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Quarterly Commentary

Investment Commentary – Q2 2021

12 July, 2021

Graduation season across the country this quarter launched a huge wave of students into new territory. Whether on to a new K-12 school , college , graduate school ,or into the work force, the graduation ritual signifies a major change and embarkation point. For those graduating in 2021, the year they have experienced as students has been unlike anything that they could have prepared for or imagined. Graduation speakers reminded students of the hardships they have endured this past year and encouraged them to look for the joy.


Speakers told college graduates that they will face a myriad of challenges and opportunities in a profoundly uncertain world. That is certainly not a stretch! The graduates of today have just come through a once in a 100-year pandemic, witnessed intense polarization in Washington and partaken in social, environmental, and racial justice marches the likes of which have not been seen in decades. They have been challenged to reinvent ways of learning and to be resilient in the face of adversity. All lessons that should serve them well moving forward.


Inspirational speaker John O’ Leary suggests that graduates adhere to the advice that success won’t be found in moving faster, striving incessantly, living selfishly, playing shallowly, or judging others but rather by the gift of slowing down, recognizing what really matters, identifying what really doesn’t, and embracing
the awesome gift that this life is. Words to live by.


Second Quarter Market Review

• As the global economy recovers from the pandemic with varying degrees of success, global stock and bond markets posted broad gains in the second quarter.


Source: FactSet financial data and analytics


Source: FactSet, CNBC, CNN, Reuters, Yahoo Finance, NY Times, JPMorgan, US Bureau of Labor Statistics


• Notable among them was US equities which gained 8.5% for the second quarter and 15.3% for the year led by easy monetary and fiscal policy, like potential infrastructure spending, strong economic recovery and robust corporate earnings. In the first half of 2021, US equities marked 34 record highs and the largest gains since 2019[i]. As equity markets have rallied, volatility fell to pre- pandemic lows[ii].


International markets trailed US equity markets for both the quarter and the year. Developed international markets gained 5.4% and trailed US equities due to negative returns in Japan over slow vaccination efforts[iii]. Finally, regulatory and policy tightening concerns in China held back emerging market equities to a 5.1% gain for the quarter.


Within the US sector, performance was varied with results ranging from 13.1% for real estate to -0.4% for utilities. Real estate continued its climb benefiting from the re-openings across the country. Energy was the third best performing sector which gained 11.3%, as Brent crude oil prices crossed $75 per barrel for the first time since 2018[iv]. Energy remains the top performing sector for the year, up 45.6% as oil prices commensurately climbed 50% in 2021. Finally, the strong economic recovery made a traditionally defensive sector like utilities less attractive relative to other sectors and lost -0.4%


The outperformance of economically sensitive value stocks that dominated the market since the news of an effective vaccine in late 2020 reversed course in the second quarter. Growth stocks outperformed value stocks as technology shares surged on falling interest rates and better earnings expectations. For the quarter, large- and mid-cap growth stocks beat their value counterparts, but small-cap value still led small-cap growth.


In the bond market, after the Federal Reserve acknowledged it was on watch for inflation, the yield of the 10-year Treasury note fell 30 basis points to 1.45% from a high of 1.74% in March[v]. As rates fell US bonds gained 1.8% during the quarter but was unable to reverse the losses from prior quarter and remains negative (-1.6%) for the year. High-yield bonds gained 2.7% for the quarter and 3.6% for the year and continues to outpace government and corporate bonds.


REITs continued its climb, returning 12% for the quarter and 21.3% for the year. Commodities also gained 13.3% in the second quarter, led by energy which was up 23% for the quarter. Inflation concerns also led gold and silver higher by 3.5%, and 6.2% respectively for the quarter. However, gold remains down -7% for the year. In REITS, with the exception of hotels, all other REIT sectors saw positive returns with self-storage up nearly 24% for the quarter.



What do Shaquille O’Neal, former speaker of the house Paul Ryan, hedge fund manager Bill Ackman, tennis superstar Serena Williams, and musician Jay-Z all have in common? All of them have a SPAC! This acronym has been in the financial press an awful lot lately, so we wanted to explain what a SPAC is and what it means for you as an investor.


What is a SPAC?
A Special Purpose Acquisition Corporation (SPAC) is a way for companies to go public without going through the traditional arduous IPO process.


How it works
A SPAC is listed on an exchange, just like a regular stock, but at the time it is created it does not own any underlying business. This is why a SPAC is often referred to as a “blank check” company. The SPAC sponsor sells shares to investors and with the proceeds they are tasked with targeting a private company, getting the company to agree to go public, and convincing shareholders to approve the merger. Once the merger is approved, the acquired company takes over control from the SPAC sponsor and starts trading under its own name and ticker symbol. If the SPAC sponsor can’t complete a merger within a set time period, usually two years, they must return the money to their investors.


