Umbrellas or magical swords…or both…or neither?
Also, a bit on expectations and comparisons…
I’m starting this weekly letter around 830 Friday morning, March 5. The jobs report just crossed the wire. A huge surprise to the upside for people being hired in February. Stunning good news…for the job market and humans in general. For our markets…well, we’ll hafta wait and see. My spidey sense says it could be ugly for our markets for a bit, or not…allow me to explain a bit about why.
Currently, interest rates are driving stock markets. This is typically the case. When you want to know why stocks are doing what they’re doing, look to bonds. When rates go up, bond prices go down. There’s also a very wonky relationship with rates and “discounting future cash flows when valuing equities”. So, in English this means if I buy a stock today and I am waiting for a company to “go up” what else could I earn in other “stuff” while I wait for the stock to go up. This is why the frothier, high revenue- low or no actual profit- companies have been hit harder than dividend type stocks. If there is suddenly an alternative option to stocks…money market rates going up, getting into bonds at higher rates (for the people who currently own bonds- I fear for them) etc…maybe stocks don’t seem as attractive? Short term…these are the prevailing thoughts. All of this interest rate stuff goes by a much scarier, more dragon like name – INFLATION!
But the facts of history give us comfort. Although rising rates can (will) get messy, typically the best insulator against INFLATION! is to own stocks. I’m fond of saying “the best way to hedge against the dollar being less valuable is to have more of them”. The types of companies we own have started to shift a bit, and will continue to do so. The 10 year treasury just had one of its most explosive moves in recent history in a VERY short time frame, so when you see that it appears we were quite active with regards to your portfolio over the last handful of weeks- you’re right, we were.
As the day wears on and as I write this and continue to monitor markets- it’s now around 1230. Around 1030 this morning things looked bleak. Time for our magical swords, not umbrellas. The federal reserve was supposed to calm markets yesterday with a bunch of their usual mumbo jumbo. They brought neither mumbo nor jumbo to the party and this highly elevated level of volatility is based mostly on the fed not calming the bond market-remember the answer to why stocks do what they do can usually be found in bonds.
And so, we have drawn our swords. For now, the dragon has ascended back into the clouds, and in fact even the rain clouds are starting to clear. We have placed very strict risk parameters around the portfolios for the next month. I hope we have the opportunity to put our sword away and watch the skies clear up even further…but just in case….especially if any of the particularly scary things rear their head again soon, we are covered. So picture it like this- we are carrying a heavy sword and an umbrella, if it’s a race we’re in, we’ll lag behind just a bit if the weather is clear and we are dragon free. But if any of the bad things come upon us, we are ready.
On expectations and comparisons-
Comparisons- Other advisors and firms will typically update you once a quarter, by phone, on how things are going. Most will offer one face to face meeting per year. Most use 3rd party money managers to choose your investments so they are not in control of or particularly aware of how your money is actually invested.
Expectations- given the business and personal relationships we have forged, and the trust we have placed in each other- I hope your expectations of us are higher than the “comparisons”. However, I do not know exactly what your expectations are, and this is because we have never asked. So, we’re going to ask! I think- weekly letters to you all and monthly individualized investment and strategy review would provide a good repeatable framework going forward. But when we reach out to schedule these coming meetings, we will ask- is that enough or is that too much?.
We look forward to speaking with you soon, and often.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Stock investing includes risks, including fluctuating prices and loss of principal. Bonds are subject to availability and change in price.
Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC.