Blog Layout

Special Investment Update – October 31, 2016

Giao • Oct 31, 2016

SPECIAL INVESTMENT UPDATE

Dear Clients & Friends,

Soon the election will be over! For investors, that means the end is in sight for the nagging uncertainty that has held the stock market back, so far, from launching into its traditional 4 th quarter rally. Even though government policies will differ somewhat depending on which presidential candidate wins, history shows that the equity market can do quite well regardless of which party is in control. The decisive factor is the economy and more specifically, corporate earnings. As long as company profits are trending upward, without being eaten up alive by inflation, share prices can advance under any political regime.

Many reliable indicators are pointing to continued growth for the U.S. economy: consumer confidence as measured by the Conference Board, jumped in September to its highest level since 2007; first-time filings for jobless benefits recently scraped a 43-year low; junk-bond prices hit a new 14-month high on October 10. On the eve of the past three recessions (1990, 2000, and 2007), prices for bonds issued by lower-grade, heavily indebted companies began to fall sharply. Just the opposite is happening now.

We are not attempting to paint an unrealistically rosy picture. We all know the U.S. economy is crawling along at a much slower pace than in the past expansions. What’s more, large parts of the developed world such as Europe and Japan are dragging behind the United States. If our newly elected president were to offer some words of reassurance to investors, it would be very much in keeping with history for the headline U.S. stock indexes to break out to a series of fresh all-time highs within the seasonally favorable November – January window.

As far as our investment strategy is concerned, we continue to maintain our standard two-pronged strategy, which is to maintain a substantial exposure to common stocks (and mutual funds) as long as there is a reasonable prospect for double-digit returns. Furthermore, we will continue to take profits more frequently so that we could gradually increase our weighting in cash as well as the fixed income portion of our portfolios. During the quarter, we continue to maintain an average asset allocation mix of 45%-50% Equity, 45-50% Fixed Income and 0%-10% cash for most of the portfolios.

As the end of the year approaches, it is a good time to think of planning moves that will help lower your tax bill for this year and possibly the next. Factors that compound the planning challenge this year include political and economic uncertainty, and Congress’s all too familiar failure to act on a number of important tax breaks that will expire at the end of 2016. Some of these expiring tax breaks will likely be extended, but perhaps not all, and as in the past, Congress may not decide the fate of these tax breaks until the very end of 2016 (or later). Not all actions will apply in your particular situation, but you (or family member) will likely benefit from many of them. We can narrow down the specific actions that you can take once we meet with you to tailor a particular plan. Please contact us at your earliest convenience so that we can advise you on which tax-saving moves to make.

We want to thank all of you for giving our firm the opportunity to serve you. We thank you very much for the trust and confidence you have placed in our firm as it is always appreciated. Please contact me should you have any questions or comments. Also, we want to invite you to visit our website at www.farmandinvestments.com for a quick Retirement calculator, our latest firm news, and Market Commentary archives.

By Steve Farmand 04 Jan, 2024
 Dear Clients and Friends, The 4 th quarter ended on a positive note with all the major stock indexes up for the quarter and year. A strong market rally has been in force since the end of October with the major indexes on a nine-week win streak. The Standard & Poor 500 Index closed just below its all-time high. After rising and then moving sideways in recent months, inflation emphatically resumed its decent in October. Since reaching a 40-year high of 9.1% in June 2022, inflation has come down substantially. The Federal Reserve is winning its fight over inflation, boosting Americans’ spirits and offering greater reassurance that the U.S. economy can avoid a recession while bringing prices under control. The Commerce Department recently reported that the Fed’s preferred inflation measure, the personal consumption index, fell 0.1% in November from the previous month, the first decline since April 2020. Prices were up 2.6% on the year, not far from the Fed’s 2% target. Core prices, which exclude volatile food and energy costs, rose just 1.9% on a six-month annualized basis, suggesting the Fed is well on its way to reaching that target. Consumers, after dealing with crushing price increases and recession fears over the past two years, are adopting a sunnier outlook. A measure of consumer sentiment from the University of Michigan released recently rose 14% to a five-month high in December from the previous month as households brought down their expectations for inflation in 2024. These developments at least raise the prospect of some longer-lasting relief for Americans who have struggled to keep pace with rapidly rising prices triggered by pandemic-related supply chain troubles and consumer demand surges for more than two years. The Federal Reserve’s December meeting brought us a “Gift from Santa Powell”. The Federal Reserve not only held rates steady for a third straight time (as expected), but also surprised investors with an indication of three rate cuts in 2024 (.25% each). In addition, the Fed’s “dot plot” (committee member expectations) also suggested an additional four cuts in 2025 ( a full percentage point). The stock and bond market’s reaction helped the Dow Jones Industrial Average (DOW) surpass 37,000 for the first time ever. Chairman Powell discussed some of the developments which may have led to their decisions: · Healthy jobs growth · Lower inflation rate · Higher economic growth Overall, a strong labor market supports economic growth while lower inflation supports the idea of lower interest rates in the future. In terms of the markets, a stable – to – lower interest rate environment is supportive for both stocks and bonds. As always, Farmand Investment Services recommends staying balanced, diversified and invested. Despite short term market pullbacks, it is more important to stay focused on the long – term (3-5 years), improving the chances for clients to reach their goals. During the quarter, we continued to take advantage of the stock market’s