Author: adamweingartner

On Wednesday, the 10-year anniversary of the March 2009 low in the stock market and the unofficial turning point of the global financial crisis will be upon us.  Ten years later the ramifications continue to be felt.  The US Government has (supposedly) put in place additional economic safeguards so “too big to fail” institutions never again threaten the global financial system.  It’s my opinion that you can’t legislate greed from any system, but that’s for a different post…

For those investors who were lucky enough to finally start making some real money during the economic expansion of the 1990s, the stock market only compounded those gains.  But by the end of the decade, fundamental analysis gave way to “potential earnings”, “buzz”, and “eyeballs” (note this is not dissimilar from the notion of MAUs, or monthly active users paraded by Twitter, Snapchat, and Facebook).  Novice investors felt the toxic blend of irrational exuberance and fear of missing out (FOMO).  With no end in sight, the technology market finally crashed in 2000, which eventually took down the entire equity markets almost 50%.  From 1998 to now, it is historically one of the worst 20 year periods in US history.  To make things worse, just as investors were starting to believe the next wave of expansion was upon us, another economic decline came to decimate their portfolios (and in some cases, their lives) in 2008.  Some of these investors never made it back to the stock market.

As I look back on my own experience during March of 2009, I have come to think of it as typical. I was part of a large generation that still couldn’t figure out what to be called (Gen Y was too easy, I guess).  I had been in the financial business for a couple years but this time period certainly had an effect on me personally and as a future advisor.  Those feelings of helplessness, fear, and anxiety became the future optimistic foundation for Second Level Capital, although I didn’t know it at the time.  The stock market had made a low three days prior, but upon waking up March 9th, it should didn’t feel like that was going to be THE low.   Pre-market futures were “limit down”.  Sellers had overwhelmed the system to the point where it was no longer allowing selling until US trading hours began.  Credit markets had been effectively frozen for months.  100+ year old institutions vanished into the history books.  Caterpillar was having trouble making payroll and the banks were on their way to being nationalized.  The average investor looking for help (even from a relative rookie) was down between 40%-60%, while the Oracle of Omaha’s holding company, Berkshire Hathaway, had fallen from 100 to 45 (so much for all those great investing quotes).  I remember thinking that maybe it really WAS the end of the world as I had known it.  After all, the Japanese stock market (a favorite example for doomsday soothsayers) had fallen 80% since 1989.

But without warning, the skies started to clear.  By the end of the month, the S&P 500 would be up 25% from the bottom.  By the end of 2009, the market had almost doubled from its low.  When looking back, it’s not how high we’ve gone that surprises me (after all I think the Dow Jones will be over 100K in the next 25 years), but the lack of volatility.  Sure, there were 15%+ declines in 2010, 2011, 2015, and 2018 (which all felt like the next BIG one was about to come), but only one of these years even finished down more than 1%.  This has undoubtedly been one of the greatest 10-year periods for stock market investors.  On a total return basis (including dividends), the S&P 500 is up over 400% since that fateful day in early March.

With the dichotomy between last two decades, what do we think the next 10 years will bring?  To be honest, we have no clue.  But we’ve seen some major extremes over these last two decades, so whatever it brings, we’ll be here to guide you through.

– Adam

• The Easiest Retirement Choice – The importance of staying fully invested in stocks with a long-term time horizon, assuming you don’t want to run out of money when you retire.
• Where Big Leaps Happen – A healthy life requires diet and exercise, but when combined they become greater than the sum of their parts.  Same as investing.

“Any man who claims to know what the market is going to do any more than to say that he thinks this or that will occur as a result of certain specified conditions is unworthy of trust as a broker.” – Charles Dow

After the worst December since 1932, the US equity markets turned in the best January since 1987 (isn’t that the year the market crashed 22% in one day?!?).  The market was massively oversold (only 6 stocks in the S&P 500 were above their 50 day moving average).  Per our previous blog posts, this condition was both emblematic of an increasingly volatile trading environment, as well as a short-term opportunity.  I’m reminded of a twist on a Mark Twain quote that states, “a pound of facts is worth an ounce of emotion”.

Since mid-December, the Federal Reserve has increased their subdued and patient language, while the stock market has continued to applaud the myriad of tweets coming out of the Trump administration about how great things are going with China trade talks.  While our opinion remains the same and we see no reason at the moment to deviate from our current asset allocation models, the speed of the decline in Q4 2018 as well as the speed of the advance in Q1 2019 are a bit disconcerting.  As always, we will let price be our guide (not pundits or tweets or conjecture), but remain cautiously optimistic for the medium and long-term.  Currently the S&P 500 is up 9% which would be a fantastic return for an entire year.  The deciding factor for the next leg of the market will be dependent on skepticism of the rally remaining (bullish for the market), or overconfidence creeping into our minds (bearish for the market).

