07 Nov

Election - Energy - Earnings - Emotions

Investing can be a challenging endeavor. Since the end of the third quarter, there has been a flood of information and policy changes that could lead to meaningful shifts in strategy. Certainly, there is no shortage of data points. And while it is key to understand connections and multi-variable regressions, it's necessary to focus on what is important instead of becoming lost in the analysis.

The first two weeks of October tested the resolve of long-term investors as global conditions communicated a slowing growth trend, falling energy prices, and the end of the Fed's bond purchasing program (quantitative easing). Bear in mind that "slowing growth" is still growth and "accelerating growth" is unsustainable. A global economy at terminal velocity only ends with a smack against a wall.

 

 

The Fed removing synthetic liquidity is a solid sign that its leaders no longer deem it necessary. In addition, the mixed consequences of falling oil prices bodes well for energy consumers in the long run. And it's even better if a nation that was once a major energy importer can become energy independent—or even a net exporter.

As companies communicated their third quarter earnings reports, we learned that they are generally healthy. Revenue increases are difficult to come by, but earnings and cash flows remain robust. The response was a "V" shaped recovery with the market eclipsing all-time highs. Enter the mid-term elections, which provided a boost to conservatives and a little jolt of positive emotions to investors during the past few days.

It is exhausting to re-read the whirlwind of activity summarized above. We take a pause to be thoughtful and focused on what we believe is important today and always:

  • Objectives – We believe investors deploy capital toward preservation, income, or appreciation. Ideally, they want to pursue all three goals at the same time but, in reality, the characteristics of each portfolio's construction must be varied. We tend to be optimistic about long-term prospects for investors exposed to risk, but recognize discounted valuations are harder to come by. The objectives you aim to accomplish have a big effect on what you should do.
  • Year end – December 31st is just another day for long-term investors, but most of our clients are required to file a tax return. Be sure to visit with your tax advisers and project what your 2014 tax year will look like. We have been busy harvesting losses (where available) and making gifts of appreciated securities to causes important to our clients. Some short conversations and simple tactics can lead to significant savings.
  • Impact – More and more, investors are seeking to understand the impact of their investments. An internal rate of return of 20 percent annualized might be fantastic, but what if it comes at a great cost to the environment or human rights? Investing is not only what you predict tomorrow will look like but a vote of confidence on what you want tomorrow to be.

Please contact us to continue the conversation.

Looking for a fun primer on the real economy? Check out We the Economy – 20 Short Films You Can't Afford to Miss (https://wetheeconomy.com/), a series of short films with Morgan Spurlock. We, personally, will be sharing these with our kids in the weeks ahead.

 

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