Risky Business
We alluded to risk in the last quarterly letter and how “This too shall pass”. The good news is that the bleak uncertainty in March seems to have passed, but the bad news is that risk still remains. The point that we didn’t emphasize last quarter is that risk is always present. Of course, with risk also comes opportunity, but it is critical that we all distinguish between fear and danger when it comes to risk. Fear is an emotion; it’s the risk we perceive. As an emotion, it’s often blind to the facts. For example, you are more likely to die from a vending machine falling on you than a shark attack in the United States. However, you never hear anyone yell “Vending Machine” on the way to get a snack in the office. Danger, on the other hand, is measurable and is therefore the part of risk we focus on. For instance, there were 273 Covid-19 deaths on June 28th, 2020 which was down 84% from the peak of 1,733 on April 19th, 2020. On average 2,353 people die of heart disease every day. We are in no way diminishing the fear present in a virus with no herd immunity or vaccine. We are instead trying to drive home the point that life presents us with risk every day and how we handle it defines us.
For instance, in the 1918 flu pandemic that killed between 17 and 50 million people, the use of the telephone rose significantly as people adapted to a world full of new risks but still needed to communicate. Keeping perspective, imagine the dangers experienced during a time period including a pandemic and the First World War. Prior to 1918 phones were considered a convenience of the well-to-do. Similarly, many businesses such as Creative Financial Group, are using video conferencing more to keep in close contact with clients and to telecommute. Telemedicine has finally taken off, as well, so you can see a doctor without sitting in a lobby surrounded by a bunch of sick people. Curbside pickup has also grown to the delight of some and the detriment of others. It seems that some companies with the ability to adapt will exit this pandemic stronger, while others may weaken and even disappear. Unfortunately, life is filled with stories like that. We learned this the first time we heard an adult say “Life isn’t fair all the time”. As adults, we know this and must act accordingly. It is why we save and invest instead of hiding underneath our beds and living from paycheck-to-paycheck. It is also why we can swim at the beach without high levels of anxiety. Certainly macro concerns enter the economic picture as we are all intelligent people who pay attention to the world around us. However, in today’s 24-hour news cycle, we realize it can be difficult to not get caught up in our emotions. Facts can help with this.
On that note here are some important facts not highlighted in the 24 hour news cycle. The Federal Reserve has increased their balance more in two months than it did in five years of quantitative easing from 2010-15. You can see the correlation between the Fed Balance sheet and the S&P 500i at the following link: https://fred.stlouisfed.org/graph/?g=HfT. Inflation is not a problem now but M2, one of the broadest measures of money supply, has increased 351.9% from a year ago. Inflation impacts assets in different ways, but we know it is negative for fixed income. As a side note, in order for returns in fixed income to be as good as they were the past ten years, rates would have to fall to -3%. Another fact is that the average return in an election year is positive. Time will tell whether or not 2020 ends up being positive, but when the Federal Reserve pumps liquidity into the market, the chances improve. This, by no means, omits the challenges presented with high unemployment, business shutdowns, pandemics and civil unrest. However, once we make it through this period of increased volatility it sure seems as if investors will want assets like, commodities and stocks that historically do well in the face of inflation.
On a topical note, we continue to make use of funds that will hold cash and other assets that allow flexibility to be in and out of the market when volatility spikes. Additionally, we have begun adding a commodity, gold, to portfolios as a hedge against inflation and volatility. This is not something we have done in the past, besides choosing a fund that would hold gold as a hedge, but we felt the upside/downside potential was attractive given the level of money printing. If this is an investment you are against, then please let us know as we are working our way through accounts. Additionally, if you see us selling to raise money for the gold purchase, you may notice we are harvesting some gains in large capitalization growth funds as they have significantly outperformed other sectors of the market. We like to say that growth stocks have performed as if Covid-19 never occurred, and value stocks have performed as if we are near the “end times”. Growth has now outperformed value for 13 years and by many metrics has not been this expensive since 1999, and we know how that ended ten years later.
Of course, we started this quarterly on the topic of risk so it only makes sense for us to end on it. Investing is a business that tries to quantify risk and return and provide an investment with a comfort level commensurate with your desired risk and return. If you feel your risk profile has changed, then please give us a call. On that note, we like to say that we serve our clients best by being consistently good, not just occasionally great. However, this is harder to accomplish if we don’t know how you are thinking. So, again, please call with any questions.
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.
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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. You can obtain more information about Synovus Securities, Inc. and its Registered Representatives by accessing BrokerCheck