Q&A: Value vs. Growth Stocks, from a Value Manager Perspective

Below is an excerpt from our recent webinar, "Value vs. Growth", originally aired on September, 22nd 2020 - featuring Metin Akyol, Ph.D, CFA, Data Scientist at Zacks Investment Management.

Did you miss the original video? Click here to watch.

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Historically, the average investor significantly underperforms the market – Why?

The reason investors tend to underperform is simple: the average investor works without a disciplined system, and he/she allows emotions or behavioral biases to drive investment decisions.

Sometimes investors become overconfident and misjudge risk. Other times they latch onto a price target or think they have identified a pattern that isn’t there. Whatever the case, the emotional decisions that result often lead to suboptimal investment outcomes. This is often referred to as the “behavior gap,” which can be catastrophic to retirement planning.

How to we overcome our investor biases?

Stay the course! Trying to time the market, means increasing the probability that you won’t be invested on big “up” days. And if stock market history tells us anything, it’s that there are a lot of up days.

With that stretch in outperformance in Growth/Technology stocks, are Value Managers stretching their parameters a little bit, in where they go hunting for their value names?

Zack’s Investment Management has not changed it’s parameters and will stay true to their process. Particularly in their dividend strategy, they are not changing their process because volatility and exposure pullback is expected.

Is there anything that you see in the overall evaluation of the market that would lead you to a more muted expected return over the next 5-10 years?

Not necessarily. History shows us that in the long-run, value stocks typically outperform growth stocks, because they are cheaper and stand the test of time. Recently however, the Growth space has taken off due to the overall dominance of the technology sector.

It is important to remember, when you are looking into performance, that it’s not just a difference of “Value vs. Growth” approach, but also a matter of which stocks are overly represented in each classification.

“Value” stocks are represented heavily in the energy and financial sector.

“Growth” space consists of an over-weight of technology businesses. Lately, the overall dominance of the tech sector drives a lot of what we’re seeing in growth.

Ultimately, we are expecting a convergence in the long-run of the growth and value sectors, due to an increased adaption of technology in the other sectors.

We have seen this before and the important thing to remember is that, in the long-run, short-term performance is not a reliable predictor for what you expect in the future. Instead, rely on the long-term investment plan your Advisor has put in place.

Confidence in a Crisis

Below is a summary of our recent webinar, "Confidence in a Crisis", originally aired on May 5th, 2020. The Gilbert & Cook team shares insight on the current economic state and explore some financial and investment opportunities. Even though we are in uncertain times, we believe that you still have choices and we believe in finding confidence in those opportunities. Please know that every situation is unique and we encourage you to speak with your Advisor regarding your individual situation. 

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The Corona-virus Aid, Relief and Economic Security (CARES) Act

Recently the $2.2 trillion CARES Act was signed into law in hopes of helping those most impacted by the COVID-19 pandemic. This brings far-reaching implications for both families and businesses, as well as many opportunities and planning strategies to consider.

Increased Charitable Deductions:

As you might expect, charities are in great need. Charitable donations of cash up to $300 may be as an "above-the-line" deduction when determining your Adjusted Gross Income ("AGI") in 2020. The Act also provides for higher limits (in calendar year 2020) for cash contributions by taxpayers who itemize deductions.

Individual taxpayers will be allowed to deduct cash donations up to 100% of their 2020 AGI - that is up from the limit of 60% in previous (and subsequent) tax years. Corporate taxpayers will by allowed to deduct up to 25% of their taxable income in 2020 - up from 10% in previous years. One caveat here is that the increased limit does not apply to donations to private foundations or donor advised funds - AND to use the increased limits your contributions must be made in cash, directly to the charity.

Qualified Charitable Distributions

Another popular strategy that has often been considered is a Qualified Charitable Distribution ("QCD"). This year, however, you may need to rethink that strategy. Due to the unlimited charitable deduction allowed for cash gifts, IRA holders can utilize cash distributions from their IRAs and give the proceeds to their favorite charity. If you are itemizing deductions for income tax purposes, you can deduct this charitable distribution (subject to reductions in total itemized deduction based on your level of AGI). This may result in a much larger deduction available than in years past, (which was limited to $100,000 (QCDs from IRA accounts)). This may be the only year this strategy can be utilized. We encourage you to talk to your tax preparer and Advisor to determine what strategy is right for you.

