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Markets & Investing

Market Overview (8/4-8/11)



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VALUATIONS MATTER: Top 4 US equity market valuation indicators, updated weekly with commentary.

S&P500 HITS ALL TIME HIGHS…¬†meanwhile the economy is still in the toilet.

BETCHA DIDN’T KNOW…¬†corporate profits have been flat for years. What has driven profit growth in the S&P500? Buybacks, lower tax rates, and other forms of financial engineering. Mainly buybacks. What are buybacks? Learn more in our knowledge base.¬†The graph below shows the S&P500 storming higher (blue) while corporate profits after tax have been flat and now declined as a result of the recession.¬†Food for thought.

OK BIG TECH DOMINATES, NOW WHAT? There is still plenty of long term investing opportunity in the US. To begin, we have seen growth businesses (like Facebook, Google, and Amazon) dominate the markets the last 10 years. Since the end of 2016, growth stocks have returned ~100% whereas value stocks (knowledge base) have returned just 15%.

COVID19 IS NOT A FOREVER EVENT. The S&P500 may be hitting new all time highs but many sectors are not doing well and that is where the medium/long term opportunity exist. The most basic question to ask yourself is this: are people really never going to eat out again? Are we really never going to use gas again? Are banks becoming worthless companies that provide no value? Are humans not social animals that thrive on social contact? Will we really never, ever leave the house again?

Financials Sector (XLF) РStill down 22.57% year to date due to the very serious economic risk with COVID. On the other hand, banks are better capitalized than ever with valuations 227% lower than the overall S&P500.

Energy Sector (XLE) –¬†Still down 38.64% year to date due to changes in demand for oil during COVID. The risks are very¬†real yet it presents an interesting opportunity in the long run.

Real Estate Sector (XLRE) –¬†This ETF tracks the real estate sector and is still down 8.10% year to date. Real estate presents strong investing opportunities but requires careful vetting to avoid the massive risks with commercial real estate like office buildings.

Equal Weight S&P500 (RSP) – This ETF tracks all stocks in the S&P500 equally so each of the 500 companies in this index carry a 0.23% weight in this fund. As a result, this ETF is still down 10.58% year to date and has been generally stagnant since 2018.

High Dividend S&P500 Fund¬†(SPYD) –¬†This ETF¬†invests in 60-80 high yield S&P500 stocks that includes companies like¬†General Mills, Gilead Sciences, and AbbVie. This fund is underweight tech and overweight many industries that have fared poorly in the pandemic. Still down 28% YTD with a 5.98% dividend yield, this could present a buying opportunity for investors looking long term and beyond the COVID pandemic.

BOTTOM LINE:¬†History shifts and an investment that delivers strong returns one decade may not deliver strong returns the next decade. During the height of the Dot Com Bubble in March 2000,¬†growth stocks outperformed value stocks over the prior 1, 5, 10, and 15 year periods.¬†By March 2001, value stocks regained the advantage over every one of those periods. With valuations in tech stocks as high as they are today and Congress eager to further regulate and potentially break apart these large tech businesses,¬†we’re personally balancing our portfolio with strong value stocks/ETFs that are quite cheap relative to tech stocks instead of doubling down on extreme valuation tech stocks. Now, if tech stocks go back on sale like they did in March 2020, there may be some good opportunities but for now… probably not.


IS THE PANDEMIC REALLY CHANGING THE WAY WE BUY HOMES? We keep hearing this Рthe pandemic is shifting home buying from urban to suburban centers. This is (mostly) not true! Zillow recently released a report that shows the housing market has been improving in both suburban and urban areas in nearly all areas (minus places like NY & SF where home values have fallen by at least 4% year over year).

HOUSING PRICES HAVE GONE UP 4.9% SINCE JUNE 2019, WILL THEY GO DOWN BY JUNE 2021? CoreLogic published their most recent US National Home Price Index showing that home prices increased by 4.9% in June 2020 compared to June 2019. In addition, CoreLogic is now forecasting a 1% decline in housing prices by June 2021. In the prior report, CoreLogic was original forecasting a 6% decline in housing prices by June 2021 so this is quite an improvement in a report published only 30 days later. Still, this will represent the first potential decline in US national housing prices in 9 years.

A RECORD ~16% OF FHA MORTGAGES ARE IN FORBEARANCE: The delinquency rate on Federal Housing Administration loans rose to a record-high 15.7% as of June 30th. FHA loans are usually extended to borrowers with lower credit and/or little cash for down payment, thus these are usually riskier loans in a recession. This is the highest levels since 1979!

BUT… MILLENNIALS WANT HOMES: Just a few years ago, the mainstream thinking was that millennials would no longer live in the suburbs or even buy homes as often as the previous generation. WRONG! This year, nearly 50% of all home buyers are expected to be millennials and this will likely only increase from here. We want HGTV homes and we want them now! Millennials comin’ in hot, even after living through 2 of the greatest recessions in US history.

BOTTOM LINE: The seriously conflicting data continues! On one hand, housing prices are up and only projected to slightly decline by June 2021. On the other hand, ~16% of FHA mortgages and ~8% of conventional mortgages¬†are in forbearance. For this situation to correct itself, either housing prices will come down or the number of mortgages in forbearance will decline and the recession and pandemic will resolve more quickly than we think today.¬†The verdict is out for now, but we’re taking a cue from banks and guessing home prices may decline/stagnate in the short term once all the government stimulus expires. After the recession subsides, housing should continue doing well because millennials are finally at prime purchasing age.

