Fed Chair Powell’s speech last Friday at the Jackson Hole economic policy symposium is key for investors to gauge short and intermediate-term monetary policy.  The bottom line is that easy monetary policy will remain for some time to come.

The large number of hawks on the FOMC were arguing for an immediate taper to Fed bond purchases.  But the FOMC is not all on the same page.  No matter how forcefully the hawks screech for tapering to begin, it looks like it will take until at least November for doves to be confident enough about the economy to begin reducing asset purchases.  We think the most likely outcome is for a taper announcement in November and slower bond purchases in December.

The FOMC won’t hike rates while they are still buying bonds.  The market is assuming that rate hikes will follow at a lag once the taper is complete.  It all depends on the path of the economy. Powell’s view is nuanced:  while he appears to support tapering later this year assuming no major economic slowdown, the “timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest rate liftoff.” Actual hikes require a “different and more stringent test,” suggesting that rate hikes are not just around the corner  Powell’s position is bullish for stock prices.

We know that the longer an investor’s time frame, the greater the likelihood they will make money in stocks.  At about a 16 year holding period, the historical probability of making money in stocks (total return) is 100%.  What about shorter periods of time – even daily?  Going back to 1928, the odds of the S&P 500 index’s price being higher on any given trading day is just 52.43% – just barely higher than a coin flip (source:  Bespoke Investment Group).  While 2.43% above the 50/50 mark might not seem like much, it adds up when you compound this advantage going back nearly 100 years.  (This is the reason why a casino that offers a win rate above 50% would quickly go out of business.)

“MAKE HAY WHILE THE SUN SHINES”:  A SUMMARY OF OUR OUTLOOK FOR STOCKS

 

 

The vast majority of market participants are making one set of assumptions about the economy – that is, they fear peaking economic momentum.  This time around, deceleration in many leading indicators should not be mistaken for late-cycle characteristics.  It is true that many measures of economic activity are peaking in terms of momentum and growth rates.  That is simply because the rates of growth are historic.  The rates of growth usually peak in the 12 to 18 months following a recession.  Yet the economic and stock market cycle can go on for years as it did from 2009-2020.
 
The combination of stunning fiscal and monetary policy support along with a private sector in such great shape makes it easy to believe that this economic cycle has years left in it.  Just the restocking cycle alone will last for quarters to come.  As a result, it is too early to call a top in S&P 500 earnings.  Peak earnings may reach near $300 this cycle, which means the market is selling at 15-16x peak earnings – hardly a crazy number.
 
Of course there are parts of the market that are egregiously valued (for example, IPOs, SPACs, and Crypto).  And price corrections will come and go.  You can argue that we are undergoing a correction now:  yes, the market averages are at record highs, but the average stock in the S&P 1500 is almost 15% below its 52 week high.  It is a tough go for many stocks right now, especially mid and small cap stocks.
 
This cycle is supported by three factors:  first, easy central bank policies (see first bullet point above), second, labor market recovery, and third, a remarkable private economy with very healthy consumer and corporate sectors.  In fact, the consumer might be finally achieving liftoff they failed to achieve since the Great Recession.
 
What is going on in the economy is more substantial than refilling supply chains.  We think supply chains need to be rebuilt for a fundamentally higher level of nominal demand.  If this is correct, we are heading into a real investment cycle.  This is something that will unfold over years, not just a few quarters.
 
The pandemic fears are the wall of worry that the market is climbing.  Our bullish position may be too rosy, and the market is certainly not without risks.  But there are always risks.  The bond market is giving off a very different signal (given ultra-low rates and little concern towards inflation).  If the deceleration in leading indicators goes all the way back to neutral in the next few quarters and leads to a reversal in the higher earnings estimates we are seeing, then the bond market is right and we are too optimistic.
 
Since we stay fully invested and do not market time, our outlook has no bearing on investment levels.  But it has a big impact on the types of stocks we buy.  Although we have a bias towards quality growth stocks, we think another “re-opening” stock rally will come soon and therefore are primarily focused on cyclical/value stocks for new purchases.

 

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Knowledge – Results

Experts in Risk Management

Are you prepared for the next market correction or financial crisis?

Knowledge – Results

Experts in Risk Management

Are you prepared for the next market correction or financial crisis?

Knowledge – Results

Experts in Risk Management

Are you prepared for the next market correction or financial crisis?

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This is achieved through an ongoing assessment of market risks given your specific financial situation and goals.

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Leadership Team

Richard Furmanski

Richard Furmanski

CFA

has been a portfolio manager and analyst for over 35 years. He manages conservative, tax-efficient portfolios for both pre-retirees and retirees. His lower risk approach appeals to investors who want less volatility and competitive risk-adjusted returns.

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Mary Ellen Adam

Mary Ellen Adam

Director of Operations

has been in office administration for over twenty years. Her experience includes customer service, firm operations, and office administration. She interacts with our clients on a day-to-day basis and handles any requests that may arise.

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Frequently Asked Questions

If you can't find the answer to your questions here, feel free to give us a call at 847-847-2505

Do you manage both stock and bond portfolios?

Yes. We build a portfolio of conservative, high-quality stocks and hold them for the long-term. The average holding period is 4 – 5 years. Our focus is on stocks that are suitable for retirement portfolios.

Our high-quality bond portfolios are designed to provide both income and stability of principal. Bonds provide the anchor for balanced accounts (those holding both stocks and bonds).

What is your investment philosophy?
We take great care in purchasing only high-quality stocks and bonds intent on a multi-year holding period. Portfolio turnover and taxable realized gains are modest in comparison to other active managers. We do not time the market but will become more defensive, in terms of stock holdings, when market conditions warrant.
Will the portfolio be managed in accordance with my financial goals?
Yes. Each of our clients has a custom-tailored portfolio. These custom portfolios are designed to meet specific client objectives with a thoughtful approach to specific constraints such as risk tolerance. And as each client’s situation changes, the portfolio does as well. There is no cookie cutter approach.
What kind of expertise do you have and how can that help me in difficult markets?
We have been working with high-net-worth clients like you since 1982. Over that time we have helped them to navigate several bear markets and financial crises (including the stock market crash of 1987). We hold the Chartered Financial Analyst (CFA) and Certified Financial Planner (CFP) designations.
Are you sensitive to taxes when managing portfolios?
Yes. Our holding period for an individual stock averages 4 plus years which means our turnover is low and realized gains can be carefully managed. Further, where possible, we tax loss harvest small losses as a way of offsetting gains taken elsewhere in the portfolio.
How have you performed?
Results will differ by client and the level of customization but we have provided competitive investment returns for many years.
How do you charge for your services?
We charge a management or consultant fee based upon the size and level of customization of the account. As the account grows, we benefit together.

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