Posts

2020 Reflections | Year End Letter

NEW YEAR’S WISHES

As we look back over 2020, this year has turned out very differently than we expected at the start. As the world has slowed down to keep everyone safe, Morton Capital has continued its work to bring an essential service to our clients and community. As you’ll see from the highlights below, we are more dedicated than ever when it comes to our team and our clients. We would like to thank you for allowing us to continue to be part of your story, especially during such a challenging time.

 

MC TEAM AND GROWTH

In 2020, initiatives around hiring, team development, and firm growth continued to be a focus.

  • MC was named one of the Best Places to Work for Financial Advisors by Investment News for the second year in a row. This list highlights the top 75 firms nationwide in the financial advice industry.

  • We implemented our Employee Value Proposition, a commitment by MC and its team members to create an organization full of meaning and purpose and that champions our core values.
  • We launched our Mentor/Mentee program, which pairs team members across the firm to provide support and development around such skills as leadership, presentation skills, and written communication.
  • We held our first Core Values Awards, highlighting team members who exemplify each of our five core values.

  • This year, we began working more closely with Talia Jacqueline of Visceral Impact to help with team development and to teach us about the psychology of communication.
  • MC hired talented new people across several teams, including the advisory, compliance, client service and private investments teams. New hires included:
    • Brian Mann (Wealth Advisor), Mollie Privett (CFP®, Client Service Associate), Thao Truong (CFP®, Associate Wealth Advisor), Sherry Uchuion (Compliance Administrator), Jessica Hull (Client Service Administrator), Cameron Meek (Client Service Administrator), Trent Paddon (Client Service Administrator), Lauren Salas (Private Investments Administrator), and Judy Lee (Private Investments Administrator)
  • Across the firm, leaders met with team members to discuss individual, personalized career path timelines, for a total of 45 firm-wide.

  • Advancements through those career path timelines included:
    • Menachem Striks (Chief Compliance Officer), Sarah Ellis (Client Experience Manager), Dan Charoenrath (Director of Operations), Olivia Payne (Associate Wealth Advisor), Chris Wahl (Associate Wealth Advisor), Benjamin Markman (Trader), Elana Yaffe (Financial Planning Associate), Edward Garcia (Paraplanner), Patrick Garcia (Fund Relationship Manager), Moriah Bowles (Client Service Technical Specialist), Austin Overholt (Client Service Administrator), Kierstan Lewis (Private Investments Administrator)
  • We enhanced leadership development initiatives and the number of team retreats.
  • Two of our team members became new partners in the firm: Wealth Advisor Chris Galeski and Chief Compliance Officer Menachem Striks.
  • Through the hard work and dedication of our team, we were able to add 40 new client households to the MC community. We now manage over 1,000 client households and surpassed $2 billion in assets under management (AUM).
  • Three team members welcomed beautiful babies Aila (Chris Galeski), Anderson (Carly Powell), and Presley (Patrick Garcia) this year.

 

INVESTMENT RESEARCH, FINANCIAL PLANNING, AND WEALTH AND LEGACY PLANNING

We work diligently behind the scenes to source great investment opportunities for our clients. To give you a peek behind the curtain, this year:

  • Our investments team had over 180 calls on new potential investment opportunities.
  • Out of all the new strategies reviewed, we introduced 3 new strategies.
  • Our CIO, Meghan Pinchuk, and our investment research, private investments, and portfolio management teams collaborated on an “Investment Approach” video that highlights the core tenets of our investment philosophy.

Financial planning and wealth and legacy planning are key ingredients to helping our clients get the most life out of their wealth, and we continually work, year after year, to refine and expand our planning offerings. This year, we:

  • Introduced a five-month-long Paraplanner training program to provide a strong foundation for our Paraplanners, both those staying on the Financial Planning Team career path and for those moving along the advisory team career path.
  • Expanded our Financial Planning and Wealth and Legacy Planning Teams to five members.
  • Reviewed and completed over 250 financial plans.
  • Completed over 130 Wealth and Legacy Planning meetings with Wealth Planner Brian Standing.
  • Held 48 education sessions for our team members around estate planning, insurance, tax strategies, and retirement planning.

 

MC IN THE COMMUNITY

Earlier this year, as a result of a company-wide innovation tournament, we formed an internal committee dedicated to pursuing charitable initiatives in the community. Our team members at MC feel passionately about giving back to the community, not just financially but also with our time and energy. Here are a few of our 2020 charitable initiatives:

  • Community Give Back – We were able to help 22 individuals/families with complimentary financial planning advice at a time when many are having to make extremely hard financial decisions.
  • Get Moving Fitness Challenge – In November, we chose Feeding America as the recipient of our first-ever fitness challenge for charity. Every time a team member exercised for 30 minutes, MC donated $5. We are excited to report that our team members were active 532 times, logging more than 250 hours and raising $2,660!
  • Holiday care packages – In December, we collected non-perishables, toiletries, and other supplies to send to the military overseas. We were able to send over 150 holiday care packages this year.

 

INDUSTRY RECOGNITION, ENHANCEMENT, AND EDUCATION

 Education is incredibly important to us at MC, as is enhancing our offering through technology and marketing initiatives. We are also pleased to share below how our firm and team members are making an impact in the financial services industry.

  • Virtual conferences:
    • COO Stacey McKinnon’s “Good to Great” presentation at Bob Veres’s virtual 2020 Insider’s Forum
  • In addition to being featured on industry forums and at conferences, MC hosted our own live webinars for the first time this year.
    • CEO Jeff Sarti and CIO Meghan Pinchuk presented market review webinars over the past four quarters.
    • Our advisory team hosted our six-part “Staying Connected During COVID-19 webinar series.
  • We launched MC’s social media presence, writing hundreds of posts over the course of this year, including advisor-written articles, our This Is Wealth series, and book stack posts of what our team has been reading.

  • To support our increased use of home offices and virtual client meetings, we expanded our technology infrastructure to include Zoom’s cloud-based phone service and the appointment scheduling software Calendly.
  • We updated our reporting process to shift to more on-demand access of portfolio performance through our online client portals rather than traditional quarterly performance reviews.
  • In February, we closed out our popular Financial Bites educational lunch series.
  • Our team members continued to work towards increasing their knowledge by obtaining additional certifications that enhance our offering.
    • Series 65 license (wealth management): Olivia Payne, Benjamin Markman, and Chris Wahl
    • CFP® certification (financial planning): Mollie Privett

Even in such a challenging year, it has been important to us to continue to pursue knowledge and growth to become even better stewards of our clients’ wealth. This year, more than ever, we feel truly grateful for your continued confidence in us and wish you and your family a happy, and healthy, new year.

Here’s to a brighter year ahead.

Your Morton Team

Mid-Quarter Newsletter – November 2020

Year-End Tax Planning

Yes, it’s that time of year again: When it starts to get a bit nippy in Southern California and we have to wear long-sleeve shirts with our shorts and sandals. The time of year when things start to get a little cheerier and we look forward to the promise of a new year ahead (especially after 2020). Yes, you guessed it—it’s time for tax planning!

This year has been an eventful one, to say the least. Amid the social, medical, and political turmoil of 2020, there have been two laws passed that may affect your year-end tax-planning: the CARES Act and the SECURE Act (passed a lifetime ago in January). Let’s take a look at some key opportunities in the new laws, as well as some oldie-but-goodie strategies, to see what’s best for you.

  • Maximize your retirement savings
    • Did you turn 50 this year? If so, you’re entitled to a $6,500 catch-up contribution for your 401(k) plan and an extra $1,000 for traditional and Roth IRAs.
    • If you’ve already maxed out your 401(k) contribution, and your company retirement plan allows you to, consider contributing additional funds to your plan on a non-deductible basis. For 2020, the total contribution limit is $57,000 (made up of your first $19,500 employee elective deferral + any employer matching + any additional contributions you make).
    • If you’re over 70.5 and still working, the SECURE Act increased the age limit to contribute to your traditional IRA to 72.
      • Note, though, if you’re considering making a qualified charitable distribution (QCD), making a deductible IRA contribution may reduce how much of the QCD you can deduct.
    • Take advantage of deductions
      • Charitable deductions
        • The CARES Act increased the limit on charitable deductions in 2020 to 100% of AGI for cash contributions made to public charities.
          • Note: contributions made to a private foundation or a donor-advised fund do not qualify as qualified charitable contributions (QCCs) so the 60% AGI limitation for cash would apply.
        • If you don’t itemize deductions, the CARES Act also permits an above-the-line deduction of $300.
      • Consider a Roth conversion
        • If your income is lower this year—either due to COVID-19 and/or the CARES Act waiver of required minimum distributions for 2020—consider doing a Roth IRA conversion since you’ll already be in a lower tax bracket.
        • The SECURE Act requires that IRAs inherited by non-spouse beneficiaries be distributed within 10 years. Mitigate the tax impact on your heirs by converting funds from a pre-tax IRA to a Roth so the distributions to your heirs will be tax-free.
        • If a Roth conversion is appropriate for you, you can pair it with your QCC to offset the income recognized from converting pre-tax funds into a Roth.

If you’re interested in discussing any of the above strategies further, contact your wealth advisory team now. The last couple months of the year can get very busy with tax-planning requests, so processing times can be delayed at brokerage account custodians. If you and your advisor decide that one (or more) of these strategies is right for you, start early to ensure any transactions are processed by year end. The holidays are going to look a lot different this year, so perhaps a silver lining is the opportunity to be more strategic when it comes to another December tradition—tax planning.

Disclosures: This information is presented for educational purposes only. It is not written or intended as financial or tax advice and may not be relied on for purposes of avoiding any federal tax penalties under the Internal Revenue Code. You are encouraged to seek financial and tax advice from your professional advisors before implementing any transactions and/or strategies concerning your finances.

 

Schwab IMPACT Video & Sharkpreneur Podcast

Featuring our CEO, Jeff Sarti

Our CEO, Jeff Sarti, was featured at Charles Schwab’s virtual IMPACT conference. Thousands of investment advisory professionals gathered remotely to learn about how to think differently about the issues that matter most to their practices. This year Schwab highlighted four firms based on the impact they are making in the industry. In a year that has brought so much change, we are honored to be chosen. Watch the video below as Jeff shares his personal thoughts on serving our clients during these uncertain times.

Jeff was also featured on a recent episode of the Sharkpreneur podcast with host Seth Greene, one of the original sharks from the hit TV show Shark Tank. Jeff discusses Morton’s market outlook given the challenging economy and also explains how our three core beliefs drive our business decisions and empower our internal teams.

To watch Jeff’s video from the Schwab IMPACT conference or listen to his podcast with Seth Greene, click below or visit our Insights page on our website.

Links:

Schwab IMPACT video link:  https://mortoncapital.com/schwabimpactvideo/

Sharkpreneur podcast link: https://mortoncapital.com/sharkpreneur-podcast-featuring-jeff-sarti-growing-to-2-billion-aum/

 

What Does “Money Printing” Really Mean?

In recent years, the term “money printing” has become commonplace with investment professionals, economists and politicians. But what does it actually mean? While the specific execution can be highly nuanced and rather complicated, at its core, money printing is when assets suddenly appear on the balance sheet of the Federal Reserve (Fed), which then facilitates the distribution of those assets to privately held banks. Contrary to its name, money printing doesn’t constitute the use of a physical printing press, but, in our electronic world, just requires the push of a button to make digital assets appear.  To better understand what money printing is and why we should care about it, let’s take a look at money printing in action over the last two global economic recessions.

