We’re halfway through 2021. Where do the financial markets stand? Pure’s Executive Vice President and Director of Research, Brian Perry, CFP®, CFA® provides an update and analysis of which markets led the way in Q2, the outlook ahead for stocks and bonds, and how to navigate higher market valuations and rising inflation.
Andi: Thank you for joining us for this mid-year market update webinar. Now your presenter today will be Brian Perry, CFP®, CFA®. He is the Executive Vice President and Director of Research here at Pure Financial Advisors. Looking forward to this mid-year update. Tell us what’s going on in the market. So, yes, just so that you know in advance, Joe would like to know, “How do you see current inflation affecting the markets?” And also, “what do you think is the biggest market growth sectors as we move on with the pandemic recovery?”
Brian: Yeah, you know I was pretty confident I’d get a question on inflation. So we definitely got some slides in there. It’s been a topic in the- in the media for quite a while. We can talk about kind of going forward in sectors and stuff, sometimes that’s a little bit tough as far as predicting, you know, but we’ll do what we can. So, yeah, excited to get into it. We’ve got some slides. Well, we’ll see how long we go. Well, we’ll kind of go through the slides and if there’s questions that come in as we go along Andi, feel free to- to weigh in and if not, then we can save them to the end, whatever you want to do. What I want to start with today is talking about what’s going on in the last quarter. Right.
Quarterly Market Summary – Index Returns
So let’s start with more recent and then we’ll look at longer term. And basically here I’ve got the US stock market, and that’s a broad measure. And then I’ve got international developed stocks. And when I talk that, think Canada, Australia, Japan, Europe, those sorts of countries. And then emerging markets, which are a little bit less developed, maybe that’s Southeast Asia or Africa or something like that, South America. And then you’ve got global real estate and then bonds, the US bond market and the global bond market. And you see all the green arrows. And as most of you probably realize, the last quarter was pretty good. And in fact, most of the last year has been pretty good. You know, up about 8.25% on the US stock market, not quite as good internationally, but still pretty darn good. Right. 5% plus on international developed as well as emerging markets. You annualize that over 4 quarters, you’re looking at 20% plus return. So really good quarter across the board there. Global real estate, even better, up 10%. And even bonds, and I bet that if I had surveyed the audience 3 months ago, 4 months ago, pretty much everybody probably hated bonds. And hey, interest rates are going up. Bonds are going to get killed. You see bonds actually held in there, produced a positive performance there in the first quarter, Across the bottom there, just want to point out a couple of things. One is you can see below the second white line, since January of 2001, you can see the average quarterly return and you can see that this last quarter for almost everything was better than average. And then you see best quarter and worst quarter. And what I want to focus on is the worst quarter. And if you come across- so this is your second sort of horizontal line from the bottom, you see the worst quarter for US stocks was down about 23% in Q4 of 2008. International stocks down about 23%, 27% for EM. Go across and look at the worst quarter for bonds, down 3.4% in the first quarter of this very year, 2021. So a couple of things. One is you had a big move in interest rates during that quarter. But I think the more instructive thing is that a bad year or a bad quarter in the bond market is very, very different than a bad year in the stock market. In fact, I’ve given presentations where stocks fell more while I was talking than bonds have in their worst year. And so, again, that just cycles back to the reason for holding bonds in a portfolio, is a little bit of income, not as much right now, but a little bit, certainly some diversification. They don’t move exactly in lockstep with stocks. And then you get that muted volatility where you see the worst quarter and for really, frankly, not that bad compared to stock market volatility.
Long-Term Market Summary – Index Returns as of June 30, 2021
So that’s the quarter. What about the last year? The last 5 years? The last 10 years? And again, you see lots of green arrows. The only red arrow there is in the last year, the bond market is down a little bit, but again, rebounded in the second quarter. You look at stocks, I mean, look at this year, up 44% for the US, 33% for international, 40% for emerging markets, just a phenomenal year for stocks. You know, this is being recorded. So I can’t guarantee you all out there that we’re going to continue to get those each and every quarter, each and every year. But, yeah, I’m not going to guarantee it.
Just remember, this is unusual. The returns that we’ve seen across the board are pretty unusual. And this is the broader market. Some of the areas that we focused on, like small company stocks and whatnot, have done even better. They’ve done really, really remarkably well in the last 9 or 12 months. You can see 5 years, a little bit and still a lot of positive news. 10 years, the same thing. What you see is really the big difference is that international stocks have not done as well as US stocks. Still really respectable returns in the 5 year horizon for some of the international markets, not as good as the US. And then 10 years you can see that the US has really lapped international markets. Biggest contributor there was probably, if you think back, I don’t know, call it 3 or 4 or 5 years of performance in the US of the large technology stocks, the so-called ‘fang’ stocks. We went through a period where those handful or those 10 really big technology companies dominated not just the US, but the global marketplace as far as performance goes. Because those are in the United States, you wind up with much higher returns during that period in the US versus internationally, and that really dragged all of those numbers or impacted, all of those numbers. Let’s take a look again, shifting back to the second quarter at some of the asset classes. And you can see here the second quarter, the green bars are the various asset classes. Again, everything did OK. If we look all the way at the bottom here, one month, the US Treasury bills, this is basically cash-flat. That’s because you’re not getting any return. The return on cash is basically zero, as those of you that have put money in a bank account or something like that have realized. We do have a cash management program here through a third party affiliate, they can get a little bit higher return. So if you have excess cash and you’re looking to get some return, the return that we can get through that is not as high as it used to be, but it is higher than a lot of the local banks. So if that’s something that you’re- got some extra cash, for whatever reason, you’re waiting to buy a home or whatnot, talk to your advisor and they can introduce you to that to that program for getting a little bit higher rates than some of the local banks.
World Asset Classes – Second Quarter 2021 Index Returns
As far as some of the other asset classes, you see, the real estate did the best year, up about 11% at the top. The emerging market, small cap 11%. And again, that speaks to the global diversification, as well as a small company premium. I can see the S&P did really well, along with the Russell 1000, Russell 3000. Really across the board. Emerging markets value companies, a lot of asset classes here getting 4% or 5%, 6%, which again, keep in mind, this is not for a year. Those are respectable, nearly average numbers for a year. These are just for the second quarter. So, again, things have been good. As scary as the world was maybe a year ago from an investing perspective, maybe 13, 14 months ago during the worst of the decline with Covid, I know that I spoke to many of you at that point, gave some presentations and really markets shut down. You know, they fell really significantly as we were forced to go into our homes and Covid was rampant. I don’t know whether or not we’re at the end of the tunnel with Covid. Right. We hear about the Delta variant. We hear about some of what’s going on in some other countries with renewed shutdowns, a spike in cases. There’s some concern about what the United States might look like come Fall. Right now, it seems like life is somewhat back to normal in many places. Whether or not that continues, I think is still to be determined. And it is really going to have a big impact on financial markets, where a lot of what’s driven markets is the prospect of the economy opening back up and then the economy actually opening back up. If you’ve been to the airport recently, you know that parking is full and the lines at TSA are pretty long. If you’ve been in restaurants are pretty full. So life is really coming back towards normal. For markets to continue to do well, I think that that needs to continue to happen. This is just my opinion. But I do think that if we were forced back into some sort of shelter in place or at the very least lifestyle restrictions, that would probably impact markets broadly and certainly some of the winners and losers out there. Keep in mind, though, that that’s the reason that you own different parts of the portfolio. So if you look at this chart, all of the asset classes at the top, real estate, different kinds of stocks, and the like, most of those tend to do well when the economy’s doing well. So those are your hey, the world is returning to normal. Everything’s OK. Those go up. Those asset classes at the bottom haven’t done quite as well. I’m pointing in particular to Treasury bills or the Barclays US Aggregate Bond Index and the like. Those are your asset classes that if Covid was to resurge, if the Delta variant was to force restrictions on us and stuff, if businesses had to re-shutter, those are the parts of portfolio that historically have done OK in that environment, have really held in there. Even back during last Spring, Spring of 2020 with Covid, those were the asset classes that held their value. And for those of you taking distributions, that’s where you pulled money from during those times that markets are falling in order to give the stocks and whatnot time to recover. For those of you not yet taking distributions, those are the asset classes then that you can sell in order to rebalance into the stocks or whatever that have fallen. So, again, bringing in that systematic discipline of selling high and buying low.