In the past 20 years or so, more and more companies have decided to remain private and have been hesitant to go through the IPO process, which takes a long time and exposes them to a high level of scrutiny. These companies have waited as long as possible before going public, so investors have not been able to participate in as much of their early growth as they could in the past. Facebook, for example, went public in 2012 at a valuation of over $100 Billion as an already very large and established company. In another era, they would have gone public well before reaching that stage.


WeWork is a recent example of a high-profile private company that started the IPO process and it nearly killed the company. They wilted under scrutiny, resulting in the near-bankruptcy of the company and the ouster of their founder/CEO. (WeWork is also an example of the allure of the SPAC process, as they just announced they are going public via a SPAC, 2.5 years after their failed IPO).


SPACs have been around since the 1980’s, but just started to gain in popularity in recent years. In 2020, this trend skyrocketed, with over 248 SPACS created and $83 billion in proceeds raised. In 2021, the trend has continued, with 349 SPACs created and $108 billion raised, in only the first 6 months of the year! For perspective, just 5 years ago, only 13 SPACs were issued raising $3.5 billion for the entire year.




Many of these companies have little to no revenue, but offer investors a chance to invest in exciting, next- generation industries, like electric vehicles (Nikola, Lucid Motors) or rockets (Virgin Galactic). For example, when Galactic went public in 2019 at a valuation of $1.5 billion, 2020 revenues were expected to come in at
$31 million. The actual revenue in 2020: $238,000.


SPACs also include companies in mature industries as well, like Hostess (the makers of Twinkies) and Topps (sports cards) among many others.
In 2020, the performance of many of these high-profile SPACs was spectacular, drawing even more interest from investors and creating more demand for new issues and also the proliferation of celebrity-backed SPACs.


In 2021, at the time of this writing, the performance of these once highfliers has slowed, with an ETF investing in SPACs about 25% below its highs. The market has become very saturated with the explosion of new SPACs all looking for attractive private companies to acquire. This may lead to less-than-stellar deals, given the pressure to close a transaction within two years and the competition flooding into the market all looking for acquisitions.


Should I Invest in a SPAC?


Investing in SPACs is nearly the definition of speculation: you invest without knowing which company you are buying! This harkens back to a famous offer during the South Sea Bubble, of “a company for carrying out an undertaking of great advantage, but nobody to know what it is.”


Without knowing the company to be acquired, you are basically betting on the jockey: the SPAC sponsor. You must also consider that SPACs are a better deal for insiders than they are for end investors. Early investors in SPACs have options that allow them to buy more shares at a preset price in the future. They also can sell their shares before deals are completed to limit their risk. SPAC sponsors generally receive 20% of the company as payment for setting up the blank check structure and finding the target. Most other investors, on the other hand, buy at the market price and are taking the risk of getting a bad deal. SEC Chairman Gary Gensler has been raising red flags and recently testified “It may be that the retail public is bearing much of the costs.”


Investors should be cautious investing in IPOs in general, which historically on average have been a better deal for insiders than they have for end-investors. SPACs are a step above IPOs in risk, as the company is unknown and does not have to go through the same public scrutiny as an IPO. Also, on average, most SPACs have performed worse than the overall market and worse than IPOs. Again, this is on average, there have been notable exceptions that have posted amazing returns. These risks do not mean that SPAC’s cannot be great investments, it just means that extra research and caution are required.


SPACs are likely here to stay and will be used by more and more companies in the future, perhaps even supplanting the traditional IPO process as the preferred method to go public. As this market matures, investor protections are likely to be increased and costs will come down – we have even seen the traditional 20% sponsor fee start to decline in some cases. In the end, a thriving SPAC market could be a great positive for investors, allowing access to companies at earlier stages in their development. As always, we are here to help you with any questions you may have about SPACs or any other investment vehicle.




The news is replete with stories of the recovery and the drive to get “back to normal”. Along the way, supply chain hold-ups and excessive pent-up demand have served to drive food, energy, and travel related expenses through the roof. Speaking of roofs, it is not lost an anyone looking to purchase a home that the prices in many parts of the country have reached ridiculous levels with little end in sight. Labor shortages have driven prices higher in many industries with restaurants just one example of a recovering group that cannot find help and must increase pay to attract workers.


In May, many States began to rebel against the Federal government’s employment benefits by withdrawing from programs created under the CARES Act of March 2020. These programs had raised the amount of weekly aid, extended its duration, and offered funds to workers who do not typically qualify for state benefits. By removing this stimulus, States hoped to push people back into the workforce and reduce the strain on employers.


