Video Newsletters: Insights and Observations

From Gary Klaben, Family Manager

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From Kevin Coyle and John Finley

  • An Update to our Thoughts on the Impact of the Coronavirus Pandemic

    Much has happened in the two weeks since my last commentary: the global Coronavirus outbreak has gone from an epidemic to a pandemic, while 125 countries and territories take action to contain the spreading virus. In response, global stock markets have sold off, with stocks in the U.S. going from a correction of 10% from it’s all-time high on February 19 to a full-blown bear market. The yield on the bellwether 10-year U.S. Treasury Note has fallen from 1.25% to well below 1%, reflecting the global demand for the relative safety of U.S. sovereign debt. Adding to all this is the sudden drop in oil prices precipitated by the recent decision of Saudi Arabia to increase oil production.

    These volatile market conditions reflect the mood many of us have of impending doom, the fear of the unknown that is symptomatic of every crisis we have ever faced as a nation. I mentioned in my last commentary that, in theory, investors should expect lower stock prices for companies that they believe will report lower earnings from the societal effects of the Coronavirus. The question is compounded by uncertainty about how long it will take to contain the virus and what will happen to the economy in the meantime.

    This leads, in turn, to questions about the proper policy response from Washington, D.C. to prevent a potentially prolonged business slowdown from becoming an economic recession. The Federal Reserve recently implemented an emergency 50 basis point cut in the Federal Funds rate and the market is currently expecting the Fed to cut that rate to zero. The Trump Administration is considering fiscal policy measures, as well, that may target sectors of the economy with financial assistance.

    Because of this uncertainty, we have taken the precautionary step today of liquidating most of the bond funds in our model portfolios and moving that cash to the safety of a U.S. Treasury-only money market mutual fund, which invests solely in short-term U.S. Treasury Bills. While the fixed-income component of our model portfolios was very high quality to start with, we felt that, in light of the extreme volatility in equities, we wanted to minimize the risk of any credit problems that may appear if, in fact, the economy slows significantly.

    At times like this, it is often difficult for us to find any rays of hope. For some of us, it may bring back memories of the Great Recession of 2007-2009, which was accompanied by no small amount of gut-wrenching market volatility. It would be good for us to consider just how strong the U.S. economy is going into 2020, creating 270,000 new jobs in both January and February of this year, with an unemployment rate of 3.5%. The U.S. economy has led the world for several years now, with a recent estimate of first quarter GDP growth of 3.1%[1].  Obviously, the Coronavirus scare will cause a hit to corporate profits, exactly how much is impossible to tell.

    Our hope, of course, is that the virus will be contained quickly. If it is, the shock to the economy may be short lived, and it’s possible that corporate profits may rebound quickly. If they do, the stock market may quickly recover what it has so quickly given up. At this point, however, it is impossible to predict. As I wrote two weeks ago: no doubt we will continue to see a mix of positive and negative news about the Coronavirus as time goes on and investors should expect to see more volatility

     [1] GDPNow by the Federal Reserve Bank of Atlanta

    All information is from sources deemed reliable, but no warranty is made to its accuracy or completeness. This material is being provided for informational or educational purposes only, and does not take into account the investment objectives or financial situation of any client or prospective client. The information is not intended as investment advice, and is not a recommendation to buy, sell, or invest in any particular investment or market segment. Those seeking information regarding their particular investment needs should contact a financial professional. Coyle, our employees, or our clients, may or may not be invested in any individual securities or market segments discussed in this material. The opinions expressed were current as of the date of posting, but are subject to change without notice due to market, political, or economic conditions.

    Copyright © 2020 Coyle Financial Counsel. All rights reserved.

     

     

     

  • February 2020

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    Transcript

    Kevin: Hello, John Finley and Kevin Coyle here, it’s February 10, 2020; John, a quick update on the year behind us?

    John: 2019, good year in US stocks, up 31% on the S&P 500. Most of that, of course, being driven by large cap growth companies. That of course is coming off a pretty bad 4th quarter in 2018 where stocks were down almost 20%. If you take that into consideration, it’s still a good year but valuations are getting up there and I’m not sure if corporate profits are able to sustain that kind of level for some of these stocks.

    Kevin: If you look at most of the prognosticators this time of year when all their forecasts come out and they look at where interest rates are, where earnings are, where price multiples are, and they give you their expectations of the 10-year forecast. Those are looking to be lower than what you would expect compared to the last 10 years.

    John: Yes, that is largely because of evaluations and the feds are on hold so interest rates will stay low for awhile but you’re right. When you’re starting at those kinds of large multiples, the expected returns are going to be lower.

    Kevin: We’ll chat a little bit about that at the end, but let’s go into some of the ranges of expectations in terms of economic activity the year ahead and things like that.

    John: Our view is pretty much in line with the consensus, and we're looking at around 2% or so real GDP growth in the US. Feds on hold as I said, inflation is still tame, there is, of course, always downside chance that the economy may take a turn, but we think the recession probabilities are low. Likewise, I think there's an even smaller chance the economy could grow at a much faster clip. I don't see that happening, but you never know.

    Kevin: When you look at the expectations and they're lower than if you look over the long-term history of expected returns from stocks, and that's been from the big run we've had over the last 10 years. It's not just going to be a single digit straight line. You would expect some volatility over the next 10 years, which is normal when you have peaks, troughs, economic growth, etc. So, when you're making your marginal decision making, in terms of your overall portfolio structure, just some final thoughts.

    John: Stocks are the place to be for the growth component of everyone's portfolio, and you're right, there's going to be volatility on a short-term basis. But on a long-term basis, you want to keep that allocation steady. There may be some opportunity here with growth stocks being valued the way they are, we may see that long awaited rotation out of growth in the value because there's many companies that are not trading at high multiples. So that could be an opportunity for some people to shift out of the growth component into the value side.

    Kevin: With that being said, we have maybe a month or so left with this winter, we're looking forward to spring. Until next time. Enjoy.

    All information is from sources deemed reliable, but no warranty is made to its accuracy or completeness. This material is being provided for informational or educational purposes only, and does not take into account the investment objectives or financial situation of any client or prospective client. The information is not intended as investment advice, and is not a recommendation to buy, sell, or invest in any particular investment or market segment. Those seeking information regarding their particular investment needs should contact a financial professional. Coyle, our employees, or our clients, may or may not be invested in any individual securities or market segments discussed in this material. The opinions expressed were current as of the date of posting, but are subject to change without notice due to market, political, or economic conditions.

    Copyright © 2020 Coyle Financial Counsel. All rights reserved.

  • November 2019


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    Kevin: Hello, Kevin Coyle and John Finley, November 7th 2019. Quick update on where we are at year-to-date on the markets.

    John: Today the US market hit a new high, so it is up about 25% on the year. International developed stocks are up 17% and the emerging markets are up 13%.

    Kevin: Now we’ve had a nice little bump since the end of the 3rd quarter but put that in the context of where we started the year after the decline in 2018. And going back maybe even early in the year of 2018.

    John: Everyone remembers how ugly the 4th quarter last year was when stocks were down about 19% in the US. So we needed to recover from that but even if you go back to February 2018 compared to today, stocks are up only about 10%.

    Kevin: Yes, so we have been in a range just shy of the last 2 years, had a nice little bump out where news seems to be better over the last 2 months. The challenge is to help folks to structure their affairs in these types of environments. It seems like in the last 10 years these markets have been climbing this wall of worry, people have been concerned about it even more so now. Stocks have gone up so much John, they have to go down.

    John: Well, that’s one theory, that we’re in a bubble. We need to step back and ask ourselves; what actually drives stock prices higher?  The driver of stock prices are the earnings of those companies. We have had stocks triple since the end of the financial crisis but at the same time earnings have tripled as well. So the fundamentals have supported stock prices where they are today.