June 2021 - A Wait and See Approach

By: Kyle M. McBurney, CFP

Managing Partner at Highland Peak Wealth

Calmer markets in May were as welcome as the flowers. As we collectively plan for warmer weather, fireworks, and sunscreen, Mother Market twiddles her thumbs as she waits for direction on inflation and the Federal Reserve. Both the stock market and fixed income universe appear to be in a “wait and see” approach – the bulls and bears fighting over whether inflation is here to stay or simply a temporary phenomenon. Trading activity in May, outside of a mid-month sell-off, was pleasantly tranquil.  The CBOE volatility index, commonly known as the VIX, is near 2021 lows, indicating investors expect low volatility in the market in the short term. 

Overall, May was yet another good month for stocks as most indexes continued their 2021 climb - a diversified portfolio gained 1% in May and continued to push client portfolios higher. The increase did not have the same oomph as April, but it was solid, nonetheless. Despite some weakness in the NASDAQ Composite Index (tech stocks), the S&P 500 and Dow Jones Industrial average continued their strong year – up 12.6% and 12.8% year to date, respectively. Market breadth was excellent, cyclical sectors continued their outperformance (such as banks, industrials, and materials), and commodity prices boosted returns.

Non-U.S. indexes did even better, with the MSCI EAFE (Developed International) leading the way – up 3.26% in May. European stocks did exceptionally well, lifted by dovish language from the European Central Bank (ECB), which promised to continue its bond-buying program. Emerging market stocks were close behind, up 2.32%, driven by Taiwan’s technology sector and rising commodity prices. Chinese stocks, which make up 37.5% of the MSCI Emerging Market Index, also had an impact, fueled by economic reopening and a milestone of over 500 million vaccinated.

Put it all together, and the theme of a stronger economy (both home and abroad) amid re-opening remains intact. While we expect some bumpiness over the summer, we believe the economy and stock market outlook remains encouraging. We will use any short-term correction as an opportunity to rebalance portfolios and potentially increase our equity targets. Of course, we will communicate these changes to you sufficiently in advance.

Executive Summary –

-          S&P 500 and Dow Jones climbs higher on accelerating growth and easing restrictions

-          Fed continues to call inflation concerns “transitory,” easing trading volatility in May

-          Fed reaffirms that it has no intention of raising rates anytime soon

-          Commodities rise – Oil reached a 52-week high, and Gold is back over $1,900 an ounce

-          Value stocks continue to lead the way as economic reopening progresses

What I am Watching – The Inflation Boogeyman (Again)

Inflation continues to be at the forefront of investors’ minds as recent reports indicate upward price pressure is picking up momentum. Fears of sustained, rather than transitory, inflation has investors concerned about an overheated economy and rising costs perhaps pushing the Federal Reserve (the Fed) into raising rates sooner than expected. Rising interest rates can have negative implications for investments in both bonds and stocks, eroding the actual value of future cash flows.

May provided markets with yet another peek at inflationary data. The PCE Index (ex Food and Energy), a critical inflationary indicator, captures price increases/decreases across a variety of goods and services.  The PCE Index rose a faster-than-expected 3.1% in April (released in May), the highest level in two decades. In comparison, the index rose 1.9% in March and 1.4% in February. Thus, you can see that the trend is there. Markets will closely watch may’s number (released in June).

The below chart from the Federal Reserve of St. Louis does a nice job of illustrating the directional trend of rising costs as defined by the PCE Index -

Despite the reading, markets were relatively unfazed. After all, more important in the short term is how the Fed will react. If inflation runs too hot, the Fed’s primary weapon/tool is to raise interest rates, which is a nerve-racking prospect for the stock market.

For now, higher rates are not a near-term concern. The Fed continues to mollify markets and provide comfort that rising costs will prove “transitory” (a fancy word for temporary). The Central Bank continues to stress that today’s increases are mostly one-time in nature, not the chronic, ongoing price jumps that characterize more worrisome bouts of inflation – as occurred in the ’70 and ‘80s. The calm in the bond market suggests bond investors largely agree and are willing to remain patient for now.

Inflation and Fed-speak will likely be a common theme through the summer months. We will do our very best to keep you updated and informed. Our team will continue to watch for more insight from the Fed’s June meeting about any potential change in monetary policy and keep you aware of major economic data releases in order to give your more information regarding the current state of inflation. There is no better beach reading than Fed minutes!  (Don’t worry, we will summarize them for you!).

An Old Wall Street Jingle

There is an old saying on Wall Street you might be familiar with, “sell in May and go away.” It is an easily remembered rhyme that pays tribute to simpler times, as summertime trading volume would typically plummet in the pre-internet era. While it may make for more peaceful days at the beach, it has proven to be a relatively poor investment approach. A “sell in May” strategy has worked roughly one-third of the time, dating back to 1928. In fact, it has not been a good strategy in the past nine years. So, enjoy time off, enjoy the coast, spend time at the beach, and allow your hard-working, diversified portfolio to work for you, and your talented (and humble) portfolio team do all the worrying.

Allocation Update

May provided little motivation to shift our previous positioning. Like April, our focus in May has been the continued build-out of value stocks within client portfolios – migrating from tech highflyers and stay-at-home “growth stocks” to more cyclical stocks. This transition continues to look supremely clairvoyant (and wicked smart) as value outperformed growth by a stellar 3.72%. Since the beginning of the year, value stocks have outperformed their growth counterparts by 11%, thus playing directly into the “economic re-opening” theme we have brought up numerous times in this newsletter.

We have, however, made some proactive moves to hedge client portfolios against rising costs and inflation. Our investment strategy committee at Highland Peak Wealth decided to increase our exposure to commodities and precious metals in early May. We continue to expect this asset class (and those commodity-related stocks) to continue to outperform in the short term. Also, this adjustment should provide client portfolios a cushion if inflation continues to run hot. This increased allocation to commodities came from the large-cap stocks, as we felt it prudent to take profits and keep client portfolios in line following this year’s ˃10% gain in equities.

May was also a moderately quiet month for the McBurney clan. After April’s trip to Disneyworld, it was certainly welcome. We did, however, make the infamous trek down I-95 to Baltimore, MD, to attend a close friend’s wedding, which the Bride and Groom had postponed for over a year. It was refreshing: meeting new people, seeing new places, and embarrassing my family on the dance floor was something I missed (and we all missed). I will never forget the Father of the Bride, who opened a stellar speech with a long, heavy sigh and an emphatic “Wow, how great does this feel?!!” I, for one, very much look forward to a more open, social, and busy summer ahead. 

One final note: we at Highland Peak Wealth continue to see a consistent increase in new business opportunities and referrals. We are thankful for all your support and trust. 

As always, comments and questions are welcome. Have a wonderful weekend ahead.

Best,

Kyle M. McBurney, CFP®

Managing Partner

The opinions expressed herein are those of Kyle McBurney, CFP as of the date of writing and are subject to change. This commentary is brought to you courtesy of Highland Peak Wealth which offers securities and investment advisory services through registered representatives of MML Investors Services, LLC (Member FINRA, Member SIPC). Past performance is not indicative of future performance. Information presented herein is meant for informational purposes only and should not be construed as specific tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, it is not guaranteed. Please note that individual situations can vary, therefore, the information should only be relied upon when coordinated with individual professional advice. This material may contain forward looking statements that are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Referenced indexes, such as the S&P 500, are unmanaged and their performance reflects the reinvestment of dividends and interest. Individuals cannot invest directly in an index

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