AM 1st Qtr 2020 letter

October 14, 2020   ·   By logicspeak   ·   Comments Off on AM 1st Qtr 2020 letter   ·   Posted in Asset Management Letter Archive

This, too, shall pass …

Less than a month and a half ago the U.S. economy signaled continued growth in the midst of an election year and another virus like SARS, MERS, Avian Bird Flu or the Swine Flu had cropped up across the pond. Fast forward a month later and Covid-19 stalled the global economy, a price war in oil broke out and the market experienced a historic drop. With all due respect to the people that say they saw this coming, there is no way you saw all of these events lining up together. As reference, the Swine Flu killed 150 to 500,000 people in 2009-10 (estimates vary) and the S&P 500ⁱ was up 23.54% in 2009 and 12.78% in 2010. OPEC tried price wars from November 2014 through 2015 and the S&P 500ⁱ was flat from November to the end of 2015, but at the end of 2019 oil and the S&P 500ⁱ were up 64.66% and 57.88% respectively from 2015. Historical revisionists sometimes gloss over risk through the lens of remembrance. Risk is an innate part of life that was not missing over the past ten years during the longest bull market in history. However, mitigating risk in order to still receive rewards is what we all must do every day.

               We lead with the historical recap to provide perspective, Abraham Lincoln was a leader with a unique insight into dealing with crises.  Oftentimes, he would tell a story about an Eastern Monarch who charged wise men to craft a sentence which should be true and appropriate in all times and situations. Their answer was “And this, too, shall pass away. How much it expresses! How chastening in the hour of pride! How consoling in the depths of affliction!” To us, the sentences about chastening in the hour of pride and consoling in the depths of affliction are the most important part of the quote. When the markets are at their highest is when we fail the greatest need for humility because risk can come quickly. However, when maximum pessimism resides in the market is oftentimes the best time to buy. For example, in 2009 when the very structure of our financial system was in question due to excess leverage our managers were able to find values that provided fantastic returns 1, 3, 5 and 10 years later. As another example, last year was when we took gains from our winners for withdrawal needs and this year we are taking withdrawal needs from fixed income. With global financial stimulus being injected into the economy against a backdrop of low interest rates, stocks are arguably more attractive than they have been in years. Quantitative easing and low interest rates make stocks cheaper no matter your perspective on what they do to debt levels. Thus, we think this historical drop in the stock market is a time for our clients to be using our conservative positioning from the past to allow them to put money to work.

               That being said, we also realize there is an emotional side to investing. As human beings emotions appear to have primacy over cognitive function. It is why we jump when a snake strikes at us behind protective glass at a zoo and it is what kept us alive when we were cave dwellers. Thus, when stocks get cheap it is hard to buy as they may get cheaper. Even if someone showed us that in the twelve bear markets previous to this one the average return is 52.2% a year later or 88.6% three years later, some are still hesitant because we know past performance doesn’t predict future results. The typical bear market is down 30% from peak to trough in a recession and the market hit that level on March 23^rd, but we understand the fear that it could go lower. However, the reasoned contrarian in us would argue that it could be we have already hit the bottom. Of course, to forecast is folly, but one could certainly contend that after a 30% drop, one is historically closer to the bottom than the top. 

               On that note, we also want you to know that many of our managers who hold cash/fixed income or hedges have been putting money into the market recently. They didn’t know we would have a triumvirate of virus, valuations, and oil hit the market at the same time, but they knew valuations were stretched, so they were holding cash for a correction to scoop up attractive assets. They can’t disclose full details of their moves yet, but when they move from 57% in the market to 73% in the market (as one manager did), you can surmise they are finding what they feel are attractive long-term purchases. Our fixed income managers have also been adding to investments that have widened out to yields not seen since 2008-09. These are all moves that we applaud as it should reward our clients significantly in the future.    

We regaled you with historical numbers in this quarterly because to quote Churchill “The farther backward you can look, the farther forward you are likely to see.” Viewing three significant setbacks in the market over the past twenty years strangely gives us hope as we peer forward to the future. A future we hope to continue to navigate with you and your family for years to come. Please stay safe, wash your hands, and practice social distancing as your health is more important than any words we can put on paper. Call with any questions or any navigational tips.

P.S. Our favorite navigational tip is “You can’t steer a boat by looking at the wake”. We find more emotional support in it versus the quote we keep hearing about our current situation of “It will get worse before it gets better”.

General Compliance Disclosures

Statements made via this letter are the opinions of Creative Financial Group (“CFG”) and its advisors, and are not to be construed as guarantees, warranties or predictions of future events, portfolio allocations, portfolio results, investment returns, or other outcomes. None of the information contained is intended as a solicitation or offer to purchase or sell a specific security, mutual fund, bond, or any other investment. Readers should not assume that the considerations, suggestions, or recommendations will be profitable, suitable to their circumstances or that future investment and/or portfolio performance will be profitable or favorable. Past performance of indices, mutual funds, or actual portfolios does not guarantee future results. Future results may differ significantly from the past due to materially different economic and market conditions; investments in securities or other financial products involve risk and the possibility of loss, including a permanent loss of principal. Investments are not FDIC insured and have no bank guarantee.

Creative Financial Group (“CFG”) is a division of Synovus Securities, Inc (“SSI”), member FINRA/SIPC. Prior to

January 1, 2011, CFG was a separate registered investment adviser affiliate of SSI. Investment products and services are not FDIC insured, are not deposits of or other obligations of Synovus Bank, are not guaranteed by Synovus Bank and involve investment risk, including possible loss of principal amount invested. Synovus Securities, Inc. is a subsidiary of Synovus Financial Corp and an affiliate of Synovus Bank.

Investment products and services provided by Synovus are offered through Synovus Securities, Inc. (“SSI”), Synovus Trust Company, N.A. (“STC”), GLOBALT, a separately identifiable division of STC and Creative Financial Group, a division of SSI. Trust services for Synovus are provided by Synovus Trust Company, N.A. The registered broker-dealer offering brokerage products for Synovus is Synovus Securities, Inc., member FINRA/SIPC. Investment products and services are not FDIC insured, are not deposits of or other obligations of Synovus Bank, are not guaranteed by Synovus Bank and involve investment risk, including possible loss of principal amount invested.

Synovus Securities, Inc. is a subsidiary of Synovus Financial Corp and an affiliate of Synovus Bank and Synovus Trust.  Synovus Trust Company, N.A. is a subsidiary of Synovus Bank.

Pursuant to rules adopted by the U.S. Securities and Exchange Commission governing federally registered investment advisors, we request that you take time to compare your account balances and statements issued by National Financial Services, who acts as the custodian for your account(s).  We request you contact us immediately if you do not receive these statements or if the values reflected are materially different.

Cost basis reporting

If you buy and sell a security in a taxable account on or after the effective date, NFS will report cost basis for the sold security to you and the IRS on Form 1099-B. If you have a mix of covered and uncovered positions in the same security, NFS will report cost basis to you and the IRS for any covered position that is sold. NFS will apply the FIFO (First In, First Out) default method unless you inform us of a different method. Your cost basis method for all transactions must be final by settlement date. If you choose to change the default method, you can do so by notifying your Financial Consultant.

Use of Indexes

ⁱThe investment return and style information and comparisons employ a variety of popular indices, and the index contents and strategies are the property of their respective companies (e.g., Dow Jones, Standard & Poor’s, Morningstar, Barclay Capital, Russell). Although the data is believed to be reliable, CFG makes no warranty with respect to the contents, accuracy, completeness, timeliness, suitability, or reliability of the information, which is represented here for informational use only and should not be considered investment advice or recommendation. None of the indices can be invested directly, and the return figures for these various securities indices are reported without management fees, trading costs, or other expenses subtracted from the returns, and are shown on a total return basis that assumes reinvestment of applicable capital gains and dividends. Components of indices may change over time. Small capitalization stocks are represented by the Russell 2000 Index. Mid Capitalization stocks are represented by the S&P Mid Cap 400 Index. Foreign stocks are represented by the MSCI EAFE Index and emerging markets are represented by the MSCI Emerging Markets Index.