04/02/2023

Dear Clients,

There are certainly quite a few moving parts to the financial markets. Banking concerns, Federal Reserve Bank (Fed) interest rate hikes, inflationary pressures, and geo-political events. Just to name a few.

If an investor were to zero in on something that seems to have its tentacles in most of these issues, my guess would be liquidity and how it affects our economy. Liquidity is a double-edged sword. Too much, we get unchecked risk. Too little, results in a potential recession. When the Fed raises interest rates, and rather quickly, it serves the purpose of slowing down growth in the economy. When rates go higher, banks loan less, individuals and companies finance less, people pay more of their discretionary income to interest, and, the all-important consumer confidence index heads south. Essentially, the Fed is pulling liquidity out of the system to moderate it. It is important to emphasize that the world’s economic progress is always a direct function of liquidity. The more money in the system, the more potential for growth. The more risk taken, the more people are employed, the more consumers spend. Additionally, it should be noted, that the Fed has a parallel plan to decrease their balance sheet by selling their fixed income securities. Again, another tool to take dollars out of play.

The recent banking (mini) crisis can be linked to liquidity as well. The few banks that have come under recent pressure did not risk manage their balance sheets very well, and that is an understatement. These banks overbought long dated bonds that have come under severe pricing pressure as a direct result of the path of interest rates. They got greedy and chased higher yields at exactly the wrong time. Simply stated, when rates rise the value of bonds decline. This repricing must be marked to market on banks’ balance sheets. Even though the bonds are high quality and not in any worry of default, their prices must reflect current market value. Given the rapid rise in rates, a bond could be written down by as much as 30%-40%. Banks have capital and liquidity requirements that must be met. Layer in our brave new world of social media, and we have a run on a bank that cannot meet its short-term obligations.

Even international events, like the war in Ukraine, have a relationship to liquidity. The US and its allies have taken extraordinary steps to damage Russia’s economy by placing numerous sanctions on it to extract liquidity out of their system and strangle any growth.

Where do we go from here? The good news is that the Fed should be nearing the end of their tightening cycle, the banking concerns are limited to those institutions that did not mind their manners, and that our economy, although slowing, seems to be holding up quite well. Oh yeah, and the S&P 500 index was up 7.5% in the first quarter.

Enjoy spring. It only comes but once a year.

All the best,

Jim

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

03/06/2023

Dear Clients,

Financial markets, while still a bit volatile, are regaining some early momentum. The S&P 500 index is up around 6% year-to-date. International indices are likewise in the green by 6-7%. As so often happens, the sector laggards from last year are now leading the charge this year. Consumer discretion, information technology, and communication services are all positive by about 14%. The utility sector, a winner last year in a very difficult market, is down 6%. Interestingly, energy is flat this year. It had such an impressive run over the past twelve months. Most analysts expected some retrenchment.

For those who study the markets, most helpful to track is the correlation between interest rates and equity pricing. When rates rise, equities are negatively affected. Bonds become more viable as rates rise. And companies face a higher cost of capital which, in turn, affects valuations. When rates moderate or decline, the stock market gains an advantage. Over time, this negative correlation has mostly held true to form. In today’s complex financial environment, however, it is even more pronounced. The Fed is fully committed to tackling inflation. When monthly data suggests the economy is still growing and companies continue to have pricing power, Fed officials will talk very hawkish in anticipation of raising rates. When the economic data comes in a bit softer than expected, the financial markets will breathe a sigh of relief. Simply stated, it appears, at least for the time being, that we are in a trading range of 3,800 to 4,200 for the S&P 500 index. Stock prices will bounce back and forth due to the hard to predict data. Only inflationary pressures subsiding or increasing substantially and sustainably will break the current trend; either on the upside or downside. We need stabilization in interest rates in order for equities to move forward.

The markets are consolidating. Actually, this is a good sign. In the near term, we must be patient. We should focus on what we can control, our budgets, our health, and our attitudes. Mahatma Gandhi said it best, “To lose patience is to lose the battle.”

Gentle reminder: Make sure to get your retirement contributions in as soon as possible. Do not wait until the last minute. Also, you should be able to access your tax documents on-line. If you have any questions or concerns, let us know.

All the best,
Jim

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

01/27/2023

Dear Clients,

The February update is a few days early due to being out of the office most of next week.

Here in Minnesota this is the time of year where drivers navigate uncertain road conditions and, dare I say, the dreaded potholes. Different weather conditions create havoc on our roads. This year seems especially difficult since temperatures have vacillated between very cold, warmer, then cold again.

As it is with our financial markets.

We began the year off strong with the S&P 500 index higher by almost 5% only to back off a bit and then, once again, regain some momentum. Warm, cold, and warm again. Navigating this market in the short-term will be like avoiding potholes. The financial weather is uncertain and investors can expect unexpected bumps along the way until more clarity around the Fed and interest rates, corporate earnings, and inflation begin to resolve themselves.

Interesting to point out that the more cyclical sectors of the economy, consumer discretion, technology, and communication services are leading the charge in the first few weeks. And that the more defensive sectors, utilities, health care, and consumer staples are lagging, albeit barely in the red. We’ll see if this strategy holds. It is typical at the start of each year that portfolio managers rebalance and the losers from the previous year gain some traction in a new year. Fixed income, as measured by an aggregate intermediate bond index, is likewise up over 3% so far. International equites are posting outsized positive returns as well.

The constructive news is that our portfolios are starting to gain some traction as both equity and fixed income are getting bids. Last year was just so unusual with both asset classes down double digits. Our expectation is for a bottoming out in the first quarter and a reset for a better second half.

John Steinbeck, noted American writer and Nobel Prize winner once said, “A journey is a person in itself; no two are alike. And all plans, safeguards, policing, and coercion are fruitless. We find that after years of struggle that we do not take a trip; a trip takes us.”

Let’s continue to keep both hands on the wheel, with eyes looking straight ahead, avoiding the potholes as best we can.

As always, let us know if you need anything.

All the best,

Jim

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

01/03/2023

Dear Clients,

Great quarter. Lousy year.

For most investors, the year could not end quick enough. All the major equity indices were negative. The benchmark S&P 500 index was off around 18%. The international index declined by 16%. The fixed income market, as measured by the U.S. intermediate bond index, was even off by 13%. Increasing interest rates, along with their rapid and unexpected pace, added to the downward pressure. There were not a lot of places to hide except for cash. But even cash did not start paying a decent return until midway through the year. And with inflation still at lofty levels, the real return on cash is still negative.

In the history of the stock market, it is a bit unusual to have back-to-back negative years. We do not know whether this year will add to the pain. What we do know is that we are closer to the end of the Fed raising rates, that the war in Ukraine is not new news and cooler heads may prevail this year, that China has finally loosened its policy on Covid, and that our economy, while not firing on all cylinders, is holding its own. Finally, monetary policy can have a six-to-nine-month lag before it begins to make a difference. We will be bumping up against this time frame in the first quarter of this year.

Where do we go from here? It is hard to be in this business for over 40 years without having optimism. And, frankly, why not? Markets go up over time. Plain and simple.

With that said, something to keep an eye on is what economists call the money supply. Simply stated, this is the total amount of money in circulation in our economy. It includes cash, coins, and all bank accounts. This is important because if the supply of money increases at a much faster rate than the economy’s capacity to produce its own goods and services, inflation will rear its ugly head. Sound familiar? With all the increased government funding over the past 3-4 years due to the uncertainty of Covid, tax law changes, and some other structural issues, our money supply has outpaced our ability to meet demand. More money in the system means more investment in the stock and bond markets. More money in the markets means share prices are bid up. Fundamental valuation analysis is placed on the back burner. Alas, momentum investing takes hold. FOMO. The fear of missing out on markets going higher, even if for the wrong reason.

With the Federal Reserve Bank now clearly taking away the punchbowl, by reducing liquidity (money supply) in the system, repricing of hard assets is underway. It is never pleasant to see long-term assets down from their highs. But ironically, it is very healthy and necessary in order to build a foundation for investor confidence. There will be a next leg up. There always is. And investors who are patient and allocated properly will be the beneficiaries.

One of our national treasures, Helen Keller, once said, “Keep your face to the sunshine and you cannot see the shadows.”

Wishing you and your family peace and good health.

All the best,
Jim

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

12/06/2022

Dear Clients,

Let’s begin with a few end-of-year housekeeping items. Sprinkle in some financial market discussion. And end with something uplifting. Only appropriate for this time of year.

We are bumping up against year-end. Given the limited number of trading days and the increased volume of requests, our custodians, TD Ameritrade and Charles Schwab, have communicated to us to get any and all paperwork into them by Thursday, December 15th. These requests can range from establishing new accounts to funding accounts to gifting to transferring securities. They will try their best to accommodate special situations after that date but cannot guarantee execution by year-end. Please let us know if you have any questions or concerns.

The market pendulum continues to swing. Through the month of November, the S&P 500 index is down 13.10% for the year. This seems like a victory given that in October the index hit a year low of 24%. However, since September 30th, the S&P 500 index is in positive territory by 14.14%. There is so much news flow. All the volatility due to elections, inflation, interest rates, geo-political crises, and unpredictable corporate earnings. It has been a bit too much for markets to price and digest.

There is always good news, though, for those who look for it. Consider this. There has not been a single decline in our history, a bear market no matter how severe, that has not eventually led to a bull market. I would argue that we are in the latter innings of this downturn. While nobody really knows when the tide will turn, we do know at some point it will come back to shore. Warren Buffett, in 2008 during the major financial crisis, said this, “Let me be clear on one point: I cannot predict the short-term movements of the stock market. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So, if you wait for the robins, spring will be over.”

This past year has not been easy for both the stock and bond markets. Frankly, it has not been easy on all of us, given the reopening after a couple years of stress and uncertainty. Here is a little something to consider. I once read that “life is the hot chocolate and jobs and money are the cups. And the cup does not define, nor change the quality of your life. The happiest people do not have the best of everything. They just seem to make the best of everything they have. So, live simply. Love generously. Care deeply. Always speak kindly. And, oh yeah, enjoy your hot chocolate!”

All the best for a great 2023.

Jim

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

11/02/2022

Dear Clients,

Wayne Gretzky, the great hockey player, once said, “I skate to where the puck is going to be, not where it has been.” He could have been an investment advisor.

The financial markets are all over the place this year. The price-weighted Dow Jones Industrial Average was impressively higher by 14% in the month of October. Which happens to be the best month going all the way back to 1976. Year-to-date, the benchmark S&P 500 index is now down 18%. That from a low of 24% just a few weeks prior.

It is important to remember that markets look to the future, out six to nine months, and discount corporate earnings back to the present. Investors evaluate how much they want to pay for those earnings, in today’s dollars, while trying to understand the associated risks. It is as much an art as a science. Today, maybe more of an art.

What we have found helpful is observing the big picture. By taking a macro view, we can look for important trends. For the average investor, those trends are their road map. The aggressive buying of equities in October may signal that markets think we could be nearing the end of the Fed raising rates, that inflation has peaked and declining, that the war in Ukraine will resolve itself sooner, or, simply, that a good bit of the bad news has been priced into equity valuations. Expect, however, that the elections next week, still undecided with some very close races, will add to the underlying stress on Wall Street. Regardless of political preference, financial markets like certainty. Expect volatility, either up or down, at the outcomes for the House and Senate. The good news is that the elections will be over. And markets have a short memory.

This year has been especially difficult for balanced investors. However, if history is our guide, better times are ahead. Looking back to 1928, coming out of a severe downturn in the stock market, investors, on average, enjoyed a return rally of 31% in the first three months, according to Bespoke Investment Group. Another positive data point, from Ned Davis Research, is that the equity market, on average over the past seventy plus years, returned 16.7% after midterms.

The markets have quite a bit to digest over the coming months. The optimist is hopeful that we will have better news on both the economic and geo-political front. In the meantime, disciplined, patient investors continue to watch their budgets, reinvest interest and dividends, maintain proper asset allocation, and skate to where the puck is going.

Enjoy a great Thanksgiving with family and friends.

Best regards,
Jim

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

10/04/2022

Dear Clients,

To our Florida friends, we are thinking about you during this difficult time.

Let’s get to the markets with some analysis and random thoughts.

Needless to say, there is a lot going on in the financial markets. And the one thing markets (people) don’t like is uncertainty. We have quite a bit at the moment. For decades, the average portfolio, with a mixture of stocks and bonds, fared relatively well in most downturns. We are now experiencing an exception to this general rule. A balanced portfolio of stocks and bonds historically tamps down volatility. Portfolio returns, although varied at times, leave investors with less dispersion. They have a way of offsetting each other.

In the current environment, where liquidity is being drained from the financial system, at the same time interest rates are climbing, both of these asset classes are experiencing negative returns. We need to go back almost 100 years to have another period similar. Thus, a balanced portfolio is under more pressure than usual. The good news is that this has a way of bottoming and reversing course. And sometimes, dramatically. Take a look at the monthly returns on the S&P 500 index for the year. Timing when to buy and sell isn’t for the faint of heart. Investors with time on their side simply don’t have to play that game.

January (5.17%) February (2.99%) March +3.71% April (8.72%) May +.18% June (8.25%) July +9.22% August (4.08%) September (9.21%)

There are just so many variables to watch to determine the direction of the markets. The two that are of particular interest to us at the moment are the strength of the U.S. dollar versus currencies of other developed nations and the shape of the yield curve. Both impact inflation which the Fed is targeting by raising rates. Rising interest rates in the U.S. can strengthen the dollar. With a strong U.S. dollar, companies in the U.S. have a more difficult time selling their products and services. They become more expensive. And with mega-cap companies, that do significant business overseas, it hurts their bottom line. Earnings and profit margins are impacted which, in turn, negatively effects asset prices. Nike, for example, makes over half their revenue outside the U.S.

The other measure we watch closely is the delta, or change, in the yield curve. Interest rates have a large impact on markets, for good reason. Investors will look to invest in bonds if interest rates become more competitive. More money flowing to fixed income can mean less to equities. But there are risks. If rates continue to move up, then the value of a bond portfolio will decline. Additionally, if the rate of inflation is higher than the bond yield, an investor is losing purchasing power. Over time, equities have provided a positive return over and above the long-run inflation rate. Thus, investors who stay the course maintain purchasing power and continue to grow their portfolio.

Monetary policy is used to manage the overall economy. But it is also used to alter human psychology – to change behavior. There will be a recession on the horizon. There always is at some point. Remember, markets have a way of discounting months ahead. It seems we are in that process now. It’s uncomfortable but that’s how markets work. Changing monetary policy from accommodative to restrictive is never pleasant. Long-term investors who stay disciplined, maybe work around the edges of portfolios, without making big decisions, have done fine.

“Patience is a form of wisdom. It demonstrates that we understand and accept the fact that sometimes things must unfold in their own time.” Jon Kabat-Zinn

Have a great fall. Enjoy this beautiful time of year.

Jim

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

08/31/2022

Dear Clients,

This update is coming to you a week early. With Labor Day next week, I will be taking a few days off.

A gentle reminder to RSVP soon if you plan on coming to our Client Appreciation Event on Thursday, September 15th. Planning the event this year will require a bit more time. We hope you attend. There will be great food (catered by the Lake Elmo Inn), fun entertainment, an open bar, and a cool gift. We don’t have any set program. Simply stop by for an hour or stay the entire time. We just want to say thank you for your continued trust and valued relationship over the many years.

Now the markets.

Federal Reserve Board Chairman Jerome Powell sent a definitive message to the financial markets last Friday at the annual Jackson Hole conference. He said, “While higher interest rates, slower growth and softer market conditions will bring down inflation, they will also bring some pain to households and businesses.” The equity markets expected tough talk but certainly didn’t like the tone. The result was a one-day decline of 3.4% in the S&P 500 benchmark index. This move after rallying almost 18% from the lows experienced on June, 17th when the index was off 24% year-to-date. The worst first half of a year since 1970. The S&P 500 index is currently in negative territory this year by 14%.

Let’s discuss a few important data points in the months ahead. First, Powell and the Fed will be looking very closely at inflation measures. One of the most closely watched will be the government’s monthly update on the labor markets. It is estimated that up to 70% of inflation is caused by rising costs of labor, specifically compensation and related benefits to employees. It’s a safe bet that the Fed will be expecting that the unemployment numbers pick up. The delicate dance is that these particular numbers slowly increase so not to spark a recession. Yes, it is a bit counterintuitive to hope for job losses, while at the same time wanting to maintain full employment in the economy. Investors are crossing their fingers for that soft landing which is why the markets rebounded substantially from their June lows. Friday’s price action signaled that maybe investors got a little ahead of themselves.

The second, and related, data point the Fed will observe will be the monthly inflation numbers, most notably the Consumer Price Index (CPI). This is the measure of the average change over time in the prices paid by consumers for a basket of goods and services. The desired annual rate set by the Fed is around 2%. Presently, the CPI hovers at or around 8.5%. The good news is that the trend is down due to lower gas prices and other goods. Make no mistake, though, Powell will stay with a very hawkish stance until this number comes down significantly. Hence, expect more interest rate increases in upcoming months to slow employment and the overall economy.

Our national treasure, Mark Twain, once said that history doesn’t repeat itself, but it often rhymes. He could very well have said this about the financial markets. The study of the price action of financial assets over the past century demonstrates the juxtaposition of human emotion and financial valuation; fear and greed in combination with arithmetic. Not surprising that the markets fluctuate as they do. Not surprising, as well, that they advantage long-term investors. We anticipate a bumpy few months but look forward to coming out on the other side by year-end.

Once again, we hope to see you at our Client Appreciation Event. Regardless, it’s a beautiful time of year. Have a great fall.

Jim

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

08/03/2022

Dear Clients,

First of all, mark your calendars for our Annual Client Appreciation Open House on Thursday, September 15th – invitations will be mailed next week! After a 2 year hiatus, we are excited to host this event again. We hope you will join us. Please note, our mailing system sends the invitation addressed to a client with an account. We certainly encourage and welcome spouses, significant others, or a friend. We do ask that you RSVP to this event as soon as you know your plans as our vendors need a bit of extra time to get supplies in order this year.

Now on to the markets. The third quarter started off on a positive note, with the S&P 500 index experiencing a jump of over 9% in the month of July. Currently, the benchmark index is now down only 12.5% for the year. At one point, we were in the red by over 20%. Fixed income has also rallied as longer-term rates moderated then declined. Our July statements look a lot better than previous months. Corporate earnings continue to show strength in light of analysts’ downward revisions. The consumer is still spending and the economy, although slowing, remains healthy. We’ll see how the balance of the year plays out. There is considerable debate as to whether we will go into a recession, and whether it will be a mild or deep one. No one knows the answer to that question. But what we do know is that algorithms plus uncertainty equals volatility. Expect more bumps along the way, at least through the remainder of this year.

Behavioral science helps us to understand economic decisions that occur at the intersection of human emotions and money. It shines a light on how we make mistakes. A study at Princeton University in the 1970’s is a case in point. A couple of professors divided their students into two groups. The first group was told to walk across campus to attend a lecture that began shortly. The second group was told the same thing but with a wrinkle. They were told that they were late and had to hurry. Unknown to the students, and planted by the professors, on their way to the lecture was a person who was in dire need of help. He was coughing, groaning, and not moving. Only 10% of the students who were in the “late” group actually stopped to provide help to the person in distress. Whereas, nearly two-thirds of the group who were “on-time” stopped to provide comfort.

This experiment illustrates how our behavior doesn’t necessarily reflect anything about us as individuals. Rather, it can be situational. We tend to base decision-making on what is experienced in that moment and put on the back-burner what we know is more important. Surely, we can surmise that those in the “late” group are as caring as those in the “on-time” group. They simply reacted to their situation as presented. They were worried about being late. Unfortunately, it overrode their better judgement.

Fast forward to our current financial markets and we experience similar reactions. Corrections of 15%-20% occur every so often. Especially after a large run-up in share prices. It is financially healthy to recalibrate pricing that has gone too far in one direction. Markets always digest it and then go up over time. Investors that stay committed to their long-term goals usually achieve them. Nevertheless, we stress over the everyday news about a looming recession, interest rate increases, inflation, the pandemic, and global issues. Stress takes a toll on our mental capacity to deal in the moment and eventually propels us toward knee-jerk automatic fight or flight responses.

The lesson is that long-term investors shouldn’t let short-term situations cloud sound investing principles. We shouldn’t allow short-term situations to define us.

Have a great remainder of the summer. Stay well.

Jim

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

07/06/2022

Dear Clients,

We mailed second quarter reports yesterday. You should receive them in a few days.

This past quarter was difficult, to say the least. The S&P 500 index declined around 16% for the quarter. It is now down close to 20% for the year. International markets fell 12% for the quarter. They are down 18% for the year. Fixed income came under pressure as well due to the Federal Reserve Bank (Fed) raising rates and more than expected. The only asset class that rose in the first half of the year was commodities. Inflation is on everyone’s mind. Investors should brace for more volatility ahead. Program trading thrives in these periods. Prolonged algorithmic trading is here to stay.

Let’s take a step back. And a deep breath. Market corrections of 20% are not rare. Actually, they happen more than investors realize. We tend to forget because, relatively speaking, they are short lived and the bounce back is usually rather quick. Not always. But most of the time within 6-12 months the equity markets find their footing and rebound. Which is why trying to time when to sell and when to re-enter the market is a fool’s game. A long-term investor has to make two pretty perfect decisions to have a better outcome than just holding their nose, reinvesting their interest and dividends at lower asset prices, and staying the course. For the past 40 years, I’ve heard people say…yeah but it’s different this time. Nope. The only difference is when markets gain momentum again. They’ve always gone up over time.

When will this downturn end? Our best guess is when inflation starts to stabilize and demonstrates a downward trend. It’s important to remember that the Fed has two mandates, full employment and price stability. Full employment….check. Price stability….hopefully soon. Once they are comfortable with inflation, they will ease up on rate increases. Their balancing act is to get prices under control while not slowing the economy too much. We expect inflation to moderate over the balance of the year. The question is…when will investors feel comfortable buying equities? That remains to be seen. But, if history is our guide, not long after.

I remember having a conversation with a mentor many years ago. We got talking about wealth and how people view having money differently. We discussed economics, the financial markets, all sorts of data, the emotions fear and greed and how they play such a big part in accumulating wealth. Over the years, I’ve forgotten most of our discussion about the numbers. What I do recall is this. She said, having money doesn’t deepen relationships, it doesn’t help you love anymore, it doesn’t give you more empathy, it doesn’t make you laugh harder, it doesn’t help you listen to others better, it doesn’t inspire you to dance more, it doesn’t make your hugs stronger. Those are choices that belong only to us. Never the markets.

Funny what we remember.

Have a great summer.

Jim

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

06/02/2022

Dear Clients,

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of light, it was the season of darkness, it was the spring of hope, it was the winter of despair.”

Charles Dickens wrote those prescient words one hundred and sixty-three years ago in his celebrated book, The Tale of Two Cities. To quote another great author, Mark Twain, “History doesn’t repeat itself, but it often rhymes.”

Let’s not sugar coat where we stand today. The financial markets are unstable, inflation is much higher and for longer than economists forecasted, a war is raging in Eastern Europe, our political system is in a stalemate, energy prices are through the roof, interest rates are on the rise, and uncertainty, which rules the roost in determining the direction of markets, is lurking around every corner.

But there are many positive things happening all around us every day. Jobs are plentiful, incomes are rising, albeit not as fast as some would hope, the economy still seems resilient, households have saved more money in the past couple years than in a long time, balance sheets are in relatively good shape, the pandemic, although still lurking, is in a better place than a year ago, and the equity markets, while hiccupping this year, are up almost 7% just in the past week and have basically doubled in the past three years. I could go on.

From our perch, the equity markets will react to news on inflation above all else. Inflation numbers dictate what the Federal Reserve Bank will do with interest rates, which will ultimately drive the direction of asset prices. If inflation comes meaningfully down over the next few months, markets could, at a minimum, tread water and hopefully recover a bit. At that point, we can catch our collective breath and begin the rebuilding process.

Something to think about as we enter the second half of the year. In behavioral economics, studies have shown that the pain of losing something is possibly as much as twice as powerful an emotion as the pleasure gained from winning. After forty years tracking the markets, and dealing with investor emotions, I can personally attest that this is, in fact, very true. And I can also attest to the fact that those of us long-term investors who understand this concept have always done fine while staying the course. For example, think of those that bailed on the markets a few weeks back only to have missed a 7% gain this past week. Remember, its time in the market, not timing the market.

Victor Frankl, an Austrian physician and Holocaust survivor said something that resonated with me many years ago. I have his quote taped to my file cabinet in my office. He said, “Everything can be taken from a person but one thing: the last of the human freedoms – to choose one’s attitude in any given set of circumstances – to choose one’s own way.” This from someone who saw the horrors of war with a front row seat and set out afterwards to find a profession and dedicate himself to helping others. When markets look grim, as they sometimes do, I think about this quote. It provides comfort and perspective. Surely, if Dr. Frankl could look forward to a brighter day, we certainly can.

All the best,
Jim

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

05/04/2022

Dear Clients,

There’s an old Wall Street adage, “the markets take the stairs up and the elevator down.”

As we have said in past communications, the financial markets are a bit like a pendulum. They swing from side to side. Once momentum gains traction in a certain direction, it takes time to settle and then move in the other direction. Markets overshoot to the upside as well as the downside. We are now experiencing negative momentum and, at least in the near-term, have to adjust our expectations accordingly. It is important to remember that the S&P 500 index basically doubled over the past three years, overshooting to the upside. With all the current headlines of rate increases, inflation, war, pandemic, and political uncertainty at home and abroad, financial markets will reprice risk. That is what is going on at the moment.

The Fed meets today to decide on how much to increase interest rates. Given that inflation is at a forty-year high, they will probably raise rates by fifty basis points (.50%) and attach a hawkish statement to go along with it. For the most part, the markets have already priced this in. Any deviation one way or the other could move the markets.

Inflation is a funny phenomenon. There is no doubt that flooding the economy with dollars over the past number of years, coupled with unanticipated geo-political risks escalating, the effects of a two-year pandemic on global growth, and the resultant supply chain issues, all have contributed to the increase in prices. But we shouldn’t underestimate the significance that inflation expectations have on the markets. Going back to the pendulum analogy, the markets are driven, in part (sometimes a large part), by something called self-fulfilling prophecy. Wikipedia defines this as “the psychological phenomenon of someone “predicting” or expecting something, and this “prediction” coming true simply because the person believes or anticipates it will.” The underlying financial fundamentals don’t register as much. Rather pure emotion, fear or greed depending on which way the pendulum is moving, takes hold. In other words, the stock market pendulum can swing violently in one direction. Seems this is where we are at the moment. Algorithmic trading on negative headlines, short-term speculators trying to game the market, the fear that inflation is worse than it maybe is and here to stay longer, all contribute to the downward emotional spiral that ensues from that assessment. Another way to think about it is what Earl Nightingale, noted radio personality and author once said……we become what we think about all day long.

It is equally important not to downplay a market correction. The month of April was off by almost 9% in the equity markets. Fixed income has not fared much better. And it looks like the US 10-year treasury could breach the psychological 3% soon. But it is imperative to keep long-term investing in context. It has never been wise to get too euphoric when markets go up and too panicked when they decline. We’ll get through this period like we always do.

On a lighter note, treat yourself to Joni Mitchell’s rendition of Both Sides Now if you have one of the digital music services. “Something’s lost but something’s gained in living every day.”

Stay well. Spring almost here in MN.

Jim

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

04/06/2022

Dear Clients,

This email will be a little longer than usual. In addition to communicating market news, we’d like to revisit a very important topic….internet security concerns.

Periodically, we will send these reminders about protecting your internet privacy. Fraudulent attempts to compromise your information are increasing and getting more sophisticated. Here are some gentle reminders.

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 matched what you expect to see.
5. REMEMBER: Never input personally identifiable information (social security number, account numbers, date of birth) unless you have initiated the request AND confirmed the source. We (Stillwater Investment Management) would never ask you to confirm personal information via email. If we required that information we would call you and send you a secure link request. Also, remember to never send us personally identifiable information via email. Call us first to request a secure link to use for sending.
6. When in doubt…pick up the phone and call us.
Now to the financial markets.

This is the first quarter in a long time, that I can remember, where the fixed income benchmarks are worse than equities due to rising interest rates. Remember that bonds are inversely related to rates. As rates go up, the underlying value of a bond will decline. And visa-versa. A bond will increase in value in a declining interest rate environment. For those with individual bonds, the fluctuation really doesn’t have an impact, except on paper, if held to maturity.

The yield curve is a line that plots interest rates with equal credit quality but having different maturity dates. A yield curve graph will have interest rates represented on the vertical or y axis and years on the horizontal or x axis. Most of the time the plot shows an upward sloping line. Makes sense since investors would demand more interest on their investment due to the longer term, or duration (more risk associated with a longer period). An inversion occurs when the shorter end of the curve is higher (rates are higher) than years out. Economists have a hard time agreeing whether an inversion signals an upcoming recession and an even harder time agreeing with what data points to use. For example, use the 2-year treasury note to 10-year treasury note, or 3-month bill to 10-year note?

I realize this is a bit wonky, but your quarterly portfolio values have been directly impacted by this rise in interest rates, and the speed at which it has occurred. We are in the camp that the slight inversion, which is happening now, is not signaling a recession. At least not yet. We like to use the 3-month treasury bill to the 10-year treasury note relationship and, as of this writing, there is a gap of almost 2%. The 3-month is at .51% and the 10-year at 2.41%.

A recession (where economic activity slows for a couple quarters) is inevitable in a normal business cycle. It just matters when it occurs. We’re not convinced it’s in the near-term. There is still a lot of dust in the wind at this time. We need to see more of it settle before making a call on a recession. But we remain vigilant.

All the best,

Jim

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

03/02/2022

Dear Clients,

Where to begin.

One of the hardest parts of our job is trying to communicate an understanding of financial markets during periods of natural and man-made disasters. It is not lost on us the human suffering and toll that always follows. Nevertheless, we move on with heavy hearts keeping those directly affected in our thoughts.

There are essentially two events that will be driving market volatility in the near-term; the war in Ukraine and the Fed’s decision to remove liquidity from our financial system through tapering bond buying and raising interest rates. And they are not mutually exclusive. The invasion of a sovereign country will have the Fed reevaluating their near-term monetary outlook.

Let’s look at the war first. Jeff Sommer, New York Times journalist, said it best in a recent article. “Global markets usually weaken as wars approach, strengthen long before wars end and treat human calamity with breathtaking indifference.” He goes on to say that history has shown that within one year after most stock market crises, the S&P 500 index has risen. A year after the bombing of Pearl Harbor the market was up 15% and again gained 35% after the invasion of Iraq. Nothing is certain with uncertainty but history does rhyme. We expect the markets to react daily to headlines about the disposition of the war in Ukraine. We lean toward a more favorable stock market outcome later this year when, hopefully, cooler heads have prevailed.

The Fed’s actions will also make already nervous markets even more nervous. A key inflation measure that the Fed watches, core personal consumption, rose 5.2% over the past year. The highest level since April, 1983. Inflationary pressures are front and center. The war in Ukraine could send already high energy prices even higher, adding more strain to the system. Fed analysts are now thinking they will increase the interest rate only .25% in March and not .50%. The Fed is caught between a rock and a hard place. They need to slow the economy to deal with inflation without putting the brakes on. Yet, they need to be wary of the spillover effect of a war and the resultant disruption in energy and food prices both at home and abroad.

Markets eventually move in relation to corporate earnings. The war and the Fed will no doubt have an impact on direction over the balance of this year. Investors need to take a step back, take a deep breath, and not let the events of the day determine their long-term investment outcome. Over the many years of dealing with volatility, I’ve learned countless things. One sticks out. It’s never a good idea to make emotional decisions during times of stress. As my mother used to say when facing uncertainty…this too shall pass.

Stay well. Spring around the corner.

Jim

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

02/02/2022

Dear Clients,

We are in the midst of the 2021 tax filing season and you should expect to receive your 1099 documents from the custodians by approximately the 3rd week of February. Please also keep in mind the tax filing deadline of April 18th this year. If you plan on contributing to retirement accounts for 2021, please make sure we receive your contribution by April 14th (payable to the custodian NOT to us). We encourage you not to wait until the last minute as mailing times have been slow and we do not want to see anyone miss the deadline. Best to mail as soon as you are able to do so. Any questions related to these items can be directed to Eric or Amy.

Markets were on notice this past month due to a number of factors. The least of which is the Federal Reserve Bank’s (Fed) slowing their bond buying along with their strong signal that they will begin the sensitive process of increasing interest rates beginning in March to offset an increase in inflation, which currently sits above their target. Sprinkle in tension in Eastern Europe, continued global supply chain constraints, the resurgence of the coronavirus, consumer sentiment measures hitting a low not seen since November of 2011, and equity markets responded accordingly.

The S&P 500 benchmark index is down nearly 5% year-to-date. Only one of the 11 S&P 500 index sectors was in the green this past month. The energy sector was up 18%, continuing its momentum from Q4. All other sectors were in the red, led by consumer discretion down 12%. With liquidity coming out of the system, albeit slowly, most asset classes in the near-term will feel some give back. For the month of January, international equities were down around 4%, small capitalization companies were underwater by about 12%, and intermediate corporate bonds fell 2-3%. The very aggressive small technology companies that are yet to have credible earnings, took the brunt of the blows, some off by 20-30%. Re-pricing assets is always volatile until some agreed upon equilibrium is found. It doesn’t feel as if we are there yet, but January certainly put a dent in it. Remember that you don’t lose money until you realize it by selling. Long-term investors have to stay patient and ride out these corrections. And, historically, they come 3-4 times a year. We’ve just had three remarkable, and in some cases unexpected, years of positive returns with lower than average volatility. These downtrends are normal, healthy, and help to consolidate in order to move higher in the future.

Expect the first quarter to be up and down. All indications are that the headwinds will remain in place for the time being. There will be some very good days like Monday, up over 400 points, but expect downward pressure as well. These types of crosscurrents don’t leave us as neatly as they arrived. All eyes will certainly be on the Fed. They have a dual mandate to try to keep the economy at full employment and inflation targeted at around 2%. Full employment……check. Inflation……last reading was at 6-7%. So their work this year will be to bring it down. The quicker inflation recedes, the better for stability in the equity markets.

It is important to always remember that financial markets are built on fundamentals but that human emotions, fear and greed, make them swing like a pendulum. For over forty years, I’ve watched how they move from oversold to overbought and back again. It is as close to a guarantee that we get from markets; at the intersection of human emotion and money is inevitably volatility. And, dare I say, not always rational.

Stay well,
Jim

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

01/05/2022

Dear Clients,

First update of the new year. We are mailing your year-end reports this week. Expect them soon. Another positive year for the markets in light of some very unpredictable headwinds. We always seem to climb that wall of worry. Yet, over time, markets go higher.

A gentle reminder that the end of a year is simply that. It is a point in time. Nevertheless, it is a good occasion for long-term investors to take inventory of their financial condition. As we all know and have experienced, the financial markets will throw us curve balls from time to time. How about this one…..the S&P 500 benchmark index enjoyed 70 new highs in 2021 out of 252 trading days. Twenty-eight percent of the time the index achieved a new high. Don’t expect that in 2022.

The consensus from the experts is on the side of a more subdued return this year. Most analysts we follow are landing between up 5% to down 5%. But the consensus from these folks is usually wrong. Not one of them predicted that the S&P 500 index would be up almost 30% last year and would double over the past three years. These prognosticators are interesting but extremely unreliable.

What will matter most this coming year will be three things. First, the economy will have to continue to expand. It doesn’t need to grow double digits but it does need to keep on a positive trajectory. Second, all eyes will be on the Federal Reserve Bank and its decision to wind down stimulus and begin the sensitive process of raising interest rates. The financial markets have calculated tapering ending in the spring with two to three rate hikes by year-end. Anything different, either dovish or bullish, could unleash the bears. Inflation expectations will play a pivotal role. Third, the direction the pandemic takes will obviously play a part in how we live our lives. This will affect consumer spending, global supply chains, political unease, and the all-important bottom-line earnings of corporations. Good luck trying to game all of these at the same time. They are not mutually exclusive. They are very interdependent.

One metric to watch in order to take the temperature of the equity markets are stock buybacks of companies. Last year, companies bought back nearly $850B of their stock instead of increasing their dividends and/or capital expenditures, investing in research and development, or mergers and acquisitions. Buying back stock lowers outstanding shares. On the surface that seems like it would increase shareholder value, but when the onion is peeled back, share count doesn’t always go down due to awarding executives and employees more stock options. The result is usually a wash. It is interesting during this particular period that CEO’s and their Boards of Directors decided this was the best use of capital. Time will tell but the cynic will say that it is a defensive move to keep share price high. Shareholders would like to see more of this money invested in growing the business not rewarding employees.

All the best to you and your families for a joyful and healthy new year.

Jim

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

12/01/2021

Dear Clients,

One month left to this very interesting year. If I told you at the beginning of 2021 that the Dow Jones Industrial Average (DJIA) would be up by 16% and the S&P 500 index ahead by 25% with a month to go, my guess is that it would have been met with some resistance.

Interestingly, there is quite a dispersion of returns between these two major indices. This is not always the case. In order to fully understand this difference, we need to look at both their composition as well as how they are measured. The DJIA has only thirty stocks and is calculated/weighted by share price. Therefore, a stock like United Health Care with a price of $444/share will carry significantly more weight than Merck trading at $74/share. The S&P 500 index, on the other hand, has five hundred stocks and is calculated/weighted by market capitalization, the number of a company’s outstanding shares multiplied by the share price. The year-to-date total return of these indices tells us all we need to know about how investors have viewed the markets. To date, the energy sector leads the pack gaining around 50%, while consumer staples is the laggard up by 8%. All eleven sectors of the S&P 500 index are in double digit positive territory except for the staples sector. Defensive areas of the market, like staples and utilities, have not garnered investors’ attention over the past twelve months. Growth companies, due to the reopening trade and continued low interest rates, have received the attention and as such favored the S&P 500 index.

Much of recent market returns and fluctuations are not grounded in underlying fundamentals. At the core of investing, those of us in the advisory business still consider valuations very important. But, at the end of the day, it would be foolish not to consider technical analysis more closely along with trading momentum. Long-term investors shouldn’t attach as much weight to these trends but, nevertheless, they are here to stay. Trading volumes are up, more people are trading, social media can move equities like never before, and interest rates are so low that there is nowhere else to invest to keep pace with inflation. Simply stated, investors should expect continued volatility. But remember, as Benjamin Graham, noted value investor once opined, “in the short run, the market is a voting machine but in the long run, it is a weighing machine.” Fundamental analysis and valuations do eventually matter. Mean reversion, after all, is a mathematical law of the universe.

I’d like to leave you with this thought: consider a study from Bank of America titled, “For Stocks, Time Really is Money.” Their research confirmed that from the period 1930 through March 8, 2021, the S&P 500 index returned 17,715%, cumulatively. What is most enlightening is the following; they found that nearly all those gains were concentrated in only a handful of days. And that those particular days occurred randomly. If they excluded just the ten best days for each decade, nearly all these gains were erased, which left the cumulative total return over this period of ninety years at a paltry 28%. Since most of you within earshot of this update are investing for decades, pretty powerful motivation to stay the course especially during times of uncertainty.

Next update will be in the new year. All of us at Stillwater wish you and your families all the best over the holidays and continued health in 2022.

Jim

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

11/03/2021

Dear Clients,

A tale of two markets. The month of September, notably was the year’s worst month, declining by almost 5%. October then rebounded (and some) booking the best month of the year, up nearly 7%. Good luck to those trying to time the market. For those who played their hand wrong, instead of holding and being up 2% over the sixty days, the downside could be a loss of 12% if sold at the bottom and stayed on the sidelines. Ouch.

Earnings have come in very strong and above analysts’ expectations. Through Friday, 82% of those companies reporting, have fared better than the Wall Street worriers anticipated. Some of the large technology companies, which were hardest hit in September, came roaring back. Microsoft, for example, rallied up over 17%.

Inflationary pressures due to rising oil and commodity prices, supply chain snags, as well as employers having to pay more to their workers (no need to look any further than the recent John Deere negotiation), are still front and center. The debate continues as to whether these increases are temporary or here to stay. Can both scenarios possibly be true at the same time, here to stay, albeit a bit longer than expected, but still considered transitory? The next six months should provide more detail to evaluate this trend better. Regardless, markets will react and adjust to this important data. The Fed meeting this month and their pending decision to begin tapering monthly bond buying will no doubt ruffle the markets feathers as well.

The S&P 500 index is up over 20% year-to-date through October. Interest rates have leveled off after increasing after Labor Day. The 10-year US treasury sits around 1.55% as of this writing. Historically, though, still at all-time lows. Liquidity continues to provide markets with the financial nutrition to grind higher. The last few months of the year traditionally bring good economic news and markets can rally into the close. We’ll see.

On another note, I recently read an article about a study conducted by Fidelity Investments that concluded, once again because there have been others, that women investors are more successful than men over the longer term. It cited two specific reasons. First, women tend to trade less often and are, generally speaking, less affected by the day-to-day headlines. Second, they tend to be less certain and, therefore, a bit more cautious than men. This could be perceived as a negative by some but, for those of us in the business, humility and caution are very important traits. The proof is in the pudding as the study suggested that over the past ten years, women outperformed men by almost a half percentage point annually. Doesn’t seem like much but fast forward over a few decades and guess who can buy the bigger beach house at retirement. The take away from this study is not so much gender based but more a lesson in that those of us who focus on the longer-term, not the day-to-day headlines that drives short termism, seem to fair much better.

Next update will be in December. In the meantime, let us know if you need anything. And have a wonderful Thanksgiving.

All the best,
Jim

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

10/06/2021

Dear Clients,

The third quarter is now in the books. We mailed quarterly reports Monday. You should receive them shortly.

The month of September caught complacent, short-term investors on the wrong side of their trades. With markets up 21% for the year through August, and considering all the noise around Covid, inflation, and the Federal Reserve Bank (Fed), among a host of other headlines, frankly it shouldn’t have caught anyone by surprise. Financial markets are built to swing like a pendulum from overbought to oversold. The past month gave us a gentle reminder that trees don’t grow to the sky.

Speculators get rattled for any number of reasons. Investors, those of us who believe in the long-term, certainly notice short-term fluctuations but remain committed to a longer time horizon. Having said that, here are four of the many reasons the markets this fall are climbing a wall of worry.

1. The Fed has come out and said two things recently that spooked the markets. The first is that they are looking into tapering their monthly bond buying program soon. Meaning that there will be less liquidity in the markets. That could affect asset prices. The second is that they continue to see inflation as transitory but here for possibly a longer period of time.
2. The 10-year US treasury note began the quarter at 1.46% and ended September 30th at 1.52%. This doesn’t seem like a big deal, but what goes unnoticed are the swings during the quarter. For example, in early August, it dipped to 1.17% before rebounding. This rate of change over a short time frame spooks investors. Think of it a bit like Abbott and Costello’s skit, Who’s on First. Remember, markets really dislike uncertainty.
3. Last year at this time companies, and the general economy, were beginning to open back up. Consumers, after nine long months, started spending in order to get back to some form of normalcy, knowing that a vaccine was just around the corner. The top and bottom-line revenue and net income comparables for this year are simply more difficult. A lot of the good news is already baked in to stock prices.
4. The final quarter of the year has institutions rebalancing their portfolios as well as tax selling. Seasonality always creates more volatility.
The overall disposition of these issues will determine the near-term path of the markets. From our perch, all are important, but none more than interest rates. With every tick up in the 10-year US treasury note, our country, with $26T of debt on the books, will pay more in interest to lenders, thus crowding out other programs that are needed and necessary to move forward and compete globally. It’s a complicated tug-of-war with significant consequences.

Fall colors are here. It’s a beautiful time of year. Hope you get out and enjoy it.

All the best,

Jim

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

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.

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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.
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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