Eureka Wealth Solutions March 2021

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Quote Of The Month

It is possible that we will have a Goldilocks moment – fast and sustained growth, inflation that moves up gently (bit not too much), and interest rates that rise (bit not too much).

-- Jamie Dimon, in JPMorgan Chase's annual investor letter

Economic Highlights

  • The COVID-19 vaccinations continue, but the J&J vaccine is halted, and new cases flare up in some states.

  • February economic data – from consumer and business spending to housing activity – were broadly weak, mostly due to unusually adverse weather.

  • Labor markets show signs of improvement especially in service industry, due to the successful vaccine rollout.

  • Tax and infrastructure bill are being discussed on the Hill.

  • Q1 corporate earnings are on tap.


Market Highlights

  • US Equities rallied in March, with the S&P 500 Index closing up 4.4%.

  • Foreign Developed Markets also added 2.3%, but Emerging Markets dropped -1.5%.

  • US high-grade bonds lost -1.3%, while the high yield was up 0.4% for the month.  Foreign bonds took a big hit, with high-grade, high-yield bonds and Emerging Markets bonds down -2.6%, -2.6%, and -2.0%, respectively.

  • Commodities dropped -2.2%, with oil taking a breather, down -3.8%, while gold lost another -1.6%.

  • US REITs led all asset classes, up 4.4%, and US Dollar jumped 2.6%.


Observations and Expectations

March was largely a continuation of the market regrouping and rebalancing from February.  Technology and energy stepped back, while the industrials, communications, real estate, and financials assumed market leadership.  That brought back the age-old question: is value taking over for growth finally?  The chart below may be offering some clues on that subject.  The success of vaccine rollout and consumer demand for products and service largely unavailable during the pandemic will have a lot to do with it, of course.  Ultimately, the upcoming Q1 earnings will perhaps settle the question of whether the technology dip will be bought again or whether the shift to the cyclicals is more permanent.

Bonds, by and large, remain out of favor, as the yields are still close to the all-time lows.  However, the narrative that the stocks are the only game in town has helped push the stocks to overall historically high valuations – see the chart below.  Thus, certain pockets of fixed income market may be approaching a buy territory. More on why fixed income belongs in your portfolio please see the Question of the Month.


Sector Update

Healthcare as a sector is at crossroads.  The big push for COVID-19 vaccine appears to be largely behind us, and with that comes a vacuum of near-term catalysts.  The sector contains some industries on the polar ends of the growth spectrum: from the highly risky hyper-growth biotechs to the steady, recession-proof service providers.  Individual stocks can still provide plenty of value and upside, but the investors are just seeing better opportunities in other sectors at the moment.

Communication Services s the most recently created 11th sector of the S&P, which combines traditional telecom companies with the new-age Internet services.  Its characteristics as recession resilient and steady revenue producing make it appealing to a broad investor base.  Add the 5G growth factor that may finally be kicking in, and it’s easy to see why it’s the #1 performing sector over the past month.

Impact Investing shines again in the President Biden’s proposed infrastructure and taxes bill, which puts heavy emphasis on the renewable technology and electric vehicles ecosystem.

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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.


Bonds are underperforming.  Do I really need them in my portfolio?


We heard this question or its variations several times recently.  It’s always easy to point out an underperforming asset after the fact and try to exclude it in the future.  This strategy – of selling low and buying high – is actually the worst idea for a long-term portfolio.  The more important question, however, is the following.  Since the fixed income underperformed US equities for a decade, what value does it bring to my portfolio?  Or more generally, how does my portfolio construction process determine what asset classes should be invested in?

This goes back to an even more fundamental question: why do you invest?  What do you hope to get out of your investment?  There are really only three reasons why you should be investing in any asset:

  1. Growth – you hope your investment will grow in value.

  2. Income – you expect your investment to produce a stream of income.

  3. Protection – you hope that your investment will provide protection to the rest of your investments in a number of adverse conditions.

To summarize it, let us remake it into a nice acronym below: PIG – as in the piggy bank.

Very few assets will actually have only one of the three characteristics above.  Most will have two, and some could have all three. For example:

  • Small-cap emerging markets stocks should only be considered for growth

  • Certificate of Deposits should only be considered for income

  • Long put options against your holdings or a broad index should only be considered for protection

  • Large-cap dividend-paying stocks would have some growth and income objectives

  • Corporate bonds will also have some growth and income objectives depending on their quality and duration

  • Precious metals offer growth and protection against recession, inflation, or geopolitical tensions

  • Utility stocks offer income, protection against economic downturn and some growth

  • Inflation-linked bonds offer income, protection against inflation and some growth

  • Floating-rate bonds offer income, protection against rising rates and some growth

The list goes on.  What’s important to note is that the growth comes hand-in-hand with risk.  So, we start the process by determining your risk tolerance and investment horizon.  It deserves an entire discussion on its own; we’ll just say that it’s an inexact science and needs to be constantly monitored.  But once the original level is determined, we match it with the growth portion of the allocated portfolio.  While some growth objectives may also be included, most fixed-income investments will be selected based on their income and/or protection characteristics.  As the old Wall Street saying goes:

And that’s the bonds’ true place in your portfolio.

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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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