Post Election Outlook

Client Note                                                                                                                                                      

November 4, 2020

Pre-election volatility continued in October, with the S&P500 climbing 5%, then dropping some 7% for a net change of about 2.5%.  Gold was a little less volatile and ended the month just slightly lower.  Bond prices trended down all month, with the Aggregate Bond index down less than 1%, while the long bond fell about 3.5%.  Our average moderate portfolio declined by 1.2% on the month, bringing year to date returns to approximately 8.5% for the average portfolio.

The pre-election volatility this year is similar to previous elections.  For the 3 months preceding the election, there have been two increases of about 8% and two declines of 8%.  2016 saw a steadier decline of almost 5% in the 90 days prior to election. 2012 saw a climb of 7% followed by an equal decline.  2020 is not unlike any other year from a market behavior perspective.

Most recently markets have jumped back up (stocks and gold) into the very middle of the past 3 months’ range.  Gold and gold miners also are moving and, as I type, moving up through their respective down channels.   Markets do not like uncertainty and in the immediate term, the longer the count takes the greater the risk of rapid swings in prices.

Looking ahead, the technology sector has been lagging the general market while ‘value’ and dividend paying stocks have performed better over the past week.  The price of oil had a recent bottom on October 29, and since climbed more than 10%.  The energy sector ETF bottomed the next day and has climbed a similar amount.  While not out of the woods yet, as additional stimulus and vaccine data comes out, energy has the most room to make gains as we gain vision to further economic growth in 2021.

However, the gulf between earnings and stock prices remains at historic levels.  Market value of the SP500 vs Total GDP remains higher than in 2000.   As I have stated a few times over the past several months, I still do expect 10-20% swings in stock prices, as we have seen over the past 2 years.  As such, buying relatively ‘low’, after a decline and locking in gains after run-ups is the prescription for continued portfolio growth.

The Federal Reserve has stated quite clearly that its own monetary stimulus is needing the complimentary fiscal stimulus that can only come from Congress.  Given the current state of the Senate, any stimulus is not likely until after the New Year.  The timing of further fiscal stimulus and a widely available vaccine appear to both be pointing to a late first quarter, perhaps mid-year 2021-time frame.  At that time we should be able then to make progress filling in the substantial (greater than 2008 recession) GDP output gap and have better vision as to the rate at which corporate earnings can exceed the 2019 high water mark.

Adam Waszkowski, CFA

 This commentary is not intended as investment advice or an investment recommendation. Past performance is not a guarantee of future results. Price and yield are subject to daily change and as of the specified date. Information provided is solely the opinion or our investment managers at the time of writing. Nothing in the commentary should be construed as a solicitation to buy or sell securities. Information provided has been prepared from sources deemed to be reliable but is not guaranteed by NAMCO and may not be a complete summary or statement of all available data necessary for making an investment decision. Liquid securities, such as those held within managed portfolios, can fall in value. Naples Asset Management Company, LLC is an SEC Registered Investment Adviser. For more information, please contact us at awaszkowski@namcoa.com

The Positive Impact of ESG Investing

ESG type investments have become popular because investors want to know the property they own will have a positive impact on the local community and the broader environment. This allows real estate investments to align with what matters most to investors and their families.

One example, is what McLemore is doing in northern Georgia.  Adhering to a strong ESG program, McLemore and its management team strives to provide a profitable return by balancing the Company’s economic goals with good corporate citizenship:

  • Economic Development Incentives: The Company has worked with local and state officials to secure millions of financial incentives.
  • Employment: The Company is targeting over 1,000 new full-time employment opportunities within Walker County, Georgia.
  • Good Stewardship: The Company has remodeled and rebuilt an existing golf course, which now includes the “Best Finishing Hole in America since 2000” by Golf Digest magazine.
  • Visitors: The Company is attracting many more visitors into Walker County, Georgia, where they can enjoy existing parks and protected wilderness areas, including Cloudland Canyon State Park, the Crockford/Pigeon, Mountain Wilderness Area, and many others.
  • The Company is the owner and operator of the McLemore Community, which is an upscale residential golf community that is in the process of developing a Hilton Curio Collection hotel, resort and conference center as well as other amenities. The McLemore Community sits on approximately 825 acres of real property, is located on Lookout Mountain, Georgia and currently consists of the
    many planned components, click here to view the McLemore Executive Summary Overview Deck 10.28.20.

