All content presented in this article is for informational purposes only. Materials presented should not be interpreted as a solicitation or offer to buy or sell a security or the rendering of personalized investment advice, which can only be provided through one-on-one communication with a financial advisor. The content reflects the opinions of Hesperian Wealth LLC (HW), which are subject to change at any time without notice. The information contained herein has been obtained from sources believed to be reliable, but the accuracy of the information cannot be guaranteed. All information or ideas provided should be discussed in detail with a financial, tax, or legal advisor prior to implementation. Any inclusion of third-party data should not be construed as an endorsement by HW of the source of the data and is included solely to expand our clients’ access to independent research and data related to investing and capital markets.
This article includes mentions some of HW’s primary methods of investment analysis: Fundamental and Cyclical analysis.
Fundamental Analysis involves analyzing individual companies and their industry groups, such as a company’s financial statements, details regarding the company’s product line, the experience, and expertise of the company’s management, and the outlook for the company’s industry. The resulting data is used to measure the true value of the company’s stock compared to the current market value. The risk of fundamental analysis is that the information obtained may be incorrect and the analysis may not provide an accurate estimate of earnings, which may be the basis for a stock’s value. If securities prices adjust rapidly to new information, utilizing fundamental analysis may not result in favorable performance.
Cyclical Analysis is a type of technical analysis that involves evaluating leading indicators, recurring price patterns, and trends based upon business cycles. Economic/business cycles may not be predictable and may have many fluctuations between long-term expansions and contractions. The lengths of economic cycles may be difficult to predict with accuracy and therefore the risk of cyclical analysis is the difficulty in predicting economic trends and consequently the changing value of securities that would be affected by these changing trends.
Any indicators or analyses of past market performance shown in this article are hypothetical and do not reflect the performance of any actual client account managed by HW, any past decisions made by HW, nor the total fees and expenses that would have been paid by a Hesperian client account, which include Hesperian’s investment management fee in addition to the operating expenses and fees of the underlying funds and other investments.
Any reference to a market index is included for illustrative purposes only, as an index is not a security in which an investment can be made. Indexes are unmanaged vehicles that do not account for the deduction of fees and expenses generally associated with investable products.
Investing involves substantial risk, including the potential loss of principal. HW makes no guarantee of financial performance nor any promise of any results that may be obtained from relying on the information presented. HW may analyze past performance, but past performance may not be indicative of future performance.
A Summary of Hesperian’s Investment Views
For those investment management clients interested, this quarter I provide an update on Hesperian’s tactical investment views with charts and data.
Hesperian Investment Views in a Nutshell
A Review of Our Tactical Investment Framework
For stocks and bonds, we evaluate them based on three variables: (1) macroeconomic risk (recession or inflation), (2) valuation risk, and (3) price trends.
Recession Risk Is High
Inflation risk is receding now. But we may not like the reason. A majority of the recession indicators in Hesperian’s recession model continues to suggest the risk of a US recession is high. And the percentage in recession camp has been increasing. When recession risk is high, and at least one other risk is also present (either valuation or negative price trends), I tend to act to protect my clients’ portfolios from the stock market drawdowns that typically accompany recessions.
The Majority of Leading Indicators Point to a Recession
Valuations
US Stocks Are Expensive
Here is an updated look at Hesperian’s valuation model for the US stock market, based on Nobel Prize–winner Robert Shiller’s research. The GREEN LINE is its prediction of what the future 10-year return for US stocks will be (the BLACK LINE).
The US stock market has only gotten more expensive since we last showed this chart. In my view, a return below 2% over a 10-year period, if it were to come to pass, is not acceptable compensation for an asset class as risky as stocks.
International stocks appear more fairly priced, but they come with currency risk.
Bonds Are in the Fairly Valued Range
Bonds on the other hand, whose yields tend to track long-term measures of economic growth (the BLACK LINE on the chart to the right), seem fairly valued. The current 10-year Treasury rate (the RED LINE) is not that far below where you might expect it to be (the GREEN AREAS show the differential, which is small today).
Right now you can lock in long-term government bond yields of over 4% at a time when inflation is around 3% and falling. Plus, bonds are a natural deflation hedge. If interest rates fall in a recession scenario, investors in US Treasury bonds can benefit from additional capital appreciation on top of yield.
Stock Prices & Interest Rates Remain in Uptrends
US stocks remain in a strong bull market with no sign of a trend change yet. That fact keeps me from being even more conservative. I must admit the market could be right. Clearly, the market as a whole is not concerned with recession or extreme valuation levels, but that can change quickly.
The medium- and long-term trends indicate interest rates will continue to rise, which would be a negative for bond investors.
A Note on Trend-Following Strategies
Trend-following strategies invest just as their name describes: they bet on (or against) prices going up (or down) across a whole range of markets (stocks, bonds, commodities, currencies), some of which most investors never have any exposure to. They typically don’t take any investment view at all but rely strictly on rules-based or algorithmic measures of trends.
To illustrate their diversification potential, the table to the right shows the performance of US stocks, US bonds, and an index of trend-following funds (not investable, but representative of the strategy broadly) over the years 2021, 2022, 2023, and year to date through May 31.
I want to focus on 2022. Inflation surprised markets and interest rates rose extremely fast hurting both stock and bonds. It’s hard to predict this except in hindsight. If you only held traditional asset classes in that year, there was nowhere to hide. Bond investors, who thought they were in a safe diversifying asset discovered that bonds tend to become correlated with stocks during inflationary periods. But trend-following strategies can bet against bonds if a trend lasts long enough and make money in a year like 2022.
In the other years, the three asset classes zig and zag, sometimes together, sometimes in an uncorrelated fashion. But all three are expected to generate positive long-term returns. So they balance each other in a diversified portfolio context.
I'm Available for a Portfolio Discussion
The most important insight I can offer you is to emphasize how powerful a truly diversified portfolio can be. I strongly believe a balanced combination of stocks, bonds, modest international exposure perhaps, and alternative strategies can smooth the path of portfolio returns and reduce the uncertainty markets inject into your financial plans.
As always, if you’d like a more detailed personal portfolio review, my virtual door is always open. Give me a call or send me an email.
Until we speak again, enjoy the summer. And let me know how I can be of further service to you in your financial life.
Eric R. Figueroa, CFP®
eric@hesperianwealth.com
(916) 546-5203
Find a Time to Meet
All content presented in this article is for informational purposes only. Materials presented should not be interpreted as a solicitation or offer to buy or sell a security or the rendering of personalized investment advice, which can only be provided through one-on-one communication with a financial advisor. The content reflects the opinions of Hesperian Wealth LLC (HW), which are subject to change at any time without notice. The information contained herein has been obtained from sources believed to be reliable, but the accuracy of the information cannot be guaranteed. All information or ideas provided should be discussed in detail with a financial, tax, or legal advisor prior to implementation. Any inclusion of third-party data should not be construed as an endorsement by HW of the source of the data and is included solely to expand our clients’ access to independent research and data related to investing and capital markets.
This article includes mentions some of HW’s primary methods of investment analysis: Fundamental and Cyclical analysis.
Fundamental Analysis involves analyzing individual companies and their industry groups, such as a company’s financial statements, details regarding the company’s product line, the experience, and expertise of the company’s management, and the outlook for the company’s industry. The resulting data is used to measure the true value of the company’s stock compared to the current market value. The risk of fundamental analysis is that the information obtained may be incorrect and the analysis may not provide an accurate estimate of earnings, which may be the basis for a stock’s value. If securities prices adjust rapidly to new information, utilizing fundamental analysis may not result in favorable performance.
Cyclical Analysis is a type of technical analysis that involves evaluating leading indicators, recurring price patterns, and trends based upon business cycles. Economic/business cycles may not be predictable and may have many fluctuations between long-term expansions and contractions. The lengths of economic cycles may be difficult to predict with accuracy and therefore the risk of cyclical analysis is the difficulty in predicting economic trends and consequently the changing value of securities that would be affected by these changing trends.
Any indicators or analyses of past market performance shown in this article are hypothetical and do not reflect the performance of any actual client account managed by HW, any past decisions made by HW, nor the total fees and expenses that would have been paid by a Hesperian client account, which include Hesperian’s investment management fee in addition to the operating expenses and fees of the underlying funds and other investments.
Any reference to a market index is included for illustrative purposes only, as an index is not a security in which an investment can be made. Indexes are unmanaged vehicles that do not account for the deduction of fees and expenses generally associated with investable products.
Investing involves substantial risk, including the potential loss of principal. HW makes no guarantee of financial performance nor any promise of any results that may be obtained from relying on the information presented. HW may analyze past performance, but past performance may not be indicative of future performance.