Blog Market Commentary

Week-in-Review: Week ending in 08.06.21

The Bottom Line

● Equities returned to their winning ways after last week’s fall. All major global equity indices posted gains for the week, are now positive for the year–most with double‐digit advances, and are at or near all‐time highs.
● The yield on the U.S. 10‐year Treasury rebounded from its lowest levels since February, to end the week at 1.30%after strong economic data showed the recovery continuing despite the spread of the Delta variant.
● AccordingtoFactSet,withabout90% of S&P500 companies having reported Q2 results, earnings growth is running at a blistering +88.7% pace with a 87% beat rate.

August brings a return to record highs

Global equities posted weekly gains, turning our market snapshot to the right entirely green for the week, and now for the year. The S&P 500 closed the week at another record high, its 44th record closing of 2021, for a +0.9% gain for the week. But Small Cap Value stocks were the best asset class for the week with a +1.1% gain, despite a ‐1.9% drubbing on Wednesday. A better‐than expected July employment report and another week of strong corporate earnings helped investors overcome concerns about rising inflation, the fast‐spreading Delta variant, and a regulatory crackdown on Chinese technology stocks. Earlier in the week data showed better‐than‐expected Factory Orders and an acceleration in the ISM Services Index to a record high. But it was the labor market that really bolstered stocks later in the week with fewer‐than‐expected unemployment claims on Thursday, followed by a stellar July employment report on Friday with upside surprises in new payrolls, a lower unemployment rate, better labor participation rates, as well as higher wages and hours worked. After several weeks of yields falling, the bounty of encouraging economic data helped Treasury yields reverse higher and the Treasury curve steepen.

Digits & Did You Knows

(NOT SO) FRIENDLY SKIES — The Federal Aviation Administration has received 3,715 reports about unruly passengers in 2021 and has initiated 628 investigations, compared with fewer than 150 in 2019. It is now asking airports and law enforcement to help mitigate the poor behavior (source: Federal Aviation Administration, WSJ).
DEBT LIMIT DEBATE — The nation’s debt ceiling limit was reset on Sunday 8/01/21 to our government’s outstanding debt as of that date (approximately $28.5 trillion). Ultimately the government will “run out of cash,” mostly likely in October or November, unless the debt ceiling is raised again (source: CBO, 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.

 

Blog Month in Reveiw

Month-in-Review: July 2021

Quick Takes

● U.S. Stocks back at all‐time highs. The S&P 500 closed July near record highs, its sixth consecutive monthly advance. But outside of U.S. large caps, the picture in July was much cloudier. U.S. Small cap fell ‐3.6% and overseas emerging markets plunged ‐6.7%.
● Disappearing act. The yield on the benchmark U.S. 10‐year Treasury yield fell ‐0.25 basis points in July, its largest monthly decline since March 2020. Yields are down for four straight months now, the first such stretch since the first four months of 2020. Yields rose four straight months from 12/20 through 3/21.
● China joins inflation and variants as key concerns. Chinese stocks ended July with steep declines, with Hong Kong’s Hang Seng index tumbling ‐9.9%, while the Shanghai Composite fell ‐5.4%. U.S.‐listed Chinese tech stocks plunged more than ‐22% in July.
● Uneven bars. Economic output is returning to pre‐pandemic levels for major economies but is taking more time for some countries than others. Business activity shows divergent recoveries as the U.S. and eurozone continued to rise in July, but Australia and emerging markets saw much weaker data.

Asset Class Performance

Stocks rallied to record highs again in July as the global economic recovery continued. However, sentiment is at risk as the more contagious Delta variant spreads and creates uncertainty about the recovery and the path to normalcy.

Global economies are largely improving, but at varying rates

The Bureau of Economic Analysis announced at the end of July that the U.S. economy has returned to pre‐pandemic levels for the second quarter through June. Although second quarter U.S. Gross Domestic Product (GDP) came in below economist expectations, growing at a +6.5% annual rate versus the forecast for +8.5%, it showed a robust rebound in household demand and put the U.S. economy above its pre‐pandemic peak on an inflation‐adjusted basis. Bloomberg economists noted that most of the downside surprise was from the trade and inventory components. Excluding trade and inventory showed growth at +7.9%. Further stripping out government spending, in which payments to banks for processing PPP loans caused a non‐recurring drop, put final sales to the domestic sector at +9.9%, an at an all‐time high. The Personal Consumption Expenditures (PCE) price index excluding food and energy costs, followed closely by Fed officials, climbed an annualized +6.1% in the second quarter, the biggest gain since 1983. As shown in the chart to the right, China and India have also surpassed pre‐pandemic economic growth. However, some countries have not kept pace and remain below their pre‐pandemic levels. Many European countries locked down more fully than the U.S. and didn’t have quite as much stimulus. And the fast‐spreading Delta variant is thwarting plans to lift lockdowns or pushing areas to return to restrictions.

