Week in Review

The Three Alternative Investments You Should Research Right Now

 

There is a current euphoria taking place in the public markets, but if you look forward it seems as though we are borrowing from future returns. Many financial institutions and analysts are projecting lower returns for both U.S. equities and U.S. bonds moving forward, and more broadly across major asset classes. Higher inflation levels are expected in the future as well, and with those higher levels, it’s going to be difficult to find places in the public markets that provide a good return without losing purchasing power.

This is why, for the right investor, alternative investments can really add value to a portfolio today. We look at incorporating alternatives into a person’s portfolio to enhance diversification and improve the risk-reward profile. Said differently, for the same level of risk, alternative investments help us to create portfolios that have a better expected return. But just like most things in life, not all alternative investments are created equally. We like the core, foundational alternatives: private equity, private real estate and private credit. Let’s explore each a little further.

Private Equity

There is tremendous opportunity in private equity. 80 percent of the companies in the United States with sales greater than $100 million are private companies. Now compare that to the shrinking opportunity set in public markets. In the 1990s, there were about 8,000 publicly listed companies in the U.S. but that number is now just under 4,000, meaning the opportunities there have decreased dramatically.

You’ll also see the opportunity in private equity if you look at the overall market cap. The average size of private companies is smaller than public companies, meaning they have more room to grow. And if they have more room to grow, that’s a growth opportunity for the investor.

When you’re looking for returns that are larger than what public markets have offered, private equity offers a huge opportunity partly because of the liquidity premium. Simply put, if you’re going to put your money in something that is difficult to get it out of, you can expect greater returns for that inconvenience.

Now is a great time to explore an investment in private equity because there’s been an amazing evolution in the vehicles and structures that investors now have at their disposal. It used to be that your only option for investing in private equity meant your capital would be locked up for 7-8 years before you’d see a return of your capital. These days, many new investments provide quarterly liquidity opportunities, which provides far greater flexibility for investors.

Private Real Estate

Real estate is a major contributing factor to consumer net worth, which makes these hard assets a great wealth accumulation vehicle. As I look at the current environment, investments in private real estate make even more sense because they serve as a natural inflationary hedge. As interest rates go up, lease rates go up. Landlords are able to pass along rising rates, instead of suffering from them.

Many private real estate investments are also very tax efficient, between the usage of depreciation, taxed deferred growth, and even 1031 exchanges that can allow investors to roll gains from one property or offering forward to another without having to recognize the capital gain at the time of the transaction

Finally, real estate doesn’t necessarily need to be confined to one particular sector. Many people think of retail stores, office buildings, or apartments when they think of this asset class, but other segments such as data centers, industrial warehouses, and even cell phone towers also provide access to secular growth trends in the economy.

Private Credit

For investors who need income ,where can they get it in this current low interest rate environment?

With private credit, you’re also able to extend to other areas of fixed income that you can’t touch in the public markets. For example, collateralized loan obligations or CLOs offer shorter duration fixed income exposure for your portfolio, which helps to limit interest rate risk. If you can get your money returned to you quicker, you face less risk from inflation lessening your purchasing power. Private lending can also offer higher rates of income for the same level of credit risk, again due to the illiquidity premium that is typically associated with these types of products.

Implementation

As we have noted, alternative investments can provide a significant diversification benefit as well as inflationary protection for an investor’s portfolio. But they also help instill better investor behavior. This was evident in March 2020 when the market crashed at the start of the pandemic. Alternative investments are often harder to pull one’s money out of in a hurry, so instead of panic selling, investors stay in and reap the benefits of the recovery.

Today’s environment calls for outside-the-box thinking for investors hoping to achieve healthy returns while maintaining a reasonable level of risk. There is by no means a perfect solution for everyone, and there could be some additional requirements necessary to participate in these types of investments so they must be used carefully, only as a satellite option to complement, rather than replace, a traditional investment portfolio. Because reporting requirements are not as stringent as those for publicly traded securities, a thorough due-diligence process is an absolute necessity before investing, and on an ongoing basis for monitoring purposes. This is where having a research team on your side can be incredibly helpful. If you have questions about alternative investments and how they can best be incorporated into your portfolio, don’t hesitate to reach out to us here at Prime Capital Investment Advisors.

​Advisory products and services offered by Investment Adviser Representatives through Prime Capital Investment Advisors, LLC (“PCIA”), a federally registered investment adviser. PCIA: 6201 College Blvd., 7th Floor, Overland Park, KS 66211. PCIA doing business as Prime Capital Wealth Management (“PCWM”) and Qualified Plan Advisors (“QPA”

Month in Review Week in Review

Q2 Quarterly Client Update

And the beat goes on…

Essentially treading water for the first half of the quarter, markets found their footing and finished positive across every major asset class. Continued vaccination success, massive amounts of fiscal and monetary stimulus, solid economic activity, and earnings acceleration all contributed to the investor optimism that witnessed the S&P 500 deliver positive quarterly results for the fifth consecutive quarter, which is the longest consecutive streak since the nine-quarter stretch that ended in 2017. Though many of the quarter’s headlines centered around fear-invoking risks like inflation and sooner than expected modifications to the Fed’s accommodative policy, the markets appeared unphased as concerns of growth moderation sent yields lower and equities higher. While still lagging other major US equity markets year-to-date with a return of 12.54%, as markets shifted toward higher quality, the more interest-rate sensitive and growth-oriented NASDAQ led the charge with a second-quarter return of 9.49%, as compared to returns on the S&P 500 of 8.55% and 15.25% for the quarter and year, respectively. While only delivering returns of 4.29% in the second quarter, US small-cap stocks, as measured by the Russell 2000 index, garnered solid returns for the year of 17.54%, only to be outdone year-to-date by the S&P MidCap 400 return of 17.59%.

