• 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