Newsletters - Wabash Capital

A Volatile Start to 2026

Mon, 06 Apr 2026 01:00:30 GMT

After a decent start to the year, markets dropped sharply during March with the beginning of the war in Iran. As the fighting expanded across the Middle East, selling intensified, with all major equity indices now in correction territory. Fixed-income markets followed equities down as interest rates climbed across the board. The price of oil jumped, as it always does when wars break out in the Middle East, bringing fears of a global economic recession.

Recession fears are well placed, as oil shocks almost always cause one. The price of 96% of American products are affected by rising oil prices. It is important to remember that oil is traded on global energy markets. It does not matter that the U.S. is the world’s largest producer of oil. Disruptions to the supply of oil anywhere in the world upend the entire market for oil, causing prices to rise. The longer the war lasts, the higher the price of oil will go.

If the war ends soon, we will probably see a jump in equity prices, but we still must deal with some significant issues. Chief among these is a U.S. economy that does not look as healthy as we would like. GDP grew at an anemic .7% rate in the fourth quarter of last year. For the entire year of 2025, GDP grew at a rate of 2.2%, well below the average of the past eighty years. The war and resulting jump in oil prices will likely affect GDP for the first quarter of this year. Another area of concern is the jobs market. The U.S. economy produces 200,000 new jobs on average each month. Less than 600,000 new jobs were created in all of 2025, and most of those were in the first quarter. The economy lost 92,000 jobs in February of this year. The lack of job creation, combined with a sluggish economy, is definitely a concern for investors.

Even with this current sell-off, stocks remain at very high valuations by historical standards. While the markets appear to be oversold in the short term, we still need to see lower valuations before stocks look attractive on a longer-term basis. It remains to be seen whether the current problems are the catalyst for a deeper sell-off.

Economic and market forces on the global stage can change quickly, and while the current change has been a negative one, positive changes can happen quickly as well. Increases in productivity due to advances in technology are not going away. Geopolitical disruptions don’t last forever, and changes in the political landscape are never-ending. Successful investing requires a long-term approach and the ability to look past shorter-term problems. While these problems are very often severe, history tells us that things will improve. We are always happy to review your investments with you, so please contact us if you would like to discuss your portfolio.

Form ADV Part 2A 2B 2026

Thu, 19 Mar 2026 01:00:05 GMT

Wabash Capital Earns Distinguished Certification for Fiduciary Excellence

Thu, 12 Mar 2026 23:26:27 GMT

Adherence to a global standard of fiduciary excellence officially marks a commitment to acting in the best interest of investors.

Terre Haute IN – March 2026 – After undergoing a thorough and independent assessment of investment management processes, investment strategy implementation, and other fiduciary practices, Wabash Capital today announced formal achievement of Centre for Fiduciary Excellence (CEFEX®) certification from Broadridge for the 13 ^th year. This makes Wabash Capital part of the elite group of nearly 250 firms from around the world to successfully complete the independent certification process.

Part of the rigorous evidence-based assessment included successfully demonstrating adherence to documented and legally substantiated best practice fiduciary standards. The annually renewed certification signifies an ongoing commitment to providing consistent objective advice that’s in a client’s best interest – both at the institutional and individual levels.

Don Edwards, President of Wabash Capital, Inc. said, “We are proud to be a CEFEX certified investment firm. This certification assures our clients that we are keeping up with the best practices in the industry. Our clients also know that we are a Fiduciary Advisor, meaning we are obligated to act in their best interest.”

The CEFEX certification program is based on the International Standards Organization (ISO) 19011: Guidelines for auditing management systems. The standard, “Prudent Practices for Investment Advisors” is substantiated by legislation, case law, and regulatory opinion letters from the Employee Retirement Income Security Act (ERISA), the Investment Advisers Act of 1940, the Uniform Prudent Investor Act (UPIA), the Uniform Prudent Management of Institutional Funds Act (UPMIFA) and the Model Management of Public Employee Retirement Systems Act (MMPERSA) in the U.S.

According to the Vice President, Centre for Fiduciary Excellence, Carlos Panksep, “Maintaining certification requires a continued adherence to the industry’s best practices. This is verified through our annual renewal assessment.”

Wabash Capital is specifically certified for Investment advisory and management services for endowments, foundation and retirement plan clients serving in an ERISA 3(21) advisory role and/or ERISA 3(38) Investment Management for official registration for Wabash Capital can be see www.wabashcapital.com as well as the Independent Assessment Report can be viewed here. To learn more about CEFEX certification visit cefex.org.

About Wabash Capital, Inc.

Company Overview:

Founded in 1997, Wabash Capital is dedicated to maintaining and growing the financial resources of our individual, institutional and 401(k) & 403(b) retirement plan clients. As a privately held fee only advisor, we offer independent financial guidance designed to fulfill each client's unique needs and priorities.

We establish a fiduciary relationship with each client, providing a personalized service unencumbered by third party compensation arrangements. This allows us to focus entirely on helping our clients achieve their financial goals.

Our Mission Statement:

At Wabash Capital, we will establish trust-filled client relationships to support our role as an advisor. We will listen to our clients’ needs and provide personalized investment advice that leads them to positive financial outcomes.

About Broadridge

Broadridge Financial Solutions (NYSE: BR), a global Fintech leader with over $6 billion in revenues, provides the critical infrastructure that powers investing, corporate governance, and communications to enable better financial lives. We deliver technology-driven solutions that drive business transformation for banks, broker-dealers, asset and wealth managers and public companies. Broadridge's infrastructure serves as a global communications hub enabling corporate governance by linking thousands of public companies and mutual funds to tens of millions of individual and institutional investors around the world. Our technology and operations platforms underpin the daily trading of more than $10 trillion of equities, fixed income and other securities globally. A certified Great Place to Work®, Broadridge is part of the S&P 500® Index, employing over 14,000 associates in 21 countries. For more information, please visit broadridge.com .

2025 Year End Review

Wed, 31 Dec 2025 23:34:43 GMT

The stock and bond markets both experienced strong returns in 2025 as the U.S. economy continued its steady growth, dating back to the post-COVID period. Since its peak in 2022, inflation has remained subdued, allowing interest rates to head lower and giving the bond market its best year since 2020. Stocks endured periods of volatility and rose on strong earnings and improved outlooks for the economy.

Investors experienced a lot during 2025. Extreme volatility and a large market drop in the Spring, followed by a furious stock rally; a long government shutdown in the Fall that added uncertainty to the markets; conflicting economic data that led to a divided Federal Reserve; and a dizzying climb in artificial intelligence (AI) stocks that looks a lot like the climb in dot-com stocks in the late 1990s.

Any discussion of the stock market in 2025 has to include AI, and AI is dominated by the so-called Magnificent Seven stocks, which are the seven tech stocks driving the market higher. These stocks are: Meta, Apple, Alphabet, Nvidia, Tesla, Microsoft, and Amazon. For 2025, these stocks made up almost 40% of the return, 45% of the earnings growth, and 75% of the capital expenditures of the S&P 500 Index. There are increased risks for markets when such a small number of stocks dominate the remaining companies. Similar things have happened many times over the years, and the dominance never lasts.

The U.S. economy is, by most measurements, in good shape. It looks like GDP will expand by roughly 2.5% for the year. However, third quarter GDP grew at a much higher than expected rate of 4.3%. Earnings and revenue had strong gains (again, dominated by AI), and consumers continue to spend a lot of money.

Challenges for investors also exist. New job creation dropped considerably as the year went on. This could be due in part to increased usage of AI by businesses, which allows many entry-level jobs to be replaced by AI applications. Whatever the reason, the lack of job creation is a concern. Also, while much lower than it was three years ago, inflation remains above the Fed’s target. This, along with the hot GDP number for the third quarter, likely diminishes the chances of further rate cuts by the Fed. Probably the biggest concern for us is the current valuations of the equity markets, which are approaching the levels of the dot-com bubble. Consumers, despite their spending, are becoming more negative on their outlook for the economy.

Switching gears, Jim Exline retired recently from Wabash Capital. One of the original founders of our company, Jim was instrumental in helping us grow to where we are today. Please join us in wishing him well.

We appreciate the opportunity to assist you with your investments. Please let us know if you would like a copy of our Form ADV when it is updated during the upcoming quarter.

Wabash Capital

Some Good, Some Bad

Thu, 02 Oct 2025 00:30:05 GMT

The equity market and the fixed income market both added to their year-to-date gains during the third quarter. Rapidly deteriorating employment data encouraged the Federal Reserve to cut interest rates during the quarter, despite the inflation rate remaining above its target. Economic data in September suggests GDP is growing faster than expected, leading many economists to question the need for further rate cuts. Stocks and bonds both rallied after the rate cut, with the hope that economic growth will continue and inflation will subside.

The Federal Reserve is currently in a very challenging position. Economic data is all over the place. Higher inflation and economic growth that exceeds expectations would suggest keeping interest rates steady or increasing them. The disappearance of new job growth would normally call for rate cuts. When you add increased political pressure and media coverage, the job becomes even more difficult. In addition to the employment problems, the economy is also experiencing a substantial decrease in year-over-year average hourly earnings, as well as four straight months of manufacturing job losses. Despite the low rate of new job creation, the unemployment rate, while higher than it was two years ago, is still quite low relative to historic averages. It is definitely a mixed bag of economic data.

Small-cap stocks, as measured by the Russell 2000 Index, closed at an all-time high during the third quarter, the first all-time high for this index since March 2021. This was the second longest streak without a new high in the index’s history, behind only the bear market following the dot-com market bust. It is also worth noting that the price-to-sales ratio of the S&P 500 is at its highest level since 1990 and is double its average for the past 35 years. It is also more than a point higher than its peak during the dot-com bubble in March 2000. Current market valuations, by all measures, are extremely high and are unsustainable at these levels.

The current stock market rally consists of a relatively small number of stocks that are doing very well, while the broader market is flat. Markets like this can mask economic problems and make it seem that things are better than they are. The employment slowdown may be temporary, but investors will be keeping close watch on what happens between now and the end of the year.

Since 1928, the S&P 500 has risen in the fourth quarter 74% of the time, the most of any quarter. Fortunately, the extreme volatility earlier in the year has improved, and market movements have been more measured. For investors, 2025 has been a very interesting year.

Wabash Capital

Wabash Capital Earns Renowned Certification for Fiduciary Excellence

Thu, 17 Jul 2025 01:21:15 GMT

Wabash Capital Earns Renowned Certification for Fiduciary Excellence

Adherence to a global standard of fiduciary excellence officially marks a commitment to acting in the best interest of investors.

Terre Haute IN – July 2025 – After undergoing a thorough and independent assessment of investment management processes, investment strategy implementation, and other fiduciary practices, Wabash Capital today announced formal achievement of Centre for Fiduciary Excellence (CEFEX®) certification from Broadridge for the 10 ^th year. This makes Wabash Capital part of the elite group of nearly 250 firms from around the world to successfully complete the independent certification process.

According to the Vice President, Centre for Fiduciary Excellence, Carlos Panksep, “Through CEFEX’s independent assessment, the certification provides assurance to investors, that Wabash Capital has demonstrated adherence to the industry’s best fiduciary practices. This indicates the firm’s interests are aligned with investors.”

Wabash Capital is specifically certified for Investment advisory and management services for endowments, foundation and retirement plan clients serving in an ERISA 3(21) advisory role and/or ERISA 3(38) Investment Management Ro Official registration for Wabash Capital can be see www.wabashcapital.com as well as the Independent Assessment Report can be viewed here. To learn more about CEFEX certification visit cefex.org.

About Wabash Capital, Inc.

Company Overview:

Our Mission Statement:

About Broadridge

Party Like It’s 1999

Thu, 10 Jul 2025 01:45:20 GMT

It is impossible to overemphasize how crazy the first half of this year was for the capital markets. Stocks, after a negative first quarter, started the second quarter by plummeting (a word we don’t like and rarely use, but fitting here) in the first week of April after massive tariffs were imposed on imported goods. The S&P 500 Index quickly dropped to near bear market territory, before a dizzying climb after the tariffs were paused. High volatility persisted for the remainder of the quarter, as shifting trade policies caused uncertainty among investors. Bonds also experienced significant fluctuations as fixed-income markets adjusted to the shifting economic landscape.

Looking at the numbers at the halfway point of 2025, both stocks and bonds have produced modest gains year to date. It is difficult to forecast what the second half of the year will look like with the uncertainty about tariffs. Most firms are like we are; one forecast with tariffs and one without. The Federal Reserve is projecting economic growth of 1.4% for 2025 and 1.4%-1.8% growth through 2027. These estimates have been lowered from previous outlooks. The Fed is also forecasting an inflation rate of 3.1% for this year, quite a bit higher than its target rate of 2%. As long as the Fed expects inflation to rise, it is difficult to imagine that it will lower interest rates. Some Fed members argue that data showing a slowing economy justifies lower rates. These are outnumbered by those who are hawkish on rates. GDP contracted in the first quarter but is expected to be positive during the second quarter.

The elephant in the room is the high valuation of the equity markets. Current stock prices relative to earnings are nearing those last seen during the dot com bubble in 1999. We all like rising stock prices, but there must be earnings to support those prices. Without sufficient earnings, market gains become untenable and are destined to fall. It is impossible to know at what point stocks are too top-heavy, but anytime we approach 1999 valuations, we should all be concerned. Prince, in his song 1999, sang, “Life is just a party, and parties weren’t meant to last.” We would advise that the same holds for highly valued stock markets.

Consumer confidence has dropped in six of the past seven months. We are just beginning to see a drop in spending, and this is an area that will be closely watched in the months ahead. Likewise, inflation and employment data are important to watch. The Fed is in a tough spot. If inflation rises while the economy slows, which is possible, any missteps will have outsized consequences.

The past five years have been challenging for American businesses, and they have been great at adapting and growing despite the difficult environment that included a global pandemic and high inflation. High valuations and uneven trade policy concern us in the short term, but we remain bullish in the long term.

Wabash Capital

Economic Uncertainty Returns

Mon, 31 Mar 2025 00:48:13 GMT

Capital markets and economic conditions have changed dramatically since the end of last year. Inflation expectations have risen. Consumer confidence is down sharply, dropping more than 16% from this time last year. The Consumer Expectations Index dropped to a twelve-year low. Labor market expectations have dropped to their lowest levels since 2009. Stocks, as measured by the S&P 500, hit correction territory in March, down 10% from their peak. Stocks ended the first quarter in negative territory year to date. The bond market produced small gains for the quarter.

As investors, we can classify our largest concerns into three categories:

1. Economic growth . We will be keeping a close eye on GDP numbers for the first quarter. Many economists are predicting negative GDP for the quarter, with some predicting a large drop. Others are calling for GDP growth, but most have lowered their expectations.

2. Inflation . As we learned in 2022, nothing can spook investors quite like inflation can. After dropping steadily through 2023 and 2024, we are seeing inflation numbers rise again. The data is unclear on this, but the Federal Reserve is unlikely to lower interest rates as long as inflation is above their target.

3. Equity market valuations . Even with the drop in stock prices, stock valuations, relative to earnings, are extremely high. By itself, this would limit market upside, but when combined with broader economic issues, this is a real concern.

Given the confluence of issues, it is difficult to forecast what will happen for the remainder of this year. A recession is possible, but by no means a certainty. The same can be said for inflation. Some analysts are calling for the possibility of stagflation, which is a recession and inflation at the same time. This is very unusual (think 1970’s), and we think it is unlikely, but not impossible. We have seen higher volatility across all economic areas, and that seems likely to continue. The capital markets will also likely stay volatile for the foreseeable future. The Fed has been diligent about keeping on the path of price stability, but monetary policy can’t fix mistakes in fiscal policy.

As investors, it is important to acknowledge that we can’t predict what the markets will do on a short-term basis. Bad news and high volatility are unnerving, and the tendency is to want to do something in response. The reality is that making major changes in a portfolio in the middle of a rough patch almost always leads to worse results. We have tried to position our portfolios to account for an uncertain economy, but volatility will, by the nature of investing, remain.

As always, please call us for our thoughts on your portfolio and to review your objectives.

Wabash Capital

Form ADV Part 2A Brochure 2025

Mon, 03 Feb 2025 00:12:53 GMT

Ginger Scott Awarded Registered Fiduciary (RF™) Certification for 2025

Thu, 30 Jan 2025 01:36:13 GMT

Team member Ginger Scott has successfully completed the training, validation and testing necessary to become a Registered Fiduciary for 2024. The Registered Fiduciary (RF™) Certification identifies financial professionals and organizations as competent fiduciaries that have achieved pertinent educational qualifications and licenses, learned required skills, and have passed a background check.

The RF™ award to Ginger Scott recognizes particular skills in the area of Retirement Services In addition, Ginger and the team provide Investment Management and Advisory services to Individuals, Trust, Corporations, Banks and Labor Unions.

In acting as a Registered Fiduciary Ginger Scott and the Wabash Capital Team is committed to always acting in the best interest of clients, using the skills, ethics and focus on the client needs that the Certification represents. Mrs. Scott also holds the Accredited Retirement Plan Specialist Certification.

“At a time when the public concern has been elevated by years of financial excesses and scandals, the RF™ validation process offers comfort in the knowledge that our firm has been found worthy of this distinction” said Don Edwards, President, adding “We have always been dedicated to our clients and this award gives us the independent confirmation of this policy.”

Wabash Capital, Inc. is SEC registered Investment Advisor under the Investment Advisor Act of 1940.

The Registered Fiduciary Certification is based on the 2010 Fiduciary Standards of the Fiduciary Standards Board and validated by Dalbar, Inc., the independent expert.

The Fiduciary Standards Board is a not-for-profit (501(c)(3)) organization established in September of 2000 to develop and advance standards of care for investment fiduciaries, which includes trustees, investment committee members, brokers, bankers, investment advisers, money managers, etc. The Fiduciary Standards Board is independent of any ties to the investment community and therefore positioned to be a crucible for advancing fiduciary standards throughout the industry and to the public.

Dalbar, Inc. is the financial community’s leading independent expert for evaluating, auditing and rating business practices, customer performance, product quality and service. Launched in 1976, Dalbar has earned the recognition for consistent and unbiased evaluations of investment companies, registered investment advisers, insurance companies, broker/dealers, retirement plan providers and financial professionals. Dalbar awards are recognized as marks of excellence in the financial community.

2024 Year End Review

Tue, 31 Dec 2024 03:04:15 GMT

Equity markets outperformed expectations in 2024 as the U.S. economy continued its strong performance and inflation continued to drop, prompting the Federal Reserve to lower interest rates three times during the second half of the year. For the year, the S&P 500 Index set 57 new record highs, and, despite a December sell-off, capped off its best two-year run since 1997-1998. Even with the Fed’s rate cuts, the bond market struggled at times as the economy continued to grow at a higher rate than the Fed wanted to see. Inflation, which is much lower than it was two years ago, was more persistent than the Fed had expected.

Looking ahead, there is much good news for investors as we head into the new year. Economic growth has been very strong and is expected to continue to be positive in 2025, although likely at a slower rate. Corporate earnings have posted strong growth the past two years and are also expected to continue to grow. If interest rates stay low and inflation continues to drop, the economy should be in good shape.

Despite the economic positives, there are some concerning things we are watching. In December, the U.S. stock market dropped for ten consecutive days, something that had not happened since 1974. Also in December, consumer confidence sank, giving up the gains seen in November. More importantly, the Consumer Expectations Index tumbled to levels that usually signal a recession. With equity valuations near record highs, any unexpected negative news for the economy or the markets could have a larger than normal impact on the markets. This two-year run has also pushed the stock market above its long-term trend by the second highest amount in the last 90 years. This cannot and will not continue indefinitely.

When we look at economic and market data to make determinations about the make up of our portfolios, we look at the risk of one asset class relative to the risk of other asset classes. Our biggest concern is the risk that there may be an increase in inflation, which would hurt both stocks and bonds. Even if inflation stays where it is, it appears likely that interest rates will not go much lower than their current level. The level of debt, both government and consumer, is also a concern. Economic growth built on debt is very dangerous when the level of indebtedness becomes extreme. We are approaching that tipping point.

We think it’s unlikely for the stock market to have another 20% plus return in 2025. Having said that, this economy and the stock market have been defying expectations and may continue to do so. Much will depend on inflation and interest rates, so keep an eye on these two numbers. These same two numbers will also determine what happens in the bond market in the upcoming year. We expect market volatility to increase in 2025.

As always, never hesitate to contact us if you have any questions about your investments. You can read our new Form ADV on our website when it is updated during the first quarter.

Wabash Capital

Lower Inflation

Mon, 30 Sep 2024 03:09:11 GMT

The capital markets have been hyper focused on inflation for the past three years. Since the end of 2022, the inflation rate has been steadily dropping, and that has been good for the markets. That trend continued during the third quarter of this year with overall PCE (personal consumption expenditures) increasing at an annual rate of 2.2%, the lowest annualized increase since February of 2021. Both stock and bond investors benefited from this as both markets posted solid gains for the quarter.

We have spoken about this before, but it is worth repeating. The mandate of the Federal Reserve is to create conditions that will allow the economy to grow while at the same time keeping price stability, or low inflation. The Fed was reluctant to raise rates as we were coming out of the economic calamity of the pandemic fearing higher rates would cause a recession. The result of keeping rates near zero while the global economy came roaring back was high inflation. The Fed has admitted they kept rates too low for too long. Since inflation has been low for many years (it peaked more than 40 years ago) most people were caught off guard and were unprepared for the damage it creates. The resulting sell off in stocks and bonds was definitely a wake up call.

To their credit, the Fed has seemingly made the right decisions since then. The inflation rate has dropped to near the Fed’s 2% target, and they have done it while the economy continues to grow. The Fed cut rates during the third quarter with a 50 basis point cut, larger than most people were expecting. Markets rallied as a result. Low interest rates are good for both stock and bond investors and a low interest rate environment is the best condition for the economy to do well. It is unlikely we will see rates back to near zero, but we believe they will drop to the 2.0-2.5% range on the short end of the yield curve.

While economic conditions have improved, it is important to note that there are still issues that can derail economic conditions. European and Middle Eastern wars are always disruptive and have the ability to spread. It is also possible that the Fed has miscalculated conditions and we could fall into an economic recession. We think this is unlikely, but it can’t be ruled out. Consumers have very high levels of debt, which can lead to rapid spending cuts and high bankruptcies. Stocks are trading at high valuations, which can lead to larger than normal drops.

As long as we see strong GDP growth and low inflation, investors should continue to be rewarded. Unforeseen events happen, so there will always be bumps in the road, but we are cautiously optimistic that this year will end on a high note.

Wabash Capital

Fed Watch

Tue, 02 Jul 2024 23:42:53 GMT

The second quarter started off with dropping stock and bond prices as hot inflation data spooked the markets. With the markets hyper focused on the Federal Reserve and hopes for lower interest rates, a jump in inflation was the worst possible news for investors. Most of the gains from the first quarter were lost during April. May gave the markets better news on inflation leading to rallies in both stocks and bonds in May and June. At the halfway point in 2024, stocks have posted solid returns year to date, while bonds, though positive year to date, have not done as well. Diminished expectations for rate cuts have kept interest rates higher than most economists had predicted, lowering bond prices.

The U.S. economy continues to outperform expectations. Low unemployment, strong job creation, and strong corporate earnings, along with high consumer spending have all contributed to keep the economy growing. It is worth noting that all of this is happening while the Fed is trying to slow the economy down in efforts to reduce the inflation rate to their 2% target. Right now, it stands at 3.5%, much lower than it was a year and a half ago, but still higher than the Fed wants it to be.

In the world of investing and economics, there is always a lot of discussion about economic growth (GDP) and what is possible and preferable. Too much growth usually leads to inflation, while dropping GDP gives us a recession. Walking that fine line is not an easy task. Looking back at economic history is helpful to put the economy in proper context. In 1929, nominal U.S. GDP was $105 billion. Today it is over $27 trillion. At its low point during the depression (1933) GDP had dropped to $57 billion, a drop of 45%. By 1939, GDP was higher than it was in 1929 before the depression. From 1929 through 2023, there have been 15 years that experienced a drop in GDP. This includes four in a row from 1930 to 1933 and seven other years that saw decreases of less than 1%. Since 1990, there have only been three negative years; 1991, 2008, and 2020.

Large drops in GDP almost always lead to large drops in the stock market. On average, it takes about two years for stocks to recover from a bear market, although it took four and a half years to recover from the 2000 bear market, and 25 years to recover from the depression market drop that started in 1929.

All eyes are on the Fed as what happens in the markets depends a great deal on what they do in response to inflation and economic activity. They continue to indicate that they see inflation coming down, which will allow them to lower interest rates. Low inflation and dropping interest rates would be the best outcome for investors. The biggest risk in attempting to slow the economy is that growth will become negative, and the economy will fall into recession. As of now, it appears the odds of a recession are dropping.

Wabash Capital

CEFEX Press Release

Mon, 03 Jun 2024 04:09:07 GMT

Wabash Capital Earns Renowned Certification for Fiduciary Excellence

Adherence to a global standard of fiduciary excellence officially marks a commitment to acting in the best interest of investors.

Terre Haute IN – May 2024– After undergoing a thorough and independent assessment of investment management processes, investment strategy implementation, and other fiduciary practices, Wabash Capital today announced formal achievement of Centre for Fiduciary Excellence (CEFEX®) certification from Broadridge for the 10 ^th year. This makes Wabash Capital part of the elite group of nearly 250 firms from around the world to successfully complete the independent certification process.

Wabash Capital is specifically certified for Investment advisory and management services for endowments, foundation and retirement plan clients serving in an ERISA 3(21) advisory role and/or ERISA 3(38) Investment Management Ro Official registration for Wabash Capital can be see www.wabashcapital.com as well as the Independent Assessment Report can be viewed here. To learn more about CEFEX certification visit cefex.org.

About Wabash Capital, Inc.

Company Overview:

Our Mission Statement:

About Broadridge

Steady as She Goes

Wed, 03 Apr 2024 00:55:27 GMT

During the first quarter of this year, equity markets built on last year’s fourth quarter gains and continued their climb. Continued economic strength and lower inflation gave investors reasons to be optimistic that the economy can continue to grow while avoiding a recession. The bond market rally of last year paused, as this same economic strength caused bond investors to rethink their optimism that the Fed will be cutting interest rates multiple times this year.

The current bull market in stocks has been impressive. Stocks have rallied with the “better than almost everybody thought it would be” U.S. economy. As inflation has dropped, recession fears have faded, and equity markets are at all-time highs. The S&P 500 Index set 17 all-time closing highs in the first 50 trading days of this year, the most since 1998. Because the S&P 500 Index is a market weighted index, as opposed to the Dow Jones Industrial Average, which is an equal weighted index, the largest companies have an outsized impact on the index. In fact, the seven largest tech stocks (Apple, Microsoft, Google, Amazon, Nvidia, Meta, Tesla) account for 30% off the S&P’s value, an all time high. Last year, these seven stocks gained an average of 71%, while the other 493 stocks in the index averaged a 6% gain. Looking at a static return number definitely does not tell the whole story of the strength of the stock market.

The bond market has not moved much this year as segments of the economy continue to expand faster than the Fed wants them to. While inflation has dropped dramatically from its high in 2022, it remains above the Fed’s target, and as long as that is the case, interest rates are likely to remain elevated, especially on the short end of the yield curve. The Fed has reiterated that they plan to cut rates at least three times this year, but we will need to see some of these inflationary pressures ease before this happens. Until then, the yield curve remains inverted, and the risk remains elevated that the Fed will not reduce rates in time to prevent a recession.

GDP growth for last year came in at 2.5%, which is quite remarkable given the forecasts of most analysts at the beginning of the year. It looks like GDP growth in the first quarter of 2024 will also come in around 2.5%. Most forecasts we are seeing show our economy growing this year about the same as it did last year. We don’t see anything that would make us forecast growth differently than this consensus. We think inflation will continue to drop to closer to the Fed’s target of 2% later in the year.

Our forecast for the markets has not changed since the end of last year. Stocks will be helped by dropping inflation rates and by lower interest rates, but with sky high valuations, there are elevated risks if there are unforeseen events. Bonds will also benefit from lower interest rates but will tread water if inflation and interest rates stay higher than normal. Much depends on the Fed.

Wabash Capital

Form ADV Part 2A Brochure 2024

Wed, 06 Mar 2024 00:04:01 GMT

Ginger Scott Awarded Registered Fiduciary (RF™) Certification for 2024

Fri, 05 Jan 2024 00:33:26 GMT

Team member Ginger Scott has successfully completed the training, validation and testing necessary to become a Registered Fiduciary for 2025. The Registered Fiduciary (RF™) Certification identifies financial professionals and organizations as competent fiduciaries that have achieved pertinent educational qualifications and licenses, learned required skills, and have passed a background check.

Wabash Capital, Inc. is SEC registered Investment Advisor under the Investment Advisor Act of 1940.

The Registered Fiduciary Certification is based on the 2010 Fiduciary Standards of the Fiduciary Standards Board and validated by Dalbar, Inc., the independent expert.

2023 Year End Review

Sun, 31 Dec 2023 00:31:31 GMT

This time last year, most economists were calling for a recession in 2023. Inflation was 9% and the Federal Reserve was rapidly raising interest rates in an attempt to lower it. Historically, these conditions almost always lead to a recession. Stock investors braced for further trouble after a difficult 2022. As is typical after a bad year for investors, we experienced large market swings in 2023. The first six months of the year were positive for both stocks and bonds. The next four months were negative for both. We ended the year with a furious rally in the stock market and the bond market in November and December, giving us solid returns across the board for the year. Inflation has dropped to 3%, and the most anticipated recession in history failed to materialize. For the year, the U.S. economy performed better than almost everyone expected it to.

While the Fed may yet achieve the soft landing they are looking for, we are certainly not past the threat of a recession. The economy is definitely slowing, and we will need to wait to see whether it slows enough to keep inflation at bay, or whether it slows too much and dips into recession. Just like the predictions for this year, most economists expect lower GDP growth for 2024 than we saw this year. The yield curve remains inverted, which typically precedes a recession. The Fed has indicated they are open to lowering rates in 2024 to keep economic growth positive. Time will tell, but the Fed, in spite of keeping interest rates too low for too long and letting inflation get away from them, has been very good at keeping the economy growing.

So where does this leave us as investors? Stocks benefit from dropping interest rates, so a slowing economy and lower interest rates are a positive. The economy slowing too much and causing earnings to drop would be a negative. It is also worth noting that valuations in the stock market are extremely high, making stocks more susceptible to big drops if things don’t go well. Bond investors will also benefit from dropping interest rates and a slowing economy. Bonds seem the safer bet right now, but we suspect stocks may do well in 2024, especially if we avoid a recession. If we do experience a recession, we believe it will be relatively mild.

We lost an investment legend in 2023, as Charlie Munger, Warren Buffet’s investing partner, died at age 99. Charlie was always willing to verbalize his opinions, almost always with humor. Here are a few of our favorite quotes: “If I can be optimistic when I’m nearly dead, surely the rest of you can handle a little inflation”, “Being rational is a moral imperative. You should never be stupider than you need to be”, “Those who will not face improvements because they are changes, will face changes that are not improvements.” We can all learn much from people like Charlie Munger.

Never hesitate to contact us if you have questions about your investments. Also, let us know if you would like an updated copy of our Form ADV, Part 2.

Wabash Capital

Focus on the Fed

Tue, 03 Oct 2023 00:06:41 GMT

After a strong first half of the year, increased concerns that interest rates will continue to climb caused markets to fall during the third quarter. Stocks, after starting a new bull market early this year, neared correction territory in September. Bonds have been drifting lower as interest rates have slowly and consistently moved higher. Rising energy prices have stoked fears about inflation, and with the Federal Reserve hyper focused on the inflation rate, most economists are now expecting interest rates to stay high longer than initially thought. GDP is expected to rise over 4% during the third quarter, which is amazing given the current level of interest rates. It looks like we’re in for a bumpy ride.

We have spoken at length in past letters about the inverted yield curve. This doesn’t happen often, but when it does, it almost always foretells a recession. The current inversion is the longest and deepest inversion since the early 1980’s. While many analysts and economists have stepped back from their recession predictions, the fact remains that we are at an elevated risk of recession, and the deeply inverted yield curve cannot be ignored.

We are often asked why higher interest rates make the markets go down. Increasing interest rates hurt both stocks and bonds, but in different ways. With bonds, it’s a matter of simple math. As rates move higher, existing bonds become less attractive relative to newer bonds. Movements in bond prices as rates change are easily calculated. Duration and convexity tell us how much bond prices will rise or fall with changes in rates. When rates rise, bond prices drop, and when rates drop, bond prices rise. This relationship never changes.

Rising interest rates hurt stocks in several ways. Appropriate valuation calculations for stocks are usually done through models that use short term rates to discount cash flows. As rates rise, valuations drop. Higher interest rates also make safer investments like bonds more attractive relative to stocks. Also, high rates slow economic activity, leading to lower profits for businesses, thus dropping stock prices.

The Federal Reserve has a very difficult job. They are charged with keeping the economy growing while doing it with low inflation. They have been mostly successful at this for forty years. They had some missteps coming out of the pandemic but that was a unique set of circumstances. It will be interesting to see how history judges them.

Over the next twelve months we could very well see energy prices drop along with inflation. This would likely lead to strong rallies in both stocks and bonds. If the Fed achieves their soft landing, consumers and investors will benefit. Until then, we, like everyone, will be watching the Fed.

Wabash Capital

Form ADV Part 2A Brochure

Tue, 08 Aug 2023 00:21:15 GMT

Conflicting Data

Fri, 21 Jul 2023 00:51:02 GMT

Conflicting Data

During the second quarter, both the stock and bond markets experienced above normal volatility as economic reports gave us mixed messages about where the economy is headed. For the quarter, stocks added to their gains from the first quarter, and had a solid first half of the year. After a strong first quarter, the bond market slowed slightly during the second quarter as the Federal Reserve indicated more interest rate increases may be required later this year. The economy is much stronger than most analysts thought it would be at this point.

The global and U.S. economies are continuing their recovery from the terrible effects of the Covid pandemic. So great was the economic damage that we will likely be dealing with the fallout for quite some time. Some changes, like remote work, may be here to stay. Other issues, like supply chain problems and higher inflation, are already improving.

There has been a lot of conflicting economic data that has made forecasting difficult. In spite of a yield curve that is at its biggest inversion in forty years, GDP is strong, with no recession in sight. We have the highest interest rates in years, but housing starts surged over 21% in May, the largest jump since 2016 and just the seventh increase of more than 20% since 1989. The Fed is trying hard to slow the economy down, but first quarter GDP was just revised upward, to 2%. Goldman Sachs lowered their prediction of a recession to only 25%. Consumer sentiment has dropped but remains higher than at this time last year and consumers are spending freely.

Monthly job growth has averaged 341,000 over the past twelve months, a remarkable number given the Fed’s rapid interest rate hikes. The rate of inflation has been dropping steadily since last Fall, and expectations for the long term inflation rate are in the 2.9-3.0% range.

Conclusions are difficult to come by in this environment. At this point, it seems likely that interest rates will stay higher longer than we thought six months ago. Investors were hoping to hear that the Fed was finished raising interest rates and were disappointed to hear that there may be further rate hikes. Consumers, on the other hand, largely shrugged off this news and have continued spending, even as they expect a slowing economy. The housing market, likewise, is rising as if interest rates are low with no end in sight.

The future will definitely become clearer when interest rates come down, inflation drops, and market valuations are lower. At this time, we think a recession is more likely than not, but will probably be mild. But, it will all depend on the success of the Fed in slowing the economy without causing a deep recession. Time will tell.

Wabash Capital

Form ADV Part 3 Brouchure

Tue, 18 Jul 2023 01:54:42 GMT

Form ADV Part 2A Brouchure

Tue, 11 Jul 2023 01:54:41 GMT

Stress in the Banking Sector

Fri, 31 Mar 2023 15:18:00 GMT

2023 has gotten off to a good start, with both stocks and bonds regaining some of the ground lost last year. Continued strength in jobs growth and improvement in inflation data combined to ease investor’s fears that a painful economic recession is inevitable. The bond market, in particular, benefited from expectations of a slowing economy and lower interest rates in the future.

We also experienced an “Out of Nowhere Banking Crisis” during the first quarter. Before this year began, a banking crisis didn’t appear on most people’s list of potential problems for 2023. But in a nervous market, with economic concerns spreading, surprises are not unusual. So, how bad is the banking crisis? As it stands now, the damage is limited to four banks: Silvergate, Silicon Valley Bank (SVB), Signature Bank, and Credit Suisse. It is worth noting that the first three of these, all U.S. banks, were very unusual institutions and not traditional banks. Silvergate and Signature Bank bet heavy on crypto currency, and SVB was almost exclusively tied to the high tech industry and had over 93% of their deposits above the insured FDIC limit, making them more susceptible to a run on their deposits. Credit Suisse has been a mess for years and the only real surprise is that they were able to stay independent this long.

Keep in mind that the problems that caused the banking crisis in 2008 are not causing the issues we are seeing now. So far, these four banks are the extent of the problems. There are always fears that these problems could spread, but we have not seen any contagion as of now. We view this as a Mini Banking Crisis, and not the full-blown melt down we saw back in 2008.

In an attempt to bring inflation down, the Federal Reserve raised the Fed Funds rate twice during the first quarter after eight increases in 2022. They have indicated they are nearing the end of their rate hikes, which is typically good news for the markets. The important question is whether they have raised rates too much, which may result in a severe recession, or if they can reduce inflation without damaging the economy. This is no small task and is very difficult to pull off. It is clear that the Fed is willing to have a recession to get inflation under control. They have admitted to being too slow to raise rates after the pandemic, and it seems likely they will not repeat that mistake.

Bonds are the safer bet this year as interest rates will likely drop as the economy slows, allowing the bond market to gain back some of what was lost in 2022. A reduction in inflation without a recession would likely allow stocks to rally, although a recession, especially a deep one, could cause more equity pain. Right now, it’s impossible to know how it will play out.

Wabash Capital

2022 Year End Review

Sat, 31 Dec 2022 16:18:00 GMT

We never know what’s going to kill a bull market. So many events, most of them impossible to predict, can change investor sentiment very quickly and cause the markets to fall. The end to the latest bull market in 2022 had many causes. The war in Ukraine caused energy prices to jump and caused fears of the war spreading; global inflation spiked to 40-year highs; once high flying investments like crypto currency and many big tech stocks, plummeted. The Federal Reserve, in an effort to get a handle on inflation, raised interest rates very quickly from levels near zero, causing the worst losses in the bond market ever. Equity markets experienced extreme volatility as investors tried to make sense of a very unpredictable future.

One piece of good news over the past year is that the unemployment rate in the U.S. has remained very low. This fact has baffled many of the nation’s top economic minds. Much has been written about this, and the question, “How can we have a recession when everybody is working?” has been pondered and discussed endlessly. By historic measurements, the U.S. entered an economic recession midway through 2022, when the first two quarters of the year experienced GDP contraction. Many economists have been reluctant to declare this a recession due to very low and steady jobs data. Regardless of whether we are in a recession or not, most economists predict slower economic growth in 2023 than we saw in 2022.

Real GDP growth for 2022 will probably come in around the 2% number. Given the global uncertainty we are dealing with, that is really not bad. GDP growth for 2023 is expected to be flat to slightly positive. Again, as far as recessions go, that is not a bad forecast. While the unemployment rate will probably rise, it is not expected rise to levels normally seen during a recession. Keep in mind, the Fed is trying to slow the economy down to get inflation under control. They seem to be willing to cause a recession to accomplish this.

Assuming the economy slows in the new year and inflation begins to drop, 2023 should be a good year for the bond market. Much will depend on what interest rates do. It is harder to make a prediction for the equity markets. Even with the large pull back in 2022, we are not seeing the low valuations we normally see during bear markets, suggesting we could see new lows in the market. At this point, it is impossible to know when the market will bottom out and a new bull market begins. With a resolution to the war in Ukraine and/or a large drop in inflation, we could see a sharp rally in stock prices. If these things persist and we see a deeper than expected recession, we could see an extended and deeper bear market. We remain cautious at the current time but are optimistic better times will come. Remember, markets hit bottom before the economy does, and are normally rising while the economy is still slowing.

Please contact us if you would like an updated copy of our Form ADV Part 2, or go to our website, where it will be posted when it is updated.

Wabash Capital

The Bear Market

Fri, 30 Sep 2022 15:18:00 GMT

Economic pain continued during the third quarter as we churn through a bear market in the equity and fixed income markets. So far, this bear market has followed the script of past bear markets pretty closely. Both stocks and bonds rallied during July and August, leading some pundits to declare the bear dead and cheering on the new bull. To quote Mark Twain, reports of the bear’s death have been greatly exaggerated. Renewed selling in September has shown that the bear market still has some bite.

