Gill Capital Partners is a is a non-traditional, traditional financial services firm with three distinct service areas, each having a primary client base: Wealth Management, Institutional Services, Corporate Services.
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gillinvest.com Given the market volatility over the last two weeks, we would like to take time to share with clients why this may be happening and what our views are, and provide data to help us all maintain perspective. These are the times in which the media loves to flash large red font and descriptive words suc
Gill Capital Partners April 2017 Commentary
“The individual investor should act consistently as an investor and not as a speculator.” – Benjamin Graham
Q1 2017 Market Review
The first quarter of 2017 was a very positive quarter, particularly for diversified portfolios. The “Trump Rally” continu...
Gill Capital Partners March 2017 Market Commentary
The “hope rally” that we described last month, which began after the election, has generally continued over the past month. As of this writing the S&P 500 is up 6.5% year to date, and international and emerging market equitie...
Gill Capital Partners February Investment & Market Update
Market Update – Making Sense of the Current Market Rally
We find ourselves in one of the most interesting (insert adjective) times in modern political and financial market history. As our Investment Committee meets each week, we find ...
2016 Thanksgiving Market Update
First and foremost, we would like to wish all of our clients, friends, and partners a very happy Thanksgiving. We are thankful for the privilege of working with each and every one of you.
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2016 Post-Presidential Election Update
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Gill Capital Partners Q3 2016 Commentary
“We don’t have to be smarter than the rest, we have to be more disciplined than the rest.” – Warren Buffett
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September Investment & Market Commentary
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www.gillinvest.com The news cycles have been dominated over the past two weeks by headlines related to a “Brexit,” a catch phrase used to refer to the possible exit of Britain from the EU. Britain will vote on the matter on Thursday, June 23rd. Global capital markets have hitched their wagon to the uncertainty and spe...
June Investment & Market Commentary
"An investment in knowledge pays the best interest." - Benjamin Franklin
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What a Difference One Month Makes
“Buy, buy, buy. Oh, everyone’s buying? Then sell, sell, sell.”
Rodney Dangerfield - Caddyshack
One month ago, global equity markets were down between 10% and 15% for the year and bond yields had dropped precipitously in a vicious global flight to quality. In our last piece, “Keep Both Hands on the Wheel,” we discussed the drivers of this volatility: $25 oil, credit issues stemming from the commodity crash, weaker corporate earnings growth, issues in China, and the realization of how all of these factors impact global monetary policy. What a difference a month makes! Have the world and the markets changed materially in one month’s time? Below is a brief overview of major topics we are discussing within our investment committee.
Recent Market Rally
Most equity markets have rallied significantly since the middle of February and now sit very close to the breakeven line for the year. The equity market rally has followed oil’s lead, which rallied to nearly $40/barrel recently after falling to roughly $25/barrel in mid-February. The chart below shows the S&P 500 (white line) and the price of WTI Crude Oil (yellow line) since the beginning of the year. The correlation is stunning, and you can clearly see the level to which oil is dominating this market.
So, is this the beginning of a new equity rally, or just an oversold bounce in the markets?
As long-term investors, we strive to look past the weekly and monthly gyrations of the market. That being said, our investment committee is aware of where we are in the market in terms of valuations and maturity (see chart below).
Despite the rally over the past month, we believe that this is not the time to take undue risk or overweight risk within portfolios, but to remain disciplined and maintain proper asset allocation. From a macro perspective, we are a bit more cautious now than we were a few months ago for the following reasons:
Valuations – While equity valuations are not absurd, they are also not overly appealing. Depending upon what metric you look at, U.S. equity valuations (based on P/E ratio) are modestly above their long-term averages. Certain international equity markets appear more reasonably valued, and in some cases undervalued.
Credit concerns – We continue to have concerns related to credit, particularly high-yield credit, based largely on the collapse in commodities. While the recent oil rally has been a positive sign, oil realistically needs to move north of $45 or $50 to have a materially positive impact on the oil producers that are still bleeding money today.
Political risk – The tone of the 2016 U.S. presidential election is clearly a backlash against the establishment on both sides. Markets like certainty and clarity, and to the extent that this election cycle will continue to introduce uncertainty and negative news headlines, then the introduction of political risk into the equation will only add to market volatility and create further headwinds.
That said, we know that long-term investors are rewarded, and there are reasons to be optimistic:
Employment growth – Employment growth has been steady and robust, which will continue to be a tail-wind for consumer spending.
