The corporate earnings growth rate (year/year) for Q4, 2017 was a spectacular 15.2%, the highest quarterly growth rate reported in over six years. It marked the third time in the past four quarters earnings growth was in double digits. Revenues grew an impressive 7.9% in Q4. For 2018, analysts are projecting earnings growth of 17.9% (boosted by lower corporate tax rates) and revenue growth of 6.6%.

In our 35­year careers in the markets, we have seen more equity downturns than we care to remember. They can be categorized into three distinct types based on varying degrees of severity: technical, cyclical and systemic.

The least punishing is a technical correction which we experienced in early February. These pullbacks can be scary because of the swiftness of the drop. The S&P 500 lost 10% of its value in nine trading days brought on by concerns of rising inflation and interest rates and exacerbated by computer algorithm volatility trading (today’s version of portfolio insurance). The bottoming process can also be quick, often occurring over days or weeks. Sixty percent of the decline was recovered in six trading sessions. We could, of course, suffer another technical correction, especially since investor optimism is rapidly rising once again.

Cyclical downturns are what we normally think of as bear markets. As economic expansions age, the available capacity of production and labor is limited. At the same time, there is increasing pressure on prices and wages. Interest rates rise, and profit margins decline. Only a few of these factors are felt today, so it is unlikely the February downturn was the beginning of a cyclical correction.

Systemic downturns are the most severe and represent a lack of confidence by investors in our financial system. The Fed’s perceived loss of control typically precipitates a credit crisis and absence of liquidity. The Crash of 1929 and the Financial Crisis of 2008 are two examples that come to mind; both were turned around by extraordinary policy measures. It took the S&P 500 five years to recover from the Financial Crisis of 2008 (peak to trough fell 55%), but it took 15 years to regain the ground lost after 1929.

Growth Stocks Still Dominate the Market—But for How Much Longer

Once again, growth stocks outperformed value stocks in 2017­­this time by over 13% (source: Lipper Data). The gap continues in 2018; growth has the lead by 4% year­to­date. After 11 straight years of underperformance, when will value stocks have their day? Or is Goldman Sachs right when they questioned last summer whether value investing is dead? (Note: Growth stocks are usually bought in anticipation of rapid sales or earnings growth whereas value stocks are purchased based on attractive valuation ratios.)

Many investors expect growth stock dominance to continue because of the synchronized global above­trend economic growth. When risk­taking is handsomely rewarded, and investors feel confident, growth takes the lead. The question is whether investors should keep betting on growth, or whether it is timely to shift towards nearly forgotten value stocks. How much of the good news to come for growth is already reflected in market valuations?

We think the gap will narrow in the coming months with value stocks making a comeback. Value stocks have historically outperformed growth in high­volatility markets, as investors seek perceived safer and steadier stocks. And with the growing disparity in valuations, many investors may now prefer to hold much lower P/E stocks as volatility rise. Our approach has always been to diversify and hold both growth and value stocks. Style cycles are unpredictable, so it is fruitless to guess which style will outperform in a given period. Value stocks will eventually have their day. In fact, they have been better performers lately with financial and industrial stocks leading the market.

Our focus lately for new purchases has been mostly in the value camp. We are comfortable with slower growing companies selling at bargain basement multiples. Granted they are not as exciting as technology stocks (including FAANG), but they offer good value to investors. In addition to providing attractive upside potential, their low valuations could provide downside protection if the market resumes its correction.

Negative Bond Returns Cause Worry

The New Year has brought with it a powerful and threatening new market force…the impact of rising interest rates on stocks. Projected U. S. deficits of a trillion dollars along with the unwind of uber­accommodative monetary policy (QE) may require the Treasury to raise as much as $1.45 trillion in new debt this year (an increase of over three times that of 2017). The combination of far greater debt issuance along with greater budget deficits (the result of tax cuts) is creating anxiety among institutional bond managers and fund investors. 

Ten-­year Treasury note yields have risen .4% already this year (to 2.90%) representing a loss in price of nearly 3.5%. And while we do not often purchase long­dated Treasury securities, this loss equals a surprising one and a quarter years of coupon interest. Further, longer­dated corporate bonds have suffered similar losses and now have some of the longest­dated average maturities on record.

After several years of an aging bull market offering solid bond returns (interest plus price appreciation) the new Treasury supply situation, improving economy and a loss of fiscal discipline across both political parties is now threatening to create serious market stress. Continued Fed rate normalization (four interest rate rises totaling one percent are proposed this year alone) should also serve to pressure overly narrow corporate and municipal credit spreads over time. We look for heightened volatility and market stresses playing out in 2018.

Knowledge – Results

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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?

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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