As we reflect on the first half of the year and look towards the second half, we thought it would be a great time to seek market insight from Jeff Krumpelman of Mariner Wealth Advisors. Jeff is the Chief Investment Strategist and Head of Equity Investments at Mariner and he joined us to help breakdown where the market is headed in the second half of 2021.
As chief investment strategist, Jeff serves as a member of the investment committee and leads Mariner Wealth Advisors’ equity team. In this capacity, he contributes to decisions impacting strategies and tactical allocation of portfolios at the asset class level and also has the responsibility of driving research, portfolio construction and security selection for large– and mid–cap equity strategies focused on U.S. Stocks.
Prior to joining Mariner Wealth Advisors, Jeff was a senior portfolio manager at U.S. Bank where he worked with private individuals and foundations. Prior to that, he served as head of investments at Hilliard Lyons Capital Management where he managed a team of investment professionals and various equity strategies including dividend growth, high yield, large–cap growth and mid–cap core. Before Hilliard, Jeff was director of core investment strategies at Fifth Third Asset Management and lead manager on the Fifth Third Dividend Growth portfolio.
About Mariner Wealth Advisors
Mariner Wealth Advisors is a leading national wealth advisory firm. Mariner’s wealth advisory teams help clients achieve & maintain financial peace of mind – preserving the wealth they have created & building a legacy for future generations of family & business leaders.
Presentation slides, click here
Learn More About Mariner Wealth Advisors at:
If you’d like to learn how Mariner Wealth Advisors can help you build a roadmap for your real estate investments head to RealCrowd’s sister company, ReAllocate, to learn more — BuildMyRoadmap.com.
Adam Hooper (00:03) Hello and welcome, I’m RealCrowd CEO Adam Hooper, and this is the Real Estate Investing For Your Future podcast. Here we explore the latest in commercial real estate trends, insights and investment strategies that passive investors can use to build real estate portfolios that last
Disclaimer (00:21) All opinions expressed by Adam, Tyler and podcast guests are solely their own opinions and do not reflect the opinion of real crowd. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions to gain a better understanding of the risks associated with commercial real estate investing. Please consult your advisors.
Tyler Stewart: (00:41) Hey listeners, Tyler here today. We have a special presentation for you with Jeff, Chief Investment Strategist at Mariner Wealth Advisors. And this episode, Jeff is going to share his market outlook for the remainder of 2021. But before we continue, hit the pause button and head to the show notes to download the presentation slides. So you can follow along. And with that, we’ll go ahead and get started with the presentation. Hope you enjoy.
Adam Hooper: (01:13) This is Adam Hooper here, CEO and founder of RealCrowd, and welcome to today’s webinar. As many of you know, RealCrowd is a direct investment platform that provides access to real estate investment opportunities around the US. We’ve had over $8 billion worth of real estate on the platform since our founding and have processed thousands of investments for our members. We’ve also recently launched a subsidiary platform called ReAllocate, where we’re working with registered investment advisors to help their clients understand where private real estate fits into their portfolios on a risk first basis. As part of that program, we’ve been fortunate enough to build a relationship with Mariner Wealth Advisors, a full service financial advisory firm based in Kansas City with a footprint around the country. We’ve always appreciated their 360 degree approach to wealth management and planning. And we’re working with them to help RealCrowd members gain a holistic picture into their financial implanting goals. You can visit, buildmyroadmap.com. If you want to learn more about that relationship and schedule a call with us to discuss.
Today though, as Tyler mentioned, we’re joined again by Jeff Krumpelman Chief Investment Strategist and Head of Equity Investments at Mariner to give us his mid-year crystal ball outlook on the equity markets and what we can expect to see as we somehow already find ourselves in the back half of 2021. If you have any questions throughout the presentation, please utilize the chat function in the webinar viewer. It will be sure to ask Jeff any questions as they come up. And as Tyler mentioned are planning on having some time for questions at the end. With that we thank again Jeff for his time today and Jeff we’ll turn it over to you.
Jeff Krumpelman: (02:42) Appreciate that Adam, for the introduction. And, um, here we are at mid year, I think, uh, sometime earlier in the year, every January, we come out with our crystal ball kind of forecast and what we think is going to happen for the year and the scenario, the environment that we see. That’s the backdrop for, um, you know, those returns that we’re, we’re looking for. Um, so at mid-year we like to kind of do a review of what’s occurred, what played out the way we thought it would, um, update and see how we think that impact. Uh, the balance of the year and really looking at a 12 month horizon, whenever we talk about where we think the market is headed.
