CIG Asset Management Update: Prudent Risk Management is Prudent Investment Management
Summary:
* U.S. equities before and after the March FOMC meeting
* A differentiated view and alternative assets can add value in difficult markets
March 2022 Returns:
Commentary:
Domestic equity returns for the month can best be looked at before and after the March 16th Federal Reserve (“FOMC”) meeting.
Pre-FOMC, March 1 through March 14 the S&P 500 was down -2.5%.[ix] As the Russia/Ukraine war intensified, crude oil hit a 13-year high of $130/barrel on March 7 with Europe and the U.S. considered banning all Russian oil imports.[x] On March 10, the February Consumer Price Index increased +0.8% m/m and +7.9% y/y, the highest rate since 1982.[xi] On March 15, the February Producer Price Index showed prices rising +10.0% y/y, tied with January 2022 for the biggest 12-month move since the current series began in 2011.[xii]
On March 16, the Federal Reserve raised interest rates by +0.25%, the first rate hike since 2018. In the press conference that followed the announcement, Federal Reserve Chairman Powell discussed in soothing tones[xiii] the timing of potential future rate hikes and that the Federal Reserve members are working on a plan to start to reduce the nearly $9 billion balance sheet.[xiv] “The Fed has got your back” seems to have become the dominant market narrative.
Post-FOMC, March 15 through March 31 the S&P 500 was up +8.6%.[xv] Despite reports of persistent inflation and an inversion in the yield curve, markets appeared to be encouraged that the next FOMC meeting would not take place until May 3-4. The war continued. On March 25, the University of Michigan Consumer Sentiment Index hit an 11-year low as consumers deal with the highest inflation in 40 years.[xvi] On March 29, the yield on the 5-year U.S. treasury surpassed the yield on the 10-year U.S. treasury, something that has not happened since 2006, before the Great Financial Crisis. In normal markets, as bond maturities lengthen in time, bond yields increase. An inversion in the yield curve historically has been one of the most reliable indicators of an impending recession.[xvii] Finally, on March 31, the Bureau of Economic Analysis released the February Personal Consumption Expenditures Price Index, the Fed’s favorite inflation gauge, showing a +6.4% annual increase in February, the steepest rise since February 1982.[xviii]
We continue to offer a differentiated view. Market history has taught us to be very careful during markets like the one described above. We scenario plan – we don’t forecast the market – meaning we are cognizant of the possibility of both continued upside speculation (like post-FOMC) and significant declines (like the 2000-2002 bear market). In significantly up markets like 2019, CIG captured mid to high teens for clients. When markets were more challenging in 2020, our clients were well-served by our risk-balanced strategy – an approach that strives for resilience to specific economic conditions. We currently hold positions in alternative assets, such as gold, a long/short fund, and a managed futures fund in client accounts which have increased in value year to date. Overall, we remain focused on striking the right aggressiveness versus defensiveness in client portfolios given the evolving uncertainty in the markets, economy, and geopolitics. Other market pundits appear to be more positive. On March 25, Jim Cramer on CNBC firmly stated, “I think the bear market is over!”[xix]
CIG attempts to manage the risk of the markets to try to limit losses. Risk management is key to how we think and execute – prudent investment management is prudent risk management. Given a holistic approach and utilizing active management, The Ride[xx] can be smoother, and clients may sleep better at night.
In today’s markets, how would you like to protect and then grow your nest egg to achieve your financial goals? We would welcome speaking with you to explore your needs and how you are tracking against your plan.
This report was prepared by CIG Asset Management and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward-looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
[i] The Growth Benchmark is a blend of 60% Russell 3000, 25% MSCI All-Country ex U.S. and 15% Bloomberg U.S. Aggregate Bond indices. Sources: CIG, Zephyr and Morningstar.
[ii] The Balanced Benchmark is a blend of 45% Russell 3000, 10% MSCI All-Country ex U.S. and 45% Bloomberg U.S. Aggregate Bond indices. Sources: CIG, Zephyr and Morningstar.
