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Market Insights and Commentary – Summer 2020

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Murphy’s Law: “If Something Can Go Wrong, it Will”

Prince Harry and Duchess Meghan Markle resigned from their duties as senior royals, the tragic death of NBA superstar Kobe Bryant, President Trump’s impeachment trial, “Brexit”, and Iranian conflict all took place within the first 30 days of 2020. How naïve we would become when COVID-19 overshadowed it all. 

The second half of Murphy’s Law says if something can go wrong, it will… and usually at the worst time. This time, the second part of that old adage is not entirely true. 2020 started on the shoulders of a record year. 2019 was a year of incredible global growth and portfolio returns. In this case, it makes sense to revise the second part of Murphy’s Law: “If something can go wrong, it will…and usually all at once. In February, the S&P 500 was overvalued and due for a correction. Then, COVID-19 developed into a global pandemic, halting output and testing healthcare systems. The trifecta was Russia and Saudi Arabia started a price war on oil. Three converging events drove global stock markets into a fast, downward spiral.

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S&P Drops in Bear Markets

A Chasm in the Data and Performance

From February 19th to March 23rd the S&P 500 declined 34%. Then, in the next month and a half the index rallied over 30%. The global stock markets continue to climb amidst the worst economic data we have seen in over 100 years. Global Central Banks, governments, and science communities are due most of the credit for the quick recovery. The Federal reserve injected $2 trillion into the economy within weeks and supported credit markets with massive bond purchasing. Governments are financing the smartest minds in science to accelerate finding and mass producing a vaccine. The world has come together, and the markets are betting on a vaccine and a clear path forward by the end of 2020. Can this be the only explanation for why stocks have rallied? Fundamentally, the stock prices are not supported by economic data. 

As state and local economies begin to reopen, some small businesses will not return. With over 35 million jobs lost, many will be permanent. During the economic shut down, many of the small and local businesses lost the battle to large conglomerates such as Target, Wal-Mart, and Amazon. You may find an out of business sign the next time you walk by your favorite shop. This dichotomy between small and large companies is directly represented in the stock market. A handful of the largest companies are carrying the markets higher. Large growth stocks are slightly positive, year to date, at the time of this writing, while small and mid-cap companies are down more than -15%. 

QQQ vs IWM chart

Historically, during recessions, we see a few companies thrive and evolve into clear winners against their competition. We also tend to see more companies restructure or file for bankruptcy. As we progress through this rare time, the gap between winners and losers will likely widen. 

Moving Forward

What will summer 2020 have in store for us? A second wave of COVID-19 cases? Extended shelter at home orders? A successful reopening? A “V” recovery in the stock market? The future is elusive. One thing is certain; we will learn more about the virus and the economic and social impacts of it. Meeting friends at a coffee shop, taking a cruise, going out to eat and office interactions will all look a little different, if they happen at all. As investors we must proceed with caution, while being opportunistic. 2020 still holds a U.S. election. Tensions with China are tighter than ever. The race to a vaccine and its effectiveness are still uncertain. However, we see opportunity in sectors such as global technology companies, healthcare equipment and other evolving markets. The new normal has just started. Hopefully, we can learn from this, evolve and grow into a better world. Maybe we should be asking, how much better will things be a year from now, in 2021? Seems the stock market is becoming more and more optimistic about the future.

Please Note: We will be continuing our Summer Hours by closing the office at 1:00 pm on Fridays through September 4th.  We hope you have a wonderful summer! 

ETFs vs Mutual Funds | Why one over the other?

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History of Funds

Humans have been investing for thousands of years, but the idea of “diversification” and pooling resources to spread risk is relatively new. The first modern day mutual fund in the U.S. was created in the 1920s. It was a way for investors to diversify their investment holdings with little capital. However, it wasn’t until the 1950s and 1960s that the mutual fund industry started to take off.

Prior to 1971, all mutual funds were “active”, meaning the investment manager could choose whatever stocks and bonds he or she saw fit. In 1971, Wells Fargo established the first index fund, which was built to replicate a certain index, not outperform it. It was a revolutionary concept that John Bogle mastered to build the largest mutual fund company of all time, Vanguard.

investment chart review

As indexing gained popularity, the first Exchange Traded Fund (ETF) was created in the late 1980s. The first ETFs were low-cost index funds that gave investors the ability to access cheap market exposure. The ETF industry has seen exponential growth since the Great Financial Crisis in 2008. Currently, there are over 5,000 ETFs that investors can trade, compared to roughly 1,000 ETFs in 2009. One of the most well-known ETFs, the S&P 500 Trust ETF (SPY), was created in 1993 and now has over $260 billion in assets.

Differences between ETFs and Mutual Funds

Why would someone invest in an ETF vs a mutual fund or vice versa? While there are many similarities between the two investment vehicles, there are a few key differences.

One of the key differences is how they trade. ETFs trade intra-day, just like a stock. This means that if you put in an order to buy an ETF, you have possession of the ETF as soon as the trade executes. A mutual fund trade will execute at the end of the day. At the end of the trading day, all the underlying holdings are priced, which then allows the mutual fund to be accurately priced. Therefore, you can only buy or sell a mutual fund at the end of the day, once the price is known. 

The vast majority of mutual funds are actively managed, meaning there is a manager making buy and sell decisions. Their goal is to purchase investments that may outperform the index in that asset class. Active management can be beneficial in inefficient markets, like bonds and international stocks, because a manager can identify opportunities and weaknesses. Most ETFs are passive index funds. Because mutual funds are more active, they typically have higher internal expense ratios than ETFs. ETFs are generally more tax efficient as well. If an ETF is an index fund, the turnover of the underlying funds is usually less than an actively managed mutual fund. This can cause ETFs to generate less capital gains distributions compared to a mutual fund.

At Sharkey, Howes, & Javer, we use a combination of mutual funds and ETFs. In certain markets, such as international stocks and bonds, we believe an active mutual fund manager can at times add value above and beyond the benchmark index. In more efficient markets like U.S. large companies, we think investing in ETFs provides a lower cost of entry to the stock market. Learn more about mutual funds and ETFs and how to implement them in your portfolio by getting in touch with us today for a complimentary consultation with a CERTIFIED FINANCIAL PLANNER™.  

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Planning for Retirement: Stock Exposure and Volatility

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investment chart review

Planning for retirement – Stock exposure and market volatility?

Preparing for and transitioning into retirement can be an overwhelming task. Over the last three decades, the responsibility to plan for retirement has shifted from employers to the employees and people are living longer, a lot longer. Most retirees will now have to make investment decisions on their own, instead of relying on a pension from their employer. So what is an appropriate amount of stocks for a retiree? The old adage of subtract your age from one hundred and that number is the percentage of stocks your portfolio should have, could be detrimental to your retirement plan.

What’s the best portfolio mix?

When people approach retirement the instinct is to get more conservative, or have less stocks in their portfolio. Every retiree’s situation is unique and people are living much longer, meaning their retirement savings will need to last longer. If people need their retirement savings to last longer, then growing their investments will be a necessary key to success. Many factors play a role in determining the best mix for you. Some retirees will rely more on the portfolio for income needs, while others may have more flexibility. Determining the best portfolio mix will depend on a person’s long term goals, risk tolerance and withdrawal needs from their investments.

older couple hike in woods
Senior couple embracing

How to deal with volatility in retirement?

When a retiree is relying on their investments as a paycheck, it can be emotional when stock markets experience volatility or have huge fluctuations. Investing comes with risk, but not all stocks are equally risky. Retirees can use many different strategies to try and lower the overall risk in their portfolio while still maintaining a certain expected return. In today’s investment arena, low volatility ETF’s are accessible. These funds try to invest in stocks that have less risk than the broader market. Another strategy may be investing in companies that pay a dividend. The dividend helps provide income regardless if the stock is up or down. When relying on a portfolio in retirement, it is important to balance both growth and risk.

Planning and investing for retirement is challenging. If you need help determining the best mix in your investment portfolio for your retirement plan, take advantage of Sharkey, Howes & Javer’s complementary consultation.

The History of the American Stock Market (Part II)

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In Part I we looked at the beginnings of debt markets, and the early days of company stock ownership and trades. The 20th Century saw huge changes in the world’s economies, political systems, and population growth. The History of the American Stock Market both reflects these changes and used them to develop into what we see today. Next we will explore the New York Stock Exchange, NASDAQ, and S&P 500.

The New York Stock Exchange

As we saw in Part I, what was called the New York Curb Market moved indoors into a new building on Greenwich Street in Lower Manhattan. By now, it had established codes of conduct and listing requirements. By 1930, despite the Great Crash of 1929, The Curb Exchange was the world’s leading stock market, and listed more foreign issues than all of the other U.S. securities markets combined.

Radio was developing, and in the 1950s, Radio Amex began to broadcast stock prices and market changes so investors and traders could have up-to-the-minute information. Between 1950 and 1960, the share value traded on the American Stock Exchange had more than doubled to $23 billion.

In 1971, the NYSE and Amex brought many of its informational and other services together to form the National Securities Industry Automation Corporation, or SIAC. One result of such a development was educational services on, for example, options trading. Trading stocks had become a much more complex process, so the intention was to help investors learn more about markets and make more informed decisions.

Trading options and futures are two such examples. Options give buyers and sellers the right, should they choose, to trade an asset at a given price at some point during the life of that contract. Futures trading is similar, but buyers and sellers must trade at that price. Making profitable decisions now about what someone may or must do in the future demanded reliable information.

In 1993, Amex introduced derivative trading. A derivative is a security whose price is based on and depends on or is derived from, the value of underlying assets. These underlying assets include stocks and bonds, commodities, currencies, interest rates, and overall market indices.

In 2008, Amex was bought by and merged with NYSE Euronext. Euronext was a European stock exchange that traded in cash and the derivatives markets. It also produced market data for traders to use. The world, indeed, became more accessible when these major exchanges and market analysts merged across the two continents.

NASDAQ

“NASDAQ” stands for the National Association of Securities Dealers Automated Quotations System. Beginning in 1971, it was the first electronic exchange, where investors could buy and sell online, without having to meet on a trading floor. NASDAQ is, today, a world-wide provider of financial technology information and trading services. It operates in 26 countries around the world. NASDAQ’s online services have enabled the world’s stock markets to evolve dramatically. Because it is an all-electronic service, it attracted companies such as Apple, Microsoft and Dell.

Today, NASDAQ services many thousands of clients and publishes approximately 41,000 global indexes covering all kinds of industries and market sectors. This data enables trading professionals to analyze markets in detail and to advise their clients accordingly.

NASDAQ major business segments all use its technology and software to generate and publish the data. The technology then enables approximately 3,100 companies, representing approximately $10.1 trillion in market valuation, to list with NASDAQ. The listings bring buyers and sellers together so they can trade in the many different asset classes offered. As a result, the NASDAQ Stock Market is the largest single pool for trading in US equities.

S&P (Standard and Poor’s)

The company began as the Standard Statistical Company in 1923, when its indicator included only 233 publicly traded companies. It merged with Poor’s Publishing in 1941, resulting in the index showing 416 companies.  It was on January 1, 1957 that it hit the famous 500 mark.

It is, now, an index that tracks the value of 500 large companies, currently representing approximately $7.8 trillion of corporate valuation, that are listed on the NYSE and on NASDAQ, hence “S&P 500.”

S&P now does more than publish corporate indices. It also publishes indices on small, mid, and large cap companies and groupings including the S&P Composite 1500, and the S&P 900. It also publishes financial market intelligence across the world, and calculates credit ratings for companies, cities, states and provinces, and entire nations.

Final Comment

The history of the American stock market is rich in fact and action. It enables individuals, institutions, and corporations to invest, raise capital, spread risk, and to speculate on individually listed corporations as well as on company groups and entire market sectors.

SOURCES Part 2:
NASDAQ
https://www.investopedia.com/terms/n/nasdaq.asp https://www.investopedia.com/terms/e/euronext.asp
https://en.wikipedia.org/wiki/List_of_stock_exchanges_in_the_Americas
https://business.nasdaq.com/intel/market-data-feeds/Index-Data
Standard and Poor’s
https://www.investopedia.com/terms/s/sp.asp
https://www.investopedia.com/terms/s/sp500.asp
https://www.investopedia.com/video/play/index/
First Sub head includes info from the links in Part I: https://www.nyse.com/publicdocs/American_Stock_Exchange_Historical_Timeline.pdf https://bebusinessed.com/history/history-of-the-stock-market/

The History of the American Stock Market (Part 1)

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The first stock markets got their start as kings, merchants, and adventurers traveled to new, unexplored lands in search of new riches. But it was the development of new technology that helped transform early markets into the exchanges we all know and recognize today.

A Brief Introduction to the Markets

The first exchanges were for debts, rather than assets. Medieval kings and crusading lords had to borrow money to fund their expeditions and wars. They borrowed the money from wealthy merchants by selling part of the debt to other merchants in exchange for a share in the profit when the debts were repaid with interest. Today, we call this trading of debt “bond markets”.

In order for the great shipping nations of Europe to explore and discover new lands and resources such as gold, spices, raw materials, and other luxuries, the fleets of ships being used had to be funded. In some cases, the monarch funded the exploration. Ferdinand and Isabella of Spain funded Columbus’s voyage of 1492, for example. In other cases, the funding came from merchants. Rather than merely lend the money and trade the bonds to reduce the risk, merchants began to join together to form a company that funded their own venture. They were, literally, the first venture capitalists.

Initially, a new company would be formed for each voyage and be disbanded when the fleet returned. As the process evolved, the same company with the same jointly held stock (hence joint-stock company) owned by the same merchant adventurers would fund new trading ventures. Many companies grew wealthy, and their stock became a valuable, highly sought after asset in its own right.

Instead of buying stock shares for cash, they could simply be traded. Because not every ship would return to port, laden with goods for sale, merchants would spread their risk by exchanging stocks in one business venture for stocks in another.

The regular trading of stock certificates in the sixteenth and seventeenth centuries grew into an official, formal, and controlled element of modern-day finance. The world had become a larger place with international trade.

Now let us jump ahead and look at the more recent history of the stock market.

The First Stock Exchanges

Great Britain was the center of one of the greatest empires as well as the center of trade, commerce, and industrial output in the late 18th century. London saw the world’s first official stock exchange open in 1773. The London Stock Exchange (LSE) could not actually trade stocks at the time: unscrupulous business owners had caused so much financial damage that the speculative trading of stocks was illegal until 1825. Outside financing was needed for new ventures, so investors bought stock in these new companies (they just could not trade existing stock certificates among themselves).

In 1792, the New York Stock Exchange (NYSE) opened its doors. New York was the center of America’s domestic and international trade, banking, and manufacturing. The NYSE was America’s second stock exchange, the first one being the Philadelphia Stock Exchange, which began in 1790. Both markets were able to speculatively trade in stocks. The NYSE quickly outgrew its Philadelphia competitor and is, today, the largest stock market on the planet.

NYSE’s Early Days

Stock traders used to meet on the open street, and were known as “curbstone brokers”. As they formalized their role and location, 24 of America’s leading brokers met under a buttonwood tree to sign “The Buttonwood Agreement” which created the NYSE, and they moved their location to Wall Street.

The brokers established rules and set fees for trading. They copied many European practices, and the NYSE became a wealthy organization. The most important regulations the NYSE established were “listing requirements.” For a company to be quoted and traded on the NYSE, it must meet certain standards.

Listing requirements cover, for example, a company’s size (its annual income or its market value) and its liquidity. Liquidity essentially means how quickly its stock can be traded at a given value. Any stock can trade quickly at a bargain price, but overall stability is needed for owners who buy and sell the stocks. Today, if a company wants to be traded on the NYSE, it must have issued at least 1.1 million shares for public-trading, and they must be worth at least $100 million.

As America’s economy and its place in the world grew, so did the power and authority of its stock markets. New stock exchanges opened in other major economic areas. For example, Chicago in the Midwest and Los Angeles on the west coast.

Existing industries grew and new industries began. Rules and regulations developed to cope with both business complexity and the expanding world of international trade brought on by the rise of technology. Traders and owners (including pension companies) and other institutional investors needed new clear and trusted methods of stock valuation and comparison. New trading floors opened their doors to address the needs of the new marketplaces.

In Part II of this blog, which will be posted in a few days, we will look at how the stock market has changed to meet the demands of both growth and these new industries.

SOURCES Part 1:
NYSE Timeline and General History https://www.nyse.com/publicdocs/American_Stock_Exchange_Historical_Timeline.pdf http://bebusinessed.com/history/history-of-the-stock-market/
http://www.investopedia.com/articles/07/stock-exchange-history.asp
Buttonwood Agreement
http://www.investopedia.com/terms/b/buttonwoodagreement.asp
Listing Requirements
http://www.investopedia.com/terms/l/listingrequirements.asp http://smallbusiness.chron.com/stock-market-started-whom-14745.html

The Pros and Cons of Owning Stock Where You Work

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Many companies offer stock options and stock bonuses to their employees, but is owning stock where you work a good idea? The short answer: it depends. Below are our thoughts on the pros and cons of owning stock where you work.

PROS

One ‘pro’ to owning stock in the company where you work is the added motivation you have for the company to succeed. As an ‘owner’ in the company, your success is tied to their success. This holds true for the employees you manage as well.

More than the incentive to work hard, owning stock in the company you work for can pay off quickly. Often companies offer their stock at discounted prices to employees. Buying stock at a discount can pay off if the company does well. In general, you may want to limit your company stock exposure to 10% of your net worth (or less) to maintain diversification.

stock charts in office
stock charts

CONS

Your paycheck is already tied to your employer and tying more of your investment portfolio to the company where you work could significantly increase your risk. While being motivated to help the company grow can positively benefit your investment, it doesn’t mean the company is destined to be successful. Their downfall can mean a big financial loss for you. Remember General Motors, Enron and Lehman Brothers?

THE BOTTOM LINE

Owning stock in the company you work for can be a beneficial part of your financial plan. Talking to your financial advisor before making a decision to invest where you work is a good idea. Call 303-639-5100 for a complimentary consultation.

Stock Market Recap with Joel Javer, CFP®

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Sharkey Howes & Javer: Stock Market Recap with Joel Javer, CFP®

Volatility is increasing in the U.S. markets making it more difficult to determine what direction your investments should take in 2015. When Oil slid from $100 to $50/barrel, the U.S. stock market rallied in anticipation that lower gasoline prices would allow consumers to spend this windfall somewhere more interesting than the pump, but that hasn’t happened yet. So far, all we’ve seen are layoffs in the oil patch and more price swings in the S&P 500. Europe is justifiably concerned about Greece and its willingness to resolve its debt crises. They keep talking and positioning as well as negotiating via the media with the Germans, but nothing significant has happened yet. So far this year, international markets have had some gains even slightly more than the U.S., but the structural problems outside the U.S. make us remain cautious. Over the past 6 years, the best place to invest your money has been the S&P 500. This index is likely a bit overvalued right now, and perhaps the international markets are a bit undervalued, but no one knows when the trend will change. It appears that the U.S. dollar will maintain the dominant currency for the foreseeable future making our exports more expensive. This does however, allow foreign companies to increase their sales to the U.S., likely making them more profitable. The U.S. has seen substantial job growth but minimal wage growth over the past year, which is encouraging news for corporate profits. We have yet to see consumer spending rebound to its pre great recession levels, but as more people get reemployed and old debts are repaid, the outlook for the U.S. appears to be the brightest around. How does this translate into your portfolio design? A large part of your portfolio will remain invested in the U.S. with some allocations hedged to the U.S. dollar in International stocks and bonds. Bond positions will remain primarily in U.S. corporations with some international exposure, but the U.S. looks like the place to be right now.

Sharkey, Howes & Javer is a Denver-based financial planning and investment management firm. For additional market updates and financial news, please follow our LinkedIn page.  If you are interested in setting up a complimentary consultation with one of our Certified Financial Planners™, please call 303.639.5100 or visit shwj.com.