Mid Year 2021 Newsletter

Hello investors and friends. We hope that you and your families are enjoying the summer season. Over the last few years, we have been distributing a newsletter in a consistent format so, we thought we would try something a little different this quarter. During conversations with our clients, we hear many of the same questions and concerns regarding the markets and investments. In this newsletter we will highlight some of the most frequently discussed topics. We will keep the answers brief, as we are aware that no one wants to read a long newsletter. First, let’s take a macro snapshot on the 1st half of the year.

Investors around the world are placing money into the U.S markets at levels we have not seen in decades. This is a clear indicator that investors globally have tremendous confidence that the U.S, the world’s largest economy, is heading toward a Covid economic recovery comparatively stronger than most other countries around the world. During the first half of 2021, investors put to work an additional 1 trillion dollars into U.S markets via ETF’s, Mutual Funds, and Equities. This is a record going all the way back to 1992. In fact, in first half of 2021, more assets were placed in U.S markets than were invested in the entire rest of the world combined. These asset inflows reflect positive investor sentiment driven by strong U.S economic growth which is projected to be 6.9% in 2021. This strong economic growth, accommodate monetary and fiscal policy, low interest rates and optimism about turning the corner on Covid were the key drivers that have pushed the markets to solid first half results.

Markets are up in the first half of the year, but what’s really in store for the second half of the year?

A significant risk to market performance is the “delta” variant of the virus. Markets really disdain uncertainty, and sadly the virus continues to plague many countries in the world that lack the abundant resources found in the U.S. Our view is we will make it to the other side in terms of beating Covid, but investors should brace for some possible air pockets as we go into the back half of the year.

The long-term prognosis for strong market returns is still in place, with these being low interest rates, strong corporate earnings, impressive GDP growth and strong consumer demand. On the opposite side of the coin, the risks that investors, and advisors, will have to address inside each portfolio include inflation, Beijing’s crackdown on U.S listed stocks and a mixed Federal Reserve policy as it reallocates to monetary adjustments.

The U.S was in a recession last year and markets took a steep decline, can we fall back into an economic recession?

A consensus taken by some of the leading global economists indicate that the world economy returned to its pre-pandemic size during the second quarter of 2021. The U.S economic output grew at an impressive annual rate of 6.5% in the second quarter and exceeded pre-pandemic levels. The economy was powered by an extraordinary increase in pent up consumer spending, government stimulus, an accommodative Fed and business investment. The brief U.S recession, and its rapid recovery, have been unlike any other recession we have experienced in the past. The pandemic-induced recession was abbreviated in its length due to the effectiveness of government stimulus programs, a Fed Reserve that provided unprecedented liquidity and the rapid development of viable vaccines. In our view, a global and/or a defined U.S recession have a faint chance of returning in 2021 and or 2022, which should continue to accommodate market moves to the upside.

With “Value” stocks beating “growth” stocks for the first time in a while will the trend continue?

Financial news media for the first half of the year have been obsessively covering the subject of “Value” vs “Growth” and where should investors focus their attention. In terms of generating return for investors, “Value” stocks have been trounced by “Growth” equity investments over the last decade by a large margin. As a firm that focuses on sector rotation, as well as thematic and cyclical trends, we have focused on the economic fundamentals that have resulted in the recent strong relative performance of “Value” equities. By investing in ETF’s that focus on segmented value stocks we are capturing this trend as it continues to play out. While portfolio managers like to frame the “Value” vs “Growth” argument in many different shades, we see it as quite simply recognizing the pricing attractiveness of “Value” stocks in relation to other market sectors after years of underperformance. Historically a rising rate environment has favored “Value” over “Growth” but since 1994 we have seen “Growth” outperform in a rising rate environment. Quite simply, with “Value” lagging for such a long time and, given this stage of the economic cycle and expectations for rising interest rates, it’s reasonable to assume that value would have its time to outperform.

Why has Copper River reduced its target asset allocation in bonds?

As our clients are aware, our market experience is deeply rooted in fixed income. The asset class will always play a special role, as it meets the needs of our client base who are seeking safety of principal and also a steady income stream. The 37 trillion-dollar global bond market is currently stable and credit conditions, as tracked by the firm, remain strong across the board. Where fixed income has been a challenging asset class is the dismal yields that are afflicting bonds globally. Because of low interest rates, companies are able to issue bonds that are attractive to them, but that are very low yielding for investors. Investors are reconsidering models that included traditional fixed income as a significant percentage of their investment portfolio. Alternatives such as private real estate income trusts and secured private credit are effective bond proxies and provide returns materially higher than traditional fixed income. With the futures market pricing in federal reserve rate hikes in 2023, we should once again see a rise in rates but investors will have to be patient until yields offer real returns.

Why has private equity played an increasing role in one’s portfolio?

Private equity’s shift from a niche asset class to a critical component of the financial system is evident from investors’ financial commitment: Private equity deals hit $62.5 billion in 2020, up 8.8 percent from 2019. Blackstone, Carlyle, and KKR are now household names and publicly-traded companies of significant size. Private equity funds today account for 15%–18% of the value of all mergers and acquisitions. As public market multiples continue to diverge from private markets, opportunistic PE firms will target underperforming public companies for buy-outs with the business strategy of restructuring and improving both operations and management. Once value has been created and/or enhanced, exit strategy options include an IPO but also a sale to another company or to a SPAC. PE continues to play an ever-increasing role in the world’s financial system and we are increasing relative portfolio weightings in this asset class.

Are the recent movements in the 10-year U.S treasury bond foreshadowing problems to come in the equity markets?

The answer is a nuanced. Bonds, historically, have played a crucial role as a leading market indicator on the strength of the U.S and Global economies. However, in our view, the recent dramatic movements in the 10-year treasury yield are a result of supply and demand issuer pressures currently taking place in the market.

While the 10-year treasury yields a rather low 1.32%, it still represents an attractive yield globally for fixed income investors. Nearly two-thirds of fixed income sovereign debt is currently yielding zero or has a negative yield. With U.S Treasuries being backed by the faith and credit of the U.S government we are seeing large demand in the monthly Treasury auctions that take place. Much of this demand is from foreign investors who value the comparatively higher U.S. Treasury yields relative to other OECD countries and the ‘safe haven” status of U.S. Treasuries. Inflationary expectations, Federal Reserve tapering, continued government stimulus, economic growth, investor demand and COVID variants are some of the key variables that will impact the 10-year and the yield curve.


Going forward, Investors will be facing headwinds in the market. They will always exist. It is our job as your Financial Advisor to identify these risks and adjust portfolio weightings and positions accordingly. Protecting principal, identifying and reducing risks, and striving to achieve a reasonable rate of return are our core objectives. Although markets do not historically repeat themselves, they have historically reacted similarly to events that cause large market disruptions. Events like higher rates, natural disasters, credit crisis and now a pandemic (which really did not have a modern historical market equivalent) will tend to lead to similar reactions in various parts of the markets. What we are emphasizing here is a phrase often heard that “there is always a bull market somewhere”. The depth of the global financial markets and strength of growing global economies present investment opportunities somewhere. Investors should try their best to shy away from an “in” or “out” mentality and stay positive on the pockets where expansion is taking place, revenues are growing, and wealth is being created.

We thank you if you have gotten this far in the newsletter and look forward to a strong 2nd half of 2021. Have a great weekend. Team Copper River

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