US Stocks – Second Quarter 2021 Index Returns
If we look a little more closely at the United States and there’s a ton going on in this chart, so please don’t worry about memorizing it all, but if you look here at the top in the green bars, you can see that the best performer last quarter was large growth stocks, followed by large companies in general. And then you can see that large value and small value underperformed a little bit. So in the small company universe, the value premium, which you all probably know that we emphasize value stocks, small company value stocks did better than small company growth stocks. So that was good there. In the large company universe, growth outperformed value and in general, larger companies did better than smaller companies last quarter. However, if you look down here in the white chart at the year-to-date numbers and then the one-year numbers, you’ll see the opposite. You can see that the smaller companies have done better than larger companies so far in 2021 and in the last 12 months. And the same thing with value versus growth. In fact, in the last one year, you can see that small value’s up 73%, large values up 43%. Again, no guarantees there. Certainly, we don’t expect to continue to get 73% from any segment of the portfolio in the next 12 months. But when it happens, it’s nice. And what I think is important to remember is that these things average out, right. So the idea isn’t that you’re going to get 30%, 40% each year or 5% or 8% each quarter. It’s that you’ll have times when you get that and times when you get maybe 1% or 2%, sometimes maybe even portfolio performance is negative. The idea is that it averages out to not necessarily what the market or some arbitrary benchmark is doing, but to what return you need in order to meet your financial goals. That’s the return assumed in your plan when you run through your cash flows and meeting that not in any given year, but across time is really the key to financial success.
Select Market Performance – Second Quarter 2021 Index Returns
Looking a little more broadly at the world, you can see stock market performance across countries. You can see on the left some developed markets and on the right, some emerging markets. You can see Denmark at the top and Switzerland, Finland, and then down to really the only negative performers on the developed side last year were New Zealand and then Japan. And then you can see in the emerging markets, there were a few negative performers, but more positive as well. Emerging markets, again, have done really well, over the last, I’d say the last 18 months or so, a little bit of a lag last quarter, although still up 20% annualized, which is pretty darn good. The other thing I would say is we get this question a lot. And so I do want to address it around valuations. And when you look at the marketplace, there are different kinds of stocks. Right. And they tend to go in cycles.
US and International Market Outperformance
And so if you look at this chart shows the US stocks and then international developed stocks and in purple are times when the international stocks are outperforming, the gray is times that the US is outperforming. And you can see that these things go in cycles, going back to the early ‘70s. A0 few years where International did better, a few years where the US International, the US and so far so forth, back and forth. Really the big outlier here is this long stretch on the right-hand side of 13 years where the United States is continuing to outperform the international markets. And there are probably several reasons for that. But I think, again, the biggest- I would refer back to the technology stocks that have really led the way. When you think about the technology leaders that have dominated the marketplace in the last 5 or 10 years, talking about primarily companies that are based in the United States, your Netflix, your Google, your Amazon, your Apple, and the like. And then some companies that are in emerging markets, Tencent or Alibaba in- in China or Taiwan, Semiconductor or something like that. So Europe and Asia or Europe and Australia and stuff have lots of great industries. They’re not necessarily dominant in technology. And I think that’s contributed to the relative outperformance of the US in the past 10 years or so. That being said, keep in mind that valuation matters and that a lot of the international markets are less expensive than the US markets. So when you look at, let’s say, like emerging markets, I know a lot of people talk about how US stocks have gone up so much and they’re at whatever level, you look at emerging markets, depending on what index in a lot of cases, they haven’t really changed in the last 15 years. So they’ve done pretty well lately. But if you stretch at that time horizon, more or less flat for a decade or more so not necessarily overvalued. So we own some of those in portfolios. If you look at the international developed, again, a little bit less expensive than the US, so we own some of those. If you look at value in small companies, they’ve done really well in the last 12 months, but had lagged for several years before that. So they’re not necessarily screaming cheap, but they’re a little bit less expensive than some of the large growth companies.
