September 15, 2020 - Monthly Update

Dear all,

With summer 2020 behind us, we will remember it as the summer where we reconnected with our families and nature, leaving the big events and crowds for some time, later in the future. I hope you and your family are all doing well and have found a way to enjoy life under the COVID social distancing rules.

All of us here at CWM are doing well, and working from our office. In order to reduce risk to a minimum, we are still maintaining our emergency plan in place. All client appointments for planning and regular reviews will still be held via teleconferences (FaceTime or Zoom) or over the phone. Our office is available for meetings when necessary for signatures or other document work that cannot be handled through mail, with strict distancing rules, mandatory masks, and other precautions in place. We will be informing you about any changes to this as they happen.

This week is normally the week where many of you would be coming to our annual client seminar. These events have become a part of our life over the years, and they give us a chance to bring this CWM community closer with all of you in attendance, presenting ideas and discussing issues that touch us all as investors who are planning for your future and legacy. Every so often, at these events it happens that one of you met up with a former neighbor, a long-lost schoolmate, or even a cousin who they did not see in a while. I always enjoyed our staying much longer than planned after the presentations and dinner, continuing our discussion or talking about our families and travel plans with a drink in our hands. I will miss you this evening. Amela and Allie miss the excitement of planning and executing the event, but they already have some amazing ideas about next year. So, lets hope for the best… let’s start with our plans for 2021, and let’s all mark our calendars for Tuesday, September 14, 2021. I hope to see all of you there! I know Amela and Allie will be able to find a great place with enough space for everyone.

Until then, please stay in touch by reading these letters and commenting on them as you do so well, far into the Coronavirus Crisis. Please stay responsive to Allie’s and Mary’s requests for documents or info needed to keep your profiles and accounts updated and well maintained. Our systems and processes proved stable and secure. All of our reporting, fund distributions and account access systems worked as required without any interruptions. Please contact us if you find any issues with the service, so that we may correct them immediately.

As we continue with our planned reviews and updates, you will discover that income distributions have maintained their stability while the principal values on the income instruments are taking time to recover. On the other hand, moderate and growth performed very well. With fall arriving we finally have some real data on economy which is being used in our planning, projections, and calculations.

We are getting into an environment of lower returns and higher volatility. I believe the issues we had as the crisis started are behind us and the risk to the financial system is much lower now, so we will probably not see the lows of March again. The difference in performance between the tech and “traditional” assets is easy to see. But, as fast as the investors’ money went into the tech companies, some of it went out last week, scared by the possibility of a bubble being created in these stocks. The discrepancy will continue, I believe, because some of the technology coming out is, and will be accepted faster by the consumers looking to adjust their lives under social distancing. Volatility will likely stay with us since many of the economic risks we counted up through the spring are still here with us, and not to forget that the upcoming elections do make many investors nervous.

We have to stay focused on the possible consequences of the Fed policy. Spending at these levels and purchasing so many assets for the Fed balance sheet, as much as it was necessary, could cause problems to the economy in the long-run. As the Fed fights to keep us out of a depression, deflation and historically high unemployment, they might create some high inflation down the road. Rates of interest and the stability of income flows do matter. Valuation of the assets adjusted with the adjustment in the discount rate. However, the risk of income instability is perceived to be high and it is creating a disruption for investors traditionally looking for retirement income, now being forced to increase the amount of risk they carry or change their strategy and plans altogether.

Many investors are concerned about elections and even more about the possibility of instability with a contested election. Historically, as you can see from the attached document from Vanguard research, elections don’t make a meaningful statistical difference on the returns of average portfolios. Economic and tax policies could make a difference, but Investors crave clarity and stability more than anything else. Contesting elections creates instability and with no clarity investors might choose to move to the sidelines pushing all markets lower.

The data is showing us that US consumer spending is going down and that people are paying down their debt with savings. Our economic policy will likely have to do more to stimulate spending in the upcoming months without a secure vaccine available to start getting us back to some normality. A real estate boom in suburbia is keeping the whole industry going even with some dark predictions about the future of the mortgage payments and rents still abound. The US banks are still solid and appropriately funded. They are cheap because of the presumed weakness of the consumers and businesses, as well as because of the low rate expectations well into the future. Over the years, these banks have learned how to make a profit in the many services they provide and their strength is part of the reason why our economy is proving more stable than others in this crisis. As central banks around the world get pressured to make the short-term rates fixed (the developed countries have already created policies to do this), currency values might become very volatile as a relief valve for the money flow. Economies with more open trade and more valuable assets will possibly benefit. All of this is keeping us more concentrated on US assets and overweight towards them. Sitting this out, has proved to be a wrong strategy for many. We believe in staying invested and diversified.

As always, please contact us for any questions and comments. Stay safe and healthy and don’t hesitate to reach out to us if we can help with anything.

All the best,

Emir Culov

Partner, Portfolio Management Director