Weekly Market Insights: 7-16-21 - Stocks Edge Higher in Short Week

Opinion

The Dynamics of Return

In a recent call regarding a client, Tyler and Jon discussed the strategy and composite makeup of return, which I thought may be interesting as an education piece for readers.

What comprises returns is the combination of Interest, Dividends & Appreciation on a set amount of invested principal.  Depending on how much principal comprises bonds, how much comprises dividend-producing investments, and how much is used to buy equities will dictate the expected amount of total return one can expect. 

Bonds are instruments created by companies when they are trying to borrow from a lender to build, invest, or buy something in large enough quantity that going to a traditional banking institution is not feasible.  The bond is issued to investors at $1,000 per bond and carries a coupon rate and a set term.  Depending on the coupon rate when compared to interest rates set by the FED, that bond will also either appreciate in face value, or depreciate in face value but it will always maintain its coupon rate.  Kind of like buying a ticket for a sporting event and the face value is X, but what you buy it for could be higher than or lower than X.

Bonds are perceived to have lower risk and volatility because their values are tied to interest rates that historically tend to have little movement over time.  We will say between 1-5% is the total return one could expect depending on the current interest rate environment. 

Equities (Stocks) of companies that are utilities are the next proverbial rung on the risk/return ladder here (there are others for all you market experts reading this, but for this simple explanation, we are going with utilities).  These are shares of companies that provide a service to consumers that they can't do without i.e. gas & electricity.  While these companies are stocks, they tend to behave like bonds and move with interest rates because they usually pay a dividend, whenever rates rise on inflation, it will take some time, but their service costs are passed along to consumers, and therefore, their dividends are increased and passed along to shareholders.  These companies are always in demand, so they're considered lower risks over the long run.

Blue Chip/Defensive Stocks are the next collective category that usually pay some sort of dividend, historically.  These stocks tend to move less than your growth stocks, but more than your utilities, and definitely more than your bonds and cash.

Growth Stocks are those companies that are more interested in reinvesting their earnings into their companies rather than paying them out to shareholders.  These companies hold all the glory and all the risk to investors most of the time, and when I say most of the time, let’s use 90%+.

When a portfolio’s designed, we begin with risk for 2 reasons.  Risk equates to the potential loss of principal, and it also equates to potential lawsuits.  Investors historically only remember what they want to remember or is convenient to remember and they ignore the downside-because, well, who wants to think of the worst case happening when the best case is so much better?

If you want peace, you prepare for war and in proper portfolio design, war equates to a rough, choppy and declining market.

The base of a portfolio like the foundation of a house, is best built on stability and not on sand.  A Portfolio that offers you bonds, what we will call income, provides a predictable, stable, and sturdy foundation.  You add in some layers of insulation, i.e., blue chip and defensive stocks, and top things off with sexy curb appeal of your Growth portfolio, you now have your sound, solid, boring, and productive investment grade portfolio.

This is MUCH more difficult than it sounds because the market conditions are ALWAYS changing and evolving as are the lives of investors.  Health changes, decisions to move, divorces, grandbabies, new jobs-all become factors that influence the economics we have to work with. 

An easy way to think about the market conditions and expectations of outcomes is to picture a teeter-totter.  The higher the growth of the market, the lower the future expected earnings become, and when they are lower, so are the returns.  The higher the interest rates, the lower the expected appreciation you should have in your conservative income holdings and vice versa.

The newsletter was a bit long-winded today but I felt it was worth the reminder for some of us...

I will be out of the office this Wednesday thru Friday on business but the rest of the team will be here in case you need something.

Till we speak again, enjoy your week,

Jon

Stocks managed small gains as investors wrestled with concerns over economic growth prospects and a rise in COVID-19 infections.

The Dow Jones Industrial Average picked up 0.24%, while the Standard & Poor’s 500 gained 0.40%. The Nasdaq Composite index added 0.43%. The MSCI EAFE index, which tracks developed overseas stock markets, slipped 0.78%.1,2,3

A Choppy Week

In a truncated week of trading, stock market action was turbulent and indecisive. A mixed start saw cyclical stocks sell off amid concerns of slowing economic growth, while growth stocks advanced in response to falling yields.

After strengthening mid-week with the release of the FOMC meeting minutes, stocks skidded when reopening fears resurfaced Thursday on a new wave of global COVID-19 infections and Japan’s emergency declaration that reintroduced lockdown protocols. This led to a broad-based sell-off, with financials, home builders, and technology hit hard. A drop in bond yields added to the deteriorating sentiment.

Bond yields rebounded on Friday, setting the stage for a strong comeback for stocks, with the three major indices closing at new all-time highs.4

Attention Turns to Bonds

Since reaching a 2021 high of 1.74% in March, the 10-year Treasury yield has been in a slow, steady decline, closing at 1.37% on Friday.5

One explanation may be that reopening sentiment has turned more cautious as the Delta variant of COVID-19 spreads globally. Another view is that overseas investors are buying Treasuries, effectively lowering yields.

Perhaps it's abating inflation concerns, or simply excess liquidity finding its way into bonds. Whatever the message, the yield narrative has changed from just a few months ago when it was believed that the 10-year treasury was heading to two percent.5

This Week: Key Economic Data

Tuesday: Consumer Price Index (CPI).

Thursday: Jobless Claims. Industrial Production.

Friday: Retail Sales.

Source: Econoday, July 9, 2021The Econoday economic calendar lists upcoming U.S. economic data releases (including key economic indicators), Federal Reserve policy meetings, and speaking engagements of Federal Reserve officials. The content is developed from sources believed to be providing accurate information. The forecasts or forward-looking statements are based on assumptions and may not materialize. The forecasts also are subject to revision.