Real estate – Both commercial and residential real estate markets continue to show strength.
Accommodative central banks – Central banks continue to provide fuel for capital markets, particularly in Europe and Japan, where central banks are injecting unprecedented liquidity in an effort to drive growth and inflation higher.
We believe this is a good time for portfolio “housekeeping,” to make sure allocations are appropriate and well-implemented. We have been dedicating significant resources to this effort on your behalf. We have made some portfolio moves at the allocation and manager level, and are in the process of assessing further adjustments, which you may see inside your portfolio in the coming weeks.
If you find this piece helpful, please forward it to others who may be concerned with the recent market environment or may be struggling for answers. As always, please let us know if you have any questions or concerns, or if we can provide assistance with any other financial planning matters including education, taxes, insurance, or estate needs.
The financial markets just completed one of the worst Januarys on record, and the risk aversion and indiscriminant selling have so far continued into February. As of this writing, equities globally are down about 10% for the year, and many investors are left scratching their heads. Below is a brief summary of a few key topics and what our view is here at Gill Capital Partners. Especially during times like these, we feel it is important to make our clients aware of current events, both good and bad, along with our corresponding outlook.
On Credit Markets and Credit Cycles
As expectations for oil prices and global growth have continued to ratchet down, concerns within credit markets are deepening. As shown in in the graph below, courtesy of our partners at Guggenheim Investments, energy related names now constitute roughly 15% of the high yield bond market. This is almost double the historical average of about 7%, as energy producers took advantage of relatively cheap debt to grow their businesses in recent years. As oil has continued to fall, the pressure is mounting on these businesses to be able to make their debt service payments.
With oil now hovering under $30/barrel, the market is anticipating defaults coming from this segment of the credit market. This concern is not a new one. The new concern is understanding to what extent the distress emanating from the energy names will spill over into non-energy related credit and whether it has the ability to materially impact economic growth.
Our view: As discussed many times over the past several months, we have been watching this issue closely. These same concerns led us to remove our allocation to high yield across portfolios early last year. Until recently, our research indicated that the issues within commodity-related credit would be contained, but the duration and severity of the drop in commodity prices has put even more pressure on these names than previously anticipated.
We are aware that often times the credit cycle leads the business cycle. A key lesson from the last crisis was that bursting asset price bubbles can create recessions. Our base case for this year was for commodity prices to stabilize and for the economy to continue to expand modestly, with the belief that strength in other parts of the economy would outweigh weakness coming from the commodities sector. However, the issues outlined above have raised our level of concern and may drive changes to our outlook in the coming weeks and months. The recent pressure on bank stocks and credit has caused us to evaluate the potential for “systemic” risk, and even though we have fewer concerns than the credit markets are currently pricing, these fears can become self-fulfilling. We are therefore approaching the current period with an extra sense of vigilance and caution.
Do we see the current issues in commodities and the credit markets flashing warning signs that a recession is near? Our Investment Committee does not yet subscribe to this view; instead our position, with considerable input from our research partners, is that the global economy, will avoid a near-term recession and instead experience a slowdown in growth. We do not expect an outright recession or a repeat of 2008-2009. We do not see the same risks with valuations, leverage and other fundamental issues that hit the heart of the consumer and the economy back then. Rather, we view this as more of a “garden variety” credit cycle, one that can still coexist with more of the same subpar growth we have seen economically for the past few years. We are likely however, to see episodes of heightened volatility (like we are seeing now), and indiscriminant selling, which will ultimately lead to value creation and opportunity. We are becoming more cautious, however, and don’t rule out the possibility of a credit cycle that could lead to more widespread issues than are currently anticipated.
On The Federal Reserve, Interest Rates and Currencies
How quickly things change. Just over a month ago, the markets were anticipating 3 to 4 rate hikes in 2016. The dollar had strengthened significantly on the back of these assumptions, and interest rates were beginning to move higher in anticipation of a tightening Federal Reserve, higher future inflation, and a stronger economy. Fast forward one month, and continued concerns over commodities, China, and credit have led market expectations to remove nearly all probability of the Federal Reserve increasing rates this year (with some analysts calling for more easing). This has led to a swift revaluation of assets across many financial markets. Interest rates have fallen sharply to the lowest levels since 2011-12 (the U.S. 10-year has fallen roughly 70 basis points from 2.3% to 1.6%). Equities have declined roughly 10%, and the U.S. dollar has weakened dramatically.
