Asset Management

CIG Asset Management Review: Outlook 2021

Summary:

• From 2009 to 2018, the structural bull market conditioned many investors to believe that despite short-term pullbacks, the market will always head higher over the intermediate and long term thereby rewarding dip buying and passive investing.
• From 2009 to 2018, the structural bull market conditioned many investors to believe that despite short-term pullbacks, the market will always head higher over the intermediate and long term thereby rewarding dip buying and passive investing.
• Now, the markets are historically expensive, fragile, and disconnected from the real economy. A 60/40 Static Allocation portfolio⁴ has a 12-year projected return of -2.2%, the lowest in U.S. history[i]. CIG’s aim is to exceed client’s goals, which are higher, in a thoughtful way.

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We held off providing our 2021 Outlook until now because of several known unknowns (e.g., the election) and some unknown unknowns (e.g., GameStop)[1]. With some resolution of these unknowns, we offer a historical perspective, an outlook, and a viewpoint on success.

A Historical Return Perspective:

We first need to look at the last four major corrections in the US stock market, as measured by the S&P 500 Index. The last two major corrections, the Fed Taper Tantrum and most recently the Covid-19 sell-off, have seen markets bounce back very quickly as governments added trillions of dollars in liquidity by adding trillions of dollars of debt and running an enormous trillion dollar budget deficit. Yes, over time stock markets go higher, but we will inevitably see corrections in future years. Will the next major market sell-off look similar to the most recent two, where markets rebound quickly, or will the experience be more like the Dot com and Great Financial Crisis sell-offs where it took years to recover losses? An investor who retired in March of 2000 or October 2007 likely suffered their share of sleepless nights as the stock market ground lower and took years to recover.[2]

Prior to October 2018, the market was supported by the Fed’s quantitative easing (i.e., money printing) and zero interest rate polices, companies buying back their shares, and some economic growth.

From 2009 to 2018, a 60/40 Static Allocation (60% S&P 500 Total Return Index / 40% Bloomberg Barclay Aggregate Bond Index) returned approximately 10.0%[3] on an annualized basis while an index approximating active management[4] returned about 4.4%[5]on an annualized basis. Please see the chart below showing the daily performance of a hypothetical $10,000 investment in the 60/40 Static Allocation, the Active Management Index, and the S&P 500 Index.

Source: Morningstar

That structural bull market ended in October 2018 when the Fed tried to raise interest rates and corporate share buybacks no longer worked. This event is known as the “Taper Tantrum”. Since
October 2018, it has been a much bumpier ride. Still, the 60/40 Static Allocation has returned 12.7%⁴ on an annualized basis while the gap has closed between it and the “Active Management” index’s⁵ annualized return of 9.0%⁶. Please see the chart below tracking this performance over this period.

Source: Morningstar

While we have come through this period, one estimate of average annual nominal total returns by John Hussman, a prominent market strategist, for a 60/40 static allocation has a 12-year projected return of -2.2%, the lowest in U.S. history, including the extreme low associated with the 1929
market peak¹. Even if the markets remain at peak valuations and pre-pandemic margins are sustained into the future, the upside range of that forecast is about 3%¹.

Source: Hussman Strategic Advisors

The Outlook:

The smooth returns from 2008 to 2018 were aided by governments, businesses, and households taking on more and more debt. Companies started issuing more bonds in the late 1990’s, households took on too much debt in 2003-2008 to buy houses (remember the foreclosure crisis), and finally the US government post the 2008 crisis (all shown in the red line in the chart below) – all to maintain economic growth. When you have a large amount of debt, one cannot afford high interest rates and the Fed kept rates very low (green line below). The Fed also increased the money supply (blue line
below). Investors were conditioned to buy the dip (BTD) and that there were no alternatives (TINA) to stocks. Both instilled a fear of missing out (FOMO).

Source: Federal Reserve of St. Louis[6]

The S&P 500 broke its 2009 uptrend in December 2018. The Fed reacted by cutting interest rates and they started buying securities in the market. This led to not only to a massive rally in 2019, but easy money also produced the one of the greatest investment traps of all time which all came to a dramatic end in March 2020 when COVID hit the world economy and the S&P 500 Index declined by 34%. The structural problems that started long ago still have not been addressed, including the lack of corporate profit growth (the green line on this graph). Now we are left with potentially ever widening extremes in the market as shown below.

Source: Federal Reserve of St. Louis[7]

The stock market is back at all-time highs and is expensive on a valuation basis. In past similar
circumstances, a 60/40 Static Allocation likely did not meet your investment goals. From 12/31/1999 to 12/31/2012, the Static Allocation returned just 3.8%⁴ on an annualized basis versus 6.5%⁶ for “Active Management.⁵” In 1999, the market was similarly expensive and driven by a handful of
technology companies. A recent Gavekal Research report⁹ showed that if you had bought the 10 large-cap technology darlings back in January 2000 – after reinvesting all the dividends, you would have been left two decades later with one winner Microsoft – and a 1.4% compounded return[8].
Over the shorter period to 2012, an investor would have needed to diversify into other sectors and bonds to produce the low single digits return above.

Source: Morningstar

Central Banks and National governments seemed to have thrown everything that they could at the crash starting at the end of March 2020. It has made people chase distorted asset prices since April 2020, given a fear of missing out. Markets now appear completely disconnected from the economy – just look around. One in 8 Americans, more than 27 million adults, reported they sometimes or often didn’t have enough food to eat in the past week, according to Census Bureau survey data collected in late November and early December[9].

Unemployment skyrocketed in 2Q 2020 and continuing unemployment claims have remained high (see the red area in the chart below while the S&P 500 continues to rise).

