Lewis Wealth Management

Investment Management, Financial Planning, Consulting

Seriously, how long can these markets continue?

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In 2017, equity markets around the world had a very, very good year. U.S. stocks were up 20%. International stocks were up 25%. Emerging market stocks were up 36%.

We are currently enjoying the second-longest bull market since World War II. The Federal Reserve has been hoping and fighting for this outcome for a long time. The Fed has played a significant role in this current market, but that role has recently changed, and we should take notice.

Since the Great Recession of 2008–2009, the Fed has driven down short-term interest rates lower and lower. In fact, the 10-year Treasury yield is still lingering at about 2.5%. Because current expectations of inflation are at about the same level, the long-term expected real rate of return on government bonds is zero.

Consequently, over the past 9 years, investors have been selling bonds and buying stocks with the hope of higher returns. This has fueled historic returns in the stock market. The S&P 500 has gained more than 200% in the 7 years from 2009 to the month before the 2016 election. The total increase is now about 300%. Feldstein, Martin. Stocks Are Headed for a Fall, The Wall Street Journal, January 16, 2018 (Mr. Feldstein is a professor at Harvard University and was the chairman of the Council of Economic Advisors under President Reagan).

But the Fed has reversed its course. It raised short-term interest rates several times last year, and more increases are planned for this year. Why?

Stock valuations have become elevated. The price/earnings ratio for the S&P 500 is at 26.8, about 50% higher than its historical average. Inflationary pressures are gaining momentum, and we are at full employment.

How Long Can This Last?

No one knows for sure, and don’t trust anyone who says they do. But we can draw several commonsense conclusions from what is going on.

No one has abolished the business cycle. There will be a correction eventually. We just don’t know when. At this point, I believe we are much closer to a market top than we are to a market bottom, but that is not always clear.

Central banks are no longer trying to stimulate the economy – they are trying to restrain it. The Federal Reserve is tightening the money supply by raising short-term interest rates several times this year. Central banks around the world are pulling back on further economic stimulus. This should slow down economic growth over time.

Expectations of continued earnings growth are high, which means that even good earnings may disappoint high market expectations.

Volatility has been at historic lows. Behavioral finance experts warn that even a small amount of downside volatility may surprise some investors who have grown to expect placid markets. Some investors have forgotten (or did not experience) the painful periods of volatility in 2008–2009.

We may be experiencing a “melt up” this year. A melt up is a dramatic and unexpected improvement in the investment performance of an asset class driven partly by a stampede of investors who don’t want to miss out on its rise, rather than by fundamental improvements in the economy. These investors create upward momentum in stock prices. Recently, have you noticed the market setting new records when there is little or no positive news to support the rise?

Are You Feeling Fearful, Greedy, or Both?

My favorite Warren Buffett quote is that you should be fearful when others are greedy and greedy when others are fearful. This is great advice, of course. But what if some people are fearful and greedy at the same time?

If you are feeling fearful, you are not alone. I hear from investors who see how far the markets have come and how long this bull market has endured. They are concerned about the potential for policy error in Washington. They are concerned about overexuberant investor behavior.

If you are feeling greedy, you are also not alone. These investors feel that the “animal spirits” of the market have finally been released. They are excited about the recent tax reform law, and how that may boost corporate profits even further. They believe the new direction in Washington is refreshing.

Some of us are feeling fearful and greedy at the same time. There is no denying that we had a good year and that the economy is humming along. We are currently enjoying outsized investment returns, but we also have concerns and reservations about the future.

Politics Corrupts Our Investment Judgment

Complicating matters is our polarized political climate. In my view, politics corrupts our investing judgment. If you lean to the left, you are much more likely to be pessimistic about the markets this year. If you lean to the right, you are more likely to be optimistic. Just remember that politics and investment markets move independently. Yes, they are interdependent to a degree, but not as much as many investors want to believe. Too many investors look at the capital markets through a political lens. That’s a mistake.

Recommendations

Be objective. Look at reliable measures of performance, like corporate earnings, when making judgments about the markets. Don’t let your political passions corrupt your investment decisions.

