Newsletter Q3 2019

We don’t have a dour view of stocks. Rather than try and call the economic cycle, we continue to invest in companies with strong free cash flow, strong business models, and conservative balance sheets. While we think there may be an earnings lull, and we worry about trade wars and Washington missteps or non-steps, the historically low unemployment rate around 3.5% with modest wage growth, should provide a ballast for the overall domestic economy. Furthermore, the weakness in manufacturing is relatively small compared to the strong consumer segment of economy which accounts for two-thirds of economic activity. In many economies, and in the U.S. in particular, households are enjoying low unemployment, rising wages, and savings from refinanced mortgages. With household wealth and incomes in relatively good shape, we believe the risks to the broader economy have fallen.

As a firm we have lowered our return expectations across stocks and bonds. Our dimmer capital market assumptions will result in clients’ target returns being slightly lower going forward. We are carefully reviewing how these changes affect clients’ financial plans, and we will be reviewing these results in detail with you in our meetings and calls over the next 6-12 months. We will continue to reflect—to be thoughtful and flexible as we deal with interest rates and political conditions we have not seen in our careers. As ever, we remain focused on navigating risks and identifying opportunities.

Newsletter Q2 2019

In this moment, we are witnessing an incredibly long run of prosperity in the U.S.. Certainly one could argue that it is not as shared as it had been in past economic expansions. And it is also aided and abetted by massive government debt (not more than most other nations though) and an accommodative, if not loose, Fed printing money whenever nudged. Companies continue to grow earnings, pay low taxes, return cash to shareholders (dividends and buybacks), and provide shareholders competitive returns. Unemployment remains the lowest it has been in decades and inflation is muted. Household net worths are growing, and consumers have reasonable debt levels given their income.

Shorepoint’s core philosophy is to manage diversified portfolios of quality, reasonably valued assets based on your investment objectives and risk tolerance. This has and will continue to be a successful investment strategy over the long-term. We seek to take advantage of opportunities as they arise and generate attractive long-term returns to help our clients reach their financial goals. As always, we are available to discuss your concerns and answer your questions.

Newsletter Q1 2019

Overall, Shorepoint is constructive on the current investment landscape. Low interest rates, solid corporate margins, significant corporate cash returned to shareholders (dividends and buybacks), low inflation and steady economic growth have driven strong equity returns since the Great Recession. Valuations as measured by price/earnings multiples are in line with historical averages and are not excessive. We continue to invest in a variety of investments across asset classes that potentially offer sound long-term, if not spectacular, returns to patient investors.

As contrarians, we have added and continue to add to international, developed market equities and emerging market equities/bonds, which we feel are still undervalued even with the 2019 rebound. We are employing a “buy the dips” approach by adding to high-quality, attractively-valued companies that have robust cash flow, strong earnings growth prospects and solid balance sheets. We are investing more in the underperforming healthcare sector which has been in the cross hairs of politicians and allocating to selective special situations that offer favorable risk-adjusted return potential. Individual stock price volatility enables us to perform tax harvesting in companies that are temporarily depressed but that we feel are excellent long-term investments such as CVS Health and Kraft Heinz.

The bond side of our portfolios has rebounded strongly with the Fed moving to the sidelines on further interest rate increases in the near-term. The Fed’s policy change has allowed us to reinvest some of our client’s money market balances into higher-yielding bonds. Overall, our clients continue to benefit from our diversified approach to producing income by investing in Emerging Market Bonds, Floating Rate Loans, REITs, Preferred Stocks, etc. instead of investing just in U.S. treasuries.

Shorepoint’s core philosophy is to manage diversified portfolios of quality, reasonably-valued assets based on your investment objectives and risk tolerance. This has been and will continue to be a successful investment strategy over the long-term. We seek to take advantage of opportunities as they arise and generate attractive long-term returns to help our clients reach their financial goals. As always, we are available to discuss your concerns and answer your questions.

Newsletter Q4 2018

Shorepoint believes that this is a buying opportunity and not the start of a bear market but a “normal” pullback as part of a secular bull market. Based on our assessment, we don’t anticipate a domestic recession and are adding about 5% to equities in our client accounts. However, we will first consider your cash needs, risk tolerance, etc. before increasing equities.   Please read on for more details!

Below you will find a variation of the missive we sent out just before Christmas. We believe the majority of the content still pertains, but we have adjusted and added additional comments and information.

The U.S. stock market hit all-time highs on September 20th. Since that time the market (S&P 500 Index) dropped almost 15% and finished 2018 down 4.4%. During this correction, over 70% of the stocks in the S&P 500 Index were down over 20% (traditional bear market territory) and the average stock was down 29%. Domestic mid-cap and small-cap indices finished down over 11% for the year while international, developed and emerging market, were down over 13%. Bonds slightly rebounded in fourth quarter with major indices barely in positive territory for the year.

Newsletter Q3 2018

While the trade wars and accompanying global tensions that follow such a policy are troubling, we are hopeful that the current administration is being political ahead of the mid-term elections and hoping to activate its base. A little softening in rhetoric and trade policy or better trade deals would go a long way to alleviating the troubling policy ramifications of picking fights with our economic partners. Given the history of the current President, it would seem likely that he would be “transactional” and give the markets what they want.

In addition, we would argue that growth is still growth, although the most significant gains of the cycle may be behind us. That does not mean that we can’t find attractive opportunities for capital in both stocks and bonds and earn patient investors competitive returns in the months and years to come. We do NOT believe the domestic economy is headed for a recession in the near-term. Fiscal stimulus provided by tax reform should continue to fuel economic growth and enable companies to grow earnings in 2019. In addition to the domestic opportunities we see, the poor performance of international and emerging markets may produce long term vindication for those of us who have remained disciplined and diversified, despite the short term drag those positions have had on recent performance. We also remain positive on our outlook for dividend paying companies with defendable business models that are benefiting from secular growth and have the ability to generate strong cash flow.

The bond side of our portfolios was hurt by Fed rate increases but bonds should eventually settle in and provide a higher income level for more moderate and conservative investors. However, our clients continue to benefit from our use of a diversified approach to fixed income instead of investing just in U.S. treasuries. Other bond sectors, such as floating rate leveraged loans, actually produced positive returns and have higher yields than Treasuries with less volatility. Also, with money market yields increasing, we may utilize money market investments as an alternative to some of the bond allocation which will reduce portfolio risk and volatility.

As contrarians, we are adding to attractively valued international developed market equities, and emerging market equities/bonds which have not performed well in 2018. We continue to advocate a “buy the dips” approach and will add to high quality, attractively valued companies that have robust cash flow, strong earnings growth prospects and solid balance sheets.

Overall, Shorepoint’s core philosophy is to manage diversified portfolios of quality, reasonably valued assets based on your investment objectives and risk tolerance. This has and will continue to be a successful investment strategy over the long-term. We seek to take advantage of opportunities as they arise and generate attractive long-term returns to help our clients reach their financial goals. As always, we are available to discuss your concerns and answer your questions.

Newsletter Q2 2018

The domestic economy is robust and is not showing any signs of slowing. Job growth is strong and unemployment is low, but we are starting to see some small signs of inflation. A majority of companies are exceeding Wall Street revenue and earnings expectations with the help of lower tax rates and healthy demand. The S&P 500 Index’s valuation is now more attractive than in the first quarter due to the significant increase in corporate earnings. Part of the current wall of worry that the market must climb is a fear of rising interest rates. However, the transparency of the Fed and the small, even increases in rates has ameliorated the reaction to the Fed’s tightening thus far. Between the interest rate hikes and trade/tariff issues, we have experienced a higher level of market volatility throughout 2018 than the unusually low levels of last year. Bonds have, for the most part, produced negative returns this year.

We have used the higher volatility as opportunity to pare back outsized positions and sell less attractive stocks, as appropriate. We are repositioning our portfolios to be able to perform better in the current environment. As contrarians, we are adding to attractively valued international developed market equities, emerging market equities and bonds, and financial and consumer staple stocks. We advocate a “buy the dips” approach and continue to add to high-quality, attractively valued companies that have robust cash flow, strong earnings growth prospects and solid balance sheets.

Overall, Shorepoint’s core philosophy is to manage diversified portfolios of quality, reasonably-valued assets based on your investment objectives and risk tolerance. This has and will prove to be a successful investment strategy over the long-term. We seek to take advantage of opportunities as they arise and generate attractive long-term returns to help our clients reach their financial goals. As always, we are available to discuss your concerns and answer your questions.

Newsletter Q1 2018

As contrarians, we are taking advantage of this correction and the positive macro environment to increase equities by 2% to 3% in client accounts (based on your investment objective/risk tolerance) which is a slight overweight from our neutral allocation. We will be funding this allocation by decreasing your bond allocation. If the stock market corrects further (between the 10-20% levels), we will be advocating a “buy the dips” approach. The market volatility is providing Shorepoint with an opportunity to upgrade your portfolios by adding to high quality, attractively valued companies that have robust cash flow and/or dividend growth prospects, strong earnings growth prospects and solid balance sheets. It is likely that you have noticed more trades than normal in your accounts as we reposition portfolios. We are also adding to international stocks in developed and emerging markets. As for non-equity income areas, we still favor a diversified allocation that includes short-term bonds, emerging market bonds, leverage loan funds, energy MLPs, REITs, etc.