strength by trimming some over weighted positions and selling some entire positions. We sold our entire position in General Electric (GE), Walt Disney Holdings (DIS), and Park Hotels and Resort (PK). We put the cash proceeds from the sales right into the Schwab Value Advantage Money Fund (SWVXX), which currently pays over 5.00%. The Schwab Value Advantage Money Fund (SWVXX) is a fund that we use for investing excess cash or for specific restrictions. We also sold some of our municipal bond funds (BLE, NVG & NZF) for a tax loss and purchased another municipal bond fund, First Trust Managed Municipal ETF (FMB) to avoid the “wash sale” rule. As far as purchases were concerned, we added one new equity position, Oscar Health, Inc. (OSCR), which operates as a health insurance company in the United States. The company offers Individual and Small Group and Medicare Advantage plans, as well as +Oscar, a technology driven platform designed to help providers and payors directly enable their shift to value-based care. It also provides re-insurance products. As far as our investment strategy is concerned, we continue to maintain our standard two-pronged strategy, which is to maintain a substantial exposure to common stocks (and mutual funds) as long as there is reasonable prospect for double – digit returns. Furthermore, we will continue to take profits more frequently so that we could gradually increase our weighting in cash as well as the fixed income portion of our portfolios. During the quarter, we continued with our average asset allocation mix of 40%-50% Equity, 40%-50% Fixed Income and 0%-20% cash for most of the portfolios. We want to thank all of you for giving our firm the opportunity to serve you. We thank you very much for the trust and confidence you have placed in our firm as it is always appreciated. Please contact us should you have any questions or comments. Also, we want to invite you to visit our website at www.farmandinvestments.com for a quick Retirement calculator, our latest firm news and Market Commentary Archives.
By Steve Farmand 03 Oct, 2023
Dear Clients and Friends, For the quarter, the S&P 500 fell about 3.6%, the Dow fell 3.5%, and the Nasdaq shed 4.1%. In September alone, the S&P 500 dropped 4.9%, the Dow fell 3.5%, and the Nasdaq declined 5.8%. The third quarter ended with the S&P 500 and Nasdaq posting their biggest monthly percentage drops of the year, while all three major indexes had their first quarterly declines in 2023. Data showed the personal consumption expenditures (PCE) price index, excluding the volatile food and energy components, increased 3.9% on an annual basis for August, the first time in over two years it had fallen below 4.0%. The Federal Reserve tracks the PCE price indexes for its 2% inflation target. The data revealed a “better than expected but still elevated inflation picture”, said Eric Freedman, chief investment officer at U.S. Bank Asset Management. During their September meeting, the Federal Reserve, again, did what all of Wall Street had anticipated and “paused” on raising key interest rates. However, the Federal Open Market Committee (FOMC) statement was very hawkish, leaving the possibility of one more future increase in key interest rates. According to the Federal Reserve, this will be based on future economic data and determined on a meeting-by-meeting basis. However, even though inflation is on a downward trend, it did spike up during the quarter. Powell’s view also changed by saying that interest rates could stay higher for a lot longer than anticipated. Powell’s baseline case is no longer for a “soft landing”, which means recession. Obviously, the markets did not like the large change in expectations and all of the major indexes fell. In addition, the threat of a federal government shutdown suddenly lifted late Saturday night as President Joe Biden signed a temporary funding bill to keep agencies open with little time to spare after Congress rushed to approve the bipartisan deal. The bill funds the government until November 17. The U.S. economy continues to show resilience in the face of steadily higher interest rates resulting from the Federal Reserve’s 18-month long fight to bring down inflation. Estimates from the Commerce Department indicate that the gross domestic product – the economy’s total output of goods and services, is picking up in its growth rate. Driving this growth was a burst of business investment. Companies plowed more money into factories and equipment. Increased spending by state and local governments also helped fund the economy’s expansion. Consumer spending, the heart of the nations economy, continues to be solid. Investment in housing, though fell, weakened by the weight of higher mortgage rates. The bottom line is that U.S. economy is still growing above trend, and the Fed will be wondering if they need to do more to slow the economy. During the quarter, we took advantage of the stock market’s strength by trimming some overweighted positions and selling some entire positions. We sold our entire positions in Sofi Technologies (SOFI), Vimeo, Inc (VMEO), Quantumscape (QS), and Alphabet Inc (GOOG). After successfully owning Alphabet from 2015 to 2020, we purchased the company again in 2022 as tech stocks broadly faced weakness. We put the cash proceeds from the sales right into the Schwab Value Advantage Money Fund (SWVXX), which currently pays over 5.00%. The Schwab Value Advantage Money Fund (SWVXX) is a fund that we use for investing excess cash or for specific restrictions. As far as purchases were concerned, we added one new position, Fidelity National Information Services, Inc. (FIS), which is a provider of technology solutions for financial institutions and businesses of all sizes. As far as our investment strategy is concerned, we continue to maintain our standard two-pronged strategy, which is to maintain a substantial exposure to common stocks (and mutual funds) as long as there is reasonable prospect for double – digit returns. Furthermore, we will continue to take profits more frequently so that we could gradually increase our weighting in cash as well as the fixed income portion of our portfolios. During the quarter, we continued with our average asset allocation mix of 40%-50% Equity, 40%-50% Fixed Income and 0%-20% cash for most of the portfolios.  We want to thank all of you for giving our firm the opportunity to serve you. We thank you very much for the trust and confidence you have placed in our firm as it is always appreciated. Please contact us should you have any questions or comments. Also, we want to invite you to visit our website at www.farmandinvestments.com for a quick Retirement calculator, our latest firm news and Market Commentary Archives.
