Q3 2019 Asset Management Letter

October 14, 2020   ·   By logicspeak   ·   Comments Off on Q3 2019 Asset Management Letter   ·   Posted in Asset Management Letter Archive

Keeping Perspective

One of our portfolio managers recently had his wife fall and break her leg. We bring this up because there is nothing like a health scare and the subsequent adjustments to give one perspective. Similarly, the market has provided some perspective this year. While the news cycle has been overly dramatic and dire, the market has chugged higher providing double digit returns. It is almost hard to believe with all the negative sentiment in the marketplace that we are ten years into one of the longest economic recoveries with historically low unemployment, low interest rates, and cheap natural resources. If you juxtapose today with the 1970’s or 2008/09, you can’t help but question the vitriol on the daily news.
Certainly, keeping perspective is always easier when you are armed with knowledge. For instance, in the fourth quarter of 2018 when the media started talking about yield curve inversion, it helped to know they were referencing the five year Treasury note and the three year Treasury note, and not the most reliable and predictable relationship between the three month Treasury and the 30 year. Furthermore, when an inversion occurs it takes between 12 and 18 months for a recession to occur, and in the meantime, the market also goes up on average 15%. In addition, yield curve inversion doesn’t cause a recession; it is just symptomatic. Typically, the yield curve inverts because the Federal Reserve drives short-term rates too high and overtightens monetary policy. It’s tight monetary policy that causes recessions, not inversions, and what has the Fed started doing? Loosening monetary policy by cutting rates this summer.
Of course, we acknowledge that all of the yield curve, trade war, and ISM Manufacturing Index talk has increased the recession anxiety to a higher level. However, we also realize that during the last “normal” recession there were some sectors of the market that did quite well. We are putting 2008 aside as we hope that type of market remains an anomaly for the foreseeable future. However, if we look at 2000 to 2003, we note value stocks, real estate, small cap and emerging markets outperformed the market significantly, even earning positive rates of return whereas the S&P 500 was negative. On that note, in the month of September, value stocks outperformed growth stocks by 9%. Furthermore, from a valuation perspective, growth stocks are more expensive than they have been since 2001. Therefore, it seems logical to us that whether the economy slips into a recession or not, value stocks seem like a reasonable place to be invested. At the same time, if we don’t slip into a recession our equity positions will still provide upside and the bucket of fixed income/cash that we hold will weather downticks in the market if a recession does occur.
On the subject of fixed income, you will continue to see us keeping duration and risk low in our portfolios. We understand that some fixed income managers have argued that you should increase duration in your portfolio because when yields go down valuation goes up on bonds, and to their credit, long dated bonds have performed well this year. We equate this with picking up pennies in front of a steamroller. We have trillions of dollars in negative yielding fixed income across the world and we are at 5,000 year lows in interest rates. Maybe central banks can control rates for the foreseeable future, but we are not willing to make that bet for our clients. It may turn out to be a fine trade, but it is not an investment in our mind. Another trade the fixed income pundits have been heavily recommending, and we have minimized, is high yield and investment grade bonds. High yield is okay when yields are in the double digits because with the default rate and the recovery rate, you can still earn an attractive return, but we are nowhere near that safety margin right now so the risk isn’t worth the paltry return. Investment grade bonds in general are a fine place to be but there is risk in investment grade bonds not being recognized, in our opinion. The lowest level of investment grade bonds, BBB, was 32.6% of the investment grade universe in 2008 and today it is nearly 50% of the investment grade sector, having quadrupled in size. Consider that half of the investment grade sector is one rung above junk bond status and yielding 3.4%. To us, this feels like prancing in front of the steamroller with a broken leg and picking up pennies.
The theme we have always focused on for our clients is minimizing downside, capturing most of the upside, and still sticking to a long-term plan to maximize the power of compounding rates of return. By keeping perspective in good times and bad, we are oftentimes able to achieve these goals. Hopefully, the information we have included in this month’s quarterly will help provide the sure-footing we all need because we certainly know the value of a stable foundation for long-term success. On that note, please call out if you need a stabilizing hand or comforting words. We have first-hand experience with the significant worth of a supportive network given recent events.

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.