View from the Chair: Windermere's Market Perspectives (March 2018)


Predictability and consistency.  Who among us doesn’t thrive under such conditions?  Most of us like things we can count on.  We enjoy feeling as if we are in control of what comes next.  We don’t like unexpected surprises (good or bad).  

2017 was such an environment for investors.  A welcome calm passage in the investing sea.   Investors could wake up each day and rest easy that markets would steadily climb and volatility would stay at bay.  Investors rejoiced in a year with a sub-3% maximum intraday move in the S&P 500.  Investors all-but forgot about 10% corrections, with the prior one having occurred over two years ago.   Investors began to ignore the virtual certainty that 2017 was an aberration – not a new normal.  And then the tides turned


Markets reversed course in late January/early February 2018.  And while many investors knew it would come (and that such moves are all part of the long-term investing process), we believe this time felt different as we seemed to be operating under the rule of “opposites”

1.)    Good News is now bad?  – Most market corrections are caused by fears of too little growth (ie: bad news) and the resulting recession and/or deflation.  This time, it was the opposite.  It appeared to be fears of too much growth (ie: good news) that was the problem.  With January job numbers and wage growth surprising on the upside, fears of higher growth (and resulting inflation) sent equity markets reeling and interest rates rising. 

2.)    Ignore fundamentals? – Most pullbacks are caused by a shift in fundamentals – such as an economic recession that causes companies’ earnings to fall.  However, this correction was again the opposite.  Fundamentals held steady during this time and actually improved as yearly earnings were announced.  It seemed sentiment and market technical were actually the ones in charge

3.)    Volatility is a leader?  – Typically, a sharp decline in stock prices will be followed by a rise in volatility.  This time, the opposite held true - volatility surged, which then caused equity prices to plunge.   Why the change?  Two words – Short Volatility.  After a year of extreme calm in the markets, “short volatility” had become a very popular trade (so crowded it overtook the long bitcoin trade in January 2018).  Essentially, with this trade, you are betting stocks will rise and volatility will fall and you win as long as those conditions hold.  When volatility reappeared in late January, millions (if not billions) looked to exit this strategy.  How do you exit a short volatility trade?  You buy volatility.  And what happens when there are countless buyers of volatility (ie: demand far above supply)?  Volatility rises.  This surge in volatility caused stocks to sell off, which then brought volatility up, and the circular reaction was off and running

Will these “opposites” subside and allow markets to return to a normal course?  Yes, we believe that to be true and have already started to see markets prove us right.  But volatility and a less-linear track are the new reality. Tightening of monetary policy and concerns surrounding fiscal policy (such as the recent proposed tariffs)  will keep markets on their toes.  However, we see several areas of strength underpinning markets, including:

  • Earnings:  Earnings are incredibly strong – and keep in mind, a stock is your share of future earnings/cash flows  (discounted at prevailing interest rate, see next point).  2018 year over year earnings are expected to grow by 18.8% ( per Thompson Reuters).  Q4 2017 earnings reports were exceptional, with 74% beating on  profits and 78% beating revenues (a record high since tracking began in 2008), as measured by FactSet


  • Interest rates:  Rising rates are a headwind for stocks.  As rates rise, future earnings and cash flows are discounted back at a higher rate, thereby acting as a drag on prices.  However, we believe that although rates may be rising, they have a long way to go to overcome earnings growth.  We’ve seen a ~0.40% rise in rates, compared to a projected ~19% growth in earnings.  That’s math we believe equity markets can handle


  • Economic strength:  Our preferred measure of economic growth is the index of Leading Economic Indicators.  This aggregates several key metrics and tracks their cumulative levels.  As you can see, it is trending up and reaching new highs. 

Perhaps of more interest is the trend in each of those factors – we don’t worry if they are “good or bad” but rather if they are getting “better or worse.”  At this time, none appear to be trending downward


  • The rhyming of history:  While we cannot be certain that past results will repeat, we do know that history tends to track in line with the past (or, rhyme).  Below charts show that both volatility and pullbacks are normal course in markets – and certainly don’t negate the possibility of positive returns

This chart shows the largest declines in the MSCI World index since 1980, as well as the largest percent decline in that same year.  Lesson learned: Annual returns can still be overwhelming positive in a year with a material drawdown




This second chart shows has the S&P 500 does in years following low volatility years, like the one we just were blessed with.  Lesson learned:  Following year usually sees larger downward moves - but performance remains positive.

Of course, we don't know what the future holds.  Nonetheless, these charts provide some historical context to today's reality.


The calm investing waters of 2017 were a treat, but now the tides have turned.  Winds are picking up and the waves are getting steeper.  But that's no reason to abandon your investing voyage.  We believe the increased gusts will act in your favor and help you reach your ultimate destination.  To quote Warren Buffett's annual letter,   "in America, equity investors have the wind that their back."  We couldn't agree more Warren, and we will see you out on the open seas.

