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CIO Notes

CIO Notes by Month

December 2021

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October 2021

September opened at a new all-time high for the broad-market S&P 500 index, and the fell fell 5%. September of 2021 was the worst one since 2011 for both the S&P 500, (down -4.7%), and the Dow (-4.2%), according to Dow Jones Market Data. The Nasdaq 100 index was also down -5.7%.

We consistently point out that correlation is NOT causation, however, historically, almost half of all Septembers have in fact posted losses.

While the S&P 500 has experienced mild pullbacks this year, investors have bought the dips, and the index never reached a correction (This is defined as >= 10% drop).

The first nine months of 2021 were tumultuous. Medical, economic, and political uncertainty caused stock market volatility. And yet, market indexes plodded along, steadily “melting up”, with the occasional pullback, then once again pushing to new highs.

As we have discussed in this space, index success is has been deceiving, and market leadership has see-sawed back and forth over the last year.

So, what is happening now? There are several factors that may be at play:

  1. The worries begin with the outlook for corporate earnings for the next few quarters. Many equity analysts who had predicted another strong quarter of economic growth are now CUTTING their estimates, and the common culprits seem to be of the same ones we have blamed since last year:
    a. The supply-chain bottlenecks (If supply constraints persist, it will be difficult for companies to access the raw materials and products needed to meet demand, while the higher costs associated with such shortages are hurting profit margins.)
    b. The COVID 19 Delta variant
    c. inflation (predominantly caused by the supply chain issues mentioned above, and increasing demand for goods as the world economy reopens)
    d. Possible potential global energy crunch
    e. China’s regulatory crackdowns on their own companies

Long-term investors are best to remember that if their PLANS do not change there is little reward to in changing their investments, and that their well-diversified financial plan drives their portfolio, NEVER the other way around.

Investors do not predict, rather, they plan. They simply cannot (and will not try) to forecast the market’s near-term future, and know that the average stock market return is about 10% per year for nearly the last century, and therefore, the longer their time horizon, the greater odds that they will see a positive market return.

Uncertainty is a constant, as always. However, slow, and consistent growth is a good thing, and participating with a diversified portfolio most certainly leads to long-term wealth creation.

Whenever you need us, we are a phone call or email away.

Be well and invest wisely.

September 2021

In spite of persistent concern about Covid (and specifically the Delta variant), stocks continued to rise in August with the S&P 500 posting its seventh consecutive monthly gain. Second quarter corporate earnings were strong, with 90% of companies beating expectations.

Large-cap growth stocks led, with the Nasdaq 100 up 4.2% and the S&P 500 ended August ahead 3.0% with the small-cap Russell 2000 up 2.2%.

Sector leadership has again shifted and remains mixed. Growth (versus value) outperformance, led by tech, started early in the pandemic and moved the market through August 2020. As seasons shifted into the fall of 2020, that growth outperformance came to an abrupt halt and shifted to an outperformance of value funds led by cyclicals through early 2021. Then, from mid-May through August of this year, growth regained the upper hand.

Spending on the nation’s infrastructure is meant to boost economic growth (through investment spending, job creation, and earnings gains) and should support longer-term growth by adding productivity-enhancing capacity, generating new products from research and development, improving education, and increasing connectivity via broadband access.

Still, according to Bloomberg, September 2021 has been the worst month of the year for stocks in the past two decades. So this could be a good time to review how you’re managing risk and make sure you’re invested in a way that can help you participate in the market’s gains and stay on track through volatile periods along the way.

Uncertainty is a constant, as always. However, slow and consistent growth is a good thing, and participating with a diversified portfolio most certainly leads to long-term wealth creation.

The plan drives the portfolio – not the other way around. Unless your plan changes, do not change your portfolio. We do not know or care where the markets will move, as we cannot control them. We design our various portfolio models around quality investments, and in engineering the portfolios so we know HOW they will respond WHERE as the overall market moves. This way we may assist you in choosing the portfolio best suited to your individual volatility preferences and liquidity needs.

Be well and invest wisely.

August 2021
In July the broad market (S&P 500) was up 2.5% and the Dow gained 1.3%, while the small-cap index (Russell 2000) lost -2.9%. Value dropped, and large-cap US growth regained the lead. Given the constant and extreme reversals of leadership trends, this year is proving quite difficult to handicap what will “work,” but validating the merit in diversifying asset classes.
Also this month, the five largest tech companies—Apple, Microsoft, Amazon, Alphabet (Google), and Facebook—reported excellent earnings results, and as a group their revenue increased over 30%, once again asserting their prominence, as they now comprise close to 23% of the SP500.
For now, and resistant to further shutdowns, the USA remains open and the stock market does not exhibit concern with the recent spike in Covid, resulting from the Delta variant.
The Federal Reserve seems reassured that the recent inflation surge is temporary (and we agree), and they have maintained their focus on full-employment, while keeping inflation moderately above target at 2%. By way of reminder, the Fed’s prime directives: to promote steady prices (i.e. inflation) and full employment, to promote stability in the financial system. Inflation concerns have abated during the last month, after a sharp increase during the last 9 months.
As always, we advise focusing on what we may control, keeping aware of investment opportunities commensurate with sound risk management principles, where we will focus on avoiding a loser, and winners will take care of themselves. Since we can’t predict future markets, we focus on the ongoing and consistent implementation of your long-term plan. We have made no updates to the portfolios since our last update 
(July 1, 2021).
Be well and invest wisely.
July 2021

The markets still seem to be driven by the vicissitudes of both the “reopening” trade as well as Fed policy (via massive and ongoing stimulus).

It’s halftime in 2021! In one of the best first halves since 1998, US stocks have enjoyed extraordinary gains since the Covid-19 bear market, yet there is no clear leadership trend (such as technology, innovation or “reopening” from April through December 2020). Furthermore, other areas that thrived during the pandemic (such as clean energy) became overbought, then reverted to their mean, and are now regaining strength.
Driven by optimism related to both reopening of the economy and massive government stimulus, market leadership shifted from growth to value stocks last fall, including financials, energy, materials, and industrials. Performance of these sectors was largely driven by rising prices, after a prolonged period of underperformance.
There is still a tug of war between growth and value, where in June 2021, growth rallied back up and value, which led the way for several months, dropped. We have in fact increased our positions in BOTH for this quarter model update (made 7/1/21), by adding Dodge and Cox Stock find (DODGX) and i-shares Core SP 500 (IVV). We have also added some exposure to larger China growth stocks (GSAIX), with concentration exposure to technology and other innovation-oriented companies.
Data shows US consumer confidence reaching highs, given the stronger economy and job market. Home prices jumped the most in more than 30 years in April 2021. Earnings season gets under way soon, and aside from some of the reopening trades (travel, leisure, etc.) sinking over concerns about further spread of the Delta variant, we have conviction in the upward trajectory of equity earnings and remain positioned as such. As markets evolve, we will advise and adjust where needed.
As We Will Consistently Counsel Our Clients:
1. The plan drives the portfolio – not the other way around.
2. Unless your plan changes, do NOT change your portfolio.
3. We do not know or care where the markets will move, as we cannot control them.
We design our various portfolio models around quality investments, and in engineering the portfolios so we know HOW they will respond WHERE the overall market moves. This way we may assist you in choosing the portfolio best suited to your individual volatility preferences and liquidity needs.
Be Well and Invest Wisely,
June 2021

There was little reason to sell and go away this May.

While in fits and starts, the rotation into value from growth is persistent and we have adapted the portfolios to reflect this.

For the month of May, the DJIA gained 2.2%, the S&P 500 was up 0.7%, and the small cap Russell 2000 gained 0.3%. The NASDAQ 100 lost -1.2%. Foreign markets outpaced those in the US. The MSCI EAFE Index gained 3.5%, and Europe, as measured by the iShares Europe ETF (IEV), was up 4.3%. Emerging markets were up 1.7%.

As we know, the coronavirus slammed the brakes on the economy in March 2020 and suddenly economically sensitive stocks—especially travel—looked awful, and powerful growth stocks looked brilliant.

With the ramp-up in vaccines and the economic relief effort in the fall, we invested in many of those hard-hit sectors.

Previously lagging areas—small caps, value, and energy—started to come back when stocks were weak, and value lost modestly less. Then by November, investors became more optimistic about the economy, and a market shift was underway.

The market rallied, and value beat growth every month, but really took off in March 2021. Value funds of all capitalizations continue to be leaders and we are in fact replacing some of aggressive growth positions, which led us out of the Pandemic.

Stocks have been on an extraordinary run since the Covid-19 bear market, and they’ve had an unusually strong start to 2021.

The S&P 500’s 12% year-to-date gain in 2021 is already quadruple the median 3.1% gain at this time of year.

We believe in the rally and have positioned the portfolios as such.

Missive of the Month

December 2021


A Teachable Moment: For 2022 and Beyond

Good Morning
December 5, 2021, marks a most significant anniversary in the economic and financial history of the United States, and I could not let it pass without comment. When properly appreciated, it can serve as an important teachable moment.

A quarter century ago, on the night of Thursday, December 5, 1996, the iconic Federal Reserve Chairman Alan Greenspan, speaking at a dinner of the American Enterprise Institute in Washington, gave his instantly legendary “irrational exuberance” speech.

This is what he asked: “How do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade? And how do we factor that assessment into monetary policy?”

Mr. Greenspan asked these twin rhetorical questions essentially because he did not have conclusive answers. And if he didn’t, you knew no one else in the world did either. Coming from him, however, this thinking out loud was a financial earthquake, and it sent shockwaves throughout the entire financial world.

He surely understood that, when he so much as broached the question, he had at least suggested an answer. And that answer was unmistakable: we’re either already there, or will be soon, as this greatest of all bull markets morphs into mania.

And therefore, I write to you today. I thought it might be instructive—as well as a certain amount of fun—to review the intervening quarter century.

Let’s begin with a key item of baseline data that may and certainly should inform our inquiry. Fact: The Standard & Poor’s 500-Stock Index had closed that Thursday afternoon at 744.38.

And sure enough—just as he presaged—the S&P 500 topped out… three years, three months and 19 days later, on March 24, 2000, at 1,527.50 (Yes, that is sarcasm!).

You read that right: it more than doubled in the 40 months after Greenspan’s dire warning. I suppose I could just stop here, invite you to draw the obvious inference from the above, and call it a day.

Of course: No one—no central banker, no economist, no market strategist, no hedge fund manager—no one can predict the market, much less tell you where to get out and/or back in.

The economy cannot be consistently forecast, nor the market consistently timed – by anyone.

But before I let you go, I’d just like to throw out a few other potentially relevant factoids:

  • As I write this, December 4, 2021, the S&P 500 is at (4602), up more than six times since Greenspan spoke.
  • With dividends reinvested, and any taxes paid from some other source, $10,000 invested in the S&P 500 on 12/5/96 is getting close to $100,000 along about now.
  • The earnings of the S&P 500 for the year 1996 were $40.63. With less than a month to go in the current year, the consensus forecast is around $200, up almost exactly five times.
  • The S&P 500’s cash dividend in 1996 was $14.90. Consensus forecast for this year is about $60, up almost exactly four times.
  • The Consumer Price Index was 158.6 in December 1996. It will most likely close out this year around 280, up a mere 1.8 times.

What, may I ask, was the single best financial decision you could have made on Thursday night, December 5, 1996?

Exactly right: turn off the TV and go to bed. Just my opinion, of course, but the best move you can make this morning, 25 years on, regardless of the headlines? The same: turn off the TV, log out of your computer. Enjoy the rest of your day. And let the compounding proceed, uninterrupted.

With every good wish to you and your families for a wonderful holiday season and 2022.

Ps. You may also find this on our blog:


Sources: Historical S&P 500 Index and dividends: “S&P 500 Earnings History, NYU Stern School.” Consensus 2021 earnings forecast: Yardeni Research. Consensus 2021 dividend forecast: Bloomberg. Consumer Price Index: Current net profit margin of the S&P 500: FactSet. 

October 2021

Climbing the “Wall of Worry”

“Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.” – Legendary investor, Sir John Templeton

Sir John believed that bull markets ultimately run out of steam, or to put a different way – using a Wall Street proverb coined in the 1950s – stock markets climb a wall of worry.

Read the financial news websites, or for a more dramatic take, get your financial information from TV/Radio, and you will hear the doom/gloom drumbeat. 2021 is no exception. Year-to-date (through September), the S&P 500 is up about 15%. That is strong stock performance, despite the COVID 19 Delta variant, extreme political partisanship, rising US debt and inflation concerns, etc.

Worry is an interesting phenomenon. Generally, what you worry about in the present seems much worse than anything in the past, simply because you are living and working through it. The uncertainty and anxiety are felt today. This may cause us to overweight current concerns and result in a myopic, rather than long-term, view of the future.

For long-term investors, it is advantageous to maintain a long-term perspective. Remember a key tenet of wealth-building success: If your financial plans have not changed, do not change (or worry about changing) your investment strategy!

Concerns – Past & Future
What did investors worry about in 2019? How about 2018, or 2008 (or how about 1988, 1977, 1963, 1955, 1943, 1931!). Generally, we cannot remember, and the reason? Worries tend to work themselves out. We adapt and adjust to our changing circumstances, especially the bad ones.

What will we stress about next month or next year? It could be a continuation of present concerns, or it could be something entirely different. As reliable as gravity, it will be something!

In our experience, I have seen that investors who focus on the “worry of the day” experience greater stress and are more likely to make an unwise investment decision. Worrying is part of the markets. It’s not worth the psychological or financial cost.

If you have any concerns, please let us know. One of our greatest values (and joys) is to help you know what is worthy of your attention and concern and what should be ignored.

Please reach out to set some time for a cup of coffee (virtually or live), for an opinion or SECOND opinion on your financial planning questions. We look forward to speaking!

September 2021

The Fallacy of Past Performance Chasing (and why we have trouble convincing you otherwise)

“Fear incites human action far more urgently than does the impressive weight of historical evidence.” – Jeremy Siegel

Prominently displayed as a metaphor, I keep a large crystal ball in my office conference room. It’s a prop to teach clients to avoid the pervasive habit of assuming a rearview mirror is a crystal ball into the future.

Paraphrasing the old saying, “Man repeats himself, but history never does,” and what we also know to be true of the stock market, history truly never repeats itself exactly. Trying to convince investors otherwise is in a word, taxing. Investors appreciate cogent explanations of market movements. But as soon as the market turns volatile, those same explanations, no matter how logically presented, will not assuage those who still feel the market will continue downward.

There have been numerous studies performed on investor attitudes and behavior. One is from finance professor Meir Statman of Santa Clara University, who curated 10 years of investor surveys. The proportion of investors who expected stocks to go up over the coming six months rose, on average, by 1 percentage point with every percentage-point increase in the S&P 500’s returns for the prior month. It was clear that these investors believed that the imminent future is shaped by the recent past.

(Kenneth L. Fisher & Meir Statman (2000) Investor Sentiment and Stock Returns, Financial Analysts Journal, 56:2, 16-23, DOI: 10.2469 / faj.v56.n2.2340)

Further, in a more recent study published in The Journal of Experimental Psychology (for additional source information, click here) (those words need to link to, researchers tested investing disclaimers about past investment performance on US investors. In over 60 rounds, the participants chose between “Fund A” and “Fund B,” with prior knowledge of the fund’s fees and gain or loss over the previous month. With a few exceptions, generally, due to much lower fees, fund A would outperform over time.