Be logical, not emotional. The pain of losses on the downside and the regret of missing out on the upside are mathematically identical and should be treated the same. But they are not. Most people feel the pain of losses much more acutely than the regret of missed opportunities. This means they are much more likely to panic during a down market. This is a common weakness to understand, appreciate, and guard against.

Be prepared for all market conditions by using a sound asset allocation. Use a diversified portfolio of stock investments to take advantage of market upside. Use conservative asset classes, like bonds, to help support the portfolio if the markets take a dive. How much of each asset class to deploy will depend on a number of individual factors, like your risk tolerance and your goals and objectives.

If you are already using a sound asset allocation, now is the time to rebalance!

Be reasonable when it comes to your expectations. Great investors know that good long-term returns require consistent and disciplined exposure to the capital markets over time. Market timing does not work. Because of this fact, great investors understand they will lose money from time to time, and there is no way to consistently avoid these losses without also missing out on the upside, which historically has been greater in the long run.

Great investors also know that if we are disciplined and have a sound investment philosophy, our chances of making money over the long term are very, very good, even if we have periodic setbacks.

If you have questions or concerns about your situation, please give us a call at (855) 353-3800.

Thank you,

Austin Lewis

This is an educational newsletter expressing opinions only. This newsletter should not be relied upon until your individual situation is taken into consideration by an experienced advisor. This newsletter is not designed or intended to give you individual investment, tax, or legal advice. We strongly recommend that you consult with your own financial/tax advisor and/or legal counsel for information and advice concerning your particular situation. If you are a client, please give us a call. Past performance does not indicate or guarantee future results. Investing involves substantial risks, including loss of principal.

Source of charts: Dimensional Fund Advisors. Past performance is not a guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. The S&P data is provided by Standard & Poor’s Index Services Group.

 

Written by Lewis Wealth Management

January 24, 2018 at 12:04 pm

Posted in Uncategorized

Strong, Quiet Markets – Don’t Get Complacent

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The Current Bull Market – The Late Innings

We just celebrated the eighth anniversary of this bull market. It seems like yesterday, but on March 6, 2009, the Dow Jones Industrial Average sank to 6,443.27. As of July 13, 2017, the DJIA closed at 21,553.09, an all-time high.

This is a testament to the resilience and power of our stock market and economy over time.

We are also experiencing low volatility. As measured by the CBOE Volatility Index (or VIX), volatility reached a low not seen since February 2007. The one-month implied volatility on the S&P 500 fell to the lowest on record, according to Bloomberg.

In addition to high stock prices and low volatility, the U.S. economy is performing well. We are officially at full employment. Inflation remains below 2%. GDP growth is tepid, but steady. Corporate earnings have been strong of late.

Even international equity markets are performing well, although some of that performance is explained by a temporary weakening of the U.S. dollar.

Yields in the U.S. bond market remain at historic lows. The 10-year U.S. treasury bond currently yields 2.34%. Current corporate bond yields are just below 4.00%.

In response to these strong economic conditions, the Federal Reserve announced another quarter-point increase to the federal funds rate in June, its second increase in 2017 and fourth overall since it began tightening last year. The Fed has also started to unwind its quantitative easing program by selling some of the bonds it bought in the past few years. The process of selling bonds puts upward pressure on rates. The process of shrinking the Fed’s balance sheet will take years.

Don’t Get Complacent

Good stock market returns combined with low volatility make investing seem easy. It’s a recipe for investor complacency, and that is a dangerous thing.

As far as I know, no one has abolished the business cycle; we just haven’t seen one in a while. There will be future corrections, bear markets and recessions. You can count on it.

A consensus of economic forecasters puts the odds of a U.S. recession at one in eight this year and one in four next year. Epstein, Gene. “Predicting the Next Recession.” Barrons at p. 25, July 17, 2017. Of course, the economist John Kenneth Galbraith once famously said, “The only function of economic forecasting is to make astrology look respectable.”

How long will this bull market last? No one knows for sure (and you should be very skeptical of anyone who says they do know). It may last three more days or three more years. What we do know is that we are 101 months into the current bull market, the second longest on record since WWII.

What Not to Do

When markets are strong and quiet, some investors feel emboldened. Investing seems easy, and they don’t want to miss out on “easy money.” They typically buy more stock, even taking the occasional flyer on a tech company with excellent growth prospects. Historically, these are signs of a market top. When markets turn, these investors have taken too much risk and they experience heavy losses on the way down.

Other investors go the opposite route. They will try to time the top of the market and sell investments to generate cash or try their hand at shorting the market. It all depends on timing. If their timing is good and the market tops out, they can pat themselves on the back. If there are three more years to go in this bull market, they will miss out on returns, which can be very frustrating.

Currently, our political beliefs and attitudes are important factors in our personal outlook. Some investors believe the economy is a coiled spring just waiting to pop when the “Trump Trade” finally arrives (i.e., tax cuts, infrastructure spending and lower regulation). These investors are bullish.

Other investors are worried about what they see going on in the White House. They believe things are about to take a turn for the worse. These investors are bearish.

Regardless, most investors will do nothing. But since stocks have been on a run since the election, their stock allocations are well above target. Their asset allocations are drifting over time, taking on more and more risk.

What to Do

Rebalance back to your target allocation. For most investors, this will mean selling appreciated stocks and redeploying that capital into other asset classes, like bonds. As long as your underlying allocation is sound, this is the best course of action in the face of uncertainly. At the very least, check your current allocation and compare it with your target allocation.

If you are like most investors, it’s difficult to see your overall asset allocation because you have numerous accounts at various custodians. You may have a 401(k) at your current employer and even one at your previous job. You may have an IRA at one custodian and a brokerage account at another custodian. You may have a money market account or a CD at a bank and a checking account at another bank. You have assets scattered all over the place.

This is typical. But when you have multiple 401(k) providers, custodians and banks, it is difficult to aggregate these accounts to see what your overall investment allocation looks like. This is why I typically advise clients to consolidate all their investment accounts with one custodian. This makes matters much simpler. Of course, you cannot move your current 401(k) because the location of that account is usually determined by your employer, but you should roll over old 401(k) assets into an IRA at your primary custodian.

With respect to your current 401(k), it is helpful to set that allocation separately. Your 401(k) probably has an automatic rebalancing feature that will help you stay on target over time.

If you cannot see your overall allocation, you should seek assistance from a good advisor so you can. Otherwise, how can you determine when you need to rebalance? Of course, this assumes you have your allocation set correctly given your long-term objectives and risk tolerance, and you have deployed your investments in a tax-efficient manner.

Having a good asset allocation and rebalancing it correctly are critical to your success as an investor, and this is where most investors fall short.

Be prepared for changing market conditions . . .

If you have questions or concerns about your situation, please give us a call at (855) 353-3800.

Thank you,

Austin Lewis

This is an educational newsletter expressing opinions only. This newsletter should not be relied upon until your individual situation is taken into consideration by an experienced advisor. This newsletter is not designed or intended to give you individual investment, tax, or legal advice. We strongly recommend that you consult with your own financial/tax advisor and/or legal counsel for information and advice concerning your particular situation. If you are a client, please give us a call. Past performance does not indicate or guarantee future results. Investing involves risks, including loss of principal.

Source of charts: Dimensional Fund Advisors. Past performance is not a guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. The S&P data is provided by Standard & Poor’s Index Services Group.

 

Written by Lewis Wealth Management

July 19, 2017 at 10:30 am

Posted in Uncategorized

The Current Frantic News Cycle and Our Investing Brains

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Our Current News Cycle

The current news cycle is breathtaking. Whether it’s crazy political conventions, Brexit, mass shootings, or a Turkish coup, there is a lot going on right now.

As our news cycles are becoming shorter and shorter and more intense than ever, the noise emanating from the news media increases in volume and intensity. The news media often play on our fears because – let’s face it – fear sells. The news media also create a false sense of urgency by telling us that their information is “breaking.” It’s hard not to feel manipulated.

For investors, the implication is that you should be doing something with your investment portfolio that somehow protects you or takes advantage of the “urgent” news they are currently broadcasting.

How We Get Our News Has Changed Dramatically

Not long ago, there were three television networks and a few major newspapers that covered the national and financial news. Now there are literally thousands of outlets, which include 24-hour cable news channels, blogs, social media, and Twitter. The amount of information available far exceeds our capacity to process it.

As investors, we should choose our news sources as carefully as we choose our investments. These sources should be high quality and objective. There should also be some diversification in your news sources. If you spend all your time watching one news outlet with a single point of view, I believe you are not receiving a well-diversified and objective stream of information. And many news sources now blur the line between objective reporting and pure opinion. As a news consumer, you have to be very discerning.

The Danger of Confirmation Bias

Confirmation bias is running amok these days. Confirmation bias occurs when we have a tendency to interpret new evidence as confirmation of our existing beliefs. The polarization and bias of some current news sources make matters worse. So, if you believe the country is falling apart, you will gravitate toward news sources that will confirm your fears over and over again. This has an adverse impact on our investing brains. There is a difference between being well informed and being fearful. Well-informed investors make good investment decisions; fearful ones rarely do.

It’s hard not to fall into this trap. At the end of a busy day, when I turn on the news, it feels better to watch or listen to something I’m probably going to agree with. It’s much harder to listen to something else that takes the opposite side. It can be annoying and irritating. But if the content quality is good and there is some objectivity, it’s worth listening to both sides.

Long-Term Investors Have an Advantage

Here is some good news for you. If you are a long-term investor, you can ignore almost all the drama and noise that you see and hear on a daily basis. It’s important to remember that you are a wealth builder and using the capital markets to build your wealth over a long period of time.

Wealth is built over time when natural resources, skilled labor, intellectual capital, and financial capital are skillfully combined in an enterprise to generate profits. As investors, we want to capture some of that wealth and make it our own. We do this by providing the financial capital part of the equation. We can provide this capital in exchange for an equity interest (stocks) or as a creditor (bonds).

When we hold stocks, we expect them to appreciate in value and, in some cases, pay us dividend income. When we hold bonds, we expect periodic interest payments and eventually the return of our original capital. The bulk of personal financial wealth in the world has been created through this time-tested process.

How to Filter the News from an Investment Perspective

I use the wealth-building process as a filter to determine whether any news item is relevant to my investment portfolio or my long-term financial goals. I ask the following question: will this news item directly impact the process of wealth building over the long run? That is, will this news item impact a company’s ability to generate profits or repay debt holders? In most cases, the answer is no, and many news items are not of great significance to the long-term investor.

But the truth is that the more anxious we are, the more likely we are to draw some sort of connection between the news item in question and the capital markets. But we should be really thoughtful here. For example, will the attempted coup in Turkey have an impact on most corporate balance sheets in the developed world? Probably not. Are there serious implications for NATO, the war on terror, and international security? Possibly, but those are not necessarily investment issues.

Will Brexit have long-term implications for your investment portfolio? Perhaps, especially if you hold some stock in British and European companies, which most of us do. But we do not have enough information to draw valid inferences or make smart decisions with our investment portfolio at this time. The impact of Brexit will take several years to process and more years to understand. There are too many unknowns at this point.

Short-Term Investors Are at a Disadvantage

Thank goodness we are long-term investors. Short-term investors, like many hedge fund managers, have a much more difficult game to play. Their clients are paying them fees based on short-term performance. Since short-term performance is so important to hedge fund managers, they are out there making speculative bets by trying to trade the current news cycle. And the recent performance of many of these funds is poor.

Speculation is a tough game. You are making bets on the value of something going up or down in value on a short-term basis. There are two sides to each of these bets. Someone is going to win, and somebody else is going to lose. In my view, if you try to trade the news cycle, you are going to be wrong as often as you will be right. You are just adding risk.

For example, after the first two hours of coverage of the Turkish coup unfolded on CNN, hedge fund managers might have shorted the Turkish lira, or they may have taken a long position the next morning when it appeared the coup had fizzled. With respect to Brexit, many hedge fund managers placed financial bets predicting that Britain would stay in the EU. Those bets did not fare so well, but there were a few speculators on the other side who made big money.

