ALINE Market Roadmap: June 2021

By Aline Wealth Management on June 29, 2021

Happy Summer! And a very happy one it is indeed given how a large part of the US (and to a slower extent the developed world) is getting back to post-COVID normal. So, given that we are moving towards more normalcy I thought to write this month’s ALINE Wealth Market Roadmap about a more “normal” investing strategy. However, the problem is that these markets are anything but normal (issues we have covered in several prior videos and musings—see our Mid-Year Market Update here).

When we consider a more normal landscape in investing, advisors, strategists and a bevy of others initially develop a “take”—how they see the world of finance or as we like to call it a report on the “conditions in the markets and economy.” From there they typically identify themes that best represent their thinking—and from themes, we move to sectors. Once we have a good sense of where we want to be sector-wise, financial professionals will don their green-eye shades, roll up their sleeves and do some good old fashioned security analysis—finding which securities are mispriced (growth trajectories being underappreciated or in many cases over appreciated) or forgotten (in a poor performing sector many securities are simply thrown away to the value investor’s delight!). In other cases, there may be a misunderstanding where investors have not put the time and effort into better assessing the opportunity in a specific security. In every case, however, a good dose of skepticism serves the financial professional well—always being on the watch for the “what ifs” and often tempering management’s conflicted optimism.

So, that’s the process we go through at ALINE Wealth when the Investment Committee (AWIC) meets and discusses various assortment of ideas, conditions, capital flows, and individual securities. Currently, we have identified the following themes—a strategy we are calling “4 I’s and 1 V”:

• Infrastructure: 5G and engineering projects (especially in the water sector—an area we have studied for years)
• Inflation: more pronounced than the Fed hopes—implications for rates and financials
• International: compelling and cheap—both developed and emerging
• Innovation: “The Golden Age of Biology”—genome sequencing, biopharma, AI, etc.
• Value: after several years of underperformance vs growth now it is time for value style to shine

On the infrastructure side, we know of course the Biden administration’s current push in infrastructure. While that will surely have an impact we see much more than that. First, with 5G buildout—which we see as mission-critical to the furthering of our communication infrastructure and therefore the ability for further growth in AI and related industries. With the reduced latency that 5G promises so many innovations will have the runway, they need to develop further.

Sticking with Infrastructure but turning our attention to the one thing we all need—water! Our water infrastructure is in dire need of repair—the EPA, as shown below, estimates more than $640 Billion in infrastructure improvements in the water sector over the next 20 years. That’s going to fuel several companies for a long time. The water sector has more swim lanes than just infrastructure and we can discuss those in depth at any time—it is a core of our Sustainable & Responsible portfolio.

Source: U.S. Environmental Protection Agency

Next up is the bugaboo of finance—inflation. Yes, Virginia there is such a thing! While the winds of inflation have been quiet for the last 2+ decades they seem to me to be on the rise. Couple a one-in-a-century global “re-opening” and the resulting optimism (“the urge to splurge”) with ultra-low rates, supply-side bottle necks and high debt levels that no one seems to care about and you have the perfect recipe for inflation. Commodities have been an overlooked—left for dead—asset class for more than a decade. Is it time for mean reversion?

See our Inflation infographic here.

Source: Novel Investor

Likewise, international markets have been out of favor for more than a decade—it has been the USA all the way but with the dollar being weak there is a change afoot. Also, valuations are more compelling and in the case of emerging markets so are the demographics and underlying financials.

Source: Bloomberg

Innovation is exciting—and yes often one has to relax their value-based sensitivities (these stocks are rarely cheap) a little in order to see the forest through the proverbial trees—but there are so many exciting technologies on the horizon that we cannot ignore the opportunities. Opportunities such as:

• 5G
• Cybersecurity
• Internet of Things (IoT)
• Autonomous vehicles
• Robotic warehousing
• Solar (and wind) as the fuel of the future
• Genomics
• Personalized Medicine
• The Intersection of Healthcare + Tech

My favorite concept in this area is one in which our bloodwork and health data is/will be on our phones (in a protected app). In a few years, we can be at a restaurant scanning the menu on an app on our phones and the app will choose the best (healthiest?) menu choices are given our health and our exercise regimen that day. Well, it doesn’t exactly sound like fun, but it is likely coming.

Finally, the V–Value. After being in the forest for more than a decade value is back and back with a vengeance. Cheap valuations and a changing landscape that is appreciating their stated business models—plus the headwinds (valuation, continued heady growth, and regulatory ire) facing some tech/growth—provide a likely long runway for the value sector. Typical value sectors like materials, mining, energy, and financials are likely to outperform going forward.

Source: GMO

Source: Russell 1000 Value, Russell 1000 Growth

One caveat to the above—this is not a simple, easy, risk-less market –one needs to be careful and in many cases (as we continue to inflate and throw normal out the window) the risks of a “market event” increases. The above is a strategy—the method by which we are deploying capital at ALINE Wealth is to have “one foot on the gas and the other hovering over the brake.” This may not be the most orthodox way to drive but given our stated fiduciary duty to always put our clients’ interests first (and second…and third!)—it’s the only way we roll.  As the charts below suggest, we are on borrowed time in this run-up and that gives us pause—as it should.

In this chart we see the then price to sales ratios—take heed to the fact that we are now nearly 2x the multiple from the pre-dot.com peak.

Here we see the disconnect between current stock prices and the earnings that “support” those prices. Typically, more closely correlated with each other—which makes sense—as earnings increase so do stock prices. Or, maybe as investors expect earnings to grow they will increase stock prices in expectation. But the below paints a different picture—where there is a disconnect between the magnitude of stock price increases and earnings.

In the chart below you can also see the exuberance in the sentiment (high flying IPO’s without earnings to support them) which gives us pause.

So, there you have it folks—hope you are still awake (sorry for the charts and eco-babble…). Think of us at ALINE Wealth as trapeze artists—well “balancers” at least. We are not in the business of maximizing returns, we are in the business of comprehensive wealth management, and doing so means we care about our clients. Their aspirations, retirements, and legacies—the next generation and the one after that. To that end, as we must “suffer the numbers” (making the bullish mantra more difficult to digest). Our truest measurement is risk-adjusted return.

Enjoy the fireworks—in the markets as well as in the skies over this blessed land of ours. All of ours! Have a great 245^th!

ALINE Wealth is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC. This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is neither indicative nor a guarantee of future results. The investment opportunities referenced herein may not be suitable for all investors. All data or other information referenced herein is from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other data or information contained in this presentation is provided as general market commentary and does not constitute investment advice. ALINE Wealth and Hightower Advisors, LLC or any of its affiliates make no representations or warranties express or implied as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. ALINE Wealth and Hightower Advisors, LLC assume no liability for any action made or taken in reliance on or relating in any way to this information. The information is provided as of the date referenced in the document. Such data and other information are subject to change without notice. This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.