By Steve Farmand 05 Jul, 2023
Dear Clients and Friends, We hope that everyone enjoyed their celebration of the Fourth of July. For us, the Fourth of July is a celebration of everything that America stands for – independence, freedom, liberties, and most of all families. The quarter ended on a positive note with all the major indexes advancing nicely for the quarter and mid-year. During their June meeting, the Federal Reserve, again, did what all of Wall Street had anticipated and “paused” on raising key interest rates. However, the Federal Open Market Committee (FOMC) statement was very hawkish leaving the possibility of two future increases in key interest rates. According to the Federal Reserve, this will be based on future economic data and determined on a meeting-by-meeting basis. Long story short, inflation is on a downward trend, the labor market is cracking, and financial stress measures are spiking – a potent combination which will inevitably force the Fed to end its rate-like campaign. The global economy has managed to avoid a recession at mid-year, thanks to resilient consumers, a surge in travel and leisure activities, and the reopening of China’s economy following pandemic-related lockdowns. That is likely to change in the second half of the year as the impact of high interest rates, inflation and a banking sector crisis combine to possibly tip the world into a mild recession. Many economic indicators are pointing to a recession in the United States, not the least of which is an inverted yield curve. That happens when yields on short-term U.S. Treasury bonds are higher than long-term bonds, indicating that investors expect tough economic times ahead. It may not feel like it at the grocery store, but inflation is on a downward trajectory in the U.S., Europe and across many other markets. That is largely due to lower energy prices, fewer supply chain disruptions and aggressive interest rate hikes by central banks. Interest- rate sensitive industries, such as housing, are already feeling the effects, with home prices falling in some formerly hot markets. Rate hikes meant to fight inflation has also triggered a crisis in the banking sector. A sharp selloff in the bond market last year hammered the portfolios of numerous regional banks. The next shoe to drop could be commercial real estate. Office vacancy rates are on the rise as more companies embrace work-from-home business models. Given these mounting risks, the interest rate outlook has changed dramatically since early March, when the banking crisis first hit. Investors no longer feel that the U.S. Federal Reserve will raise rates as far or as fast as previously expected, largely due to a tighter lending environment stemming from the banking turmoil. Most everyone knew there would be consequences to one of the most aggressive tightening campaigns in history. The dislocations we are seeing in the financial markets signal a painful new phase for the Fed. It has clearly exposed some vulnerabilities and as a result, we feel we are nearing the end of this rate-hiking cycle. In the meantime, the economy is showing surprising resilience in the face of higher interest rates. The U.S. economy grew at a 2% annual pace from January through March as consumers spent at the fastest pace in nearly two years. The economy has been slowed by the Federal Reserve’s aggressive drive to tame inflation through a series of interest rate hikes beginning early last year. The Fed has raised its benchmark interest rate ten times since March 2022 in its attack on inflation, which hit a four-decade high of 9.1% last year but has since slowed to 4%. In the current April-June quarter, the economy is believed to be slowing further but still managing to maintain its growth. Therefore, over the next few months, we feel that we will continue to get falling inflation with a dovish shift in Fed policy and rising earnings. During the quarter, we took advantage of the stock market’s strength by trimming some overweighted positions and selling some entire positions. Our biggest trimming came from the partial sale of Nvidia. We sold one-half of the Nvidia position in each of our portfolios for a nice gain. We sold our entire positions in GE Healthcare (GEHC), which was spun off from General Electric (GE), which we still own. We believe the remaining company is still undervalued, while CEO Larry Culp has reduced leverage, cut costs, streamlined operations and improved overall morale. In the first quarter of 2024, GE will separate aviation and power, which we believe will highlight the underlying values of each as the strong, defensive growth businesses they are. We also sold all three of our positions in the Inflation Protected Bond-The iShares TIPS Bond ETF (TIP), the SPDR Portfolio TIPS ETF (SPIP) and the iShares 0–5-year TIPS Bond ETF (STIP). In addition, Cowen, Inc. 7.75% Preferred stock (COWN) was “called” in at $25.00 a share, which caused the liquidation of our entire position. We put the cash proceeds from the sales right into the Schwab Value Advantage Money Fund (SWVXX), which currently pays around 5.00%. The Schwab Value Advantage Money Fund (SWVXX) is a fund that we use for investing excess cash or for specific restrictions. It can be easily liquidated within one day. However, it is important to note that this fund is not a permanent place to invest your funds. As far as our investment strategy is concerned, we continue to maintain our standard two-pronged strategy, which is to maintain a substantial exposure to common stocks (and mutual funds) as long as there is reasonable prospect for double – digit returns. Furthermore, we will continue to take profits more frequently so that we could gradually increase our weighting in cash as well as the fixed income portion of our portfolios. During the quarter, we continued with our average asset allocation mix of 40%-50% Equity, 40%-50% Fixed Income and 0%-20% cash for most of the portfolios. We want to thank all of you for giving our firm the opportunity to serve you. We thank you very much for the trust and confidence you have placed in our firm as it is always appreciated. Please contact us should you have any questions or comments. Also, we want to invite you to visit our website at www.farmandinvestments.com for a quick Retirement calculator, our latest firm news and Market Commentary Archives.
