Hello once again and welcome back to the land of blinking screens.

We find at this time of year that it is pretty common for investors (all investors) to make the assumption that markets will continue to behave as they did in the prior calendar year. However, I see some changes taking place that might be worth your consideration.

First on my list, the interest rate environment has clearly changed. Instead of the regular downtrend that moved the yield on the 10-year treasury from 3.2% in fall of 2018 to an incredible low of 0.7% in March of 2020, rates are now definitively trending upward. This appears to be accelerating (perhaps as a result of the ‘blue wave’ which will likely bring additional stimulus), and will likely produce more borrowing and higher tax rates. As the rates increase, the face values of many bonds will decrease.

Personally, I don’t believe this will slow down stocks unless the yield becomes a viable alternative to the dividends paid on stocks, so this is just something we’re watching…for now.

Next there’s the economy. Stocks will usually discount future expectations, and that means that investors will be looking forward to healthier days; and continued decent market returns. Note that the services sector is still struggling as they face new potential lockdowns (re-lockdowns?) which may be enforced, but most of the sectors are looking quite healthy at this time.

Number 3, we still have the virus. And the expectation that vaccines might bring a bit of normalcy. We wonder when will enough people be vaccinated to reach the promised (premised?) heard immunity to turn Covid-19 and future variations to nothing more than a yearly flu-bug?

And into the market: The monster-cap tech stocks are no longer dominating the returns spectrum, and small-caps and cyclicals (that were the losers in 2020) are moving up rapidly. As a matter of fact, I note as I write this that many small-cap indexes are up over 7% already this year!

Finally, let’s look at inflation, or at least inflation expectations. Note that the expectations are bumping up, and inflation is usually considered to be a market ‘killer’.  I don’t believe there’s enough of it yet to affect markets, but it’s worth keeping an eye on.

So, as always, (because many of you have asked) our strategy for 2021 is the same as 2020.  We will continue to search out the parts of the markets that investors are buying, and add those to client holdings. At the same time, we will be searching for those holdings that investors are selling, and we’ll ignore those.

We’re looking forward to another year of serving you. Here’s to a prosperous 2021!

Ron’s Market Minute — A Word of Caution

Just when I thought it could not get any better, we are seeing fresh new highs in S&P Index*, a resurgence in the Nasdaq* Index, new lows in the yield spreads and a new high in the Fed balance sheet. Over 90% of stocks in the S&P Mid-Cap 400* and S&P SmallCap 600* are above their 200-day moving averages and 150-day moving averages, while over 85% of stocks in the S&P 500 are above these moving averages. Breadth and price action are strong so what could go wrong?

So far this week, small-caps are actually taking a breather and lagging large-caps, and large-cap techs. IWM (small-cap index proxy) is up less than 1% so far this week, while the S&P Index is up over 2% and Nasdaq is up over 4%. Over a more meaningful time period, the small caps are still leading over the last 12 weeks with a 39% surge since early October (and THAT is not a typo!). For comparison the S&P is up around 18% and Nasdaq is up around 22%.  These are awfully strong numbers that would be very good YEARLY returns, much less quarterly returns.

So, here’s the key takeaway today. We do not need technical charts or a sentiment indicator to figure out that stocks are quite extended after these really large moves the last 12 weeks. Overextended or overbought conditions, however, are not always great for timing a correction. There will be a correction at some point and this will create the next opportunity.  And this is not a prediction, just a heads-up.

At the moment, I do not see any signs of deterioration in the breadth indicators that would point to a correction in the major indexes. S&P and Nasdaq do not look that extended on the price charts, but small-caps are another story. Nevertheless, I think we are in a trend-monitoring phase right now. It is simply time to observe the price action, plan our potential active trades and wait for the next opportunity. Enjoy this bull market run till it runs out of steam.

Ronald P. Denk, CFP®
Investment Advisor
Denk Strategic Wealth Partners
10000 N. 31st Avenue, Suite C-262
Phoenix, AZ 85051
Phone (602) 252-8700
Fax (602) 252-8701
Toll-Free (877) The-Denk
www.denkinvest.com

LFS-3417998-012221

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*The indices are representative of domestic markets and include the average performance of groups of widely held common stocks. Individuals cannot invest directly in any index and unlike investments, indices do not incur management fees, charges, or expenses, therefore specific index returns will be higher. Past performance is not indicative of future results.

Ron Denk is a Registered Representative, offering investments through Lincoln Financial Securities Corporation, Member FINRA/SIPC.

Mr. Denk is also an Advisory Representative offering services through Denk Strategic Wealth Partners, a Registered Investment Advisor. Denk Strategic Wealth Partners is not affiliated with Lincoln Financial Securities Corporation.

Please see Denk Strategic Wealth Partners’ Client Relationship Summary here http://denkinvest.com/?page_id=7099 for succinct information about the relationships and services DSWP offers to retail investors, related fees and costs, specified conflicts of interest, standards of conduct, and disciplinary history, among other matters.

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Past performance is not a guarantee of future returns.