I hope you enjoyed a Merry Christmas and a wonderful New Year!

In 2019, I saw great success stories in our client’s lives. I want to congratulate those who invested in themselves to confidently walk into the next chapter of their lives. We have families who:

• Retired successfully
• Paid off their debts
• Bought vacation homes with cash
• Bought and/or sold businesses
• Invested in and/or updated their Financial Plans
• Families who established plans a few years back saw the rewards of their sacrifices come to fruition

Congratulations on your accomplishments! I am so excited and thankful to be part of your financial journey and look forward to seeing what you will be rewarded within 2020.

An Incredible 2019 in the Rear-View Mirror

Last year started with a lot of uncertainty. But as the months went on, we saw the market recover from two 2018 corrections, and things started to look promising. A few things contributed to a good year:

• Tax cuts stimulated the economy
• Deregulation has made it easier for corporations to do business
• The Federal Reserve cut interest rates three times, making borrowing more affordable

We have a lot to be grateful and thankful for. That said, history follows a pattern.  It would not surprise us to see some sort of correction after the strong year in 2019. Economic and political issues such as China trade, unrest in the Middle East and the upcoming November elections are potential risks.

Do you know where you stand?

Since the last great recession of 2008, we have had 10 years of a strong bull market, albeit with some temporary declines.

Let’s plan today so that when history repeats itself, you will have peace of mind, confidence, and freedom in knowing that you were proactively planning and taking care of your financial health.

Whether you are already in or are getting ready for retirement, ask yourself the following questions:

• Am I prepared for the unexpected?
• When the market corrects, how will that impact my income?
• How much can my assets go down before my lifestyle is impacted?
• Do I know where I stand?

If you’re not confident answering these questions, it’s time to review your plan.

What to look forward to in 2020.

1. Towards the end of last December, Congress passed numerous new laws to take effect in 2020 (for instance, the SECURE Act that impacts IRA’s).

We will research and understand the implications of the new laws. Throughout the year, we will also have conversations with those of you who are part of the Financial Planning Club, to guide you through changes and steer you to success.

2. As I’ve said repeatedly for the last two years, having a roadmap is the most important investment you can make in yourself to find peace of mind, confidence and freedom. Don’t short change yourself or get in the way of your own goals. Tomorrow comes faster than you think.

3. I have been asked by Camas and Ridgefield Life magazines to write educational articles each month. If you live in the Ridgefield or the Camas area, I encourage you to look for our articles.

Investment Brief

Looking towards 2020, we continue to see similar themes that we have covered in prior newsletters (4Q19 and 3Q19).

Here’s a quick glance at investment trends:

• US growth remains positive, but subdued.
• International growth is still weak, but stabilizing.
• Prices in many assets are high, but interest rates still remain low.
• Macro volatility is still a risk, though unlikely to derail the broader economic story in 2020. Politics (US elections, China trading, unrest in the Middle East) might offer more risk than economics (Fed already cut rates, and are unlikely to raise in the near term).

After a strong year in 2019, we would expect positive but more subdued returns this coming year.  We are projecting to see a good balance of risk and return.

If you want more in-depth resources on these trends, please visit our website and read our investment newsletters from 2019.

Summary

As you set your New Year’s resolutions, I encourage you to be proactive with your financial planning.  You can control your future, but it’s up to you to make it happen.

Now is the time to set new goals and dreams for the year. I’m here to cheer you on along the way.

Let’s make 2020 a great one!

Sincerely,

Petr Burunov, CFP®
President / Wealth Strategist

The post Client Newsletter 1Q20 appeared first on AWM.

Brief Investment Update

On the macro side, not a lot has changed from our last newsletter.  The US economy looks relatively better than the Rest of the World.  Global growth in general is tepid to challenged.

Controversy swirls over whether the US will join the rest of the world in negative economic growth soon.  Reasonable arguments could be made in either case, though current data goes against the case for recession.

Indeed, current numbers suggest weak but continued positive growth.  Consumption has been solid, and jobs growth has been positive, albeit decelerating.

Housing has resumed its growth from last year.  Housing starts hit a new cyclical peak in August.

If trends of the last 50 years were consistent with today, that might suggest recession could be at least 2 years away.  That also assumes that housing starts have already peaked for this economic cycle (which might or might not be the case).

One of the main arguments for a future US recession is vulnerability in manufacturing.  Non-residential construction has been weak.  Exports have been languid due in part to the trade war (our best guess: de-escalation but no trade deal soon) and also lack of overseas demand.

Growth in major economies such as China, Germany, Japan, India, and the UK is sluggish to negative.  Global growth is likely to weigh on profits for US companies with large overseas businesses.

On the flip side, there have been all kinds of interest rate cuts and liquidity bolstering measures overseas.  The US has gradually followed suit with 2 interest rate cuts of 25 basis points each to the Fed Funds rate.  The yield curve remains inverted.

How Might This Influence Your Investments?

Based on your objectives and risk tolerance, your investment portfolios generally retain a neutral to cautiously optimistic tilt.  We see a balance of opportunities and risks, which is reflected in diversifying the positions in your portfolio.

Certain of your investments have done very well (especially broad large domestic equity exposure and generic high-quality bonds).  Other investments have trodden water in the last 2 years, particularly active managers in small cap and long-short equity.  These active managers tend to favor diversification and investments with good fundamentals at reasonable valuations.  For the reasons cited later, active managers have not participated as much in the rally over the last couple of years.

However, these laggards might be starting to show signs of life.  If they were to continue to recover, this could help meaningful portions of many portfolios.

In spite of the market’s flattish performance over the last 12 months, we have seen some significant anomalies develop.  Pockets of potentially overhyped momentum and overvaluation have emerged.  Other areas appear to have been “left for dead” by investors.

One example is “growth” vs. “value”.  Growth stocks have higher valuation measures anticipating higher future earnings growth (or even ignoring negative earnings).  Growth stocks have risen far more than value stocks with lower valuation and lower implied growth expectations.

The chart below shows performance from 2017 to 2019 of US small cap stocks by deciles of profitability and valuation.  Bars to the right indicate the most expensive stocks with the lowest levels of current profits.  Bars to the left show companies with cheaper valuations.

The chart below suggests that extremes in performance between “growth” and “value” might not persist forever.  Sharp outperformance in growth is often followed by a reversion back to historical averages.  Such trends might reward those who look for quality assets at reasonable, not just any, prices.

We will adjust your portfolios as we monitor trends in markets and the global economy.

Thank you,

Stuart P. Quint, III, CFA
Director of Investments and Compliance

The post Investment Newsletter 4Q19 appeared first on AWM.

After one of the worst quarters in a couple of years, risk assets recovered strongly in 1q19.  Stocks, commodities, and bonds, for the most part, posted positive gains.  Possible reasons include:

• Continued strong corporate profits especially in the US
• Economic growth in US still positive though weaker (less so internationally)
• Declining bond yields
• Stabilization in oil prices owing to OPEC agreement to cut oil production
• Hope for China growth to turn around, including a potential truce in the trade war

So, are the good times back for good?  We think a healthy dose of skepticism might still be appropriate.

We have previously commented on the slope of the yield curve as an indicator of economic health.  When the line is moving up, historically that has often signaled economic expansion.  When the line moves down, one needs to be more cautious.  “But when the yield curve turns negative, all bets are off.”

Today, the difference between long term bond yields (10-year US Treasury) and short-term interest rates (3 Month T-Bills) is a -0.05%.  That might augur a cautious outlook for the economy and risk assets.

One potential mitigating factor is that comparable international bond yields are even lower.  For example, current 10-year yields in the US of 2.6% exceed yields of 0-1% in Japan, UK, and Germany for similar bonds.  Apparently, global bond managers might be to blame rather than a necessary weakening in US economic fundamentals.  Perhaps US bonds might be priced higher (and the slope more positive) were it not for low international bond yields?

Our read is somewhere in the middle between bull and bear.  While jobs and consumption continue to grow (mainly in the US, to a lesser degree in emerging markets), other areas of the global economy are stalling or even declining.  Corporate earnings growth is clearly decelerating.

When you factor in that markets now are also back toward the higher end of history (off both recent troughs and bubble peaks), we have a neutral tilt toward risk in portfolios.

How Are Your Portfolios Being Positioned?

Your portfolios are constructed based on 3 buckets.  Depending on your specific financial situation, you might have a greater weighting in a bucket versus the others.   Included are some brief updates:

• Income – goal is to clip coupons with low to moderate variation in price

Update: we added an active total return manager with expertise in consumer and muni bonds.  This might enhance yield with a modest increase in credit risk.

• Growth – goal is strong capital appreciation with high potential price variation

Update: we added exposure to an emerging market consumer goods ETF that might benefit from growth in the middle class in emerging markets.  We also took profits on US small cap, REIT’s, and Japan.

• Diversification – goal is moderate capital appreciation with moderate variation in price; some elements reflect hedging against macro events

Update: we added 2 new strategies to your portfolio: merger arbitrage and equity long/short.  Both strategies potentially offer positive returns with moderate exposure to traditional equity and fixed income risk.  The manager of the strategy had run another larger successful fund at another firm. 

Please let us know of any questions.  You can also find a lot of information on a variety of investment topics on our website.

Sincerely,

Stuart P. Quint, CFA
Managing Director, Investments and Compliance

The post Investment Newsletter 2Q19 appeared first on AWM.

We had started 2018 being cautiously optimistic on prospects for asset returns in 2018.  We did not expect to see returns repeat as strongly for 2018 as in 2017.  Yet, we had a moderately positive bias due to:

1. Corporate profits remaining healthy
2. Accommodating, but tighter, monetary policy
3. Overseas economies continuing to recover

However, chinks in the armor sprung up in the summer.  Economic activity overseas was turning downward in Europe, China, and other emerging markets.  Coupled with hotter valuations in US markets, we chose to pull back on aggressive exposure.  However, we did not turn completely bearish as corporate profits remained strong.

An interesting item to note is the radical change in markets since September 20, the peak of the S&P 500 Index.  Although US markets were up double-digits for the year, international markets and fixed income were already down and lagged significantly.  Some questions we received included, “Why do I own anything apart from the S&P 500?” and “Why do I own fixed income at all?”

These trends changed abruptly from September to December.

Fixed income rallied and finished flat for the year as fears of recession spread overseas and even to the US.  Although it was in the red for much of the year, fixed income returns differed from what was occurring in most equity markets in the winter. We made another defensive adjustment in October.  The Fed appeared more aggressive on tightening interest rates than we and many observers had believed earlier in the year.  Additionally, credit spreads began to weaken.

Equity markets led by US markets declined (though the US still finished ahead of global markets for the year).  Particularly in the US, high-flying stocks that had led the market’s previous rise were among its worst performers.

How Are Your Portfolios Being Positioned?

Entering 2019, we view the world this way:

1. Corporate profits are slowing (maybe declining), though still strong, BUT
2. Monetary policy is tight (with some chance of pausing), and
3. Overseas economies are weak – the US remains relatively stronger but is diminishing, too.

Your portfolios are constructed based on 3 buckets.  Depending on your specific financial situation, you might have a greater weighting in a bucket versus the others.

1. Income – goal is to clip coupons with low to moderate variation in price
2. Growth – goal is strong capital appreciation with high potential price variation
3. Diversification – goal is moderate capital appreciation with moderate variation in price; some elements reflect hedging against macro events

1. Income – Playing More Defense

We chose in December to reduce or eliminate exposure to corporate credit, particularly high yield bonds, in your portfolios.  Given the risk of a slowing economy along with higher risk-free interest rates, we are concerned about potential rising corporate bond downgrades and defaults.

Consequently, we have added even more to US Treasury positions, using a mix of short and intermediate duration positions.  For the first time in over a decade, short-term Treasury rates of 2.5% exceed core inflation and provide meaningful, albeit not dramatic, return with limited downside.  Longer duration positions might benefit from appreciation if macro volatility were to persist.

2. Growth – Mainly Staying Home, but Selectively Looking at International

We remain focused mainly on the US and Japan while acknowledging that select emerging markets might also be attractive given price declines and changes in the inflation outlook due to lower commodity prices and a potentially weaker Dollar.  For now, we retain positions mostly in large US stocks, small cap, and REITs with a focus on the domestic economy.  Stay tuned for potential future changes.

3. Diversification – Refilling the Bucket

For conservative to moderate portfolios, we have initiated a position in gold.  The US Dollar has enjoyed a strong run in 2018 due to a more hawkish Fed and stronger economic growth relative to the rest of the world.  While both directionally might remain in 2019, we believe the gap will decline for one or both factors.  Gold might have the potential to rise, particularly if investors continue to worry about macro risk impacting economic growth.  Additionally, given that many major currencies outside of the US Dollar have their own issues (even lower interest rates, political tension within Europe), gold possibly might come into favor after many years of being moribund.

Please let us know of any questions.  You can also find a lot of information on a variety of investment topics on our website.

Sincerely,

Stuart P. Quint, CFA
Managing Director, Investments and Compliance

The post Investment Newsletter 1Q19 appeared first on AWM.

The above chart suggests high yield corporate bonds are enjoying calm weather.

Data compiled by Cohanzick Management, a New York-based asset manager, and Bank America show the amount of US high yield corporate bonds[1] priced as if they were going to default in the near future.  The data include corporate bonds that trade 10% or more (1,000 basis points) above the yield of the equivalent US Treasury bond.  Such bonds appear to sport high yields, but they do so with a reason: fear that the company could choose not to pay bondholders back and default.  Think Toys R Us as one recent example of a company that eventually went bankrupt.

The blue bars represent the absolute level (market value) of bonds priced for bankruptcy for a given year.

The yellow line shows the percentage of the total high yield market that is priced as if it were going to default.

Whether an issuer priced as distressed actually defaults or not depends on the situation.  Often the market is correct about such dire prospects.  Sometimes, the market overly panics, and the company manages to find a way to bail itself out.  What matters for this discussion, though, is this: what message is the high yield market sending about the US economy overall?

Currently, the level of bonds priced for default is about 3% of the total US high yield market.  This is close to the lows set earlier this century.  While this number appears good for the moment, there are also reasons to be concerned.

Defaults at this level are likely to get worse, not better, based on past history. Two historical precedents for a bear case going forward might include:

1. 1999: TMT[2] on the eve of the dot-com bubble bursting, when the Fed also had just been hiking interest rates aggressively after pumping in excess liquidity to stave off contagion from the Russia debt default/emerging market crisis to the US. High yield defaults were concentrated mainly in those sectors, but the economy later turned into recession, and stocks corrected.
2. 2006: The housing bubble was about to burst. The Fed was raising interest rates while oil was over $100 a barrel.  It took another 2 years before we finally entered the Great Recession.  Numerous sectors experienced high defaults.  Stocks corrected.

A more benign case might consist of something like 2003.  Interest rates remained quite accommodative for a long time.  Steady economic growth and reasonable interest rates prolonged a benign credit cycle for years.  Eventually, however, it gave way to asset bubbles particularly in the housing and debt markets.

What lessons might we learn for today?

Economic recovery, while the second longest on record, has also been tepid, as evidenced by the weakest level of growth in recorded US history.  The hangover from the financial crisis has allowed central banks to keep interest rates low even after recent rises.  Additionally, low inflation has also resulted in robust profit margins for many companies.

However, any change in inflation might make central banks tighten short-term interest rates more aggressively.  Cost pressures from either wage or input price inflation might weaken corporate margins.  A combination of these two issues might put pressure on certain issuers in the high yield market.  That might send a warning signal to corporate credit and adversely impact other assets, including equities.

Download the White Paper

[1] “A high-yield bond is a high paying bond with a lower credit rating than investment-grade corporate bonds, Treasury bonds, and municipal bonds.  Because of the higher risk of default, these bonds pay a higher yield than investment grade bonds.  Issuers of high-yield debt tend to be startup companies or capital-intensive firms with high debt ratios.”  Source: Investopedia, https://www.investopedia.com/terms/h/high_yield_bond.asp  accessed on May 17, 2018.
[2] “What is the ‘Technology, Media, and Telecom (TMT) Sector” on https://www.investopedia.com/terms/t/technology-media-and-communications-tmc-sector.asp  accessed on May 17, 2018.

The post Investments 101: High Yield Corporate Credit: Don’t Worry, Be Happy? appeared first on AWM.

October 3, 2018

Dear Ambassador Family:

In August, we made some tweaks to many of your portfolios.  The net result is that they have become a little more defensively relative to the start of this year.  Here are three major themes:

1. More Cautious on Global Growth

   We have drastically reduced positions related to global growth (commodities, emerging markets) and reduced Japan in portfolios.  We have grown more cautious on global growth in recent months.  Economic data from Europe and China has peaked.  Emerging market currency volatility is reemerging.  Lower global growth also puts commodity demand growth at risk.

   While the fundamentals of many Japanese companies still remain attractive, the fact is that China is Japan’s number one export destination.  Japan will not escape international volatility, though it can outperform it.  As an offset, the Japanese Yen often strengthens in times of global volatility as a safe haven, given that Japan is still a net lender to the rest of the world.  Our active manager invests in companies more geared toward domestic economic activity as well.  We keep the active manager, but reduce exposure to reflect a deteriorating situation overall for international markets.

2. Play More Defense by Raising US Exposure

   We have reinvested into low beta areas of the US such as US REITs and fixed income. REITs consist of commercial property mainly in the US.  Rises in construction (material and labor) costs could restrict further supply growth.  Continued growth in US jobs helps demand for real estate.  Yields around 3% with moderate growth are reasonably attractive.

   While we are still cautious on much of traditional fixed income, we have narrowed our underweight position as a form of insurance against macroeconomic risk.  Macroeconomic risk potentially could arise from an upset either in Europe (weak growth, rising populism), China (weakening economic growth, fallout from US tariffs), or other emerging markets.

3. Conclusion: A Little More Caution, But Not Bearish

   Let us be clear that we do not foresee a major bear market around the corner.  Rather, we are acknowledging that the bull market is “long in the tooth”.  Risks have risen, particularly overseas.  (Let us also not forget US mid-term Congressional elections, which might provide some future noise with a change in control of at least one house of Congress.)  On the other hand, the US economy shows no signs of weakening, and corporate profits continue to impress in aggregate.  Hence, we stick with a cautiously optimistic bent, albeit a little more cautious compared to the start of the year.

Please let us know of any questions.  You can also find a lot of information on a variety of investment topics on our website.  Learn our thoughts on various types of investments as well as psychology (a major factor for building and maintaining successful financial health).  You can also find past investment newsletters in the Investment Management folder of our Resource page.

Sincerely,

Stuart P. Quint, CFA

Managing Director, Investments and Compliance

Schedule appointment

The post Investment Newsletter 4Q18 appeared first on AWM.

• Update on returns for different asset classes.
• 5 improvements to how we manage your investments
• Continue with cautious optimism and selective stance on risk assets

I wanted to change the format specifically for this letter to share with you some enhancements to our process.  April marked one year since I started working with Petr at Ambassador Wealth Management.

Along with a brief market update, I wanted to share with you some additional benefits to your investments we have implemented during this time.

Market Update

Related to the quarter, US stocks and high yield corporate bonds rebounded after lackluster performance earlier in the year.  Corporate earnings were solid, and the US economy displayed strength.  In contrast, government bonds and international equities declined.

Bonds fell as the Fed showed further desire to raise interest rates.

International equities suffered from political turmoil in Europe, uncertainty over US-China trade, and reductions in economic expansion.

Commodities were volatile as the rally in oil petered out.  Strong demand provided a backdrop for concerns on supply.  At first, prices rose in response to worries about supply from Venezuela and Iran being curtailed.  The subsequent response by Saudi Arabia and Russia to stabilize the market caused oil to stumble.  The real question, though, is how much spare supply really exists to balance markets.

Our positions on different asset classes have not changed, nor has our list of concerns. You can read about them here.  We plan a portfolio reallocation in the third quarter and will communicate changes as needed.

The table below updates you on returns for the quarter and year thus far in various asset classes:

5 Investment Enhancements after One Year at AWM

Warning: this letter will be somewhat geared for “investment nerds.”

While a little technical, you still might care to read further.  We want to share with you insights on how we are striving to manage your portfolios better.

When I joined Petr last April, my role was to review the investment mix of different portfolios and recommend changes.  The goal was to help investors weather through the coming transition in markets.

Specifically, Petr tasked me to find ways to reduce risk and expense as we enter the late stage of the bull market with the likelihood of higher volatility compared to the recent past.

5 major changes that impacted your portfolios include:

1. Align investments to reflect environment, generate return, and reduce downside risk

   We are late in a bull market.  It might continue for several more years to come.  It is also possible we might see a more significant correction if the economy were to contract.

   Regardless, we have already seen a larger drawdown (market decline) this year than during all of last year’s run.  1q18 gave us a reminder that markets do not simply go straight up.

   Because of the full valuation in many asset classes, simply assuming the bull market returns of the last decade persist might appear naïve.  Assuming investment returns of the last decade repeat in the next decade might not be a safe assumption.  Hence, we should have some skepticism about the future.

   As stated in prior newsletters, we are cautiously optimistic, not bearish at all.  However, we are also mindful that bouts of volatility can break out.  One major factor at play is the extent to which the Fed raises interest rates.  After an historically unprecedented cutting of interest rates, the Fed wants to play “catch-up”.  Unlike other cycles, the Fed has much more influence on long-term as well as short-term interest rates.  The transition from a depressed to a “normal” interest rate environment might entail risks to markets.  Higher volatility in risk assets might be a reasonable consequence of such a transition.

   However, fixed income might not provide the benefits of diversification that it once did.  It is conceivable to have an environment where core fixed income might decline even if “risk-on” assets such as equities were also to decline.  Such was the case in the first quarter of 2018, when both stocks and bonds fell in value.

   We have sought to diversify your portfolios in order to participate in further growth in the economy (especially the US).

   Furthermore, we want to take prudent risks and not chase overvalued assets with peaking fundamentals (think “avoid asset bubbles”, such as housing in 2006).

2. Focus on where we can add value (and where we should not bother)

   People at times can take unnecessarily extreme positions on complex subjects.

   The active/passive debate is one of those subjects.

   Some people (a shrinking minority) would have you put all your investments into actively-managed mutual funds and other active vehicles.  As we will see later, in many cases, this is an expensive solution that often does not yield positive offsets for investors.

   Other people (a growing popular view) tout exclusive use of passive vehicles such as Exchange Traded Funds.  They present data that suggests most managers cannot add significant value beyond the indices represented by the Exchange Traded Funds (ETF’s).  “If you can’t beat them, join them?”

   We have taken a more nuanced view with your investments.  Both passive and active investment vehicles can play helpful roles in your portfolio:

   • Passive – in general, passive vehicles such as ETF’s are cheaper than active vehicles such as Mutual Funds. Areas where we believe passive makes more sense include: large domestic equities, major portions of international equities, and core fixed income.
   • Active – inefficiencies exist in certain asset classes that active managers can exploit in favor of investors. In fact, many of the current ETF structures actually are more volatile and of greater risk than active funds, particularly in fixed income.  Examples include: Japanese equities, small cap equities, high yield credit.

3. Enhancement to investor returns through lower costs

   A benefit of improving your mix of investments is the potential for cost savings.  We seek ways to pass these savings on to you and still maintain a robust, diversified portfolio.

   How much?  The answer depends on how you were invested before we relocated your portfolios.

   For large investors whose portfolios consist of stocks, we saved you roughly 20%, or $2, per trade by switching custodian from LPL to TD Ameritrade.  This cost savings does not consider additional benefits to you such as improved trading execution and lower risk of error with automated trading.

   For most of our clients invested primarily in mutual funds and ETF’s, we estimate that you might have received a reduction in annual fund expenses of nearly 50 basis points (0.50% or one half of a percent each year).  (Your specific portfolio might vary from that of other clients, so we cannot assure you this exact number will apply to you.)

   An additional one half of percent of return every year going forward is a tangible benefit to you.

   How did we do that?  Two ways:

   • Where we chose to add value through manager selection, we also ended up finding cheaper funds. Not only are you benefiting from some potentially great managers, but you also are helped by paying lower expense ratios in the fund classes we use.  Institutional share classes, also known as “I” shares, often carry lower expense ratios than other share classes.
   • Where we did not see opportunity to add value with active managers, we swapped out of expensive mutual funds into less expensive Exchange Traded Funds (“ETF’s”). As an example, swapping out of the average US large cap equity fund manager into one of the most popular S&P 500 ETF’s used would save nearly 1.35% (135 basis points) on that portion of an investor’s portfolio.  Doing a similar swap from the average bond fund to one of the popular core bond ETF’s could save nearly 0.85% (85 basis points) on that portion of the portfolio.[1]  Lower expense ratios and trading costs on stocks and ETF’s add real benefits to your investments.

4. Trading: Increase efficiency and fairness, mitigate operational risk

   Trading is like the computer help desk at a company.  No news is good news, but bad news travels fast.

   Becoming a world-class RIA means you have to have top notch trading.  The ideal system is one that allows the manager to react quickly, treat all accounts involved equally, and reduces the risk of error.

   New trading software introduced late last year significantly improves our ability to help your portfolios.  One of the reasons we chose to go with TD Ameritrade as our new custodian was their emphasis on cutting-edge technology.  iRebal is an integrated software tool that allows us to trade more quickly and ensure more thoroughly that all clients receive fair execution on their trades.  iRebal also reduces risk for you because it automates processes and minimizes key strokes that might otherwise lead to potential trading errors.

5. Investment Committee: More eyes to watch your investments and make us sharper

   To elevate our game, we chose to invite some outside help. We formed an Investment Committee.

   In the last year, we have gone from 2 eyes to 8 that are watching your investments.

   The Investment Committee is your network of experts designed to enrich our capability to manage your investments.  The group examines and challenges our thinking as well as making sure we practice what we preach.

   Two members from the inside are Petr and myself.  We also invited two outside experts.  One comes with a strong academic and behavioral finance background.  The other comes with decades of experience in managing large institutional portfolios.

In conclusion, I want to thank you for welcoming me as part of the Ambassador family.

Petr mentioned our plan to roll out more educational material on the new website.

We have already done 3 investment newsletters in 2018 and an interim blog.  We expect to introduce additional articles and video/audio updates on different topics (not just investment-related).

Please let us know of any questions or comments.  Thank you for being part of the Ambassador family.

Sincerely,

Stuart P. Quint, CFA

Managing Director

Investments and Compliance

Schedule appointment

[1] https://www.thebalance.com/average-expense-ratios-for-mutual-funds-2466612  accessed on June 8, 2018.

The post Investment Newsletter 3Q18 appeared first on AWM.

• Brief market update after a little roller coaster in 1q18.
• Signs of hope and areas of concern in markets
• Themes we like and dislike

At face value, 1q18 seemed like a fairly calm quarter.  Major asset classes posted slight losses while emerging markets and commodities posted gains.  The S&P 500 was not “the only game in town” to start the new year.

Source: Ycharts.com

However, face value masks the rocky ride markets have experienced since rallies stalled out at the end of January.  The numbers show a mild correction after a strong rally in 2017.

Source: Ycharts.com

As a reminder, we wrote both in our January Investment Outlook (link to 1q18 newsletter) and February blog (link to Market Roller Coaster) that it would not surprise us to see a correction at some point.

Markets in 2017 were too calm to avoid some sort of uptick in volatility in the near future.   A correction came (albeit mild by historic standards).  In and of itself, a correction does not have to portend the end of a bull market, but it would not be surprising to see more moderate returns than 2017 in the near term.

In spite of the recent correction, there are some bright spots.  Diversification away from large US stocks and bonds was generally helpful.

1. Bonds are no longer the simple “risk-off” asset that rallies when risk assets are selling off. Even in a soft market, bonds were slightly negative in the recent correction (and negative for the quarter).  So long as the Fed desires to raise short-term rates further and valuations remain high, fixed income returns might continue to be challenged.
2. Small cap and commodities held up in the correction. It is possible that the markets were concerned more about volatility than a significant decline in economic growth prospects.  Both categories lagged US large cap equities in 2017.  Though emerging markets sold off in line with the US, they still managed to post a positive performance for the quarter.
3. Commodities might finally begin to see a sustained but gradual uptick. Possible fundamental catalysts include limited supply growth (copper, perhaps oil) and demand recovery driven by global growth.  Technically, commodities have underperformed stocks and bonds over the last several years.  Investors looking for diversification and believing in continued economic recovery might shift some allocation into commodities.  (If growth were to sputter, then commodities might not be so attractive.)

Nevertheless, 5 indicators indicate the more fragile state of the markets in March relative to last December:

1. FANGs[1] fizzling – or merely pausing?

   

   

2. Global economies less sizzling (though still positive). After nearly 7 months of consistently positive economic surprises not only out of the US, but also Europe, Japan, and emerging markets, data has inflected downward in 1q18.  It is far too early to call for global recession, as levels went from too hot to just hot.  Policy tightening is a wild card as to whether things get much worse.

   

3. Trade protectionism reemerging. President Trump announced $20bn of tariff hikes on Chinese imports and has threatened to impose another $100bn.  Depending on what is implemented, the size of tariffs appears small compared to the potential impact of $800bn of fiscal stimulus on the $20,000bn ($20 trillion) size of the US economy.
4. Volatility spiked (finally after a long hibernation since presidential elections in 2016). An outlook for higher interest rates as signaled by the Fed, investor complacency, technical factors, and short-term political concerns contributed to pushing volatility from historical lows.  To put in perspective, however, volatility simply has shot back to levels of summer 2017. 
5. Yield curve flattening. Markets have started to worry that the Fed might be raising interest rates too quickly at the risk of economic growth.  This is a key area to monitor for if and when we need to temper even our cautious optimism further.

We will continue to monitor risks and opportunities in different asset classes.

 What we like:

• Broader equity exposure beyond S&P 500 (small cap, Japan, emerging markets)
• Liquid absolute return strategies less correlated to equities or fixed income (call writing)
• Exposure to commodities might act as a hedge against broadening global growth and/or geopolitical events

What we dislike:

• Much of fixed income (duration, most credit pricey)
• Europe
• Many illiquid “alternative” strategies

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[1] “FANGs” is an acronym for popular technology stocks Facebook, Amazon, Netflix, and Google.  See https://www.investopedia.com/terms/f/fang-stocks-fb-amzn.asp

The post Investment Newsletter 2Q18 appeared first on AWM.

• Ambassador Wealth remains cautiously optimistic heading into 2018.
• Why we are optimistic – and why we are cautious
• Where your portfolios are invested – and where they are not

Investors in risky assets had a jolly good year in 2017.  The S&P 500 gained nearly 20%.

Even with the fanfare over FANG stocks, other risk assets performed well.

Entering 2018, Ambassador is taking a cautiously optimistic stance with regard to portfolios.  We think positive gains in many areas are still possible.  However, we are also mindful of risks and would not be surprised to see a mild correction at some point.  Let us explain.

Why are we still optimistic?

1. Corporate profits are still healthy.
2. Monetary policy is still accommodative.
3. Global growth is broadening beyond the US.
4. US tax reform helps economic growth (at least temporarily).
5. Technological innovation (US leads the world in this area)

Why are we only cautiously optimistic (instead of all-out bullish)?

1. Last year’s strong markets might be hard to repeat this year

• Technical – Strong gains of the previous year historically have not repeated in the following year.

That does not necessarily have to mean disaster.  According to data studied by Strategas Research, 6 out of 9 years still resulted in positive market gains.  Nonetheless, corrections are possible even if the bull market were to persist.

• Valuation – The US market appears richly valued relative to history over the last 50 years (although nowhere near the peak of 1999-2000). Corporate profits need to remain strong to justify current levels.  Near term, it is hard to see significant profit erosion without an economic recession.

2.  Pressures on US corporate margins

• Corporate profit margins are still close to historic highs, helped in part by pricing power and low cost of debt.  Productivity will engage in a “tug of war” between rising wage pressures and productivity gains from technological innovation.  With the Fed seeking to raise rates, debt costs have potential to rise.  However, so long as economic growth remains moderately positive, though, shrinkage in profit margins might be limited.

3.  Midterm congressional elections potentially pose risk to the US market outlook. The possibility exists that the Democrats might take over both houses of Congress.  Democratic Congresses and Republican Presidents historically have resulted in muted returns for markets.

4.  The Fed (and other central banks) might continue to raise interest rates. Tighter monetary policy might contribute to higher volatility and lower returns.  Markets have rallied in part to the stability of growth and inflation experienced over recent years.  Any change in that stability might disappoint markets.

• Risk to upset Goldilocks of low volatility (inflation, growth, credit)

5.  Overseas risks (in descending order of concern for us): Europe (Italian election results possibly could lead to calls for withdrawal from EU), China growth (tighter monetary and structural policy could squeeze growth for China, the world’s largest economy), geopolitical (populism, North Korea)

What we like:

• Cautiously optimistic on equities (still cheaper than fixed income)
• Broader exposure beyond S&P (small cap, Japan, emerging markets)
• Liquid absolute return strategies less correlated to equities or fixed income (call writing)

What we dislike:

• Much of fixed income (duration, most credit pricey)
• Europe
• Many illiquid “alternative” strategies

We wish you the best in 2018 and look forward to giving you more communication on your portfolios.  You will see more short blogs in the future.  You will see more detail as to how we think about the world in seeking to benefit your investments.  These blogs will come in addition to the quarterly articles you will receive with future statements.

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The post Investment Newsletter 1Q18 appeared first on AWM.