FORD WEALTH MANAGEMENT LLC
Integrity•Independence•Insight
536 Pennsylvania Avenue
Glen Ellyn, IL 60137
630.545.2800
www.fordwealthmanagement.com
Erik G. Ford, CRPC®, AIF®, CFP®
Principal Partner
Trent E. Warren, CRPC®, AIF®
Partner
April 8, 2016
“Being a long term investor is the only intelligent thing to be.” Howard Marks, investment manager, founder of Oaktree Capital Management and author on February 18, 2016 on Bloomberg TV.
Fellow Investors,
So another quarter is behind us and what have we learned? We watched the new year start with a 9% decline in the S&P 500 by mid-February. This after the S&P, as one of the best returning market sectors in 2015, returned essentially nothing for the full year 2015. By the end of the first quarter of this year, the S&P was up 2.3% YTD and 12.6% from the February low. As seems to be the new norm, we took a long route to not go very far. Now that was just the S&P 500 (used as a proxy for US large caps), anyone with a prudently diversified portfolio was likely even less thrilled by the results, despite a strong showing by emerging markets and high yield bonds, both poor performers for 2015. And then there are the non-existent to negative interest rates to round out your portfolio.
Regular readers will identify with the quote cited above. It is exactly because things are so volatile, and likely to continue for some time, that we need to focus much further down the road. Just consider the difference a few weeks would have made if you had hypothetically invested in the S&P 500 on January 1, 2016 versus February 11. In the first case you have only a marginal gain today and in the second you look like a hero. If only we could invest with hindsight! We believe what will matter 10 or 20 years from now is that you were invested, not the exact day you started.
The volatility we are experiencing may have many causes, and probably does have many causes rather than a few, and we have our opinions on what those are. However, we also
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are of the opinion that similar to previous periods of uncertainty, resiliency will eventually prevail.
Our overriding theme is change, rate of change and uncharted territory. The changes we want to highlight are not unfamiliar: technology, demographics and economic structure. We are all familiar with the power we hold in our hands with our latest smartphones, but have we really considered the impact this has on productivity from not all that long ago? You can essentially run a small (or maybe not so small) business from your pocket. Throw this capability into the fast growing emerging markets and its potential is awesome with much room to grow, but unpredictable and difficult to measure. These advances in technology go beyond being able to post selfies immediately. More significantly are the advances to date and potential to affect change in finance, health sciences and data management, as well as many others. The ability of existing economic measurement methods to capture these effects, particularly as they impact productivity and costs, may be lagging and not paint the true picture, thus inserting uncertainty into financial markets. You can add to the uncertainty equation the growing issue of data security in an increasingly data dependent world.
The rate of this change is steadily increasing, compounding the aforementioned difficulty in understanding where our technological achievements will take us. The gap in this understanding may be increasing, making life more complicated and difficult for policy makers. Major central banks are out of bullets. When the discussion starts to include dropping cash from helicopters you know the policy options have run out. Perhaps they haven’t considered that they are trying to solve tomorrow’s problems with yesterday’s tools. As described in Greg Ip’s recent book, Foolproof, trying to solve problems and make our world “safer” often ends up creating a bigger crisis when the solutions inevitably fail or the “safeguards” create stress on the system that eventually breaks it. Again, this leads to market uncertainty both to the results of current policy and what are the likely next steps.
As to demographics, the age and income gaps between developed and developing economies are key factors. Developed economies are aging and growing slowly or not at all (Japan being the poster child), whereas developing economies are younger and growing much faster (population and economically) from their low base. In 2007 economies defined as emerging represented 28% of global GDP and grew to 39% of global GDP by 2014. They became a much larger piece of a larger pie. These growing economies of relatively young people have the additional benefit of the aforementioned technology developments as they move from near subsistence to consumerism. We marvel at our experience of going from a flip phone to a smartphone. In some developing countries they have gone from outdoor plumbing to smartphones. In some cases, they still have outdoor plumbing with their smartphones! These are economies and populations in rapid transition. Uncharted territory leading to uncertainty. The
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uncertainty exacerbated by histories of poor governance and regulation and capital misallocation.
This leads us to economic structure. We referenced the fact that key central banks are running low on ammunition. Perhaps they should stop shooting. China is a global conundrum as it transforms at a speed that is likely beyond the control (and
understanding?) of their policy makers. The demographics of developed economies are moving to areas never experienced before. The increasing level of older workers and retirees and lower birth rates are increasing the costs of healthcare and safety nets. Those are not costs that any of these economies are prepared for. These factors also lead to productivity and growth constraints at the exact time when growth and productivity improvements are needed most. The faster growing economies are constrained by checkered histories and undeveloped capital markets or unproductive capital controls. Add to the mix the realignment of global energy producers, political instability and continued threat of terrorism and, at the risk of being repetitive, all this creates uncertainty.
Finally, the difficulty all this inserts into our investment lives is that we are human and have an inherit aversion to risk and a belief that we can predict the future based on what we have experienced in the past. We are arrogant in that way and generally wrong. As described by Karl Popper in his writings on historicism, our tendencies to believe we can rely on the past to anticipate the future does not take into consideration that it is our interaction with these past events that change them from one period to another. An identical event (if there is such a thing) in a different time is, well, different. These events are not hard science and predictable as much as we may wish they were.
Our long term investment optimism is based on opportunities, capabilities and resilience. The changes that we are experiencing present the opportunities, both in developed and developing economies. Capitalizing on those opportunities will be driven by the exponential growth in technology capabilities and data access. The resilience of our economy as a global driver and the resilience of our capital markets to find and exploit opportunities despite bumps in the road and setbacks is as strong as ever. However, it is the unknowns and uncertainties that occupy our short term thinking. Stay focused on the long term and follow Mr. Marks sage advice from the top of this letter and we do not believe investors will be disappointed. Perhaps unnerved at times, but not disappointed.
Sincerely,
Erik G. Ford Trent E. Warren
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The Standard and Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine
which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Securities offered through LPL Financial. Member FINRA/SIPC. Investment Advice offered through Ford Wealth Management LLC, a registered investment advisor and separate entity from LPL.