Our view: Our expectations for rate increases were always more subdued than the market expectations; our portfolios, particularly our fixed income portfolios were built with this in mind. Our base scenario called for 1-2 interest rate hikes by the Federal Reserve in 2016. It does appear to us that certain aspects of the credit markets are pricing based upon worst outcomes at the moment, leading to what appears to be a complete disregard for fundamental economic strength in other areas. At this point, barring a significant disruption in the credit cycle, or a realization of systemic risk (as outlined above), we would anticipate the markets to regain their footing and begin to stabilize and for the economy to realize a modest level of economic growth led by consumer strength and real estate. This will lead to a normalization within fixed income markets, a stronger dollar, and higher equity valuations.
While the above overview may sound overly negative, we do not believe that we need to be making wholesale changes within portfolios to remove risk in anticipation of a much larger move down as we saw in 2008-9. We have made some minor portfolio moves, mostly within our fixed income allocation, based on evolutions in the credit markets. We believe this is very different than 2008-9 and do not have the same level of concern. Rather, we are trying to alert you to the fact that we do see growing risks within parts of the global financial system, and we continue to diligently analyze our portfolio allocations to make sure we are optimally allocated and will continue to do so as the information evolves. Furthermore, it is beginning to appear that equity markets are significantly oversold at this point. Investor fear and pessimism are at levels that would indicate a near term bounce. Valuations are becoming increasingly more attractive, and in some cases may represent deep value opportunities for long term investors.
If you find this piece helpful, please forward it to others who may be concerned with the recent market environment or may be struggling for answers. It is times like these that so many advisors, especially those who are unprepared or poorly allocated, tend to disappear. As always, please let us know if you have any questions or concerns, or if we can provide assistance with any other financial planning matters including education, taxes, insurance, or estate needs.
As the Gill Capital Partners’ Investment Committee gathers around the table to review, discuss and debate recent market movements, the biggest question has been what, if anything, has changed over the last few weeks? The only quantifiable change has been a 20% drop in oil prices, which has taken the markets hostage and caused confusion and fear among investors. On Wednesday, we saw sizeable swings in all markets, as the Dow traded down intraday 565 points, only to rally back over 300 points to close down 249 points. The markets are trying to digest to what extent the collapse in oil will impact an otherwise healthy economy. We continue to pull research, analyze data, and have discussions with our many partners including Bloomberg, Goldman Sachs, BlackRock, JPMorgan and others. Here are the themes we have focused on over recent days:
Oil is almost exclusively to blame for the volatility so far in 2016. The oil decline has been vicious and has taken most investors by surprise. Goldman Sachs President and COO Gary Cohn said Thursday, "What I think the confusing part of the oil market is, everyone's relating the sell-off in oil to be an economic slowdown," Cohn told CNBC's “Squawk Box” at the World Economic Forum in Davos, Switzerland. "I don't believe the sell-off in oil is reflective of an economic slowdown. We're not seeing a demand slowdown in oil," Cohn said. “What we're seeing is a massive oversupply of oil." In the opinion of our Investment Committee, oil must stabilize for markets to respond positively. It does not necessarily have to rebound sharply for the stock markets to move higher, but it does need to find a bottom.
Economic data is currently not indicating a recession. Economic reports remain very stable in both the U.S. and internationally. Corporate profits have remained solid as well, with 67% of the companies reporting beating estimates for the 4th quarter. Financial institutions specifically have had good earnings, but have gotten caught up in this decline as well. Markets are not rewarding these companies and valuations are becoming attractive at these levels.
Volatility has dramatically escalated as measured by the VIX, a gauge of the market’s anxiety level. Market bottoms are formed in extreme high readings on the VIX. We are currently seeing the VIX approaching the territory where we have seen past market bottoms.
Investor sentiment, as measured by the American Association of Individual Investors, is currently reporting a significant level of negativity, which is commensurate with past major cycle lows. To be clear, negative sentiment has been one of the most consistent indicators of historical market bottoms.
While we are not foolish enough to attempt to call a bottom in the markets, the combination of the above items give us comfort that long term investors will be rewarded and short term movements should not deter investors from their long term objectives. We understand that the volatility can be unnerving and makes for great news headlines, but during times like these, history has taught us to focus on fundamentals, tune out the noise, and look for opportunity rather than heading for the exits.
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