The Meydenbauer Blog

Values Investing


By Tama Borriello, CFP, Senior Vice President - Investment Officer

In today’s climate of a global health crisis, social justice concerns and overall ambiguity of the future, many of us have been forced to ask, “What can I do to support the values I care about?”   From our perspective at The Meydenbauer Group, we’ve spent the last fifteen years developing a robust and thoughtful approach to contributing to positive change in the world through investing. 

Our team actively manages a socially aware portfolio using a blend of actively managed institutional share mutual funds along with ETF’s (Exchange Traded Funds).  The guiding principles of the portfolio are an intention to bring about positive change at a corporate level through impact investing as well as honor traditional socially responsible filters through the use of index funds. This is done through the Private Investment Management (PIM) program.  PIM is a discretionary program where our Senior PIM Portfolio Manager’s Paul Capeloto, Manging Director – Investment Officer, Tama Borriello, Senior Vice President – Investment Officer and Sean McGowan, Senior Vice President – Investment Officer, are the managers of your assets.

This portfolio uses a three pronged approach.  They are as follows:


  1. Socially-responsible investing (SRI), a portfolio construction process that attempts to avoid investments in certain stocks or industries through negative screening according to defined ethical guidelines.
  2. .Impact investing, which involves investing in projects or companies with the express goal of effecting mission related social or environmental change.
  3. Environmental, social and governance (ESG) investing, which involves integrating ESG factors into fundamental investment analysis to the extent that they are material to investment performance.
    As part of the social and governmental focus on promoting changes in publicly traded companies, the managers we work with have sought to address diversity and racial inequality issues through education, advocacy and accountability.  We are proud of the continued focus on these subjects and will be hosting a virtual call with some of our SRI teams to review details of past success stories as well as what the focus will be going forward to elicit and retain a record of true change.  The call will be held on Wednesday, September 16th at noon.  If you have an interest please contact any of our team to be included in this event.

     
    The PIM program is not designed for excessively traded or inactive accounts, and may not be suitable for all investors. Please carefully review the Wells Fargo Advisors advisory disclosure document for a full description of our services. The minimum account size for this program is $50,000.

     
    0820-03752

Forbes honors Paul Capeloto, Managing Director, Investment Officer
and Tama Borriello, Senior Vice President, Investment Officer


By Ben Pawlak, Vice President, Investments


This year has been a rollercoaster of events.  The pandemic has forced us here to work in a much different capacity than usual, but we are all thankful to be healthy and with our families during this time. It has (mostly) been a blessing being at home with my 2 year old son.

Amidst the uncertain times we’ve entered into, I have some great news to share about our team, but before I dive into that I want to say that it is an honor to work with everyone on our team and that each person deserves to be individually recognized as they do an incredible job for our clients.  Working with each and every person in our group is a pleasure, and I’m very proud to serve our clients alongside them as a team.  It is a lot of work to do things the right way in this business and it starts with our team leadership.  Paul Capeloto and Tama Borriello have been exceptional at their jobs for a long time and are the two biggest influences on my own career.  I count myself very lucky to work with them every day.

Recently, Forbes has recognized both advisors for being excellent in their field.  Earlier this year, in January Paul was listed as a Forbes Best in State Wealth Advisor for Washington for 2020.  Working closely with Paul (we share a wall), I have been able to learn how to work with clients.  How important it is to continue expanding your knowledge each day.  I can catch Paul reading his research material every morning without fail. I know Paul will be on the phone with clients each and every day taking calls and giving informed and caring advice.  Most of all, I know Paul will be honest with his partners, team and clients.  Despite all of his success, he has remained humble and hard working.  This is a well-deserved honor for one of the best in the business.

Not to be outdone, Tama was recognized by Forbes as one of the Top Women Wealth Advisors in America in 2020.  As many of our clients know, Tama is an exceptional advisor and is wonderful to work with.  She has also taught me so much about the business and is a great leader for our team.  She works extremely hard to make sure our clients get the best advice possible.  I can honestly say from working with Tama every day, that she deeply cares about her clients and she is one of the rare cases where exceptional talent meets hard work and compassion.  She’s a great role model and mentor, and we are very lucky to have her as a partner in business.

I could go on for a very long time on why Paul and Tama are so deserving, but at the risk of gushing and embarrassing them further, I will simply say, well done!

 

To learn more about Forbes Best in State for Paul Capeloto, Managing Director, please visit:

https://www.forbes.com/best-in-state-wealth-advisors/#481d0dda291d 

 

For more information on Forbes Top Women Wealth Advisors for Tama Borriello, Senior Vice President, please visit:

https://www.forbes.com/top-women-advisors/#8fced9951f44 

 

Both the Forbes Best in State Wealth Advisors 2020 and Top Women Wealth Advisors 2020 ranking algorithm is based on industry experience, interviews, compliance records, assets under management, revenue and other criteria by SHOOK Research, LLC, which does not receive compensation from the advisors or their firms in exchanges for placement on a ranking.  Investment performance is not a criterion.

 

0520-03708

 

2020 Second Quarter Newsletter


To write it has been an “unusual” six months in the investing world does not do the phrase justice.  To have a total stock and credit market melt-down in the first quarter followed by an equally stunning melt up in the second quarter…. that has not happened in almost one hundred years.  With exuberance running amok, at one point the S&P 500 was within 4% of its February all-time high and finished the quarter within 8.5% of its high.  Not bad considering the S&P 500 was down 37% on March 23rd.

Why the big comeback?  Since market lows, investors have been focusing positively on a potential vaccine for COVID 19, a reopening of the economy and actions taken by the Federal Reserve (Fed) which were announced late on the 23rd.  In contrast, investors have been ignoring surging COVID 19 cases.

Of the positives, once again the Fed is primarily responsible for the market comeback.

In late March, the corporate bond market stopped working as fears of an economic depression sparked panic selling with few buyers to be found. Unlike the last time this occurred in 2009, The Fed quickly stepped in. The Fed pumped over $3 trillion into the financial system through banks and adding a new strategy of directly buying both high quality and junk bonds of corporations.  In essence, the Fed became a buyer of all credit and these actions calmed the credit markets and allowed them to function as designed.  

This has permitted companies with investment grade and high yield ratings to raise $840 and $180 billion respectively through June 30 (https://www.wsj.com/articles/fed-backstop-fueled-corporate-bond-surge-11593515309, 6/30/2020), which is more than all of last year.  Hopefully these funds will be enough to carry over cash strapped companies until the economy normalizes.

Historically, stocks follow the credit markets.  Hence, once the Fed got involved, it was in hindsight a “green light” to purchase stocks. 

And the stimulus may not be done, as there may be a major infrastructure program passed by Congress this summer.  Unlike the Fed which works with monetary policy, this would be direct fiscal stimulus for jobs.  This package looks like it would be one trillion dollars or more. 

What about the surge in COVID 19 cases?  Not an issue for the markets as investors believe the Fed will be there to keep the financial markets rosy.

So, a great comeback for all markets in the second quarter.

What are the long term ramifications of all the Fed’s actions?  Since 2000, there have been three major financial disruptions in the last twenty years and in each case, the role of the Fed to bring about financial order has significantly increased.  With the latest moves, the Fed is now ingrained in the orderly functioning of every aspect of the credit and indirectly, the equity markets. 

The Fed never pulled back from the two earlier disruptions and the odds are it won’t from this one either.  Some of the ramifications of no pullback are:

Significantly higher permanent debt levels that for the first time since World War Two will be over 100% of gross domestic product.  Looking at other countries that have crossed this threshold (with Japan leading the way at over 200% of GDP), future growth is constrained because of debt service cost on this massive amount of debt.  Put another way, money that could go into the economy for growth initiatives now goes for interest payments.  This is not a big problem now but if interest rates were to ever increase, yikes!
 

The Fed controlling the markets.  Stepping back, if the Fed did not intervene in all three cases, stocks are probably a lot lower and interest rates a lot higher.  So, how does the Fed ever pullback without the markets reacting negatively?  

All this points to the Fed actively staying involved in the credit markets and keeping interest rates near zero as long possible.  With the ten and thirty year Treasury obligations yielding .65 of 1% and 1.4% respectively as of June 30th, low risk investors seeking income are going to have to make some tough choices.  Buying risk assets such as stocks and real estate may be the solution with many sleepless nights thrown in.

As we move into the third quarter, we still believe the Fed runs the show.  Investors believe earnings will recover in 2021, so our opinion is all is good for now.

What might the markets be missing?  Elections are four months away and a Congressional sweep by Democrats or even a Biden presidency in our opinion are not currently factored into the stock market.  More on this in our next missive.  

Paul A. Capeloto, Managing Director – Investments
The Meydenbauer Wealth Management Group
of Wells Fargo Advisors

Dividends are not guaranteed and are subject to change or elimination. •Stocks are subject to market risk which means their value may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Investments in equity securities are generally more volatile than other types of securities. •There are special risks associated with an investment in real estate, including the possible illiquidity of the underlying properties, credit risk, interest rate fluctuations and the impact of varied economic conditions. Wells Fargo Advisors did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results. Additional information is available upon request.

0720-00926


May Market Update


By Sean McGowan


The Meydenbauer Group partners each collaborate and corroborate in researching the current economic environment, different investment markets and (most recently) pandemic progress. Each of those noted areas have cause and effect on each other. Those can be highly correlated moves or inversely correlated. For example, as economic conditions strengthen – so should the stock market. Inversely, as the Coronavirus declines the economic health should increase.

The three aforementioned “legs” of this current situation (stock market, economy & virus) are all pointing in different directions. Currently the stock market is going up, the economy is declining and the virus has seemed to go flat. For example, these are recent headlines…

·         Record unemployment

·         Corporate bankruptcies mounting

·         Bond defaults rising

·         Oil prices tumbling and energy sector crumbling

·         Consumer spending slowing

Yet stocks, as measured by the S&P 500 stock index, have recaptured a large portion of its earlier decline.

To what do we attribute this equity surge in the face of negative news?  The only plausible answer is the Federal Reserve. The Fed has stepped up in an unprecedented way to make sure markets continued to normally function. Rates have been cut to historic lows and the coordinated response with the White House was on spot. This created a sense that risk of a major calamity in the US economy would be circumvented and we could focus on the recovery instead dwelling on the current situation. Investors threw valuations to the wind and chased stocks higher.

As of writing this, the Standard & Poor’s 500 stock index is within 12% of its all-time high. Considering no one really know what the economy will look like in three months, much less three years, the markets are pricing in a significant economic recovery – called a “V” shaped recovery (economy straight down and straight back up). We are concerned you may get a “W” shaped recovery (numerous ups and downs) or even and “L” shaped recovery (flat line for some time). Either of these unexpected scenarios could trip up markets.

There is an old adage in our industry: “Don’t fight the Fed”. While we agree that has historically been true, this downturn is so significant that we believe the Fed cannot single handedly prop up markets or the economy. We recommend caution at current levels.



Wells Fargo Advisors did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results. Additional information is available upon request.

0520-03250


2020 First Quarter Newsletter


COVID-19.

Not much else to write about other than the Coronavirus.  Just five weeks ago we were celebrating record highs in stock markets around the globe and - boom - , we go into the fastest bear market (defined as a 20% drop in stocks) in history.

All bear markets seem to be created differently and this one was no exception.  What started as a virus that was within Chinese borders became a full blown global health and financial crisis within a matter of four weeks.

We could spend a lot of time explaining what has happened but prefer to look at the progression of a bear market and what needs to happen to get out of it.

History indicates a three phase bottoming process to markets.  They are:

Phase One: The Breakdown

Up until the end of February, the markets were in uptrends that looked at negative developments through a glass-half-full lens.  The first signs of the COVID-19 were thought as a non-event.  In time, the magnitude of the issue changes the glass-half full approach to half empty and when the severity becomes too big to ignore, markets negatively react quickly and violently.  This tends to be the shortest of the three phases but the damage can be severe.

Phase Two: The Consolidation

Once selling exhausts itself, markets tend to jump sharply off the lows and retrace a good portion of the price decline.  This phase presents the biggest test of emotional fortitude as sharp rallies try to entice investors back into markets only to be dashed by quick disappointments as markets can reach for new lows from time to time.  Within phase two a trading range is usually established (we can argue S&P 500 Index range between 2240 and 2800) This is often the longest of the three phases as investors come to realize things are going to be different in the future.  However, once the underlying issue begins to resolve itself, you get...

Phase Three: The Bullish Breakout

Phase three is kicked off by breaking out of the upper end of the trading range established in phase two.  By this time, the solution to the problem is coming into focus and economic growth begins to pick up.  Any pullbacks in this phase tend to be short and shallow, frustrating those waiting for one more retest of the lows as a chance to buy equities.

Where are we now? We think markets are in the early stage of phase two.

We believe the following has to occur before markets breakout of phase two:

Continued unlimited backing of the credit markets from the Federal Reserve and U.S. Treasury to keep them working in and orderly manner.  About ten days ago, the amount of bonds for sale overwhelmed all buyers, causing most credit markets to seize up.  Fortunately, the Federal Reserve quickly recognized the situation and responded with appropriate actions.
 

Continuous stimulus programs from Congress.  Two trillion dollars passed Congress last week so that is a great step.  The only question is will it be big enough?  Two trillion dollars should buy thirty to forty five days before another round of stimulus would be needed.  The economy and markets are expecting the lockdowns to ease by early May.  Should this not occur, then markets may have to readjust and more stimulus will be needed.
 

Something positive on the virus itself, either a peaking of cases or the announcement of a viable vaccine. 


One final point.  At March 31st, The Standard and Poor’s 500 stock index is yielding 2.25%.  The ten year Treasury Note is yielding .66 of 1%.  This is the widest spread in the history of these two indexes, historically indicating stocks are a better relative value to bonds.  In the near future, if investors want income, they may decide to favor stocks with higher potential dividends than bonds as earning one percent or less in bonds may not produce enough income. 

Dividends are subject to change or elimination and are not guaranteed. Wells Fargo Advisors did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results. Additional information is available upon request.


Paul A. Capeloto, Managing Director – Investments
The Meydenbauer Wealth Management Group
of Wells Fargo Advisors

0320-04948

 

The Meydenbauer Wealth Management Group continues to invest in women

Tama Borriello, CFP®, Senior Vice President and Paul Capeloto, Managing Director

Recently, one of the largest investment banks in the world announced that they would not take any company public that had an executive board that did not meet their requirements for gender diversity.  (Bloomberg, 2020) This was a landmark proclamation in the world of business.  Gender diversity is a theme that is part of socially aware investing.  Eighteen years ago, our team had the foresight to create a socially aware investment platform.  Since that time we have also taken a close look at studies illustrating the performance advantages of companies and boards of directors that have gender diverse leadership. 

Not only is gender diversity an important issue for many retail investors, but there is also a strong business case.  For example, Credit Suisse recently released a study that found that companies with higher percentages of women in senior management outperformed companies with lower percentages over a five year period in terms of share price and higher return on equity (ROE).  (PAX, 2019) Morgan Stanley also reported that companies with greater gender diversity delivered higher ROE and lower volatility than their lower diversity peers. (PAX, 2019)  There are many other studies that have pointed to similar conclusions.

To help clients understand the current landscape of socially aware investing, we are launching a luncheon series that supports our team’s socially aware investment philosophy.  To learn more about Socially Aware Investing, please reach out to one of our advisors about our luncheon series, or simply read about it here. 

Sources: Bloomberg, 2020: https://www.bloomberg.com/news/articles/2020-01-24/goldman-rule-adds-to-death-knell-of-the-all-white-male-board

PAX, 2020: https://impaxam.com/assets/pdfs/thought-leadership/investment-case-for-gender-equality.pdf?pwm=3351  

0320-01941

2019 Fourth Quarter Newsletter


2019 will go down as one of those rare years where almost everything went up in value.  All the major asset classes of stocks, bonds and real estate provided positive returns for the year.  As noted in last quarter’s missive, investor’s continue to ignore the “noise” and focus on market valuations, the Federal Reserve (Fed), the election and trade issues.  The Standard and Poor’s 500 index returned 31.5% and the MS EAFE index returned 22%. (Wells Fargo Capital Markets, 2020)

A year ago, stocks had a horrific fourth quarter as the Fed indicated they were going to hike interest rates two or three times in 2019.  Realizing the economy was slowing and rate hikes would slow it further, they changed their tune in the last week of 2018, indicating they would lower rates instead of increasing them in 2019.  This current phase of the bull market started in that week and it has been pretty much straight up as there was not a 10% correction in 2019.

And what a positive market it has been. This bull market started on March 9, 2009 and has been the second longest on record spanning about 3,920 days and has the second best return of about 366%.  (Investopedia, 2020) Yet, because of the lingering effects of 2008 – 2009 it has been the most unloved bull market in history as so many investors were fearful of what may happen.

In the investment world, there is a very old phrase that seems to always rings true:  “never fight the Fed”.  When the Fed lowers rates, this historically stimulates the economy and earnings, when the Fed raises rates, it slows the economy and lowers earnings.  Stocks historically follow suit and respond well to lower rates and not-so-well to rising rates.  That helped in 2019.

Corporate earnings in 2019 have been good but have not nearly risen at the same pace of the S&P 500.  Therefore, a lot of this year’s returns have come from the expansion of the price-to-earnings ratio (P/E).  This ratio was about 15.6 times earnings to start the year and now is at 18.6 times earnings of $174 per share earnings. (The Seven’s Report, 2020)

Multiple expansion happens quite a bit so that alone is not a concern.  But, the higher the number, the higher the risk so there is less margin for error in 2020. 

What may happen in 2020 you ask? 

With the economy on firm footing, the Fed has indicated it will not further lower rates in the foreseeable future.  This action removes a tailwind enjoyed in 2019 and we consider that a stock market negative.  But, with the economy picking up steam, the Fed also indicated they would be happy to let inflation increase for quite a while so the threat of rising rates was also put on the back burner.  Net, net, the Fed is now neutral on monetary policy.

We would be surprised to see the multiple go above 19 times earnings.  If that is the case, then stock returns and earnings growth may match off more closely in 2020.  For example, if earnings increase 3%, then stocks may increase 3% to stay at 18.6 times earnings.  We think this scenario is far more likely this year.

Regarding trade, a lot of good news is now priced in with the U.S. pulling back on tariffs and China buying more commodities. Not much more good news to be had in our opinion.

Politically, we will not even guess what may happen but historically stocks markets are positive in an election year.

In summary, with the economy doing well, we do not believe a recession will occur in 2020; recessions are a bull market stopper.  Therefore, while we expect returns to be muted this year and believe you will have a 10% decline in markets sometime in 2020, we do not see the big whopper decline in sight and therefore would hold current allocation. 

Paul A. Capeloto, Managing Director – Investments
The Meydenbauer Wealth Management Group
of Wells Fargo Advisors

0120-00960

Wells Fargo Advisors did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results.  Additional information is available upon request.

2019 Third Quarter Newsletter


As we do before every missive is published, we sit down as a Group and talk about issues that could influence markets.  Usually the list is less than ten items but this quarter’s list went on for two pages.

For example, our list includes:

Trade war is not getting resolved (historically bad for stocks).
Will the trade war get resolved (should be really good for stocks).
Interest rates briefly inverted during the quarter, raising fears of a recession (historically bad for stocks).
Will there be a recession and if so, when (historically bad for stocks in about a year after it begins).
Escalation of activities in the Middle East (anticipated to be bad for stocks).
Politics, impeachment, elections (unknown).
manufacturing sector on a monthly basis through surveys of hundreds of companies.  Their report is widely followed because it is an early indicator of what the economy is doing in real time.
Stock market valuations appear high (historically bad for stocks).
Overnight credit markets for interbank borrowing are not functioning well, forcing the Federal Reserve to intervene to provide cash to banks (no impact yet for stocks).
Will the Federal Reserve start another “quantitative easing” program (historically good for stocks) to put more money in the financial system?
Will interest rates decline (historically good for stocks).

We could go on and on but what is not being recognized by most investors is the stock market has not gone down with all these issues right in front of their eyes.  In fact, it is less than one percent from its all-time high?  How could this be?

We think the answer is pretty simple: most of our list is noise to investors.  What the markets are focusing on is what they always have: valuation and interest rates. 

The S&P 500 is expected to earn around $178 per share in 2020 (Seven’s Report, 2019).  The S&P 500 ended the third quarter at 2,977; this is 16.7 (2,977 / $178) times 2020 earnings.  This multiple is slightly above a historical earnings multiple of about 15.5 times earnings.

We believe the key to this multiple is the validity of $178 per share earnings for 2020.  This is where the trade war may come in to play.  Should it persist, there is a high probability $178 per share is too high.  If resolved favorably, the U. S. economy could see a significant boost if tariffs decline or go away.  This should increase earnings and the $178 mentioned above could be too low.

If not resolved within the next few months, increased costs should become an issue for the U.S. consumer, perhaps lowering spending and causing the economy to meaningfully slow.  An earnings decline and a market pullback would likely ensue.

For example, the Institute for Supply Management (ISM) supplies an economic indicator that measures growth or contraction of the U.S.
Last week, its monthly measurement of the economy showed the largest contraction of industrial manufacturing since 2007-2009, raising recession fears.  The decline is widely blamed on uncertainty around tariffs. (Trading Economics, 2019)

For now though, investors still believe the $178 figure will be met, supporting the current U.S. stock market valuation keeping in mind this is a forward looking estimation for an index and is not guaranteed.  Indices are unmanaged and you cannot invest directly in an index.

Regarding interest rates, we always look at the ten year Treasury Note, or what we call the lowest risk rate of return.  Put another way, it is the rate of return that you can earn with the lowest risk.  Money follows rates, the lower the rate a T-Note offers, the more money that may flow to other investments and vice versa if rates are increasing.

Currently, the ten year T-Note rate is near an all-time low of 1.60%.  The S&P 500 index dividend yield is 1.96% (Standard and Poor’s, 2019).  Rarely is it higher than the ten year T-Note.  With this situation, investors are now willing to accept more risk in their portfolios to get extra return, supporting stock prices.

The other indicator we watch closely is cash available in the financial system.  This was the canary in the coal mine in 2008 - 2009 and with global debt levels higher than 2009, we believe it is still a valid indicator to watch going forward to watch for signs of trouble. 

For now it is easy for corporations to obtain credit.   While we can always have a ten percent market decline, until companies have a tougher time obtaining credit, we do not see any major (down twenty percent) market decline in the near future.  Our estimation supports stocks.

Combining all this together, there are good reasons why U.S. stock markets are near record territory. It is however one of the most uncomfortable bull markets in history because of all the news.  We choose to ignore the daily news for now.  One thing we are very confident in writing: expect recent increased volatility to continue as who knows what tweet is forthcoming.   

Paul A. Capeloto, Managing Director – Investments

The Meydenbauer Wealth Management Group
of Wells Fargo Advisors

Dividends are subject to change or elimination and are not guaranteed. Wells Fargo Advisors did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results. Additional information is available upon request.

1019-02020


Are Money Market Mutual Funds an Appropriate Alternative to Cash
in the Current Interest Rate Environment?

By Paul Capeloto and Sean McGowan

What is a money market mutual funds (MMF)?  A MMF is a type of open-end mutual fund that focuses on capital preservation and invests in short-term, high-quality, U.S. dollar-denominated securities that mature in 13 months or less.  Like all mutual funds, MMFs are a security sold by prospectus (A legal document issued by fund companies selling securities). 

MMF’s invest in securities such as U.S. Treasury Bills, commercial paper, and other short-term investments issued by the U.S. government, U.S. corporations and state and local governments. MMFs available to retail investors seek to maintain a stable net asset value at $1.00 per share although, there is no guarantee they will be able to do so and pay interest. 

MMF yields generally reflect short-term interest rates.  These rates are variable and tend to follow the federal funds rate; a rate established by the Federal Reserve (Fed) based on numerous economic indicators that show inflation, recession and other gauges of economic health.

With the federal funds rate now at 2.25%, many prime MMF's (that is, MMFs that invest in corporate securities) are now yielding over 2%.  Each time the Fed raises or lowers the federal funds rate, MMF rates tend to follow within a few months.

Currently, the Fed is indicating they may lower the federal funds rate in anticipation of a slowing economy.  If so, MMF rates will decline. But, if you are earning little or nothing on cash balances not expected to be used soon, current and future MMF rates are very appealing and could be considered as an alternative to cash, when appropriate.

We give no opinion on the funds to consider as your risk tolerance and asset allocation will dictate your choice of MMF.

Although money market funds seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. Money market funds may impose a fee upon sale of your shares or may temporarily suspend your ability to sell shares if the liquidity falls below required minimums because of market conditions or other factors. An investment in money market funds is not a deposit of the bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. 

The opinions expressed here reflect the judgment of the author as of the date of the report and are subject to change without notice. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.

CAR-0919-03312


Beyond Financial Literacy:
Inspiring Our Young Adults to Lead with Their Money.


By Tama Borriello

A recent comment by a financially prudent young adult inspired me to think about the next generation of clients whose parents had successfully educated them over the years on sound financial decisions.  The enthusiastic comment was, “As soon as I inherit, I’m going to just give it away!” While that is an extreme (with the other extreme being the well-known statistics and stories that point to inheritances being gone within a generation or blown on cars and vacations), we’ve realized over the years that teaching our client’s children about smart money practices is just an introductory step of financial literacy.

Over my career, I have found that taking the next step in financial stewardship involves learning what is important to your young adult children and helping them articulate their values.  We have had remarkable results when we let go of our assumptions and what we think their values should be and engage enough to listen to what the next generation has internalized as their definition of success.  We realized that many young people feel overwhelmed by the amount of options they have to honor their own socially conscious values which leads to difficulty in making thoughtful decisions.

To simplify this, we’ve focused on two items.  First, determining “touchpoint” words that reflect how our future community members wants to be perceived or remembered (aka Legacy).  And second, detecting “touchstone” words that symbolize the standard of values they hope to espouse.  This simple word exercise helps to unveil their larger purpose or mission and allows one to streamline their many different options without feeling overwhelmed.  By using words that define our values we can maintain consistency and purpose with action. 

There are other unique approaches we’ve applied as well.  We have worked with families to set up family foundations, both big and small.  This allows the next generation to participate in charitable giving based on their family values which can leave a lasting impact.  We believe that this has also enhanced the next generation as they begin to understand how to strategize for their own saving and planning in a meaningful way.

As for the young man whose parents were taken aback by proclaiming he was going to give away their estate; he came away with the realization that his value-based plans would be determined by his role as a steward.  While already fulfilling that goal through his chosen profession and lifestyle, he began to comprehend the impact he could have through stewardship of his family assets.  At the end of the day, this is what the Meydenbauer Group’s values encompass – the opportunity to guide the next generation to enriched family relationships and thoughtful impact.

0919-00158

A Follow Up to Our Recent Market Update


By Ben Pawlak


On August 14th, the Dow Jones Industrial Average Stock Index was down about 800 points or a little over 3% for the day.  While there are obviously many financial news stories these days, the main culprit was what is termed “an inverted yield curve” in U.S. Treasury Bonds, specifically the two year and ten year Note market.

What is an inverted yield curve?  A little background first.  The U.S. Treasury issues debt from one month to thirty years maturity.  Historically, the further out you invest, the higher your interest rate because of the risk of investing long term.  Consequently, the ten year Note normally returns more than the two year Note.

However in some cases, the two year Note returns MORE than the ten year Note.  This is called an inverted yield curve.  Why do stocks fear this type of market?  It’s because it is widely viewed as an upcoming recession indicator and stocks don’t like recessions.

But what does history actually say about the 2/10 yield curve inversion?  While it is correct that each recession since 1950 was preceded by this inversion, it took fifteen months on average after the inversion for a recession to occur (Sevens Report, 2019).  In the last five occurrences since 1978, the S&P 500 has been an average of 13.5% higher a year later, 14.7% two years later and 16.4% three years after the inversion (Dow Jones Market Data, 2019).  The shorter term expectations are more volatile with the 90 day data anywhere from down 10% to up 13% and an average of +2.5% return (Barron’s, 2019).

In conclusion, bear markets historically do not begin immediately after an inversion occurs, however volatility picks up.  So make sure your long term investment plan and asset allocation is where you want it.

0819-02978

Wells Fargo Advisors did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the Meydenbauer Wealth Management Group of Wells Fargo Advisors and are not necessarily those of Wells Fargo Advisors or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results. Additional information is available upon request.


Market Update: The Return of Volatility


By Sean McGowan, CIMA


In 1986, the movie Poltergeist II came out and there was one line that has stuck 3 decades later… “They’re back!”   It’s been over a decade since the Great Recession and there is one thing that has come back for sure, volatility.  Volatility does not mean negative returns, it just means more price movement. Today we are back at normal levels of volatility that have been absent for a considerable period.

Our team believes that volatility is here to stay, but market returns will still trend positive. Here are the 3 key drivers of future volatility…

Trade war with China – Expect the “tit for tat” to continue as the two largest economies of the world fight for the final word and upper-hand.

Geo-political conflict – It may be nothing more than a war of words, but North Korea and Iran will continue to grab headlines.

Election Cycle – Between the Tweets and the debates, we expect it to be a fight for 2020.

With those three points laid out, we also think it is imperative to give you what The Meydenbauer Wealth Management Group of Wells Fargo Advisors feels are the biggest positives that will keep this market moving forward…

The Fed – The Federal Reserve has shown in recent action that they are here to support the economy. We believe in the saying, “Don’t Fight the Fed”.  We expect the interest rate environment to stay conducive.

Low Unemployment/Low Inflation – We expect unemployment to remain at record lows and inflation to stay in check…. All supporting the thriving US consumer.

Earnings – While earnings growth is not as strong as 2018, it is still very good on a long term basis and well into positive territory. This will support equity valuations.

With that stated, in May we were concerned with global stock market risk and felt that the bullish returns at that point were too optimistic.  We decreased stock exposure across the board on all of our managed portfolios.  While we didn’t predict the particular scenario of the last few days, we were not blindsided by the vulnerability of a fully valued market to any bad news. This approach allows us the capability to proactively reduce risk within the portfolios that are under our active management.  While we are aware that we may have an opportunity to invest in the market at lower prices currently, we are also keeping in mind that Chinese currency issues were also a factor in the 11% pullback in August of 2015.

In conclusion, we feel our portfolios remain diversified with an eye always on mitigating risk.  We continue to feel positive about the markets and assess the temperature of the global markets on a daily basis. 

0819-01975


2019 Second Quarter Newsletter


Goldilocks is back in the house (not too hot, not too cold, just perfect) as both stock and bond markets had a great second quarter and continue to have a great year through June.  The S&P 500 had its best second quarter return since 1997 and it was the best June since 1964!

But it wasn’t easy as the S&P 500 significantly declined in May only to roar back by quarters end to near new highs (Wells Fargo Investment Institute (WFII), 2019).  The S&P 500 finished up 4.3% for the quarter and 18.54% for the first half of the year (WFII, 2019).

U.S. bonds returns were equally impressive as the U.S. ten year Treasury Note went from 2.60% on April 16th to 2.03% at June 30.  In the bond world, that is one of the sharpest declines within a ninety day period on record (Barron’s, 2019).  You can thank one source for a great six months for all investors:

The U.S. Federal Reserve (the Fed).

You may remember the Fed was indicating two or three interest rate hikes as recently as December 2018.  The S&P 500 declined 19.9% from high to low in the fourth quarter of 2018 on this news.  They went to a neutral stance on rates in January, 2019 and stocks advanced (Wall Street Journal, 2019).  In April, they indicated rate cuts may be in the works and stocks were off to the races.  In the span of four months, instead of two rate increases, markets now believe there will be two rate cuts by year-end to combat a potential slowing economy.  This gave an all-clear indicator for investors to accept risk.  There was a noticeable jump in cash leaving money market funds into stocks, bonds and real estate.

This major decline in interest rates is also happening elsewhere.  The Fed’s equal in Europe, the European Central Bank came out and said they too would lower rates in the near future.  Europe’s rates are already significantly below ours to the point that over thirteen trillion dollars are now invested in negative interest rates throughout Europe and Japan; meaning you pay the bond issuer money to hold your money.  

Think of that…, for safety of principal, you will pay a government to hold your money.  We have not seen this in the U.S. but it is commonplace in Europe.

So, even though our rates appear very low, on the global stage they are not.  As an example, our ten year Treasury Note yields about 2%, Germany’s ten year note yields about -.40 of 1%.  That 2.40% difference is a very large historical spread which draws a lot of international investors to invest in our T-Notes and Bonds (Barron’s, 2019).

What is unusual is our economy is growing at over 3%.  Historically, you would have U.S. interest rates above the growth rate to prevent the economy from growing too fast. But, global growth is much lower than the U.S., so the Fed finds itself in a very difficult spot (The Seven’s Report, 2019).  The economy is doing fine and it does not want to add fuel to the fire by adding the stimulus of lower rates to increase borrowing.  Yet, if they don’t lower rates, they run the risk of putting the U.S. economy at a disadvantage to those countries that are lowering rates, perhaps causing the one thing they are trying to prevent: an economic slowdown as U.S. sales overseas decline.

You might think this is an awful lot of commentary about bonds but stocks are one of the largest benefactors of lower rates because their returns compete against bond returns. For example, at a 3% risk free return through investing in a long term Treasury Bond, an investor might say that return is high enough for what is needed so there is no reason to take on additional risk of buying stocks.  But at 2%, that same investor may say that return is not high enough so I will accept risk by investing in stocks.    

With all this information to digest, here are our thoughts.  We do believe the Fed will lower rates once or twice later in the year to prop up our slowing economy.  This is what investors expect and we believe these moves are already factored in current stock valuations.  If this comes to pass, then the major stock market catalyst of lower rates will flip to neutral as further rate cuts may not occur.  Under this scenario, the hope for stocks then is lower rates spurring on the economy and growth and earnings accelerate.  On the other side are issues like conflict in the Middle East, tariffs worsen or President Trump tweets the wrong thing. 

For now, the phrase “never fight the Fed” holds.  If you have not done so in the last year, we suggest now is a good time to rebalance your portfolio.  This will take you back to whatever your original investment allocations were which we hope matches your risk tolerance.

Paul A. Capeloto, Managing Director - Investments
The Meydenbauer Wealth Management Group
of Wells Fargo Advisors

The views expressed by The Meydenbauer Wealth Management Group of Wells Fargo Advisors are their own and do not necessarily reflect the opinion of Wells Fargo Advisors or its affiliates.

0719-00781