As noted above, the Federal Reserve has termed this inflation as “transitory”. We believe that we will see a downward movement in inflation later next year but that the higher wages being paid to employees will be difficult to reverse. It is hard to put the genie back into the bottle. There are some signs of material prices retreating but there is much movement to be done to get close to pre-pandemic levels. As an example, lumber prices have moved from $400 per thousand board feet pre-pandemic to $1,700 in May and now hover in the $800 range.1 High prices have been the elixir here as they have led to postponed purchases while mills get back online.


We expect global growth will continue to accelerate through early 2022 and that fiscal and monetary stimulus, while waning, will continue to be supportive near-term. For the year, US GDP is expected to grow more than 6.5% and more than 4% in 2022, a run-rate significantly above the 2-3% range since 2014.2 One would expect that the bond markets would have continued their move higher given this expected growth yet the yields on long-bonds have actually gone in reverse. What is this telling us?


Former Defense Secretary Donald Rumsfeld passed away recently. A controversial figure, he famously said “As we know, there are known knowns. There are things we know we know. We also know there are known unknowns. That is to say, we know there are some things we do not know. But there are also unknown unknowns- the ones we don’t know we don’t know.” Without a clear answer to what the bond market is seeing, we will chalk it up to some unknown unknowns and some expectation that slowing stimulus, a still lingering concern about the Delta variant, hot inflation, and overly optimistic earnings estimates could be waiting to upset the applecart.

Meme stocks, cryptocurrencies, and space X are just a few of the stories that captured headlines this quarter. For some, these offer warning signs of speculation over investing. The jury remains out on the crypto world, but we believe that digital currencies are here to stay and that a further shakeout will occur amongst the over 5,000 cryptocurrencies resulting in some form of government back digital currency and some non- government backed currency that has matured enough for prime time.


Equities continue to look better than fixed income as growth around the world continues. Fixed income remains challenged but has surprised us and many with the decrease in rates leading to some short-term positive performance for longer-duration fixed income. Much of our decision regarding allocations overseas is driven by the dollar and we see the dollar remaining is fairly tight range for now. We continue to look to global managers to provide some active management between US and non-US companies with dedicated international managers making up a smaller part of our overall international allocation.


We have allocated capital to several alternative managers in the private equity, private debt, and alternative lending space as we look to further diversify portfolios. We anticipate adding more of these investments into portfolios this quarter. Hedged equity ETFs have also been a staple of our portfolios as we believe that the risk/return they offer is attractive. A next iteration of these investments is also on the table and we will



• Covid variants impacting non-US more than the US at this time
• Inflation risks
• Equity and Fixed Income valuations are high on an historical basis
• Elevated corporate and government debt levels offset in part by healthier consumer balance sheets.
• Government stimulus sill on the way but winding down.
• Cyberattacks
• Higher tax rates expected in coming year(s)

• More fiscal support approved and moving into the economy
• Accommodative monetary policy
• Healthy consumer and corporate balance sheets
• Vaccines are working and enabling the economy to reopen
• Potential for improving trade globally under new US administration


PRW News

We are thrilled to announce that Nate Baldwin has joined the firm as senior wealth advisor. Nate brings to the firm over 22 years of financial planning and investment management experience. Nate’s primary responsibilities are providing financial planning and investment services to clients, drawing on his own expertise while collaborating with tax, legal, and other internal and external professionals to develop truly comprehensive strategies for clients. He is a CERTIFIED FINANCIAL PLANNER™ and a CFA® charter holder.


Bill Payne attended a Board meeting in May in Texas for Lion Street. The Austin-based company serves PRW Wealth Management and our clients in several capacities, including as our Broker Dealer. Lion Street has continued to distinguish itself as a premier financial services entity with national recognition.


We are also excited to announce that Duncan Payne has joined the firm as Business Development Officer. Duncan is a 2013 graduate of Northeastern University and joins the team after 8 years of active duty with the Navy SEALs where he achieved the role of chief medic. We look forward to introducing you to him.


PRW baseball phenom Ted Dziuba penned a piece in June discussing the buzz about Bobby Bonilla Day celebrated every July 1. A snippet of the piece is below.


Bobby Bonilla was a 6-time Major League All-Star and 1997 World Series Champion who played for 9 different teams across a successful 16-year career in the big leagues. His name is familiar to many outside of the game of baseball because of some savvy financial planning that he implemented when he was released by the New York Mets in 1999. Still owed $5.9 Million on his contract with the Mets, an agreement was made to defer that payment for 10 years, with an agreed-upon annual interest rate of 8%. Mr. Bonilla’s eventual payout would grow to $29.8 Million, which was annuitized to provide annual payments of $1.19 Million per year for the next 25 years. The full article can be found here.


We wish you a very happy and healthy summer filled with fun new memories. We look forward to connecting with you.


William A. Payne

Richard A. Renwick

Elliot B. Herman

1 NASDAQ, Bloomberg

2 Bloomberg, Federal Reserve Bank of Atlanta GDPNow model




[iv] https:



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