So, um, this is a preface. Let me just say that we were very optimistic. Um, had a positive outlook on the market. As we headed into the year and specifically we had a target of, uh, 41 50 for the S&P 500. Uh, for calendar year end, and that was roughly a 13% return on the S&P 500, which is a pretty handsome return. Here we sit at 4,400 on the S&P 500 and folks will, of course it begs the question. Well, you know, Jeff, um, are you going to update. That target. And do you feel like we’re overpriced overvalued? You know, we’ve had a lot of things happen this year. Um, Bitcoin was on fire for a bit. We had the, uh, so-called meme stocks that were out there. The GameStop’s being AMCs that, uh, folks were just all a Twitter about. And there was, I think, just a continued feeling that maybe we’ve got some fraud. And some bubbles that are developing and you know, this just can’t continue. Um, we actually are updating our forecast. You’ll see, in just a minute, we’re taking our S&P 500 up to 4,600 or, uh, the next 12 months, if we will look through June of 2022, and it comes back as it has for us each and every time, two, three things that we look at and assessing the market.
The fundamentals, the valuation levels in the market and the technical price trends. And if we see a lot of check marks in each of those categories, then we feel comfortable that the market still is on good footing. And we do have a lot of check- marks in those areas, a robust economy, solid earnings, low rates accommodate a fed tight credit spreads. Those are all good things and they continue to be in place that said. We do see signs just as a executive summary of some slowing momentum in the market and would not be at all surprised to see some type of correction within the next six months before, you know, year end or a stall, if you will, in the market. To allow earnings to continue to catch up with price level of the S&P 500 in, there are some wall of worry items that are out there that could cause some temporary kind of pullbacks in the market. Uh, concerns about tax policy next year. What about accelerating inflation, is the fed behind the curve?
Those are all things that are out there. And then this idea of peak in the economy. And what that means we think each of those wallet worry items will be adequately. Uh, maneuvered through and managed and its fundamentals, the evaluations and the technical, uh, price trends that we see as all positive will carry the day.
So, um, we’ll talk about all this in, in the, in the next, you know, 30, 40 minutes, but, um, let’s look at this first slide, just a quick review that I think helps us the stage. Some of the comments I’ll make about what we see going forward. And if we look at the returns, this is through mid year. Just to refresh.
We’ve got returns. There’s the all country world index, which is a global index combined of U S and international securities of 13%. We have the S&P 500 up over 15% for the six months. Small cap stocks did even better up 17%. And then you can see the international arena also in high single digit territory with regard to return.
We really liked the fact that this was a broad based advance in the market that says that there is competence. Um, it doesn’t look like folks are, uh, looking for this to be a kind of bull market, uh, peak. It wasn’t led by, you know, just a few stocks, a very narrow market. The worst thing that, that, you know, really can happen is where you just see a handful of stocks carrying the market in most of the market being weak and just the big cap. Doing really well. We didn’t see this. We saw broad strength and that does portend well for, for, uh, future, uh, returns. If you look at that right-hand column, you can see that we had really robust recovery off of the March 20, uh, 20 low. Um, you saw for March 23rd through the end of June, the S&P 500 almost doubled.
It was up 96%. Russell 2000 up 134%. And you know, the, the two comments I’d make from that is that again, if you would’ve gone back to that February, March period, there was a lot of pessimism pessimism that was out in the market. A lot of people were looking at the headlines we can do to continue to stay focused on the data. What were the fundamental drivers, what was policy to could keep personal income? Um, at very high levels, uh, keep the consumer and, um, you know, good, good stead for spending going forward. Um, and those elements remained in play along with low interest rates, tight credit spreads, all those factors I just talked about. And so that gave us the confidence to say, Hey, hold your ground. Stay invested. And not, um, encourage or allow our clients to suffer the whiplash of selling in that 34%. Uh that we saw in the market in March. Uh, it was about a three weeks wound, uh, in March and the S&P 500 miss out on these robust returns and right hand column. Now having said all that, I would admit that after you’ve seen those returns, Um, we’ve been probably a little surprised by the swiftness in the magnitude of, um, the recovery and the returns that we’ve seen so far this year. But, you know, I’ll, I’ll never apologize, um, or underestimating where the market’s headed.
We’re just trying to get the trend, right. And again, we go back to those underpinnings fundamentals, valuations and technical. Um, to try and assess the trend and where it’s headed. And let’s remember that as we were kind of climbing the wall, worried through this, we were looking at a potential contested election. We were asking ourselves, are we going to get the stimulus and how will run a virus, uh, being managed will the vaccines and vaccine dissemination, uh, be successful in the U S no major hiccups that those issues have been resolved. And there are ones ahead of us. Um, but you know, I think that’s what enabled the market to do what it did. Um, and we think that, um, the environment also in the issues that we see today will be, uh, managed well, not without correction, not without pause. But over the next 12 months that we’ll see, um, relatively healthy returns. And let’s look at the next slide here. I just want to make the point that when I talk about corrections potential, you know, stall in the market in the, in the short term, um, a couple things about that.