This blog post nor any links above are a solicitation of securities, that may only be performed by a private placement memorandum.  To view McLemore Due Diligence files, including their Private Placement Memorandum and learn more “How to Invest” type information, click here. This offering is for Accredited Investors only. 

IRS Boosts 2021 Income Limits for Deductible IRA Contributions

The Internal Revenue Service announced Monday income range increases in 2021 for determining eligibility to make deductible contributions to traditional Individual Retirement Arrangements, to contribute to Roth IRAs and to claim the Saver’s Credit.

However, 401(k) contribution limits for 2021 are unchanged at $19,500.

Catch-up contribution limits for employees age 50 and over remain unchanged at $6,500.

The limitation regarding SIMPLE retirement accounts remains unchanged at $13,500.  The limit on annual contributions to an IRA remains unchanged at $6,000.

As the IRS explains in Notice 2020-79, taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. If during the year either the taxpayer or his or her spouse was covered by a retirement plan at work, the deduction may be reduced, or phased out, until it is eliminated, depending on filing status and income. (If neither the taxpayer nor his or her spouse is covered by a retirement plan at work, the phase-outs of the deduction do not apply.)

Here are the phase-out ranges for 2021:

  • For single taxpayers covered by a workplace retirement plan, the phase-out range is $66,000 to $76,000, up from $65,000 to $75,000.
  • For married couples filing jointly, where the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is $105,000 to $125,000, up from $104,000 to $124,000.
  • For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $198,000 and $208,000, up from $196,000 and $206,000.
  • For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000. The income limit for the Saver’s Credit (also known as the Retirement Savings Contributions Credit) for low- and moderate-income workers is $66,000 for married couples filing jointly, up from $65,000; $49,500 for heads of household, up from $48,750; and $33,000 for singles and married individuals filing separately, up from $32,500.
  • The income phase-out range for taxpayers making contributions to a Roth IRA is $125,000 to $140,000 for singles and heads of household, up from $124,000 to $139,000. For married couples filing jointly, the income phase-out range is $198,000 to $208,000, up from $196,000 to $206,000. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

The SIMPLE catch-up limit stays unchanged at $13,500. Catch-up contributions do not apply to SEPs.

The 2020 Roth IRA contribution eligibility phase-out limits based on income have increased slightly to $198,000 to $208,000 for married-joint and $125,000 to $140,000 for singles and heads of household.

 

SEC Expands Accredited Investor Definition

The Securities and Exchange Commission Wednesday amended its “accredited investor” definition to allow investors to qualify based on defined measures of professional knowledge, experience or certifications — including holding certain Financial Industry Regulatory Authority licenses — in addition to the existing tests for income or net worth.

The 166-page amendments adopted Wednesday also expand the list of entities that may qualify, including by allowing any entity that meets an “investments test.”

“For the first time, individuals will be permitted to participate in our private capital markets not only based on their income or net worth, but also based on established, clear measures of financial sophistication,” said SEC Chairman Jay Clayton, in a statement. “I am also pleased that we have expanded and updated the list of entities, including tribal governments and other organizations that may qualify to participate in certain private offerings.”

The commission stated that the amendments to the final rule are part of its “ongoing effort to simplify, harmonize, and improve the exempt offering framework, thereby expanding investment opportunities while maintaining appropriate investor protections and promoting capital formation.”

SEC Commissioner Hester Peirce tweeted Wednesday “Americans shouldn’t have to ask the SEC for permission to invest, but today’s accredited investor rule at least offers people a path to ask permission based on their education, rather than simply telling them ‘no, unless you’re rich.’”

In the case of individuals, “the previous rule used wealth — in the form of a certain level of income or net worth — as a proxy for financial sophistication,” the SEC states. However, “we do not believe wealth should be the sole means of establishing financial sophistication of an individual for purposes of the accredited investor definition. Rather, the characteristics of an investor contemplated by the definition can be demonstrated in a variety of ways.”

The thresholds stand at a net worth of at least $1 million excluding the value of primary residence, or income at least $200,000 each year for the last two years (or $300,000 combined income if married).

According to the SEC, the amendments to the accredited investor definition in Rule 501(a):

  • add a new category to the definition that permits natural persons to qualify as accredited investors based on certain professional certifications, designations or credentials, including the Series 7, Series 65, and Series 82 licenses as qualifying natural persons. (The Commission will reevaluate or add certifications, designations or credentials in the future);
  • include as accredited investors, with respect to investments in a private fund, natural persons who are “knowledgeable employees” of the fund;
  • clarify that limited liability companies with $5 million in assets may be accredited investors and add SEC- and state-registered investment advisers, exempt reporting advisers and rural business investment companies (RBICs);
  • add a new category for any entity, including Indian tribes, governmental bodies, funds, and entities organized under the laws of foreign countries;
  • add “family offices” with at least $5 million in assets under management and their “family clients,” as each term is defined under the Investment Advisers Act; and
  • add the term “spousal equivalent” to the accredited investor definition, so that spousal equivalents may pool their finances for the purpose of qualifying as accredited investors.

The amendments also expand the definition of “qualified institutional buyer” in Rule 144A to include LLCs and RIBC programs if they meet the $100 million in securities owned and invested threshold in the definition.

The amendments also add to the list any institutional investors included in the accredited investor definition that are not otherwise enumerated in the definition of “qualified institutional buyer,” the SEC said, provided they satisfy the $100 million threshold.

Client Note September 2020

Client Note                                                                                                                                                      

October 8, 2020

September saw the S&P500 slip approximately 3.8%, ending a streak of 5 positive months in a row.  While equity markets and precious metals (oddly) are moving together, our cash and bond holdings kept average portfolio declines to approximately 1.5% on the month. Year to date through September 30, the S&P 500 is up 5.6%, while our average Moderate Portfolio is up almost 10% year to date.  The fact that financial markets are up this year, despite 2020 being on track for the worst GDP contraction since 1946, is remarkable.

Estimates for 2020 GDP growth will come in around -4%, while the 2007/2008 era saw only a 2.7% contraction.  But this time markets are faring far better.  The key difference between today and 2008 is the emergency actions of the Fed.  The Fed acted far faster and far more substantially than it did in 2008.  The labor market bottomed out in February 2010 with total losses of 8.8 million jobs.  Not until May 2014 did the US recover all the jobs lost.  Currently, we have recovered half of the 22 million jobs lost.  IF, the now-slowing recovery is similar to post 2008, it could be 5 years before all jobs are recovered.  Fortunately, the S&P500 mirrors the Fed’s balance sheet growth more than the economic data.   

History shows us that markets recover more quickly than jobs or the economy.  As such, it appears equity markets have priced in a full profit recovery in the coming year.   In 2008, corporate profits bottomed almost the same time markets did.   Profits and markets grew alongside each other for several years. This time, markets have already recovered and are waiting on profits to back fill the massive valuation gap that now exists.  Because of this mis-match in timing, we could see a few more bouts of 20% gains and declines, as data/news shows economic activity slowing or increasing; as governments decide to add fiscal support or skip it; and as hot spots of the Covid virus spike and recede over the next year or longer.

Some analysts see rising inflation and higher rates coming because of economic growth.  In order to create the ‘good’ inflation (demand-pull), consumers need to spend.  They spend wages, new credit (loans/credit cards) and transfer payments (social security/welfare/stimulus checks).  Banks’ lending standards are increasing; lending is decreasing.  Aggregate wages have declined each month since May. Finally, in August the Cares Act $600/week stimulus ran out while 10 million remain unemployed, keeping pressure on consumer spending.  The Chairman of the Federal Reserve has asked Congress for fiscal stimulus to lift the economy.  As it stands now, there is no real impetus for market rates to rise, and may bode well for bond prices, as rates stay low or perhaps decline again.

My outlook for markets and rates remains the same as during the Summer.  Rates remain low and there is a good likelihood of large swings in market prices.  That outlook will remain until either a large stimulus package with money going right to consumers or control of the spread of the virus occur, maybe both.  I am expecting a post-election rally that may start mid to late October, simply because regardless of the winner, markets like certainty.  Precious metals appear to have completed their correction and a nascent rally may have started.

Adam Waszkowski, CFA

 This commentary is not intended as investment advice or an investment recommendation. Past performance is not a guarantee of future results. Price and yield are subject to daily change and as of the specified date. Information provided is solely the opinion or our investment managers at the time of writing. Nothing in the commentary should be construed as a solicitation to buy or sell securities. Information provided has been prepared from sources deemed to be reliable but is not guaranteed by NAMCO and may not be a complete summary or statement of all available data necessary for making an investment decision. Liquid securities, such as those held within managed portfolios, can fall in value. Naples Asset Management Company, LLC is an SEC Registered Investment Adviser. For more information, please contact us at awaszkowski@namcoa.com.

Client Note August 2020

September 3, 2020

August saw the S&P500 gain approximately 7% on the month, making 5 positive months in a row; and the last 9 of 10 days have closed.  Over the past few hours today, September 3, the S&P 500 has fallen 3.5%.

While the equity markets pressed on in their upward trajectory, gold fell just over 1% and long dated bonds saw a decline of just over 5%, while the broader bond market fell less than 1%.  Combine the various asset classes and our average moderate portfolio for August was flat to slightly up on the month.

Looking ahead, valuation on the market have become extreme-ier than normal as analysts forecast full earnings recovery plus some.   The Forward P/E ratio, the price you pay per $1 of earnings is just under 23x.   This compares to 19x in January 2018; 26x in 2000; and a mild 15x in 2007.   The economic recovery has been V-shaped.  The most recent high-frequency economic data coming in is showing a reduction in the pace of growth coming out of the second quarter.  That is, the right side of the “V” is getting rounded off and is lower than before the pandemic shut down.  This general lower level of economic activity will likely persist well into 2021 as localized covid-19 outbreaks and continued travel restrictions prevent the hardest hit areas from recovery.  Fuel usage by airlines is off by 55%, July 2020 compared to July 2019.

Gold and bonds have been in an extended sideways consolidation going back and forth in about a 6-7% range since mid-June. Staying over $1900/oz is critical.  Rates/bond prices are likely to remain range bound but may see a test of recent highs (approx. +4-5%).  Today’s stock selloff may mark the beginning of the pre-election volatility.  And if we see a total 7-10% correction should give us the opportunity to look at more individual names again, using the large cash position that we have.  Either way the election goes, once settled, should be constructive, as the market dislikes uncertainty.

Fortunately(?), the S&P500 has a very tight relationship to the Fed’s balance sheet which went from $800billion in 2007 to $2.2trillion end of 2008.  The Fed’s balance sheet continues to rise to $4.5trillion by end of 2014, after which was a gradual decline to a low of $3.7trillion in August of 2019, just before the recent dollar funding crisis in September 2019.  Over the past year, the balance sheet grew from $3.7trillion to   $7trillion recently.  The Fed added $3.7trillion over 6 years to get prices back up after the Great Financial Crisis; and now has added again, $3.3trillion, most over the past 6 months, to keep asset prices high.  I see no reason why the Fed or other central banks would choose to even hint at reducing support for markets.

