After the market and sentiment hit a low on September 30, stocks had a fabulous October. The Dow surged 14.0% in October with the S&P 500 up 8.0%.  NASDAQ trailed but was up 3.9%.  It was the best month for the Dow since January 1976.

The most impressive part of this surge was that the mega-cap stocks provided no support.  It was a brutal earnings season for the FANG+ stocks plus Tesla, with those six stocks reporting earnings off 9% on average.  Facebook, Amazon, and Alphabet (Google) plunged on their reports.  While many analysts and investors have now soured on FANG+ and declared their market leadership is over, we don’t agree.  We think that these market leading stocks of the last decade showed they are not bulletproof, and are more cyclical than originally thought.  The cycle will eventually change with accelerating economic growth at some point in the future.  Meanwhile, FANG+ stocks are on sale and some of them remain as our favorites for the long-term.

The bar was set low coming into this earnings season. Still, investors are punishing companies’ stocks that miss forecasts.  Margins are compressing for the fifth consecutive quarter.  At some point, pricing power in an inflationary environment goes away.  The U.S. dollar, up 10% year-over-year, is a major headwind.

As we expected, future earnings growth estimates are plunging.  Q3 growth estimates have been revised down to +1.5% (negative excluding energy stocks) from +9.5% earlier this year.  Estimates for 2023 have been reduced to 7% growth, still too high in our view.  In spite of a tough earnings season, stocks rallied sharply.

The October Big Money Poll of institutional investors shows that 40% of managers are bullish about the outlook for stocks over the next 12 months, with 30% bearish. Bulls say this is an attractive entry point for both stocks and bonds.

The S&P 500 began 2022 trading at about 23x forward earnings, now about 16x estimated 2023 profits.  Price/Earnings ratios are contracting by even more for many companies.  Still, about 40% of poll respondents call the market overvalued, while 22% now think stocks are undervalued.

According to the poll, the three biggest risks that the stock market will face in the next six months?  Rising interest rates, recession, and disappointing corporate profits.  Inflation is a distant fifth in the survey.

Big Money investors are sitting on more cash than usual, waiting for better buying opportunities.  Some of this cash was used to fuel the huge rally in stocks in October.  How much cash is left to keep this rally going?

Mid-term elections are next week, and there have been some major shifts in the polls that appear to have tipped the balance of power for control of both the House and Senate in the GOP’s favor.

Using probabilities from the site electionbettingodds.com, control of the House has been favoring Republicans all year. The Senate has been a different story.  For much of the first half of the year, Republican odds to take the Senate were well over 70%, but in summer those odds plummeted to under 30%.  Since early September those odds have now bounced back to over 50%.

LEADING INDICATORS POINT TO RECESSION

The Conference Board’s index of leading indicators showed a larger than expected decline in September.  With that decline, the ratio between leading and coincident indicators has continued to roll over and has now declined by a magnitude that has historically been followed by a recession.

RATIO OF LEADING TO COINCIDENT INDICATORS:  1960-2022

Source:  Bespoke Investment Group

On a year-over-year basis, leading indicators have decline 1.45%, which is the steepest decline since the Covid crash.  Historically, every time the year-over-year reading has dropped 1% or more, a recession has followed within the next year.  Even the Conference Board’s own recession model now puts the odds of a recession within the next year at 96%.

 

 

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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

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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