By Steve Farmand 07 Apr, 2023
Dear Clients and Friends, After a red-hot start to the year, the stock market has stalled out in February and March and now some investors are questioning whether we are going back into a bear market. The S&P 500 rose 6.2% in January, one of its best January performances ever. In fact, since 1950, the S&P 500 has risen 6% or more in January in just ten separate years. The results are even better when stocks popped in January after having a bad showing in the previous year, which is exactly the situation we have in 2023. That has happened four times since 1950. Each time stocks rose by more than 20% through the entire year. Barring a black swan event, history says it has a very good chance of being the start of a big stock market breakout that lasts for at least the rest of this year. During the last few weeks, three important pieces of economic data were released. We are talking about February’s Consumer Price Index (CPI), the Producer Price Index (PPI) and February retail sales. The CPI was up 0.4% in February and is now reviving at a 6% annual pace. That is down from 6.4% in January and is the smallest increase since September 2021. The PPI fell 0.1% in February, below the estimate for a 0.3% increase. Year-over-year prices rose 4.6%, which is down substantially from 5.7% in January. Then the Commerce Department reported that retail sales fell 0.4% in February, which was in line with expectations. During their March meeting, the Federal Reserve did what all of Wall Street had anticipated and raised key interest rates by twenty-five basis points. However, the big news was the Federal Open Market Committee (FOMC) statement. The previous FOMC statements typically had the phrase “we are going to have ongoing rate increases.” However, this phrase was missing from the March FOMC statement. In addition, the Federal Reserve has not ever discussed “tightening credit conditions” during this rate-hike cycle. Yet, Powell mentioned it about a dozen times in the post-meeting press conference. He kept saying repeatedly that because of the bank failures, credit conditions are tightening. He wanted to emphasize to everyone that bank lending standards are tightening. Tighter credit conditions mean it is harder to get access to capital. The harder it is to get access to capital, the less capital consumers and businesses have at their disposal. The less capital they have at their disposal, the less they spend. The less they spend, the lower inflation goes. Inflation and falling stock prices were the prevailing themes of 2022, but in 2023, disinflation and rising stock prices are the prevailing themes. Also, leading indicators of labor market strength have weakened over the past two months, implying that the stubbornly hot labor market is finally cooling. In addition, while the banking crisis appears to be contained for now, it has put banks on edge. Historically speaking, whenever financial stress measures spike to levels like this, the Federal Reserve typically supports financial markets with either a rate pause or rate cuts. Stocks tend to follow that action with big rallies. Given falling inflation trends, deteriorating labor market conditions and spiking financial stress measures, it appears very likely that the Federal Reserve will pause its rate-hike campaign very soon. We are hopeful that a Fed pause in May or June will spark a big stock market rally that will spill into a new bull market. To understand our investment strategy, we need to first understand the behavior patterns of stocks. In the short-term, stocks are driven by several factors such as geopolitics, interest rates, elections, recession fears and so on and so forth. In long term, however, stocks are driven by one thing, fundamentals. That is, at the end of the day, revenues and earnings drive stock prices. If a company’s revenues and earnings trend upward over time, then the company’s stock price will follow suit and rise. Conversely, if a company’s revenues and earnings trend downward over time then the company’s stock price will drop. Therefore, the historical correlation between earnings and stock prices is about as perfectly correlated as anything gets in the real world. At the end of the day, earnings drive stock prices. During the quarter, we took advantage of the market volatility by reducing our Equity portion of our portfolios and increasing our Fixed Income portion of our portfolios. We sold some overweighted equity positions and invested the proceeds by adding more U. S. Treasury Notes and Bills that have one-year maturities. As far as our investment strategy is concerned, we continue to maintain our standard two-pronged strategy, which is to maintain a substantial exposure to common stocks (and mutual funds) as long as there is reasonable prospect for double – digit returns. Furthermore, we will continue to take profits more frequently so that we could gradually increase our weighting in cash as well as the fixed income portion of our portfolios. During the quarter, we continued with our average asset allocation mix of 40%-50% Equity, 40%-50% Fixed Income and 0%-20% cash for most of the portfolios. We want to thank all of you for giving our firm the opportunity to serve you. We thank you very much for the trust and confidence you have placed in our firm as it is always appreciated. Please contact us should you have any questions or comments. Also, we want to invite you to visit our website at www.farmandinvestments.com for a quick Retirement calculator, our latest firm news and Market Commentary Archives.
