Wealth Management

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 The dangers here are i) hundreds of companies have withdrawn their revenue guidance for 2020⁽⁸⁾, ii) only 63% of companies beat analysts’ consensus expectation – the lowest quarterly figure in seven years⁽⁹⁾, and,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. 

CIG Asset Management Update March 2020: March Madness

Market volatility continued through the month of March and continues month to date at extreme levels. Long time readers of our updates know that we have been warning about asset bubbles and Central Banks’ recent actions since last year. Valuation, volatility and liquidity are the three main areas that we believe investors should focus on right now.

Valuation: In spite of a -20% year to date return for the S&P 500⁽¹⁾ through March 31^st, U.S. stock market valuations are still quite high relative to the size of the U.S. economy on a historical basis. The ratio of total U.S. market capitalization to GDP (TMC/GDP), reached an all-time high of 151.3% in December 2019⁽²⁾. As a result of the sharp sell-off in March 2020, TMC/GDP dropped -21% to 119.2% as of March 30^th(2). As easy as it is to measure total market capitalization on a daily basis, nobody knows how much or for how long the U.S. economy (GDP) will decline. The TMC/GDP ratio fell to 75 or lower during the post-Dot Com recession in 2001 and the Great Financial Crisis in 2009. An argument could be made that if the contraction in the economy is large and persistent enough, the U.S. stock market may not have yet seen its low.

Volatility: March witnessed two of the top 20 daily percentage gains and two of the top 20 percentage daily losses for the Dow Jones Industrials Average (Dow), ever⁽³⁾. Generally, these periods of extreme moves to the upside and downside have not occurred at or near market bottoms. Major market bottoms have occurred once volatility becomes more muted. Please reference the table below. As of this writing, we can add an additional top 20 up day. The Dow was up +7.7% on April 6, 2020⁽³⁾.

Liquidity: Following the rare emergency interest rate cut on March 3^rd, the Fed cut the fed funds rate again by 1% to a 0 to 0.25% range at a subsequent emergency meeting on Sunday, March 14th. The Fed balance sheet expanded by an average $1 million per second from March 18^th to March 31^st.  Bank of America believes the balance sheet could expand to $9 trillion by the end of the year (~40% of the U.S. economy.)⁽⁴⁾ This is an exponential move from the expansion that began in late 2018. Typically, when the Federal Reserve pumps money into the financial system, stock market volatility calms down. In spite of unprecedented Fed action, volatility in March remained high. In fact, for the month of March, the stock market as measured by the S&P 500, moved intra-day an average of 5%, the most for any month on record. Even through the depths of the Depression or the Great Financial Crisis, the average intra-day move did not surpass 4%.⁽⁵⁾

Despite the continued ups and down, we would offer a little additional commentary beyond what we have discussed in the two recent webinars and above. For March, the numbers speak for themselves. The S&P 500⁽¹⁾ lost -12.4%, while the MSCI EAFE Net Index⁽⁶⁾ of developed international equities was down -13.3% and the Emerging Markets Net Index⁽⁶⁾ declined -15.4%. The Barclays U.S. Aggregate Total Return Index ⁽⁷⁾ returned -0.6% last month. The Barclays US High Yield Index⁽⁷⁾ decreased -11.5% for the month. Hopefully, you are not too glued to CNBC or Fox Business News which we have warned house-bound market watchers about, given the media’s continued emotional rollercoaster and market manipulation (yes, we are talking about you, Bill Ackman).

In March, we kept our heads down and continued to focus on the one of the most important aspects of our relationship with clients. Beyond the investment expertise that we offer, our job is to ensure when times like this arise that we work together to restrain any exuberant investment behaviors as well as moderate our fearful investment behaviors.

The actions that we took in March in the Dynamic portfolios exemplify this goal. When the ten-year Treasury bond declined to an all-time low yield, we reduced portfolios exposures to long-term bonds. As you may recall, prices increase when bond yields fall. When it appeared that equity markets were temporarily bottoming, we increased our stock market exposure by adding to the equity hedge fund manager. During the last week of the month, when it looked like the House of Representatives would approve the CARES Act, we increased Treasury Inflation Protected Securities (TIPs) and more market sensitive equity positions. Overall, the Dynamic portfolios ended the month with more stock market exposure but not dramatically so.

Last week, we began our quarterly rebalancing of portfolios towards their strategic targets. We identified some areas that seem to be successful in this current environment, and we reduced cash and bonds that previously worked but are less likely to do so going forward. We are taking incrementally more risk via adding to defensive equities like healthcare and consumer staples. In certain portfolios, we added a “value-add” fund that is focused on a trend-following process which can work in higher-volatility markets.

On a positive note, we would quote Dr. Anthony Fauci: “You can’t rush the science, but when the science points you in the right direction, then you can start rushing.”⁽⁸⁾ We have many laboratories looking to develop and roll out a vaccine. When the science is ready, a solution to the virus could come well before the usual 18 months. Even if we end up “going old school” and transferring plasma from previously infected individuals, we will get to the mountaintop and, ultimately, see a safer public health, economic and investment environment. Until then, we will continue to very nimble and proactive as we manage the portfolio allocation.

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.

1. Calculated from data obtained from Yahoo Finance, as of April 1, 2020.
2. https://www.gurufocus.com/stock-market-valuations.php
3. https://en.wikipedia.org/wiki/List_of_largest_daily_changes_in_the_Dow_Jones_Industrial_Average
4. “How big could the Fed’s balance sheet get?” Financial Times, April 5, 2020 citing report from Bank of America
5. Bloomberg, Jonathan Ferro as of March 31, 2020
6. MSCI, as of April 1, 2020.
7. NEPC
8. https://www.brainyquote.com/lists/authors/top-10-anthony-fauci-quotes

Diversification Can Help Protect Against Market Crashes

The idea of diversification is very old and can be, in some cases, useful for survival. How many times in life have we heard “Don’t put your eggs all in one basket?” In investment terms, market crashes like the one we witnessed in March 2020 can happen. Losses such as these can be bad for your financial and mental health as well as your ability to meet your financial plan or retire. Diverse investment strategies and assets can behave differently in various crashes, and this differentiation of responses increases the chance your portfolio will survive a market crash. Here’s why a diversification strategy is important:

Diversification in terms of investing became more popular in the early 1990s and really took off in the early 2000s. Whether it is emerging market bonds, wind parks, real estate, etc., the diversification argument became more obvious after the DotCom Crash of 2000. At its core, diversification forces you to “buy low and sell high,” an adage that is arguably commonplace and easily mocked. But it really works. Just look at March 2020’s market returns.

In March 2020, COVID-19 appeared to impact most asset classes. As a result of our investment strategy and process, we became worried about the asset valuations in early to mid-2019. This led us to diversify away from an over-concentration in stocks and into a more varied portfolio of assets.  Consequently, we were better prepared for March 2020 and had exposure to longer-dated Treasury bonds and gold, which were some of the only major asset classes up last month.

In 2019, prudence and diversification came under fire. With the S&P 500 Index up a massive 31%[i], investors with diversified portfolios felt like they left money on the table. In 2020, diversification came roaring back as investors realized the above-mentioned benefits of having parts of their portfolio perform when risky assets struggle. What a difference a few weeks and months can make! March 2020’s crash was the quickest decline in stock market history[ii]. During market crashes, diversification not only helps to potentially shore up returns, but also provides a source of money for rebalancing. With a 20% decline in equities in just under a couple of weeks, buying low and selling high is paramount for investment success over the long term.

In March 2020, the Federal Reserve balance sheet has increased +$1.1 trillion and the European Central Bank’s balance sheet has increased +$400 billion[iii]. Another $2 trillion fiscal stimulus bill is being considered in the U.S.[iv] So, we may yet again be lulled into believing that a period of elevated U.S. stock market valuations and low market volatility could persist throughout this decade. In that case, diversification may return to its regret-maximizing ways, where there will often be an underperforming asset (in this case, bonds or cash) in your portfolio that you wish you had sold, just like there will often be the asset (usually, equities) you wish you owned more of because its price went up the most. That said, when market volatility inevitably returns, you realize that staying diversified is worth it in the long run.

At CIG Capital Advisors, we attempt to pursue diversified portfolios for clients by employing the following thought processes. First, we invest only in investment choices we understand. Second, we determine investment and asset allocations based on collecting as much data as possible, employing common sense constraints, doing fundamental research, and rebalancing portfolios regularly. Lastly, we adapt to change, try to learn continuously, seek new sources of returns, and re-evaluate allocations regularly. We tend to shy away from an investment with an effortlessly smooth return history. These might or might not be safe as many of these strategies are the equivalent of picking up pennies in front of a steamroller.