Source: CIG using data from Yahoo Finance and the U.S. Department of Labor[10]

In our view, either the economy picks up and unemployment moderates or stocks decline. Economic pick-up suggests inflation while stock declines may indicate a deflationary event like more COVID. Active Management seeks to avoid risk to your financial plan while a static allocation to stocks could mean some sleepless nights. How do we do that: a proprietary volatility signal to proactively add or subtract risk; extensive market technical analysis on indices and individual securities; a consultant who uses Natural Language Processing (NPL) on media sources  to understand investor Zeitgeist; and value-added positions featuring disparities in value by asset class, sector and geography. Our Investment Committee meets bi-weekly to discuss these inputs, model potential outcomes, and agree on future actions.

From our Investment Committee discussion, here are the extremes that are possible given the excesses of the current market. Below is the inflation-adjusted S&P 500 Index (SPX, orange line) and Dow Jones Industrial Average (DJIA, blue) from 1958 to 1995. From the 1968 peak to the 1982 low, the SPX lost 65% of its inflation-adjusted value. It was not until 1993 that the inflation-adjusted SPX exceeded its 1968 peak! 1995 for the DJIA!

Source: Bianco Research LLC

Below is the return of the Japanese stock market which experienced a long-term deflationary environment. Despite the stock market benefiting from the Bank of Japan’s huge stimulus drive, in which it has bought exchange traded funds (ETFs) and its monetary easing to drive down the yen, helping exporters, the annualized return is 1.30%[11] from 12/31/89 to 2/13/21. After 30 years, this market is only now reaching new highs.

Source: Morningstar

We are always striving for a balanced view. From these discussions, striking the right aggressiveness
versus defensiveness incorporates the possibility that corporate profits could boom in 2021 based on some significant lifts to economic activity:

1. Massive global monetary stimulus.
2. Vaccine inspired economic recovery.
3. The housing boom and higher consumer net
   worth.
4. A declining US Dollar to support
   multi-national companies.

Of course, risks to the outlook include:

1. Inflation accelerates, bond yields surge, and the Fed hints at tapering sooner than expected.
2. COVID gets out of control, vaccinations hit some bumps in the road, and the global economy is impacted, even China.

Success

Due to the above, now more important than ever is to have a professional fiduciary looking out with you for your monetary interest. It is so easy at this stage, to miss the disconnect between the real-world economy and the stock market and be tempted to chase stock valuations that as a whole,
are trading near all-time highs based on many historical measures. One could follow narratives like, “stocks only go up over the long term” while listening to CNBC and ever bullish Wall Street strategists and act against your best interest. The recent GameStop affair is the best example. If you are investing
based on this information, likely your maximum regret would be not participating in the last leg up in these markets.

In contrast, we’ve talked a lot about risk balancing. In practical terms, we do not want to fight the Federal Reserve, run for the hills, or make judgments on how others make money. Rather it is important to be in the market and have the proper intellectual and emotional distance to achieve client goals while avoiding scenarios and regimes that can damage your long-term success. We believe your true maximum regret would be not being able to retire, donate or spend when you choose.

In 2021, minimizing this maximum regret is of greatest importance to us at CIG. In our view, either the economy picks up or stocks decline. Economic pick-up suggests inflation while stock declines portend a deflationary event like more COVID. Our preference is for better economic growth without excess inflation. Continuing our theme for 2020 – “The Ride”[12], we will keep on actively managing the portfolios and applying the risk balancing framework to help clients achieve their goals and sleep well at night.

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[1] https://www.hussmanfunds.com/comment/mc210201/

[2] https://en.wikipedia.org/wiki/There_are_known_knowns

[3] https://finance.yahoo.com/quote/%5EGSPC?p=%5EGSPC

[4] Source: Morningstar as calculated by CIG

[5] https://lab.credit-suisse.com/#/en/index/CSLAB/CSLAB/overview

[6] Source: Morningstar

[7] https://fred.stlouisfed.org/graph/?g=B6jj

[8] https://fred.stlouisfed.org/graph/?g=B6mv

[9] Gavekal Research/ Macrobond

[10] https://www.washingtonpost.com/business/2020/12/31/stock-market-record-2020/

[11] https://www.dol.gov/sites/dolgov/files/OPA/newsreleases/ui-claims/20210261.pdf

[12] Source: Morningstar

[13] https://cigcapitaladvisors.com/june-2020-asset-management-update-the-ride/

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 Update December 2020: Farewell 2020

Summary:

• Global stocks built on November’s gains notwithstanding lackluster economic news
• Two large IPOs reflect the extent of FOMO (Fear of Missing Out)
• Positives: The coronavirus vaccine rollout, U.S. stimulus bill finally passed and Great Britain reached Brexit deal

Commentary:

In December 2020, the S&P 500 Index was up +3.7%[i] while the international stocks, as measured by the MSCI EAFE Index Net, gained +4.6%. Emerging Market stocks (MSCI EM) returned +7.2%[ii]. Certain areas of the market continued November’s large gains. Small-cap stocks, represented by the Russell 2000 Index were up +8.7%[iii]. Crude oil added +7.0% to the prior month’s +26.7% gain and Gold was up +6.6%[iv].

As equity valuations continued to trade near all-time highs, U.S. economic data continues to be lackluster. The BLS November Employment Situation Summary showed a gain of only +245,000 jobs versus analysts estimated +440,000[v]. Retail sales for the month of November were down -1.1%[vi].

“Fear Of Missing Out (FOMO)” was exemplified this past month in two red hot IPOs. DoorDash gained +86% and AirBNB’s shares soared +113% on their first day of trading. There was such frenetic buying of Airbnb shares that investors mistakenly clamored to buy call options on ABB, a large European industrial company.[vii] This type of speculative activity continues in the equity markets as the Federal Reserve continues to create more liquidity. Federal Reserve Chairman Jerome Powell said, “Our guidance is outcome-based and is tied to progress toward reaching our employment and inflation goals. Thus, if progress toward our goals were to slow, the guidance would convey our intention to increase policy accommodation through a lower expected path of the federal funds rate, and a higher expected path of the balance sheet.”[viii] Investors seem to believe that the Federal Reserve will come to the rescue and provide even more liquidity if the economy slows.

Several positive events transpired regarding Covid-19. Mid-month, the Pfizer vaccine was rolled out in the United States and United Kingdom. President Trump signed a $900 billion stimulus bill to aid struggling Americans[ix]. Also on a positive note, Great Britain reached a Brexit deal with the European Union on Christmas Eve[x]. Negative events in December included Facebook being sued by the Federal Trade Commision and 48 states[xi] and Apple announcing that it was closing all of its California stores due to the rampant spread of the virus. On January 4, Prime Minister Boris Johnson announced a countrywide lockdown in the UK effective through mid-February as a mutated strain of Covid-19 hit the country hard[xii]. It remains to be seen how hard this latest shutdown action will effect the European economy.

As we start the new year, we remain focused on the big picture. The U.S. stock market continues to be overvalued and equal to over 187% of the country’s GDP[xiii]. Beyond valuation, we keep on being concerned that the markets appear to be divorced from socioeconomic reality. On Wednesday, January 6, the Dow Jones Industrial Average finished at a record high and the Russell 2000 Index was up almost 4% despite the U.S. Capital being breached and the national guard being called out.

Consequently, we continue to apply diversification and vigulent risk management in client portfolios. We endeavor to reach a balance between offense and defense positions to take just enough risk to generate attractive returns to meet client financial goals in these very uncertain times. On Christmas Eve, we added an equity holding to growth and balanced portfolios that may benefit from people working and shopping from home.

We bid the year 2020 adieu and are hopeful as we enter 2021 that vaccines prove to be effective combating the pandemic and the global economy continues to recover. We look forward to taking advantage of positive developments as 2021 progresses.

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] https://finance.yahoo.com/

[ii] https://www.msci.com/end-of-day-data-search

[iii] https://www.ftserussell.com

[iv] https://finance.yahoo.com/

[v] https://www.bls.gov/news.release/empsit.nr0.htm

[vi] https://www.census.gov/retail/marts/www/marts_current.pdf

[vii] Barron’s “From Airbnb to Tesla, It’s Starting to Feel Like 1999 All Over Again. It May End the Same Way.” 12/11/2020

[viii] https://www.cnbc.com/2020/12/16/fed-meeting-live-updates-watch-jerome-powell-speech.html

[ix] https://www.washingtonpost.com/us-policy/2020/12/27/trump-stimulus-shutdown-congress/

[x] https://fortune.com/2020/12/24/after-years-of-negotiations-the-u-k-has-finally-reached-a-christmas-eve-trade-deal-with-the-eu/

[xi] https://www.ftc.gov/news-events/press-releases/2020/12/ftc-sues-facebook-illegal-monopolization

[xii] https://www.cnn.com/2021/01/04/uk/uk-lockdown-covid-19-boris-johnson-intl/index.html

[xiii]https://www.gurufocus.com/stock-market-valuations.php

CIG Asset Management Update November 2020: Change and Balance

Summary:

• November was an extraordinary month for stocks globally.
• 0% interest rates and a 64% increase in the money supply create months of speculation, like November.
• Our most important job is to balance the amount of offensive and defensive investments in portfolios given an uncertain near-term future.

Commentary:

Positive vacine news from Pfizer, Moderna and AstraZeneca helped make November an extraordinary month for stocks globally, despite the pandemic still raging in many areas.

Last month, the S&P 500 Index was up +10.8%[i] while the international stocks, as measured by the MSCI EAFE Index Net, gained +15.5%[ii]. Emerging Market stocks (MSCI EM) returned +9.3%[iii]. The standout country returns were two long-term laggards – Spain and Brazil (as calculated by MSCI) – which both increased in the neighborhood of +30%[iv]. Some of the most beaten-down areas of the U.S. market soared in November, including small companies, energy, financials and industrials[v]. CIG’s client accounts tied to growth and balanced approaches generally had one of their best months in the last five years.

Where do we go from here? Near-term performance can be notoriously difficult to predict. As we mentioned in our October update, underneath the surface of a post-election rising market tide, our measures of the underlying health of the markets continue to worsen. For example, on a small scale, recently Zoom Media (ZM) was down more than -15% one day – despite being an essential tool for many and beating investor expectations seemingly on almost every conceivable metric[vi]. When good news doesn’t translate into good stock returns but rather a sharp decline, we perk up our ears.

We, however, remain focused on the big picture. Global stock markets are now worth over $100 trillion, rising to a record high[vii] and equal to 115% of global Gross Domestic Product (GDP), i.e., the sum of all the goods and services produced[viii]. In the U.S., the stock market is unprecidentally expensive and equal to over 180% of the country’s GDP[ix]. While there is great variability about the future, it is likely a mistake to not be careful and thoughtful when buying stocks this expensive.