The need for central banks to continue to “add liquidity/support” to financial markets is, at its core due to lack of savings, which flows from income (for individuals) or profits (from corporations).  Without natural savings from the economy, new money must come from central bank “balance sheet expansion”.   Which dovetails into the idea that low rates beget low growth.  An extended period of exceptionally low (even negative) rates has resulted at best, in below average economic growth.  Longer term, rising aggregate income from higher interest rates (someday) and increase in aggregate incomes should support longer term growth and healthy stock prices.  In the medium term we need to be aware of and take advantage of, larger swings (up and down) in the markets until that takes hold again.

Adam Waszkowski, CFA

 This commentary is not intended as investment advice or an investment recommendation. Past performance is not a guarantee of future results. Price and yield are subject to daily change and as of the specified date. Information provided is solely the opinion or our investment managers at the time of writing. Nothing in the commentary should be construed as a solicitation to buy or sell securities. Information provided has been prepared from sources deemed to be reliable but is not guaranteed by NAMCO and may not be a complete summary or statement of all available data necessary for making an investment decision. Liquid securities, such as those held within managed portfolios, can fall in value. Naples Asset Management Company, LLC is an SEC Registered Investment Adviser. For more information, please contact us at awaszkowski@namcoa.com.

Client Note July 2020

After a brief pause in June, financial markets continued their climb, trying to get to even on the year.  Of the major indexes, only the tech-heavy NASDAQ has managed to make new all-time highs.  The discrepancy across indexes is significant.

Off its all-time high             year to date price return

The Dow:                              -10% (Feb 2020)                                  -7%

S&P 500                                 -4% (Feb 2020)                                 +1%

Russell 2000 (small cap)    -12%   (Jan 2020)                               -10%

NASDAQ                                  -3% (July 2020)                                 +20%

EAFE (Eur/Afr/Far East)      -15%  (Jan 2018)                                 -8%

 

Inside the NASDAQ, the top “6” holdings are Apple, Microsoft, Amazon, Facebook, Alphabet A shares and Alphabet B shares.  These 5 stocks make up 44% of the index.  What this means is that only a handful of stocks, in one sector, are keeping the overall indexes up.  One can say, “so goes tech, so goes the markets”.    US mega cap growth/tech has been the only game in town.   More recently tech has weakened against the rest of the market.   If tech loses it dominance without another sector or two to take the reins, equity markets will have a bumpy second half 2020.

Portfolios I manage continue to do very well.  Gold is in the news a lot recently.  Over the past 15 months, gold has dramatically outperformed equity markets, and climbed 65% since November 2018.  The last 15% of that has come in the past two weeks.  Trimming and taking profits is on the schedule for August.   The individual stocks I choose from time to time have become a mixed bag.  IRBT and APRN recently reported significant upside earnings surprises, only to be sold off hard.  I am seeing this in several areasIts feeling like a ‘sell the news’ kind of market.  After a 50% climb since the March lows, its not inconceivable that stocks will take a breather.  Perhaps even give back some as we adapt to living with Covid19.     Clients can probably observe the steps I have taken to reduce exposure and take some profits, so that if/when we get a correction, it should not be too painful.

July 30, 2020 has the potential to be a historic day.   GDP for the second quarter 2020, covering March 30 through June 30 will be released.  Current estimates are to see a contraction in US GDP of -30%.  This would be the worst quarter since Dec 1946 and sets up the worst year since then as well.  While this is widely known to people who follow it, I am sure it will be a shock to some, and widely covered in the financial press.   In addition, all the tech stocks mentioned above will report earnings.  They will all be very profitable, but if this is indeed a ‘sell the news’ market, beware.  Microsoft already reported on July 22, beating estimates, and was sold off by 6%, recovering only a part of that decline this past week.

The economy is not coming back as fast as hoped and is already showing signs of levelling off.  Roughly 10% of our economy has disappeared (hospitality/tourism).   As long as the Fed promises, and CONTINUES to inflate the monetary base, financial markets can remain elevated However, if a small correction gets out of hand, the Fed has little influence in the very short term—and not much new to offer.  .  The real economy however will not come back without greater spending from consumers and businesses—either through earned wages, or stimulus, or loans/credit.

 

Adam Waszkowski, CFA