While there are many known unknowns related to COVID-19, we anticipate continued volatility in the near term as the economic fallout from the pandemic is realized. As always, we maintain diversified, risk-balanced portfolios for clients to help ride out potential market selloffs, and to evaluate, and sometimes capture, the opportunities that present themselves. We conclude with a famous quote from Benjamin Graham, the British-born American investor known as the “father of value of investing,” “the essence of investment management is the management of risks, not the management of returns.”[v] Thus, diversify!

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] Yahoo Finance

[ii] Bloomberg, Goldmoney Research

[iii] https://docs.google.com/spreadsheets/d/1s6EgMa4KGDfFzcsZJKqwiH7yqkhnCQtW7gI7eHpZuqg/edit#gid=0

[iv] Source: “How big could the Fed’s balance sheet get?” Financial Times, April 5, 2020 citing a report from Bank of America

[v] https://www.azquotes.com/quote/1259823

Important Client Announcement Related to COVID-19

CIG Asset Management Update February 2020: The Unknown Unknowns and Our Thoughts on COVID-19

Market volatility spiked starting at the end of February and continues today at extreme levels. Long time readers of our updates know that we have been warning about asset bubble and Central Banks’ recent actions since last year. On March 3rd, The Federal Open Market Committee (FOMC) cut the federal funds rate by 0.5 percentage points to a 1 to 1.25% range. An emergency interest rate cut between regular meetings is very rare. The last such cut was during the Great Financial Crisis (GFC) in October 2008. In fact, there have only been 7 emergency actions since October 1998. Interestingly, the FOMC took this action after only a -8.2% decline in February for the S&P 500 Total Return Index(1). Similarly other markets around the world showed “orderly” selling – the MSCI EAFE Net index of Developed Markets was down only -9.0% while Emerging Markets, as measured by the MSCI Emerging Markets Net Index, lost only -5.3% during the month(2). How have stocks performed in the past after the FOMC cuts rates unexpectedly? The answer in the table below(3) is that they tend to go lower the following 12 months. The average one year return on the S&P 500 following an emergency cut is -7.3%. The October 15, 1998 emergency cut was in reaction to a hedge fund, Long Term Capital Management (LTCM), imploding. Excluding the LTCM cut, the average one year return after the other six actions was much worse, -12.5%. On February 20 and 21, FOMC speakers were cheerleading the market and saying that no rate cuts were necessary. We must ask ourselves, why did the Federal Reserve deem it necessary to act so suddenly? Ultimately, fears intensified over the new coronavirus (COVID-19) turning into a pandemic given that the number of new cases appearing outside of China were outpacing those within China, all this without adequate testing in many places. However, we remain skeptical that monetary policy can solve the global economic issues. Amazon, Google, Facebook and Microsoft are now pushing working from home(6). All, in addition to Apple, JP Morgan, Proctor & Gamble and others, have limited employee travel(6). Major events such as the St. Patrick’s Day Parade in Dublin have been cancelled, and forthcoming cancellations will be likely, too. Corporate management teams know that they will be forgiven if they lump as much bad news as possible into the first half of 2020 whether it is COVID-19-related or not. The bad news is likely to keep coming and the economic damage may be significant. It is possible that that Central Banks can regain control as Central Banks have managed to restrain volatility for the six previous times issues arose since the GFC. However, with the VIX at 60+, they appear to be more challenged than ever post-2008. Already, Treasury yields have reached record lows in February. Accordingly, the Barclays U.S. Long Treasury Index increased 6.7% during the month(4). Market participants are now anticipating three interest rate cuts to occur in 2020(5) and in March, Treasury yields have reached unprecedented low levels! The 30-year Treasury is below 1% as we write(1). In this high volatility environment, anything is possible and we are watching the markets and economy like a hawk. The CIG-managed portfolios have benefited from being positioned for late cycle volatility since October, with the Dynamic portfolios even more so since late February. There is massive risk to the downside as well as the upside. On the plus side, we may get a global fiscal stimulus package which would in turn boost markets. In that case, markets are very oversold, meaning assets that have traded lower/ gotten cheaper have the potential for a price bounce. On the other hand, the constant subsidy of the markets and the economy has led us to a large bond and stock market bubble and very high debt levels while the Federal Reserve has left themselves with way fewer tools. We have plans for both scenarios. CIG has a robust business continuity plan to lessen any interruption to service and allow us to remain fully operational at all times. We can accommodate a fully remote staff if necessary. We believe the communication procedures that we have in place will help ensure that there is no disruption to your service. We remain committed to meeting your expectations regarding meeting attendance and recognize that some clients may prefer conference calls or videoconferencing in lieu of in-person gatherings. Finally, we are persistently following the investment markets and repercussions of COVID-19 and will continue to communicate with you when appropriate about the portfolio impact and opportunities that are created. Until then, please stay well and support your friends and neighbors. The elderly who are deeply concerned now and neighbors without alternative childcare will need our help. As long as it is advisable, please visit your service vendors like restaurants and tip generously. We also ask that you generously give to local organizations who support the needs of lower-income families who might rely on travel, retail and hospitality sources of income. They will suffer disproportionately. Even if COVID-19 burns out in the coming months, as we hope it will, the economic issues could possibly linger for some time. 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:  1.  Calculated from data obtained from Yahoo Finance, as of February 28, 2020. 2. MSCI, as of February 28, 2020 3.  Deutsche Bank report using Bloomberg Data 4.  NEPC 5.  https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html as of March 9, 2020. 6.  https://www.businessinsider.com/companies-asking-employees-to-work-from-home-due-to-coronavirus-2020

Easing into Retirement

Given the physical and emotional demands of their profession, it’s little wonder that some physicians look forward to retirement. However, many other doctors nearing retirement age are reluctant to turn their backs completely on their profession and would rather find a way to ease into retirement.

What should you do if retirement is on the horizon but you would prefer to transition gradually into retirement by working part-time? Here are some things to consider if you are thinking of cutting back on your work hours:

1. Review Your Finances

First off, determine if you can afford the reduction in earnings that reducing your work hours will entail. Pay particular attention to any debt you are carrying (mortgages, etc.). Ideally, you don’t want to be overly burdened with debt once you are no longer practicing full-time.

A review of your current net worth can give you a clearer picture of your overall financial standing. Net worth takes into account the value of all your assets as well as your outstanding liabilities.

If you’ve been funding a tax-favored retirement plan, hopefully you have accumulated sufficient assets to provide a steady stream of income for all the years you may be retired. If you still haven’t met your goal, you’ll want to determine if your earnings from part-time work will allow you to comfortably continue adding contributions to your retirement plan. You’ll also want to determine when you can start taking penalty-free withdrawals from your plan(s) and project what your tax situation will look like. These are all issues we can help you assess.

2. Look at Your Options

If you are part of a multi-physician practice, talk to your colleagues about what arrangements can be made for you to start cutting back your hours. You may need to revise your practice agreement to incorporate a new compensation arrangement. Typically, such arrangements are based on the productivity of the part-time physician less a share of practice overhead expenses.

If you are a solo practitioner, you may find it hard to practice part-time without creating problems with your current patient base. Patients may feel that you can’t deliver the type of patient care they expect if you are practicing part-time. Bringing in a physician assistant may be helpful. However, recruiting another physician who would eventually take over the practice may be the most effective route for solo practitioners.

Give careful consideration to the financial arrangements you make with the new physician. When it comes time to sell, you’ll want to have a formal purchase agreement that outlines all of the rights, obligations, and responsibilities of the buyer(s) and the seller. It should also include a valuation of the practice.

3. Consider Malpractice Insurance

Don’t ignore the issue of malpractice insurance when you are weighing the pros and cons of going part-time. You need to be certain you will be covered during your part-time years and after you stop practicing completely. “Tail coverage” can protect you against any malpractice claims that may be filed against you after you retire.

CIG Capital Advisors Can Help with Retirement Planning

Whether you are serious about transitioning to part-time work or are simply exploring your options, be sure to consult with us. We can help evaluate your personal financial preparedness for retirement and assess the need for other steps, like medical practice valuation or a partnership exit strategy. Schedule a complimentary consultation with a CIG Capital Advisors professional to discuss your specific situation.

2019 Asset Management Year in Review and Look Ahead to 2020