Skip to content
Weekly Insights
Volume 10, Edition 23 | July 5 – July 9, 2021

Avoiding Unnecessary Risks

Doug Walters, CFA
2021 continues to be a year of cautionary tales as risk appetites are high and investors appear emboldened to invest in alternative assets. In such an environment, a straightforward, simple approach may be best.

Contributed by Doug Walters, Max Berkovich

The theme of our Q2 Perspectives report published last week was “keep it simple.” That message was underscored this week by an ugly first-half report by a hedge fund caught up on the wrong side of the meme stock frenzy. Given high valuations and frothy risk appetites, 2021 is likely to be full of cautionary tales. Avoiding these pitfalls is not hard.

Melvin Capital, a prominent hedge fund, started the year with $12.5 billion and a big negative bet on Gamestop. Then came the retail squeeze, and overnight the fund found itself down over 50%. This week Bloomberg reported the fund ended the first half of the year with a 46% loss. What is perhaps more amazing is that assets of the fund as of June 1st were $11 billion, indicating that, despite horrible results, they were able to pull in additional assets. There is a certain allure of hedge funds and other alternative assets which create a velvet rope mystique. They have achieved this despite the fact they charge high fees, are generally not very liquid and have tended as an asset class to underperform the stock market.

“Given high valuations and frothy risk appetites, 2021 is likely to be full of cautionary tales. Avoiding these pitfalls is not hard.”


On the other side of the Melvin story are the retail investors driving up the shares of meme stocks like Gamestop and AMC Entertainment. Just like cryptocurrencies, these stock valuations are not backed by real fundamentals. Instead, they require a constant flow of new investors and assets, much like a Ponzi scheme. Once that demand dries up and prices start falling, they can fall fast as investors race for the exit. Bitcoin is down nearly 50% over the past few months, while Gamestop and AMC are down about 37% and 26% from recent peaks. The race may be on.

Avoiding these investor pitfalls is not hard. A well-diversified portfolio, invested in liquid securities, and rebalanced regularly is a proven winning strategy. It is not that the well-diversified portfolio cannot go down. It certainly can. But those are normal declines and not the sort of permanent loss of capital that can come from unnecessarily risky assets.


Bonds on the move again

Bond yields fell hard this week. After ending the week at 1.43%, the 10Y Treasury dipped down to 1.29% on Thursday. In the world of bonds, that is a big move.

Headlines This Week

Peak Everything

Bonds stole the show this week as yields fell almost as fast at they rose in February. Nothing appears to have changed other than sentiment.

  • The 10Y Treasury fell from 1.43% to 1.29% before bouncing on Friday.
  • This week’s narrative has focused on peak growth, peak inflation, and peak stimulus as we gradually return to a post-pandemic normal.
  • All of this was very predictable given the low base that the economy set a year ago, but that did not seem to matter to bond investors this week.

The Growth and Value Battle

The bond rally has been mirrored by growth stocks, which outperformed much of the week.

  • Value had a very strong start to 2021. Financials, Industrials, and other cyclical sectors are benefiting from reopening momentum. As the economy improves, this segment of the market has the most to gain.
  • In recent weeks, the “peak growth” narrative has inflicted some damage on Value sentiment, enabling Growth to outperform.
  • But Value’s day may not be done. While we may have hit the peak year-on-year growth, given how low the base was a year ago, continued reopening momentum has the potential to keep growth well above average for some time.

Meeting Minutes

The Fed released its closely watched FOMC meeting minutes on Wednesday.

  • The notes underscored that the committee is talking about a plan for tapering asset purchases.
  • They also made clear that patience is important in the process. So, while the Fed has taken a slightly more hawkish tone over the past month, they will not be quick to act.
  • There was a discussion of inflation. While acknowledging that inflationary pressures were higher than expected, they still see them as transitory.

The Week Ahead

Central Banks Reconsidering

The Bank of Canada (BoC), Bank of Japan (BoJ), and the Royal Bank of New Zealand (RBNZ) will all have meetings and interest rate decisions next week.

  • A further reduction in quantitative easing is expected from the Bank of Canada, even as virus fears escalate again with the delta variant sending countries back into lockdown.
  • The Bank of Japan is expected to keep its monetary policy steady as Japan re-enters stricter lockdowns in anticipation of the Tokyo Olympics later this month.
  • The RBNZ will garner attention next week as it publishes its forward guidance amongst rising inflation and growth metrics.
  • It is expected that the RBNZ will move forward with its forecast for rate hikes, with the first increase moving to November of this year (previously August 2022).

US Banks Looking to Sustain Results

Earnings season is back and will be kicked off by US banks reporting next week.

  • Included next week will be Goldman Sachs Group (GS), JPMorgan (JPM), Citigroup (C), Morgan Stanley (MS), Bank of America (BAC), and Wells Fargo (WFC).
  • Financial institutions, including banks, have been in favor of much of the first half of 2021, seeing their stock prices continuing to climb.
  • After the big banks performed so well in the first quarter of 2021, a slight decrease (5%) is expected as the segment begins to normalize.

Inflation at Home and Abroad

The US, UK, and the Eurozone will all be publishing inflation data next week.

  • June’s annual US consumer price index (CPI) is expected to tick down to 4.9% after May’s high of 5.0% slightly.
  • If forecasted correctly, this could bode well for the Fed, which has repeatedly stated that this recent surge in inflation is transitory and will subside.
  • UK inflation is out on Wednesday and expected to nudge up to 2.2% year-over-year from 2.1% in May.
  • Finally, on Friday, the Eurozone’s CPI data is out and to remain relatively low and stable at 0.9%.

Retail Sales Rollercoaster

US retail sales have been inconsistent this year as we have already seen two negative months and three positive months.

  • On Friday, the retails sales number is likely to attract the most attention after an unexpected drop of 1.3% month-over-month in May.
  • Analysts are not anticipating a rebound for June, with another decline of 0.6% forecasted.
  • If this repeated reduction in retail sales comes to fruition, it will support the case for the Fed to be patient before reducing any asset purchasing programs.

About Strategic

Founded in 1979, Strategic is a leading investment and wealth management firm managing and advising on client assets of over $2 billion.



Strategic Financial Services, Inc. is registered with the Securities and Exchange Commission (SEC) as an Investment Advisor. The term “registered” signifies compliance with regulatory requirements and does not imply a certain level of skill or training.

The information provided on our website, including weekly market commentaries, financial planning articles, and other educational resources, is intended solely for educational purposes. It is designed to offer insights into financial planning and investment management, aiming to enhance understanding of financial concepts, strategies, and market trends. This content should not be interpreted as personalized investment advice or a recommendation for any specific strategy, financial planning approach, or investment product. Financial decisions are deeply personal and should be made considering the individual’s specific circumstances, goals, and risk tolerance. We recommend consulting with a professional financial advisor for personalized advice.

Please be aware that Strategic Financial Services, Inc. does not provide legal or tax advice. The content on this website is not intended to be used as such or as a substitute for legal or tax advice from a licensed professional. We advise seeking guidance from qualified legal and tax advisors regarding these matters.
Investment Risks and Portfolio Management.

The discussion of any investments on this website is for illustrative purposes only and provides no guarantee that the advisor will make any investments with the same or similar characteristics as those presented. The investments identified and described herein do not represent all the investments purchased or sold for client accounts. The selection of representative investments to discuss is based on various factors, including recent company news or earnings releases.

It should not be assumed that any investments discussed were or will be profitable. All investments involve risk, including the potential loss of principal. There is no assurance that investments mentioned will remain in client accounts at the time you view this information.

When index returns are mentioned on this site, they are provided as a general indicator of market conditions and are not representative of any client’s portfolio performance. Indices are unmanaged, do not incur management fees, costs, and expenses, and cannot be invested in directly. Therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.

While index returns are used as a framework to report on general market conditions, they should not be construed as an indicator of future performance of any specific investment or portfolio. Discussion of index returns is intended to provide context and insight, not to suggest that clients will achieve similar results. Each client’s portfolio is managed according to their specific investment goals and financial situation.

The opinions and any forward-looking statements expressed in the articles and videos featured in our resource center are as of the date of publication. These statements are based on current laws, regulations, market conditions, and other relevant factors, including third-party data. Given the dynamic nature of financial and regulatory environments, as well as potential changes in market conditions or economic circumstances, the information provided may become outdated or may no longer be accurate.
We rely on third-party data to form our opinions and projections, which means that these are subject to the same uncertainties that affect all data-dependent analyses. As such, we advise readers to exercise caution and not rely solely on the statements made herein for making financial decisions. It is recommended that investors consult with a professional advisor who can help assess the relevance and accuracy of the content in light of the current economic climate and personal financial situation.

Our website contains links to third-party websites as a convenience to our users. Strategic Financial Services, Inc. does not control, endorse, or guarantee the content found on such sites. We are not responsible for the accuracy, legality, or content of the external site or for that of subsequent links.
Contact the external site for answers to questions regarding its content.
The inclusion of any link does not imply our endorsement of the site, nor does it imply any association with its operators. Use of any such linked website is at the user’s own risk.

Related Resources