INSIGHTS FROM FIRST FOUNDATION

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The Week Ahead – Tug of War

Welcome to “The Week Ahead” where we take a moment to provide our thoughts on what we can expect in markets and the economy during the upcoming week.

My father’s 1973 copy of Webster’s New World Dictionary of the American Language defines “Tug of War” as: 1. A contest in which two teams pull at opposite ends of a rope, each trying to drag the other across a central line 2. Any power struggle between two parties. The more modern Wikipedia.org delves deeper into the origins of the sport, noting that the sport was practiced in ancient times going back as far as the 8th to 5th centuries BC. It was even briefly an Olympic sport from 1900 until 1920. The investing world has always had many forces constantly in a state of tug of war – and during this COVID-19 pandemic, a few new contestants have entered the ring:

  • Bulls vs. bears
  • Invested vs. holding cash
  • Stocks vs. bonds
  • Domestic equities vs. international equities
  • Large cap vs. small cap
  • Growth vs. value
  • Rational vs. irrational
  • Optimism vs. pessimism
  • Work from home equities vs. back to the office equities
  • Closing vs. reopening

Unlike the sport, winners for the above are never fully declared until much time has passed. More importantly, they’re not binary outcomes. Both stocks and bonds can do well and many investors are rewarded by owning both through the concept of modern portfolio theory. The same rule applies for the argument between owning domestic equities vs. international equities, large cap vs. small cap, and growth vs. value. The other remaining forces are also not binary like a light switch but more of a gradual shift over time. The shifts will not be smooth, the data will be erratic, there will be hiccups, and there will be times where it seems like we’re taking two steps back before moving forward again.

Last week equity investors saw their most volatile week since March of this year, as the S&P 500 sold off almost 5% primarily due to fears of a second wave of COVID-19 infections interrupting the reopening process. Thursday alone accounted for an almost 6% dip which wiped away all of the gains that we saw for the month of June. As my colleague Cal Jones noted in his piece a couple of weeks ago, “Are we missing something,” markets had seemed to price in quite a bit of optimism which was reflected by the 18% combined gain we saw in April and May. More recently we’ve seen retail day traders enter markets and have begun leaving their mark, bidding up deep value sectors and companies where transparency is at its most opaque. American Airlines stock over the last 7-days has traded +16%, -15%, -8%, -9%, +9%, +11%, and +41%! Hertz, which has already filed for bankruptcy, in that same period has traded +37%, -18%, -39%, -24%, +115%, +71%, and +84%! To add to the head scratching, a judge ruled that Hertz would be allowed to issue $1 billion in new stock. Irrational exuberance at its finest?

The week ahead will be highlighted by Fed Chair Powell testifying to Congress at his semiannual monetary policy report. This will be a mulligan opportunity for Fed Chair Powell to provide some insight on the Fed’s medium-term plans on monetary policy after stating that the Fed would keep rates anchored at zero through 2022.

Data deck for June 13–June 19

Date

Indicator

Period

June 15

Empire Manufacturing

June

June 16

Advance Retail Sales

May

June 16

Industrial Production

May

June 16

Fed Chair testifies before the Senate

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June 16

NAHB Housing Market index

June

June 16

Business Inventories

April

June 17

MBA Mortgage Applications

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June 17

Housing Starts

May

June 18

Initial Jobless Claims

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June 18

Philadelphia Fed Manufacturing

June

June 18

Leading Indicators

May

June 19

Current Account Balance

1Q20

 

IMPORTANT DISCLOSURE INFORMATION    

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 First Foundation Advisors), or any non-investment related content, made reference to directly or indirectly in this blog 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 blog serves as the receipt of, or as a substitute for, personalized investment advice from First Foundation Advisors. Please remember that if you are a First Foundation client, it remains your responsibility to advise First Foundation, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. 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. First Foundation Advisors is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the First Foundation Advisors’ current written disclosure statement discussing our advisory services and fees is available for review upon request, or at firstfoundationinc.com.  Please Note: First Foundation Advisors 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 First Foundation Advisors’ web site or incorporated herein, and takes no responsibility therefore. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

Andrew Chan, CAIA, Managing Director of Portfolio Strategy
About the Author
Andrew Chan, CAIA, Managing Director of Portfolio Strategy
Mr. Chan serves on the investment team and is responsible for conducting investment manager research and portfolio construction. As a member of the investment committee, he provides market commentary and investment insights. Mr. Chan’s responsibilities include overseeing client portfolios, calculating risk metrics, conducting the rebalancing of client portfolios, and evaluating the selection of new investment managers. With over 10 years of wealth management experience, Mr. Chan has played key roles across various aspects of investment and wealth management. Prior to joining First Foundation Advisors, Mr. Chan was most recently a portfolio manager at U.S. Trust where, in addition to his daily responsibilities, he served on numerous internal committees including the investment manager committee, the portfolio model committee, and the strategic technology committee. He also served on the in-house strategic consultant committee reporting directly to the President of U.S. Trust. Mr. Chan is a graduate of the Wharton School Executive Program on Investment Management and holds a Bachelor of Arts degree in Business Administration from the University of California, Riverside. He is a Chartered Alternative Investment Analyst (CAIA). Mr. Chan serves on the executive board for CAIA Los Angeles and is the Interim President for the association. Read more