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As we discussed last month, January started off strong only to fade to almost flat for the month. February followed somewhat of the same pattern, rising early in the month and fading downward (due to worry about rising interest rates) as the month came to a close.
 

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AS OF LATE   

 

     Things are quickly beginning to diverge. What we have seen happening in markets over the last few months, and it continues to accelerate at a decent speed, is that investments are beginning to spread out in terms of their risk and their performance relative to that risk. What this really means is that risk is moving around a great deal and the level of performance is not being coupled highly with that risk.

 

     Years ago, I was involved in the automobile racing business for a while. It's a really interesting pursuit to take on. Many of the risks that you and I might have as we drive a car on the streets of America, never really come into play on a racetrack. There is no oncoming traffic, there's nothing that's really as specific as a street light; you don't have cross traffic at any point or any intersections on the track; there are obviously no police officers; the only reason you would slow down on a racetrack is because you know it is a risky situation, and if you did not slow down something drastic would almost always occur. This is a great deal different from driving on the streets where are you slow down more because a risky situation might occur but on a racetrack, it will occur if you do not slow down.

 

     So what we see happening today in investment markets is more risks are being taken on in some areas and it's not really healthy risks and the rewards are not currently commensurate with the amount of gains being provided. Yet many investors seem to be heading forward in this manner without understanding the risk that lies ahead. 

 

     We'll take a look at a couple of basic notions that show risks are ever-present and likely much more so than many might realize. As someone recently said, when the first quarter of 2021 is over, we will see what bodies float to the surface, implying some are not really aware of the risks buried in some portfolios. In other terms though, we're going to see how well some "roll" in focused areas of investing which show they really know how to swim well.

 

The S&P 500 for the full month of February. Great start and yet succumbed to a weak finish.
 

   

 

     As we asked last month, "So if the S&P index is not shooting higher as the media talking heads announce that it is, what is going on with the market and where is there real growth?"

     In all fairness, it IS shooting higher, only to come back down almost to where it started before it shot higher. So during the last two months, the rise in the S&P is very short term. Januar
y clearly showed this and then we saw this repeated again in February shown in the graph above. 
     

     In our opening statement above, we mentioned that things were beginning to diverge.  While we have mentioned that some in the last couple of months we will focus on it here to strongly illustrate the point.

 

    Sometimes, it seems that holdings in portfolios can actually be too broad, too diverse; money has flowed into too many places to really benefit the portfolio overall. There is an old saying that says, “It is possible to have too much of a good thing…”

 

     A few months back I discussed that the recovery from the pandemic would likely begin to take on the shape of this, <, meaning that some industries would rise rather quickly from their ashes and begin to grow and show their strength. Other industries, would not be able to rebound so much and they would struggle to recover and actually begin to take on greater losses. 

 

We can clearly see this in the chart below. While the S&P 500 shows some growth, the NASDAQ is actually showing that it can grow, but it can also stumble and fall quickly. In addition to both of these indexes, we also see that the Russell 2000, which has been leading the market higher since November and continues to outperform other broad indices of the overall market by an extensive margin. While these three indexes are not really divergent, the strength in their growth is noticeably divergent month after month after month recently.

 

Three major U.S. indexes shown here on a 2021, year-to-date basis.  The difference in their performance is almost staggering.
 


     

     So the fact that we see this very broad and widely-held index, the S&P 500, lagging when an index of much smaller companies, the Russell 2000, is currently looking more like a product that NASA would produce, clearly shows us the divergence mentioned earlier.

 

BONDS
 

 

     Since we've been talking about things being divergent, now we're going to show some huge divergence. A lot of people think bonds, particularly government bonds are really pretty boring. But they're not boring at all. Last year they became somewhat the outstanding icon of investments certainly while the pandemic first began to unfold here in the US and even as the year wore on. Long-term government bonds ended 2020 up about 16% last year and they were the only asset class in the United States that never went negative in the midst of the pandemic.

 

 Now, that has all changed! Look at the two graphs below, both depicting US government bonds. The first one shows 20/20 as a full year and the performance of the long-term US government bonds. They actually put on quite the stellar performance. The second graph below, shows 2021 and US government bonds have been anything but good performers.  Between 2020 and 2021, bonds are showing a huge divergence. (Remember this from last month's newsletter?) Not only have they fallen quite quickly in the last 60-plus days but they've also begun to be the source of a great deal of worry for the investment community. Since they're falling in price, that simply means that the interest rate market is going up, up, up. How high does it have to be to impact the stock markets? Not very high evidently since people are already starting to worry a great deal. Some people may have made changes so far based on bonds while other people may have not, but the fact that it's on their minds and in their calculations shows it's playing a significant role. 



 

Long Term U.S. Government bonds for the full year of 2020. When the pandemic hit, these bonds were the beacon of safety rising more than 25% in 3 months.

 

 

      Long Term U.S. Government bonds for the year to date of 2021. Rising interest rates are killing prices in quick order.  So divergent from 2020 shown above.

 

     So many people seem so worried about rising interest rates.  But if rising rates are on your mind, there are very straightforward ways to address that concern.

 

We remain watchful. (and prepared for rising rates).


Have a question or two you would like addressed here in the newsletter? Let us know and we will be glad to entertain responding to it.

 

 


Ken Graves, Chief Investment Officer

Capital Research Advisors, LLC
 
 

 

CaptialResearchAdvisors.com 

Capital Research Advisors, LLC, 
4185 B Silver Peak Parkway, 
Suwanee, GA 30024 
770-925-1000 
800 -767- 5364 
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Mortgages (click here)  

 

Mortgage rates.. we have been pointing them out for a long time.  Talking about them heading lower and lower and now, the great opportunities may be gone. Not certain the lowest rates in history are behind us but they may well be.  Know that they are not "jumping higher here but they have bumped up some.

There is an old saying about housing though,

"If housing subsidies, the economy dies."

So the Fed may step in and try to artificially do more to try to drive mortgage rates lower in the midst of a rising interest rate environment.

Second verse, same as the first.

     If you recall, back at the end of August, our side panel comments were all about inflation. First, we focused on the large disparities of interest rates and inflation around the world. In some places around the world, government bonds were (still are) actually paying their own countrymen negative interest rates! But if consumers in those countries went to a bank to borrow money, interest rates on things like cars were as high as 99% per year! We simply were illustrating that though inflation and interest rates in the United States were at historically low levels that was not true around the world. We also pointed out that the imbalance between the US and many other countries likely would not remain.
 

     The second half of our input about inflation in August directed the attention to items here in the US that were already inflating at a pretty serious clip. Mainly housing costs. Whether that be ownership cost or the cost of being a renter.  This coupled with the increasing cost of transportation whether being a car buyer or simply shipping costs.  Recall, at the time the article was written, the cost of getting on an airplane was next to nothing. It was the middle of the pandemic, airlines had hundreds and hundreds of planes grounded and people were simply afraid to get on planes due to the virus.

 

     Inflation is one of those things that typically doesn't move very quickly but when it does move it continues in the direction it's moving typically for a long period of time. It trends.

 

     So here we are today and inflation is indeed a factor. A report just came out at the end of February stating that the cost of building a new home of average size and average cost here in the United States, jumped $24,000 in 6 months solely due to one factor, lumber prices. This did not include the cost of concrete used in the building of that new home; nor did this include the costs of better technology being used in everything from heating and air conditioning hardware or refrigerators or thermostats. It was solely due to the cost of lumber.

 

  If we look at some of the building blocks in many manufacturing processes, the use of copper for instance, copper has skyrocketed lately. That cost will be passed along to consumers. We also see that just in the last 60 days, the price of gasoline around the country has jumped a little more than 20%! Energy costs are rising in a serious manner!


     So with housing costs/housing prices rising at an alarming rate, particularly when you factor in the current unemployment rate in the 7% zone in the U.S., some areas of the economy will struggle to come back.  So with 7% unemployment and housing prices going up pretty precipitously, we see that many people are going to be priced out of the housing market fairly soon. We also realize that rent rates are going up at the same rate that housing is going up. 
 

     Looking also at the prices of lumber, cotton, concrete, copper, coffee, wool, energy and various types of basic materials, all of these prices are rising much faster than the S&P 500 in general. These items that we’re looking at here, which cause inflation, are always affected by simple supply and demand. That age-old rule in investing. So, when people drive cars less, gas prices stayed soft but that is all changing quickly. Oil pumpers could cut production to try to boost pricing but with soft demand, they want to give people all they are willing to burn.

     Economies around the world have to have a lot of money and energy-dependent sellers of oil are not willing to cut production of oil because when they do, they cut off their own cash flows. Whether it's the U.S. or Russia, or Venezuela, or Africa, or the Middle East, or Canada, or South America, oil means cash flow and right now jobs and cash flow are King to economies. 

 

     So housing prices are rising on a pretty constant and fairly quickly trend. But what we may not realize is that all these other basic materials mentioned above, have been the items going up in price as well. One of the problems for the home building industry and the remodeling business currently is ..... availability of products. Drop by your local do-it-yourself superstore and look to see if there are vast amounts of lumber products stacked all over the place. The shelves are either bare or certainly somewhat depleted.

     One of the big issues that have affected finished lumber products is labor. The pandemic has impacted production due to limited numbers of employees but also the checks for unemployment from state and federal governments in many cases have sidelined truck drivers. Some of them have elected to stay home and collect unemployment checks rather than drive in the current situation.

 

     As I said earlier, the supply and demand issues take over here. If you can't supply enough products to the market to meet the demand, prices will go up.

 

      So to summarize a lot of this, supply and demand rule the day and the high supply of gasoline keeps pump prices lower yet the low supply of many products, fuel to lumber to copper, to coffee, and all manner of manufactured plastic products will continue to push production prices higher and that means you and I will pay more for the products we buy off the shelf.

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This report/summary is to be considered general in nature, reflects our opinions and is based on our best judgment at the time of writing. All information is deemed to be from reliable sources but we cannot guarantee its accuracy. No warranties are given or implied as to their promise of occurrence in the future or their accuracy. It is the readers’ responsibility to decide if any of our opinions are suitable for their own individual situation, and in what manner to use the information. No specific decisions should be made based on this report. These opinions should not be construed as a solicitation for any service. Past performance does not guarantee future results. The opinions expressed in this piece are those of the author and do not necessarily reflect the opinions of Ceros Financial Services, Inc.

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IMPORTANT DISCLOSURES

All the information in our newsletter is believed to be reliable and much of it is based on the proprietary research of Capital Research Advisors, LLC itself. However, because of the volume of information we review and the frequency with which it changes the information can only be provided as is on a best efforts basis. The information is not intended to be actionable investment research and therefore should not be used as such. Sources for this information include, but are not limited to, CBS MarketWatch, Big Charts, Bloomberg, Streetscape, Money/CNN, Futuresource, Stock Chart, Yahoo Finance, AmiBroker and http://www.newyorkfed.org/

CaptialResearchAdvisors.com

Capital Research Advisors, LLC,
4185 B Silver Peak Parkway,
Suwanee, GA 30024
770-925-1000
800 -767- 5364
All rights reserved







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