In Australia, Sydney was locked down for the first time in more than a year. Indonesia, the fourth most populous country in the world, is experiencing a spike in both infections and deaths. It has resisted tighter restrictions, but with only had about 5% of the country fully vaccinated it began additional curbs in hard‐hit areas. Of course, the Olympic games started which began in late July in Tokyo have no live fans after the government declared a state of emergency for the duration of the games. Nicolas Colas of DataTrek Research pointed to Apple mobility data to show the divergent recoveries and the challenges resulting from different levels of restrictions, infection rates, and vaccination levels. Mobility data in the U.S. and Europe showed positive trends and traffic that was near or above early 2020 levels. But Asia was seeing much lower mobility activity with Sydney under lockdown, Bangkok closing public spaces, and India just starting to ease restrictions after their devastating Delta surge.

The chart of PMI data to the left reflects the stark contrast of deviating business activity with the U.S. and eurozone well into economic expansion but Australia falling back into economic contraction. South America has seen little disruption from the Delta variant but is struggling with its own highly infectious Gamma variant. Bottom Line: The global economy experienced a largely synchronized recovery following the initial COVID‐19 pandemic beginning in the Spring of 2020 and the following year. But different levels of vaccination rates, and subsequent waves of COVID variants across—and within—countries, means the recovery is now increasingly divergent. Rebalancing and risk management will take on additional importance in this more challenging environment.

 

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©2021 Prime Capital Investment Advisors, LLC. The views and information contained herein are (1) for informational purposes only, (2) are not to be taken as a recommendation to buy or sell any investment, and (3) should not be construed or acted upon as individualized investment advice. The information contained herein was obtained from sources we believe to be reliable but is not guaranteed as to its accuracy or completeness. Investing involves risk. Investors should be prepared to bear loss, including total loss of principal. Diversification does not guarantee investment returns and does not eliminate the risk of loss. Past performance is no guarantee of comparable future results.

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.

Blog Market Commentary

Week-in-Review: Week ending in 07.30.21

The Bottom Line

● U.S. equities, save for the Russell, lost their footing for the week and were in the red. Despite the negative week, the S&P was up for the month of July, the sixth consecutive month in the green.
● The 2- and 10-Year yield both resumed their downward trend, falling -1bps and -5bps respectively .
● The week was heavy with economic data releases, including a miss on GDP, strong consumer income and spending numbers, and the FOMC interest rate decision and Powell’s press conference on the meeting

Duck, Duck, Dove

To no surprise, the FOMC left rates at near 0.0%. What markets have been more interested of late is the language surrounding their decision. Investors are searching for any clues as to when and how the Fed will begin to taper its purchase of assets. The Fed is still looking for “substantial further progress” in the economic recovery, but did admit that progress is occurring. Markets ultimately shrugged off Chairman Powell’s comments on Wednesday and Thursday with most major US and international indices posting a positive return on Thursday. The major indices weren’t able to carry their upward momentum into Friday and all ended the week down, with the exception of the Russell and European equities, both up for the week at +0.75% and+0.05% respectively. The Nasdaq lost the most, posting a -1.11% decline, followed closely by Japanese equities with the Nikkei losing -0.96%, and the S&P lost -0.37% for the week. Yields resumed their decline as well with both the 2-and 10-year Treasury Notes declining by -1bps and -5bps respectively. Despite the downturn on Friday, the S&P has advanced for the past six months in a row and all major US and International indices have posted healthy year to date returns, with the Nikkei being the exception at -0.59%.

Digits & Did You Knows

NEXT MONTH — August has been the 2nd worst performing month for the S&P 500 index over the last 30 years (1999-2020), losing and average of -0.2% (total return) over the period. However, the S&P 500 gained +7.2% (total return) in August 2020. (source: BTN Research)
THE HIGH COST OF CARE — 12% of US retirees, i.e., 1 out of 8, will spend at least 4 years in a nursing home. (source: Bureau of labor Statistics, BTN Research)
CHEAPER NOW — The median 2-bedroom apartment in San Francisco cost $3,146 per month in March 2020, but has dropped 14% to $2,695 per month as of July 2021. (source: www.apartmentlist.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.

 

Blog Featured Articles

The Bezos Effect: 3 Big Things Corporate Boards Need to Do About Succession Planning

Many successful leaders tend to be nonconformists. They often demonstrate individualism at an early age and aren’t afraid to break a few rules. It’s part of what makes them so successful. But their risk-taking behavior, especially in their personal lives, can present unique challenges for the boards that manage their companies.

What would happen to a company’s business plan or board of directors if, say, the Chairman of the Board decided to take a rocket ship into space? Or, a board member faced a health concern that changed everything?

