November 20, 2018
Fourth Time is a Charm!
Markets, as they occasionally do, have declined over the past month. Since early October of this year we have experienced another retest of the early February 2018 lows. This year, there have been several retests of this area this year and all have held successfully. This is a strong indication of a healthy market that has significant support at the February 8th level.
There are many reasons why markets occasionally disconnect from fundamental reality as we’re seeing now. What is the fundamental reality? Our economy is as strong, and growing stronger, than I have ever seen it in my 31-year professional career. As our economy grows it’s important to recognize that corporations and individual businesses make up that economic growth. Therefore, while quality companies can move up and down in price short-term, they will, inevitably and undeniably, track upward long-term in a growing economy.
This is where my long-term investment confidence comes from. That is why I don’t allow the market’s day-to-day, month-to-month, or quarter-to-quarter vagaries to distract me from clear, underlying economic improvement and momentum. When that momentum is strong, particularly as strong has it has been in the past nearly two years, we have historic certainty that our investments will ultimately rise in accordance with the economy’s long-term movements. Markets eventually always move long-term with underlying economic growth – but short-term almost anything can affect them. That “almost anything” keeps some up at night. It’s what causes nagging doubts, lingering worries, and even sleepless nights. The returns you see long-term in the Ibbotson’s chart shown below will only occur if we have faith in our economic system (capitalism), and not focus on short-term deviations, like we are currently experiencing.
The chart above shows returns of various financial segments over long periods of time. It is extremely instructive and studying it can teach us a lot about investment. The biggest thing that stands out is that over any long period of time, stocks more than double the returns of government bonds and triple the returns of treasury bills – treasury bills are a money market equivalent. However, note the worse thing on the chart, which would be the declines. The last significant decline that we saw, as of the end of 2017, was the deep 2008-2009 recession. The vast majority of Spectrum clients made up for that extremely steep decline in approximately a year and a half, then have gone on to more than double their capital. Remember, that was an actual fundamental recession – not our current, mere short-term technical correction!
This is instructive because it shows exactly why Spectrum is a long-term investment manager. In addition, we have tremendous confidence in the power that has been unleashed in America’s economy over the last two years. With rational regulations (instead of overregulation, which destroys industries and jobs) and reasonable taxation (instead of over taxation, which leads to more tax cheating and reduces investment and job growth), excellent growth is predictable. Our confidence is predicated on what you see in the chart – decades upon decades of consistent growth in equities. The only way you truly “lose” in the equity market is if you also lose sight of these facts. Long-term investors historically have always achieved double digit annual returns. Over the past 31 years of my professional career, our clientele has experienced the same. Do not let this current technical correction cause you to lose a single night’s sleep, or to lose sight of the fact that our nation is truly in an incredibly good, fundamental growth position.
Upcoming Game Changers
The next two months will see many positive, precipitating events occurring. One of those events will be the Federal Reserve hiking interest rates again on December 19. This will be positive long-term for our bank sector, so it is a very good event. Even after that hike, interest rates will still be near historic lows, therefore also allowing the economy to be further stimulated. Another precipitating event occurs even sooner, which is the meeting at the G-20 conference between President Trump and President Xi of China. The Chinese do not want to let the trade dispute between China and the US go into the new year because on January 1, 2019, the tariffs that our country impose on many Chinese goods will more than double. This is a necessary policy to stop decades of trade policy disparity between China and the US, as well as the continuing theft of our intellectual property and forced transfer of technology on American corporations wishing to do business in China. Just these two events are likely to cause significant upside movements in this market. There are many more potential game-changers on the horizon!
Again – This is a Technical Correction!
What we are experiencing now is clearly a technical correction and a retest of the market’s February 8, 2018 low. That low is approximately 5% lower than the pre-open level today. We firmly expect to bounce above that low for the fourth time this year and then see the market continue its long-term climb over the next few years. Even in excellent economic growth environments, like now, you will traditionally see a couple of 10-15% moves down annually. That does not negate what you clearly can see in the historic returns shown on the Ibbotson chart above.
Tips for Success in Your Portfolio
Focusing on the long-term is important, so here is my first tip. Look long term, not short term. Short term minded individuals normally do not realize success in their investment returns. Tip two, turn off the news when it is causing you to worry. Worry is counterproductive, and no matter how much you worry, you will not change the course of economic events. There is no way any of us can impact short term market events with our worry. Three, be confident in your portfolio. The ten to thirteen stocks that make up our clients’ portfolios are multi-billion-dollar diversified companies with great track records of accomplishment, who have, over decades, made millions of Americans many trillions of dollars. Four, understand that we do not buy the market, but we are a concentrated asset manager who only utilizes select companies whose financial characteristics should allow us to outperform the great market returns you see on the Ibbotson chart above long term. We do not seek to “buy the market”, but rather seek sectors of the market that fit with the investment themes most likely to protect and increase the value of your capital long-term.
My Economic Confidence Level?
Please know this – on a scale of 1-10, my confidence that this is not a recession (nor business slow-down), but rather a short-term event, is at a 10! I am more confident than at any time in my professional career about where this economy is headed long term. There will be speed bumps along the way (like the past six weeks), but no brick walls to stop us. We are invested in the greatest country on the face of Earth and America is, once again, the economic driver of the world’s growth. Once trade disputes are in the rear-view mirror, and the full effects of reasonable regulation are felt, you should see, long term, much higher price levels in the outstanding companies that we own. It’s time in the market that provides those returns not timing of the market through poorly planned buys and sells.
I need to say this unequivocally. I am confident to a higher degree than ever in my professional career that your investments will outperform historic norms as long as we don’t lose sight of the fact that a growing economy will ultimately result in growing investment portfolio values. If you accept this historically supported conclusion, regardless of your age or circumstances, then you will create a more confident and relaxed mindset that allows real wealth creation and growth in your portfolio to occur.
