November Market Perspective

As we approach the end of another bewildering economic year, there are reasons for optimism and caution.

Hilltop President Erik Brenner and Private Wealth Advisor Bill Davis sort through all the forces at work in the November Market Perspective

Excerpts from their remarks:

We’ve had a good year in the markets, and things seem to be continuing. It’s surprising, and everybody’s asking, “How can it be so that we’ve done so well. I think we had a lot of pent-up demand coming out of the pandemic, and people stashed a lot of cash. There was stimulus money, and people were spending less because they weren’t going out or traveling. That money rolled into the economy and resulted in higher corporate profits.

In September, we had some volatility, which caused some easiness in many investors, but we finished October with the S&P 500 rising nearly 0.2 percent to 4,613.67, which is pretty amazing.

Inflation is here. The most recent Consumer Price Index showed that prices have risen across the board by a lot. So we have seen some rising inflation, and as of the date of this recording, we believe soon the Fed’s going to start tapering bond purchases.

The process will involve a $15 billion monthly reduction from the current $120 billion a month the Fed is currently buying.

I don’t think anybody expects interest rates, today, to move too much. We don’t believe at this stage that interest rates will go up till probably mid-to-late 2022, maybe even to 2023. At that point, our fixed income portfolios will be under pressure because when interest rates rise, values of bonds decline, but it’s a long way away.

If you’re a little uneasy in your portfolios and thinking of scaling back and taking less risk — and you certainly want to be where you’re most comfortable — but doing so will reduce your opportunity.

The benchmark 10-year yield is trading a 1.6 percent. Think about lending somebody money for ten years and getting paid 1.6% interest.
Inflation is over 2%. So that’s a negative return.

Our financial models will continue to be overweighted in equities and underweighted in fixed income — at least until we get to that point when fixed income returns counterbalance riskier assets. 

Our quantitative research has been so spot-on in saying that we should have a higher equity weight.

After 25 years in the financial services industry, my gut instinct would have been to have lesser weight. By my last count, we were over 60 all-time highs in the S&P 500 this year. And we saw one 5 percent pullback. In previous years, we had 9, 10, and even 11, 5 percent pullbacks.

This year, you’re rewarded for having risk assets. You’re not rewarded for having fixed-income investments.

As of the date of this recording, there’s still no agreement on anything in Washington as it relates to tax law changes and, infrastructure spending, and so forth.

Typically, we don’t spend a lot of time on stuff that hasn’t happened yet, but indications are pretty good that our middle-class clients will not be negatively affected by the tax proposals.

At this point, [the Build Back Better framework] is relatively firm on not affecting people with under $400,000 in taxable income.

So, wages and unemployment. With wages, the indicators have been good and they’re improving. But we haven’t gotten back to full employment.

Across the board, our clients are saying they can’t find employees. And with the increase in wages, that’s pretty significant.

We’re seeing base increases of 10 to 15 percent to get people to come to work. But it’s not enough to attract more people into their organizations. So it’s an ongoing struggle.

It’s another one of those headwinds for company profits — in addition to issues with the supply chain, which probably is not going to unwind until mid-next year.

Many who are watching may not be clients, so let’s briefly discuss our asset management philosophy.

First, no one knows the future. And many times, people invest based on emotion. So, they’re not investing based on data and facts.

At Hilltop, we use a sophisticated process. It’s a partnership with a third party, Helios Quantitative Research, who serves as our chief investment officer.

Helios has demonstrated an ability to be more predictive about what’s happening with risk assets because of the many variables they put into their algorithms.

As a result, it’s helping us at a high level to understand and be more predictive about whether we should be more weighted in equities or less weighted.

And now we’re getting into a deeper dive [with our investments]. We’re getting country-specific. We were in Greece and Germany. And then we switched to Italy because rotating sectors into G7 countries can be a good opportunity.

Helios helps us to be more predictive about which sectors we’re going to be rotating into next. So, we’ve added that as our next level of sophistication.

Helios has demonstrated their value. I told you that my gut [on which sectors to rotate into] would have been wrong so far this year.

We know a lot of clients are feeling a bit uneasy, but when you look at it, we’re dialed up on equity. That’s more risk right now.

We’re right at the top of our equity bumpers for each of our risk tolerances and continue to stay dialed up

[Hilltop Advisors] meet on the first of every month to review [asset allocations], and our investment committee — that you and I both sit on — have been going along with what the research and data analysis says versus what our gut might say.

I probably would have been saying to take risk off, but Helios was right. And so far, so good.


Hilltop Wealth Solutions is a registered investment adviser. This is not intended to be relied upon as investment advice, nor an offer to solicit to buy or sell any securities.