A lot has changed since my last newsletter. Vaccine rollouts have allowed most businesses to resume life as normal.  June and July brought scorching temperatures and inflation. Summer is only halfway done.

Let’s jump into an investment update, an economic bubble, and some talk about taxes.

Investment Update

Since our last newsletter, we have turned slightly more defensive.  Risk management over chasing returns is the priority.

We have pared back somewhat investments with strong gains as well as those with higher risk and rotated your money into higher quality and liquidity names.  We also maintain positions in strategies that can benefit from higher commodity inflation.

Positives that cause us not to go totally bearish:

• Persistence in low-interest rates
• Banks have money to lend, yet consumers are not borrowing (yet)
• Earnings fundamentals near term should be decent

What has us worried (and leaning slightly defensive):

• Inflation – market thinks it “transitory”, but more supply bottlenecks crop up
• Asset bubbles – fixed income, stocks, residential real estate,
• Supply bottlenecks – commodities (food, energy, copper), computer chips, shipping containers
• Investor sentiment – retail is bullish, but corporate insiders are selling stock

We do not know the exact timing of when the market might take a pause or even have a significant pullback.  However, data and precedent suggest a possible correction might come in the second half of 2021. Regardless, we expect more volatility through the end of the year. Some of you might see more realized capital gains in 2021.

“A Bubble Is in the Eye of the Beholder”

Speaking of bubbles, many people can sense one.  But can you actually describe it?

Picture a business opportunity in the entertainment business that has been slammed by the pandemic.  Something that had been under pressure even in the past because more people could simply watch movies at home or on their phone or tablet.  Even with reopening, many people still hesitate to go to the movies for different reasons (including the high expense of tickets and food).

That business has financial challenges: debt to pay, a heavy expense base, struggling sales, rising cost of goods, and a higher cost of employment.

Now on top of it all, this business opportunity constantly asks for money from its stakeholders.  If they fail to give them money, they find other people willing to give it to them.  Plus, their existing stakeholders’ shares are diluted (in other words, their ownership is reduced/diluted).    And the business continues to struggle.

Does this sound like an alluring investment?

This describes one of the most popular stocks in the market today!  Retail investors have pushed it to become one of the best-performing stocks in 2021.  Other examples exist in today’s environment as well.

Now, do you see why this is a bubble?  It looks nice and shiny until it pops…

This is a small example of what we mean by the need for risk management.  (You do not own this stock in accounts we manage.) However, some people get excited by what they hear in the popular press and want to own it.

Update on Taxes

As previously mentioned in our last newsletter, taxes tend to be one of your biggest expenses.  We pay a lot of attention to taxes (and how to manage around them).  Here are some updates from last quarter:

1. Federal – nothing concrete has passed in DC in 2021. However, indications suggest capital gains taxes might still be moving up.  One definite change: temporary provisions related to the Covid lockdowns of 2020 (suspension of RMD’s, stimulus checks, bonus weekly unemployment) are gone or fading away.
2. Return of RMDs – speaking of covid-related relief, RMDs are back. We will make sure all required distributions are taken before the end of the year.
3. Child Tax Credits in 2021 – Taxpayers eligible for child tax credits might receive a boost in 2021.  Expanded child tax credit from $2,000 to $3,000 for children between the ages of 6 and 17 (and $3,600 for children under age 6).  You could receive part of the credit monthly in advance starting in July ($250 per month for children 6-17 and $300 for children under 6).The Child Tax Credit starts to be reduced for joint returns with AGI over $150,000 or $112,500 if filing as head of household.For more details, see https://www.irs.gov/credits-deductions/2021-child-tax-credit-and-advance-child-tax-credit-payments-topic-c-calculation-of-the-2021-child-tax-credit.
4. State taxes – Washington has already passed a de facto capital gains tax on long-term capital gains over $250k (excluding real estate and retirement assets). Wage and salary earners will begin paying into a state-administered Long Term Care fund in 2022.
5. Oregon has also seen a variety of new state and local tax increases for higher wage earners and businesses.
6. Bucking the national trend, Arizona has passed an effective reduction on income taxes, including a flat 2.5% tax and wider tax exemptions and deductions.

We are carefully watching and analyzing the changing trends in the economy and market.

Stay posted and keep an eye out for updates from me. Enjoy the rest of your summer.

Sincerely,

Petr Burunov, CFP®
President / Wealth Strategist

The post Client Newsletter 3Q21 appeared first on AWM.

What a whirlwind 2020 turned out to be.

We just experienced a six-month sprint through a global pandemic, new laws, record-breaking unemployment, the loss of loved ones, and the disruption of everyone’s personal and professional lives. (For a quick recap of 2020, read through the box on the below.)

Six months of absolute crazy. It felt like forever. And, unfortunately, the ride is far from over.

What we predicted.

There is still much uncertainty. Back in March, we predicted:

• Coronavirus quarantines would put economic activity on hold for much of the spring, or longer.
• Low oil prices would pressure US energy producers for months to come.
• Earnings would likely decline in 2020.
• Persistently stubborn high unemployment

What have we been doing?

The Ambassador team is very grateful for your trust and partnership. We take our job extremely seriously and want to remind you of what we’ve done.

Towards the end of 2019, we took a lot of risk off the table. A lot of our clients were well-positioned going into the coronavirus recession.

In April, we started to see opportunities in the market and signs of a new economy emerging. We have designed a sleeve to fit these new trends, which has been added to most of your portfolios. This new model takes advantage of companies who are benefiting from: employees working remotely, technological and cybersecurity advances, online payments and shopping, pharmacy and biotech renewals, and vaccine development.

While this has been working for our clients, there are still a few potential risks that we’re facing going into the second half of this year.

• Resurfacing of Coronavirus
• Earnings impacted from the shutdowns
• International uncertainty (especially trades with China)
• Federal reserve stimulating the economy
• November Elections of 2020

We have been communicating often and extensively with you. I want to make sure you understand what is happening. If you have not read our previous newsletters, please take the time to do so. We have talked a lot about the uncertainty around COVID-19 and its impact on you.

Online Portal

Are you taking full advantage of your online portal? It’s a special tool you have access to. Some features include:

• You can link outside assets/liabilities – view all of your finances in one easy-to-use platform
• Personal Planning Tools
• Various reports on your AWM accounts
• Info gathering tools for Financial Planning
• Vault – locate your AWM reports, upload documents you wish to share, and your private documents folder

If you need assistance accessing your online portal, please reach out to Debbie.

Taxes

This is a big one. There have been so many changes since December 2019. Many of them are still being updated and clarified with new rules and laws, often if not daily.

Retirement account rules and exceptions are very complicated. With many changes, we encourage all of you to check with us before you make any decisions. I don’t want you to find yourself dealing with tax consequences. In other words, don’t do it yourself.

Things are still changing, being interpreted, and worked on. We encourage you to be careful in decisions you make or have us research on your behalf to see if there is a tax-advantageous way to do it.

Investment Update

Currently, we are neutral to slightly cautious with risk.  While we are favorable on liquidity and market technicals, we are quite concerned about valuation and see risks stemming from an uneven pace of economic recovery and an adverse November election outcome.

1. Economic fundamentals are improving but fragile. On the plus side, housing benefits from low rates and limited inventory.  Technology continues to be a strong secular theme as companies looking to grow and contain costs are likely to replace labor with capital.  Banks have much stronger capital than the previous recession, but they might face stronger economic headwinds from low rates and rising bad loans.
2. On the negative side, many companies have lots of debt and little visibility into the top line (at least for 2020). Unemployment is improving but remains stubbornly high.  Government stimulus might be peaking.  While the Federal government expands its programs, states and local municipalities face huge revenue shortfalls.  They will still have to cut back on spending.  Net exports are a mixed bag as the rest of the world also suffers from the hangover of the COVID downturn.
3. Potential exists for near-term improvements with lockdowns winding down, but the risk of a second wave of COVID and corporate layoffs might make it an uneven recovery.
4. Valuations are unfavorable given most stocks and bonds appear expensive, and signs of a bubble (NASDAQ vs. the rest of the market are back to highs in 1999) are visible. The one saving grace is that on a relative basis, stocks are not as overvalued when compared to the ultra-low level of interest rates.
5. Liquidity is a favorable factor going for the market right now. So long as the Feds continue to keep rates low and pump up liquidity, it is hard to argue for a sustained near-term decline.  However, liquidity does not solve the problems of weak consumer demand, high unemployment, and growing fiscal deficits.
6. Technicals for many parts of the market are strong and might indicate potential for solid returns. Price momentum is robust.   That does not apply to many pockets of the market, such as bank, energy, and many small-cap stocks as well as the US Dollar.
   Parts of sentiment feel bubbly but are not quite at maximum euphoria.  (This indicator is our least favorite, but we would be remiss not to acknowledge its potential to keep working.  It is one of those things that keeps working, until it no longer does, often before a tangible turn in fundamentals or news flow.)

Political risk appears skewed to the negative side.

Presidential and congressional elections in November might be one of the most momentous in years.  If Democrats manage a clean sweep, risk exists for slower growth and rising spending and regulation, factors that the market might not favor.  Another scenario of a President and Congress split by party might add to deadlock, but perhaps a more favorable (less unfavorable?) market scenario.  At this point, we think either scenario is a coin flip (50/50).

Our strategy going forward:

Since the spring, markets have been creeping higher as the Federal Reserve has pumped liquidity to support the economy.  While we are mindful of opportunities, we are also sensitive to try to mitigate the potential downside from the risks mentioned earlier.

In short, we are:

• Watching your money
• Being careful
• Looking for ways to improve
• Keeping you in the loop

So much has happened since January. Even though we have communicated a lot with you in writing, we still want to hear how your situations have changed. Understanding your situations will help us serve you better.

Sincerely,

Petr Burunov, CFP®
President / Wealth Strategist

The post Client Newsletter 3Q20 appeared first on AWM.

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.