 Retirement Plan Distributions

Those who have inherited either 401k or IRA accounts in the past will not be required to take distributions in 2020 under the CARES Act. Additionally, if you would have normally had a Required Minimum Distribution ("RMD") from a retirement account in 2020, those have also been suspended for 2020. RMDs are the distributions that you are required to take from your qualified retirement accounts and IRAs at age 72 (formerly age 70 1/2 prior to the SECURE Act passed at the end of 2019). Many people use these retirement plan distributions for their day-t0-day cashflow, while others have just had to deal with the required distributions as part of their annual personal tax planning. Again, every situation is different so please consult with a qualified tax professional if you have questions about your specific tax situation.

Prior to the CARES Act, if you were under the age of 59½, typically you paid a 10% penalty to take a withdrawal from a retirement account. In calendar year 2020, however, if you are under 59½ AND affected by COVID-19 (specific requirements in the Act must be met), those withdrawal penalties are waived for distributions up to $100,000 (or 100% of your account, if less). Keep in mind that you will still be required to pay income tax on the withdrawal amount, just the 10% early withdrawal penalty is waived. Note: There are also provisions that the withdrawals will not be taxed IF the amounts are returned to the retirement account(s) within specific time-frames. Again, consult with your tax advisor as it relates to your personal tax and financial picture. 

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Timely Tax & Investment Strategies

Tax Loss Harvesting

You may have heard the saying, “when the market is down, you don’t lose any money until you sell the investment and recognize the loss.” So why would you want to sell at a loss?

We are NOT recommending that investors get out of the market. We always challenge investors to think about investment strategies that may be beneficial for their overall individual tax and financial situations.

Tax Loss Harvesting occurs when selling a security at a price less than you paid for it in order to use the recognized loss to offset other recognized gains and/or ordinary income for the current or future tax year. Harvested capital losses can be used to offset capital gains later in the year or possibly decrease your other taxable income (up to $3,000 per year). Any net capital losses (over the $3,000 annual maximum that can be used against ordinary income) can be carried forward to future years. It is important to 1) consider the financial plan you and your Advisor have put into place; 2) review your specific portfolio; and 3) see if there are some losses that it makes sense to harvest. Once again, we encourage you to talk with your Advisor and tax professional to see what is best for you.  

Roth IRA Conversions

What is a Roth Conversion? Basically, it is when you take money out of your traditional IRA and move it into a Roth IRA. In doing that, you are trading tax deferred dollars inside your traditional IRA for completely tax-free growth and tax-free withdrawals in the future in a Roth IRA. As the original account owner, you are not required to take RMDs from Roth IRAs, and the Roth IRA is a great legacy asset to leave for the next generation(s).

There are tax considerations to keep in mind, though. You DO have to pay income tax on the value of the assets that you convert from “traditional” to Roth. Although Roth IRA contributions do not provide immediate tax benefits like traditional IRAs, there is more flexibility in the future when it comes to withdrawing the funds and planning for taxes. This could be an opportune time to take advantage of this simple tax strategy (the Roth Conversion). Be sure, however, to consult with your tax advisor to determine your specific income tax implications.

Frontloading Contributions

If you are a long-term investor, there can be some good opportunities when the market is down. We have encouraged many of our clients to make their annual 401(k) or IRA contributions while the market is down (thereby providing an opportunity to buy into portfolios at a lower cost).

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How to Keep Score During COVID-19

As we started into the economic understanding of this pandemic just two months ago, the world had three big, real-time scoreboard numbers that everyone was watching: 1) the number of new COVID-19 cases; 2) initial unemployment claims; and 3) the stock market. And ALL the numbers were bad! We are still getting constant doses of “Breaking News” and the latest stock market fluctuations. Since our March article, “What Turns a Healthcare Crisis into a Financial Crisis”, we’ve seen the following play out: forced shelter in place, forced business shutdowns, business revenue loss, job loss, economic contraction, debt and rent delinquencies, state and local governments strained, etc.

