End Of Week Market Update

One year.  It seems incredible, but it’s been one year since COVID-19 struck our shores.  One year since the World Health Organization declared a pandemic.  One year since the markets crashed and the schools closed and we realized just how much we take toilet paper for granted. 

Since then, the markets have recovered and risen to new heights.  The economy, meanwhile, has recovered more slowly.  Now, a quarter of the way through 2021, we have a new president, several new vaccines, and a completely different world than the one we knew before all this started.  We’ve also seen some renewed volatility in recent weeks.  This has many of my clients asking, “Where are the markets going next?  What should we expect for the rest of 2021?” 

I’ll address those questions in this letter.

As you know, there are two types of long-term market situations: Bull markets and bear markets.  But the whole “bull vs bear” concept can also be used to describe two types of investor sentiment.  Bulls are investors who have a positive, or “bullish”, view of where the markets are headed.  Bears, meanwhile, generally have negative, or “bearish” expectations.  So, in this letter, I’m going to let both animals debate each other, each presenting their case for why the markets will have a positive year or a negative one.  We’ll start with the Bull, move onto the Bear, and then give the Bull a chance for a short rebuttal.  Finally, as your financial advisor, I’ll give you my view. 

The Bullish View

Last year’s market crash was sudden, swift, and deep.  But in the grand scheme of things, it didn’t last very long.  In fact, it took only six months for the markets to recover.  (By contrast, it took the markets almost six years to recover after the Great Recession.)  Since then, the markets have risen to new highs. 

Three things propelled the markets to this remarkable turnaround: Low interest rates, federal stimulus, and the expectation of a major economic recovery.  Let’s start with the first one.  To help juice up the economy, the Federal Reserve lowered interest rates to a historic degree.  Low interest rates promote more borrowing and spending, two pillars our economy is based on.  They also help people buy homes and encourage businesses to invest more in themselves.  (Including hiring more workers.) 

Congress, meanwhile, has passed three major stimulus packages in the last year.  The most recent bill was signed by President Biden on March 11.  The America Rescue Plan Act of 2021, as it’s called, provides $1.9 trillion in aid for both businesses and consumers.¹  Among other things, the Act extends COVID unemployment benefits through Labor Day, provides $1,400 direct payments to individuals, expands certain tax credits, and grants billions to small businesses to help meet payroll and retain workers.¹  The first two stimulus packages had a positive impact on things like retail sales and consumer spending, and it’s widely expected that this one will, too. 

This combination of low interest rates and government stimulus have helped the economy tread water while we deal with the virus.  But much of the market’s rise is due to something else: Expectation.  Specifically, expectation that the pandemic will end, and the economy will hit the accelerator. As more people are vaccinated and case numbers fall, the thinking goes, more and more of society will re-open, releasing a flood of pent-up demand.  Demand to travel, to eat out, to catch a movie in theaters, you name it.  Add the latest round of stimulus to the mix, and suddenly Americans have both extra money in their pocket and the means to spend it.  In other words, all the ingredients are there for a major economic comeback, the likes of which we haven’t seen in decades. 

Now, we seem closer than ever to that expectation becoming reality.  As of this writing, there are three approved vaccines in the U.S., with more than 115 million doses administered.²  (40 million people are currently considered fully vaccinated, approximately 12.3% of the total population. ²)  Currently, our nation is averaging over 2 million shots each day.²  It’s no surprise, then, that cases in the U.S. have been falling for weeks.  In fact, as of March 19, cases are down over 14% over the last two weeks.³ 

We’re not out of the woods yet, not by a long shot.  Masks and social distancing will continue to be a part of our lives for some time yet, and of course there are relatively new variants of the coronavirus to deal with.  But if we can maintain this trajectory, increasing the number of people vaccinated and reducing the number of people sick, that could do wonders for our economy.  It could lead to more of society re-opening, leading in turn to more jobs, more consumer spending, and greater company earnings.  Greater earnings, of course, usually lead to higher stock prices. 

The Bearish View

So, in light of all this, how can anyone have a negative view of where the markets are headed?  It all comes down to a single word:  Inflation.

Inflation.  It’s a scary-sounding word that conjures up images of German children stacking useless money in the 1920s, or gas rationing in the 1970s.  For decades, economists have monitored it relentlessly.  The Federal Reserve considers managing inflation to be a core aspect of its mission.  That’s partly why our nation’s inflation rate has been relatively stable over the last twenty years. 

But recently, some analysts and investors have begun stressing over inflation again.  They don’t deny that the economy is poised to grow.  They just worry that it will grow too much, too fast.  There’s a word for this, too.  Economists call it overheating.

When an economy overheats, it essentially no longer has the capacity to meet all the demand it faces from consumers.  Some producers will simply not be able to supply all the goods their customers want.  Other producers, to keep up with that demand, will be forced to raise prices.  It’s a classic example of the Law of Supply and Demand.  (When the demand for something outpaces its supply, the price goes up.)  For example, if everyone suddenly decides to fly to that vacation spot they’ve been putting off for a year, the cost of air travel would skyrocket.

If the economy were to grow too quickly, prices would rise across the board – and the value of our currency would drop.  This, essentially, is inflation: When the general price level rises, a dollar simply pays for less than it used to.  That makes it much harder for people to buy the goods and services they need.  Or to pay off their debts.  It makes it harder for businesses to hire new workers or pay the workers they already have.  The upshot?  When inflation gets too high, consumer spending plummets, unemployment jumps, and economic booms turn into economic busts. 

Some experts worry this is what’s in store in 2021.  They see the economy as a garden hose that’s been tied up into a knot.  Untie the knot – or re-open the economy too quickly – and the water will burst out with sudden, savage force. 

So, here’s what this has to do with the stock market.  Normally, the Federal Reserve combats inflation by raising interest rates.  Higher interest rates tend to cool off the economy, because they prompt people to save their money instead of spending or borrowing it.  A cooler economy decreases inflation, and gradually things go back to normal.  The problem is the stock market has become accustomed to the Fed’s low interest, “easy money” policies.  Low interest rates mean that many types of investments, most notably bonds, simply don’t provide the same return on investment as they would in a high-interest rate environment.  That drives more and more investors into the stock market to get the returns they need.  But what happens when interest rates go up?  Consumers and businesses could cut back on spending, which in turn could cause earnings to fall and stock prices to drop. 

Fear of inflation, and fear of higher interest rates.  That’s the bearish view in a nutshell. 

Rebuttal

I promised the Bull would have the opportunity for a short rebuttal, so here it is.  There are two main reasons for thinking this fear of high interest rates are overblown.  The first is that, even if inflation does go up – which it likely will – we have a lot of room to work with before it becomes a problem.  In 2020, the inflation rate was only 1.2%.⁴  That’s well below the 2% mark the Fed generally aims for, and nowhere close to the mindboggling numbers we saw in the late 70s and early 80s.  (In 1979, for example, the inflation rate was 13.3%.⁴) 

The other reason is that there’s no reason to assume the Federal Reserve will automatically raise interest rates just because inflation goes up.  Why?  Because the Fed itself has said that it won’t!⁵  Currently, the Fed sees stimulating the economy and boosting employment to be far bigger priorities than tamping down on inflation, and recently, the Fed Chairman suggested interest rates would remain low at least until 2022. 

My View

I’ve told you what the Bulls and Bears think.  So, here’s what I think. 

Here at Research Financial Strategies, we don’t focus on guessing what the Fed will do, or anyone else.  We don’t have a crystal ball.  No one does!  That is why we base our strategy on technical analysis instead of macroeconomics.  We analyze – and take advantage – of market trends, relying on the Law of Supply and Demand rather than fighting it. 

Historically, an improving economy leads to a stronger stock market.  If that happens in 2021, wonderful!  But if interest rate fears worsen and volatility goes up, we are ready to play defense and move to cash.  Remember, we don’t need to “buy and hold” even when there’s a Bear roaring in our face.  If there’s a general rise in prices and inflation skyrockets above what the Fed can handle, we don’t have to ride out another market crash like so many investors do.  We’ll obey the rules of our strategy and do what the trend dictates.  If our technical signals indicate major volatility on the horizon, we’ll be prepared. 

It’s been a year since the pandemic began.  A year since some of the worst market turmoil in a long time.  We got through that by being flexible, disciplined, and diligent, and we’ve been rewarded.  So, that’s what we’ll continue to do. 

If you have any questions or concerns about the market, please feel free to contact me.  In the meantime, enjoy the upcoming spring season!       

Sincerely,

Jack Reutemann, Jr. CLU, CFP®​
240-401-2355

SOURCES:
¹ “The American Rescue Plan Act Greatly Expands Benefits through the Tax Code in 2021,” Tax Foundation, March 12, 2021.  https://taxfoundation.org/american-rescue-plan-covid-relief/
² “How is the COVID-19 Vaccination Campaign Going In Your State?” NPR, March 19, 2021.  https://www.npr.org/sections/health-shots/2021/01/28/960901166/how-is-the-covid-19-vaccination-campaign-going-in-your-state
³ “How Severe is Your State’s Coronavirus Outbreak?” NPR, March 19, 2021.  https://www.npr.org/sections/health-shots/2020/09/01/816707182/map-tracking-the-spread-of-the-coronavirus-in-the-u-s
⁴ “US Inflation Rate by Year,” The Balance, March 1, 2021. https://www.thebalance.com/u-s-inflation-rate-history-by-year-and-forecast-3306093
⁵ “Powell Confirms Fed to Maintain Easy Money Policies, The Wall Street Journal, March 4, 2021.  https://www.wsj.com/articles/feds-powell-to-take-questions-on-job-market-interest-rates-bond-yields-11614872817

There’s still time to contribute to your IRA!

If you haven’t already contributed to an IRA (Individual Retirement Account), there’s still time to do so. Many people don’t know that the 2020 contribution deadline is actually April 15, 2021.¹  However, if you do decide to contribute, you must designate the year you are contributing for. (In this case, 2020.) Your tax preparer should be able to help you fill out the necessary forms, but please feel free to contact me if you have any questions or need help.

For 2020, the maximum amount you can contribute is $6,000, or $7,000 if you’re over the age of 50.²  This applies to both traditional and Roth IRAs. If you’re unsure whether to contribute, remember: 
· Contributions to traditional IRAs are often tax-deductible. And while distributions from IRAs are taxed as income, your tax-rate after retirement could possibly be lower than it is now, lessening the impact. 
· Contributions to a Roth IRA, on the other hand, are made with after-tax assets. However, the advantage of a Roth IRA is that withdrawals are usually tax-free. 
· Whichever type you use, IRAs provide a great, tax-advantaged way to save for retirement.

If you or your spouse is covered by an employer-sponsored retirement plan and your income exceeds certain levels, you may not be able to deduct your entire contribution.  You may qualify to contribute to an IRA for a spouse without taxable compensation. There are also income limitations to be able to make contributions to a Roth IRA.  The rules are tricky and there can be penalties for contributing to either a traditional IRA or Roth IRA when over income limits. Consult your tax advisor to be sure you are making the right contribution choices.

If you have yet to set up an IRA for 2020, you can still do that. The deadline to establish an IRA is also April 15th. In other words, if you want to take advantage of the benefits an IRA has to offer, there’s still time to do so, either by contributing to an existing account or by establishing a new one.

If you have any questions about IRAs – whether one is right for you, how it should be managed, or anything else – please give me a call at 240-401-2355.  I’d be happy to help you. 

Jack Reutemann
Research Financial Strategies

​1 “IRA Year-End Reminders,” IRS, https://www.irs.gov/retirement-plans/ira-year-end-reminders
2 “IRA Contribution Limits,” IRS, https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits

Special Edition from Jack – the 45 DAY REPORT!

Friends and Clients, 

Hard to believe, isn’t it?

The first quarter is half over. The year is 45 days old. It’s 1/8th over with!

The stock market bull rally continues, and hopes for President Biden and his COVID stimulus package are high. Looks as if it’ll pass. The president is also promising an infrastructure bill, which will create jobs and fuel several sectors that we are thinking about adding to our aggressive growth model: the industrials, building materials, trains, planes, cement, steel, tractors, heavy machinery, etc.

If the infrastructure bill passes, we’re looking at two ETFs. Click here for details on the holdings in XLI and XLB. Lots of infrastructure companies.

Interest rates continue to remain very low, and residential real-estate sales, as well as new construction, remain high. One of my close friends and clients, a broker in Ocean City, Maryland, said that while he was in church on Sunday, from 9:00 to 10:30 AM, he missed 17 calls from buyers wanting to see properties. I hear similar stories all day long from my network.

Here’s How We’re Doing

Our 45-day returns look like this:

Our Growth Model

·         The AG model is + 9.15% so far in 2021.

·         The S&P 500 equity benchmark is +4.5972%.

·         So our performance is almost exactly twice the performance of the S&P.

Our Bond Model

·         The bond model (“fixed income”) is + 5.16% YTD.

·         AGG, the Barclays fixed income benchmark is negative 1.362%.

·         So we’re miles ahead of the benchmark.

Both models are on track to match or beat our record setting returns of 2020!

Defense When Necessary

As always, I am prepared to take decisive and speedy defensive action if market conditions turn against us. We will not let your wealth suffer in a market plunge.

Thank you … for your trust and confidence.

Sincerely,

Jack

Call me on my cell 240 401 2355
Please share my number with family, friends, clients, and colleagues.

Little Drummer Girl

On this Valentine’s Day, we often find the feeling of this special day in relationships between people so different you’d never imagine a relationship ever forming.

This is one of those stories you often receive in emails with the admonition:

      ​Must watch!

Many of those can make your day. We hope this one helps to send a Valentine’s message to you from all of us at RFS..

Ten-year-old Nandi Bushell hails from Ipswich, England—half a world away from her idol, Dave Grohl, world-famous drummer for the band Nirvana and the one he founded, Foo Fighters.

Sold-out concerts, hit records, and the Rock & Roll Hall of Fame—these make Dave’s resume shine. Nandi plays in her basement.

If you haven’t noticed, kids these days think Rock & Roll belongs only to those Old Boomers, a generation whose time has come. But don’t tell that to little Nandi. Rock & Roll is her life.

The pandemic cooped her up. But she worked and worked at her drumming craft and began to post videos of herself and her drum on YouTube. One day she recorded her “cover” of Dave Grohl’s biggest hit, a song called Everlong, first released in 1997, long before Nandi was born.

As the video began, she twirled her stick, stared straight into the camera, and issued her challenge:

      ​“Dave Grohl, I challenge you to a drum off!”

Asked why she challenged an icon, Nandi’s logic was refreshingly simple:

      “He’s a drummer, he thrashes the kit really hard, which I like, so why not? My dream is to one day jam with Dave Grohl.”

When the video started to go viral, Dave Grohl’s phone blew up with texts.

      “You’ve been called out by a 10-year old, Dave. What are you going to do about it?”

Most famous Hollywood types would smile, pat themselves on the back, and go on with their glimmering lives.

But not Dave. He went about recording his own video, where he said:

      “Nandi, I’ve gotten at least 100 texts from people all around the world saying, ‘This girl is challenging you to a drum-off.’

      ​You’re an incredible drummer! I’m really flattered that you’ve picked some of my songs to do for your videos, and you’ve done them all            perfectly. So today, I’m going to give you something you may never have heard before. This is my response to your challenge—so now          the ball is in your court!”

​Nandi watched the video, listened to Grohl’s song—and two days later, recorded her own rendition of it, saying:

      ​“Dave Grohl, that was epic! It’s an honor to battle you!”

A friendship then blossomed. Dave and Nandi started meeting on Zoom. He then told her he was writing a new song just for her:

      ​“She’s got the power / She’s got the sound / Nandi on the drums makes the world go round!”

Not to be outdone, Nandi wrote her own song, titled “Rock and Grohl”:

      ​“Rock n’ roll’s my love / Rock n’ roll’s my soul / Rock n’ Grohl will help me change the world!”

Whatever kind of music you listen to, it’s impossible not to smile when you see these two very different people—with kindred souls—come together over the instrument they love. Their videos have now been watched by millions of people, and the two have made plans for Nandi to realize her dream and play with the Foo Fighters onstage as soon as the pandemic is over.

According to Grohl:

      ​“There’s something about seeing the joy and energy of a kid in love with an instrument, She’s a force of nature. But [she’ll have to play]           at the end of [our concert] because she’s going to steal the show!”

A force of nature, indeed.

Here’s the Little Drummer Girl. Watch and enjoy. So far, 3,901,493 people already have.

https://www.youtube.com/watch?v=MRvHI8tgx8A

Have a wonderful Valentine’s Day.

With best wishes,

Research Financial Strategies

Investment advice offered through Research Financial Strategies, a registered investment advisor.
* This newsletter and commentary expressed should not be construed as investment advice.
* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.  However, the value of fund shares is not guaranteed and will fluctuate.
* Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.
* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.
* All indexes referenced are unmanaged. The volatility of indexes could be materially different from that of a client’s portfolio. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. You cannot invest directly in an index.
* The Dow Jones Global ex-U.S. Index covers approximately 95% of the market capitalization of the 45 developed and emerging countries included in the Index.
* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
* Gold represents the afternoon gold price as reported by the London Bullion Market Association. The gold price is set twice daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy ounce.
* The Bloomberg Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
* The Dow Jones Industrial Average (DJIA), commonly known as “The Dow,” is an index representing 30 stock of companies maintained and reviewed by the editors of The Wall Street Journal.
* The NASDAQ Composite is an unmanaged index of securities traded on the NASDAQ system.
* International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
* Past performance does not guarantee future results. Investing involves risk, including loss of principal.
* The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee it is accurate or complete.
* There is no guarantee a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
* Asset allocation does not ensure a profit or protect against a loss.
* Consult your financial professional before making any investment decision.
* To unsubscribe from the Weekly Market Commentary please reply to this e-mail with “Unsubscribe” in the subject.

Investment advice offered through Research Financial Strategies, a registered investment advisor.

How Long Can This Last?

