Still Alive and Well
On October 21st, the Wall Street Journal featured an article bemoaning, “Your Investment Strategy is Broken, the End of the 60-40 Strategy”, in reference to the time-honored allocation of 60-40, or 60% equites to 40% fixed income. Just about one week later, the WSJ’s sister publication, Barron’s, had a cover story “Time to Buy Bonds”, which would leave one to believe that the 60-40 strategy is about to begin a new fresh start. So, in which direction is an investor or money manager to lean… Let’s first take a trip down memory lane… Beginning in the late seventies, or about forty years ago, interest rates began falling from record highs after the Fed had raised rates to combat inflation amidst an energy crisis. The next thirty years witnessed an unprecedented bull run in both bonds and stocks, even with occasional disruptions, like the dotcom bubble in 2001 and the credit crisis of 2008. And it was in these crisis moments where the 60-40 shined brightest. In 2008 for example, a 60-40 mix outperformed a straight stock portfolio by 23%, offering investors not only income but also an easier path back to profitability. For the past 12 years though, as the tired bond bull was fed dose after dose of government intervention, interest rates were kept at or near zero percent. Stock prices and other risk assets were huge beneficiaries of this constant flow of easy money and then a pandemic ultimately paved the way for monetary craziness. We would suggest then that the 60-40 strategy first broke and then ended about ten years ago, and the anemic returns for bonds, (the US Aggregate bond index has returned on average less than 1% a year over the past ten years), were overshadowed by the heady gains in equities over the same time. Last week the 10-year Treasury hit 5% for the first time in about 16 years. Fixed income is now once again, a legitimate investment choice. After what looks to be the third down year in the bond market, which by some measures is the worst stretch since the 1700’s, bonds, or the 40%, look to be poised for a potential rebound as the risk reward picture becomes clearer. The attributes of having fixed income in a portfolio, income generation, lessening of overall account risk and volatility, and potential appreciation in times of economic stress may finally be back in play. Stocks for their part should continue to benefit from a relatively strong economy, full employment, high and sticky inflation, and innovation (think AI). Conversely, geopolitical events, high valuations, and extended credit are just a few of the dangers to the market lurking in the shadows. Our goal is to go into the corners and into the shadows to manage risk. We will also go to the bright spots of opportunity to help you achieve your financial goals. We appreciate your business and look forward to working with you in any way we can in the years ahead.
Alone With My Thoughts – 11/1/2023
The Mendoza line is baseball jargon from the seventies for the supposed threshold for offensive futility of hitting at an average of .200. Players can be above or below the Mendoza line (named for major leaguer Mario Mendoza, a lifetime .215 hitter). There are several Mendoza lines on Wall Street currently…lines that when crossed get everyone’s attention. For example, the Mendoza line for the ten-year treasury appears to be 5%, above that and money flows from stocks to bonds. Gasoline has a Mendoza line at $4 per gallon, above $4 and the economy begins to slow. Bitcoin has seen somewhat of a Mendoza line at $26,000 and has made a recent significant rally to $34,000 plus. For stock traders, the 200-day weekly average is at $3,945, which is a line we do not want to see crossed.
Alone With My Thoughts – 09/11/2023
Beware the Man Behind the Curtain The finance industry has always made investing seem complicated and mysterious to many of us. As a form of job security, the more dependent their clients are, the more “silver bullet” products and plans can be sold. But like the Wizard, once the curtain is pulled back, investment success can be relatively simple…spend less than you make, have a financial plan with the guidance of someone that understands your goals, and invest in great companies and mutual funds. The first step is to do the simple things that you can control and then ignore the man behind the curtain.
Alone With My Thoughts – 07/26/2023
Rags to Riches The world lost an iconic legend last week when Tony Bennett passed away at 96. Tony Bennett captivated the nation, most notably a young Frank Sinatra, who famously claimed in a Life magazine article that “for my money, Tony Bennett is the best singer in the business.” Speaking of money, Tony Bennett represented everything good about successful investing. He was innovative, with an incredible knack for re-creating himself time and time again. He thought long-term, achieving 19 Grammys, with 17 of them coming after he reached his 60’s. He was frugal, as he ands his manager son mapped his 200 appearances a year to perfection. From Ray Charles to Lady Gaga, he was diverse and willing to take a little risk. Cheers to a national treasure.
Alone With My Thoughts – 06/26/2023
“We would be careful not to give in completely to FOMO (fear of missing out), as a skipped hike is not a pause, inflation still handcuffs the Fed…” Benjamin Bowler, BofA Securities. The FOMO is definitely out there, what with Morgan Stanley upgrading Nvidia, this past Friday no less, to overweight. Thanks for the update guys, the now trillion dollar chipmaker’s stock is up 193% year to date. And FOMO is finally reaching out to the broader market, with all 11 S&P 500 industry sectors up during the month of June. It may be ok to join the party now, who doesn’t like a good party, but again, they say nothing good happens after midnight…
Alone With My Thoughts – 06/01/2023
“When you come to a fork in the road, take it.” Yogi Berra. The stock market road typically has plenty of forks to take, but this year we have seen a road that gets narrower and narrower. For example, If not for the seven largest tech stocks, the S&P 500 would be negative for the year and not up over 9%. The AI inspired gold rush into tech has been pretty remarkable and continues with the recent push in Nvidia, now a Trillion dollar company. Narrow stock market leadership has not always bode well for diversified portfolios and we need to battle the FOMO of the artificial intelligence crowd. Sometimes it is good to stay in your own lane.
Alone With My Thoughts – 05/22/2023
Home buyers are feeling a bit like Hannibal Lecter, what with homeowners handcuffed to low mortgage rates. A recent Wall Street Journal article by Nicole Friedman, pointed out that the reluctance of these homeowners to sell differentiates the potential downturn in housing from other periods of rising interest rates. This idea of going from a historically low interest rate to a much higher one will most likely stunt the supply of homes for the near future. As of March 31, nearly two thirds of primary mortgages were at rates below 4%. For investors, the net effect could provide an opening for builders, an opportunity for home remodeling, and possibly dull the Fed’s attempt at to slow inflation. Moral to the story, interest rate moves, both up and down, are not without unintended consequences.
Alone With My Thoughts – 04/28/2023
The tech heavy Nasdaq has been leading the way in 2023 after a horrendous prior year performance. As we leave the month of April, the Nasdaq has gained about 16% year to date, led by familiar big tech names like Amazon, Meta, Google, and don’t forget Microsoft. The sales numbers have been impressive…Amazon clocking in with over $100 billion in quarterly sales, Google (Alphabet) with more than $60 billion, and Microsoft with over $50 billion. As the arms race for AI takes off, there seems to be cash available for the perceived next big idea. At the midway point of earnings season, about 75% of companies have beat expectations and through the first quarter, $77 billion has flowed into equities. This, along with tight employment, will hopefully portend a “soft landing” for the economy and maybe even softer inflation rates.
Do You Remember Your First Time?
Do you remember your first time? The words awkward, exciting, and clunky come to mind. The fear of the unknown is only surpassed by the seemingly unlimited future reward. We of course are talking about the internet… The sound of the AOL sign-in, floppy disks, paying for online minutes…that was the beginning of the internet. The internet in the mid 1990’s was awkward, exciting, and clunky. On some level, we all knew it would radically change our world and thirty years later, it has, as we are basically carrying our entire lives in our pocket. Silicon Valley, and then naturally Wall Street, are both showing the same level of almost hysteria about the great expectations for Artificial Intelligence (AI) as they did for the internet. Is it the next really big thing? It is early in the game, and current applications are far from perfect, but the key words are compounding, speed, and generative. Data is being processed at incredible multiples and speed. Picture the 173 million items contained in the Library of Congress accessed in literally seconds to render a decision. Consider facial recognition to diagnose strokes and other diseases. Imagine genetic testing for new life saving drugs and procedures that could knock years off the approval process. Finally, electric vehicles are obviously top of mind right now, but AI has already begun to transform agriculture, logistics, and a wide array of ever day functions in dramatic fashion. The point is, as investors we need to overlay the huge potential effects of AI on society, both good and bad, as we develop our investment plans. Like the magic of compounding our investments, the compound effect of generative data and information management is happening right now. Sir Francis Scott Bacon, “Knowledge itself is power”. For the first quarter of 2023, volatility continued but we were able to see some bounce-back gains across the equity board on the heels of what was a brutal prior year. For the record, Nasdaq stocks paved the way, gaining about 16.9%, followed by the Russell 1000 Growth up 14.2%, the large cap S&P 500 gaining about 7%, and the venerable Dow basically unchanged. Of note, and piquing our interest, the developed international markets had a strong showing to begin 2023, benefiting from lower-than-expected winter energy prices, a positive interest rate environment, China’s re-opening, and comparatively lower stock valuations. We continue to monitor our portfolios to take advantage of current financial trends, including high short-term yields (inverted yield curve), potentially positive news internationally, and near record low employment rates. We appreciate your confidence in our firm, and we look forward to helping you navigate the financial scene for many years to come. Finally, while looking at the current state of AI, we are reminded of a quote by author James Surowiecki, “The history of the internet is, in part, a series of opportunities missed.”
Alone With My Thoughts – 02/20/2023
During a recent interview, growth stock investor Cathie Wood remarked that “innovation solves problems”. That is one of the beauties of investing, entire industries seemingly come out of thin air when the times get tough. Most recently, the pandemic brought us Zoom Video which is now a $22 billion dollar household name. Think of Moderna, another pandemic problem solver. And as we come out of an unprecedented economic shutdown that inadvertently is causing a major shortage of workers, witness the lowest unemployment since 1969, Amazon is adding about 1000 robotic “workers” per day. “That means Amazon could have more robots than employees by the year 2030” continued Wood. Innovation and savings are the keys to economic growth and its hard to bet against the ingenuity that is here at home and around the world.