So, let’s call it what it is, the US is in the midst of a recession. We were due, after the longest run in history of uninterrupted economic expansion. Recessions, as a matter of course, are normal parts of the economic cycle. However, we couldn’t have predicted a recession due to a forced closure of vast parts of the economy due to a global pandemic. So how bad is this recession compared to others?

Gross Domestic Product (GCP)

In the 1st Quarter of 2020, it was reported that US goods and services were down -1.2%. That of course is -4.8% on an annualized basis – which is the reported number for the headlines. Estimates now for the 2nd quarter – April, May, June – are worse yet. Depending on how quickly the economy reopens, probably down somewhere between 20 – 30% on an annualized basis. That would mean that in the first two quarters of the year, the GDP would have contracted somewhere between 6-9%.

To put that into perspective, the entire 2008-2009 contraction was -4%. And it took six quarters to play out. The first half of 2020 will be a number that, most likely, far surpasses that. From a single quarter perspective, if we hit the 6-9% contraction level in the second quarter, we are basically retracing our steps to 2016 GDP levels. 

Bear Market Drawdown and Recovery

From the highpoint on February 19th, to down -34% on March 23rd took 23 trading days. Let’s look at how quickly, and compressed, that market recovered so far. On May 5th, we are up more than 28% from that bottom - a very compressed recovery time of only six weeks. So, what happened? The government has stepped in and provided various supports for our economy, including bond market backstops and the CARES Act as mentioned above.

The US Stock Market is a regenerating, rejuvenating mechanism. After a financial crisis, we find that opportunities emerge, and new ideas replace the old. The economic world is always evolving and adapting, and the stock market is the best way to participate in that. As investors, we have to be focused on the long-term nature of the market. If the recovery takes longer than expected, the markets will likely react negatively. We will need to be patient in terms of our expectations for stocks and GDP output. 

Resetting Expectations

As we look at our current economic situation, we must reset our future expectations upward. 2020 saw Gilbert & Cook start the year with relatively conservative stock and bond expectations. We were at historic highs in the stock market and historic lows in interest rates. We will admit, we did not anticipate a pandemic and recession in 2020. But given that, all stock categories and debt categories (except US Treasuries) now have better long-term expectations from where we sit today. In this pullback, we do hit a reset button to some degree. In periods of crisis and downside like this, it is not the correct time to stray from the long-term financial plan we have put into place.

Keeping Score

Initial jobless claims are a score-keeping mechanism for the economic downtown and recovery. Since the shutdown at the beginning of the COVID-19 crisis, in the last six weeks we’ve seen 30 million people file for initial unemployment claims at their state's unemployment office.

What we truly believe here is that those jobs are not gone – they are in hibernation. Out of isolation – when safe, those workers will return to their jobs and businesses will once again be back near full-capacity. Part of the government stimulus program increased weekly unemployment benefits. In most states, the additional stimulus makes the average replacement wage equal or greater than 100%. Therefore, the impact to individual households will be much more tolerable than in previous economic crises. We are more focused at this time on the number of continuing unemployment claims. In just the last 2 weeks, we saw more workers going back to work than the number of new claims filed.

Risks

The sole villain in this drama is the Coronavirus itself. If you eliminate that enemy, you see the markets react very positively. The risks are:

• A virus relapse causing the economic resuscitation taking longer than anticipated. How much uncertainty will people tolerate? As we go back to work, are we willing to trade possible loss of life? Will the country go back to work, or will there be a fear of further contamination? A recovery is dependent on bringing jobs and consumers back out of hibernation and reinvigorate the economy as quickly and as safely as possible.

• Dividend Payouts – Certain providers in energy, retail, and real estate sectors are cutting their dividend payouts. 

Opportunities

Know yourself as an investor. The stock market will reinvent and regenerate itself. Lean into your Gilbert & Cook team to help you know your course and follow your plan.

We believe that American ingenuity and resilience will persevere. The world health and science communities are smarter and better funded than at any time in history. Ever.

We believe the debate is around when the virus will end, not if. And that COVID-19 is the only enemy. If the virus is contained then all those other issues that we are talking about will begin to dissipate.

We believe that life after the virus will be different. In the same way that 9/11 changed our way of life forever, this pandemic may also. But we will figure it out. And every day, all across the world - people get up, they go to work, and they make the lives of their families and communities better. 

Be safe & healthy. Please reach out to your Gilbert & Cook family if there is anything that you need.

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Disclosure: This event is for informational purposes only. Gilbert & Cook, Inc. does not offer tax or legal advice. You should consult with an attorney for legal advice and a qualified tax professional for tax advice. Gilbert & Cook, Inc. is a Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where Gilbert & Cook, Inc. and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Gilbert & Cook, Inc. unless a client service agreement is in place.

Market Insight - March 2020

Brandon Grimm, MBA, CFA

Brandon Grimm, Portfolio Manager at Gilbert & Cook provides insights on recession concerns, recent market volatility, and the importance of re-balancing.

There has been much discussion and debate over where we are in this economic cycle. From our perspective, we remain in the latter stages but believe the modest-growth/modest-inflation/low-interest rate environment we have been living with has a good chance of continuing over the course of at least this year. While the probability of a recession occurring at some point in 2020 is not zero, we do believe it is low. However, as I will discuss later, the chances of a recession do appear to be growing as the coronavirus spreads globally and begins to impact global supply chains and consumer confidence. 

Despite those fears, the Gilbert & Cook Investment Team still maintains a positive view on the U.S. economy, as current fundamentals still support a prolonged recovery where unemployment remains low, job growth and wages increase, borrowing costs remain low, and most importantly we see a healthy and confident consumer base. 

We compare this recovery to running a marathon and reiterate our view for investors to remain fully invested according to their diversified, long-term Strategic Asset Allocation. 

Coming off an extraordinary 2019, the stock market continued its upwards trajectory with the S&P 500 Index closing at a record high of 3,386.15 on Thursday, February 19th (up +4.81% YTD). Then last week fear over the Coronavirus (COVID-19) finally gripped investors as both the Dow Jones Industrial Average and the S&P 500 index fell over 3% multiple days and ended the week down 12.26% and 11.44% respectively. The daily declines were the largest daily declines in two years and the weekly return was the worst since 2008. With minimal volatility over the past six months, one could argue at least a minor pullback was overdue irrespective of the catalysts. 

As we look at the next few quarters, the real economic impact of the coronavirus will need some time before it is fully understood. In the meantime, fear appears to be driving the markets to price in a major economic impact and even a potential recession. Although we are not comfortable going there yet, we recognize the longer the virus disrupts trade and supply chains, the greater the chance the markets remain at correction territory levels and a subsequent economic recession.

Maybe this time is different….or is it?  We look to history for the answers and similar recent events for context. Over a 38-day trading period during the height of the SARS virus back in 2003, the S&P 500 index fell by 12.8%. During the Zika virus, which occurred at the end of 2015 and into 2016 the market fell by 12.9%.1  As we have pointed out during prior times of stress, the S&P 500 Index has never failed to fully recoup any losses sustained from corrections or bear markets over time. In other words, the stock market and more broadly speaking, the U.S. economy, has proven itself to be quite resilient. Last week’s rather quickly pullback was likely overdone as evidenced by the strong market rebounds on Monday, with various stock indices gaining over 5% on the day. For more perspective on pullbacks and market volatility, reference our Timely Topic from October 25th, 2018 entitled Market Update – “Is this still normal?”.

This does not mean investors should dismiss the outbreak altogether, but rather use these pullbacks as:

1) a time to ensure cash needs are supported, or

2) buying opportunities to re-establish or add to equity exposure if your risk tolerance allows.

Certainly, risks remain, and the duration of the outbreak will determine the near-term impact to the global economy. Revenues and earnings from companies that are highly exposed to China will unquestionably be affected. The longer the virus remains, specifically in China, the greater risk to the global supply chain and ultimately the soundness of economic fundamentals.

In the end, we believe the U.S. is relatively insulated given a strong economy and fantastic health system. Robust job growth and more fiscally responsible consumers continue to provide solid underpinnings in the U.S. Economic data has been strong to start the year and so far, nothing has changed. We suspect that any drop in earnings or economic activity will be short lived, and more than made up for in the year to come.  

Right now is not the time to overreact. Instead, Gilbert & Cook has been proactive in protecting portfolios from events and pullbacks like these during this recovery by regularly re-balancing portfolios. Through the planning process we established a Strategic Asset Allocation which is all about balancing risk and reward given your time horizon and other factors. Regular portfolio re-balancing is a disciplined process to help reduce downside investment risk and ensures that your investments are allocated in line with your financial plan. We continue to focus on investing for the long run and potential short-term disruptions can give investors long-term opportunities.

As we’ve said before; Rely on process, not prediction. The Gilbert & Cook team keeps focus on patience and a long-term perspective.

Sources: 1First Trust Advisors L.P.

What is the SECURE Act?

By: Jarret Sheets, CFP®

Welcome to the new year (and decade)! Many take this time of year to look forward and plan for the upcoming year (or decade in this case). One thing we can plan on for sure is that the Setting Every Community Up for Retirement Act (SECURE Act) is officially becoming a law, and changes to how we plan for retirement come along with it. In this article I will discuss the new SECURE Act and highlight a few areas I think will create additional planning conversations as we move into the new decade.

So - What Changes?

Required Minimum Distribution (RMDs)

When money is contributed to a pre-tax account such as a 401k or an IRA, you receive tax benefits when you contribute. Those benefits come in the form of a lower taxable income (your income's reduced by the amount you contribute) and your money can grow tax-deferred until you decide to take it out. Eventually, however, the IRS would like to receive their taxes and you're forced to take money out through a Required Minimum Distribution (or RMD).

An RMD is a minimum amount you’re required to take out each year once you've reached a certain age and it changes yearly based on your age and account size. You can always take out additional money above the RMD amount, but you must distribute the required amount each year. If you don’t, you’ll be facing a 50% penalty on the amount you did not withdraw.

With the SECURE Act, RMD’s weren’t eliminated, but the starting age did increase from age 70 ½ to age 72, which provides a little extra time for tax-deferred growth.

Note: If you turned 70 ½ in 2019, unfortunately, you still fall under the old rules and must start your RMD’s in 2020.

STRETCH IRAs

Under the old rules, if you inherited a retirement account as a non-spouse beneficiary, you could elect to keep the money in that account and let it grow tax-deferred. If you chose that option, you were required to take an RMD out each year, but RMD’s could be "stretched" over your lifetime, resulting in smaller yearly distributions. As a non-spouse beneficiary, which is typically a younger individual, this was a great opportunity to let that account grow for future use while incurring minimal taxes each year from the required distribution.

With the SECURE Act, those rules changed quite dramatically. Now, as a non-spouse beneficiary, you must distribute the entire retirement account (IRA, 401k, Roth IRA, etc.) within 10 years of receiving that account. During those 10 years, you have flexibility on when to take distributions and how much those distributions are (i.e. could take a lump sum or take 10 yearly distributions), which creates an important planning opportunity for inherited retirement accounts. Additionally, if you've saved a large amount in pre-tax accounts, this may be a good time to review your beneficiaries and consider how those accounts will be passed on.

Note: The SECURE Act would NOT eliminate the stretch IRA for existing inherited IRAs for the current beneficiary.If the IRA owner is already deceased and there is an existing inherited IRA, the SECURE Act would not eliminate the stretch for the current beneficiary. Existing inherited IRAs would be grandfathered. The bill as currently written would make these provisions effective for inherited IRAs when the IRA owner dies after December 31, 2019.  If the current beneficiary dies after December 31, 2019, the successor beneficiary would be subject to the new rules of the SECURE Act.

CONTRIBUTIONS & DISTRIBUTIONS 

If you're charitably inclined in any way and may not need your RMD (or at least a portion of it), a Qualified Charitable Distribution (QCD) may be a strategy to utilize. With a Qualified Charitable Distribution, you can donate up to $100,000 per year ($200,000 for couples) directly from an IRA to a public charity and you can exclude the donated amount from your taxable income. With the SECURE Act, the age to begin utilizing QCDs remained unchanged (starts at age 70 ½).

The last two items to touch on before I close are the age limits for IRA contributions and 529 distributions. With IRA contributions, there is no longer an age limit for when contributions must stop while previously contributions were required to end at 70 ½. For 529 plans, student loan repayments up to a lifetime limit of $10,000 are now considered a “qualified expense”. As an added benefit, an additional $10,000 distribution is allowed for every 529 beneficiaries siblings.

As you can see, the SECURE Act brought about some interesting changes and in turn created new areas for unique planning conversations. If one of these topics or any of the other unmentioned changes from the Act creates questions for you, please reach out your Gilbert & Cook team. - Jarret Sheets, CFP®

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Jarret Sheets, CFP®, Associate Advisor

Jarret joined our firm as an Associate Advisor in November 2019. In this role, he works with the Lead Advisor to help his clients and their families meet their financial goals.

Contact Jarret Sheets: jsheets@gilbertcook.com

2019 Market Review & 2020 Outlook

By: CHRIS COOK, CPA, CFA
Partner, Chief Investment Strategist

Market Update : 2019 Year in Review

Trade wars and a decline in global manufacturing weighed heavily on the overall state of the economy this past year. However, resilient consumers and a cut to interest rates provided a positive counterbalance for the stock market, which reached record highs in 2019.

What drove the 2019 markets? Three key factors had the most influence over investment performance in 2019:

The Fed did a major pivot in U.S. monetary policy in 2019.

In 2019 the central bank made three quarter-point cuts to the benchmark short-term interest rate. Investors welcomed this change, counter to the interest rate hikes in 2018. Since January, when the Fed began changing course, the S&P 500 index has risen more than 600 points, or 25 percent and the unemployment rate fallen from 4 percent to 3.5 percent - putting the economy on solid footing heading into 2020.

 (washingtonpost.com/business/2019/12/11/year-federal-reserve-admitted-it-was-wrong/ [12/11/19])

The trade quarrel with China cooled down slightly.

In December, representatives from both nations agreed on a “phase-one” trade deal after a year-and-a-half of imposing tariffs on each other’s products. The new agreement, which is expected to be signed in early 2020, will be the initial step toward a larger deal in hopes to reduce some US tariffs in exchange for more Chinese purchases of American products and better protection of US intellectual property. bbc.com/news/business-45899310 [12/16/19]

Earnings beat (low) expectations. 

One year ago, stock market analysts were pessimistic about corporate profits. With economies worldwide slowing down in 2018, year-over-year earnings growth for S&P 500 firms seemed ready for a slowdown as well.

Deceleration was evident, but as the year passed, many firms managed to exceed reduced estimates. According to stock market analytics firm FactSet, 75% of S&P 500 components beat earnings-per-share estimates in Q3, compared to a 5-year historical average of 72%. (insight.factset.com/earnings-insight-q319-by-the-numbers-infographic [11/21/19])

The S&P 500 climbed above 3,000 for the first time finishing 2019 up 31.49%. The Dow Jones Industrial Average advanced 25.34%, while the Nasdaq Composite was up 36.69%. (Morningstar)

Certainly an impressive year by any measure, but let’s look longer term. Specifically, at the last two decades. The 2000’s were much tougher for the S&P 500. For the 10-year period 2000-2009, the index was down a cumulative -9.1% (-0.95% per year). The next decade, capped by a notable ‘19, was up by +256% (annualized +13.65%). The average for the entire 20 years? +6.06%.

An innocuous prediction for the next 10 years would be somewhere between those two decades of extreme.

Looking Ahead to 2020

The news and political cycle will remain volatile this year. A U.S. economic outlook split between manufacturing and business investment still struggling to decipher trade deal(s), however, interest rates and borrowing costs are likely to remain unchanged for some time and consumer confidence and spending is expected to stay healthy and strong with low unemployment.

As we’ve said before; Rely on process, not prediction. The Gilbert & Cook team keeps focus on patience and a long-term perspective. Living an abundant life and fulfilling the needs of your future is dependent on the plans and solid process executed today.

2018 Economic Outlook

2017 turned out to be a very attractive year in financial markets around the world.  Stocks were the story, but even bonds (Barclays US Aggregate index) were up +3.54%.  US large companies (as represented by the S&P 500 index) rose +21.83%, US small companies (Russell 2000 index) posted +14.65%, and international stocks (MSCI EAFE index) won the year at +25.03%.  The first year in 5, by the way, where Europe Australia and the Far East developed markets (EAFE) performed better than the S&P 500, and only the 2nd year in the past 8.  The S&P 500 had a positive total return (price + dividends) each and every month during 2017.  Remarkable.

So where from here?  What does 2018 hold for investors?  We’re side-stepping the direct question a bit as we paint a broader perspective.  Whether we credit Nostradamus, Mark Twain, or Yankee catcher/philosopher Yogi Berra, it is true; “It is difficult to make predictions, particularly about the future”. Certainly, that humorous quip does not keep mortal men from offering our honest and educated guesses about future events.  (Think politicians, economists and meteorologists).  But let’s have some candid reflection about our collective ability to do so.

Who would have predicted nine years ago that we would stand on top of mounting records in US equity markets?  That interest rates would still be near historic lows?  Or that Amazon’s market capitalization would easily eclipse that of Wal-Mart, Target, Kroger, Best Buy, Kohls, Macy’s, Dicks Sporting Goods, Under Armour, Dollar General, TJ Maxx, (plus others) combined?  A family can’t live in a virtual single-family home, but they certainly can shop for goods that way.  FYI…Target on its own made more profit over the past year than Amazon.

That nine-year reference is an important one.  2008 saw the S&P 500 drop by -37%.  The world was in the vice grip of financial system paralysis, and predictions of economic prosperity, lets be honest, were as scarce as home equity.  We all remember it.  How it felt.  Not to read about it from a 1929 history book, but to run our lives through it.  To make a forecast on January 1st, 2009, that the S&P 500 would increase on average more than 15% per year for the next nine would have come with a side of pixie dust.  Incidentally, the market would have been down nearly -25% to start that bold prognostication before ultimately coming true.

Backtrack even further to 1968.  The brightest minds from multiple disciplines were assembled in New York for the Foreign Policy Association’s fiftieth anniversary.  Within the throws of the Vietnam War and the cloud of Martin Luther King’s assassination, their charter was to look fifty years into the future, documented in a book called “Toward the Year 2018”.  Clear misses such as nuclear replacing natural gas and “the suppression of lightning” can be coupled with eerie accuracies like “large-scale climate modification will be effected inadvertently” from carbon dioxide.  Or, “a global communication system (of weather and communication satellites) would permit the use of giant computer complexes” with the revolutionary potential of a data bank that “could be queried at any time”.  Spooky.  So is “putting broad-band communications, picture telephones, and instant computerized retrieval in the hands of (humans)…is much too optimistic” to assume that these same technologies would entail the ability to use them wisely.
The biggest misses, however, were outlined recently by Paul Collins of The New Yorker in the current, real-life 2018.  “Not a single writer predicts the end of the Soviet Union – who in their right mind would have.  There’s also nary a woman contributor, nor a chapter on civil rights in sight.”  The 1968 book did ask the question: “Will our children in 2018 still be wrestling with racial problems, economic depressions, other Vietnams?” and then forgets to answer.

Today we sit in the comfort of hindsight.  Basking in the profits and prophesy.  But what did we really learn?  We learned that a forecast, if overtly relied upon, can miss the eventual truth considerably. A solid process, on the other hand, captures the “when”, not the “if”.  Process waits for the future patiently and
does not attempt precise calculation.

The Gilbert & Cook investment process shapes to each circumstance.  Future client events are planned for now and a diverse mix of tools are set in place to anticipate multiple forecasts. Near-term, mid-term, and long-term categories are matched to the risks and rewards fashioned together by our team and the client.  We spend our predictive power and experience on those issues that can be controlled.

We do still have thoughts around the obstinate big picture as the US economy has every chance to continue growing the next few years, thereby setting the record for the longest uninterrupted (by a recession) expansion in our nation’s history.  While stretched in terms of time, the dollars produced in this recovery trail past accounts so our view is toward sustainable growth.  New US corporate tax laws are favorable to company profitability and free cash flow providing a 2018 tailwind for stocks.  International equities may continue to outperform the US due to being earlier in their economic recovery cycle and more favorable in valuation and currency effect.  And our expectations for bond returns are muted, but continue to provide inevitable volatility control for stocks.

That’s the beauty, excitement, and reward of it; that no one can truly know in absolutes what lies around the corner.  Rely on process, not prediction.