By Rick Rubin, CFA
Many financial advisors build a book of business using mutual funds for their affluent clients. Is it because funds have favorable characteristics and offer stronger investment returns? Absolutely not. Mutual funds have many drawbacks!! First, they limit an advisor’s ability to customize a portfolio and manage risk effectively. Second, they add an additional layer of fees, which reduces an investor’s returns. Third, they are inefficient for investors who want to manage their tax bills. Small retail investors have few options and mutual funds may make sense for them. Fortunately, our clients enjoy a customized approach to managing their money. We invest in a diversified portfolio of individual stocks and bonds to meet their goals.
by Chad Meyer CFA
For all of its joys, the holiday season also has a well-documented history as a source of stress. While they couldn’t all have been hosting their in-laws for an extended visit, American investors certainly bore the brunt of that phenomenon this past December. As trees were lit and skis waxed, market commentary ranged from stunned disbelief to gallows humor. Perhaps nowhere was the mood more accurately captured than in the Wall Street Journal’s Christmas Eve headline: “On the Bright Side, The Market Closes Early Today.” Bah humbug, indeed.
By the numbers, this pervasive pessimism was amply justified. The S&P 500 and Dow Jones Industrial Average turned in respective tumbles of nearly 14% and 12% in the fourth quarter. Both performances were punctuated by the worst December drop either index had seen since 1931. Unable to lean upon the once-invincible “FAANG” gang, the Nasdaq followed a similar script, plunging a remarkable 17.5%. With a year’s worth of gains (and then some) melted away, the perches of September suddenly felt like ancient history.
By Eric Schopf
The Standard and Poor’s 500 turned in the worst fourth quarter performance since the depths of the financial crisis of 2008. The fourth quarter total return of -13.52% wiped out all performance gains for the year, which finally settled at -4.38%. It was also the worst quarterly result since the third quarter of 2011 when the S&P 500 contracted by nearly 14%. While these figures pale in comparison to the 22% correction in the fourth quarter of 2008, they serve as a good reminder about investment time horizon, asset allocation and risk tolerance.
In typical fashion, as the stock market swooned, the bond market rose. With the exception of the very shortest term instruments, interest rates on United States Treasury securities fell across the yield curve. Ten-year rates dropped from 3.05% to 2.68%. However, the ten-year rate touched 3.23% intra-quarter which made the decline even more impressive. As a proxy for mortgage rates, the ten-year rate is an important economic gauge. Rates on one-, three- and six-month Treasury Bills continued to climb during the quarter in reaction to the Federal Reserve’s most recent interest rate hike imposed in December. The higher short-term rates have kept money market fund rates elevated.
By Chad Meyer, CFA
It’s an ongoing debate. Should investors use active or passive strategies in their portfolios? Proponents of active management argue that experienced money managers can outperform their benchmarks over market cycles while simultaneously positioning portfolios to avoid investments thought to have poor risk/return characteristics. Advocates of passive management, on the other hand, often point to greater tax efficiency and lower costs. Let’s explain how both of these two strategies work.
By Ted Hart
Today it is more prudent to think about Apple (AAPL) as a consumer discretionary or consumer staple company rather than a technology hardware company. Despite popular belief, Apple is rarely the innovator for each product category; they simply improve ease of use and product appeal. Starting with the MP3 player, Apple redesigned and released their version with the iPod. In 2007, Apple “connected the dots” with the iPhone, merging the cell phone, the Palm Pilot and the MP3 into one device – all the while keeping the device small and sleek. The iPad came soon after, capturing many of the already iPhone customers. Finally, the launch of the Apple Watch in 2015 was introduced as nothing other than a luxurious item. CEO Tim Cook alongside supermodel Christy Turlington Burns released the watch at the Apple Developer Conference. The release was followed by a twelve-page advertisement in the popular fashion and lifestyle magazine Vogue.
Compounding is often referred to as “magical” because of the way it can help your savings grow. While its power is impressive, the way it helps you is simple math, not magic.
Compounding simply refers to producing earnings off of your previous earnings. Each time your earnings are “compounded,” it means that the amount you have earned on your original investment (usually in the form of interest or dividends) has been added to your original investment, increasing both the principal and the amount that your principal can earn on its next earnings payment. With a savings account, you can usually choose to compound yearly, quarterly, monthly or even daily. With stocks, bonds or mutual funds, the most frequently you can compound may be monthly. When all other factors are equal, generally the more often you compound, the higher your earnings will be. The reason compounding gets so much fanfare (Albert Einstein reportedly called it “the eighth wonder of the world”) is that it can offer you exponentially increased earnings with minimal effort on your part. (more…)
by Chad Meyer CFA
With class officially back in session, it is perhaps fitting to greet fall with the words of an author familiar to most American students. “October,” wrote Mark Twain, “is one of the peculiarly dangerous months to speculate in stocks in. The others are July, January, September, April, November, May, March, June, December, August, and February.”
If there’s any truth in numbers, it appears Mr. Twain was at least partially mistaken. Rather than unleashing “peculiar” peril, July, August and September offered the kind of across-the board gains to which American investors have, by this point, become accustomed. In the third quarter of 2018, the Dow Jones rose roughly 9%, while the S&P 500 and the NASDAQ both posted gains of over 7%. Driven in large part by continued robust earnings growth, each index closed out September near record highs, with the S&P drawing particular praise for its strongest quarterly showing of the last five years. Stepping back to a macroeconomic perspective, the story stays much the same. Real GDP growth is expected to clock in at an annualized 4.2%, consumer and executive confidence is high, and joblessness claims have reached lows not seen since the 1960s. (more…)
By Eric Schopf
The third quarter brought wet conditions to many areas of the country. We in Maryland experienced the soggiest July ever with nearly 17 inches of rain measured at Thurgood Marshall Airport. Not only was this the wettest July ever, it was within a few inches of being the rainiest month ever for our area. Although we may have been shrouded in clouds, the sun was shining brightly on Wall Street. The Standard and Poor’s 500 provided a total return of 7.71% for the quarter. The total return for the year stands at 10.56% as of September 30.
The impressive market returns reflect a strong economy and surging corporate profits. Second quarter Gross Domestic Product (GDP) grew at 4.2%. Preliminary estimates for the third quarter are 3.1% growth – quite respectable. Third quarter year-over-year earnings growth for the S&P 500 was 18%. We are also gaining clarity on the trade front. The United States – Mexican – Canada Agreement (USMCA) was reached at the end of September. The USMCA will replace the North American Free Trade Agreement, which was implemented on January 1, 1994. Major provisions of the new agreement will impact dairy farmers and automobile manufacturers. More importantly, the USMCA eliminates the uncertainty surrounding nearly $1.2 trillion of combined trade with Canada and Mexico. Trade negotiations, particularly with China, are continuing behind the scenes. The European Union is also unresolved business. These discussions promise to be contentious and may stretch out longer than we like. (more…)
By Eric Schopf
Founded in 1792, State Street Corporation (STT) is headquartered in Boston, Massachusetts. State Street provides a range of financial products and services to institutional investors worldwide. The company has two lines of business: Investment Servicing and Investment Management.
The Investment Servicing business offers accounting, custody, fund administration and shareholder recordkeeping. The company offers its products and services to mutual funds, collective investment funds and other investment pools, corporate and public retirement plans, insurance companies, foundations, endowments and investment managers. They provide some or all of these integrated products and services to clients in the U.S. and in many other markets, including Australia, Cayman Islands, France, Germany, Ireland, Italy, Japan, Luxembourg and the U.K.
Being able to dote on children is one of the advantages of being a grandparent. But some gifts, like a college education, are a bit too big to just be handed out. For grandparents (or other extended family members) who want to support a child’s education there are a number of methods available for use—each with its own advantages and uses. All provide financial support for the student, of course, but each has its own challenges and tax considerations to take into account. (more…)
By Scott Murphy
Generally, we as value investors steer clear of thematic investing. We tend to be bottoms up rather than top down investors and let price, fundamental valuation and temporary business setbacks guide us to new investment opportunities. However, this doesn’t take us off the hook when it comes to understanding important business trends, especially in the technology area. Keeping track of major themes in technological change helps us gain a better understanding of where technology is heading and allows us to “fact check” and make sure our existing portfolio companies are keeping pace and have a shared vision of where things are headed. Today’s topic is the pending move and upgrade from the current fourth generation (4G LTE) standards to fifth generation (5G) standards in our communication networks. (more…)
by Chad Meyer
As humidity takes hold and Fourth of July memories fade, there’s just no denying it: the dog days of summer have officially arrived. And while it’s no surprise for market activity to “cool off” around this time of year, one cannot help but suspect there’s more than the usual pre-Labor Day lull currently at work in the financial world. In this space roughly twelve months ago, I described the second quarter of 2017 as “frothy times,” characterized by the feeling that almost any stock was a winner. Looking back over the last three months, it’s clear that froth has given way to a more cautious mood, due in no small part to a collective acknowledgement of uncertainty as the new normal. The view from the beach, it would seem, now includes whitecaps. (more…)
By Eric Schopf
Trade tensions escalated during this past quarter, leaving the markets with a renewed sense of uncertainty. In May, the United States imposed a 25% tariff on steel and a 10% tariff on aluminum imports, in a decision that primarily affects Canada, Mexico and the European Union. These tariffs are in addition to those levied during the first quarter on goods, such as solar panels and washing machines. Furthermore, in mid-June, President Trump announced new tariffs of 25% on up to $50 billion of Chinese goods. As a result, Canada and China, two of our largest trading partners, retaliated with tariffs on various goods imported from the United States. In response, Trump shot back by threatening an additional tariff of 10% on up to $200 billion more of Chinese goods, while also ordering the U.S. Trade Representative to identify an additional $200 billion of goods that would face the same 10% tariff. At this rate, the United States is on track to levy tariffs on nearly 90% of the approximate $505 billion worth of Chinese imports. In 2017, U.S. exports to China were just $133 billion, leading the president to believe he has more leverage in the situation. (more…)
By Rick Rubin
Philip Morris International (Ticker: PM) is a global leader in the manufacturing and sale of cigarettes and other nicotine-containing products. It has an attractive portfolio of iconic brands including Marlboro, Parliament, and L&M, which it markets internationally. All of its sales are outside of the U.S., and it has an impressive share of 28% of the international cigarette and heated tobacco market. Furthermore, it is in the process of commercializing IQOS, a “heat-not-burn” device, in nearly forty markets. In March of 2008, PM was spun off from Altria Group, formerly Philip Morris Companies. Altria is a holding company and the leading cigarette producer in the U.S., where it has the right to sell the same brands to domestic consumers through its subsidiary, Philip Morris USA. This corporate action allowed PM more freedom to operate independently in less regulated international markets, such as Europe and Asia. (more…)
After campaigning during the 2016 presidential election on the promise that he would renegotiate unfair trade deals for the United States, President Donald Trump has begun to attack the country’s trade deficits in the form of international tariffs being placed on imports. Trump has pledged to level the playing field, citing many “unfair” taxes foreign countries have long placed on U.S. exports. The president has also pointed to national security as a reason for the tariffs, directly claiming the need for a strong steel industry to supply our military with tanks and fighter jets. Indirectly, through Commerce Secretary Wilbur Ross, the administration stated definitively, “Economic security is national security.” On this issue, Trump may have an unlikely yet familiar ally in decrying our nation’s balance of trade. In 2003, Warren Buffett wrote in an article entitled “America’s Growing Trade Deficit Is Selling The Nation Out From Under Us” that, “our trade deficit has greatly worsened, to the point that our country’s ‘net worth,’ so to speak, is now being transferred abroad at an alarming rate.” Our nation’s leader and the head of Berkshire Hathaway may propose different practical solutions to the problem, but at the very least they agree that a trade deficit is not good for America. As a result, the ultimate question is: how would a potential tit-for-tat trade war affect businesses and consumers here at home? (more…)
