“When I started counting my blessings, my whole life turned around.”
Willie Nelson
In this season of Thanksgiving, we are mindful of our many blessings. What we will do here is to simply list, in no particular order, a few of those things for which we are thankful.
• The sense of team and purpose we feel as all of us at Payne Wealth Partners work together to serve our clients’ needs in wealth planning, investment management and life.
• The trust our clients place in each of us as professionals, and in our firm and the 99%+ of our clients that have stayed with us in these most challenging times.
• A Federal Reserve led by a scholar (Ben Bernanke formerly a Princeton professor) who specialized in the Great Depression and knew the steps to avoid a reoccurrence.
o Bernanke is highly intelligent having scored a 1590 out of 1600 on his SAT going on to graduate summa cum laude in economics from Harvard and earn a PhD in economics from MIT.
o After having been appointed to chair the Federal Reserve in 2006, one of Bernanke’s first speeches was titled “Deflation: Making Sure it Doesn’t Happen Again.”
• The system of capitalism that was sorely tested over the past 18 months, but has surely survived. In capitalism the search for profits ensures the market will produce those goods and services that the consumer desires to purchase. Although excesses can result in this system, this is still the most efficient system for allocation of capital and human resources. This system will reward most those individuals that work hard and remain responsible to their family, community and self.
As we examine the month of November (where the S&P 500 return month-to-date through Friday, November 27 is 5 1/2%, and year-to-date return is 24%), we are of the opinion that the period of rapid investment recovery from the lows of this March has come to an end, and we now must look forward to what type of economic growth we can expect to drive returns in the future. At Payne Wealth Partners, we see more economic challenge than opportunity over the next several quarters. Although some cyclic recovery is to be expected after any recession, the challenges going forward are significant, including:
• A US stock market that is presently trading at a PE ratio of approximately 20x future 12 month earnings and therefore has already priced in substantial profit recovery.
• Stock and bond markets worldwide that still are counting on government support for much of their current pricing. Policy makers are now beginning to publicly discuss how and when to remove this stimulus and to no one’s surprise there is some disagreement.
o Just this week the European Central Bank was discussing some possible tightening in the near term while the World Bank was promoting the continued presence of stimulus to assure not dipping back into recession
• A US home mortgage market where almost 11 million (about 1 in 4) mortgage holders are “underwater” (mortgage in excess of home value) with areas like Nevada, Arizona and Florida where the percentage of those with negative equity ranges from 45% to 60%. Notably in Indiana less than 9% of mortgages are underwater.
• A worldwide banking system that is still undercapitalized, including China where the Banking Regulatory Commission this week is reported to have said the banks must increase capital from 10% to 13% of risk-weighted assets.
• Unemployment in the US of 10.2% (or 17.5% if we include those underemployed and who have just given up looking) and still on the rise. Such high levels of unemployment have historically weighed on consumption and resulting economic growth.
For our client portfolios, we continue to maintain equity positions at the low end of our target ranges to account for the above concerns. Additionally, we continue to emphasize emerging market positions in both equities and bonds (to enjoy economic growth of emerging markets while benefiting from anticipated future dollar weakness against these currencies), and build some positions in alternative assets that can provide returns which are somewhat uncorrelated with the overall stock market. We are making no changes to client portfolios, other than to continue to move into alternative assets as described in last month’s investment commentary.
