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A Game Plan and Updated Outlook for Tough Times

Ben and Jake share a state of the market then discuss three positive actions to implement during times of market volatility to bring comfort and direction during trying times.


  1. Equity Markets – were lower this week with U.S. stocks (S&P 500) down -0.16% while international stocks (EAFE) fell -1.99%.

  2. Fixed Income Markets – were lower with investment grade bonds (AGG) down -1.09% while high yield bonds (JNK) fell -0.85%.
  3. Fed Moves ‘Expeditiously’ – on Wednesday, the Federal Reserve moved its core interest rate up by 0.5%, after a 0.25% increase earlier this year. In an expected move, the FOMC said they are, “…highly attentive to inflation risks” and Chairman Powell stated the central bank will move “expeditiously” to dampen inflation to a 2% annual rate. Powell did seem to rule out hikes higher than 0.50% in future meetings but are expected to hit that bogey for the June meeting.

  4. Market Whiplash – investors seemed to respond to the Fed raising rates with smiles and sunshine (a little too much) as the S&P 500 rallied 2.84% intra-day Wednesday. Gains would soon disappear with sunshine replaced by rainclouds as investors then grappled with an extended economic outlook that included a still aggressive Fed and a thought of a ‘soft landing’ unattainable. The S&P shed -2.89% as the NASDAQ tumbled -5%.

  5. Key Insight – [VIDEO] Ben and Jake share a state of the market then discuss three positive actions to implement during times of market volatility to bring comfort and direction during trying times. [ARTICLE] After a quick update from Tim on the markets, Ben takes a bit of a lighter tone with some fun history of the upcoming Kentucky Derby and how some of the principles applied in consideration of the horse, are similar principles applied to portfolio construction and management.


Market Update

What a week in the markets, and yet will finish within a couple percent from where we started the week. If you read/watched our commentary from last week (see here), you’ll note that ultimately none of this is a great surprise. In fact, we stated back in January, when we raised cash, we thought an overzealous Fed could drop the S&P to around 4000. This isn’t about making predictions, but mentally preparing for what is possible to avoid panicking at times like this.

Of course, there is bad news out there from Russia and Fed hikes, to inflation, but it’s equally true that those are all known and largely priced in. Anything less than worst case scenarios like WWIII and 10 hikes from the Fed could provide quite a bounce to the upside.

Furthermore, there is a fair amount of good news being ignored. Today’s nonfarm payrolls rose 428,000 vs. expectations of just 380,000 and total hours worked reached an all-time high. S&P 500 earnings are coming in at +7%, +10%, if you back out the anomaly of Amazon’s bad quarter due to its investment in EV car maker Rivian.

S&P 500 valuations are now at 18x earnings, which is in line with the 10-year average. Bears will argue that should be lower in today’s interest rate environment, but you could also argue it should be higher given its composition in technology and companies that can/should trade at higher multiples.

Even on the fixed income front there appears to be some light on the horizon. Breakeven yields, which measure the point where losses from falling prices fully offset income, show that 2-year yields have +136bps of buffer room over the next 12 months. In short, even if rates move up a bit more, bond investors can make money from today’s levels.

For those understandably unnerved by the whipsaw action of the markets, especially this week, Bespoke highlighted that such action has historically been a positive signal.

They noted, “What has been more unique, though, is for the S&P 500 to rally more than 1% in the final hour of trading twice within a three-day span. Since 1985, that has now occurred 41 times. Just looking at the chart, these occurrences have usually, but not always, occurred after or late into market pullbacks of varying degrees. Before this week, the last occurrences were during the COVID crash…

…Looking further out, median returns over the following three, six, and twelve months are significantly better than the average for all periods since 1985. One year later, in fact, the S&P 500 was up by a median of more than 25%, with positive returns every time. In terms of the range of the returns over the next twelve months, it was wide spanning from a gain of just 6.33% in the year following the occurrence of Cinco de Mayo in 1999 to a gain of 59.2% in the year after the March 10, 2009 occurrence.”

Being an investor is tough, but the rewards are great. As always, we are here watching and moving on your behalf, and here to talk anytime. Enjoy your weekend, and Ben’s fun piece below! – Tim

What does the Kentucky Derby have to do with investing?

Ben Klündt

Baseball may be America’s past time, Football entertains the armchair quarterbacks, but the Kentucky Derby is actually the longest running sporting event in the US dating back to 1875. This Saturday, it’s Derby time! Every year a group of our friends get together to partake in a mint julep, a bourbon tasting, maybe the occasional sear sucker suit for the gents or fascinator the for the ladies and of course, two very intense minutes of horse racing.

The history and skill of horse racing is impressive. I know you may be thinking, “is this guy really going to try and draw a parallel between horse racing and the stock market”, but the answer is YES. It takes years of practice, calculated risk on the part of the jockey, and regimented practice and strategy to qualify in a class of horse and jockey that is eligible to run in the Derby.

First, a fun bit of history. The Kentucky Derby started after Meriwether Lewis Clark, grandson of the famed William Clark of the explorers, “Lewis & Clark,” was visiting Europe. While there, he attended the pony races and realized there wasn’t a club in the US. Meriwether was so inspired that he formed the Louisville Jockey Club, connecting with his uncles John, and Henry Churchill, whom he bought the land for a horse racetrack from. In 1889 a horse by the name of “Spokane” won the derby being the first sired and trained out of Montana. Fast forward to present day and now over 150,000 people attend, with millions more watching as the horses/jockey’s compete for a $3Million purse.

With the history and lore covered, I want to examine the particulars of how a horse is chosen. When a stable/owner is deciding which horse will run in the Derby, there are a few elements considered. We’re going to focus in on three and how those same factors are applied to portfolio construction. They are:

  1. The last 12 races of the horse over the last 12 months
  2. The fitness of horse
  3. The race conditions for race day

1. The last 12 races

Past Performance is not a guarantee of future results. We’ve all read that disclaimer at the bottom of any investment document. While it’s not a guarantee, it’s something we all look at to get an idea of how recent performance of the horse, or the investment holding, has gone. This gives us an idea if there is something out of the ordinary we can dig into for a reason as to the lack of performance, or if it’s on a hot streak. When reviewing a fund, we’ll consider the past performance, negative or positive. Is the fund poised for a comeback, has it run up to it most recent high and not been able to break through the technical level? Careful consideration of performance, but even more, why it has performed in that manner and where the opportunity lies.

2. The fitness of the horse

When considering a horse, you’re checking their health history, e.g., have they had any recent health setbacks that may be a hindrance on their ability to perform in the race? Have they been in an environment with good nutrition to allow for max energy output? When looking at investments, we’re looking at the fitness of the management team of a particular fund. Do they have a deep bench with varying backgrounds/outlooks and long tenure with the fund and the asset class that they manage? A change in management would show us a questionable “fitness” level and a cause for pause, whereas a fund manager which a good track record of performance and tenure (e.g., a high level of fitness) would give us comfort in the future of the investment holding.

3. The race conditions of the day

As with any race, external forces need to be considered. A wet and muddy track will create a very different race than one on a dry track and most every horse performs different based upon the conditions of the day. The same is true of asset classes and our decision as your financial advisor whether we overweight one sector/asset class over another. What are the conditions of the market and are they favorable to the asset class we are considering for inclusion? For example, we know risings rates (an external force) have a negative impact on bond values. We made the decision to overweight alternatives and limit our bond exposure which has helped buffer the downside. I offer this just as one example of the type of conditions that may affect our decisions.

In summation, while my analogies aren’t perfect…they’re close. In any race, it takes consistent performance, good fitness, and positive conditions for your best results. The markets are a race, all be it a slow one. The winner is the one who doesn’t come out of the gates too fast and burn out, but one that’s consistent, adheres to their lane, and makes each move with purpose.

As always, we’re here for you with any questions you may have. Have a great weekend and tune into the Derby this Saturday!

Ben and the team at TEN Capital

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