Market Update - January 2020

2019 was a year that taught investors they should not rely solely on the “experts” and their forecast.  You might recall the sentiment at the end of 2018 - the bull market is over, prices are going down, and the sky is falling.  Recession was the resounding message. 

Scientists say the human brain is hard wired to see the storm cloud, not the rainbow, so it is not surprising when investors gravitate toward negative advice and act upon it.  Those that thought the storm was coming and felt compelled to sell missed out on a major boost in net worth in 2019.  But if you buckled down through the darkness, and owned stocks during the year, you were a likely beneficiary of the Federal Reserve transitioning to a more accommodative monetary stance and the corresponding lift in asset prices. 

It is once again that time of year when “knowledgeable investors”, “experts”, and “seasoned professionals” provide their outlooks, or in the case of this year, a glimpse into the next decade as we embark on “the twenties.”  Our advice would be to limit your information consumption. Most forecasts are of little value since they generally prove to be wrong.  Most fail to see a change of circumstances during the year since those circumstances are impossible to predict.  Case in point: raise your hand if you heard anyone predict the S & P 500 was going to be up around 30% in 2019.  Hmmm….thought so.

Given the aforementioned track record of crystal ball gazers, we are not going to attempt to guess what will happen in 2020.  However, there are positives to consider.  The tax cuts passed in 2017 have helped to keep total federal tax receipts at a low level relative to GDP, even though actual tax collections have risen due to the strong economy.  This is very stimulating for stock prices.  In addition, we can’t forget this is an election year.  That in itself will probably provide for some volatility.  However, historically the 12 months leading up to an election are generally positive, although that is not always the case.  Couple all of this with the accommodative stances of Central Banks around the world and we see a reasonably friendly environment for the stock market.  But let’s put this positivity into check.  What occurred in 2019 theoretically is a once in 20 year event and there is plenty of geopolitical risk to go around.

We feel positive about the coming year, but think expectations should remain grounded.  The current investor mood seems almost polar opposite from last year and quite optimistic.  This can carry on for a while, but you never know.  As “Ace” Greenberg, the head of Bear Stearns said during the 1987 crash, “stocks fluctuate.” Times like this serve as a good reminder to assess your investment goals and make sure you are allocated correctly regarding risk.  Ideally, you want to put your winter tires on before the snow falls.  It may seem odd to use that phrase in the middle of January, but you get the market metaphor.

Emotions drive stock market decisions and we’re fairly confident there will be plenty of emotion to go around this year.  You hire us to try and keep the emotions out of your investment decisions.  We will do our best to fulfill that obligation.


Market Update - April 2019

When the stock market reaches your target return for the whole year in the first three months, what’s an investor to do?

The answer is stay disciplined. The S&P 500 index rose 13.1% during the first quarter, the largest first quarter gain since 1998. The natural inclination is to take your chips off the table and go home. But “natural inclinations” are rarely the right thing to do in the stock market. This latest rapid market upswing makes more sense when put in perspective by expanding the performance time period a bit. If you look at the numbers, we have now returned to nearly the same levels as the end of last year’s third quarter. In addition, one needs to take valuation into consideration. The S&P 500 is valued at a price/earnings ratio at or near the long-term average, hardly excessive.

Yes, there was a harrowing downturn between September and now, which got everyone’s attention. That sell-off was triggered by fear of the Federal Reserve continuing to raise interest rates. It’s possible the decline in the stock market changed their mind, but Fed speak quickly turned from somewhat hawkish to somewhat dovish, prompting the market to rally strongly. For an investor, trying to outsmart these market swings is a fool’s game. Usually that results in doing the wrong thing at the wrong time, as evidenced by the abundance of mutual fund money outflows during the month of December. Investors were scared, and they responded by taking cash out of the market. We certainly got calls from some of our clients during that time as emotions took over. Our advice was to stay the course and stick to our discipline. Keep in mind that, historically, when the market has a fixation on an issue, and the overwhelming commentary begins and ends with details and scenarios that support that fixation, the issue is likely to be of limited, lasting impact. In this case, most of the scenarios at the end of last year were doomsday in nature. As we now know, doomsday didn’t happen.

The current popular topic of discussion is recession. Market strategists are trying to predict when the next one might happen and using an inverted yield curve as the basis of their concern. An inverted yield curve means that shorter interest rates are higher than longer rates. This is abnormal and happened briefly in March. The argument is that inverted yield curves generally are a precursor to recession. In theory, this condition creates a disincentive for banks to lend money long term. In an inverted yield curve environment, lenders pay a higher rate on their cost of funds, which are short term, and higher than what they would receive by loaning to individuals and businesses longer term. Again, in theory, this phenomenon causes economic growth to slow and end up in recession. The truth of the matter is that recessions are notoriously difficult to predict and the yield curve is an imperfect indicator. This entire subject probably falls into the aforementioned “market fixation” discussion. If everyone is focused on it, it may be a non-event for the near future.

For now, the global economy is still growing and the Federal Reserve has indicated their willingness to be patient and data dependent. That allows for a decent backdrop for economic growth and the stock market. This year won’t be without its challenges, but we haven’t seen a year yet that has been a picnic all the way through. Since the S&P is at the top of its trading range, caution is in order. Volatility for the remainder of this year is likely to rise as news flows from the likes of an on again off again China agreement, Brexit, tariffs, or something currently unknown continue to ebb and flow. The key to our discipline is the long term, and we use volatility to take advantage of opportunities.


Market Update - April 2018

You may recall our 2017 year-end letter expressing our sentiments that 2018 would likely be a more challenging year for the financial markets and that the current backdrop would be supportive of further, albeit more modest equity gains.  Furthermore, we suggested that there was a good chance of a correction at some point in the future.  We had no idea it would be so soon!  Volatility has returned to the markets with a vengeance as investors attempt to comprehend the news flow in a series of developments now unfolding.

The initial catalyst for the abrupt decline was centered on interest rate normalization and quantitative tightening by central banks.  The current cause of the ruckus is about Washington D.C., Syria, tariffs, trade, and rapid-fire bombs being tossed into the news cycle, which has led to a duck-and-cover mentality and continued volatility.  The Nielsen Company recently reported that 26 of the 40 most watched programs on cable TV the week ending March 30 were political shows on MSNBC and Fox News.  Just three scripted entertainment programs made the list! 

Last year was characterized by historically low volatility.  The typical year is much different.  Research done by JP Morgan,[1] follows the intra-year declines for the years 1960-2017.  To put it into perspective, the average intra-year drops are 13.8% and markets were positive 76% of those years.  2018’s reversal from the highs on January 26 through the early February lows and subsequent retesting has been 11.8%.  This study should hopefully ease your mind that volatility is normal and investors can still make money, although the ride is rarely like 2017.

Human nature is a funny thing, particularly when it comes to investing.  The market has a way of toying with emotions; it entices you to do the wrong thing at the wrong time.  While momentum investors have had the majority of the investing glory of late, ultimately, if one pays too much for a company, realignment with true value will almost always take place; it is the timing that is not predictable.  We found a study that addressed this issue: Which style of investing -- buying popular stocks or low P/E stocks – performs better over the long term?  The study covered a ninety-year period from mid-1926 through 2017 and during that time, the low P/E value approach to investing outperformed buying the popular growth stocks 94% of the time over a rolling fifteen-year period and 75% of the time over a rolling five-year period.[2]  Past performance is no guarantee history will repeat itself in the future, ninety years of data says that this value tilt puts the odds in your favor.

Stock prices will continue to move up and down. Therefore, we will continue to execute on the plan to take advantage of the inefficiencies that have been created by the volatility.  We are excited about our prospects and are confident that this volatility will give us a chance to suggest to you some world-class companies at attractive prices.

As always, thank you for your trust and confidence. 

[1] JP Morgan Annual Returns and Intra-year Declines - Guide to the Markets/March 31, 2018

[2] Dimensional Fund Advisors Historical Performance of Premiums over Rolling Periods/US Markets


Market Update - April 2017

“Headlines, in a way, are what mislead you, because bad news is a headline, and gradual improvement is not.” – Bill Gates

The stock market continued its post-election strength into the first quarter of 2017.  Historically, romances with new administrations are not uncommon, especially when there is a change in party. Oftentimes, however, these rallies fizzle by Inauguration Day. To use baseball parlance, the continuation of last year’s second half rally into 2017 caught a lot of investors looking!

While we are certainly enjoying this lift in the market, we are cautious here. From a sector perspective, technology provided a big assist in Q1 as it was the leading gainer. Two sectors that were attractive in the second half of 2016 took a breather in the period, as energy and financials lagged. Financials, however, have regained momentum recently as momentum on tax policy has picked up again.

For the first time since the Great Recession, we see gradual improvement as most major global economies seem to be growing in sync. Despite the ongoing uncertainties posed by politics and policy around the world, this growth may help stabilize the environment for risk assets. In the U.S., we are in the midst of Q1 earnings season and as of Friday, April 21, 72.6% of companies who have reported have beaten EPS estimates and 62.1% have beaten revenue estimates. The revenue surprises are higher than normal and may indicate acceleration in the economy. Additionally, the housing industry, which is a significant contributor to economic activity, has a long way to go to catch up to the demand for housing in many areas of the country as housing was underbuilt for several years coming out of the financial crisis. We would highlight that S&P 500 earnings peaked in 2014 and have a long way to go to regain that level.

We mentioned taking a cautious stance, but what does that look like? There is no magic bullet. By its nature, our value discipline helps. We continue to look for companies that are priced, in our opinion, relatively more attractive than the market in general. This can provide a measure of comfort if broad market valuations continue to stretch. In addition, cash that we have on hand allows us, to use another baseball analogy, to look at pitch after pitch after pitch. We prefer to let prices come to us.

Headlines sell advertising and there will be an endless stream of headlines from all corners of the globe trying to unseat investors from a thoughtful investment plan. Life’s biggest investment mistakes tend to be behavioral, and while self-discipline is one of the least glamorous, most challenging aspects of any investment strategy, it is what makes sense.

If you haven’t reviewed your financial plan with us recently, we encourage you to visit our new office. As always, thanks for your trust and confidence in us.


Market Update - January 2017

As Financial Advisors, we can’t remember a period of time so dominated by spirited discussions with clients. 

Emotions can, at times, be dangerous when it comes to investing.  Picking a discipline isn’t terribly complicated, but sticking with it is.  The constant barrage of so called experts making confident predictions doesn’t help.  We can’t begin to count the number of people who were inclined to follow commentator advice to sell before the election and buy back on a market slide in the event of a Trump win.  It is our job to make sure that clients don’t buy into group think.  We are committed to our process, even when the crowd becomes frantic.

Certainly sentiment has changed to the upside since the election.  As was the case pre-election when psychology was too negative, the current positive celebration also needs to be kept in check.  During the last week of the year, consumer confidence climbed to the highest in nine years.  This was not driven by current economic conditions, but hopes for the future.[1]   While we, too, are hopeful, we are realistic enough to know that no one person has a magic wand.  Fixes to programs and the economy take time and face hurdles.

Since the November 8 election, the stock market has staged a powerful rally based on this increased optimism and confidence.  This is fairly normal action when a new President gets elected from a different party.  That optimism typically fades when reality sets in.[2]  As they say, the devil is in the details and the details are devilishly complex.[3]

This certainly doesn’t mean we are bearish.  Quite the contrary, many of the potential proposals on the table are positive for stocks.  However, successful investors act continuously on a plan, and we will continue to act on our plan.  As longtime money manager Birinyi Associates said, “The internet has given individuals who have nothing to say a place to say it.”[4] Our job is to attempt to decipher between what is real and what is not. When crowd behavior causes an overreaction in our view, we try to use it to our advantage.  We believe the rally since the election has given us that opportunity in certain cases.  We have taken profits where warranted and will look to put that cash to work when given the chance.

After a difficult start, 2016 was generally a satisfying year to be invested in the stock market.  It was especially rewarding for us during the second half.  We are hopeful this trend toward Value will continue in 2017.   

We wish you a very Happy New Year and look forward to reviewing your portfolio with you soon.  The New Year will bring a new home for our office. Barring any unforeseen circumstances, we are planning to relocate our office in early February and will send our new address card in the mail by the end of January. 


[1] Barron’s, January 2, 2017

[2] The McLellan Report 12/20/216

[3] Sightlines 12/2/2016

[4] Reminiscenses – Birinyi Associates – June 2017


Market Update - June 2016

Fear - An unpleasant emotion caused by the belief that someone or something is dangerous.

At the end of 2015, only six short months ago, the prevailing “fear” was that oil prices were heading “lower for longer.” News outlets were relentless in speculation that oil was headed for $20 a barrel.  That, coupled with the continued strong dollar versus a basket of currencies (bad for multi-national companies) and higher interest rates rattled the markets and investor nerves.  

If you bet on any or all of those fears becoming reality, you would have lost.  As is often the case, investors were better served to take the stance opposite the herd. At the end of June, oil is trading near $50 per barrel, interest rates are back near historical lows, and the dollar has retreated from 2015 highs.

Yet, once again, there is plenty to be nervous about as we face a different cast of characters. Lingering doubts about the strength of the U.S. job market, global economy, concerns over the direction of Federal Reserve (Fed) policy, and a cliffhanger referendum with the Brits deciding to exit the European Union. Amid the kitchen sink of woe and worry, investors have ramped up their holdings of good old fashioned cash.  As usual, they appear to be taking their investment advice from the evening news.

According to Merrill Lynch’s most recent fund manager survey, investors have the highest percentage of net holdings in cash since November 2001[1]. Recall that at that time we were mired in recession while dealing with the fallout of the tech bubble bursting and the September 11 terrorist attacks. Similarly, there currently seems to be an abundance of investors anticipating something bad may happen!  Markets rarely give investors their way when they are leaning too far in one direction.

For almost two years, the domestic markets have been stuck in a trading range. Broadly diversified portfolios have seen little or no returns. In these environments, investors grow impatient and seek investments with promising recent rear-view track records. We have seen this movie too many times to fall into this return-killing behavior. Successful investors will stick to a well-thought-out plan for life. Few investors have one, and when fear takes center stage, they do exactly the opposite of what they should.

We have not wavered in our belief that taking the long-term view in investing is the right path and that no factor is as important to returns as valuations. This is far from the first time in which the patience of long-term investors has been tested.  

[1] Myles Udland, “Investors haven’t hoarded cash like this in 15 years”, Business Insider [Online]. (June 14, 2016)


Market Update - March 2016

“Getting deliberately rich or achieving consistent financial performance is at least as much a psychological problem as it is a logical problem.”[1]

Emotion is one of an investor's greatest enemies. 2016 opened with the Dow Jones Industrial Average having its worst five-day start in history. Despite the hand-wringing declines to begin the year, the market has bounced back nicely. By the end of the quarter, the average diversified U.S. stock mutual fund had clawed back enough to close down less than 1% for the first quarter, and the average international stock fund closed down 1.7%.

Fear makes it hard to remain optimistic about holding shares whose prices have declined; just as envy makes it hard to refrain from buying the appreciating assets others are enjoying owning. We have recently endured our share of pain in a handful of cyclical companies. We have gone through these cycles in the past, and they are never any fun. However, we keep a balanced mix of exposure for this very reason and are confident that our current holdings are well positioned to buoy portfolios.

Time and time again, we have discussed the benefits of value investing and the importance of staying with it through thick and thin.  It was refreshing to read a recent article which complements our beliefs.   In the March 14, 2016 Barron's publication, the article within this edition entitled, “It's Time for Value,” sited “After nine years of underperformance, value stocks look poised to shine.”[2]

But in the framework that value is built upon, you must have the right mindset when you digest this news.  The Barron's article reiterated this point as well, “After such a long period of disfavor, value investing could be on the verge of a multi-year comeback.  But it could require patience.”[3]

We whole-heartedly agree.

[1] Morris, W. T., HOW TO GET RICH SLOWLY, BUT ALMOST SURELY, ©1973 (There is no sure way to wealth.)

[2] Barron's, March 14, 2016, It's Time for Value

[3] Barron's, March 14, 2016, It's Time for Value

The Dow Jones Industrial Average is an index that shows how 30 large, publicly owned companies based in the United States have traded during a standard trading session in the stock market.


Market Update - January 2016 

No doubt, 2015 was a difficult year for active money managers. In order to win, you needed to be concentrated in a few large stocks and hold on to them. If you didn't, you were likely to be negative for the year. As of late December, the average S&P 500 stock was nearly 20% below its 52-week high!

Our value strategy makes it difficult to justify owning high flying stocks at a price earnings ratio that is at least double the S&P 500. Valuations like this don't fit our discipline.

The Chosen Few

Our market letters throughout last year repeatedly cautioned that the market advance was becoming more and more concentrated in a few popular companies. In many ways, this market action reminds us of the late 1999 bubble. At that time, like now, market action concentrated on fewer and fewer companies that rose dramatically. We all know how that ended.

Are we at an Inflection Point?

At some point, leadership always changes as markets go through their inevitable cycles. We believe we are there. Jim Paulsen, Chief Investment Strategist of Wells Capital Management Inc., seemed to agree with us in a recent market commentary. He stated that the recent interest rate hike highlights that the U.S recovery has finally reached some semblance of full employment. In the post-war era, once a 5% unemployment rate was reached, both the character and the performance of the U.S stock market have been altered. This type of environment has favored stock pickers, which is what we are. As this shift happens, our portfolios should benefit. 

Is “the Sky Falling”?

About the same day you received your October Market Update from us, Monday morning quarterbacks were out in force as our beloved Seahawks had just lost to Carolina in another late-game defensive collapse to fall to a record of just 2 wins against 4 losses. The pundits and casual fans alike were piling on with all manner of criticisms. Rather than panic and change course, the organization insisted that “the sky is not falling” and maintained a steadfast commitment to its process and discipline. As you know, the Seahawks have gone on to clinch another playoff spot. Temporary underperformance and criticism did not tempt the staff to veer off a plan. We aren't either.

Like the Seahawks, we feel like our value style, discipline, and process are poised for a nice run.


Market Update - October 


Correction or crisis?  Know the difference

“The key to making money in stocks is not to get scared out of them.”  -  Peter Lynch

As every sports pundit reminds us, our beloved Seahawks again started their season in the hole. Armchair analysts have prescribed countless remedies. New legions of fans continue to hold lofty expectations, but how quickly we forget that our Hawks struggled to attain 3-3 last fall… ahem, on their way to another Super Bowl appearance.

Sports fans and investors have much in common. Both are prone to the same critical mistake of assuming that good, short-term outcomes are the result of a successful process, and that bad outcomes simply imply a failed process. In fact, the best long-term performers in any probabilistic field emphasize a disciplined process over an immediate result.

This fall, as the stock market shows us its volatile side, we want to remind our clients that one of the biggest risks we face is one of human psyche. The key question is: Will investors withstand the whipsaw of a volatile ride long enough to fully participate in a recovery over time? Here's some “coaching” to help you answer this question for yourself.

The playing field: Value stocks have underperformed growth stocks late in the current economic cycle.  This has happened only six times since 1945.  In our view, this may portend a change in market leadership. Investors are evaluating potential for a Fed-driven rise in rates for the first time in almost a decade. History shows that when interest rates are low and getting lower (2010-15), growth stocks tend to outperform, and especially during the six months leading up to a rate increase.  This occurs because growth stocks tend to be valued based on future earnings. Value stocks, on the other hand, are priced based on actual cash flows – a “bird in hand” approach, according to Barron's columnist Leslie Norton. Ultimately, when the Fed actually does increases rates, value stocks subsequently tend to outperform. In such an environment, we are confident that our value-driven investment discipline stands to benefit.

Recruiting undrafted talent:  For the past year, the investment herds have concentrated much of their buying on a narrowing list of popular stocks because they view them as “no brainers.”  Not exactly. Howard Marks, of Oaktree Capital, puts it well: “When everyone believes something embodies no risk, they usually bid it up to a point where it's enormously risky.”  On the other hand, “when everyone believes something is risky, their unwillingness to buy usually reduces its price to a point where it's not risky at all.” 

Know thy enemy: In the face a short-term struggle, investors are often haunted by our last historic financial crisis. Rather than recognizing a near-term market correction as opportunity, they too often fear monsters under the bed, and pull the covers tight.

Therefore, we want to emphasize some glaring differences between the struggle of 2015 and that of 2008-09.  Durable goods (cars, appliances, etc.) are selling at a breakneck pace. Bank lending is ramping up, and with stringent credit safeguards in place. Just compare the paperwork of a loan application today versus 10 years ago. Housing and commercial real estate are healthy -- just plain booming in Seattle. Unemployment is down and holding. Even gasoline and gold are cheap. Average prices for stocks are relatively low. Inflation is modest. Little of this was true when the crisis hit us seven years ago.

As we enter the final quarter of 2015, we understand it's been a trying period for investors holding virtually any type of risk assets. We also see value stocks as poised for potential market leadership, and we recognize this cycle for what we believe it is – a short-term challenge coupled with a valuable opportunity for selective buying on the market dips.

StarCapital research has shown that value has outperformed growth over the long haul. Value is also our discipline of choice. Our expectation is that a strategic, value-driven discipline will prevail in the long run, and we are encouraged by recent evidence that the privilege of market leadership may come our way soon.


Market Update - July 2015  

Trophy of market leadership seems to be changing hands

Momentum is powerful – never permanent. Just ask Tiger Woods after June's U.S. Open at Chambers Bay or LeBron James after the last NBA finals. Yesterday's champions are doing conciliatory interviews while an ever-changing list of competitors is busy getting new names etched onto a trophy.

As we enter the third quarter of 2015, the potential for rotation in the stock market is glaringly evident. The trophy of market leadership appears to be changing hands as we speak. A narrow band of large-cap growth stocks that was leading the S&P 500 Index has become uncomfortably pricey. The tailwind of momentum that we have been describing during recent quarters appears to be waning, and the possibility of greater appreciation in value-priced stocks exist in the near to medium term.

None of this should come as a shock to our investors. We've been here before – if this year's momentum-to-value shift follows our script, we believe it will essentially be a PG-rated version of 1999. It was 16 years ago when irrational exuberance of technology startups swept across investors' psyche with a vengeance.  The fundamentals of corporate balance sheets and earnings growth were seen as relics from an “old school” economy.

Fortunately, today's wave of investor sentiment – irrational at times – appears to be cresting more gently. We expect a market rotation with less harmful upheaval, and here are some telltale signals to evaluate as we enter the second half of 2015:

  • Bumpy ride to nowhere – Through June, the S&P 500 is little changed from where it was before Christmas, traveling a jagged road to nowhere. But this flat first-half performance masks increasingly volatile return patterns. The average stock chart looked tempting in early 2014, but today the combination of higher overall valuations and increased volatility are daunting.

  • Restless herd – Many investors appear to have grown fearful, so the masses may be prone to overreaction. The AAII Investor Sentiment Survey shows bullish sentiment has fallen to a two-year low. As of June 17, only 24% of investors expected the stock market would rise during the upcoming six months; 34% of investors were bearish, 40% were neutral.*

  • Bullish contrarians – While mainstream sentiment has grown bearish, the market's contrarians are growing excited about the prospects of a sell-off in some market segments, which creates opportunity.

  • Active selectivity – During momentum-led markets, passive investing in broad stock indexes is often rewarded, as was the case last year. But in a rotation away from momentum, active investing – a process of discriminating stock selection – is often more rewarded.

  • Fed rates and election – The Federal Reserve is fully expected to introduce a modest interest rate increase this fall, but most expect the Fed will use a gentle policy touch as the 2016 presidential election year comes upon us. A dovish approach generally means lower risk of dramatic market reaction.

History tells us diversification is often rewarded, especially when market leadership rotates unpredictably on the winds of shifting sentiment. The same history shows us a pattern of market leadership that resembles a multi-colored quilt of changing forces – today's performance leaders often become tomorrow's laggards, and vice versa.

For all these reasons, this recent environment only reinforces our beliefs in a value-oriented investment approach. While the style of “value” is not always posted atop the leader board of performance, we believe that the combination of diversification across market sectors and a disciplined eye for opportunistic buying and selling will help us and our clients pursue success.

American Association of Individual Investors (AAII) Survey measures the percentage of individual investors who are bullish, bearish, and neutral on the stock market for the next six months; individuals are polled from the ranks of AAII membership on a weekly basis.

The Standard & Poor's 500 Index is a capitalization-weighted index that is generally considered representative of the U.S. large capitalization market.  

Diversification (or asset allocation) does not ensure a profit or protect against loss. 

Past performance is no guarantee of future results.


Market Update - April 2015

Volatility – a familiar friend comes calling in early 2015

The hyper-concentrated stock market of 2014 has left the building.  After the first quarter of 2015, we find ourselves living with a noisy new roommate from out of town.  Meet our friend, volatility.

While the market's newest guest lacks the decorum of 2014, it's not a new visitor.  Volatility has “crashed” here many times.  As always, we know it leaves some investors confused, fearful, and tempted to call the front desk for a room upgrade.  For our part, we welcome volatility with a hearty embrace.

As we have noted in the past, our value-oriented investment strategy considers volatility more friend than foe.  We don't enjoy inflicting uncertainty on our clients, but we know volatility brings with it fertile price swings that can fuel potential opportunities for patient opportunists.  We believe that volatility, when correctly managed for the long term, can enhance our clients' financial outcomes rather than threaten them.

But volatility can be a fickle fellow with a variety of clever disguises.  It's important to recognize one type from another, so here are a few timely examples:

Restless radicals:  Commodities are renown for unexpected price swings.  For the leader in current volatility, look no further than the corner gas pump. Since last summer's price crash began, oil prices have fallen nearly 60%.  A barrel of crude was marked below $49 as of mid-March.  A short-lived rally in February stalled, and many analysts are saying the bottom remains to be seen.  While this creates a windfall when filling up the family SUV, we also will be looking for high-quality investments in the price-deflated energy sector during this window.

Bruised blue chips:  Most of us yearn for the days when mainstay growth stocks were cheap.  The fact is, even the prized stalwarts suffer setbacks during volatile times.  Several of the largest tech stocks have repeatedly seen their value decline by 25% or more over the last decade.  When big brands get bruised, herd investors flee; value investors often buy.

Strong, silent types:  Quality isn't always flashy.  Many of the trusted, well-managed companies we monitor go about their business with little fanfare. Some of the companies are in the pharmaceutical, construction, and automotive industries, where investors need to look further into the future than this week's news cycle to recognize opportunity.  Because of this, valuations can fall in the near term due to shortsightedness, or just plain boredom.  We often find that a healthy level of value lives here.

As we make our way toward mid-2015, we again want to remind our clients that volatility is a fuel just as potent as that cheap gallon of unleaded we just bought at the self-serve pump.  Investors who run with the momentum-induced herd tend to view volatility as little more than downside risk.  And too often they see risk as a four-letter word that translates into lost capital, shortfalls in education funding, or postponed retirement plans.

In our view, volatility simply means a bumpier pattern of change in market values – downs and ups that can generate both risk and return.  With risk comes potential opportunity for intelligent entry into quality stocks.  Our aim is to recognize the value of the bumps rather than pretending we can avoid them entirely.  In doing so, we are confident in our ability to grow and preserve capital over time while helping to ensure our clients' goals and dreams become more – not less – secure.

Past performance is no guarantee of future results. 

The risk of loss in trading commodities and futures can be substantial.  You should therefore carefully consider whether such trading is suitable for you in light of your financial condition.  The high degree of leverage that is often obtainable in commodity trading can work against you as well as for you.  The use of leverage can lead to large losses as well as gains.

Market Update - January 2015

Objects in the rearview mirror are not exactly as they appear

In December, published an article titled “2014:  The Year That Nothing Worked.”  It captured brilliantly how active mutual fund managers were failing to keep up with the major indices, such as the S&P 500 (up 13.7% for 2014 including dividends) and the Dow Jones Industrial Average (up 10% including dividends).  In short, 2014 was the worst year for active money managers relative to the market in three decades.*

By looking at these market indices, investors might assume their personal portfolio should be up by similar double digits as well.  However, that may not be the case.  Most of the market's performance was heavily concentrated in just a handful of companies, so those stocks accounted for a significant portion of the market's gains.*  We are very conscious of risk, so we don't take big bets on a narrow handful of companies. It's simply not what we do.

In recent years, many investors have opted to simply buy the holdings of the S&P 500 Index since the index has outperformed many active managers.  As a result, cash flows to these types of funds have increased dramatically.  After all, many investors, rather than adhering to a strategy, gravitate naturally to what has “worked.” 

This momentum-driven behavior frequently takes hold in the markets, whether it involves index funds, tech stocks, or any other popularized investment type.  However, betting on recent winners can become harmful whenever people feel a false sense of “safety” with their focus on past performance.  Our longtime clients know that we don't trust the rearview mirror when it comes to investing.  They also know we get uncomfortable when we see a crowd swinging too much in one direction. 

On the surface, index investing may look like a low-risk, passive strategy, but it's no silver bullet. Consider that investors who put their money in an S&P 500 index vehicle in 2000 lost more than 45% of their portfolio value from peak to trough, and it took them 13 years to fully recover.  During the same period, skilled active managers were able to create valuable wealth by finding attractive opportunities.**  

What about the future?  We concentrate on time-tested, value-driven principals.  In our view, there is nothing that replaces the process of a human brain applying in-depth analysis.  We will continue to put our confidence in research and discipline rather than chasing what happened last year or last quarter. 

In fact, since the market's performance during 2014 was concentrated in so few companies, many opportunities seem to have been overlooked and appear to be selling at attractive valuations.  If you think of the market as a pendulum, it has swung toward a narrower and narrower group of leaders.  In time, the pendulum returns to the middle ground.  We believe some of these overlooked high-quality stocks may become a valuable source of returns in the future.  The stocks that held us back in the second half may be the stocks that lead to strong performance going forward.  Over time, successful investors will always go through periods of outperformance and underperformance.  The key to our long-term success is our willingness to stick to our value discipline. 

So instead of watching every move of an index, we encourage you to stay focused on your desired goals: retirement, financial security, business opportunity, college plans, and travel dreams.  These are life's tangible destinations, and they mean more to you -- and to us -- than data points of a market index. 


2014:  The year that nothing worked


**Minneapolis Portfolio Management Group

Market Summary

Walking on This Ice

October 2014


Market Update - October 


Let's face it.  Everyone in the investment universe has an agenda.  Stock analysts want their recommendations to get noticed.  Web sites want page views, clicks, and ad revenue.  The talking heads on TV want the anchor chair or a book deal.  Publishers want subscribers.  So, as an investor, you have to constantly ask one key question:  Should their agenda influence mine?

As we enter the fourth quarter, the noisy winds that influence market sentiment are blowing like a November squall.  Market dips in July and September are described either as overdue corrections or pauses in a rebuilding process, depending who you ask.  Geopolitical risk is staging an ugly and troubling parade in every ring of the global circus:  Ukraine, Syria, Iraq, Iran, Gaza, and Africa.  The so-called “wall of worry” has no shortage of new and frightening bricks being added daily.

The soundtrack of distraction also plays loudly in financial circles.  Fed-watchers speculate about the timing and magnitude of an interest rate ramp-up (aka tapering).  The divergent performance of large stocks (up) and small stocks (down) raises debate about the maturity of the current growth cycle.

All the noise causes sentiment-driven swings in markets.  We can expect to see some of these swings during upcoming quarters.  But the ultimate questions are:  Should these market swings cause you to act?  How will the emotions of the moment affect your decisions as an investor?

We believe none of this noise should change your agenda as an investor.  Nor will it change our mission as we help you manage your wealth.  Whatever sort of noise arises, we adhere to a simple rule:  We focus on value by watching for out-of-favor pockets in the market.  Whether bulls or bears are leading the charge, we look for companies with promising revenue streams, discounted prices, stable management, and potential that the herd may have overlooked.  We see ourselves as equal part bargain hunters and guardians against inappropriate risk.  And we see potholes as opportunities.

Similarly, we urge our clients to put their agendas first.  We want you to stand with us, above the noise and apart from the herd.  If your priorities involve a comfortable retirement, security for family members, a reliable income stream, or a steadily growing portfolio, those desires and outcomes should become your benchmarks for decision-making.

If you have cash sitting complacently under your mattress, buried in your back yard, or as part of an investment account, ask yourself whether it should be put to work as part of your investment agenda.  If you are one of those that favor bonds over stocks because of risk factors, ask whether that plan is lined up with your agenda.  If you have been waiting for a cooling-off period in order to invest more fully in the growth of well-positioned companies, ask whether you are ready to view a market dip as a reason to seek opportunity.  We stand ready to help you through all of these questions.

Above all, if you are allowing a very noisy marketplace to affect your decisions, attitudes, or actions as an investor, ask yourself what's more important:  your agenda or that of the herd?

As the fall winds blow, please let us know if you would like to discuss or update your investment plans.  We believe our price-aware approach can help our clients make meaningful strides toward pursuing their goals in this environment. That's our agenda!


Market Update - July 2014

“This is just the first step on a long way.  We cannot lean back and be complacent.”  Wolfgang Bernhard

With the end of the second quarter comes the official start of summer. For some it's time for travel, boating, golf, or maybe just a backyard nap.  In the Pacific Northwest, we reclaim temporary bragging rights for the best climate in the land, at least until Labor Day.

As summer takes hold, we are not taking our eye off the ball.  We have enjoyed a relatively mild and steady stock market during the first half of 2014, so it's tempting to think that we, as investors, might relax.  But we don't dare become complacent at this stage.  Yes, stocks reached record highs in June (S&P 500 at 1,957), and portfolios have benefited from healthy, fairly broad-based performance.  Better yet, some investors have remained wary, so ownership of stocks is lighter than we typically see during periods of economic growth.  This is potentially good news in that additional capital could enter the markets, which can exert upward force on prices and, in turn, investor sentiment.

On the other hand, our world economic climate is not exactly sunny and 72 degrees.  Iraq is falling back into tribal violence.  Gas prices have jumped past the bewitching level of $4 per gallon.  The truth-or-dare foreign policies of Russia and China are more stressful than any peace-loving diplomat wants.  The Federal Reserve (Fed) and other central banks must at some point be brave enough to move away from prolonged zero-interest monetary policy.  To paraphrase our respected Stifel strategist, Barry B. Bannister*, the riddle for investors is whether the Fed's policies will create enough “escape velocity” to pull us out definitively from the 2008/2009 financial crisis.

As value-oriented investors, what do we do when the stock market is a productive place, but the world around us appears fraught with risk and uncertainty?  Frankly, this is when our job becomes both challenging and stimulating.

When asset values are healthy, we have to look harder to find the best opportunities.  We have to be ready to respond quickly to market setbacks or dips that might put stocks in our target-price range.  The intrinsic value of companies is worth watching, especially when risk is so real.  We have to remind ourselves that value investing is often rewarded in an environment when interest rates are likely to rise. And we have to remind our investors that owning bonds is less about investment performance and more about the ballast needed to offset turbulence.

Looking forward, some strategists see the S&P 500 slipping from the 1,950 range to the 1,850 range by fall.  But they also admit we could see the market keep chugging along if we see strong wages, modest inflation, and market acceptance of the Fed's move to slowly increase interest rates.  The other bellwether indicators to watch are Gross Domestic Product (GDP) growth, corporate earnings reports, and the stamina of our housing market recovery. Together, these factors will pull or push the market during the second half of this year, and we will be watching intently.

So go ahead, enjoy the summer.  But don't let a low volatility investment market cause you to become a complacent investor.  It's a great time to check in with us about your financial priorities and investment goals.  Easy-going markets provide investors with an ideal opportunity for level-headed planning.

* Barry B. Bannister, CFA, from the June 8, 2014 Stifel Market Commentary Letter.

The Standard & Poor's 500 Index (S&P 500) is a capitalization-weighted index that is generally considered representative of the U.S. large capitalization market.  


Market Update - January 


Climate change?  Looking for windows of opportunity in 2014

Have you ever enjoyed a lively stroll along the beaches of the Pacific Northwest, only to turn around and discover that your fleet-footed performance was benefiting from the wind at your back?

As investors, we should pause to take a breath at the start of 2014.  For the past year, the markets jogged along at a pace that few Wall Street pundits predicted.  The most optimistic strategists predicted 10-12%, yet by most measurements, the U.S. stock market had doubled those predictions by late December 2013.  As it turns out, investors enjoyed a remarkably sunny climate last year, with low interest rates, stabilized economic growth, and a re-energized manufacturing sector.  Our own value-focused investment strategies were rewarded for having stayed the course while investing in select buying opportunities along the way.

As we look forward to 2014, we expect both stocks and interest rates to grind upward, but both at modest pace.  The policymakers at the Federal Reserve have shown they will be cautious in any efforts to taper the government's monetary support, allowing investors to rationalize the fact that interest rates are likely to inch upward during the years ahead.  

So, here are our reminders to help you prepare for both opportunity and uncertainty during the upcoming year:

Valuation is still vital - Stock prices are relatively high as of year-end, so buying must be done very carefully, and selling must be done based on achievement of targets and specific goals.  Many strategists are saying that this year's market must now validate some of the price appreciation that already occurred in late 2013.  All of this will require a sharp eye for quality opportunities and an investment strategy based on discipline rather than emotion. 

Volatility is still opportunity - Choppy markets are likely to return in 2014, and while that may create some discomfort for some investors, it also creates windows of opportunity.  We actually prefer some degree of volatility because it allows for selective investment in companies that have strong underlying fundamentals – characteristics that are being overlooked temporarily by the mass market.

Economic growth still has room to run - The global economy continues to put the Great Recession in its rearview mirror.  Consumers are willing to spend on durable and consumer goods, such as automobiles, home appliances, and technology gadgets.  The global manufacturing index is climbing, an indication that suppliers are selling more goods to manufacturers.  Unemployment in the U.S. dropped to 7% last November, continuing a healthy descent from 7.9% a year earlier.  Home buying and building trends are returning to normal and even robust levels in some markets.  Global indicators such as German auto sales and Japanese heavy construction both showed encouraging rebounds in the second half of 2013.

In general, we like the beneficial economic trajectory we saw at year's end.  In 2014, we see more room for modest growth and selective opportunities in the year ahead, even if economic uncertainties, market volatility, and geo-political unknowns are part of the picture.  We continue to believe in and practice our value-oriented approach.  If you have questions or new planning issues this year, please don't hesitate to contact us directly. 


Market Update - October 


The times they are a changing – or are they?

Some things change quickly – look outside at the rain gauge and the gray skies compared to just a month ago. Other things change slowly, or not at all – look at the ideological stalemate in Congress and the questions surrounding our economic dependency on the Federal Reserve Board (Fed) fiscal policy. When it comes to investing, we must decide which changes affect our goals, and which are merely annoying distractions. As we enter the final stretch of 2013, our attitude toward the markets remains largely unchanged. We continue to fend off distractions while watching closely for opportunities in the less popularized corners of the market.

Here are some of the current winds of change we must evaluate when trying to separate real shifts from bothersome noise:

The Tailwinds

The markets, in general, continue to prove resilient by showing a generally improving trend, although a volatile ride at every turn. Investors are gradually regaining confidence, but many continue to hold tight to the exit rail for fear of getting caught in another severe downdraft.

  • Strong rebounds in auto sales and a healthier housing industry are contributing to investors' willingness to stay the course.

  • Improved fiscal reforms in Europe have created stability and a perception that economic contagion is less of a threat. 

  • The Fed surprised everyone in late September by not pulling back on their asset-purchase program, a non-change that caused stocks to reach new highs, at least temporarily.  On the surface, this conservative decision was positive for markets, but it also shows that policymakers see the economic recovery as delicate and dependent on fiscal support.   

  • Slower tapering by the Fed supports a continued commitment to stocks, and vlaue stocks in particular, as a strong compoone of our investors' asset alocation.  This also has created an environment where interst rates are controlled and, therefore, high-yield bonds are winning renewed support.

  • Investor appetite for risk and a belief in traditional investment planning practices has gradually returned to more normal levels as investors realize that they must take on some degree of risk in order to pursue retirement goals and other asset growth objectives.   

The Headwinds

Nothing comes easily or risk-free in this market environment. Uncertainty exists around every corner, and those looking for tranquility might consider investing in a new sofa rather than market-priced stocks and bonds. Some degree of uncomfortable volatility is the price of admission for any goal-driven investment strategy these days.

  • Geopolicitcal conflict and unclear regime changes are brewing on multiple fronts, and U.S. policy is no quick remedy for the troubling issues in Syria, Egypt, Norht Korea, and other extremist regions.

  • Declines in unemployment are being generated mostly by lower participation rates (demographic shifts) rather than real jobs growth, so it remains to be seen whether our economy will truly generate sustainable new jobs for jobless workers.

  • The partisan political divide in the U.S. remains dysfunctional; so don't expect effective policymaking in Washinton, DC anytime soon.  Governance by partisan threat has become the norm.  

  • Both interest rates and inflation remain in check, but the Fed is left wondering when the economy will be able to wean itself from the parental supervision of asset-purchase policies.  

Overall, we see these changes creating a net-positive picture as we head toward year-end 2013. We believe the market rally will be longer and stronger than others expect. But we are also quite certain that volatility and short-term erosion of market strength will be a part of the trend for the foreseeable future. The latter means we will continue to recommend maintaining healthy cash reserves to enable opportunistic value purchases during sudden price declines.

We believe our clients are positioned correctly to serve their financial interests for both the near and long term. If you have any questions or would like to address specific year-end planning issues before the busy holiday season arrives, we welcome a more detailed conversation.