That’s not something necessarily to fear. Um, we think it will be helpful. And this chart goes back to 1980, the gray bars show the calendar year returns for the S&P 500, the annual returns each year. And you can see most of those bars are positive and they move up. Um, there are a few years, very few where those gray bars are moving down and you saw negative returns, um, in the market. But even in those years where they were negative, notice that most of them. Or, um, not significantly negative, kind of in that minus six to minus 10%, uh, territory. There were a few, um, where you had some, some outsize, um, losses. Um, but in most cases you can see the red dots capture the entire year. Correct. That you see, and many times it’s not unusual at all for you to have short-term for corrections that you get through. For example, in 2020, you had a 34% decline in the S&P 500. You see that red dot and yet the price return was positive. 16% of the total return was positive 18%. So the market will do that. It will give you these correct periods and most of those, correct. Or driven by psychology it’s it’s news items that are out there in 2016, it was, um, you know, Brexit that’s going to cause a global depression. Uh, supposedly folks were very concerned about the presidential election that year with, uh, Trump and in 18, it was all about, uh, tariffs and tariff rhetoric or tariff rider, and the fear that we would have, uh, not tariff discussions, but.
Or that the pot that the fed would make a big policy mistake. And, um, they started speculating that we were going to have a recession as a result of those factors and it never came about, and then in 2020 it was pandemic in each of those cases. You needed to look underneath the surface underneath the hood, look at the fundamentals, the valuation levels and detection.
And the economy continued to grow in each of those periods with the exception of the pandemic, where we had a forced temporary shutdown and a quick V-shaped recovery. Um, but, but you could look through that and see that valuation was reasonable or attractive fundamental trends were, um, positive. Yeah. Um, technically the market showed signs, um, not have a run towards sphere and defensive names, but the more aggressive areas in market continued to perform well.
And that gave us the confidence to stay invested. So corrections, you can maneuver through it’s okay to be negative in the market. Um, but this is a, a, an industry where our being an optimum. Uh, generally pays off because the market is up 75 to 80% of time. If you’re going to be negative, you better have the data behind you, the negative data behind you to support that. Um, because most of the time the market will climb the wall of worry. If those factors that I mentioned remain positive. So why am I saying that? You know, we might see some type of correction in the near term, and yet I remained positive on the market, uh, over the longer term. Um, that appears on this slide. This shows you that the S&P 500 in terms of, um, the percent of stocks that are trading above their 200 day moving average, and the red, silver got over 90% of stocks trading above their two day moving average. It says there’s pretty good momentum over the longer term. And most stocks remain in a long-term uptrend.
And yet, if you see what’s happened over the last 50 days, we have seen. Um, some momentum fallout in the percentage of stocks trading above their 50 day, moving average, um, is, is falling to the 50% or below level at this point. So the market’s kind of signaling that it might want to take a bit of a rest, which shouldn’t be surprising given some of these wall worry items that we see in the news and the fact that we’ve had the strength and the rally that we have for, to take a pause or arrest, shouldn’t be surprising whatsoever, but that doesn’t mean you’re at a bull market top by any stretch.
Um, also, if we look at higher beta stocks compared to low beta stocks, whereas they had been in a strong uptrend where you had the more aggressive areas of the market within consumer discretionary and technology, industrials and materials, those stocks really leading, um, they’ve kind of flat-lined over the last couple of months, um, as we. Uh, deal with and struggle with, Hey, is this inflation going to be transitory, you know, or not? Um, is economic data peaking and, uh, if so, what does that pretend? Um, you know, we’ve seen just a little bit of that momentum coming out of the market. So that’s why I say, you know, it seems like the market does want to rest in here before moving to higher highs from a technical standpoint.
Um, doesn’t mean. Um, just because I, I, I’m talking about reasons why we might have a correction doesn’t mean that, that we have to, and it doesn’t mean that just because you’ve had a super strong first half that historically the second half, you know, is, has been a tough second half. We looked at, uh, the top 15 first hats on record, uh, for the S&P 500 in this most recent year. In fact, Um, falls within the top 15th. That’s the 13th strongest, um, that we’ve seen on record. And if you look at these top 15 first half periods, what’s interesting is in the blue the table. And the blue shows that you on average, the second half 73% of the time is positive. And the average return, if you look at that far right column and the second half is about 6.6%.
So we’re not doomed to negative returns just because we’ve had really strong returns. Um, that’s again, why I look, you know, underneath the surface and, and look at some of these technical trends within momentum to see what it seems to be telling us at this point in time. And it does seem to me to be saying, Hey, I want to rest a little bit. Um, yeah, yeah. That may not be the case. Maybe we’ll continue to have kind of these rolling corrections. That we’ve seen within sectors, not the aggregate index, uh, kind of pull back and in a, you know, 10%, 15% of fashion. Um, as, as I wouldn’t be surprised to see, um, you know, in the month of July we saw, um, energy stocks, uh, down about 8%.
We saw financial stocks down in negative territory, and yet the S&P, uh, posted a 2% return for the month of July. Uh, earlier in the year we saw the NASDAQ, correct about 10%. So maybe we’ll just have these rolling corrections, you know, across the different sectors. That could be another scenario. Um, and because of the churn that we’re seeing in the market, we’ve recommended to our clients, that we have a very balanced portfolio between growth and value. I think it’s a time to be diversified and have a blend of those two versus many experts that are saying, oh, we ought to run to all these, uh, you know, old economy socks, these account, these, these reopening types of stocks. I think technology will continue to do quite well and is exposed to, uh, catalysts that will drive earnings for some time.
