Monthly Market Update

Market Update and Model Portfolio Reviews 11/30/2021

By Dustin Latham, CFA, CAIA, CRPC

DISCLOSURE (Click links for sources. If in print, sources available upon request). Calculations & Definitions available upon request. *Trailing returns as of 11/30/2021 and are annualized returns if over 1-Year. See “Model Disclosure” page for important disclosures and information – Total Period Measured 12/31/2016 – 11/30/2021. “Inception” refers to Inception to Date. Inception calculation assumes end of day market prices on 12/30/2016 for starting period values to calculate Inception to Date figures. Performance presented net of highest advisory fee. Views and opinions are of Alternative Capitalis, LLC and are not intended as investment advice or recommendation(s). The results do not represent actual trading and actual results may significantly differ from the theoretical results presented. Past performance is no guarantee of future results.

Domestic equities finished November down by -0.69%, although still strongly up 23.18% year to date. Investment Grade Bonds* recovered in November up 0.30% but are still down -1.29% on the year. There were not many places to hide on the equity front as both developed and emerging markets were broadly negative in November. Sector wise the two that yielded positive results were domestic Technology and Consumer Discretionary Sectors.

Below we highlight areas of concern and optimism as we head into year end, which in the last three trading days of the month were largely overshadowed after the news of another COVID variant. There’s not much to offer at month end regarding the new variant. The biggest risk we see so far is the reemergence of restrictions that create an economic slowdown (both domestic and abroad), which was quickly realized in the travel and leisure space on Black Friday. In our view, It is too soon to jump to a conclusion that this new variant in isolation is a major cause for concern, at least that is how the South African doctor who first discovered the new Variant explains in this video. As of late, the traditional 60/40 stock/bond portfolio has been working during periods of market stress with bond prices rising when equity prices are falling. That said, we are watching interest rates and balancing the tradeoff of the recent bond rally and how long that diversification persists. We don’t see any need to take extraordinary measures on the equity side at this time. Falling interest rates might make a case to add back to the banking industry but overall, outside of our Brazil exposure, we continue to like our equity positioning. Iron ore prices have come under pressure and signs point to continued prices falling which has a material impact on our Brazilian exposure. Our positioning maintains a barbell approach to areas that tend to do well with positive reopening sentiment on balance with positioning more suited for restrictive reopening scenarios. The important take away is that the barbell approach is skewed to do better in a reopening environment, with above average inflation, weakening dollar and international equities rebounding in relative terms to domestic equities.

Areas of Concern:

Unusually high level of quits specifically in employment areas that are essential to supply chain and prices (https://www.bls.gov/news.release/jolts.nr0.htm).
Prices and Wages – Real wages (adjusted for inflation) have been dropping even with higher nominal wage growth. (https://fred.stlouisfed.org/series/LES1252881600Q#0)
Consumer Confidence at 10 year low (http://www.sca.isr.umich.edu/charts.html) (https://fred.stlouisfed.org/series/UMCSENT)
The potential for retail sales figures in October reflecting hoarding in advance of the holidays due to persistent warnings of supply chain issues (demand being pulled forward). Can we really blame the supply chain issues on the shortage of truckers? (https://www.census.gov/retail/marts/www/marts_current.pdf) / (https://time.com/6116853/truck-driver-shortage-supply-chain/) / (https://time.com/6112491/supply-chain-shopping/)
Signs of an inventory build up https://www.census.gov/mtis/index.html (not yet)?
Lower savings rate: (https://fred.stlouisfed.org/series/PSAVERT#0) Down to more normal (pre-COVID) levels but still fighting inflation and pull forward demand.
Does earlier, higher spending, mean capitulation of growth in the near term (fourth quarter), with first quarter 2022 beginning to slow? How early is too early for risk asset prices to reflect this (with the norm being six months)?
Earlier comments from the Federal Reserve that tapering should be seen as flexible but planned to be concluded by mid-June 22. Signaling risk could be large risk for risk assets as policy statements or hints to anything but a slow tightening could be harmful. This is now evident after the last trading day of the month when Federal Reserve Chair Jerome Powell reminded markets of the ability to change course with his comments from the November 30 Senate Hearing (start at 1:06:08 of 2:46:12):, "At this point, the economy is very strong and inflationary pressures are high, and it is therefore appropriate in my view to consider wrapping up the taper of our asset purchases, which we actually announced at the November meeting, perhaps a few months sooner."
Fiscal and Monetary Policy running out of hot air. This coming at a time with the unknown health and policy impacts driven by the new Omicron COVID variant
Dot com bubble like valuations that continue to persist. Is this due to low bond yields, TINA (There Is No Alternative)?