There are a multitude of issues happening around the world that are contributing to our economic and market troubles, many of which we have discussed in previous letters. It is impossible to watch the news without hearing about inflation. Inflation is insidious and hurts both stock and bond investors. It’s worth noting that the inflation we are currently dealing with is a global problem, not just an American problem. Almost all central banks in the developed world are raising interest rates in an effort to bring down inflationary pressures. A subplot to the inflation drama is a severe labor shortage in the U.S. This puts upward pressure on wages, which adds to inflation. A related subplot is the easy money during the pandemic. While we won’t debate the need for government assistance, when the government borrows money to give away, it is certainly a challenging economic exercise. In the midst of these challenges, a war in Europe beginning earlier this year just made a bad situation worse. Disruptions to the oil markets have always caused economic pain, and Russia is a leading oil producer, supplying most of Europe’s energy.

All these things happening when the stock market is near record high valuations and interest rates are near zero, market corrections can be swift and severe. This is what we are seeing now.

We find it useful to look at the current bear market relative to historical bear markets. (A bear market is a 20% decline in the market) Since the end of World War 2, this is our twelfth bear market. We have also had another four corrections of over 19%, which just miss the bear label. The average length of the previous eleven bear markets has been sixteen months, with an average decline of 35%. On average, it takes just over two years to recover bear market losses. Given our extremely high valuations, it would not be unexpected to see a more severe sell off than average just because the market was so expensive to begin with.

Bear markets and occasional painful sell offs are a normal part of investing. Even though they are relatively frequent, they are the part of investing nobody likes. Keeping a long term time horizon helps prevent making short term changes that can dramatically damage your financial future. Things may get worse before they get better (though they may not), but they will get better. Never hesitate to call us to discuss your investments.

Wabash Capital

The Death of a Bull

Thu, 30 Jun 2022 15:18:00 GMT

Global equity markets continued their sell off during the second quarter as economic conditions around the world deteriorated. An aggressive Federal Reserve raised the Fed Funds rate to pre pandemic levels, causing more drops in bond prices. With inflation continuing to rise, the Fed seems willing to risk a deep recession to get rising prices under control. Stocks entered bear market territory during the quarter, with a 20% pullback from their highs. The yield curve inverted during the quarter, signaling that a recession is likely. Most economists have stopped talking about whether a recession is likely and are now discussing how bad the recession will be. In fact, we could very well already be in a recession now, as GDP contracted in the first quarter. A repeat of this in the second quarter would meet the definition of a recession. While a recession is not a certainty, it is looking more likely than not that we will see one.

It is easy to look at the last six months and talk about what has happened. The more difficult thing is to predict what will happen the next six months. In the short term, we are probably over sold in the stock market, and a rally from these levels would not be a surprise. However, we feel we have probably not seen the low point for stocks. On the bond side, we feel most of the damage has already been done in the bond market, although persistent inflation could mean there is more selling to be done. Keep in mind the average drop in stocks during a bear market is 36% and right now we are down roughly 20%. The average bear market lasts close to one year, and we are six months in. When you consider the fact that earnings multiples were near all time highs in December, we likely have more room to fall.

Bear markets are scary. The longer they go on the more frustrating they become, and there is a tendency to want to do something to stop the pain. Making investment changes based on emotion almost always leads to bad outcomes. This market is more painful than most because bonds are dropping as well and there is no place to hide. The worst bear markets seem to last forever, and the losses seem irreversible. Fortunately, this is not true. Every bull market begins after a bear market ends. The largest market gains come after the biggest market drops. The best investment approach is to be a buyer as the market drops rather than being a seller. While we are not yet adding to our equity positions, there will be a time that stocks look attractive, and we will begin shifting more money into stocks.

In the meantime, history tells us that the best approach to markets like this is to hold the course and stay focused on the long term. As we have during the first half of the year, we will continue to make adjustments to our portfolios as conditions change. Markets typically hit bottom well before the economy does, so our focus is on equity valuation and economic performance.

Wabash Capital

Three Headed Monster

Thu, 31 Mar 2022 15:18:00 GMT

A lot happened during the first quarter, and most of it was bad. Stocks had negative returns, despite a 10% rally the last two weeks of the quarter, as fears rose about slowing economic growth. The bond market also had negative returns as interest rates spiked due to rising inflation. The Russian invasion of Ukraine added a new level of uncertainty to the markets as economic sanctions and fears of spreading hostilities spooked investors. In this letter we will discuss inflation, the war, and Covid, which together create the Three Headed Monster that is affecting the economy and the markets.

We will begin with Covid because that is where many of our troubles started. Ironically, for the first time in two years, Covid has become less of an issue as cases and deaths have dropped significantly. The pandemic has disrupted almost every facet of our lives, and from an economic viewpoint, has caused tremendous damage and uncertainty. Another wave would cause additional damage to an already weakened system.

The seeds of our high inflation were planted during the pandemic. As demand for almost everything dropped in 2020, supply chains were severely disrupted. When demand picked up again very rapidly, supply chains were unable to rebuild at the same pace. More demand than supply leads to inflation. Additionally, generous government stimulus, combined with a shortage of workers, and we end up here. Most economists feel that inflation will subside as we move into next year, but many things could prolong the pain. The Fed, by their own admission, was too slow to raise interest rates and is now trying to get ahead of inflation with higher rates.

The war in Ukraine, in addition to being a humanitarian disaster, affects the global economy in multiple ways. The price of oil has skyrocketed as energy markets have been disrupted. Raw materials used to manufacture fertilizer have also skyrocketed, leading to increased food prices and fears of shortages. These two items also lead to higher inflation across the globe. A war in Europe also increases fears that fighting will spread to other countries and eventually involve forces from NATO and the U.S. While unlikely, history teaches us that big wars always start out as small wars.

There are several important things to watch as the year unfolds. The yield curve in the U.S. is very close to becoming inverted. The last eight times this has happened we have had a recession within the next eighteen months. Since 1970, oil shocks, like the one we are seeing now, have almost always led to a recession. Even with the sell off we have had this year, stock and bond markets remain overvalued relative to historic valuations.

The good news is that challenging times always lead to good investment opportunities in the long term. Conditions can change quickly and bad times, like good times, never last forever.

Wabash Capital

2021 Year End Review

Fri, 31 Dec 2021 16:18:00 GMT

During 2021, the U.S. economy continued to improve after last year’s contraction, taking the stock market along for the ride. Stocks benefited from the growing economy, low interest rates, and strong corporate earnings. The bond market gave back some of their gains from 2020 as interest rates rose from levels near zero. The stock market is ending the year at record highs, which is interesting given some serious issues that we are dealing with as an economy. Rising inflation, the ongoing pandemic, a shortage of workers, and supply chain problems are among the issues that could derail economic growth in the new year.

As we write this letter, the Omicron variant is racing around the globe, causing new restrictions, and lowering economic growth estimates for the first quarter of next year. As long as this pandemic lasts, it will be a threat, not only to human health, but to economic health as well. The last truly global pandemic was so long ago that it is impossible to draw any parallels about how our economy will recover as the pandemic persists.

During the last decade, inflation has averaged just 1.8% per year, the lowest average for a decade since the 1930’s. We talked a year ago about the Federal Reserve changing their mandate to keep inflation low and made the decision to allow inflation to rise, so higher inflation shouldn’t be a surprise to anyone. However, several things combined to let inflation get higher than the Fed wanted. Supply chains damaged during the pandemic have been slower to recover than product demand. American workers have left the workforce in large numbers, with 3.2 million Americans retiring in 2020, an increase of 56% over an average year. The Fed has kept interest rates low to keep the economic recovery going, which also adds to inflationary pressures.

Since 1960, inflation has been higher than 5% twelve different years, most recently in 1990. The stock market rose in six of those years, but with an average gain of just 3.2%. High inflation is even worse for the bond market, pushing interest rates higher and bond prices lower. High inflation makes it much harder for investors to make money.

As we make our economic and market forecasts for the upcoming year, there are many factors that could go either way, leading to dramatically different outcomes. If the pandemic ends, we would expect stronger economic growth, higher interest rates, low bond returns, and continued good stock returns. If the pandemic gets worse, we could see lower interest rates, a strong bond market, and disappointing stock returns. Inflation, likewise, will lead to different outcomes if it continues to rise versus dropping. Our crystal ball is definitely very cloudy this year leading us to remain risk neutral for the foreseeable future.

As always, we appreciate your confidence in Wabash Capital. Please contact us if you need anything, or if you would like an updated copy of our Form ADV.

Wabash Capital

Defying Gravity

Thu, 30 Sep 2021 15:18:00 GMT

Volatility in the markets increased during the third quarter as fears rose that soaring Covid cases could slow the economic rebound we have been experiencing for the past year and a half. Consumer confidence numbers took a nosedive in September, and with consumers accounting for two thirds of U.S. economic activity, worries have risen that we are facing economic headwinds. In addition to the potential of a slowing economy, the increasing fear that inflation might be getting out of hand has also weighed on investors. It is an interesting time right now and economic and market uncertainty is climbing.

The economic recovery in the U.S. since the lockdown of 2020 has been quite remarkable. Last year’s recession was short but very severe. While we can always debate the level of Government stimulus necessary in times like this, there is no denying that flooding the economy with money helped bring us back to growth. The question now is when to end the stimulus and how to ween the economy off Government spending.

Current economic data is a mixed bag. New job growth continues to be impressive, with gains across the economic spectrum. However, inflation over the past twelve months is running higher than at any point in the last thirty years. The Fed maintains that this inflation is temporary, but many economists disagree. This will be something that almost everyone will be keeping their eyes on as we move forward.

Maintaining economic stability is one of the responsibilities of the Federal Reserve. Using a number of fiscal and monetary strategies at their disposal, the Fed tries to keep the economy growing while making sure it does not grow so fast that we get inflation. This is a very difficult job, and they have been quite successful at it over the past forty years or so. However, there is often political pressure placed on the Fed for them to extend their influence to taking action to keep the markets rising. This is beyond the scope of the Fed. Markets rise and markets fall, it’s what they do. Taking action to artificially keep stocks high ultimately lead to bigger problems in the future. The stock market must be allowed to drop. Pullbacks in the markets keep them healthy and prevents bubbles from forming. By almost every measure of valuation, the stock market today is nearly at the levels only seen during the height of the dot com bubble in the late 1990’s. Free and easy money from the Government is helping to push stocks higher, even with little underlying justification.

The U.S. economy is in remarkably good shape given what we have had to deal with over the past eighteen months. We feel that the stock market is over valued at current levels and there is more downside risk than upside potential. That doesn’t mean we sell all our stocks. It means that we are currently lower weighted to stocks than normal, and we believe there will be a better time to increase stock exposure in the future.

Wabash Capital

Is Inflation a Threat?

Wed, 30 Jun 2021 15:18:00 GMT

Despite an increase in volatility, stocks ended the second quarter with solid gains as the global economy continued to recover from the Covid pandemic. The bond market recovered some of its first quarter losses with a nice rebound during the second quarter. Strong corporate earnings across the board and rising consumer confidence continue to fuel stock gains, and consumers are on a spending binge after last year’s lockdown. While most economists expect this growth to slow down sometime in 2022, right now optimism abounds.

The one thing that is currently causing anxiety among investors is the threat of rising inflation. Inflation has been low for such a long time that many have forgotten what terrible economic damage can be caused by rapidly rising prices. The risk to the bond market is fairly obvious. Rising inflation leads to higher interest rates, which leads to lower bond prices. Bonds have benefited from forty years of dropping interest rates, but with rates effectively zero, we are likely to see rates move higher as economic conditions improve.

What is not quite as obvious is how inflation hurts stocks. Most calculations of equity valuation use discount rates as part of discounted cash flow models. In these models, the discount rate is the denominator in the equation. When this number gets lower, the fair valuation of stocks goes up. As rates move higher, these same models lead to lower fair market valuations. Very low interest rates and these valuation models are used by some in the industry to justify current market valuations. The problem is that these models tend to break down when interest rates are zero. Remember in third grade when you learned that you can’t divide anything by zero? The same thing applies to equity valuation models. No matter what interest rates are, higher rates lower equity valuations all the time. It’s no coincidence that stocks started rising when interest rates peaked and started dropping in 1981.

Now back to the questions posed above: Is inflation a threat? As we discussed in our year end letter, the Federal Reserve dropped its price stability (low inflation) mandate last year. It is obvious that the Fed wants to see some level of inflation. The tricky part is allowing inflation to rise while not allowing it to get out of control. Think back to the 1970’s, when neither stocks nor bonds could keep up with inflation. Equity valuations crashed as inflation and interest rates soared. High inflation with no growth (stagflation) was the result. As our economy has continued to evolve, this terrible mix of economic conditions is unlikely to repeat itself, but it is worth remembering that inflation is indeed a threat that needs to be managed.

Another threat to the current economic rebound is the Delta variant of Covid. Several U.S. states with low vaccination rates are at risk of new outbreaks. The markets are wary of new restrictions. We will be watching this closely.

Running With The Bulls

Wed, 31 Mar 2021 15:18:00 GMT

Equity markets have gotten off to a strong start in 2021, reaching record highs as the U.S. economy continues to recover from the pandemic. Stocks benefited from ongoing vaccination efforts as well as from government stimulus money being distributed to individuals, businesses, and local governments. The bond market, which benefited last year as interest rates dropped to near zero as the economy slowed, declined as interest rates rebounded with the improving economy.

We are in a very interesting time right now. The U.S. economy is recovering, but it is not an equal recovery across the board. Lower wage industries, who bore the brunt of the economic slowdown last year, have been much slower to recover. Likewise, minority and female employment remains more depressed and slower to recover. As of now, the economic recovery continues to be dependent on fiscal and monetary support. We need to see a broader recovery to allow economic growth without the use of government help.

There is an old adage in the stock market that things are either getting better, or they are getting worse. When they are getting better the stock market goes up and when they are getting worse, the stock market goes down. Right now, things are undeniably getting better, and we are seeing the markets rise as a result. Economic growth is accelerating, unemployment numbers are down, corporate earnings have been higher than expected, and retail sales are rebounding. Nationally, individuals are using their stimulus checks to pay down debt, fund purchases, and add to their savings. In the short-term, giving money away does help the economy.

On a longer-term basis, however, we are very concerned about the rising level of debt the U.S. Government is accruing. Government debt is not always a bad thing, and in fact is necessary and healthy for the country. Unbridled spending with no long-term plan is not a healthy thing. There seem to be those who believe we can eliminate recessions and economic downturns by sending checks to people and businesses, and now even to cities, towns, and counties, whenever the economy slows. We are less concerned about stimulus dollars being used to recover from the pandemic and are more alarmed that we were running trillion dollar deficits when the economy was in good shape before the pandemic. While there are definitely hardships that can and should be addressed, the debate over who is responsible for them is an important one. This seems to be a slippery slope and once it becomes normal, will be difficult to step back from. It will be fascinating to see how this plays out in the future.

While vaccinations in the U.S. have been great and will be what allows us to get back to a normal way of living, it is important to understand that the pandemic will not be over until Covid is defeated globally. New waves of the disease can lead to new variants that threaten the global recovery. While optimistic, caution and vigilance remain.

2020 Year End Review

Thu, 31 Dec 2020 16:18:00 GMT

If you are like most people we know, you are very glad to be reaching the end of this year. During the past year we have experienced a global pandemic, massive social unrest, a contentious political atmosphere, an economic recession, the largest quarterly drop in GDP in history, and an end to the longest running bull market in American history. While there is no guarantee that things will be better in the upcoming year, sometimes the expectation of better times, along with an effective vaccine against Covid, can lead to better outcomes. The U.S. stock market defied the carnage of 2020 by rebounding after the lockdown, helped by the largest post-election rally since 1932. Bonds also posted gains as interest rates plummeted due to severe economic contraction. It was a very strange year indeed.

The U.S. economy has been on a wild ride this year. GDP dropped at an annual rate of 5.0% during the first quarter and an additional 31.4% in the second quarter. As the economy rebounded the second half of the year, GDP rose at an annual rate of 33.1% during the third quarter and is estimated to have risen 4.0% in the fourth quarter. For the entire year of 2020, GDP is estimated to have contracted somewhere between 3.5%-4.0%. Estimates for GDP growth in 2021 range from 3.5% to 6.5% as the economy continues to improve. The recovery in new jobs has stalled as the year has gone on but has improved markedly from the second quarter.

Making projections for 2021 depends largely on how quickly everyone can get vaccinated. Estimates are now calling for this to happen by mid-summer. If the experts are correct and the pandemic’s worst days are still ahead of us, we could easily see more economic and market damage during the first half of 2021 before things improve later in the year. The next twelve months will definitely see shifts in consumer confidence as the pandemic gets worse and then hopefully improves.

Something that has been lost in the Covid shuffle this year was a shift in the mandate of the Federal Reserve. Since 1977, the Fed’s mandate has been price stability, or keeping inflation low. Their new mandate is to target average inflation as well as achieving maximum employment. If not for the pandemic, this would have likely been much bigger news. As of right now, it is not clear what “maximum employment” means, but it does appear that the Fed is now open to higher levels of inflation. This is probably a result of years of very low interest rates and increasing levels of debt. Higher inflation helps with both of these issues.

This has been a very challenging year and we are optimistic that the New Year will bring better times for all of us. However, we are realistic enough to know that not everything goes according to plan and there will be hurdles to overcome. Economic conditions in the U.S. and around the world are improving but are worse than they were a year ago. There is much work to be done before we get back to a “new normal”. If you would like a copy of our updated Form ADV, please go to our website or give us a call. Stay safe.

Wabash Capital

It’s all About the Pandemic

Wed, 30 Sep 2020 15:18:00 GMT

The Covid-19 pandemic continues to be the dominate news maker in the U.S. and around the globe. Equity markets rise and fall with positive or negative vaccine news, or news of a spike or reduction in cases and deaths. Most medical experts agree that even with the successful development of a vaccine we are still likely a year away from mass vaccinations, and that’s assuming people are willing to get vaccinated. Polling suggests that up to one half of Americans indicate they will not take the vaccine, ultimately delaying a complete economic recovery. During the third quarter, stocks rose and are now positive for the year, although they experienced a sell off in September as worries grew of lingering economic problems. Bonds were also positive during the third quarter, adding to their gains year to date.

The impact of the pandemic on our economy has been profound. Since this started, over 58 million Americans have filed first time unemployment claims. There are almost 13 million continuing unemployment claims. It is estimated that one third of the pandemic related layoffs between March and May of this year will be permanent. Second quarter GDP contracted at an annualized -31%, after a first quarter of -5%. We are seeing estimates of returning to pre pandemic GDP levels anywhere from 3-7 years from now. Another round of economic stimulus from the Federal Government is being discussed but as of now the timing of this is uncertain.

Certain areas of the economy are doing quite well. The performance of the technology sector has been very impressive, as has the housing sector and some areas of the consumer retail sector. Airline, restaurant, hotel, energy, finance, and travel sectors have been decimated. Most of the U.S. economy is driven by the consumer. Consumer confidence crashed in March and April before rallying throughout the summer, plummeted once again in August as Covid numbers spiked, and then rallied again during September. It goes without saying that a confident consumer is essential to a lasting economic recovery, and with Covid numbers expected to rise again this Fall, this will be an important number to watch.

With any recession, a side effect is an increase in government debt. This is due to government stimulus spending as well as decreased tax collections. Unfortunately, the U.S. was running record deficits when the economy was expanding, so our debt is now exploding. At the end of June, our debt to GDP ratio was 137%. Only four advanced economies in the world are higher: Japan, Greece, Italy, and Portugal. This is not very good company to be keeping. Excessive debt is an economic burden for the future. Hopefully when the pandemic is behind us, we can take measures to live within our means better than we have been.

All of us at Wabash Capital hope you remain safe during these difficult times.

Wabash Capital

A New Normal

Tue, 30 Jun 2020 15:18:00 GMT

After a dismal first quarter for global stock markets, the second quarter was a welcome reprieve. Equity markets staged a fierce rally during the second quarter as investors bet on a quick resolution to the Covid-19 pandemic. However, stocks returned to selling pressure the past two weeks as cases have begun to spike across the U.S., leading to fears that the economic recovery will not be as smooth as many hoped. The unpredictable nature of Covid-19 makes forecasting very difficult and it is likely that a true recovery will not be seen until a vaccine is readily available. When the economy does recover, many industries will be forever changed and will be faced with a new normal.

The scope of our current economic damage is truly remarkable. Over 47 million Americans have filed for unemployment benefits. First quarter GDP contracted at a 5% annualized rate, and consensus second quarter GDP is expected to contract at a 25% rate. In U.S. history, we have never seen a quarterly number anywhere close to this bad. Estimates are that 25% of restaurants will not survive. The U.S. government has handed out over $3 trillion in stimulus funds, four times the amount given out in 2008.

Many people are asking why, in the face of all these scary numbers, is the stock market rising? There are two reasons this is happening. First, the equity markets do nothing but discount future expectations, and investors feel that once the virus is gone, economic conditions will improve. Secondly, investors are betting on a quick recovery once this happens. We agree with the first part of this. Economic growth will recover when compared to lockdown conditions. We are not as convinced about the second part of this. While a vaccine may be developed within a year, it may not. The fastest a viable vaccine has ever been developed is four years, and there’s never been a vaccine developed against a coronavirus. Predicting that a vaccine will be ready to go in less than a year, while possible, seems overly optimistic. Also, the likelihood that we return to the pre pandemic level of GDP quickly is unrealistic. Economic consensus is that the U.S. economy will take 5-7 years to fully recover. The Congressional Budget Office (CBO) has marked down its ten-year estimate of U.S. economic output by a cumulative $15.7 trillion.

There has been much discussion about what the economic recovery will look like. V shaped, W shaped, U shaped, L shaped. We call these the alphabet soup theories. A V shaped recovery would be the best case scenario; an L shaped recovery would be the worst. What we end up with depends on the virus. The longer it lasts, the more damage will be done to our economy and the longer the recovery will be. At this time, this is unknowable.

The spike in Covid-19 cases leads to higher uncertainty about the remainder of this year. As one economist eloquently stated, there’s a growing lack of clarity about the future. Given this uncertainty and the market’s high valuations, we remain cautious.

Pandemic

Tue, 31 Mar 2020 15:18:00 GMT

Since our last letter to you at the end of December, the world has changed with breathtaking speed. As the COVID-19 pandemic has raced around the world, economies have ground to a halt, equities markets have plunged, lockdowns have become the new normal, and everyone’s lives have changed dramatically. From our perspective as money managers, you really could not imagine a more disruptive event. When we experience disruptive events like this, we always look for similar events in the past to get an idea of what it might look like. For this pandemic, there are really no parallels. We have basically shut down our economy for a sustained period of time. That’s never been done before. Adding to the economic shock is the collapse in oil prices, which, if not for the pandemic, would be the major news event so far in 2020. We normally do not like words such as “Plummet”, “Plunge”, and “Crash”, but all three seem appropriate for describing the markets and the economy this quarter.

We have talked for the last couple of years about the bull market in stocks and that it was the longest running bull market in U.S. history. The bull died on March 11th, only 19 trading days after setting an all time high. That’s the second fastest bear market in history. The average bear market takes 136 trading days, so this drop was fast and steep. The U.S. economy, which was expected to grow at a 2% pace for this year, will likely be negative for the first quarter and then extremely negative for the second quarter. Estimates for GDP contraction during the second quarter are as high as a negative 24% annualized rate. It could be even worse than that, and we have never seen a drop that large, not even during the Great Depression. It is extremely difficult to make forecasts during an unprecedented economic collapse, so we will really just have to wait until the numbers some out to see how much damage is being done. Whatever the numbers turn out to be, they won’t be good, and will probably be as bad as economic numbers last seen during the 1930’s.

In early February, first time jobless claims were the lowest in over fifty years. Seven weeks later, jobless claims were almost 3.3 million, the most ever. Such a stunning reversal is unprecedented and could easily get much worse before this is over. We are seeing estimates that the unemployment rate may reach 30% on a temporary basis.

In response to this economic stoppage, the Federal Reserve has unleashed a $2 trillion stimulus to pump money back into the economy, doing essentially what they did during the 2008-2009 recession, except on an even bigger scale. The Fed has also dropped interest rates to zero. To state an obvious fact, until the spread of COVID-19 slows, any economic measures will have limited success.

The question often asked is, How long will this last? At this point, the answer to this question is impossible to know. As this letter is being written, the pandemic continues to spread and it looks like the peak in the U.S. will not be for several more weeks, at best. While the stock market has rallied the past ten days, it is important to know that most of the best one-day gains in stock market history come during bear markets. It is too early to know if stocks have bottomed, or if this is nothing more than a bear market rally.

Time will tell on this, but I suspect it will get worse before it gets better. Even at its lowest point, the stock market was not cheap relative to earnings, and those earnings are going to plummet for at least the first two quarters of this year.

I have always advised investors to pay attention to the numbers, because they tell you how to invest. The quickness of this economic and market plunge skews the numbers and makes them largely useless. We’ve really never had this type of economic shutdown, so history isn’t much of a guide. We are forced to make decisions and plans based on forecasts of the future that are, at best, problematic and changing nearly every day. Buyers of stocks right now are counting on the virus ending sooner rather than later and that the economic stimulus will keep the recession short and fairly mild. Neither is guaranteed, or even likely. We will be buyers of stocks at some point, but not now. I see nothing that leads me to believe that the potential return relative to the risk is justified at this time.

I expect this recession to be fairly short but very severe. History tells us that recessions caused by a single event tend to be shorter than ones caused by broader economic problems. However, while it is possible, I am not expecting the much talked about “V” recovery, which is a fast drop followed by a fast recovery. I believe that a prolonged economic downturn and a slow choppy recovery is a very real possibility. The longer the pandemic lasts, the more economic damage will be done, and the longer it will take to recover. I have read many estimates on the recovery, but most are not based on facts but only on hopes and speculation.

Due to shelter in place requirements, all three of our offices are closed and we are working remotely. Please do not hesitate to contact us, and rest assured that we are doing all that is possible during these difficult times. This isn’t the first bear market we have been through, and it won’t be the last. Times like these are very scary and it sometimes seems like things will never get better. But this will pass. The list of catastrophes the world has survived takes up more room than this letter allows, but we always recover and come back stronger than before. This time will be no different.

As always, please let us know if you need anything, and stay safe.

Don Edwards, CFA
President
Wabash Capital, Inc.

2019 Year End Review

Tue, 31 Dec 2019 16:18:00 GMT

After a difficult year in 2018 for both stocks and bonds, the U.S. capital markets roared back in 2019 with strong gains across the board. The bond market posted gains as interest rates dropped throughout the year. Stock indices in the U.S. are near record territory, recovering from last year’s losses and extending the bull market run that started in 2009.

We have talked a lot the past couple of years about this bull market in stocks. From its beginning back in March of 2009, the bull market is now 129 months old, a record for the U.S. stock market. During this run, the market has had 14 drops of at least 5% and 6 drops of at least 10%. The steady growth of the U.S. economy has fueled this climb as there have been no recessions during the past ten years. The bull lives on.

As we enter a new year and a new decade, we ponder what the next few years will look like from an investment viewpoint. There are several positives for stocks: 17 of the last 19 presidential election years have produced positive returns for the S&P 500, with the only negative years being 2000 and 2008. Also positive for the stock market are low interest rates and low inflation. Corporate earnings are strong and consumer confidence is high. Challenges for stocks include slowing global economic growth; high stock valuations; high levels of debt for American consumers and corporations; and the ballooning Federal government debt. With a government debt of over $23 trillion, we pay over a $1 billion a day in interest. During a ten year economic expansion like we are in, we would expect the national debt to be dropping rather than expanding. Like the late 1990’s, much of the current economic expansion is being financed by debt.

Economic expansion in the U.S. as measured by our gross domestic product (GDP) will end 2019 at a positive 2.2% to 2.4%. Most estimates for 2020 have this number slowing to 1.8% to 2.1%. While our economy is generally in good shape, the combination of slowing growth, high debt, and high stock valuations is a combination that carries risks. While it is impossible to predict with any level of certainty what will happen over the next twelve months, we are taking a conservative stance with our investments.

Some new IRA laws that will affect many of you take affect with the new year. The age at which you must begin taking required minimum distributions (RMD’s) rises to 72 from 70 ½. If you turned 72 ½ in 2019 or earlier, you are not affected by the change. Also, distributions from inherited IRA’s must now be completed in ten years rather than based on life expectancy.

Please let us know if you would like to receive an updated copy of our Form ADV Part 2, which is also posted on our website. Welcome to the 2020’s!

Wabash Capital

The Economy and The Fed

Mon, 30 Sep 2019 15:18:00 GMT

The stock market continued its volatile ways during the second quarter, finishing with small gains for the quarter. The bond market had a strong quarter as interest rates fell in response to slowing economic growth. It is also notable that the Federal Reserve cut the Fed Funds Rate during the third quarter for the first time in more than a decade. The U.S. economy is being impacted by slowing global growth and domestic trade policy.

There has been much discussion about interest rates lately and the Fed’s policies when it comes to making rate decisions, so we thought it might be a good idea to take a closer look at the Federal Reserve and what they do. The Federal Reserve is the central bank for the United States. They are charged with providing our country a safe, flexible, and stable monetary and financial system. That’s a pretty tall task. Through various mechanisms they attempt to keep the economy growing at a targeted rate while at the same time keeping growth from becoming overheated and causing inflation.

While the Fed Funds Rate, the interest rate banks charge other banks for overnight borrowing, and the Discount Rate, the rate banks are charged on loans from the Fed, get the most attention, the Fed has other important tools in their toolbox to affect the economy. Open market operations, the purchase and sale of securities in the open market by a central bank, are a key tool used by the Federal Reserve in the implementation of monetary policy. Reserve requirements are the amount of funds that a depository institution must hold in reserve against specified deposit liabilities. Within limits specified by law, the Fed’s Board of Governors has sole authority over changes in reserve requirements. Depository institutions must hold reserves in the form of vault cash or deposits with Federal Reserve Banks. The Federal Reserve Banks pay interest on required reserve balances and on excess reserve balances. The interest rate on required reserves is determined by the Board and is intended to eliminate effectively the implicit tax that reserve requirements used to impose on depository institutions.

The Federal Reserve would like the Fed Funds Rate to be within a range of 2% to 5%. They would like our economy, as measured by the gross domestic product (GDP) to grow between 2% and 3% per year. The Fed’s target inflation rate is 2%. Deviations from these targets results in one or a combination of Fed actions, most of which are never seen by the public or talked about by politicians.

It is important to know that the Fed’s job is not to make the stock market rise or to keep politicians happy. Since the early 1980’s, the Fed’s overriding mandate has been price stability (low inflation) in the economy. When the economy grows and inflation remains low, the capital markets will be just fine. There will always be economic cycles, but they are less severe because of the actions of the Federal Reserve.

Wabash Capital

Roller Coaster Stocks

Wed, 19 Jun 2019 05:26:56 GMT

After a strong first quarter, global stock markets gave us increased volatility during the second quarter before finishing the quarter with solid gains. Stocks were strong in April, suffered a large sell off in May, and rebounded once again in June. Bonds were much more stable, following up a good first quarter with more gains during the second quarter. Mixed economic data and heightened trade fears left investors unsure of where the economy is headed, which increased volatility.

We talked in our last letter about the yield curve inverting briefly during the first quarter and the possible implications of this. The yield curve inverted again in late May and remains inverted to this day. This happens when yields on short term bonds are higher that they are on longer term bonds. This rarely happens and is often the signal that an economic recession is looming. In fact, the last seven recessions in the U.S. have been preceded by an inverted yield curve. It is worth noting that the bond market is much better at predicting the economic future than the stock market is. There is an old adage on Wall Street that is worth remembering: Never ignore an inverted yield curve.

The stock market in the U.S. began its current bull market run in March of 2009, and has risen over 400% since then. Since September of 2010, the U.S. economy has produced almost 21 million new jobs. It has been a great ten year run. How much longer this expansion has to run is difficult to forecast. As we discussed earlier in this letter, the bond market is predicting economic headwinds. Also concerning is the valuation of the stock market. A measure of valuation often used by Warren Buffet measures the total value of the stock market against the overall size of the economy. This measure has never been higher than it is currently.

Most of the money we invest for our clients will ultimately be used to provide retirement income. A sad reality is that almost one half of the Baby Boomers in the U.S. have no retirement savings and will live on Social Security alone. You may not know the name Ida May Fuller, but she holds an interesting spot in American retirement history. Miss Fuller was the first ever recipient of monthly Social Security benefits, beginning back in January of 1940. She paid payroll taxes for three years before she retired, paying a total of $24.75. She received a monthly benefit for thirty five years until she died in 1975 at the age of 100. She received $925 of benefits for every dollar she paid in payroll taxes. It’s always good to be first.

The current investment room is occupied by two elephants: High stock valuations and the inverted yield curve. While bond yields can adjust quickly, high valuations are not going anywhere until there is a price adjustment. We remain cautious with our outlook for the remainder of this year.

Wabash Capital

2018 Year End Review

Mon, 31 Dec 2018 05:32:29 GMT

It was difficult to make money in 2018. The equity markets experienced their worst year since 2008, and had their worst December performance since 1931, despite a furious rally the last week. The bond market, facing rising interest rates all year, was negative most of the year until a December rally left it even for the year. Global stocks fared worse that U.S. stocks as questions about world wide economic growth rates hung over markets around the world.

We have talked a lot the past year about the record setting bull market that started back in 2009. In December of this year, the S&P 500 dropped 19.8% from it’s high, just short of the 20% needed to be considered a bear market. Technically, the bull market lives on, although it’s on life support. Many markets and individual stocks are well into bear market territory, and it seems likely that the rest of the market will follow. It is worth noting that even with the pullback in stock prices, the market remains expensive relative to earnings. To become more reasonably priced, we will need to see further market drops and/or increased corporate earnings, which, based on current forecasts, is increasingly unlikely.

We reduced our equity exposure a year ago based on our expectations of potential selling in the equity markets. While this doesn’t eliminate the pain of market drops, it does leave us well positioned to buy back into stocks as the market gets more attractive. Even with the large fourth quarter drop, we do not feel that stocks are yet attractively priced. At this time, we continue to be cautious investors.

With the struggling capital markets and slowing global growth rates, there are the inevitable questions as to whether we are facing the prospects of an economic recession. While rising interest rates and the global problems are a concern, we feel it is too early to know if we will see a recession. Interestingly, a recent study by Dr. Davis Kelly found that, since 1948, recessions in the U.S. have become less frequent and milder as our economy has gradually stabilized. Recoveries have also become weaker as the overall pace of economic growth has slowed. This has been caused by better inventory management by U.S. corporations, less disruption from big swings in government spending, and the increasing rise of the service economy, which is more stable than traditional manufacturing.

We here at Wabash Capital would like to bid a fond farewell to Chris Doll, who is leaving Wabash Capital and the investment industry to work with a new start up business. Chris was one of the founders of Wabash Capital back in 1997, and for the past few years has worked in our retirement and fiduciary businesses. Please join us in wishing Chris well as he embarks on his new career.

Wabash Capital

Historic Bull; Missing Bear

Sun, 30 Sep 2018 05:39:39 GMT

During the third quarter, the current bull market in U.S. stocks became the longest running bull market in our history. Beginning on April 10 ^th of 2009, the S&P 500 has gained 430%. During that time, it has also experienced eleven drops of at least 5%, and five corrections of at least 10%. Bull markets end with a drop of at least 20%, when we enter bear market territory. This has been a very resilient bull. Meanwhile, in the bond market, rising interest rates have led to falling bond prices throughout the year.

We may be almost ten years into this bull market, but there are obviously some leftover anxious memories about the Great Recession of 2008-2009. In a recent poll conducted by Betterment Research, 48% of American adults surveyed thought the stock market was flat over the past ten years, while an additional 18% thought the stock market had declined over that ten-year period. A whopping 83% felt that Wall Street was no more ethical now than it was before the financial crisis.

There is a mixed bag of data on the economy and the markets. Real GDP growth in the second quarter of this year came in at 4.1% annualized rate, giving us a growth rate of 2.8% for the past four quarters. For the full year of 2018, GDP growth is forecast to be just under 3%, slowing to just under 2% by 2020. The unemployment rate dropped to 3.9% in July, which is well below the natural rate of unemployment. This is an important factor in inflation forecasts as tight labor markets can cause inflation to rise.

The Federal Reserve has been diligent in raising the Fed Funds Rate to keep the inflation rate from rising above their 2% target. Currently, the yield curve, or the spread between short-term and long-term interest rates, is very flat. Short-term rates have moved up dramatically while long-term rates have stayed stable. This is also a very important factor to keep an eye on. Historically, an inverted yield curve, or short-term rates higher than long-term rates, is usually a sign that a recession is coming.

There is an old saying in the investment industry that bull markets don’t die of old age, they’re killed by the Federal Reserve. That may or may not be true of this bull market, but the Fed has made it clear they will risk a recession to maintain price stability.

It has been said many times that predicting market tops and bottoms is a loser’s game: impossible to win and predetermined to lose based on the actions of those who are trying to win it. Fortunately, investing success does not require the ability to predict these points of inflection. We invest based on our economic and market forecasts and try to focus on the long term rather than short term volatility. The two things we are most certain of is that there will be time periods where we lose money; and that over the long-term the markets will reward us for being patient.

Wabash Capital

Head Winds

Sat, 30 Jun 2018 06:25:34 GMT

For the capital markets, the second quarter of this year was very much like the first quarter. Equity markets were volatile and ended up close to where they started, at least on the domestic side. Bonds continued to struggle as interest rates moved higher. Global stocks and emerging market stocks sold off as worries rose about the state of the global economy. In the U.S., fears of higher inflation combined with worries over free trade, causing investors to fear that the nine-year economic expansion may be in danger. The yield curve has become very flat, meaning there is not much different between short term and long term interest rates. This is rarely a good sign for the markets.For the capital markets, the second quarter of this year was very much like the first quarter. Equity markets were volatile and ended up close to where they started, at least on the domestic side. Bonds continued to struggle as interest rates moved higher. Global stocks and emerging market stocks sold off as worries rose about the state of the global economy. In the U.S., fears of higher inflation combined with worries over free trade, causing investors to fear that the nine-year economic expansion may be in danger. The yield curve has become very flat, meaning there is not much different between short term and long term interest rates. This is rarely a good sign for the markets.

There remains much positive economic news. In the U.S., consumer sentiment remains high. Home prices are strong, and the unemployment rate dropped to 3.8% in May. The average hourly earnings rate rose 2.7% in the past year and corporate earnings are rising.

With all of this great economic news the question arises, “Why are the capital markets struggling?” To answer this, we must look beyond the numbers. The unemployment rate is well below the natural rate of unemployment. With a tight labor market wages rise, which we have seen over the past couple of years. Higher wages are passed through to the consumer in higher prices, increasing inflation. High home prices force households to spend money on a mortgage payment that would otherwise be spent other places. This can continue as long as consumers are optimistic about the future, but once they start to pull back their spending, economic growth can slow rapidly, bringing down earnings and the markets.

There is sometimes a disconnect between the markets and the economy. For example, the best time to buy stocks in the past thirty years was the Spring of 2009, when the economy was terrible. The best time to sell stocks in the past thirty years was the Spring of 2000, when the economy was fantastic. In bad economic times, pessimistic investors drive prices lower than they should be, and in good economic times, optimistic investors drive prices higher than they should be. This has been going on for hundreds of years and as long as there have been investors and investment opportunities. The good news is that while stock prices are high right now relative to earnings, they are not close to the levels seen in 2000. And if we do experience a recession and a corresponding sell off in the capital markets, it is very unlikely to be as nearly as bad as it was in 2008.

From a business and economic standpoint, the world has become a very small place. All the world’s economies are interconnected as never before. Economic difficulties are shared across the globe and are not isolated in one or two places. Economic growth is also shared. Economic policies that help the rest of the world also help U.S. businesses and consumers. We are all in this together. American business benefits greatly from free trade and our hope is we back away from the protectionist talk in Washington.

Wabash Capital

Choppy Markets

Sat, 31 Mar 2018 06:31:01 GMT

The first three months of 2018 were very entertaining if you like market volatility and drama. January started the year off strong as we saw equity market gains across the board. February and March were both negative months with markets experiencing greatly increased volatility, including two trading days in which the Dow Industrials lost over one thousand points. Higher interest rates and increased fears of inflation caused the bond market to also drop during the first quarter. This was one of those quarters where gains were hard to come by regardless of how you were invested.

The current bull market began nine years ago during the Great Recession of 2008-2009. During this nine-year run, the equity market has had a few corrections, defined by a 10% drop. In February the market dropped 10% from its January highs, rallied, and then fell to the 10% level once again. In times like these the question is always, “Is this a temporary pull back and thus a buying opportunity?” or “Is this the early stages of a deeper sell off and thus a chance to sell?” We believe the answer depends on your time horizon. The stock market is highly priced right now and a deeper sell off would not be surprising. However, we also feel that we remain in the midst of a longer-term secular bull market that has more time to run.

From an economic viewpoint conditions in the U.S. continue to look great. Corporate earnings are forecast to have double digit increases over last year, helped by large corporate tax cuts. New jobs growth continues its nine-year upward trend and the unemployment rate is roughly 4%. Two things concern us on the economic front: rising interest rates and inflation; and the recent increase in trade protectionism. Both issues have the ability to derail the current economic expansion and bring the markets down to lower levels.

The new tax law that went into effect at the beginning of the year included increases in the estate tax exemption and the annual gift tax exclusion. The Federal estate tax exemption is now $11.2 million for individuals and $22.4 million for married couples. Because of this very few people will need to worry about paying Federal estate taxes. The annual gift tax exemption, or the amount each person can gift without using any of their gift tax exemption amount, is now $15,000.

We have taken steps to reduce the risk of market pullbacks in our portfolios. We do not know where the markets are headed in the short term, but we feel very comfortable holding stocks for the longer term and will increase our stock holdings should the market get back to more reasonable valuations. Please feel free to contact us if you would like to discuss our thoughts in more detail.

Wabash Capital

2017 Year End Review

Sat, 30 Dec 2017 06:53:28 GMT

Another year in the books. 2017 ended with strong equity markets as the eight-year bull market continued to impress. Global stocks did especially well as economic conditions improved around the world. The bond market produced small gains, as it has for the past few years, as the prospect for rising interest rates kept gains in check. The equity markets experienced relatively low volatility, with the best one day gain for stocks during the year being 1.4% back in March, while the worst one day drop was a loss of 1.8% back in May.

We pointed out a year ago that the current economic expansion is one of the longest expansions since World War II. A year later nothing has changed. Economic growth has continued as has new job creation. Corporate earnings remain strong and most measures of economic activity continue to look good. Based on the economic data we are seeing, an economic recession seems unlikely in the upcoming year.

In the bond market, the Federal Reserve raised interest rates three times during the year. In spite of this, interest rates stayed very steady during the year. The yield curve, which is the difference between short rates and long rates, has gotten very flat, which typically is a sign that equity markets may struggle.

Looking forward to the New Year, the biggest concern we have is the current valuation of the U.S. equity markets. Stocks are very expensive relative to earnings right now. This is not unusual for this point in the economic cycle. After long expansions, stock valuations almost always rise, and the longer the economic expansion, the more expensive the markets get. Will stocks continue to rise in 2018? That is impossible to know. Markets can stay expensive for a long time and don’t drop just because they are expensive. However, when a sell off comes, expensive markets will drop more just because there aren’t earnings to support prices. We believe that the longer-term bull market still looks good, so we would be buyers if we do see a stock sell off.

We have become more cautious in the past year as stock markets have continued to set new highs. In many ways, markets like this are the hardest in which to be an investor. The economy is good, unemployment is low, and markets are rising consistently. It is difficult to take money out of stocks in this environment. However, earnings and valuations matter and sometimes there is a disconnect between the economy and the stock market. By almost all valuation metrics, stocks are higher than they should be and we believe caution will be rewarded. As always, please let us know if you would like to receive our updated Form ADV, which is on file with the SEC and contains information about our firm.

Wabash Capital

The Bull Lives

Sat, 30 Sep 2017 06:56:43 GMT

The stock and bond markets both produced gains during the third quarter as investors continue to be optimistic about the U.S. economy. Corporate earnings remain strong and inflation remains low. Both factors combine to produce a good economic environment for the capital markets.

The third quarter was notable for producing two devastating hurricanes, Harvey and Irma. Combined, these two storms caused an estimated $290 billion in damage to Texas and Florida. Lost economic activity is likely much more than this. This is the first time in history that two category 4 or higher hurricanes have hit the U.S. mainland in the same year. One in every seven cars in the Houston area was destroyed by Harvey and 25% of all homes in the Florida Keys were destroyed by Irma. The damage done and the lives affected by these two storms is truly remarkable. We have many clients in both Texas and Florida. Fortunately, all made it through the storms with no physical injuries and relatively minor property damage

Over the years, you have heard a couple of themes from us many times: Stock performance is all about corporate earnings; and economic conditions around the world matter to U.S. investors. To illustrate how the two works together, the latest earnings growth rate for the S&P 500 was slightly more than 10%. Earnings growth for companies with more than 50% of their sales in the U.S. was 8.5%, while earnings growth for companies with less than 50% of their sales in the U.S. was 14.5%. Almost one third of all sales by S&P 500 companies come from non-U.S. markets. A large part of our strong stock market and strong earnings growth is a result of improving economic conditions around the world.

We talked in our last letter about the high valuations we are seeing in the equity markets. That has not changed during the third quarter. An interesting measure of this that is often overlooked is the ratio of household net worth to disposable personal income. Over the past few years, household net worth has risen faster than disposable income. The ratio of the two is at its highest point ever. Like most measures of stock valuations, this metric does not tell us when the market will turn, but it does point to future returns being lower than historical average from current levels.

We continue to be rather cautious in our forecast for the future of this bull market. It is already one of the longest running bull markets since the end of World War 2, and at current valuations, any sign of an economic slowdown could mean a rather severe pullback for the markets.

Economy Good; Markets Expensive

Fri, 30 Jun 2017 06:59:37 GMT

The stock and bond markets continued their winning ways this year as the U.S. equity markets set multiple record highs during the second quarter. The bond market rose during the quarter, pushing yields lower. We are seeing mixed, although mostly favorable economic data, which is providing the fuel for stocks to rise.

Falling interest rates are usually a sign the bond market is forecasting a slowing economy, while rising stock prices are a sign the equity markets are forecasting a growing economy. It is interesting to look at the factors that are giving us these seemingly opposite outlooks. Stocks, in the short run, are very volatile as investors discount the likelihood of various things happening. Our economy has been growing since 2009 and optimism has been growing for eight years. It is worth noting, however, that 40% of the gain this year in the S&P 500 is due to just four companies. This latest uptick does not have broad market breadth, which is usually a warning sign that the rally is not sustainable. As we have stated in our past few letters to you, we are also seeing signs that are typical of a late bull market run. Bond yields have been dropping as we are seeing little evidence that the tight labor markets are leading to rising wages, which suggests that inflation remains in check.

People sometimes misinterpret what we mean when we say the stock market is expensive. The fact that the Dow Jones Industrial Average is over 20,000 does not mean the market is overpriced. The market is only over or under priced relative to the earnings that are produced by the companies that make up the index. After the bear market in 2008, the market doubled in price but earnings also doubled, so the index did not get any more expensive. One of the metrics we use to determine market valuation and our overall asset allocation is the CAPE ratio, or the cyclically adjusted price earnings ratio. We could fill many pages with our methodology on building portfolios based upon different valuation levels, but suffice it to say that as stocks get more expensive we become more conservative, and as stocks become cheaper we become more aggressive. It is worth noting that the CAPE ratio is currently near 30, and since 1880, there have only been two times it has been higher than this: 1929 and 1999. In both of these time periods, these market valuations were unsustainable.

We are not predicting a market crash or even a deep sell off. We do, however, think that the upside potential in stocks is limited at current levels. For the longer term, stocks should still be held as markets can stay overvalued for a long time and are impossible to predict in the short term. In the near term, we have become somewhat more conservative in our allocations.

2017 Economic Growth Continues

Fri, 31 Mar 2017 00:44:54 GMT

The stock market stormed out of the gate during the first two months of 2017 as hopes regarding fewer business regulations and increased consumer confidence fueled investor’s optimism for equities. The bond market was flat during the first quarter as increased inflation expectations and higher interest rates were a drag on bond prices.

The Federal Reserve raised interest rates during the first quarter for the first of what is expected to be multiple rate increases during this year. The economy continued the expansion that has been underway since 2009, allowing the Fed the ability to hike rates. Most analysts are projecting a pickup in inflation over the next two years and this is the primary catalyst for increasing interest rates. Another factor is the very low unemployment rate, which can be inflationary with a growing economy. As we have said before, the Fed has the very difficult job of keeping the economy growing but preventing it from growing so fast we have high inflation. This can be a difficult job to manage.

The current economic expansion is the third longest since the end of World War II and is showing signs of age. Business spending is slowing, earnings multiples are high, profits are weakening as a percentage of GDP, short term interest rates are rising, and M&A activity is increasing. These are all late business cycle events. While we do not believe that an economic recession is eminent, there are certainly warning signs out there.

The bond market has dropped considerably since the election. In the five weeks after the election, the value of a 10-year Treasury note dropped by 26%. Back in July, the yield on a 10-year Treasury note hit 1.36%, the lowest yield ever, and 10 year Treasuries have been trading for 226 years. Currently, the yield on the same bond is over 2.5%. It is obviously difficult to trade in this type of market and extreme volatility. While interest rates have moved up, we believe rates will stay relatively low.

For the record, the best trading day of the year for stocks was +2.5%, back in January. The worst trading day of the year was -3.6%, back in June. Overall, it was not a very eventful year for stocks, the late rally notwithstanding. Valuations have risen to high levels, which is typical for this stage of the business cycle. While we cannot accurately predict short term stock market performance, we continue to believe that upside potential is limited at these levels and have taken a cautious stance with stocks. We shifted to more conservative portfolios earlier this year, and if stocks move much higher from current levels, we are nearing the point where another shift is warranted. Always remember that successful stock investing requires selling when stocks rise, and buying when stocks drop. While we are cautious in the short term, we believe the longer-term bull market in stocks remains intact, and would be stock buyers if there is a pullback in the market.

If you would like an updated copy of our Form ADV, which is on file with the SEC, please contact us or go to our website. This form will be updated in early 2017, as it is every year. We encourage you to review this as it has lots of information about Wabash Capital and our officers. We truly appreciate your business and please feel free to contact us if you need anything.

Economic Growth Continues

Sat, 31 Dec 2016 01:09:53 GMT

By most measures the equity markets are at the high end of the valuation spectrum. While this does not mean that a large sell off is eminent, it does suggest that upside potential is limited at these levels. We shifted to a more conservative stance last summer and we remain cautious today. The current bull market, one of the longest since World War Two, is getting old and is showing signs of a late cycle bull market. While we can never predict short term market moves, we believe this conservative stance is appropriate.

We are also cautious in our outlook for the bond market. Interest rates have been so low over the past few years that even a moderate increase in rates would cause a fairly substantial selloff in bond prices. We will be watching the inflation numbers very closely this year and adjusting our bond portfolios accordingly. While we believe inflation may pick up to some degree we do not believe it will reach high levels.

All in all, the U.S. and world economies are still expanding, and that is good for equity markets. In an expansion as old as this one, however, markets tend to get overextended and expensive relative to earnings, which is where we find ourselves right now. We feel the longer-term bull market remains intact, so if there is a selloff in stocks we would be buyers. We will keep you posted as our thoughts change, but in the meantime, please feel free to call us if you would like more details on our investment thoughts or if you would like to review your portfolio.

About Wabash Capital

Wabash Capital is an employee-owned registered investment advisor based in Terre Haute, Indiana, providing investment advice and professional portfolio management to individuals, corporations, banks, trusts, retirement plans and endowments. To learn more about our business, please visit www.wabashcapital.com .

Forgotten But Not Gone

Fri, 30 Sep 2016 01:14:52 GMT

When we wrote our last quarterly letter to you at the end of June, capital markets around the world were in panic mode due to the British voting to leave the European Union. When was the last time you heard anything about the Brexit? It is probably safe to say that once the U.S. stock market rebounded after a week, most people moved on and forgot this even happened. With election dominated news, our normal financial reporting has been replaced with political propaganda. Fortunately, by the time we write our next letter to you at the end of the year, the election will be behind us and we can (hopefully) get back to financial reports that are more meaningful.

Stocks and bonds both posted gains during the third quarter. For stocks it was a relatively uneventful three months, which is not a bad thing. The S&P 500 Index set a new record high in August before pulling back slightly to current levels. Bond prices rose as interest rates dropped to record lows. We expect to continue to see low interest rates as long as inflation remains tame. For some perspective on this, for the five year period from 1977-1981, inflation averaged more than 10% per year. Since then inflation has only reached 5% one time, and that was in 1990. The inflation rate over the past twelve months is only 1%. As we have said in the past, we think deflation is a bigger problem on a global scale than inflation is.

On the economic front, financial conditions in the U.S. remain accommodative and supporting of growth. Job growth remains strong and the unemployment rate stands at 4.9%, which is usually considered to be full employment. Over the past six years, the GDP of the U.S. has risen from $14 trillion to almost $18 trillion. China’s GDP is $12 trillion, while Germany’s and Japan’s are less than $4 trillion.

Economic performance has improved markedly during the third quarter in China, which is great news for the smaller, emerging economies around the world. Brazil and Russia, which together were in very deep recessions earlier this year are also in much better shape. Why is this important? Companies that make up the S&P 500 get 32% of their revenues from outside the U.S. The world has become a global marketplace and problems, especially in the larger economies, are exported around the world.

By year end, some of our current problems will likely be forgotten, but they won’t be gone, just like the Brexit. We continue to be somewhat cautious for the equity markets, but we would be surprised to see a major pull back during the remainder of this year. We may even see a rally after the election as this uncertainty is removed.

Brexit

Thu, 30 Jun 2016 01:16:57 GMT

It had been a relatively uneventful quarter for investors until the last week of June, when British voters voted to leave the European Union. Markets around the world plummeted on the surprise vote. The Dow dropped 900 points in the first two trading days after the vote; then regained almost the entire amount over the next three trading days. There is little to do when the markets react like this, and in reality, the Brexit will likely have little impact in the U.S. It is also worth noting that this was a non-binding referendum, so we do not know what the ultimate outcome of the vote will be.

It should come as news to no one that we are in the middle of a presidential election year. As is normally the case, we are asked about the election and its impact on the markets more than any other topic. For the record, presidential election years are normally positive for the markets. Sixteen of the last eighteen election years have produced positive total returns in the stock market. The two down elections years were 2000 and 2008. From a statistical standpoint it is difficult to reach the conclusion that the markets are positive because it is an election year. Likely the two are not connected. We find it reassuring that stock market performance is not tied to presidential elections.

From an economic standpoint, growth of the U.S. economy remains positive, although sluggish, as it has been for the past few years. From an investment viewpoint, this is not a bad thing. Slow and steady economic growth tends to keep asset bubbles from forming like they do from strong growth. New housing starts are at their highest levels in nine years. Employment gains have been nonstop since 2009. Inflation remains very low. As we have stated before, most of the economic problems we are seeing are outside of the U.S. as economic slowdowns in China and Western Europe lead to concerns about our own growth. Long term, it is impossible to be the only growing economy in the world.

It is worth noting that the current bull market is now 87 months old, just the second bull market to reach this age since 1950. The bear market of 2008-2009, during the “Great Recession” came when the U.S. economy contracted 4.2% during an eighteen month period from December 2007 to June 2009. This was the largest economic contraction in the U.S. since 1947 when we started tracking this data. The economy and the markets have come a long way in recovering from this very scary time.

With interest rates at historic lows and the equity markets near all-time highs, we have taken a cautious stance in the near term. While we think the chance of a large drop in the stock market is low, we think the upside is limited from these levels. We will keep you posted as our outlook changes.

Comeback

Thu, 31 Mar 2016 01:20:08 GMT

It may not feel like it, but the U.S. stock market made an historic comeback during the first quarter of 2016. From its low on February 11th the stock market has rallied more than 11%, wiping out the losses for the year. This is the biggest quarterly comeback for the market since 1933. The bond market has continued to be volatile but ended the first quarter with modest gains as interest rates fell during the quarter.

Economic growth in the U.S. continues to be sluggish, although it remains positive. The U.S. GDP grew roughly 1.9% last year, which was less than the Federal Reserve was expecting. Economic data suggests only a slightly higher GDP growth rate for this year. This disappointing growth, as well as muted inflation projections, has led the Fed to slow down the frequency of their interest rate hikes. They had been planning four rate hikes per year for the next three years. They are now planning only two for this year. Economic growth outside the U.S. continues to be sluggish as well.

The Fed, as well as many economists, has projected the core inflation rate to rise to 2% by 2018. We remain somewhat skeptical of this timeline. With current economic conditions and dropping commodity prices, it is difficult to imagine a scenario that leads us to increases in inflation. Also, for the past twelve years, we have been warned of higher inflation, “Two years out.” While we acknowledge that the Fed has more economic data at their fingertips than we do, we still see deflationary pressures worldwide. This has kept inflation low and has the potential to keep it in check in the future.

On the investment front, we think we will see continued volatility in both stocks and bonds for the remainder of this year. In the near term, stocks could have limited upside potential as the yield curve flattens and questions linger about corporate earnings. Fears about higher interest rates in the future are also likely to keep stock returns muted. As concerns about higher interest rates and inflation abate we should see the outlook for stocks improve. It is very difficult to predict when this will happen. For the bond market, we would not be surprised to see this year turn out much as 2015 did with slightly lower interest rates and negligible gains. In short, there are many variables out there that will impact the performance of the markets this year and at this point it is difficult to know how things will turn out.

Changes can happen quickly in the investment world and by our next letter we may have a different outlook. Current economic conditions lend themselves to frequent updating. Given the number of economic question marks, we remain cautious.

2015 Year End Review

Thu, 31 Dec 2015 01:25:34 GMT

2015 was a frustrating year for investors. Both stocks and bonds experienced lots of ups and downs, but ended the year with very little to show for it. Continued economic growth gave us the gains, while questions regarding future growth rates, particularly around the world, gave us the losses.

Economic growth in the U.S. grew roughly 2.1% during the past year. While positive, GDP growth slowed late in the year. Strong employment gains throughout the year lowered the unemployment rate to 5%. Also in the U.S., strong consumer spending and continued debt reduction added to our economic growth. The other big economic news during the year was the FOMC raising the Fed Funds rate for the first time in nine years.

Most of the volatility in the markets this year, and the largest reason the markets were flat for the year, came from overseas. An economic slowdown in China, military uncertainties in the Middle East and Russia, and the ever present economic trouble in Greece all weighed heavily on the future outlook for our economy and the capital markets. All of these issues are a concern as we enter the new year.

We are generally positive regarding the U.S. economy for the upcoming year. We expect GDP growth rate to rise marginally over this year’s rate. We believe most of the drop in oil prices is behind us and a more stable outlook for oil should be a positive, although our outlook on this could change depending on how events unfold. We believe inflation will rise gradually, as will interest rates. Corporate earnings, which ultimately determine stock prices, are forecast to rise next year as businesses continue to recover from the Great Recession.

Our expectations for the stock market are also guardedly optimistic. Current earnings multiples are in the high normal range. While this gives us some downside protection, it likely also limits the upside potential of the market. As we said earlier this year, if there are surprises we believe they will be on the upside rather than the downside. It is, as always, very difficult to make short term predictions about the stock market. We also expect the bond market to have limited upside potential as interest rates move upward.

As we have said many times, the one certainty in investing is volatility and uncertainty. This year there have been more of both than in normal years. Longer term we believe the markets will continue to reward investors, and we try to focus on this rather than the year over year volatility. As always, please feel free to contact us with your questions or comments at any time. We would also remind you that our updated Form ADV is available upon request.

Where Do We Go from Here?

Wed, 30 Sep 2015 01:32:48 GMT

The third quarter of this year was an unpleasant one for investors. The stock market had its worst quarter’s performance in four years. The bond market was very volatile during the quarter as speculation regarding the Federal Reserve’s intentions ran wild. Bonds ended the quarter with small gains. The Fed’s decision to keep rates unchanged caused renewed fears that worldwide economic growth is slowing.

Much of the fear currently hurting the stock market comes from overseas. Economic weakness in China is causing concerns about the health of the global economy. Slow growth in the Eurozone and fears that there will be a widening to the conflict in the Middle East are also causing anxiety among investors. We also can’t forget the problems in Greece, which have not been fixed and will continue to boil to the surface from time to time. For the first time, the Fed announced that international economic conditions will be considered when making policy decisions. The world definitely continues to become a smaller place.

Economic growth in the U.S., while being adjusted lower, continues to be positive. While our growth rate has been frustratingly slow the past few years, there are several important positive factors that make a recession unlikely at this time. Dropping energy prices puts more money in consumer’s pockets and keeps inflation low. Likewise, both consumers and businesses continue to improve their balance sheets as they reduce debt levels. Consumer spending continues to be strong as do home prices. Also, household net worth is at an all-time high.

Since stocks have now experienced their first correction (10% drop) since 2011, we look at the question of where we go from here. On the negative front, world economies are likely to hurt U.S. economic growth, possible higher interest rates can undermine corporate earnings, and continued tightening of our labor markets puts upward pressure on wages. On the positive front, market valuations are not especially high, consumers continue to grow their purchasing power, and, overall, financial conditions remain supportive of growth. We believe a sell off to bear market territory is unlikely.

As long as we have such conflicting economic and market data, we will continue to see higher than normal volatility. We would expect stocks to end this year with a loss and bonds with slight gains. Conditions like we are in now are difficult for investors. We do feel, however, that any surprises are more likely to be on the upside than the downside. Markets can turn quickly and usually when people least expect it to happen.

More of the Same

Tue, 30 Jun 2015 01:46:55 GMT

The heightened volatility the markets experienced during the first quarter continued during the second quarter. The stock market was very choppy as fears of an interest rate hike by the Fed combined with mixed economic data to leave investors unsure of what the future holds. Once again, problems in Greece are causing anxiety around the world as the European Union tries to hammer out a compromise to bail them out of their extreme debt. With a Fed rate hike looking more likely, bonds sold off across the board causing interest rates to move markedly higher.

It is doubtful that many of you know the name Ted Benna, although it is certain that all of you know what he created. Ted Benna is known as the father of the 401(k) plan. Back in the late 1970’s, Mr. Benna worked as a benefits consultant helping businessmen design retirement plans. He grew frustrated because many of the companies that hired him wanted him to design retirement plans that helped their top professionals at the expense of their lower paid employees.

While designing a plan, he noticed that section 401(k) of the tax code, which was a part of the 1978 Tax Reform Act, could allow employees to make pre-tax contributions to a retirement plan and also allow the company to make matching contributions. The tax code language did not specifically allow for this, but did not exclude it either. He was the first to see this and, amid much skepticism, designed the first retirement plan that we now know as the 401(k) plan. The IRS provisionally approved the plan in 1981, and gave it the official go ahead in 1982. Official regulations were not issued until 1991.

While most people would agree that 401(k) plans are not perfect, they are becoming an increasingly important part of American worker’s retirement income. Over 50% of American workers are now covered by a 401(k) plan. A large portion of the assets we manage at Wabash Capital are in 401(k) plans or are rollover accounts from a 401(k) plan. As these plans continue to evolve they will become a much larger piece of the retirement pie.

While both the stock and bond markets are nervous about higher interest rates and what that will do to security prices, it is worth noting that eight of the last nine times the Fed has raised interest rates, the stock market has risen over the following twelve months. We expect continued volatility and a possible price adjustment in the near term, but longer term economic growth and the bull market both look secure.

Ups and Downs

Tue, 31 Mar 2015 01:50:13 GMT

The first three months of 2015 were very eventful in the stock and bond markets. For stocks, January and March both saw declines while February saw large gains. Stocks ended the quarter marginally higher. The bond market experienced very large swings as interest rates climbed dramatically in early March and then dropped as the month went on. For the quarter, bonds also ended slightly higher, despite the volatility.

On the economic front, we continued to see mixed economic data. Most economists have lowered their forecasts of economic growth as the data suggests the U.S. economy is beginning to slow, at least temporarily. The one area of the economy that has been stronger than most forecasts has been jobs growth and the overall employment picture. The jobs numbers released in late February were strong enough to cause the bond market to drop as interest rates spiked on the belief that the Federal Reserve would begin to raise interest rates sooner than expected. Interest rates dropped throughout the month of March as additional economic data was weaker than expected, leading many to push back the date of the expected rate increases.

We just passed, on March 9th, the six year anniversary of the bottom of the stock market during the Great Recession. It is worth remembering that our economy was on the brink of a depression during the Fall of 2008 and the Spring of 2009. The economic recovery has been quite remarkable since then. While we can argue that different actions should have been taken along the way, it is hard to argue about a stock market that has nearly tripled from its lows.

Sir John Templeton once said, “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.” This is very true. The market expectations of the public as a whole have always been an important factor that determines the life span of a bull market. Where are we now? We have clearly moved beyond pessimism, and it is hard to argue that people are euphoric on economic prospects. Gauging from consumer confidence numbers and the increasing willingness to spend money, we would argue that we have moved into the optimistic phase of the market cycle and a maturing bull market. The good news is these cycles can last many years before euphoria takes hold of the markets. While there will be the inevitable bumps along the way, we believe the longer term bull market has much room to run.

2014 Year End Review

Wed, 31 Dec 2014 01:54:26 GMT

With this quarterly letter, our 68th, I wanted to alter the format from our previous 67 letters. All of our letters have included our thoughts on the markets and a review of the current quarter or year and they have come from the company. With this letter I wanted to write to you personally as the President of Wabash Capital.

2014 was another positive year for stocks as the U.S. economy continued its expansion. We have now had six straight years of gains following the Great Recession of 2008-2009. The bond market rallied following a difficult year in 2013 as interest rates dropped to new lows during the year. The last half of the year was quite volatile as we saw conflicting economic data. We expect more of the same in the upcoming year.

For me personally, 2014 was a milestone year as I turned fifty years of age. Maybe it was getting the AARP application in the mail, but I have been reflective about the markets and our company and I wanted to share some thoughts with you. During the past year, Wabash Capital celebrated seventeen years in business. The day we started the company we had no clients and no assets under management. Today, we have over six hundred clients and manage a little over $250 million. We have also lived through two of the worst bear markets in the last one hundred years. It has been an exciting and rewarding seventeen years for all of us at Wabash Capital.

The Dow Jones Industrial Average recently passed the 18,000 mark for the first time. To put that in some perspective, on the day I was born, the Dow closed at 825, and on the day I graduated from high school, the Dow closed at 836. During my lifetime the market has set roughly seven hundred record highs, and it is worth noting that all of this happened in spite of multiple wars, including the two longest in American history, seven economic recessions, three extended bear markets, and the worst terrorist attack on American soil in our history. I have no doubt that in fifty years when I write this letter after turning one hundred we will all marvel that the Dow was at 18,000 when I was fifty.

I am a lucky man in that I make my living doing something I love. Over my career, I have loved getting to know all of you and helping you invest for the future. There is honestly nothing else I would rather do, and my partners and I plan to be here for many more years. If any of you have questions or comments for me, I can be reached at 812-242-9113. Please do not hesitate to call me. I would remind you that our updated Form ADV is available. Please call us if you would like to receive one.

Volatility Increases

Tue, 30 Sep 2014 01:57:21 GMT

Both stocks and bonds experienced increased volatility during the third quarter. Both markets were negative in July, positive in August, and negative again in September, ending very nearly even for the quarter. Conflicting economic data, much of which points to a U.S. economy running out of steam, was the primary culprit. Also causing concern among investors were geopolitical threats in the form of ISIS, renewed military action in the Middle East, and questions about the health of Europe’s economy. It was, needless to say, an eventful three months.

The question of the day is this, "Is this recent sell off and increase in volatility an opportunity to buy stocks before a rally, or a signal that more drops are coming?" There is no simple answer to this question. Recent market behavior is consistent with a short term bottom and it does not look like the longer term upward trend is in danger. Stock markets that have risen as much as this one with no meaningful pull backs often become volatile when economic data begins to suggest a slowdown in growth. At this point we feel the longer term bull market in stocks remains intact, but we will probably see an increase in volatility in the short term until the markets can see which way we are headed as an economy. At this point we are not making any changes to our asset allocation.

A couple of interesting facts: Over the past twenty five years, the S&P 500 has returned an average of 5.1% during the fourth quarter of the year. In fact, over that time period, almost one half of the market's total return has come during the final three months of the year. Also interesting: The projected earnings for the S&P 500 companies for this year are 66% higher than they were for the year 2007, the year before the financial collapse. When companies are able to grow their earnings, stock prices rise. This explains why the stock market is not expensive even though it has risen more than 150% over the past five years.

In a relatively long period of rising markets, it is our experience that investors often forget that markets sometimes go down. Whether this is the long awaited correction or just a minor bump in the road, a long term view of the markets is always the best view. We will, of course, continue to monitor economic events and will keep all of you alerted should our forecasts change.

Steady As She Goes

Mon, 30 Jun 2014 02:05:09 GMT

The second quarter ended with solid gains in both stocks and bonds, even as economic data showed mixed results. Stocks continue to add to their gains of last year, and bonds have rebounded nicely from a difficult 2013. While not all economic data support market gains, the economy continues to show slow, steady improvement, which the markets like to see. A recent headline on the market asked the question, “Why is the stock market so boring?” We will take today’s boring market over the excitement of 2008 anytime.

There is an old adage in investing that bull markets don't die of old age, something has to kill them. We think that is worth remembering now. Many people, including us, have pointed out that we have gone well over nine hundred days since the last stock market correction, and a correction at this point would be neither surprising nor unhealthy. Having said that, it is always dangerous to wait for the markets to do something. When the markets do correct, there will be a trigger, and that trigger is likely to be something unforeseen today. Markets love to surprise people and this bull market is undoubtedly no different.

In our letter to you at the end of the first quarter we talked about the geopolitical risk that was the Ukraine. That fear has largely faded. The new geopolitical risk is once again Iraq. As we know from the past forty years or so, problems in that part of the world ripple through our economy as uncertainty and oil prices both rise. It is estimated that for every ten dollar rise in the price of a barrel of oil, our GDP drops by almost one half of one percent a year into the future. In a slow growing economy like we have now, that is a significant impact. Hopefully this will fade as quickly as the Russian problem, although that seems unlikey.

Lastly, we would like to bid a fond farewell to Barb Wiram, who has been the office manager in our Terre Haute office for fourteen years. Before that Barb worked with all of us for many years before we started Wabash Capital. Barb is retiring to spend more time with her family and to spend more time at the beach. We will miss not only her industry knowledge and professionalism, but also her cheerful nature and her friendship. Please join us in wishing Barb the very best as she leaves the Wabash Capital family.

Off and Running

Mon, 31 Mar 2014 02:09:28 GMT

Stocks are off to a volatile start in the New Year, as a weak January was followed by a strong February. March saw lots of ups and downs as the events unfolding in Ukraine surpassed economic news in the U.S. in importance. When it was all said and done, stocks were able to end the first quarter with a small gain. The bond market also experienced small gains during the quarter as inflation remained a nonfactor.

In our letter from the end of 2013 we discussed the chances of a stock market correction given the length of time since the last one. We can say pretty much the same thing today, as we have now gone over nine hundred days since the last 10% pullback in stock prices. This is the fifth longest stretch without a correction in the last fifty years. There are a couple of things to take from this: First, our economy has been steadily growing over the past five years and has not suffered a significant drop off during that period. Second, when stocks do have a correction, and it will happen at some point, it does not necessarily mean that the bull market is over. Healthy markets suffer pullbacks, and these pullbacks keep the market from getting overly expensive.

The biggest risk currently for the market as well as the economy is the threat of violence in the Ukraine and the fear that the violence will spread. Geopolitical events like this cause problems because of the fear that these events will escalate and involve other countries, including the U.S. Fortunately, the worst case scenario rarely plays out and calm is restored. Until that happens, this will hang over the market and we will see gains on good news and drops on bad news.

The strong market fundamentals we listed in our last letter remain intact. The economy continues to expand, inflation is low, and interest rates remain low. Corporate earnings are forecast to rise during the year. Earnings multiples on the market remain reasonable, which suggest that the chances of a major bear market are low. As things now stand, we would be buyers on any market weakness.

Lastly, we would like to remind everyone that it is always a good idea to review your asset allocation at least once a year. As things change in our lives or as we just get older, we need to ensure that our portfolios are properly aligned. Please feel free to contact us to help with this review.

2013 Year End Review

Tue, 31 Dec 2013 02:15:58 GMT

2013 was a good year for stock investors and a bad year for bond investors. Stocks had their best year since 1997, while bonds had their worst year since 1994. Improving economic data pushed stocks higher while at the same time causing bonds to sell off as long term interest rates moved higher from their historic lows.

The stock market rose in ten of the twelve months of 2013 and set fifty one record highs during the year. Stocks have risen in ten of the last eleven years, the exception being 2008. Since the bear market low in March of 2009 (fifty-seven months ago), stocks have gained roughly 175% and have not pulled back more than 10% since October of 2011.

Comparing this bull market to other bull markets gives us some context. Since 1928 there have been thirteen bull markets, including this one. The average gain has been 165% and has lasted, on average, fifty-eight months. The best and longest bull market was October of 1990 to March of 2000, when stocks gained 417%. The smallest bull market was from October of 1966 to November of 1968 when stocks gained 25%. In other words, this has been an average bull market by historical standards.

We are often asked why the stock market continues to rise when the economy is not doing very well. The markets do not care as much whether the economy is good or bad as whether the economy is getting better or getting worse. By most measures, the economy continues to get better, as it has been doing for the past four years. This has been a slow and sluggish recovery, but the economy is growing.

While stock market fundamentals are strong, we are becoming overdue for a correction. Barring any unforeseen events, however, we remain positive on stocks. The economy is expanding, inflation and interest rates are low, and corporate earnings are expected to continue to grow. These are all positives. Like 2013, bonds will likely struggle this year as interest rates move to more normal levels. Many of the issues that weighed on the economy a few years ago, such as housing and Europe, have largely gone away. In the short term, it is impossible to predict market moves, but conditions are in place for stocks to do well.

As always, please feel free to contact us if we can do anything for you. Also remember that you can request an updated copy of our Form ADV that contains information about our company that is on file with the SEC.

Stock Bulls, Bond Bears

Fri, 04 Oct 2013 02:18:11 GMT

The stock market continued its climb during the third quarter, rising in July and September while declining slightly in August. Through September, stocks, as measured by the S&P 500, are up nearly 20% for the year. Bonds rallied during the quarter, reversing course after a big selloff during May and June. Even with this rally, most bond indices remain negative on a year to date basis. Stocks have probably gotten a little over extended at this point and a pullback would not be a surprise during the fourth quarter. Longer term, however, stocks continue to look good, especially relative to bonds.

We have written a lot over the past few years about the bond market and the likelihood that interest rates would move higher. It appears to us that the thirty year bull market in bonds is over and, at the very least, interest rates will move back to a more normal level over the next few years. This is not a bad thing as it shows that our economy continues to improve. It is important to note that just because rates are rising and inflation may pick up, we feel that it is very unlikely that we will see interest rates move dramatically higher. A steepening yield curve (the difference between short term and long term rates) shows an economy that is expanding and is a good thing to see. Over the past sixty years, the yield on the ten year Treasury has never been more than 385 basis points higher than the Fed Funds rate. We do not see that changing.

There has been much discussion recently about the Federal Reserve's tapering program and when or if it will be wound down. In reality, the expectation of this happening probably has more impact on the markets than the program actually has on the economy. It seems that the markets react every day to new predictions and guesses. People tear apart every comment made by Fed members looking for some insight into what they are thinking and when they are going to act. There will likely be little effect when the tapering goes away. The other big news story of the week is the Government shutdown, which will hopefully be over by the time you read this. If our children acted like this they would be sent to their rooms without supper. Enough said......

Our custodian, Fidelity Investments, has created a new website for you to view your account online. You will continue to access the online view through our website, wabashcapital.com. You will click on the Fidelity button in the top, right hand corner of the homepage and complete the new registration by answering a few questions. Please feel free to call us if you experience any problems.

What Happened to Bonds?

Sun, 30 Jun 2013 02:20:00 GMT

Despite a late sell off by stocks, the second quarter of the year produced positive returns for the stock market. The bond market, however, concerned that economic stimulus by the Federal Reserve may be coming to an end, sold off as interest rates jumped.

Many investors are concerned about seeing negative returns in their bond portfolios. While we never like to see negative numbers on our performance reports, bonds fluctuate in value just like all other financial assets. We have gotten very accustomed to seeing nothing but gains from the bond market over the years as interest rates have dropped to near zero. As interest rates move back to a more normal level, bond prices will drop. When prices drop by more than the bond’s interest rate, you get negative returns.

The inverse relationship between interest rates and bond prices is mysterious to many people so we thought we would provide an explanation to help make it clearer. As an example, imagine you have a choice between two bonds with the same credit rating and maturity. One bond pays 6% and the other pays 2%. You would clearly want the 6% bond over the 2% bond. This makes it more valuable and you would have to pay more for this bond. If, after a year, interest rates have risen to 8% for the same bond, you would need to lower the price of your bond if you wanted to sell it because the bond buyer would rather own an 8% bond than your 6% bond. To make it worth it to the new buyer, you would need to drop the price of your bond to where it equals the yield to maturity of the higher paying bond. The opposite is true if interest rates drop. Your bond becomes more valuable than those with a lower interest rate.

All of this explains how our bond portfolios have averaged 6 ½% returns over the past few years when interest rates are near zero. Bond prices have risen as interest rates have dropped, giving us outstanding returns. In fact, interest rates have been dropping for more than thirty years since they peaked in 1981. From current rates, it is difficult to imagine rates continuing to drop, so it is almost a certainty that bonds will underperform their numbers in the future from the past thirty years or so.

It is important to remember that all of this does not mean you should sell all of your bonds and buy stocks. A bad year in bonds is much better than a bad year in stocks. Bonds still provide the stable part of a portfolio and will continue to do so in the future. As always please call us if you would like to review your bond portfolio and discuss our market expectations in more detail.

About Wabash Capital

The Running of the Bulls

Fri, 28 Dec 2012 02:37:11 GMT

For the quarter just ended, the U.S. stock market experienced its second best first quarter return in the last fifteen years. March was the fifth positive month for stocks in a row and the ninth positive month out of the last ten months. Both the Dow Industrials and the S&P 500 are currently at all-time highs. The bond market held its own the first quarter as interest rates stayed at historical lows.

Most of the economic data we saw during the past three months shows that the U.S. economy continues to gain momentum. Improvements in the employment situation and housing fueled the market higher. We are also seeing improvements in consumer confidence numbers, which is an important factor in an improving economy as roughly two thirds of our GDP comes from consumer spending.

Many people are hesitant to invest in stocks when the market is at an all-time high like it is now. It is important to remember that there is not a ceiling on stock prices. The important number is not the level of the market but that level relative to market earnings. Corporate earnings for the S&P 500 companies are twice as high now as they were when the market was this high back in 2008. As long as earnings continue to grow, the stock market can continue to climb and not get "expensive."

As we have said many times we are not short term predictors of the stock market. When we look at fundamental measurements of the market, however, we are seeing lots of things that are good for the stock market. Interest rates are very low, more people are going back to work, the housing market is improving, debt levels are dropping, and the economy is improving.

All of these items point to a great environment for corporations to increase their earnings which, in turn, lead to higher stock prices. There is never a time when the market can't go down. However, massive market drops come when valuations are high or some extreme shock hits the markets. We think a large drop from these levels is unlikely.

There are, as always, things out there to be concerned about. Growing tensions in Korea and the continued economic uncertainty in Europe are two of the biggest. As history is our guide however, the market overcomes these problems over time and continues to reward investors.

About Wabash Capital

2012 Year End Review

Fri, 28 Dec 2012 02:33:54 GMT

The stock market, as measured by the S&P 500 Index, had a very good year in 2012, finishing with a total return of 16%. An improving housing market, continued new job creation, improving consumer confidence, and strong corporate earnings combined to fuel the market gains. The bond market experienced an average year as interest rates remained largely unchanged throughout the year.

In addition to improving economic data, we also saw some improvement in a few areas of concern that we talked about in our year end letter of a year ago. The problems in Europe, while still there, have at least stopped getting worse. Fears of a European Union collapse have calmed and these problems have stopped making daily headlines. As the U.S. housing market has improved, we have also seen an improvement in the mortgage problems we have experienced for the past four years. While many homeowners are still under water on their mortgages, that number is much smaller than at this time last year.

Now that the Presidential election is behind us and the dreaded Fiscal Cliff has moved off the front page, everyone’s attention has now shifted to the annual question of “What will the markets do this year?” This letter marks our sixteenth year ahead preview (Fifteen if you don’t count the first one, written when we were less than two months old and were still finding our footing). In looking ahead to 2013, we see a stock market that is not cheap relative to earnings, but is not expensive either. If corporations are able to continue growing their earnings, stock prices should continue to rise. If we see the economy begin to slow and earnings drop, stock prices will likely fall. Most recent economic data looks good, so we are cautiously optimistic about stocks. With interest rates at record low levels, bonds are at heightened risks as any rate increases will cause a selloff in the bond market. At this point, however, we do not anticipate seeing rates move dramatically higher.

We are in the process of updating our website, which should be complete in the next few weeks. Please stop by and take a look and let us know what you think. You can find us at wabashcapital.com. We have also created a Twitter feed, which you can also find at our website. Follow us on Twitter and you will receive our investment thoughts on a regular basis.

As always, please feel free to contact us if we can do anything for you. Also remember that you can request an updated copy of our Form ADV that contains information about our company.

About Wabash Capital

Winding Down The Year

Sun, 30 Sep 2012 02:40:37 GMT

Since June 4th of this year the stock market has risen almost 16% as the rally from the end of the second quarter has continued throughout the third quarter. This has occurred even as we have seen mixed economic data. Consumer sentiment has improved, as has the housing market. The employment situation has continued to be very uneven although the new jobs trend is upward. We are also seeing a spike in the negative to positive corporate earnings ratio which usually alerts us to a market selloff, at least in the short term. Bonds have held their gains for the year as interest rates have stayed at very low levels.

The third quarter saw an additional round of quantitative easing (QE3) by the Federal Reserve. This is the fourth Fed action since late 2008 and is an attempt to boost the sluggish economy by lowering interest rates. The hope is that an improving economy will lead to more job creation. Results, so far, have been mixed. While the economy is producing new jobs the rate of job creation is well below that of most recoveries. An overall lack of optimism about the future seems to be keeping business from investing for the long term by hiring new people. It is a classic chicken and egg problem: Are jobs created as a result of a good economy or is the economy good because of jobs being created?

The big event of the fourth quarter will be the presidential election, which is always a source of uncertainty for the markets. One of the most common questions we get leading up to an election is which election outcome will be better for the markets. Good question. Since 1871 (Before this, the U.S. economy was largely agricultural) stock market performance has been nearly identical under Republican and Democratic administrations. Looking at shorter times frames give us similar results. The bottom line is, despite all of the rhetoric, companies are able to produce earnings equally well regardless of who occupies the White House. Stock market cycles are long term and largely beyond political influence.

The rally we have had the past three and a half months, coupled with some challenging economic conditions, will likely lead to a volatile stock market for the remainder of the year and could very well lead to lower stock prices by the end of the year. Looking beyond that it is difficult to make predictions for the stock and bond markets. While there are areas to be concerned about, we see nothing that leads us to make any major changes to our asset allocation at this time. If you would like to discuss your portfolio please do not hesitate to contact us.

About Wabash Capital

Summer Slow Down

Sat, 30 Jun 2012 02:44:19 GMT

Like the past two years, this year started out with the promise of stronger economic growth only to see the economy begin to sputter as the summer months arrive. After a very strong first quarter for the equity markets, stocks sold off early in the second quarter as evidence of a weaker than expected economy began to emerge, then rallied late in the quarter. As we said in our last letter to you, the stock market was due for a pull back, so we were not been surprised by that. More alarming to us is the fact that the economy can’t sustain any momentum and is affected by several problems that have difficult solutions.

Since the last economic recession ended three years ago, the recovery has been very uneven and inconsistent. Of the twelve recessions we have had since 1940, this recovery has been ninth of the twelve in terms of new jobs created, adding 2.5 million. While all of us yearn for a return of the economic growth of the 1990’s, it is important to remember where we were in 2008 and how far we have come since then. Three years ago we were embroiled in the worst recession since the Great Depression. To expect a complete recovery this quickly is unrealistic. Our economy has been growing in the 2 - 2 1/2% range the past three years and that is expected to continue over the next year. The Fed would like to see that number closer to 3 - 3 1/2%.

There are several obstacles to improved economic growth that must be overcome before we will see any sustainable growth. The situation in Europe is very precarious and seems to be getting worse rather than better. As long as this persists, it will continue to be an anchor to our economy and our markets. The U.S. housing market continues to be a problem, although we are beginning to see some new life in select areas of the country. We, as a country, have too much debt which limits our ability to spend. The average American has total household debt equal to 109% of their annual after tax income. While that is down from 131% in 2007, it is still higher than we see during strong economic expansions.

The 11 1/2 years of this century so far have been very fascinating from an investment viewpoint. We have lived through two terrible bear markets in stocks as well as dizzying stock market rallies, all of which have left us pretty much where we started. The bond market has steadily produced great returns year after year. During the next ten years, we expect stocks to reemerge relative to bonds as the market that produces better returns. Bonds have been on a thirty year bull run since interest rates peaked in 1981. With rates at historical lows, stocks look very inexpensive when compared to bonds.

About Wabash Capital

Improving Economy and Markets

Fri, 30 Mar 2012 05:44:37 GMT

The stock market just ended its best first quarter since 1998. This strong performance continued on the heels of a strong fourth quarter last year. The fuel for this rally has been economic improvement across the board in the U.S. as well as renewed hope for the economic situation in Europe. Corporate earnings remain strong and we are finally beginning to see meaningful improvement on the employment front. Consumer confidence and spending are rising and people are beginning to become more optimistic that the economic improvement is for real.

While we are generally optimistic for the markets this year, a pullback in stocks over the near term would not surprise us. Healthy markets occasionally pause to digest gains, and since the last six months have been straight up, we are probably due for some rest to catch our breath. Pullbacks of 3% to 5% in the stock market happen every two to three months on average. In fact, since the market low in early March of 2009, there have been 11 separate pullbacks of at least 5%. The average pullback has been 8.8% over an average of 18 days. The deepest pullback was 17.2% over 24 days last August. During those three years and eleven pullbacks, the stock market has more than doubled.

Many people ask us when the market volatility will subside and more “normal” markets will return. In reality, “normal” and volatile are one and the same. While we sometimes have extreme periods of volatility, such as late 2008 and early 2009, the reality is that capital markets move up and down on a routine basis. The ratio of up days to down days in the stock market is 53% to 47%, which surprises most people. This is why we always talk about the importance of keeping a long term view of investing. There simply is no way to be in stocks when they are rising and out of stocks when they are falling. We design and construct our portfolios to take advantage of the benefits of diversification and the correlations of different asset classes to each other. While we can’t eliminate your portfolio’s volatility, we can spread out and minimize the risk as much as possible.

Lastly, we would like to recognize Harrisburg, Illinois, the site of a devastating tornado in February. We opened an office in Harrisburg in 2000 and have many friends and clients there. The terrible effects of the tornado are truly hard to fathom and tremendous damage has been done to their town. While we grieve for those who lost their lives, we are thankful that Sandy Smith and all of our clients were spared. Please join us in offering your thoughts and prayers to the people of Harrisburg.

About Wabash Capital

2011 Year End Review

Sat, 31 Dec 2011 05:53:31 GMT

The stock market, as measured by the S&P 500, finished 2011 less than one point from where it started the year, the smallest change in history. With dividends factored in, the market showed a small gain for the year. At the high point for stocks, the market was up 8% for the year. At its low point, the market was down 12% for the year. If you missed out on the three best days of the year, your return went from a small gain to a 10% loss. It was, to say the least, a very volatile year for stocks, especially for international stocks. Bonds turned in another good year as interest rates stayed at historic lows throughout the year.

2011 was an eventful year. Some events were good, such as an improvement in the job situation in the U.S., and strong corporate earnings; and some events were bad, such as the debt crisis in Europe and the continuing mortgage problems in this country. The U.S. economy suffered during the middle of the year, but then showed signs of increasing strength during the fourth quarter.

This is the time of year we are always asked what we think will happen with the markets in the New Year. As is normally the case, our crystal ball is less than clear about the future. However, in trying to peer through the fog of uncertainty, we do see some reasons for optimism in the upcoming year. An economic recession was avoided this past fall and we are seeing the economy growing once again. The jobless rate is shrinking, although slower than we would like to see. Consumers continue to pay down debt, which increases their purchasing power. Government spending is declining as a percentage of our GDP (A good thing), and the Fed has indicated that they will remain accommodative toward growth for the foreseeable future.

On the downside, we continue to believe that gold is overvalued and will eventually sell for much lower prices than we see today. The debt crisis in Europe will remain a concern and has the potential to be an anchor on economic growth. Likewise, the housing and mortgage markets in the U.S. continue to suffer and likely will for the foreseeable future. Progress toward fixing these problems would go a long way toward getting our economy growing at a more reasonable rate again.

What is most likely in 2012 is that there will be times that you wonder why you would own anything but stocks, and others times you question what you were thinking to ever agree to own any stocks. In other words, it will probably be a normal year. The capital markets are, and have always been, volatile. But for the patient investor they provide returns to justify the risk and allow investors to meet their financial goals. If you would like to receive an updated copy of our Form ADV, please feel free to contact us.

About Wabash Capital

What a Mess!

Fri, 30 Sep 2011 05:56:12 GMT

Economic trouble in Europe and a slowing economy in the U.S. combined to give us the worst quarter for the capital markets since 2008. September marked the fifth consecutive negative month for stocks as investors tried to make sense of the outlook for economic growth. We have said for the past two years that this has been a sluggish expansion, which is why a slowdown is troubling. From this point it would not take much for our economy to fall back into another recession.

The problems in Europe stem from too much debt and the possibility of defaults in Greece. The fear is that a default by Greece would spread to other countries, resulting in massive bank failures. At this point we will need to see a resolution of some sort to this problem for the fear in the markets to subside. This resolution will certainly involve lenders agreeing to take losses of at least 50% with some estimates as high as 70%. In our opinion, the sooner this happens the better off we will be.

In an effort to spur growth in the U.S. economy, the Fed recently announced “Operation Twist” where they will sell U.S. Treasury securities from their balance sheet on the front end of the yield curve and buy Treasuries on the long end. Their goal is to bring down longer term interest rates and flatten the yield curve to create a better environment for borrowing and refinancing outstanding debt. With interest rates at historically low levels it is hard to imagine that lower rates will have much of an impact at this point. Economic fear and uncertainty about the future seem to be the biggest detriments to further investment, and lower interest rates will do nothing to make those fears go away.

Whether we have one or not, the stock market is already pricing in another recession. Valuations for the S&P 500 are 25% below the average level from the last nine recessions. Even with future earnings downgrades expected, the market seems to be expecting the worst. There is so much negativity in the world right now that buyers are staying on the sidelines.

The pullback by the equity markets is the result of new, lowered growth forecasts for earnings based upon these economic conditions. In almost every case the stock market hits its low point well before the economy does. Often, the market begins its rebound before we even know that we are in a recession. This is why we try to keep a long term view of investing and try not to figure out what’s going to happen in the next two months. There are simply too many variables that are unknowable in the short term. As is always the case, good markets happen when we least expect them.

About Wabash Capital

Pessimism & Optimism

Thu, 30 Jun 2011 06:17:14 GMT

During the last week of June, the stock market posted its best weekly performance in almost two years. Prior to that, it had dropped in seven of the previous eight weeks. Such is the world of stock investing. Economic data that suggested the economy was slowing down was the cause of the sell off. Better than expected data late in the quarter calmed many of these fears. Manufacturing data that topped expectations, stable home prices, lower unemployment claims, and higher consumer confidence all combined to push stock prices higher. We also saw some resolution to the debt crises in Greece, which calmed some of the fears on the global economic front, at least for now. The whole European debt problem will likely continue to be a problem for the foreseeable future.

When we discuss the economy and how strong it is or isn’t, it is important to remember how bad things were three years ago and how far we have come since then. During the fall of 2008 and the spring of 2009 the U.S. economy was on the brink of falling not into a recession, but into an economic depression. While things might not be where we would like them to be, it is remarkable that we’ve gotten this far this fast.

One positive we’ve seen over the past three years is the American consumer has been repairing their personal balance sheet. During the past year, the average person has dropped their total household debt from 120% of their annual after tax income to 114%. Outstanding credit card debt in the U.S. is at its lowest level since 2004. While paying off debt and saving money doesn’t add to economic growth, it does make people healthier financially, which makes our economy stronger over the long term.

Since 1940, there have been twelve recessions in the United States. Since the most recent recession ended two years ago, there have been 550,000 new jobs created. In terms of jobs created that places this recovery tenth out of the twelve. The best recovery in jobs was after the 1982 recession when almost seven million new jobs were created in the first two years of recovery. While things have improved, this has definitely been a sluggish recovery. The terrible housing market has a lot to do with this. While job creation has been slow, corporate earnings have experienced a strong bounce back. Profits for the companies in the S&P 500 are projected to be up 27% over a year ago. It will be key for the stock market to keep growing earnings despite the uneven recovery. We expect to see continued volatility in both the stock and bond markets as the economy tries to overcome these obstacles.

About Wabash Capital

2011 Off and Running

Thu, 31 Mar 2011 06:21:28 GMT

Despite a few trouble spots around the world (Libya, Japan), U.S. capital markets continued their rise during the first quarter of the year as corporate earnings continue to impress. Stocks turned in volatile gains as good earnings trumped international events. Bonds were even for the quarter as interest rates continued creeping upward. Our economic recovery continues to gain strength, which should bode well for stocks going forward.

Since the stock market bottomed two years ago, the S&P 500 has nearly doubled. It is worth noting that during that time period, there have been six different pullbacks of at least 5%. Volatility is a normal part of a healthy stock market.

You will notice that we have included with your statement a new document that we created as an SEC registered investment adviser. This is our Form ADV Part 2, and contains information about Wabash Capital and our associates. We wanted to give you some information about this document and the information it contains.

This ADV Part 2 replaces the old ADV Part II that we had used since we opened in 1997. The SEC felt that the old form did not convey advisor information in a format that was easy to understand, and we agree. The new form must be written in “Plain English” and easily explain to clients and potential clients how we run our business. The format of the new form is mandated by the SEC and must be the same for all advisors. The hope is that clients and prospects can easily find and compare information about all prospective advisors so that they can make an informed decision about which advisor best fits their needs.

Our new Form ADV Part 2 contains three sections:

Brochure This contains information about Wabash Capital
Summary of Material Changes This describes important changes that have occurred at Wabash Capital during the past year
Brochure Supplement This contains information about the officers of Wabash Capital

We always welcome the opportunity to tell people about our company and we hope you find this new form informative. Please feel free to contact us if you have any questions about this form or your investments.

About Wabash Capital

2010 Year End Review

Fri, 31 Dec 2010 06:22:44 GMT

2010 was a good year for investors as both stocks and bonds turned in nice gains for the year. The stock market ended with a strong December, following up on strong gains during the third quarter. Bonds outperformed our expectations, even with a sell off late in the year. Stocks have benefited from improving economic conditions since the melt down two years ago and have regained most of what was lost during that time.

Since the bear market low set in March of 2009, the S&P 500 has gained over 93%, proving once again that buying stocks when things look bleak is the best way to create long term wealth. Additionally, if you were not invested for the three best days of 2010, you would have given up 78% of the year’s gains. As is almost always the case, being in the market during the best days is much more important than being out of the market during the worst days.

Most economic measures continue to improve. New jobs are being created at an increasing rate. Small businesses, which are where most new jobs are created, have increased their rate of new hiring. In addition, last month’s index of service sector activity rose for the twelfth straight month and is at its highest level in more than four years. Consumer sentiment has improved dramatically, leading to strong consumer spending. From an economic standpoint, the recovery in the U.S. looks like it is increasing its pace. Also a positive is the lack of inflation we have seen up to this point. Keeping the economy expanding while keeping inflation in check will be important for both the stock and bond markets as we move forward.

Given the improving economic conditions, we are generally optimistic about the outlook for the stock market in the upcoming year. Valuations remain reasonable and most forecasts call for healthy gains in S&P earnings. As the panic from two years ago continues to subside, earnings will be key in the year to come. We are less optimistic about the outlook for the bond market than we are for the stock market. As the economy improves, we expect interest rates to increase, resulting in lower bond prices. We continue to keep our bond maturities short to protect us as much as possible against rising rates.

All of us at Wabash Capital wish you a happy and prosperous New Year. Every year, we make available to you an updated copy of our Form ADV, which has information about Wabash Capital that is on file with the SEC. Please contact us if you would like an updated copy.

About Wabash Capital

Stocks Retreat

Wed, 30 Jun 2010 06:29:17 GMT

After four straight quarters of stock market gains, the market sold off during the second quarter as economic data showing troubling signals from housing and jobs fueled fears that the economic recovery may be in jeopardy. An unexpected drop in consumer confidence also spooked the markets. Economic recoveries rarely happen in a straight line and slowdowns in growth during recoveries are not unusual. Whether this is a bump in the road to recovery or the end of the recovery itself remains to be seen.

Most of the disappointing economic news we have seen recently appears to show an economy struggling to sustain growth rather than one headed for a recession. While jobs growth has been weak, the economy is still adding jobs. The private sector is expected to add about 100,000 new jobs monthly going forward. Year over year growth in the automotive industry has shown strong growth, although it remains far below peak numbers. While these numbers need to show improvement, they do provide some positive news.

Ultimately, economic numbers only matter to investors because they impact the ability of corporations to produce profits. Consensus analyst earnings forecasts show 2010 S&P 500 earnings growing at 34% over depressed 2009 levels. Analysts are expecting 40- 50% annual growth in the second quarter of 2010. From a valuation standpoint, the stock market is currently trading at 13 times this year’s earnings outlook and 11 times 2011 forecasts. With these numbers, the market is currently trading at a 40% discount to its five year average P/E ratio. The one thing we do know is that stocks are either very cheap or earnings are way over stated. A good argument can be made by both sides, but as is normally the case, time will tell and we suspect that reality will fall between both extremes. The good news is that stocks are not over valued by most any measure, which provides downside protection.

There is no denying that there is a lot of emotion in the investment world today. Investors are understandably leery of the market after the collapse of two years ago. When emotion is injected into stock investing, whether it is exuberance or fear, volatility and unrealistic valuations inevitably follow. In both good markets and bad markets, investors often forget investing fundamentals and let emotion lead them to bad decisions. We recognize that investing can be very frustrating at times, but we also know that, over time, stock and bond investing are very good ways to reach financial goals. We are always available to discuss your portfolio, so please feel free to contact us to schedule a meeting.

About Wabash Capital

The Recovery Continues

Wed, 31 Mar 2010 06:30:26 GMT

The stock market continued its rally during the first quarter of the year as improving economic conditions and better than expected corporate earnings fueled the advance. The rally continues to be broad based with almost all market sectors doing well. The S&P 500 experienced its best first quarter performance since 1998 and has now generated positive returns in the last four quarters. Before this, the S&P 500 had declined for six consecutive quarters; the first time that had happened since 1969-1970. The bond market appears to be running out of steam as higher yields are beginning to materialize, resulting in lower bond prices.

The economic data we are seeing suggests the economy is gaining momentum and growing at an increasing rate. Consumer spending is rising and consumer prices are flat. Consumer confidence numbers are also rising. The ISM manufacturing survey rose in March as the manufacturing sector is showing improvement at an accelerating rate, fueled in part by strong export demand. The U.S. economy added 162 thousand jobs in March with most being in the private sector, as initial unemployment claims fell. This was welcome news as the lack of job growth has been a drag on economic growth.

After a market rally as strong as the current one, there is often a fear that we have risen too far and too fast. However, there are two important things to keep in mind: We are still 25% below the all time closing high from back in 2007; and, more importantly, the aggregate annual earnings of the S&P 500 companies are 79% higher today than they were just one year ago. This illustrates how the market can rise and not become over valued. It is really all about corporate earnings. An expanding economy produces higher earnings and higher stock prices.

While the economy is in the early stages of recovery, it is always good to remember that no two economic cycles are the same. We have said for the past year that we expected this recovery to be slow and have some fits and starts. This still seems to be the most likely course. The stock market, also, will experience good times and bad. Since the rally began a year ago, there have been four pullbacks of at least 5%. This is normal and should not be a cause for alarm. In general, this part of the economic cycle is a profitable time to own stocks. We expect interest rates to move higher as the economy improves. We have been, and expect to continue, keeping bond maturities short to better take advantage of higher rates in the future.

