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Trademark Market Perspective for 07/09/2021

Follow-ups and New Thoughts: 1) On July 7th the 10-year Treasury traded at less than 1.30% for a short time before closing near 1.32%. Some of the factors behind the decline are:

  1. Reduced expectations for 2022 and 2023 growth

  2. Systematic buying by the U.S. Treasury and insurance companies - the former due to the ongoing QE program and the latter practicing asset re-allocation following a period of strong equity returns and weak bond returns.

  3. Capitulating short sellers. Inflation may or may not be transitory, but if you get into a crowded trade and it starts to move against you, it doesn’t matter whether or not you will be proven right in the long term. Another thing to watch is the Federal Reserve meeting on June 16th.  This may give us guidance as to whether the Fed has begun real discussions on eventually tapering their bond purchases.  Similar talk roiled the stock market back in the fall of 2018. 2) June tested us with a disappointing May jobs report early in the month and then an awkward Fed meeting in the middle of the month, yet it finished on a high note. July has a much more favorable historical win rate.  There hasn’t been a major stock market top in July in a very long time. 3) High yield bond yield spreads are the lowest since 2007. Until very recently, lower quality credits outperformed despite Treasury yields falling, but investors should know that they are not being adequately compensated for the risks they are taking.  With inflation rising well over 2%, however, that statement could be made about most bonds.  If you look to CCC rated bond spreads for a sign of impending economic stress, you will not find it.  This is why I believe the decline in bonds yields is not a reflection of investor fears about economic weakness, but rather due to the aforementioned technical factors. 4) Emerging markets as a whole have been among the worst places to invest lately, largely because of the Chinese crackdown on internet firms, but also because of poor responses to COVID and some moderation of commodity prices.  That said, Taiwan, India, South Korea, and Brazil are doing quite well.  Index performance shows the overwhelming influence of China on the benchmark.  It also suggests, given that the Vanguard EM Index ETF is in the 51st percentile YTD and the 62nd percentile on a 10-year basis (per Morningstar), that this area still lends itself to active management. 5) Cryptocurrencies’ price peak coincided exactly with the IPO of Coinbase back on April 14th. Could the coming IPO of Robinhood mark the top for meme stocks?  Or perhaps for stocks in general?  Just a thought. 6) Municipal bonds have had a great rally on the back of tax increase concerns, but their valuations have reached lofty levels. Anecdotally, many fund managers have turned cautious on that space.  Some are even increasing exposure to taxable munis. 7) I think the market consensus is right about the economy slowing but wrong about the extent to which inflation will be “transient”. Many goods prices are volatile and respond to temporary supply disruptions.  Markets have been correct over the past 20 years to ignore hurricane-related lumber and energy surges as transitory, so that appears to be  the playbook investors are working from.  This time, however, we are seeing labor shortages that so far seem to be difficult to remedy simply by temporarily raising wages.   Rising costs are being more easily passed on in the prices of goods and services than at any time since the 1980s.  Neither stocks nor bonds are priced for an environment of slowing economic growth yet stubbornly above trend price increases.  We better hope this stagflation (obviously at a lower level than what we experienced in the late 1970s) does not take hold. Finally, two charts and related thoughts: Figure 1: Real S&P Composite: 1871-Present with P/E10 Ratio

Source: Advisor Perspectives At 170% above the long-term regression line, stock prices are extremely expensive on a historical basis.  It can take a long time for valuation peaks to fall back to the trend line, but they always have.  None of us know how long we have until a great reversion begins, but any investor with less than a 15-year time horizon really needs to take this into consideration. The second chart shows how much investors have shoved into equity markets this year so far.  As equity exposure as a percentage of one’s investment assets passes the roughly 62% level peak of the late 1960s and again in early 2000, one should consider how confident we should be that we can continue to defy history. Figure 2: Equity Fund Flows

Source: Disclosure Past performance is no assurance of future results. Trademark Financial Management, LLC (“Trademark”) is a registered investment adviser with its principal place of business in the State of Minnesota. Trademark and its representatives are in compliance with registration requirements imposed upon investment advisers by those states in which Trademark operates. Trademark may only transact business in those states in which it is registered or qualifies for an exemption or exclusion from registration. This newsletter is limited to the dissemination of general information pertaining to its investment advisory/management services. Any subsequent, direct communication by Trademark with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. A complete list of all recommendations will be provided if requested for the preceding period of not less than one year.   It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list.  Opinions expressed are those of Trademark Financial Management and are subject to change, not guaranteed and should not be considered recommendations to buy or sell any security. For information pertaining to the registration status of Trademark please contact Trademark at (952) 358-3395 or refer to the Investment Adviser Public Disclosure web site ( For additional information about Trademark, including fees and services, send for our disclosure statement as set forth on Form ADV from us using the contact information herein or by calling 952-358-3395. Please read the disclosure statement carefully before you invest or send money. Any reference to a chart, graph, formula, or software as a source of analysis used by Trademark Financial Management staff is one of many factors used to make investment decisions for your portfolio.  No one graph, chart, formula, or software can in and of itself be used to determine which securities to buy or sell, when to buy or sell them, or assist any person in making decisions as to which securities to buy or sell or when to buy or sell them.  Any chart, graph, formula, or software used is limited by the data entered and the created parameters. The data was obtained from third parties deemed by the adviser to be reliable. Nonetheless, the adviser has not verified the results and cannot be assured of their accuracy.

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