by Richard Cull
July 2021 Market Recap & Commentary
July saw the majority of broad market indexes finish higher despite a bit of downside turbulence mid-month.
If we back up and take a longer-term perspective, we see that 2021 thus far has been a very quiet calendar year. According to Ned David Research, going all the way back to 1970, this is only the fourth time the S&P 500 has not had at least one pullback of 5%. Last year we had eight such drawdowns and 2008 saw eleven! With a renewed threat of the virus, the Federal Reserve possibly winding down their bond purchases and a myriad of other unknowable uncertainties, odds are we will experience at least a single 5% retreat before December 31st.
One overlooked reason for stocks buoyancy thus far in 2021 is the bond market.
Last week the real yield on the 10-year U.S. Treasury Note dropped to NEGATIVE -1.1% - a record low. The real yield, or real-rate-of-return is the stated (Nominal) yield on a bond minus inflation. So with inflation rising and yields falling investors are actually foregoing purchasing power in leu of safe and steady cash flows.
What does this have to do with stocks?
Most investors, both individual and institutional hold balanced portfolios, a combination of different asset classes including stocks and bonds. Because the safest bonds, like U.S. Treasuries are in effect losing money, those portfolios are shifting their allocations to lower-rated bonds, stocks or other higher-risk assets. This short-term mentality is at times expressed as “TINA” – There Is No Alternative. But things change quicky on Wall Street and that’s why our experience and discipline leads us to look beyond near-term anomalies, like negative real rates, and focus on our longer-term strategic goals.
The Risk Number is at the heart of a sophisticated set of tools to precisely measure the appetite and capacity for risk that each client has, and demonstrate their alignment with the portfolios built for them. The following graphic shows the risk of various asset classes as measured on a scale of 1-99 (1 being the most conservative and 99 being the most aggressive) as of the date above.
We start with a Risk Number, a measurable way to pinpoint how much risk you want, need, and already have. Then, your wealth advisor will optimally allocate our investments to help you reach your financial goals. Along the way, you will receive transparency of information, seamless proactive service and the trust and accountability you need to stay on track. All of this will lead to your personal comprehensive investment strategy that is powerful, disciplined, responsive.
Centric’s Market Assumption Disclosures: This information is not intended as a recommendation to invest in any particular asset class or strategy or product or as a promise of future performance. Note that these asset class assumptions are passive, and do not consider the impact of active management. All estimates in this document are in US dollar terms unless noted otherwise. Given the complex risk-reward trade-offs involved, we advise clients to rely on their own judgment as well as quantitative optimization approaches in setting strategic allocations to all the asset classes and strategies. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Assumptions, opinions and estimates are provided for illustrative purposes only. They should not be relied upon as recommendations to buy or sell securities. Forecasts of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. If the reader chooses to rely on the information, it is at its own risk. This material has been prepared for information purposes only and is not intended to provide, and should not be relied on for, accounting, legal, or tax advice. The outputs of the assumptions are provided for illustration purposes only and are subject to significant limitations. “Expected” return estimates are subject to uncertainty and error. Expected returns for each asset class can be conditional on economic scenarios; in the event a particular scenario comes to pass, actual returns could be significantly higher or lower than forecasted. Because of the inherent limitations of all models, potential investors should not rely exclusively on the model when making an investment decision. The model cannot account for the impact that economic, market, and other factors may have on the implementation and ongoing management of an actual investment portfolio. Unlike actual portfolio outcomes, the model outcomes do not reflect actual trading, liquidity constraints, fees, expenses, taxes and other factors that could impact future returns. Asset allocation/diversification does not guarantee investment returns and does not eliminate the risk of loss.
Index Disclosures: Index returns are for illustrative purposes only and do not represent any actual fund performance. Index performance returns do not reflect any management fees, transaction costs or expenses. Indices are unmanaged and one cannot invest directly in an index.
Riskalyze Disclosure: The Risk Number® is a proprietary scaled index developed by Riskalyze to reflect risk for both advisors and their clients. The Risk Number is at the heart of a sophisticated set of tools to precisely measure the appetite and capacity for risk that each client has, and demonstrate their alignment with the portfolios built for them.
Shaped like a speed limit sign, the Risk Number gives advisors and investors a common language to use when setting expectations, recognizing risk and making portfolio selections. Just like driving faster increases hazards, a higher Risk Number equates with higher levels of risk.
General disclosure: This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks.