Dear Client:
"If you don’t know where you’re going, you might end up someplace else." That’s one of my favorite Yogi Berra quotes, not only for the simple contradiction but also for the simple accuracy. It brings to mind the concept of intentionality -doing something with a purpose. The investment committee at Sequoia puts this philosophy into practice every day as we advise our clients. We made particularly strategic and purposeful changes to our portfolios during the second quarter and in November.
Market movements and changes in economic data, combined with a detailed analysis of predictive indicators, have resulted in a number of tactical allocation shifts this year. In May, our team put in place a reduction in high-yield bonds, a corresponding increase in large cap U.S. equities, and increased exposure to both emerging markets equity and debt. On average, these shifts have encouraging results compared to leaving investments as status quo.
Among other factors, the recent run-up in the U.S. equity markets, the Federal Reserve’s announcement of $600 billion of additional quantitative easing (more commonly known as QE2) and the political changing of the guard in Congress have all combined to initiate a second round of tactical shifts in Sequoia portfolios. Changes have primarily included a continued overweight to emerging markets debt and equity, as well as increased natural resource exposure.
While we do not believe it is prudent to make large allocation swings in an effort to "time" the market, we do believe a cautious and well-executed strategy can provide superior returns over the long term. These tactical allocations to favored sectors, combined with a long-term, macro-economic perspective, have generally provided positive results for our client portfolios.
Last quarter we predicted that weak housing, high unemployment and low consumer confidence data indicated slow economic growth in the second half. Since the end of the second quarter, combined new and existing U.S. home sales have decreased further, unemployment has remained stuck at the mid-9% level and consumer confidence has remained low. While housing, Gross Domestic Product (GDP) and job growth continue to lag, equity and commodity asset values have seen a significant rise, predominantly in September and October. A number of factors have played into these movements and will continue to influence the markets.
Unemployment - The national jobless rate has been, and we believe will continue to be, integral in determining the rate and duration of the recovery. Currently 9.7% of Americans are unemployed and annualized GDP growth in the third quarter was 2%*. A recent study by JP Morgan indicates that at 4.5% annualized GDP growth, it will take four years to get back to 6% unemployment. The current 2% annualized GDP does not foreshadow a quick recovery.
Interest Rates - We continue to believe that interest rates will remain low until significant improvement is seen in the jobs market. The Federal Reserve has been increasingly vocal in their desire to keep rates low, and the recent round of QE2 indicates that monetary easing remains the current focus.
QE2 - What exactly is Quantitative Easing and what is it meant to do? Quantitative easing is a tool in which central banks (i.e., The Fed) purchase fixed income securities, therefore flushing the banking system with cash. In theory, this should:
Push bond yields lower (increasing prices)
Push U.S. dollar lower (i.e., making the price of U.S. goods more attractive globally)
Force foreign central banks to defend their currency
Create increased lending and cash available for investment (the positive effect) or debt reduction (the negative effect)
Increase risk asset prices (i.e., stocks, bonds, commodities)
Increase consumer spending
Mid-term Elections - Voters expressed their frustration with the slow pace of the economic recovery and with the administration’s priorities by putting Republicans in control of the House. But with Democrats still in control of the Senate, President Obama and both political parties likely will be forced to find common ground on a number of key issues. Perhaps the most pressing is the extension of the Bush Tax Cuts. There seems to be increasing sentiment that the lame duck session will work to extend the cuts for both middle- and high-income families for a period of two to three years. Most people seem to agree that a distressed economy is the worst time to raise taxes on anyone. Yet, it came as a shock last year when Congress did nothing to stop the expiring estate tax in 2010. Will this time be different?
One clear take-away from these recent events is that U.S. economic policy has officially changed course. The Republicans now have a pedestal from which to be heard in Washington, and The Federal Reserve has taken an aggressive stance in jump starting an otherwise sluggish economy. Will these actions be enough to get 15 million unemployed Americans back to work in a timely fashion? Recent market growth and a positive jobs report indicate that we are moving in the right direction-but the road to recovery likely will remain slow and bumpy, regardless of who is at the wheel.
Finally, on the Sequoia front, we are pleased to welcome Michael Chisnell to our team. Michael joins us from ValMark Securities, Inc. where he distinguished himself as a key leader in the Investment Services Division and one of the top Retirement Plan experts nationally. Beyond his technical skills in retirement plans (CFP, QPFC, AIF), he is well versed in all areas of Financial Planning. Michael graduated from The University of Akron with a degree in Finance while focusing on Financial Planning. Michael holds the Certified Financial Planner™ (CFP®) designation from the CFP Board of Standards, the Qualified Plan Financial Consultant (QPFC) designation from The American Society of Pension Professionals and Actuaries (ASPPA), the Accredited Investment Fiduciary™ (AIF®) designation from The Center for Fiduciary Studies, and is a Registered Representative who maintains his Series 7, 24, and 66 registrations and life, health and annuity licenses with ValMark Securities, Inc., a FINRA registered broker/dealer. In addition, Michael has spent time as an Adjunct Professor with The University of Akron teaching a CFP® required curriculum course focused on Retirement Benefits Planning.
As always, if you have any questions or would like to discuss these items further, simply contact any Sequoia team member. Best wishes for a happy and healthy holiday season.
Sincerely,
Sequoia Financial Advisors
Thomas A. Haught, CFP®, ChFC
President
*Source:
Capital Markets Consultants: "November 2010 Economic and Capital Markets Update" (www.cmarkc.com)
Algonquin Advisors, LLC Q3 Global Macroeconomics Insights (www.algonquinadvisors.com)
Past performance is not an indication or guarantee of future results.