A Market Update To Our Most Recent Investment Letter.

 Clients will be opening their mailboxes by the end of this week and find their year-end portfolio summaries.  Rarely in this business, now spanning over thirty-five years, have I felt the need to revisit what I have written so soon out of the box after I’ve sent these reports out.  One of the major topics I covered  in that report was the  higher probability of a major market correction in 2022 and briefly touched on the hidden damage that’s been going on away from the major market indices for months now.  Well, we’ve now had that correction.  Once again the old Wall Street saying that “stock prices take an escalator higher and an elevator lower” is proving prescient. Although markets rallied higher today, the damage we’ve seen to stocks in the past few weeks has been fast and furious.  Most major indices are down between 8% and 15% so far in 2022.  Most made what now look like major tops in December.  Many of the more speculative areas, of the market, along with many individual securities are down nearly 50% from their highs.  The question of whether we’re having a more than a run of the mill correction has now been answered with a resounding yes!  The question of course is now what?  

 I’m not going to go through most of the things that have investors concerned because you can read that in my January letter, however, I’ll briefly cover two issues.  The first is the fear of slowing economic growth.  Investors are worried that the combinations of covid health related issues, along with supply chain issues, rising inflation and rising interest rates will lower economic growth from current expected levels.  I’ve also given my thoughts on this in my January letter, so I won’t detail that here.  What I believe is being overlooked is what’s going to happen as the various Covid related restrictions start to unwind in the coming months and the supply/demand shocks we’ve been facing in the past two years begins to abate.  

 

First thing that must happen for sustained economic growth is that people need to be able to get back on with their lives.  They’re now doing that regardless of governmental mandates.  Probably 250,000 fans packed NFL stadiums this weekend to watch the playoff games.  I don’t know what the mask mandates were in the various cities where the games were held, but I saw very few in the crowd.  More and more places are now in defiance of many of the most onerous restrictions that have been placed on individuals.  Politicians will soon follow suit or face the likelihood of being booted out of office.  People want to get out and they also want to do and buy everything with all that money they haven’t been able to spend in the last two years.  They want to be able to find the things they want to buy like cars.  They want to travel again like they did before the virus.  They want to go out and do the things they did, free of being told how to do it.  It is hard for me to envision a sharp economic slowdown in the face of that kind of demand.  It’s hard for me to see a contracted drawdown when every business in the country is desperate for workers.  My guess is the next two quarters will see slightly slower economic growth, just because of what we’ve been through with the Omicron surge, but the back half of the year will see the economy expand at a rate higher than what most economists are currently expecting.

 

The other issue that’s beginning to weigh on stocks is the situation in Ukraine and since I’ve had a couple of people ask me about that, I’ll weigh in.  Right now, unless you know what’s going on in Vladimir Putin’s mind then the situation over there is a mystery.  Let’s say right up front that if the Russians invade Ukraine, then stocks will hit a rough patch.  War isn’t good for business.  However, the probability of direct military involvement by NATO forces also seems very low right now.  It’s more likely that Western nations will employ economic sanctions to hurt the Russian economy as much as possible.  That’s not a great solution, but it’s one that becomes manageable for economies and their markets once they adjust to the new paradigm.   There’s also the real possibility the Russians will get what they’re after in some manner at the bargaining table.  Hard to know what’s going to happen in the Ukraine, but all my years doing this I’ve learned that it’s hard to not only anticipate the outcome but also to anticipate how markets will react.   Unless something’s changed with your personal situation, my instinct is to stay the current course until we receive more clarity on what’s going on over there.

 

Markets are showing all the signs that some attempt at a short-term bottom may be in place.  Stocks rarely come down this fast without at least an attempt to rally higher.  Given my investment outlook, I believe we are at the trading point now where longer-term value is being created.  We may not be done with the corrective phase, but unquestionably many indices are cheaper today than they were a few weeks ago. My investment philosophy is that you should evaluate your portfolio and its assets with a 6–18-month time horizon.  That’s how I consistently model what I own in client portfolios.  I think for those that share my investment philosophy, there’s a higher probability today that what you are buying will make a reasonable return in that timeframe.  However, I will again warn you, that we are likely to see increased volatility in 2022.  Also, while there’s a higher likelihood that some sort of short-term bottom may be coming for stocks, probability also suggests we’ll see more market gyrations until we see some clarity on how things might look in the 2^nd half of the year.  In short, be prepared to ride out a bit of a rough patch in the coming months.  I’ll be looking for ways to take advantage of volatility if asset prices decline and value is created.  Nothing I’m seeing changes my longer-term view of things which I’ve repeatedly outlined for you in past letters.

 

The evidence as I still see it points to a better risk/reward environment based on where we will likely be with the economy later this year and by how much certain parts of the market have come down in price.  Ukraine is an outlier, and it is impossible to know if we’ve put in the final bottom for this corrective cycle.  I like to buy things when they are cheap.  I realize that sometimes means the assets I’m buying may become cheaper still, which is why I rarely go all in at any given moment.   But I think assets purchased now, given where I believe we are in the economic cycle, will be well rewarded within our timeframe even if there’s some back and forth in the coming months.  It is also easier to adopt this approach when you are achieving diversification by using ETFs.  I would also note that ETFs based on the major market indices have declined but have lost less value than for example the more than 50% of the Nasdaq that is down nearly 50% as of this writing.

 

Having said that, now would be a great time to review your asset allocation with me.  Let’s discuss if there’s any changes in your life that might need us to revisit how your portfolio is positioned.  Let me know if anything’s changed, what’s bothering you about the market or any thoughts you might have about your investments with me.

 

Nobody likes corrections.  That being said, they’re part of the investment process.  They clear out the deadwood that inevitably accumulates in periods when they investment crowd careens towards exuberance.  They also ultimately lead to the next advance whenever that may be. 

 

Stay safe and God Bless

 

Christopher R. English.

Winter 2022 Letter to Clients

Please find below the investment letter recently sent to clients and friends of Lumen Capital Management, LLC.

 Certain Inconvenient Truths                                            Winter 2022

 

 

Markets had extraordinary returns in 2021.  The largest companies that treaded in trade in the US returned nearly 29%, most major US indices had returns in the low to mid-20% range.  Yet under the hood things were perhaps not as rosy as the indices appeared.  The majority of this return came from the largest of the large.  Something like 10 stocks were responsible for 35% of the S&P 500s~ return last year.  40% of all US stocks in fact fell nearly 50% from their highs around mid-year.   Overseas markets returns were paltry in comparison to US markets.  Emerging markets actually saw negative returns in 2021.  A balanced asset allocated portfolio returned 13.4% last year.*  As of this writing, 2022 has brought renewed selling to the markets with major US indices down 4-6%.  The market is dealing with certain inconvenient truths right now regarding valuations, interest rates and continued issues related to the pandemic and it’s having a bit of a digestion issue regarding these things at the moment.  I’m going to use the rest of this letter to argue that while I think these issues could impact investors in the next 4-6 months, they do nothing to impact the longer-term positive trend that both markets and the economy are currently on.  

 

Valuation of the stock market:  By any measure US equities are trading at extreme valuation levels.  Historically when this has occurred then stock prices have at best traded sideways.  It is very likely that we will see a decline closer to historic volatility in the markets in 2022.  We may be in the process of this occurring right now. Probability would therefore suggest that to mean we could see a decline at some point this year in the range of 10-15%.  That does not mean it must occur, just that it is more likely to happen.  The most likely culprits for this would be slowing economic growth, higher interest rates, higher inflation and supply chain disruptions related to Covid.  Corrections are a normal part of every market cycle.  For all the reasons I’ve outlined in previous letters to you I would welcome that kind of pullback as I like to buy assets cheap.  I also don’t think this kind of decline, were it to occur, is a precursor to a long-term bear market in stocks based on what we know today.  I think US economic growth will be higher than current consensus because I think the Covid crisis will largely be over by the spring.  More on that in a bit.  The loosening of restrictions and I believe some loosening of supply chain bottlenecks will mean greater not less economic activity by summer.  I think fixing the supply chain will go a long way towards easing some of the inflationary pressures in the economy.  For why I think that, go back and see what I’ve written in the past about what happened at the end of World War II.  Regarding interest rates, the Federal Reserve has been screaming for months now these are going higher.  The markets know this.  The adjustment we’ve seen since the beginning of 2022 are in response to this.  However, interest rates are at such historically low levels that even a 1% rise shouldn’t make money expensive enough to stifle economic activity.  On the contrary it starts to get rates up to levels where financial institutions might be willing to make loans again.  This would be healthy and expansionary for the economy. I believe at some point when stocks reach attractive levels, we’ll see a resumption of the upward trend we’ve been on since the spring of 2020.  That’s because I’m looking for higher than consensus economic growth this year, especially in the 2^nd half once we work through the Covid bottlenecks.

 

The Pandemic: I have finally cleared the Covid virus from my body.  It took me five weeks, but it’s gone.  It was basically like having a bad head cold.  I was able to continue working and exercising throughout.  I still get tired and have a cough I can’t seem to shake.  Other than that, I’m back to normal. All my kids also came down with Covid over the holidays as well.  Their symptoms weren’t much different than mine, though they recovered faster.  Omicron is more contagious than measles.  Once it gets into a place, it rips through there like gas and a match.  However, for the millions of Americans who’ve been vaccinated and boosted, it is likely less a life and death struggle than a bad case of the flu.  Millions of people that have it are also asymptomatic.  Throw out all statistics on how many of us have it because we’re undercounting millions of cases right now.  A person I know with some knowledge of these things thinks that by March everybody in this country will have been exposed to Omicron.  Simply put the virus in its bid to survive is becoming less lethal.  Probability suggests this could be the last extreme surge of the virus as a pandemic.  Regardless, Americans are increasingly voting with their feet and hearts.  They are done with the pandemic.  Thousands attended the national collegiate football championship recently.  Travel is restricted more by transportation issues than people’s unwillingness to get on an airplane.  It is not parents for the most part that do not want their children in school.  In many parts of the country people are going without masks with infection rates no different than in places like Chicago with more draconian rules.  People are ready to get on with their lives and it is governmental policies at all levels that are behind the curve.  The only thing that will change this mindset would be a variant much deadlier than what’s currently showing up.  I believe the dam is breaking in terms of what people are willing to tolerate regarding many of the pandemic related mandates we’ve lived under these past two years.  There will be other variants but again probability suggests Covid is rapidly becoming an endemic problem, something we’ll have to learn to live with like the flu.  This should also help economic growth, probably by spring as weather becomes milder in much of the country, allowing people easier ability to get out and about.

 

Things are getting back to normal:  I’ve got bad news if you think this is going to take place because there is no magic that takes us back to life as it was in January, 2020.  The world was knocked of its axis the same way we were after Pearl Harbor in 1941 and after the 9/11 terrorist attacks in 2001.  That is not necessarily a bad thing.  True, the world has been through wrenching change since then and the human toll is catastrophic.  Over 5 million people have died from Covid.  Here at home, we are approaching a death level equivalent to the entire city of San Francisco.  Yet, the pandemic has accelerated changes that were already happening and stepped up the pace of innovation and the adoption of new ways of doing business.  Telemedicine isn’t going away.  Neither will Zoom conference calls, working from home, the sharing of medical information, use of drone deliveries, home delivery services, streaming, contactless exchanges of payment, the use of a cellphone as a personal depository of key information, overall better sanitation and cleaner air quality in many buildings and public places in this country.  I could go on, but you get the drift.   Billions have been spent on new vaccine technologies, better hospital procedures, public policies to fight infectious disease.  There is also a better appreciation for the day-to-day struggles of the poorest amongst us and we are actively trying to come up with better policies to alleviate some of the issues in this regard.  Businesses are grappling with unprecedented supply chain issues and a persistent labor shortage.  Expect to see more jobs come back to the US and more money invested in automation technology.  What passes for normal in 2025, years after we’ve likely cleared this thing will no more resemble 2020 than 1946 resembled 1941 prior to Pearl Harbor.  I’d argue in many ways this will be a good thing and has the potential to be extremely beneficial to the economy as well.

 

While I believe the first half of 2022 could be challenging, I believe any declines in prices and any renewal in volatility would set the stage for the better potential for opportunity in the back half of the year.  

 

 

Christopher R. English

*Source:  Guide to the Markets, 12.31.2020.  JP Morgan and Co.}

~Currently long indices related to the S&P 500 in both clients and personal accounts.

Solas! An Introduction

 

Hello and Welcome! At least once a year I will  republish the introduction to this blog and my general disclaimer:

As stated way back when, this is an experiment and Solas! so far seems to me to be the best opportunity to focus on what I want to write in a time efficient and hopefully interesting manner. As a work in progress, especially at its inception, this may be a hit or miss endeavor. I don't know how and may never have time to do many of the things that make this look pretty or more professional. Nor am I going to take time away from my business to become an expert blogger. I do over time hope to make this better. I welcome your comments and suggestions.

What this is:

A learning experience. A way for me on occasion to make a point.

A way for me on occasion to discuss markets and investing.

A place for me on occasion to discuss the vagaries of life and perhaps editorialize.

A place to discuss the investment process.

What this is not:

A forum to tout any form of individual investments. (Particularly individual stocks or ETFs). We do not make recommendations on this blog! If we do discuss individual sectors or securities it will be solely in the context of a learning experience. You should understand that any individual sector or security that may be discussed here has the possibility of loss of principal.

A place for me to give individual investment advice. (Call me or others for this).

A theatre for me to tell you how wonderful I am or one for you to tell me what you think of me!

An environment for me to make stock valuation claims i.e. "XYZ is worth 50 dollars!" If & when we do discuss valuations, that will be an opinion and nothing there should be construed as a guarantee of return or a guarantee that a stock will ever trade to an actual price.

And anything else that I might think of going forward.

One other thing. Where I discuss any individual security I will disclose whether I or clients currently own that stock or ETF. That disclosure is only valid for the day of the post as investments can change at any time. Any person who reads this blog and is not a client of Lumen Capital Management, LLC should either do their own research, give us a call or talk to their own investment advisor before making any investment based on anything written within the confines of this blog.

Oh and a final disclaimer!!! I write principally for the clients and friends of my firm, Lumen Capital Management, LLC. It is a way for them to get a quick read on my thoughts about the markets and any other subject I might cover. I do so after understanding to the best of my ability their unique risk/reward criteria. As such any casual or outside reader of this blog should understand that I am not writing for them! Therefore I or my firm takes no responsibility for any actions overt or otherwise a casual reader of this blog might take based on our discussions here. Casual or outside readers should do their own homework, discuss our articles with their own investment advisors or better yet hire us.

Also in 2021 we are going to experiment with a few other communication endeavors, so at the start of this year we are going to take our posting down to a minimum of one article a week.  Finally here listed below is some information about myself and my firm.  

Christopher R. English is the President and founder of Lumen Capital Management, LLC.-a Registered Investment Advisor regulated by the State of Illinois. A copy of our ADV Part II is available upon request. We manage portfolios for investors and also manage a private investment partnership that is currently closed to outside investors. The information contained on this blog or in any other correspondence from myself or my firm is taken from sources deemed reliable but cannot be guaranteed. Mr. English may, from time to time, write about stocks or other assets in which he or other family members has an investment. In such cases appropriate discloser is made. Lumen Capital Management, LLC provides investment advice or recommendations only for its clients. As such the information contained herein is designed solely for the clients or contacts of Lumen Capital Management, LLC and is not meant to be considered general investment advice.  Mr. English may be reached at Lumencapital@hotmail.com.