Notes from the CIO

No Room for Cosplay in Investing

mark@srcmadvisors.com (Mark Mowrey, CFA) — Sat, 3 Dec 2022 03:02:19 +0000

Most years see some manner of substantial decline in stocks, even as most full-year tallies turn out positive. This year has proved an exception to that tendency. Thus far, at least—there’s still about a month to go. With stocks well off the trough for the year, but still far from their peak at the start of 2022, many are wondering what’s to come next. We’re not much for specific predictions, so readers will hear echoes of our broader investment approach in our thoughts for 2023:

Macroeconomic volatility likely will remain elevated in 2023. Those forces in turn may promote instability in corporate earnings, so stock investors are likely to see price volatility remain heightened next year, too
But stocks are naturally volatile. So more volatility should always be a core component of return expectations
Per our normal stance, we expect longer-term stock returns to be positive, though perhaps not yet in 2023
But let’s not forget that the market generally gets ahead of turns in macroeconomic growth and corporate fortune. So folks concerned about the news flow of late may find focusing only on the present may crimp the potential gains a longer-term perspective may provid

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Not the Normal Outcome

History shows that most years, U.S. stocks have seen positive returns. This year so far has bucked that norm. With only a month to go, seems quite possible we may not see the broader market turn positive by New Year’s Eve. Despite the nearly 14% rebound from October’s low, we’ve have heard more than a few folks suggesting the worst hasn’t yet been seen from this latest equity drawdown. That recession is nigh and stocks will plunge in sympathy at some point next year. Such pessimism seems always the easier note to strike when the market’s down and the rebound seems set upon a shaky foundation. But honest folks will admit they have no idea how next year’s market will perform and that whatever specific forecast they are offering must sit within a range of outcomes that include both better and worse scenarios. Of course, a wide range of potential outcomes is par for the course of equity returns, as our next chart demonstrates.

Wide Range of “Yearly” Returns

Looking at market returns only through the January-to-December lens masks the fact that stocks are pretty volatile over any 12-month period, including those that don’t begin in January. Starting from the beginning of 1926, there have been 1,152 12-month periods through the end of November 2022. The median return of the S&P 500 Index across those “rolling” periods was 13.2%. Well distant from the far more extreme drops seen in history, the S&P’s decline of 9.2% (including dividends) over the past 12 months (November 2021 through November 2022) sits well within the range of values that most results fall.

Positively Biased

And that range has a positive bent: more than three-quarters of rolling 1-year returns have been positive. Sequential down years are possible for sure, and the U.S. stock market has seen very long periods over which investors would have lost money, but the longer we look out into the future, the greater the propensity for returns to have been positive. Not all can maintain such patience in the face of market volatility, though. So will take the opportunity of the year’s close to remind readers to reach out to an advisor to discuss any shifts in comfort with exposure to market risk, as well as any changes in financial situations and goals.

Speaking of looking to the future, wishing everyone a safe a festive close to 2022 and a grand launch into the new year.

Important Information

Signature Resources Capital Management, LLC (SRCM) is a Registered Investment Advisor. Registration of an investment adviser does not imply any specific level of skill or training. The information contained herein has been prepared solely for informational purposes. It is not intended as and should not be used to provide investment advice and is not an offer to buy or sell any security or to participate in any trading strategy. Any decision to utilize the services described herein should be made after reviewing such definitive investment management agreement and SRCM’s Form ADV Part 2A and 2Bs and conducting such due diligence as the client deems necessary and consulting the client’s own legal, accounting and tax advisors in order to make an independent determination of the suitability and consequences of SRCM services. Any portfolio with SRCM involves significant risk, including a complete loss of capital. The applicable definitive investment management agreement and Form ADV Part 2 contains a more thorough discussion of risk and conflict, which should be carefully reviewed prior to making any investment decision. All data presented herein is unaudited, subject to revision by SRCM, and is provided solely as a guide to current expectations.

The opinions expressed herein are those of SRCM as of the date of writing and are subject to change. The material is based on SRCM proprietary research and analysis of global markets and investing. The information and/or analysis contained in this material have been compiled, or arrived at, from sources believed to be reliable; however, SRCM does not make any representation as to their accuracy or completeness and does not accept liability for any loss arising from the use hereof. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated thereby. Any market exposures referenced may or may not be represented in portfolios of clients of SRCM or its affiliates, and do not represent all securities purchased, sold or recommended for client accounts. The reader should not assume that any investments in market exposures identified or described were or will be profitable. The information in this material may contain projections or other forward-looking statements regarding future events, targets or expectations, and are current as of the date indicated. There is no assurance that such events or targets will be achieved. Thus, potential outcomes may be significantly different. This material is not intended as and should not be used to provide investment advice and is not an offer to sell a security or a solicitation or an offer, or a recommendation, to buy a security. Investors should consult with an advisor to determine the appropriate investment vehicle.

The S&P 500 Index measures the performance of the large-cap segment of the U.S. equity market.

One cannot invest directly in an index. Index performance does not reflect the expenses associated with the management of an actual portfolio. Investing in any investment vehicle carries risk, including the possible loss of principal, and there can be no assurance that any investment strategy will provide positive performance over a period of time. The asset classes and/or investment strategies described in this publication may not be suitable for all investors. Investment decisions should be made based on the investor's specific financial needs and objectives, goals, time horizon, tax liability and risk tolerance.

Changes at the Margin

mark@srcmadvisors.com (Mark Mowrey, CFA) — Sat, 5 Nov 2022 00:15:10 +0000

Seems reasonable to expect that corporate earnings are likely to fall on account of inflation-induced weaker profitability and a slowdown in revenue growth. The growth-stall is likely to stem in part from the Federal Reserve’s efforts to tame that margin-crushing inflation, as the Fed directly intends to provoke a slowdown in macroeconomic activity, perhaps even a U.S. recession, in order to alleviate upward pressures on prices. Data have supported those expectations, but perhaps not as dramatically as many folks might have thought…or hoped. Several aspects of this gap are worth noting:

The pace of change in perspective matches what we continue to see as the pace of change in fundamentals: slowing inflation against a backdrop of a slowing economy and somewhat eased employment pressures
Executives are keen to guide investors into an evolving reality, the near- and medium-term future characteristics of which are unknown even to them
That policy makers, executives and investors alike are slowly steering into fresh realities provides comfort that intensely adverse reactions of all sorts might be limited

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Falling, Not Plunging

Driven by commentary provided by corporate executives and likely filtered through each analyst’s individual lens on corporate America, earnings expectations for companies within the S&P 500 Index have dropped rather steadily since the middle of this year. These trends surely reflect ruminations on the potential impacts of more restrictive monetary policy, which might slow top-line growth, set against persistent inflation, which could pressure profit margins, along with the evolution of the war in Ukraine and myriad other considerations. For the current calendar year, estimates are just about where they were at the beginning of 2022, though the rainbow-like route those estimates took include a growing deceleration since July. Even so, the pace of decline in optimism has remained rather steadyish in tempo. As importantly, the annual growth figures for the next few years remain positive, at least for now.