Now onto the “elephant in the room”. Our firm had projected that Republicans would likely hold the House and pick up three to four seats in the US senate during the midterm elections. Although not all election results are final, it does appear that Republicans will have picked up three Senate seats – increasing their majority significantly. In the House elections there was no “blue wave,” but the Democratic party did have significant pickups and won the majority. Those pickups were nowhere near what was projected. Republicans in the House were operating at a significant disadvantage because 42 largely secured Republican seats (historically high) became competitive when the Republicans that occupied them elected not to run for reelection. Ultimately, I believe this was the greatest factor in the change of the House majority.
Divided government, historically, has been a positive for economic and investment growth. We do not fear Democratic leadership in the House. Those folks are largely patriots, just like the Republicans. They’re also equally conflicted with too much campaign cash and too many corporate chiefs pulling their strings which results in things like the caravan coming up from Central America through Mexico. American companies’ desire for cheap labor has no party affiliation – only a money affiliation that has resulted in our nation’s middle class not getting well-earned raises and benefits because illegal immigrant cheap labor displaced them. Not everyone in America will go to college or trade school. Not everyone will hustle and aggressively pursue the American dream. But for those who choose that course, they deserve to have the opportunity to work without having their wages and benefits reduced by folks here illegally, who will take work for much less compensation. Illegal immigration in our country has undoubtedly reduced our economic growth, reduced income gains for the majority of Americans over the last three decades, has shifted benefit costs from corporations to the American taxpayer, and has eliminated the rule of law on our Southern border. The lawlessness that has extended for over thirty years on our Southern border has, in large part, resulted in our nation’s current opioid epidemic, devastated families and lives, literally destroyed the inner city by encouraging drug-related crime in cities like Chicago, LA, Baltimore, etc., and distracted our nation’s leaders from governmental issues at both the federal, state, and local level. We have to stop the flow of illegal immigration and the insidious and pervasive criminality that comes with it. This does not mean illegal immigrants are bad, although their illegal immigration is wrong and harmful. Criminal elements are using their same methods of travel and conveyance into our country, and some of those criminal elements are drug couriers or dealers. Now, according to Department of Homeland Security statistics, we are even seeing ISIS terrorists crossing our Southern border to create havoc and death.
A Look Ahead
On December 30th, President Trump and Chinese President Xi meet face to face at the G-20 meeting in Buenos Ares. Discussions about our nation’s trade dispute with China are being held on a daily basis, and the G-20 meeting should provide an opportunity for progress on the inequitable trade policy, intellectual property theft, forced transfer of technology from American companies doing business in China, and many other clearly unfair practices. Every one of these issues, including the North Korean, and Iranian problems, should have been dealt with decades ago – by both Republican and Democrat presidents. But no one wanted to stand up to our enemies, or even our allies (like NATO), and demand fair trade, fair business practices, and an equitable division of defense costs. Thankfully, our country elected a nonpolitician who simply decided his personal popularity was not as important as a fair shake for the American people and American workers. As we look ahead to the G-20 meetings, I believe that it is likely we will see significant upside market movements prior to, and after, those meetings, which conclude on December 1st. I’m not suggesting that there will be a complete settlement of the trade issues that exist with China or other nations. But, I do believe that meaningful progress will be made and ultimately a common agreement will be signed between our two countries, and the European Union, at latest by the first quarter of next year. This will create a very powerful economic boost in our equity markets.
Make no mistake, America is holding all aces in dealing with our trade disputes, and this president is very likely to complete highly successful negotiations, as he has done with so many other nations, over the last two years. We also look forward to a new Congress being seated in January, and to a more collaborative and cooperative approach in the governance of our nation. Remember, divided government in the Reagan and Clinton eras resulted in tremendous economic progress, large job gains, a thriving economy, and huge upside movement in the equity markets. We expect the same result now.
Fear and greed can work their will on a nation’s markets, but only in the short or intermediate term. Long-term, what moves your portfolio is underlying economic growth and the driving force behind that growth is an increase in corporate earnings. With all of the companies we own having reported great third quarter earnings, and their collective anticipation of an even better fourth quarter, we believe that this economic expansion has many years to run.
I could address many other concerns in this letter. Rather than dwell on every potential negative issue, we seek to find the economic outcome that is most probable and allow your investments adequate time to reach their projected higher levels. Make no mistake, investors who act on nerves, fear, or feelings traditionally destroy their returns. The old adage “buy low and sell high” is easy to say, but when we allow our emotions to get involved, it’s extremely hard to do. Our firm has carefully selected each element of your portfolio, tracks all news announcements on each company daily, and understands fully the implications those announcements have on your portfolio values. Investment excellence long-term is our goal and our history shows that we’ve achieved that very well. Trust in our process. Your peace of mind and successful financial management are our complete concern, and we will not lose sight of diligently managing your precious funds. Thank you so much for your faith in our company and the many warm wishes I have received this year from so many wonderful clients. Each and every one of us appreciate you and our opportunity to help manage your family’s wealth. God Bless.
C. Kelly Buckley, MBA, CFP
Managing Director for Asset Management
Integrity. Commitment to Service. Standards of Excellence.
Spectrum Financial Alliance, Ltd., L.L.C (“Spectrum”) is a Registered Investment Advisor. This letter contains general information that is not suitable for everyone and should not be construed as personalized investment advice. Past performance is no guarantee of future results and there is no guarantee that the views and opinions expressed in this letter will come to pass. Investing in the stock market involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security. If your financial situation or investment objectives have changed or if you want to impose and/or modify any reasonable restrictions on management of your accounts, please contact our office at 859-223-6333.