[iii] Morningstar: S&P 500 TR USD
[iv] Morningstar: Bloomberg US Agg Bond TR USD
[v] https://www.msci.com/end-of-day-data-search
[vi] https://www.msci.com/end-of-day-data-search
[vii] finance.yahoo.com
[viii] finance.yahoo.com
[ix] Return calculated by CIG using data from finance.yahoo.com
[x] https://www.cnbc.com/2022/03/06/us-crude-oil-jumps-to-125-a-barrel-a-13-year-high-on-possible-western-ban-of-russian-oil.html
[xi] https://www.bls.gov/news.release/cpi.nr0.htm
[xii] https://www.bls.gov/news.release/ppi.nr0.htm
[xiii] This is how the media and market missionaries described his demeanor.
[xiv] https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20220316.pdf
[xv] Return calculated by CIG using data from finance.yahoo.com
[xvi] https://news.umich.edu/inflation-top-consumer-issue-top-policy-challenge/
[xvii] https://www.chicagofed.org/publications/chicago-fed-letter/2018/404
[xviii] https://www.nytimes.com/2022/03/31/business/economy/pce-inflation-february.html
[xix] https://www.cnbc.com/video/2022/03/25/jim-cramer-says-the-bear-market-is-over.html
[xx] https://cigcapitaladvisors.com/june-2020-asset-management-update-the-ride/
Image: iStock by Getty Images
CIG Asset Management Review: Uncertainty About How Much Risk You May Be Taking Is a Risk unto Itself
Summary:
* Threat of a growing war, inflation and interest rate hike fears led equities lower
* Risks may be buried in your portfolio
* Will the “January Barometer” portend a bad year ahead?
January 2022 Returns:
Commentary:
So far in 2022, inflation, interest rate fears and war in Europe have led equities lower as crude oil surged +27.27% to close at $95.72 a barrel[xvii] and the yield on the 10-year U.S. Treasury bond rose +0.33% to 1.84% on February 28.[xviii] Partially because of the horrible events in Ukraine, we have seen crude oil reach $130.50 and the 10-year U.S. Treasury bond as high as 2.13%, since then on an intraday basis. Amid these events, fixed Income did not provide a safe haven, as the Bloomberg U.S. Bond AGG Index lost -3.12% in the first two months. The S&P 500 suffered its worst January since 2009, during the depths of the Great Financial Crisis.[xix] The year is off to a difficult start. But what year hasn’t over the last few?
What does a bad first month suggest for the rest of the year? In 1972, Yale Hirsch, founder of the Stock Trader’s Almanac, introduced the “January Barometer”, which simply put says, as goes the S&P 500 in January, so goes the year. Our team is focused on illuminating potential blind spots as we attempt to manage the risks of the market in efforts to protect clients’ assets. There were many events in January that underscore the importance of managing those things that may fall outside of what is clearly visible.
On January 5, the minutes from the December 2022 FOMC meeting showed the Federal Reserve was becoming more hawkish than expected. A key section of the minutes stated, “Participants generally noted that, given their individual outlooks for the economy, the labor market, and inflation, it may become warranted to increase the federal funds rate sooner or at a faster pace than participants had earlier anticipated.”[xx]
Technology stocks are particularly sensitive to interest rates and the tech-heavy NASDAQ 100 Index reacted negatively to a potentially more hawkish Fed that same day, falling -3.1%, its largest daily loss since March 2021.[xxi]
We have witnessed many investor portfolios outside of CIG that are overweight large cap information technology stocks versus a typical growth benchmark. At CIG, we have significantly limited our exposure in what we believe is an expensive sector, to approximately 55% of the benchmark allocation in our managed accounts. To those who may read this who are not currently CIG clients, we would ask, “Do you know how much risk you are taking in technology currently?”
Many investors have also chased yield in a low interest rate environment and as a result, the duration of their fixed income portfolios may have increased. These portfolios tend to have more bonds that have maturities in the 10- to 20-year range. When interest rates rise, longer duration fixed income tends to fall more than shorter duration. Corporate bonds many times also lose value as higher rates can potentially lead to more defaults.
At CIG, we have limited the duration in the fixed income portion of our portfolios to approximately 90% of the Bloomberg U.S. Agg Bond Index. We have also limited our exposure to corporate bonds to about 2% of our fixed income exposure. The benchmark currently has 24% in corporate bonds that the Federal Reserve will no longer be buying once they stop expanding the balance sheet. Do you know how much risk you are taking in the fixed income portion of your portfolio?
In Part 2 of this Market Review, we consider additional potential risks given February’s events and explore further Yale Hirsch’s January Barometer. If you would like to learn more, please click here to e-mail Brian Lasher.
