“Don’t put all your eggs in one basket.” 

2022 has been a good illustration of this saying for investors.  Both stocks and bonds declined.

It is true that, over the long term, stocks can appreciate from earnings growth, dividends paid, and price expansion.

That does not mean that stocks go up each and every year, especially when valuations are high and interest rates are rising (like now).  There are times to load up – and times to lighten up.

Currently, bonds that earn less than inflation won’t help investors achieve their objectives to grow and defend principal.  (Until these conditions change, you are unlikely to see a lot of fixed income in your portfolio.)

Hence, we have committed a lot of resources and time to seeking other diversified investments.  We are very selective about what you own.  It is arduous to separate the wheat (tenured managers with success that has the potential to repeat for current or new investors) from the chaff (most hedge funds and REITs do not deliver and simply charge expensive fees).

We also demand that they are liquid (you can invest or take money out any working day of the week) and transparent (daily pricing by a reliable third party).

This short blog will tell you a little how your “diversified” investment bucket might help your portfolio.

Introducing a New Strategy to Your Portfolio

In our last newsletter, we mentioned our caution on traditional fixed income.  Rates and credit risk were not enough to compensate for inflation and other risk.  Consequently, cash balances in your account were high.

Recently, we added a new investment strategy that potentially provides some of the positive characteristics of traditional fixed income with potentially lower risk.  This is called “merger arbitrage”.  When an acquiring company (or private equity) announces it will buy a target company, it requires time and regulatory approval before the deal is completed.  The current price of the target company does not fully reflect the acquisition until the deal is completed.

Such a discount creates opportunity for merger arbitrage funds to make money.  Presuming their due diligence on the deal going through is correct, they earn returns by buying the shares of the target company and hedging market risk by selling (going short) of the acquiring company.

The potential benefits to investors might include: (1) steady, positive returns over time, and (2) limited equity market risk due to hedging.  Possible risks include deals falling through and drastic reduction in the opportunity set of deals in which to invest.

Merger arbitrage also has the potential to benefit if interest rates continue to rise, since they can generate higher income on cash invested in deals.  In that sense, merger arb resembles a short duration bond strategy, perhaps with higher potential returns.  (In contrast, many parts of traditional fixed income might be hurt by higher rates; investors might sell high duration and credit risk in favor of a higher, safer yield on money market assets.)

Seeking to Make Money in Rising and Falling Stocks? 

Another manager in your diversified sleeve is an equity long-short strategy.  (This fund is closed to new investors and can only be accessed through select advisors like us.)  The manager invests in securities with solid businesses and cheap valuations on the “long” side while hedging by selling stocks with poor fundamentals and expensive valuations on the “short” side.

The chart below suggests that most managers have reduced or given up investing in falling stock prices for the average stock in the S&P 500.  Less competition might open more opportunity for managers that seek to make returns in part through falling share prices.

We remain cautious on most traditional assets.  Since the market rebound from the June lows, sentiment has grown too optimistic.  While bears talk at cocktail parties and AAII sentiment surveys, they are not putting their money where their mouth is.  For example, the average investor at Bank of America still has very high exposure to stocks (measured as stock allocation as a percentage of total investments).

Indeed, it is close to the all-time high only a few months ago and well above average levels from 2009.

Commodity Investments Ride the Inflation Wave

Your portfolio might also include shares in commodities, including an active mutual fund manager and passive exchange-traded strategies.  Supply constraints and concerns of a weaker dollar might continue to push prices upward over time.  Risks of lower demand from slower economies also exist.

You can read more about our thoughts on commodities here and here .

Conclusion

In bull markets, people typically focus on returns over risk.  But when the markets change, they are reminded that risk still exists.

Let’s be clear.  No one (we ourselves included) can promise you a portfolio without any risk.  It is impossible.

Even getting out of bed in the morning entails risk (you could fall, for instance).  But you do it because most of the time, something good happens.  Even when bad things do occur, the good far outweighs the bad over time.  (Staying in bed all day also entails risk to your health.)

What we seek to do, however, is to take prudent risks.  Not all risk is created equally.  Not all risk is equally likely to happen or incurs damage to your portfolio.

That is why you will see a number of investments of your portfolios, including a chunk in what we call the “diversified” bucket.

If you know someone whose nest egg has been beaten up in the market and needs help to stabilize things, please let us know.  We are here to help.

The post Investment Update: September 2022 appeared first on AWM.

We are reviewing each account and making any necessary adjustments to reflect your personal investment strategies.

Update on Your Investments

As recently mentioned in the quarterly newsletter in January, your investments entered the new year with a moderately cautious stance.  High valuations, less favorable growth, and rising interest rates motivated us to enter the year with some caution.

A month later, we still remain of that view, though we have made some tweaks in your portfolios.

We increased allocations to precious metals by increasing gold and adding silver.  Both of these metals might benefit from several things.  Persistent inflation, questions about the US Dollar, and rising macro risk (mainly economic, potentially geopolitical) potentially might offer positive diversification.  (In other words, precious metals in certain situations might offer positive returns even with choppy equity and fixed income markets.  Naturally, precious metals might also lag if markets were to resume a solid rise, as they did in 2021.)

Consequently, we have also raised cash and reduced exposure to fixed income.  Despite the recent increase in market interest rates, they still do not appear attractive.  When adjusted for inflation, interest rates of 10-year bonds remain negative.  We would anticipate using cash to make further adjustments to portfolios.

Your existing exposure outside of traditional equity and fixed income might also provide diversification benefits.  Your investments in alternatives, including broad commodities and a hedged long/short manager, might continue to offer returns that do not move with falling stock and bond prices.

On a selective basis, we have also done some tax harvesting.  Given most assets appreciated in 2021, it was difficult to find opportunities to pass on tax savings to those of you with taxable accounts.  In contrast, 2022 has offered some opportunities.

Realizing tax losses while maintaining (or reducing) investment positions might allow flexibility later in the year for us to reallocate risk.  For instance, in some cases, we might choose to sell shares with gains that would be offset by the realized losses taken now.  If we do not do anything for the rest of 2022, taxable investors might gain the benefit of capital losses on their taxes filed next year.

How are we able to do this?

The plethora of investments in today’s markets give taxable investors a lot of flexibility.  It is possible, for example, to maintain one’s exposure to large US stocks and harvest capital losses.  One could sell one Exchange Traded Fund (“ETF”) and buy a different ETF with similar (or identical) exposure.

We remain vigilant of market risks and opportunities.  Our bias remains moderately cautious, particularly on most fixed income and equities.  As opportunities or risks present themselves, we anticipate making more changes to your portfolios.

The post Investment Update: February 2022 appeared first on AWM.

High Unemployment

The spike in unemployment from below 4% last year to over 10% this year is blamed mainly on the COVID lockdowns. Some of the jobs are coming back as case numbers decline and state economies reopen for business. (Indeed, the government reported a decline in unemployment to below 8.4%.)

However, a resumption of layoffs in the private sector (moving from jobs temporarily furloughed to jobs permanently eliminated) might slow the recovery in late 2020. (Case in point: United Airlines expects to furlough over 16,000 of its 90,000 workers in October[1]. American will lay off another 19,000.[2])

Another factor to watch is the “fiscal cliff” that could cause further shortfalls in income for unemployed Americans. Many people claiming unemployment received additional government money. Such as an extra $600 per week in benefits. (Government income supplements, or “transfer payments”, ballooned to nearly 30% of total income from roughly 17% prior to the recession.)

If Congress fails to enact another CARES Act, the loss of the extra weekly benefit might put a big dent into Americans’ income.

Structural changes in “the new economy”

• • Urban to suburban/rural – Lockdowns, rising crime, and high cost of doing business is motivating workers and businesses to rethink their commitments to urban centers. While causing real estate booms in markets outside, cities inside might be suffering in terms of vacancies and oversupply for a while.
  • Work from home – pandemic lockdown has alerted employers to the risk of widespread disruption if they contain operations only to corporate offices. Travel & entertainment budgets have also been cut in response to corporate expense discipline.  New technology has lowered the bar for many professions to work remotely and productively.
  • Physical to electronic (cash, shopping, business) – Online adoption from the lockdown might also continue into other areas of the economy and society. Infrastructure needs will rise to accommodate this shift.

We continue to watch the markets and how your investments are positioned.

Please reach out to us with any questions.

[1] https://www.foxbusiness.com/economy/united-airlines-furloughs-coronavirus-pandemic
[2] https://www.zerohedge.com/personal-finance/american-airlines-warns-admin-keep-bailing-us-out-or-least-19000-more-jobs-are

The post Investment Update and Comments on Jobs (How Many and How We Work) appeared first on AWM.

We’re encouraging everyone: don’t let fear rule your finances.

Many of you have developed a financial plan to achieve successful retirements and we’re very thankful that during these times, those plans have helped to mitigate uncertainty.

If you don’t have a plan, we encourage you to think about developing one and putting it in place. Knowing where you are going can help give you peace of mind and confidence, especially in the midst of economic and social uncertainty.

During seasons like this, our focus is to continue reviewing risks and looking for opportunities.

What have we been doing?

1. Continue to Further Reduce Risk.
   

   After such a strong market in 2019, we suspected we were due for some sort of correction. That said, we did not expect the coronavirus or a crash in oil prices to move the market to such an extent.

   In January, we started reducing risks in your portfolios. Specifically, we reduced positions in emerging markets, small-cap equities, and intermediate high yield debt in favor of cash and gold.  We had concerns over international growth, especially from China, causing us to cut emerging markets. High leverage and higher credit risk (in part due to the collapse in oil prices first on lower China and air travel, then recently the collapse in OPEC talks with Russia) made us cut positions in small-cap and high yield.

2. Roth Conversions.

   This might be a good opportunity for some to think about doing Roth Conversions. Converting more shares at lower prices can potentially reduce your future RMD’s once the market starts to recovers.

   As a result, these conversions could reduce your taxable income in the future.

3. Tax Harvesting.

   Taking down risk in portfolios followed by the market’s subsequent decline has also created opportunities for tax harvesting in taxable accounts.

   This might be a good opportunity to start taking gains off the table and offsetting them with more current losses to minimize or even reduce future tax liabilities in taxable accounts.

4. Looking for Opportunities.

   This week we are slowly beginning to selectively re-enter the market when the opportunity presents itself and aligns with your goals. We are being patient and not jumping in too quickly.

   We are also seeking to enhance client portfolios in the process. For instance, one shift is to remove individual companies with more exposure to economic downturn and add more diversified investments (individual companies or broader equity baskets).

What might lie ahead?

Much uncertainty remains.

• Coronavirus quarantines will put economic activity on hold for much of the spring, if not longer.
• Low oil prices will pressure US energy producers for a while longer.
• Earnings are likely to decline in 2020.

However, US Treasury yields have collapsed below inflation. Relative valuation for equities, particularly those with sustainable dividend yields, have improved immensely. While their stock prices have cratered, US banks appear to be better capitalized than in 2008.

Valuation has not yet been enough of a compelling argument to boost risk-on assets like stocks and commodities. Yet, when the US economy eventually starts to resume operating at normal capacity with a peaking in Coronavirus cases, we think the market might start to recover on less bad news.

It’s impossible to know when the chaos will end. That said, we are proactive and vigilant.

What can you do?

1. Stay calm and don’t panic. Stay true to yourself and don’t let your emotions run your financial decisions
2. Have a plan. If you have a financial plan, lean into it and let it do its job. If you don’t have a plan, now is the time to get one.
3. Let’s look for opportunities. Tax season is upon us and we are encouraging you to look for opportunities to utilize the new tax code to save on tax liabilities.
   Now might also be the time to think about slowly re-entering the market in small increments.

Thank you for your trust in us as we partner on your financial journey with you.

The post Separating Emotions from Investing is Key to Surviving Coronavirus. appeared first on AWM.

First and foremost, we hope for good health and wellness for you and your families.

Our Perspective:

As I mentioned in our last update, we anticipated some sort of market correction in 2020.

What we did not expect, was the Coronavirus striking this much fear into our communities and economy. No one knows when the madness will end.

Despite the volatility in the market, we are starting to see opportunities. Instead of continuing to reduce risk, we might be encouraging our clients to take on a little more in the coming weeks.

This is not my first time saying this. It’s crucial to have a strategic Financial Plan. Not only will a plan give you peace of mind, but it will also provide discipline to weather the ups and downs for the market.

During these uncertain times, I can only suggest that you be careful how much the media and noise of every day affect your decision making.

Remember, the stock market also tends to overreact to the various noises in the world:

1. We saw the market turn overly euphoric in January 2020, with little to no justification.
2. What we see now is the market turning overly depressed due to recent corrections and the abundance of negative news headlines regarding the Coronavirus.

In the midst of chaos and havoc, I encourage you to stick with your long-term goals. Don’t let emotions run your life.

In this update, I want to cover a few areas that could suggest stabilization in the market and also a few caution signs we are carefully watching.

Signs of Hope:

1. A good portion of the stock market advertises yields above those of the 10-year US Treasury:

   

2. Perspective on the recent decline: we just went from euphoria to summer 2019 levels on the S&
3. Central banks are still providing “punch to the party” by cutting interest rates.

   

Signs of Concern:

1. The bond market is worried about growth (U.S., not just international).

However, current low rates might keep on stimulating the housing market via cheap mortgages (refinancing, too).

2. Airline traffic in the US might be an indicator of consumer fears.
3. Lead indicators for global activity are weak.

Summary:

As we continue to see volatility in the markets, here are a few things you can do:

1. Don’t let the news control your emotions.
2. Stay focused on your long-term goals.
3. And don’t forget that if you have a plan in place, it will give you confidence for your success.

Thank you for your trust in us as we partner on your financial journey with you.

The post Investment Update: Did the Market Just Catch a Cold, or Is It Terminally Ill? appeared first on AWM.

We are reviewing every account and making necessary adjustments to reflect your individual investment strategies.

Here is a brief overview:

• Since January, we have grown a little more cautious.
• We added gold to many portfolios and reduced international exposure.
• While the full impact of the Coronavirus is still unknown, we think it is likely to impact international growth (at least for the first 6 months of 2020).
• The US presidential elections and geopolitics pose some risk despite positive fundamentals.

2019 ended strong and continued through January. That said, now we are seeing more volatility. Personally, I don’t think we are headed into a bear market just yet. Hence, being a little more cautious.

Is the Coronavirus to blame?  

Not entirely. We have been noticing yellow flags for some time now.

As I mentioned, in January we grew cautious, even before the onset of the Coronavirus. We noticed things like:

• Earnings started to level off.
• Sentiment and valuation in many asset classes seemed a little rich.
• International growth (prior to China & Coronavirus) continued to show downward revisions. Germany and Japan actually posted negative economic growth in the last quarter due to weak exports and consumption tax hikes.
• Volatility during election cycles. Many are speculating more volatility than normal during the 2020 US presidential election.
• Market breadth was narrowing. Growth and momentum have overwhelmed other factors. Large-cap and defensive stocks have resurged versus small/midcap and cyclical stocks.  In fact, the FANG stocks (and Tesla) along with stocks with negative earnings were dominating YTD market gains.

What are we doing to minimize risk exposure?

Over the last several weeks we have started to:

• Reduce international exposure
• Add gold to positions
• Focus on domestic stocks with positive cash flows and valuations
• Avoid/minimize high risk in fixed income (particularly corporate credit)

So why are we not going outright bearish?

Despite some negative trends, there is a lot working in our favor.

• Interest rates are low, which can cushion economic growth.
• Housing and consumption are still positive anchors for US growth.
• Selective pockets of valuation still exist, particularly companies with solid balance sheets with the ability to sustain and grow dividends.
• A pullback was no surprise to me. See what we wrote in the 1Q20 newsletter. I predicted that history will always repeat itself.

We are carefully watching your portfolios and the markets. Our goal is to seize opportunities and minimize risks.

The post Investment Update: February 2020  appeared first on AWM.

“Dull” quarter?  Not really…

Dear Ambassador Family,

We have not changed much since the last letter – 3 on a scale of 1 to 5.  The strong rally in 1q19 is flattening out as corporate fundamentals are modest but solid.  Low interest rates thus far have limited downside.

Since the last newsletter, we have moved slightly more negative on the US Dollar.  This continues a trend from last year of adding gold and emerging markets (depending upon your family’s model and risk tolerance).  Slower growth, a potential cut in interest rates, and volatility from upcoming elections next year are the main reasons.

Over the last several months, we have been reviewing client portfolios and taking down risk to specific factors (trade war, exposure to negative yield curve, most cyclical commodities).

Gold and Treasury bonds have rallied in 2q19 as investors sense a more dovish Fed.  S&P 500 is holding onto a slight gain with solid corporate fundamentals continuing to be offset with high valuations.  Small cap and international markets are slightly down for the quarter.

Do not let the lack of big price moves fool you.  Cross-currents in the global economy remain:

• The US yield curve remains inverted – though, now, Fed has tipped its hand that it might lean a little dovish (e.g. likely to cut rates now rather than raise them).
• US economic growth has been steady but unexciting. Jobs gains are positive but well off the peaks.  Inflation is subdued.
• International growth continues to be weak in general.
• The US and China are now unlikely to come to a trade deal in the near term. Markets have been surprisingly resilient.
• Geopolitical tensions with Iran might be rearing their ugly head (though that has not boosted oil much)
• Markets have generally yawned about European elections (more populists in power, but not enough to get excited) and risk of a disorderly Brexit.
• It is early, but US presidential elections in 2020 might add some market volatility.

We continue to be hopeful for gradual gains.  Yet, we are also mindful that risks at current high valuations remain.

Please let us know of any questions.

Sincerely,

Stuart P. Quint, CFA

Managing Director / Investments and Compliance

The post Investment Newsletter 3Q19 appeared first on AWM.

You can read about our outlook for 2019 in the Investment Newsletter.  In the meantime, here are 3 facts that made the year 2018 truly unusual in recent market history.

Cash: The New Winning Asset Class for the First Time in a Decade

What is this chart?

• This chart ranks annual returns on different asset classes from equities to fixed income to alternatives.
• Assets on the top of the row indicate the best performers for a given year; assets on the bottom are the worst for a given year

Why does it matter?

• Cash and fixed income occupied the top 3 positions, which had not occurred since 2008.
• Cash was the best performing asset for the year. Returns were positive but below US core inflation of 2%.
• Foreign stocks and commodities occupied the bottom 3 positions. Economic growth in Europe and China greatly decelerated in 2018.  This is not an unusual event for them to be at the bottom in the last decade.
• US equities declined. The S&P 500 was the best performing major world equity market, but still negative.  (It had been up over +10% through September before coughing up its gains and then some in the fourth quarter.)

Earnings Growth Did Not Reward Investors

What is this chart?

• This table displays historical returns of the S&P 500 when annual corporate earnings growth is strong (above 17%).

Why does it matter?

• 2018 was only the fourth year in 45 years when earnings grew substantially – yet the market declined.
• One factor in play might be that roughly half of this earnings growth came from lower corporate tax rates – a factor that will not recur in 2019.
• Other macro worries pressured the S&P 500 (and most other world markets) in 2018.

Historical Trading Patterns Did Not Repeat Themselves in 2018

1. Rally after midterm elections did not recur in 2018.
2. Split Congress did not inspire stock markets in 2018.
3. Seasonal peak in 4q did not result in stock market rally in 2018.
4. December 2018 was the worst month for stocks since 1935 (midst of the Great Depression).

The post 2018 Was Truly an Unusual Year for Markets appeared first on AWM.

As you might recall, we took risk down in your portfolio(s) in August.  Since then, we have made some further adjustments to become more defensive.

Market volatility has returned, and prices have corrected accordingly, particularly in equities.  Concern has grown that the Fed will hike interest rates further in an effort to constrict economic recovery and asset prices.  Growth overseas is increasingly problematic, whether you look at China with trade and leverage issues or Europe with trade, Brexit, and the Italian budget.  Throw in seasonality (August through October have often been difficult months for markets), and it is not a complete surprise that markets are jittery.

