• 09/01/2021

    Dear Clients,

    One more week of summer. It’s gone too fast. As it always seems to. We hope you’ve had a great summer with family, friends, and simply enjoying all that life brings to us.

    As expected, the markets have bounced around a bit over the past month. Every piece of economic data gets parsed, dissected and overthought as investors begin their fall repositioning into the final quarter of the year. Short-term volatility is never much fun. Successful long-term investors, though, have a way of compartmentalizing the near-term. Volatility is simply a given. Making rash decisions based on emotion isn’t an option.

    The S&P 500 benchmark index is up around 20% year-to-date. The financial, energy, and real estate sectors are all in positive territory by over 30%. Remember that these were the laggards in previous years. The consumer staples sector, a leader last year considering all the surrounding uncertainty, is up only 7%. All eleven sectors of the S&P 500 index are higher heading into Labor Day.

    The closely-watched 10-year US treasury is hovering around 1.30%. I know we talk about this data point quite a bit but this is something to keep a close eye on. As long as interest rates remain low, investors will look to put money to work in equities. Equity valuations are competitive, on a relative basis, and dividend payouts remain attractive and tax efficient.

    All the major equity indices, S&P 500, Dow Jones Industrial Average, and the Nasdaq are at all-time highs. We don’t know yet what the fall will bring. Although, it is usually a time in the calendar when investors get a gut check. We expect increased volatility this year for a variety of reasons. But we also expect markets will cooperate by year-end. There are not many places to invest money and liquidity is still plentiful. Worth watching will be how the Federal Reserve Bank begins its long-awaited tapering of bond purchases which seems inevitable this fall. While most believe that this is already priced into the markets, we’re not so sure.

    On another note, I recently read a good article on philanthropy written by Melanie Brown. She works for the Bill and Melinda Gates Foundation and is also an adjunct instructor at American University in Washington, DC. I learned that the word “philanthropy” means “love of mankind”. Makes sense. I further learned that in 2020, 73% of adults in the U.S. donated to charities. Much higher than I thought. Moreover, in 2020, Americans gave nearly $450 billion to more than 1.5 million charitable organizations. Very cool. Our capitalist system works best when we are all invested and engaged. When we care about each other. What is simply, and elegantly, called the “common good.” As poet Maya Angelou once said, “Giving liberates the soul.” Just thought I’d toss it out there.

    All the best. Stay healthy. Let us know if you need anything.

    Jim

    James K. Tonrey, Jr.
    Partner/Chief Executive Officer


  • 08/04/2021

    Dear Clients,

    This is the first of our now monthly updates which we plan to send the first Wednesday of the month for the foreseeable future. If we have anything additional that needs to be communicated in between, we will certainly get that off to you.

    The first month of the third quarter is now in the books. As expected, markets remain a bit on edge. Remember that the summer months tend to have some increased volatility due to lower trading volumes. Large institutional trades can have larger impacts, in both directions, north and south. The S&P 500 index is up around 18% year-to-date. All eleven sectors are up for the year. Energy leads the way in positive territory by 33% with utilities lagging, higher by just 6%. The benchmark index was up over 2% for the month of July. With the closely watched 10-year US treasury declining, hovering around 1.20%, the equity markets continue to attract investors looking for an alternative to negative real rates, when inflation is factored in.

    I met with a referral this past week and was reminded once again of how investors tend to view the long-term. He is 57 years old and wants to retire at 62. We spent the initial conversation discussing the equity markets, volatility, and staying with a diversified plan. And then this, he said, ….”But remember, I only have a 5 year time horizon so I need to be very conservative.” I don’t know why this still surprises me after forty years in the business. My own opinion is that we, as investors, are hard wired to think a particular date in the future is the end of something rather than a beginning. His time horizon, assuming life expectancy, is more like twenty-five years, not five. A light bulb went off in his head after I made the case that he can be a bit more aggressive. And, frankly, should be, given he will need to draw a fair amount of income off his funds.

    As markets swing to and fro, a gentle reminder to keep focused on the longer-term and disciplined in approach. Control that which you can control, your budget, your allocation (risk), your attitude. This fall will surely present some more ups and downs. It always does. Traders will be returning from long, overdue vacations, the virus will still be with us in some fashion, the markets have already climbed a wall of worry very successfully to date, and uncertainty, as always, will be lurking.

    Enjoy the remainder of your summer. Stay healthy and positive.

    All the best,
    Jim

    James K. Tonrey, Jr.
    Partner/Chief Executive Officer


  • 07/07/2021

    Dear Clients,

    Markets have added to their annual gains through the first few days of the quarter. We expect trading to be somewhat muted through the summer months. Seems everyone is trying to take some well-deserved time off to recharge. Notwithstanding an unforeseen event, the equity markets, after a very good first half of the year, should tread a bit of water for a while.

    We’d like to take this time to communicate some operational matters.

    1. Second quarter reports are in the mail. You should be receiving them soon.

    2. By now you should have received our annual client appreciation gift. If you haven’t, please contact our office.

    3. Our office is usually open between the hours of 8:30 and 4:00. We normally staff at least two of us but will always try to have someone here during those times. We are now meeting with clients in our conference room and are happy to meet anytime. If a question/issue can be discussed over email or the phone, that is always preferable.

    4. The email updates we have sent out over the past year have been well received. We plan to continue sending but will go to once a month. We’ll stay with that schedule for the foreseeable future. You should receive the first Wednesday of every month, beginning in August. If we need to communicate anything in between, we will certainly use this platform to get you timely and important information.
    The past year and a half have reminded and reinforced two essential behaviors. One, that communication is critical, especially during heightened and uncertain times. The second is that we can only control what we can control. Investing for the long-term always demands patience and, at times, a leap of faith that things will be better down the road.

    Let us know if you need anything. Enjoy the summer months.

    All the best,

    Jim

    James K. Tonrey, Jr.
    Partner/Chief Executive Officer


  • 06/23/2021

    Dear Clients,

    Markets bumping around a bit after last week’s Federal Reserve Bank (Fed) meeting. Every word in their minutes gets parsed and interpreted differently by all kinds of analysts. This is where human bias enters the picture. It’s always good advice to stick to one’s own knitting rather than tracking the herd. In the investment business, following consensus often times leads to disappointment.

    The big topic remains inflation. Will the recent spike in the cost of goods and services be transitory, as the Fed suggests? Or will prices remain elevated for a much longer period of time. The increases have been predicted, and expected, due to reopening the economy and government programs to get cash in the hands of those in need due to the pandemic. Consumers are sitting on record amount of cash. And, after a long year, are certainly willing to spend it. Couple that with supply chain disruptions and the squeeze is on. High demand tugging at supply pressures. A recipe for an inflationary outcome. It shouldn’t be a surprise that prices rise.

    Circling back to the question of how long inflation will remain elevated over the Fed’s target of 2%. They seem to think about six months. Maybe a bit more. Once taken hold, hawkish market analysts think it could have traction for years. Given the on-going and relentless path of technology, we take a middle ground posture. Inflation will likely stay longer than most think. Like a pendulum, once an economic force is set in motion, it takes a while to get back to equilibrium. However, given the tremendous efficiencies that technology advances, and the industries that are under constant pressure to transform themselves, it’s hard to imagine that inflationary increases would win that battle over the longer-term.

    We are entering a period where the efficiencies that technology yields are a formidable force for cost containment. Staying balanced and flexible with investment portfolios, not putting all the ballast on one side of the boat, remains prudent.

    You should receive our client appreciation gift via UPS today or tomorrow. Have a great 4th.

    All the best,
    Jim

    James K. Tonrey, Jr.
    Partner/Chief Executive Officer


  • 06/09/2021

    Dear Clients,

    Markets are entering the summer period. Not always, but they do seem to trade in a range while traders and investors take some time away. There are a number of positive signs that the equity markets are consolidating, possibly to take another leg up in the fall.

    The S&P 500 benchmark index is currently trading at a price-to-earnings ratio (P/E) of around 21. This is certainly dependent on what is used as an earnings estimate. An average, from a number of analysts, would lead to future earnings on the S&P 500 index of $200. Divided into the current value of about 4,220, we come up with the multiple of 21. Historically, equity markets trade more in line with 15-16 times earnings. On first glance this would indicate a significantly over valued market. Important to remember (and continually remind ourselves) that financial markets do not trade in a vacuum. Historical comparisons can be difficult.

    Simply put, with the 10-year Treasury standing at 1.50%, equity markets are more attractive for investor dollars. Money goes to where it is treated best. Investing $100,000 in a 10-year treasury that will yield $1,500 at the end of a year (and taxed at ordinary income rates) instead of buying value stocks like Verizon that pays 4.4% or Johnson & Johnson with an annual yield of 2.5%, isn’t attractive. Qualified dividends also have the advantage of being taxed at lower capital gains rates. And there is the potential for upside appreciation in stocks to help offset any inflationary pressures. No doubt average investors, especially over the last few years, have moved out on their risk curve. So far they have been paid for the additional risk taken.

    Additionally, international markets are trading at a lower P/E of 16 because of the uncertainty due to the pandemic. The Russell 2000 index of small company stocks is likewise trading at around a P/E of 16. Both are performing well so far this year and highlight a broadening out of the equity markets as investors look for long-term value. A good sign.

    ———–
    A COUPLE HOUSEKEEPING ITEMS:

    We will be sending out a letter this month to those of you that do not have a Trusted Contact on file with us. Please take the time to complete this form and return in the envelope provided. It is important that we have someone listed that you have chosen for us to call in an emergency situation.

    Also, we decided this Spring to cancel our Annual Client Appreciation Event once again in order to ensure everyone’s safety. We look forward to gathering again next year and, in the meantime, look for a special gift delivery to your home the week of June 21.

    If you have any questions about these housekeeping items, reach out to Dana at djt@stillwaterinvest.com.
    ———-

    Summer is here. Temps are rising. And it feels good to get outside and be with others. We hope you take advantage after our long year. Let us know if you need anything.

    Best regards,

    Jim

    James K. Tonrey, Jr.
    Partner/Chief Executive Officer


  • 05/26/2021

    Dear Clients,

    As we close in on the halfway point of the year, let’s take the pulse of the markets.

    The benchmark S&P 500 index is up over 12% for the year. It’s hard not to overstate this performance and the resiliency of the equity markets. Last year, on the heal of a pandemic and ultra-slowing economy, the market also rose 18%. To date, the sectors that have benefitted the most are energy and financials, up almost 40% and 30%, respectively. The laggards are technology and consumer discretion. Although both are still on the plus side by single digits. Interesting to note the flip-flop from last year. Large, mid and small cap asset classes are all trading higher by 11-12%. Somewhat broad based and a healthy sign. International markets are up about 9%, with the emerging markets flat. The more mature economies around the world seem to be getting the most attention. Quality and value are the focus for investors so far this year.

    The closely watched 10-year treasury began the year at .91% and is now trading at a 1.59% level. This 75% increase seems substantial, and it is, since assets are priced/valued off this number. But in light of such low rates, it is still historically low. A tell for equity markets for the balance of the year, discussed in prior Updates, is the velocity of rate changes. Simply stated, markets need to have time to digest any sudden shifts. Especially to the upside.

    Where we go from here will depend on a number of factors. Earnings will be front and center as well as keeping an eye on any sudden movement in interest rates or change in Fed speak. Getting people back to work will continue to be a focus. In order to maintain equity valuations at present levels, the economy must continue to grow, or at the very least, not have any major stumbles.

    A very wise axiom is that long-term wealth is created by “time in the markets” not “timing the markets.” Investors always seem to find a wall of worry to climb. Under all kinds of scenarios. Keep to the plan. Don’t let short-termism enter the picture.

    Hope you are getting out and enjoying the weather. Have a great Memorial Day weekend.

    Jim

    James K. Tonrey, Jr.
    Partner/Chief Executive Officer


  • 05/12/2021

    Dear Clients,

    Warren Buffett, CEO of Berkshire Hathaway, raised some eyebrows at their recent annual meeting. He mentioned that his various companies were experiencing pricing pressures from lumber and copper to all kinds of building materials. By itself, this isn’t all that notable or unusual. Except that it comes on the heal of a public debate that is stirring reaction from investors far and wide.

    Inflation is simply defined as “a general increase in prices and corresponding fall in purchasing value of money.” It occurs in both the cost of goods as well as services across an economy. There are a number of variables that can cause inflation, or can, at the very least, cause inflation expectations to rise. The Federal Reserve Bank of New York just released data that suggests Americans are expecting inflation to hit very high levels over the next few years. What is important to keep in mind is that wages and benefits comprise the bulk of inflationary pressures. Anecdotally, and only one of many examples, Chipotle is reportedly going to hike their wages for employees in order to gain an advantage in hiring in this labor market. Full employment, coupled with strong consumer demand and an easy monetary policy, will usually spur inflation. And that is what market analysts are trying to understand and model into their forecasts.

    The U.S. Federal Reserve Bank (Fed) has reinforced the notion that we should expect some inflationary pressures. But, given the year-long pandemic and now the re-opening, it’s their view that these pressures should be transitory. Keeping a close eye on the trajectory of inflation will be important for investors. Simply stated, a prolonged period of inflation would cause interest rates to rise which, in turn, trigger equity valuations to come under pressure. Stock prices reflect a discounting of future cash flows. Any incremental rise in the discount rate used to value companies will no-doubt place the equity markets under some selling compression. Under this scenario, growth-oriented companies (think NASDAQ) will likely experience the most downward momentum.

    We’ve posited for a while now that the path, and velocity, of interest rates demands investors continual attention. A prolonged, rising interest rate environment, for the wrong reasons, would throw cold water on equity prices. Given the Fed’s involvement and attention to this matter, we’re not anticipating any near-term surprises.

    Trust that you are well. Let us know if you need anything.

    Best regards,

    Jim

    James K. Tonrey, Jr.
    Partner/Chief Executive Officer


  • 04/28/2021

    Dear Clients,

    The S&P 500 index is up over 11% year-to-date. Markets continue to churn higher. The next couple weeks will be important as earnings season has begun and expectations are high. Expect volatility in the short-run.

    Periodically, we will send communication that reminds all of us about internet security concerns. Recently, we received a note from one of our custodians that there has been an increase in fraudulent emails being used in malware and phishing attempts. These attempts are becoming more and more sophisticated and are targeting clients from all kinds of financial firms.

    Malware is short for “malicious software”. These are programs designed specifically to damage or take control of computers with the purpose of engaging in harmful activity by leveraging infected devices. These hacks are usually the result of opening an attachment or link from a “phishing” email.

    Here are four steps that can help protect you:

    1. Do not click on links or attachments included in unknown or suspicious emails.
    2. Look for clues within the text of emails that may indicate they were sent by bad actors. These include errors in grammar, capitalization, or spelling.
    3. Hover over links to reveal the website’s URL to see where the link really leads. Do not click on the link if the destination is not what you expect to see.
    4. Check the sender’s domain in the email address (for example, the “abc.com in the address in john.doe@abc.com) to see if it matches what you expect to see.
    REMEMBER, do not put any personal information on the internet like social security number, date of birth, account numbers, etc.). For example, we (Stillwater Investment Management) would never ask you to confirm or provide any personal information over the internet. We would have you call us or provide in person.

    Unfortunately, this is the world we live in. Take extra care when dealing with your financial information. Importantly, make sure to contact us immediately if you feel your system has been breached or compromised.

    Take care and let us know if you have any questions or need anything.

    Best regards,

    Jim

    James K. Tonrey, Jr.
    Partner/Chief Executive Officer


  • 04/14/2021

    Dear Clients,

    The S&P 500 index is up 10% for the year, including dividends, hovering around its all-time highs. With earnings season beginning this week, markets will be very sensitive to any surprises, especially to the downside. Consensus first quarter earnings is for an increase of roughly 22% from last year.

    Fed Chair Powell was on “60 Minutes” over the weekend and remained cautious, not expecting to raise interest rates this year. He also reiterated that any inflationary pressures should be transitory. Meaning that we will experience some short-term pop in prices due to reopening the economy. However, he feels it should not persist but instead revert back to the 2% target the Fed deems appropriate. The Fed is increasingly focused on the national unemployment rate, which stands at around 6.3%. It’s a double edged sword as more people need to get back to work. At the same time, with Americans starting to spend more and save less, inflationary pressures are always front and center. From our perch, it appears a ways off from the Fed having to take any unexpected interest rate action.

    There is a lot riding on reopening and the continued rollout of the vaccine. Equity prices reflect this optimism. In the near-term, strictly from a valuation standpoint, the risk appears to be to the downside with markets already up significantly for the year. Having said that, investor bias is to the upside, setting up for a possible tug-of-war. The important financial sector has run up nearly 20% year-to-date on the heels of all this good news. Their earnings, as well as guidance for future quarters, will come under increased scrutiny. This S&P sector, in particular, will need to continue to participate for the markets to resume their ascent.

    With spring around the corner, and a long year behind us, we hope you enjoy some well-deserved time outdoors. Certainly, a lot of lessons learned over this past year. Getting some exercise, clearing one’s mind, and taking some time to appreciate all of nature is at the top of the list.

    Stay well and let’s continue to do our part to turn the corner.

    All the best,

    Jim

    James K. Tonrey, Jr.
    Partner/Chief Executive Officer


  • 03/31/2021

    Dear Clients,

    We are one year removed from when the S&P 500 index spiked down 34% from its February, 2020 high. It was the largest decline in the benchmark index in the shortest amount of time ever. It took just twenty-two days.

    As noteworthy as this precipitous drop was, also noteworthy is the fact that it only took six months to return to that February high mark. Additionally, the index is now up almost 80% from the low point of March 23, 2020. Certainly, there are many investor lessons to be learned from this unprecedented volatility. All that is in the rear-view mirror, though. The question going forward is……where do we go from here?

    With the market trading at around 21 times next year’s earnings, most market watchers take an overvalued stance. But we should not look at this important metric in a vacuum. Historically, markets trade at about 16 times earnings. What is historically unusual now, as we all know, is that interest rates are low and projected to stay low for the foreseeable future. When factored in, this leads to the higher earnings multiple. Simply stated, assets, like equities, have a dearer valuation due to relative value. Owning assets, and not lending in today’s financial climate, has been more beneficial. The result is higher asset prices and investors willing to assume more risk in their portfolios. Hence, the 21 times multiple on the S&P 500 index.

    Psychologically, we get comfortable when equity markets continue to trend higher. Occasional corrections, adjustments to prices, however, are always on the horizon and necessary to keep relative value in check. As an investor it is hard to watch markets decline. But on the macro level it is healthy. The nod that things are becoming overdone, in our view, will start with the debt markets. Debt levels have a way of taking on their own life and, importantly, come in many different flavors. Borrowing is great when rates remain low and liquidity flush. But when the music stops, the ugly side of debt takes over. The current plan is that we navigate the financial environment with precision, keeping the “velocity of debt” within reach and trusting that our economic growth forecasts meet or exceed their projections. Coming out of this pandemic, there is clearly a lot of work to do to repair a year’s worth of economic damage. Expect financial markets to be more volatile, and a bit less forgiving, as we move through the year. A fair amount of good news has already been priced in.

    We will be sending out our first quarter reports next week. Let us know if you need anything.

    Best regards,
    Jim

    James K. Tonrey, Jr.
    Partner/Chief Executive Officer


  • 03/17/2021

    Dear Clients,

    Equity markets are holding their own so far this quarter. As of this writing, the benchmark S&P 500 index is up around 6% for the year. Every day there seems to be a tug-of-war between the equity markets and the 10-year Treasury note.

    It’s important to keep in mind that the Federal Reserve Bank (Fed) doesn’t directly control the middle to long end of the yield curve. Rather, bond traders make decisions on pricing based on inflation expectations and growth outlook for the economy. That is why the 10-year Treasury note bears watching. Bond traders (proactive, thoughtful) have a unique way of predicting future trends; more so than equity traders (reactive, emotional) who tend to be shorter-term.

    The Fed will use all of its power to keep interest rates from rising too quickly. They want/need inflation to rise to 2-3%, but are wary of the path of rates rising too fast. This would spook the markets by increasing borrowing costs and debt service to levels that would affect economic growth. The Fed can influence interest rates anywhere on the yield curve by simply buying U.S. government bonds in the maturities they want to control. The more treasuries they buy at certain maturities, the more they impact rates by keeping them artificially in check.

    The Covid Relief package, passed by Congress recently, will undoubtedly increase economic activity in the near-term. However, it remains to be seen how much it will add to longer-term growth prospects. Certainly, that is the hope. It will be valuable to keep a close eye on where funds get spent, or saved (invested).

    Weather is getting warmer in MN. Let’s keep doing our part to get through what could be, and hopefully is, the final chapter for this period of time.

    Best regards,

    Jim

    James K. Tonrey, Jr.
    Partner/Chief Executive Officer


  • 03/03/2021

    Dear Clients,

    Over the past few weeks, it’s been a seesaw watching the benchmark 10-year Treasury note and the equity markets. In percentage terms, the note has risen substantially from the beginning of the year. Although, still historically low at around 1.4%, it represents an increase of 50% from the year-end mark of .91%. Remember that the velocity of rising rates is as important as the direction.

    The equity markets, after a down January, rebounded a bit in February and now the S&P 500 index is in positive territory by about 4% for the year. It appears that as one variable (interest rates) goes up, the other variable (company valuations) goes down. A negative correlation. Simply stated, higher rates have a dampening effect on a company’s future cash flow projections. Thus, lowering valuations, especially with higher growth companies.

    This investment year will be remembered, and influenced, in two ways; by potentially rising rates (hopefully for the right reasons) and the rollout of the vaccine. Rising rates have ripple effects throughout the economy like a stone in a pond. Real estate, debt, stock valuations, the value of the US dollar, to name a few assets, are significantly shaped by the direction of rates. The success of the vaccine will allow the economy to open and people to regain some sense of normalcy again. The equity markets are poised (priced) for success on both fronts. Any unanticipated fork in the road will send some tremors through the financial system. We believe it’s calibrated that close.

    A gentle reminder for those of you still making retirement contributions to get them in sooner rather than waiting until the last minute. Also, one year into our Weekly Updates, we will be going to every other week, unless there is something that needs to be communicated. The next Update will be around the 17th.

    All the best,

    Jim

    James K. Tonrey, Jr.
    Partner/Chief Executive Officer


  • 02/24/2021

    Dear Clients,

    Under the hood of the equity markets, there seems to be a rotation from one asset class to another, one sector to another. However, there have been multiple head fakes over the past few years. Investors certainly need to be wary before making any big portfolio decisions.

    Specifically, recent momentum has shifted from growth companies to more value-oriented, from domestic to international, and from large-cap companies to smaller-caps. With the path of interest rates creeping up, markets have slipped over the past week. Rising rates aren’t necessarily bad, but the velocity of the increase is worth paying attention to. High priced growth companies will surely come under pressure. Financials should benefit due to capturing a greater net interest margin. If rates are increasing due to better economic conditions, smaller companies fare better.

    When I first entered the business, a hundred years ago, we used correlation analysis, one of our important tools, to help decide where to over and under-weight portfolios. It’s a statistical method used to determine and study the strength of a relationship between two variables. For example, what happens to the price of oil when interest rates go up? Or what happens to the technology sector when Gross Domestic Product (GDP) declines? Never foolproof, but there were certain characteristics, signals, that could be gleaned from the math.

    In today’s more complex, fast-paced, multi-multi variate world, this type of technical research doesn’t yield the same benefit. Financial relationships of yesteryear simply don’t hold the same significance. It used to be when variable X goes up then variable Y more than likely will go down. Not so much anymore. The tremendous liquidity and resultant increased speculation, that naturally follows, defines our time and, thus, makes investing now even more of an art than a science. Maybe it’s always been that way. One thing for sure. Focusing on the long-term and making decisions based on reason, not emotion, has always been highly correlated with success.

    Spring is around the corner,

    Jim

    James K. Tonrey, Jr.
    Partner/Chief Executive Officer


  • 02/17/2021

    Dear Clients,

    We are coming up on the one-year anniversary when we started sending out our Weekly Updates. The purpose was/is to communicate regularly to keep you informed on the financial markets and, in particular, how the pandemic could affect portfolio management. Never did we imagine that fifty-two weeks later we would still be sending them out. And never did we imagine that the S&P 500 index would be up around 18%, including dividends, over this period.

    Our objective was not only to help educate but, importantly, to ease anxious minds during what has become a once-in-a-lifetime human event. To lessen your burden in some way. Overall, your comments have been very favorable. We’re glad we took on this weekly missive. We will continue until we see a brighter light at the end of the tunnel.

    Putting our human condition aside for the moment, the many changes and lessons learned, let’s focus on the equity markets. Just as they were twelve months ago, the markets are a bit rich. The price-to-earnings ratio on the benchmark S&P 500 index is around 21 versus 19 last year. However, there are three key differences from last year; trillions of dollars of stimulus and fiscal support, a Federal Reserve Bank willing to keep an accommodative monetary policy for longer, and the brave new world of the retail investor entering the markets, for the first time, through easy to use, no fee trading applications. All these, at least for the time being, will continue to underwrite a bull market in equities. When will the music stop? Nobody really knows. We continue to keep a trained eye on the path of interest rates for any signal.

    In my first Update a year ago, I wrote the following…

    For the past thirty-eight years, I have personally worked helping individuals and their families navigate some pretty difficult times. And every time, together, we came out on the other side just fine. I intend to keep that streak going.

    It’s now thirty-nine years. And I feel even more resolute.

    Stay well and keep the faith,

    Jim

    James K. Tonrey, Jr.
    Partner/Chief Executive Officer


  • 02/10/2021

    Dear Clients,

    The equity markets have certainly been resilient in light of all the challenges faced. There are three events on our radar that could potentially derail the momentum in the months ahead.

    The first is the upward climb in bond yields and the steepening of the yield curve. Interest rates at the longer end of the curve (think 10 years) have steepened at a faster pace than the shorter end (think 2 years). When this relationship expands, or yields widen, investors become wary of inflation expectations and other economic pressures. Although no need for concern at this time, it is noted that the 10-year Treasury has reached 1.15%, an eleven-month high. All the while the 2-year Treasury has remained stable at .10%. It’s also worth mentioning that the 30-year Treasury recently bumped up against the 2% mark.

    Earnings expectations on the S&P 500 index is the second potential fly in the ointment. Analysts’ average estimate of earnings growth for this year is 24%. The market expects another 16% in 2022. Equity markets have pretty much priced in these figures. Any significant deviation downward will upend the rally from last March. This is a very interesting area to pay attention to. Analysts across the board have had an extremely difficult time trying to ascertain these numbers due to the pandemic. It’s also wise to remember that the markets are trading at high price-to-earnings multiples due to the continued low interest rate environment.

    The final event, the most watched and hardest to predict, understandably is the rollout of the vaccine. Simply stated, interest rates, the slope of the yield curve, and earnings predictions are all influenced by the economy opening back up. And the equity markets will be reacting to the week-to-week, month-to-month, news flow. This is the single most important variable that will determine the path of equity markets for the balance of the year.

    It’s easy to write about how markets will react to these near-term events but practically impossible to predict. And that is why we invest for the long-term. No doubt short-term negative catalysts will catch our attention. Always keep focus on the longer-term.

    We’re getting there,

    Jim

    James K. Tonrey, Jr.
    Partner/Chief Executive Officer


  • 02/03/2021

    Dear Clients,

    A continuing question that clients ask is whether to pay off low interest debt. As with most things in finance, there are no perfect answers.

    Any financial decision has two components: the arithmetic and the emotional. The math part is usually the easiest. For example, should you pay off a 3% fixed loan in today’s financial environment? If the source of the funds is a savings account that is yielding much less, for example, around .5%, then it makes sense. Why keep funds in a taxable account at such a low rate and yet, at the same time, pay interest on a loan substantially higher? The assumption is that the funds used are not needed in the near to intermediate term.

    But let’s complicate matters by introducing the financial markets. Let’s say the source of these funds is not a low interest savings account but instead the stock and bond markets. And the annual total return of the portfolio over the past few years has averaged 7%. Now the question is a bit more interesting. Should a low interest loan be paid off using funds that have, at least historically, earned much more? Why take funds from an account that is seemingly earning much more than it takes to service the debt? This is when the emotional part comes in.

    Arithmetic is all well and good but we have to sleep at night and feel good about our financial condition. The benefits of paying off a loan at any time, regardless of where funds come from, is the comfort of knowing you are not in debt anymore, to anyone. It simply provides a greater sense of control and flexibility. And let’s not forget that math can change. Markets that have yielded healthy, positive returns year over year recently can also go the other way.

    It’s been my experience that when the emotional part conflicts with the arithmetic, the emotional usually wins. In today’s world, low interest rates are seductive. But it’s important to remember, and emphasize, that leverage is a two-way sword. Staying ahead of debt even when the math, at the time, doesn’t seem to work in your favor, is never a bad decision.

    Stay well,

    Jim

    James K. Tonrey, Jr.
    Partner/Chief Executive Officer


  • 01/27/2021

    Dear Clients,

    In order to give some perspective, and a degree of reasoning, to the equity markets climb over the past few years, a discussion of interest rates should be front and center.

    I bought my first house outside of Boston in the mid 1980s. I got a first mortgage through an insurance company with an interest rate of 12.5%. At the time, I thought I was pretty lucky based on my income level. The 10-year Treasury note was yielding 15% and the fed funds rate was around 16%. Today, the 10-year Treasury is hovering around 1% and the fed funds rate is at .25%.

    In the U.S., and across the globe, interest rates have been on a steady decline for the past forty years. It’s like people who grew up in the depression era. Over the course of their lives, they never forget the pain and anxiety of that particular period. Similarly, because of my prior experience, I keep thinking that rates will again head much higher. It’s taken some reconditioning to appreciate the brave new interest rate world.

    There are numerous reasons why rates are low. Not just due to the Federal Reserve Bank’s (Fed) actions. Remember, the Fed can only control the short end of the yield curve. China, especially, entering the world economy over the past two to three decades has kept inflation low. More funds have flowed into capital markets due to greater income inequality. Additionally, the psychological aftermath of the great recession of 2008 has kept people seeking safer assets. Last, but certainly not least, the tremendous growth in technology doesn’t demand capital like manufacturing once did. All of these tend to tamp down inflationary pressures. The net effect is lower interest rates, for longer, across the board.

    There are real, tangible benefits to low rates. Families can afford homes with low mortgage rates. Government debt, which has skyrocketed over the past decade, can be more easily serviced. Asset prices tend to hold more value.

    Our crystal ball isn’t any better than yours. But one has to wonder if/when interest rates will begin their upward path as well as their possible velocity. If they rise for the right reasons and at a measured pace, like for greater economic growth, then markets will behave. If they rise for the wrong reasons, slow or no growth coupled with inflationary pressures, or at an accelerated pace, markets will hiccup. It bears watching over the near-term.

    Looking forward to spring,

    Jim

    James K. Tonrey, Jr.
    Partner/Chief Executive Officer


  • 01/20/2021

    Dear Clients,

    So far the equity markets are treading water as we enter the new year. Investors are gaming the potential for a new stimulus bill, changes in the vaccine rollout, and the continued political discourse.

    It’s difficult not to focus on current events and daily headlines. Savvy, seasoned investors, however, have their eyes on the horizon. And a topic that will come up more often than not is the debate centering on inflation. Inflation is caused by rising input costs to goods and services, like increasing raw materials and, in particular, rising labor expenses. Surges in demand contribute as well. The result is lower purchasing power for the consumer. Simply stated, things cost more.

    Keeping inflation in check with stable prices is one of the mandates of The Federal Reserve Bank (Fed). Over the past decade due to a more integrated global economy, with labor costs in places like China much lower, and the tremendous advancements in information technology, the onset of any significant inflation has been muted, averaging well below the annual target rate set by the Fed of 2%.

    With a lot of money sloshing around due to aggressive fiscal and monetary policies and households sitting on a record savings rate, in combination with people chomping at the bit to travel, spend, and resume their lives, a case can be made that demand will soon surge and outstrip supply, leading to price increases in goods and services. There are only so many hotel rooms, Disney Parks, restaurant and airline seats. Prices rise when demand exceeds supply. If the unemployment rate is relatively low, there would also be upward pressure on wages. Many more job opportunities than there are workers to fill them. It’s really important to remember that a big chunk of calculating inflation are labor costs.

    Making a bet one way or the other on inflation has been, and let’s be polite, simply too difficult. A fair amount of money has been ceded to bad calls over the past decade. We’ll continue to watch for signs along the way. If prices begin to become an issue, and there should be time to reflect on this, then paying off debt and looking into some portfolio adjustments like adding more real estate, commodities, inflation-indexed bonds, and growth-oriented equities with a tilt toward solid balance sheets, while holding a bit more in cash, would be prudent.

    All the best,

    Jim

    James K. Tonrey, Jr.
    Partner/Chief Executive Officer


  • 01/13/2021

    Dear Clients,

    Certainly, there is a lot going on around us. In the next few months, we could experience more than average volatility in the equity markets as a new administration takes its place, the continued rollout of the vaccine, and just the day-to-day, month-to-month normal, and always unexpected, hiccups.

    A way to understand volatility is to follow the CBOE Volatility Index (VIX). Simply stated, this index uses options to determine how investors feel about near-term equity prices. It’s known to be a leading indicator. For example, when investors expect markets to decline they purchase options called puts on the S&P 500 index. These put options give the buyer the right (option) to sell (put back) shares to another at a specified price. Basically, it gives an investor downside protection. But at a cost. It is referred to as insurance protection.

    The VIX, as an indicator, will rise in times of uncertainty, fear, and signs of financial stress on the horizon. It is not a predictor of long-term movements but rather of short-term (30-45 days) bumps in the road. Speculators use the VIX as a tool to try to get in front of very short-term trading opportunities.

    The VIX simply provides long-term investors with a greater awareness of possible upcoming volatility. Given that the markets are currently somewhat overbought, due to a better than anticipated 2020, we could expect a bit of mean reversion and price consolidation. Doesn’t mean we should pull the covers over our head. Just ready the ship for some potential near-term chop.

    As always, let us know if you need anything. Stay well.

    Jim

    James K. Tonrey, Jr.
    Partner/Chief Executive Officer


  • 01/06/2021

    Dear Clients,

    An article by Neil Irwin and Weiyi Cai in the New York Times caught my attention over the weekend. The data helped explain the juxtaposition between the equity markets and the underlying economy. Why markets rebounded so favorably in relation to an economy on the edge.

    Three areas highlighted the analysis. The first was that personal income increased to around $1.03T due to the Cares Act, PPP program, stimulus checks, and other recurring income. On the other side of the ledger, spending decreased by $535B. We spent more on durable goods like stay-at-home purchases (think gym equipment) and on nondurable goods, cooking more at home for example. But we spent significantly less on leisure, travel, vacations, and many services in general (think dry cleaning, gas, car maintenance). Additionally, our interest payments on debt decreased sharply due to low interest rates.

    The net effect is that total earnings were surprisingly up over the balance of the year. Coupled with a dramatic drop in household spending, Americans personal savings rate increased dramatically. Guess where some of that money went. It found its way into the equity markets. Remember we have a natural human fear of missing out (FOMO). As markets climbed over the year, people put some of this discretionary income into stocks. It makes sense. What also makes sense is that margin accounts (borrowing to buy equities) hit new highs. If markets unwind a bit these are areas to keep an eye on.

    As with all things pertaining to financial markets, this is certainly not the only reason or, frankly, even the biggest reason equity markets increased while in full view of a struggling economy and pandemic. But it does help explain some of the exuberance.

    Stay well. There is a light at the end of the tunnel.

    Jim

    James K. Tonrey, Jr.
    Partner/Chief Executive Officer


  • 12/30/2020

    Dear Clients,

    With only a few days left of trading, it appears that the S&P 500 benchmark index will be up in the mid-teens for the year, including dividends.

    It’s certainly been a year to remember in so many ways. Financial markets corrected significantly in March and now sit at all-time highs. All the while a pandemic still surrounds us and most global economies put on hold.

    For investors, this year, in particular, offers many lessons. The least of which is not to try to time the markets. Those that tried had to make two really good decisions: when to sell and then when again to buy back in. For us mortals, working around the edges of a portfolio during stressful, uncertain times and paying attention to allocation seems more reasonable. More profitable as well. A long-term investor has time on her side and markets over time go higher. Why bet against this? This doesn’t mean there won’t be some difficult months, quarters, or years. But……and the last time I say this, over time, markets go up.

    The second valuable lesson that we were reminded of again this year is that the financial markets are not the economy. Meaning that current economic conditions only tell part of the story. The emotional part. In late spring, as markets started to rebound, investors were already looking down the road to a better day. If we invested simply using today’s headlines, we’d go broke. That is why staying the course, as hard as it is at times, has always rewarded the retail investor.

    Let’s stop here and turn to the future. Expect some bumps in the road early in the year. We’re coming off an unexpected, good year and markets will seek to find some equilibrium. The vaccine rollout and global economies getting back to some form of normal will drive investor sentiment. Remember we’ve priced in some very positive news already. We will need to be a bit more patient. Although we seem to always watch the markets, getting our lives and routines back will be front and center.

    Importantly, we need to keep in mind those that suffered loss in 2020. Empathy is one of humanity’s great gifts. Here’s to a lot to look forward to in 2021. Markets will do what they do. Let’s instead focus our energy on all the good ahead of us.

    Happy New Year from all of us at Stillwater.

    Stay well,
    Jim

    James K. Tonrey, Jr.
    Partner/Chief Executive Officer


  • 12/23/2020

    Dear Clients,

    The S&P 500 benchmark index is up around 16%, including dividends, year-to-date. With only six more trading days until the end of the month/year, it appears that, against all odds, we will experience a very healthy (and unexpected) return from equities in 2020.

    The leader this year is technology and the laggard the energy sector. Additionally, small-cap stocks are outperforming large-caps. The international markets have come back as well, with an increase of over 9% for the index for the year. What continues to be noteworthy is the 10-year treasury note sitting at .93%. As long as rates stay low, equities will be dear. But that doesn’t mean markets go up in a straight line. Continue to expect a lump of volatility in ’21.

    A word about annual rates of return. The numbers mentioned above are called point-in-time estimates. Meaning that anyone can take a time period, any time period, to analyze the return for that particular frame. It’s a way Wall Street and investment professionals communicate to clients. A means to measure and compare relative value. But here’s the problem. Most retail investors invest like it’s a marathon and not a sprint. Although important to know annual returns, they are no more important than any of the quarterly performance reports that we provide. Investors should watch their performance trends over a long period and not focus on a particular quarter or year.

    All of us at Stillwater wish you and yours a truly joyous holiday season.

    Stay well.
    Jim

    James K. Tonrey, Jr.
    Partner/Chief Executive Officer


  • 12/16/2020

    Dear Clients,

    A number of months ago an article caught my attention. It was written by Paul B. Brown, titled “When You Have Enough, Help Others.”

    There were a bunch of reasons it was interesting. But one, in particular, that hit home. He states in the article, “While I continue to invest for a retirement that grows ever closer, I am no longer focused on trying to increase my net worth. There is nothing more I want.” As someone who’s helped people for the past thirty-nine years increase their net worth, I thought this was a bit strange. Yet, at the same time, refreshing. I mean don’t we all want to increase our net worth year-over-year? We constantly worry about inflation affecting our purchasing power, the markets taking a downturn, helping our family members, and how about the cost of our health insurance and potential long-term care burden. Simply stated, it seems impossible to know how much is enough.

    Mr. Brown goes on to say, “But once you have sufficient resources to achieve your objectives, the pressure to achieve them goes away.” And this is where it gets refreshing. And also where it gets hard. Because we don’t have a crystal ball, and, frankly, the goalposts keep moving, we just don’t know what we will need in the future to meet our needs. And we don’t want to be a burden on someone else. So, we worry, we keep accumulating, we watch our budgets, and we trust that over the years we have been good stewards of our finances.

    But can’t we do both? Can’t we be responsible for our own welfares and, at the same time, take a chance at knowing that there will be enough in the kitty to meet our future obligations? Which brings me to what hit home. I don’t remember, in my lifetime, when there was a greater need to help others than now. There is no doubt in my mind that we’re in a difficult period when, as an example, I’m told that two out of seven children go to bed hungry in my county, one of the wealthiest counties in the state of Minnesota. I’ll let others debate how we got here. I just know we’re here.

    Whether it’s resources, money, time (volunteering), or just a simple recognition and act of kindness, now more than ever, our neighbors need our help. Anything will do the trick. We are all different, so I don’t know when to say enough is enough. But what I do know is that to share will always increase our self-worth, if not our net worth.

    All the best,
    Jim

    James K. Tonrey, Jr.
    Partner/Chief Executive Officer


  • 12/09/2020

    Dear Clients,

    What will drive equity performance in 2021?

    There are a number of variables. Let’s begin with common sense. The vaccine and its rollout will be front and center. Period. If successful, we could expect markets to continue their upward climb or at least maintain their current lofty levels. Certainly, and it’s not guaranteed, but a good bet that we will begin to get back to our normal lives. And it’s expected that a bit of “sigh of relief” spending will accompany this rebound.

    Another catalyst that will affect markets is the path of interest rates, both short-term and longer-term. This, we believe, is one of the most important factors influencing markets. If we take Fed Chair Powell at his word, and he’s been pretty consistent, rates should stay low and for longer than anticipated. This should provide positive momentum for the markets.

    It’s been estimated that around $1 Trillion of money is parked in money market funds and bank accounts due to risk-off behavior during this uncertain time. Again, with good news and the economy settling in, we could expect some of this to find its way into the equity markets. People will begin to feel more comfortable with the direction of the economy.

    With constant new data coming in, every day offers a glimpse into the future. We are optimistic that markets will trade consistent with clearer and more upbeat news. But, frankly, the majority of research reports we read say the same. Everyone on one side of the boat can sometimes cause consternation. And that may be the biggest risk of all to financial markets in the near-term. Too much optimism can lead to a “melt up”. Which is usually accompanied by a downward draft. Something to keep on the radar.

    Hope you are gearing up for the holidays. It’s a wonderful time and only comes once a year. Let’s make the best of it.

    Stay safe.
    Jim

    James K. Tonrey, Jr.
    Partner/Chief Executive Officer


  • 12/02/2020

    Dear Clients,

    The month of November was the best month for the equity markets since the ‘80’s. The Dow Jones Industrial Average hit and surpassed 30,000 for the first time. We are at or near all-time highs. I should take more time off. Markets seem to like it when I’m not in the office.

    Year-to-date the sectors of the market that are doing exceptionally well are technology, communication services, and consumer discretion. All are up over 20% for the year. They all have a similar theme. Equity markets have rewarded growth companies this year, unlike any other, in relation to their value-oriented sibling. Not a surprise due to such low interest rates coupled with a pandemic that brought forward our need for greater technology and communication. Another example of this risk-on trade is small-cap companies had their best month ever in November. The real laggard on the year has been the energy sector. But even that area of the market caught a bid recently. November was a standout month for those invested in this sector.

    With all that is going on around us, the S&P 500 benchmark index is up around 14% for the year, the thirty-year mortgage rate is down to under 3% and the 10-year U.S. Treasury note is at .90%. It really is an unusual time in our lives in so many ways. Financial markets always seem to reflect and capture our human anxiety, our concern for the future, and also, frankly, our innate optimism. It is apparent that investors are looking forward to next year when our lives may get back to some normalcy.

    Long-term investors respect and appreciate the financial markets with the understanding that there still are many obstacles between today and next spring that could derail the current positive momentum. Let’s continue to keep our eye on the ball and not make emotional decisions based on short-term events. And like cold in winter in Minnesota, we can always count on short-term events.

    Keep safe and let us know if you need anything,

    Jim

    James K. Tonrey, Jr.
    Partner/Chief Executive Officer


  • 11/19/2020

    Dear Clients,

    With the increase in COVID-19 cases here in Minnesota and around the country, we are once again closing our office to visitors and working mostly remotely to ensure the safety of our staff. These past 9 months have shown that we have the capabilities to continue to offer our very high level of service from the comforts of our home so will do that through the end of the year. At that time we will re-evaluate and make another decision going forward. Please continue to email or call our office as you usually do to contact us.

    We wish you all a very Happy Thanksgiving in whatever form it takes for you and your families. Although, it will be much different in setting, we can’t allow circumstances beyond our control to change the true meaning of this day. That said, Amy, Eric, Jenny, Dana, and I are all so very thankful for the trust you’ve placed in us over the years.

    My next update will be sent the week after the Thanksgiving holiday. Markets are holding more than their own in light of all the perceived risks around us. It’s a resilient time in so many ways.

    Be safe and be well,
    Jim

    James K. Tonrey, Jr.
    Partner/Chief Executive Officer


  • 11/12/2020

    Dear Clients,

    Jim is out of the office this week for some well-deserved vacation time. So, I thought I would write a short e-mail to keep the weekly updates going. We all know that if I don’t put something out, then Jim will not actually take a vacation and will instead make sure he writes an update! However, I am not as good at writing these updates and do not have Jim’s quick wit and sage advice. My strengths lie in operations and keeping things in good order, which leaves you with a short list of housekeeping items!

    Year End Giving: If you are planning on any year-end gifts to charity, please keep the following suggested deadlines in mind as custodian processing times are slowed with the volume of year-end requests.

    Gifts of Appreciated Stock-December 15

    Gifts of Appreciated Mutual Funds-December 1

    Gifts of Cash via Check or Wire-December 18

    Any gifting requests can be directed to either me or Eric.

    Roth Conversions: If you are planning to convert any IRA funds to a Roth conversion account, you should contact us in early December to review and start this process. It is best to start with your tax preparer for questions on whether or not a conversion is something you should consider.

    Other Miscellaneous Items: Year end is a good time to make sure you have notified us of any address changes, major life changes, cash needs, or desired beneficiary updates.

    On-line Security: Just a friendly reminder to be on the lookout for phone scams and email “phishing” messages. Phishing is the act of sending an email falsely claiming to be an established legitimate enterprise in an attempt to scam the user into surrendering private information that will be used for identity theft. Private information requested in phishing email messages often includes user names, account passwords, credit card, social security, or bank account numbers. If you’re unsure about an email or phone call, contact the company you normally do business with using your listing of their phone number, email address or website, and ask them to verify the request. For more helpful tips, visit: https://staysafeonline.org/stay-safe-online/

    Hoping everyone stays healthy and enjoys the upcoming holiday season in whatever form it takes!

    Amy

    Amy Enderlein
    Partner/Chief Operations Officer


  • 11/08/2020

    Dear Clients,

    Financial markets like two things, greater certainty and checks and balances. Although, we’re not there yet, it appears we have more knowns and a higher probability that there will remain a balance of power.

    It’s important to remember that markets are not the economy and do not necessarily react to political outcomes. History is littered with false narratives. It’s always been a loser’s game to try to trade politics. Markets look forward not backward. Markets exhibit no emotion. Markets are neither liberal nor conservative, blue or red. Markets are simply made up of millions of participants who seek one thing…..to make money. Long-term investors should keep this in mind. We will no doubt have some volatility in the near-term. That’s healthy. Corporate America is facing a number of challenges and unknowns that need to be debated and valued. For over thirty-eight years of doing market analysis, it’s been my experience that it’s not wise to bet against America.

    This has been (is) an incredibly stressful time for all of us. And we all handle stress differently. Just remember the four A’s. Avoid stress if you can. If you can’t, then try to Alter the way you deal with it. Maybe communicate better or get more exercise. Next, Adapt. Look at the bigger picture for the positives and try to change your attitude. Lastly, Accept it. Learn to accept those things out of your control. Above all else, practice forgiveness.

    We’re here to help in any way we can. Stay well.

    Jim

    James K. Tonrey, Jr.
    Partner/Chief Executive Officer


  • 11/01/2020

    Dear Clients,

    We usually send out the Weekly Update mid-week but with the election Tuesday, it’s best to wait until we have some clarity. We’ll provide market analysis later in the week.

    It’s both an honor and a privilege to vote in our great country. Sticking with a noteworthy theme, it makes us all feel invested. Regardless of the outcome, in the short-run markets will oscillate since that’s what financial markets do when presented with uncertainty. Keep focused on the future.

    Stay healthy and centered,

    Jim

    James K. Tonrey, Jr.
    Partner/Chief Executive Officer


  • 10/28/2020

    Dear Clients,

    So far this year, two of the three major averages are in positive territory despite volatility due to the virus and election. The Dow Jones Industrial Average (DJIA) is basically flat while the S&P 500 index is up 7% and the Nasdaq higher by 28%. As discussed in prior Updates, we are now heading into some increased unpredictability. Expect markets to see-saw in the short-term with amplified headline risk.

    Something that may help explain why year-to-date the markets have held their own has to do with yields. Currently, the DJIA has a dividend yield of around 2%, the S&P 500 index 1.7%, and the Nasdaq 1.5%. For many of us, qualified dividends are taxed favorably at a 15% rate. Compare these numbers to the yield on the 10-year Treasury, which sits at .8%, and is taxed at an ordinary income rate.

    For the past twelve months, the inflation rate has hovered around 1.4%. Assuming no growth in the coming year, inflation staying the same, and dividend yields remaining stable, after paying taxes, an equity investor can at a minimum expect to keep pace with the cost of living. By comparison, an investor receiving interest from a treasury can expect to lose ground to inflation, and if current economic conditions continue, suffer significant purchasing power and erosion of capital in the years ahead. Furthermore, and importantly, dividends from equities have a history of increasing over time keeping pace with inflationary pressures. A treasury will simply pay the guaranteed interest rate. No potential for growth.

    Let’s put some numbers to this exercise. Joe investor puts $100k into a 10-year Treasury. At the end of the year, for a principle guarantee from the US government, he will receive $800 in interest. Assuming a 20% combined federal and state tax rate, Joe will net $640. Given inflation at 1.4%, he just lost $760 to purchasing power ($1,400 – $640). Stating the obvious, Joe will have some financial issues down the road if his portfolio is not addressed and/or conditions don’t change.

    As long as yields on treasuries and other government bonds stay artificially low, long-term investors will turn to equities. And as long as the markets cooperate and the economy remains somewhat stable (granted, a risk), with even moderate growth potential, there are not many choices for people seeking to keep pace with the daily cost of living. This is why keeping an eye on the path of interest rates is of particular importance as we enter the new year and beyond.

    Thanksgiving on the horizon and a lot to be thankful for.

    Best regards,

    Jim
    James K. Tonrey, Jr.
    Partner/Chief Executive Officer


  • 10/21/2020

    Dear Clients,

    Another week closer to finding a vaccine, better treatments, and having the 2020 elections over. History shows that financial markets are more interested in certainty not necessarily outcomes. In the short-term, there will be volatility either way. Nevertheless, in the end, fundamentals do matter. With that in mind, let’s look at one of the closely followed market fundamentals.

    On average, the S&P 500 index trades at a price-to-earnings ratio (P/E) of around 16x. Investors, traditionally, have been willing to pay $16.00 for every $1.00 of corporate earnings. What can be lost, and is really important, is this ratio is influenced by a number of variables. It doesn’t exist in a vacuum. For example, given the current pandemic, how does an analyst actually determine a company’s earnings? From one day to the next, uncertainty is around every corner. Consumer confidence and spending are just too hard to predict. If we don’t have a good handle on the denominator then of what value is the math?

    Another variable that plays a big part is interest rates. If investors can put their money in a safe vehicle, say a government bond that pays 4%, then taking stock risk doesn’t look as attractive. The P/E ratio would probably be nearer the historical average with higher rates. Since they are artificially low, equities are clearly more dear.

    No surprise that the current P/E ratio of the S&P 500 index is at a high of 20x-22x depending on which analyst numbers are used. Investors now are willing to buy $1.00 of corporate earnings for around $20.00. The bear case is this demonstrates the stock market is overvalued given historical comparisons. The bull case is that this ratio is overstated due to lower anticipated corporate earnings reflected in the difficulty trying to calculate corporate earnings. Bulls also argue that investors will turn to more risk-oriented assets when given such ridiculously low returns on cash and bonds. Money goes to where it is treated best.

    Hall of Fame football coach Bill Parcells once said of his team, “You are what your record says you are.” And like the financial markets, whether one agrees or disagrees with current P/E valuations, the markets are what investors say they are.

    As always, let us know if you need anything.

    Best,
    Jim

    James K. Tonrey, Jr.
    Partner/Chief Executive Officer


  • 10/14/2020

    Dear Clients,

    When we started our firm in July, 2004, it was decided to keep things somewhat simple. We established custodial relationships with just two providers, Charles Schwab and TD Ameritrade. Both are best-in-class in the discount brokerage space. Last November, they struck a deal. Schwab offered to buy TD and merge the two firms, creating one of the largest, most well capitalized, and finest custodians in the country. The deal was approved by the regulators this year and on October 6th, it closed. The full integration is expected to take between eighteen and thirty-six months. Presently, Stillwater Investment Management, LLC is bumping up against a half billion dollars in assets-under-management, with approximately equal funds allocated between Schwab and TD.

    Although there will be some changes down the road, rest assured as your investment advisor, we will handle the logistics and communication. Nothing to concern yourself with on your end. When asked if this is a positive transaction for both us and our clients, the answer is a resounding yes. Scale in any business matters now more than ever. Both firms have unique strengths that, when combined, will provide best-in-class execution, service, and technology. We’re very excited.

    On a larger note, mergers and acquisitions have increased dramatically over the past decade in every area of the financial markets. Like the Schwab/TD merger, businesses are trying to gain scale and efficiencies like never before. In economics, it’s called “creative destruction.” Capitalism over time, as an economic system, has a way of dismantling established ways of doing things to create better mousetraps. We experienced it with the assembly line, the internet, chip technology, the media, and in all sorts of ways. It means there will be winners. And it means there will be losers.

    There is an old saying on Wall Street, “cash is king.” It should be replaced with, “cash flow is king.” Firms with the management, the vision, and the means to move forward in this complex world will stand to gain the most. Again, the Schwab/TD merger will be very beneficial to all its’ constituents.

    As always, let us know if you need anything.

    All the best,

    Jim
    James K. Tonrey, Jr.
    Partner/Chief Executive Officer


  • 10/07/2020

    Dear Clients,

    The fourth and final quarter is usually the most volatile time of the year in the equity markets. A few things to keep in mind to maintain perspective.

    Portfolio managers will rebalance their client’s portfolios, making sure sector weightings are tilted toward areas of the market where they feel performance, heading into the new year, will improve. Usually, but not always, that means that the sectors that did well this year (technology, consumer discretion) could be sold down, profits taken, and reinvested into areas of the market that have underperformed (financials, energy).

    Another rebalancing tactic is to sell asset classes that have outperformed and reinvest proceeds into the underachievers. There could be a rotation from growth areas of the market with funds redeployed into more value leaning securities. Portfolios would then slant toward a more conservative posture, favoring companies that pay solid and increasing dividends and that carry lower price-to-earnings ratios. There has been a huge dispersion of returns between growth and value this year. It wouldn’t be unexpected. Likewise, there could be a further rotation from large-cap to small-cap stocks. Year-to-date large-cap indices are up around 7%, while smaller company indices are down about 4%. A dispersion of 11% that, over time, should narrow.

    A third driver of volatility that occurs is the result of tax strategies. Portfolio managers, and really all investors, will look to optimize their tax situation by offsetting any gains with losses, and visa-versa. This results in increased buying and selling over and above normal daily trading volumes. And if all that isn’t enough on its own, there is an election in November and an on-going pandemic.

    Especially this year, the equity markets seem poised for increased volatility. Long-term investors need to accept this and, in the short-run, roll with the ups and downs. Remember that heightened volatility isn’t necessarily a bad thing. Think of it this way. There are three possible outcomes in the short-term. Markets go up from here, down from here, or remain flat. If we place a 1/3 probability on each outcome then there could be a 33% possibility that markets go down. A 66% chance they remain the same or go up. If they go down, let’s place a 50% chance that the decline is more than a “normal” 10% correction. Given this hypothetical (very unscientific, of course), the markets have a 16.5% (one in six) possibility of declining more than 10%. An investor should ask this question. Is it worth trying to time these events? Especially, when invested funds will not be needed for years and years to come.

    Stability will find its way after a period of elevated uncertainty. Always seems best to stay the course.

    All the best,

    Jim
    James K. Tonrey, Jr.
    Partner/Chief Executive Officer


  • 09/30/2020

    Dear Clients,

    The September market correction, somewhat anticipated after the unexpected gains this summer, is now down four weeks in a row, knocking the S&P 500 index off almost 6% and taking away some of the gains from August. The Nasdaq has dropped by about 7%. The mega-cap technology companies were certainly due for an adjustment. Overall, investors sold more than $20B of their stock holdings in just the last week. The S&P 500 index bumped back up against the 3,200 range, notably where the year began. Pullbacks are normal, especially when conditions get overbought as they did this summer. Keep in mind the S&P 500 index is still up around 5% for the year. Investors now see a better risk-reward level.

    Something interesting is going on under the surface of the equity markets. Companies are beginning to restart their dividend and stock buyback plans. Back in the spring, a number of our large domestic firms put these programs on hold. Some will see this as a positive sign that CEO’s and their Boards of Directors have confidence that the worst is over and the broader economy is on the mend. There are others, though, that disapprove saying these decisions are premature due to continued furloughing and laying off employees that are yet to be rehired. These critics also maintain that buybacks, in particular, are self-serving and erode corporate long-term growth for short-term stock price appeasement. This is all with the back-drop that credit markets remain stable and Treasury yields unchanged.

    At the risk of stating the obvious, the markets are in the middle of a push-pull with all the surrounding uncertainty. Like a storm passing over head, a competent captain will lower the sails, right the ship, take inventory, and prepare for some temporary choppy waters ahead. No big decisions made and time taken to make ready for a smoother sail tomorrow. On open seas, patience is always rewarded as the winds calm and the sun eventually finds its way through the cloud cover once again. And so it is with the financial markets.

    Enjoy the fall. It only comes once a year.

    Jim

    James K. Tonrey, Jr.
    Partner/Chief Executive Officer


  • 09/23/2020

    Dear Clients,

    Most of the chatter now, and over the next forty days, will be about the election and how it will impact investors. This seems like a short period of time but, as we have just experienced with the passing of Justice Ginsburg, there will be a number unforeseen events leading up to election day that will be emotionally charged.

    If we put all the noise aside, however, realizing how hard that is to do, and we simply focus on what has historically happened, financial markets will undoubtedly march to their own drummer, regardless of the outcome. For example, when Trump was elected the “smart” money touted the energy and financial sectors as the places to invest since deregulation will take hold and these areas of the market will flourish. Since then, both have been the worst performing sectors. Ironically, investors also sold the market after his victory only to see it rebound nicely over the next year. In the ‘80’s when Reagan was elected everyone was sure that markets would take off. It took two years after, until a recession ended, when that actually came to fruition. Investors thought the election of Obama was a threat to free markets. In his eight years, we experienced one of the best stock markets in history.

    Politics aside, the point is that no one really knows what the future holds in the short-run. What market historians have concluded, though, is that markets generally underperform slightly around an election but, given a twelve-month period, have seen gains of around 6%. Whether that holds true this time is anyone’s guess. And it’s just that. A guess.

    It’s important to keep in mind that returns from the markets are dependent on a full business cycle. And that this cycle is usually much longer than a four-year presidential term. As stated before, markets can be detached from the economy, and, it seems, from presidential election results as well. It can’t be stressed enough how long-term investors need to keep this front and center and not overthink the problem.

    All of us at Stillwater are here to help in any way. Stay well.

    Jim

    James K. Tonrey, Jr.
    Partner/Chief Executive Officer


  • 09/16/2020

    Dear Clients,

    Markets are starting to game the upcoming election. We should expect some ups and downs as previously expressed. History tells us that financial markets can have a knee-jerk reaction to who wins. After a few months of digesting results, however, they get back to a normal pattern. Importantly, it’s not just the presidential race but the many congressional ones as well.

    An interesting trend, somewhat under the radar, is how growth companies, and their stocks, have significantly outperformed their value-oriented cousins. For example, the ishares S&P 500 Value index is down around 10% year-to-date and the ishares S&P 500 Growth index is up 20% year-to-date. This dispersion in return of 30% is highly unusual, to say the least. At some point it will revert to the mean. Markets are fickle, though, and this difference could remain for quite a while.

    With interest rates so low and societal changes, due principally to the pandemic, rapidly disrupting our daily work and home lives, companies that exhibit long-term growth have performed better. With good reason. They have more leverage to the future. Their vision, products, revenue streams, and creativity are considered more dear to investors. That’s why Apple, Netflix, Square, Amazon, and a whole host of others, have headed higher. It’s simply hard to ignore their business models in today’s world in light of what fixed income asset classes are paying and what slower growth companies offer. Remember that balance in investing is still the key. As we never know when the tide will turn.

    We continue to believe that the Federal Reserve Bank holds most of the cards. As long as rates remain at these historic lows and liquidity is abundant, equity markets will benefit. And growth companies that have market share, with products that people want and need, along with an excellent management team in place to guide them forward, will garner our attention.

    As we leave summer and head into fall, we wish you peace and continued good health.

    Best regards,

    Jim

    James K. Tonrey, Jr.
    Partner/Chief Executive Officer


  • 09/09/2020

    Dear Clients,

    Markets are entering the fall season. Assume that volatility will pick up. Meaning that there could be some pretty large swings from day-to-day, week-to-week in the major averages. As of this writing, the S&P 500 index is still up around 5%-6% for the year. The technology sector, which has carried the upward momentum for the past six months, is coming under expected pressure. For long-term investors, though, this is an area of the market that should continue to outperform. But there will be some pretty good fluctuations along the way.

    The one thing we can be certain of entering the last quarter is…uncertainty. And markets don’t like uncertainty. Although it’s always around us, this particular period of time, given the election and pandemic, will heighten our senses. With that, let’s revisit some solid, long-term investing principles to keep in mind.

    1. Volatility can be your friend. The funds that are invested, and not counted on for 3, 5, or 10 plus years, will have interest and dividends reinvested at lower prices over time during periods of downturns. Albert Einstein once said, “Compounding interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t pays it.”

    2. Wealth is accumulated and grown at a reasonable rate over time by owning assets, more than lending to people that own the assets. Accumulating shares of the largest, most well financed and best managed, companies in the U.S. and world has always provided long-term growth for those that are patient.

    3. Don’t get too excited when the markets hit all-time highs and don’t panic when a correction occurs. Markets will correct. Since 1950, the S&P 500 index has averaged a 5% pullback three times a year and 10% correction every sixteen months. It’s also been estimated that every seven years there is at least one 20% decline. We’ve had more volatility recently.

    4. The financial markets are not the economy. Markets (investors) look at least nine months out. Investors today are betting on growth in the future not what will happen tomorrow. The economy can be in a recession and yet people can bid up prices of shares of stock. Sound familiar? It’s because we are optimistic that in nine to twelve months, we will not only be through this election cycle but, hopefully, treatments and a vaccine will be available. Less uncertainty.

    5. Markets go up over time, not down. Here are approximate beginning of year S&P 500 index values over past three decades.

    1990 – 350 2000 – 1,400 2010 – 1,100 (great recession) 2020 – 3,300

    6. Important to understand the concept of loss aversion. In many studies, it has been determined that people react to loss twice as much as the pleasure they gain from something. We react twice as much to a market downturn then we do to a surge upwards.

    7. When in doubt, remember the Serenity Prayer.
    “God grant me the Serenity to accept the things I cannot change; the Courage to change the things I can; and the Wisdom to know the difference.”

    Stay safe, healthy, and remember to think long-term,

    Jim

    James K. Tonrey, Jr.
    Partner/Chief Executive Officer


  • 09/02/2020

    Dear Clients,

    So much for the old Wall Street axiom……sell in May and go away. Markets continue their upward climb. The S&P 500 index is up over 13% just this quarter. And it’s the best August since 1984. Here are the monthly returns for the past five months.

    April +12.82% May +4.76% June +1.99% July +5.64% August +7.19%

    Keep in mind, however, that the top five stocks in the S&P 500 index represent about 23% of the entire index and thus the year-to-date gains as well. Moreover, the 200-day moving average on the index is extended by any measure. It could be signaling a pause or a pull-back in the near-term. It shouldn’t come as a surprise to see some downward drafting after Labor Day, heading into the fall and the election.

    Interestingly, market pundits are now adjusting their corporate profit estimates higher and consumer confidence seems to have found its footing and is adding to a bit more optimism. There are some indications that markets aren’t getting too far over their skis. This is very important as fundamentals of companies still matter. In the long-run, fundamentals that provide comparative value, like price-to-earnings ratios, price-to-sales ratios, cash flow, debt-to-equity, and a whole host of other metrics, act like a tether, or a magnet, that brings the price of a company’s stock back to earth. In the short-term, the math can get muddled and momentum can play a bigger part. But over time, it’s never been wise to discount the power of “mean reversion.” Benjamin Graham, the father of value investing, said it best. “In the short-run, the market is a voting machine, but in the long-run, it is a weighing machine.”

    The question that investors have to ask themselves is whether these high-flying stocks, that have dominated this upturn, will grow into their valuation. Or put another way……are they pulling forward earnings and growth from the future due to how the pandemic is changing our work and daily habits? Are companies like Apple, Microsoft, and Netflix meaningfully gaining greater market share that can justify their higher valuations? The answer to this question will go a long way in determining whether the markets have gotten ahead of themselves. Especially since the majority of S&P 500 companies, in particular the value sectors, have not participated, or at least not fully, in the run-up.

    The balance of the year will be interesting on many fronts, the election, any news of a vaccine, and how a country seemingly divided can find a path forward. I’m optimistic. I don’t doubt there will be some bumps along the way. There always are when a democracy is challenged. But it’s not like we haven’t been here before. We need continued good news. And we should focus more of our attention on the common good. No matter which side of the aisle we may sit on, it’s important to keep in mind that true freedom is a derivative of the common good and never has been the other way around.
    Have a great Labor Day Weekend.

    All the best,

    Jim
    James K. Tonrey, Jr.
    Partner/Chief Executive Officer


  • 08/26/2020

    Dear Clients,

    Twenty-seven weeks ago, I didn’t imagine I’d still be writing a weekly note to clients. But here we are. We’ll remain on this path for as long as we have to. We want to make sure you continue to receive important, timely updates about the markets, our firm, and the way forward.

    The past six months have been an interesting study in investor psychology for sure. We’re in the middle of a world-wide pandemic, a presidential election, an economy sputtering, and our personal worlds turned upside down, but the stock markets are riding all-time highs. There are so many ways to assess this phenomenon. And frankly, it’s anyone’s guess as to exactly why.

    Let’s dig in though. Some on-going dynamics seem to converge at this time to create this perfect storm. The first is one we’ve highlighted over the past few weeks. And that is the fact that the equity markets still offer the best opportunity to build wealth over the long-run, especially in light of the lowest interest rates in history. Money will flow to where it is treated best.

    Another reason is that we human beings have a very difficult time “missing out” on good things. The news about the markets have been nothing but positive over the past four months, given all the challenges around us. We read about it, we hear from our neighbor Joe how much money he’s made (by the way he’ll never tell you when he’s lost, and he has, just sayin…), and we are experiencing first-hand the bounce-back in our portfolios. John Maynard Keynes, noted economist, termed this “animal spirits.” These “spirits” are not necessarily rooted in fundamentals but rather in tagging along with the crowd, leaping on the momentum bandwagon.

    Lastly, does the term cognitive dissonance ring any bells? It’s our behavioral tendencies to avoid dissonance, or competing beliefs. We search out things that are consistent with our personal behaviors and attitudes. We seek harmony, not disharmony. This plays into the current momentum trade. We want so much for something positive. In the short-term the markets have given us some hope. So, we search out anything that will reinforce this optimism. We want to believe. We need to believe. So we invest.

    The markets have always exhibited tremendous investor emotion. More than at any time in our history, the equity markets near-term fuel tanks run on technical trading, human emotion, sophisticated algorithms, and momentum. As investor participants, we need to understand and accept that this trend is here to stay. If you put one hundred market analysts in a room rest assured fifty of them will believe markets are overvalued and the other fifty will come down on the side of under or fairly valued. And this doesn’t mean that we are in for a correction or shock to the system anytime soon. Our friend Dr. Keynes said it best. “Markets can stay irrational longer that an investor can stay solvent.”

    Long-term investors have to remain disciplined, keep focused, look down the road, and ignore both the upswings and downdrafts that inevitably occur week-to-week and month-to-month. Let’s not get too hyped-up when markets are breaking records and let’s not get too anxious when they turn down. There will always be, and always has been, ebbs and flows to financial markets. Investing for our future and our families future is a marathon. It’s never been a sprint.

    Enjoy the remainder of the summer,

    Jim

    James K. Tonrey, Jr.
    Partner/Chief Executive Officer


  • 08/19/2020

    Dear Clients,

    The S&P 500 index is now up over 5% for the year bumping up against the all-time high set in February. Just this quarter, the benchmark index has gained around 9%. The good news is that there seems to be more broadening out of the companies participating in these gains. Investors now look to areas of the market that appear undervalued and ignored. Technology, though, continues to shine and hold much of the interest. In the short-run, expect the equity markets to trade sideways as we enter the fall considering all the noise surrounding the upcoming election.

    The last note was spent on the fixed income markets and how their influence can affect the equity markets. The comment was made that interest rates could remain quite low for an extended period of time, for a whole host of reasons, offering equity investors more room to the upside. Something that gets overlooked in this discussion, and why rates may stay low, is the impact that rising interest rates will have on debt service, given our total national borrowing. Our total national debt, according to the Congressional Budget Office, is hovering around $27Trillion (27 with twelve zeros). Last fiscal year, we spent $574Billion on interest expense alone. Doing a bit of back of the napkin math, every .25% increase in interest rates (remember that the government has to continually find investors for this debt) would add about $5.6Billion/month to interest expense. A total of $67Billion/year. If rates increased 1.0% across all the various maturities (very possible), look at adding $22Billion/month additional expense, or around $264Billion/year. Just to fund the interest payments. No principal paydown.

    This analysis is not perfect as different maturities have different increases, and there are many other influencers. Nonetheless, it is powerful simply to illustrate how debt can be a two-edged sword. Borrowing is great when rates remain low to help fund necessary areas that generate better returns, either financially or socially, but will be a choker if rates don’t cooperate. In economics, there is a something called the “crowding out effect.” When interest expense and borrowing become factors that take away funds that could be used for investment in other needed areas like health care, education, infrastructure, and the military. Another important reason why interest rates may not be going anywhere, anytime soon.

    A lot going on in the world and certainly a lot going on in our own homes as we continue the journey together through this unusual period of time. We’re here to help in any way we can. On the plus side, our office is working quite seamlessly given the challenges. We will continue to let you know if anything changes on our front.

    All the best,

    Jim

    James K. Tonrey, Jr.
    Partner/Chief Executive Officer


  • 08/12/2020

    Dear Clients,

    The equity markets dominate business headlines every day. “The Dow Jones Industrial Average is up 153 points today on news that……” What we don’t pay enough attention to, however, are the fixed income markets. In particular, how they help shape the direction of equity markets. It’s been said that money goes to where it is treated best. If that is the case, then stock markets aren’t overvalued. Investors are putting money where they feel they are getting the best bang for their buck, given all the noise around them.

    Let’s take a look at the numbers. The benchmark 10-year Treasury began the year at 1.88% and the 1-month Treasury was 1.53%. Today, the 10-year is at .57% and the 1-month at .08%. In comparison, Apple shares have a dividend yield of around 1% and Pfizer’s is around 4%. If you are a long-term investor which would you prefer? Remember that you can also get appreciation on stocks over time, and that many companies increase their dividend payouts over the years. In this environment of historically low interest rates, any potential appreciation on the Treasury will be virtually impossible. The investor is basically left holding a 10-year Treasury paying .57%. Taking it one step further, if the inflation rate averages 2% annually over the next ten years, a 10-year Treasury will lose substantial money to purchasing power. Even if equity valuations seem high today, keep in mind this comparative relative value analysis. Money goes to where it is treated best.

    It is also important to emphasize the tremendous liquidity that is generated by these unusually low rates. The U.S. Federal Reserve Bank has opened the spigots to ensure the economy doesn’t free fall due to the pandemic. They continue to buy corporate bonds, both lower credit quality as well as blue-chips, to provide greater stability to fixed income markets. And let’s not forget that another $600 billion is set aside in the Main Street Lending Program. More money in the economy, more velocity of this money exchanging hands and getting invested. Important to note that Federal Reserve Banks around the world have also increased their liquidity positions for exactly these same reasons.

    As long as interest rates remain low, and liquidity is abundant, equity markets will be a favored place for investors. Given all the uncertainty around us, it’s hard to imagine, especially over the next few years, when this will change.

    Keep the faith,

    Jim

    James K. Tonrey, Jr.
    Partner/Chief Executive Officer


  • 08/05/2020

    Dear Clients,

    The late, great Yogi Berra once said that when you come to a fork in the road…take it. Not sure if we are at that particular fork, but the markets continue to surprise to the upside, in light of the many uncertainties. Digging deep into the data, however, notice that only a few companies have significantly outperformed adding the necessary fuel to these performance numbers. From the March lows, the S&P 500 index is up 47%, the Nasdaq up 60%, and the Dow Jones Industrial Average up 34%.

    Year-to-date, the S&P 500 index is positive by 3.5% (and only 3% from its all-time high) while the Nasdaq Composite is higher by almost 30% (all-time high). The stocks that have propelled this tremendous increase are the ones we regularly hear about: Microsoft, Apple, Google, Facebook, Netflix, and Amazon. They are now making up a greater portion of these indexes. And, as they rise, so too will an index. It can be a bit deceiving, though, and worth noting, that a great majority of stocks are flatlining and/or declining depending the sector or industry. For example, any travel related companies, cruise ships, airlines, and hotels are struggling, while these multi-national, tech conglomerates thrive due to a variety of progressive reasons. The bottom line is that the underlying economy is still trying to find its footing. As they say, the future waits for no one.

    The pandemic has pulled forward a host of issues from the future and the tech giants are benefitting. We are now debating how much office space we really need, how we can work from home more, what technology is important to accomplish our tasks, and how we will be entertained. Companies that can solve these challenges, have the right business model and leadership, the vison, and have the necessary cash flow, will ultimately win. That is why we see these particular companies hitting their stride. Right place at the right time in our history.

    The last five months have been challenging to say the least. Not just from an investment standpoint but simply living our daily lives. When we come through this period, and we will, let’s all look back and remember some lessons learned. For me, it will be the little things. Just being able to gather and not worry about a handshake or a hug. Friends and family, and all the love and drama that tags along. A meal at a favorite restaurant…a crowded, busy, loud restaurant. Not worrying so much. I’m just not gonna sweat the small stuff.

    We hope the remainder of your summer is filled with joy.

    Jim

    James K. Tonrey, Jr.
    Partner/Chief Executive Officer


  • 07/29/2020

    Dear Clients,

    Statistical analysis plays a role in many areas of our lives. It has been especially front and center with the pandemic. Every day we hear about the number of people tested, how many positive results, what age groups have been affected, and what the virus curve looks like. Similarly, in the financial markets, statistics are used to provide key data on trends, momentum, and asset price fluctuations.

    One particular area of statistical analysis can be valuable when following the markets. It is the financial concept of how we measure the rate of change of a variable or of multi-variables. This change is referred to as delta, the fourth letter of the Greek alphabet, and noted by a triangle symbol. Traders will track the delta of a particular variable, say an equity position, relative to another variable, say the consumer price index. This relationship, over time, may provide a clue as to where the price of that particular stock may go given the movement in an alternate variable. A trend line can be used to show movement over a time series. This line is usually illustrated by a 50 or 200-day moving average. The real meat of this analysis is measuring not just the frequent changes in these variables but the rate at which these variables change during certain periods.

    Speculators use this method to try to time their buys and sells. Long-term investors, on the other hand, will experience many significant rates of change in their portfolios over many years and decades. Where it can come into play for the average retail investor is when to put cash to work in the ever-changing equity and fixed income markets. Caution may be the best course of action if the rate of change signals a negative bias. A positive bias may mean the coast is clearer to put more funds into the markets.

    The rate of change of Covid-19 is a vital measure as to where we stand with reopening or closing down again, where we need to add additional resources, and where we need to anticipate potential spread. The main difference between statistical analysis of Covid-19 and the equity and fixed income markets, however, is that with the virus it is all about the math and the science. On the other hand, trying to calculate the short-term movements of the financial markets are more of an art. Simply put, pandemics have no emotion. The financial markets, and its participants, certainly do.

    Continued good health to all of you,

    Jim

    James K. Tonrey, Jr.
    Partner/Chief Executive Officer


  • 07/22/2020

    Dear Clients,

    As of this writing, the S&P 500 index is hovering around up 2% year-to-date. Something to note and pay attention to is that, historically, the next three months can be unusually volatile. We can never be certain in this business, but many traders usually take August off and return after Labor Day to trade around the edges of their portfolios to position for a run into year-end.

    This year, in particular, we may experience more bumps in the road. We have a presidential election, a virus with continued uncertainty, a debate on school openings, and the fact that the market has rebounded significantly from its March lows. How Congress will handle this last week of $600 unemployment benefits also adds to increased investor anxiety. What a new stimulus plan will look like is another matter and that is even if Congress decides to move forward. The economy is still in a state of suspended animation and very vulnerable.

    Dr. Jerome Groopman, a professor at Harvard Medical School, in a recent article in the New York Times said, “Medicine is not an exact art. There’s lots of uncertainty, always evolving information, much room for doubt. The most dangerous people are the ones who speak with total authority and no room for error.” Sounds a lot like the financial markets. Seems every day all of us are flooded with information about the next big investment idea. How we should invest our hard-earned money. We all have that neighbor at the cookout who holds court on how well he’s doing with his portfolio. John Maynard Keynes, an influential economist, once was heard to say to a reporter in an interview, “When the facts change, I change my mind. What do you do sir?” Suffice it to say, no investor has all the answers and those that think they do simply don’t.

    This fall is set up to test the equity markets again. We’ve come a long way in a very short period of time. If the stock market does correct, we’ll work through it as we always do. There are many rays of sunshine ahead. We just have to look for them. We just have to be patient.

    As they say on the open seas, expect a bit more chop the further out we sail.

    Enjoy the remainder of the summer and, as always, let us know if you need anything.

    Jim

    James K. Tonrey, Jr.
    Partner/Chief Executive Officer


  • 07/15/2020

    Dear Clients,

    The equity markets aren’t far from their all-time highs, off just around 7%, and now almost in positive territory for the year. The technology sector continues its’ torrid pace up 20%. We don’t know how much of these gains are due to pure momentum, investors simply chasing what’s working in a difficult environment, or how much is reflected in the new normal. This new normal is being underwritten by stay-at-home and our need to connect on-line for both work and social purposes. Companies like Amazon, Netflix, Microsoft, Apple, and Facebook have all surged in recent months. My guess, like everything that has to do with the markets, is a combination of both. We are placing a greater emphasis on our need for technology. While at the same time, we are also making sure we don’t miss out. Regardless, tech, in particular big tech, is obviously benefiting and probably continue to hold on to these gains. Expect a period of consolidation. Trees don’t grow to the sky.

    In finance, there is a theory called the Efficient Market Hypothesis (EMH). It reflects the view that all asset prices in the market trade at fair value due to everyone having all relevant information at the same time and then acting in their own best interest. Thus, the market is considered efficient. Doubters, and I have always been one, respond by saying that is really not the case as inefficiencies exist all through the markets because of various fee structures and costs, taxes variances, information that is not received universally and timely, algorithms and momentum investing, and, most importantly, human behavior. EMH does not take into account the reality that people get very emotional and that there are indeed forces at play behind the scenes like algorithmic trading that distort pricing in the short-run. We don’t always act rationally, in our best interests, with our financial decisions. An example would be that investors sometimes, on both sides of the aisle, make portfolio investment decisions based on political leanings. Not always a good investment decision. Hence, asset prices vary and are inefficient.

    This is an important discussion because, at this particular moment in our history, we are trying to unpack the tremendous swings in the markets. Given all that is going on in our world, is the recent surge in equity prices real or a head fake? Since there is always a certain amount of bravado and animal spirits at play (retail trading is at a nosebleed high) it’s hard to say in the short-term. But prudent asset allocation, proper diversification, periodic rebalancing, and dividend reinvestment are proven tools to navigate uncertainty. Stay focused on these principles and portfolios, over time, take care of themselves.

    Hope you and family continue to stay healthy,

    Jim

    James K. Tonrey, Jr.
    Partner/Chief Executive Officer


  • 07/08/2020

    Dear Clients,

    Over the past few months, the stock market has experienced unprecedented volatility the likes of which we rarely see. For long-term investors, it’s another reminder why “time in the market” and not “timing the market” has proven to be the right choice.

    Here are some numbers that demonstrate just how hard it is to get in and get out at exactly the right moments. Since March, if an investor missed just the five best days for equities, they would have lost an opportunity for a 38% gain. Yes, you read that correctly.

    March 13th +9.32% March 17th +6.01% March 24th +9.39% March 26th +6.25% April 6th +7.03%

    Those are one day gains. Conversely, if an investor stayed in the market on just the two worst days, they would have suffered a total loss of over 21%.

    March 12th (9.49) March 16th (11.98)

    Imagine a trader/speculator making the decision to stay in the market on the worst two days and also squandered the five best days. They would have missed out on a 38% gain while booking a 21% loss. Netted together, an opportunity loss or differential of almost 60%. Ouch.

    This discussion leads to the concept of accepting risk. In finance, we hear all the time how risk is easily compartmentalized as simply financial risk. But what that doesn’t tell us, and frankly ignores, is that understanding risk is very much human, physical. What John Coates, a research fellow at Cambridge University terms, the biology of risk. He says, “Risk is more than an intellectual puzzle – it is a profoundly physical experience, and it involves your body.” Our body becomes particularly active when subjected to increased uncertainty and newness. And this reaction, Coates goes on to say, often causes a greater challenge response than the unpleasant thing itself. He further notes, importantly, that risk preferences being a stable trait is often misleading.

    The bottom line is that the study of financial markets and investor behavior, and all the associated risks, are as much about how we humans physically, and subsequently intellectually, digest uncertainty. Like a fine-tuned athlete, we long-term investors have to learn how to manage our biology better, and more efficiently, when faced with overcoming difficult periods. Otherwise, we’ll always lose to the house.

    Hope you had a great 4th,

    Jim

    James K. Tonrey, Jr.
    Partner/Chief Executive Officer


  • 07/01/2020

    Dear Clients,

    In what has been a tale of two quarters, the second quarter, ending 6/30/20, had the S&P 500 index advancing 20.54% while the first quarter was down 19.60%. Year-to-date, the benchmark index is down 3.08%, including dividends. Financial markets dislike uncertainty and there is no more uncertainty than a pandemic. This particular period stands alone atop my list for trying to determine market sentiment from one week to another.

    The one sector of the market that has experienced a positive return is technology. The other ten sectors are either near flat or in negative territory for the year down anywhere from 2% (health care) to 36% (energy). The energy sector, however, rebounded up over 30% in the most recent quarter. Technology is an area that can benefit from stay-at-home and social distancing. We need our computers and gadgets and all the newer applications that help all of us deliver solid productivity. Expect ups and downs in the stock market over the summer as we all adjust to opening up our economy and what exactly that will mean. As previously stated, the virus will determine the direction of equities in the short-run.

    Having said all that, it is important, once again, to emphasize that during this time we should focus on those things that we can control and that matter.

    Certainly, the financial markets matter but we don’t have much control but to keep an eye on our portfolio allocation, liquidity needs, and associated risk. Things that matter and we can control are our habits, routines, and attitude toward ourselves and others. It’s never been easier to find something to complain about as we navigate these challenging waters. But a good captain never grumbles and never looks backward but rather excitedly gazes ahead to the new sky off the bow, to the next horizon, to the next day. Always appreciating the cool breeze and warm sun.

    We will be mailing out your quarterly reports next week sans the Quarterly Commentary. All of us at Stillwater hope you are doing well and have a good summer.

    Thanks,
    Jim

    James K. Tonrey, Jr.
    Partner/Chief Executive Officer


  • 06/24/2020

    Dear Clients,

    We have decided to keep our office hours the same through Labor Day.

    Monday, Wednesday, and Friday – 8:30 am – 3:00 pm.
    Tuesday and Thursday – Office closed. Work from home.

    We will continue to send our Weekly Updates throughout the summer. As we move forward, together, through this period, we will continue to keep communicating with any changes.

    The S&P 500 index is down only 2.5% year-to-date. Ironically, the index is on pace for its best quarterly gain in over twenty years. It is currently up over 21%. What this doesn’t tell investors, unless we look under the hood, is that five companies represent just over 20% of this index. They are Facebook, Microsoft, Amazon, Apple, and Alphabet (Google). The technology sector has led the way this year so far up around 12%, while the financial and energy sectors have lagged down over 20% and 30%, respectively. With both interest rates declining and the economy coming to a halt for a number of months, both these sectors have been negatively impacted in the short-run.

    A number of months ago, I read an article by Kate Murphy, author of “You’re Not Listening: What You’re Missing and Why it Matters.” The piece discussed the art of listening. I was obviously drawn to it since that is what my job has been for the past thirty-eight years. I ask questions, take notes, try to dig down on what clients really want and need, and, frankly, play the role of a financial psychologist. Then I apply my knowledge of the investment world to match the client’s objectives. Through a lot of trial and error, I’ve learned a few lessons that Ms. Murphy highlights in her article.

    1. Listening takes time, patience, and a sense of caring or empathy. It’s interesting that high schools and colleges offer a variety of courses on speech and persuasion but not many on listening.
    2. The art of listening goes beyond what people say. A good listener will watch for how people say certain things. And they will study the context in which the person is speaking.
    3. Good listeners will ask probing questions that engage the other person and that don’t show judgment or bias. A good question should not begin with “Don’t you think…” Instead, something like this is better, “Tell me about…”
    4. Importantly, a good listener will listen for the quiet, unspoken sounds. Try to understand where the other person is coming from, their fears, their concerns, their past experiences that have shaped their views.
    Over these many years, I’ve learned that the financial markets have their own way of communicating. As a market analyst, I’ve also learned to spend more time listening to the quieter sounds rather than the loud, hubris that too often captures our airways and can distort and redirect the conversation. It’s served me well.

    A good investor, like a good listener, should feel a sense of connection. Something we all need.

    Stay well,

    Jim

    James K. Tonrey, Jr.
    Partner/Chief Executive Officer


  • 06/17/2020

    Dear Clients,

    Over the weekend, I read where a number of advisory firms in our industry applied for and took money from the Paycheck Protection Program (PPP). There seems to be a division between those that took the funds, supposedly for their payrolls and expenses, and those that chose not to. My guess is at some future point, when the program is properly evaluated and scrutinized, there will be pushback on companies that shouldn’t have participated. I think some have already made efforts to repay the program. In the event you read about this it’s important to know that we did not participate and have no intention to. The program was principally established to help those small companies in desperate need overcome hardship in the short-term through no fault of their own.

    Now to the markets. I’d like to elaborate on the concept of momentum in the markets that we discussed in our previous Weekly Update. Short-termism, or speculating, is now more prevalent than ever. Algorithms that determine in a nanosecond what and when to trade coupled with new trading platforms, like Robinhood, that allow speculators (not investors) to buy/sell fractional shares without any fee, and at any time, have given rise to greater speculation and, hence, much more short-term volatility. For the moment, it’s important for long-term investors to ignore the significant volatility in the markets. It’s sometimes hard but it’s here to stay for a while.

    Benjamin Graham, the father of value investing and Warren Buffett’s mentor, once said “In the short run the market is a voting machine but in the long run it is a weighing machine.”
    Let’s continue to concentrate on the long-run. And not just with the financial markets but also in our day-to-day lives. Either way, it always seems to come down to how we place value on something.

    All the best,
    Jim

    James K. Tonrey, Jr.
    Partner/Chief Executive Officer


  • 06/10/2020

    Dear Clients,

    Markets keep moving to the upside despite all that we have going on around us. We’ve written about this phenomenon a few times but it’s important to revisit. Financial markets will swing in one direction or another like a pendulum. Momentum plays a very important role in the short-run, as investors emotional fear of missing out (FOMO) can significantly provide fuel for further, yet at times, unwarranted price action. Portfolio managers of large pension plans and mutual funds, who have been underweight equities due to the pandemic, now begin their catch-up.

    Here are the year-to-date performances, including dividends, of the three major indices through Monday:

    (Dow) -2.27% ( S&P 500) +.94% (Nasdaq) +10.61%

    The S&P 500 index is up around 47% from the March lows. At one point, the index was down over 30%. Certainly, the betting is that we overshot to the downside in March and that the reopening of our economy should provide something like a V shaped recovery. We’ll see. In the short-run, the risk at the moment, after this incredible run, should be to the downside. Or more than likely, at a minimum, a pause. Trees simply don’t grow to the sky.

    The one variable that has spurred this confidence and resultant price momentum, and one that investors should keep front and center, is the coordinated efforts of the Federal Reserve Banks around the world to backstop any market liquidity issues. A tremendous amount of money has found its way, not only to people that need and will use it, but also with speculators into the financial markets. We always talk about unintended consequences, especially when it comes to the Fed. It is something to keep an eye on as we watch further action by our Fed as to when they begin the process of taking away the “punch bowl.” The Fed is well aware of undoing anything too quickly or without properly communicating, well in advance, their intentions. As they say, at least for the time being, don’t fight the Fed is usually prudent advice.

    When dealing with today’s complex financial markets, sometimes it’s just best to…

    “Don’t do something, just stand there.”

    Let us know if you need anything.

    Jim

    James K. Tonrey, Jr.
    Partner/Chief Executive Officer


  • 06/03/2020

    Dear Clients,

    As of this writing, the S&P 500 index is only down around 4% for the year, after experiencing an up 30% last year. All this in light of what is going on in our world at the moment, adding to a wall of worry.

    Something that is often overlooked by the average investor is the effect of compounding. Warren Buffett once said that “Compound interest is such a powerful yet neglected idea, that Albert Einstein famously called it the eighth wonder of the world. He who understands it earns it.….he who doesn’t…pays it.”

    The total return on an investment account is the combination of interest + dividends + capital gains (losses). In other words, income + appreciation. Breaking it down even further, appreciation is a combination of inflation (companies raising prices through normal growth in the economy) and additional growth in a company through new products, mergers and acquisitions, excellent management, etc.. What gets under-appreciated is the magic of compounding over time.

    For example, let’s say a balanced investment account with $1M has an annual yield (interest + dividends) of 3%. At the end of the year the account will have generated $30k in income. Hopefully that will get reinvested. Let’s further assume that the market, and thus the account, was flat that year. No appreciation, no depreciation. Beginning the following year, the account is now worth $1.03M and will have 3% of that amount reinvested, or $30,900. That will in turn get reinvested and away we go. You get the point, compounding portfolio income on portfolio income. Over time that adds tremendous value, possibly even more than the potential capital appreciation component. This doesn’t even take into account that income through dividends can, and usually does, increase year over year. Investors who flee the markets at difficult times will never benefit from this “eighth wonder of the world” calculus.

    This is why it is so important for those of us a number of years away from retirement, and drawing down funds, to stay the course. Counterintuitively, and this should not be lost on this important topic, we actually want markets to correct at times so we can reinvest this income at lower share prices, building even greater value creation down the road.

    Week fourteen of these updates. It seems like longer. Here is hoping we can get back to some semblance of normalcy soon. All of us at Stillwater continue to wish you and your families the best. Once again, let us know if you need anything.

    Jim

    James K. Tonrey, Jr.
    Partner/Chief Executive Officer


  • 05/27/2020

    Dear Clients,

    Financial markets continue to show resiliency in the face of historic unemployment numbers, main street businesses just starting to reopen, public companies suspending future revenue and profit guidance, friction between the U.S. and China, not only on the pandemic, but also on trade and now Hong Kong, and the global uncertainty on the path of the virus.

    Investors are maybe learning more than they bargained for about how equity markets operate and just how untethered they can be, and remain, for extended periods of time. John Maynard Keynes, noted economist, said, “Markets can stay irrational longer than you can stay solvent.” Simply stated, investors can do all the fundamental research they want and come to an educated, logical conclusion that a particular stock or sector of the market is undervalued. But they could be terribly wrong on the timing of when to buy and/or sell. That is why trying to game the markets has always been a difficult challenge, even for our largest institutions.

    The next few months, in particular, will be a tell as to whether we revisit some of the lows in the markets (day after day a lower probability) or they continue to hold their own and chug along. Although there are a number of creditable variables, such as the upcoming election, that will provide fodder. The virus is, and will remain, the most important predictor of future equity market movements. Just how quickly we can get back to some sort of “new normal” is really what will drive this debate. And then how that will take shape.
    Indeed, it is Groundhog Day for most of us. Wash, rinse, and repeat. But here is something to ponder. Ever wonder how miraculous the human body compensates and recalibrates so effectively when we lose something? Studies have shown that a person who lost sight has their other senses, like hearing, become more acute. We adapt. And that is what we are doing now. We’ve lost some of our freedoms, our routines, our ways of life. In doing so, however, we’ve gained a greater sense of an appreciation of the little things in our lives that sometimes, and frequently, we overlook and take for granted. Maybe a silver lining.

    Hope you and your family are well. Let us know if you need anything.

    Jim

    James K. Tonrey, Jr.
    Partner/Chief Executive Officer


  • 05/20/2020

    “When this old world starts to getting me down, and people are just too much for me to face.
    I climb way up to the top of the stairs, and all my cares just drift into space.
    On the roof, it’s peaceful as can be, and there the world below can’t bother me”.

    Up on the Roof
    Written by Gerry Goffin and Carole King
    Recorded in 1962 by the Drifters

    Dear Clients,

    Financial markets are reacting daily to any news on the virus front. This week there was good news that a biopharmaceutical company has had some very positive success in initial trials for their vaccine. They will be moving on to further trials. Markets opened significantly higher. As we have all recently lived through, however, any negative news will just as likely have sellers heading for the exits. Either way, long-term investors need to take any news in stride in the short-term.

    The volatility index (VIX), which measures implied volatility in the futures markets, has declined precipitously over the past few weeks. This is reflecting a more normalized pattern of trading. Usually when this index is high, price volatility spikes, and markets come under considerable pressure. Returning to less volatility is a good sign for the average investor. Markets are now beginning to turn attention to how the country opens back up economically, and, importantly, how the virus reacts.

    It has certainly been a see-saw ride over the past couple months. In March, the S&P 500 index experienced its fastest drop in history of 30% from a record high. Markets, like a pendulum, always seem to overcorrect to the upside as well as the downside. The S&P 500 index has since sprinted back up over 35%. Currently, the index is only down around 8% year-to-date and actually up over 3% over the past twelve months. No one really knows where markets will go in the short-run. Here is a quote from a veteran market pundit that pretty much sums up where traders are at the moment. “What’s clear, though, is that anyone buttressing a positive case by claiming “everyone is bearish” and those calling for deep downside on the notion that “everyone is too bullish” are equally unreliable at the moment.” I’m heading out to my office roof deck now.

    Continue to stay well and centered,

    Jim

    James K. Tonrey, Jr.
    Partner/Chief Executive Officer


  • 05/13/2020

    Dear Clients,

    As most of you know, I’m originally from Boston and worked there for over twenty years before moving our family to Minnesota. During that time, I enjoyed season tickets to the Boston Pops Orchestra. The highlight each year was their Holiday Concert. For a short period, I got to know Grant Llewellyn, who was a conductor at the time. He is now the conductor of the North Carolina Symphony. Anyway…..below is a video I wanted to share with you. It put a smile on my face. I thought maybe the same for you. Sit back, turn it up loud, and enjoy these fabulous musicians. It will only take eight minutes out of your day. You can click to skip the intro. advertising.

    Keep the faith,
    Jim

    James K. Tonrey, Jr.
    Partner/Chief Executive Officer


  • 05/06/2020

    Dear Clients,

    We are on week #9 of our updates. Two months have gone by rather quickly in some ways and yet it seems hard to remember what life was like before our social distancing and stay-at-home directives.

    Much has transpired in the markets over the past few months. Let’s take a look under the hood of the equity markets to see where we’ve been and where we stand at the moment. Here is the S&P 500 index scorecard by month, including the reinvestment of dividends.

    January (.04%) February (8.23%) March (12.35%) April +12.82%

    Year-to-date, through April, the S&P 500 index is down 9.29%. Monday, March 23rd marked the low point when it was down 30% for the year. Speculators who sold around that date will have a very difficult time recapturing these lost gains. Unless we revisit the lows.

    Something to consider. In 2019, the S&P 500 index was up over 31%, quite unexpected. Most market analysts had a number closer to 8% – 10%, considering the bull market had already run for over a decade. Corporate earnings seemed more in line with these estimates. If one stepped back from the current decline and took a more macro, and frankly, more reasonable, approach, they would notice that the S&P 500 index is up over 18% over the past 16 months, since 12/31/18. That’s a pretty healthy return, even in light of the recent volatility and decline.

    Market participants need to realize a few things when it comes to trying to understand the equity markets. First, there is an old saying, markets take the stairs up and the elevator down. And that is why we react so emotionally when times get tough. We get used to a steady climb only to have the rug get pulled out from under us. And usually very quickly. To make matters worse, humans react twice as emotional to a loss than a gain.

    Secondly, there usually is a disconnect between the equity markets and the underlying economy. Markets tend to look 9-12 months into the future and discount projected values to the present. That is why we can experience markets running to the upside when current headlines seem rather negative. There is an anticipation by investors that times will get better.

    The eternal optimist in me asks that you not stress about the markets. Corrections of between 10% – 20% happen in “normal” times. In terms of the markets, we’ll get through this. It will be a bit choppy but as Warren Buffett just said at his annual shareholder meeting………..

    Never bet against America.

    Stay safe.

    Jim

    James K. Tonrey, Jr.
    Partner/Chief Executive Officer


  • 04/29/2020

    Dear Clients,

    Something that has always fascinated me over the many years, working with families and their financial assets, is how near-term events, both positive and negative, can affect our long-term views. Many academic studies have shown that a person’s ability to envision the future is strongly influenced by their past. Simply stated, we seem to rely on our current and past experiences as a predictor of what the future may look like. And we make decisions, big and small, based on that perception.

    This behavior emerges both in good and bad financial markets. People tend to send more money into their accounts, to be invested, when the financial markets are rocking to the upside (buying high) and, conversely, ask to have positions unwound when markets correct (sell lower). It’s human nature. But that doesn’t make it an advisable, pragmatic, long-term investing strategy. By making emotionally driven decisions, an investor will miss out on reinvestment of dividends at lower prices (compounding is a very significant component to future growth of capital), as well as not knowing exactly when to step back up the plate. They remain in the on-deck circle far too long and, invariably, miss out once again.

    Although we are in a very uncertain period in our lives, and fear certainly can rule the day, what we do know is that we will get through this. We don’t know when, or for how long, we will remain in suspended animation. Nevertheless, we should make prudent, thoughtful decisions, financial and otherwise, based on a positive outcome. Assuredly, short-termism, uncertainty, and resultant fears will rear their ugly head to convince us otherwise. Just don’t let them win. Always bet on optimism.

    Stay safe and we’re here to help in any way.

    Jim


  • 04/22/2020

    Dear Clients,

    “When something bad happens, you have three choices. You can either let it define you, let it destroy you, or you can let it strengthen you.” – Dr. Seuss

    One of the most frequently asked questions we get during trying times is…… “how much should I have in cash and equivalent securities to ride out a difficult market so I don’t have to sell equities?”

    Although the answer depends on a number of variables, let’s keep it simple and break it down into two groups; people that are still working and have at least a couple years before they retire and those that are in retirement drawing down their portfolios.

    If you are still working, a general rule of thumb is to keep 9-12 months of expenses in readily available money like cash, CD’s, treasuries, maybe even some high-quality shorter-term bonds. Let’s say monthly expenses are $8k. An individual then should have up to around $96k set aside. For those in retirement, the calculation should be a bit more conservative since they are drawing down their portfolios and not adding to them. A good benchmark is 18-24 months of liquid assets. Using this same example, then around $144k – $192k in safe, available cash and fixed income vehicles should be considered. While riding out a storm it is not advisable to sell assets, like stocks, where prices have declined dramatically.

    One of the hardest things to get our heads around while in the midst of a market correction is to envision a better day. Fear, our reaction to fight or flight due to uncertainty, plays such a large part. Needless to say, we should side with the great investor, Dr. Seuss. To take the high road and to have our difficult times enlighten and strengthen and not destroy or define us.

    Let us know if you need anything.

    Jim

    James K. Tonrey, Jr.
    Partner/Chief Executive Officer


  • 04/15/2020

    Dear Clients,

    Over the past month or so I’ve hesitated to write about the financial markets, generally, due to the nature of the health crisis we face. It’s a balance to focus our energies and thoughts with the communities, families, and individuals most affected by this virus while at the same time add some narrative as to where the markets are currently priced and may be heading. Even though, at best, that’s a tough call when markets are considered “normal.”

    Caution it seems is at every turn. The good news is that our financial markets, though stressed to limits not seen since ‘08, have worked in a somewhat orderly fashion. The equity markets have performed fairly well (from a trading/liquidity perspective) in light of the tremendous volatility experienced. The fixed income markets, on the other hand, have had their moments over the past few weeks as credit seized up in certain riskier areas. The Federal Reserve Bank stepped in quickly, and backstopped with words and actions, these anomalies. Although still volatile, the markets are functioning much better.

    The equity market, as benchmarked by the S&P 500 index, is down around 18% year-to-date. Where we go from here is really anyone’s guess. It is important to remember, and emphasize, that this is a health crisis first and foremost. We can argue that stocks were overvalued prior. Nevertheless, the financial shock experienced was principally due to a virus and the extreme uncertainty it presents. Typically, markets off major corrections like these rebound quickly to retrench about 50% of its lost value. And that is what we are seeing now. Equities were off around 38% from the high and now are trading around half that loss. The remaining loss is where the hard work begins and it can take quite a while to regain. In this particular case, the markets will react to positive news on any treatment and/or, especially, a vaccine. In my opinion that will be the only true, sustainable catalyst that moves the markets higher in the near-term.
    While we wait and make good use of the time we have, it is important that we take care of our mental health as much as our financial health. The markets, outside of our allocation decisions, are out of anyone’s control. And they will come back. It’s our mental health that we can control. Maybe spend more time on repairing and/or strengthening relationships, listening a bit more closely to others with differing opinions, and planning, in some way, to help those around us that will certainly need it in the months ahead. If we do these simple things then all the hardship may have been worth it.

    Keep the faith,

    Jim

    James K. Tonrey, Jr.
    Partner/Chief Executive Officer


  • 04/08/2020

    Dear Clients,

    Our office hours through the month of April are:

    Monday and Wednesday – 8:30 am – 3:00 pm

    Tuesday and Thursday – office closed. Working remotely.

    Friday – 8:30 am – Noon

    We will reevaluate again at the beginning of May. Also, please note that our office (and the Stock Markets) will be completely closed this Friday, April 10.

    As many of you are aware, we modeled our business after two titans in the industry; John Bogle, Vanguard Group founder and Warren Buffett, Berkshire Hathaway, CEO and founder. Here is a link to a recent article that articulates how we view investing at this time as well.

    https://www.marketwatch.com/amp/story/guid/6798179E-69EF-11EA-AFE6-3B7F98D26610

    I thought that I would highlight two hypothetical conversations to further illustrate how fear and long-term investing do not partner very well.

    1) A fifty-five year-old fellow is anticipating retiring at age sixty-two, seven years from now. His retirement portfolio is balanced and is down around 14% this year. He is considering stopping his 401(k) contributions into equities and he’s also thinking he’d like to lower his overall equity exposure from 65% to 35%. He’s concerned about having enough money for retirement. I tell him that now would not be the time to stop monthly 401(k) contributions into equities but actually a more advantageous time to buy since prices are down substantially from just a few months back. Secondly, and I hear this quite often, he says, “But I need to lower my equity exposure since I’ll be retiring in seven years.” I remind him that retirement is only a date. Simply that, a point in time. I then remind him that he needs to plan not just for the date he officially retires at but for all the years while in retirement. His investment time horizon is really around thirty years, not seven. And, he needs the money to grow to support his life style. He also only plans to withdraw 3% of his portfolio at sixty-two. I tell him to stay the course as hard as the short-term is and not make any big decisions during a market correction.

    2) The second conversation is with a young lady. She mentions right away how she has lost $75k this year due to the stock market. She also recently just bought a house for $500k. I ask her what the value of her home is now, if she could sell it. She says probably at least 10% lower or $450k. I then ask her if she feels that she has lost that value. Her response, “of course not because I’ll only lose it if I sell.” Investors react differently with their stock ownership versus other assets. The simple reason is that we can now trade our accounts while sitting at home, on our couches, and in our pajamas. Within a few minutes we can sell everything in sight and, even better, at no trading costs anymore. But at such opportunity cost, since study after study have shown the average retail investor will lose trying to time the market. It’s been said, and bears repeating, that it’s not timing the market, it is time in the market.

    Continue to stay-at-home, social distance, and think long-term. We will get through this together. And the sun will shine ever brighter.

    Jim


  • 04/02/2020

    Dear Client,

    Our company has been operating very well given the circumstances. We each come into the office at various times and are working from home while responding to your needs like we always have.

    On that note, it is important that I mention what some of you may be thinking. Stillwater Investment Management is open for business and financially not under the pressure that a lot of other small businesses face today. We have no debt, bill our clients in arrears so everyday accruing revenue, low fixed costs, and have one of the most solid balance sheets in our industry. As the CEO, I have taken great pride over the years building an incredible practice, the right way, with some of the best people our industry has to offer. The markets would have to go down substantially from here, and stay down for many, many years, before we would have any issues. With all the concerns we have on our plates at the moment, this is not one of them.

    Something to ponder. Here is a statement from Warren Buffett a few years back from an annual Berkshire meeting:

    “Imagine yourself back on March 11, 1942. I’d like you to imagine that at that time you had invested $10,000 to hold a piece of American business and never looked at another stock quote. You’d have $51 million (now) and you wouldn’t have had to do anything. All you had to do was figure that America was going to do well over time, that we would overcome the current difficulties. It’s just remarkable to me that we have operated in this country with the greatest tailwind at our back.”

    We plan to mail your quarterly reports next week and will let you know if anything changes.

    Stay well.
    Jim

    James K. Tonrey, Jr.
    Partner/Chief Executive Officer


  • 03/26/2020

    Dear Client,

    One positive that comes out of our social distancing and stay-at-home is that we get a chance to think a bit more.

    I was reminded recently of Shakespeare’s Hamlet, where the father, Polonius, offers advice to his young son, Laertes, who is embarking on a journey from home for the first time. Among the many sage pieces of advice, Polonius conveys these that seem relevant today while we reevaluate our daily routines and the future.

    Listen to many people. Hear everyone’s opinion. Take the time to listen to everyone’s opinion, their hopes and dreams, their fears. We all have a story to tell. Take the time to hurt for the homeless when it rains outside for that will always be a gentle reminder of how fortunate you are. Always be kind.

    Don’t blurt out what you’re thinking. Don’t be quick to pick a fight, but once you’re in one hold your own. Have the courage of your own convictions. Stay with what you believe even if in the short-term it’s difficult. Never let anyone define you. You define you.

    Above all, be true to yourself. What is important to you? How can you use your considerable and unique skills to make a positive impact in the world?

    And one last very important point my friend Polonius forgot to mention. Always take the time to give back, to your family, your friends, your community, to those who have influenced you. And when you do never ask for anything in return. Do it because it’s right. The positive energy you expend will come back to you and those you love exponentially. It’s an unspoken law of the universe.

    And that’s where I’d like to end. Not about the price action of these unsettling financial markets or what I think about investing in technology stocks versus utilities, but rather about taking the time to give back. Our system of capitalism works like a three-legged stool: governments doing their part, corporations doing their part, and, most importantly, individuals doing their part.

    There will be individuals, families, and small businesses in our local communities that will need our help over the coming months due to no fault of their own. Think about how you can help. Whether by your considerable resources or your time.

    Remember that to have lived a full life, you must give something to someone who will never be able to repay you.

    Stay well.

    Jim

    James K. Tonrey, Jr.
    Partner/Chief Executive Officer


  • 03/19/2020

    Dear Clients,

    We want to try to reach out to you every week with any news or updates we feel are important to pass along.

    Financial markets are obviously reacting to news everyday about the virus and its spread. This past week we experienced more panic selling, which can be interpreted in two ways. Either we are nearing a capitulation, and possibly somewhere around a bottom, or we are not quite there yet. Continue to expect very sharp swings, both to the upside and downside, as we move forward. Trying to time this market is not only difficult but nearly impossible. One day on the sidelines could end up costing an investor 10%, which only adds to more anxiety. To those of you who need funds over the next few months to year-end, we have tried to set aside cash and fixed income to accommodate these anticipated withdrawals. For those of you who don’t need to withdraw any money in the near future, as difficult as it is, try to remain focused on the longer-term. We have every reason to believe markets will begin to function in a more normal pattern.

    As to our office, we plan to be in every day until further notice. As part of our company disaster recovery plan, we are prepared to work remotely and have contingencies in place. We will let you know if/when that happens. You can call our office and leave a message. One of us will promptly call you back. We also will continue to have direct access to our custodians, Charles Schwab and TD Ameritrade.

    Let us know if you need anything at this time. Remain calm and vigilant.

    Jim

    James K. Tonrey, Jr.
    Partner/Chief Executive Officer


  • 03/12/20

    To Our Valued Clients,

    Given the current unprecedented and sharp market swings due to the coronavirus, as well as the precipitous drop in oil prices, we wanted to reach out to you.

    It is possible that, over the near-term, news surrounding the virus will get worse before it starts to get better. Expect financial markets to react accordingly with volatility and large daily price changes. Long-term investors, while certainly concerned, should not panic. If history can be a guide, once we see our way through this crisis, markets have a way of price correcting and snapping back. And sometimes very quickly.

    Our firm is here and prepared to help you through this difficult time. For those of you taking distributions, this is an important example of why we diversify and use fixed income as part of your portfolios. As we get through the next few months, these will be the source of funds so equities do not need to be sold until markets find equilibrium.

    For the past thirty-eight years, I have personally worked helping individuals and their families navigate some pretty difficult times. And every time, together, we came out on the other side just fine. I intend to keep that streak going.

    Let us know if you need anything. And take this time to reflect on what is truly important.

    All the best,
    Jim

    James K. Tonrey, Jr.
    Partner/Chief Executive Officer