The beginning of each quarter is always especially busy for us in terms of reporting and connecting with each client, so we’ve been a bit behind on our reading recommendations.  For those of you who enjoy diving further down the rabbit hole (both of you), see below.

• The Biggest Returns
• In or Out?
• Diversification is (almost) Undefeated
• Beware The Gatekeeper

– Adam

In our December 27th blog post we wrote that the most likely scenario from the oversold condition and the rough Christmas week was an 8-10% rally from those levels, and that until the S&P 500 traded above 2600, we should continue to have in our mind that the market is in a downward trajectory.

Well, the world didn’t end and the S&P 500 has miraculously rallied over 11% to close above 2600 for the first time since December 13th.  The Federal Reserve has struck a more patient tone to the gradual rising of interest rates and the first taste of corporate earnings showed significant slowing in the fourth quarter, but also that the American consumer remains quite healthy.  As long as the data is consistent through earnings season, we feel the likelihood of recession remains small.

But just because we don’t see a recession coming, does that mean the stock market will continue to drift higher?  The short answer is no, but we’re now into the place that was previously support for the stock market (now could be resistance).  We anticipate a pause in the stock market’s advance, probably more of a wait and see approach to earnings over the next 2-3 weeks, but once we’re through most of the reports, it’s quite possible (even probable) the market stops pricing in the sky falling, and we could continue a very healthy rise throughout most of 2019.  Just like last year, the S&P 500 is up quite a bit in January (4.5% and counting).  If we continue at this pace, the S&P 500 will be up almost 50% this year!  That’s definitely not going to happen, so we need to remain on guard.  We remain cautiously optimistic, because things can change very quickly.

The biggest takeaway from the last month should be a confirmation that your long-term goals shouldn’t be affected by short term market gyrations.  Panicking and getting more defensive over the last month was the WRONG move.  If you’ve felt like the short-term price movements over the last couple months were too much to handle, let’s setup a conversation and tweak your plan so you can sell enough to get to sleep at night.  Now that we’ve had a chance to breathe, let’s look at your plan, unemotionally and in the light of day.

As for our picks in 2019, an update is below

• China deal – nothing here, despite the rhetoric, but FXI is up 5.48% YTD
• Brazil (EWZ) – Up 5.28% YTD
• Semiconductors (SMH) – up 2.13% YTD, AMD up 5.5% YTD
• Crude Oil – up 13% YTD
• US Dollar – down .61% YTD

– Adam

People love the hot “stock” tip.  Well my usual answer when people ask me about the stock market is “I have no idea”.  This is infuriating to most people, but also true.  I do have some thoughts, but still not sure they are actionable intel.  I do, however, like the idea of being judged in public and having a complete record of what I was thinking at the time and why.  This seems as good of a place as any to do that.  Proceed at your own risk.

1. The trade war with China will end sooner than most think. Although it would appear that China doesn’t have to rush into any agreement, the tariffs and protectionism of the US consumer are hurting the Chinese economy. More importantly, President Trump views the stock market as his report card (poor choice on his part), so saving face, getting a win with some type of agreement, quickly, will gain him favor moving into 2020 (which is ANOTHER election year, can you believe it?).

2. I’m going to double down on my (bad) call from last year regarding emerging markets. Brazil is my favorite, and I do believe that without the trade war in China, the emerging world may have been on par with the US. If you’re trading at home (I wish you wouldn’t, but I understand), EWZ is the Brazilian stock market ETF ticker symbol.

3. Long Semiconductors – For those of you following the chipmakers over the years, you will know that this is a cyclical business. The semiconductor sector (SMH) was down almost 30% from high to low. In my opinion it’s a little overdone, although there is certainly room for this one to fall a bit more before it decides to bounce. Favorite names here would be SMH itself (the index), and for you more adventurous souls, AMD.

4. Long Energy and Commodities (Specifically WTI Crude Oil) – In my opinion, oil could go from $45 to $60 (33% gain). This is simply another mean reversion call, as I believe the washout in oil has priced in a massive world demand slowdown.  While I do believe that earnings estimates will be tempered moving forward, oil is pricing in a recession (or worse), and until we print negative GDP numbers that will continue to be speculation. Best way to play here is XLE, XOM, or USO. As reminder for those income-focused investors out there, XOM pays a 4.7% dividend yield at this price. Not too bad…

5. Short US Dollar. This could happen with the Federal Reserve backing off their relatively inflexible tone about raising interest rates, or anywhere else in the world getting their act together (best chance is the UK). We’re already slightly overweight a negative US dollar position in our portfolios, so no need to overweight even more on your own.

Be Careful Out There!

– Adam

It goes without saying, but we are currently in the midst of a massive selloff.  It’s close to the worst December in more than 85 years (on average, a stronger month for stocks).  The S&P 500 went from an all-time high to a 52-week low in 59 trading days.  The Nasdaq 100 just had its worst week since 2008, and it was the worst Christmas Eve ever.

While the overall magnitude of the decline hasn’t been historic (quite average actually), it’s been the speed of the decline that’s causing the most angst, prompting the blaming of computers and algorithmic trading programs.  For those of you who haven’t heard this excuse before, computer trading was also blamed for the Black Tuesday stock market crash of 1987.  This event left a generation of investors (and advisors) with PTSD, while the luckiest few who managed to sidestep the crash with enough hubris to last a lifetime.

The Headwinds…

• Rising Interest Rates and Quantitative Tightening (QT)
• Slowing Growth in China and Europe
• Algorithmic-driven “fire sale” in equities and credit markets
• Inverted Yield Curves
• Brexit

The Tailwinds

• Cheaper Oil
• Trade War Pause
• 2019 Earnings Growth
• Historically Low US Unemployment
• Health of the Consumer (retail sales)

At the moment, we’re the in the middle of these two forces.  A tornado trying to predict whether the economy goes into recession or resumes the solid economic growth we’ve seen over the past several years.

No one knows.  And let’s something else out of the way as well.  The answer to the question is “Yes”.  The market can always go lower, and please don’t ever forget this.  Investment accounts are not savings accounts.

Making predictions never goes well, but in my opinion, the most likely scenario moving forward is that there is a stellar 8-10% short-covering rally (we saw a good portion of this move yesterday), which would allow long-term investors to take a deep breath.  If this scenario plays out, don’t be fooled, until the S&P 500 trades above 2600, the primary trend will remain down and all rallies should be taken with a grain of salt.

Yesterday’s rally (and hopefully subsequent ones ahead) is the reason why we prefer staying fully invested.  Systematic rebalancing locks in the certainty that you will partake in these gains, but unfortunately the cost for doing so is muddling through the times that aren’t so fun.

As Jim O’Shaughnessy puts it, “corrections and bear markets are a feature, not a bug of the stock market.  Without them there would be no equity risk premium.”  So, if you’re trading at home, be careful.  It is chewing up even the most seasoned professionals as they attempt to navigate the quickest trend changes in history.  February saw the fastest ever 10% decline from an all-time high, which was then subsequently followed by NEW all-time highs later in 2018, which was then subsequently followed by…well, you get the idea.

If you’re an investor, be patient.  Fantastic investment opportunities are beginning to present themselves.  If you’re fully invested, let the rebalancing do its job and start bringing you out of your bond allocation into a bit more equities.  If you have additional capital to deploy, it is a great time to start nibbling (but not all at once).  If you’re still actively making retirement contributions, these are the most important ones you will make as they become the backbone for future growth and, more importantly, exhibit the requisite faith in your strategy.  In all likelihood, in 12-18 months you won’t even remember how you felt during these times.  But you can be sure I’ll remind you about it…

— Adam

As my wife was reading my latest post, commenting on how I sound like Suze Orman (who is now retired and living the Bahamas, btw), I was looking ahead at the next few days on what will be a bit of a hectic personal schedule.  Three Christmases with two children under seven means lots of family time.  But the next couple days before we get fully into the Christmas swing will be busy for a different reason.  We’ve had three deaths affect our family over the last week.  My stepfather’s brother (cancer), a good friend’s father (in poor health for some time), and a classmate of my first-grade son (accidental gunshot).  I’m old enough now to realize these moments tend to dart in an out of our lives, just long enough to remind us of our mortality and then eventually wither back into the noise of everyday life.  Of course, we eventually settle back in and move on, but as I get older, they stay with me a bit longer.  Perhaps because of the ever closing window of my own life.  Or perhaps, because in order to look back and fondly recall memories, we better get busy making them.

Financial health should be the battery power for making these memories, not for status or self-esteem.  There is more to life than bull and bear markets.  Time is our most finite resource.  Just a quick reminder to hug a little tighter this holiday season.

– Adam

This morning, Brad and I were discussing the comments made yesterday by Jeff Gundlach (“The Bond King”), specifically as they related to passive investing (we may address this misnomer in a future post).  Gundlach said that passive investing has reached “mania status” and will exacerbate problems in the market because it’s hurting behavior.  Our clients each have a clear plan of where Brad and I want to go with their account (even if some of them aren’t fully aware).  Theoretically, if we stick to these plans, this shouldn’t apply as much to them (the best laid plans…).  But certainly for those of you without an anchor you should get one.