In markets like November, where the “Fear Of Missing Out (FOMO)” is seemingly driving participants, indepth study of stocks and economies are displaced by emotional biases which are supported by 0% interest rates and a 64% increase in the money supply[x] by the Central Banks. Such speculative behavior is the nature of market cycles and one of the primary elements necessary to create the proper setting for an eventual reversion or change. Last month, we discussed how it appeared that investors in October started to choose between decelerating and expensive large companies versus opportunities in growing and cheaper small companies. Small cap stocks, as measured by the Russell 2000 Index, had their best month ever in November 2020 and gained 18.3%[xi]. Overall, small company stocks are up dramatically off the March 2020 lows[xii] when we added to investments there. While still unconfirmed, evidence of change appears to be beginning.

Our most important question today is how the balance should be set today between aggressiveness and defensiveness in clients portfolios to take just enough risk to generate attractive returns to meet their financial goals in these very uncertain times. Then, how do we apply an active tactical approach and find undervalued investments that are poised to enter a period of market outperformance like the cheaper small companies mentioned above and where client portfolios already have some investments. All year, we have had a plan for more offensive investments if the economy does get better as well as a plan for the opposite outcome. In December, we added to an investment which we expect would increase in value if people stay and shop at home more. As always, we will continue to apply diversification and balance between the appropriate risk and returns.

Please be well and stay safe.  We are encouraged by the latest vaccine results but expect a dark, uncertain winter. We suggest continuing to monitor the Johns Hopkins University’s Daily COVID-19 Data in Motion video.

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] https://finance.yahoo.com/

[ii] https://www.msci.com/end-of-day-data-search

[iii] https://www.msci.com/end-of-day-data-search

[iv] https://www.msci.com/end-of-day-data-search. MSCI Spain Index Net and Brazil ADR Index Net.

[v] https://finviz.com/

[vi] https://finance.yahoo.com/quote/ZM/history?p=ZM

[vii] https://www.reuters.com/article/us-global-markets/world-shares-hold-close-to-record-highs-u-s-markets-close-for-thanksgiving-idUSKBN28601F

[viii] Bloomberg. WCAUWRLD Index as of 12/5/2020.

[ix] https://www.gurufocus.com/stock-market-valuations.php

[x] https://fred.stlouisfed.org/series/M1

[xi] https://finance.yahoo.com/

[xii] https://finance.yahoo.com/quote/%5ERUT/history?p=%5ERUT

CIG Asset Management Update October 2020: A New Hope?

Summary:

• Diversifying to include Emerging Markets helps in tough month for Developed Markets.^i,ii,iii
• Continued worries about rising COVID-19 cases and the economy.^iv
• Narratives appear to be shifting as more evidence of a potential market inflexion point.

Commentary:

Globally, this month was tough for Developed Markets and not for Emerging Markets. In October, returns for the S&P 500 were -2.8%[i] and MSCI EAFE was -4.1%[ii] while the MSCI Emering Markets was +2.0%[iii]. It was the second month in a row of monthly declines in U.S. equities. As mentioned before, we continue to employ diversification specifically to areas like Emerging Markets to potentially cushion against U.S. equity losses as in October.

Overall, Developed Markets suffered from increasing COVID-19 cases[iv] and in the U.S., diminished hopes of a pre-election stimulus package. The month culminated with a -5.6%[v] sell off during the last week when technology earnings missed expectations, with Microsoft disappointing most in our opinion.

Underneath the surface of a post-election rising market tide, the relative price movement in sectors and investing styles (Factors) appears staggering. Our broad measures of the underlying health of the market continue to worsen. Events happen daily that have either likely never happened before or not happened in a long time. For example, on November 4, the Dow Jones Transportation sector had its worst day relative to the S&P 500 since April 2009, down almost -4%[vi]. Growth had its best day versus Value (using Russell 1000 indices as proxies) since January 2001 – almost 20 years![vii] In our opinion, the market narrative appears to be that the Federal Reserve has everything under control and that it has “got your back.” Meanwhile, we continue to worry about how COVID-19 will affect the economy this winter given the explosion of cases shown by the Johns Hopkins University’s Daily COVID-19 Data in Motion.

In October, we saw the beginnings of a narrative shift to a scenario that reminds us of 2000, similar to what we discussed in our August update. In that market cycle, the technology bubble was formed by companies from buying to prepare for the risk that at the stroke of midnight on January 1, 2000 their computers would be unable to function. In 2020, companies and individuals spent on technology to work from home during a pandemic. In both cases, decelerating earnings occurred once priorities shifted away from investments in technology. Last month, it appeared that investors started to choose between decelerating and expensive large companies versus opportunities in growing and cheaper small companies where client portfolios have some investments. Specifically, the Russell 1000 Growth Index (large) lost -4.7%ⁱ versus the Russell 2000 Index (small) gained 3.4%ⁱ in October. This shift is potentially bullish for CIG’s portfolios and less so for investors indulging in passive investments[viii].

We would like to thank our clients and friends for their continued trust and support, as well as to respectfully encourage all to focus on the positives on Thanksgiving Day. Obviously, 2020 has been an excruciatingly difficult year for many of us and it continues with the contested election and the division in the country. However, we have a newfound appreciation for going to family gatherings, restaurants and sporting events, for more frequent phone calls with elders, and for being able to see our children during the workday at home.

Lastly, we suggest that you listen to the replay of our webinar “Keeping your Financial Plans Alive Amid Chaos.” We discuss the challenges, opportunities and questions ahead as we navigate the current and future market conditions.

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.

SOURCES:

[i] Yahoo Finance

[ii] https://www.msci.com/end-of-day-data-search

[iii] https://www.msci.com/end-of-day-data-search

[iv] https://coronavirus.jhu.edu/covid-19-daily-video

[v] Calculated by CIG using data from Yahoo Finance for 10/23 to 10/30.

[vi] Research report from Epsilon Theory, “The King is Dead. Long Live the King” dated 11/5/20.

[vii] Research report from Epsilon Theory, “The King is Dead. Long Live the King” dated 11/5/20.

[viii] While small companies as measured by the Russell 2000 small-cap index has had six 10%+ multi-day moves in 2020, per Bespoke Investment Group, the number of underlying companies with negative profits appears to be quite large relative to history and could pose a problem if investors just buy the index versus those stocks which have positive earnings.

CIG Asset Management Update September 2020: Continuing Stimulus Hope

Summary:

• Stocks fell in September as big technology companies faltered [i] .
• COVID-19 deaths hit a grim milestone in the U.S. and increased around the world [v] .
• The markets traded up or down based upon the probability of a new stimulus bill.

Commentary:
The S&P 500 declined -3.9% and the tech-heavy NASDAQ dropped -5.2%.[i] Outside of the U.S., developed markets, as measured by the MSCI EAFE net, were down -2.9% and the MSCI Emerging Markets Index retreated -1.8%.[ii] Little protection was offered by Gold as it moved -4.1% lower as the US Dollar Index gained +1.9%.[iii] Fixed income (the Barclays U.S. Aggregate Total Return Index) returned -0.1% and the Barclays U.S. High Yield Index fell -1.0% for the month.[iv]

Republicans and Democrats struggled to come to an agreement to provide more stimulus to the economy. Republicans in the Senate were unable to pass their own “skinny” stimulus bill on September 10. Meanwhile, markets traded lower throughout the month as the COVID-19 death toll in the United States continued to increase and finally surpassed 200,000 on September 22.[v] Over the following two days, there were no less than sixteen Federal Reserve speeches in two days, but investors were unimpressed. Fed speakers reasserted that the Fed will do what it takes to support the economy and cautioned that what is really needed right now is more fiscal stimulus. On September 25, economy re-opening hopes blossomed when Governor DeSantis announced on that he was lifting all restrictions on the Florida economy. The following Monday, stimulus hopes were re-ignited as Speaker of the House Nancy Pelosi said she was hopeful to get a $2.4 trillion coronavirus stimulus bill passed.

September’s weakness in equities and their back and forth nature keep investors on notice that both the financial markets and the economy remain on thin ice. Uncertainty abounds and volatility could increase dramatically on short notice, especially as the election nears. Investors’ latest reminder was on October 6, when these stimulus machinations whipsawed the markets again.

We continue to employ diversification, discipline and flexibility in managing client portfolios to potentially avoid air pockets like the one above. Our focus on clients’ long term financial plans remains paramount.

Please join the team at CIG Capital Advisors for an engaging discussion looking at the challenges, opportunities and questions ahead as we navigate the current and future market conditions:

WEBINAR: “Keeping your Financial Plans Alive Amid Chaos”

Tuesday, October 20 at 6 p.m.

CLICK HERE TO REGISTER

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] Calculated from data obtained from Yahoo Finance, as of September 30, 2020

[ii] MSCI, as of September 30, 2020

[iii] Calculated from data obtained from Yahoo Finance, as of September 30, 2020

[iv] Calculated from data obtained from Bloomberg, as of September 30, 2020

[v] John Hopkins / NPR September 22, 2020

CIG Asset Management Update August 2020: A Reminiscence of a Bubble Past

The S&P 500 recorded its best August return since 1986, up +7%. The S&P5, the so called FAAMG stocks, provided a majority of the S&P return for the month[i]. Developed market stocks, excluding the U.S., as measured by the MSCI EAFE Index, rose 4.9% and the MSCI Emerging Markets Index gained 2.1%[ii]. Domestic fixed income measured by the Bloomberg Barclays Aggregate, was down -0.8%[iii]. The trade-weighted U.S. dollar index continued its decline, falling an additional -1.3% in August[iv].

As we have pointed out in previous letters, stock market valuation had already reached lofty levels as measured by overall stock market capitalization versus the size of the economy (market cap/GDP). In July, we reached 171%, eclipsing the level of the Dotcom boom in March of 2000, and it has continued to grow to 178% as of this writing[v]. A perhaps more relatable valuation metric has also reached record highs: The forward price to earnings multiple on the S&P 500 is above 26, the same level reached in March 2000. March 2000 was also the peak of the market[vi].

We have vivid recollections of the Dotcom boom and the following bust from 1999 to 2002. Strangely enough, we are currently seeing many other similarities to that era 20 years ago. In addition to comparable record market valuations as illustrated to the right, we have talked at length about the lack of breadth in the market, that a very few number of stocks are providing most of the returns for the indices. This also occurred during the Dotcom bubble. Twenty years ago it was, similar to today, technology providing the majority of the returns.

Additional events in August remind us of that era 20 years ago. During the Dotcom boom, companies would add “.com” to their name to significantly boost their stock return and participate in the bubble. Yes, it really happened and we lived through it. Three professors from the University of Purdue published a study, “A Rose.com by Any Other Name” in the December 2001 issue of The Journal of Finance, that showed company managements could increase their stock price by about 74% in the 10 days after announcing that they were adding “.com” to their name! Imagine our sense of déjà vu when Walmart announced on August 27 that it was teaming up with Microsoft to bid for TikTok, a social media platform. Walmart stock gained +4.5% on this announcement. Less than one week later on September 1, Walmart gained an additional +6% as it announced it will launch a membership program similar to Amazon Prime later in the month[vii]. Walmart has traditionally been viewed as an old-school brick and mortar retailer. It appears they are trying to change that perception.

Another phenomenon during the Dotcom bubble was to split your stock into more shares, which in many cases helped to drive the price higher. Apple announced a 4-for-1 stock split on 7/30/2020. Tesla announced a 5-for-1 stock split on 8/11/2020. From the announcement of each stock split to August 31, Apple gained +34% and Tesla gained +81%[viii]. These high gains were in spite of the fact that a stock split simply lowers the price for a share of the company’s stock. A split does not add any economic value to the underlying company and investors can already buy fractional shares through many trading platforms. Ask yourself the following question: Would you like your pizza cut into 8 slices or 16? No matter how many slices you decide to cut the pizza into, you still have the same total amount. If non-value-additive stock splits and acquiring social media properties like TikTok juice your stock price, more company managements may likely be considering doing the same, but we would not rely on that as an investment strategy.

Just a couple of other similarities:

• The market has appreciated about 80% while normalized earnings have flat lined for four years. Going in to 2000, the same thing happened when the spread blew out to 70%[ix].
• The valuation gap between high valuation stocks (29x earnings) and low valuation stocks (10x earnings) remains wide and similar to 2000[x].
• The number of stocks trading over 10x revenues in the Russell 3000 is more than 400, like the year 2000. That means for a 10-year payback, the company needs to pay investors 100% of revenues for 10 straight years in dividends regardless of the cost of goods sold, payroll, taxes, etc[xi].

Where do we go from here? As of August 31, 20 of 22 prominent Wall Street strategists have a year-end 2020 price target for the S&P 500 at or below the closing price of the index[xii]. Valuations did not matter during the Dotcom bubble of 1999 – 2000 until suddenly they did, after Labor Day 2000. Then the narratives about the market and specific “darling” stocks that everyone believed that everyone believed broke. It took two years for the market to reach bottom after the bubble burst. The S&P 500 lost 50% and the NASDAQ lost 78% from the March 2000 peak to the October 2002 low[xiii].

To paraphrase the great Yogi Berra, it’s tough to make predictions, especially about the future – of what very well may be the largest financial bubble of all times. That said, market conditions are likely continue to be volatile for some time. Volatility usually means that we are nearing an inflection point. We feel strongly that having our safety nets up,  bracing for some potential steep air-pockets, and refraining from speculation in the hyper-valued growth stocks that we are seeing like Apple and Tesla, is the correct way to be positioned as we wait for the inflection to present new opportunities. Historically, outsized returns in out-of-favor areas can appear swiftly and dramatically. If such a move occurs from growth to areas such as value, dividends and small caps, we are already invested there. At the same time, we have a plan if the markets and the economy do get better, likely leading to the bubble marching on.

[i] Calculated from data obtained from Yahoo Finance, as of August 31, 2020

[ii] MSCI, as of August 31, 2020

[iii] Calculated from data obtained from Bloomberg, as of August 31, 2020

[iv] Calculated from data obtained from Yahoo Finance, as of August 31, 2020

[v] https://www.gurufocus.com/stock-market-valuations.php as of September 14, 2020

[vi] Factset, September 1, 2020

[vii] Calculated from data obtained from Yahoo Finance, as of September 3, 2020

[viii] Calculated from data obtained from Yahoo Finance, as of August 31, 2020

[ix] Bloomberg Data from 01/01/1990 to 7/31/2020 via Invenomic Capital

[x] Goldman Sachs Investment Research. Data from 01/01/1985 to 6/25/2020

[xi] Bloomberg Data from 01/01/1997 to 07/31/2020 via Invenomic Capital

[xii] Bloomberg, as of August 31, 2020

[xiii] Calculated from data obtained from Yahoo Finance, as of August 31, 2020

CIG Asset Management Update July 2020: Mettle versus Metal

Hopefulness around a COVID-19 vaccine, expectations of additional stimulus, and better-than-expected quarterly corporate earnings in the U.S. bolstered investor sentiment and risk assets in July. Positive vaccine announcements were dominant in investors’ psyche despite a record spike in infection rates in many parts of the country and poor macroeconomic data.

The S&P 500 Index was up for the fourth straight month, increasing 5.5% in July. By month’s end, the index was into positive territory with a 1.2% year-to-date return[1]. At the same time, gold increased 9.5% during the month, pushing year-to-date returns to 29.2%[2].

Gold became an investment across most of our portfolios about a year ago based upon what, at the time, was a high level of uncertainty within the U.S. and global economies. However, last year’s China/U.S. trade war was a walk in the park versus today’s unknowns. Gold has typically been a good hedge against uncertainty and accordingly it has performed well during 2020.

Warren Buffett, a longtime critic of gold as an investment, has said that the “magical metal” is no match for “American mettle.” Recently, he might have changed his tune by buying 21 million shares of Barrick Gold, a gold miner, while also selling shares of financial firms such as Goldman Sachs, Wells Fargo and J.P. Morgan Chase[3].

The bond market seems to be concerned over the economy as global rates moved lower. In the U.S., yields on 10-year Treasury bond fell 0.11% to 0.528% on July 31. Excluding just one single day this past spring, March 9, this is an all-time record low[4]. When factoring in inflation, U.S. real interest rates moved further into negative territory. With the help of central bank intervention and tighter credit spreads, companies issued debt hand over fist to avoid potential lower availability in the future[5].

The DXY Index, which represents a trade-weighted index for the U.S. dollar and an implicit view of the U.S. in the foreign exchange markets, fell over 4%, its worst monthly performance since 2010[6]. The combination of dollar weakness and risk-on investor sentiment helped non-U.S. equities. In July, the MSCI Emerging Markets Index gained 8.9%, while developed market stocks, excluding the U.S., as measured by the MSCI EAFE Index, rose 2.3%[7].