 

Money printing during the Great Financial Crisis (GFC)

To ensure they can meet their obligations, banks must hold a certain amount of cash as reserves. In 2008, according to the FRED economic database, U.S. banks had very low cash levels (only around 3%!), which meant that, as millions of Americans defaulted on their mortgages, banks didn’t have the cash on hand to remain solvent on their own. The Fed stepped in and essentially created “cash” in banks’ accounts with a few keystrokes. The hope at the time was that this move would shore up bank balance sheets and allow them to start lending again to stimulate the economy. While the first objective was accomplished, the higher level of lending activity didn’t materialize, leading many to cite this example as evidence of how money printing was not economically stimulative or inflationary.

 

Money printing during COVID-19

Over the last several months, the financial media has highlighted numerous ways in which banks are now in better shape than in 2008. However, total debt as a percentage of the gross domestic product in the U.S. economy remains very high. High debt levels make the economy fragile to external shocks—COVID was an example of such a shock. As millions of people lost their jobs and businesses struggled to remain solvent, it quickly became clear that this round of money printing needed to channel money directly into people’s pockets rather than shore up the cash reserves of banks.

To provide the economy with trillions of dollars, the government passed a large fiscal package, which included increased unemployment benefits, stimulus checks and paycheck protection loans. To fund these fiscal outlays, the government had to issue even more Treasury securities, which the Fed stepped in to purchase as the buyer of last resort. Unlike during the GFC, money was poured directly into the economy. As a result, the money supply sharply increased.

The real risk of all of this money printing and fiscal stimulus is that there are now more dollars out there chasing the same number of goods. While money printing may not be obviously inflationary in the short term, it’s essentially adding powder to the inflation keg. Just because it hasn’t ignited yet doesn’t mean that all that extra powder won’t ultimately matter. While some investors may choose to ignore this risk, we’ve turned increasingly to real assets such as real estate and gold to protect client portfolios. Money printing may seem like a harmless push of a button, but its prevalence as the stimulative tool of choice for those in charge makes it especially important to understand and monitor.

Disclosure: This information is for educational purposes only. It should not be taken as a recommendation, offer or solicitation to buy or sell any individual security or asset class. This document expresses the views of Morton Capital and such views are subject to change without notice. Any investment strategy involves the risk of loss of capital. It should not be assumed that MC will make investment recommendations in the future that are consistent with the views expressed herein.

 

Welcome Judy and Cameron

Judy Lee

Private Investments Administrator

Judy Lee came to Morton Capital in March of 2020, after previously working in graphic design, copy editing, and project management for over 20 years. She brings a wealth of experience and organizational skills, having worked in the fields of publishing, product design/manufacturing, corporate/marketing design, and education. Judy graduated with a Bachelor of Arts degree in English from the University of California, Los Angeles. When not at work, she enjoys spending time with her family, collecting children’s books, cooking, watching Dodgers and Bruin sports, and serving at her church.

 

Cameron Meek

Client Service Administrator

Cameron Meek joined Morton Capital in May 2020 as a Client Service Administrator. Cameron is originally from North Dakota, and moved to California to pursue work in the entertainment industry before attending Pepperdine University. She graduated from Pepperdine with a degree in communications. Cameron enjoys spending time at the beach with friends, hiking, and trying new recipes.

 

DISCLOSURE: Your security and privacy protection is important to us. All emails with attachments or the word “secure” appearing in the subject line have been sent with the highest level of security and encryption available to protect your privacy.

Please contact your Wealth Advisor at Morton Capital if there are any changes in your personal or financial situation or any changes in your investment objectives, or if you wish to add, or to modify any reasonable restrictions to our investment advisory services. A copy of our current written disclosure statement (Form ADV Part 2) discussing our advisory services and fees continues to remain available for your review upon request. All e-mail sent to or from this address will be received or otherwise recorded by Morton Capital in accordance with SEC regulations and is subject to archival, monitoring, or review by someone other than the recipient. The information contained in this e-mail message is intended only for the personal and confidential use of the recipient(s) named above. If the reader of this message is not the intended recipient or an agent responsible for delivering it to the intended recipient, you are hereby notified that you have received this document in error and that any review, dissemination, distribution, or copying of this message is strictly prohibited. If you have received this communication in error, please notify us immediately by e-mail, and delete the original message.

Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment, investment strategy (including the investments and/or investment strategies recommended by Morton Capital) will be profitable. Many factors affect performance including changes in market conditions and interest rates and changes in response to other economic, political or financial developments. There is no guarantee that a particular investment objective will be achieved and Morton makes no representations as to the actual composition or performance of any security.

Quarterly Commentary – Q3 2020

In our third quarter 2020 client letter, we address four prevalent myths as they relate to financial markets and our clients’ portfolios:

Myth #1: The economy and the stock market have recovered
Myth #2: The stock market leaders (i.e., mega-cap tech stocks) will keep outperforming.
Myth #3: If [insert Democrats or Republicans] win the election, the stock market is doomed.
Myth #4: Stocks and bonds are good diversifiers.

To read the entire letter, click here or on the image below!

Why Is Gold Going Up?

Gold is making headlines in 2020, as its performance leads most other asset classes year-to-date and investors are starting to take notice. In particular, Warren Buffet’s recent purchase of a gold mining stock has caught the attention of the media. Those who only think of gold as a “safe-haven” investment have been surprised by its strong performance even as the stock market rallied from its March low. But fundamentally, we believe that gold is not an investment at all. Instead, it’s just another form of money like the U.S. dollar or the Euro. So, if it’s not an investment, what’s driving this big rally in gold? While the answer can be complex, we’d argue that there are two main areas on which to focus when it comes to understanding the price of gold: the money supply and investor sentiment.

Read the full article by clicking the image below.

 

Mid-Quarter Newsletter – August 2020

Our Investment Philosophy

The last several months have been extraordinary to say the least and there are still so many unknowns in terms of the financial markets, our economy, and what our world will look like post-pandemic. As a firm, we have undoubtedly adapted how we communicate with our team, other business professionals, and our clients. Throughout all of these changes, the element of our business that has stayed consistent is our investment philosophy. At Morton Capital, we’ve always taken a different approach to investing—one that we believe is the best way to provide the returns our clients need for their lifestyle while trying to protect them from the swings of the market. Our beliefs have remained the same since our founder, Lon Morton, started our company almost 40 years ago and we take great pride in carrying on his legacy.

As we continue to communicate virtually, our Investment Team recently created a video that speaks to how we design portfolios to help our clients get the most life out of their wealth. Watch the video to meet the team and learn a little more about us.

Watch our Investment Approach Video here.

 

Financial Advisor Success Podcast & RIA White Paper
Featuring our COO, Stacey McKinnon

Our Chief Operating Officer, Stacey McKinnon, was featured on a recent episode of Michael Kitces’s Financial Advisor Success Podcast. Michael is a well-known speaker, writer, and editor in the financial services industry. In the episode “Scaling an Advisory Firm by Finding New Talent Outside the Financial Services Industry,” Stacey and Michael talked in-depth about how Morton has grown and evolved as a firm in recent years. Stacey touched on our culture of trust initiative in 2017, our non-traditional approach to hiring talent from outside the industry, and the way we’ve restructured our compensation model.

Stacey also co-authored an RIA white paper with the CEO of PFI Advisors, Matt Sonnen, called “The New RIA Workplace.” The industry report explores the changes firms have had to make to their businesses since stay-at-home orders began. It also shares the pros and cons of both office and remote work environments, how leaders and managers are maintaining company culture during these times, and what the office of the future could look like.

Click here to listen to Stacey’s podcast with Michael Kitces and read the RIA White paper here.

 

Why Is Gold Going Up?

Gold is making headlines in 2020, as its performance leads most other asset classes year-to-date and investors are starting to take notice. In particular, Warren Buffet’s recent purchase of a gold mining stock has caught the attention of the media. Those who only think of gold as a “safe-haven” investment have been surprised by its strong performance even as the stock market rallied from its March low. But fundamentally, we believe that gold is not an investment at all. Instead, it’s just another form of money like the U.S. dollar or the Euro. So, if it’s not an investment, what’s driving this big rally in gold? While the answer can be complex, we’d argue that there are two main areas on which to focus when it comes to understanding the price of gold: the money supply and investor sentiment. Read the Full Article here.

 

A Conversation About Change with Chris Galeski
Featuring Retired PGA Tour Player Peter Tomasulo 

Chris Galeski, Wealth Advisor and Partner at Morton Capital, speaks with Peter Tomasulo, retired PGA Tour player and Director of Investor Relations at Lyon Living. In this 30-minute video interview, they reflect on their former sporting careers, life lessons, family, and the triggers and milestones that opened the door for transition and career change.

 

Watch the video!

Quarterly Commentary – Q2 2020

Welcome to Wonderland

Adults and children alike are familiar with Lewis Carroll’s classic story, Alice’s Adventures in Wonderland, where the intrepid Alice ventures into a fantasy world that mixes the ridiculous with periodic insights into the human condition.  The story is one of the most well-known examples of the “literary nonsense” genre, which combines elements that make sense with others that do not.  In thinking about how to explain current events, certain anecdotes from the story offer some striking similarities.  If we lived in Wonderland, we might accept a market that is optimistically rising in the middle of a pandemic. But given that we do not live in Wonderland, we are staying consistent with our investment philosophy of risk management, true diversification, and cash flow, which has shown its resiliency in the first half of 2020 despite the wild roller coaster ride in the broader markets.

As the magnitude of the pandemic started becoming clear in early March, the financial markets fell into a bear market.  From its high in mid-February, the S&P 500 Index lost almost 35% in a span of five weeks, as volatility exceeded the turbulence of the Great Financial Crisis in 2008 and 2009.  Both the Federal Reserve (Fed) and the federal government reacted to the market downturn with aggressive policy responses that exceeded any other historical response (more on this later).  The extraordinary stimulus fueled a robust recovery in equity prices, though limited for the most part to larger companies in the United States.  From its low in late March, the S&P 500 Index rallied close to 40% to close down only 3.1% for the year by the end of the second quarter.  While other stock indices had a strong second quarter, most are still meaningfully negative on the year.

The table below summarizes the second-quarter performance for selected indices.

 

“Curiouser and Curiouser” 

After tumbling down the rabbit hole, Alice invents the word “curiouser” to try and describe the simultaneously fascinating and nonsensical world in which she finds herself. Our reality today bears similar attributes to this world of make-believe. All the economic news pundits out there keep talking about the different letter shapes that the economic recovery could take. Will the precipitous drop in economic activity be followed by an equally strong rebound, creating the ideal V-shaped recovery? Will economic growth flatline for some time, creating more of an “L” or, ultimately, a “U”? While the debate is still rampant as it relates to the fundamentals of the global economy, stock prices are looking more and more like a “V” as illustrated in the below chart of the S&P 500’s recent performance.

 

Fastest Stock Market Fall and Recovery in History

There is a real danger of confusing this stock market rebound with an economic recovery. While many stock prices have had a V-shaped recovery, valuations and underlying fundamentals tell a completely different story. Corporate earnings have been almost cut in half from pre-crisis levels. While unemployment has slowed its rise, it remains meaningfully elevated. Though numerous cities in the United States started to reopen a few weeks ago, spiking virus cases are sending many back into lockdown. These challenging fundamentals have made us wonder whether the “V” in stocks will turn into a “W” and retest previous lows.

There is a general perception out there that all this economic damage is temporary and will be reversed as soon as there is a vaccine or we get the virus under control. Unfortunately, though, we are already seeing more permanent damage to the economy in the form of spiking bankruptcies—and we are only a few months into this crisis. Many of these bankruptcies are big-name companies that most of you likely know: Hertz, J.Crew, Neiman Marcus, JCPenny, Cirque du Soleil, Pier 1 Imports, and 24 Hour Fitness. Most of the bankruptcies so far have been consumer-related companies, which does not bode well since the consumer accounts for two-thirds of all economic growth! With so much bad news on the actual economy, it is definitely “curiouser and curiouser” that the stock market continues to march higher, day after day, almost in defiance of reality.

 

The Stimulus Rabbit Hole

In the absence of improving fundamentals, the U.S. government’s aggressive response to the COVID-19 crisis seems to be the driving force behind the stock market’s recovery.  The below graph puts the current stimulus and policy response in context with spending that took place in previous crises.

These numbers are in today’s dollars, or, in other words, they are adjusted for inflation to make them apples to apples. And these numbers do not factor in the additional stimulus that is likely coming in the ensuing months. The CARES Act infused $2 trillion into the American economy and included assistance to businesses, states and localities; 159 million stimulus checks to individuals and families; and extra payments of $600 a week in unemployment benefits to tens of millions of Americans. The Fed entered the fray as well by employing their main tools designed to stimulate economic growth: lowering interest rates and buying bonds (with the goal of keeping long-term interest rates low). The Fed very quickly lowered short-term rates to zero and then launched a bond-buying campaign that is expanding its balance sheet to a parabolic degree. Already, the Fed has added $3 trillion to its balance sheet, pushing it up to an all-time high of $7 trillion, and it has all but promised to continue throwing money at the problem and do whatever it takes to get the economy back on track. The challenge is that with each economic bump in the road, it seems to be taking more and more extreme policy responses to keep the economy on track. As the Red Queen tells Alice, “It takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!”

By injecting massive stimulus, governments are once again contributing to speculative investor behavior that has further decoupled asset valuations from underlying fundamentals. This manifests itself in various forms, one example being the massive run-up in the stock prices of a handful of technology companies. The five largest stocks in the S&P 500 are Facebook, Amazon, Apple, Microsoft, and Google. Toward the end of May, those five stocks were up 15% for the year while the other 495 stocks in the index were down 8%. While some of these companies have held up well or even prospered in the current crisis, their stocks are still escalating at a pace well beyond their current earnings growth trajectories. Not surprisingly, the increase in the stock market (coupled with Americans getting stimulus checks and no longer having professional sports to bet on) has corresponded with a spike in new accounts being opened at brokerage firms like Charles Schwab and E*TRADE. These new traders not only speculate on the darling tech companies, but have also jumped into distressed names. There has been very high trading volume in companies like Hertz, which declared bankruptcy in late May and subsequently saw a jump in its stock price from $1 up to $5, before it fell back down again, as these inexperienced day traders jumped in and out of a stock that is very likely worth $0 at the end of the day. Perhaps Alice would have been able to empathize with these traders when she declared, “Why, sometimes I’ve believed as many as six impossible things before breakfast.”

 

We Refuse to Play Croquet with a Flamingo

Investing in broader markets today, we can relate to how Alice must have felt playing “croquet” with the Queen, where the balls were hedgehogs and the mallets live flamingos. The rules of the game keep changing, but rather than give into the nonsensical, we are more determined than ever to find investments where the fundamentals still make sense.

An example of one such investment is the allocation that we made during the second quarter to a mutual fund that invests primarily in bonds backed by real estate. At the height of the volatility this year, these bonds traded down dramatically as certain holders were forced to sell to generate liquidity. The fundamentals, however, did not justify such dramatic price declines. When we dug deeper, we found that many of the bonds were backed by seasoned home mortgages that were outstanding prior to the 2008 crisis. These loans survived that crisis and now have 12 to 15 years of payment history, lower balances since they have been amortizing over time, and typically higher home values since real estate prices have appreciated. Pools of these mortgages had average loan-to-value ratios of approximately 55-60%, meaning that home prices would have to take major hits before the loans would be at risk of impairment. Because of the dramatic price declines these bonds saw earlier this year, they now yield income in the mid-single digits and have the potential for double-digit total returns as prices recover in the future.

Another example of sticking to the fundamentals is our allocation to gold. We have had an allocation to gold for some time but increased our target to this asset in late 2019. While we, of course, had no insight into the upcoming pandemic, we were increasingly concerned with the lack of discipline being exhibited by governments. This lack of discipline has only been magnified in the current environment, increasing our conviction in gold as a true store of value in an environment where more and more money is being printed every day. We think that this is an environment where the fundamentals support a strong outlook for gold.

We continue to look for other opportunities with solid fundamentals, but many of the investments that are currently on our radar are less liquid than those found in public markets. Even prior to the recent crisis, we were finding that willing investors could trade market risk for some degree of liquidity risk (i.e., an inability to immediately sell for cash). We believe these less liquid assets have the potential for more consistent long-term returns based on the fundamentals and offer investors an alternative to exposing themselves to the irrationality of investing in Wonderland. However, the amount of liquidity risk that is appropriate is going to vary for each individual’s portfolio. As we pursue a number of these new strategies in the coming months, we would strongly encourage you to revisit your financial plan. Your plan is essential in determining how much liquidity risk is appropriate for your personal situation. It is also a great time to revisit your risk tolerance and ask yourself how much volatility you are comfortable within your portfolio. We just went through a roller coaster ride in the stock market; if you found yourself nervous and losing sleep over it, it may make a lot of sense to take some risk off the table now that asset prices have had a strong recovery.

Please do not hesitate to contact your Morton Capital wealth advisory team if you have any questions or would like to review your portfolio or financial plan in more detail. As always, we appreciate your continued confidence and trust.

Morton Capital Investment Team

 

 

Disclosures

This commentary is mailed quarterly to our clients and friends and is for information purposes only.  This document should not be taken as a recommendation, offer or solicitation to buy or sell any individual security or asset class, and should not be considered investment advice. This memorandum expresses the views of the author and are subject to change without notice. All information contained herein is current only as of the earlier of the date hereof and the date on which it is delivered by Morton Capital (MC) to the intended recipient, or such other date indicated with respect to specific information. Certain information contained herein is based on or derived from information provided by independent third-party sources. The author believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information. Any performance information contained herein is for illustrative purposes only.

Certain private investment opportunities discussed herein may only be available to eligible clients and can only be made after careful review and completion of applicable offering documents. Private investments are speculative and involve a high degree of risk.

The indices referenced in this document are provided to allow for comparison to well-known and widely recognized asset classes and asset class categories. Q3 returns shown are from 06-28-2019 through 09-30-2019 and the year-to-date returns are from 12-31-2018 through 09-30-2019.  Index returns shown do not reflect the deduction of any fees or expenses. The volatility of the benchmarks may be materially different from the performance of MC.  In addition, MC’s recommendations may differ significantly from the securities that comprise the benchmarks.  Indices are unmanaged, and an investment cannot be made directly in an index.

Past performance is not indicative of future results.  All investments involve risk including the loss of principal. Details on MC’s advisory services, fees and investment strategies, including a summary of risks surrounding the strategies, can be found in our Form ADV Part 2A. A copy may be obtained at www.adviserinfo.sec.gov.

Quarterly Commentary – Q1 2020

“Weathering the Storm Together”

It is shocking how our lives have changed so dramatically in the span of a few weeks. While these are unprecedented and challenging times, we are grateful that everyone at Morton Capital and their families are safe and healthy. We hope that you and your families are as well. Beyond our company, we are heartened to see the strong spirit of cooperation on display every day in our larger community: hospital personnel and medical professionals exhibiting courage and dedication; pharmaceutical firms rushing to develop a vaccine; industrial companies shifting their businesses to manufacture ventilators; and even a beer brewery helping to produce hand sanitizer and giving it away for free to first responders. We may be isolated in our homes, but we are all truly in this together. We feel confident that we will emerge from this pandemic a stronger firm and community.

 

“The Bull Market Hits the Illiquidity Wall”

In a 180-degree reversal from 2019, volatility spiked and risk assets fell sharply during the first quarter of 2020. The U.S. equity market drop of over 30% from its February peak was the fastest such decline on record. The S&P 500 Index either rose or fell at least 4% in eight consecutive trading sessions, the longest streak in history. Given the sharp stock rally in the last week of the quarter, the S&P 500’s 19.6% loss appeared somewhat tame, especially as compared to broader markets: U.S. smaller company and value stocks and developed and emerging international stocks all experienced meaningfully higher losses. While the negative demand shock affected most commodities, oil was especially hard hit as it collapsed over 65% to the low $20s per barrel. Gold was one bright spot, up close to 4.0% during the quarter after a strong year in 2019. The table below summarizes the first-quarter performance for selected indices versus 2019.

While stock markets and commodities experienced significant volatility, the more unexpected story was the corresponding carnage in bond markets. While U.S. government bonds were up modestly, other major categories of bonds experienced significant losses. The below chart looks at the decline in various bond categories in 2020 as compared to their maximum drawdown during the 2008 crisis as well as their recovery when the markets rebounded in 2009:

Certain types of bonds will undoubtedly face challenges if the current economic climate worsens. However, the sharp selloff in bonds was not only driven by concerns for the future, but also by a wave of forced selling that sucked up all the liquidity in the bond markets. Counterintuitively, higher-quality bonds actually took some of the largest hits since that is where desperate sellers rushed believing that they would have the most liquidity. At this stage, certain bond securities seem to be oversold, as they also were back in 2008. The above chart demonstrates that opportunistic and patient investors who saw this as an opportunity back then were ultimately rewarded with equity-like upside when conditions in bond markets stabilized in 2009. We believe that we are with the right managers to capitalize on these types of moves. We currently have meaningful allocations to bond funds that we categorize as “tactical fixed income,” meaning that the managers have broad mandates to move in and out of various bond market segments depending upon where they see opportunities. These managers are now in a position to take advantage of the current market disruption if they believe it presents an opportunity for the longer term.

 

“Redefining Money at Ludicrous Speed”

In the classic Star Wars spoof, Spaceballs, light speed is not fast enough for Rick Moranis’s evil Dark Helmet. He insists that his spaceship jump to ludicrous speed, causing them to overshoot and lose their quarry. Similarly, recent events feel like they have been played out at ludicrous speed, starting with the fastest 30% decline on record for stock markets, followed up with a comparably fast and drastic monetary and fiscal policy response.

Back in the 2008 financial crisis, various government programs were rolled out by the Federal Reserve (“Fed”) and federal government over many months. In the current environment, government programs to shore up the economy and markets have been launched at a rapid-fire pace. The Fed has announced what equates to unlimited quantitative easing (or “QE”), which is a program where it essentially prints money to provide liquidity to the system. It accomplishes this by buying various securities, ranging from treasuries to corporate bonds, which aims to keep interest rates low and stimulate economic activity. QE was a favorite tool of the Fed’s back in 2008 after it lowered interest rates to zero and ran out of traditional stimulus methods. The scope of this current QE, though, makes the QE from 2008 look like child’s play. The Fed’s balance sheet has already increased to over $5 trillion and is projected to double to over $10 trillion by the end of 2020. These types of numbers are inconceivable in their size. Back in March of 2009, the entire global stock market was valued at around $27 trillion total. Today, we are talking about the Fed, just one of many central banks globally, owning assets of over $10 trillion. These types of policy moves are doing more than just stimulating economies and markets; they are redefining money. Money has historically been thought of as a store of value, but that definition is totally incongruous with the way it is being used today as trillions of dollars (and other currencies around the globe) are created out of thin air to stem the current crisis. The point is not that stimulus is not necessary given the extremity of the current crisis, but rather that there will ultimately be a cost.

 

“Focus On What We Can Control”

While there are many things outside our control in the current environment, there is also much that we can control about our own situations and how we respond to upcoming events. The recent stock and bond market volatility created an excellent opportunity for investors to reexamine and reaffirm their risk profiles. It is natural for investors to think they can handle more risk when markets are going up with very little interruption, as they had for the past decade. But recent events are a better measure of how much volatility investors can handle. Did this latest turbulence keep you up at night or were you confident in your long-term plan? Did you have the urge to get out of risky asset classes or were you comfortable with how your portfolio was positioned? When it comes to risk tolerance, there are two essential components: how much risk you should take to meet your goals and how much risk you are willing to take. The first component is a function of more objective criteria like your time horizon, spending needs and other data that can be input into your financial plan. The second component is all about emotions, but in spite of that it is an equally important part of the equation. Even if your financial plan dictates that you can have a more aggressive portfolio, if emotionally you cannot handle big swings, then that positioning may not be appropriate for you. After all, the best portfolio for you is one you can stick with, in good times and in bad.

Another important situation within our control is whether we have sufficient liquidity or emergency funds to meet our short-term cash needs. Certain asset classes like stocks, or even riskier bonds, are technically liquid on a daily basis. But just because you can sell daily does not mean that it is a good idea. On a short-to intermediate-term basis, stocks in particular should not be thought of as a source of liquidity. Instead, investors should have sufficient liquidity outside of their portfolios to meet their needs and handle any smaller emergencies that may arise. This prevents forced selling at the wrong time.

Finally, we can control how we allocate our portfolios and whether we are positioned aggressively or defensively in any given environment. When risks are heightened, as at present, we believe it is time to be defensive. Rather than avoiding risk (e.g., going to cash), this means favoring asset classes that we feel have more attractive risk/return characteristics than those of traditional stocks and bonds. While alternative assets are not immune to current events, they are typically much less sensitive than those traditional assets. We are in touch with all of our various managers and are monitoring the impact of current events on their portfolios closely. We believe that we are with the right managers that have the right mindset to face these types of challenges. The first order of business is protecting what we have, but if things deteriorate further, there will undoubtedly be opportunities for the longterm as well. We will continue to look beyond short-term noise towards how we can best protect and grow our clients’ assets for the longterm.

Please do not hesitate to contact your Morton Capital wealth advisory team if you have any questions or would like to review your portfolio or financial plan in more detail. As always, we appreciate your continued confidence and trust.

Morton Capital Investment Team

 

 

Disclosures

This commentary is mailed quarterly to our clients and friends and is for information purposes only.  This document should not be taken as a recommendation, offer or solicitation to buy or sell any individual security or asset class, and should not be considered investment advice. This memorandum expresses the views of the author and are subject to change without notice. All information contained herein is current only as of the earlier of the date hereof and the date on which it is delivered by Morton Capital (MC) to the intended recipient, or such other date indicated with respect to specific information. Certain information contained herein is based on or derived from information provided by independent third-party sources. The author believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information. Any performance information contained herein is for illustrative purposes only.

Certain private investment opportunities discussed herein may only be available to eligible clients and can only be made after careful review and completion of applicable offering documents. Private investments are speculative and involve a high degree of risk.

The indices referenced in this document are provided to allow for comparison to well-known and widely recognized asset classes and asset class categories. Q3 returns shown are from 06-28-2019 through 09-30-2019 and the year-to-date returns are from 12-31-2018 through 09-30-2019.  Index returns shown do not reflect the deduction of any fees or expenses. The volatility of the benchmarks may be materially different from the performance of MC.  In addition, MC’s recommendations may differ significantly from the securities that comprise the benchmarks.  Indices are unmanaged, and an investment cannot be made directly in an index.

Past performance is not indicative of future results.  All investments involve risk including the loss of principal. Details on MC’s advisory services, fees and investment strategies, including a summary of risks surrounding the strategies, can be found in our Form ADV Part 2A. A copy may be obtained at www.adviserinfo.sec.gov.

Quarterly Commentary – Q3 2019

“May You Live in Interesting Times”

The above phrase is an English translation of a traditional Chinese omen.  While it seems like a blessing, it is actually meant ironically and foreshadows a period of disorder and trouble. The omen feels appropriate given our current era of political and economic instability.  With the combination of continued trade tensions between the U.S. and China, slowing global growth, the re-emergence of hyperactive central banks and rising geopolitical uncertainty, things are a little more interesting than we would like.

Yet despite these forces of turmoil, both stock and bond markets have continued their steep ascent.  Most major stock indices are up double digits for the year, and even core bonds are up a surprising 8.5% for just the first nine months of 2019.  The third quarter did start to show some cracks, however, as smaller U.S. stocks and international stocks lost some ground even as large U.S. stocks and core bonds posted relatively strong performance.  The standout asset class for the quarter, though, was gold, as the proliferation of negative-yielding bonds has made the case for owning gold even stronger. The table below summarizes the third-quarter and year-to-date (YTD) performance for selected indices.

“But Why Is the Rum Gone?”

The 2003 film Pirates of the Caribbean: The Curse of the Black Pearl saw a motley crew of pirates (led by Johnny Depp’s Captain Jack Sparrow) hunting for treasure, but also with a running gag about the pirates’ desperation for more rum.  Investors today are thirsty for yield in a similarly desperate fashion.  While the precipitous drop in interest rates so far this year has resulted in strong price appreciation for bonds, investors are now asking themselves, “But why is the yield gone?”

The yield on 10-year U.S. Treasury bonds collapsed from 2.68% at the beginning of the year down to 1.67% by the end of the third quarter. The cause of the drop is mainly due to slowing global growth and international trade.  While these heightened risks have dented CEO confidence and business investment activity, U.S. consumers (accounting for 70% of the U.S. economy) have remained resilient in their outlook and spending.  The Federal Reserve seemed to err more on the side of concern, cutting rates twice during the quarter.  Significantly, global central banks are once again using monetary policy as a panacea for all problems.  Their re-introduction of unconventional monetary policies has resulted in record levels of negative-yielding bonds, with roughly 27% of global bonds sporting negative yields by the end of the third quarter.

How Can a Bond Yield Be Negative?

Negative interest rates are a remarkable and counterintuitive concept.  The only reason this concept exists is that central banks across the globe are desperately trying to stimulate their economies, and negative rates are a key part of their plan to force banks to increase their lending activity.  Historically, banks that chose to hold higher levels of cash reserves would make some positive return on those reserves.  However, both the European Central Bank and the Bank of Japan have set those reserve rates at negative levels.  The central banks hope that charging banks to keep their money idle will incentivize them to lend the money to businesses and consumers, thus stimulating their respective economies.

Negative rates on these bank reserves are one thing, but negative-yielding bonds are a different animal altogether.  In a normal environment, lenders receive interest on their loans as compensation for the default risk that they are taking on.  That rate of compensation varies, of course, depending upon the perceived level of risk.  A negative-yielding bond, on the other hand, is typically issued with zero percent yield and at a price above par. By the time the bond matures, the price will drop back down to par, ensuring that the investor who holds the bond to maturity will incur a loss.  A numeric example would be an investor who pays $102 for a bond yielding 0% that matures at a price of $100.  If that investor holds the bond to maturity, he or she will lose $2, resulting in an effectively negative yield or return.

Given the above, one may wonder who in their right mind would buy negative-yielding bonds?  There are a number of non-economic or forced buyers out there, such as European banks and index funds, which must invest in government bonds for regulatory or investment policy reasons.  In addition, speculative buyers may purchase these bonds to try and profit from potential price appreciation, but do not intend to hold these bonds to maturity.

Why Do Negative Bond Yields Matter?

There are potential consequences to this strange experiment with negative rates and yields.  The most obvious has been the steep appreciation in the prices of risk assets (e.g., stocks, bonds, real estate, etc.) as savers have been forced to take on more risk to maintain their lifestyles.  For example, the yields on bank CDs and Treasury bonds no longer meet most savers’ income needs so they are forced to seek higher-yielding returns in the stock market. This has led to a decoupling of asset prices from the underlying fundamentals and heightened valuations.  Also, with the proliferation of cheap debt, corporations have become over-leveraged to the point where many companies will be vulnerable to defaults when rates eventually rise.  Most importantly, however, we believe that these types of extreme policies have actually suppressed the very economic growth that central banks are trying to create.  With cheap debt comes the misallocation of capital.  What that means is that weak companies are able to survive much longer than they should be able to, which in turn takes away growth opportunities from stronger companies.  The end result is that weak companies that should go out of business end up puttering along, thereby keeping stronger companies from flourishing as they should.

Unsurprisingly, there is no convincing evidence that setting short-term policy rates to zero or below and buying large amounts of longer-term bonds has stimulated the economies of Europe and Japan.  These policies were effective short-term tools in the aftermath of the Great Recession to stabilize financial markets.  However, the two long-term drivers of any country’s economic growth are productivity and the growth of its labor force.  With productivity stagnant over the past decade, population growth has become even more important than in decades past.  Population growth trends, however, are negative in both Japan and the developed European countries.  In the U.S., structural changes within the economy and a slowing immigration trend have also combined to reduce growth potential relative to the past half-century.

There is no way to know how long traditional stock and bond markets will continue to run without any apparent regard for the fundamentals.  While it seems like an obvious decision not to invest in negative-yielding debt, it is somewhat less obvious where to invest given the heightened levels of risk and the wide ranges of return scenarios with more traditional asset classes.  In view of this, we have chosen to position our client portfolios away from traditional core bonds and focus instead on specialized segments of the bond market in an attempt to generate reasonable returns regardless of what happens with interest rates.  We have also chosen to trade market risk for illiquidity in a portion of client portfolios as these less liquid investments are often driven by factors beyond just economic growth and interest rate movements.  In interesting times such as these, the more true diversification and consistency we can incorporate into portfolios, the better we sleep at night.

Please do not hesitate to contact your Morton Capital wealth advisory team if you have any questions or would like to review your portfolio or financial plan in more detail.  As always, we appreciate your continued confidence and trust.

Morton Capital Investment Team

 

 

Disclosures

This commentary is mailed quarterly to our clients and friends and is for information purposes only.  This document should not be taken as a recommendation, offer or solicitation to buy or sell any individual security or asset class, and should not be considered investment advice. This memorandum expresses the views of the author and are subject to change without notice. All information contained herein is current only as of the earlier of the date hereof and the date on which it is delivered by Morton Capital (MC) to the intended recipient, or such other date indicated with respect to specific information. Certain information contained herein is based on or derived from information provided by independent third-party sources. The author believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information. Any performance information contained herein is for illustrative purposes only.

Certain private investment opportunities discussed herein may only be available to eligible clients and can only be made after careful review and completion of applicable offering documents. Private investments are speculative and involve a high degree of risk.

The indices referenced in this document are provided to allow for comparison to well-known and widely recognized asset classes and asset class categories. Q3 returns shown are from 06-28-2019 through 09-30-2019 and the year-to-date returns are from 12-31-2018 through 09-30-2019.  Index returns shown do not reflect the deduction of any fees or expenses. The volatility of the benchmarks may be materially different from the performance of MC.  In addition, MC’s recommendations may differ significantly from the securities that comprise the benchmarks.  Indices are unmanaged, and an investment cannot be made directly in an index.

Past performance is not indicative of future results.  All investments involve risk including the loss of principal. Details on MC’s advisory services, fees and investment strategies, including a summary of risks surrounding the strategies, can be found in our Form ADV Part 2A. A copy may be obtained at www.adviserinfo.sec.gov.

Morton Capital Perspective on Recent Market Volatility

“The stock market is a device for transferring money from the impatient to the patient.” – Warren Buffet

The markets have been on a roller coaster ride recently, but now is not the time to get off—it is time to be patient.  While we understand that fear is a natural result of uncertain times, it is important to remember that market corrections, and even recessions, are a natural part of the market cycle.  In this article we answer three key questions that we have been asked in recent weeks, including our thoughts on the economy, the markets and the recent volatility.

What is happening in the markets?

If you’re expecting more volatility, why not sell stocks now?

What is Morton Capital’s approach given this uncertainty?

READ OUR FULL ARTICLE HERE

_________________________________

 

Disclosure: This communication is for informational purposes only. Any investment strategy involves the risk of loss of capital. Some alternative investment strategies discussed are limited to qualified eligible investors. Past performance does not guarantee future results.