The Boat & The Storm
The Boat & The Storm
Both explore the question of “what can be done?” What it often means, what it should mean and what we do at TEN to helps clients through the storms until markets can find their historic resiliency once again.
Five Things You Should Know
- Equity Markets – were lower this week with U.S. stocks (S&P 500) down -6.14% while international stocks (EAFE) fell -4.96%.
- Fixed Income Markets – were lower with investment grade bonds (AGG) down -0.91% while high yield bonds (JNK) fell -2.02%.
- Fed Raises Rates – As expected this week the Federal Reserve announced an interest rate hike of 0.75%, the largest increase since 1994. As the economy continues to struggle with inflation and high oil prices, the Fed has not backed down from their aggressive rate hike path plan, with odds of another large hike next month almost certain.
- Crypto Winter – the leading cryptocurrency Bitcoin is now off -55% year-to-date and briefly dipped below $21,000 for the first time since December 2020. This has had a snowball effect across the crypto market as investors have speculated a ‘crypto winter’ is on the horizon where prices stay low for an extended period. Cryptocurrency exchange Coinbase has responded by laying off 18% of its workforce and crypto lending platform Celsius, paused all withdrawals and transfers due to volatility.
- Key Insight – [VIDEO & ARTICLE] Both explore the question of “what can be done?” What it often means, what it should mean and what we do at TEN to helps clients through the storms until markets can find their historic resiliency once again.
Insights for Investors
“Capitulation – the point at which investors throw in the towel and sell, basically giving up on (an) asset and the hope of recouping lost gains.” – CNBC’s investing twist on the word
The Boat and the Storm
I hope you’ll take a few (approximately 7) minutes to watch the video above where I expand upon the following analogy of The Boat and the Storm that I have been sharing with clients over the last couple of weeks.
After the tough start to the year, it is only natural that many investors are asking, “what should we do?”. This is of course a physical and psychological response that we all have when faced with uncomfortable positions. The problem is while this instinct may help you in a one or two variable situation where your actions can have a real impact (e.g., a hand on a hot stove), when it comes to a multi-variable situations like investing, your actions are often both limited in their impact and often counter-productive (see countless studies around investor underperformance from selling during market weakness).
The reality is investors need to ask themselves what do you really mean by the question above – is it a) can you make the (market) storm stop/abate? or b) is my (financial) boat going to sink?
These are of course two very different things, with two very different answers.
The hard truth as to the first is that there isn’t too much that can be done for the “seasickness” caused by the “waves” of volatility by trying to control the weather. Such storms are a part of the journey to reaching your goals on the other side of the sea.
However, the good news is that just like turbulence doesn’t mean your plane is in danger, neither do the waves mean your boat is destined to sink and this truth can help ease your discomfort.
When I get the above question, I always make it a point to refocus people on their actual portfolio positions (e.g., planks of their ship) and their income stream or time horizon (e.g., their rations). If the former are sound, the latter is sufficient, then an investor will be just fine.
Markets are broken right now and the queasiness you feel is real, but for the prepared investor – they are not fatal.
Different Messages for Each of You
I found over the years that those of you reading these Commentaries fall into three general categories, who likely now find yourselves in three different positions.
A. Our Clients
For our clients who ask, “what should we do?” The real answer is, “it’s already been done”. You prep for storms in advance, and here at TEN Capital we have.
It’s why we take so seriously and repeat both in our communication and within our process, the importance of planning and income generation at all times, and in recent times moderating your risk to aggressive stocks as well as your concentration of conservative fixed income.
If this is you, rest easier and take confidence from the fact you’ve already done what you should do and your portfolio has been both tailored around your goals and designed to help you achieve success with the full knowledge that such markets are inevitable parts of the journey.
B. The Interested
I won’t pretend to know all the various reasons people have for reading/watching these weekly missives without (yet) becoming a client, but I know they do.
For some, they don’t think there is real value in having an advisor, for others they are still holding out for some magic solution, while for others they think we wouldn’t be interested in working with them.
Clearly, I don’t believe any of those are true.
But I can tell you this, based on the referrals we get, the prospects we talk to and our collective antidotal conversations with various friends in the community – most of you in this category were not properly prepared for this moment and have no real idea what it truly means for whether you can accomplish your goals.
I don’t say that to be mean or say I told you so, but only simply to point out a truth with the hope that whether it is us, or someone else that is qualified, that you’ll embrace the fact that no one makes it alone – and that absolutely includes us here at TEN.
If this is you, I hope you’ll give us a call. I promise you’ll find nothing but someone on the other end of the phone excited to help.
C. I Follow It, But I Don’t Do It
I also know a lot of people that follow markets and are interested in related news but are not investors themselves. For some they were nervous to begin with, while for others their apprehension comes from a prior bad experience that made them “capitulate” with regards to the industry or investing in general.
At times like these, I am sure you are saying “THIS is exactly why I don’t invest!!”.
And while of course holding all that cash feels good for the moment, the reality is that you will pay a far bigger price over time than having to endure market volatility every now and then.
Without even considering the “gains” a diversified investor who stays the course makes over time, consider your “losses” from inflation with a look at the chart below.
If this is you, I know it’s hard, especially at times such as these, but the struggle of volatility is nothing compared to the struggle of looking yourself in the mirror one day knowing you and your family could have had such a better life had you simply found the right partner, process, and path.
Of course, we are here to help anytime (and show you there is so much more to successful investing that just the stock market).
What’s Next?
As to the next few days/weeks/months, I don’t know and neither does anyone else. Fundamentals don’t matter in the short term when it becomes more about the limits of peoples’ fear and greed.
However, there is no reason to doubt that in time markets will do what they have done so many times before and that is prove their resiliency. This resiliency of course comes from the fact that like many others around us, WE are resilient, WE don’t capitulate but rather wake up each day working to make it better than the last.
For those that need another graphical reminder of how powerful the market’s resiliency has been time and time again, consider the graph below (which doesn’t even include returns from dividends).
While it “feels” like time to capitulate, as is reflected by the latest AAII data showing investor bearishness that is DOUBLE its historic average, that is exactly what longer term opportunity feels like.
Industry analytics leader Bespoke put it this way this week, “Of course, investor sentiment remains historically bearish after such large declines, and we definitely aren't hearing anything positive from market commentators that had been bullish leading up to the peak six months ago. In terms of historical analysis, most of our work shows that if you have longer than a one-year time horizon, now is the time to be putting money to work rather than raising cash. Remember, the goal is to buy low and sell high, not buy high and sell low!”.
As to those of you focusing on the few red numbers above instead of the big picture and totality of evidence, consider the following thoughts from Morgan Stanley CEO James Gorman and Brian Wesbury of First Trust (video link below) addressing the likelihood of a severe and immediate recession like those seen in 2000 and 2008.
As to those citing severe concerns regarding the economy, Gorman took the other side stating, “We’re clearly in a different world, but I think what a lot of people are forgetting, it’s against a backdrop of consumer balance sheets are very strong; corporate balance sheets are very strong; there has been enormous refinancing from banking … A lot of people saved money, a lot of high savings rate during the PPP [Paycheck Protection Program] and the last couple of years of Covid, so the consumer is in much better shape and employed, importantly”.
Wesbury also believes overall market and economic concerns are overdone, even if there is of course real issues to get past or confront in time (Click here).
In Closing
We all must pay a price in life, its unavoidable.
For me, I would rather pay the price of enduring with volatility (and the seasickness that comes with it) from time to time on my “journey” to achieving my goals, rather than never leave the shore and in so doing pay the price of real permanent loss (see inflation chart above again).
There may not be much one can do to calm the storms that will rage, but we can build sound ships that will safely reach the other side where our dreams and goals reside. Such is our work and focus here at TEN.
As always, we are here to serve you and provide comfort and clarity around your financial lives – especially during times such as these.
Have a wonderful weekend,
Tim and the team at TEN Capital
Data, Just the Data
Data points this week included:
- U.S. Jobless Claims – fell by 3K to a reading of 229K claimants for the week ending June 11th – above market forecasts of 210K. The four-week moving average increased slightly to 218.5K.
- U.S. Retail Sales – contracted (0.3%) MoM in May marking the first decline of 2022 and in contrast to a forecasted rise of 0.2%. High inflation, increased borrowing costs, and high gas prices all put downward pressure on non-essential goods. Auto and appliance stores sales fell (4%) and (1.3%), respectively.
- U.S. Housing Starts & Permits – dipped (14.4%) MoM in May which is the largest drop since last April as rising building costs, high home prices, and skyrocketing mortgage rates are weighing on overall consumer affordability. The YoY number fell to 1.55M after 1.81M the month previous. Single-family housing starts dipped (9.2%) and multi-family moved down (26.8%).
- U.S. Industrial Production – edged up 0.2% MoM in the month of May which was slightly lower than the 1.4% rise the month previous. This is the weakest gain in production thanks to a (0.1%) decline in manufacturing. Electric utility output expanded 1.9%, but the output of natural gas utilities was lowered by (4.5%).
- U.S. PPI Final – Producer prices crept up 0.8% in May after a 0.4% increase in April. Prices of goods expanded 1.4% with gasoline pushing up 8.4% and cost of services also rose 0.4%. Excluding food, energy, and trade, producer prices went up 0.5% and YoY prices are up 10.8%.
- U.S. Manufacturing Index – the Philadelphia Fed index decreased (3.3) in the month of June, which was far below growth forecasts of 5.5. This is the first factory decline since May 2020 with orders, unfilled orders, and inventories all down, (12.4), (7), and (2.2), respectively. Despite a contraction in growth, number of employees edged higher, marking some future optimism.
- Eurozone Industrial Production – bumped up 0.4% MoM in April which was a welcomed rebound after a (1.4%) decline the month previous. Energy production, intermediate goods and non-durable consumer goods all rose 5.4%, 0.7%, and 0.4%, respectively. Supply chains are still stressed thanks to lengthened lockdowns in China and the invasion of Ukraine.