Halftime Review

Our clients’ long-term investment plans reaped significant gains in 2020 and have continued to be rewarded in 2021. Most importantly, they continue to make progress toward their financial goals.

This quarter ended with markets near all-time highs. This has been one of the strongest market first halves since 1998.

As the first half of the year ended, the S&P 500 Index, which is a broad-based index of 500 larger U.S. companies, ended June at a record high. The better-known Dow Jones Industrials, which is made up of 30 large firms, finished the first half with a strong gain of nearly 12.7%.

The NASDAQ is up 12.5% year to date while the International markets were up 8.4%. Barclays Aggregate Bond return, which would be a benchmark for more conservative strategies, struggled and was actually down -1.6%.

Similar to last year, growth strategies have done well while more conservative strategies have struggled. Being defensive has not paid off.

This market has been somewhat difficult to manage as different sectors have been leading, then lagging, and then leading again — somewhat randomly — based on the post-Covid news cycle. Adding to the difficulty is the enormous amounts of government cash being dropped into the economy, which has benefitted some areas more than others. All in all, things are positive. But from an investment standpoint, it has not been an easy time to navigate.

What’s Next?

The question, “What have you done for me lately?” is always followed by, “Where might we be headed for the rest of the year?”

Please follow me as I briefly dive into the numbers. As always, past performance is no guarantee of future results, but it is interesting to review.

Data from LPL Research shows that bull markets following at least a 30% decline have had strong returns in the first year. The rally that followed 2020’s bear market (a 34% decline) is no exception.

The average increase in the six bull markets since WWII that followed a 30% or greater decline was 41% in the first year. It’s an impressive one-year return and a reminder that bear markets usually end unexpectedly. Those who move to cash for safety during the decline usually find themselves missing out.

The first year increase of 75% from 2020’s bottom ranks as No. 1, exceeding 2009’s second place return of 69%.

On average, all the bull markets in question have been positive in year two, with an average return for the S&P 500 of 17%.

However, the second year usually is quite volatile, with an average pullback during the second year of 10%. Thus far, we have yet to see a meaningful pullback in the broader market indexes, but we are only three months into the second full year following the decline.

What helps drive returns? Momentum, an expanding economy, higher corporate profits, and a generally accommodative policy from the Federal Reserve.

Those variables are in place today, but every cycle has its own peculiarities. This year is no different.

The economy has never experienced the kind of lockdown and reopening we are seeing today. It’s uncharted economic territory. So far, growth has been much stronger than most forecasters expected. We can credit massive fiscal stimulus, the reopening of various sectors of the economy, pent-up demand, and the easing of social distancing restrictions.

But the benefits have been spread out unevenly.

Inflation also remains a concern, though the recent drop in Treasury bond yields suggests that most investors seem to view the recent surge in prices as temporary.

We could also see the rate of growth peak in the second quarter as fiscal stimulus begins to wane.

This is why we follow our models. They are the cornerstone of our approach. Short-term traders will react to unexpected events, both positive and negative. We will always follow our models, which are designed to adjust to ongoing market changes.

Year-to-Date Performance

In the context of our huge outperformance in 2020, our portfolios have continued to perform relatively well. Usually, because of mean reversion, when you have outsize returns, the year following lags a bit. This year, net of all fees, Managed Income is up 1.18%, Fast Movers is up 7.24%, Liquidity Factor is up 8%, Top Flight is up 10.26%, and Fundamental 20 is up 15.91%. Please see return disclosures on the last page of this newsletter.

Mayor Race?

About three months ago, several influential members of the community asked me to run for Mayor of Orem. I’ve always been involved in the background of Orem politics and am very much aware of the good and bad that goes on. However, I have never had a desire to run for political office.

I explained to my friends that I like my current life and have no reason to run. They pushed that Orem is at a tipping point and, without good leadership, will continue down the path of continuously adding more high-density apartments without decent infrastructure. This will continue to create the traffic nightmare that Orem is becoming.

There are a number of forces pushing Orem away from its motto of “Family City USA.” Without decent leadership, Orem will move completely away from the core values that have always made it a great place to live.

I’ve lived in Orem for 31 years and raised my family here. I believe I have the ability to make a difference and get Orem back on track.

What does all of this mean to my clients at Paragon? Orem’s government structure is a PART TIME mayor and city council. Their role is to shape the future direction of the city and to keep it on  track. Orem also has a full-time city manager and entire staff to manage the day-to-day activities of running the city.

If I win, and I am the underdog in this race, then my focus on Paragon and my clients will not change. I may need to eliminate other activities that take up my time, but that does not include Paragon.

Our job is always to assist you. If you have questions or would like to discuss any matters, please feel free to give me or any of our team a call.

As always, we appreciate the trust you have placed in us to guide you toward your financial goals through these difficult markets.