#investing

Monthly Economic Summary

Last month was very good for the markets and below is the economic summary for April.  As always, if you have any questions or want to discuss more in-depth do not hesitate to give us a call!

Sources:

  1. Sources: J.P. Morgan Asset Management – Economic Update; Bureau of Economic Analysis (www.bea.gov); Bureau of Labor Statistics (www.bls.gov); Federal Open Market Committee (www.federalreserve.gov)
  2. Indices:
    • The Barclays Aggregate Bond Index is a broad-based index used as a proxy for the U.S. bond market. Total return quoted.
    • The S&P 500 is designed to be a leading indicator of U.S. equities and is commonly used as a proxy for the U.S. stock market. Price return quoted.
    • The MSCI ACWI ex-US Index captures large and mid-cap representation across 22 of 23 developed market countries (excluding the U.S.) and 27 emerging market countries.  The index covers approximately 85% of the global equity opportunity set outside the U.S. Price return quoted.
    • The MSCI Emerging Markets Index captures large and mid-cap segments in 26 emerging markets. Price return quoted (USD).

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s web site or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.

Monthly Economic Summary

As we enter April, we are still seeing the markets reach new highs. Below is a summary of the important economic data over the last month:

Sources:

  1. Sources: J.P. Morgan Asset Management – Economic Update; Bureau of Economic Analysis (www.bea.gov); Bureau of Labor Statistics (www.bls.gov); Federal Open Market Committee (www.federalreserve.gov)
  2. Indices:
    • The Barclays Aggregate Bond Index is a broad-based index used as a proxy for the U.S. bond market. Total return quoted.
    • The S&P 500 is designed to be a leading indicator of U.S. equities and is commonly used as a proxy for the U.S. stock market. Price return quoted.
    • The MSCI ACWI ex-US Index captures large and mid-cap representation across 22 of 23 developed market countries (excluding the U.S.) and 27 emerging market countries.  The index covers approximately 85% of the global equity opportunity set outside the U.S. Price return quoted.
    • The MSCI Emerging Markets Index captures large and mid-cap segments in 26 emerging markets. Price return quoted (USD).

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s web site or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.

Do You Want Some Froth with That SPAC

When there is so much liquidity sloshing around the system, Wall Street always comes up with a way to capitalize with a bit of financial engineering. The latest soup de jour is a special purpose acquisition company (“SPAC”). A SPAC is a “blank check” company that raises money in an Initial Public Offering (“IPO”) to merge with a privately held company that then becomes publicly traded as a result with the SPAC shareholders getting shares in the new combined company. In other words, it basically involves handing over money in something of a blind faith investment.

SPACs raised a record $82 billion last year and they now make up 50% of all IPO volumes which speaks to the current frothy investing environment.

Source: Deutsche Bank, Dealogic

Who is benefiting from this SPAC-hype? It is rarely the Main Street mom and pop investor. The post-merger SPAC performance is typically dismal as we can see.

Sources: Citi, New York University School of Law, Stanford Law School, J.P. Morgan Asset Management.
*Latest SPAC included in cohort is from June 2020. Data is based on availability as of February 28, 2021.

The Wall Street investment bankers and hedge funds are the real winners – at least until the music stops. SPACs pay bankers for going public and for negotiating mergers, pay sponsors (those who set-up the SPAC and find the merger target) typically 20% of their stock, and then there is dilution on top of that due to redemptions of warrants. If you want to dig deeper into the high costs of SPACs, we recommend you take a look at “A Sober Look at SPACs” by Michael Klausner of Stanford and Michael Ohlrogge of New York University, which is summarized here.

We believe this speculative behavior from the r/wallstreetbets movement to Bitcoin and from tech to SPACs, is due to the extraordinary amount of money sloshing around the financial system. As bond markets have flashed a warning sign, we have seen SPACs fall about 25% since their February peak. Is this a precursor of what is to come for some of these speculative investments?

Source: Bloomberg, Chart of Defiance Next Gen SPAC Derived ETF (ticker SPAK)

With more stimulus forthcoming from the fiscal side of the government, speculative behaviors could drive these types of investments higher in the short run. As the former Citigroup CEO, Chuck Prince said “When the music stops, in terms of liquidity, things will be complicated, but as long as the music is playing, you’ve got to get up and dance.” Sorry, Chuck, BFSG is not getting up to dance to this speculative behavior. We continue to firmly believe that the best remedies to an uncertain world are fundamental analysis, appropriate asset allocation, broad diversification, disciplined rebalancing, and cost minimization.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s web site or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.

