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Capital Markets 2021 Third Quarter Outlook

Henry+Horne Wealth Management President Michael Carlin discusses the current capital market environment, and what we can expect from the third quarter of 2021.

 

 


Hey, everyone, it’s Michael Carlin, President of Henry+Horne Wealth Management. It’s 10:00 a.m. sharp, so I figured I’m ready. So why don’t we just go ahead and take a dive into our third quarter marketing outlook? It’s always an interesting series of times with economic data piling in from a variety of different sources.

As you know, every single quarter. What we do here is we’ll grab data from every different source that we can find available and work hard to understand, reconcile and compile a comprehensive overview of where we think the market and the economy is and is going. And the critical component of it is that we’re really working hard to get through all of the opinions and get through all of the organizations, institutions that are trying to sell or position something. What are we doing this for? We’re doing it to create a single, unified language with which to communicate to our clients.

So that as we’re putting our portfolios together and making implementation decisions and changes to your asset allocation and changes to your investment portfolio, we have these quarterly sessions to help explain where we’re at and why we might be doing some of those things. Chelsea is with us on the recording. So what that allows us to do is that when you have questions, you can certainly go ahead and pose those questions. You’ve got to kind of use the toolbar at the bottom of the screen to enable that chat feature or the raise hand feature, and Chelsea will connect with you and fire away because I do want to make sure that you get tons of value out of this.

If you do find yourself with questions like, hey, what was that? Can you go a little bit more into this? I’m absolutely happy and delighted to go through and answer those questions. So I’ve got a bunch of slides. As always, I’m going to work hard to get through them. My goal is it’s ten two. My goal is to try to get through this in under 40 minutes. Let’s see how we do. So I’m going to go ahead and share and share my screen real quick, and we’re going to just get right into the graphics, into the dialogue and what we’re looking at for the quarter, the first half of 2021, the 13th best six month run in stock market history. I bet you thought that the first six months were good. You probably feel that way by looking at the growth in your portfolio.

If you take a step back and remember, in the year of 2020, we had marvelous portfolio results, which were great. We were able to navigate rather successfully the COVID economic shutdown and what happened with the stock market. And you fold that into what’s been a remarkable start of the year. We’ve been leaning heavily into stocks more so than normal across all spectrum of client portfolios. And that’s proven to be the right place to be at the right time.

And if you look kind of historically, here what you’ll see is if you look at the three other similar market runs that we’ve had in 84, 2009, 2020. What’s interesting to note is that this time and really, even maybe even a few months before, if you’re looking at the cursor right now on the screen is where the market starts to lose a little bit of energy. Let’s just be really clear that the stock market investments in general do not go up linearly forever. They don’t. That’s just not how it works.

The way that the market works is it will go up. There’ll be pauses. There’ll be times of reconciliation or consolidation where the market will go down a little bit. And it wouldn’t be surprising for us to start to see that. That doesn’t mean there aren’t going to be areas of the market that we’re going to overemphasize now.

I’m going to talk more about that throughout this presentation, but it wouldn’t surprise me here using again history as a guide for us to be seeing some kind of a pause here with the market, especially given the fact that we’re making new record highs right now. And if you look across all areas of the market, take a look at where we are. January to June, end of quarter in July has been a nice start, too, by the way, on large cap stocks or small cap stocks with a terrific run this year. And from the market bottom March 24. Look at how far these areas of the market have run since the bottoms.

It’s been tremendous for those of you that have been our clients throughout 2020. You’ll note that we started making buy decisions on March 25, which was great and more on April 1. So those things were really helpful for our client results. And as you look, the question starts to become, is this sustainable? Are we going to see the same kind of returns in the second half of the year?

Where should we be looking for portfolio results? Should we be concerned? Here is the market overvalued. We’re going to get into all of that. Some other things of note is that it’s been a terrible year for bonds.

You could take a look whether it be US bonds down 2.6 Japanese bonds down seven or European area, all government bonds down or 2.6 the same as the US market. And how we’ve been able to combat that is certainly for clients with taxable accounts that have high tax brackets. We have been deploying money into municipal bonds, which was remarkably successful. If you look, the average municipal bond was up 1.1%. Our portfolio results year to date are up almost double that.

We’ll talk a little bit more about that as well. So we’ve been trying to find the safe havens within the safe haven in the municipal bond or tax free bond marketplace. It’s been a really nice move for our client portfolios. We can’t talk too much about the economic recovery without diving into where we are with COVID. It’s widely known for all of you that are tuning into this podcast in this market outlook, that where we are here in COVID.

