Summer 2021 - Broadridge Advisor Solutions
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Summer 2021
To: Clients and Friends of UBS Financial Services Inc.
From: Paul J. Leeming
RE: “When investing, pessimism is your friend, euphoria the enemy.”
– Warren Buffett
A favorite musical moment in my life came on a night in Figure 1: US currently hospitalized COVID-19 patients (rhs)
New York City when I found myself alone and without against vaccinations
plans following a day of meetings. A quick scan of the live
performance listings revealed a performance of
Beethoven’s 6th symphony (“The Pastoral”) at Lincoln
Center. A short and pleasant walk from the UBS midtown
west headquarters up the Avenue of the Americas and
across the corner of Central Park brought me to that iconic
plaza and ultimately to one of the few remaining seats in
David Geffen Hall – a dizzying height above the orchestra.
I had heard the famous piece before, but somehow this
time the music struck me differently and powerfully. I will
not pretend to expertly interpret the music, but anyone
who knows it will remember the violent storm quite clearly Source: Bloomberg, UBS, 27 June 2021
represented in the 4th movement and the resolution in the
5th, which is known as “The shepherds’ hymn—Happy
Figure 2: TSA passenger throughput, in thousands
and thankful feelings after the storm.”
I now listen to this piece often…and from time to time --
to irritate my children and temporarily pull them from the
grip of Taylor Swift -- I’ll play it in the car and ask them to
listen for the lightening and sheets of rain in the storm
sequence and then the slowly diminishing thunder and
the sun and soaring birds of the clearing day passage.
Reluctantly they do so, yet I can tell that even they feel the
euphoria of that moment when the storm rolls past and
nature revives.
Writing this commentary, I can’t help but think of that
heartening moment as I review the investment landscape,
considering the storm we have just experienced (COVID-
19) and the clear day that appears to be developing
around us with markets at record highs, stellar earnings
reports from segments poised to do well in an expanding
economy, vaccinations increasing (see Figure 1) and
holding against variants, and a consumer eager and able
to dine out, travel (see Figure 2), and spend money again
across the economy.
Source: TSA.gov, UBS, 16 June 2021But before we get carried away with the music… Among the inputs we use when considering and
Those who have read these quarterly commentaries for interpreting these factors and the risks and opportunities
many years, are no doubt already hearing the sober voice they represent, are the views of our colleagues in the UBS
of Tom Lips in your heads, specifically his frequent Chief Investment Office, some of which we excerpt below:
warnings concerning euphoria in the investment context.
For those who are more recent subscribers to these letters,
I share some of these warnings below in the voices of Tom On inflation risks and the Fed:
“The minutes of the June FOMC meeting noted that
and his much-revered (and apocryphal) mentor… Mr.
US inflation had surprised to the upside, though there
Market:
was no consensus on how long higher inflation might
• "In the face of escalating markets and persist. Core PCE inflation reached 3.4% year-on-year
public euphoria, let us be guided by the in May. While there was nothing in the FOMC minutes
English proverb: A full cup must be to suggest that the recent inflation data was
carried steadily." – Tom Lips pressuring the Fed to consider hiking rates anytime
soon, the majority of participants believed inflation
risks were now tilted to the upside, as ‘supply
• “Be selective, be diversified, be humble
disruptions and labor shortages might linger for
⎯ and do your homework. Finally, longer and might have larger or more persistent
don’t be caught up in the emotions of effects on prices and wages than they currently
the moment – be they fear or assumed.’ We expect the recent rise in inflation to
euphoria.” – Tom Lips ease by year-end, as pandemic-related disruptions
clear and base effects dissipate. But investors
• “The key is to keep your vision fixed on shouldn’t neglect the risk of a more sustained increase,
the far horizon and remember that at which would erode purchasing power more quickly.
the height of both euphoria and In the longer term, inflation is on track to be higher
despair, financial objectives have much than before the pandemic. Last week, the European
more to do with the future stretched Central Bank approved a new monetary policy
out before us than the ephemeral strategy that includes a symmetric 2% inflation target
present that we fear or embrace on any over the medium term, higher than its previous target
given day.” – Tom Lips of ‘below, but close to, 2%.’” – Mark Haefele, Global
Chief Investment Officer, UBS Global Wealth
• “Stay humble, stay in the game, and Management.
manage both your fears and your
On the recent drop in yields:
euphoria…as well as your expectations. “We don’t think that bond investors know something
If you do, the future will be as equally that equity investors don’t. In our view, these three
rewarding as the past.” – Mr. Market factors don’t present a fundamental case justifying
the drop in yields and equities: 1) We do not expect
Delta or other variants to disrupt the economic
recovery in developed markets, although there is
A final quote sums this up well. Says Tom in a letter to our
scope for a modest delay… 2) Market concerns and
clients and friends several years ago: “Why is it that this
pricing are running ahead of likely Fed policy
moveable feast of financial euphoria brings as much
change… and 3) Fears of a growth scare are
angst as satisfaction to your author and his
overdone.” - Mark Haefele, Global Chief Investment
colleagues? Perhaps because we are paid to worry.”
Officer, UBS Global Wealth Management.
In this context “worrying” on our part takes the form of
daily investment committee rigor. More specifically, our On equity markets:
team is actively weighing the positive signs described “Over the last five weeks, the Russell 1000 value index
above against the risks that linger, including the pandemic has lagged its growth index peer by about 10
itself, which continues to persist and mutate; the specter percentage points. There have only been a handful of
of higher inflation, which is alternatively interpreted as times over the last 30 years when value stocks have
transitory or cyclical (more on this to follow); the threat of fared worse on a relative basis over a five-week period.
earlier than expected monetary tightening; political policy Small-caps have also suffered. Still, since the move in
uncertainty on taxes and regulation; and geopolitical interest rates and the shifts within equity markets
hotspots around the world (described by Tom later in this have not altered our outlook for economic growth or
letter). for corporate profits, our overall positioning remains
intact. Cyclical segments should disproportionately
benefit from the economic momentum that we
2expect to persist over the next year. We think earnings If history is a guide, resolve on this last point will be tested
growth for value stocks will meaningfully outpace by bouts of volatility that we expect to play out over the
growth stocks over the next several quarters.” balance of this year as investors and policy makers react
to economic readings, earnings reports, regional pockets
“Moreover, rising interest rates and a steeper yield of virus resurgence, government policy outcomes (e.g.,
curve should benefit Financials, the largest value infrastructure, taxation, and regulation), and geopolitical
sector. Valuations for value have become even more flare ups across China, Russia and the Middle East. Simply
compelling after their recent pullback—trading at one put, it is in these moments when a financial plan,
of the steepest discounts to growth since the dotcom investment discipline, and professional guidance are of
bubble. We believe that rising rates will be a the most value.
headwind again for growth valuation and longer-
duration assets.” – Solita Marcelli, Head of CIO Returning to that symphony... I do recommend “The
Americas Pastoral” to anyone who has not heard it -- or perhaps
not for some time. And if you are compelled to listen
On corporate profits: when next in the car, I’d urge you to enjoy and savor that
“… even though the breadth of positive earnings musical clearing of the storm clouds…but also to keep
your eyes firmly on the road ahead and your mind on the
estimate revisions is at the highest rate in 35 years, we
ultimate destination.
believe EPS estimates are still too low. Our above
consensus estimate for 40% earnings growth in 2021
remains unchanged, but we have raised our 2022
estimate to 10% growth, which includes a 4–5% drag The “so what?” – Inside the Long River
from higher corporate taxes. We have also raised our
price target for the S&P 500 index to 4,500 by Wealth Management Investment Process
December and to 4,650 by June 2022, up from 4,400 In the section that follows, I ask Ashley Martella, Head of
and 4,550, respectively, previously. During periods of the LRWM Investment Committee, to weigh in on some
higher than-average GDP growth, value earnings of the issues addressed above in the portfolio context.
typically grow at a faster pace than growth earnings.
We believe the next leg of the rally will be led by Q: Ashley, in our spring commentary, you were
cyclical and value parts of the market, including ahead of the curve in voicing concern over the
energy and financials. We continue to advise investors specter of rising inflation. How have your views here
to position for reopening and recovery.” – David evolved since then?
Lefkowitz, Head of Equities Americas
A: A timely question as the Labor Department just
With all of this in mind… we distill the current thinking reported an increase in the consumer price-index of 5.4%
of the Long River Wealth Management Investment from a year ago, which beat expectations and is the
Committee down to the following high-level conclusions: highest 12-month increase in 13-years. Items like real
estate, agriculture, automobiles, and industrial metals
• We continue to remain cautiously optimistic on have experienced significant price increases year-over-year,
the markets and the economy. although the price of lumber has come back down to
• We believe opportunities in equites remain, earth in a big way. The important question is whether the
particularly in the cyclical and value segments of increases we are seeing are transitory or something more
the market. permanent. I suspect that certain developments are
temporary while others could be more enduring. Coming
• On the fixed income side, we prefer high quality, out of the recession we have seen supply chains fail to
short duration securities. keep up with rebounding demand due to pandemic
• We do not believe that the recent decrease in related shutdowns and staffing issues and businesses that
treasury yields represents a “risk off” trade. were initially cautious with procurement having to quickly
• We acknowledge risks from the pandemic, reverse course as the economy recovered quicker than
inflation, policy missteps, and geopolitical expected. I anticipate that we will see supply come better
turmoil, and, accordingly, we maintain into line with demand as bottlenecks clear out, pent up
appropriate levels of diversification across our consumer demand runs its course and stimulus payments
client portfolios. get spent. However, I’m not yet convinced that we will
• We continue to counsel clients to get invested quickly return to the disinflationary and, in some cases,
deflationary trends of the past few decades and especially
and stay invested…and to get diversified and
the last decade where the Fed had trouble meeting its 2%
stay diversified. Along the way we recommend
CPI mandate. Increased globalization, changing
maintaining adequate liquidity and staying demographics and technology have seemingly kept prices
focused on long term goals rather than day-to- in check. However, we could potentially be at the early
day market performance. stages of a shift away from globalization as companies
3look to onshore certain supply chains and change from late last year up until the second quarter (i.e.,
behaviors due to increased protectionism (i.e., tariffs) and technology). The fundamentals still favor “value”
geopolitical risks. Only time will tell, but the trend in companies whose earnings benefit more from an
inflation does have implications for portfolios if it runs improving economy. These shifts in the relative
hotter than expected and is something other than performances of investment style have historically lasted
transitory. well over a year and, in some cases, 5-10 years. Up until
late last year “growth” had outperformed “value” over
Q: Related to inflation -- or perhaps not – we’ve seen the last decade by one of the largest margins on record as
some interesting moves in the Treasury yields these technology/e-commerce companies experienced earnings
past couple of weeks. Specifically, the 10-Year has growth that far surpassed that of companies in the
moved quite significantly and rapidly lower. I financial and energy sectors. Because of this divergence
referenced the piece above entitle “Do bond “growth” stocks had become historically expensive
investors know something equity investors don’t?” relative to their “value” counterparts. Since fundamentals
What do you make of these moves? have improved considerably in the more cyclical sectors,
we believe these parts of the market are attractive on a
A: Yes, the move lower in rates has been interesting and relative basis.
significant. Most individuals wouldn’t expect to see a 10-
year U.S. treasury bond yield hovering around 1.4% with Q: Ashley, many of our clients and investors in
headline CPI running around 4-5%. Historically the bond general have been wrestling with the idea of
market has been a good leading indicator and a declining putting money to work in markets that are at all-
yield in the face of higher than-average inflation could time highs. What are your thoughts on investing at
indicate fears of slowing future growth. However, we historically high valuations?
haven’t yet seen other areas of the market react in concert,
as has been the case historically, to a potential growth A: It’s always difficult to time entry points into the market;
scare. Defensive sectors, such as utilities and consumer especially after markets have been so strong over the past
staples, haven’t outperformed, and we haven’t seen any few years. History suggests that we are due for a pullback
significant widening of credit spreads. We have seen of some sort, but these pullbacks for longer-term investors
“growth” sectors reassert leadership over the past few tend to be very small blips in the grand scheme of things.
months at the expense of the more “value” oriented and For those concerned about putting money to work at
cyclical parts of the market, including financials which are these levels I would suggest legging into the market via a
highly correlated to changing interest rates. Rather than modified dollar cost average program of 3-6 months that
indicating an economy that’s weakening and a “risk-off” can be expedited if we do experience a 7-10 percent (or
environment, it could be a case where yields ran too far more) correction. I recall having these conversations with
too fast to start the year and we are witnessing a reversal many clients back in 2011 as to what the appropriate
of a very crowded trade (i.e., shorting treasuries). It also timing was. Fast forward to 2021 (10-years later) and the
could be due to global central banks that are artificially timing really didn’t matter so long as you got invested and
keeping rates low and taking supply out of the market stayed invested.
through their various quantitative easing programs. With
t-bills hovering around zero and banks flush with deposits Q: We’ve talked about inflation, Ashley, but what
it could have spurred extra investor demand for longer- are some of the other risks you’re watching as you
dated and higher yielding government debt. We still lead the Long River Wealth Management investment
believe that the global economy is improving and, barring committee?
some unforeseen negative developments with Covid
variants and resistance to vaccines we expect rates to be A: It’s generally the items that nobody is talking about that
higher by year-end, which would favor the more cyclical present the greatest risk to markets. There are always risks
areas of the market, such as U.S. and International small and potential unknowns and I would say geopolitical risks
capitalization stocks, and sectors such as financials, are an item today that could throw a monkey-wrench into
industrials, materials and consumer discretionary. investor sentiment since most people aren’t focused on it.
With valuations somewhat stretched it may not take much
Q: Ashley, you referred just now to a higher 10-Year for volatility to spike if an incident were to occur. A
by year-end being supportive for financials and standoff with China over Taiwan or Iran over oil could
other cyclical areas of the market. We talked about create a risk-off environment. Of course, the return of the
the rotation from growth to value, last quarter. Do virus as we get closer to the Fall is something to monitor;
you still believe in the value trade at this point…and especially if any of the variants turn out to be more
if so, how much room is there to run? resistant to vaccines than we currently believe.
A: We still do believe in the value trade and the past few Q: Now the inverse of that last question. Where do
months have experienced what we believe will be a you see future opportunities?
temporary rotation out of an extremely hot part of the
market (i.e., small cap stocks) to those that had lagged
4A: As noted above I believe the opportunities are still in important sectors —especially those high-in-demand
some of the cyclical parts of the market that have taken a semiconductors. A military incursion would have negative
breather over the last few months. Financials have pulled implications throughout economies near and far, and that
back with interest rates, but we do expect interest rates to impact could immediately be felt in the financial markets
be higher by year end. There are also opportunities in which have not had to deal with any matter of great
energy, materials and certain industrials names that are import other than the pandemic in recent years. (Recall
beneficiaries of infrastructure. Finally, I do think investors how the markets reacted to the Covid outbreak with the
should pay attention to overseas markets in areas like fastest, most significant bear market decline in history.) As
international small cap and emerging market value. Many we all have come to understand and respect, those same
of these markets have lagged the recovery in the U.S. financial markets are perhaps the most astute, apolitical
markets and should benefit as vaccination rates pick-up.
observer of world affairs and mankind’s follies. They have
had a remarkable record in absorbing and reacting to any
-Ashley Martella, CFA® number of seismic occurrences —from earthquakes to
hurricanes to domestic violence to central bankers’
miscalculations. Exogenous events of material import,
and consequences are another matter entirely. (Recall
again the impact of the pandemic.)
“Of notice” – Tom Lips on a potential geopolitical As the saying goes, you never know the future on Wall
flash point Street until after the fact, but one discipline we at Long
River Wealth Management have long stressed to our
The financial markets have a remarkable record and ability wealth management clients is broad portfolio
to absorb both “good” and “bad” news with efficiency, diversification to lessen the negative risks of concentration
even equanimity. One thing they cannot absorb well or along with sufficient, on-going liquidity to navigate
even tolerate is uncertainly of a kind that can have a through unanticipated and negative cycles of uncertainty
material and on-going negative impact on domestic or and disarray. And if and when such negative uncertainties
global economies in either of our two hemispheres. become better defined and of material consequence, we
A looming example of such concerns is a potential advocate and practice defensive actions, reducing equity
Mainland China incursion into Taiwan. The implications exposure and increasing allocations to low-risk
of such an untoward event can be many fold and alternatives such as short-term Treasuries, highly rated
overwhelmingly negative, particularly given the municipal bonds, and gold. Never an easy call, but such
importance of Taiwan in the so-called foundry market of challenges and responsibilities are an implicit part of the
semiconductor manufacturing, a key component to many profession in which we have chosen to devote our
global supply chains impacting such industries as careers. It goes with the territory...indeed.