So why not be completely bearish?

• Corporate earnings in the US continue to show strong growth.
• Although the S&P 500 is up for the year, less than half of the stocks in the index have actually posted positive gains. In many cases, stocks got cheaper even though earnings grew.
• Credit markets have been much calmer than the recent volatility in equity markets. There exist lots of fear about worse credit.  However, the reality is that corporate fundamentals, for the most part, remain solid.

We continue to monitor the markets for signs of calming and investment opportunities.  In the meantime, we wait.

The post October Volatility Update: Near-Term Caution, But Looking for Opportunity appeared first on AWM.

Can superior economic growth overcome rising debt in emerging markets?

Emerging markets[1] have stumbled thus far in 2018 after enjoying solid appreciation in 2017.

Stated economic growth in places like China and India remains well above that of developed economies.  Financial markets appreciated that fact and propelled emerging markets to a gain of over 45% in 2017.[2]

However, 2018 has been a rockier story for emerging markets.  Nearly six months after the solid rally in 2017, emerging markets have declined roughly -4%.

Several reasons include fears of capital outflows following the US Federal Reserve’s intentions to keep raising interest rates in 2018.  Threats of further tariffs by the US on China also have caused concerns over deterioration in emerging market growth rates.  Political unrest in Brazil has also weighed on sentiment.

However, the biggest potential overhang to emerging markets might be debt.

Emerging Market Debt Rising with Growth – What Gives?

The chart above compares total government debt in emerging markets vs. developed economies.

Moody’s, a global debt rating agency, tracks the level of national debt (akin to Treasury bonds in the US) relative to Gross Domestic Product (the level of economic output for a given country).  Averages are then computed for both emerging markets (the light blue bars) vs. developed (the dark bars).

A couple of trends bear watching:

1. Emerging markets have lower debt to GDP than developed markets. This trend has been in place since 2007, the eve of the Global Financial Crisis.  There is a big “but”.
2. But emerging market levels have closed the gap with developed markets. While developed markets witnessed a decline in debt since the peak in 2013, emerging markets have actually grown consistently since 2007.  The gap has narrowed from roughly 30% in 2013 to only 10% in 2018.  This is notable given the gap in interest costs emerging markets pay relative to developed markets.

A growing debt to GDP ratio implies that economic growth is dependent upon debt issuance.

Debt issuance, particularly in emerging markets, can be a fickle source of funding growth.  Flows of capital into emerging market debt has been historically volatile.  Interest rates can rise sharply if foreign outflows were to occur.  Because the size of emerging market debt markets is much smaller and less liquid than in developed markets, interest rates can spike more sharply if investors were to pull out capital.  Spikes in interest rates can depress future economic growth.

Developed countries in Europe and the US were most affected by the 2008 Financial Crisis.

In efforts to prop up their economies and save their banking systems, central banks and governments collaborated to inject money into their economies.  Consequently, many developed countries suffered from rising debt to GDP levels.  As economic growth has returned, debt to GDP has started to decline.

In contrast, debt to GDP in emerging markets has risen despite economic growth.

One factor is China, where fiscal deficits and other stimulus attempted to prop up high growth rates.  The question exists as to when and how much will growth in China slow.  China cannot continue its rate of debt expansion.  Other economies in Asia and Latin America also experienced growth in fiscal spending and domestic credit expansions.  The idea was this stimulus would offset declining growth in world trade.  Unfortunately, emerging markets might now have entered a phase where they have less ammunition to confront a global environment of rising interest rates and positive, but not spectacular, global growth.

Growth and interest rates are the key factors to watch for emerging markets.

Let us help your family to navigate through this challenging environment.

Download the White Paper

[1] For a definition, see Kimberly Amadeo, “What Are Emerging Markets?  Five Defining Characteristics”, March 22, 2018, the balance on https://www.thebalance.com/what-are-emerging-markets-3305927  accessed on June 18, 2018.
[2] As measured by the return in the iShares Core Emerging Markets ETF (symbol: IEMG). 

The post Investments 101: Emerging Markets: Debt Still Rising appeared first on AWM.