive returns during both inflationary and deflationary environments, there are notable historic advantages for certain stock styles and economic sectors during inflationary periods. However, the Federal Reserve’s hesitancy to raise rates has caused sectors of the economy that have historically reacted negatively to rising rates to continue to outperform, as the market has interpreted the Federal Reserve’s hesitancy as a green light. Now, if the Federal Reserve changes its tune regarding raising rates, that may be the catalyst for a shift in the economic sectors and their performance. In the meantime, however, investors should remain vigilant and follow the words of The Great One, Wayne Gretzky: “skate to where the puck is going, not to where it has been.”

 

Market Indices

Year-to-date returns

Large Cap indices

S&P 500:                                           24.67%

Dow Jones Industrial Average:    17.95%

Nasdaq-100:                                    25.69%

Mid and Small Cap indices

S&P 400 (Mid Cap):                       25.82%

S&P 600: (Small Cap):                   30.08%

Russell 2000:                                   22.12%

International indices

MSCI EAFE Developed Index:       10.09%

MSCI Emerging Markets:               -0.45%

MSCI ACWI ex-US:                            7.82%

Economic sector indicesinfrastructure bill

Basic Materials:                              24.05%

Communication Services:            25.13%

Consumer Discretionary:             23.74%

Consumer Staples:                           8.77%

Energy:                                              51.88%

Financials:                                         35.92%

Healthcare:                                      17.70%

Industrials:                                       20.49%

Real Estate:                                      32.13%

Technology:                                     28.15%

Utilities:                                               5.78%

 

Inside the infrastructure bill

On November 5, the House of Representatives officially passed the long-awaited, $1.2 trillion infrastructure bill that has taken up headlines for over half a year. While the bill includes $550 billion in new spending, we would like to go through the bill and breakdown how the bill will invest in each segment of the economy, as well as any additional costs not included in the aforementioned $1.2 trillion price tag.

The largest portion of the $550 billion in new spending will be going towards the construction and repair of new and current roads and bridges, with $110 billion dedicated to this endeavor. The bill also includes $66 billion for railroad maintenance and improvement, although there is no mention of high-speed rail coming to the U.S. anytime soon. $17 billion is dedicated to the expansion of ports, which is top of mind for many investors today as we experience ongoing supply chain issues. Also, airports are expected to receive $25 billion for major expansions at U.S. airports, as well as upgrades to air traffic control towers and systems. In addition, public transit will receive $39 billion to create additional bus routes and to augment public transit to be more accommodating to disabled Americans and senior citizens.

Outside of transportation, the infrastructure bill also looks to prioritize the expansion and improvement of modern-day utilities. The bill includes $55 billion towards water infrastructure, with the aim being to replace lead pipes to avoid instances like the infamous Flint, Michigan crisis, as well as an additional $8 billion dedicated to water treatment and storage facilities in the west to combat drought conditions. $65 billion is included for the improvement of power lines and cables, as well as $47 billion to prevent damage to the power grid, whether it be cybersecurity attacks or extreme natural disasters. Also, in a time where access to the internet is indistinguishable from participating in modern society, the infrastructure bill includes $65 billion towards expanding broadband in low-income communities and rural areas across the U.S.

On the controversial side, the infrastructure bill also includes highly debated spending on the environment and continued shifts towards clean energy. $21 billion were agreed upon as an environmental budget, aimed at cleaning abandoned mines, former oil wells, and brownfield sites, which are sites that were previously used to industrial purposes but have since been abandoned due to hazardous chemicals. The bill also includes continued expansion for the shift towards electric vehicles, or EVs. $7.5 billion apiece has been dedicated to the continued construction of additional charging stations for EVs across the country, as well as the creation of electric school bus fleets.

While Congress will continue to debate additional spending in the Build Back Better bill, the infrastructure bill looks poised to address the majority of the structural issues facing our nation. However, it is not a perfect bill. With the majority of car manufacturers targeting 2025 for their continued transition to EVs, it remains to be seen if the $7.5 billion for EV charging stations will be enough to support a transition of this magnitude for our society. Likewise, there are provisions within the bill that will allow for renewals of certain parts of the bill, meaning that the actual price tag on this infrastructure bill may be difficult to quantify today. Only time will tell, but it appears that the infrastructure bill will help to bring our infrastructure in line with modern times.

infrastructure bill

 

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

tesla evs

 

tesla evsOctober 29, 2021

I got my Happy Halloween present last night.  I want to thank all of my Green Bay Packer friends for saving my football season. See, as a life long Miami Dolphin fan, there has been only one thing to look forward to in the last 20 years, and that’s when the last undefeated team goes down. Last night’s game went down to the final seconds, but Green Bay pulled out the victory against the undefeated Cardinals. Speaking of Trick or Treating, Janet Yellen says the new Build Back Better Spending Bill, which is now only a mere $1.75 trillion, is actually non-inflationary. Is this a trick or a treat? Really? Inflation today just notched a fresh, 30-year high, but somehow adding another honey pot of money is magically not going to impact inflation? The good news is that my friend “Brandon” says that this spending bill is free and already paid for. If that’s the case, why not go big or stay at home? Another freebee that got my attention this week is that the current administration is considering offering $450,000 in reparations for immigrants that were separated while crossing our southern border illegally. Wow, we didn’t even provide that benefit to our family and friends killed in the attacks on 9/11.

Moving on, I don’t know if you saw this week that Tesla has passed $1 trillion in market valuation. It is insane that we offer tax payer-funded credits to Tesla for cars that the average American can’t afford. In addition to this, does dysfunctional Congress understand that you just can’t plug your Tesla into your home outlet at night? Well, actually you can with a converter, but it’s going to take you four full days to charge your car. If you charge your car overnight, you are going to get a full four miles for your next day. Only 63 percent of homes in the US have garages or carports, which means we are going to have to build out infrastructure for the electric vehicle market. What will our apartment and condo dwellers do? Maybe before we put the cart before the horse, we should understand what it’s going to take and cost for electric vehicles to become mainstream. My “treat” for you this Halloween— you might have seen that Facebook changed its company name this week to Meta. This is like an episode of Star Trek the Next Generation. Maybe Mark Zuckerberg should have thought this name through a little bit better— I saw on the “interweb” today that Meta actually stands for Make Everything Trump Again.  Happy Halloween!

 

 Three Market Drivers

We focus on three market drivers that lead to notable movements in the stock market: economic fundamentals, technical environment, and investor sentiment.

Our fundamental indicator follows 19 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 U.S. economy and the stock market. Between our own polling and professional surveys like the American Association of Individual Investors (AAII) Investment Sentiment Survey and Citigroup’s Panic/Euphoria Model, we track the two most dangerous emotions for investors: fear and greed.

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

Initial Jobless Claims once again set a new pandemic low, coming in at 281,000. While this is still historically high, it is the continuation of a declining trend since last summer. However, is it declining because people are gaining employment, or is it declining because people are giving up on searching for work and leaving the labor force? That remains to be seen.

The three major indices all have handily recaptured their 50-day moving average, with all three at least two percent above this indicator. This further confirms the incline following the pullback from September.

The CBOE Equity Put/Call Ratio, a sentiment indicator that compares the number of put options being purchased (bearish) to the number of call options being purchased (bullish), had its lowest reading since mid-June at 0.36, implying strong bullish sentiment amongst investors.

tesla evs

tesla evs

 

Market Seasonality

One of the most underappreciated traits of successful investors is the ability to set realistic expectations. Whether it is the frequency of market corrections or historic market performance, having realistic expectations allows investors to avoid the two most dangerous emotions of investing: greed and fear. Today, we will discuss the seasonality of the stock market, and how it tends to affect market returns.

Market seasonality, also known as the “Halloween Effect”, refers to the unique market phenomenon that involves the stock market having a historically “strong” six months and a historically “weak” six months. The strong season refers to the period of November through April, whereas the weak season refers to the period of May through October. Since 1950, the market’s strong season has averaged a return of 7.16%, whereas the weak season has averaged a modest return of 1.67%. Since 2000, the market’s strong season has averaged a return of 5.23%, whereas the weak season once again lagged significantly with an average return of 1.09%.

Surprisingly, there has yet to be a conclusive reason for this consistent occurrence in the market. While there are multiple theories behind this phenomenon, one of the most prominent ideas simply has to do with investor psychology. As the year begins to wind down and we head into the holiday season, investors tend to renew their optimism towards their investments and the new year in general. In the same way that an overly ambitious New Year’s resolution fades after a few months, the reality of the new year tends to set in for investors by the time summer comes around. This reality check coupled with summer vacationing has caused some analysts to suggest that this diminished investor involvement and optimism may be the cause for the lull during the weak season.

Now, you may be asking yourself, “does this mean I should only invest from November to April, and then sell my investments in May?” Well, not exactly. If you were to buy the S&P 500 in May 1950 and only own it during the weak seasons, you would have a gain of 140% as of today. Conversely, if you only owned the S&P 500 during the strong seasons over the same timeframe, you would have seen a return of 9,683%, a significant difference. However, if you were to simply buy and hold the S&P 500 from May 1950 to the present, you would have seen a return of $23,349%!

In short, while the strong season significantly outperforms the weak season, the weak season also produces a positive return on average. With this in mind, you are able to have realistic expectations for your investments whenever a seasonal market lull occurs.

 

Market indices

Year-to-date returns

Large  Cap indices

S&P 500:                                      22.37%

Dow Jones Industrial Average:    16.47%

Nasdaq-100:                      22.42%

Mid and Small Cap indices

S&P 400 (Mid Cap):                                 21.10%

S&P 600: (Small Cap):                             23.22%

Russell 2000:                                16.36%

International indices

MSCI EAFE Developed Index:         9.64%

MSCI Emerging Markets:               -1.18%

MSCI ACWI ex-US:                                   7.26%

Economic sector indicestesla evs

Basic Materials:                              17.86%

Communication Services:            22.95%

Consumer Discretionary:             21.77%

Consumer Staples:                         6.56%

Energy:                                            53.46%

Financials:                                      37.02%

Healthcare:                                     16.67%

Industrials:                                     17.84%

Real Estate:                                    32.71%

Technology:                                    23.28%

Utilities:                                             7.18%

 

 

TESLA: The Future of EV?

To say that Tesla’s stock price is not based on today’s fundamentals is an understatement. In June 2020, Tesla surpassed Toyota as the largest car manufacturer in terms of market cap, which is simply the stock prices multiplied by the number of shares outstanding. Last Friday, Tesla made its most notable move yet, surpassing Facebook as the fifth-largest U.S. company in terms of market cap. For comparison’s sake, Toyota and Facebook had revenue of $248 billion and $86 billion in 2020, respectively, while Tesla had $32 billion in revenue. Also, Toyota sold over 9.5 million vehicles in 2020, while Tesla sold just under 500,000; for perspective, that is a market cap-per-vehicle-sold of roughly $30,000 for Toyota and $2.1 million for Tesla. In short, Tesla’s current stock price is dramatically being influenced by future expectations for the company and its industry as a whole.

Another aspect of Tesla’s to consider is how regulatory credits have affected its profitability. Regulatory credits are credits received from the government to incentivize certain industries- in this case, electric vehicles, or EVs. One way in which Tesla has made money has been by selling these regulatory credits to other car manufacturers who purchase the credits as insurance against future regulatory uncertainties. Prior to the past two quarters, Tesla had not had a profit when disregarding their regulatory credit revenue, meaning that the profits that earned Tesla a spot in the S&P 500 were due to their regulatory credits and not organic growth.

Still, Wall Street and everyday investors alike continue to maintain their best-case scenario valuation for Tesla. However, we believe there may be two causes of reflection for investors: increasing competition amongst the old guard of car manufacturers, and the costs and infrastructure required for EVs to become mainstream.

While Tesla has become the face of EVs and autonomous vehicles, the familiar names in the car manufacturing industry seem poised to throw their hats in the ring. General Motors CEO Mary Barra recently commented that GM can “absolutely” catch Tesla in U.S. EV sales by 2025, in part due to the construction of a $2.4 billion EV facility being built in Tennessee. Also, GM has already announced deals with FedEx and Verizon to provide an electric fleet for both companies, entering the commercial EV business before Tesla has had a chance to enter this space. Additionally, Ford announced earlier this year that they would be releasing an electric F-150 to maintain their market share on pickup trucks as the industry evolves. Speaking of market share, business analytics company IHS Markit projects Tesla’s market share of the EV industry to drop from 79% in 2020 to 56% in 2021, and all the way down to 20% by 2025. In short, Tesla’s virtual EV monopoly seems poised to face plenty of competition in the near future.

Finally, while a transition to EVs as a society would be a step in the right direction, the costs and infrastructure required to make this a reality remains a roadblock for companies like Tesla. Depending on the size of your EV’s battery and the quality of your charging station, the time required to charge an EV today can be anywhere from 30 minutes to 12 hours. If you have a charging station at your home, then the charge requiring a few hours isn’t a big deal. However, this would be a real hassle for anyone who lives in apartments or can’t afford an at-home charging port; if they have to go to a public charging station, what happens if the charge takes a few hours, or if there is a line to use the charger? At this point in time, our infrastructure isn’t prepared to handle that kind of demand. Regarding costs, while charging an EV is notably cheaper than gasoline on average, mounting a personal, at-home charging station can cost anywhere between $1,500 and $4,500. While EV owners today may expect to pay a premium for their vehicle, including the current costs of installation for a personal charging station may price out would-be EV owners.

Despite the increasing competition and infrastructure questions, the market continues to price Tesla for a perfect future. From this valuation, we can assume that the market is viewing Tesla in a different light: instead of being a car manufacturer, perhaps the market is viewing Tesla as a technology company, envisioning a future focused on EV software and EV battery innovation. Whatever the case may be, it will be interesting to see how both the EV industry and Tesla’s valuation evolve over the next few years.

 

 

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