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The DDK Group

News & Insights

Q3 2021 Review & Outlook Thumbnail

Q3 2021 Review & Outlook

The third quarter was a test of equity market resolve. Only large cap growth and commodities managed a positive return as geopolitical factors, together with continued supply chain interruptions, brought resurgent prices in all parts of the energy sector. Price inflation was driven by a rise in all input costs including materials, labor and transportation. This caught the attention of lawmakers and the Federal Reserve causing Fed Chairman Powell to recently concede that inflation appears to be less transient than originally thought. Most economists are seeing inflation in the 4-6% range for 2022 before returning closer to the Fed target of 2% in 2023. For now, the Fed seems committed to begin tapering its $120 billion in monthly bond purchases without any immediate change to its policy rate. Fiscal changes and tax policy remain in flux. Instructive is that both of the previous administrations were able to pass just one signature piece of legislation during their tenures – The Affordable Care Act (Obamacare) and the so-called Trump tax cuts. The Biden Administration’s Infrastructure bill and Build Back Better bill will test the “one and done” nature of legislation in a first-term president with his party in control of Congress. Will these proposed bills pass as is? At this point, we cannot say. We would recommend that clients call us to discuss what action MIGHT be available IF some or all of the proposed federal income tax and estate tax changes become a reality. From an investment perspective, we continue to recommend keeping at or slightly below equity targets given current valuations. Attached is Baird’s Q3 2021 Review and Outlook which highlights several of the above themes. In recent team news, we are excited to introduce some new faces to the DDK Group! You may recognize Connor Allen, as he has been working with our team through Baird’s Foundation Program since the beginning of 2021. He has recently officially joined the team as an Associate Financial Advisor. We also have Myles Murray joining our team through early 2022. Myles is a member of Baird’s Foundations program, and he will be spending 6 months with the DDK Group as part of the rotational program. Please join us in welcoming both Connor and Myles!

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Q2 Review & Outlook Thumbnail

Q2 Review & Outlook

The latter half of 2020 and the first quarter of 2021 saw a fairly clear rotation toward a higher, long-term interest rate environment; or at least the expectation of such. We saw in the second quarter an appetite for traditional value stocks, as well as small caps over large cap, reverse once again as treasury yields fell and bonds rallied, while the headline growth stocks re-established their leadership. Fans of the FAANG names, bolstered by re-opening economic metrics, pushed these megacaps to all-time highs, while the industrial and financials names were either flat or retreated slightly. Real estate (+13.1%) and energy (+11.3%) bucked the growth bias and had returns in-line with Technology (+11.6%). International equities continued their positive performance, though still struggling to keep up with US equities, were no doubt hurt both by dollar strength and a slower re-opening trade. Despite the most recent moves in bonds, we continue to favor shorter duration fixed income as we believe short-term moves in interest rates are transitory and that the Fed is likely to move short-term rates closer to its policy rate over the next eighteen to 24 months. We encourage our clients to be at or near their strategic allocations while keeping short term cash needs available in cash or short-term fixed income.

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Q1 Review / Q2 2021 Outlook Thumbnail

Q1 Review / Q2 2021 Outlook

The strong performance of equity markets that closed 2020 continued through the first quarter of 2021 with outperformance by value and cyclical stocks. Fiscal stimulus of over $3T finding its way into the economy provided the fuel for a continued appetite for risk assets. The strength in bonds experienced in 2020 reversed in 2021, as the Barclay’s Aggregate Bond index lost 3.4% and the 10-year Treasury yield rose from less than 1% at the start of the year to close the quarter at 1.74%. The combination of even more fiscal stimulus when paired with an accommodative Federal Reserve provides a sturdy short-term tailwind for risk assets. We continue to recommend that clients stay at or near their long-term strategic asset allocation.

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Q4 Review / Q1 2021 Outlook Thumbnail

Q4 Review / Q1 2021 Outlook

No one could have predicted the events of 9/11, the Great Financial Crisis, nor COVID-19’s dramatic effects on the economy and markets. Yet what is predictable is that such shocks can occur and do occur. Against such backdrop, it is helpful to think of the following from Mike Antonelli’s recent posting: ”So how am I thinking about 2021 and beyond? Here is my framework: - Continued bounce in employment and GDP growth from crisis low levels as we inch back towards normalcy. - Housing remains a considerable tailwind as Millennials trickle into home ownership over the next decade spurred by population migration and low rates. - Demographics are favorable right now, 80mm millennials are entering the prime of their lives. - The vaccine will finally reach critical mass sometime around Q2 setting the economy up for potential supernova of growth, 5-8% annually over the next few years, as people absolutely FLOOD out of their homes. I don’t want to get delivery for the next few years and I’d be happy seeing every single Baird branch in person. - The Fed is still easy and committed to such, do you realize how important that is? - The potential is there for a “roaring 20s,” I just hope its “roaring” for everyone (and that prohibition doesn’t come back).” Though Mike has an air of levity in all of his posts, a focus on such broad economic and market tailwinds has us continuing our view that clients should stay invested at or near their long-term strategic allocations with sufficient cash to meet short term obligations over the next year or so.

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Q3 Review and Outlook Thumbnail

Q3 Review and Outlook

The third quarter allowed us all to breathe a sigh of relief. That said, until the virus is under control, challenges remain. Our friends and partners at Strategas summed it up this way: "The easy part may be over. Outside the theatre of war, few things have been as universally negative as the COVID-19 pandemic and its effect on the global economy. We avoided a depression thanks to a swift and aggressive policy response. It wasn’t surprising to see a rebound off such low lows as the economy reopened, and third-quarter GDP is expected to be up 25% from the previous quarter. But as our chief economist Don Rissmiller has suggested, the easy part of the recovery may be over. COVID-19 follows us into Q4. The pandemic persists as we approach the fourth quarter, and we think it’s fair to say that society as a whole is learning to live with the virus. But in the absence of additional income replacement provisions or durable drivers of organic growth, we should expect the slope of economic recovery to soften. And with the Fed’s recent acknowledgement that monetary policy is likely to remain easy for years to come, we are likely to see more disparity between the rise in stock prices and the rate of economic recovery.” It would be hard not to overlay the upcoming national elections as a further factor that could weigh on stocks. While the historical evidence suggests that the outcome of such elections has little correlation to the performance of the equity markets over any appreciable look back period, the ride may be rough in the short-term given this particular election and it being conducted during a pandemic. However, the volatility may present opportunity. It is against this backdrop that we continue to advise that clients stay at or near their long-term strategic allocations with an overweight to cash to meet near-term needs.

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Third Quarter 2020 Outlook Thumbnail

Third Quarter 2020 Outlook

A strong US large cap rally in technology focused companies erased much of the first quarter pain suffered in well diversified portfolios. Nonetheless, the lack of participation by more cyclical stocks and value oriented equities have left most client portfolios down year-to-date with longer lookback periods punctuating such divergence.

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