Performance Numbers

Our aggressive growth model is once again outpacing the S&P 500 Index. We’re up 8.48%  year-to-date, while the S&P sports a mere 4.25%. And get this: that 8.48% performance occurred while holding 18% of assets in cash.

There’s more: our fixed income accounts now enjoy a 4.16% gain, just barely behind the S&P itself.

So far, so good.

The Market

I have no idea when this party will end. We remain on guard for a pullback, if (and when) it ever happens.

Right now, the market likes President Biden and his stimulus package. Stimulus money means more consumer spending, and money printing means ever-increasing demand for assets … such as the stock market. Low interest rates continue to fuel the boom in new home sales. Those low rates and the increase in the money supply also propel our holdings in XLY (consumer spending) and TQQQ (technology companies).

Bitcoin

Yesterday, the financial world absorbed the news that Elon Musk (whose net worth now exceeds Jeff Bezos’s bottom line) has purchased $1.5 billion worth of Bitcoin for Tesla’s treasury account. Further crypto news included the move by Bill Miller to devote 15% of his Miller Opportunity Trust to Bitcoin exposure through purchases of Grayscale’s GBTC (a trust instrument backed by Bitcoin).

Mr. Miller, we should note, is a very old-school value investor. He gained much of his fame when he led the old Legg Mason Value Trust. His move might just resemble your 90-year-old grandmother signing up for Tik Tok, Twitter, Instagram, and Facebook all on the same day. In a word: jaw-dropping.

Our Exposure

Some might ask about our approach to Bitcoin. Right now, we enjoy significant Bitcoin exposure through our ownership of Tesla. We own four ETFs with significant Tesla holdings:

·         QCLN – Tesla is the #1 holding

·         PBW – Tesla is the #1 holding

·         XLY – Tesla is the #2 holding

·         TQQQ – Tesla is the #4 holding

Strategy to Protect Your Wealth

Why are we holding 18% cash? Shouldn’t that be invested to enjoy these amazing gains? Why sit on money that’s just sitting there?

Because we stand ready to play defense.

Remember last Spring? The market plummeted very quickly. We weren’t caught unawares. We bought some ETFs that go up when the market goes down. Using this leverage, we protected our clients against one of the most frightening declines in recent stock-market history.

If our technical analysis portends similar dives in the market, we are ready to deploy that cash to a defensive position that will protect your account.

As Always

Please feel free to call my cell number whenever you have any questions or comments: 240-401-2355.

Have a wonderful week.

Sincerely,

Jack

Time to Take Stock

Bye-bye 2020. For everything not financial, we don’t hate to see you go. Pandemics. Riots. Elections. Safe Distancing. Masks. Lockdowns.

The parade of horrors just doesn’t stop.

But for matters financial, 2020 was a very good year. And when the year is new, it’s time to take stock … or … it’s time to buy stocks.

Look What The S&P Did

On December 31, 2020, the S&P closed at 3,756.07, making a year-to-date gain of +16.258%—a fairly respectable gain. Many investors hope to match the performance of the S&P 500 Index. But here at Research Financial Strategies, we seek to beat it.

And beat it we did. In a big way. Our aggressive growth model racked up a year-to-date gain of 32% (net of all fees). Even our income model clocked a gain of 8.5% (and that’s an income portfolio).

Here’s a one-year chart of the S&P 500. We wonder how many “buy and hold” investors managed to survive the gut-wrenching drop in March 2020.

When the big drop came, we were ready: we played defense; we pared our long positions; we took on certain ETFs that go up when the markets go down. We not only survived. We won.

And we hope we made things less stressful for you.

Please Forward This Email

You might have friends, family, and colleagues who’re wedded to “matching the S&P.” If so, please forward this email to them. If they’re doing only as well as the S&P, then they’re leaving serious money on the table.

Or you might have other accounts that you manage or that have sat around gathering dust (and losses). If so, give me a call at 240-401-2355.

A Note to Those Who Receive This Forwarded Email

If your investments didn’t return over 30% this year, then we need to talk.

Overall, 2020 laid an egg. But your investments don’t have to.

Give me a call. Share your portfolio with me. Our financial advisors will perform a free, no-obligation second opinion on your investments.

No pressure, just conversation.

Call My Cell

Get out your smart phone and make a smart call right now. Call my cell at 240-401-2355. We’ll arrange a virtual meeting to get to know each other and to look over your portfolio.

Then together, we can make 2021 a very good year, indeed.

Wishing Everyone All the Best

We thank you for entrusting your wealth to us at Research Financial Strategies. We guard it as we would guard our own.

All of us here at Research Financial Strategies wish you a Happy New Year.

​Sincerely,

Jack