Asset Management

FOR IMMEDIATE RELEASE:

June 28, 2022—Southfield, MI—CIG Capital Advisors (CIG), a leading independent wealth management and business advisory services firm, has obtained an independent performance certification by ACA Group’s Performance Services Division for its flagship strategies for the period from August 1, 2018 through December 31, 2021. The certification provides reasonable assurance that CIG’s performance for its flagship strategies has been calculated consistent with its policies and procedures which reflect industry best practices. A copy of the certification reports is available upon request.

Brian Lasher, Head of Business Advisory, Wealth and Investment Management, said, “I believe few advisory firms elect to undertake performance certifications given what is involved, so we are incredibly proud of our team for reaching another milestone in our continual pursuit of delivering an exceptional client experience. It was a long, involved process and our work had to be meticulous. Our clients benefit from this investment of our time and effort, and it is ultimately for this reason that we undertook this process.”

Since its founding, CIG has remained dedicated to providing successful medical professionals and entrepreneurs, as well as senior executives from other fields, with wealth and investment management, and business advisory solutions tailored to support their increasingly complex financial lives—enabling them to focus on what is most important and “elevate their success”. CIG views obtaining performance certification as part of the firm’s broader focus on consistently delivering an exceptional client experience—a transparent view into how performance is calculated. Going forward, performance certifications will be conducted on an annual basis, giving clients important insights into the integrity, scope and uniformity of performance, enabling direct comparability of the firm’s track record to better inform their decision-making.

Eric T. Pratt, Head of Research & Trade Execution, said, “This was a significant project for a firm like ours and highlights our commitment to ongoing innovation and embracing industry best practices. We recognize the importance of continually earning our clients’ trust and confidence, and our performance certification works to strengthen and deepen the relationships we share with clients by providing transparency.”

About CIG Capital Advisors

Founded in 1997, CIG Capital Advisors (CIG) is a wealth management and business advisory firm serving high-net-worth clients—enabling these individuals and families to focus on what is most important to them. CIG tailors its delivery of service based on the situation, goals and aspirations of each client it works with. The firm seeks to provide exceptional client benefit through its independent, objective, and transparent strategic thinking and implementations. CIG is headquartered in Southfield, MI. To learn more, please visit cigcapitaladvisors.com.

About ACA Group, Performance Services Division

ACA is the largest team in the world providing GIPS standards verification and related services. Their team—comprised of more than 60 professionals with extensive performance experience—provides GIPS standards verification and consulting services to investment managers around the globe. ACA offers a variety of performance solutions that aid firms with performance calculation methodology reviews and assessment of control and oversight framework. ACA provides an independent third-party review and examination of input data, methodologies, and assumptions used to support an investment performance track record. This solution is designed to bring credibility to the historical track record by examining your adherence to disclosed methodologies and results in a tailored performance certification report that may be shared with the marketplace. To learn more, please visit acaglobal.com/our-solutions/performance-services.

Image: Conny Schneider/Unsplash

In the 1999 movie The Matrix, Morpheus offers the protagonist Neo the choice between a red pill or blue pill. Morpheus says, “You take the blue pill…the story ends, you wake up in your bed and believe whatever you want to believe. You take the red pill…you stay in Wonderland, and I show you how deep the rabbit hole goes.”[x] Neo is offered a choice between continuing to live his life in contented ignorance or learning an unsettling, life-changing truth.

This type of choice was explored thousands of years earlier by Plato in his Allegory of the Cave. In it, a conversation between Plato’s brother Glaucon and Socrates describes a group of people who have lived their entire life chained in a cave facing a blank wall. These people watch shadows projected on the wall and believe the shadows are the only things that are real. What happens when one is freed from the cave to face reality; how would they cope; would they choose to return to the cave? The story goes on to assume a freed prisoner goes back to the cave to free the others so they too could learn the truth about the real world. Socrates and Glaucon conclude the other prisoners would likely kill anyone who tried to free them; that they would not want to leave the security and comfort of the world they perceived to be real.[xi]

It feels like markets have been living in the same contented ignorance as the aforementioned people in the cave and ignoring valuations. The Buffet Ratio, which is the total market capitalization of U.S. stocks divided by the Gross Domestic Product of the economy, hit a dizzying 202% on December 30, 2021. This was far more than the 143% seen back in March 2000 at the peak of the dot-com boom. While the recent sell-off in the markets has brought the Buffet Ratio back down to 170% as of April 30, 2022, it remains above the dot-com peak.[xii]

After a decade, it appears that some market participants seem to have begun stepping out of the cave to see reality. As of April 30, 2022, the S&P was down -14.3% from its all-time high hit on January 4, 2022, and the NASDAQ 100 was down -23.3% from its peak set back on November 22, 2021.[xiii] A bear market is defined as a -20% correction from the high. Surely with the NASDAQ 100 trading in bear market territory the worst is behind us, right? Not necessarily. In August 2020, we reminded investors in A Reminiscence of a Bubble Past[xiv] how the S&P 500 lost 50% and the NASDAQ lost 78% from the March 2000 peak to the October 2002 low.[xv]

As we discussed last October in What if the Bubble Bursts?[xvi], the market can trade lower for longer. It took just under 13 years for the NASDAQ 100 to recoup its losses after the dot-com bubble burst. Many investors are likely not comfortable with a 13-year time horizon where they simply just climb back to even. In April 2021, we asked the questions, Do you have enough time? Why is this time different?[xvii] and discussed how the average duration for a balanced portfolio was up to 43 years, 2.5 times longer than the historical average. The average duration corresponds to the time that it would take for investors to recoup their investment if they only received dividends and interest and never sold. The S&P 500 is +4% higher as of April 30, 2022 than it was on March 31, 2021, when the average duration was calculated.[xviii]

We are not alone in thinking that the market has become highly speculative. At the Berkshire Hathaway annual meeting on April 30th, Warren Buffet said U.S. markets have become “almost totally a casino,” and “overwhelmingly large companies in America, they became poker chips and people were buying and selling like three-day calls, two-day calls.”[xix]

Of course, markets – and the investors who participate in them – always operate across a broad range of risk with wise investment at one end and the “gambling” described above by Mr. Buffet at the other. The term speculation describes where one is on that range. Buying stocks with a “margin of safety” to protect the investment’s value in adverse conditions, like Mr. Buffett does, is considered less speculative, while uninformed or knee-jerk investments, such as short-term call option buying, are more speculative. Gambling involves the deliberate creation of new risks for the sake of diversion. Today, many investors see “investing” as a form of entertainment.[xx]

Assessing where the market is and where our clients’ portfolios should be along the range discussed above is among our most important focuses at CIG. Of course, we avoid gambling and attempt to be at the less speculative and more prudent side. Given our holistic approach and utilizing active management, The Ride[xxi] can be smoother, and clients may sleep better at night during periods like we are experiencing now.

Charles McKay, the author of Extraordinary Popular Delusions and the Madness of Crowds (1841), highlights that “Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one” in speculative manias.[xxii] Recently, Bank of America’s Michael Hartnett discussed his Capitulation Indicators checklist suggesting that while the recovery process has begun, we have a fair way to go. For every $100 coming into the market during this cycle, only $3 has gone out. In past bear markets the average was $50 going out. Additionally, only 0.2% of industry-wide assets invested have moved out of the market versus 3% to 6% during prior market lows.[xxiii]

For those who would opt for the blue pill, we would welcome the opportunity to learn about where you think the market is and how your portfolio is positioned to weather the process of market capitulation ahead. We saw many bear market rallies during the dot-com bust, to only see the market grind lower for two more years before finally hitting rock-bottom. As of April 30th of this year, the Growth Benchmark is down -12% YTD, something not seen since the Great Financial Crisis.[xxiv]

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.

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.