Personal Finance

REFINANCING YOUR MORTGAGE WILL COST ~$1,400 MORE BEGINNING SEPTEMBER 1ST: Rates are lower than ever before and people have been increasingly¬†refinancing their mortgages for months. Beginning September 1st, the 2 largest mortgages companies that buy or back most home loans in the uS¬†are charging an “adverse market refinance fee” equal to 0.5% of the loan amount. Why? Freddie Mac says its all because of “COVID-19 related economic and market uncertainty.” If you’re in the middle of closing a refinance, get it done ASAP! If you’re still looking to refinance, make sure you use NerdWallet’s Mortgage Refinance Calculator. With rates as low as they are, refinancing is still worthwhile in many cases.

SHOULD I BUY A HOME?¬†Buying a home is a highly emotional decision that goes far beyond a typical investment. Really, housing is not an investment. Your home is where you live and everyone needs shelter. But, there is a few ways to think through it if you’re in the market for a home.

  1. Understand what you can afford. The 28/36 debt-to-income rule asserts that you do not want to spend more than 28% of your monthly income on housing-related expenses and no more than 36% total of your income against all debts, including your mortgage. This will help ensure you have enough money left over for other expenses and saving. Nerd Wallet has a great calculator that helps you understand how much house you can afford.
  2. Have a margin of safety. We’re still¬†in the midst of the COVID19 recession with a lot of uncertainty. Without continued and significant government stimulus, the economy can go south fast. Since the risks are high, having savings that allow you to pay your mortgage and meet your other needs during a crisis is important. If you lose your income source¬†tomorrow, can you still pay your mortgage? How long? And how long do you need to find a new income source before you run out of savings?
  3. Understand a house is not an investment.¬†Buying a house is a major decision that can provide you peace of mind and a place to live that you love.¬†However, your primary residence is not an investment. Over the last 100 years, average US real estate values gained less than 1% when adjusted for inflation. Yes, you can have serious appreciation over time but this isn’t always guaranteed.
  4. Recognize you can still potentially save money long term.¬†Rents generally climb over time.¬†According to the US Bureau of Labor Statistics, $1,000 in 1990 has the same “purchasing power” as $2,453.89 in 2020 in terms of rent. When you buy a home, you lock in what you’ll be paying for some time to come and keep up with rent inflation, at the very least.
  5. You want a home.¬†At some point, most people have a desire to own a place of their own. When you want a home, you can afford the home, you understand your risks, and you’ll be in that home for a minimum of 5 years, you should buy the home instead of waiting for prices to come down (unless,¬†you can afford to wait and truly believe prices may come down in your area… like if you’re in SF or NYC).
  6. Still worried? Do the math. How much rent will you pay for 5 years? How much will you pay towards your mortgage, property taxes, any tax benefits, and general repairs in that same 5 year period? In my own case, I was worried about an impending recession in mid 2019 but determined that buying a home was still the more profitable decision even if my home value fell by 30% after 5 years. It became a no brainer at that point.

BOTTOM LINE:¬†It’s a tricky time to buy a home yet life can’t simply stop due to a recession or pandemic. Before making such a large financial decision during an economic crisis, make sure you are well prepared for all the possibilities and build in serious margins of safety. Better safe than sorry!


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Founder Talk

Last week, we posted a video with too much content. This week, we’re breaking down that¬†video for you. tl;dw (too long, didn’t watch):¬†

  • A recession is the absolute best time to start a business. Notable businesses like Disney and Microsoft were started during prior recessions.
  • In 2020, starting a business takes little to no capital. Ya just need smarts!
  • During the Great Recession, I had to scrap¬†together $15k in 10 days to save my business. It was brutal… learn how I made it happen beginning 3 minutes into the video.

BOTTOM LINE:¬†“Everyone who has taken a shower has had an idea. But it’s the people who get out of the shower, towel off, and do something about it that make the difference.” – Nolan Bushnell, the co-founder of Atari


Every week, we’ll point out a few of our¬†favorite resources/articles/news that actually provide value.¬†

Value stocks trade at lowest value relative to growth stocks since 2001 – Growth stocks have been hot the last 10 years, will the trend remain the next 10 years?

NYC is “dead forever” according to¬†life long New Yorker James Altucher – A grim view on NYC after the pandemic, it’s an interesting perspective worth reading but we’re a lot more optimistic than this. While NYC will likely take years to recover, we believe American ingenuity will always drive us forward.

Goldman Sachs has done the math and a national mask mandate to halt the spread of coronavirus would have a big impact on the U.S. economy – I know, I know. Masks are a sensitive topic. Take a read, decide for yourself.

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About the Founder

Hi, my name is Fehzan! I’m a serial entrepreneur that loves studying economics, investing, and the world around us. I started Return On Time after spending many years reading finance/economic news and actively investing in various asset classes. While I did learn a bit, I learned more that the real, valuable resources to invest really take a lot of time to find. After all these years, I decided to start Return On Time to deliver a balanced view backed with data and the right news.

We look forward to providing you with ROTI in 10 minutes a week.