Divergence Underneath

The story isn’t the same for all sectors, though. The Energy and Materials sectors express two different outlooks for prices: energy prices may remain high, while prices for many other raw materials may continue to fall through next year. And oncoming macroeconomic weakness can be seen in the divergence in expected fortunes of the cyclical Consumer Discretionary group relative to the generally more stable Consumer Staples group. With the exceptions of Energy and Utilities, expectations for which remain higher now than in the summer, earnings forecasts at the sector level are flat at best from summertime views, with dramatic declines far more common.

Could be Worse

So earnings expectations in the aggregate hide contradictory trends underneath. Even with that understanding, many commentators still seem rather confident that the data—maybe all the data—are a ruse. That corporate execs might be telling half-truths in order to let investors down lightly as sales and margins deteriorate more quickly than their outlooks suggest. Or even worse (and more cynically), not divulging their dire circumstances for fear of scuttled year-end bonuses. On the flip side, execs might be telling the full truth as they presently perceive it, thereby demonstrating that the economy is not slowing sufficiently and that inflation will prove more persistent than desired such that the Fed will have to work harder for longer to tame it, potentially leading to a worse-than-now-expected recession.

Either of those beliefs suggest another market dislocation is in order: from a kitchen-sink acknowledgement that earnings are much worse than folks had expected or that the outlook for monetary policy will have to become much more restrictive than presently thought. Neither is out of the question. In fact, some manner of both is possible.

Should be Worse?

But that does not mean a market dislocation is a required result of some or all of both being true. Much depends on the rate of recognition of an environment being different than earlier had been thought. To the extent that the changes continue along a path of incremental deterioration (within some range of lower-bounds, of course), investors may find that the present still hefty drawdown in equity markets relative to the January peak, along with much higher interest rates (compared to the past decade, at least) sufficiently acknowledge potential circumstances. Still more volatility would likely be in store, but perhaps not substantial additional downside.

Of course, a more dramatic shift in trend is possible. But such is the nature of the uncertainty that comes along with investing. The “risk” part of the risk premium that is demanded by the expected return that investing is meant to present. As always, we are happy to discuss the potential ramifications of any such potential surprises on existing and/or considered portfolio exposures.

Important Information

The S&P 500 Index measures the performance of the large-cap segment of the U.S. equity market.

One cannot invest directly in an index. Index performance does not reflect the expenses associated with the management of an actual portfolio.

Investing in any investment vehicle carries risk, including the possible loss of principal, and there can be no assurance that any investment strategy will provide positive performance over a period of time. The asset classes and/or investment strategies described in this publication may not be suitable for all investors. Investment decisions should be made based on the investor's specific financial needs and objectives, goals, time horizon, tax liability and risk tolerance.

Bad News is Good News?

mark@srcmadvisors.com (Mark Mowrey, CFA) — Fri, 7 Oct 2022 16:55:10 +0000

Many trends suggest progress has been made against inflation, which remains historically elevated across most of the globe. And though mixed in their estimates for how quickly and to what level inflation will fall, survey- and market-based measures for future inflation reflect expectations for a return to more comfortable levels of price change. While we might agree and continue to believe that global efforts to ease upward price pressures ultimately will prove successful, many challenges remain:

Foremost is the war in Ukraine, inflationary reverberations of which persist around the globe
Supply-related pressures outside of energy continue to wane, though more slowly than perhaps desired
Volatile energy markets likely will present ongoing macroeconomic challenges in addition to inflation, with Europe likely particularly stressed
Higher interest rates may slow regional economies to such an extent that they fall into recession
Various fiscal measures meant to offset inflation may well limit the near-term effectiveness of monetary policy

202210 SRCM Commentary Download

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Breaking Away

The U.S. Treasury sells Treasury inflation-protected securities, or TIPS, which offer buyers protection against inflation by adjusting the principal of the bond by the change in the U.S. Consumer Price Index over the life of the bond. Each semiannual coupon is based on that revised principal, and owners receive the higher of the original or the adjusted face value of the bond at maturity. Inflation is generally positive, meaning the principal generally adjusts upward, so TIPS buyers generally accept a lower yield on TIPS, versus a “nominal” bond of similar maturity. Theory suggests that potential buyers will choose the inflation-protected bond only up to the point at which the expected return from TIPS exceed the nominal Treasury yield by an amount sufficient to account for their individual expectations of future inflation and the fact that future inflation is uncertain (i.e., at least their expectations for inflation, probably plus a little bit of a cushion). The difference in those two yields for a given maturity (e.g., 2-year nominal minus 2-year TIPS) is the inflation rate at which the TIPS buyer would breakeven owning either type of bond. That is, inflation “breakeven” rates are indicative of the rate of inflation that would have to be realized over the life of the inflation-protected bond—again, when they consider that future inflation is uncertain (we’ll explain this more in a moment)—for the buyer to be indifferent between having considered the purchase of a normal (“nominal”) Treasury bond or a TIPS.

After a surge coming out of the depths of the COVID-19 market crisis, expectations for future inflation continued to rise along with rampant actual inflation. However, as the pace of growth in inflation slowed and then turned flat to negative, investors began to expect prices to grow less quickly in the future. With breakevens now in the mid- to low-2-percent range—well below peak, though still elevated relative to the decade prior to the recent surge—it would seem investors in the aggregate presently surmise that monetary policy ultimately will prove successful.

There are some meaningful caveats to that otherwise favorable take, though. First, theory suggests that among the reasons inflation breakevens may not be entirely accurate depictions solely of investor expectations for future inflation are 1) the thought that the prices of TIPS reflect an inflation premium to account for potential future volatility in inflation, and 2) the fact that the TIPS market is much smaller than the nominal Treasury market the prices of TIPS are thought to be penalized with a discount to reflect the trading challenges presented by lower liquidity (generally higher costs, especially when pressured). More generally, it might be easier to think about TIPS as a form of insurance. Because there generally is a cost to insurance, that cost naturally would be reflected in generally lower yields on TIPS compared to what one might have expected.

Furthermore, as with most forecasts, expectations do not future results make. In Figure 2 we chart historical breakevens for the next two years of inflation (light blue line) against the actual annualized inflation rate realized over the following two years (dark blue line). Obvious is the fact that the two lines rarely intersect, with inflation expectations often widely off-mark. Larger “misses” tend to be more dramatic around periods of economic uncertainty. For example, investors were slow to believe that inflation would rise back to the Federal Reserve’s target[1] after the Great Financial Crisis of 2008-09, and then were slow to come to terms with the idea that deflation remained a possibility in the early 2010s. And coming out of the COVID crisis, investors clearly misjudged the potential for such dramatic inflation as we have seen over the past year. Potentially happily for them, of course, is the fact that TIPS may have protected them from that unexpectedly higher inflation via the adjustment in principal, versus having chosen a nominal bond (though both types of bonds likely would have been negatively affected by generally rising interest rates).

These data are nonetheless valuable, though, in that among the primary concerns of central bankers around the globe is that higher levels of inflation might become entrenched in public thought, thereby reinforcing inflationary trends as consumers purchase in excess of need or actual desire to avoid having to pay more in the future. Indications that inflation expectations are fading help to ease those fears somewhat.

No Laurels on which to Rest

Positive indications aside, this period of high inflation may well be far from over. And as Federal Reserve chair Jerome Powell noted in a recent speech, there may be more pain to come before his team is comfortable that they have succeeded in taming inflation.

War in Ukraine

Perhaps most pressing is the ongoing conflict in Ukraine, which remains at its greatest intensity since the invasion began, while still threatening critical supplies of food and energy. Though fears of a frozen winter due to lack of natural gas have waned, Europe seems at some point quite likely to lose all access to Russian energy supplies, whether by their own choice or by Russian decree. Securing longer-term supplies and establishing natural gas and alternative infrastructure likely will prove costly and take years to totally compensate for failed supplies from Russia. And while grain and other food stuffs continue to flow out of Ukraine, Russia may find earlier agreements no longer tenable.

Supply Chain Disruptions

Off the port of Los Angeles (San Pedro), the Pacific Merchant Shipping Association calculates that the average “dwell” time for containers at the port has dropped from a high of more than eight days last November to just a bit over five days in August. Pre-COVID data suggest a normal time closer to half the latest value, with elevated waits due in part to peak delays in outbound rail traffic and still slow outbound truck traffic. And some of that West Coast port easing comes from a shift in deliveries to still-clogged East Coast ports to avoid what had been pile ups out West. Still, the general progress reflects both the slow unravelling of COVID-related kinks and a slackening in demand. Both can be seen as positive for future inflation, even as the latter is an indication that global growth is stalling. But U.S. and global supply chains remain stressed nonetheless, on account of the war in Ukraine, volatile energy markets and high transportation costs (fuel and otherwise), in addition to delays due to mismatches in levels of imports and exports (delays coming in cause delays going out and vice-versa).

Volatile Energy Markets

Though oil prices remain well below summer peaks, prices remain volatile. And the Organization of Petroleum Exporting Countries (OPEC) is seeking to limit production in order to prop up prices, already having announced a plan to cut production by 2 million barrels a day. They may not be able to achieve that goal, but these actions may limit further downside in energy prices (and therefore downward pressure on inflation in general). Meantime, gas prices have soared in California and elsewhere in the States due to widespread refining outages, a not-so-friendly reminder that oil doesn’t just flow out of the ground into a barrel and then into our tanks and that disruptions specific to petroleum product supply chains can materially affect prices in the short and medium term.

Heightened Recession Potential

Exorbitant costs and in many places limited availability of fuel, higher interest rates and waning sentiment may slow regional economies to such an extent that they fall into recession. Among developed markets, recessionary pressures seem highest in Europe and the UK. The situation is well different in the U.S., with employment robust and growth still well in the positive domain. But a recession is not out of the realm of possibility this year or next. As we’ve discussed in prior commentaries, the fact that the stock market remains well off peak highs reached at the beginning of 2022, while longer-term bond yields reflect an eventual easing of rates on account of slowing growth, give some peace of mind with regard to potential further downside.

Meantime, politicians may feel the need to offset inflation and the negative influence of higher interest rates through supportive fiscal measures. But most measures we’ve seen—borne as much of political expediency as they are of a desire to support those truly in need—are likely to prove temporary and likely will serve only to stimy progress against inflation, not provide any durable impact.

What’s Not Yet Known?

Of course, forecasts (including those we just offered) are generally unreliable, so who knows what’s to come. While it’s hard to be sure to what extent markets discount the range of current “normal” and “not normal” risks, we do have the sense that they minimally express moderate expectations of a meaningful slowdown in macroeconomic activity and even recessions in many regional economies, the United States included. The greatest uncertainties, in our view, relate to the war in Ukraine. With no end in sight, and hostilities on the rise amidst more ominous threats of existential escalation, the near-, medium and long-term impacts of war remain highly uncertain and likely will continue to press investible markets.

As we head into the final quarter of 2022, we want to remind readers that now is as good a time as ever to reach out to an advisor to discuss implications of decisions required prior to year-end. And we are of course always available to review matters discussed in this month’s and other commentaries, in particular as they relate to any changes in preference and tolerance for exposure to market risk.

Important Information

Statera Asset Management is a dba of Signature Resources Capital Management, LLC (SRCM), which is a Registered Investment Advisor. Registration of an investment adviser does not imply any specific level of skill or training. The information contained herein has been prepared solely for informational purposes and is not an offer to buy or sell any security or to participate in any trading strategy. Any decision to utilize the services described herein should be made after reviewing such definitive investment management agreement and SRCM’s Form ADV Part 2A and 2Bs and conducting such due diligence as the client deems necessary and consulting the client’s own legal, accounting and tax advisors in order to make an independent determination of the suitability and consequences of SRCM services. Any portfolio with SRCM involves significant risk, including a complete loss of capital. The applicable definitive investment management agreement and Form ADV Part 2 contains a more thorough discussion of risk and conflict, which should be carefully reviewed prior to making any investment decision. Please contact your investment adviser representative to obtain a copy of Form ADV Part 2. All data presented herein is unaudited, subject to revision by SRCM, and is provided solely as a guide to current expectations.

The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Indexes are available for the U.S. and various geographic areas.

The PCE price index reflects changes in the prices of goods and services purchased by consumers in the United States.

[1] It’s important to note here that, while the Consumer Price Index (CPI) tends to be the more talked about inflation rate, and one that seems to more closely track how consumers experience inflation (with many caveats that are challenging to delineate on the limited space these pages provide, such as the manner in which housing inflation is incorporated into the math), the Federal Reserve prefers to use the “core” Personal Consumption Expenditures Index (PCE) to track inflation. Perhaps the most obvious difference between the two approaches is that the latter excludes changes in food and energy prices. Those exclusions have resulted in periodically wide differences in the two series; recent data show a wide gap as a result of price volatility in food and energy.