Overall, Shorepoint’s core philosophy is to manage diversified portfolio of quality, reasonably valued assets based on your investment objectives and risk tolerance. This has and will prove to be a successful investment strategy over the long-term. We seek to take advantage of opportunities as they arise and generate attractive long-term returns to help our clients reach their financial goals. As always, we are available to discuss your concerns and answer your questions.

Newsletter Q4 2017

In keeping with the turn of the year and renewed resolve, we would like to begin 2018 by encouraging all of our clients to make their health a top priority starting now. It may be unusual for this advice to be coming from your financial people, but time and again we see how important a basic fitness regimen and sensible diet can be for our clients.

Whether you are a 32 year-old trying to squeeze in some cardio and a healthy lunch between career and family demands, or a 75 year old trying to stay safe and independent by keeping limber with some stretches, yoga, or walking 9 holes of golf, it all helps. As a society, we are living longer than ever, and though nothing is guaranteed, it’s worth acting accordingly, with expectations for longevity. In short, prepare your body for the long haul.

Why not try to get the most quality out of life that you can in the short and long term? In addition to feeling good, you may also experience a great savings financially by avoiding chronic diseases, obesity, and unplanned early retirement due to illness, not to mention minimizing prescription, medical and healthcare costs over decades. For those still in the workforce, check with your human resources department to see if your medical insurance plan qualifies as a high deductible plan allowing you to open a health savings account (“HSA”). An HSA has many benefits that we would be happy to discuss with you. Health is often an overlooked investment that each of us can make daily to benefit ourselves, our loved ones, and society as a whole.

Newsletter Q3 2017

We continue to advocate a diversified portfolio of quality, reasonably valued assets based on your investment objectives and risk tolerance. We believe that this has and will prove to be a successful investment strategy over the long-term. That being said, we will continue to make changes as prudent. We have taken profits on outsized positions that have grown during this bull market run to fund more attractive, cheaper looking opportunities. The equity allocation has been reduced – taking some chips off the table – and we have moved to a more neutral, conventional stance in our portfolios. We will continue to take advantage of stock volatility to harvest losses in companies experiencing near-term challenges but that we believe have the potential for attractive long term returns. The tax losses we take now will help offset your 2017 capital gains and/or shelter future gains. Our aggressive use of tax loss harvesting is part of our tax management process that adds significant financial benefit to our clients.

Our longer term commitment to international equities and bonds has paid off in 2017 as they have produced strong returns and significantly outpaced domestic returns. We think international securities will continue to benefit from a combination of a strong economic recovery and cheap valuations. On the home front, the debate on U.S. tax reform is still in the early stages and it’s unclear who the winners or losers will be. However, we expect if tax reform is enacted, it will apply starting in 2018. Any reduction in corporate tax rates should benefit small cap and other stocks that get a significant amount of their revenues domestically.

Although the S&P 500 Index is trading above its 20 year price/earnings average, with low interest rates and inflation, we don’t think it is significantly overvalued. However, domestic equity markets are long overdue for at least a 5-10% correction – we would see this as a buying opportunity.

We continue to diversify our bond exposure outside of U.S. Treasuries to mitigate interest rate risk in this rising rate environment. Overall, Shorepoint expects to stay the course, seeking to take advantage of opportunities as they arise and generating attractive long-term returns to help our clients reach their financial goals.

Newsletter Q2 2017

As of this writing, the gridlock in DC has remained strong. The markets seem to celebrate this fact daily as Republicans have been unable to accomplish much of anything with their majority-on the legislative front – no border wall, little success on immigration laws, no repeal or replacement of the Affordable Care Act, no tax cuts (personal or corporate), no repatriation of dollars abroad, and no signs of an infrastructure spending plan. These are massive, complex goals with myriad of potential results and consequences. While some of these initiatives could prove a boon to the market if enacted (corporate tax reform, repatriation, infrastructure spending) there is no way to know how this might play out.

We do know, however, that owning a diversified portfolio of quality assets at reasonable prices has proven to be a successful investment strategy over the long term. We will use market/stock volatility to add to higher quality stocks – companies that have a durable competitive advantage, solid balance sheet, robust cash flow, strong returns on invested capital and are attractively valuated. In addition, we will continue to have an allocation of the portfolio devoted to contrarian companies (i.e. value stocks) that in most cases have underperformed the general equity market in the short-term. Overall, Shorepoint intends to stay the course, looking for and taking advantage of opportunities as they arise and generating attractive returns to help our clients meet their goals.