The Perils of the Wall Street Hype Train

Wall Street can often feel like a popularity contest. Every year the market has a darling stock or stocks that everyone agrees to be the flavor of the month (or year, or decade) and the stock(s) will dramatically rise regardless of fundamentals or other factors. Asset bubbles inflating and bursting are a recurring phenomenon in world economic history – the British South Sea Company bubble (1720), the British railway mania (1844-1846), the Nifty-Fifty bubble (1960’s), the gold bubble (1970’s), the Japanese stock market bubble (1980’s), the Dot Com bubble (1990’s), the housing bubble (2000’s). More recently we are seeing this same trend with some high growth stocks. While it is always a fun ride on the hype train it is not uncommon for these stocks to come crashing back to earth.

Let’s take a quick look at some interesting charts regarding Tesla (TSLA), a recent darling stock, highlighting some of the dangers of riding the hype train too long. Currently, Tesla is worth more than almost all the other car manufacturers combined as we can see in the chart below showing their market caps.

Looking at current auto sales we see the exact opposite story. Tesla accounts for a small portion of all cars sold. The next chart shows that the rest of the industry accounts for the vast majority of sales but Tesla is just a pittance in comparison.

These charts are not to say that Tesla is a bad investment (a surge in regulatory-credit revenue has been a major factor in Tesla’s streak of quarterly profits that has sent shares soaring) or that it can’t become a dominant auto manufacturer. All they suggest is that the stock price may have gotten ahead of itself and this could leave some investors in a bad position if the stock tumbles. As with any investment, it is important to understand the merits and risks of the investment. We have seen too many investors get wrapped up in the hype train of Wall Street and they often end up getting burned.

Disclosure: Investing involves risks, including the potential for loss of principal. There is no guarantee that any investment or strategy will be successful or meet its objectives. The investments discussed may not be suitable for all investors. Investments and strategies outlined in this blog are not provided as personalized investment advice and should be discussed with an advisor prior to implementation.

BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.

Real Estate…A Terrible Investment?

The title might take many of you by surprise and this topic is not to discourage homeownership but is more geared to explaining why your home (and possibly other properties) may not be the best investment or why your home should not be viewed as an investment.

The primary focus of this article will be on your primary residence and not on rental properties. We are also going to assume that this is just an average community without any additional factors such as a gold rush, or a green rush, or an establishment as the next Silicon Valley. In those circumstances, real estate can outpace the national average. Do not forget the three things that matter in real estate is location, location, location!

The ability to use leverage (borrow money from the bank) is what attracts people to invest in real estate. When you buy the home you only have to put down 20% or less in some cases and the bank gives you a loan to pay on over the next 30 years (or whatever term you select). For example, purchasing a home for $500,000 in a traditional scenario requires 20% down ($100,000) and the bank provides a loan over 30 years for $400,000. With rates near historic lows (2.75%) the payment for this 30-year loan is about $2,041 per month.

The downside to using leverage is that it has a cost. Looking at the loan above ($400,000 loan at 2.75% interest for 30 years) you would pay over $187,000 in interest over the life of the loan! To put this another way, instead of buying the home at $500,000 you are paying $687,000 for the home ($500k purchase price + $187k interest paid). Owning a home is expensive and has many additional costs besides the loan. With a home, you have to pay property taxes, homeowner insurance, repairs, and potentially other costs like homeowner’s association (HOA) or mortgage insurance if your down payment is less than 20%. Below are the estimated costs for a $500,000 home in Orange County:

Source: Redfin

What we see is that the true cost of homeownership is much higher than we realize. The example above does not take into account any upgrades or repairs and maintenance the home may need as well. With the costs for owning a home so high, this lowers the actual investment return of the home.

We all know that home prices go up over time, but many people are not aware that the primary driver for the increase in home prices has been inflation.  If you look at the chart below, it shows since March 1999 until now real estate home prices (1) have grown 131.37% and stocks (2) have grown 342.27%.

Source: Bloomberg

Another factor that needs to be considered when looking into real estate as an investment is liquidity. Other investments like the equity and bond markets provide liquidity and you can have access to your money quickly. For real estate, this is not necessarily the case and it can be difficult to get your money back. If major employers move out of the area, you cannot quickly sell your home before home prices drastically shift downward.

Please understand we are not telling you to not buy a home. Homeownership is one of the biggest accomplishments one can achieve and provides security and stability for you and your family. We just caution against considering your primary residence to be considered an investment like many people recommend. Real estate is good as part of an overall portfolio but can be done in many ways in a more liquid manner. Please feel free to contact us to discuss how this article impacts your circumstances.

  1. U.S. Existing-Home Sales, National Association of Realtors (www.nar.realtor.com)
  2. The S&P 500 is designed to be a leading indicator of U.S. equities and is commonly used as a proxy for the U.S. stock market. Price return quoted.

Disclosure:

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Benefit Financial Services Group (“BFSG”), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from BFSG. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. BFSG is neither a law firm, nor a certified public accounting firm, and no portion of the newsletter content should be construed as legal or accounting advice. A copy of BFSG’s current written disclosure Brochure discussing our advisory services and fees is available upon request

BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s web site or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.