A recent NPR segment, Corporate Boards Find It Difficult To Limit Executives’ Risk-Taking Hobbies, highlighted these questions and the critical need for corporate boards to plan for inevitable, albeit unpredictable, change. While succession planning isn’t going to grab any juicy headlines, it is the tried and true method for mapping the long-term viability of a company.

So how does your organization get started on this journey? Here’s a hint – You don’t have to touch the edge of space to get going. Here are the three big things corporate boards need to do about succession planning right now.

CREATE: Creating a written succession plan is the first step to providing stability to the organization during times of crisis and change. This will be a living, breathing document that will be updated over time, but the first charge is to outline the steps that the board will take to fill a position whether it was vacated due to an emergency or a planned departure.

IDENTIFY: Identify potential leaders both inside and outside the organization who align with your corporate goals to fill these vacated positions. Viewing this process as a way to develop and mentor strong leaders for your organization will also get the board motivated to make progress on this step.

MEASURE: Measure your progress by holding outgoing interviews with retiring or exiting board members. I also recommend an annual board performance assessment that is both self-reflective and evaluated by fellow board members. Ongoing policy review and analysis will ensure that the succession plan is executable. Making succession planning a mandatory annual agenda item for discussion at board meetings is key.

Policy adherence begins at the top and the board must lead by example. Proactive succession planning puts your organization and your stakeholders at ease no matter what arises…..even if it’s a rocket ship.

 

All investment and financial opinions expressed are intended as educational material. 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”). Securities offered by Registered Representatives through Private Client Services, Member FINRA/SIPC. PCIA and Private Client Services are separate entities and are not affiliated.

Blog

Week-in-Review: Week of 07.16.21

The Bottom Line

● U.S. equities fell for the first time in four weeks. All the major US equity indices posted a negative return for the week, but still maintain healthy year to date figures.
● The 10-Year yield started the week on the upswing but couldn’t cross the 1.42 level. Ultimately, it resumed it’s decline and ended the week down -7 bps, settling at 1.29.
● The markets had plenty of economic news to digest this week with June inflation data releases, retail sales, labor market reports, and major US banks kicked off earnings season.

Dog Days of Summer

Markets are traditionally tepid during the summer months, and this summer might fall victim to the adage of the “Dog Days of Summer”. The S&P started the week just as it finished last week, carrying an increase of +0.49% up to Wednesday. This didn’t last as inflation metrics came out higher than expected and above consensus estimates on retail sales weren’t able to revive the indices on Friday. The Russell took the brunt of the selling pressure, posting a -5.12% loss for the week. Major US banks reported their earnings, top line numbers were propped up by robust investment banking division revenues, but other segments couldn’t boast similar results. Concerns over the spread of the delta variant continued to weigh on European equities with the STOXX 600 posting a -0.64% loss for the week. After a difficult week last week, Japanese equities were able to post a modest gain of +0.22% for the week. Volatility wasn’t only present in the equity markets, the 10-year yield sent investors on a ride with rates pushing higher at the beginning of the week, but the 10-year wasn’t able to surpass the 1.42 level and finally ended the week down -7bps to 1.29 as investors searched for a haven.

Digits & Did You Knows

IT’S DIFFERENT — The Federal Reserve measures inflation using the “Personal Consumption Expenditures” (PCE) price index while the government uses the “Consumer Price Index” (CPI) for the “cost of living adjustment” (COLA) to increase Social Security retirement benefits. The CPI gives “housing” prices a 42.1%weighting in its calculation, while the PCE gives “housing” just a 22.6% weighting. The CPI gives “medical care” prices an 8.8%weighting in its calculation, while the PCE gives “medical care” a 22.3% weighting. (source: Federal Reserve, BTN Research).
NOT JUST KIDS — 19% of Americans that have outstanding student loan debt from college are over age 50, i.e., 8.7 million borrowers out of 44.7 million total borrowers. (source Federal Reserve Bank of New York, 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.

 

Blog Market Commentary Quarterly Client Update

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”).

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Week-in-Review: Week ending in 07.09.21

The S&P 500 and Dow couldn’t advance for a third week in a row, but small cap stocks were able to extend their streak to three. The Russell 2000 small cap index has gained about +16% in November. For the second week in a row, markets opened on news of a promising new vaccine, only to fade as the week wore on after new coronavirus cases in the U.S. continued to surge and new lockdown measures were announced by various state and local officials.

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After-Tax Contributions – An Old Idea to Solve a Modern Problem

Employees in America are stressed about money. 71% suffer from some level of stress related to their personal finances. Even before the pandemic, 38% of employees didn’t have $1,000 saved up to cover emergency expenses. And 63% have indicated that their stress has increased since the onset of COVID-19. [1] So, what can employers do to help their employees?

