In case I haven’t spoken to you already, it is my privilege to introduce myself to you now in the context of our monthly newsletter. A couple of months have already passed since I joined WrapManager, though it feels like I’ve been here much longer (in a good way). My name is Mike O’Connor and I’ve joined the firm as Executive Vice President with responsibilities of overseeing our investment and advisory teams. I was brought in to not only maintain the high level of service and financial advice that you have come to expect from WrapManager but to build on that foundation and improve the experience that you, our valued clients, have with our firm.
Some of my past experience includes work at Harris, Bretall, Sullivan & Smith LLC, one of the premier money management firms in the country which at their peak had over $8 billion in assets. My tenure there overlapped with the burst of the tech bubble back in the early 2000’s, so I know, first hand, the importance of not only diversification but vigilant oversight of manager selection. Most recently, I was with Genworth Financial Wealth Management, formerly a division of General Electric. Genworth is an investment management platform for Independent Registered Investment Advisor (RIA) firms, like WrapManager. While there, I contributed to the growth of our assets from $3 billion to nearly $20 billion today. After more than 6 years of consulting to some of the most successful RIA firms in the country, I decided it was time to take that experience in a new direction. My search extended to some of the biggest investment firms in the world. In the end, I knew that WrapManager was an ideal fit. WrapManager provides an investor experience that is truly unique, with its First Class customer care and access to some of the most experienced money managers in the world, and I was eager to be a part of it. This is a very challenging and exciting time for our business and as such, I am equally enthusiastic to join WrapManager and look forward to working for you, our clients.
But enough about me. This newsletter is about sharing some of our insights and perspectives on current market conditions. And what a market it is.
Sentiment vs. Fundamentals
This past May was the worst May for US stocks since 1962. It’s interesting to look back to 1962 and compare it to today. Back then, US GDP was increasing at a steady pace but the S&P 500 was down nearly 30% due to the uncertainty surrounding the failed Bay of Pigs invasion and the Cuban Missile Crisis. In times like this, stocks can be driven much more by sentiment than fundamentals. I believe that is exactly the type of market we are in today, one which is driven by sentiment over fundamentals.
And why shouldn’t sentiment be negative? Let’s have a look at just some of the headlines over the past month. Sovereign debt issues, Greek default, Greek riots, the SEC’s case against Goldman Sachs, Credit Default Swaps, the rising Dollar, the fate of the Euro, European Central Bank, FX Swap Lines, “fat-finger” trades, high-frequency trading, North Korea, Israel, Hungary, Iran, the financial reform bill, Spanish banks, Germany’s ban on short-selling, volcanoes in Iceland, market circuit breakers, and oil spills.
As you read about all these events, you may begin to ask yourself:
- If Greece defaults on their debt, what effect will that have on the U.S. recovery?
- Are Spain, Portugal and Italy next? What about Hungary?
- Is Goldman Sachs really as bad as the SEC would have us believe or a victim of an over zealous regulatory agency?
- What really caused the sudden 1000 point drop in the market and the equally sudden 600 point recovery?
- Is the situation in Israel going to deteriorate into war?
If I were to only read those headlines I’d be scared to leave the house much less invest in the stock market. But I did leave the house today and I am currently invested in the stock market. Why?
Wait, It’s Not as Bad as it Seems?
In our view, the increased uncertainty and skepticism that surrounds today’s headlines is the reflection of a global economy in flux. Sentiment is overall negative but the fundamentals of our economy are improving.
- US GDP was up 3 % in the first quarter 2010. In fact, the Federal Reserve recently revised its 2010 and 2011 GDP outlook upwards.
- The Institute for Supply Management’s Manufacturing Index (ISM) reported growth in 16 of the 18 manufacturing industries, saw economic activity in the manufacturing sector expand for the tenth consecutive month, and showed the overall economy growing for the 13th consecutive month.
- The Conference Board Consumer Confidence Index increased to 63.3 in May from 57.7 in April.
- The U.S. Commerce Department reports Retail and Food Sales were up 0.4% (+/-0.5%) from March, and 8.8% (+/-0.5%) above April 2009. In addition, consumer spending increased 3.6% in the first quarter.
- Purchases of new homes rose 15% in April to a two-year high. Pending home sales, a forward looking indicator, increased for the third consecutive month in April rising 6%
- Over 75% of companies in the S&P500 are beating analyst’s earnings estimates, and corporate earnings have increased 85% over last year’s figures.
This combination of negative sentiment and positive fundamentals has certainly contributed to the increased volatility we’ve seen in the market. What’s more, it appears that volatility is here to stay. As our economy recovers, slowly but surely, there will continue to be a mix of good and not so good economic data. Always keep in mind that markets will move day to day based on the headline that’s in the largest font or the talking head that is yelling the loudest (Jim Cramer, I’m looking at you). But over any economic cycle, there are really four main variables that drive markets higher or lower; interest rates, inflation, GDP and corporate earnings. With both interest rates and inflation low at the same time that GDP and earnings are rising, we believe the road to our economic recovery is ahead. Though the volatility is going to make it a bumpy ride, our view is that the well allocated, disciplined investor will be rewarded in the end.
Final Thoughts
We have always believed in the power of diversity, an investing approach that emphasizes proper asset allocation. One of the best ways to help achieve this is by having a plan in place so you know where you are, where you want to go, and how you’re going to get there. Developing fully customized asset allocations based on your unique goals, objectives, and financial situation is area in which we excel, and one that I’m especially proud of. This process can be extremely valuable and is free of charge with no obligation.
Once again, I would like to thank you for the opportunity to speak with you today. This is a truly exciting opportunity for me. In the weeks and months ahead, I hope to speak with all of you to properly introduce myself. As always, if there is anything that we can do for you please don’t hesitate to contact us. Thank you for your business and the trust that you have placed in WrapManager.
The attached report and information have been prepared or produced by WrapManager, Inc. from sources and data believed to be reliable. Information provided in this report is for educational and illustrative purposes only and should not be construed as individualized investment advice, as an offer to sell, or the solicitation of an offer to buy any security in any states where such an offer or solicitation would be prohibited by regulations. WrapManager, Inc. is not a tax advisory firm. We recommend you contact your tax attorney or CPA prior to utilizing any of the tax-related strategies mentioned or discussed. Returns and experiences will vary for each client. Each client’s risk tolerance and investment objectives are unique to them. Past performance may not be indicative of future results. No assumption that future performance of any specific investment or product made reference to directly by WrapManager, Inc., on its Web site and in marketing materials, will be profitable or equal the corresponding indicated performance level(s). If performance numbers are generated gross of fees, a client’s return will be reduced by investment advisory fees and any other expenses. Opinions expressed are those of WrapManager, Inc. and are subject to change without notice and are not necessarily those of Prospera Financial Services, Inc., its directors, parent company or its affiliates. Securities offered through Prospera Financial Services and cleared through First Clearing, LLC. Prospera Financial Services - Member FINRA/SIPC.