We had our first wave, our second wave, our third wave here at the end of the year in 2020, and we are in a much better shape in terms of the amount of COVID cases that we’re seeing. If you look at where we are, anecdotally 44% of this data point here of US citizens had at least one dose of the vaccine. Now we’re trailing somewhere between 52% to 55% of US population having at least one dose of the vaccine today. The hope is the conventional wisdom is that we would want to be at a 70% nationwide total vaccination rate in order for us to reach a destination where we can truly and more meaningfully get over the hump. We’re seeing that worldwide the numbers are different.

This is largely India right here. This surge that has improved, it’s still a certainly different picture with where we are. But the way that I interpret this information is here. We have as much travel now as we did really pre-COVID and restaurant reservations for the most part are about where they were. So economically speaking, what we’re seeing is a return to normal.

Across the board, we’re seeing covered numbers improving. We’re seeing vaccination numbers improving. All of this leads us to part of this backdrop that feels pretty good about where the economy is right now and where we’ll be over the next number of months, which allows us to stay. This is part of the thesis of why we stay as aggressive as we are with the market. This is another component of it.

If you look at the trailing twelve-month earnings per share number for COVID, here’s where we were before COVID hit. And you can see that the economic numbers, which already started to deteriorate really before COVID a bit more meaningfully changed during COVID. And then look at what has happened. Our second quarter, 2021 estimated earnings per share growth for publicly traded companies has already exceeded where we were pre-COVID. And if you look at the third quarter and fourth quarter estimates, it’s showing continued estimated improvement.

And essentially what this means is these numbers would provide some fuel for the economy in the stock market to continue to rise. We’re expecting to see corporations continuing to earn more. I’ve got a couple of other slides on it, but fundamentally speaking, this is the kind of backdrop when you add it with the COVID data where it starts to make you feel like this stock market momentum has a little bit more room to run because the economic numbers are going to continue to improve, the earnings numbers should continue to improve. And we would wonder, though, when we would worry. Well, Michael has the valuation.

Fundamentally speaking, as the market gone too far, our stocks too high. And what are you seeing there? Because every time we hit a market high, these are the main questions that we get from clients like, Whoa, is this an issue I need to be worried about? If you look at price to sales, it’s alarmingly high. This gives you every if price to sales was the most vital statistic that we would use to determine stock price viability and affordability.

This would be a great concern. This on a standalone basis isn’t great. When you add it to price to book, you’re looking at numbers that are reaching the dot com bubble bursting. If you’re looking at where we are on a PE basis, you’re seeing some other similar highs. I’ve just showed you where the equity risk premium.

If you’re looking at each of these four key data and you look at them in total, a few of them are alarming. Where I categorize it is that it’s okay for now, but it’s something that we absolutely have our eye on. My expectation is you’re going to see price to book and price to sales, to continue to come down. As sales numbers improve, and as book value improves, that will end up naturally fixing some of these equations. And in much the same way that as earnings, the earnings numbers have dramatically improved for publicly traded companies.

And as a result of that earnings improvement, there has already been an improvement in the PE ratio. PE ratios have come down. Everyone can relax a little bit. That’s excellent news, a little bit less to worry about. And as those earnings numbers continue to improve, and again, this previous chart shows just that, then if that continues to be the case, as long as stock prices don’t go bananas higher, you should see continued improvement in the PE multiples coming back down to Earth and potentially providing everyone a well needed rest.

And worrying about, my goodness, is the stock market to overvalue here and then there’s, of course, a lot with great expectations. So as we’re putting together the fabric of what is the story of the market, is it overvalued? Is it undervalued? Is the economy moving forward? Should we be stalling out here?

I’ve got a couple of different data points that are incredibly important. If you look at the developing markets or the really developing countries, how much cash is sitting on the sidelines. There’s no better chart that I’ve seen than just this one here on the top left, cash balances, for the most part, stayed relatively flat until covet. What happened was a major retrenchment in spending a major push out of money from both the Fed and our government that went directly to consumers bank accounts. And there it stayed, not just here, but all across the world.

This is a remarkably great economic data point for us to count on for the market environment moving forward, we all know that consumer spending drives our economy here in the United States. It’s also similar in most of the developed world. And with that kind of cash that’s sitting on the sidelines, you can expect future retail sales, future, just all kinds of consumer confidence numbers to continue to look favorable, which is a great thing for both stocks, the broad stock market in the economy at large. You also look at rebounding consumer confidence numbers. So a confident consumer is one that spends, one that has a lot of cash in the balance sheet will be one that spends.

And to top it off, we’ve got companies that were coming out with earnings that were beating expectations, certainly over a five year average on both earnings and revenue. And the earnings guidance looking forward was way better than it is. And it has been on average. So if you’re looking at increased earnings, increased calendar year expectations, a more confident consumer, you really start despite all the things that you hear. And I’m sure that you have heard quite a bit about the market being overvalued, and this is going to be terrible.

And waiting for the other shooter drop, there’s a tremendous amount of economic data points to support where the market is right now, and all of this is buffeted into the fact that retail investors surging. So let’s not be surprised, given all the other data points that I’ve given you a more confident consumer more cash on their balance sheet, that we’re seeing individuals investing more in the stock market. This has been a real Renaissance and a resurgence of the individual investor. Unfortunately, some of that has been just expressed and concentrated in GameStop and AMC movie theaters and that whole Reddit chat room scene. But beyond that, we’re seeing retail investors redeploying some of that capital into the market.

That’s been helpful with improved balance sheets and improved confidence. One of the things that we’re losing, it’s still at a high, but we’re losing is this government assistance. All of you should know if you don’t already know that right around by September of this coming year, the unemployment benefits that States have been putting out there will run out. And what we have seen in States that have stopped with their additional unemployment payments. We’re seeing the employment numbers pick up dramatically.

So here’s the thing. Even though we saw a huge surge higher in government assistance with multiple stimulative pushes from the government, those numbers are coming down. I have another chart on the next slide that will explain this a little bit more completely. We’ve seen a tremendous amount of stimulus and checks going out for both businesses and individuals. All of that support has been wonderfully, supportive and helpful to help make this recession, maybe the skinniest recession that we’ve seen, maybe ever.

And what’s interesting is if you look at this gray line, this right here measures the duration and length of the recession. Look at where we were when they had the financial crisis or the dot com bubble bursting the relative size of this economic contraction, this recession may be the shortest on record in large part, that’s due to the fact that the government was so stimulative and did push so much money into the system. But we know that for as much as they pushed in 2000 and 22,021 as measured here, 2022 is going to be a lot less.

If Biden’s entire fiscal agenda gets through, it will look like this red bar here certainly will pale in comparison to where we have been the past couple of years. And in 2023, depending on what Biden’s agenda ends up passing, the economic assistance that’s coming from the government will look even skinnier.

This is a way that we can look at it maybe more dramatically. So here in Red, you can see that on an adjusted basis. Taking a look at what’s going into the economy, we’re going to have a lot less support from the government virtually, no matter how you slice it. Even if the Biden administration is able to get everything that they want, all of their infrastructure spending packages, they’re not all putting lump sum distributions of money into the economy at once. They’re spread out over ten years.

So because of that lack of stimulative effort, we are going to be doing a better job standing on our own. 2ft economically speaking, without that government assistance. So this positive thrust that we experience, we’re going to see what the economy is made of here rather shortly. So if you’re trying to figure out handicap, wow, that sounds terrible. Is that going to destroy the stock market?

No. In fact, let’s just go back to the negative thrust that we had here from 2010 ish all the way through to the beginning of 2015. This was a marvelous stock market run. We had a flat year in 2015, but you don’t necessarily need the government to drive money into consumers and businesses hands in order to have a thriving economy in a strong stock market, all you need for a thriving economy in a strong stock market is confidence and stability. People need to know with certainty what the plans are going to be.

And we do understand what the government plans are. So I don’t view that as a negative either. What about all of the spending that we have done in higher taxes? So I thought, what better way to handicap the tax proposals than to get a long term historical perspective on what taxes have looked like? Let’s take a look.

So if you look here at the corporate tax rate, the Biden proposal is to go from here to here, which, historically speaking, isn’t as high as we were just a few years ago, which wasn’t as high as where we were in the 80s and the 70s. And so if you look historically speaking, yes, it is a number that would have to be digested by corporations. Now, not all publicly traded corporations are going to feel that tax increase the same. There are certain sectors of the corporate market that will perform better if there’s a higher tax proposal because their tax picture may not end up changing all that much.

Look for us to as those administration moves, if they do, and indeed end up happening for us to navigate into certain sectors and areas of the market that will not be as heavily impacted from a corporate standpoint.

This one could be a little bit eye popping the capital gains rate. We’ve never going back to what is this, 1910 when capital gains weren’t introduced, maybe it was in 1910. We’ve never had a capital gains rate as high as what by the administration’s proposed at 43%. If indeed that does go through the conventional thought is, and we tend to side with it that a 43% capital gains rate is not reasonable. And part of that is that it’s been shown that when you do have capital gains increases, like again here in the 80s or again here, call it the early 2010 horizon.

If these things start to happen, what we do see is we do see economic activity and business activity slowing. You see less transactions, less volume because people are less willing to sell their appreciated assets to create that capital gain. And as a result, it’s quite often that capital gains tax increases do not mean increased revenue to the government. So on one hand, there might be parts of the political dogma that love the concept of higher capital gains rate because it is squarely focused on the wealthiest Americans who are deemed to be able to afford it best. But capital gains tax is a transaction based tax.

There may be significantly less transactions if we were to see that. So I wouldn’t expect to see that kind of a move, maybe something minor. But I could tell you that if this were indeed to become something that looks like it’s going to happen, our opinion would change pretty dramatically about the short term direction of the market. So right now, we’re operating under the belief that if there is a capital gains tax increase, it wouldn’t be all that great. And here you are on the individual rate.

Many people forget that in the 40s, the top tax rate was in the 90% range, the top tax rate for individuals in the 90% range. So people forget, yes, there were a lot of deductions that were offered to help really force the hand of economic activities that you didn’t have to pay a 90% tax rate. But that’s where we were where we are now again, appears to be the administration wants to do a little bit of a suggested increase in individual income tax. I don’t know what’s going to end up happening. None of us really do, but this doesn’t meaningfully impact the market. This move may hurt some companies more than others, and this could be a real problem if it were to end up happening. I don’t think you’ll get there.

We need to spend a few minutes talking about the Fed and the Federal Reserve and what they’re doing. Let me take a half a step back. The Fed is in charge of making sure that inflation doesn’t run away. That’s their number one objective. Number two, they do that by increasing or decreasing the supply of US currency. That’s in the system.

Well, they give it a third objective. And that is, can you also worry about our economic growth because anything that the Fed can do to help to promote economic growth, that would be helpful, too. They’ve been added a fourth objective beyond economic growth. And that is the labor market. Can you also pay attention to the job market?

So it’s inflation all the way to the job market. There’s so many different things the Fed is trying to balance, and their best tool that they traditionally will use is increasing interest rates. Mind you, when the Fed increases interest rates, that’s only on the shortest part of the yield curve. The Fed can’t change where interest rates are all over the place. It’s just on the really short stuff.

It’s just the short stuff that controls things like money markets in your bank account, whether or not it’s earning interest, the Fed has a direct impact on that by the virtue of the Fed putting it at zero where it’s been, it’s creating an environment where you earn nothing on your cash. It’s essentially trying to force people to take money out of their money market and deploy it into the capital system somehow. What’s interesting is that over the past few weeks, really? In June, we’ve seen that the timing with which people are people experts are expecting the first Fed interest rate increase to happen went from March to October of 2022 rather quickly, really, just over a few weeks where that sits today.

Why that’s important is that there may be some short term market confusion.

If the Fed does increase interest rates here, it has to recalibrate a lot of things. Well, our interest rate is going to be high enough where people are going to be disincentive to take their cash. And investors are they going to be hoarding cash at that point when they’re going to be earning a quarter .1 quarter 1% interest on their cash reserves? It’s very unlikely, but we are keeping our eye on it. So for now, there’s no immediate urgency that the Fed is going to be increasing interest rates.

If and when they do, it looks like they’re going to be starting small and starting slow. We realize that the numbers getting a little bit closer. October of 2022 is still a little bit of time for us to read and react. But we’re watching it. We’re watching it.

We put this kind of out of neutral. And if you look at what not just our own Federal Reserve has done. But the Federal reserves of the world have done collectively since, really the financial crisis, it’s been notable. Take a look back. So the dot com bubble burst and the Federal reserves of the world and these layers are made up of the European Central Bank here and kind of like this.

Can I call it red? Maybe like a light red. Our own central bank here in this, I’m going to call it periwinkle color. The bank of Japan here in Orange and bank of England and the Swiss National Bank, which really the Swiss had virtually nothing. So this is the amount of assets that were sitting on their balance sheets to make sure that as they were contracting and expanding the money supply, that they had some resources to do those things.

These things were fairly stagnant for a long period of time. And then the financial crisis hit and the moves that the central banks made this, by the way, I know this looks really small, but these were huge moves back then. The moves didn’t end up dissipating. You see that there was just continued movement to increase these balance sheets of these central banks across the world, cycle after cycle after cycle, whether it be Japan or here in the United States or in Europe. And then when COVID hit the amount of balance sheet expansion, look at what it was just now, comparatively speaking, to what it was during the financial crisis.

Now, mind you, that was record breaking numbers back then, the amount of money that’s been dumped into the financial system is astronomical. We’re seeing $26 trillion of money sitting on Federal Reserve balance sheets across the world. I would love to show you a chart next to say, hey, well, the last time Federal Reserve banks across the world had $26 trillion of assets on their balance sheet, this is what happened. I don’t have that it doesn’t exist. How are these banks going to unwind their balance sheets?

In truth, no one knows. What we do know is that this has done a lot to help support the stability and consistency of our financial system. So we don’t see any meaningful change to this yet. We’re going to watch it as we watch everything else. We made an effort to try to reverse that trend here.

As you can see, it worked at that time until COVID, where we ended up having to reverse course. I don’t know if the European Central Bank or us, if we’re going to be able to successfully or when that will be, we’ll be changing things. But we’re going to talk about the tapering here in just a few seconds. And behind the backdrop of the Fed doing everything it’s doing and the Fed potentially increasing interest rates is you have the ten year treasury.

I’ll switch screens here for just a second.

You may be wondering with all that money creation with all the money that’s sitting on the balance sheets. Where is the inflation? We should be having runaway inflation and consequently runaway inflation typically then means, wow, our interest rates need to go way up in order for us to be able to combat that inflation move. That’s what happened in the 70s. So it should be happening again.

And we’re not seeing that. In fact, if you look at all the headlines about where inflation is and these are all the different headlines stripped just from The Wall Street Journal by Bianco, which is one of the research outlets that we lean heavily on as the wall of inflation stories continued to come through, the ten year treasury just continued to go down, which is exactly opposite of what you think. And we’re looking at this ten year treasury, and this is a little bit of a longer look going back to 2012.

There are so many experts and analysts that have long since predicted that the ten year treasury is going to need to get back to normal. And this normal is this 3% range. We did end up making our way back there in 2019 briefly for a hot second. And since that moment where we hit right around three and a quarter. By the way, the ten year treasury had a massive slide down all the way through, bottoming out at Covet at 50 basis points and from 50 basis points all the way through up to one point 75, and then yet down again to one and a quarter.

It’s been a real wild run for the ten year treasury. It’s important to note, because there’s a lot of different reasons. One is mortgage rates, the other is the stock market, and three is that, as the Fed may seek to pull some of its easing and some of its balance sheet expansion back, what will the ten year treasury do? And if you look, the last time we had this, it was called the taper tantrum, the Fed said. We are going to be doing a little bit less with our balance sheet.

We’re going to be buying less mortgages. We’re going to be buying less Treasuries. And the market responded with a massive increase from 1.6% to 3%, seemingly overnight. It happened in a couple of months. And if you recall, the market did not react very favorably.

Well, there either. Then the Fed said, we’re not going to be tapering. Sorry, just kidding. What we expect to happen is we expect the Federal Reserve to be very deliberate with their messaging. They’re going to likely let us know exactly and how they’re going to start tapering.

But we would anticipate that the Fed to start doing less at some point here soon, because essentially what’s been happening is all the Fed buying of mortgages and buying of our yields has unnaturally suppressed and pushed down our yields, particularly on mortgage rates, which is having a pretty interesting impact on the housing market. And I do have some housing slides coming up here in the future. So we really do need to watch what the Feds doing with tapering, because I would expect when they reduce the taper, it will probably start with mortgage backed securities, which would mean that yields may jump there in that part of the market.

And if that does indeed end up happening, you could expect that to translate into the housing market and may give the housing market a little bit of a short term rest on this massive increase in housing prices, which I’ll get to a little bit more here in a minute.

So I hear you, Michael. Great. There’s been all this anxiety about inflation, but at the same time, we’re starting to see some pretty significant numbers. And let’s look at core CPI here in lime, lime or lime green color. And if you look at core CPI, it’s been hot, meaning that inflation numbers have come in really high and much higher than expected, the Fed has said since they’ve seen these high inflation numbers, yes, we realize that our number one agenda item is to keep inflation in check.

We think that the inflation will be in the word they use is transitory or short term. So since inflation is going to be short term, the Fed has said, we’re going to allow inflation to run away a little bit here. They’re increasing their bandwidth a little bit, and they’re going to allow it to temporarily move significantly higher than they normally would. They kind of put out there like maybe a 2% inflation rate would be fine for them. But my goodness, we’re going to let it run hotter.

There’s just been many that say, well, this is running hotter than maybe the Fed is comfortable with. We’re aware of that. But if this is a short term inflation move and all these numbers that we’re seeing with inflation, if they’re short term in nature, then maybe that’s okay, because maybe it’ll naturally fix itself. We have a lot of different factors at play here. This isn’t just the economy reopening, and we’re seeing a huge surge in hotel pricing.

We have a chip shortage. So we had a shortage of cars. So you’re seeing a huge increase in used car prices. You’re seeing these huge kind of short term increases in things that are driving these inflation numbers higher. But are they sustainable?

I look at things like order backlogs, which are super high in inventories, which are super low. Essentially, what we’re saying here is that the economy got caught for lack of better term, with their pants down a little bit. Once Covet hit. We had this whole just in time, very fragile economic system that we’re accustomed to ordering things when we needed it. We had no inventories.

For the most part, all of a sudden, Cove had hit everybody cut back, and all the suppliers had to figure out ways to continue to migrate their business and make it work. The amount of money that flooded the system was massive. There was a quick push to a reopening, and we haven’t been able to rebound. So as a result, there’s, like, almost no inventory of anything. I don’t care if it’s a house or if you’re trying to buy a new washer dryer.

There’s just not a lot of supply out there. And backlogs are high. So we’re seeing an economy that’s trying to reopen. We’re seeing a consumer that’s trying to spend. There’s a big backlog to that spending with not a lot of inventory.

So all of this lends itself really nicely to this being a short term situation. One of the things that people who are worried about inflation, then are concerned with say, well, hold on. What if this is a long term inflation problem? Here’s what I’ll give you. If inflation does become a long term problem and it is not a short term issue, it could be a real significant issue that we have to reckon with the stock market.

And here’s the data as to why inflation when it runs super high. Now, mind you, 14, 12%. This is you’re talking late Seventies inflation data right here. When you have super high inflation at that time, it was coupled with earnings multiples of ten to five, meaning people were very unwilling to pay a lot for stocks in those markets. With that kind of inflation number, the stock market is way overvalued.

We have to recalibrate everything. It’s a great concern. But if inflation with it running between 2% to 3% in this range here, if you look historically, this is kind of where you’re able to get really high valuations on your stock portfolios as measured in this 20 to 30 range right here. This is where we kind of like to live. But the data is very suggestive, and it is proof that there’s no fighting the fact that if inflation were persistently, the 6810 twelve persistently high inflation would end up, meaning that, yeah, we might have a problem with the stock market.

We would have to recalibrate your portfolios accordingly. We’re aware of this linkage. The question is, how likely is that? And right now, with all the economic data points that we’re looking at, because for a lot of reasons that we can point to about shortages, we can even look at the Panama Canal closing as a potential reason for inflation, too, as it did the second quarter when that ship was blocking the Panama Canal. This should be a short term thing that should fix itself.

If, in the event that it doesn’t believe me, we’ll be here and we’ll make adjustments accordingly.

But we do need to prepare for the Fed to do a little bit less of what it has been doing. So we look back to that market of when the Fed was talking about tapering, what did poorly and what did well, we know industrials consumer, discretionary financials did well, healthcare did well we know that real estate did poorly in utilities and consumer staples. We know that another way to look at it is we are aware here on the right of different things that we would be investing in.

Should the taper end up happening. We know the parts of the market that we would be avoiding.

So for those of you on the call that say, I have a pretty big reposition. Michael, should I be worried and I’m just letting you know right now, this is my way of saying we’re aware of if the Fed does end up talking about tapering, look to us to make Proactive moves with real estate positions as quickly and as swiftly as possible, because the last thing we want to do is again, for those of you that have significant real estate positions, it has been a wonderful holding.

It’s been a plus 15% to 20% holding this year. We have no interest in letting those profits dissipate. And we are aware that a Fed tapered discussion may end up doing that.

So look for us to examine that data, and if we start to see it, make some adjustments to the best degree of our ability to do that.

But, Michael, that’s just tapering the Fed shrinking their balance sheet. But what would we do if the Fed, because you mentioned the Fed may start increasing interest rates? What if the Fed really starts increasing interest rates? How does the stock market normally perform? Here’s the data.