Sector Returns Fluctuate
So we try to diversify the portfolio in order to get exposure to these different parts. And I get the question all the time of, hey, should we just buy IT? Like if information technology has been the best, why don’t we just buy that? And when you look at this chart that I just pulled up, it goes over the last 12 months, and from top to bottom, it’s stack-ranked in each month. Which sector did the best? And, you know, if we stop and pause and I say, like, hey, what’s the pattern here? Well, I think we can all agree that there really isn’t a pattern. There’s a lot of craziness. And that’s really the point. The point is that there are different sectors that take the lead each month. And if you look at what did best in the last year or so, this is for the year. You can see that the financial sector in the top right-hand column there did the best, up about 62% in the last 12 months. And yet there was only one month that it was the best performer. The flip side is that you can see that energy was the best performer in 3 of the months but was smack in the middle over the year. And so again, the idea here is that you don’t want to concentrate in just one sector at any point. Industry leadership definitely rotates on a regular basis.
Asset Class Returns Fluctuate (2006 – 2020)
And it’s a similar story across asset classes where when you look at the same chart, again, staggering from top to bottom, the different asset classes from best performer to worst. Now we’re looking at year- so 2006 to 2020 and you can see that each year leadership rotates. You can see that real estate investment trusts have been the best performer in a number of years. You can also see that despite that, they’re not the best performer. If you look at the annualized return in the second column from the right, they’re done well, but not the best. And then you can look at emerging markets. Same thing. They’ve been the best performer in 3 of the years, but again, not the best. And it turns out that your best performer annualized in this particular period has been large company stocks. And they were never actually the best performer in any given year. So, again, the idea here being a couple things. One is that there’s not necessarily a pattern. Two is that just because something did the best the prior year doesn’t mean it’s going to continue. Right. So the idea of jumping into just what’s done the greatest doesn’t necessarily float. But the third is this, if you look at the line going through at the white bars and the line, that’s asset allocation, not just some random diversified portfolio. What you see is that it’s never the best and it’s never the worst. And I’ve talked about this often, but that’s really, to me, the concept of diversification. And the way I think about it is, if you went to the fair and they have the game with the balloons where you pay a dollar, you throw a dart, you pop a balloon and everybody’s a winner. And so you get a junky plastic whistle. But behind a few of the balloons is a big stuffed animal, a big panda bear that- that’s what you really want to get. And so your goal is to go up there, pay a dollar, throw a dart and get the big panda bear. But what are your odds of actually doing that? They’re not very good. Right. And so what you could do instead is you could walk up with $20, buy 20 darts, throw them and your odds of getting the panda have gone way up. However, the best possible outcome is one dart, $1, get the panda. So by paying $20, in that case spreading your bets around, you’ve eliminated the possibility of getting the best possible return. Right. And that’s what diversification is. The best possible return is to each year pick whatever asset class or whatever sector is going to do the best. Right. So when you diversify, you lower the ceiling, you’re reducing the possibility of getting the best returns, but you’re also raising the floor because you’re increasing the odds of getting acceptable returns. And that’s the way we view diversification, is you’re making a conscious decision to maybe lower the ceiling as opposed to putting all your chips in one basket. But you raise the floor and you increase the odds of getting the returns you need, again based on your plan in order to get where you want to go financially. For most people with their financial goals, we find that that’s a pretty good tradeoff.
Stock Market Momentum – Equity Markets
I also wanted to point out this chart, right, I get a lot of questions around. Well, stocks have done so well since the- the sharp fall back in the Spring of 2020. Can they continue to go up? And so basically what this chart looks at, is the S&P 500 and it’s got what, 6, 5 instances since 1970 where the S&P fell more than 30%, back in 1970, 1974, 1987, 2002, 2009, and then 2020. So what does that 6- 6 instances in which stocks fell more than 30%. And you can see that as you might expect like if you dropped a rubber ball from a high height and it fell, it tends to bounce a lot. Right. And so you can see that the light blue column is the performance in the year following the sharp decline. And not surprisingly, you’ve got really solid returns in each of those, right? Anywhere from 17% up to 56%. So historically, when markets fall sharply, they tend to rebound sharply in the next year. But what I think is interesting and again, this is just statistics, it doesn’t guarantee the future, but it does give you some sort of indication, is that statistically, the dark blue is the second year following the sharp drop. So what happens? Sharp decline, sharp rebound, and then historically, you’ve gotten pretty good returns the next year as well, averaging 18% in the second year after a sharp drop. And it makes sense, right? Think of the analogy again. If you’re on a 10-story building, you drop a rubber ball, it hits the ground, it bounces really high, but it’s not like it then goes back down to the ground and stays there. It goes back down, hits the ground. It might not bounce quite as high the second time, but it still tends to get a pretty healthy rebound. And so, again, no guarantee that the next year is going to be as good as the prior year. But based on the evidence, there’s also no guarantee that just because we’ve gone up a bunch of markets need to fall either.
The Federal Deficit – Federal Net Debt (Accumulated Deficits)
Percent of GDP, 1940 – 2031, CBO Baseline Forecast, end of fiscal year
Want to shift gears a little bit and talk about the road ahead and the deficit and inflation. This all wraps in together, taxes. If you look- this looks at the federal deficit, this chart going back to the ‘40s and you can see the big spike with World War II. And then we paid that debt down and it kind of stayed somewhat consistent until probably the last 15 years. And then it really increased with the financial crisis. And then since then, up to 103% of gross domestic product, which is one way they measure the national debt. So the debt is obviously increased a lot, particularly since Covid. What’s interesting to me and what I’m not sure I believe, this is the CBO, the Congressional Budget Office’s forecast as well. You see this consistent increase in the last 15 years and then all of a sudden they’re saying that we’re not going to run up any more debt and it’s just going to peter out and stay in place for the next 10 years. If you ask me, if we’ve spent all this money in the last 10, 15 years, I don’t see why suddenly there’d be an urge to stop spending. I haven’t really heard a single politician say that lately. So the deficit is reasonably high. My guess is it continues to at the very least, stay at high levels and potentially go higher. So what does that mean? Well, how do you pay off a deficit? And there are 4 ways and I’ve talked about this in the past, is that you could default on your debt. I don’t think we’re going to do that or don’t spend a lot of time worrying about it. You can grow your way out. So if you have a certain level of taxes and you get more economic growth, that’s more revenue to pay down the debt. I tend to think that if we went that route and had better growth, we’d probably just spend the money. Or I could be wrong there. The two main ways are you either inflate your way out or you tax your way out, right.
The US Debt Clock as of July 8, 2021
So you get higher taxes in order to pay down the debt or you get higher inflation to pay back the debt with less valuable dollars. And this is just another way of looking at it, the situation we’re in. A lot of numbers on here. This is the US debt clock. And it’s a little bit depressing to me because every time I do this, we’ve added another $500,000,000,000 worth of debt. You can see here in the left-hand, left-hand, upper side, US national debt is about $28,500,000,000,000. That’s trillion with a T. It’s a pretty big number. When you look at the debt per citizen, this is how I like to look at it. it’s $85,000 per citizen of debt. And then I come over here in green into the federal tax revenue and then the revenue per citizen. I think of a business and you’ve got revenue and expenses. And if your revenue per citizen is $10,000 and your debt per citizen is $85,000, that math isn’t great. And it tells me that something has to happen to pay that off. As you know, we spend a ton of time talking about taxes. It’s one of the foundations of the company, one of the foundations of what we do with all of you. Taxes are scheduled to go higher at the end of 2025 based on current law. There’s certainly plenty of talk right now about taxes being increased sooner. I think most of my colleagues in our firm and potentially many of you in conversation think taxes over the next 5, 10, 20 years, whatever it is, are going higher. That’s why we spend so much time protecting against higher taxes and doing what we can to build asset diversification and tax diversification.