The 5g, the move towards advanced fries. Um, and plowed in data center. I think that we want to continue to have a nice blend of, uh, you know, those types of technology oriented stocks, as well as the cyclicals and within cyclical land. I think that you want to be exposed to those that are very innovative.
Um, you know, examples within, um, the consumer discretionary area. We have exposure to Aaptiv, which is an auto supplier. That’s very. Um, leverage to the move forwards advanced, uh, driving and making components that are involved in, um, but for electric vehicles and, you know, advanced driving. And I think innovation is, is key even within your cyclical exposure.
So, you know what we got right in the first half, we thought that S&P 500 earnings and economic growth would be very healthy and would support the solid stock market. Um, I think we, uh, we’re pleased at that. That’s kind of the result that we saw when, when many were kind of pessimistic about how vaccine dissemination and economic reopening would play out, uh, we thought that inflation would become a concern, but that it would be manageable. I think we still feel that that is the case it’s going to accelerate, but not to those, um, margin destroying levels. Uh, we thought that rates would rise. We got that right for a while. I might have to move that into other okay. Category. Um, as, as treasuries approach, the 1.75% mark, uh, they’ve dropped back to less than 1.2% at this time.
And, um, we thought they would trade in a range of about, uh, where they are now up to the, uh, 2% plus level. But the point is I think that, uh, we, we do think. Rates will, um, not surge, um, and not plummet, but stay in kind of a sweet spot if you will, that will be supportive of the market. And we thought domestic equities would, would outperform. And they certainly do, uh, handsomely in the first step. What we did miss was a strong push into Seco poles in that first part of the year, we were blended throughout and, uh, the perfect portfolio would have been heavily invested in financials and entering. For the first four to five months of the year. What’s interesting now is that that has right-sided itself. And now you’ve got the second cool. And the non-cyclical categories in the market, really? Yeah. Parody growth stocks that performed, uh, absolutely in line with value stocks and that gap has been erased. So we missed that in the first four or five months, but at this point you could move that into what we got right.
Column that you wanted to. Uh, between the cyclical and the non-cyclical. So here’s, uh, just the, the forecast that we see, um, for, uh, mid year 2022, we in the base case is in the green. We assign a 65% probability to an S&P 500 level of 46 50. That would represent 8%. Um, price return from where we were at June 30th, 10% total return. And, uh, the environment that would describe that kind of still healthy, not crazy robots, but still healthy return would be, uh, economic growth through the calendar year of around six to 7% in terms of real GDP growth. Uh, we certainly have had a very strong V-shape recovery. It is going to slug, but we think it will slow to still healthy levels.
We look at 2022, we’re looking for three percentage growth and then that will decline and kind of steady out. We think going forward at the 2% level, but still, um, healthy growth. We don’t see recession, um, you know, and, and view it at this point in any way, the federal reserve that will remain accommodative. We’ll get some numbers out this Friday on the job report. They’ve been solid and strong. The ADP, uh, John report that came out today was a little soft. And if it is just a little soft, I think that that will give the fed even more cover, uh, to remain accommodative, uh, for, um, you know, a fair amount of time.
And then we see, uh, interest rates trading in that range of 1 25 to two and a half percent or so, um, so rising over time and we think they will, but not the levels. That will be a real concern. Um, now we, we do think that there’s a small probability that we get. What one might call a blow off top that we could see a 5,000 handle on the S&P 500, uh, by mid-year 20, 22. And that would happen if inflation really did turn out to be pretty benign. I think there’s, there’s fear out there right now that it’s going to accelerate. Um, and, and that’s keeping investors a little skeptical, um, and sober PE levels at 22 times aren’t cheap, but at these low level of interest rates, they’re very reasonable.
They could rise to the 24 times level. I think if folks really got confident that inflation was going to be contained and that the economic growth while peak. Was going to slow to still healthy levels. And that kind of is our view. Uh, if we did see 5,000, that would, that would be probably a moment for us to be more cautious, to think about rebalancing a bit, but there is a chance that we get this, uh, optimistic kind of view that’s stronger than single high single digit returns. And so if you combine those two together, we assign a 75% probability to relatively handsome, rigid returns over the next 12 months. Now there are disappointing scenarios and we highlight them there. We think that there’s a 20% chance that you don’t have, um, you know, a bull market top and an ugly bear market, but that you do get, um, some type of pullback over the next 12 months. And that would be. If inflation really was less transitory than advertised by the fed stickier, more of the wage price spirals, um, that could cause margins to come in just a bit. And if that would happen, earnings growth would be slower than expected and you might get some multiple contraction. And then we assign a very low probability to a pessimistic case that would be.
No stagflation inflation is far higher than expected the best behind the curve. And then you could get a handsome, um, you know, decline in the market. Yeah. But very low probability that we see that happening. And to put that base case in perspective, that’s really just saying a 22 moldable on consensus earnings of around $211 a share or so, and actually earnings continue to come up. We’ve just gone through a very strong earnings season. And so, um, you know, w we’re not stating that we’re, we’re having far better outcome than is kind of expected in the market right now, we’re saying, Hey, you’re probably deliver about, uh, where, uh, it looks like the numbers are going to come in, you know, for the year to get that kind of, kind of return the reason, you know, again, trying to differentiate between. Temporary short-term corrections and signs of a real bull market top and bear markets last for multiple months quarters, even, you know, over a year. And they tend to be associated with, uh, you know, nine or 10 signals that tell you this is more than just psychology. And we just don’t see any evidence of this.These are the nine things that we look at. Uh, that kind of signal a bull market top for the beginnings, perhaps of an ugly bear market. It’s that blow off top that I talked about, where you really get stretched PEs, uh, to levels that are far higher than norm, where you get heavy inflows into equity funds and everyone’s buying stocks and selling bonds, uh, where you have very heightened MNA activity.
Rates real rates start to rise significantly. You get weaker earnings, the erosion and number of stocks, making new and utilities and beverage companies, more defensive names leading and in credits Fred’s Whiting out. And people hearing that, you know, corporate bonds won’t be able to, um, pay principal and interest.None of them that is happening right now, we do have heightened IPO activity, but that’s about the only thing that you could check all of these factors. You would have checked off in 2000 and in 2007 and eight, they’re just absent today. And so that’s another thing that gives us confidence in saying, Hey, we expect relatively healthy outcome over the next 12 months.
Adam Hooper: (28:25) And Jeff, before we go on to the next slide here, um, SPAC activity, that’s, you know, that’s been talked about quite a bit as a signal. Maybe you would lump that in with the IPO activity. Uh, Pretty strong earlier this year, we’ve seen a pullback in that. Do you, do you include that in this more IPO activity or do you look at that differently? And then what are the behaviors that you’ve seen there as they’ve kind of cooled off here, a middle part of this
Jeff Krumpelman: (28:49) year? No, I wouldn’t include that. And, and you know, this activity and, you know, that would be an area that we would say, you know, this is a mosaic. That is a sign that as, um, you know, stock market prices and multiples have come. Yeah. Um, you know, that’s, that’s something to watch for is, is that a sign of froth? Um, but again, it’s the mosaic and that’s why we combine it with, um, these other categories. Um, in, in, you’re just not broadly saying massive flows into equities over, uh, uh, you know, over the last 12 months on a rolling basis. You’re not seeing these other things break down. Um, that would suggest that there’s, you know, broader concerns. Um, in terms of, in terms of the top. Great, thanks. Sure. So these are, um, just, just say you don’t trust my check marks. This shows you the flows into equity funds and on the left-hand side, you can see in the blue bars that they have come up, but then when you look at it on a longer term, 12 month rolling basis, you can see that flows into equity and mutual funds. Um, you know, continue net flows, um, continue on a 12 month rolling basis and be negative. So it’s not like these other peak periods that we’ve seen. Um, that really, uh, was, you know, um, signaling that the average retail investor is just pouring in, uh, to equities, which tends to mark a market top. This is a picture of the 10 year treasury yield.
And, you know, for those that are worried of that, you know, rising rates could, you know, potentially end, um, the rally, we were a 3.2, 5%. I think people forget this back in December of 18. So, you know, rates had come up to that 1 75 levels since they’ve rolled over, they’re still an upper trend. We were at 0.5%. If you go back towards the beginning of the year. Um, but certainly not in any kind of level that, um, would, would cause you to, you know, be concerned that, uh, you know, bonds are looking far more attractive than stocks and stocks compete for bonds, uh, with bonds for attention back in 2000. When, you know, we had the tech bubble and, you know, pretty ugly, um, crashed in the market. The 10 year treasury was trading at 6%. So when you get strong earnings, um, a decent economy and, um, a differential that earnings and shield on stocks versus the bond yield still is very attractive. 53%, uh, Um, S and P 500 constituents have a dividend yield that is higher than the S and P 500. So, you know, if the 10 year treasury is trading at 6% of people go, wow, I could get 6% in a relatively risk-free bond.
Um, versus the risks I have taken a stock. Uh, I think I’ll go with the bond here. That certainly is not the case. So that’s one of the reasons why we think valuation is still very reasonable. Yes, multiples are at 22 times, but that’s happening at a time where earnings are coming up and re being revised up.
And also, if you look at the dividend yield, just the, the current income that you can earn off of a stock versus a bond is very attractive versus history. So that, that factors into our valuation analysis. And then you can see the credit spreads here. Remain at historic lows normally before. And you can see what they did in those 7 0 8. You can see what they did in 2000. They rise significantly and bond investors are way smarter than equity investors. I’ll be the first to admit it, even though my focus is on equities. Um, you know, when you’re a bond investor, you’re arguing about a few basis points and equities, you know, you’re talking about. Uh, you know, higher return differentials. And, um, so you, you, you want to be really smart in the bond market is not fearful of accelerating inflation. At this time. You see that in the treasury market as the 10 years, uh, come back down to less than 1.2% and credit spreads are extremely tight. So this is a signal to us that inflation, um, probably remains under control.Um, yes, it’s accelerating, but not the fearful levels of the bond market certainly is not worried about that right now. And that is comforting to us. As equity investors, sacral leadership remains in the cyclical camp here. You can see that it’s not utilities and staples or leading the market. In fact, they’re the worst performing sectors in the market.
Generally towards market tops. You get people buying food, beverage conferences and utilities. That’s not happening. You see the more cyclical areas you see, real estates and stuff. They’re surprisingly strong return for real estate. Um, and, um, so, so leadership and no way of signaling some type of a bull market top, and this is my yoga page.This is what I like to share. Um, when, when people ask me about the market, here are the three levels of analysis that I’ve mentioned several times, fundamentals, valuation, and technical. If you saw a bunch of red Xs in here, that would be a time to say, Jeff, how can you be positive? You know, all this stuff is negative, but there are all kinds of sub-components to each of these categories making up fundamentals.
You have friends in the economy that includes our, uh, review of. Uh, things like personal income and consumer spending, real GDP growth, capital investment, all kinds of stuff that, that compose this, uh, trends and earnings fed policy, so on and so forth. But you can see a lot of pluses here. Valuation. I just mentioned, um, looks reasonable or neutral if you, you put it in the context.Uh, interest rates and then technical price trends. This is a relatively broad market. It’s not like a few stocks are carrying the market. It’s gotten a little less broad that makes me think you could have a correction, but it’s a no way. If you look at the number of stocks advancing versus declining, suggesting anything like a bull market top, you know, whatsoever, most stocks remain in a nice longterm up.And the percentage of Sox training of other two day moving average at plus 90% is not typically what you see at a bull market top. So this gives us comfort and conviction to tell our clients to remain, you know, invested in inequities and the outlook remains pretty solid. Now we do look at wall of worry items.I’m going to cover a few here in just the next few minutes. Um, we, we do can continue to monitor coronavirus and the Delta stream. Um, looks like that’s going to be peaking in the next couple of weeks. Hospitalization and death rates are not rising dramatically or as dramatically as, as new daily cases, that’s a positive, we’re much better prepared, uh, to combat some type of resurgence, um, than we were, you know, back in the early stages of 2020.We think that this will be massive. Uh, inflation is on the rise, but we do think a lot of it’s transitory 30% over 30% of the contribution to inflation was used for our prices. Um, and then you had, you know, travel, airline tickets, restaurant prices, those kinds of things coming up, they will anniversary and there’ll be more temporary in nature.
And, um, there are some other positives that we think offset, um, this temporary kind of search and inflation that we’re sending and we think it will. Economic data is peaking, but we think that it will slow not to recession levels, but to still healthy levels. So we’re not concerned about peak economic data.And, um, I kinda, I think I’ll leave the wall of worry items that I highlight. If those three right now human nature is to go to worst case outcomes and project the worst. That’s what we saw in 2018 with regard to fed policy and tariff and trade. Right. People just go to worst case outcomes and then speculate about recession.And that can cause pullbacks. But what we look at to determine how we want to invest in and keep our clients invested is the data on the right? What does economic growth look like? What does inflamed the trend look like? How that earnings, what about the level and trend and rates and credit spreads. And on those factors, we still give, uh, you know, plus March.And so that’s why, um, we say. Let’s, you know, deal with the wall of worry and the market should climb this wall, worry, the items are manageable and the data’s good if the data’s negative and the items look like, you know, they’re not manageable, that’s when bull markets, you know. And so let’s just take a couple of, of fear factors that are out there on the wall.
Worry. One of the things that you talked about, you know, just in terms of. Economic data. People worry that, um, this fiscal stimulus is going to end. Um, and that that’s going to cause some type of slowdown it’s, it’s ending at a time where we’re we’re we’re reopening. So the timing for it to decline is solid. And my, my question is, well, if it’s, if it’s, uh, declining the amount of stimulus, is it declining? The levels that are below where we were. It kind of normal, uh, conditions back in 2019. And the answer is no, it’s not. Uh, we saw, uh, accepts of spending in 20, 20 and 2021 to keep the economy going as the economy shut down.And yeah, it’s slowing in 2022 and 2023, but not the levels that were below what we saw pre pandemic. So, uh, this fiscal cliff that seems to be in the news. Um, I think his is overstated. If we look at inflation, it is, uh, you know, accelerating, no doubt. But as I mentioned before, you see the, the core and the headline CPI spiking in that top panel, but you can see that a lot of that is from used car prices, uh, alone and other items like this.Um, And w th this will be temporary as supply chain issues, ease within semiconductor land. Um, then as we anniversary some of these excessive, uh, you know, uh, price increases after a period of decline in the middle of the Panda, Also labor productivity is increasing. That’s a very positive sign to us. We get nervous about inflation. If you get into an ugly wage price spiral, and, um, that that can happen if inflationary expectations, rise, um, and, and also if unit labor costs are rising, but if labor productivity, if each worker is able to produce more and more, you can increase wages a bit with that.
Um, uh, eroding margins and we’re heartened by the fact that we see strong trend in rising labor productivity, which should keep labor costs well contained. This shows you that earnings the stuff on the right-hand side of that wall of worry page earnings for 2021, uh, the, the estimated earnings growth.Has risen significantly from the beginning of the year. Now it’s over 30, almost 37%. As of, um, this early print in July today it’s over 40%. So earnings revision continues to be positive now because of that earnings are going to be higher. This year earnings growth expected in 2022, the number hasn’t come down, but the growth has come in a little bit because, uh, The the, the, the number and the growth for 2021 has come up, but earnings are coming in at very healthy rates.If you look at service and manufacturing activity, that remains extremely strong. The chart on the left is a results. It’s an index taken from surveys from the Institute of supply management, where they asked folks in the manufacturing sector. Are you hiring more? Are your delivery times being pushed out?Do you see growth? Um, when you want to get concerned is when these lines dip below the 50 level, the 50 index reading, we’ve had a recession every time that’s happened and you can see historically going back now, that’s when you want to be concerned, the gray bars, the recessionary periods, and it’s when they dip below that we’re well above those marks and they continue to succeed.
All right. Growth CEO. Confidence is strong on the right-hand side. Uh, small business, um, optimism remains on an uptrend capital expenditures, continue to come up. And if you look at TSA, travel numbers and people eating out, they continue to improve. So these are all positive trends then, um, we, we talk about value versus growth.And, you know, really believe that you should have a blend between the two. You do see, uh, periods historically this line, when it’s moving up, that tells you that, uh, values is strongly outperforming growth. And when it’s moving down, growth is outperforming value. Uh, you know, we think that right now, while value started to apt perform enhanced some way you can see that stall a little bit.And we think it’s likely that, um, that will kind of continue and that will be more parody. And that innovation is the key. As I mentioned, that you want a blend between the two, just given, um, kind of the underpinnings of, um, the economy and where the growth is coming from. Um, I’m going to lock this down for those that do want value exposure.I just want to point out that the international markets are a great way to get that value or cyclical exposure. The S&P 500 is much more weighted towards growth. You can see the heavy, uh, value of the S&P 500 that’s in information technology and in, uh, communication services, which would be your Google and your face box. If you look at the international. Uh, Europe, Australia, far east and index on the right. You can see that he has much more exposure to financials and industrials and materials or minerals and mining stocks. So that international exposure is a great way to get, uh, some leverage to, um, economic reopening place, if you will, and to have some diversification, the blend in some international for that value weighting, we think that’s a great way to do it.And then I just closed by saying just because we get a correction in the next six months, should that occur? It doesn’t dim you to, uh, a negative 12 month period at all. We can see many times you get entry year, uh, temporary corrections, and yet the full 12 months, uh, ends up being very productive. So I’ll leave it there. Those are my formal comments and happy to take questions.
Tyler Stewart: (45:05) Okay. Thank you, Jeff. Thanks for the presentation as a reminder, um, if you have any questions, you can enter those in, uh, in the chat box and we’ll go through those questions. Uh, Jeff, first question we have here is, uh, you mentioned, uh, rotating corrections across the sectors. Earlier in the year it was energy and technology. Um, how can you tell the difference between a correction and a sector versus an overall just rotation out of that sector?
Jeff Krumpelman: (45:35) Well, if you look at those sectors right now, what we see is it was it take within energy and financials. The stocks remain in a long-term and a longer term uptrend. And yet they’ve pulled back. So it’s not like everything is roll up, rolling over and, you know, hitting new lows, they still remain, um, in positive trend, um, over a longer period. But within the month in the last month or two they’ve shown significant weakness and the number of stocks hitting, you know, one month highs has come way in. So, um, you know, to, to, to me, Uh, the big difference if you’ve seen, uh, just a total breakdown where, you know, they’re hitting, um, new longer-term lows and we just don’t see, you know, that occurring.
Tyler Stewart: (46:30) Got it. So you’re looking at kind of early indicators that the one month high and one month lows?
Jeff Krumpelman: (46:35) We’re looking at the fact that, um, you know, they, they, they appear to be oversold just looking on, uh, the, uh, Percentage of stocks that are hitting, um, you know, one month lows have accelerated the number that are hitting one month highs have come way down.
Tyler Stewart: (47:02) Got it and that’s a, that’s a great segue to question number two here. Um, uh, so you mentioned that 85% of the S&P stocks were above their 200 day moving average. Uh, when you’re looking at the 200 day moving average, what, what percentage levels are significant for being above and below that 200 day moving average?
Jeff Krumpelman: (47:22) So it, you know, you can slice it into deciles and it’s very rare for 90% of the S&P 500. Um, to be trading above, you know, their, their 200 day moving average, um, you know, kind of a neutral reading would be in that, you know, 40 to 50% range. And then when you’re looking for, um, kind of oversold, consistent conditions, you get down to 20% or below. So it’s, it’s kind of a range that you’re looking at, but it’s very rare where 90% of them are trading, you know, above their 200 day moving.
Adam Hooper: (48:05) That’s one of the things that we’ve we’ve talked about on the podcast a few times is the benchmark that you’re comparing it relative to you. Right. I’d be curious, you know, the 200 day average, that’s going to be in a fairly challenged market time. Right. What would would maybe indicate that a higher, so the benchmark that you’re looking back to, where do those stand relative to pre pandemic levels? Or do you have that data handy?
Jeff Krumpelman: (48:27) I don’t, I don’t have that data. Um, you know, we could look at that, but I go on into the pandemic. It was, um, I don’t think anywhere close to 90% of the stocks that we’re trading above. Um, they’re, they’re moving average.
Tyler Stewart: (48:46) Got it. And speaking of the S&P 500, uh, we got this question here. Um, so. How, is the PE ratio? Um, so if we’re, if we’re looking at the valuation that S&P 500, is it, is it overvalued, uh, when, when you look at PE the PE ratio?
Jeff Krumpelman: (49:10) Well that’s the million dollar question. And so, um, what I would tell you is that the PE ratio expanded significantly when earnings fell off. Back in spring of 2020. And, um, you know, they, they went to 20 to 22 times earnings immediately. And actually they’ve been pretty flat ever since June of 2020. So they haven’t continued to expand if anything, they’ve come in just a little bit. And it’s true that the average PE over long periods of time is around 15 times. So at first block, You might say, Hey, that’s, that’s really expensive, but you have to put that in context because, um, you know, that PE history includes times when the treasury was trading at six or 10% in times when it’s trading, like it is now at 1% and they tend to be very low PEs do when a bond yields are high. And they tend to be high when bond yields are low. So for an environment where you have historically low interest rates, I do not think that they’re high. I think that they’re more normal. And the other thing that we look at, you have to look at other valuation metrics. One of the metrics that we look at is the earnings yield on stocks. That’s just simply the net income of a stock divided by its stock price. How much, how productive they are, are in terms of earnings generation, compared to a bond yield and, you know, interest income is really the bonds, uh, earnings yield, if you will. But back in 2000, the earnings yield on stocks, uh, less the bond yield was negative. So, so, you know, bonds were yielding much more than stocks. That’s not the case today. The case today is that you have an earnings yield on stocks that are it’s positive, it’s higher than what you can get on a bond in terms of the bond yield. So in that context, uh, you can argue that the market is cheap. I’m not going to do that. Um, I’m just going to say it’s reasonably priced at this level of interest rates and it’s not expanding. It’s actually, you know, coming in just a little bit after having that big bump back in, um, the beginning of the pandemic, that’s how I view it. Now, if rates, all of a sudden we saw the treasury at 4%, I would say what, uh, they’re looking more expensive, stocks are. I hope that helps.
Tyler Stewart: (52:10) That does, thank you. We’ll wrap up here with one final question. Uh, what are you seeing in the commodities markets? Uh, most notably what’s the story been with lumber pricing?
Jeff Krumpelman: (52:22) So that will lumber pricing did shoot up. Um, I think it was $1,500 or more and it’s come back in, um, and, and come, come down. It’s much more reasonable. Um, commodities are, you know, still. Um, that more peckish levels in the industrial metals, I’m still strong in, in copper. Um, so you still have that commodity level of inflation as lumber going to signal that these others are going to come in. You know, we’ll, we’ll have to see, uh, how that plays out, but energy prices have come up. As we all know, north of $70, uh, for brands. And that that is, um, you know, a headwind that the companies will face in terms of, uh, commodity price pressure. So we’re still seeing elevated commodity prices. That that is true.
Tyler Stewart: (53:20) Alright and with that, we’ll wrap up the webinar. Jeff, thank you so much for joining us.How can participants learn more about what you’re up to?
Jeff Krumpelman: (53:28) Well, they, they certainly can, uh, look at our website. We post all kinds of information, um, on the website, um, we have a monthly newsletter investment strategy, commentary pieces on wealth planning. I just, uh, you know, recorded the crystal ball that’s on the website. Um, so, you know, please, uh, please visit us. And, um, you know, look forward to hearing from y’all.
Tyler Stewart: (53:59) Aright, thanks Jeff for allowing us to share this webinar on the podcast. For our listeners out there if you have any questions for Jeff, please send a note to firstname.lastname@example.org. And with that, we’ll catch you on the next one.