Sometimes to solve modern problems, you don’t have to innovate, but simply repurpose old ideas. You see, before 401(k) plans became law in the early 1980s, many employees had access to something called a “thrift plan” as part of their benefits package. These programs allowed employees to save money directly from their paycheck on an after-tax basis into an account, and the earnings would grow tax-deferred. So, how does this help your employees and why is it different from other 401(k) or 403(b) contributions?

After-tax contributions (also called Employee Contributions) enable employees to contribute money to your plan that is easily accessible to them. Unlike pretax and Roth contributions dollars, which are only available for withdrawal under limited circumstances, after-tax contribution dollars can be withdrawn at any time. Since the contributions have already been taxed before they’re deposited, the only taxes paid are on the earnings attributable to the after-tax dollars. Plus, since they are contributed to the plan via payroll deduction, just like your other plan contributions, they’re easy to use, making them a nearly ideal way to help the average employee build up an emergency savings fund.

After-tax contributions are also quite versatile, bringing with them an additional benefit to higher paid employees. While pretax and Roth contributions are subject to an annual cap (i.e., $19,500 for 2021 and $26,000 for those age 50 and over)[2], after-tax contributions are not subject to that limit. Rather they are only subject to the annual plan additions limit, which caps aggregate contributions to defined contribution plans (i.e., $58,000 for 2021, or $64,500 if age 50 or over)[3]. Once an employee reaches the $19,500 limit for the year, they may still contribute to the plan on an after-tax basis. The real magic though comes in the next step. You see, if your plan allows, employees can elect to convert any of their contributions to Roth at any time during the plan year. Employees who make after-tax contributions to the plan and aren’t otherwise interested in taking any future withdrawals from these dollars could instead immediately convert them to Roth contributions, avoiding accumulating any taxable earnings and making them all tax-free at retirement.

Now it’s important to keep in mind that any after-tax contributions are subject to the annual Actual Contribution Percentage (ACP) test, even if you’re plan is safe harbored. However, if your plan employs automatic enrollment and your general employee population are funding after-tax contributions for emergency savings purposes, it’s increasingly unlikely to fail the ACP test. Even if you do fail, most of the dollars refunded will likely be after-tax money anyway, making the refunds relatively benign.

After-tax contributions were forgotten by benefits professionals a long time ago. It may be time to pull them out of the moth balls and repurpose them for a new generation of savers.

Advisory services offered 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”).

[1] PwC 9th Annual Employee Financial Wellness Survey©

[2] IRC Section 402(g)

[3] IRC Section 415(c)

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Week-in-Review: Week of 07.02.21

The Bottom Line

● U.S. equities reached more record highs after seven straight gains, it best winning streak in 10 months. It was the second straight week of gains for the S&P 500, which is now up in five of the last six weeks.
● The yield on the 10‐year U.S. Treasury dropped 10 basis points, closing at 1.42%. Meanwhile, the price of a barrel of West Texas Intermediate crude oil rose above $75, hitting its highest level since 2018.
● Economic data continued to suggest solid expansion, with strong manufacturing and consumer confidence reports, as well as solid June jobs data that come in higher than expected, but with moderate wage gains.

Stocks rebound from last week’s fall

The S&P 500 posted another solid week of gains with seven consecutive winning sessions, its longest winning streak since August. For the week, the S&P 500 climbed +1.7% and the tech‐heavy Nasdaq Composite rose nearly +2%. The S&P 500 has now risen in five of the past six weeks, while the Nasdaq has gained in six of the past seven weeks. One weak spot for equities was small caps, as the Russell 2000 Index fell ‐1.2%for the week. The price of a barrel of West Texas Intermediate crude oil rose above $75, hitting its highest level since 2018. Signs of solid economic growth continued with June U.S. manufacturing activity from both ISM and Markit coming in at historically high levels and well into expansion territory. Several major banks announced plans to return capital to shareholders in the form of increased dividends and share buybacks following last week’s successful stress test of the sector by the Fed. But the market was particularly enthused by a solid employment report for June that was released on Friday. June nonfarm payrolls easily topped economists forecast. Factory orders also topped estimates and consumer confidence hit its highest level since February 2020, before the pandemic.

Digits & Did You Knows

FEWER BABIES — Despite a year of lockdowns with our spouses/partners, the number of US births fell in 2020 to 3.6 million, the 12th decline in the last 13 years (source: CDC).
TRAVEL — When travel for vacations slowed in the summer of 2020, rental car companies sold off more than 500,000 rental cars just to survive, leading to a shortage of rental cars and higher prices in 2021 (source: CNN, BTN Research).
(POOL) HELP WANTED — U.S. cities don’t have enough lifeguards, e.g., Austin, TX is short 80% of its 750‐lifeguard goal for the summer of 2021. The pandemic shutdown put a freeze on training and certification programs for lifeguards (source: American Lifeguard Association, 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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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.

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