Inflation – CPO and Core CPI
But speaking of inflation, right, that’s the other way. When you look at it, inflation is a little bit like the boogeyman. And the reason I say that is it’s often feared but seldom seen. And if you look at the last 30 plus years, there hasn’t been a whole heck of a lot of inflation. In fact, it’s rarely been above 4%, although it just ticked above that recently. So just in the last day or two, we had the highest reading on inflation since 2008, certainly at high levels. And really the big debate right now is over this word, transitory, right. Transitory. And what’s meant by that is that, is this spike that we’ve seen in inflation a temporary phenomenon or a passing phenomenon? Or is it going to be stickier and more permanent? The argument for it being more transitory, more just a passing thing, is that a lot of the inflation we’re seeing is because of Covid. Right? If people were stuck in their house and couldn’t spend and now you release them and they’ve got money in their pocket, they run out to spend. And then when you couple that with the fact that I don’t know, like rental car companies cut their fleets because they couldn’t rent cars during Covid. Now, I looked into renting a car a couple of months ago. It was like a $1000 a day for, like a little mini car, right? There are shortages because of chip plant issues and trade issues? You can’t get new cars and used cars. So prices are really high there. So there are some influences from Covid that are being blamed for some of the increase in inflation and the argument for transitory is that those will eventually pass through and you’ll get more normal inflation. The argument for more permanent inflation revolves around the fact that the economy is doing pretty well. And yet we’ve had a fair amount of economic stimulus and rebates and- and payments and stuff, which is pretty unusual. So consumer balance sheets are pretty good. You’re also in a situation where there’s a fair amount of capacity constraints among some companies and the ability for some companies to ramp up production. Isn’t that great? And then you’re seeing increases in minimum wage and stuff like that, and then wages paid in a lot of places. And whether that’s good or bad is an argument for another time. But the fact of the matter is that people in some of the lower-income tiers, if you look at the data, spend essentially everything that comes in, where people at the higher income levels tend to spend just the portion of what comes in. So if you increase wages to lower-income earners, they tend to spend that. The idea of those dollars cycling through the economy pretty quickly could make inflation more permanent. We’ll see. And so it’s like, all right, well, what do we think about inflation? Well, we think a couple things. One is that we’ve already built in a measure of protection in portfolios and in plans simply by running inflation in your financial plan at 3.7%. So we’re running inflation in all of our projections at the 100-year average. Lately in the last, I don’t know, 5, 10 years, inflation was below that. Even with the recent increase in inflation, we think that the fact that we used a 100-year average gives your plan a little bit of a stress test, a little bit of a conservative measure to- to help protect against higher inflation. The other part of it is that when we run inflation, we have different parts of the portfolio that do better in different environments. And so if you think about your portfolio and I’ll generalize it really widely, is there some US stocks? Right. And within there are companies that hopefully have some measure of pricing power. Right. I don’t know if you have Verizon as your phone carrier and they raised their monthly fee $5 a month. Are you going to get a new phone number and get rid of your phone and go through all that hassle because of that? No, you’re probably going to stick with it, right? Just to pick an example, if you have Netflix and they raise their monthly price $1, are you going can stop watching? So there’s a lot of companies that have pricing power, even in an inflationary environment. And frankly, corporate profits should be pretty good if there’s more dollars flowing through the economy. So we think that stocks in general give some protection against higher inflation. We also think international stocks give some protection because the very definition of inflation is that the dollar becomes less valuable, whereas a US investor, if the dollar is less valuable, that’s a net benefit for holding foreign stocks. So we think there’s some protection there. And then we look at the natural resources component that we hold for many people. And historically, commodities and natural resources have- have done well in an inflationary environment. So we think there’s some protection there. The flip side is the bonds and the bonds are there for the opposite, right?
10 Year Treasury Yield, Decade Ending July 8, 2021
The bonds are there so that if the opposite happens, if instead of inflation- just a couple of weeks ago, there was a lot of chatter in the markets about fears of the economy in the US and abroad slowing down. So if that happens, it’s like, all right, well, what’s going to protect you? Well, in that environment, the bonds tend to hold their value and maybe even increase in value. And so we think that there’s a hedge there and it gets back to that diversification where a portion of the portfolio is designed to do well if inflation increases in other portions designed to do OK, if inflation falls. And then either way, there’s something there that you can distribute income or use to rebalance. We also think that when you look at the bonds, we want to be selective in what kind of bonds we hold. Right. And so if you look at this chart of the 10 year Treasury going back the last decade or so, you know, I think that there are a couple things. One is that you can see the sharp decline in 2020 from close to 2%, down all-time lows of about .5%. You can also then see the sharp rebound to 1.75%, which led to the Q1 of this year performance, which was the worst on record. But then also, I mean, I think most people, myself included, honestly, would have thought rates were going to continue to go higher and they’ve actually turned around and dropped pretty significantly in the last 3 months or so. So, again, proving it’s pretty difficult to forecast, particularly with interest rates. I also think the interesting thing is this is the last decade and look at the range, the top of it’s three and a quarter.
The US Treasury Yield Curve
And if we look here, this is going back over the last 10 years. And you see the gray is the range of treasuries and then it’s the yield curve. So it’s you map out 3 month Treasury, 6 month, one year and so on, 5 years, 10 years, 20, 30. And you just draw a line through it. And the gray line is December 31st of 2013. And that’s just kind of a date picked on this, just as an example. You can see the purple line is August 4th of 2020. That was about the low in interest rates and then the greenish line is just at the end of the last month. So a couple of days ago- and you can see that we’re basically in the middle of the range, maybe a little bit below the average, so the reason I bring that up is that two things. One is that even if interest rates increase, which they very well might, we don’t necessarily think that they’re going to 5%, 10%, 15% or something. We don’t think you’re going to see a repeat of the 1980s or ‘70s. They’d probably stay within the range they’ve been in. So maybe they go from 1.5% to 2.5% or something like that, which would be a decent-sized move. But we’re not talking about a tremendous increase in rates. The other is that in order to protect against interest rates, we hold relatively short maturity bonds, which tend not to be as volatile as interest rates increase.
The Dow Since 1900
I want to end here and then we’ll invite some questions, with the Dow since 1900. And what do you see is that in the last 120 years there’s been a heck of a lot of progress. We’ve gone from effectively zero up to 35,000, 34,000, something like that. And I’ve crunched the numbers. We get a lot of questions like, hey, is the Dow too high at $35,000 or pick whatever index- the price? And I think it’s important to get away from the idea of, hey, markets made new highs, so they must be expensive. Markets generally make new highs. They go up over time like you can see on this chart. And if you crunch the numbers, I mean, if the Dow continues to increase for the next- call it the rest of the 21st Century- at the same rate it historically has gone up, you’re talking about a Dow level in the many millions, Dow 3,000,000, Dow 5,000,000, Dow 10,000,000, depending on what rate you compound it at. Right. You know, like 8% on the Dow or 9% on the Dow, you’re talking like $6,000,000, right, at the end of this century. So those of you with grandkids, those grandkids might live to see a day in which there’s a celebration because the Dow crossed 5,000,000 for the first time. And they may have a really bad day where, hey, the Dow fell 400,000 points yesterday or whatever. And so the reason I bring it up is I think that right now, the idea of the Dow falling 4000- or 10,000 points would give us a heart attack. Right. But the reality is, is someday within most of your lifetimes, a 10,000 point swing in the Dow is probably going to be almost the expectation. So, you know, just cautioning away from it’s easy to get focused on numbers, new highs and stuff like that. And this isn’t me jumping on the table. Hey, you have to buy stocks or be bullish, because it’s not that. It’s just that if you think about it, just because a market has made new highs, it really has nothing to do with what’s going to continue from there. Markets tend to make new highs, hit higher numbers at different times. And if you think about it, just in the last 24 hours, you’ve all set a new all-time high for the number of steps you take in your lifetime, the number of breaths you’ve taken in your lifetime, the number of nights you’ve gone to sleep in your lifetime. Right. New highs are a part of life. Why should financial markets be any different? Let’s pause there. That’s all I have for slides. But let’s- let’s see what kind of questions Andi has for me.
Andi: So right now, the only question that we actually have is from David, he said, “Is the Covid Delta variant on your radar and at what point would we make adjustments based on the impact it may have?”
Brian: Yeah, I mean, I think obviously it’s on the radar. I’m not a scientist or a biologist, so I don’t know what impact it’s going to have. It definitely seems like a thing. On the flip side, as I read stories that if people, you know, maybe people that are vaccinated are protected against it. So I don’t know what the truth is. When it would prompt potential changes is when it starts to impact the portfolio and the markets and the economy. Right. We’re not going to change the portfolio based on something that’s going on in the news, no matter what it is. It would be, hey, what’s the impact on the economy? What’s the impact on the financial markets? and then the portfolio? And if it gets to be where that’s really substantial, then we would make potential impacts or potential changes then.
Andi: All right, and then the next question is from Richard, “What is your opinion for digital currency for the rest of the year? I have 2% of my portfolio in it.”
Brian: My- my projection is it’s going to go up a bunch and down a bunch and be really volatile. That’s about as close as I can come. I mean, look like the truth of the matter is, is I don’t know. I do think that digital currencies are more than a passing fad. I don’t think that this is something that’s just going to disappear. You see even central banks, whether it’s in China or Europe, the US, are all talking about launching digital currencies, I think digital currencies, and I think that the infrastructure behind it is- is here to stay. I think that at the end of the day, I don’t think there’s going to be 100s or 1000s of digital currencies like there are right now. I think some of them will get consolidated. As far as my projection for any one of them, I don’t know. I do think they’ll continue to be really, really volatile because that’s just what history has told us over time. For a small portion of the portfolio that depends on what you’re trying to accomplish, that may or may not be a good fit.
Andi: All right. And at the moment, that is all the questions that we have. If we do have more questions, of course, you can always email your advisor or you can email Brian. You can send those emails to info@PureFinancial.com, and we will make sure that they get routed to the right place. And I also wanted to mention for our clients that we are in the middle of our annual Pure Financial Advisors client survey. So you’ve probably already received emails about that. If you have not filled it out yet, tonight at 11:59 PM is your last chance. And it’s also the last chance to enter into the drawing for the $100 Amazon gift card. So I’m going to put the link to that survey in the chat right now. So if you haven’t filled. that, go ahead and do so before midnight tonight. And Ray says “Great presentation and nice slides. Thanks, guys.”
Brian: Yeah, thanks. We definitely appreciate that. And yeah, if you get some time to fill out the surveys too, just, you know, it’s helpful cos we want to know what’s, what’s good, what, what we can improve and stuff like that. So, so we, I can tell you honestly, we spend a fair amount of time looking through the- what comes back and stuff and then trying to take that and continue to- our- our goal is always to improve, to help all of you get where you want to go. So if you take the time to fill it out, we appreciate it. Yeah. And like Andi said, certainly if additional questions come up, send them in. We’re happy to answer them. If there are topics you want to see for webinars like this, let us know. And yeah, stay healthy. Stay safe. And yeah, wishing everybody nothing but the best.
Andi: All right. Thank you very much, Brian, and thank you all for joining us. Have a great day.
• Investment Advisory and Financial Planning Services are offered through Pure Financial Advisors, Inc. A Registered Investment Advisor.
• Pure Financial Advisors Inc. does not offer tax or legal advice. Consult with a tax advisor or attorney regarding specific situations.
• Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
• Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
• All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.
• Intended for educational purposes only and are not intended as individualized advice or a guarantee that you will achieve a desired result. Before implementing any strategies discussed you should consult your tax and financial advisors.
CFP® – The CERTIFIED FINANCIAL PLANNER™ certification is by the Certified Financial Planner Board of Standards, Inc. To attain the right to use the CFP® designation, an individual must satisfactorily fulfill education, experience and ethics requirements as well as pass a comprehensive exam. Thirty hours of continuing education is required every two years to maintain the designation.
AIF® – Accredited Investment Fiduciary designation is administered by the Center for Fiduciary Studies fi360. To receive the AIF Designation, an individual must meet prerequisite criteria, complete a training program, and pass a comprehensive examination. Six hours of continuing education is required annually to maintain the designation.
CFA® charter – Chartered Financial Analyst® designation contains three levels of curriculum which includes analysis using investment tools, valuation of assets, and synthesizing the concepts and analytical methods in a variety of applications for effective portfolio management and wealth planning. Candidates must meet enrollment requirements, self-attest to professional conduct, complete the approx. 900 hours of self-study, and successfully pass each level’s 6-hour exam to use the designation. CFA Institute does not endorse, promote, or warrant the accuracy or quality of Pure Financial Advisors. CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.