While gold’s recent rally partially reflects weakness in the U.S. dollar and the asset’s negative correlation to real rates, U.S. money growth (the so-called M2) has never been faster than it is today. It is two-thirds faster than during the inflationary 1970s and more than two times the growth since 2008[8]. While inflation expectations remain muted, the greater than $4 trillion of fiscal stimulus estimated to be injected in the U.S. economy would suggest that a pick-up in inflation seems quite possible, if not probable.

Going forward, it is our view that the only certainty is that uncertainty will continue. We need to muster our own METTLE to meet these challenges: stretched market valuations, any COVID intensification, grueling elections, China/ U.S. strains and U.S. social tensions. While the recent performance of risk assets has been encouraging, we continue maintain our discipline and dedicated appropriate allocations to gold, Treasuries and cash. We are also attempting to be opportunistic, adding to international and emerging markets equities that may benefit from a continuing weakening of the U.S. dollar.

[1] Yahoo Finance as of July 31, 2020

[2] Yahoo Finance as of July 31, 2020

[3] https://www.marketwatch.com/story/did-warren-buffett-just-bet-against-the-us-economy-his-latest-investment-raises-some-questions-2020-08-16

[4] Yahoo Finance as of July 31, 2020

[5] https://www.marketwatch.com/story/corporate-borrowing-in-2020-to-smash-prior-records-goldman-says-11598044749

[6] NEPC Monthly report

[7] https://www.msci.com/

[8] https://www.advisorperspectives.com/commentaries/2020/08/14/charts-for-the-beach

CIG Asset Management Update June 2020: The Ride

The pandemic-infused markets have been a roller coaster ride during the first half of 2020. After a short climb in January and February, the S&P 500 Index fell by 35% in just over one month and then staggered back up the lift hill[i]. What twists and turns the market roller coaster will offer next is difficult to know.

Going forward, the best possible outcome in our opinion would be a widely available vaccine by year-end and everyone goes back to work. The U.S. would just need to figure out servicing trillions of additional government debt. Many worse outcomes would likely include no effective vaccine like most viruses, millions of permanent job losses, and enduring changes to business models in multiple industries.

When the market reached its high on June 8, our view was investors seemed to be focused predominantly on the best possible outcome. It is our opinion that the massive rally from the March 23 low was largely driven by “Stimulus” winning the tug-of-war over “COVID-19.” According to Cornerstone Macro, until last week when the European Union agreed to a unified stimulus fund which brought them in line, the U.S. has led the world in fiscal and monetary stimulus.[ii] But the U.S. has continued to lag the world in COVID-19 response. Only some emerging markets now have infection rate trends worse than those of the United States.[iii]

Regardless of any value judgment about the present situation, one could theoretically pull out the playbook for a traditional recession, review the history books, assess the probabilities/outcomes and lock in a portfolio for the next two years and perhaps experience a ride like Cedar Point’s kiddie coaster Woodstock Express.

If only more of us were alive back in the 1918 global pandemic and the structure of the economy, technology and banking had more resemblance to today’s world; if only probability theory could be easily be applied to a pandemic occurring in a non-ergodic, uncertain time, maybe we could do that. A non-ergodic system, such as this time, has no real long-term properties i.e., history is no help to predicting the future. It is prone to path dependency – which is just a fancy statistical way of saying that “THE RIDE is everything”.

Months like March keep us up at night. When we think about the markets, we are thinking about our goals, dreams, fears, and hopes. These long-term goals end up in the financial plan and are embedded in the portfolio strategy that our clients may select. Given a choice between being down -35% or losing -15% in March, many of us would choose -15%. At the same time, we try to stay focused on the long-term goals.

Now that we may be again back at the metaphorical top of the coaster’s lift hill, it is important to consider the next moves both prudently and imaginatively. Since June 8, the S&P 500 Index has been alternating between gains and losses around a 250-point range[iv]. There have been several 2%+ declines, including June 11’s -6% loss when Federal Reserve Chairman Powell said, “We’re not even thinking about raising rates” any time soon. Investors were distressed that the dovish Fed does not expect to raise rates until 2023. With almost 40 +/-2% days this year, the markets are on pace for the most swings since 1933[v]. For the month of June, the S&P 500 index returned just 1.8% while gaining 20.5% during the quarter (the best quarter since 1998)[vi].

For now, the stunning market rally from the March 23 low appears to have come to a pause in the U.S. Investors are back to that nervous feeling when checking the market each morning as if looking over the precipice of the rollercoaster’s first hill. What investors see is a stock market that is at peak valuations, as measured by total market capitalization / GDP (which we have talked about in the past)[vii]:

As the chart above clearly illustrates, there is no history that shows valuations over 150% to GDP are sustainable, even for brief periods of time. Yesterday, GDP for the second quarter was announced and the -33% annualized decrease was its worst quarterly hit since the Great Depression[viii]. With GDP falling from approximately $21.5 trillion to $19.4 trillion, valuations are now over 170% to GDP.

The S&P5, the so called FAAMG[ix] stocks, earlier this month added over a half a trillion in market cap in just 6 days. (Please see the chart[x] below showing the percentage return of these five stocks from June 29 to July 8.) In 2020, these stocks have added over $1.6 trillion in market cap[xi], a striking feat during any bull market with excellent growth, not a historic recession. Sure, some of these companies may have grabbed market share and pulled some sales forward during the shutdown but they all face anti-trust concerns which seem to be bi-partisan and international concerns. These stocks are disproportionately driving the market.

Certainly, economic data has seen a massive improvement from the recent historic collapses. However, it important to keep focused on year-over-year data and especially permanent job losses, which keep mounting. The chart[xii] below shows data from the US Department of Labor with the blue line indicating the number of temporarily laid off workers in the US and the yellow line displaying the number of permanently laid off workers.

Today, past experience is not unworkable, but if relied on thoughtlessly it can be hazardous. Some events will play out in the future as they have in the preceding times, but many will not. As indicated above, markets are rich and driven by a few stocks and simultaneously, the U.S. is experiencing some of the worst economic conditions in a long time.

Based upon CIG’s investment process and what we saw in the markets, we had fortunately already started to get more conservative in 2019 in the Strategic and Dynamic portfolios. Fast forward to 2020, at the beginning of February when the markets became more volatile, we acted within the Dynamic portfolios to reduce risk further, primarily by reducing the portfolios’ exposures to equities and adding to diversifying assets generally believed to be protective in a downdraft. We continued to act in March to attempt to dial-in the appropriate market exposure in the Dynamic portfolios, increasing risk, primarily by adding equities, after the market bottomed on March 23.

Hopefully, our strategic and tactical actions have allowed our clients to sleep better at night. CIG attempts in its client portfolios to get closer to the kiddie coaster experience versus the full rollercoaster ride of the S&P 500 index. The most important job is to strike the appropriate balance between offense and defense, i.e., the risk of losing money and the risk of missing opportunity. There will continue to be twists and turns along the ride but so far, all the previous scary rollercoaster rides in the market have concluded the same way: eventually, they stopped.

We will see in the coming months how the tug-of-war between Stimulus and COVID-19 plays out. There is probably nothing more path dependent than re-opening an economy in a pandemic. Let us hope for the best – a confidence-inspiring Goldilocks-style “not-too-fast / not-too-slow” opening, while also considering the myriad of possible economic and financial outcomes. Of course, never ignore the extreme risks which do not appear to be going away, especially as positive COVID-19 cases trend higher. We continue to be thoughtful, adaptable and at your service.

[i] Calculated from data obtained from Yahoo Finance, as of July 27, 2020

[ii] Cornerstone Macro, CSM Weekly Narrative, July 26, 2020, page 2.

[iii] Coronavirus.jhu.edu/map.html, as of July 30, 2020.

[iv] Calculated from data obtained from Yahoo Finance, as of July 27, 2020

[v] Bespoke Investment Group, July 2020

[vi] Calculated from data obtained from Yahoo Finance, as of July 27, 2020

[vii] Bloomberg as of July 30, 2020

[viii] Source: U.S. Bureau of Economic Analysis

[ix] Facebook, Apple, Amazon, Microsoft, Google

[x] StockCharts.com via NorthmanTrader on July 9, 2020

[xi] “Warning”, NorthmanTrader, July 9, 2020

[xii] U.S. Department of Labor via Bloomberg as of July 6, 2020.

CIG Asset Management Update May 2020: Stay the Course

The good news within these numbers is that for the month of May, the FAAMG stocks and other 495 stocks were up almost equally. This could be quite constructive, as a broader number of stocks contributing to the overall return of the S&P 500 may lead to a healthier market.

We are encouraged as more states begin the process of re-opening their economies. It remains to be seen how the civil unrest that has followed the death of George Floyd in Minneapolis over the past few days will impact re-opening efforts.

On May 22, Barron’s published an article, “Day Trading Has Replaced Sports Betting as America’s Pastime. It Can’t Support the Stock Market Forever.” Within this article, Jim Bianco from Bianco research argues many people who typically would gamble on sports went to the stock market as sports have been shut down. In addition, many Americans took their coronavirus stimulus check and invested it into stocks. Online brokerages have seen a surge in new accounts this year. Robinhood saw three million new accounts in the first quarter, and the total number of stock positions more than doubled year-to-date⁽⁶⁾, even with the platform suffering crashes and glitches on heavy trading volume days.

Bianco believes that this retail investor mania has driven much of the markets’ 30%+ retracement from the low.⁽⁷⁾ Retail investors piled into low-priced stocks that were down considerably, hoping to make big profits if they rebounded. The dangers here are i) hundreds of companies have withdrawn their revenue guidance for 2020⁽⁸⁾, ii) only 63% of companies beat analysts’ consensus expectation – the lowest quarterly figure in seven years⁽⁹⁾, and, finally, iii) multiple pharmaceutical companies have put out “market-moving” positive press releases without remotely having the vaccine data to back up their claims⁽¹⁰⁾.

As we talked about in our recent webinar, we at CIG believe the path to successful investing over the long term is to develop a plan, exercise discipline, and stay the course. Retail investors piling into stocks that are down significantly or betting on vaccine cures, looking for short term profits, is not a long-term plan.

The most encouraging news in May was the May 28 unemployment claims report that showed continuing claims decreased by 3.86 million to 21.05 million. This is the first decrease since February, before the shut-downs. Although the absolute level of continuing claims is still over three times higher than the post-Great Financial Crisis high of 6.64 million⁽¹¹⁾, we are happy to see claims heading in the right direction. Volatility, as measured by the VIX, has also decreased from 34.15 on April 30, to 28.43 on June 1. This is still high versus historical averages; however, it is a far cry from the March 16 high of 82.69⁽¹²⁾.

If volatility continues to fall and high frequency data following the progression of the economy reopening improves, we are likely to continue with the plan to rebalance towards the strategic equity targets. If volatility surges and reopening efforts are hindered by a resurgence in coronavirus cases due to the recent crowds of people protesting, we have a plan. Please always be mindful that our main objective is to reach the return necessary to achieve your goals as outlined in your financial plan, not to pursue returns without regard to risk. Valuations remain excessively high.