With uneven COVID containment across emerging market countries, along with varying degrees of inoculation success, surging commodity prices, and falling US yields, the MSCI Emerging Market Index delivered a positive return of +5% in the second quarter; bringing the year’s return across developing countries to 7.4%. Conversely, foreign developed countries (primarily Europe and Japan) continue to lag the US in vaccine rollout progress, though France and Germany are approaching 50% of their populations receiving at least one inoculation. Rising concerns over the Delta variant continue to threaten the near-term recovery. Fortunately, recent vaccination success and easing of some travel restrictions drove the cyclical heavy MSCI EAFE Index (Energy, Financials, Industrials, and Materials make up more than 40% of the index) +5.2% for the period, bringing the total for the year to +8.8%

Despite high levels of inflation reported over the quarter, long-term inflation expectations are actually down on average. When coupled with an overly accommodative and reassuring Fed, along with the looming fiscal cliff and Delta variant posing risks to the expansion, the market witnessed the yield on the 10-Year Treasury contract about 30 basis points (0.30%) to end the second quarter at 1.45%; still up more than 0.50% for the year. While the inverse relationship between bond prices and yields pushed the return on the Bloomberg Barclays U.S. Aggregate Bond Index up 1.8% for the quarter, the index remains down -1.6% for the year.

Economy

Though first quarter GDP accelerated at a 6.4% rate, the US still sat below its pre-pandemic growth levels. Massive amounts of Congressional and monetary stimulus continued to drive economic activity back into positive territory in the second quarter. The Conference Board forecasts that US Real GDP in the second quarter will rise to a 9.0% annualized rate and 6.6% year-over-year for 2021. While Bloomberg forecasts have moderated in recent weeks, they’re still anticipating second-quarter growth of 10% (from 11% in March), and 7.2% for 2021 (from 7.7% in March). Growth of 7.2% for the year would be the fastest annual rate since the economy surged out of the 1981-1982 recession. With the effects of the March Congressional stimulus package fading, several key economic indicators have demonstrated some recent softening. While consumer spending was robust in the first quarter (up +11.4%, according to Bloomberg), we’ve witnessed a normalization in retail spending in both April and May. Furthermore, as the economy has continued to reopen, consumers have started to shift their spending preferences away from goods and more toward experiences and services, like dining out and traveling. In general, consumers appear poised to drive significant pent-up demand, as evidenced by their elevated savings of 14.9% (more than double the post-Great Financial Crisis average), unprecedented consumer net worth, and an M2 Money Supply of more than four trillion dollars above average levels – up 18% year-over-year, and 30% higher since February 2020. Given that the consumer comprises roughly 70% of our economy’s output, spending should serve as a significant driver for economic growth for the remainder of the year. That spending should be supported further in the intermediate term from both the monthly child tax credit payments that are going out this month, coupled with the eventual spend-down of excess savings.

The Fed, Inflation, and Labor Market

Over the course of 2021, equity markets have become increasingly more dependent on overly accommodative central bank policy, where Fed policy appears priced to perfection and risks of a policy mistake appears more likely than not, hence the flattening yield curve. Though continually pressured, the Federal Reserve has remained resolute in their current policies and messaging, maintaining their accommodative stimulus through open-ended Quantitative Easing (QE4) and keeping rates historically low. This “anything it takes” mentality has seen the Fed’s balance sheet balloon to more than $8 trillion, with no real signs of slowing. The Fed is currently purchasing $120 billion ($80 billion US Treasury securities and $40 billion in mortgage-backed securities) per month and has indicated the intent to maintain this pace through 2021 and possibly into 2022, before beginning to taper their purchases. As we’ve communicated in the past, taper does not mean that the Fed will halt buying bonds; it means that they will slow the pace of their purchases. Tapering could reduce purchases from $120 billion per month to approximately $100 billion per month in a transparent and well-communicated manner. Perhaps the two most monumental changes coming out of the surprisingly hawkish June Federal Open Market Committee was the mention of “talking about talking about tapering” and revising their projection for rate increases from 2024 to 2023. The Fed continues to communicate that their decisions will hinge on actual data and not forecasted data. In the third quarter of last year, the Fed changed its policy framework to achieve 2% inflation and adopted a soft, or flexible, inflation averaging approach. This soft approach would hypothetically allow inflation to run above 2% for an undisclosed period, as long as the average falls back 2% over the long run. With so much emphasis on inflation, what’s often overlooked is the Fed’s dual mandate to both average their 2% inflation target and their commitment to achieving “substantial further progress” toward the goal of maximum employment.

Inflation measures the rate of increase in prices of goods over a given period, and high inflation levels can damage productivity and economic growth. Last year, prices fell in March and April and remained low in May, creating a low base for future year-over-year readings – resulting in price level changes that might be slightly exaggerated. But in looking at the economic data, it’s hard to deny inflation currently exists. The Consumer Price Index (CPI), a prominent measure of inflation, witnessed Headline CPI come in at 5% and 5.4% in May and June, respectively, which are the highest readings since 2008. After stripping out the more volatile food and energy components, the Core CPI registered its highest reading since 1991, 3.8% and 4.5% for the same respective months. While the increases in the basket of goods measured in the CPI in April, May, and June did include some noise resulting from the base effect, most of the price increases have been a result of significant supply chain disruptions, coupled with a significant surge in demand. During the pandemic, inventory levels were significantly depleted, and once the economy began to reopen, demand surged, causing a bottleneck in the supply chains. Many consumers have felt this if they’ve tried buying a car, buying a house, or even building a deck. This type of supply chain disruption is relatively normal during recovery periods and can be seen as mostly transitory. Therein lies much of the debate around inflation – will it be transitory (temporary) or structural (sticky)? When looking at the most recent two CPI reports, more than half of the total increase in Core CPI can be attributed to used cars, rental cars, hotels, and airfare. These small categories only represent a combined total of Core CPI of about 6%. Their large price jumps are due to reopening and supply chain disruptions, both temporary, or transitory. Conversely, the larger components like rent and healthcare represent roughly 49% of Core CPI and have experienced only modest price gains; though the two consecutive readings of 0.3% for rents is worth noting and will be important to monitor going forward. One of the major issues causing disruptions across nearly every economic sector is semiconductor, or chip, shortages. Our everyday lives have become dependent on chips; they’re found in nearly everything from automobiles, dishwashers, phones, computers, to microwaves, etc. Through May, the average order-to-delivery interval reached all-time highs of 18 weeks. In other words, if a single chip was ordered in May, it took 18 weeks for that single chip to be delivered – hence the severe disruption in production and significant spike in new and used car prices.

Over the coming months, perhaps the most telling variable to monitor for clarity around inflation’s transitory or structural nature will be wage growth. It’s difficult for inflation to be sticky or structural without upward wage pressure. June’s 3.6% year-over-year wage growth is worth noting, though not overly concerning. Should the labor market start to exhibit the same pricing power as we’ve witnessed in commodities, we could witness a wage/price spiral, causing yields to normalize quicker than anticipated and indicating inflation might last longer than expected. When wages increase, businesses must increase the cost they charge for their goods and services to compensate for the higher wages, adding to inflationary pressures. If prices remain elevated, workers will eventually demand another wage increase to offset the increase in their cost of living – making inflation more structural. To correct the labor shortages and hire workers to meet surging demands, employers are getting creative to hire and retain workers, including higher wages. Several retailers, like Walmart, have raised their internal minimum wages to $15 per hour or more. Once these changes are made, an employer can’t reduce employees’ salaries, making these changes more permanent. Additionally, during first-quarter corporate earnings announcements, nearly every announcement mentioned inflation and the rising input costs applying pressure to their margins, and furthermore, their intentions to pass those increased costs along to consumers. Much like wage increases, if a company can successfully pass along cost increases, and consumers are willing to pay those higher prices, then once supply chain disruptions normalize and their cost of goods fall in line, many companies are not willing to slash consumer prices – again making inflation more structural and stickier than transitory and temporary.

We partially agree with the Fed and Treasury Secretary, Janet Yellen that the current supply chain disruptions will start to work out, and price gains will start to normalize. We believe that inflation will be transitory in the sense that it should start to moderate sometime in the third or fourth quarter of this year from its current levels. However, we also think that we could be headed for a regime change in future inflation. In other words, the post-Great Financial Crisis inflation averaged less than 2%, and we wouldn’t be surprised to see the next several years running closer to the 3% range. Outside of that view, when looking at the June CPI numbers of 5.4% and 4.5% on Headline and Core, respectively, it’s understandable investors are fearful. However, we are still dealing with some base effects, which are causing overstated numbers. This same base effect will also impact year-over-year CPI data as we approach the second and third quarters of next year, except then we’ll experience a reverse base effect. This time next year, the base will be these elevated inflation results currently being reported, which could produce negative year-over-year CPI readings. Given the cliff experienced during the heart of the pandemic, followed by sharp V- shaped reversals, we anticipate several variables to suffer from base effects for at least another year or so, continuing to insert noise into the data. When looking at the metrics closer, about 50% of the components tracked in the CPI basket that contributed to growth came from transitory components like buying used cars (up 45% YoY) and dining away from home. Therefore, as production comes back online, many supply chain disruptions should dissipate and lead to a moderation in inflation.

The rest of the Quarterly Update covers the Federal Reserve, Congressional Stimulus, and other Implications moving forward. Read more.

The preceding commentaries are (1) the opinions of Chris Osmond and Eric Krause and not necessarily the opinions of PCIA, (2) are for informational purposes only, and (3) should not be construed or acted upon as individualized investment advice. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal. Past performance is no guarantee of future results.

Advisory services offered through Prime Capital Investment Advisors, LLC. (“PCIA”), a Registered Investment Adviser. PCIA: 6201 College Blvd., 7th Floor, Overland Park, KS 66211. PCIA doing business as Qualified Plan Advisors (“QPA”) and Prime Capital Wealth Management (“PCWM”).

Financial Planning

Inflation: Transitory, Sustained, or Runaway?

The buzz word of the year in the financial industry has without a doubt been “transitory.” This is the label that Federal Reserve Chairman, Jerome Powell, Treasury Secretary, Janet Yellen, and many leading economists have placed upon the recent surge in inflationary pressure sweeping across the country. While inflation has been somewhat dormant coming out of the financial crisis in ’08-’09, it’s been painfully visible for anyone who has tried to build a deck, buy a used car, or hire new employees in recent months. Inflation can also have major implications for financial markets, as analysts and investors obsess over every word from the Federal Reserve trying to understand exactly when this unprecedented level of “easy” monetary policy will start winding down.

The argument from those in the “transitory” camp would suggest that this bump in prices was inevitable due to the massive disruption in the supply chain from the COVID-related shutdowns, coupled with a surge in demand from consumers as the economy springs back to life. The Federal Reserve sagely began preparing for this scenario almost a year ago, when they shifted their “inflation control” policy to seek an average rate of 2% over the long run, rather than a fixed target, giving themselves the flexibility to keep policy loose (interest rates low) even if inflations should spike for a few months or even a few years.

Those that fear runaway inflation would argue that this new approach could be dangerous. They are concerned that the massive amount of stimulus money sent directly to consumers in the last 12 months, funded by an ever-increasing mountain of debt, will cause prices to spin out of control. The consequence of this, they fear, would be a need for a more drastic movement upward in interest rates, as was seen in the 1980’s. This could indeed cause a severe recession and potentially a sharp decline in real estate prices as affordability would drop overnight.

So which side is correct? We will take a deeper dive into this topic in our quarterly newsletter, but in short, we fall somewhere in the middle. We’ve already seen evidence of cooling in some of the hottest commodities from a few months ago (lumber, copper, etc.). But it’s quite possible that other areas that have seen price increases, such as the cost of labor, might be more sustained. This “elevated” but not “runaway” level of inflation shouldn’t spell disaster for investors, but does require careful consideration in the portfolio construction process. As I mentioned above, stay tuned for more on this topic in the coming weeks, but please don’t hesitate to reach out to our team if you would like to discuss your personal thoughts and concerns in more detail.

 

Financial Planning

Marriage and Money

Historically, June has been the most popular month for weddings. Marriage brings change to a couple’s financial situation that can affect all aspects of their life together. With it being wedding season, we thought we’d share some financial implications to help you as you enter this new time of your life.
Before the “I Do’s”

  • Communication is crucial to a successful marriage. Money is often considered an uncomfortable and sometimes even controversial subject. However, understanding the complete picture of each other’s finances is crucial to starting things off on the right (and honest) foot. Have a heart-to-heart about how each of you value money, how your parents talked with you about finances and your spending tendencies (i.e. one person prefers to save, one person spends more freely).
  • Commit to transparency with one another. Be sure to disclose all assets, liabilities and credit information. Your wedding is a celebration of your love. But marriage is a legal contract and it’s important to know what you’re getting into before committing your lives to one another.
  • Create a plan. If you have significant debt, create a plan together on how you will pay it off.
  • Create a household budget. By creating a budget, you create a framework for how to achieve your financial goals as a couple. Ask yourselves questions like, “What are your top priorities in life?” and “Will one of us stay at home full-time or part-time to care for children?”
  • Talk about a financial plan for your wedding. Between flowers, dresses, venues and food, wedding costs can easily get out of control. Determine your wedding budget, figure out how much assistance if any you will get on the costs and then set up your expenditures accordingly.

After You’ve Tied the Knot

  • Update account beneficiaries. If you have life insurance or retirement accounts, this is a good time to update your beneficiaries. This helps to ensure that, when the time comes, the assets you accumulate are distributed the way you intend.
  • Have regular check-ins. Remember when we said communication is crucial to a successful marriage? Well, we mean it! Financial discussions are ongoing. Set a regular “marriage meeting” (weekly, monthly, bi-monthly) and talk about whether your budget is still on track or if you need to make adjustments.
  • Consider working with a financial advisor. Clearly we are big advocates of using an advisor. And for good reason. A financial advisor is a neutral party who can help work through the differences you and your spouse may have. They can also help you see your spending habits more clearly and work with you on a reasonable plan based on your unique financial goals.
  • Talk about retirement. Yes, seriously! Whether you’re 24 or 44, it’s important to talk about your retirement goals as early as possible so that you can work toward them immediately. Consider whether you are both on the same page about your ideal retirement age. Discuss your expectations for retirement and the lifestyle you envision for yourselves. This is another way a financial advisor comes in handy, helping you establish your plan and keeping you accountable to it, in good times and in bad.

Are you and your partner ready to create a plan for your future together? We are ready to help! Set up an appointment with one of our advisors to get started.


*Securities offered through Private Client Services, Member FINRA/SIPC. Advisory products and services offered through Prime Capital Investment Advisors, a Registered Investment Advisor. Prime Capital Investment Advisors doing business as Qualified Plan Advisors, “QPA.” Private Client Services, Qualified Plan Advisors, and Prime Capital Investment Advisors are unaffiliated entities. 6201 College Blvd., 7th Floor, Overland Park, KS 66211
*Prime Capital Investment Advisors, LLC (“PCIA”) and its associates do not render any legal, tax or accounting advice nor prepare any legal documents.

Week in Review

Week-in-Review: Week ending in 04.30.21

The Bottom Line

● Global equities were little changed for the week with the S&P 500 essentially flat while the Nasdaq, Russell 2000, and international stocks were slightly negative.
● The yield on the benchmark U.S. 10‐year Treasury note climbed +0.07% to 1.63% as commodity prices continued to rally and inflation expectations continued to rise.
● Transportation stocks are at all‐time highs after 13 straight weeks of gains, their longest winning streak in 122 years. Railroads, airlines and trucking companies make the Dow Jones Transportation Average, which is up + 23% this year as investors reward companies that will benefit from the U.S. returning to normalization.

Americans get back out and about.

Global equities were little change for the week, with the S&P 500 essentially flat at +0.02%, while the Nasdaq Composite and Russell 2000 small cap index fell less than half a percent. Although technology has been the driving force for markets since the pandemic recovery began more than a year ago, it has been old fashioned railroads, airlines, and trucking companies that are enjoying strength lately. The Dow Jones Transportation Average gained +1.4% last week, marking its 13th consecutive weekly advance, which is the index’s longest streak since it rose for 15 straight weeks in January 1899. The Transportation index is up +23% this year, to all‐time highs, and well ahead of the +10‐15% gains other U.S. indices are up. The Transportation’s strength underscores investors’ high expectations for a rebounding economy that will benefit companies carrying goods and raw materials as Americans get back out and spend again. And spend they did. The U.S. reported a +6.4% first quarter GDP growth fueled by a surge in personal consumption, to a +10.7%annual rate, the second best rate of spending since the 1960s. Corporate earning have maintained their impressive growth, now running at +45.7% with about 60% reported.

Digits & Did You Knows

RENT IS DUE —The median asking monthly rent rose to$1,463 in March across the country’s 50 largest markets, according to a report from Realtor.com. That’s a +1.1%increase on an annual basis and the first month where the pace of rent growth increased since last summer, the report showed. The Covid‐19 vaccine rollout and rising employment are prompting more people to move back into cities and look for apartments to rent (source: Realtor.com, WSJ).
STICKER SHOCK — The median sales price of existing homes sold in the U.S. was $329,100 in March 2021, an all‐time high both on a nominal basis and on an inflation‐adjusted basis (source: National Association of Realtors, BTN Research).

Click here to see the full review.

Source: Bloomberg. Asset‐class performance is presented by using market returns from an exchange‐traded fund (ETF) proxy that best represents its respective broad asset class. Returns shown are net of fund fees for and do not necessarily represent performance of specific mutual funds and/or exchange‐traded funds recommended by the Prime Capital Investment Advisors. The performance of those funds may be substantially different than the performance of the broad asset classes and to proxy ETFs represented here. U.S. Bonds (iShares Core U.S. Aggregate Bond ETF); High‐YieldBond(iShares iBoxx $ High Yield Corporate Bond ETF); Intl Bonds (SPDR® Bloomberg Barclays International Corporate Bond ETF); Large Growth (iShares Russell 1000 Growth ETF); Large Value (iShares Russell 1000 ValueETF);MidGrowth(iSharesRussell Mid‐CapGrowthETF);MidValue (iSharesRussell Mid‐Cap Value ETF); Small Growth (iShares Russell 2000 Growth ETF); Small Value (iShares Russell 2000 Value ETF); Intl Equity (iShares MSCI EAFE ETF); Emg Markets (iShares MSCI Emerging Markets ETF); and Real Estate (iShares U.S. Real Estate ETF). The return displayed as “Allocation” is a weighted average of the ETF proxies shown as represented by: 30% U.S. Bonds, 5% International Bonds, 5% High Yield Bonds, 10% Large Growth, 10% Large Value, 4% Mid Growth, 4%Mid Value, 2% Small Growth, 2% Small Value, 18% International Stock, 7% Emerging Markets, 3% Real Estate.

Advisory services offered through Prime Capital Investment Advisors, LLC. (“PCIA”), a
Registered Investment Adviser. PCIA doing business as Prime Capital Wealth Management
(“PCWM”) and Qualified Plan Advisors (“QPA”).
© 2021 Prime Capital Investment Advisors, 6201 College Blvd., 7th Floor, Overland Park, KS 66211.

Week in Review

Week-in-Review: Week ending in 04.23.21

The Bottom Line

● The S&P 500 Index was just 0.13% away from making its fourth consecutive weekly record high. Trading was choppy during the week despite strong economic data and stellar earning results with more S&P 500 companies beating EPS estimates than average, and beating those EPS estimates by a wider margin than average.
● After rising for essentially every week in February and March, the yield on the 10‐year U.S. Treasury bond has fallen for each of the three full weeks in April, going from a closing high of 1.722 on 4/2 to 1.558 on Friday 4/23. That has helped the Bloomberg Barclays US Aggregate Bond Index to gains in three of the last four weeks.

Missed it by that much…

U.S. stocks just missed making record highs for the fourth Friday in a row following a week of choppy trading. The S&P 500 rallied more than +1% on Friday after a sharp drop on Thursday on news that the Biden administration planned to nearly double capital gains taxes on high income earners. The rebound on Friday was buoyed by new highs in both the services and manufacturing Markit Purchasing Managers Indexes (PMIs) suggesting faster and broader growth in the second quarter than was already expected. The PMI data underscored strong economic activity data from the Chicago and Kansas City Fed regional economic surveys. New home sales were also very strong, as was the Conference Board’s Leading Economic Index (LEI). Meanwhile, it is shaping up to be a stellar earnings season, particularly for cyclical sectors like banks and retailers. According to The Earnings Scout the new blended first quarter earnings growth estimate for the S&P 500 is +24.2% from last year. At the beginning of the year, Wall Street was only expecting +12.2% growth for the first quarter. FactSet reports that 84% of S&P 500 companies have beaten estimates so far, which would tie the highest earnings beat rate since FactSet began the data in 2008.

Digits & Did You Knows

GROWING DEMAND, LAGGING SUPPLY —Inflation, as measured by the Consumer Price Index (CPI), was up +0.62%in March 2021, the highest monthly rate recorded in the United States since June 2009 (almost 12 years ago). There have been just 6 months in the last 30 years (360 months) when monthly U.S. inflation has been greater than +0.62%(source: Bureau of Labor Statistics, BTN Research).
DO YOU HAVE ANY PEANUTS? — 1.49 million travelers went through TSA screening at U.S. airports last Thursday 4/15/21, up from just 95,085 screened passengers on 4/15/20, but still down from 2.62 million passengers on 4/15/19 (source: Transportation Security Administration, BTN Research).

Click here to see the full review.

Source: Bloomberg. Asset‐class performance is presented by using market returns from an exchange‐traded fund (ETF) proxy that best represents its respective broad asset class. Returns shown are net of fund fees for and do not necessarily represent performance of specific mutual funds and/or exchange‐traded funds recommended by the Prime Capital Investment Advisors. The performance of those funds may be substantially different than the performance of the broad asset classes and to proxy ETFs represented here. U.S. Bonds (iShares Core U.S. Aggregate Bond ETF); High‐YieldBond(iShares iBoxx $ High Yield Corporate Bond ETF); Intl Bonds (SPDR® Bloomberg Barclays International Corporate Bond ETF); Large Growth (iShares Russell 1000 Growth ETF); Large Value (iShares Russell 1000 ValueETF);MidGrowth(iSharesRussell Mid‐CapGrowthETF);MidValue (iSharesRussell Mid‐Cap Value ETF); Small Growth (iShares Russell 2000 Growth ETF); Small Value (iShares Russell 2000 Value ETF); Intl Equity (iShares MSCI EAFE ETF); Emg Markets (iShares MSCI Emerging Markets ETF); and Real Estate (iShares U.S. Real Estate ETF). The return displayed as “Allocation” is a weighted average of the ETF proxies shown as represented by: 30% U.S. Bonds, 5% International Bonds, 5% High Yield Bonds, 10% Large Growth, 10% Large Value, 4% Mid Growth, 4%Mid Value, 2% Small Growth, 2% Small Value, 18% International Stock, 7% Emerging Markets, 3% Real Estate.

Advisory services offered through Prime Capital Investment Advisors, LLC. (“PCIA”), a
Registered Investment Adviser. PCIA doing business as Prime Capital Wealth Management
(“PCWM”) and Qualified Plan Advisors (“QPA”).
© 2021 Prime Capital Investment Advisors, 6201 College Blvd., 7th Floor, Overland Park, KS 66211.

 

 

Week in Review

Week-in-Review: Week ending in 04.16.21

The Bottom Line

● For the third week and a row the S&P 500 and Dow Jones Industrial Average both closed at new record highs. Earnings and economic data continues to come in stronger‐than‐expected.
● After being relatively flat for the last two weeks, the yield on the 10‐year U.S. Treasury bond fell 8 basis points, its largest weekly decline since June 2020, partly due to renewed buying from overseas, particularly Asia.
● After subpar economic activity in February, which was negatively impacted by severe winter weather, the U.S. economy has clearly shifted into high gear in March and April. Retail sales, manufacturing, and housing all jumped.

Better than expected… all around

First quarter earnings season kicked of this week and so far companies are reporting numbers way above what Wall Street expected. With 9% of the S&P 500 reporting earnings so far, according to FactSet about 81% of companies have beaten estimates – and with an earnings growth rate of 30.2% so far. Its still very early, but if that holds up, it would mark the best earnings season since Q3‐2010. It was a busy week for economic reports and they too were much stronger than expected. Retail sales boomed in March, new jobless claims plunged, and April Empire State and Philly Fed manufacturing surged. Heck, even state revenues fared better than expected in a pair of studies, one by The Pew Charitable Trusts’ state fiscal health initiative and one by the Federal Reserve Board of St. Louis. It’s no wonder that the S&P 500 is at a record high and up +11.4% YTD through Friday 4/16/21. The index has set 23 record closing highs this year and is up for four straight weeks now. The Dow Jones Industrial Average also set a record high on Friday after crossing 34,000 for the first time on Thursday. After pausing the past two weeks the yield on the 10‐year U.S. Treasury fell 8 basis points, its largest weekly decline since last June.

Digits & Did You Knows

APRIL 14th IN HISTORY —On April 14th in 1865 President Lincoln was assassinated. In 1912 the Titanic hit an iceberg and sank. In 2021, cryptocurrency exchange Coinbase Global made its stock market debut, exceeding a market cap of$100 billion before falling back to a first‐day closing valuation of $86 billion (source: Crossing Wall Street, CNBC).
CLOSE THE DOOR? — 32% of Americans believe that foreign imports shipped into the U.S. represent a “threat” to the U.S. economy. The Port of Los Angeles and the Port of Long Beach, just 3 miles apart on the West Coast, are the 2 busiest American ports by total container trade (source: Gallup’s 2021 World Affairs survey, iContainers.com, BTN Research).

Click here to see the full review.

Source: Bloomberg. Asset‐class performance is presented by using market returns from an exchange‐traded fund (ETF) proxy that best represents its respective broad asset class. Returns shown are net of fund fees for and do not necessarily represent performance of specific mutual funds and/or exchange‐traded funds recommended by the Prime Capital Investment Advisors. The performance of those funds may be substantially different than the performance of the broad asset classes and to proxy ETFs represented here. U.S. Bonds (iShares Core U.S. Aggregate Bond ETF); High‐YieldBond(iShares iBoxx $ High Yield Corporate Bond ETF); Intl Bonds (SPDR® Bloomberg Barclays International Corporate Bond ETF); Large Growth (iShares Russell 1000 Growth ETF); Large Value (iShares Russell 1000 ValueETF);MidGrowth(iSharesRussell Mid‐CapGrowthETF);MidValue (iSharesRussell Mid‐Cap Value ETF); Small Growth (iShares Russell 2000 Growth ETF); Small Value (iShares Russell 2000 Value ETF); Intl Equity (iShares MSCI EAFE ETF); Emg Markets (iShares MSCI Emerging Markets ETF); and Real Estate (iShares U.S. Real Estate ETF). The return displayed as “Allocation” is a weighted average of the ETF proxies shown as represented by: 30% U.S. Bonds, 5% International Bonds, 5% High Yield Bonds, 10% Large Growth, 10% Large Value, 4% Mid Growth, 4%Mid Value, 2% Small Growth, 2% Small Value, 18% International Stock, 7% Emerging Markets, 3% Real Estate.

Advisory services offered through Prime Capital Investment Advisors, LLC. (“PCIA”), a
Registered Investment Adviser. PCIA doing business as Prime Capital Wealth Management
(“PCWM”) and Qualified Plan Advisors (“QPA”).
© 2021 Prime Capital Investment Advisors, 6201 College Blvd., 7th Floor, Overland Park, KS 66211.

 

 

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Q1 Quarterly Client Update

What a Difference a Year Makes

This time last year, we were all forced to make drastic changes to our everyday lives — working from home, acting as educators to our children and grandchildren, and settling in for the unknown long-term. Fortunately, there is finally optimism and a shred of pre-pandemic normalcy. As the first quarter of 2021 closed, we are just over a year removed from the Federal Reserve’s (Fed) announcement of the intent to provide significant liquidity to the markets, restoring confidence, and seeing the market bottom on March 23, 2020. One-year returns from 03/31/2020 to 03/31/2021 are remarkable, led by small- and mid-sized companies, as measured by the Russell 2000 and S&P MidCap 400, gaining +94.85% and +83.46%, respectively. While large company indexes lagged, the +56.35% return on the S&P 500 and +72.04% gain on the tech-heavy NASDAQ over the same period are nothing to sneeze at. Given the global capital market synchronization, factored with a weaker dollar, it should not be surprising that the foreign markets turned in solid gains over the last year of +44.57% and +58.39% on the MSCI EAFE and the MSCI Emerging Market Index, respectively. Though the yield on the 10-Year Treasury has more than tripled since bottoming in 2020 (prices and yields have an inverse relationship; as yields go up, bond prices go down), the Bloomberg Barclays U.S. Aggregate Bond Index still delivered a +0.71% return.

To the Moon?

While equity markets ended the quarter in positive territory, the road to gains was anything but smooth. Late January brought about the ‘Reddit Revolution,’ whereby hordes of retail investors banded together in taking a fight to Wall Street. Their primary focus was small companies with extreme levels of short interest, such as GameStop (GME) and AMC Entertainment Holdings (AMC), intending to send the stock prices ‘to the moon.’ What started as a message board for people to invest their stimulus money morphed into a movement, pitting Main Street against Wall Street, albeit short-lived. Investors’ attention quickly turned to the spike in longer-dated yields, prompting fears that inflation will exceed the Fed’s target of 2%, forcing them to a reduction in their accommodative policy sooner than planned. These fears essentially caused the general market to move in the opposite direction of yields day by day (if yields went up, equities went down, and vice versa). The market’s yield sensitivity sent the tech sector reeling, pushing the NASDAQ into correction territory (10% or more contraction). A rotation out of large- and mega-cap companies into smaller companies continued to lead equity markets higher, with S&P MidCap 400 and Russell 2000 generating +13.47% and +12.70%, respectively. While not as impressive, the S&P 500 delivered a solid +6.17% return, and the NASDAQ, even with contraction, brought up the rear gaining 2.78% year-to-date.

Uneven COVID containment across emerging market countries, along with varying degrees of inoculation success and rising US yields, saw the MSCI Emerging Market Index experience increased levels of volatility yet delivered a positive return of +2.29% in the first quarter. Conversely, foreign developed countries (primarily Europe) continue to lag the US in vaccine rollout progress and suffer from tighter mobility restrictions which threaten the near-term recovery. Yet, the MSCI EAFE Index gained +3.48% for the period. A weakening US dollar served as a tailwind for investments outside of the US in 2020, but thus, far in 2021, the dollar has strengthened, thereby dragging down foreign markets’ performance.

A third major Congressional COVID Relief Package coupled with extraordinary monetary support from the Fed and easing of COVID restrictions caused a lift in growth projections – and higher inflation expectations. Consequently, the bond market, with yields on the 10-Year Treasury up +0.84%, closed the quarter at 1.75% resulting in equity investor anxiety. This inverse relationship bond prices have with yields booked a return on the Bloomberg Barclays U.S. Aggregate Bond Index down -3.37% for the quarter.

From Cold to Hot?

After the February freeze, the economy is heating up. With $600 checks from the late December Congressional stimulus package in hand, consumers started spending, as evidenced by the revised 7.6% jump in Retail Sales experienced in January, the fastest pace in seven months. Retail Sales contracted in February, as did other economic indicators resulting from the Arctic freeze that essentially closed activity for multiple weeks during the month. Strong January sales, along with another round of stimulus checks in mid-March, accelerated reopening, and accumulated savings, should boost spending for March and beyond. Given that the consumer accounts for roughly 70% of our economy’s output, spending is a significant driver for economic growth. The composite Purchasing Managers Index (PMI) has accelerated recently, well beyond pre-COVID
levels, registering all-time highs of 63.8. A reading above 50 indicates expansion, while a number below 50 indicates contraction; composite PMI comprises Manufacturing and Services PMI. The service-oriented industries sector, including leisure, travel, hospitality, dining, etc., shut down in March of 2020, resulting in a massive contraction in services. Yet, as mandates were lifted or loosened, these sectors’ activity picked up significantly, rising to levels we have not seen in nearly
two years. Since our economy is primarily services-oriented, it is clear that our services sector’s health is essential to a sustainable recovery. Fiscal COVID relief and accelerated economic activity have led many to increase their first quarter and full-year GDP outlooks. Bloomberg forecasts a first quarter acceleration of +6.0% GDP output and 7.7% for the year, with the
second and third quarters clocking in at 11% and 10%, respectively. The last time the economy grew at a similar pace was following the 1981-82 recession when growth accelerated at 7.9% in 1983.

One area of the economy still suffering impairments is the labor market. The April 2020 unemployment rate peaked at post-Great Depression highs of 14.7%. While the headline unemployment rate has continued to recover, with March’s unemployment rate falling to 6.0%, the bottom line is that while momentum in the labor market is developing, it is still fractured. First-time unemployment filings are averaging more than 700,000 per week and remain elevated over the 2008 Great Financial Crisis’s peak. Returning the labor market to pre-pandemic maximum employment levels is one of the Federal Reserve’s primary objectives, a requirement before consideration of raising rates. By their admission, a long road ahead remains. The Fed’s recent forecasts suggest that hiring will continue to accelerate as vaccines are administered, pushing the unemployment rate down to 4.5% by the end of the year. February gains of 468,000 were restrained by the month’s arctic weather, but March saw a spike of 916,000 new jobs added. This trend expects to continue, and we would not be surprised to see more than a million jobs added over each of the next several months. Given the economy needs an average run rate of 400,000-500,000 new jobs per month to approach an unemployment rate near 4% by the end of 2022, the significant, expected gains are undoubtedly welcome.

Economic and market indicators are often presented as year-over-year statistics, so as data releases in the coming months, they may seem extraordinarily large due to the base effect. Essentially many economic indicators were in the basement this time last year which suggests data today may appear inflated from reality over the next several months. Arguably no data point has been more debated and in the spotlight than inflation. Inflation measures the rate of increase in prices of goods over a given period, and high inflation levels can damage productivity and economic growth. Last year prices fell in March and April and remained low in May. As such, the year-over-year increases for March through May will likely appear inordinately high. Since the Fed is targeting an average inflation level of 2%, these reports are critical to monitor and decipher, which may prove more difficult when accounting for the recent $1.9 trillion pandemic relief package. Given significant monetary and fiscal stimulus provided over the last year and supply chain disruptions resulting from the pandemic, it is hard to envision an outcome where inflation does not rise. Some would suggest that we are positioned for hyperinflation. In contrast, others like the Fed and Treasury Secretary, Janet Yellen, believe we will experience higher inflation levels, though the elevated levels will prove transitory and will ultimately normalize. They have been vocal about their expectations and the impact of the base effect over the coming months. While they have communicated their expectations surrounding the illusory readings expected, we would not be surprised if some investors still view elevated readings as confirmation that inflation is surging, which could lead to market volatility in both equities and bonds.

The rest of the Quarterly Update covers the Federal Reserve, Congressional Stimulus, and other Implications moving forward. Read more.

The preceding commentaries are (1) the opinions of Chris Osmond and Eric Krause and not necessarily the opinions of PCIA, (2) are for informational purposes only, and (3) should not be construed or acted upon as individualized investment advice. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal. Past performance is no guarantee of future results.

Advisory services offered through Prime Capital Investment Advisors, LLC. (“PCIA”), a Registered Investment Adviser. PCIA: 6201 College Blvd., 7th Floor, Overland Park, KS 66211. PCIA doing business as Qualified Plan Advisors (“QPA”) and Prime Capital Wealth Management (“PCWM”).

Week in Review

Is Your Current Budget Working For You?

With the tax filing deadline around the corner, many individuals might be wondering what they are going to spend their refund on. A more important question might be, “How much can I save?” With the COVID-19 pandemic continuing on, many companies have had to lay off or furlough employees with countless more experiencing reduced hours. While it might seem like a good time to splurge, we learned in 2020 that you can never be too prepared for the future.

As you’re preparing for your potential refund or if you’ve already received it, here are a few items you should also be evaluating:

  • Nonessential recurring expenses: Write a list of all nonessentials and decide which ones are important enough for you to keep and which items you can cancel. You can also see if you can pay off the ones that you want to keep. If you want to keep that gym membership see if you can pay for the entire year and potentially get a better deal!
  • Credit card balances: Look at what credit cards have the lowest balances and see if there is an opportunity to get some paid off with your refund.
  • Student loan payments: Do you have lingering student loans? Take a look at what you owe and plan to use your refund to make a dent in your debt.
  • Restrict online shopping: Unsubscribe from all retail emails, don’t save your card information online, and delete shopping apps off your phone to make it harder for yourself to shop online.
  • Prep for grocery shopping: Before you go shopping or place your delivery order, set aside a little time to create a grocery list. Not only will it help you stay on track to purchase only what you need, but it’ll also stop you from eating out as much.

The most important step is to have a plan. As soon as you know if you will be getting a refund, you should decide what to do with it. Setting time aside to prepare and plan will ultimately pay off in the long run. For help with determining how much you need to set aside in savings and how to build up that account, reach out to our advisors at https://pciawealth.com/contact-us/.

*Prime Capital Investment Advisors, LLC (“PCIA”) and its associates do not render any legal, tax or accounting advice nor prepare any legal documents.

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