Part of our mission is well-informed investors. For those who may not currently be CIG clients, we believe you would find benefit in assessing what risks exist in your portfolio – such a conversation has no downside for you. A “second opinion”, if you will, seeking nothing more than to help increase your knowledge. Please click here to schedule a strategic review with CIG Asset Management.
This report was prepared by CIG Asset Management and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward-looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
[i] The Blended Growth Benchmark is a blend of 60% iShares Russell 3000 ETF, 25% iShares MSCI ACWI ex U.S. ETF and 15% iShares Core U.S. Aggregate Bond ETF. Sources: CIG, Hedge Fund Research, Yahoo Finance and Morningstar.
[ii] The Blended Balanced Benchmark is a blend of 45% iShares Russell 3000 ETF, 10% iShares MSCI ACWI ex U.S. ETF and 45% iShares Core U.S. Aggregate Bond ETF. Sources: CIG, Hedge Fund Research, Yahoo Finance and Morningstar.
[iii] Morningstar: S&P 500 TR USD
[iv] Morningstar: Bloomberg US Agg Bond TR USD
[v] https://www.msci.com/end-of-day-data-search
[vi] https://www.msci.com/end-of-day-data-search
[vii] finance.yahoo.com
[viii] finance.yahoo.com
[ix] The Blended Growth Benchmark is a blend of 60% iShares Russell 3000 ETF, 25% iShares MSCI ACWI ex U.S. ETF and 15% iShares Core U.S. Aggregate Bond ETF. Sources: CIG, Hedge Fund Research, Yahoo Finance and Morningstar.
[x] The Blended Balanced Benchmark is a blend of 45% iShares Russell 3000 ETF, 10% iShares MSCI ACWI ex U.S. ETF and 45% iShares Core U.S. Aggregate Bond ETF. Sources: CIG, Hedge Fund Research, Yahoo Finance and Morningstar.
[xi] Morningstar: S&P 500 TR USD
[xii] Morningstar: Bloomberg US Agg Bond TR USD
[xiii] https://www.msci.com/end-of-day-data-search
[xiv] https://www.msci.com/end-of-day-data-search
[xv] finance.yahoo.com
[xvi] finance.yahoo.com
[xvii] finance.yahoo.com
[xviii] finance.yahoo.com
[xix] https://www.ft.com/content/5cf5199c-5538-40b6-a059-d2c795108919
[xx] https://www.federalreserve.gov/monetarypolicy/fomcminutes20211215.htm
[xxi] https://www.bloomberg.com/news/articles/2022-01-05/nasdaq-100-posts-worst-day-since-march-sparked-by-fed-minutes
Image: iStock by Getty Images
CIG Asset Management Review: How To Be A More Strategic Investor In 2022
Summary:
* US and developed international equities rallied
* The importance of remaining rational in an increasingly emotional environment
Commentary:
A Blended Growth Benchmark returned approximately 2.80% while a Blended Balanced Benchmark gained about 1.96% in December.[i] These benchmarks represent the theoretical performance of diversified passive portfolios blending indices related to geography and asset classes. During December, international stocks in developed markets were higher with the MSCI EAFE net index up +5.05%[ii], slightly besting the S&P 500 index (up +4.48%[iii]), while the MSCI Emerging Markets equities lagged, only gaining +1.62%.[iv] From an asset class perspective, Fixed Income was down slightly as with the Bloomberg US Agg Bond Index falling -0.26%.[v] Crude Oil recovered a little more than half of November’s losses, gaining +13.6% to close at 75.21 a barrel.[vi]
A recent Wall Street Journal article cited an American Psychological Association survey conducted last year that found that after two years of pandemic, nearly one-third of adults are struggling with basic decisions, including small choices like what to eat or wear.[vii] One of the experts interviewed suggested that one way to make decisions was to replace individual choices with all-encompassing principles that do the work for you. If you create and honor rules, for example, you can better assess risks, mitigate biases and act. The year ahead, as with any new year, will bring both challenges and opportunities. How we meet these challenges will impact, in our opinion, our ability to capitalize on the opportunities and manage the challenges we are presented in the market. Here is what we suggest.
Avoid looking in the rear-view mirror. While the newspaper may state that the S&P 500 has returned 8.4% each year since its inception in 1957 to December 31, 2020[viii], no one should put 100% of their retirement savings into the S&P 500. If one did, those savings could be exposed to potentially swift, unexpected losses. We explored this exposure in Risk Happens Fast. So, why would we consider the S&P 500 a benchmark for what your real-world, diversified portfolios have done? We should not.
Search for the best potential investments going forward, not what worked in the past. CNBC’s twice yearly “Millionaire Survey” discussed the inherent risk of buying and holding onto large technology stocks (FANGMAN) – “They [investors] haven’t got the guts to pull out.”[ix] For example, investors continue to ignore Apple’s missing earnings guidance in its recent quarter given the prospect of reaching a $3 trillion market capitalization. And the Apple car? Bulls have been trotting that one out since 2014. We’ve seen how a drawdown in technology stocks played out in 2000, and shared our thinking in What If the Bubble Bursts?
Pay more attention to what is going on beneath the surface. In December, Bloomberg ran a story when the S&P 500 closed at a 52-week high. It highlighted that 334 companies trading on the New York Stock Exchange hit a 52-week low, more than double the amount of those hitting 52-week highs on that same day[x]. The last time that the market experienced this Market Internal[xi] was just prior to the tech bubble collapse more than twenty years ago. We discussed other internals, as well – poor liquidity and retail trader’s share of stock market volume in Inflation and Fragility.
Consider that we are likely in uncharted territory. Over the last decade, the Federal Reserve has tried multiple times to end its various “money printing” programs, but it didn’t take long before a market downdraft caused a “U-turn.” This time, the difference is that the Fed is perceived to have lost control of inflation. On January 5, Federal Reserve meeting minutes[xii] indicated officials are considering an earlier timetable for shrinking their $9 trillion balance sheet – that’s not just raising rates or tapering buying (“printing”), that’s completely taking away the liquidity punchbowl. In our opinion, the most prudent prescription is The Return of Active Portfolio Management.
The Wall Street Journal article mentioned above concludes with advice from Annie Duke, a former professional poker player and author of How to Decide. She reminds us that many decisions can be tweaked later but we must ask, “What might be the early warning signs of an unpleasant outcome?” Active risk balanced investing can help identify potential problems, guide us through a volatile market landscape and help us in managing the outcomes.
In December, we presented our unique perspective on the current investment and economic environment via a small group gathering of select clients and prospects. To listen to the recording of our presentation, please reach out to your Wealth Manager or Brian Lasher <blasher@cigcapitaladvisors.com>.
You can find more information on this and related topics at https://cigcapitaladvisors.com/category/asset-management/.
As we enter 2022, we remain focused as always on ensuring that client portfolios are aligned with their planning objectives and long-term goals.
This report was prepared by CIG Asset Management and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward-looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
[i] These indices shown are broad-based and used for illustrative purposes only. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, expressed or implied is made regarding future returns. The Blended Growth Benchmark is a blend of 60% Russell 3000 Index, 25% MSCI All-Country World Index excluding the US ETF and 15% iShares Core U.S. Aggregate Bond ETF. The Blended Balanced Benchmark is a blend of 45% Russell 3000 Index, 10% MSCI All-Country World Index excluding the US ETF and 45% iShares Core U.S. Aggregate Bond ETF.
Sources: CIG, Hedge Fund Research, Yahoo Finance and Morningstar
[ii] https://www.msci.com/end-of-day-data-search
[iii] Morningstar: S&P 500 TR USD
[iv] https://www.msci.com/end-of-day-data-search
[v] Morningstar: Bloomberg US Agg Bond TR USD
[vi] finance.yahoo.com
[vii] https://www.wsj.com/articles/decision-fatigue-is-real-heres-how-to-beat-it-this-year-11641186063
[viii] https://www.wsj.com/articles/wall-street-bets-s-p-500-will-say-goodbye-to-outsize-stock-gains-in-2022-11640514607
[ix] https://www.cnbc.com/2021/12/28/millionaires-want-to-own-a-little-less-of-everything-bubble-next-year.html
[x] https://www.bloomberg.com/news/articles/2021-12-27/it-s-december-1999-based-on-the-nyse-shares-touching-new-lows
[xi] Market internals are a series of indicators that traders can use to get a sense of where the market is heading.
[xii] https://www.federalreserve.gov/monetarypolicy/files/fomcminutes20211215.pdf
Chess image: Carlos Esteves/Unsplash
Stock exchange board image: Pixabay/Pexels
CIG Asset Management Review: What If the Bubble Bursts?
Summary:
* US Equities surge while international equities lag
* Tesla and the growing stock market bubble
* What happens when a bubble eventually bursts?
Commentary:
The S&P 500 index gained +7.01% in October, bouncing back from its September decline and closing at an all-time high.[i] Overseas markets were up, but much less so versus the U.S., with the MSCI EAFE net index up +2.38% and the MSCI Emerging markets up +0.93%.[ii] Fixed income did not offer much in the way of returns for the month with the Bloomberg US Agg Bond Index falling -0.03%.[iii] Crude oil added to September’s gains, increasing +11.38% and closing at $83.57/barrel, a 7-year high[iv], despite global growth forecasts being revised lower.[v]
We continue to be concerned that U.S. equity markets may be in a bubble. Tesla, for example, gained +44% in October.[vi] In just 2 weeks, the company gained $310 billion in market capitalization. That gain is more than the market cap of 482 companies in the S&P 500 Index.[vii] Tesla’s current market cap is over $1.2 trillion, greater than the market capitalization of Toyota, VW, Daimler, GM, Ford, BMW, Honda and Hyundai combined![viii] Tesla isn’t the only stock that may currently be overvalued.
When we look at the market using several different measuring sticks, we find more extreme valuations. The Buffet Ratio, which we have talked about before and measures total market capitalization to U.S. GDP, is at 215.5%, double the 107.5% seen in May 2007, right before the Great Financial Crisis and 50% higher than the March 2000 dot com boom high of 142.9%.[ix] The current Shiller PE ratio for the S&P 500 is 40.09. The only other time that we saw the market trade at such a high price to earnings ratio was during the dot com bubble, when the S&P 500 traded above 40x from January 1999 through September 2000.[x] No one can predict with any degree of certainty just how much larger the current bubble can get or how long it may last, but we must take note of what has happened when previous bubbles finally burst.
How bad can things get when a stock market bubble bursts? During what was, prior to now, the largest stock market bubble, the dot com boom, the NASDAQ 100 hit its then all-time closing high on March 27, 2000. The broader market, as measured by the S&P 500, did not reach the bottom until October 9, 2002 with a peak to trough loss of -49%.[xi] As illustrated in the chart below, a lot of money was lost in different sectors and factors during this period while gold and consumer staples, which clients currently have exposure to, gained.
An investor would have to be extremely unlucky to buy at the top and sell at the bottom. What do returns look like if you bought one year before the top, on March 27, 1999 and held on for three years after the bottom, October 9, 2005? The S&P 500 was down -6.8%, and the NASDAQ 100 lost -24.7%. Notably, gold, energy, financials, industrials, utilities, materials, and value stocks were up.
As seen in the chart below, it took just over 7 years for the S&P 500 to get back to its March 27, 2000 high (from point (1) to point (2)). Just months after the market had recovered, the Great Financial Crisis began, and the market did not bottom out again until March of 2009. The S&P 500 did not fully recover until March 4, 2013 (point (3)). If you bought the S&P 500 on March 27, 2000, you had a very brief amount of time in 2007 to get out even, or you had to wait until March 2013 to recoup your losses, just under 13 years after the dot com peak![xii] “Do you have enough time?” was the title of a recent Asset Management Insight.
Source: barchart.com
During the dot com bubble in 1999 to 2000, many investors believed that traditional valuation metrics such as price to earnings and price to sales no longer mattered. “This time is different” was a phrase often used. During the pre-Great Financial Crisis housing bubble many believed again, “this time is different”, no money down mortgages and other financial innovations would forever change the way assets were valued, and residential real estate has never gone down on a country-wide basis. Ultimately, traditional valuation methods won out and both bubbles burst.
History has taught us to be very careful. We continue to stay the course of risk balanced investing – take enough risk to reach your goals but not much more. We remain focused on striking the right aggressiveness versus defensiveness in client portfolios given the evolving uncertainty in the markets and the economy.
This report was prepared by CIG Asset Management and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward-looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
[i] Morningstar: S&P 500 TR USD
[ii] https://www.msci.com/end-of-day-data-search
[iii] Morningstar: Bloomberg US Agg Bond TR USD
[iv] Finance.yahoo.com
[v] IMF, FactSet
[vi] Finance.yahoo.com
[vii] @zerohedge 10/29/2021
[viii] Finbox 10/25/2021, https://twitter.com/JamesEagle17/status/1452950604662419464
[ix] https://www.gurufocus.com/stock-market-valuations.php
[x] https://www.multpl.com/shiller-pe, as of 11/08/2021
[xi] CIG calculated using data from finance.yahoo.com
[xii] Data from barchart.com
image: iStock by Getty Images
CIG Asset Management Review: Market Unknowns
Summary:
* S&P 500 declined for the first month since January 2021
* Increasing economic and geopolitical uncertainty
* Market volatility rising
* Do we know?
Commentary:
The S&P 500 index fell -4.65% in September, its first monthly decline since January 2021 and the worst monthly decline since March 2020.[i] In overseas markets, the MSCI EAFE net index declined -3.19% and the MSCI Emerging markets fell -4.25%.[ii] Chinese stocks, represented by the SSE Composite Index, gained +0.68%[iii] and was one of the very few equity markets with positive performance for the month. Fixed income did not offer much protection against the decline in stocks as the Bloomberg US Agg Bond Index fell -0.87%.[iv]
What changed in the month of September? Economic and geopolitical uncertainty appears to have increased.
On September 3rd, the Federal Reserve Bank of New York issued a suspension notification for Nowcast, its official forecast for growth in the U.S. Gross Domestic Product (the total value of goods produced and services provided during one year) stating the following, “The uncertainty around the pandemic and the consequent volatility in the data have posed a number of challenges to the Nowcast model. Therefore, we have decided to suspend the publication of the Nowcast while we continue to work on methodological improvements to better address these challenges.”[v] Upon hearing this announcement, we were reminded of Yogi Berra, the great baseball player and sometimes philosopher who once said “It’s tough to make predictions, especially about the future.”[vi]
Later in the month, Federal Reserve Chairman Powell held a very unconvincing press conference after the FOMC meeting on September 22. Regarding inflation, Powell said the current inflation is “a very modest overshoot. You’re looking at 2.2[%] and 2.1[%], you know, two years and three years out. These are very, very – I don’t think that households are going to, you know, notice a couple of tenths of an overshoot.”[vii] Did investors notice on September 23 that the National Association of Realtors’ August existing homes sales report showed that the median sales price of existing single-family homes in the U.S. rose +14.9% year over year to $356,700?[viii] Did investors notice that the price of U.S. natural gas hit a 12-year high of 6.325 as of October 5, 2021?[ix]
Chairman Powell also said the current inflation is a “reflection of bottlenecks and shortages that…seem to be going to be with us at least for a few more months and perhaps into next year.” As of September 24, there were 600 large container ships waiting to dock at ports in Asia, Europe, and North America. In June there was an average 14-hour delay of ships arriving to Canadian and U.S. ports. Now the delay is almost 10 days![x] There is not much in the way of historical data regarding the current world-wide supply chain issues. But, as the Drewry World Container Index chart below shows, shipping prices have more than doubled year to date.
Source: Drewry.co.uk
Actionable idea: buy your year-end holiday gifts early and locally.
To make things worse, tensions with China are growing and Taiwan is extremely important to the world economy. Semiconductor companies in Taiwan generated almost 65% of global revenues from outsourced chip manufacturing in the first quarter of 2021. Taiwan Semiconductor (TSMC) alone accounted for 56% of global revenues. Most of the 1.4 billion smartphone processors are made by TSMC.[xi] On Friday, October 1, as China celebrated the National Day of the People’s Republic of China, the People’s Liberation Army (PLA) flew 38 warplanes into Taiwan’s air defense identification zone (ADIZ). October 2 saw 39 planes and on October 3, 16 more planes entered the ADIZ. On October 3 the United States State Department issued a statement urging Beijing to “cease its military, diplomatic, and economic pressure and coercion against Taiwan.” China responded on Monday, October 4, by sending a record 56 Chinese warplanes into the ADIZ.
We do not know i) how much GDP will grow next year, ii) whether supply chain issues will abate soon, or iii) if China and the U.S. will lower tensions. This economic and geopolitical uncertainty appears to be contributing to stock market volatility. Historically we have observed that usually when volatility increases by a large margin, stock markets head lower. In market terms, it has been a long while since we had such volatility.
Meanwhile equity markets are near record highs and record valuations. So, we continue to stay the course of risk balanced investing – take enough risk to reach your goals but not much more. We remain focused on striking the right aggressiveness versus defensiveness in client portfolios given the evolving uncertainty in the markets and the economy.
This report was prepared by CIG Asset Management and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward-looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
[i] Morningstar: S&P 500 TR USD
[ii] https://www.msci.com/end-of-day-data-search
[iii] Finance.yahoo.com
[iv] Morningstar: Bloomberg US Agg Bond TR USD
[v] https://www.newyorkfed.org/research/policy/nowcast
[vi] https://www.economist.com/books-and-arts/2007/05/31/the-perils-of-prediction
[vii] Federalreserve.gov Transcript of Chair Powell’s Press Conference, September 22, 2021
[viii] https://www.nar.realtor/blogs/economists-outlook?page=1
[ix] https://twitter.com/Schuldensuehner/status/1445489330865115152/photo/1. Futures price.
[x] https://www.wsj.com/articles/germanys-christmas-king-gets-caught-up-in-shipping-chaos-11632475801
[xi] https://www.wsj.com/articles/the-world-relies-on-one-chip-maker-in-taiwan-leaving-everyone-vulnerable-11624075400
Container ship photo: Ian Taylor/Unsplash
Bottle photo: Bobby Donald/Unsplash
CIG Capital Advisors Market Update Video: September and Volatility
In September, the S&P 500 TR Index had its worst month since March 2020[i]. Will volatility continue to head higher?
Brian Lasher and Eric Pratt of CIG Asset Management give a quick posting on the markets.
Please click on the 3-minute market update video attached below.
This report was prepared by CIG Asset Management and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward-looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
[i] Morningstar: S&P 500 TR USD
CIG Capital Advisors Market Update: Risk Happens Fast
CIG’s inaugural 3-minute market update is attached. This soon-to-be regular conversation between Brian Lasher and Eric T. Pratt of CIG Asset Management focuses on an important aspect of the current stock market environment. If you have questions post viewing, please do not hesitate to contact your CIG wealth manager.
For more information on this 3-minute market update, please click here.
This report was prepared by CIG Asset Management and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward-looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
CIG Asset Management Review: Risk Happens Fast
Summary:
* S&P 500 advances for seventh month in a row
* Strong corporate profits and the Fed’s not tapering yet
* A long time without a 5% pullback
Commentary:
The S&P 500 index rose for the seventh month in a row, gaining +3.0% in August[i]. Growth stocks continued July’s outperformance over value stocks with the Russell 1000 Growth Index up +3.7%[ii] while the Russell 1000 Value Index advanced +2.0%[iii] last month. Small-capitalization stocks as measured by the Russell 2000 Index gained +2.2%[iv]. Overseas, MSCI Emerging Markets led, rising +2.4% while developed stock markets, measured by MSCI EAFE net, gained +1.5%[v]. Chinese stocks, as represented by the SSE Composite Index, recovered a portion of July’s -5.4% drop, gaining +4.3% in August[vi].
On August 26, the U.S. Bureau of Economic Analysis (BEA) released its updated estimate for second quarter 2021 gross domestic product. The data in the report was encouraging, showing the economy grew at a +6.6% annual growth rate. Delving deeper into the report, second quarter growth in corporate profits was +9.2% which is even better than the +5.1% growth seen in the first quarter. Domestic corporate profits are now above their 2019 pre-pandemic peak.[vii] Historically, strong growth in profits leads to increased capital spending, wage increases and job creation.
Federal Reserve Chairman Jerome Powell spoke at the virtual Jackson Hole symposium on August 27. Investors were looking for a signal for when the Federal Reserve would begin tapering the purchase of at least $120 billion per month of bonds and they appeared to be encouraged by his comments, inferring that a taper was not imminent. Powell said, “We have much ground to cover to reach maximum employment,” and “The timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest rate liftoff, for which we have articulated a different and substantially more stringent test.” Chairman Powell also added, “Today, with substantial slack remaining in the labor market and the pandemic continuing, such a mistake could be particularly harmful,” and “We know that extended periods of unemployment can mean lasting harm to workers and to the productive capacity of the economy.” [viii]
Despite the encouraging growth and a dovish Federal Reserve, we started to suspect that it has been quite a while since we have seen even a minor pullback which is usually necessary for market “health.” Exploring the data, we found that such suspicions were correct as seen in the chart below.
We haven’t had a 5% drop in the S&P 500 since the above chart was published on August 16, 2021. The S&P 500 has now gone 210 trading days without a 5% pull-back.[ix] During the past 50 years, there have only been five longer streaks than the one we currently enjoy. During such streaks, investors can become complacent, but risk happens fast.
As seen in the table below, those five streaks all ended swiftly and out of the blue, with drawdowns, or losses, in the S&P 500 ranging from -7.0% to -9.2% and the NASDAQ -7.9% to -12.0%. Volmaggedon in early 2018 saw a spike in volatility that caused ETFs holding leveraged bets on calm markets to lose most of their value.[x] In 2015 China suddenly devalued its currency, the yuan.[xi] The Great Bond Massacre in 1994 was set into motion when Federal Reserve Chairman Alan Greenspan suddenly started to raise short term interest rates for the first time in five years.[xii] July 1996 marked the end of a 5½ year long bull market[xiii], and on July 7, 1986, after an extended Fourth of July weekend, Robert R. Prechter Jr. told his investment newsletter subscribers to “sell everything right away.”[xiv] Interestingly enough, even though Prechter’s 1986 call was short-lived, he nailed it on October 5,1987 when he told subscribers to get out just days before the October 19, 1987 crash.[xv]
Drawdown calculated using data from finance.yahoo.com
Another interesting statistic came to our attention for last month’s S&P 500 performance. The S&P 500 made 11 new intraday all-time highs in August 2021, tying the record set in 1929 – a year that did not turn out well. The next best August on record? August 1987 saw 10 intraday all-time highs.[xvi] As we recall, the October 1987 market crash was brutal.
The current bull market may continue, with the Federal Reserve delaying a taper in bond purchases but given its historic run we may be overdue for at least a small drawdown. Equity valuations are in the stratosphere. Current price to earnings ratio on the S&P 500 is 35.36, more than double the historical average of 15.95.[xvii] Current total U.S. market cap is 207.5% of U.S. GDP. At the peak of the dot com boom, this ratio was 142%.[xviii] How extreme are some valuations? On August 27, electric truck company Rivian filed for an IPO, seeking an $80 billion valuation. Elon Musk, whose investment in Tesla has made him the world’s second richest man with a net worth around $190 billion as of this writing[xix], commented on this news, tweeting on August 28, “I thought 1999 was peak insanity, but 2021 is 1000% more insane!” [xx]
During this period of record equity markets and record valuations we continue to stay the course of risk balanced investing – take enough risk to reach your goals but not much more. We continue to focus on striking the right aggressiveness versus defensiveness in client portfolios given the evolving positives and negatives in the markets and the economy.
This report was prepared by CIG Asset Management and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward-looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
[i] Morningstar: S&P 500 TR USD
[ii] Morningstar: Russell 1000 Growth TR USD
[iii] Morningstar: Russell 1000 Value TR USD
[iv] Russell 2000 TR USD
[v] https://www.msci.com/end-of-day-data-search
[vi] finance.yahoo.com
[vii] https://fred.stlouisfed.org/series/A053RC1Q027SBEA
[viii] https://www.cnbc.com/2021/08/27/powell-sees-taper-by-the-end-of-the-year-but-says-theres-much-ground-to-cover-before-rate-hikes.html
[ix] Data from finance.yahoo.com
[x] https://www.cfainstitute.org/en/research/financial-analysts-journal/2021/volmageddon-failure-short-volatility-products
[xi] https://www.investopedia.com/trading/chinese-devaluation-yuan/
[xii] https://fortune.com/2013/02/03/the-great-bond-massacre-fortune-1994/
[xiii] https://www.latimes.com/archives/la-xpm-1996-07-16-mn-24708-story.html
[xiv] https://www.washingtonpost.com/archive/business/1989/04/23/where-have-all-the-gurus-gone/853f8ead-ae7a-4364-8315-0bc0439e01dc/
[xv] https://www.nytimes.com/2007/10/13/business/13speculate.html
[xvi] Carter Braxton Worth, August 27, 2021 @CarterBWorth
[xvii] https://www.multpl.com/s-p-500-pe-ratio
[xviii] https://www.gurufocus.com/stock-market-valuations.php
[xix] https://www.forbes.com/real-time-billionaires/#471cc9893d78
[xx] https://twitter.com/elonmusk/status/1431499453618327554