2022 Q1 Market Update

Russia’s invasion of Ukraine, continued supply-chain issues, accelerating inflation, the Federal Reserve’s interest rate hikes, China’s continued Covid lock-down, and inversion of the yield curve put into context negative quarter one returns in equity and bonds. Long-term implications may include more military spending, acceleration of green energy, shifts from global to regional economies, greater unity among the European Union and NATO, countries taking sides (or forced to), and impact on US and China interactions. Officially, stocks and bonds entered a correction. ¹The quarter ended with negative returns: S&P 500 -4.6%, NASDAQ -8.9%, and ten-year treasuries -5.5%. International markets were down as well with the Nikkei -2.6%, Stoxx Europe 600 -5.9% and the Dax -9.3%. In contrast, energy finished 41.3%, agriculture 25% and industrial metals 21.5%. The labor market is tight with employers adding 431,000 jobs in March. Airline fares are up 10.7% in March from February.

Yield-Curve

²Notably, the two-year treasury yield outpaced the ten-year treasury yield, and the five-year treasury yield outpaced the 30-year treasury yield. Not all inverted yield curves lead to recession but often it can signal an upcoming recession. The Federal Reserve owns about $9TN in bonds which is 25% of the Treasury Market. Historically, quantitative tightening in 2017 resulted in volatile equity returns and bond yields plummeting.

Inflation & Federal Reserve

³Inflation is the highest it has been in 40 years having accelerated to 8.5% in March which is a four-decade high. This marks six straight months of inflation above 6% and is above the Federal Reserves’ 2% target. Meat is 13.7% more expensive than it was last March, cereal and bakery products up 9.4%, and fruits and vegetables up 8.5% according to the U.S. Bureau of Labor Statistics. Some increase in pricing is because of the Russia-Ukraine war as the countries are big producers of wheat, maize, and fertilizer. The Organization for Economic Cooperation and Development estimates that global economic growth may be about 1% lower and inflation almost 2.5% higher than if Russia’s invasion of Ukraine had not occurred. The Federal Reserve’s top priority is to reduce inflation while still tightening monetary policy. It is considering raising rates by a half of a percent instead of a quarter point in May given strong job growth and inflation numbers.

Source: BLS, FactSet, J.P. Morgan Asset Management. Guide to the Markets – U.S. Data are as of March 31, 2022
Ukraine

Russia’s invasion of Ukraine is a grave, profound, and unthinkable humanitarian crisis with about 4.9MM refugees having fled Ukraine since February 2022 and about 13MM stranded or unable to leave according to the UN Refugee Agency. The depth of economic hardship in energy, commodities, trade, and supply chain reverberates worldwide. Russia and Ukraine are key players in energy, agriculture, and metals. The European Commission recently announced plans to eliminate dependence on Russian natural gas and crude oil this decade. ³The European Union currently imports 40% of its natural gas from Russia. Russia supplies about 19% of the world’s natural gas, 11% of oil. Green energy acceleration will not be easy given dependence on scarce metals and materials. More than 35% of the world’s palladium is in Russia, and Ukraine has abundant lithium reserves. Fuel cells for hydrogen-powered vehicles use palladium and electric vehicle batteries use lithium.

Source: FactSet, J.P. Morgan Asset Management; (Left) Bloomberg, CME; (Right) EuroStat, HSBC. Guide to the Markets – U.S. Data are as of March 31, 2022.
China

China’s gross domestic product grew 4.8% in the first quarter of 2022 with most growth occurring in January and February. However, the world’s second largest economy slowed in March because of Beijing’s efforts to curb Covid outbreak and businesses being forced to suspend operations. About a quarter of the country’s population (40% of its economy) are subject to lockdown. Beijing’s 5.5% GDP growth target may be out of reach. China responded with interest rate cuts in effort to boost the economy and spur lending.

Conclusion

Many analysts continue to favor equity over bonds and cash for 2022 assuming the U.S. does not fall into recession but caution that the market may remain volatile with significant uncertainty. The White House announced a record release of one million barrels per day of oil for the next six months to address oil and gas prices. The U.S. labor market is very strong, unemployment is decreasing, and baby boomers are exiting the workforce.  Inflation is likely to remain moderate. Forecasts of 3% of less for real GDP on a year-over-year basis by fourth quarter remain.

It is important to keep in mind that financial markets are forward-looking, while economic data tends to be retrospective.  More balanced diversification across the market sectors is our basis for a prudent long-term investing approach.

Disclaimer

The information provided is for informational purposes only and should not be considered investment advice. There is a risk of loss from investments in securities, including the risk of loss of principal. The information contained herein reflects Callan Capital Management’s views as of the date of distribution. Such views are subject to change at any time without notice due to changes in market or economic conditions and may not necessarily come to pass. Callan Capital does not provide tax or legal advice. To the extent that any material herein concerns tax or legal matters, such information is not intended to be solely relied upon nor used for the purpose of making tax and/or legal decisions without first seeking independent advice from a tax and/or legal professional. Callan Capital has obtained the information provided herein from various third-party sources believed to be reliable but such information is not guaranteed. Callan Capital makes no representations as to the accuracy or any other aspect of information contained in other Web Sites. Any forward-looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. Callan Capital is not responsible for the consequences of any decisions or actions taken as a result of information provided in this presentation and does not warrant or guarantee the accuracy or completeness of this information. No part of this material may be (i) copied, photocopied, or duplicated in any form, by any means, or (ii) redistributed without the prior written consent of Callan Capital Management. For detailed information about our services and fees, please read our Form ADV Part 2A, and our Form CRS which can be found at https://www.advisorinfo.sec.gov or you can call us and request a copy at (866) 912-4888 

All data presented as of March 2022

Sources:

¹https://www.cnbc.com/2022/03/30/stock-market-futures-open-to-close-news.html

²https://www.pgpf.org/blog/2022/03/the-federal-reserve-holds-more-treasury-notes-and-bonds-than-ever-before

³https://www.bbc.com/news/58888451

³https://www.marketwatch.com/story/palladium-eyes-record-prices-as-russia-ukraine-war-looks-to-deepen-supply-deficit-11646419466

Q4 Market Commentary

2021 began with the promise of vaccines and a belief that everything would return to “normal” after a turbulent year due to the pandemic. Over the past 12 months, we have seen historic price spikes for companies and consumers, acute labor shortages across industries, and an ongoing bottleneck in the global supply chain that continues to this day. However, after a slow start this quarter, growth quickened at the end of 2021 and is expected to continue strong as re-openings resume and companies try to rebuild inventory. Despite the many curveballs thrown by the COVID-19 pandemic, consumers are learning how to adapt to ever-changing conditions and remain financially healthy with job growth and increased wages. 

COVID-19

There are plenty of factors to watch as we move into 2022. First and foremost, the COVID-19 pandemic is still present and weighs heavy on investors’ minds. As the fourth quarter progressed, investors saw market risk shift to a new coronavirus variant from South Africa. Like the Delta variant, Omicron shocked the markets and caused lockdowns to resume in many parts of the world. Fortunately, a national uptick in vaccination rates [including booster shots] have allowed for a reduced infection rate, hospitalization stay, and an overall milder case for those with the Omicron variant. This should lead to fewer cases and, moreover, fewer fatalities over the coming months. In addition to the business disruptions the pandemic caused, there was also a strain on healthcare, education, and travel. Moreover, the pandemic is continuing to cause product shortages and supply chain disruptions. This has driven up product demand resulting in the increase pricing of goods and shipping costs, in combination with labor shortages contributing to storage surpluses and a lack of truck drivers.

Source: Centers for Disease Control and Prevention, Johns Hopkins CSSE, Our World in Data, J.P. Morgan Asset Management as of December 31, 2021

Supply Chain and Inflation

This year demand for many products increased beyond the capacity of the world economy to supply causing businesses to struggle, and sometimes fail, to meet consumer demand and investor expectations. There were many factors contributing to the global supply chain’s disruption, including cutbacks in production prompted by the COVID-19 pandemic, the growing demand for goods, and labor shortages that led to delays at ports and across the transportation sector.

Many companies have cited a challenging labor environment, including higher labor costs, which has not only pushed them to cut margins, but also created inefficiencies within their operations. By mid-October, most S&P 500 companies had warned investors they would be impacted by supply chain issues, leading to lower profits and revenues.

