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Eureka Wealth Solutions April 2021

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Quote Of The Month

Anyone who is fully vaccinated can participate in indoor or outdoor activities, large or small, without wearing a mask or physical distancing.

-- CDC Director Rochelle Walensky

Economic Highlights

  • The COVID-19 vaccinations continue, and the economy re-opening is on track.

  • March economic data were quite strong, particularly in consumer spending, rebounding from February.

  • Payroll employment growth slowed significantly in April.

  • Housing starts and existing home sales are now well above per-pandemic levels.

  • Q1 corporate earnings mostly surprised to the upside but were not enough for many high-flyers.

 

Market Highlights

  • US Equities broadly rallied in March, with the S&P 500 Index closing up 5.3%.

  • Foreign Developed Markets also added 3.0%, and Emerging Markets added 2.5%.

  • US high-grade bonds rebounded 0.8%, and the high yield was up 1.0% for the month. Foreign bonds also all rebounded, with high-grade, high-yield bonds and Emerging Markets bonds up 2.3%, 3.5%, and 2.1%, respectively.

  • Commodities led all asset classes, up 8.30%, with oil up 7.5%, and gold also rebounding 3.6%.

  • US REITs were up again, 8.1%, and US Dollar was the lonely loser, down -2.1%.


 

Observations and Expectations

On the surface, April looks like a perfect month from investing perspective.  Virtually, all major asset classes closed in the green.  Corporate earnings were good, and economic data mostly encouraging.  Yet was largely a continuation of the market regrouping and rebalancing from February.  However, many growth and small-cap equities saw continued selloff, and market volatility spiked throughout the month.  Many recent speculative IPOs as well as cryptocurrencies saw big price swings and eventually posted steep losses for the month.

What’s more troubling, many positive returns in April were on the heels of March losses.  With the economy moving into the seasonally slower time-frame, most good news already priced in, and a multitude of questions, the markets are poised for more volatility and uncertain direction in the near future.  More on this in the Question of the Month.

Looking forward to May, as the earnings are winding down, we’re watching the tax and infrastructure legislature and their impact on the markets.  We continue to like large financials and most real estate sectors and see opportunities in industrials.  We’re beginning to see some real values in certain technology and clean tech stocks, even though the correction there and rotation into value stocks may not be over yet.  We’re staying away from the new IPOs as the market may be over-saturated at the moment.

 

Sector Update

Utilities as a group may be the most boring bunch. That in itself is not a bad thing; in fact, some of the best investments may be boring businesses with very predictable positive cash flows. The problem is, though, that after the economy rebounded, there’s no more pop left in this sector. The downside is limited as well, but with the dividends still relatively low, the investors are just seeing better opportunities in other sectors at the moment.

Real Estate has been the top sector performer over the last two months. It’s been a beneficiary of the economic rebound, low rates, financial stimulus, government spending, increased housing activity, and the inflation scare. Another words, real estate is seeing a ton of tailwinds. Beware of certain areas, though, including commercial and healthcare real estate where significant risks remain.

Impact Investing continues to garner attention and gather record assets, according to multiple surveys. Some areas such as electric vehicles and solar power may be the “crowded trade” right now and will probably take some time to consolidate, but the future remains bright.

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Question of the Month

This is where we answer the best investment question we’ve heard all month. If you’d like your question to be considered, please send it to us.

Question

What are the current market risks and their likely weight on the markets?

Answer

This question is not new, as risks always exist in the financial markets.  Some are known, some are known unknown, and some are truly unknown.  There’s an increase in the number and variety of current risks that warrant investors’ attention.

  • COVID-19. Yes, it’s one of the biggest risks still, and the economic re-opening, both domestically and globally remain highly dependent on the vaccine rollouts and efficacies.
    2021 risk on a scale of 1 to 10: 5

  • Interest Rates. So, the Fed pledged to keep rates near zero for a long time, but the Treasury Secretary seems to disagree.  Any premature rate increase will certainly throw off the current investment sentiment and could cause a major investors’ “tantrum”.
    2021 Risk: 3

  • Supply chain issues. Now, that’s a new one.  Blame the pandemic, China, the Suez Canal disaster, ransomware attacks, the government or the corporations, but we’re experiencing very real supply chain shocks from computer chips to gasoline to food.  If these issues don’t get resolved soon, the consumer and investor confidence can take a major hit.
    2021 Risk: 3

  • Inflation. It has been low for a long time, but a huge shock to supply by the pandemic and a huge shock to demand post-pandemic are clearly creating a classic inflationary scenario.  Areas such as energy, food, and housing are already producing alarming inflationary rates.  So far, only bond investors seem to take it seriously, but the risks to the entire economy loom.
    2021 Risk: 5

  • Economic Rebound Stalling. In addition to the items above, perhaps the ironic additional risk factor is the latest stimulus package.  Many laid-off workers find it uneconomical to return back to work due to the generous government payments.  So much so that as many as 8 different states have already announced discontinuation of unemployment benefits in the next few months, in hopes of speeding up the economic reopening.
    2021 Risk: 3

  • Corporate Earnings. This is the biggest market driver, together with their growth and future prospects, as compared to the market expectations.  After all, that’s what the equity ownership is all about.  The current worry is that the last quarter might have been “as good as it gets”, and pricing in return to the full economic activity soon, so the next few cycles will be key to see either continued growth or a step back.
    2021 Risk: 4

  • Biden Tax Plan. No matter the merits, raising taxes is a net negative for the markets.  Depending on the specifics of the business, personal and capital-gains taxes, the net negative could be relatively small and mostly priced in, or it could become a major factor.  For example, a raise of the business taxes and simultaneously a jump in capital-gains taxes on the top bracket, as currently proposed, may lead to a significant selloff this year and lower levels of market investments going forward.
    2021 Risk: 4

  • Geopolitics. One more example of the “known unknowns”.  The usual host spots – China, Russia and the Middle East – are always.  The stalled trade situation with China, the unknowns around North Korea and Iran are also in the back of investors’ minds.  The rule of thumb is, these are one-off events just like the sad reality of terrorist acts and natural disasters, and they may affect markets, sometimes severely, but typically in a very short term, as long as it doesn’t become a pattern.
    2021 Risk: 3

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The materials presented above serve informational purpose only and do not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. The author, Eureka Wealth Solutions, LLC, and/or its clients may hold positions in the ETFs, and/or any investment assets mentioned above. Folio portfolios that may be presented are created by Eureka Wealth Solutions, LLC, and are available for purchase through Folio site.  Indices and trademarks are the property of their respective owners.  There are risks involved in investing including possible loss of principal.  Performance results of individual securities and portfolios are not indicative of overall client account performances. Past performance does not guarantee future results.
 
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