Here We Go Again

Here we go again.  After having the biggest ever advance on an election day, the S&P 500 experienced another gut wrenching sell off with the biggest two day decline since 1987 – Wednesday and Thursday of this week.  Clearly the market is still digesting the bout of bad economic reports, including payrolls which indicate the highest jobless rate since 1994 at 6.5% and a 4.6% decline in the sales of existing homes.  Both reports were worse than expectations.  The news out of Detroit is particularly bleak, with the big three burning cash at an astonishingly high rate, as vehicle sales cratered in the last two months. 

 

With such horrendous news in the economy one would be led to believe that the stock market would be teetering on the edge of another precipitous decline.  This is not necessarily true.  As we have said, the stock market is a leading economic indicator.  The market is down tremendously over the last year, during a period of economic growth.  As the economic clouds darken, the stock market is forward looking towards the horizon for the slightest sign of a break in the clouds, at which time we could experience a sizable and unexpected rally in the midst of the storm. 

 

Take this time to focus on the things you control.  Review your family cash flow statement with an eye towards reducing discretionary expenditures.  If you are in an accumulation phase, increase your savings rate, and buy stocks when they are cheap.  If you are in the distribution phase, rebalance your portfolio by increasing your dividend income and improving diversification.  Most of all keep a clear head and don’t let the emotions overwhelm your decision making.

 

Rick Manske, CFP

Managing Partner

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What is Parsec’s Process for Choosing Securities?

We are calling this market “Mr. Toad’s Wild Ride” so it might be of interest to explain about our investment process and how we determine what to buy and what to sell, particularly during times like these.  We have a buy list with securities, mutual funds, index funds and ETFs.  Each security is “vetted” by our Investment Policy Committee, which reviews the securities’ fundamentals before being placed on our buy list.

 

We have two dedicated research and trading associates who compile the research material necessary for our analysis.  Some of the standard fundamental measures of the companies we review are:  debt-to-equity ratios, P/E ratios (price-to-earnings), PEG (price-to-earnings relative to growth), cash flow measures, operating expenses and profit margins, and dividend yields.  The information is compiled for the committee to review, focusing on a different sector each week.  Our goal is to pick the strongest companies within each market sector and add these to our buy list.  Sometimes a security’s metrics change our opinion about that security, and we downgrade it to a neutral or a sell.  According to firm policy, advisors are prohibited from buying anything that is not on our buy list, though we can buy securities if the client directs us to do so.  All exceptions must be documented.  

 

On a broader scale, we have portfolio guidelines that give us the allowable range of assets in any particular sector.  For instance, a growth-oriented portfolio is allowed to have between 4 – 8% of equity holdings in the software sector, and between 12 – 25% of equity holdings in international companies.  Individual securities cannot be over a 5% weighting of the total portfolio.  Our Financial Planning Committee spot checks a sample of each advisor’s portfolios for compliance purposes on a monthly basis.  Some clients do have favorite securities over the 5% weighting that they don’t want to sell for a number of reasons, such as tax sensitivity.  All out-of-compliance items must be documented in the client file.  In this way, we ensure that each client’s assets are managed in accordance with Parsec philosophy and guidelines.

 

Many clients ask how often we look at their portfolio.  In fact, our buy securities are on a spreadsheet that we all look at on and off all day long.  Any unusual price changes dictate a full fundamental metric review, while other securities get a full analysis on a regular basis in our Investment Policy Committee.  Individual client portfolios are reviewed on a weekly or monthly basis, depending on the specific client’s situation.

 

Lately the view has been grim, and as with the market as a whole, many of the securities we buy for our clients have been beaten down far beyond where company-specific fundamental analysis suggests they should be.  The opposite occurred with the technology boom in the late 90s when fundamentals did not support the high prices of many stocks.  This time securities are undervalued, which we view as a good time to invest.  Focusing on good quality companies, with good fundamentals, will serve you well over the long term. 

 

Barbara Gray, CFP®

Partner

Chief Compliance Officer

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Current stock market volatility

Welcome to the first posting of the Parsec blog.  This is something new that we are trying in order to share some of our thoughts on various topics such as the economy and our investment philosophy.  We are committed to posting updated content each week on Friday, and possibly more frequently depending on market conditions.  A number of us are involved in writing the posts, so you will have a chance to read a variety of perspectives.  We welcome your feedback, whether positive or negative.

At the risk of sounding too technical, today let’s talk about volatility.  As of yesterday’s close, the S & P 500 was down 38.2% for the year.  When I arrived this morning, S & P 500 futures were down another 6.5%.  We have recently seen several intraday swings on the Dow of 800-1100 points.  This type of volatility is distressing to both us and our clients, but one of our core principles is not to let random short-term market movements distract us from our long-term goals.  We are currently suffering the second worst year in stock market history, and are flirting with taking the crown for the worst year ever (currently held by 1931, -43.3%).  This is not the type of environment in which to be a seller of stocks.

A recession has not been officially declared yet, but if we assume that we are currently in one, there are many companies that we cover that still have rising earnings and dividends.  Over time, stock prices follow rising earnings and dividends.  In the current negative market environment, focusing on quality companies with low levels of debt, and rising earnings and dividends, is even more critical than under less volatile market conditions.

Over the long-term, the market has had average annual returns of about 10% since 1926.  The current decade has had negative returns, and is the worst in modern history including the 1930’s.  We continue to believe that these negative returns cannot persist.  Two of the best years in stock market history were 1933 and 1935, which nobody at the time would have predicted.

We have heard a number of arguments that “it’s different this time.”  This argument was used to justify unsustainable valuations of technology companies earlier in the decade, and is now being used to support the thesis that the market will continue to decline.  Throughout history, there have been many panics and bubbles that were unthinkable and unprecedented at that particular point in time.  Now nobody even remembers when they occurred or what caused them.  It’s like trying to remember who won the Super Bowl two years ago.  I don’t even know who played.  We have data going all the way back to 1815, and the consistent theme is that there have been many more up years than down years. We have endured the panic.  Let’s stay in position for the eventual recovery.

Bill Hansen, CFA

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