This Week: Companies Reporting Earnings

Tuesday: JPMorgan Chase (JPM), Goldman Sachs (GS), Wells Fargo & Co. (WF), Pepsico, Inc. (PEP).

Wednesday: Bank of America (BAC), Citigroup, Inc. (C), Delta Airlines (DAL), Blackrock, Inc. (BLK).

Thursday: UnitedHealth Group (UNH), Morgan Stanley (MS), Taiwan Semiconductor (TSM).

Friday: Charles Schwab (SCHW), Kansas City Southern (KSU).

Source: Zacks, July 9, 2021Companies mentioned are for informational purposes only. It should not be considered a solicitation for the purchase or sale of the securities. Investing involves risks, and investment decisions should be based on your own goals, time horizon, and tolerance for risk. The return and principal value of investments will fluctuate as market conditions change. When sold, investments may be worth more or less than their original cost. Companies may reschedule when they report earnings without notice.

“One does not fall 'in' or 'out' of love. One grows in love.”

– Leo Buscaglia

Your Plans This Summer May Be Eligible for Itemized Deductions

If you have big plans this summer to sell or buy a home, donate some old items, or hit the casino, some of these activities may be able to be itemized as deductions. Here are some examples:

If you are refinancing your home this summer, you may be able to deduct a part of your mortgage interest. There are some limits to these deductions, though. According to the IRS, the deduction is limited to interest paid on a loan secured by the taxpayer’s main home or second home. When you refinance, you must use the loan to buy, build, or substantially improve your main home or second home.

If you are buying a new home this summer, you can deduct mortgage insurance if you pay on a total of $750,000 in qualifying debt for a first and second home or $375,000 when married filing separately.The summer is a great time to go through your things and donate old clothes, furniture, or home goods you no longer need. Even better, these donations may qualify for a tax deduction if you itemize the deductions and show proof of the donations.In addition to donating items, you may also be able to deduct mileage on your personal vehicle for services done for a qualified charity.

Lastly, if you enjoy hitting the casino, you may be able to itemize and deduct gambling losses up to the amount of gambling winnings.

* This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax professional.

Tip adapted from IRS.gov6

Zero-Waste Skincare: Fight Back Against Plastic

Single-use bathroom products, including shampoo, conditioner, and body wash, all contribute to the tons and tons of plastic we throw away every day. Often, these bottles are difficult or impossible to recycle.

Next time you're shopping for your next beauty product, consider choosing a zero-waste option. These options use biodegradable packaging and aim to reduce landfill trash as much as possible. The idea isn't to live like a "sustainability saint," but instead do a small part to help the future of our planet.

Some of the most popular zero-waste beauty product brands include:

• Ethique: Their bar shampoos and conditioners reduce the need for a big, plastic container.
  
  
• Etee: They ship in a cardboard box with cellulose packing tape.
  
  
• Bathing Culture: A carbon-neutral company, the products come in 100% recycled and reprocessed bottles from California.
  
  
• Meow Meow Tweet: They make cardboard stick deodorants, cream deodorants, and plastic-free soaps.

These are just a few of the ways beauty products are moving toward creating zero-waste products.

Tip adapted from Sustainable Jungle7

It can be as round as a dishpan, as deep as a tub, and still the oceans couldn’t fill it up. What is it?

Last week’s riddle: What 11-letter word must always be spelled incorrectly? Answer: Incorrectly.

Sunset in Maui, Hawaii.

Footnotes and Sources

1. The Wall Street Journal, July 9, 2021

2. The Wall Street Journal, July 9, 2021

3. The Wall Street Journal, July 9, 2021

4. CNBC, July 9, 2021

5. U.S Department of Treasury, July 9, 2021

6. IRS.gov, November 9, 2020

7. Sustainablejungle.com, 2020

Investing involves risks, and investment decisions should be based on your own goals, time horizon, and tolerance for risk. The return and principal value of investments will fluctuate as market conditions change. When sold, investments may be worth more or less than their original cost.

The forecasts or forward-looking statements are based on assumptions, may not materialize, and are subject to revision without notice.

The market indexes discussed are unmanaged, and generally, considered representative of their respective markets. Index performance is not indicative of the past performance of a particular investment. Indexes do not incur management fees, costs, and expenses. Individuals cannot directly invest in unmanaged indexes. Past performance does not guarantee future results.

The Dow Jones Industrial Average is an unmanaged index that is generally considered representative of large-capitalization companies on the U.S. stock market. Nasdaq Composite is an index of the common stocks and similar securities listed on the NASDAQ stock market and is considered a broad indicator of the performance of technology and growth companies. The MSCI EAFE Index was created by Morgan Stanley Capital International (MSCI) and serves as a benchmark of the performance of major international equity markets, as represented by 21 major MSCI indexes from Europe, Australia, and Southeast Asia. The S&P 500 Composite Index is an unmanaged group of securities that are considered to be representative of the stock market in general.

U.S. Treasury Notes are guaranteed by the federal government as to the timely payment of principal and interest. However, if you sell a Treasury Note prior to maturity, it may be worth more or less than the original price paid. Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications and other factors.

International investments carry additional risks, which include differences in financial reporting standards, currency exchange rates, political risks unique to a specific country, foreign taxes and regulations, and the potential for illiquid markets. These factors may result in greater share price volatility.

Please consult your financial professional for additional information.

This content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG is not affiliated with the named representative, financial professional, Registered Investment Advisor, Broker-Dealer, nor state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and they should not be considered a solicitation for the purchase or sale of any security.

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