Effective Date:  June 30, 2021

MARKET UPDATE SUMMARY

Equity markets posted strong gains this quarter as economies continued their post pandemic recovery. Interest rates reached a short-term peak in March with the US 10-year Treasury yielding 1.8% Since that time, interest rates declined modestly, and bond prices gained. The aggregate bond index gained 1.8% during the quarter. The US 10 Year Treasury bond currently yields 1.5% compared to 1.7% on March 31, 2021. No changes are recommended to your portfolio at this time.

 

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INVESTING IN REAL ESTATE

 

Equity markets posted strong gains this quarter as economies continued their post pandemic recovery. Interest rates reached a short-term peak in March with the US 10-year Treasury yielding 1.8% Since that time, interest rates declined modestly, and bond prices gained. The aggregate bond index gained 1.8% during the quarter. The US 10 Year Treasury bond currently yields 1.5% compared to 1.7% on March 31, 2021.

 

During the last three months, the COVID-19 pandemic has receded due to the rollout of several effective vaccines. Countries like the US, Israel, and UK that lead the world in vaccination penetration have seen the largest decline in new cases, hospitalizations, and deaths. Countries that were not able to roll out vaccines as widely are still having problems. While there are continuing risks with new variants and the future remains uncertain, it appears the vaccines are effective and the worst is behind for most countries. Nearly as quickly as the pandemic receded, economies surged, and in many ways surpassed pre-pandemic levels.  GDP, company earnings, retail spending, housing, and many other sectors are strong and likely to remain strong for several quarters. Employment is one area that is still below pre-pandemic levels, but there are currently more open positions in the US than unemployed people seeking work. Employment is expected to surpass January 2020 levels by the end of the year.

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ADVANTAGES OF INVESTING IN REAL ESTATE

 

Market indicators and outlook are unchanged since the last quarter. The strong positive economic momentum is a result of stimulus and pent-up demand. During this quarter, earnings of the S&P 500 companies in aggregate surpassed pre-pandemic levels. As companies reported earnings in April and early May, those earnings exceeded estimates by the widest margin in twenty years. Strong earnings growth normally translates into strong market returns, similar to what has been happening. Since the beginning of the pandemic, we have been more optimistic than most about the economic and market recovery. Even though economists and investors are finally acknowledging the situation has improved, it is possible the economy and/or markets continue to outperform expectations and surprise people to the upside.

 

Many investors are concerned about valuations given the rise in the markets. Valuations are above historic averages, which makes sense given the low interest rate environment. Somewhat surprising, is that while the markets have surged, earnings have risen even faster than the market, and price-to-earnings (P/E) ratios are lower now than they were during most of 2020. 

 

It is possible equity markets trade sideways for a time or see a correction of 10% or more. This would be considered normal market activity. On average, the US equity market experiences a 10% correction about once per year and we have seen two smaller pullbacks already this year. Corrections are difficult to predict, but one potential catalyst would be an abrupt change in policy of the Federal Reserve. With that said, we have a positive outlook for the remainder of the year and over the next ten years.

 

On a short-term basis, this is the strongest period of economic growth in the US since 1950, albeit the economy is bouncing from an unusual recession. Markets usually have good years when economic growth is accelerating, like we are experiencing now. Since 1950 there have been sixteen years in which markets have been up greater than 12.5% as of June 30th. In twelve of the years (75%) markets saw a strong second half of the year with above average additional gains. Only one year (1987) saw a significant decline in the second half of the year, but still finished the year positively. 

 

Longer term, we are optimistic about the future. The US has favorable demographic trends with the millennial generation entering their peak productivity, earnings, and spending years. The Millennials are the largest US generation yet and are significantly larger than Gen X who immediately preceded them and even larger than the Baby Boom generation. Large demographic trends, such as this one, have driven positive economic and market trends in the past. In addition, crisis’ like the world recently experienced have historically accelerated positive economic and technological changes after the crisis ends. We expect markets will have some good years and some not so good years, but the next ten years may be better than what many investors are expecting.

 

MYTHS OF INVESTING IN REAL ESTATE

 

A common goal mentioned by people interested in real estate is to “generate passive income”. Many people think collecting a rent check each month is as easy as it gets. However, there is nothing passive about owning real estate. It takes work to find and keep reliable long-term tenants or high occupancy rates. You have to find and pay quality contractors to maintain the building and grounds or do it yourself. Getting calls late at night about flooding toilets when you have to go to your full-time job early the next morning is not fun. Hiring a third-party property manager can make it way easier on you, but your profit margin will most likely suffer significantly. 

 

While the passive income potential from real estate makes for happy investors, your property may not always generate a net positive cash flow. Instead, you may need to make capital outlays above and beyond the initial payment you made to purchase the property. For example, real estate investments require repairs and maintenance on a regular basis and major renovations periodically. Make sure to budget for possible future expenditures.

While the passive income potential from real estate makes for happy investors, your property may not always generate a net positive cash flow. Instead, you may need to make capital outlays above and beyond the initial payment you made to purchase the property. For example, real estate investments require repairs and maintenance on a regular basis and major renovations periodically. Make sure to budget for possible future expenditures.

While the passive income potential from real estate makes for happy investors, your property may not always generate a net positive cash flow. Instead, you may need to make capital outlays above and beyond the initial payment you made to purchase the property. For example, real estate investments require repairs and maintenance on a regular basis and major renovations periodically. Make sure to budget for possible future expenditures.

BOOK CLUB RECOMMENDATION

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Many people dream of quitting a job or leaving a boss they dislike and becoming their own boss by starting a business. Each year, a million new businesses are started. However, 40 percent fail within the first year and 80 percent fail within five years. Of those that last five years, more than 80 percent fail in the next five.
 
Underlying the high failure rate are persistent romantic notions about how businesses are born and what it takes to succeed. In The E-Myth Revisited: Why Most Small Businesses Don’t Work and What to Do About it, Michael E. Gerber argues that new business owners typically fail because they focus on technical expertise rather than on developing business knowledge. They mistakenly think that knowing how to do a specific thing, such as baking pies, is all it takes to make a business work. But there’s much more to it. The important thing isn't the commodity — what is produced — but how it’s produced. The business itself is the product.
 
This book is a must read for anyone contemplating starting a business, investing in rental real estate, or operating a farm. It can also breathe new life into a venture already in place that is struggling to get off the ground.

Do you have book recommendations you would like to share with us? We would love to hear from you! 

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Des Moines, IA 50309
www.westfinancialadvisors.com