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.
This article includes mentions of HW’s primary methods of investment analysis: Fundamental, Technical, Cyclical, and Charting 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.
Technical Analysis involves using chart patterns, momentum, volume, and relative strength in an effort to pick sectors that may outperform market indices. However, there is no assurance of accurate forecasts or that trends will develop in the markets we follow. In the past, there have been periods without discernible trends and similar periods will presumably occur in the future. Even where major trends develop, outside factors like government intervention could potentially shorten them.
Furthermore, one limitation of technical analysis is that it requires price movement data, which can translate into price trends sufficient to dictate a market entry or exit decision. In a trendless or erratic market, a technical method may fail to identify trends requiring action. In addition, technical methods may overreact to minor price movements, establishing positions contrary to overall price trends, which may result in losses. Finally, a technical trading method may underperform other trading methods when fundamental factors dominate price moves within a given market.
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.
Charting Analysis involves the gathering and processing of price and volume information for a particular security. This price and volume information is analyzed using mathematical equations. The resulting data is then applied to graphing charts, which is used to predict future price movements based on price patterns and trends. Charts may not accurately predict future price movements. Current prices of securities may not reflect all information about the security and day-to-day changes in market prices of securities may follow random patterns and may not be predictable with any reliable degree of accuracy.
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.
Investment Commentary—Year-End 2022
The year 2022 has been an awful one for most investors. Both stocks and bonds are down—in some cases down big. The good news now is that yields on bonds are pretty decent for the first time in a long time. There are very low-risk bonds available in today’s market yielding greater than 5%. We can’t say as much for stocks; we’re afraid the worst is not yet over for assets tied to the consumer or the economy. While inflation seems to have peaked, at least temporarily, the reason might be because a recession approaches. In this post, we update you, our clients, on our latest investment thinking.
Inflation Update
Inflation has not been kind to stocks. In fact, since 1965 the entirety of stocks’ inflation-adjusted return has been earned in months when the year-over-year inflation rate was either below 5% or lower than it was six months ago. It’s 7.1% today, but it’s falling now. Using that simple heuristic, inflation risk can be said to have eased with the October data.
Recession Update
But why is inflation falling? In our opinion, inflation risk is just giving way to recession risk. And stocks don’t like recessions either. The balance below shows the overwhelming number of recession indicators we look at that are flashing red (and the handful of others that are getting close):
Outlook & Positioning
Stocks
Back in May, we discussed on the Impactful Blog that we thought everything was lined up against the stock market: the macroeconomic environment, valuation, and price trends. Since then, we’ve seen two futile rallies, but as of December 20, stock investors have experienced a lot of volatility in the intervening time with nothing much to show for it so far.
Inflation is still high in absolute terms, recession risk is high, but stocks are only a little less expensive than they were. And the stock market is still volatile and in a downtrend. For all these reasons, we remain as conservatively positioned as we can get in terms of stocks.
Bonds
Bonds are a different story. We think investors are being compensated reasonably well even for longer-maturity bonds. We like a mix of bonds that will benefit if inflation continues and bonds that should benefit from falling interest rates in a recession scenario.
(We don’t just limit ourselves to stocks and bonds. We look at other alternatives as well. These are hard for everyday investors to assess on their own, but we have the time and experience to explore them. Alternative investments can be particularly interesting when traditional investments in a word—suck.)
Our “Prime Directive”
Our number one mission when it comes to investment management remains seeking the highest return without exceeding the maximum volatility and downside that correspond to your personal attitudes toward risk. We primarily seek to smooth returns to improve our ability to meet the future cash flow needs of your financial plan. If as a side effect we help you outperform the baseline portfolio we selected out of our planning work together, so be it. But we’d be happy to simply lower the “cost” the uncertainty about investment returns injects into your financial plan. As always there are no guarantees we will be successful, but if bad times aren’t over for investors, we expect to add value over the next 12 months by being conservative—and most of all—patient. Then opportunistic when something’s on sale again.
To our investment management clients, thank you all for your trust in us and our investment framework. We’re proud to serve you. Happy holidays to you and your families!
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.
This article includes mentions of HW’s primary methods of investment analysis: Fundamental, Technical, Cyclical, and Charting 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.
Technical Analysis involves using chart patterns, momentum, volume, and relative strength in an effort to pick sectors that may outperform market indices. However, there is no assurance of accurate forecasts or that trends will develop in the markets we follow. In the past, there have been periods without discernible trends and similar periods will presumably occur in the future. Even where major trends develop, outside factors like government intervention could potentially shorten them.
Furthermore, one limitation of technical analysis is that it requires price movement data, which can translate into price trends sufficient to dictate a market entry or exit decision. In a trendless or erratic market, a technical method may fail to identify trends requiring action. In addition, technical methods may overreact to minor price movements, establishing positions contrary to overall price trends, which may result in losses. Finally, a technical trading method may underperform other trading methods when fundamental factors dominate price moves within a given market.
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.
Charting Analysis involves the gathering and processing of price and volume information for a particular security. This price and volume information is analyzed using mathematical equations. The resulting data is then applied to graphing charts, which is used to predict future price movements based on price patterns and trends. Charts may not accurately predict future price movements. Current prices of securities may not reflect all information about the security and day-to-day changes in market prices of securities may follow random patterns and may not be predictable with any reliable degree of accuracy.
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.