Such Profound Convictions

mark@srcmadvisors.com (Mark Mowrey, CFA) — Thu, 1 Sep 2022 14:26:19 +0000

We were having such a good time, weren’t we? After dropping more than 20% from the beginning of the year through mid-June, the market staged a convincing rebound as investors seemingly saw fit to look beyond the complexities of central bank policy, maybe trusting that inflationary forces could be weakened and might otherwise work themselves out over time. That rebound has stalled, but one shouldn’t be surprised. Investors need not forget:

With sources of rising and otherwise still-high prices so diverse, there’re no quick fixes to present challenges
Impatience is understandable as trends remain indecisive. Even so, we’ve begun to see favorable shifts in the data, which lend credibility to the current courses of action
But there’s always a tomorrow. Facts can change such that more or less effort and/or time may be required for inflation to return to tamer levels, and employment and growth may suffer as a result
Meantime, stock and bond markets likely will remain volatile as investors take varying cues from fresh data as they arrive

202209 SRCM Commentary Download

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A Bit about Inflation…

Putting the current rate of inflation in context, we see that the U.S. consumer has not seen a rate of change in prices this high since the 1980s. The surge comes after more than a decade of reasonably calm inflation, the rates of which rolled around the collectively desirable 2% range, a level set for its not-too-cold/not-too-hot tendency to give folks little reason to pay attention to it. But a collection of forces applied upward pressure on prices after the initial global COVID shutdown. First, that shutdown brought global supply chains to a near standstill. From raw materials to finished goods, product deliveries stalled and often halted, leaving final supply low relative to demand. Since scenarios in which levels of demand exceed supply tend to see prices pulled higher, inflation began to rise. Well before those supply chain challenges began to ease, though, governments around the world provided vast fiscal and monetary stimuli to jolt their economies back to life. These funds tended to enhance demand—in many segments beyond what otherwise might have been desired without the excess funds—further expanding the mismatch between supply and demand. Next came the war in Ukraine, which wreaked further havoc on supply chains just as they were beginning to gain post COVID-crisis momentum. Particularly hard hit were grains and other foodstuffs sourced from Ukraine (again, lower supplies for a given level of demand). Energy supplies—for Europe most starkly—were crimped by a combination of sanctions-related import restrictions on Russian oil and gas, and Russia’s restrictive responses to those actions. Various other mostly raw material (e.g., raw and processed metals) and some finished goods (e.g., a range of automotive goods) saw shipments slow or cease as Ukrainians focused attention on the war.

The Levels, They Are A-Changin’

What’s important to remember about inflation, though, is that it is a measure of the change in prices, not the level of prices. That is, prices may remain high in historical context even as inflation drops. The American Automobile Association shows the average price of a gallon of regular unleaded gasoline in the U.S. at $3.841 on August 31. It could linger at this relatively high level (the average of daily values since August 1992 is $2.827), perhaps by trending more sluggishly downward. Markets nonetheless might continue to think positively even of a slower inflation unwind, despite ongoing consumer distress over the still-high cost to fill the tank.

Good news, then, that gasoline prices in fact have actually fallen pretty dramatically since peaking at $5.016 on
June 13 of this year. Same for global food prices: bulk costs for corn, rice, palm oil and wheat are at or below pre-war levels. Both groups of prices (energy and food) tend to be volatile, which is why folks tend to focus on inflation excluding those two groups (Figure 1 shows inflation with and without energy and food). But inflation outside of energy and food have been easing as well (latest readings show a decline in both series). Which brings us to a more critical point with regard to how markets seem to respond to these sorts of data. While levels are important—the rate of inflation remains historically high—the hooks at the end of both lines are what matter more to investors now. That is, the fact that the rate of inflation is slowing means we may be on the path back to more favorable price stability.

Eyes Forward

Much as we noted in last month’s commentary discussing recessions, markets will tend to react to incrementally positive shifts in economic trends to get in front of a return to macroeconomic expansion (and vice-versa, of course). It has not been surprising, then, to have seen the stock market respond positively to initial signs that inflation might be slowing, while the broader economy seemed not yet to feel a burning sting from the bite of higher interest rates. That’s the bounce from the June lows. Even so, we must note that the sting isn’t abating, and may we worsening. For example, higher mortgage rates seem to have crushed home sales. There, both levels are low and the rate of change has been increasingly negative. Waning housing demand is among the incremental changes of the worrisome sorts, of which there are a few. Hence the stall in the market rebound.

Those two states of affairs—easing energy and food prices amidst plunging home sales—reflect the balance that must be struck such that we might march an orderly path out of the presently distressing state of affairs. Top of mind for investors seems to be whether the Federal Reserve, which sets the tone for interest rates across the economy as part of its mandate to maintain stable prices and full employment—and thereby demand for credit, which can be used to fund additional purchases, investment and growth—will be able to support the cooling of inflation without placing too heavy of a hand on employment or growth. Since the Federal Reserve arguably can have little impact on global supply chains outside of, as an example, the potentially negative impact on incremental investment in supply that might stem from higher interest rates, much attention is focused now on what’s historically seen as among the more permanent drivers of inflation: workers’ wages. As prices remain high, with little sense of an easing in inflation, while the unemployment rate remains historically low, workers may begin to require greater pay for the same amount of work (demand for labor stays the same or as is generally the case grows, while the supply of labor for a given price level falls). Wage inflation tends to be stickier, as workers are unlikely to settle for less once more has been achieved. And those extra dollars might actually worsen inflation (more demand for a given level of supply) such that prices might continue to rise, spurring additional wage increases, and so on in a ruinous cycle.

Thankfully, we’re not there yet: wage growth remains high, but the rate of increase also has been slowing over the past several months. But one cannot rule out a disastrous wage-price spiral just yet. Happily, a range of measures express expectations for inflation to slow. But expectations are not reality, so one neither can yet confirm a not-too-harsh impact on growth and employment from higher interest rates potentially set in order to tame inflation that persists longer than presently expected. Investors therefore are apt to focus on each new metric that reflects shifts in supply, demand, the prices at which the factors two meet and the resulting net change in aggregate employment and growth. Those details are likely to remain volatile in pace and direction, while often spawning mixed views as investors differently weigh each datum and alter prognoses. Stock and bond markets will reflect that changing of attitudes and positioning, likely a source of ongoing volatility. Even so, just as was the case at the depths of COVID-crisis uncertainty, we continue to believe that the optimal approach for most investors is to adhere to an existing investment plan established prior to this latest drawdown, so long as financial situations and constraints do not differently require. And we again will remind folks that it’s often during times such as these that a conversation with an advisor may support the historically more favorable stay-the-course stance when thoughts might lead actions otherwise.

Important Information

The S&P 500 Index measures the performance of the large-cap segment of the U.S. equity market.