It performs pretty well. You could take this thing back to the 70s all the way through. These are a bunch of different interest rate increasing cycles. And this is again focused on the ten year treasury. If we do see a significant rebound from where we are in the ten year treasury, the market does usually do well.

The rebounding interest rate scenario. What that really is telling you is that the economy is strong and it can handle it. Now I will say this is that you go through these interest rate increasing cycles, and once you kind of reach the top peak of that cycle, well, there’s a reason to step back into make your portfolio more conservative once you reach the end of that interest rate increasing cycle. That’s a whole different story. But I don’t view interest rates rising as necessarily a negative thing.

I don’t view the ten year rising as a negative thing, and history matches that expectation. We also know that growth and quality will outperform when we’re kind of in this new economic cycle, where it’s likely that the amount of growth that we’re seeing because it’s been so explosive. We’re coming off of a pandemic. The numbers have been explosive, so it’s not alarming to see that the growth numbers will slow down.

Anything is going to look like a slowdown. We’re not going to end up seeing if we have a 6% to 10% growth rate here in the United States, that’s more of a reflection of the year that was 2020 than it is kind of where we are economically speaking now, and it’s okay if we got a six to 10% growth rate here in the United States for 2021, that if 2022 came in at a three or four, that’s not a disaster scenario. It just means that we would need to focus again on growth and quality.

We have the historical data to back up our opinions in terms of why we would be doing it. We would just continue to make those navigations happen over and over again.

Let’s take a look at cash on the balance sheet, and this again is another positive. If you look, retail investors had increased the amount. We talked about this of cash on their balance sheet. We’re seeing some of it come back into both the stock market. We’re seeing some of it in consumer spending institutions.

They increase the amount of money sitting on their balance sheet. They let a little bit of it go up, but we’re seeing that increase. What this is telling you that there’s a lot of cash on the sidelines. Has it all flown back into the stock market? No.

Look at the amount of money that’s cumulatively floated into the bond market in the stock market. This is a wonderful sign for those of us that are concerned that the market is overvalued. If these numbers were flip flopped and stocks were over here, this is the amount of money flowing into stocks and the amount of money flowing into bonds. This is the kind of thing that is, we may hope, and we may expect to see consumers and institutions to continue to drive money in the market, particularly there’s fewer, fewer options in the bond market. And there is so much money in the bond market.

We’re aware of it. It’s largely concentrated on both corporate bonds and Treasuries. We tend to focus right now on municipal bonds, which the numbers look a heck of a lot better than doing the taxable bond market. I should say anecdotally we did end up making a transition for those of you that saw we took profits out of a bear bond fund position that was a little longer term, made it shorter term. We’re making moves and adjustments in your portfolios now.

But this is really, again, another decent to solid sign for the stock market to continue to move forward, saying that there is a little bit too much money in high yield, high risk bonds. This is not an area of focus that we have client capital in, but it’s interesting if you’re a prospective client, you don’t have capital with us and you have a bunch of money and you’re listening to this call. If you’ve got a bunch of money in high yield bonds, I don’t care what sector it is of the high yield bond market.

Historically speaking, there’s been so much money that’s deployed into this high yield junk bond marketplace that it’s probably a good time for you to take some profits there. That doesn’t mean that this high yield contraction can’t last for some time, but likely the easy money has been made there.

I could do an hour just on this, but just know this. This is not an area of concentration for us, but really, this is not going to be an area where we’re going to be seeking to try to extend and try to increase your rate of income in this high yield junk bond market. Certainly not now, given how overvalued that part of the market is, I mentioned I’ve got a couple of slides on housing here. What I’ll say is this two fold. On one hand, the number of homes that we have from a supply standpoint have not kept up with what we’ve needed.

We’ve needed this 2 million new home creation number in order to kind of meet our annual growth needs and we haven’t seen a recovery in the amount of homes that have been constructed since the housing bubble burst. This is part of the problem. This is part of the reason why there’s an under supply. There just aren’t enough homes on the market, but this is the other issue and this is, by the way, my favorite chart of the month, because it goes back to the 1800s. I never can find data that goes back that long.

But thanks to my friends at Bianco, using the Shiller Index, my goodness, you can go back. And this does a wonderful job of showing you just how expensive home prices are now as to where they’ve been. Historically, we’re really matching where we were in five. The saving Grace now is that home affordability has been outstanding, meaning people have more cash. We’ve talked about it.

There’s a lot of homeownership out there, so people are able to use their more appreciated homes to buy to buy new homes and home affordability, given the fact where our wages are is favorable as well. So even though home prices have run up, home affordability is not completely out of whack yet. This is proof that the housing market has rebounded significantly. This does not necessarily mean that it has to go down again, given the fact that we haven’t produced enough homes and supply is tight helps explain some of this.