Speculating is not long-term investing and it’s more risky. It requires a different set of skills and attitudes. Most speculators have trouble building wealth over time. Disciplined long-term investors almost always prevail in the end. I’m not going to bet someone’s retirement or college fund on a Turkish coup or Brexit.

Conclusion

As a long-term investor, rely on your objective investment process to get you through any news cycle. Evaluate current news objectively. Review your long-term financial goals. Make sure you are saving enough money. Review your asset allocation, and make sure it strikes the appropriate balance between risk and return. Manage that allocation in a disciplined way. Stay diversified. Make sure that the investments you have chosen to fill your asset allocation are delivering the expected return in their respective asset classes over time. If you do this consistently over a long period of time, your chances of success are very good.

The news cycle may cause you to question your investment approach, but making changes to your portfolio based on the current news cycle should be the exception, not the rule.

If you have questions or concerns about your situation, please give us a call at (855) 353-3800.

Thank you,

Austin Lewis

This is an educational newsletter expressing opinions only. This newsletter should not be relied upon until your individual situation is taken into consideration by an experienced adviser. This newsletter is not designed or intended to give you individual investment, tax, or legal advice. We strongly recommend that you consult with your own financial/tax adviser and/or legal counsel for information and advice concerning your particular situation. If you are a client, please give us a call. Past performance does not indicate or guarantee future results. Investing involves risks, including loss of principal.

 

Written by Lewis Wealth Management

July 26, 2016 at 11:25 am

Posted in Uncategorized

When to Be Patient and When to Change Course

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January and February provided one of the worst starts to a year in Wall Street history. But the markets roared back in March.

Investors have been concerned about low oil prices and slower growth in China. Both of these concerns have abated.

During challenging markets, investors sometimes lose faith in the approach they are taking. They start searching for alternatives.

Before making an important investment decision, you should make sure you have correct information about your performance (which most investors do not) and be able to put your return into context.

You should also ask whether you are properly diversified, using a sound asset allocation, and investing efficiently.

If you have the basics covered, sometimes the best thing to do is nothing.

If you are out there searching, avoid chasing returns, reaching for yield, falling for a private investment scam, or signing up with a “hot” adviser with a lucky forecast.

Be careful out there.

To read our complete Newsletter on this subject, please go to our website: http://www.LewisWM.com.

 

Written by Lewis Wealth Management

April 28, 2016 at 12:18 pm

Posted in Uncategorized

Here we go again . . .

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2016 is off to a rough start. Global markets were off sharply in the first two weeks of the year.

Investors are watching the contraction of the Chinese economy, low oil prices, and how higher interest rates in the US are causing distortions in the currency markets.

It’s tough to be an investor right now. Many do not feel they are making progress, even though they are.  Wages have been stagnant and investment returns have been low or non existent. But when you look at investment returns in the context of our low inflationary environment, you are likely making more progress than you think. Wage inflation is finally starting to pick up.

It’s a long-term game. There is a risk premium for investing in stocks, but it takes time to consistently collect it. Warren Buffett has said, “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.” Data shows this to be true. When you look at equity risk premiums over one, five, and ten year periods, you can see that if you are currently unhappy with your return on stocks (or any asset class for that matter), increase your holding period.

There are patterns in the market and investor behavior. When markets turn, some investors are fearful and cannot stay with a good investment strategy. They always underperform. Others are patient and disciplined. Their long-term performance is good.

Resist the urge to abandon your current portfolio (assuming you have a sound strategy) and chase returns elsewhere. There is no free lunch out there waiting for you. With record high prices, it’s not a good time to buy a rental home or fix and flip. Private investments, like hedge funds or your brother-in-law’s business, are risky, illiquid, and expensive. Gold, cash and CD’s are so-called “safe haven” assets and they may make you feel better initially, but they do not generate the long-term returns necessary to achieve your financial goals. Stock picking and market timing don’t work.

Take advantage of dips to rebalance your portfolio. While you wait for the market to turn, knock out your savings goals, reduce debt and streamline your spending. Grow your net worth over time.

Markets do recover.

Thank you,

Austin Lewis

For a full discussion, please see our current newsletter at www.LewisWM.com.

This is an educational post expressing opinions only. This post should not be relied upon until your individual situation is taken into consideration by an experienced advisor. This post is not designed or intended to give you individual investment, tax, or legal advice. We strongly recommend that you consult with your own financial/tax advisor and/or legal counsel for information and advice concerning your particular situation. Past performance does not indicate or guarantee future results. Investing involves risks, including loss of principal.

Written by Lewis Wealth Management

January 19, 2016 at 10:46 am

Posted in Uncategorized

Climing the Wall of Worry

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Financial markets have recently been roiled by Greece, China, Puerto Rico, and the Fed.

The debt crisis in Greece is ongoing, but it is well contained and not large enough for long-term investors to change course. The same can be said about the Puerto Rican debt crisis.

China’s stock market reached bear market territory last week. This 30% decline followed a 135% rise over the preceding 12 months. China is an important source of global growth, but only about 3% of the world’s market capitalization. They will find a bottom and grow again. Be careful not to over expose your portfolio to this nascent market.

The Fed will likely begin to raise interest rates in September. This will cause distortions in the bond and stock markets. We have shifted our bond portfolio to short-duration and high-quality bonds to minimize the impact of Fed policy.

When considering what to do in the face of bad news, remember that long-term investors do better than short-term speculators, and that most of us have a long-term investment horizon.

Showing restraint in the face of market stress will serve you well in the long run.

For a more detailed discussion, please visit our website and take a look at our Quarterly Newsletter. http://www.LewisWM.com

Thanks, Austin Lewis

Written by Lewis Wealth Management

July 20, 2015 at 3:31 pm

Posted in Uncategorized

Greek Tragedy

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June 29, 2015 – 11:00 a.m. MDT

Greek banks are closed this week. The Greek stock market is also closed. Greece will default on a $1.69 billion debt payment due tomorrow to the International Monetary Fund (IMF). The negotiations between Greece and the IMF, the European Commission, and the European Central Bank (ECB)(the so-called, Troika) broke down last week when Greece’s Prime Minister, Alexis Tsipras, terminated negotiations and announced that we would put the issue before Greek voters on July 5th. This was not expected.

So what does all this mean for the average US based investor? Not much if your investment horizon is longer than 6 months and your asset allocation is sound. The turmoil created by Greece will only be temporary, whether they stay in the European Union or not. Greece is simply too small to take down the world’s credit markets. The ECB has worked diligently over the last few years to put a financial fence around Greece. The European banking sector is much stronger than it was when the last Greek debt crisis took place in 2010. While markets are off this morning, there is no sign of panic outside of Greece.

If you are correctly allocated, your asset allocation will help during periods of market stress and uncertainty. Portfolio managers sold most Greek investments several years ago. Most of Greece’s debt is now held by other European governments, the IMF, and the ECB. If European stocks sharply correct, it may be a buying opportunity

Expect to see a lot of media attention on this issue. The situation inside Greece is quite serious. There will likely be political and social unrest inside the country. There will be lines outside the banks during the day and rocks thrown in the streets at night. Try to keep this in perspective.

It will be interesting to see how the referendum plays out. If Greek voters decide they want to stay in the European Union, they will have to come to an agreement on further austerity with the Troika. In that case, Tsipras and his left-wing, anti-austerity Syriza party will likely not survive. If they vote no, Greece may be exiting the EU. No country has ever exited the EU, so there will be uncertainty regarding the details of such an exit and the reintroduction of the old Greek currency, the Drachma. But this is not necessarily a bad thing. It will show the world that membership in the EU is a privilege and not a right. The key will be containing the crisis to Greece and we believe the ECB is prepared for such a contingency.

You can expect some further volatility as the crisis plays out. There will be new developments. I would be very careful to make any serious moves in your portfolio at this time.

Austin Lewis

Written by Lewis Wealth Management

June 29, 2015 at 10:49 am

Posted in Uncategorized