Every Little Bit

mark@srcmadvisors.com (Mark Mowrey, CFA) — Sat, 6 Aug 2022 01:45:27 +0000

With savings, every little bit counts. In our view, one should focus on regular contributions to investment portfolios to build an asset base, in turn allowing investment gains to compound over time and further bolster accumulated assets. In addition to the notion that even small amounts of savings, when invested according to a disciplined strategy, may grow substantially over time, we think the following additional thoughts are important for savers to consider:

The compounding of returns may add to the proportion of portfolio assets that earlier savings and gains on those savings helped build
And those compounded gains in absolute dollar terms may become increasingly large with time
Seemingly small changes in long-term returns can have a relatively outsized impact on the eventual value of an investment portfolio

Listen to this month's Notes from the CIO podcast:

202208 SRCM Commentary Download

Savings are Good…

To demonstrate the potential power of a regular savings and investment plan, we created a hypothetical portfolio built using $100 per month in savings that’s invested at an annualized return equal to that achieved by an index reflecting a 60/40 mix of equity and fixed income over the past 40 years. Past performance is not indicative of future performance and one cannot invest in an index, but we think the long-term return of 10.0% achieved by that index sets a reasonable basis for this demonstration. To start the discussion, we show in Figure 1 the proportion of accumulated portfolio value achieved by savings, versus the value achieved by having theoretically invested those savings. After 5 years of savings, the investment gains represent just a bit over a fifth of the portfolio. Not much, but still meaningful. But if one leaves those savings invested, they, too, may grow as returns “compound” over time. After 25 years, those gains represented three-fourths of the portfolio in this hypothetical scenario, a proportion that continued to grow.

…Gains on Savings Even Better

The longer one can save, the longer those gains may compound and the potentially larger the portfolio may become, even as the savings rate might remain relatively small. It’s helpful to think about the extra years of savings as being added at the end of the accumulation phase, rather than at the beginning. And that’s because the later years are when compounding can prove most impactful in terms of absolute dollars. To see how the math works we can break up each month of savings into its own “portfolio”. The first $100 had most of forty years to grow at that near 10% annualized rate, eventually expanding to be worth $4,472. The second month of $100 savings grows at that same rate for 478 months to $4,437. And so on, all the way to month 480, by which time the $48,000 in savings may have grown to a considerably larger sum.

Picking up where we left off in Figure 1, we show the absolute dollar amounts of that hypothetical portfolio built from savings of $100 per month. The substantial boost to long-term growth from compounded returns shows up even more starkly in this view, which includes the hypothetical portfolio value at the end of each year. From a comparatively small $48,000 in total savings, all that compounding of returns in this demonstration results in subsequent gains of more than half a million dollars.

But at What Rate of Return?

We’ve made several critical assumptions so far that may or may not apply to any individual’s personal financial situation. We first assumed a $100 per-month savings rate. That could be more or less affordable for certain folks. We then assumed that savings rate held steady for 40 years. That’s perhaps an even more hard-to-fit assumption, as we would normally assume excess “savable” funds are likely to vary through time, as would the desire to actually stash away those funds in an investment portfolio. We in turn assumed those funds remained invested throughout the time frame at a steady rate of return that almost assuredly won’t be experienced by any individual investor over the next 40 years.

Still, such assumptions allow us to demonstrate the math that we think can be helpful as individuals think about savings for future financial goals. As one can see from the above charts, the more critical variable in the math with regard to the eventual outcome of the savings and investment plan is the rate at which one assumes those savings grow over time. And given the power of compounding, even small differences in the assumed rate of return can have a grand impact on eventual portfolio value. When we calculated data for the charts above, we assume the returns from a “blended” index that combines the returns from an equity index, the S&P 500, and a bond index, the Bloomberg 1-5-Year Government Credit Index, with the former representing 60% of the blend and the latter the remaining 40%. Again, that historical return approximated 10% per year for the past 40 years. Most of that return came from the equity side: the S&P 500 Index posted an annualized return of 12.3% over the past four decades, while that bond index returned a relatively tamer 5.7% per year.

We should highlight that “tamer” bit. Regular readers will know that we often revisit the idea that all investing carries risk and that investing in stocks tends to be risker than investing in bonds. So, the higher return that stocks achieved arrived only via a much more tumultuous path than did the lower return seen by bonds. And that fact is among the reasons we combine stocks and bonds in a portfolio: the bonds can offset the relatively risker stocks, resulting in a lower expected return, but also a lower expected depth and duration of loss. We did so for this very exercise and see that the long-term return of 9.3% for a 50/50 mix of stocks and bonds was a bit lower than that for the 60/40 mix. And the 70/30 mix saw a bit higher return at 10.6%.

Those differences of less than a percentage point might not seem like much, but those seemingly small differences can result in rather large gaps in long-term hypothetical value of an investment portfolio. Figure 3 demonstrates that potential difference. The potential for more sizeable long-term growth of portfolio assets from judiciously taking on incremental risk where one’s financial situation and tolerance for that risk allow is another reason we emphasize that balance of risk and return in our conversations as we seek to assist clients achieve financial goals.

Important Information

The S&P 500 Index measures the performance of the large-cap segment of the U.S. equity market.

Genuinely Patient

mark@srcmadvisors.com (Mark Mowrey, CFA) — Fri, 1 Jul 2022 21:35:58 +0000

Unlike market peaks, when positive sentiment easily supports staying in the game, a market drawdown leads many to question portfolio exposure to equity. Fears of further downside to come not only leave many hesitant to retain an existing strategy; they can push some to throw in the towel altogether. In squishier times like these, when the pressures driving market declines are more difficult to pin down, it can be particularly challenging to find reasons to keep a steady hand, let alone be optimistic. We think the simplest, most powerful reasons are:

Having proved unable to time the peak, one is unlikely to be able to time the bottom
History suggests that decisions to unwind stock exposures in the wake of market downturns tends to prove detrimental to financial outcomes
Missing out on potential upside ultimately may prove more painful

Listen to this month's Notes from the CIO podcast:

20220701 SRCM Commentary Download

We Saw It Coming...

According to the entity charged with delineating economic cycles, the National Bureau of Economic Research (NBER), “a recession is a significant decline in economic activity spread across the economy, normally visible in production, employment, and other indicators. A recession begins when the economy reaches a peak of economic activity and ends when the economy reaches its trough.” Over the past half-century, a market drawdown has preceded the declaration of every recession. But this makes sense. Markets generally get ahead of an eventual recession determination as investors digest whiffs of uneasiness that turn into anecdotes of slowing trends that in time become data that reflect a slowing of the broader economy across many metrics. Given that lag, we only learn of the fact of a recession well after one’s already begun. Sitting more than 20% below the market peak set back in January, then, as we ask ourselves whether the U.S. has or will enter into a recession, we should accept that the market seems to suggest that the answer is yes.

..Now What?

Like we said, a stock market downturn generally precedes the actual announcement of a recession, as investors react to changes in data trends that form the basis for the eventual declaration that a recession has occurred. As is now the case, when it seems the market already reflects a sense that a recession is in the offing, we have found it a particularly opportune time to revisit a basic premise of investing: that all investing carries risk, but that investors tend to be rewarded for patience during times of market stress. Historical patience even against a potential current or oncoming recession supports that tenet. Across 16 recessions over the past near century of data that we show in Figure 2, once a recession has begun, the market’s been rather quick to provide durable gains. Acknowledging that in most cases the market is off a prior peak once the recession has started (look back to Figure 1), investor patience may allow those gains to offset those earlier losses, then potentially rally into positive territory over time.

This tends to have been true whether or not the drawdown was associated with a recession. Looking at the largest 10 drawdowns in the S&P 500 Index since 1925, which we do in Figure 3, all saw gains over the ten years subsequent to the depth of the downturn. In fact, aside from two 10-year periods that were bookended by distinct macroeconomic and/or geopolitical crises—December 1968 through December 1978; and March 2000 through March 2010—markets were higher ten years later even from the mark peak just before the drawdown.

These views further support the belief that the wiser approach tends to have been to have avoided what might otherwise have felt like a sensible strategy when confronted with market tumult: to sell out of stocks in order to avoid a further decline. The thinking simply accepts the notions that 1) you’ve already incurred paper losses that 2) may prove permanent if you “lock them in” by selling downtrodden investments, and that 3) you’re well unlikely to be able to time a reentry into the market (since you likely did not time the exit prior to the drawdown) if you were to sell down your equity exposure and, finally, that 4) the fact of the drawdown may tilt the odds of potential future return a bit more in your favor.

Fortuneteller Folly

That’s not to suggest there isn’t the potential for markets to fall further if a recession appears or worsens. And we would not necessarily be surprised if further downside were to fruit. This period of distress after the superior market gains from the depths of the COVID-19 decline in early 2020 has seen successive versions of more conventional wisdom falling away as more optimistic tones are confronted with an incrementally more dire situation. The war in Ukraine has proved longer lasting and more brutal than many initially thought likely. And global inflation trends have proved far more persistent than consensus found probable.

The potential fly in the ointment of the present situation: seems stock analysts have yet to reel in their expectations for profits over the following quarters in moves that could be seen as acknowledging the potential oncoming slowdown in macroeconomic growth. As a result, the U.S. stock market has become less expensive relative to expectations for profits in the near future. Some may argue those perhaps too-rosy expectations are bound to see downward adjustments and that a decline in those forward expectations might result in a further drop in the market. Conversely, since this potential mismatch is already widely known, investors may well have already incorporated a potential decline in corporate profits into their analyses. That is, the current drawdown may already reflect a reduction in earnings growth, perhaps even an actual decline in earnings, that might come as a result of a potential recession.

Regardless, it’s hard to know in advance how quickly the global economy will decelerate, and how contributory the U.S. economy will be in that deceleration. So, patience once again is demanded by a market that, per the norm, offers little in the way of tea leaves useful in supporting a change in investment approach.

With investment markets likely to remain volatile as macroeconomic trends evolve, we want to ensure all readers that we welcome any discussions you may wish to have regarding your financial situation, your thoughts regarding market events and otherwise.

Meantime, SRCM wishes everyone a safe and celebratory July 4th weekend!

Important Information

The S&P 500 Index measures the performance of the large-cap segment of the U.S. equity market.

One cannot invest directly in an index. Index performance does not reflect the expenses associated with the management of an actual portfolio.

How Very Smart You Are!

mark@srcmadvisors.com (Mark Mowrey, CFA) — Sat, 7 May 2022 00:47:34 +0000

20220506 SRCM Commentary Download

Only once before in the history of the U.S. fixed income market have investment-grade bonds suffered as steep a decline as their current drawdown. The consequence of the impending reversal of stupendously accommodative, COVID-focused monetary policy, rates have risen from historical depths to put them likely within striking distance of what might be appropriate for “normal” macroeconomic conditions. The upshot is:

Bond markets have raced ahead of actual shifts in monetary policy, pulling forward the effective implementation of expected policy moves
And that may mean the bulk of the damage to fixed income portfolios might be complete
Risks remain, however, that inflation could surprise on the upside and/or growth on the downside, heightening the challenges and hazards of an already intensely complicated project for the Fed

Listen to this month's Notes from the CIO podcast:

Duration Illustrated

A basic rule of fixed income investing is that bond prices move in the opposite direction of interest rates. A second rule states that the longer the time until a bond matures—shorthand for the bond’s “duration”—the more sensitive that bond will be to changes in interest rates. Given the first rule, as interest rates began a sustained rise last year, bond prices began to fall. Taken as a whole, the U.S. investment-grade bond market has dropped just over 11.7% from
August 3 last year, when the interest rate on 2-year Treasury bonds reached another low point of 0.17%, having bounced around for more than a year after reaching a post-COVID crisis depth of 0.10% on February 5, 2021.

Some bonds fared better and some worse than that, though. Demonstrative of the second rule we stated earlier, the longer the duration of the bond, the deeper the price decline. As we show in Figure 2, longer-maturity bond markets suffered the greatest losses. Those with 20 years or more until maturity have sunk on average more than 21%. Short-term bonds, on the other hand, have fallen by much smaller amounts. Corporate bonds suffered a similar fate, with their prices falling even a bit more than those for Treasuries of comparable maturity on account of widening “spreads”, or the extra interest investors demand to reflect the fact that corporations can default on their bonds, potentially leaving investors with less than full return of the bond’s face value.

Rising Apace

Yet another rule of fixed income investing is that the impact of interest rate changes with respect to bond maturity are complicated by the level of rates at which one is doing the math. The lower the initial starting point for the change in rates, the greater the likely impact of the change in rates will have on the price of the bond. The fact that the shift upward in rates began at such a low level is part of the reason that the current drawdown was bested only by the shift in rates prompted by Federal Reserve actions taken in the late 1970s and early 1980s to combat then rampant inflation. Exacerbating the decline is the pace at which rates have risen: there’s been little time for the extra income provided by higher rates to offset the decline in bond prices.

Close to Normal?

As we recorded the last time we experienced a rather rapid increase in interest rates (there are a few on-topic commentaries from early 2018), the U.S. Federal Reserve is tasked with fostering a stable environment for macroeconomic growth as qualified by full employment and price stability (low and stable inflation). They seek to achieve this goal primarily by targeting levels of interest rates in the broader economy. Lower rates can be seen as “accommodating” growth, while higher rates can be seen as “restricting” growth.

Seeking to direct changes in the interest rates in the U.S., the Federal Reserve maintains a target for the federal funds rate, which is the rate that banks charge one another for overnight lending. The reasons banks do this are varied, but the rate is best thought of as the most immediate of lending rates in the U.S. Most other rates—those on U.S. Treasuries, corporate bonds, mortgages, bank loans and credit card APRs and others—key off this rate in some fashion. The belief, then, is that changes to the fed funds rate can steer changes to lending rates across the economy.

Theory suggests that lower rates make debt less expensive (lower interest payments on loans and newly issued bonds), which fosters investment that may, in turn, result in faster macroeconomic growth. Seen in reverse, higher rates are thought to slow macroeconomic activity. The Fed thus seeks to lower rates when it wants to enhance conditions for growth in macroeconomic activity and seeks to increase rates when it wishes to tamp down the potential for growth.

Interest rates might be considered “neutral” when the net effect on macroeconomic activity balances, with the economy at full employment and experiencing stably positive, but low inflation. Looking at the history of Treasury yields (Figure 3), though, one might think that we still have a long way to go before we reach “normal”. One could think, too, that Figure 3 suggests there might not be such a thing as normal. In fact, both statements could be true. While there are many ways to arrive at a subjectively quantitative assessment of the neutral rate of interest in advance of achieving it, we likely only will know when that rate is achieved when we can observe the Fed’s goals as having been met.

During his conference call on May 4 this week, shortly after the Fed announced a 50 basis-point hike in its target for the federal funds rate, Fed Chairman Jerome Powell confirmed as much, noting: “When we talk about the neutral rate, we are really talking about the rate that that neither pushes economic activity higher, nor slows it down. It’s a concept, really. It’s not something we can identify with any precision. So, we estimate it within broad bands of uncertainty. And the current estimates on the [Federal Reserve Open Market] Committee are sort of 2% to 3%. That’s a longer-run estimate...that’s an estimate for an economy at full employment and 2% inflation. Really what we are doing is we’re raising rates expeditiously to what we see as the broad range of plausible levels of neutral. But we know that there’s not a bright line drawn on the road that tells us when we get there. Our policies affect financial conditions and financial conditions affect the economy. So, we are going to look at the effect of our policy moves on financial conditions. Are they tightening appropriately? And then we are going to be looking at the effects on the economy. And we’re gonna be making a judgement about whether we’ve done enough to get us on a path to restore price stability.”

That is, the Federal Reserve might target a particular level of interest rates that it believes will support its full employment and price stability mandates, but only the achievement of the latter two will tell us that the neutral level has been met. Further challenging the math, as it were, the universe evolves such that the neutral rate of interest is thought to change through time as well. And sometimes the Fed’s targeting of one goal may come at the expense of the other. The current situation is among those times when such offsetting impacts might prove more challenging to manage. With inflation so high at the present, the Federal Reserve likely is more squarely focused on it, potentially at the expense of the employment rate. And that forced balancing act leaves wide open the possibility that the Fed’s actions either work too slowly to reduce the damage inflicted by high rates of inflation, or too quickly such that macroeconomic activity slows beyond desired levels, with a recession the potential undesirable outcome of that scenario.

Avoiding those strongly negative outcomes is top-of-mind for Team Fed, though, another point that Chairman Powell reiterated during his presser. And he’s confident—as he, of course, must be, at least in public—that the path remains open to what would be seen as a “soft landing” or a progression of the broader interest rate environment that modulates macroeconomic activity just enough to reach desired levels of inflation, 2%, while not seeing too much pressure on employment or growth. We remain in the believers’ camp—of the likelihood of success, that is, not just the possibility of success—even as we know the challenge remains a great one.

Not Riskless; Not Riskiest

And even then, we imagine the universe will conspire to alter the trajectory of interest rates yet again. Perhaps the war in Ukraine worsens. Or the world is hit with another round of COVID-related stress. Inflation could remain too hot, pressuring the Fed to raise rates even further than presently expected. Those and other potentially dire scenarios in mind, despite the historically substantial drawdown seen in global bond markets, we continue to find bonds to be the far more stable partners to risker equity in portfolios; the list of historical drawdowns for U.S. stocks and U.S. investment-grade bonds shown in Figure 4 supports this view.

What’s to Come?

Of course, we would have liked for rates to have moved up in a more leisurely manner, limiting the near-term drawdown in bond exposures, especially considering the fact that global equity markets have seen a drawdown only marginally greater than the U.S. investment-grade bond market. As we noted in January this year, our repositioning of portfolios acknowledged the likely higher path for interest rates this year. While the repositioning helped to avoid a good portion of the broader market’s losses, we missed not all of it, and worse still may yet come.

As we noted earlier, though, with rates having increased so quickly, the bond market has pulled forward much of the work the Federal Reserve so far has planned to accomplish in order to tame inflation. We therefore expect rates to remain a bit more range-bound until such time as current trends—a slow decline in inflation and mostly stable employment—markedly change course. In the meantime, the obvious benefit of higher interest rates is that the going-forward expected return on bonds has grown sharply in 2022.

Important Information

The S&P 500 Index measures the performance of the large-cap segment of the U.S. equity market.

The Bloomberg U.S. Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate pass-throughs), ABS and CMBS (agency and non-agency).

One cannot invest directly in an index. Index performance does not reflect the expenses associated with the management of an actual portfolio.

On Fiduciary Duty

mark@srcmadvisors.com (Mark Mowrey, CFA) — Fri, 1 Apr 2022 21:31:39 +0000

Given the unpredictability of investment markets and corporate fundamentals, we tend to pay minor heed to generally unreliable guesswork about the future, instead emphasizing the facts of market history. Analyst estimates for corporate earnings provide a fine example of a dataset that one otherwise might think would be usable, driven as it is by crowd-sourced wisdom. Turns out that they’re not the most dependable source of real-time information:

Early estimates for future corporate fundamentals tend to prove overly optimistic
While changes in estimates highlight shifts in investor sentiment that could be seen as informative, they probably are at best a lagging indicator
We think folks with a long-term orientation to their investments should maintain a focus instead on similarly longer-term trends

Also listen to this month's podcast from CIO Mark Mowrey:

20220401 SRCM Commentary Download

20220401 SRCM Commentary

Paths Diverged

mark@srcmadvisors.com (Mark Mowrey, CFA) — Sat, 5 Feb 2022 02:35:22 +0000

The world has been left bereft of “safe” yield for a decade. And over that time, savers have been required to adjust their perspectives regarding what’s possible in terms of income generation from a portfolio. That thinking has led many to pursue yield from dividend stocks, rather than bonds, as a means to bolster income. That approach may not be appropriate for many, considering:

While dividend yields from stocks were higher than those available from U.S. Treasuries through much of 2020, that spread has turned negative again (stock market yields are generally lower than high-quality bond yields)
Dividend stocks are still stocks, which means they’re generally risker than investment-grade bonds
A focus on yield, alone, may unintentionally introduce other characteristics to the portfolio that might lead to outcomes different than had been expected

Listen to this month's podcast here:

20220204 SRCM Commentary Download

20220204 SRCM Commentary

Braving Future Performance

mark@srcmadvisors.com (Mark Mowrey, CFA) — Fri, 7 Jan 2022 23:09:00 +0000

While it’s true that we fancy smaller, less-expensive and more profitable companies, those preferences have not been shared among the bulk of investors over the past decade. With relative performance as testament to that fact, investors have been rather more interested in pulling forward the longer-term potential of growthier names. But history generally has been hostile to a growth focus, and we expect the longer-term future to prove little different:

If companies ultimately are worth their long-term earnings, richly valued stocks present a much higher bar for future excess return relative to the broader market than do less-expensive stocks
Much of the recent performance difference has come from expanding multiples for large-cap and Growth stocks
The relative valuations of small-cap and Value stocks have trailed those of their peers by a growing margin, bolstering support for positioning in favor of those characteristics

Listen to this month's podcast here:

20220107 SRCM Commentary Download

20220107 SRCM Commentary

"Be Cheerful."

mark@srcmadvisors.com (Mark Mowrey, CFA) — Fri, 3 Dec 2021 23:06:29 +0000

Fresh variation in the COVID-19 virus spooked investors over the Thanksgiving holiday. Fears of the virus rather quickly gave ways to fears of missing out on further market gains, then turned about again. The u-turns brought these tenets to mind: Even if not presently expressed, investment risk is always present. That is, if for no […]

Inflation and the Planets

mark@srcmadvisors.com (Mark Mowrey, CFA) — Fri, 5 Nov 2021 23:13:13 +0000

When something new comes along in Finance, it can be fun to watch market participants line up to present themselves as experts, quick to provide “insight” into what the future will hold. Over the past few weeks, voluminous ink has been spilt over the confluence of rising inflation and nascent digital currencies, both of which […]

Worst Week in a Few Weeks!

mark@srcmadvisors.com (Mark Mowrey, CFA) — Fri, 1 Oct 2021 19:42:51 +0000

Each spring, we hear echoes of a favorite line among many market watchers: the months of May through October have proved the worst of all in terms of return for U.S. investors, so better to watch out. Perhaps even cut and run. Among other such compartmentalizations of historical returns, the goal presumably is to show […]

When is a Portfolio Like a Pizza?

mark@srcmadvisors.com (Mark Mowrey, CFA) — Fri, 3 Sep 2021 14:57:39 +0000

Financial and social media can leave investors with an overpowering feeling that there’s something missing in their portfolios. Our approach seeks in many ways to counter those pressures. And there actually are many oft-championed exposures that we purposely leave out of our portfolios. While the motivations of this approach are many, the primary rationale is […]

So Much Breathlessness

mark@srcmadvisors.com (Mark Mowrey, CFA) — Sat, 7 Aug 2021 00:18:23 +0000

On July 19, late-day headlines spoke of “carnage” during that day’s equity market “rout”. “Plunging” indexes prompted scary thoughts of impending market doom. And an evening walk around the neighborhood confirmed the locals heard those scary messages loudly and clearly. In truth, U.S. stock market had dropped only 1.5%. Next day, that same market proceeded […]

Risk Is. Return Might

mark@srcmadvisors.com (Mark Mowrey, CFA) — Fri, 2 Jul 2021 14:37:19 +0000

In our advisory work, we find two perspectives provide the basis for determining a level of exposure to investment risk appropriate for each client: capacity to take on investment risk and willingness to take on that risk. While capacity can be seen as more quantitative in its basis, an assessment of risk tolerance generally is […]

Factors With Legs

mark@srcmadvisors.com (Mark Mowrey, CFA) — Sat, 5 Jun 2021 01:21:25 +0000

The relative performance of our favored equity characteristics have set a few records over the past year, with small-cap and value-oriented stocks having found renewed favor among investors. Perhaps that should not come as a surprise, given the lengthy period of underperformance that both factors had and still have been experiencing. Despite the nearer-term relative […]

Reminder for Next Time

mark@srcmadvisors.com (Mark Mowrey, CFA) — Sat, 8 May 2021 01:43:33 +0000

We long ago learned that adhering to an existing plan, seeking to make adjustments only where truly necessary, remains the smarter course for achieving investment success. Often, that means retaining an investment strategy when it can feel the most uncomfortable to do so. But while that discomfort might seem unbearable for a time, history shows […]

Tendency to Stabilize

mark@srcmadvisors.com (Mark Mowrey, CFA) — Fri, 2 Apr 2021 14:05:48 +0000

The rule that all investing carries risk applies even to bonds. The negative price impact of rising rates over the past few months proves that case well. Even so, bonds in our view remain a fine compliment to equity exposures for those wishing to dampen overall portfolio volatility. To this day bond price swings remain […]

Brief History of Return and Risk

mark@srcmadvisors.com (Mark Mowrey, CFA) — Fri, 5 Mar 2021 18:12:43 +0000

Even without the pandemic or the U.S. election, market returns alone would have made 2020 an abnormal year. Adding to their peculiarity, though, was the fact that global equity markets at one point in 2020 had lost a third of their value from a prior peak. The historic drawdown and the ensuring gargantuan rally, all […]

Not the Only Game in Town

mark@srcmadvisors.com (Mark Mowrey, CFA) — Fri, 5 Feb 2021 22:30:55 +0000

For a moment, you’d have thought there were no other stocks in the world. Though a handful of names were caught up in what’s proved so far to have been a short-lived frenzy, one dominated headlines. And by dominated, we mean to suggest it seemed there was no other news, as electronic gaming retailer GameStop […]

A Lesson Revisited

mark@srcmadvisors.com (Mark Mowrey, CFA) — Fri, 1 Jan 2021 15:40:38 +0000

Amidst a year of unprecedented turmoil, the domestic stock market experienced what may in hindsight be considered its requisite volatility. U.S. stocks saw two separate declines of 5 percent or more, and a maximum decline of more than 34 percent from a peak in February to a late-March trough. The market nonetheless turned in a […]

Things Are Looking Up

mark@srcmadvisors.com (Mark Mowrey, CFA) — Sat, 5 Dec 2020 04:55:35 +0000

Now that the presidential election has passed, seems investors have turned their collective gaze toward many stocks otherwise forgotten earlier this year. Smaller-capitalization and less-expensive stocks have strongly outperformed over the past few months. While we might not call it the start of a durable trend, we are pleased to see these two groups seemingly […]

Still Undecided

mark@srcmadvisors.com (Mark Mowrey, CFA) — Thu, 5 Nov 2020 00:16:30 +0000

No, we don’t mean the election. We mean the market. Once the presidential election has been resolved, investors tend to shift their focuses to the likely big initiatives the winner will seek to execute as the new term begins. Even the best laid plans run into the realities of governing, though, and earlier investor expectations […]