Invest on,




View from the Chair: Windermere's Market Perspectives (February 2018)

Market pullbacks.  We certainly didn’t miss them when they were seemingly on vacation in 2017 -  a year in which the S&P 500 rose 19% and did so with only 8 days of +/- 1% moves and a maximum intra-year drawdown of 3%.  

January 2018 seemed to indicate that we were in for another year of the “good life” as shown in the market returns for the month.


However,  last week was a reminder that markets do in fact move in both directions and that market pullbacks are indeed a part of the investing process.

For the week ended February 2, 2018, the US stock market capped off its worst week in almost two years, with the S&P 500 falling 3.9% and the Dow falling 4.1%.   While markets are still positive for the month, this sharp reversal was jarring.  Monday's market has brought mixed action with some ongoing selling pressure.

In times like this, it is very common (and easy) to feel anxious and to question your investment approach.  Simply put - it becomes a "glass half-full or empty" exercise:

Glass half-empty:  Pessimistic tone.  Thoughts include:  "We need to take action now.  What should we sell,  we need cash, let’s get out, I should have done this weeks ago, the commentator on CNBC just told me markets are down big – I need to do something” 

Glass half-full: Optimistic tone.  Thoughts include: "Markets move both ways, including this move, we are still in a major bull market based on known data and analysis, this gives me a chance to rebalance and look for fundamentally sound companies that are now priced in my range"

How do you know which is the correct view to have (and convince your mind of that fact?).  By focusing on analysis and ignoring rhetoric.  By distinguishing between what you know for sure and what you only assume to be true.  Let's do that together:

What we know for sure:

Interest rates – They are moving higher.  This is not a surprise.  This has been the intention of the US Federal Reserve for years (they are no longer buying US debt and have been raising US rates steadily).  What has been surprising is the rate of that change.  The US 10-year yield rose from 2.40% at year-end to 2.85% on Friday, a 16% change in just over a month.  Rates improving globally and the US dollar weakening have lowered demand for US debt, which brings rates up. It's possible they will decline from here before moving up once again.  We know rates are heading up longer-term, not down

Inflation – For several years, inflation has been negligible.  Advances in technology and the lack of skilled labor has kept wage growth low and prices of goods dampened.  Friday’s job report showed private-sector wages rising 2.9% year over year, sending a signal that perhaps inflation is emerging.  We know near-zero inflation is a thing of the past

Earnings - For Q4 2017 (with 50% of the companies in the S&P 500 reporting actual results for the quarter), 75% of S&P 500 companies have reported positive EPS surprises and 80% have reported positive sales surprises. If 80% is the final number for the quarter, it will mark the highest percentage since FactSet began tracking this metric in Q3 2008. We know earnings are growing

US recession indicators – US economic growth continues, no sign of a recession on the horizon, as measured by the Index of Leading Economic Indicators.  We know there are no major recession warnings signs as of today

Global growth – Synchronized global growth remains.  Every one of the world’s 45 major economies tracked by the Organization for Economic Cooperation and Development (OECD) is growing this year and expected to post another year of growth in 2018, per OECD forecasts. We know global growth is strong

Rising rate impact on bonds – There is an inverse relationship between interest rates and bonds.  As rates rise, the value of bonds fall.  Take for example a 10-year bond.  For every 1% rise in rates, the value of the bond falls approximately 10%.  While cash can be reinvested at higher and higher rates, the decline in principal can overwhelm the increased interest with a sharp rise. We know rising rates hurts most bond investments

Rising rate impact on stocks – Recall what a stock is – ownership in a business, priced at the present value of future cash flows, discounted with an appropriate interest rate.  As rates rise, so does the discount rate and valuations of stocks also decline – unless the future cash flows (earnings, growth, dividends) grow at a similar, or faster, rate.  As noted above, earnings are coming in very strong, supporting this argument. We know rising rates acts as a headwind for equities, but that it can be overcome by accelerating earnings

Smooth rides don’t last – Historically, low volatility years have been followed by more volatile years.  As the below chart from Schwab shows, low volatility years are followed by more volatility – and a rising market on average.  Of course, history may not repeat but it does provide some context. We know volatility is normal course

So there’s what we know.  What can we only assume?  That list is endless and could fill up 100 blog posts.  To name just a few: the level at which this pullback bottoms, the timing in which that occurs, where rates move from here, what asset classes will win the year, which stocks will fall, and thousand of over items that no one really knows for sure.

Given all of this, where do we come out?  Our view is that this is a glass half full/optimistic moment.  The facts we outlined above support ongoing growth in our equity asset class, both US and international.  This pullback gives us the opportunity to trim selected securities that have experienced outsized gains and look for other securities that are exhibiting strong fundamentals and "sale" prices.  And perhaps most importantly, we manage client portfolios (like yours) with diversification - so you have asset classes working for you in these pullbacks, such as cash, short duration fixed income, dividend paying equities, and liquid alternatives.

We are taking action on your behalf as we see fit.  There is nothing you need to do - other than focus on the facts, dismiss the "noise," and reach out at any time.  We know it can be unsettling but let's stay the course - together. 

Invest on,