About Wabash Capital

2009 Year End Review

Thu, 31 Dec 2009 06:39:40 GMT

By any measure, 2009 was an amazing year for investors. The stock market, as measured by the S&P 500, gained 26% for the year. This was the second best year of the decade and the eleventh best year in the past fifty years. It is doubtful that many of you reading this would have predicted these results back in March, when we were at the depths of a very painful bear market. In fact, from the market lows in March, the stock market gained over 67% through the end of the year in what has been one of the steepest post bear market rallies in history.

As we have pointed out in the past, market rallies tend to mirror market declines. The intense sell off in the stock market late last year and early this year resulted from a classic run on the bank as panicked investors dumped everything without regard to long term value or realistic expectations. While it was definitely a scary time to be an investor, it is always important to remember that successful investors are those who keep a long term view of the world. Market decline happen, but it is important to be invested during these rallies. The one thing that always proves to be impossible is to try to own stocks when the market is going up and not own stocks when the market is going down.

The economic recession of 2008/2009 will go down as one of the worst since the Great Depression of the 1930’s. While the debate about the cause will rage for years, the U.S. economy is once again growing and most measures of economic health are improving. While it is impossible to know what the pace of this recovery will be, it is generally profitable to be an investor during this stage of the economic cycle. It is our hope that future gains will be based on true economic value and profitability and not by pouring money into a new bubble, such as housing, commodities, or gold.

Looking into the new year and making our forecasts for the stock and bond markets is always a challenge, but especially so this year. Stocks are well off their lows, but also well off of their highs of two years ago. We have gained back much of what was lost during the panic, but we now need to see continued economic improvement to see further market gains. While further stock market gains look promising, it will likely be a difficult year for the bond market as interest rates are almost certain to rise as the economy improves. Even without a strengthening economy, interest rates cannot drop from current levels, which are at historical lows.

We wish all of you a happy and prosperous New Year. We also remind you that you can request an updated copy of our Form ADV, which has information about Wabash Capital that is on file with the SEC.

About Wabash Capital

Better Times

Tue, 30 Jun 2009 06:41:40 GMT

There has been much discussion over the past few months about the stock market and the economy and whether or not they are recovering or whether there are still dangers lurking. While both are still on shaky ground, it does appear that things are improving for our economy, although at a slow pace. We will likely continue to shed jobs and see the unemployment rate climb through the first stages of economic recovery. The stock market has also recovered over the past four months, although it remains well off of its highs.

We have often pointed out that during a recession the stock market normally bottoms out well before the economy does. As bad as the market was during the first quarter of this year, over the past sixteen weeks the S&P 500 has risen over 35%. To continue this momentum, we will need to see continued economic improvement over the remainder of this year. History suggests that this should be a good time to invest in equities. Since 1957, the S&P 500 has averaged a return of 35% in the first year following a bear market and 8% in the year following a down year for the index. As is the case with most bear markets, panic selling last fall has provided opportunities for long term investors to buy quality companies at reduced prices.

To illustrate how bad the economy has been over the past year: Earnings for the S&P 500 companies for the second quarter are expected to be down 34% from the second quarter of last year, while actual profits on a trailing one year basis are off 88% over a year ago. Five of the eight largest corporate bankruptcies in US history have occurred in the last nine months. Through the end of the first quarter of this year, the US economy had contracted for three consecutive quarters, which has not happened since 1975. Also, over the past eighteen months, the unemployment rate has doubled, to 9.4%. As recessions go, this is a long one and a deep one, and one that seems destined to be studied for many years.

Barring any unforeseen setbacks, we think we have seen the worst in both the economy and the capital markets. It is very difficult to predict the pace of recovery for both, but it is likely we will see an increased level of volatility as the markets search for direction. Seven of the top eight best percentage gain days for the S&P 500 over the past fifty years have occurred during this recession. Given the large sell off we have seen this is an amazing statistic. The markets will be watching economic news closely over the remainder of this year. Improvement in the economy will lead to further improvement in the markets and we think both are likely over the rest of this year.

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A Wild Beginning

Tue, 31 Mar 2009 06:43:05 GMT

If you like volatile stock markets, the first quarter of 2009 was for you. The three month period we just finished saw a bear market and a bull market, all on its own. From its low point on March 9 th , the S&P 500 gained more than 20% over the next three weeks, including the fourth best one day return in the last fifty years. March ended the month as one of the best months for the stock market in the last twenty years after starting the month as one of the worst.

An obvious question to ask is whether we have seen the market bottom or is this just another bear market rally that will not hold. Consider that since the market reached an all time high in October of 2007, we have seen three different rallies of at least 15%, including the latest, which is the largest of the three. While short term market prediction is impossible, there are signs that the market is behaving in a more reasonable manner. We are also seeing better, although not great, economic data that suggests the economy is beginning to show some signs of life.

Another positive sign for stocks is the amount of cash being held by investors. Aggregate money market fund balances are at an all time high as a percentage of stock market valuation. Through the first ten weeks of this year, Americans deposited $246 billion into bank savings accounts, more than they did in all of 2008. Cash always builds toward the end of bear markets as this money is poised to be invested or spent, both of which are good for the economy and the markets.

We are also seeing a huge change in the world wide look of the financial sector. While the U.S. financial sector is obviously going through some major changes, it is not isolated here. In 1999, eleven of the largest twenty financial institutions in the world were based in the U.S. Today, only four of the top twenty are based here. The three largest financial institutions in the world today are Chinese, who did not have any firms in the top fifty a decade ago. This is a truly remarkable trend that will likely continue, especially given the current financial crisis we are experiencing.

While this downturn has been worst than most, investing has always experienced corrections and volatility. It is important to keep focused on your investment goals and not allow the current troubles distract you from your long term objectives. We realize this is sometimes difficult to do. To review your investment goals, please feel free to contact us.

About Wabash Capital

2008 Year End Review

Wed, 31 Dec 2008 06:45:16 GMT

The unfortunate thing about the current financial crisis is that it did not have to happen. While our economy has always gone through cycles, a crisis like this one cannot happen without a lot of help from a lot of people. A tremendous lack of oversight allowed Wall Street firms to run wild and take enormous amounts of risk. These same firms cultivated a self serving culture, seemingly creating products that served no purpose other than to make themselves vast amounts of money. Government regulation not only allowed the emergence of an unregulated shadow banking industry, but required financial firms to make mortgages to borrowers that had little ability to repay. People cared little about what they paid for a house because they had the mistaken belief that home prices would never go down. Leverage can be a good thing, but too much can be devastating. This is true for individuals, businesses, and the economy as a whole.

The U.S. economy has been in a recession for twelve months, but the stunning events of September, October, and November surprised almost everyone. With the near collapse of the financial sector, consumers and businesses basically stopped spending money, causing further economic contraction. With consumer sentiment readings reaching all time lows, it is clear that people are bracing for the worst. At this point it is impossible to know when this recession will end, although it seems clear that we are not as of yet out of the woods. There are those that have stated that we are headed for another 1930’s like economic depression. It is important to keep in mind that there are major differences between today’s crisis and the depression:

During the 1930’s the U.S. economy contracted between 2530%. Since then the worst contraction we have seen was from 1973 to 1975 when the economy contracted by 3.4%. Also, the 1930’s saw unemployment reach 25% as opposed to 6.5% today.
The 1930’s saw thousands of bank failures. During this crisis we have seen twenty two banks fail, and with Federal deposit insurance, no depositor has lost money.
During the 1930’s the Federal Reserve decreased the money supply and kept interest rates high. Today, huge amounts of money have been pumped into the economy.
We are also seeing a global response to this crisis as opposed to the 1930’s when global trade collapsed due to the implementation of trade restrictions and tariffs.

While our economic problems may be bad, they are certainly a far cry from the depression we experienced in the 1930’s.

What are the implications for the capital markets given this economic uncertainty? Is this a buying opportunity or is there more risk to the downside? These are legitimate questions as we head into the New Year. Markets of all kinds fluctuate as future expectations change and they tend to over shoot their true values, both on the upside and on the downside. This is why stocks can rise during bad economic times. In fact, the stock market rose 72% during 1935 and 1936 and it’s unlikely there were many predictions of that kind of rally in the middle of the depression. Given the very fast and severe sell off we have suffered since September, a fast and sharp rally would not be a surprise in 2009. Certainly from an historic viewpoint, the probability of a big rally after dropping 40% is much greater than the probability of having a big rally after gaining 40%.

Any time we see a big rally after such a large fall there is always the question whether it is a new bull market or just a bear market rally. Bear market rallies are normally led by the same sectors that led the last bull market, in this case energy, commodities, and emerging market stocks. If we see a rally led by out of favor sectors it should be a signal that the rally is more sustainable.

On top of all of the other negative news in late 2008, we also witnessed the unveiling of Bernard Madoff, the architect of the largest ponzi scheme in history. Ponzi schemes have been around as long as there have been investors and describe frauds where old investors are paid with money from new investors. They get their name from Charles Ponzi, who, a hundred years ago, made a fortune by getting people to invest in a bogus mail coupon scam. The amazing thing about Madoff is that he operated for decades and his scam totaled fifty billion dollars. Scams such as this give a black eye to the entire investment industry and cast doubt on everyone in the business. It is important to know that Bernie Madoff operated his own broker dealer and held custody of all of his client’s money. When independent custodians such as Fidelity Investments or Charles Schwab are used, scams like Madoff’s are impossible. In our eleven years in business, we have never taken custody of any client funds. Our clients can feel safe that while markets sometimes have bad years, your portfolios are protected from this type of fraud.

Almost no investment asset classes had positive returns in 2008. This is almost unheard of, and it would be a mistake to assume that these asset classes will never make money again. While it is likely we will see continued volatility in the months ahead we have to remember that it is almost always a bad idea to make major changes in your asset allocation based on the market’s actions over the past three months. The massive government stimulus that we have seen and will see more of in 2009 will take time to show up in the economy, but it will have an impact. Please feel free to call us to discuss your investments during this turbulent time. Also, please let us know if you would like to receive an updated copy of our Form ADV, which outlines details of Wabash Capital and the information we provide with the SEC.

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Bailouts, Crashes, and Panic

Tue, 30 Sep 2008 06:47:11 GMT

A lot happened during the third quarter of this year, and almost none of it was good. To recap the events of the past few weeks: A segment of our financial sector has been nationalized; we suffered the largest one day drop in the stock market since the crash of 1987; the credit market completely seized up; and investments that were rock solid a month ago have suddenly become very shaky. The rapid worsening of the financial crisis has thrown all of the capital markets into disarray and threatened to spill over into all segments of the economy. We will discuss the scope of the problem and what we think should be done about it, as well as what we think investors should do and not do in response to these extraordinary events.

We have talked in past letters about the housing bubble and the subprime mortgage problems. It initially appeared that the problems were confined to the subprime market, but these problems quickly expanded into a full blown credit and liquidity crisis that has affected leveraged holders of all assets. This lack of liquidity and credit has led to rapid write downs in asset values and an inability to raise the necessary capital to make up the difference. This is how we can go from having well capitalized companies to bankrupt companies literally over night. We have been seeing a classic run on the bank as investors try to dump securities where there is no market, causing prices to tumble.

There has been a lot of discussion, as there should be, about whether the government should bail out these troubled financial companies. It is important to note that when credit markets seize up, all financial firms are in danger. It seems clear that nobody would benefit from a collapse of our financial sector and most people agree that something needs to be done to prevent it from happening. Unfortunately, with the election a month away, politics has been thrown into the mix. Political posturing from both sides of the aisle has added to the violent market swings we have seen over the past few weeks. Predictions of economic doom and depression have been thrown around by everyone from the President on down. This, frankly, does little to calm the nerves of already skittish investors.

The one big difference in this crisis from others we have seen is that bond investors, normally immune from large losses, have been hurt right along with stock investors. The liquidity in the credit markets has literally gone away, making it almost impossible to sell bonds. The only investment drawing any money is the U.S. Treasury market, resulting in Tbills, the world’s safest investment, actually returning negative yields on two separate occasions during September, an unprecedented occurrence. While we expect volatile times in the stock market, this seizing up of the bond market has been the most unnerving event for us. At this point, there is very little to do until things in the market calm down. The question has come up a lot recently about who is to blame for this crisis. There are lots of fingers pointing at lots of culprits. It seems to us that assigning blame at this point in time is like Captain Smith pointing fingers as the Titanic sinks from beneath him.

There will be plenty of time later for the blame game. Right now we need to work on a solution to the problem. Suffice it to say that there is lots of blame to be shared by everyone. We can blame the politicians; we can blame the Wall Street investment banks; we can blame the millions of people that bought homes they could not afford at inflated prices. Investors were happy to buy mortgage debt as long as it yielded higher returns than more secure bonds. Rating agencies assigned high ratings to mortgage securities based upon faulty assumptions. The blame falls on many rather than a few. We should expect much more regulation in the financial sector when the dust settles.

What should we do now? This is a very understandable question that we have gotten a lot over the past few weeks. It is very difficult to think clearly when it seems like things are crashing around you. It is important to know that money is never made when you sell your investments when panic selling is going on around you. Successful investors do not change their investment goals based upon a reaction to market movements. Valuations in the stock market are at their lowest level in years, so from that standpoint stocks are a great buy at these levels. We will need to see some type of resolution to the current financial crisis, however, before we see a sustained rally. Bonds will also improve once the credit markets thaw out. This crisis will pass, as they always do, although it is impossible at this point to know if the worst is behind us or in front of us. We do know that it is impossible to correctly time the market. While it is always good to reassess our risk tolerance, selling into this market is almost guaranteed to be the wrong decision.

We welcome your calls in times like these. Please feel free to call us to discuss your investments and review your portfolio.

About Wabash Capital

Bad Economy, Bad Markets

Mon, 30 Jun 2008 06:49:05 GMT

You need only look at two pieces of data to understand why the capital markets have struggled through the first half of this year; consumer confidence is at its lowest level since 1980; and only 17% of the American people are optimistic about the direction in which we are headed as a nation. This pessimism, driven by a number of factors, directly causes the economy to slow down and stocks to fall. The factors causing this pessimism include the following:

The price of oil and other commodities We have discussed the price of oil often over the past couple of years and it remains an issue. The high price of energy affects almost every segment of our economy in addition to making people feel poorer every time they fill up their car. Food prices and other basic materials are also rising rapidly. This type of inflation has always unnerved consumers and causes them to slow their spending in other areas. A worker making minimum wage spends almost 25% of their weekly earnings to buy one tank of gas for their car. Farmers earn more on their crops but spend huge amounts on fuel and chemicals. Nobody benefits from spiking commodity prices.

The housing market We are in the first sustained drop in housing prices since the 1930’s and comes as a direct result of the huge gains seen in housing over the past five years. Since the bulk of most people’s net worth is in their home, this also makes people feel poorer. In addition, many people have taken equity out of their homes over the past fifteen years because of low interest rates, exacerbating the problem. Nationally, three million people owe more money on their homes than they are worth. The bubble in home prices over the past five years looks a lot like the bubble in internet stocks in the late 1990’s with the difference being that people did not borrow the money to buy tech stocks like they have to buy their homes.

The mortgage fiasco The fact that everyone didn’t see this problem coming is amazing. Mortgage brokers were paid to make loans, which were then sold to investment pools, which were sold to investors. These brokers had no incentive to make good loans since they were not putting their own capital at risk. To book more loans, they went to the sub prime sector, making loans to people who had never been able to get mortgages before. These borrowers were the most susceptible to rising interest rates and falling home values, although many prime mortgages have also defaulted. Investors that thought they were buying high quality mortgage bonds are finding that historical default rates are meaningless in today’s environment.

Identifying the problems is easier than knowing when things will improve. It sometimes seems that things will never improve and the stock market is in an endless downward spiral. Fortunately, there is no historical basis for these fears. The American and world economies are very resilient and have always gone through cycles. It is worth noting that we have only suffered through two recessions over the past twenty five years. Maybe we have forgotten that these cycles are normal, not uncommon, and temporary.

Investing during economic times like these is certainly difficult. There is a tendency to want to throw the investment plan out the window and bury the money in coffee cans in the backyard. Space does not permit a full discussion on why this is a bad idea, but suffice it to say that we would always advise against that course of action. It is a true statement that it is more important to be in the market when it’s going up than to be out of the market when it’s going down. Over the twenty year period from 1988 through 2007, the S&P 500 index was up 11.8% per year on a compounded basis. If you missed the twenty best days over that twenty year period, your return dropped to 7.2% per year. Compounded over twenty years, that results in a huge difference in dollars.

The spikes we are seeing in commodity prices are no different than price spikes we see in other assets. Spikes like this are not sustainable and eventually always pull back to normal trends. We are seeing this pullback now in home prices. While predicting at what point oil will peak is difficult, if not impossible, it will happen. Likewise, home prices will stabilize and the excesses of the mortgage industry will subside. We will likely need to see these things improve before consumers feel optimistic again. Investing money, whether it’s in stocks and bonds, or in a home or new car, requires optimism. This optimism normally returns quickly and when people least expect it.

Please call us if you would like to review your investment plan to ensure that you are on the right path with your investments.

About Wabash Capital

A Rough Beginning to 2008

Mon, 31 Mar 2008 06:52:49 GMT

Economic concerns and soaring energy prices combined to whipsaw the stock market during the first quarter of 2008. While this is not the first quarterly pullback stocks have experienced since the beginning of the latest bull market in late 2002, it is the most severe. The bond market posted gains as interest rates dropped in response to the slowing economy. There are many questions being asked about the capital markets and we will do our best to answer the most common ones.

Are we in a bear market like the one that lasted from 2000 through 2002? While it is impossible to know what will happen in the future, we are confident that this is not a secular bear market like that one was. Over the past one hundred years, we have only experienced three secular bear markets and they have all come after historic bull markets that drove valuations to record levels. Going into this slowdown, valuations have fallen an unprecedented 50% from the record levels seen in 2000. This should provide a cushion to stock prices.

Should the Fed be bailing out Bear Stearns and other investment banks? This is a question that will be debated for years to come. Trust in our banking and financial sector is what makes our economy run the way it does. When that trust evaporates in the form of a sudden loss of liquidity, companies can collapse with startling speed. While we are rarely fans of government bail outs, we feel the Fed did the correct thing to restore trust in the system to allow it to continue working. Expect to see increased government regulation after the dust settles.

Is the falling dollar a bad thing? This depends on who you talk to. The falling dollar helps our capital goods export sector, which is growing and hiring new workers. It is a negative for import prices, inflation, and for those who use basic commodities. While we want a strong dollar, this is not the problem some would have you believe. Is the housing slump almost over? Probably not. This is a sector of the economy that saw huge gains over the past seven years, and it will take more than a few months to get back to reasonable levels. The remainder of this year will see large amounts of mortgage rates resetting which will likely keep pressure on housing prices.

Are we in a recession? We could very well be in a recession, although we often don’t know we are in one until it’s almost over. If we are not in a recession, we are standing on the edge of one. If we are in a recession, the severity and length of it will largely depend on the housing slump and the mortgage crisis. In most cases, stock prices bottom out well before the end of the recession.

Should we buy commodities? After the recent run up in all commodity prices, we think prices are extremely over valued. The past few months of gains in commodity prices has been fueled solely by speculation rather than demand. In the short term they may trade higher, but we think they are a bad long term investment at these levels. How are the employees of Wabash Capital invested? The same as you are, with no exceptions.

Will stocks ever go back up again? This is the question we hear the most and is also the one we are the most confident with in our answer. The answer is yes, stocks will be fine. The history of the stock market is one filled with corrections, bears, panics, corruption, bubbles, and anguish. It is also one of the greatest wealth generators ever created. Corrections like the one we are experiencing now, while not pleasant, are a normal part of investing in the stock market. Every correction throughout history has left investors questioning the wisdom of buying stocks. Successful investors look beyond the current troubles and see opportunities in the future.

History also teaches us that it is very difficult to predict market bottoms. Since 1950, the U.S. stock market has declined more than 13% over a three month period on ten different occasions. In eight of these periods, the market rebounded by more than 20% over the following twelve months. Because these rallies come quickly and when they are least expected, investors are almost always better off staying invested rather than trying to predict market tops and bottoms.

You may have other questions that we did not address in this letter. If so, please do not hesitate to call us. We understand that market cycles like the one we are in now can be unnerving. If you would like to readdress your long term investment plan, please let us know.

About Wabash Capital