By Steve Farmand 07 Apr, 2023
Dear Clients and Friends, The fourth quarter ended on the same tone as the prior three quarters, with much volatility. In fact, the year 2022 started out on a collision course between Congress and the Federal Reserve. Congress kept passing more “spending” bills that increase the deficit as well as inflation and the Federal Reserve kept raising interest rates to curb inflation. During their last meeting in December, Federal Reserve Officials predicted that they will need to raise interest rates more than they had planned in 2023 to bring down inflation. The Federal Reserve’s final interest rate hike of the year, while historically large at half a percentage point, marked a step down from four straight three-quarters of point increases. Some economists say the Fed is more worried about the buoyant stock market and long-term interest rates that fell sharply as inflation pulled back. A vibrant stock market makes consumers feel wealthier prompting them to spend more. Also, lower long-term rates such as for mortgages lead consumers and businesses alike to borrow and spend more. Such developments bolster the economy but could well fuel more inflation. Some economists are also puzzled because the Fed’s inflation forecast does not seem to jibe with its economic projections. The Fed expects the economy to grow just 0.5% next year, weaker than the 1.2% it forecast in September. It also says that the 3.7% unemployment will rise to 4.6% by the end of 2023, above the 4.4% it had estimated. Normally, a softer economy and higher unemployment lead to less inflation because fewer shoppers are buying products and fewer employers are hiring, curbing pay increases. During the fourth quarter, stocks reduced their losses for the year. October was a stunning month for the stock market, with the S & P 500 jumping 8% and the Dow soaring 14%. The NASDAQ rose nearly 4%. Inflation also cooled, with both Consumer Price Index (CPI) and Produce Price Index (PPI) reports coming in lower than economists had anticipated. The slowdown in inflation had investors optimistic that the Federal Reserve would dial back on its aggressive key interest rate hikes in December. However, stocks pulled back sharply in the wake of a surprisingly hawkish Federal Open Market Committee (FOMC) statement in early December. The language was not dovish, and the Fed’s dot-plot survey showed that the Fed plans to raise interest rates up to 5.1% in 2023, which was above its previous goal of 4.6% in September. Bonds have recorded their worst year in 2022 since the early 1930’s. With the Bloomberg Aggregate Bond Index down more than .15% for the year through mid-October, losses are more than double any prior retracement back through the 1970’s. In combination with the stock market rout, this has made investing especially difficult for traditionally diversified portfolios, where allocations to bonds have significantly softened the blow in the past. Even in 2008 when the S & P 500 Total Return Index was down -3.7%, the Aggregate Bond Index posted a +5.2% gain for a total 60/40 blended portfolio loss of just -20.1% on the year. This historic “flight to safety” quality of bonds has simply not held true in 2022. So what will the Fed do in 2023? Despite its forecasts, economists expect the Central Bank to halt its rate hikes sooner if inflation continues to ease and the economy weakens in the coming months. The issue now is that the economy is again contending with stubbornly high inflation resulting from the massive Covid stimulus programs and supply chain disruptions as well as legislative spending bills. Further, the Federal Reserve has once again declared war on inflation by aggressively raising interest rates. In addition to higher rates targeted ahead, “Quantitative Tightening “is on the horizon whereby the Federal Reserve plans to reduce its balance sheet by selling bonds into the marketplace. During the quarter, we took advantage of the market volatility by reducing our Equity portion of our portfolios and increasing our Fixed Income portion of our portfolios. We sold some overweighted equity positions and invested the proceeds by adding more U. S. Treasury Notes and Bills that have one-year maturities.  As far as our investment strategy is concerned, we continue to maintain our standard two-pronged strategy, which is to maintain a substantial exposure to common stocks (and mutual funds) as long as there is reasonable prospect for double – digit returns. Furthermore, we will continue to take profits more frequently so that we could gradually increase our weighting in cash as well as the fixed income portion of our portfolios. During the quarter, we continued with our average asset allocation mix of 40%-50% Equity, 40%-50% Fixed Income and 0%-20% cash for most of the portfolios. We want to thank all of you for giving our firm the opportunity to serve you. We thank you very much for the trust and confidence you have placed in our firm as it is always appreciated. Please contact us should you have any questions or comments. Also, we want to invite you to visit our website at www.farmandinvestments.com for a quick Retirement calculator, our latest firm news and Market Commentary Archives.
By Steve Farmand 07 Apr, 2023
Dear Clients and Friends, The third quarter ended on the same tone as the prior two quarters, with much volatility. Most investors were rattled by all this volatility, and this can be nerve racking. This was particularly troubling for all our investors, especially those who are not comfortable with all this volatility. In fact, the year 2022 has been one of the most volatile years in decades, with everything from inflation to global conflict hurting the market. During this quarter’s volatility, our portfolios went up and down along with the stock and bond markets. As your investment advisor, we were very busy reviewing and analyzing each of our portfolios to make sure of the proper asset allocations as well as to make sure it meets each client’s investment goals.  The quarter began on a positive note until Federal Reserve Chairman Jerome Powell surprised the stock market with his hawkish comments at the Kansas City Federal annual conference in Jackson Hole, Wyoming during its August meeting. As a result, stocks got crushed and wiped out most of the gains. Powell also implied that “with inflation running far above 2% and the labor market extremely tight, “additional rate hikes may be necessary which they did after the September meeting. At the September meeting, the Federal Reserve provided a clear outlook for the rest of the year, and it was a little shocking. As expected, the Federal Reserve officials noted unanimously to raise key interest rates by 75 basis points for the third straight time. What was surprising was the Fed expects key interest rates to reach 4.25% by the end of the year, which implies two more sizeable rate hikes. Even though the Fed has never raised interest rates right before any election, we feel that we will see a 0.75% rate hike at the November meeting and a 0.50% increase at the December meeting. We also feel that he will pause in raising any more interest rates for a while in 2023. As a result of the Fed’s latest rate hike, Treasury yields spiked higher with the two-year Treasury yield breaching 4% and the 10-year Treasury yield rising to above 4%. The one thing that Wall Street is afraid of is rising Treasury bond yields. The higher Treasury rates soar, the more the Fed must raise key interest rates to get to “neutral.” Higher rates will destroy the interest rate-sensitive parts of the U. S. economy and will eventually ripple through the rest of the economy. Given the surge in Treasury yields, virtually all of the stock markets’ gains since mid-June have now evaporated. In September alone, the S & P 500 dropped 11.6%, and the Dow declined 11%. The S & P has successfully “retested” its June lows. Now, this also creates a very strong U. S. dollar, so foreign capital should pour into U. S. Treasuries and shove the Treasury yields back down. Treasury yields are basically the interest you earn when you own U.S. Treasury bills, notes, bonds, or inflation-protected securities. The U.S. Department of Treasury sells these securities as a way to pay for the U. S. debt. The first thing to know about bond yields is that they move inversely to bond prices, just like a dividend stock. If the price of the bond goes down, you are earning a higher rate of return because you paid less. The opposite is true when bond prices go up. So, whenever you see the yields rise, the price of the bond is falling. The second thing to know is that Treasury prices fluctuate with supply and demand. Treasury bonds are sold at auction initially, but they can be bought and sold in the secondary markets after they are issued. As we discussed in the past, the latest inflation data crushed any hope that the Federal Reserve would back off its aggressive key interest rate hikes. As you may recall, the August Consumer Price Index (CPI) rose 0.1% month-over-month, missing economists’ expectation for a 0.1%% decline. The CPI shocked Wall Street as energy prices dipped 5% in August, with gasoline prices dropping 10.6%. On the other hand, food prices rose 0.8% in August. Excluding food and energy, core CPI climbed 0.6% in August, which means that inflation is now embedded in many service costs. The next big inflation data to hit the tape will be October 13 with the September CPI. Even though there has been much discussion in the news about “recession”, the real buzz word should be “inflation”. We are hopeful that the economic data will reflect that inflation is being controlled, which should stabilize interest rates. In addition, in less than five weeks, we will have the opportunity to vote and possibly change our government’s structure so that we may grow the economy. We feel that we will have a nice rally in the fourth quarter. During the quarter, we took advantage of the market volatility to purchase new businesses that have been left behind by the market as well as added to our existing position. We added Alphabet, which we previously owned and sold for a nice gain. We also purchased more of Nvidia Corp. (NVDA), which we currently hold but added to our position. We also added to the energy sector, especially for those portfolios that did not have a full allocation. We added a position in Devon Energy (DVN) as well as Cenovus Energy (CVE). In the fixed income portion of our portfolios, we added U. S. Treasury Notes that have a yield in excess of 4.2%. They have a one-year maturity. As far as sales are concerned, we sold Biogen (BIIB), W. P. Carey, Inc. (WPC), Matterport, Inc. (MTTR) and Zoetis, Inc. (ZTS) and Fiserv, Inc. (FISV). As far as our investment strategy is concerned, we continue to maintain our standard two-pronged strategy, which is to maintain a substantial exposure to common stocks (and mutual funds) as long as there is reasonable prospect for double – digit returns. Furthermore, we will continue to take profits more frequently so that we could gradually increase our weighting in cash as well as the fixed income portion of our portfolios. During the quarter, we continued with our average asset allocation mix of 40%-50% Equity, 40%-50% Fixed Income and 0%-20% cash for most of the portfolios. We want to thank all of you for giving our firm the opportunity to serve you. We thank you very much for the trust and confidence you have placed in our firm as it is always appreciated. Please contact us should you have any questions or comments. Also, we want to invite you to visit our website at www.farmandinvestments.com for a quick Retirement calculator, our latest firm news and Market Commentary Archives.
By Steve Farmand 07 Apr, 2023
Dear Clients and Friends, First of all, I hope you and your family had a great July 4 th Independence Day celebration weekend. Let us start with the bad news. The first six months of 2022 mark the S & P 500’s worst performance in 52 years. As you are already aware, our stocks and bonds in our portfolios were not spared from the selling. The United States began 2022 with great promise. We expected GDP growth of more than 4% in real terms, ongoing monthly job gains in the hundreds of thousands, and decelerating inflation pressures. We recognized the risk posed by a Russian troop building on Ukraine’s border, but our base-case scenario did not anticipate that Russian President, Vladimir Putin would order an invasion of Ukraine given the consistent, unified warnings about the consequences from the United States and its European allies. The second quarter continued with much volatility, and it was exasperated on June 15 after Federal Reserve Board Chair Jerome Powell delivered a 75-basis point hike. Jerome Powell also said another huge move is likely in July. Higher interest rates mean slower-economic growth. Slower growth means that inflation may be under control. When inflation gets under control, stocks will rebound. So long as inflation remains out of control, stocks will keep falling. Over the past few months, the Fed’s actions did not provide much support to help calm inflation. Quarter-point hikes do not do much when you are starting at zero and inflation is above 8%. But 75-basis-point hikes do a lot, and when strung together, they should pack a powerful enough punch to stomp out inflation. It is important to note that inflation (not the Fed) is the driver behind the recent stock market declines. The Fed did not start hiking rates until March 2022. This current market selloff started well before that, in November 2021. The last and arguably the most important implication of the last Fed decision is that Treasury yields have likely topped out. A spiking 10-year Treasury yield has been causing harm to stocks all year long, mostly because higher bond yields mean lower equity valuations. So long as yields keep surging, stocks will keep falling. If all goes according to plan, then the Fed’s target interest rate should top out at around 3.4%. Historically speaking, the 10-year Treasury yield tends to top out at levels largely in line with the maximum interest rate in any given rate like cycle. If that proves to be 3.4% in the current cycle, then the 10-year Treasury yield has topped out and is ready for a pullback. By now, you have certainly heard that a recession over the next 12 months is very likely. The Fed aggressively hiking interest rates into an already slowing economy, and historically, that combination almost always leads to a recession. Recently, we received another batch of data which illustrated that, indeed, the U. S. economy is falling into a recession. Industrial production growth slowed in May, the leading economic indicators index dropped for a second straight month. However, inflation is a tough sucker to kill quickly. In order to do that, we need all the help we can get. We need current labor shortages to abate. We need economic demand to fall. And we may even need a recession. Investors understand that priority number one right now is killing inflation. So, if we want to kill inflation quickly, we are going to need a recession. Not a big one like 2008 or the 1930’s. But we need a short, shallow, regular, run-of-the mill recession like the early 2000’s and early 1990’s. As we all know, inflation is a function of supply and demand. If supply is improving and demand is falling, inflation should subside over the next few months. On the supply side, multiple economic data points are showing that the COVID – related supply chain disruptions of 2020 and 2021 are gradually subsiding in 2022. On the demand side, the growth in the volume of money circulating in the U. S. economy is slowing. Specifically, M2 money supply growth is moderating. M2 is measure of the money supply that includes cash, checking deposits, and easily convertible near money. During the post-COVID money printing boom, the year-over-year growth in M2 money supply averaged north of 20% throughout 2020 and north of 10% throughout 2021. But in recent months, M2 money supply growth has dropped into its historically normal ranges of 5% to 10%. With demand falling and supply rising, we feel that the stage is set for meaningful deceleration of inflation for the rest of the year. During the quarter, we added several positions in the equity portions of our portfolios including Vimeo, Inc. (VMEO), MGM Resorts International (MGM), Realogy Holdings Corp. (RLG), which we previously owned and Warner Bros. Discovery, Inc. (WBD), which was formed by liquidating Discovery Holdings (DSCA) as well as the partial spinoff from AT &T. As far as sales were concerned, we sold several positions, including Disney (DIS), Kraft Heinz Company (KHC) and Prosy (PROSY), which we sold for tax purposes. We added a new sector in the Fixed Income section called Treasury Inflation Protection Securities (I Bonds, ETF’s), which include all publicly-issued United States Treasury inflation – protected securities that have at least one year remaining to maturity, are rated investment-grade and have $300 million or more of outstanding face value. We established several positions in the performance of the inflation protected public obligations of the U.S. Treasury commonly known as “TIPS”, including iShares TIPS Bond ETF (TIP), SPDR Portfolio TIPS ETF (SPIP), iShares 0–5-year TIPS Bond ETF (STIP) and Vanguard short-term inflation – protected securities Index Fund (VTIP). As far as our investment strategy is concerned, we continue to maintain our standard two-pronged strategy, which is to maintain a substantial exposure to common stocks (and mutual funds) as long as there is reasonable prospect for double – digit returns. Furthermore, we will continue to take profits more frequently so that we could gradually increase our weighting in cash as well as the fixed income portion of our portfolios. During the quarter, we continued with our average asset allocation mix of 40%-50% Equity, 40%-50% Fixed Income and 0%-20% cash for most of the portfolios. We want to thank all of you for giving our firm the opportunity to serve you. We thank you very much for the trust and confidence you have placed in our firm as it is always appreciated. Please contact us should you have any questions or comments. Also, we want to invite you to visit our website at www.farmandinvestments.com for a quick Retirement calculator, our latest firm news and Market Commentary Archives. We hope that you are keeping yourself and your loved ones and your community safe from COVID-19. 
By Steve Farmand 07 Apr, 2023
Dear Clients and Friends, Well, the first quarter was full of volatility and much uncertainty. Part of that uncertainty was lifted once the Federal Reserve Board Chairman, Jerome Powell announced the beginning of the interest rate cycle by increasing interest rates by .25% a couple of weeks ago. The voting members reduced their 2022 GDP growth guide from 4% to 2.8%, hiked their inflation guide from 2.6% to 4.3%, and raised the number of rate hike projections in 2022 from three to seven rate hikes.  After the cold winter months, April is often when the seasons change, and everyone’s mood improves as spring brings in warmer temperatures. It is a time of transition when everyone also looks to make a few changes at home, decluttering and deep cleaning. Wall Street is no different, especially after a very rough quarter in 2022. While none of us has a crystal ball and can predict what will happen between Russia and Ukraine or where the market is headed next, there is one thing that we know for certain – Inflation will remain elevated for the foreseeable future. The latest Consumer Price Index (CPI) and Producer Price Index (PPI) revealed just how hideous inflation is right now. The CPI is now running at an annual pace of 7.9%. Wholesale inflation is even worse, with the PPI up 10% in the past twelve months. Even when you strip out the volatile and soaring food and energy prices, core CPI and core PPI were up 6.4% and 6.6% respectively, during the last twelve months. The Federal Reserve is finally admitting that inflation is no longer “transitory” and started to take steps to combat it with its recent 0.25% key interest rate hike in March. However, many analysts feel that it is too little, too late. They are not entirely wrong, because even if the Fed would raise interest rates another six times this year, with a few half-percentage-point increases in the mix, key interest rates would still be well below inflation come year end. Plus, we suspect the Fed will be a little more hesitant on further interest rate increases this year. The yield differential between the two-year Treasury and the ten-year Treasury is now too close for comfort. Right now, we have dramatically rising interest rates with a relatively flat or inverted yield curve. On top of that, we are experiencing hideous inflation that will persist for the foreseeable future, ongoing supply chain issues, a new round of COVID-19 lockdowns in China, and crude oil is still up significantly from last year. That does not even account for the ongoing effects of the conflict in Russia and Ukraine. Under no circumstances does the Fed want to invert the yield curve, as it would cause undue stress on the banks that it regulates. So, what does an inverted yield curve mean and how does it affect our portfolios? Investors tend to get worried about yield curve inversions because it has served as a precursor for a recession in the past. However, it is important to note that yield curve inversions are infamously early in predicting recessions. That is, they tend to happen about twenty months before the stock market hits a peak. Also, during those twenty months, Wall Street tends to party like there is no tomorrow. A yield curve is the relationship between short-term and long-term interest rates of fixed-income securities, like bonds, from the U.S. Treasury. In a healthy bond market, long-term interest rates are higher than short-term rates. When the yield curve inverts, it means short-term interest rates have moved above long-term rates. This suggests that bond investors are worried about the economy’s long-term prospects. As investors, the best way to benefit from surging inflation is to continue to invest in stocks with pricing power in the current market, which is what we own in our portfolios. During the quarter, we reduced our Equity portfolio’s cash position, which averaged between 15% and 20% over the course of last year but ended the quarter at less than 10%. We added several equity positions including Nio Inc. (NIO), Millicom Int’l Cell (TIGO), Madison Square Garden Co (MSGS), Renaissancere Holdings Ltd (RNR), Liberty Broadband Co (LBRDK), Fiserv Inc (FISV), Biogen (BIIB) and QuantumScape Corp (QS). As far as sales were concerned, we sold Comcast (CMCSA) for a nice gain as well as Erickson (ERIC) for a small loss. We also sold Lucid (LCID) in January but re-purchased it a month later. In the Fixed Income section of our portfolios, we sold our entire positions in Vanguard GNMA Fund. As far as our investment strategy is concerned, we continue to maintain our standard two-pronged strategy, which is to maintain a substantial exposure to common stocks (and mutual funds) as long as there is reasonable prospect for double – digit returns. Furthermore, we will continue to take profits more frequently so that we could gradually increase our weighting in cash as well as the fixed income portion of our portfolios. During the quarter, we continued with our average asset allocation mix of 40%-50% Equity, 40%-50% Fixed Income and 0%-20% cash for most of the portfolios. We want to thank all of you for giving our firm the opportunity to serve you. We thank you very much for the trust and confidence you have placed in our firm as it is always appreciated. Please contact us should you have any questions or comments. Also, we want to invite you to visit our website at www.farmandinvestments.com for a quick Retirement calculator, our latest firm news and Market Commentary Archives. We hope that you are keeping yourself and your loved ones and your community safe from COVID-19.
By Steven Farmand 07 Feb, 2022
Dear Clients and Friends,
By Steven Farmand 07 Feb, 2022
Dear Clients and Friends,
More Posts
Share by: