Omicron vs. the Markets: Stay Tuned

The Week in Review

Fed Sings New Inflation Tune
Dry Rot in the Bull Market’s Foundation
Chart of the Week: Volatility Is Back
Celebrating 100 Episodes of Our Podcast…With $100K!
Boost the Sale of Your Business
Strategy Activity Update
Adviser Capital’s Market Takeaways
Looking Ahead

One word dominated headlines this week as a mix of exasperation and trepidation continued to roil markets: Omicron. Even the tiniest hint of news about the new COVID-19 variant seemed to send stocks sinking. The announcement that the first omicron case had been discovered in the U.S. on Wednesday prompted an immediate drop in the Dow Jones Industrial Average, which closed down 1.3% after having risen 1.5%, nearly a 1,000-point intraday swing.

While traders were focused on the latest pandemic news, this week’s economic data painted a mixed picture. Jobs data from the Labor Department this morning showed the unemployment rate dropped to 4.2% from 4.6%, a bigger decline than expected. At the same time, employers added just 210,000 new jobs in November, well below what economists had expected and less than half of the average monthly figure this year.

Overall, the American economy has added back 18.5 million jobs since April 2020, but private sector employment is still down by 3.9 million from its pre-pandemic levels. Perhaps most striking, one of the sectors reporting job losses in November was retail—an ominous sign given that one of the biggest shopping days of the year, Black Friday, is a November tradition. If another surge in COVID-19 cases keeps consumers at home instead of at work and in the shops, it could hinder economic growth.

Alternatively, if omicron’s symptoms prove to be milder than earlier variants, and if this latest version of the coronavirus proves equally manageable with existing vaccines, we may experience an even more whiplash-like turnaround in trader sentiment. Stay tuned.

Fed Sings New Inflation Tune

In his address to Congress this week, Federal Reserve Chair Jerome Powell hinted that the central bank may speed up its effort to remove the economic stimulus it’s had in place since the coronavirus landed on U.S. shores.

“The economy is very strong, and inflationary pressures are high,” Powell said. “It is therefore appropriate, in my view, to consider wrapping up the taper of our asset purchases...perhaps a few months sooner.”

Powell wasn’t alone: Two other Fed officials chimed in to suggest that a rise in short-term interest rates may be in the cards sooner than many on Wall Street expected. Why? Inflation has refused to yield as quickly as policymakers anticipated.

Even a whiff that the Fed was looking to raise rates was enough to send stocks tumbling, with skittish traders apprehensive about a reduced economic safety net from the central bank.

The omicron variant has the potential to make Powell’s job more difficult. If the evolved virus leads to shutdowns that result in shortages of parts or logjams in ports, additional supply chain disruptions could push prices higher. And renewed health concerns could add to worker scarcity, weakening the job market—all possible complications for the Fed as it carries out its dual mandate of stable prices and maximum employment.

But we’re not leaping to judgment. Powell is keeping his eye on the situation, just as we’re keeping ours focused on market fundamentals.

Dry Rot in the Bull Market’s Foundation

Despite the recent omicron-inspired declines, the major market indexes are still hovering near their November highs. And if this latest wave of the virus proves susceptible to existing vaccines, both Wall Street’s confidence and the economy’s recovery may yet rebound to close out the year.

Hope, however, is not an investment strategy. At Adviser Capital, we make investment decisions based on data and have built disciplined tactical and fundamental strategies to take emotion out of the equation. Lately, we’re seeing some data which suggests that even though the bull market appears solid on the surface, some underlying cracks are emerging.

The broad market indexes have climbed to new heights again and again this year, but gains have been led by a handful of Sherpa-like stocks, while many others are lagging behind—and some have been left gasping. For instance, earlier this week, the S&P 500 notched a decline of 4% from its high. Of the index’s 500 companies, however, more than 480 were down more than 25% from their peaks over the prior month.

Step back and look through a wider lens and the picture worsens: Of the thousands of stocks in the small-cap Russell 2000 index, 98% are at least 10% below their 2021 highs, with an average drawdown of 37%.

Note: Data through 11/30/21. Sources: Charles Schwab, Bloomberg.

In previous market downturns, when a majority of an index’s member stocks were enduring steep declines, the overall index was equally hard-hit. But in this pandemic-spooked market, the broader weakness is concealed by the steep gains of a few mega-companies. Microsoft, with its $2.5 trillion market cap (the largest stock in the S&P 500, or second-largest, depending on the day), has seen its shares rise by more than 50% this year.

A narrow market, with gains concentrated in a handful of firms, isn’t necessarily a recipe for a crash. But it can make life difficult for investors and fund managers; correctly picking those concentrated winners becomes even more hit or miss.

Chart of the Week: Volatility Is Back

We monitor a wide range of data to form our outlook on the market and the broader economy—here’s one indicator our analysts have found enlightening or curious.

Note: Chart tracks consecutive days of an absolute change (positive or negative) of more than 1% from the prior day’s closing value for the S&P 500 index from 12/30/2020 through 12/2/21.
Sources: S&P Dow Jones Indices, Adviser Investments.

Director of Research Jeff DeMaso: With omicron emerging, volatility has returned to the market. Since Thanksgiving, we’ve had five consecutive trading days when the S&P 500 index rose or fell by 1% or more (and it’s looking like today will be a sixth day)—the first time that has happened all year. While three of the five days were to the downside, keep things in perspective: The index was only 2.7% below the high it hit on Nov. 18 as of Thursday’s close.

Celebrating 100 Episodes of Our Podcast…With $100K!

Seems like only yesterday that we launched The Adviser You Can Talk To Podcast and now it’s turning 100. We released our inaugural episode in February 2018, and we’re just getting started. In recognition of this milestone, Director of Research Jeff DeMaso joined Manager of Financial Planning Andrew Busa and Account Manager Diana Linn for an entertaining and instructive discussion about the best ways to handle a windfall of $100,000. Click here to listen!

We’re grateful for the support of our listeners and subscribers, which helped us reach this landmark. Don’t forget to subscribe via your favorite podcast platform for many more episodes to come!

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Financial Planning Focus

Boost the Sale of Your Business

Selling your business can be nearly as exciting as building it. But there’s a lot to consider. In some cases, the emotional aspect of selling what you’ve created adds a new level of complexity. The best way to rise above the distractions is to focus your attention on the elements that matter most:

1. What is your business worth?

Valuing your business is an important prerequisite to a sale. While there are multiple approaches to valuation, it’s safe to say that you’ll need to have the latest financial statements and a firm grasp on the relevant figures, including inflows, outflows, contracts, sales growth, assets and net income. Even more, you’ll have to know how your balance sheet and growth potential stack up relative to your competitors. Given the importance of having a reliable valuation, it’s a good idea to bring in an independent expert to help perform the assessment. That person will be in a better position to run the numbers and evaluate your company’s competitive position within your industry.

2. Where are its vulnerabilities?

Every business has its risks. Is the business largely seasonal? Will customer loyalty become an issue once the founders exit? Regardless of the specifics, it is important to see your business through the eyes of a buyer and be ready to address the challenges they’ll face. Even if you can’t fully eliminate risk, you can decide how to best disclose it to potential buyers. Tackling the tough issues at the onset will lead to better conversations and a smoother due-diligence process down the road.

3. Is now the time to sell?

Selling at the right time can positively impact the value of a firm. For instance, is your prime selling season approaching? Have your revenues edged up in recent quarters? Suffice to say, you want your performance to indicate upside for the buyer. And the same goes for your industry at large: If your company made it through the pandemic with flying colors (and in the black) but your competitors are struggling, that may be a red flag for buyers. Finally, are you really ready to move on? Walking away from a business you’ve grown from the ground up can be difficult, and many owners struggle to let go. Selling before you’re ready can cause you to decide on a price that’s too high or turn down a respectable offer.

4. What is your tax exposure?

Selling a business should result in a substantial windfall for most owners—which means it’s crucial to understand your tax exposure. Generally, proceeds from a business will be taxed at the current capital gains rate of up to 20% for the highest earners. Increases to the capital gains tax rate are currently being debated in Congress, with some proposals going as far as bringing the cap gains rate in line with ordinary income tax, which peaks at 39%. (The latest versions of the bill don’t go quite that far.) There are ways to structure the sale to help mitigate the burden, such as spreading payments out into multiple tax years, but be certain to consult a tax professional to ensure you’re aware of all the implications.

5. What is your post-sale financial plan?

You know how much income your business generates for you annually. But do you have a plan to replace that income after the sale without taking on more risk than you’re comfortable with? If you are heading into retirement, the proceeds from the sale may be the bedrock of your savings. Regardless, have a financial plan that will offer you peace of mind and allow you to enjoy the next stage of your life.

Strategy Activity Update

Please see below for a summary of the trades we executed over the week through Thursday and our current tactical strategy allocations.

Dividend Income

No trades this week.

AIQ Tactical Global Growth

Sell SPDR S&P Transportation ETF (XTN).

Buy iShares US Home Construction ETF (ITB).

AIQ Tactical Defensive Growth

Sell iShares Core S&P 500 ETF (IVV).

Buy Cash.

AIQ Tactical Multi-Asset Income

Sell Invesco DB Commodity Index Tracking Fund (DBC).

Buy Invesco DB Agriculture Fund (DBA).

AIQ Tactical High Income

No trades this week.

Adviser Capital’s Market Takeaways

In this week’s Market Takeaways, Research Analyst Liz Laprade examined what omicron means for the markets, while Vice President Steve Johnson offered his thoughts on why a small pullback in growth stocks may be a good thing.

Looking Ahead

Next week’s slate is relatively light: We’ll get reports on consumer credit and sentiment as well as job openings and inflation. In the absence of more expansive data, we may be in for more volatility unless and until we get greater clarity on omicron’s impact.

To all our readers celebrating Hanukkah this week, we’re wishing you and yours a happy, healthy Hanukkah and new year during this season of blessings.

If you’d like to learn more about our tactical or fundamental strategies, please contact Steve Johnson at 844-587-7393 or info@advisercapital.com.

Please note: This update was prepared on Friday, Dec. 3, 2021, prior to the market’s close.

This material is distributed for informational purposes only. The investment ideas and opinions contained herein should not be viewed as recommendations or personal investment advice or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.

Purchases and sales of securities listed above represent all securities bought and sold in each strategy during the period stated. Each strategy’s portfolio generally includes more holdings in addition to the transactions listed above and in some cases the securities listed above may only represent a small portion of the particular strategy’s complete portfolio. Further, the securities listed above are not selected for listing based on their investment performance; thus it should not be assumed that any of the securities listed above were profitable or will be profitable, nor should it be assumed that future recommendations will be profitable. Clients and prospective clients should only make judgements about a strategy’s performance after reviewing the strategy’s composite performance information. There is no assurance that each security listed above will remain in the strategy’s portfolio by the time you have received or read this email. Securities are listed for informational purposes and are not intended as recommendations. Existing investor accounts may not participate in all transactions listed above due to each account’s particular circumstances.

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