So I would look more to where the Fed with their tapering of mortgage backed bonds as a potential future issue for us to continue with housing prices, but not housing prices in and of themselves.

I mentioned the Munich Credit World. What I would indicate to you here is that what we have done is we have put our client assets more into the triple B rated high yield unrated part of the mini market, which has had a marvelous 2021. Where for those people that have these AAA bond ladders, you had very little return this year. This has not been the case for our municipal bond portfolios, which have done exceptionally well. We’re comfortable there.

We think that again, that there are parts of the bond market that are horribly and horrendously overvalued. But it’s not where we tend to participate, but we’ll continue to monitor the Muni market. If that changes, we will make adjustments. What I would say here is the following from March to May, most parts of the world, from us to China, we’re seeing GDP growth forecasts increase. If you’re looking at real GDP growth on an inflation adjusted basis, we’re expecting to see an increase there.

What I’m saying is that we see global. The global growth story is not just located here in the United States, it’s elsewhere. As a result, we saw that there is an opportunity here with European stocks. So many of you on this call saw us make a very significant and meaningful move deeper into international and specifically Europe as well. So those adjustments, that adjustment has been an area that we think is significant upside.

So if you’re trying to figure out what we’re doing and how we’re trying to identify opportunities of future growth, this is part of the data set in the future economic indications of continued growth on a worldwide basis, particularly again overseas. We see real opportunity there because we think that the European stock market, more specifically, is about six months behind ours. So we think we’re in the right place at the right time there and positioning your assets appropriately. Are we too bullish? And I put this in there because there are economic data points, whether it be the Bull bear ratio or put the call that are trading at really high flashing red signals, we’re aware of it.

It’s not unanimous. It’s not across the board with sentiment. We think that the story here is a little bit more broad, and that is it still is a covet store. It’s still an economic reopening story, meaning that as the pent up demand continues to release itself, we’re going to see more people traveling. We’re going to see that affecting the travel and leisure and entertainment industry significantly, which increases the velocity of money, which puts more people to work.

And this is a really good and favorable thing I didn’t mention, but the jolts labor numbers came out and that’s just that. It’s a really nice employment data set. And what it shows is there’s nine and a half million job openings, which is phenomenal. But there’s been a real gap with job openings and people willing to jump into those jobs, which feeds itself really nicely into again, as we started off the call with the September changeover, where you’re going to have reduced or eliminated unemployment benefits, massive job openings.

Again, all of this stuff starts to come together and provide this next leg of increased consumer spending, more money in consumer pockets.

It helps again, continue to drive things like even the housing market forward, depending upon what the Fed does all of these things. Really, they lend themselves well to a continuation of what we’ve seen with the policy driven. I mentioned this here a little bit of fiscal stimulus. Right now. There’s policy support.

We are going to have to pay attention to the inflation target that the Fed puts out there.

We’ve got a number of things on the long term side that also are going to help dictate whether or not the stock market continues to roll. This has a lot to do with. Are we going to see different globalization policies and economic policies are going to change things. We’ll get more into that at a later time.

But here’s how I score it. And this is great data from Strategists. By the way, if you look at what we have for assets in terms of things that are economically in our favor, things that are net neutral. And we’ve talked about each one of these things throughout this whole market outlook call it’s starkly positive. So there’s nothing yet in the negative reliability category that we have to worry about at the moment.

So what I would say is this is that throughout the call, I tried to show you areas of the market, we’re emphasizing parts that we’re not touching, why we’re not touching it, how we’ve made some portfolio evolutions, like with the Bare bond fund, how we went from more medium term to shorter term in those trades that we’ve done this recently is this week. We’ll continue to make those evolutions as we see the market making its adjustments, its movements, its changes certainly do not hesitate to contact me or us, anyone at the office.

Whenever you need more data information, these charts are always available to you. We record these Market podcasts, Outlook podcasts. They’re always available to you.

You can go back and take a look at what I was saying last quarter or even years ago. We want to make this stuff completely transparent and available to you so that at all times, you know what we’re doing, what we’re thinking, how as we all work towards the same thing, which is to strive to help to create a robust portfolio that works in all markets. For each of you. I thank every one of you for tuning in. I really, really appreciate your time.

If you need anything, please let us know. Take care. Have a great safe summer. We’ll speak to you soon. Have a great day.