Bull Market Intact

Global stock markets have continued their rise despite a recent pullback. The S&P 500 was up over 6% in first quarter, and the U.S. small company Russell 2000 index was up over 12%.

Stocks were arguably ripe for a pullback, given buoyant investor sentiment.  One indicator—the SentimenTrader’s Panic/Euphoria Model—had risen to a level not seen since the technology boom in the late 1990s. Following that boom, which was later named the Tech Bubble, technology shares suffered steep declines over multiple years.  But recent market weakness has brought sentiment down to a level that historically has tended to be better for stock market returns.

The market has been rising since the pandemic drop more than a year ago.  SilverPeak Wealth believes this trend can continue as the economy continues to strengthen.  That said, the market never goes straight up, and investors should expect more of the normal pullbacks and corrections that come with a multi-year bull market.

Bond Market Signaling Strong Economic Growth

The 10-year Treasury yield has recently spiked higher. During February and March, the 10-year yield went from 1% to 1.75%. While this yield is still low by historical terms, this change does signal an important shift in economic outlook. That is, the bond market is predicting stronger economic growth is ahead.

Treasury yields are rising for the right reasons, such as increased confidence in the economic outlook, progress on vaccine deployment, and additional fiscal support.  Consequently, the Fed appears to be complacent with its current policy.

In other words, it is unlikely that the Federal Reserve will raise short-term interest rates any time soon. Fed Chair Jerome Powell has been explicit that the Fed is likely to keep short-term interest rates near zero and maintain a large balance sheet until the unemployment rate falls back toward pre-pandemic levels, even if that means inflation overshoots its 2% target.

With regional social-distancing measures easing, mobility is gathering steam and the path to a broader reopening is becoming clearer. Many believe that the recent massive buildup in savings will be spent quickly as the economy broadly reopens. This is hard to say, but what is clear is that the consumer is in a good financial position to propel the economy for some time to come.

What SilverPeak Wealth Likes Now

U.S. stocks have come under some pressure recently with the rapid rise in the 10-year Treasury yield since the end of February. The information technology and consumer discretionary sectors have led to the downside, as investors continue to rotate into cyclically oriented sectors, given the prospects for rapidly-accelerating growth this year.

We think this trend which favors large, dividend-paying stocks is likely to continue, while the richly-valued tech stocks are likely to lag the broader market.  Growth stocks like technology have outperformed value stocks like financials and industrials for nearly 15 years.  This might seem logical given the rapid evolution of technologies over the period.  After all, most every advance in technology requires the purchase of a new device, an upgrade to service, or new software. But all this growth has led to tech stocks being significantly overvalued versus historical norms and compared to the rest of the market.

We suspect big-name tech stocks will take a break from the limelight and allow to new leaders to emerge.  Likely candidates are industrial, materials, and clean-tech companies benefitting from the proposed infrastructure spending and the trend towards cleaner energy throughout the energy grid.  Financial companies also tend to do better in a rising interest rate environment.

In addition, we continue to believe small company stocks and emerging markets can continue to outperform the broader markets and are overweighting these in client portfolios.

Real Estate

As clients of SilverPeak Wealth know, we are big proponents of including real estate in portfolios.  Our preferred real estate investments avoided areas such as malls and multi-tenant office buildings that were hit the hardest during the pandemic.  Instead, these funds have focused on segments like industrial/warehouse and housing, which continue to be the strongest areas of commercial real estate.

The real estate funds we invest in for our clients focus on “core” real estate.  That is, high-quality properties that are fully leased, often on long-term leases.  As a result, the values of these properties (and the real estate funds that own them) have stable prices and predictable income.

With bond yields so low, owning real estate with a dividend yield above 5.5%, and the potential for price appreciation in the underlying real estate—especially if inflation rises—is an attractive alternative to traditional bond investments.

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