Source: BLS, FactSet, J.P. Morgan Asset Management as of December 31, 2021

The price of goods and services has risen significantly this year as consumer spending has outpaced supply shortages across major sectors of the economy. U.S. household net worth has grown tremendously because of strong employment gains, rising wages, government transfers, and booming stock and real estate markets. In November 2021, the US 12-month CPI inflation rate reached its highest level in the US in nearly 40 years at 6.8 percent. The indexes for gasoline, shelter, food, used cars and trucks, and new vehicles were among the larger contributors. Airline fares also increased in November, rising 4.7 percent from October after declining over the previous few months as people geared up for holiday travel. More than half of the month-over-month increase in the CPI was due to price increases in cars and energy. Energy index measures were up 3.5 percent in November, while gasoline measures were up 6.1 percent.

Many aspects of the recent inflation surge appear to be transitory, specifically in terms of energy and supply chain issues. It is expected that base-year effects will help reduce inflation rates from current 30-year highs, and there are signs that some of the most extreme supply-related pressures are dissipating. Worker shortages should subside as more employees re-enter the labor force. Nevertheless, labor markets will remain tight enough to maintain solid wage growth, which will limit the downward trend of inflation rates. We see inflation settling at levels higher than pre-Covid whenever these supply bottlenecks ease.

The Federal Reserve

As we move into 2022, the Federal Reserve is expected to raise interest rates to fight inflation. At the December Federal Open Market Committee (FOMC) meeting, the Fed accelerated the pace of tapering by $30 billion per month, suggesting they would conclude the process by March 2022. The median forecast of FOMC members now calls for three rate hikes in both 2022 and 2023, with a terminal rate of 2 percent – 2.25 percent by 2024. The Fed’s key rate, currently at near zero, influences many consumer and business loans, including those for mortgages, credit cards and auto loans.

Source: Bloomberg, FactSet, Federal Reserve, J.P. Morgan Asset Management as of December 31, 2021

Policy makers expect the U.S. economy to grow 4% in 2022 and unemployment to fall to 3.5% by year-end, according to the Fed’s latest growth forecast, a key criterion for the Fed before it lifts rates of zero, where they have been since March 2020 at the start of the pandemic.

A rising number of Coronavirus variants and severe supply shortages have made the road to pandemic recovery more challenging than anticipated. After slowing in the fall, growth re-accelerated at the end of 2021 and is expected to continue strong as reopening’s resume and companies try to rebuild inventory. Despite the many curveballs thrown by the COVID pandemic, consumers are learning how to adapt to ever-changing conditions and remain financially healthy with job growth and increased wages. 

Disclaimer

The information provided is for informational purposes only and should not be considered investment advice. There is a risk of loss from investments in securities, including the risk of loss of principal. The information contained herein reflects Callan Capital Management’s views as of the date of distribution. Such views are subject to change at any time without notice due to changes in market or economic conditions and may not necessarily come to pass. Callan Capital does not provide tax or legal advice. To the extent that any material herein concerns tax or legal matters, such information is not intended to be solely relied upon nor used for the purpose of making tax and/or legal decisions without first seeking independent advice from a tax and/or legal professional. Callan Capital has obtained the information provided herein from various third-party sources believed to be reliable but such information is not guaranteed. Callan Capital makes no representations as to the accuracy or any other aspect of information contained in other Web Sites. Any forward-looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. Callan Capital is not responsible for the consequences of any decisions or actions taken as a result of information provided in this presentation and does not warrant or guarantee the accuracy or completeness of this information. No part of this material may be (i) copied, photocopied, or duplicated in any form, by any means, or (ii) redistributed without the prior written consent of Callan Capital Management. For detailed information about our services and fees, please read our Form ADV Part 2A, and our Form CRS which can be found at https://www.advisorinfo.sec.gov or you can call us and request a copy at (866) 912-4888 

Q3 Market Commentary

Q3 Market Update  

After solid performances in both July and August, the S&P 500 ended September 4.8% lower, its first monthly drop since January and the biggest since March 2020, at the onset of the COVID 19 pandemic.   

There are plenty of possible explanations for the market’s diminished presence:  

  • Delta Variant  
  • Potential default of Evergrande  
  • Pending Congress legislation & the national debt crisis  
  • Concerns about inflation and supply chain issues 

Delta Variant  

The momentum of the U.S. economic recovery slowed in the third quarter as a surge of Delta variant infections led to a deceleration in economic activity in industries such as travel, restaurants, and tourism. Fortunately, COVID 19 cases, hospitalizations, and deaths are once again declining in many parts of the country.  Vaccines are working and boosters are becoming widely available.   

The current 7-day moving average of daily new cases (84,555) decreased 12.5% compared with the previous 7-day moving average (96,666) for the week of October 6 – 13. A total of 44,615,528 COVID-19 cases have been reported as of October 13, 2021.  

Source: www.cdc.gov as of October 13, 2021

Evergrande 

Globally, markets were shaken by the potential collapse of Chinese property magnet, Evergrande.  The Chinese and Hong Kong markets were unstable throughout the month while they waited to hear the fate of Evergrande’s debt. With a staggering $300 billion in outstanding debt, the company’s potential failure risk set off a chain reaction in China and overseas markets. About 67% of Evergrande’s debt is cash that customers have paid towards property that is still under construction.  Evergrande is currently attempting to sell assets in order to raise the cash needed to meet its debt obligations.  

Source: CNBC as of September 24, 2021 
 

Congress 

Investors kept their eyes on Washington, while Congress debated extending the national debt limit. The House of Representatives approved an extension of the nation’s debt limit through early December to avoid catastrophic default and economic disaster.   

Details on the much-debated budget reconciliation bill emerged and provided the first detailed look at the major tax provisions affecting large corporations and high-income households. 

Proposed tax policy changes include:  

  • A 15% corporate minimum tax that could affect companies that are profitable but report low tax rates 
  • U.S.-based multinational companies could face a different 15% minimum tax on their foreign income.  They could pay at least 15% in each country in which they operate 
  • For individuals, the plan includes a 5% surtax on adjusted gross income above $10 million and an additional 3% on adjusted gross income above $25 million 
  • High-income business owners could face a 3.8% tax on active business income 
  • Corporate stock buybacks could face a new 1% excise tax

Inflation & Supply Chain Issues

This year’s inflation jumps were largely caused by a combination of factors - a spike in the prices of products that are in high demand as the pandemic lockdown restrictions loosened, supply chain disruptions, and monetary relief benefits that are keeping some workers at home rather than back to work.  

The biggest increase in prices is noted in oil and gas, with a barrel of oil sitting at $80/barrel at the beginning of Q4/2021. But it is not only oil and gas, our basic goods like produce and meat are also becoming more expensive.  

Consumer spending has further been inflated by temporary payments disbursed through various pandemic fiscal programs which expired in September.  

Source: JPM Guide to Market as of August 31, 2021

There is still a silver lining to the headwinds described above.  The economy appears to have a supply problem, not a demand problem.  Recession usually begins when we have excess supply and falling demand.  Demand has been rising most of 2021.  These savings do not include the increased wealth effect from the large gains in stocks and real estate.   

Our base case is that the pandemic has ironically prolonged this expansion by taking the world offline for two years; removing excess supply in the system while demand has continued to rise, stoking supply chain bottlenecks and increasing the demand side of the equation. We believe that if this current bottleneck in the supply chain is resolved, the demand will take time to meet, creating a continuation of this economic recovery.  Despite the Q3 weakness, we expect the U.S. to bounce back in the fourth quarter and continue growth into 2022.