This got us thinking a bit more.  Shouldn’t the idea of passive investing (indexing), those people in it for the long-term, be much stronger holders of equities than most?  Vanguard tells us that their index fund assets account for only 10% of the total global investable market and 5% of trading volume on U.S. exchanges, so it shouldn’t be a issue of indexing becoming too large to sway the natural buying and selling.  Perhaps, it’s the fact that sentiment traders and active managers (speculators), since the beginning of the stock market have relied upon people’s fear and greed as contrarian indicators.  We’ve heard a lot about the term “capitulation” recently, and you’ll hear it more on the financial news in the coming days and weeks.  Capitulation is an emotion we’ve all felt.  I like to think of it as the moment where you throw your hands up in the air and say “Enough!”.  For investing, this is the moment when you decide you want to deviate from your plan because you become consumed by risk aversion (even though data would point you elsewhere).  After all, Warren Buffett is famous for saying “be fearful when others are greedy and be greedy when others are fearful”.  Clearly we know what type of environment the current market finds itself in, but we also know, buying the stock market at this level feels a bit like catching a falling knife.  Well, I was interested in waiting until the market came down, but now it’s come down so far, so fast…perhaps I should wait a bit longer.

The arbitraging of human emotion will always and forever be our greatest tool against poor investing.  Our own fears and greed rely upon irrationality and imperfection to creep into our mind (and not just as it relates to investing).  When we take on new clients, generally early in the behavioral education process, some investors feel they should be robotic, attempt to rid themselves of these basic human emotions, but we’re not so sure that’s possible.  I wouldn’t consider myself an emotionally volatile person, but the roller coaster of day-to-day market volatility still hits me from time to time.  That being said, what can we do to help.

1.  Education – Read.  If you don’t have time, find a trustworthy financial professional who has enough time to get you up to speed.  FInancial education is applicable in every walk of life, and sometimes delegating is an incredible hurdle, one that some people never make it over.

2.  Self-Awareness – Feeling those emotions of fear and greed are not only inevitable, but healthy.  How you react to them determines everything.  Because you have the ability to think about thinking, you can use your emotions to enhance your chances of realizing your investment goals.  I’m not talking about outsmarting the market here (unlikely), I’m talking about outsmarting yourself.

3.  Long-term Thinking – We have no connection to our future selves, and no comprehension of saving a $1 today to turn it into $10 in 35 years (it’s about a 7% compound growth rate).  Sticking to one strategy, being responsible about debt, and saving more than we spend (gasp), are much more important for your overall financial health than the incremental difference between your asset allocation and the optimal flavor of the month.

If you don’t have a plan, get one.  If you have a plan and don’t understand it, have your advisor explain it to you.  If you have a great plan, go over it again and trust.  Times like these are when the rubber meets the road and some of the toughest you’ll face along the journey.  It’s time to learn now, so you’ll be prepared.  Your future self will thank you.

– Adam

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

Being an independent firm, we manage portfolios, service our clients, and write content.  That’s it.  Because we offer fees tied to client outcomes, we have a direct incentive to ensure your portfolio is optimized and our process is streamlined. If you work with a large, profit-center advisor, you know a few headwinds are working against you: sales goals, conference calls, middle managers, and corporate bureaucrats, just to name a few.  Being committed to fewer families allows us the ability to understand everyone’s unique communication style, anxiety level, and quirks (these are my favorite).

The only reason I mention this is to say that we are built for times like these, so use us.  If you’re a “hands off” investor; Fine.  If you’re someone who looks at their statement every couple of months; Great.  If you’re someone that is intimately involved and wants more education on why Amazon’s year-over-year revenue growth of 30% led to the largest two-day DECLINE in the stock in 4 years, even better.  We’re here for you.  And we’re not going anywhere.

Below are a couple of my favorite articles from the last couple weeks.  Enjoy.

– Adam

Diversification Means Saying Sorry – “Unnecessary risks can be avoided. Unnecessary risks include a host of decisions including, but not limited to; single securities, sector bets, reaching for yield, and failure to invest in almost half of the world’s stock market. Unnecessary risks can lead to periods of excess performance, but they are not a reliable strategy for the long term.”

Broker vs. Advisor – “The financial advisor is a stakeholder in the client’s outcome, a professional with something to lose should the plan fall apart or fail to be adhered to. Financial advisors are for people with complex situations who want a relationship with someone that knows them, understands them and will fight like hell to see their goals and objectives met in the future. Order takers don’t fight, they abide.”