period ending June 30, 2021
Reflecting back to 2020 Q2
Is the market really up 41% in a year? At the end of June 2020, the S&P 500 Index closed at 3050.20 with many lingering questions around a global pandemic, the economic impact of the pandemic’s global shutdown, uncertainty about the upcoming election, and a multitude of other issues. Since then we have experienced a period of sustained growth for both the economy and investors. By the end of June 2021, the S&P 500 rose 41% to 4,297.50. There will always be questions and uncertainties for investors which is why we believe it is crucial to have a disciplined and long-term approach to investing.
Is the economy in growth mode?
GreenUp believes the economy is and will remain in a period of growth. Earnings growth has been strong in 2021 with first quarter earnings up 56.8% year over year and the second quarter earnings growth rate estimated at 64.0%, which would be the highest growth rate since the end of 2009 (source: Factset, July 9, 2021). Goods and services are increasing in price as the Consumer Price Index (a measure of inflation) has increased 5.0% from May 2020 to May 2021, a rate we have not seen in the US economy since August 2008. The financial news media has latched onto the news of rising inflation as a cause for concern (we humans tend to pay more attention to negative news stories than to positive news stories). The COVID-19 pandemic led to unprecedented worldwide economic shutdowns and the inflation we are currently seeing may just be a temporary side effect of shutting down and then restarting the economy. Time will tell if higher inflation is a trend.
“Normal” inflation is a sign of growth, and we have not seen normal inflation since the Great Recession of 2008. We must ignore the noise that the media provides and remember that an expanding economy is positive for investors. GreenUp is closely monitoring the situation and is prepared to adjust portfolios accordingly.
Following the COVID-19 pandemic, GreenUp believes the US economy has moved past the initial recovery phase and moved into the expansion phase of the economic cycle. If we are truly in an expansion, we should expect continued growth in stock earnings and in market valuations. We should also expect volatility as early expansions tend to be volatile, but through the cloud of volatility GreenUp expects asset prices to appreciate.
There are several catalysts for an economic expansion. One obvious catalyst is the waning of the global pandemic. Another is that the Federal Reserve (the Fed) will continue to keep short-term borrowing rates near zero for the time being. After the Fed’s last meeting in April Chairman Jerome Powell said that the recovery remains “uneven and far from complete” and that the Fed will not change policy until the economy showed “substantial further progress.” Finally, the US Government continues to spend, and the White House and Congress are working on a potential infrastructure bill (the House of Representatives passed their version on July 1).
GreenUp believes this period of economic expansion may be shorter than normal as the Fed’s monetary policy and the government’s fiscal policy is supporting the economy, nonetheless we anticipate economic growth in the short term.
GreenUp Investment Models Update
Active Allocation Models (Capital Appreciation, Growth, Balanced, Capital Preservation)
Our active allocation models remain at 107% to 108% of risk versus their benchmarks. We are replacing iShares MSCI EAFE ETF (ticker EFA) with Avantis International Equity ETF (ticker AVDE) which has better long-term performance, lower fees, and a layer of fundamental analysis that EFA does not. GreenUp is also replacing iShares Floating Rate Bond ETF (ticker FLOT) with SPDR ICE Preferred Securities ETF (ticker PSK) which we believe will offer a better risk/reward tradeoff.
Breakaway Stock Model
We are selling Tapestry Inc (ticker TPR) and buying Diamondback Energy Inc (ticker FANG), Invesco Ltd (ticker IVZ), DXC Technology Co (ticker DXC), and EOG Resources Inc (ticker EOG).
Equity Income Model
We are adding Verizon (ticker VZ) and Broadcom (ticker AVGO), bringing the total portfolio to 13 stocks.VZ and AVGO have strong balance sheets, pay high dividends, and provide opportunities to sell options for additional income.
Large Cap Stock Model
We are adding Coinbase (ticker COIN) and Snowflake (ticker SNOW). Cash decreases from about 5% to about 1% of the portfolio. COIN and SNOW are both large cap stocks without peers giving the portfolio exposure to emerging technologies.
Passive Allocation Models
No changes this quarter.
Tactical Equity Model
We are adding iShares US Real Estate ETF (ticker IYR) and iShares US Basic Materials ETF (ticker IYM)
Tactical Income Model
No changes this quarter.
GreenUp Wealth Management is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.