APG Capital Asset Management 2nd Quarter 2020 Review and Outlook

The United States is still grappling with escalating Covid-19 cases, historically high unemployment, and a severe recession, all while the stock market had the best quarter in twenty-two years. With such a bleak background, this strength seems fairly bizarre but there are reasons for the S&P 500’s 20% quarterly rally to end the year down only 3%[1].  

Stock prices are determined by the present value of estimated future earnings.  Stock market valuations may imply that investors are looking past the next few quarters and that corporate profits rebound fairly rapidly in 2021 and 2022.  But with the uncertainty that exists, most of those estimates are impossible to determine so optimism over future profits only tells part of the story.

The most reasonable explanation is due to the unprecedented amount of government stimulus being pumped into the economy.  The payments to taxpayers and businesses, combined with the Federal Reserve bond buying programs (see the chart below of Fed activity), have created a flood of new money into the economy.  The effect of this is to devalue dollars, which increases inflation.  This, in turn, pushes assets like stocks, real estate and commodity prices up.  This gels with what we’ve experienced.  But stock prices should also weigh the risks of a depressed economy on the profitability of corporations and demand for hard assets.  We may be in a stage of the market recovery where the market will bounce around, finding where these opposing forces find an equilibrium.

It is useful to note how the market reacted to past pandemics.  During the Spanish Flu of 1917-1918 as shown below, the market then similarly plunged about 33%.  After the market bottomed, it quickly rebounded, traded in a range for a year, and then trended higher.  It took about 15 months for the market to fully recover the pre-virus highs.

This pandemic is forcing companies to adapt to news ways of doing business.  While many companies are struggling, there are some that are capitalizing on their market position.  Active management could have a good chance to outperform in this environment. We remain focused on growth stocks relative to value and de-risking portfolios through an overall lower weighting to stocks may be prudent.  We believe It is important to stay focused on the long term. While there may be short-term market weakness as we learn more about the wave of outbreaks and how companies are faring in the next earnings announcement cycle, it is hard to bet against the long-term ability of companies to evolve and thrive in new environments. This is especially true as long as the Fed remains highly supportive.

While the market continues to confound, we recommend paying attention to areas we can control.  Here are some things to consider:

1.       Make sure you are taking advantage of tax savings. 

• maximizing deductible 401-K and IRA contributions, (the deadline for 2019 contributions were pushed to July 15th this year

• tax-loss harvesting, and

• smart charitable giving, either to a Donor Advised fund or a Qualified Distribution from IRAs.  

2.       With the prospect of higher future tax rates, there may be opportunities converting Traditional IRA holdings to a Roth IRA.  

3.       Reviewing your mortgages to see if a refinancing makes sense

4.       Take a closer look at your expenses so there are no holes in your budgeting and cash planning.  

5.       Please stay safe - avoid crowds, wash your hands and, for the safety you and your loved ones, wear a mask.

This marks the third anniversary of APG Capital and I want to thank all of my clients for your trust and time.  I truly appreciate our collaboration and sharing of ideas.  I look forward to seeing you all in person soon.

Advisory services offered through APG Capital Asset Management, a Member of Advisory Services Network, LLC.

713-446-3233

www.apgcap.com

All views/opinions expressed in this newsletter are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC. Indexes are unmanaged and do not incur management fees, costs, or expenses.  It is not possible to invest directly in an index.  The information and material contained herein is of a general nature and is intended for educational purposes only.  This material does not constitute a recommendation or a solicitation or offer of the purchase or sale of securities.  The future performance of an investment or strategy cannot be deduced from past performance.  As with any investment or investment strategy, the outcome depends upon many factors including: investment objectives, income, net worth, tax bracket, risk tolerance, as well as economic and market factors.  All economic and performance data is historical and not indicative of future results.  All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed.

[1] https://www.statista.com/chart/22169/change-in-us-stock-market-indices-in-the-second-quarter-of-2020/

[2] https://www.marketwatch.com/story/market-behavior-a-century-ago-suggests-the-worst-could-be-over-for-stocks-if-not-for-the-coronavirus-pandemic-2020-03-19

How "Top Gun" Can Help You Position Your Portfolio when the Yield Curve Inverts

Maverick: “We Were Inverted”

During the iconic Tom Cruise scene in Top Gun when he details his interaction with a Russian MIG during a test flight, he explains to a shocked room (not before he removes the cool shades), that the way he was able to see the MIG while flying above it, was that “We were inverted.”  This week, in a shock to the market, the 5-year minus 2-year yield was negative, or “inverted”.  Usually, the longer the duration, the higher the yield; however, short-term interest rates are currently higher.  A more common tracked metric is the 10-year minus 2-year yield which is close to inverting as seen below.

There are several reasons why this is occurring.  The Fed (which controls short term rates) is witnessing strong domestic growth and an upward creep in core inflation.   Since interest rate changes can take time to move through the economy, the Fed preemptively will move to limit anticipated problems, i.e. runaway inflation.   By increasing rates, they can put the brakes on growth limiting inflation.  It also gives the Fed room to move rates lower if the economy slips.  On the other hand, the market (investors and traders) determines the rest of the interest rate curve.  Currently, the market has a strong demand for longer duration bond for the relative safety of government bonds due to a combination of fear of market volatility and an outlook that the Fed may have to lower rates in the coming years.

What are the implications of an inverted curve? All seven recessions since 1970 have been heralded by a yield curve inversion.  However not all inversions imply a recession.  Tom Lee, the co-founder of Fundstrat Global Advisors LLC, calculates that the 3- to 5-year yield inversion has occurred 73 times since 1954 while the economy endured only nine recessions. “5Y-3Y inversion predicted 73 of the last 9 recessions, too many false positives.”[i]

Now the question is: “What are investors to do about this?”  It really all depends on your risk appetite, holding period and allocation. While market weakness is not a guarantee, there are strong indications, like the higher VIX index, the market will be more volatile going forward.  Investors need to know how they are positioned to ensure their allocations are aligned with their capacity for risk.  At my firm, we use Riskalyze’s risk alignment software to make sure we know how much risk our clients are willing to take and to position their portfolios accordingly.  First, we determine your “Risk Number” though a short survey.  Then we analyze your current portfolio of securities to see how risky your portfolio is.  If you are interested in this, or just curious what your risk number is, click here for a short survey and check out more on Riskalyze here. 

[i] https://www.bloomberg.com/news/articles/2018-12-06/history-shows-inverted-yield-curve-is-no-death-knell-for-s-p-500

Advisory services offered through APG Capital Asset Management, a Member of Advisory Services Network, LLC.

Phone: 713-446-3233  Website: www.apgcap.com

All views/opinions expressed in this newsletter are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC. Indexes are unmanaged and do not incur management fees, costs, or expenses.  It is not possible to invest directly in an index.  The information and material contained herein is of a general nature and is intended for educational purposes only.  This material does not constitute a recommendation or a solicitation or offer of the purchase or sale of securities.  The future performance of an investment or strategy cannot be deduced from past performance.  As with any investment or investment strategy, the outcome depends upon many factors including: investment objectives, income, net worth, tax bracket, risk tolerance, as well as economic and market factors.  All economic and performance data is historical and not indicative of future results.  All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed.

Third Quarter 2018 Review and Outlook

It was a tale of two markets in the third quarter.  US Equities markets on one hand and, seemingly, the rest of the investable universe, on the other.  US Equities rallied, as evidenced by the 7.7% surge for the S&P 500 for the quarter (+10.6% year to date)[i], while the Developed Markets eked out a 1.1 return in the quarter (-1.3% year to date)[ii] and emerging markets dropped 1.4% (-7.9% year to date)[iii]. Even domestic bonds continued their streak of losing quarters, dropping marginally in the quarter leaving the Barclays’ US Bond Aggregate Index down 1.6% for the year.[iv] 

Domestic Backdrop

The effects of lower taxes and regulation have helped sustain the economy’s growth momentum. The 4.2% growth in GDP for the second quarter may have been boosted by a “sugar high” form the tax-cut but expectations are for continued growth as the US Conference Board is forecasting a 3.1% growth rate for 2019.[v] Furthermore, as shown in the Federal Labor Market Conditions Index, the labor market has fully recovered from the Financial Crisis.

Interest Rate changes

Emblematic of this strength, the Fed has removed their “accommodative” stance for interest rates, signaling continued rate hikes.  The effect of these hikes make housing more expensive and hurts profitability for debt-laden companies. The Fed hopes that, while tempering growth, these increases keep inflation under wraps.  While the Fed makes changes to short term rates, longer term rates are set by the market.  Recently, the 10-Year rate broke out of its trading range and moved significantly higher, from about 2.80% to 3.25%.   Back in February, when we saw these rates jump higher, the market corrected sharply, but since has recovered and have shown decent gains for the year.  We may see another similar situation with the markets acting a bit jittery while the economy sorts out these countervailing impacts. 

With the expansion almost a decade old, we are certainly in the later stages of the growth cycle, but when the economy turns downward is still a question.  Positioning portfolios more cautiously is probably warranted, but we are still optimistic for the mid- and long-term for the US markets.

International Situation

The current trade policies of the US Administration are a heavy-handed approach to fix some of the unfair treatment of US companies when dealing overseas, especially when it comes to intellectual property.  Specifically, escalating tensions with China are proving to be damaging to the worldwide growth story and most markets are feeling those effects.  Hopefully the new tariffs on trade is ultimately posturing, and a more pro-trade resolution is negotiated.  Ahead of that resolution, maintaining some exposure to emerging markets should be a good risk/reward position considering the current weakness, as these markets are trading at significant discounts to US markets and should witness higher growth.

Looking forward, the underperformance of international stocks this year make it a good opportunity to bring portfolios back to target allocations by trimming winners like larger cap growth companies and adding (as painful as it may seem) to those international laggards. 

Advisory services offered through APG Capital Asset Management, a Member of Advisory Services Network, LLC.

Phone: 713-446-3233  Website: www.apgcap.com

All views/opinions expressed in this newsletter are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC. Indexes are unmanaged and do not incur management fees, costs, or expenses.  It is not possible to invest directly in an index.  The information and material contained herein is of a general nature and is intended for educational purposes only.  This material does not constitute a recommendation or a solicitation or offer of the purchase or sale of securities.  The future performance of an investment or strategy cannot be deduced from past performance.  As with any investment or investment strategy, the outcome depends upon many factors including: investment objectives, income, net worth, tax bracket, risk tolerance, as well as economic and market factors.  All economic and performance data is historical and not indicative of future results.  All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed.

[i] http://performance.morningstar.com/funds/etf/total-returns.action?t=SPY&region=USA&culture=en_US

[ii] http://performance.morningstar.com/funds/etf/total-returns.action?t=IEFA&region=USA&culture=en_US

[iii] http://performance.morningstar.com/funds/etf/total-returns.action?t=IEMG

[iv] http://performance.morningstar.com/funds/etf/total-returns.action?t=AGG

[v] https://www.conference-board.org/data/usforecast.cfm

Interview with Heidi Dugan - Top Real Estate Agent with Greenwood King

Key insights on Houston's market since Harvey and critical advice when buying a home that may have flooded.

Making the Most Out of Your Bonus

It’s that time of year when many companies are paying out their year-end bonuses.  Hopefully “congratulations” are in order and all that hard work from the last year paid off.  Now the real decisions begin.

In some fields, like energy trading, your bonus can vary widely from year to year and are only maximized when the stars align -- you have a great year, your group meets their goals, and the company hits their profit targets.  Even the most successful may only get a dozen or so of these big paydays in a career, so it is critical to be thoughtful about how you allocate your bonus.   These are the payments that ought to support you and your family’s hopes and dreams for a lifetime. 

What is your plan?  Upgrade the house, pay off an existing mortgage, invest in the market or just sit in cash?  How much should you save versus spend?

·         Working through the hierarchy of how to allocate new capital can be challenging.  A good place to start is making sure to maximize your employer’s matching 401-K plans, Health Savings Accounts and any other tax advantaged account that is underfunded, like an education 529 Plan.

·         While it is tempting to ratchet up your lifestyle with a big payday.  Be careful when adjusting your spending habits that even when there are years when the bonus is sub-par, you can handle your bills.  One way to keep your spending in check is to imagine: what if I had to find a new job?  What kind of salary could I earn in the current job market?

·         Finally, as there are no one-size fits-all decision-making tools, consider working with an independent Register Investment Advisor.  RIAs typically do not market products or have outside pressures as to where these funds go plus as your fiduciary, have an obligation to put the client first and develop solutions that align with your risk appetite and long-term goals.  Even when an advisor’s pay is a function of the amount of assets they manage, your advisor should acknowledge this and determine the best course, regardless of this conflict.

We hear of athletes or actors going from rags to riches and end up having financial problems later in life.  Many other careers can have volatile earnings streams. Careful and thoughtful planning during the heady years can help to minimize the impact of the lean years.

Advisory services offered through APG Capital Asset Management, a Member of Advisory Services Network, LLC.

Phone: 713-446-3233  Website: www.apgcap.com

All views/opinions expressed in this newsletter are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC. Indexes are unmanaged and do not incur management fees, costs, or expenses.  It is not possible to invest directly in an index.  The information and material contained herein is of a general nature and is intended for educational purposes only.  This material does not constitute a recommendation or a solicitation or offer of the purchase or sale of securities.  The future performance of an investment or strategy cannot be deduced from past performance.  As with any investment or investment strategy, the outcome depends upon many factors including: investment objectives, income, net worth, tax bracket, risk tolerance, as well as economic and market factors.  All economic and performance data is historical and not indicative of future results.  All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed.