Our PMs spend a ton of time on research and portfolio reviews, and I was lucky enough to grab 30 minutes to ask what they’ve been seeing. Together with what we’re hearing in conversations with advisors, we figured it’s a great opportunity to record and share feedback from the trenches. Joining me:
- JD Gardner, CFA, CMT Founder/CIO
- Beckham Wyrick, CFA Equity Analyst/PM
- John Luke Tyner, CFA Fixed Income Analyst/PM
- David Wagner III, CFA Equity Analyst/PM
Key topics covered:
- The Stealth Correction
- September Taper Tantrum
- Equity Valuations
- Supply Chain & Inflation
- DC Happenings
- The Fixed Income Challenge
- Strong US Consumer
Was a ton of fun for me, but ultimately for the benefit of the thoughtful advisors who keep us busy supporting their efforts. Full transcript below, beware transcribing errors and verbal slips!
Derek Hernquist:
Hello, Derek here with Aptus. I’ve got four of our CFAs here today to just kind of walk through some of what happened in the third quarter of markets, and some of what started to happen in the fourth, and what to look forward to. There’s four of our CFAs here. I’ve got JD Gardner, the founder and chief investment Officer. I’ve got Beckham and Dave who are equity-focused portfolio managers. And John Luke is also a portfolio manager with a fixed income focus. We’re just going to rapid fire shoot through some of what’s been going on in the markets. First, I got to give you the disclaimer that I have to read. The opinions expressed during this call are those of the Aptus Capital Advisors investment committee and are subject to change without notice. This material is not financial advice or an offer to sell any product. Forward-looking statements are not guaranteed. Aptus reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. More information about Aptus Investment Advisory Services can be found in its Form ADV part two, which is available upon request.
Derek Hernquist:
We’re just going to talk a little bit about markets. Obviously, we are an ETF manager, but we also manage model portfolios. And we talk with advisors a lot about what they’re hearing from clients, what clients are concerned about. There’s obviously a lot going on in the headlines. I think probably the first thing that we may want to cover is just setting some perspective, like what’s been going on with markets, and where do we sit right now. So if anyone wants to kind of give a couple minute overview of what’s going on in the markets, fire away.
David Wagner:
Yeah. I’ll take that one, Derek. First of all, we love these calls. So thanks very much for listening on in. I’ll talk about performance over the past quarter and a little bit about the performance in September, because that’s what really feels like what drove everything during the quarter. So performance-wise in September, the US stock market posted its worst monthly performance since COVID, and that’s really a microcosm of why performance for the S&P 500 was actually flattened during the third quarter.
David Wagner:
The market witnessed increased volatility, especially towards the end of the quarter as it had to really navigate a slew of negative headlines, which we’re probably going to touch on, probably a little bit later on this call. But overall, it’s been a tale of two markets this year. Higher longer term interest rates and the out-performance of cyclicals in the first quarter. And then, again, here in the most recent month of September, interrupted by lower rates and the out-performance of growth stocks are really in-between. So for the quarter, which is very different than what we actually saw during the first quarter. We had US large outperform US small. We had US large outperformed international, and we had US large outperform EM.
David Wagner:
So Q3 was all about domestic Large-cap stocks, especially those in the higher end of the market cap spectrum, i.e FAANG. September really though kind of caught us by storm given the volatility that we actually saw during the month. But the one thing that really stuck out to us during September’s performance was that bonds did not provide the insulation on the downside. Bonds had a negative return, much like the S&P 500. The S&P 500 was down about 4.65% while the US Barclays Agg, the measurement for fixed income in the United States was down almost 1%.
David Wagner:
So that really stuck out to us here. But the next one I’m going to make is kind of more the striking thing. And it’s something that if you really looked at index returns just year to date or over the quarter, you probably wouldn’t really see this at all that majority of the index has actually been in a correction for most of the year. So if you look at the S&P 500 as of today, which is October 19th, the S&P 500 is about 2.2% off of its all-time highs. But when you look underneath the hood, the average stock in the S&P 500 is down over 10%. And it actually gets even more draconian. If you go down the market cap spectrum to the Russell 2000, the measurement of US small cap performance, the Russell 2000 is about 5% off of its all-time highs, but the average stock within the Small Cap indices is down over 25%.
David Wagner:
And it actually even gets worse. If you look at the tech stocks, 55% of the constituents within the NASDAQ Composite are 20% off of its year to date highs. And then if you take it a step further, 25% of that composite is down more than 50%. So this year, and especially this quarter, you kind of seen a yin and a yang here lately that when MAGA is outperforming, the cyclicals are underperforming and then vice versa. And that’s what you saw actually, during the first quarter. And in September, you had the cyclical substantially outperformed, really kind of the mega names. So you one can almost make an argument that we’ve been in somewhat of a stealth bear market for most of 2021. So I’ll leave you guys with one final point that, valuations are going to matter at one point, they haven’t mattered thus far year to date, and they definitely did not matter actually in 2020, but right now the S&P 500 is trading at 20.6 times forward earnings, which is actually, on historical purposes, pretty expensive.
David Wagner:
But when you look at it, a relative basis, given where interest rates are, it’s not as bad given the amount of growth that we’re actually seeing over the next 12 months, but when you look at it relative to Small Caps, Small Caps are trading at a 23% discount to Large Caps when they normally trade at 3% premium. And when you look at it internationally, international stocks relative to the S&P 500 are trading at a 27% discount when they normally trade at an 8% discount. So final point, valuations will matter at one point, and that’s how we have the portfolios positioned from an asset allocation right now. So we’re very happy where we stand from an overall asset allocation looking forward.
Derek Hernquist:
Cool. Thanks, Dave. Yeah. And one of the things, as Dave mentioned, it’s October 19th. So we have a little bit different lens to look through. Then maybe if we had done this on October 1st. Obviously September was a rocky month all around including stocks. And I think we’ve gotten probably all of that back and then some so far in October. So I guess we’re just getting into earnings, but there’s been a ton of headlines, supply chain, inflation, the Fed, DC policy, China, like there’s lots of stuff, but we won’t try to cover them all today. But if anyone wants to fire away on any of those topics and just talk about what the market’s seeing there, I think that’d be a good place to cover cause that’s what clients are getting hit with when they turn on CNBC.
John Luke Tyner:
Yeah. Perfect Derek and nice job Dave, on the intro there. But when you really look at the picture of what’s going on behind the scenes, and you look at the supply chain issues that we’re having, really what we’ve seen as a disruption that really no one expected. And when you have an economy that just essentially closes down for months on end at 2020, the ramifications that we’re seeing just weren’t expected. And I think that’s part of the more persistent inflation that we’re getting across the economy and some of the data that’s presented here lately.
John Luke Tyner:
I know we’ve gotten four straight months with headline CPI that’s been significantly elevated over 5% and that’s different and it’s a different environment. But really what we think is that these headlines are obviously attention grabbers, but when you pull back the layers of the curtain, as we continue to get people back to work, as we continue to get unemployment moving in the right direction, lower and lower, as well as the ports reopened from the different COVID policies that we’re seeing across the globe and logistics running more efficient or normalized, that we’ll continue to see these inflation pressures abate. And I think that’s the thing to continue to keep an eye out for, as we move into the next quarter, as well as into 2022, looking ahead, we expect that these supply chain constraints will continue to shake themselves out.
David Wagner:
I think another headline that we’re really seeing, cause I kind of let the cat out of the bag, let you guys know that today is October 19th is, we’ve started to begin earning season right now. And for the past few quarters, given everything going on with the COVID situation, tangible [inaudible 00:08:56] these numbers haven’t really mattered. That’s what makes this earning season so very important. It’s probably one of the most heavily anticipated earning season probably in the last few years, but I’ll start off by saying from a growth perspective, year over year, Large Caps are expected to grow about 9%. And when you go down the market cap spectrum to Small Caps, Small Caps are supposed to grow about double that closer to about 17%. But as you guys know, we really kind of keep our ear kind of close to the ground to really get firsthand commentary from management on what they’re seeing from a macro perspective, there’s really three things that we’re going to be looking at throughout this entire earnings seasons across a breadth of different industries.
David Wagner:
And the first one’s going to be, is inflation still helpful to EPS at the index level or our supply chain shortages at the point of reversing the EPS recovery trend?, The second point would be, are investors going to react to supply chain misses the same way they react to demand weaknesses or who would it continue in extending the cycle that that narrative will continue? And the third thing we’re going to be looking at is, is Q3 2021, the peak supply chain stress, or will the markets start to price in something that, this might last longer than expected? So overall, we’re going to get a slew of indicators from a company perspective on the macro situation at hand, really highlighting some of the major factors that will be driving performance of the market into the future.
Derek Hernquist:
All right, cool. I guess you guys had summarize like there’s a lot going on, clients are hearing a lot, do we care? What what’s going on at the portfolio level? Are there things that are being considered or being done to address any of the allocation issues that we’re seeing that are ultimately important to, to advisor’s clients?
JD Gardner:
Yeah, I think our portfolios, and I know that we said this multiple times and we’ll continue to, if you think about the backdrop of the environment and a lot of what JL and Dave have covered, our portfolios are positioned, whether it’s a headline risk or whether it’s valuation or whether it’s inflation or whether it’s interest rates and Fed decisions. I think a lot of our portfolios, we’ve the most powerful lever that we can pull was the asset allocation and what we do by trying to incorporate volatility into the portfolio in beneficial ways, if valuations were to reset, what is allowed our portfolios to do at the allocation level is shift away from bonds and more towards stocks. And really simply not only are we addressing return, because if you think about the fixed income landscape right now, bonds in general, are most likely going to struggle, especially with elevated inflation, but even without elevated inflation bonds just don’t have a lot to get excited about when it comes to a return.
JD Gardner:
So we solve a lot of potential return issues by trying to shift away from bonds and more towards stocks, but when you think about our approach to owning more stocks in favor of less bonds, but to do so with different types of long volatility exposure, a lot of the risk and the things that should concern investors, inflation and interest rates and all that we are addressing most of that, not perfectly, but in the best way that we know how to, or that we can in this environment.
Derek Hernquist:
So I guess a lot of cautionary words from pretty much everybody. Anything we should be fired up about, excited about, looking towards the end of the year and into 2022.
Beckham Wyrick:
Sure. Yeah. I’ll take the cue there Derek. It’s been a great back and forth so far here, and obviously anybody who’s listened to this call or who’s been paying attention to the financial media, knows that there have been a lot of different headlines out there, potentially some cause for concern, but like JD just said, we feel like our portfolios are positioned pretty well, to do well in any environment going forward. And I think another thing to point out, I think we’re in a great position for economic and market growth from here. If you look at COVID it’s something that’s looking like it may be in the rear view mirror from here, as people will have either had the virus and have natural antibodies now, or have gotten vaccinated, or with mark bringing out this new oral therapeutic, it’s going to bring another layer of normalcy in everyday normalness to this virus that we have.
Beckham Wyrick:
If you’re looking at the news, could be a tendency for concern, but I think important to point out is that on the whole, our US consumer is as strong as we’ve ever been, through all the stimulus enacted during COVID and the ensuing kind of rapid recovery that we saw in the market and in the housing market, the consumer balance sheet is flushed right now. The average net worth of the American consumer right now is 30% higher than it was pre-COVID and 110% higher than it was just 10 years ago. So a lot of talk in the media about slowing growth, inflation, stagflation, whatever you’re paying attention to that day. But the reality is we are America and we are powered by the growth and the spending of the American consumer. And that’s not really something that we want to bet against.
Beckham Wyrick:
Historically two thirds of our GDP growth has been driven by the American consumer and we’re in a good spot in that regard. So, We do think there are a few kinks to work out, I think, in the supply chains and making sure supply and demand are balanced and prices normalize a bit, but growth is really what’s going to continue to drive this recovery and the consumer is going to be a big part of that. And I think that we’re positioned well from there. So definitely some excitement there.
JD Gardner:
Yeah. I would add to Beck’s comments and just kind of a closing from a positioning standpoint, again, nothing is going to be perfect except onsite, which we don’t have, looking at the landscape, then here’s what I would stress. I’m worried about valuations really mattering, or I’m worried about Fed decisions, or I’m worried about you name the headline risk. If there is some major volatility and draw-down in the markets, that is what our portfolios are built for. That’s a really positive note. We’ve never had as much volatility exposure in the portfolios now, which should translate to similar type of return in a poor looking market like we saw during the draw down of early 2020. So, that is a good thing.
JD Gardner:
And then the other thing is, we are still in the camp that a lot of what Beck just said, I think the path of least resistance, you can talk about stocks being expensive and we do, but when you compare the relative opportunity set, they don’t look nearly as expensive as bonds do. And until that changes, and as long as we have a really accommodated Fed, the path of least resistance is most likely higher for the markets and our portfolios are positioned to benefit from that. That’s kind of speaking out of both sides of our mouth, but that’s exactly how we build portfolios, at least we don’t believe we’ll have many upset clients if markets are rising. And we think we’ll have a whole lot of happy clients if markets are falling. And that is without being perfect, whereas we’re positioned as good as we can be given the relative opportunity set.
Derek Hernquist:
So I guess I’d summarize, you guys do all the worrying, so advisors and their clients don’t really need to. The one thing that I think it’s cool that you do when you guys are building portfolios is worry about all the risk, address all the risk, have the protection in place, but our portfolios are built for markets to ultimately get to the upside over time and for clients values to rise. I think it’s a good balance. Anybody else have anything? If not we’ll wrap here. I think we like to get to the point, make it short and sweet and not have it drag out to be an hour, but appreciate you all for making the time. And, and we’ll do it again next quarter.
JD Gardner:
Thanks for QB-ing Derek. Thanks everybody for listening.
Disclosures
This information is for investment adviser use only and should not be distributed to any other parties.
The commentary included in this post is for informational purposes only and the opinions, viewpoints, and analysis expressed herein are those solely of Aptus Capital Advisors’ employees, and do not necessarily reflect the services or performance results of Aptus Capital Advisors. It is for informational purposes only and does not constitute a complete description of our investment services or performance. Nothing in this post should be interpreted to state or imply that past results are an indication of future investment returns. Investing involves risk including the potential loss of principal. This material is not financial advice or an offer to sell any product. The actual characteristics with respect to any particular client account will vary based on a number of factors including but not limited to: (i) the size of the account; (ii) investment restrictions applicable to the account, if any; and (iii) market exigencies at the time of investment. Aptus Capital Advisors, Inc. reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. This post may contain certain information that constitutes “forward-looking statements” which can be identified by the use of forward-looking terminology such as “may,” “expect,” “will,” “hope,” “forecast,” “intend,” “target,” “believe,” and/or comparable terminology. No assurance, representation, or warranty is made by any person that any of Aptus’s assumptions, expectations, objectives, and/or goals will be achieved. Nothing contained in this post may be relied upon as a guarantee, promise, assurance, or representation as to the future.
This is not a recommendation to buy or sell a particular security. There is no assurance that any securities discussed herein will remain in an account’s portfolio at the time you receive this report or that securities sold have not been repurchased. The securities discussed may not represent an account’s entire portfolio and in the aggregate may represent only a small percentage of an account’s portfolio holdings. It should not be assumed that any of the securities transactions, holdings or sectors discussed were or will prove to be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein. Information was obtained from third party sources which we believe to be reliable but are not guaranteed as to their accuracy or completeness. Aptus reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. Be sure to consult with an investment and tax professional before implementing any investment strategy. Investing involves the risk of loss.
Aptus Capital Advisors, LLC is a Registered Investment Advisor (RIA) registered with the Securities and Exchange Commission and is headquartered in Fairhope, Alabama. Registration does not imply a certain level or skill or training. More information about the advisor, its investment strategies and objectives, is included in the firm’s Form ADV Part 2, which can be obtained, at no charge, by calling (251) 517-7198.
Chartered Financial Analyst® (CFA®) are licensed by the CFA® Institute to use the CFA® mark. CFA® certification requirements: Hold a bachelor’s degree from an accredited institution or have equivalent education or work experience, successful completion of all three exam levels of the CFA® Program, have 48 months of acceptable professional work experience in the investment decision-making process, fulfill society requirements, which vary by society. Unless you are upgrading from affiliate membership, all societies require two sponsor statements as part of each application; these are submitted online by your sponsors.
Please carefully consider the funds objectives, risks, charges, and expenses before investing. The statutory or summary prospectus contains this and other important information about the investment company. For more information on DRSK, or a copy of the full or summary prospectus, visit www.aptusetfs.com, or call (251) 517-7198. Read carefully before investing.
Investing in the Aptus Defined Risk ETF involves risk. Principal loss is possible. The Fund is non-diversified, meaning they may concentrate their assets in fewer individual holdings than diversified funds. Therefore, the Funds are more exposed to individual stock volatility than diversified funds. The Funds may invest in options, the Funds risk losing all or part of the cash paid (premium) for purchasing put and call options. The Funds’ use of call and put options can lead to losses because of adverse movements in the price or value of the underlying security, which may be magnified by certain features of the options. The Funds’ use of options may reduce the ability to profit from increases in the value of the underlying securities. Derivatives, such as the options in which the Funds invest, can be volatile and involve various types and degrees of risks. Derivatives may entail investment exposures that are greater than their cost would suggest, meaning that a small investment in a derivative could have a substantial impact on the performance of the Funds. The Funds could experience a loss if its derivatives do not perform as anticipated, the derivatives are not correlated with the performance of their underlying security, or if the Funds are unable to purchase or liquidate a position because of an illiquid secondary market. The Funds may invest in other investment companies and ETFs which may result in higher and duplicative expenses. Investments in debt securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term debt securities. Diversification does not assure a profit nor protect against loss in a declining market. One cannot invest directly in an index.
Investing in ETFs is subject to additional risks that do not apply to conventional mutual funds, including the risks that the market price of the shares may trade at a discount to its net asset value(“NAV), an active secondary market may not develop or be maintained, or trading may be halted by the exchange in which they trade, which may impact a fund’s ability to sell its shares. Shares of any ETF are bought and sold at Market Price (not NAV) and are not individually redeemed from the fund. Brokerage commissions will reduce returns. Market returns are based on the midpoint of the bid/ask spread at 4:00pm Eastern Time (when NAV is normally determined for most ETFs), and do not represent the returns you would receive if you traded shares at other times. Diversification is not a guarantee of performance, and may not protect against loss of investment principal.
Aptus Capital Advisors, LLC serves as the investment advisor to the Aptus Funds. Aptus Capital Advisors, LLC is a Registered Investment Advisor (RIA) registered with the Securities and Exchange Commission and is headquartered in Fairhope, Alabama. The Funds are distributed by Quasar Distributors LLC, which is not affiliated with Aptus Capital Advisors, LLC. The information provided is not intended for trading purposes, and should not be considered investment advice. ACA-2110-9.