However in spite of viewing the standard mutual-fund disclaimer that “past performance does not guarantee future results,” they more often chose the fund with higher fees. Therefore, the average investor was saying that they know better, and perhaps it WILL work for them. The researchers concluded the phrase “does not guarantee future results” may cause investors to mistakenly conclude that past performance is a highly reliable indicator, and that apparently investors do not want to settle for investing like others, rather, they simply want to get ahead!

So, as you watch the market gyrating based on the disaster du jour (or other external stimuli) and you do not listen to your advisor, or follow your own common sense, try to remember most investors acting irrationally, on either fear or greed, or buying what is popular, will most likely lose money.

Take comfort! You won’t suffer that fate, because you are implementing a well thought-out financial plan customized for your needs and goals by Eaton Financial Group.

August 2021

“For a piece of information to be desirable, it has to satisfy two criteria: it has to be important, and it has to be knowable.” -Warren Buffett

Much has been made of economy, where the markets are headed, etc. To Mr. Buffett’s point, we know that the future is unknowable, and we feel this is an excuse to once again point out that we choose not to make bets on economic predictions. That’s especially true now when the biggest wildcard is inflation – a phenomenon no one fully understands. But just because something is unknowable doesn’t mean it’s unimportant. That is why we will devote this memo to a topic we strongly disavow, predictions/forecasting.

Many financial advisors believe their job involves developing a macro-economic outlook and/or predicting the markets’ direction. We reject that. It is not that we will ignore forecasts or consensus. We will certainly study them, but we will not pretend to be able to have any skill in foretelling movements with any level of confidence, and as we have consistently pointed out, our focus rests squarely on factors within our control, such as asset allocation, acting in your best interests, and with a focus on your overall long-term financial plan.
Our Role at Eaton Financial Group is to advise on the successful implementation of a well thought-out financial plan. We help our customers MINIMIZE the regret of doing the wrong thing at the wrong time. With that, we are sharing the Eaton Financial Group Client Engagement Tenets.

We Believe In The Following:

  • Our purpose is to provide great advice.
We do so by providing the unvarnished truth and by assisting in controlling only those factors within your control
  • Your active participation is essential in our on-going financial planning process. Our client partnerships allow for consultation together before considering any material financial decisions.
  • Your plan guides the portfolio and your financial decisions, not the markets nor headlines in the news. If the plan hasn’t changed, don’t change your portfolio.
  • The most successful financial plan provides peace of mind, achieves your objectives, and minimizes the risk of outliving your money.

Important Investing Truths To Keep In Mind:

  • No strategy works 100% of the time. There will be times when your plan does not seem to be working. Process always trumps returns in uncertain scenarios.
  • Investing is about tradeoffs. Investing with emotion will provide short-term relief, but at a long-term cost. True performance can only be judged correctly over an entire market cycle.
  • Beware of the media’s influence. Their primary goal is to get you to tune in, not make wise financial decisions. They are masters of sensationalization and eliciting our emotions.
  • Real investor skill is demonstrated through discipline and patience. Our emotions and mental hardwiring influence us to react hastily to news and market movements. While it will feel good at the time, it often results in costly mistakes.

Please write to us or call with any comments/questions on how our client engagement tenets may apply to your specific situation. If you are not a client, please contact us for a cup of coffee and a second opinion – our door is always open.

June 2021

Crypto: The Good, the Bad and the Ugly

If there was an apt summation of the get rich quick mentality and how crypto seems to bring out the worst and best in us as investors, Tuco (from Clint Eastwood’s 1967 Spaghetti Western) nailed it. He wanted the easy way out, but also reminds us that working SMART, rather than hard is also a decent way to go!

In this month’s article, I wanted to relay what I have been learning about crypto currency during the last couple of years, what I have found to be the Good and the Ugly, and what I have concluded.

Click to read the full story

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