computers to smart phones to automobiles and other Many astute observers contend today that Taiwan is the
forms of transportation. Those same supply chains are “most dangerous” flashpoint in the relationship between
key ingredients to healthy and productive economies China and the United States. Few believe this relationship
across the globe. Today Taiwan dominates the foundry will evolve to a consequential conflict, but it has our
market with more than sixty percent of worldwide group’s undivided attention in our daily work and
revenue. deliberations. If circumstances become sufficiently
For more than 70 years an uneasy peace has prevailed confused and daunting, we may be obliged to call upon
between these two entities which have had separate our august (and apocryphal) mentor Mr. Market (quoted
political and economic lives since the end of the Chinese already in the opening lines of this commentary) for his
Civil War and the retreat of the Chinese Nationalists to the always welcomed intellectual guidance and emotional
island across the Taiwan Straits which is at its narrowest is grounding.
but 80 miles in distance, dividing Taiwan from the Stay tuned along the way.
Mainland. China’s policy has been for several decades
“peaceful reunification”, and until recently relations -Tom Lips
between the two have been reasonably stable. More
recently, Beijing has put pressure on governments near
and far to isolate Taiwan internationally, while fomenting
tensions within the latter’s population and institutions to “An invitation” – Andrew Worthington on planning
evolve to a “one China” policy. through change
An escalation of any consequence between the two could Greetings from the dog days of summer! I thought I
severely disrupt Taiwan’s economy and its role as a major would conclude this quarter’s commentary with a topic
player and productive partner in a number of critically with which we typically begin all of our client
interactions: financial planning. We recently recorded
5some short videos describing our practice and values
(released later this year), and at the risk of spoiling your
first viewing, I’ll preview a few of my lines: “We’re a
planning-based team. Before we invest a penny of In closing
a client’s wealth, we understand why we’re
investing it. We get that answer by asking We hope this letter finds you all well and enjoying a well-
everyone we work with. ‘What are your needs, deserved Summer of at least some rest and relaxation. We
your objectives, your circumstances?’ Not what look forward to speaking with you and your families in the
index are you trying to beat…” This, in admittedly coming days, weeks, and months.
glossy terms, is the core of our work. We seek to
understand your objectives and then plan for them And we hope you will join us for our quarterly “clients
against the backdrop of an ever-changing world. and friends” conference call this Wednesday, July 21
at 4:15PM ET. In addition to Tom, Andrew, and Ashley…
And if anything, change today is accelerating - whether we are pleased to welcome special guests and UBS
because of world stage developments like COVID, Investment Strategists Ainsley Carbone and Justin Waring
government policies impacting the tax code, or -- on a who will share the latest thinking on behavioral finance
personal scale -- the constantly evolving dynamics and and total wealth strategy. If you can’t make the live call,
circumstances within our own lives and families. there will be a replay available for you to listen at your
convenience.
As these plates shift beneath your feet, we take pride in
helping you adapt and improve your planning Best regards,
accordingly. Whether in the context of trust and estate
Paul
planning, philanthropic strategy, goal discovery, the
education of children on the responsibilities of wealth,
or a family meeting to increase transparency,
understand values, and set expectations across
generations…we enjoy this element of our work, and
together with specialists across our firm, we do it well. Paul Leeming
We will continue to actively engage you on these topics Executive Director, Financial Advisor
in our regular meetings, but we also invite you to contact UBS Global Wealth Management
us at any time with questions you are considering in the
context of your personal and family goals and objectives.
-Andrew Worthington CPWA® CFP®
6Long River Wealth Management
UBS Financial Services Inc.
One State Street, Suite 1600
Hartford, CT 06103
860-275-8060
855-247-8028 fax
800-510-9709 toll free
ubs.com/team/lrwm
Thomas Lips
Andrew Worthington
Ashley Martella
Paul Leeming
Paula Johnston
Stephen Kane
Carol McKenzie
Nancy Gilbert
Kelly Hodgkinson
Stacy Sisk
Erin Messier
The information contained herein has been obtained from sources believed to be reliable, but we cannot guarantee its accuracy or
completeness. Neither the information nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.
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