“Unprecedented” feels like an overused word these days, but it is no overstatement when it comes to the oil market.  In the March mid-month commentary, we wrote that the oil supply glut could throw another gut punch to our economy on top of the coronavirus.  Our worst fears came to pass last week Monday as the price of oil crashed and actually went negative!

Oil traders are storing crude in the expectation that they can get a higher price later, but storage capacity is running out.  Traders who are long in the market are having trouble finding storage for delivery, so they have to sell at a firesale price.  Oil has since rebounded to positive territory – about $13/barrel for WTI (West Texas Intermediate) June contracts.  Higher prices reflect optimism that the global economy will bounce back later this year, and that sufficient demand will return to soak up some of the glut.

The larger problem won’t expire when these short-term contracts do.  The American Petroleum Institute estimates that global oil production is still about 100 million barrels a day, but demand has fallen to 70 million barrels.  Demand for oil will return when global growth returns, and the sooner, the better.

What all this means for the economy is hundreds of thousands of jobs lost – at exactly the time our economy can’t afford to take another hit.  Cap-ex expenditures in the oil patch are plunging and smaller drillers are just trying to survive – many won’t, either through bankruptcy or mergers.  Banks are big lenders to the oil industry and will be hit with defaults – especially regional banks in Texas and Oklahoma.
 Technology stocks have never been considered “defensive,” but maybe they should be considering how well they are performing during the pandemic.  In a society forced to shut down, consumers will flock to the “digital world.” 

The strong outperformance of the tech-heavy NASDAQ 100 versus the S&P 500 is nothing new.  Over the last 17 years the NASDAQ 100 has been on a straight path higher relative to the S&P 500.  This ratio is now close to the peak seen at the height of the internet bubble in 2000 (see graph).  Back then, the spike in the ratio came as the entire market was soaring.  The recent spike came during a broad market crash.

Source:  Bespoke Investment Group

Although the long run outperformance of tech concerns us (it won’t last forever), we remain overweighted in tech stocks.  In a no-growth world, many tech companies are posting impressive gains in sales, profits and cashflow.  Many of the larger tech companies tend not to be heavily indebted and are sitting on piles of cash.  The big investment question is in whether they can survive a deep recession.  Most can answer:  Yes.

Barron’s recent Big Money Poll shows bullish sentiment by institutional investors.  About 39% are bullish on stocks in 2020, but a whopping 83% are bullish for 2021.  This surprises us seven months ahead of a year with very low visibility.  Almost a third of respondents expect the U.S. economy to start growing again in the third quarter, and a half point to the fourth quarter. 

The three biggest risks to the U.S. stock market in the next 12 months according to the survey?

Coronavirus pandemic spreads                          35%
U.S. recession                                                             24%
U.S. depression                                                          14%

Finally, the poll asked who will win the 2020 Presidential Election:

President Trump                      56%
Former VP Biden                      39%

 

THE FEDERAL RESERVE VERSUS VALUATIONS

Two of our most convincing market-drivers are pulling in diametrically opposite directions.
 
On one hand we have the Federal Reserve.  The recent monetary stimulus has been unprecedented, easily outpacing the actions during the financial crisis.  Having the Fed add so much liquidity into the system is very encouraging.  In the past, smaller Fed moves have been grounds for prolonged rallies in stocks.  We believe in the old adage, “Don’t fight the Fed.”
 
But on the other hand, we have rich valuations – again.  At the March 2009 lows, stocks were trading at 8x peak earnings.  This time around stocks bottomed at 16.5x peak earnings, about double the 2009 low valuation.  The recent rally has brought us back to over 20x peak earnings.  From the 2009 lows, it took more than seven years to reach these multiples, first getting to this level in Q4 2016 when there was much less to worry about than today.  It was accepted that stocks should trade at the high end of historic valuations.
 
Looking at just one data point, the September 2016 ISM Services report showed the largest monthly jump in history.  That contrasts with this March’s report that showed a decline (the first in years) and the April report is certain to be weak.  It is a very different world than it was in late 2016, yet the multiples on earnings potential is the same.
 
To summarize, P/E multiples are almost as rich as they were just before Covid-19.  Yet the personal tragedy and the underlying economic disaster the world is dealing with are unlike anything we have seen since the Great Depression.  Unless we see a quick V shaped economic recovery (unlikely), we expect stocks to retreat until we have more clarity on the economic fallout.

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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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