Month: November 2018

Brad here…

Every year, the holidays seem to edge closer and closer and pass by even faster. This makes sense since I’m getting older and each year is a smaller percentage of my life, but I can’t help but think this effect is exacerbated by retail stores.  Shelves transition seamlessly from school supplies to Halloween candy to Thanksgiving doilies to Christmas gadgets. As soon as one holiday ends, the next holiday’s sale or limited item bombards our screens and mailboxes.  If we don’t act now, we’ll miss out forever.  Retailers use fear of missing out (FOMO) to coerce consumers into worrying about the future holiday, consequently sucking the enjoyment out of the present.  Why is it so easy to manipulate our actions using fear?

The Webb household has been on a Survivor kick lately; an addictive CBS reality show where contestants are thrown on a desert island, tasked with voting each other off one by one, with the lone survivor winning a million dollars.  Each episode, contestants compete in some physically or mentally difficult challenge and the winner receives “immunity” for the night’s vote; he or she is one step closer to the goal.  Inevitably, as each challenge gets difficult, host Jeff Probst offers up some tempting, delicious food.  But, in order to eat, the contestant must give up his or her chance to win immunity, making it more difficult to reach the goal.  Here, emotion coerces the contestant into choosing short term pleasure over long term goals.  Enjoy the now or focus on the future.

This fear-based emotional fallacy manifests itself similarly when it comes to our personal finances. We’ve all come to investment island with the goal of winning financial security and stability by sticking to our plan. Just as things start to get difficult, out trot permabears with a plate full of tasty contrarianism and we all want to drop out of the challenge to quench our short term fear. “We need to get out of the market now before it crashes. I need to buy the hot tech IPO because it’s going to be huge.” I’m always surprised how quickly people get nervous after a Trump tweet or a jobs report, same as I’m stunned at how many Survivors quickly give up immunity to eat a cheeseburger.

In their simplest form, financial advisors create a plan and do their best to ensure implementation.  For many years, conventional wisdom professed the best advisors created the best plans, but that’s the easy part.  Sticking to it is hard.  In fact, it’s so hard it’s brought behavioral finance out of the dark corners of academia onto the covers of best selling books.  I recently read a large money manager announced its most recent C-suite hire: Chief Behavioral Officer.  Yep, that’s a thing now.  Don’t let your emotions dictate short term decisions that may adversely affect long term goals.  Sticking to a horrible plan is better than deviating from a great one.

So as the year draws to a close, allow yourself to enjoy the season and all that comes along with it.  Be present with your presents.  Adam and I will be holed up in our office planning for the future.  That’s what we’re here for!

– Brad

It’s been touted over the last month and a half that there are two main problems hanging over the market (supposedly holding us back from continuing one of the longest bull markets in history). The first is rising interest rates and the second is the trade war with China.

The data coming from homebuilders and auto dealers has been relatively stark. A median home in the United States is roughly $300K. That means a 1% rise in interest rates will cost an extra $300/month for a mortgage (if the Federal Reserve raises rates in December it will have raised by 1% this year). That will put affordability out of range for some potential buyers. This could lead to a “resetting” of asset prices throughout the economy, just as the converse (lowering interest rates) caused asset prices to inflate.  During his speech today, Fed Chairman Jay Powell made it clear that the “neutral” rate is very close to where it is right now, which signaled to the marketplace that a pause in rate hikes is around the corner.  This is exactly what the market wanted.  Some signal that the deliberate deflating of asset prices was going to be gradual and that the Fed is aware of the “two steps forward, one step back” approach in order to prevent destabilization of the economy.

The rhetoric surrounding China, tariffs, and the G-20 summit (Friday) could lead to another market upside surprise, if talks with President Xi are positive.  I could envision a scenario that would lead to another 5%-10% move in US equity markets (and even more in emerging markets).

The real question to me will be what happens if both of these headwinds are mitigated? Will the market zoom back to all-time highs?  Given the growth numbers and cutting of guidance throughout the Q3 earnings seasons, I find that scenario to be highly doubtful, but not out of the realm of possibility. The takeaway from today should be to survey the overall landscape and keep our heads on a swivel.  In my opinion, the speed and magnitude of October’s decline was a clear sign that something is different. Chairman Powell’s comments don’t change the fact that even after today’s stellar rally, the technology sector (XLK) is still 12% below it’s all-time high, made just 8 weeks ago.

Hi all,

Hope everyone had a Happy Thanksgiving,

I was talking to fellow trader the other day and I was lamenting the struggles over the last few months with the active trading strategy we employ for a few clients.  Knowing my background (having worked closely with someone negative on the stock market for many years), he understood why I was dismissive of him being bearish on current market conditions (hasn’t panned out too well over the past nine years).  I found myself realizing that he was correct.  I lump those people who let current events dictate their mindset, rather than a long or short bias, in with every Chicken Little that pops up from time to time. I do have a positive tilt toward the overall stock market, and I always will.  It’s not seductive, or special, in any way. I just feel that over the long-term, technology will continue increase productivity (keeping inflation low), the population will continue to grow throughout the world, and GDP will continue to trend upward.  Being a long-term bull and a short-term bear is incredibly difficult for me to reconcile.

But…

That doesn’t mean valuations haven’t become extended, growth expectations haven’t become unrealistic, and caution should be thrown to the wind.  We currently have the first real signs of fundamental economic weakness since 2016, specifically for interest rate sensitive sectors like housing and automotive sales.

We have no idea whether this blip on the long-term radar will end today and travel back to new heights, or continue lower and extend losses which have been quick and furious.  Even if we do zoom right back up to all-time highs, a downturn of some type will always be around the proverbial corner. If you’re young and are adding capital to your portfolios, you WANT prices to go lower (gasp!).  If you’re nearing retirement, trying to make up for those two stock market crashes over the last 18 years, but feel as though you can’t afford to see your nest egg go down another 20%, it means you’re stretching. If you’re in retirement and are living off of dividends and interest, the strongest dividend payers in the world are taking their turn laughing at the growth guys.  Pepsi, Coke, Pfizer, Merck, Johnson & Johnson…all at decade highs or more.

There will be recessions along the way, there will be corrections, bear markets, and even crashes, but I just can’t bring myself to view any of these downturns as anything more than a great buying opportunity, which, in retrospect, is exactly what they are.  We need to try and stop calling for a bottom because it makes the journey easier.  It’s never been easy and won’t be in the future, but the good news is that we know what happens after Winter ends.  Spring…

– Adam

Hitting the Links

Built to Break – “Knowing that markets break sometimes doesn’t make dealing with broken markets any easier. But if we know that broken markets are eventually repaired, then it would behoove us to build a portfolio that breaks in a non-catastrophic way, giving us the ability to hang around until the time that they are fixed.”

Exception to the Rule – “Most swans are white”

A Picture is Worth…

Potent Quotables

“People tend to believe that recent trends will continue, whatever they may be, and then, when things shift, they change their expectations again.” – Robert Schiller