 
Disclaimer

The information provided is for informational purposes only and should not be considered investment advice. There is a risk of loss from investments in securities, including the risk of loss of principal. The information contained herein reflects Callan Capital Management’s views as of the date of distribution. Such views are subject to change at any time without notice due to changes in market or economic conditions and may not necessarily come to pass. Callan Capital does not provide tax or legal advice. To the extent that any material herein concerns tax or legal matters, such information is not intended to be solely relied upon nor used for the purpose of making tax and/or legal decisions without first seeking independent advice from a tax and/or legal professional. Callan Capital has obtained the information provided herein from various third-party sources believed to be reliable but such information is not guaranteed. Callan Capital makes no representations as to the accuracy or any other aspect of information contained in other Web Sites. Any forward-looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. Callan Capital is not responsible for the consequences of any decisions or actions taken as a result of information provided in this presentation and does not warrant or guarantee the accuracy or completeness of this information. No part of this material may be (i) copied, photocopied, or duplicated in any form, by any means, or (ii) redistributed without the prior written consent of Callan Capital Management. For detailed information about our services and fees, please read our Form ADV Part 2A, and our Form CRS which can be found at https://www.advisorinfo.sec.gov or you can call us and request a copy at (866) 912-4888 

Q2 Market Commentary

The stock market is off to its strongest first half start in over 20 years with the S&P 500 up 16.07% as of July 9th, 2021.  The economy is also seeing improvements largely driven by a combination of improved vaccination statistics, economic reopening and two stimulus packages worth $2.8 trillion.

So far, our year of the recovery thesis described in our Q1 outlook is coming to fruition and we do not see it drastically changing.  But rather than check-in on our previous outlook, our focus is now on the following narratives:

  1. Stimulus, Act II
  2. Inflation
  3. An Update on Biden Tax Proposals

Stimulus, Act II:

After months of negotiations across the halls of congress, an agreement—albeit tentative—is in place for a $1.2 trillion Bipartisan Infrastructure Framework. Details below:

Data as of July 13th, 2021

The emphasis on getting it done now is due to an amalgam of factors, namely: historically low interest rates allowing manageable debt-servicing costs, infrastructure-related scares (See: Texas’s ongoing power grid troubles, historical drought in the Southwest United States, New York City’s energy conservation request, and the Colonial Pipeline hack), and a general consensus across the aisle that something must be done.  Economists with market analytics firm S&P Global assert that “infrastructure, if chosen wisely, may be a long-term solution, providing the productivity boost needed to help get the U.S. expansion back on track” adding that a well-reasoned infrastructure bill “would likely add a cumulative $1.3 – $1.8 trillion to GDP by 2027.”  Such targeted spending bolsters our country’s infrastructure while creating millions of jobs and facilitating future economic growth.  Opponents of further government spending often cite concerns over inflation as a major reason to pull back on spending. However, leadership at the Federal Reserve remains steadfast in their view that inflationary pressures are transitory in nature.

Inflation:

Whether it’s on the news, social media or if you’re in the process of building a home you are likely aware of the latest discourse around inflation.  But the difficulty with inflation is that it’s causes are tough to pinpoint.  Thinking back to the last crisis in ’08, many pundits, economists and market forecasters predicted rampant inflation in the years to come due to the stimulus response to the housing crisis.  Taking a look below we see that although we experienced a short-term spike in inflation following the ’08 crisis, inflation subsequently trended lower the following decade.

Source: JP Morgan Guide to Markets June 30th, 2021

Admittedly, the world in 2008 looked much different than 2020, with the obvious difference being COVID-19.  But taking a look at the knock-on effects of a world shut down reveals a global supply chain crisis.  Discrepancies in policy responses and vaccination rates have caused an unequal recovery, especially for smaller emerging markets where manufacturing’s off shored by global corporations.  Such disruptions cause supply-demand imbalances across a variety of goods, resulting in demand outpacing supply.  The idea that inflation is transitory stems from the perspective that as the world reopens and smaller markets catch-up to the US, this imbalance starts to resolve itself.  A good example of this phenomenon is the price of lumber, a primary input for homebuilding.  The chart below shows a significant increase followed by an equally steep decrease in costs

Figure 2: Price of Lumber; as of July 9th, 2021

(source: https://markets.businessinsider.com/commodities/lumber-price)

It’s with this backdrop in mind that Federal Reserve policy makers maintain the view that inflation is transitory, but they’re prepared to act should the data reveal cause for concern.  For now, the Fed’s signaling an interest rate hike in late 2022 or early 2023.  The likelier policy change in the months ahead is the Biden administration’s tax agenda.

An Update on Biden’s Tax Proposals:

Our primary focus across the broad-ranging tax proposals set forth by the Biden administration is on policies affecting personal income tax, pass-throughs and Estate & Gift taxes.  In May, the U.S. Treasury released a 114-page document outlining provisions for amending laws surrounding trust & estate tax.  Some of the proposals highlighted by the National Law Review include:

  • Treat death and gifts of appreciated property as realization events that require gain to be recognized as if the underlying property was sold, subject to a $1 million lifetime exclusion. Gains on gifts or bequests to charity or to a surviving spouse would be excluded from tax but the basis would carry over.
  • Treat all pass-through business income of high-income taxpayers as subject either to the 3.8% net investment income tax (“NIIT”) or the 3.8% Medicare tax under the Self-Employment Contributions Act (“SECA”).
  • Increase the long-term capital gains rate and qualified dividend income rate to 39.6% (43.4% including the net investment income tax) from 20% (23.8% including NIIT to the extent the taxpayer’s income exceeds $1 million, indexed for inflation. This proposal is proposed to be effective retroactively for gains and income recognized after April 28, 2021.

Other proposals not included in Treasury’s report but likely to change include lowering the lifetime estate tax exemption from the current $11.7M per-person to as low as $3.5M per-person, as well as increasing the top estate tax rate to 45%.  The likelihood of all, or even most, of these changes is unknown.  But it’s best to prepare for potential changes sooner rather than later to be in the best position possible to manage what lies ahead.  Consulting with your team of financial advisors, estate lawyers and CPA is paramount in the weeks and months ahead.

Conclusion:

While the economy continues to propel ahead it is important to take note of potential bumps in the road.  As COVID variants pop up across the globe vaccination efforts are imperative for a sustained global recovery.  With markets fully recovered from the pre-COVID sell-off and a critical infrastructure bill hanging in the balance, we remain constructive about the next phase of this market cycle.  Our primary focus in the near-term is ensuring our clients are well-positioned for potential changes in tax policy.

Disclaimer:

The information provided is for informational purposes only and should not be considered investment advice. There is a risk of loss from investments in securities, including the risk of loss of principal. The information contained herein reflects Callan Capital Management’s views as of the date of distribution. Such views are subject to change at any time without notice due to changes in market or economic conditions and may not necessarily come to pass. Callan Capital Management does not provide tax or legal advice. To the extent that any material herein concerns tax or legal matters, such information is not intended to be solely relied upon nor used for the purpose of making tax and/or legal decisions without first seeking independent advice from a tax and/or legal professional. Callan Capital Management has obtained the information provided herein from various third-party sources believed to be reliable but such information is not guaranteed. Certain links provided connect to other Web Sites maintained by third parties over whom Callan Capital Management has no control. Callan Capital Management makes no representations as to the accuracy or any other aspect of information contained in other Web Sites. Any forward-looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. Callan Capital Management is not responsible for the consequences of any decisions or actions taken as a result of information provided in this presentation and does not warrant or guarantee the accuracy or completeness of this information. No part of this material may be (i) copied, photocopied, or duplicated in any form, by any means, or (ii) redistributed without the prior written consent of Callan Capital Management. For detailed information about our services and fees, please read our Form ADV Part 2A, and our Form CRS which can be found at https://www.advisorinfo.sec.gov or you can call us and request a copy at (866) 912-4888

2021: MARKET OUTLOOK

In the past 12 months, the global economy ground to a halt and markets experienced their sharpest drawdown in history but ended with the S&P 500 up ~17% for the year. Markets once again proved resilient, buoyed by extraordinary measures taken by monetary and fiscal authorities across the globe.

We see 2021 being a year of recovery in the economy as it plays catch-up with financial markets. With the following themes paving the way:

  1. Global output and demand are likely to rebound strongly in 2021
  2. We believe investors should expect returns to moderate over the next full market cycle (5-7 years) as the financial markets have, to an extent, priced in an economic recovery
  3. Change in market leadership
  4. Opportunities in private markets

Economic Rebound:

After conquering the daunting task of developing a vaccine in record time and then getting off to a rocky start with distribution, we are seeing signs of logistical improvement with appointment availability opening and the average rate of administered vaccinations reaching nearly 1.5mm Americans per day according to CDC data.

With mortality rates around 80%, the most vulnerable cohort—individuals over 65—are expected to continue falling as the group is largely vaccinated by the end of the first quarter of the year.

While the vaccine effort progresses, Central Banks around the world are keeping interest rates lower for longer and federal governments are providing significant stimulus for main street.  This also tends to push up asset prices which benefits investors.

A change in leadership at the Federal government level implies strong support for main street stimulus, as well as an expectation of easing global trade tensions exemplified by the United States rejoining the Paris Climate Agreement. Moreover, with Brexit largely behind us we see favorable conditions for international trade moving forward.

Cautious Outlook:

We believe the swift recovery in public equity and credit markets last year indicated that the market has, to an extent, priced in an economic recovery. The large amount of liquidity in the market has investors looking towards less traditional investments. Special Purpose Acquisition Companies (SPACs) bringing non-revenue generating early-stage companies public is an area we are keeping a close eye on for signs of excess. As a result, we see this as a time for careful portfolio positioning while looking towards areas of the market with more attractive valuations.

Change in Market Leadership:

Rather than growth and technology stocks leading the charge, as they have in the last 12 months, we expect the rest of the market to start improving with more cyclical and value stocks pulling ahead with strong earnings growth as the economy reopens. Travel and leisure, in particular, stand to benefit from the economy’s reopening as vaccines become more widely available.

Recent data shows indices like the S&P 500 are heavily skewed towards technology stocks creating a sector imbalance. Currently, the top 10 holdings in the S&P 500 account for almost 29% of the total index, which is historically more than their fair share. Simply put, the names that got us through the COVID-19 recession are unlikely to lead us through the next phase of the cycle.

The current monetary & fiscal landscape gives reason to believe that the US dollar will face continued downward pressure as interest rates remain lower for longer. Generally, a weaker dollar creates a favorable environment for international equities, which also happen to be cheaper in comparison to their US-based peers currently. Both the weaker dollar and relative cheapness of international securities make international stocks an attractive investment. These circumstances inform our view that small companies, international stocks and cyclical equities could perform well on a relative basis through the next phase of this investment cycle.

Private Markets:

Private market assets could play a role to lower volatility and provide higher returns than traditional fixed income. With yields in bonds expected to remain lower for longer, we believe strategic private market assets are an interesting place to look. There may be opportunities in private equity, credit, real estate, and infrastructure that can offer a higher yield with relatively lower volatility than public equity markets.

One of the most crucial trade-offs between public and private assets is liquidity. Meaning it is far easier to buy and sell a stock or ETF through an online broker than it is conducting a transaction in private markets.  However, lower liquidity could be a reasonable tradeoff for certain investors.

Conclusion:

It is important to keep in mind that financial markets are forward-looking while data from the economy tends to be retrospective. While we are constructive on prospects of recovery in the economy, we remain cautiously optimistic about market returns in the next phase of this market cycle.  More balanced diversification across the market sectors is our basis for a prudent long-term investing approach.

DISCLAIMER

The information in the presentation is not intended to provide and should not be relied upon for accounting, legal and tax advice or investment recommendations. Callan Capital does not provide individual tax or legal advice, nor does it provide financing services. Investors should review planned financial transactions and wealth transfer strategies with their own tax and legal advisors. Callan Capital outsources to lending and financial institutions that directly provide investors with, securities based financing, residential and commercial financing and cash management services. For more information, please refer to our most recent Form ADV Part 2A which may be found at www.adviserinfo.sec.gov.

Opinions and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. The views and strategies described may not be suitable for all investors. The views contained herein are not to be taken as an advice or recommendation to buy or sell any investment in any jurisdiction. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without previous notice. All information presented herein is considered to be accurate at the time of writing, but no warranty of accuracy is given and no liability in respect to any error or omission is accepted. This information should not be relied upon by you in evaluating the merits of investing in any securities or products mentioned herein

PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS and does not guarantee future positive returns

The S&P 500 Index is widely regarded as the best single gauge of the U.S. equities market. This world-renowned index includes a representative sample of 500 leading companies in leading industries of the U.S. economy.  Although the S&P 500 Index focuses on the large-cap segment of the market, with approximately 75% coverage of U.S. equities, it is also an ideal proxy for the total market. An investor cannot invest directly in an index.