Charleston Financial Advisor | Coastal Wealth Advisors

Inflation Surprise, Really?

May 18, 2021 by Justin M. Follmer, MBA, CFP®, AIF®

It’s been a volatile week. For the better part of six months, investors haven’t seen a material pullback like we are seeing right now. Several newsletters ago (available only to clients), I stated “a strong recover is likely, but we can’t rule out a market correction on any potential negative catalysts.” It seems we now have that catalyst in the form of a spike in inflation.

Let’s put this in perspective so we are all on the same page.

Wednesday’s Consumer Price Index (CPI), the widely accepted measure of inflation, came in at 0.8%, the highest in 13 years and was much higher than the 0.2% predicted. This pushed the year-over-year number to 4.2%, much higher than the 2.6% from March’s reading. But we have to take this in context…what was happening in March/April 2020? You guessed it, lockdowns.

Since then, we’ve seen massive amounts of stimulus, a 25% increase in the M2 money supply, a 2×4 piece of lumber almost double in price, housing values significantly higher, and extra unemployment compensation that’s causing a labor shortage and price increases. Are we really surprised by a spike in inflation?

So if it was kind of expected, why are the markets acting like an angry toddler? In my opinion, markets were overextended from the past several months of rallying. Any negative catalyst that could imply the Fed tightening monetary policy sooner than they’ve stated was enough to cause this pullback. Recall the Fed “not even thinking about thinking about raising rates?” Yeh, they may consider “thinking about it” now if next month’s CPI reading runs even hotter. In my opinion (and history is on my side), raising rates gradually, methodically, and transparently is far better for markets than trying to chase higher inflation with drastic increases to control it. The latter typically causes a recession. Being proactive is the key here and I certainly hope Powell & Co. (slang for The Fed) are smarter than me.

Am I allowing this to change my clients’ investment strategies? A resounding, no. These past few weeks have seen an increase in selling on the growth/tech side of the style box and buying on the value side. This has pushed value stocks higher and my clients have benefitted from this. Even during broad market down days, we see the value side perform less-badly than growth. Why are we positioned this way: Our Investment Philosophy.

Should we add inflation hedges?

The best long-term inflation hedge is equity exposure, in my opinion. Even during these short-term bouts of volatility, equities are typically the best bet. Other inflation hedges are Treasury Inflation Protected Securities (TIPS) and ultra-short bonds for conservative clients. Real estate exposure and commodities (gold, oil, raw materials, etc.) are hedges as well. But none of these have the long-term track record that equity exposure provides. Since my clients are globally diversified, most of them own all of these already. I can’t make a case for timing our way into and out of concentrated positions specifically to hedge against inflation. Recall that we aren’t traders, we’re investors.

Higher inflation is a drain on purchasing power. So too are higher taxes. Both of which we are likely facing in the coming year. These questions remain:

How “hot” will inflation run before Fed intervention?
How much will taxes actually increase under President Biden’s proposal?
What other catalysts are we likely to face through the fractured reopening of America and the world?

For clients of Coastal Wealth Advisors, I monitor this information, among many others, daily and keep clients informed of issues relevant to their invested dollars, like inflation surprises. We maintain a passive approach to our investment philosophy, but an active approach to monitoring and rebalancing as needed. Monitoring is the final step of the financial planning and investment management process. It is in this phase of the process where I believe value is created. It’s crucial to be in contact with your advisor often. When’s the last time you heard from your advisory team? If your answer is more than a year, let’s chat. I believe there’s a better investment experience waiting for you. Get in touch here.

Is the Stock Market Divorced from Reality?

September 15, 2020 by Justin M. Follmer, MBA, CFP®, AIF®

By Weston Wellington, Vice President of Dimensional Fund Advisors, LP.

I have been sheltering in place on a former dairy farm in rural New Hampshire—surrounded by more Scotch Highland cattle than people—and relying on my iPhone and Microsoft Surface Pro to keep in touch with the office via email and Zoom video. I haven’t sat in a restaurant in six months, so my dining out costs are close to zero while my grocery bill is sharply higher. I venture out every 10 days or so to stock up on supplies (Hannaford supermarket, Walmart, Tractor Supply, Home Depot) and order frequently online. Judging by the traffic on my dead-end dirt road, I’m not the only one whose habits have changed. It’s only a small exaggeration to say every third vehicle going up or down the hill is a FedEx or UPS truck making another delivery, most likely from Amazon.

For many of us, the daily routine has changed dramatically from a year ago. This writer is no exception. I customarily travel extensively for business, with well over 100 airline flights and dozens of hotel stays over the course of a year. Since March 18, the number is zero on both counts, and the near future offers little reason to expect any change.

With this shifting landscape in mind, it shouldn’t be surprising that some companies have prospered during this upheaval while others—especially travel-related firms—have struggled. From its record high on February 19, 2020 the S&P 500 Index¹ fell 33.79% in less than 5 weeks as the news headlines grew more and more disturbing. But the recovery was swift as well: from its low on March 23, the S&P 500 Index jumped 17.57% in just 3 trading sessions, one of the fastest snapbacks ever among 18 severe bear markets since 1896. As of August 18, 2020 the S&P 500 Index had recovered all of its losses and notched a new record high.

Many individuals are puzzled by this turn of events. For those under the age of 75, the news headlines are likely the grimmest in memory: Millions have found themselves suddenly unemployed, and storied firms such as Brooks Brothers, Neiman Marcus, and JC Penney have entered bankruptcy proceedings.

How can stock prices flirt with new highs while the news is so discouraging? One financial columnist recently observed that the stock market “looks increasingly divorced from economic reality.”²

Is it? Let’s dig a little deeper.

The stock market is a mechanism for aggregating opinions from millions of global investors and reflecting them in prices they are willing to accept when buying or selling fractional ownership of a company. Share prices represent a claim on earnings and dividends off into perpetuity—current prices incorporate not only an assessment of recent events but also those in the distant future. In some sense, the stock market has always been “divorced from reality” since its job is not to report today’s temperature but what investors think it will be next year and the year after that and the year after that and so on.

Moreover, the universe of stocks does not march in lockstep. At any point in time, some firms are prospering while others are floundering. This year’s wrenching economic turmoil has inflicted great hardship on some firms while opening up new opportunities for others. Based on this admittedly abbreviated list, it appears the stock market is doing just what we would expect—reflecting new information in stock prices.

Past performance is not a guarantee of future results.

No one could have predicted the tumult we have seen this year in financial markets. But investors would do well to focus on what hasn’t changed.

1. Markets are forward-looking, so focusing on today’s economic data is akin to looking at the rearview mirror rather than the road ahead.

2. Broad diversification makes it more likely that investors capture market returns that are there for the taking—including companies that do far better than expected.

3. Since news is unpredictable, a strategy designed to weather both expected and unexpected events will likely prove less stressful and easier to stick with.

Bottom line: read the newspaper to be an informed citizen, not for advice on how to navigate the financial markets.

¹S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.
²Matt Phillips, “Repeat After Me: The Markets Are Not the Economy,” New York Times, May 10, 2020.

5 Real Things + Bonus Offer you can do Right Now to Address the Coronavirus and your Investment Account.

April 1, 2020 by Justin M. Follmer, MBA, CFP®, AIF®

Here’s 5 Real Things + Bonus Offer you can do Right Now to Address the Coronavirus and your Investment Account.

As the country continues its best efforts to slow the spread of the coronavirus, it seems that everywhere you turn, you cannot help but run into some article, podcast, Facebook post, television special or Tweet about the latest COVID-19 projections. We, investment advisors, are no different. In just a quick sample of my email inbox, there isn’t a single email within the last 3 weeks that hasn’t mentioned either “COVID-19” or “Coronavirus” and how to help clients address it through their investment account. Some of the common themes among these emails include:

“Here’s our fund that has beaten the S&P 500 year-to-date.”

“Buy this leveraged ETF to protect downside risk.”

“Sell this fixed insurance product to weather the current storm.”

“We offer a suite of software solutions to address market volatility.”

And so many others…that just get deleted.

None of these would help any of my clients and they likely won’t help you either.

Here’s 5 Real Things + Bonus Offer you can do Right Now to Address the Coronavirus and your Investment Account.

#1 Don’t Sell Anything

I’m not simply repeating what all financial advisors say during this time. I’m telling you that there is far more evidence in favor of not selling than there is in support of cashing in and choosing to buy back at another point in time when things “feel safer;” take a look at returns following market drawdowns. There’s one caveat to this: if you’ve been laid off and need money to pay your bills during this difficult time, that would be a reason to choose specific positions to sell to free up cash to live from.

How does this help you? Selling for selling sake is an emotional response. Many people struggle to separate their emotions from investing making it one of the single hardest things to do as an investor. When you sell, you miss rebounds. And some of the best market days are immediately following the worst days. If you aren’t invested, you’ll lock in losses without the ability to earn gains. Stay invested unless you fall into the caveat above.

#2 Understand Why Your Account Dropped in Value

Is it just your account or is it everyone else too? You likely own several investments within your account. These investments could be in the form of a mutual fund, an exchange traded fund (ETF), or a money market fund. There are many other types, but let’s focus on those three since they are the most prevalent in the typical investment account. Each of the different positions in your investment account are designed to pursue a specific strategy outlined in its governing document. This document is called a prospectus and you received a copy of it when you first bought the fund (hint: it’s that massive book you threw out a long time ago that was too big and boring to read). This document outlines the goal of the fund and how and why it invests the way that it does. You could call the fund company and request a copy and read it as you practice social distancing -or- you can take a shortcut. Head over to www.morningstar.com and enter your fund’s ticker symbol to get some quick, current data about the fund.

Let’s use an example. One of the most popular funds widely available in company sponsored retirement plans is the Vanguard Total Stock Market Index Fund, ticker symbol VTSAX. When you enter this ticker symbol in the search bar on the Morningstar website, it produces a page that shows you how the fund is invested. In this example, it’s a mutual fund that comprises of about 3,500 companies and is designed to track the entire US Stock Market.

How does this help you? If you know that the entire US Stock Market has decreased in value over the last several weeks as a result of both market panic and expectations of the future, it stands to reason that this fund would follow that same trajectory. Having this understand of why your fund decreased in value can help bring back perspective and understanding where you may not have it. Considering looking up each fund you own to gain this perspective.

#3 Understand How Each Fund in Your Account Works Together

Now that you know how to look up each fund, considering putting them together to fully understand your account in its entirety. To do this, you may need to purchase a paid version of Morningstar (costs about $200/year but there’s likely a free trial available) so you can see how each fund interacts with the others in the account.

How does this help you? Owning one total stock market fund, for example, diversifies your risk across the entire US stock market. But you can spread this risk even further. You can add other funds to see how they may have affected the recent drop in value. By adding fixed income or alternative funds that may be uncorrelated to the stock market, you can ensure parts of your portfolio don’t drop at the same rate as the general market. This is the very definition of diversification.

#4 Determine your Risk Score

The risk tolerance questionnaires in use by many firms are antiquated. There’s no other way to state this: they are terrible and do nothing to address the actual investment account level risk. They are also easy to game in that you can look at the answers and choose the ending outcome based on the range of answers. Several years ago, I partnered with Riskalyze to offer a unique scoring method to pinpoint my client’s specific risk metric. Think of it like the Sleep Number Bed System but for your investment account: you are scored between 1 and 99.

You can score yourself here.

BONUS OFFER: For as long as South Carolina is under a COVID-19 State of Emergency, I’ll take this a step further and add your investments to the scoring system so you can see if your portfolio matches your risk score…at no charge. Send a quick email to [email protected] for this offer with the subject: “Limited Time Offer: Risk Matching Request.”

How does this help you? When you invest your account to match your risk score, you have a far likelier chance of staying invested while working towards your financial goals. This helps you make better investing decisions through Riskalyze’s mission: “empowering the world to invest fearlessly.”

#5 Review your Beneficiary Designations and Estate Planning Documents

An often overlooked thing about an investment account is what happens to it following your expiration. Give your custodian (the company holding your investment account) a call and ask this question: “if I die, what happens to this account?”

You may be surprised to hear that a beneficiary isn’t listed or there’s “no record available.” Paperwork at custodians gets messed up all the time; trust me, I deal with them every day. Use this time to review your Beneficiary Designations, WILLs, Healthcare Directives, and Power of Attorney appointments to ensure the correct people are listed. If not, reach out to your estate planning attorney to start the update process. If so, please be sure your documents are signed and fully executed. I can’t think of anything more unfortunate than spending thousands of dollars on an estate plan and then having unsigned estate planning documents. Unsigned documents are not executed and won’t accomplish your wishes upon your expiration.

How does this help you? Our lives change all the time and it’s important that long-term plans reflect those changes. Close family members that may be listed as a trustee or executor may not be so close now. Staying on top of these things is very important. The last thing you want to happen is the very thing you’ve planned against while having the ability to ensure it doesn’t.

During this historic time in our country where economic activity has come to a halt and when markets have struggled to find direction, it’s tough to stay motivated and focused. We hope that you can follow these 5 Real Things and take advantage of our Bonus Offer that you can do right now to address the coronavirus and your investment account.

Here at Coastal Wealth Advisors, I work with each of our clients on all the above steps – and so many more. I do all the heavy lifting for you by spending countless hours with each family to address their financial goals and risk tolerance in order to implement financial plans and manage investment accounts on their behalf. I’d love nothing more than to help you right now. I’m equipped to work virtually and am fully dedicated to helping clients through all market climates. Consider reaching out today to learn more.

Please stay safe and healthy and remember, this too shall pass.

Portfolios and Coronavirus

March 12, 2020 by Justin M. Follmer, MBA, CFP®, AIF®

It goes without saying that the entire world is fixated on the near- and long-term ramifications the coronavirus, COVID-19, could have on the world’s population and resulting global growth expectations. Using the Russell 3000 as a widely available proxy for the entire US stock market, as of midday Thursday 3.12.2020, it was well into bear market territory. It is down -25.22% since the previous high set back in February.

What’s Causing the Markets to React so Fiercely?

Using the 1st Pillar of Our Investment Philosophy, we know that world markets are a giant information processing system, in that, market prices reflect all available information and expectations of the future. With stock markets entering bear market territories (defined as a drop of more than 20% from recent highs), it would indicate that global growth expectations are now less than they were just a few short weeks ago…the question is how much of an economic impact this will ultimately have on the economy?

“Market declines can occur when investors are forced to reassess expectations for the future,” read the latest publication from Dimensional, “the expansion of the outbreak is causing worry among governments, companies, and individuals about the impact on the global economy. We see this happening when markets decline sharply, as they have recently, as well as when they rise. Such declines can be distressing to any investor, but they are also a demonstration that the market is functioning as we would expect.”

With new cases of the virus popping up across the world, the concern for widespread infection with little containment, and no current vaccine, it makes sense that the markets are reacting to any signs of negative news. Yet it seems that positive news is hard to come by lately.

So Let’s start there; here’s some positive news articles you likely haven’t read.

Scientists are working 24/7 on potential vaccines, but they take time.

Supply chains are starting to come back online in China.

The US-China trade war unintentionally prepared companies for coronavirus.

Markets will likely get relief as more positive news happens and with confirmation that new cases are peaking or slowing over time or when a vaccine has been discovered. As of last check (3.12.2020 at 12:45pm EST), there are 56,864 active cases across the globe, with 90% of them (51,150) reportedly in Mild Condition; 10% (5,714) in serious or critical. This means that 68,677 have recovered. Unfortunately, 4,756 people have lost their lives. (source)

So…What’s next?

It’s impossible for anyone to determine the direction of this market until more reliable positive data takes hold. “From a macro-economic point of view, the real question is how this impacts the US economy over the coming year,” says Brian Wesbury of First Trust Portfolios in a recent email, “The US consumer is on solid footing…we believe, just like all other viruses we have seen over the past decades that have dissipated, the coronavirus will be no different.”

“We can’t tell you when things will turn or by how much, but our expectation is that bearing today’s risk will be compensated with positive expected returns. That’s been the lesson of past health crises, such as the Ebola and swine-flu outbreaks earlier this century, and of market disruptions, such as the global financial crisis of 2008-2009. Additionally, history has shown no reliable way to identify a market peak or bottom. These beliefs argue against making market moves based on fear or speculation, even as difficult and traumatic events transpire. (Source)”

The Takeaway

With markets continuing their slide, it’s important that you adhere to an investment strategy that was designed specifically for you. Clients of Coastal Wealth Advisors go through a robust risk tolerance assessment to test their commitment to a certain level of risk given their own emotional reaction to hypothetical changes in the value of their portfolio. It is this assessment that drives the portfolio design process. Combining this risk-based discussion with an Investment Philosophy rooted in academic science can make for a better overall investment experience. This is how we address negative market movements, like the coronavirus, long before they occur. We never have all of the answers about world events and it doesn’t mean that portfolios won’t fluctuate over time, but it does mean that the fluctuations should be in line with what you are willing to withstand when it may seem like everyone else is running for the hills. A better strategy, in my opinion and backed by academic evidence, is to build an allocation that marries your financial goals with your risk tolerance and is designed to weather market storms. In essence, build a portfolio that you can stick with during the good and bad times.

If you find yourself in a state of panic or uncertainty regarding your current portfolio, please get in touch with Justin today. Call him directly at 843-870-9568 or email [email protected] He’d be happy to chat with you and provide you with honest feedback…even if it’s simply to do nothing.

Reliance on an Investment Philosophy

August 20, 2019 by Justin M. Follmer, MBA, CFP®, AIF®

“The important thing about an Investment Philosophy is that you have one you can stick with.”

– David Booth, Founder and Executive Chairman of Dimensional Fund Advisors

Last week markets continued their slide as investors fled equities for safer-haven assets like U.S. Treasury Bonds. The buying pressure of US Treasuries caused the interest rates on these bonds to decrease. It’s important to remember that bond prices and bond rates (also called yields) move inversely to each other; as more investors push up the price of bonds, yields will decrease. The opposite happens when investors sell out of bonds and buy equities. In spite of all of this, we believe a reliance on an investment philosophy is crucial.

What’s driving the direction of both bond and stock markets?

Two words: Tariffs, FED.

That’s been the name of the game over the last 18+ months, and at times, I feel like we are repeating the same ole song and dance.

A few months ago, the difference between the 3-month and 10-year Treasury bond yield went negative for the first time since 2007. The financial media took this as a sign of imminent recession; however, we maintained the stance that no recession was in sight. On Wednesday, August 14th, the difference between the 2-year and 10-year Treasury bond joined the 3mo/10yr in turning negative. Economists call this negative difference an inversion of the yield curve. An inverted yield curve has preceded each of the previous 7 recessions. As of my writing this, global stock markets are not taking this news lightly – mid-day Wednesday August 14th, the major US indices are down around -2.75%. However, bond markets are signaling conflicting information.

There are a few components that we are continuing to monitor that may explain this inversion and why it doesn’t necessarily spell doom.

European Economic Weakness

Germany posted its first negative GDP results (-0.1%). Recall that a technical recession is two consecutive quarters of negative GDP. This would fit the narrative of a global economic slow-down. In addition, there’s rumors of trouble with a hard-Brexit plan from the EU. Add these issues to Italian Populist Party concerns and one has the makings of trouble abroad. But the US economy, by most measures, is still relatively healthy. Last Quarter’s GDP decreased to +2.1% from 1st Quarter results of +3.1%; well within the range of GDP reports over the last 9 years.

Market Expectations of Further FED Rate Decreases

Three weeks ago, the FED reduced the Federal Funds Rate after a multi-year period of raising rates. The last increase was December ’18. At that time, I believed (and still do) that the economy did not need that final rate hike. Markets felt the same sentiment that caused the rest of December’s rapid market decline. It wasn’t until the FED signaled a cautionary policy in moving rates going forward (i.e. data dependency) that stock markets rebounded to 2019 highs between January and July. And if by political pressure, the FED essentially removed the December rate hike through its rate decrease last month. The FED called it a “mid-cycle adjustment” however, investors wanted more and still do. The question remains if the recent market turmoil and additional tariff action by the Trump Administration will force the FED to reconsider their stance. We almost have to question if one is driving the other? As of today, the bond markets are pricing in a 100% chance of another 0.25% rate cut in September. This pricing in may be the sole reason for the yield curve inversion. Remember that we believe (1st Pillar of our Investment Philosophy) all available information and expectations of the future are reflected in market prices. If investors are expecting the FED to reduce rates, it only makes sense that current rates would also decrease. Yield Curves have historically inverted due to tight monetary policy – that isn’t the case today. And why is no one talking about the $1.4 TRILLIONS of dollars in excess reserves still flooding the system? US monetary policy is not tight by our measures and some would say it’s simply, less-loose.

Why First Trust Portfolios says “This Is Not 2008”

Tariffs

The Trump Administration recently removed some tariffs and delayed others until Dec 1st. The mixed signals from President Trump explains much of the volatility in recent trading days. To say it has been whipsawed action would be an understatement. Markets were moving higher on signs of progress in trade talks with China but dropped significantly as a result of the inverted yield curve. As I’ve been meeting with clients over the last couple of weeks, I’ve explained the rationale behind why the world needs a successful trade agreement with China. To recap, I believe the global economy will benefit when trade secrets and other intellectual property are protected across country borders. These secrets are crucial to keeping capitalism and free markets alive. There remains an additional benefit to tariffs that hasn’t been discussed much – supply chain transitions to non-tariff countries. US companies with locations in China may be forced to transition their business to neighboring countries where labor costs remain low compared to the US but still comparable to China. If US corporations can strategically exit China to avoid tariffs, the Chinese economy may feel more pain than they are experiencing through a loss of jobs and tax revenue. This could be another pain point for the Chinese needed to force the US and China to meet in the middle on an agreement. The only concern I have here is whether the Trump Administration is ready to give a little ground to gain a lot of ground. If we look to President Trump’s twitter feed, I’m not certain he’s willing to capitulate on any demand. This, in my opinion, would be a mistake; negotiations become successful when two opponents meet in the middle.

Conclusion

We, as advisors, monitor these data points and concerns daily and we must remain focused, diligent, purposeful and unemotional in our approach to wealth management. Looking to the Investment Philosophy and the empirical evidence that is deeply rooted in academic science, each client’s portfolio strategy is designed with their financial goals, risk tolerance, and risk capacity in mind. For this reason, every portfolio is built with economic downturns, stock and bond market corrections in mind. It’s the primary reason we use fixed income assets to soften volatility. Recessions are a part of the economic cycle and avoiding them is not possible. It is highly provocative to imagine a strategy that gets out at the top of the markets and in at the bottom at precisely the right times. Imagine the money one could make and the emotional stress one could avoid with such a strategy? The reality is that such a strategy is impossible for humans to implement consistently and reliably and there is a plethora of data to support this impossibility.

Here’s what we will be/are doing for our clients. We believe that maintaining a consistent allocation to a globally diversified portfolio within your risk tolerance remains the most reliable method to achieving your long-term financial goals. To maintain this consistency, we rely on rebalancing techniques to keep allocations in-check as global markets move. This means that, at times, we’ll sell out of portions of one position and buy into others. We may also replace positions or add positions as necessary to take advantage of depressed prices and/or other opportunities. These actions aren’t meant to time the market, per se, but rather to ensure prudent management of our client’s investment portfolios.

Whether you’ve been a do-it-yourselfer or have been working with another financial advisor, maybe it’s time you consider a second opinion? Our phone lines are open, email inboxes properly filed and ready for your message. We’d love nothing more than the opportunity to sit down and show you why we’re different and how we believe our Investment Philosophy can help create calm during market storms.