The Legacy Perspective – July 2021
by Steve Wachs, CFP®
“As the economic expansion continues, inflation fears are escalating. The Federal Reserve considers yet another interest rate increase to engineer a soft-landing. However, critics fear that increased rates will put the brakes on economic growth leading to a recession and the end of the bull market. In fact, a market correction or even worse, a bear market, could be just around the corner.”
This was the quote from the first Legacy Perspective (formerly known as “Steve’s Perspective”) written June 30, 2000. That was 21 years ago with this Perspective being the 84th edition. Other than the reference to “another interest rate increase,” it is relevant to our current economic environment. Since summer is the time when reruns are shown, now would be the time to revisit some of these past Perspectives to see if what was written then has applicability now. Some of our younger readers may have no idea what a “rerun” is. If that is the case, please let me know and I will send you the past 83 Perspectives and you can “binge read” them.
“Furthermore, as the clouds that descended four months ago begin to lift, the fundamental strengths of the American economy come into focus once again. The United States has less than 5% of the world’s population but accounts for 25% of GDP. Americans work longer hours and produce more innovations than any other culture. Whatever problems continue to bedevil us, we start with considerable advantages. We have proven to be able to confront new challenges.” – Fred Alger
This quote was featured in the December 31, 2001 Perspective. Mr. Alger was president of Alger Management, a leading growth asset management firm, that lost 50% of its employees in the 9/11 attack including David Alger, his brother. His sense of optimism could certainly be challenged by what had occurred. His reference to “innovation” and being “able to confront new challenges” could be applicable to the global impact of COVID-19 and subsequent pivoting of companies and accelerated vaccine development that has led to the economic rebound we are currently experiencing. Interestingly, the US now represents 4% of the world’s population and 24% of GDP.
“Letting tax ramifications dictate investment decisions – Seeing the exceptional investment gains generated in the late 1990’s, it was easy to rationalize letting the “winners” run, especially if it was going to result in realizing large capital gains. Well, the winners quit running, much of the gains were lost, and the tax “problem” was solved. In the future, if it makes sense to capture gains, we will recommend doing so and enjoy any complaints about capital gains.”
This was also featured in the December 31, 2001 Perspective (it must have been an incredibly creative time for me) under the “What Did Not Work” section. We have had recent discussions with clients about potential tax changes that could impact their tax bill; particularly, a change in capital gain tax rates. From an investment standpoint, we are conscious of portfolio changes that will have tax consequences. However, we will not allow the proverbial “tax tail to wag the dog” as gains can be wiped away suddenly resulting in portfolio declines.
“Bull market? Bear market? Is the market cheap or expensive? Those questions dominate the financial news and absorb the lion’s share of attention among Wall Street economists, strategists, analysts, and cognoscenti. But we think the endless back-and-forth debate between bulls and bears is getting tired. The bull-versus-bear argument has all of the vices of the Hatfield-McCoy feud. Ideologues on both sides so dislike and disparage the other side that it often seems that they would rather win than be right. With so much data available, and with so much of it ambiguous, both sides have ample fodder to continue the battle for the foreseeable future. While those two trade punches, the market is changing. It is being defined not by bulls, bears, or even by sectors, but by companies with skilled management who adapt to current conditions and anticipate trends. We are entering a stock market that doesn’t irrationally punish or reward and is comprised of many companies that offer solid prospects for long-term returns. In short, we are entering a market that will be led by superior companies. And after more than five years where the market was driven by sentiment, fear, euphoria, international crises, and momentum, that is a substantial shift.”
This quote was from the June 30, 2003 edition. March 2003 was the bottom of a severe equity downturn that began in 2000. The predictions of what will happen next in the equity markets is one that has been ongoing since the formation of stock market indexes. You may recall in the first quarter of 2020, we experienced the largest first quarter decline in stock market history as the impact of the pandemic reverberated through the financial markets. Rather than trying to predict what would happen next, we focused on companies and specific sectors we believed were undervalued. As those companies increased in value toward the end of last year, we shifted our attention to companies that would benefit as the economy reopened in 2021. Our focus is not guessing what the equity markets are going to do. It is directed toward the analysis of individual companies and investment managers that will add value to the equity portion of your portfolio.
“If you get caught up in things over which you have no control, it will adversely affect those things over which you have some control.” John Wooden
Does anyone feel in “control” given all that has gone in the financial markets the past 12 months? Lack of control can result in a perception of danger which can translate into feelings of fear, desperation, and at the extreme, panic.
If you are a long-term reader of these Perspectives, you have seen my use of quotes from John Wooden. As my father was a Hall of Fame basketball coach, Coach Wooden, one of the most successful college coaches in history, was a mentor of mine though his books and speeches. These quotes were written on June 30, 2009. We were coming to the end of what has been termed the “lost decade” as the S&P 500 stock index was basically flat for a 10-year period with two steep declines of 49% and 57% during that timeframe. The Dallas Morning News opening quote in their December 31, 2009 investment section was “The cunning Wall Street investment rogues left us in a fine mess – a legacy of indebtedness, high unemployment, and perhaps worst of all, a bone-deep cynicism.” During that time, one client asked in an email “does your job completely suck this year?” (or this decade). We responded to his question with the following statement, which was true then, is true now and will be true in the future…
When the markets are rising, your overall outlook on investing can be positive if not almost euphoric as you approach your financial goals. When the tides swing the other way, you may feel fear, panic, and even despondency as your goals are typically tied to personal targets. Each one of you has serious personal financial goals that we have helped you define. You have entrusted us with assisting you in making progress toward these goals; we believe this is a sacred trust. We understand the emotions that surface when you feel these goals are at risk. There is nothing wrong with the feelings; it is letting the feelings dictate action that creates problems. It is our belief that helping you manage this cycle of market emotions is the single biggest contributor in making progress toward your financial goals.
- Legacy Consulting Group is registered as an investment adviser with the SEC and only conducts business in states where it is properly registered or is excluded from registration requirements. Registration is not an endorsement of the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability.
- Information presented is believed to be current. It should not be viewed as personalized investment advice. All expressions of opinion reflect the judgment of the authors on the date of publication and may change in response to market conditions. You should consult with a professional advisor before implementing any strategies discussed.
- All investments and strategies have the potential for profit or loss. Different types of investments involve higher and lower levels of risk. There is no guarantee that a specific investment or strategy will be suitable or profitable for an investor’s portfolio. There are no assurances that an investor’s portfolio will match or exceed any particular benchmark.