Areas of Optimism:

Secular bull market kicked off by historical levels of Fiscal and Monetary stimulus, varying degrees of wealth redistribution and inequalities. Temporary slowdowns after higher growth rates could easily be confused with recessions and market corrections.
The domestic consumer is, on average, in a healthier financial situation than prior to the Pandemic when measured by debt relative to personal disposable income and/or assets (https://fred.stlouisfed.org/series/TDSP ) / (https://fred.stlouisfed.org/series/TNWBSHNO ).

Total Liabilities as % of total assets falling 2021-11-30.png

U.S. oil increased output potentially helping to ease pain at the pump, home heating oil. “Following another hefty inventory decline in September, benchmark crude oil prices surged by $9/bbl to fresh highs above $86/bbl for Brent and $84/bbl for WTI. However, preliminary data and satellite observations of stock changes in October suggest the tide might be turning.” (https://www.iea.org/reports/oil-market-report-november-2021)
International equities have broadly underperformed domestic equities in 2020 and 2021 and could be poised for relative outperformance heading into 2022.

Non-domestic equities have struggled in 2021, as a combination of the U.S. Dollar recovering from the selloff in 2020, limited vaccine access in certain markets and continued flare ups of COVID outbreaks with mixes of lockdowns slowing recoveries in many international markets. Inflation concerns continued through the month until markets were hit with a new reality of a COVID-19 variant. The World Health Organization held a special meeting on November 26 and labelled a new strain of COVID-19 a VOC (Variant of Concern), called “Omicron” for short or B.1.1.529. Black Friday was more like a red Friday for markets with most risk assets discounted relative to the day before Thanksgiving. The day was marked with plunging reopening trades and booming work from home trades with the healthcare sector getting a lift from vaccine makers. Airlines were one of the hardest hit areas as well as travel and leisure stocks in general. We took the November 26 selloff to recognize small gains on a risky short allocation in domestic markets. On November 4, for our direct clients, we implemented a small allocation to The Direxion Daily S&P 500® Bear 3X Shares. At the time of implementing this trade, the framework was based on the view that markets were near term overbought and appeared ready for a healthy pullback (healthy in this case meaning not a cause for alarm). Although a small pullback followed, it was not as meaningful as anticipated and we were stuck holding the bag on this low probability payoff profile. This is not a buy and hold allocation and, by design, not intended to be held (unless daily adjustments are made) for longer than one trading day. Having exited this position with a nonmaterial gain, we now sit with a very small allocation to cash on the equity side.

All of the model strategies and respective benchmarks were negative in November. All the model strategies lagged their domestic benchmarks while outperforming all but two of their global benchmarks. The hardest hit allocations within the model strategies were mostly realized on the final three trading days of the month which included Banking, Airlines, Health Care Services, and Communication Services. The few bright spots were in our equity Technology and Large Cap Core Growth allocations as well as our long duration exposure through Treasury coupon strips.

DISCLOSURE (Click links for sources. If in print, sources available upon request). Calculations & Definitions available upon request. Measured by the Barclays US Aggregate Bond Index* - Morningstar. S&P 500 Total Return Index**. See “Model Disclosure” page for important disclosures and information. Views and opinions are of Alternative Capitalis, LLC and are not intended as investment advice or recommendation(s). Total Period Measured 12/31/2016 – 11/30/2021 for performance presentation .“Inception” refers to Inception to Date. Inception calculation assumes end of day market prices on 12/30/2016 for starting period values to calculate Inception to Date figures. Performance presented net of highest advisory fee. The results do not represent actual trading and actual results may significantly differ from the theoretical results presented. Past performance is no guarantee of future results.

Disclosure WARRANTIES & DISCLAIMERS

There are no warranties implied. Alternative Capitalis, LLC (“RIA Firm”) is a registered investment adviser located in Massachusetts. Alternative Capitalis, LLC may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. Alternative Capitalis, LLC’s presentation is limited to the dissemination of general information pertaining to its advisory services, together with access to additional investment-related information, publications, and links. Accordingly, the publication of Alternative Capitalis, LLC’s presentation should not be construed by any consumer and/or prospective client as Alternative Capitalis, LLC’s solicitation to effect, or attempt to effect transactions in securities, or the rendering of personalized investment advice for compensation, over the presentation. Any subsequent, direct communication by Alternative Capitalis, LLC with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For information pertaining to the registration status of Alternative Capitalis, LLC, please contact the state securities regulators for those states in which Alternative Capitalis, LLC maintains a registration filing. A copy of Alternative Capitalis, LLC’s current written disclosure statement discussing Alternative Capitalis, LLC’s business operations, services, and fees is available at the SEC’s investment adviser public information website – www.adviserinfo.sec.gov or from Alternative Capitalis, LLC upon written request. Alternative Capitalis, LLC does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Alternative Capitalis, LLC’s presentation or incorporated herein, and takes no responsibility therefor. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. This presentation and information are provided for guidance and information purposes only. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy. This presentation and information are not intended to provide investment, tax, or legal advice.

Model Disclosure

Alternative Capitalis, LLC is a registered investment adviser. Information presented herein is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Model Performance Disclosure: The performance shown represents only the results of Alternative Capitalis, LLC’s model portfolios for the relevant time period and do not represent the results of actual trading of investor assets. Model portfolio performance is the result of the application of the Alternative Capitalis, LLC’s proprietary investment process. Model performance has inherent limitations. The results are theoretical and do not reflect any investor’s actual experience with owning, trading or managing an actual investment account. Thus, the performance shown does not reflect the impact that material economic and market factors had or might have had on decision making if actual investor money had been managed. Model portfolio performance is shown net of the model advisory fee of 1.25%, the highest fee charged by Alternative Capitalis, LLC. This reflects a change from Alternative Capitalis, LLC highest fee charged to a client(s) account from 1% to 1.25% annually. April 1, 2018 model performance to most recent date presented adjusts for the higher 1.25% annual fee. Model portfolio performance is shown net of the sample trading costs based on our Custodian’s, TD Ameritrade Institutional, trading costs. Performance does not reflect the deduction of other fees or expenses, including but not limited to brokerage fees, custodial fees and fees and expenses charged by mutual funds and other investment companies. Performance results shown include the reinvestment of dividends and interest on cash balances where applicable. The data used to calculate the model performance was obtained from sources deemed reliable and then organized and presented by Alternative Capitalis, LLC. The performance calculations have not been audited by any third party. Actual performance of client portfolios may differ materially due to the timing related to additional client deposits or withdrawals and the actual deployment and investment of a client portfolio, the reinvestment of dividends, the length of time various positions are held, the client’s objectives and restrictions, and fees and expenses incurred by any specific individual portfolio. The performance calculations are based on a hypothetical investment of $100,000 for both the model and benchmarks presented. Benchmarks: The performance results shown are compared to the performance of the performance of a blended ETF (exchange-traded-fund) portfolio comprised of the following two ETF’s symbols, SPY & AGG, are described below. The benchmarks used are investable ETFs and their performance calculation is inclusive of the highest fee charged to a client(s) account, 1.25% annually. This will reduce the total return of the investable benchmark by the annualized rate of 1.25%. The ETF symbol SPY (SPDR® S&P 500® ETF Trust) which seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the S&P 500® Index (the "Index"). Visit https://us.spdrs.com/en/etf/spdr-sp-500-etf-SPY for more information about the ETF. The S&P 500® Index results do not reflect fees and expenses and you typically cannot invest in an index. The ETF symbol AGG (iShares Core U.S. Aggregate Bond ETF). The iShares Core U.S. Aggregate Bond ETF seeks to track the investment results of an index composed of the total U.S. investment-grade bond market. (the "Index"). Visit https://www.ishares.com/us/products/239458/ishares-core-total-us-bond-market-etf for more information about the ETF. The index composed of the total U.S. investment-grade bond market results do not reflect fees and expenses and you typically cannot invest in an index. The benchmark is blended representing a weighting of a percentage (%) to SPY and percentage (%) to AGG based on the respective model weights below. Unless otherwise indicated, the benchmarks are not rebalanced to maintain their original weighting over the period measured. Instead, they are comprised of the starting allocation and will shift given the prevailing market environment over the period measured. Return Comparison: To benchmark the results, the ETF (exchange-traded-fund) symbol SPY (SPDR® S&P 500® ETF Trust) which seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the S&P 500® Index (the "Index"). The S&P 500 was chosen as it is generally well recognized as an indicator or representation of the stock market in general and includes a cross section of equity holdings. In addition, the ETF symbol AGG was chosen as a benchmark. The iShares Core U.S. Aggregate Bond ETF seeks to track the investment results of an index composed of the total U.S. investment-grade bond market. The total U.S. investment-grade bond market was chosen as it is generally well recognized as an indicator or representation of the bond market in general and includes a cross section of debt holdings. For each respective model benchmark the performance measurement weightings are as follows to SPY / AGG %: 20/80, 30/70, 40/60, 50/50, 60/40, 70/30, 80/20, 90/10 % respectively for Ultra Conservative, Conservative, Moderate, Balanced, Growth & Income, Growth, Aggressive, Ultra Aggressive. OPTIONS TRADING RISK DISCLOSURE: Options Trading – Both the purchase and writing (selling) of options contracts –involves a significant degree of risk not suitable for all investors. Investors should carefully consider the inherent risks and financial obligations associated with options trading as further detailed in the Options Clearing Corporate booklet “Characteristics and Risks of Standardized Options.” 101 Federal Street, Suite 1956A, Boston, MA 02210 is Alternative Capitalis, LLC’s client facing address. All books, records, receipts, correspondence (mailing address) and day to day operations are located at 1565 West St, Wrentham, MA 02093.

The ETF symbol BNDX (Vanguard Total International Bond ETF). The Vanguard Total International Bond ETF attempts to track the performance of the Bloomberg Barclays Global Aggregate ex-USD Float Adjusted RIC Capped Index (USD Hedged). Visit https://investor.vanguard.com/etf/profile/BNDX for more information about the ETF. The ETF symbol VT (Vanguard Total World Stock ETF) seeks to track the performance of the FTSE Global All Cap Index, which covers both well-established and still-developing markets. Visit https://investor.vanguard.com/etf/profile/VT for more information about the ETF. The ETF symbol BND (Vanguard Total Bond Market ETF). The Vanguard Total Bond Market ETF attempts to track the performance of the Bloomberg Barclays U.S. Aggregate Float Adjusted Index and attempted to track the Bloomberg Barclays U.S. Aggregate Bond Index through December 31, 2009. Visit https://investor.vanguard.com/etf/profile/BND for more information about the ETF. The benchmark is blended representing a weighting of a percentage (%) to BND, percentage (%) to VT and percentage (%) to BNDX based on the respective model weights below. The benchmarks are rebalanced over periods that include a calendar year end date, on the calendar year end date, to their original weighting over the period measured. The Benchmarks are comprised of the starting allocation and will shift given the prevailing market environment over the period measured. Return Comparison: To benchmark the results, the ETF symbol BNDX (Vanguard Total International Bond ETF) attempts to track the performance of the Bloomberg Barclays Global Aggregate ex-USD Float Adjusted RIC Capped Index (USD Hedged). The Vanguard Total International Bond ETF was chosen as it is generally well recognized as an indicator or representation of the global bond market, ex-U.S. bonds, and tracks an investment-grade, non-USD denominated bond index, hedged against currency fluctuations for U.S. investors. The ETF symbol VT (Vanguard Total World Stock ETF) seeks to track the performance of the FTSE Global All Cap Index, which covers both well-established and still-developing markets. The Vanguard Total World Stock ETF was chosen as it is generally well recognized as an indicator or representation of the global stock market and tracks a market-cap-weighted index of global stocks covering approximately 98% of the domestic and emerging market capitalization. The ETF symbol BND (Vanguard Total Bond Market ETF) attempts to track the performance of the Bloomberg Barclays U.S. Aggregate Float Adjusted Index and attempted to track the Bloomberg Barclays U.S. Aggregate Bond Index through December 31, 2009. The Vanguard Total Bond Market ETF was chosen as it is generally well recognized as an indicator or representation of the U.S. Domestic bond market, and tracks a broad, market-value-weighted index of U.S. dollar-denominated, investment-grade, taxable, fixed-income securities with maturities of at least one year. For each respective model benchmark the performance measurement weightings are as follows to BND/VT/BNDX %: 66/20/14, 57.8/30/12.3, 49.5/40/10.5, 41.2/50/8.8, 33/60/7, 24.7/70/5.3, 16.5/80/3.5 and 8.2/90/1.8 % respectively for the Ultra Conservative, Conservative, Moderate, Balanced, Growth & Income, Growth, Aggressive and Ultra Aggressive Global Benchmarks.

The results do not represent actual trading and actual results may significantly differ from the theoretical results presented.