2nd Quarter Updates and Commentary from IEM
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As we head into the second half of 2020, now is a good time to pause and reflect.
We want to once again extend our gratitude and appreciation to everyone who has continued to put their faith in our team. We understand that the past quarter has been challenging in many ways, but we remain hopeful that better days are to come. The tumult of the first two quarters made your generosity at our Shred & Share event a humbling surprise, and IEM’s commitment to under served children through Start Reading Now was a bright spot in a rather gloomy few months.
On behalf of the entire IEM team, we wish you a safe, peaceful and enjoyable summer!
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In the second quarter of 2020 a significant portion of the equity market losses from the first quarter were recovered, at a swiftness that caught even experienced investors by surprise. The speed of recovery has stirred consternation with investors as to whether the gains will hold, given the economic challenges ahead. Before elaborating on that below, the approximate year-to-date returns of major indices as of the end of June are as follows:
- S&P 500 -3%
- Russell 2000 (Small Cap US Stocks) -13%
- MSCI ACWI Ex-US (International Stocks) -11%
- Barclays Aggregate Bond +6%
To better contextualize the contrast of the second quarter’s faltering economy alongside a rising stock market, there are three considerations that may have been discounted.
- First, the market is forward-looking. Investors attempt to price in available information ahead of time. Thus, when economic data is released, ‘the market’ evaluates the data compared to its ex-ante expectation of the data. Bad data that is ‘less bad’ than expectations can be a positive.
- Second, it is useful to remember that buying a stock is buying a fraction of a business, and as a fractional owner, an investor is buying the net present value of expected future cash flows. These cash flows [hopefully] will be received over many decades, thus even the complete loss of earnings for a year would be a small portion of the net present value of the business.
- Third, owners of capital are always evaluating alternatives in how they believe they can receive the highest risk-adjusted return. Since cash and bond yields have moved dramatically lower, and are now under 1% for Treasuries with maturities up to 10 years, investors may respond by paying a higher multiple for stocks.
In the long-run, stock prices follow earnings, and therefore large disconnects between the economy and the market eventually find a new equilibrium.
In times like these, we believe it is as important as ever to stick to the ‘blocking and tackling’: revisit your financial plan; confirm that your asset allocation is aligned with your need, ability, and willingness to take risk; emphasize areas within your locus of control (ex: spending and saving); and stay the course.
We encourage you to call, email, or use our online portal at any time if you want to check-in on your journey or if we can help you with any questions.
Best,
Daniel Schoenecker, CFA, MBA
Chief Financial Officer
Disclosure: Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. All indices are unmanaged and investors cannot invest directly into an index. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The MSCI ACWX Index is a float-adjusted market capitalization index designed to track the investment results of an index composed of large and mid-capitalization non-U.S. equities. The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index . The Bloomberg Barclays Aggregate Bond Index is an unmanaged market value-weighted index representing securities that are SEC-registered, taxable, and dollar-denominated. It covers the U.S. investment-grade fixed-rate bond market, with index components for a combination of the Bloomberg Barclays government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities.
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I was very fortunate to have had an Economics professor during college who made a lasting impact on my life. He was one of those special teachers who found a unique way to connect with each and every student in his class. One day, he started his lecture by telling us that if there was just a single piece of knowledge we took from him, it was going to be taught in this class. I’ll never forget the ensuing 90 minutes of that day since it was the first time I learned about the power of compounding interest.
There’s a reason why Albert Einstein called compounding interest the eighth Wonder of the World. He took it a step further by saying, “He who understands it, earns it; he who doesn’t, pays it.” In its most basic definition, compounding interest can be described as “earning interest on interest”.
In almost all calculated scenarios, the most important realistic factor when looking at the exponential return achieved from compounding growth is an investment’s time horizon. Fortunately, this factor is also the easiest for an investor to control. By starting out early and making consistent investments (even if they’re small), an investor can take advantage of their most valuable asset, which is time.
These systematic investments can take place through many different platforms, such as employer sponsored plans (401k, 403b, etc.), IRAs, and 529s. For many, the hardest part throughout the entire process is simply taking the time to get things started. By staying disciplined, and sticking to a plan, long-term investors find that small but continuous investments over a long period of time, can result in something that’s not so little down the line.
Regards,
Dan LaNasa
Associate Vice President / Private Wealth Manager
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Start Reading Now
For the third year in a row, the IEM team took part in assisting the Start Reading Now book fair.
The event took on a different look this year given the pandemic and distance learning throughout Minneapolis schools, but we were happy to have another opportunity to take part in this incredible program.
For more information on Start Reading Now, please follow the link below.
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Congratulations to
Mr. & Mrs. Church!
Gretchen and her new husband Zach didn’t let the COVID pandemic interfere with their wedding bliss.
Although they had to change their venue and drastically reduce their guest list, they were still able to hold an outdoor micro wedding with a few friends and close loved ones on May 24th.
It was a welcomed bright spot in an otherwise uncertain time in this world!
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Shred & Share
Thank you again to the many clients who participated in IEM's Shred & Share event last month.
In total, over 5,600 pounds of paper were shredded in a safe and secure way in addition to approximately 1,000 pounds of food and hygiene products donated to Neighborhood House.
We look forward to doing it again next summer!
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Best wishes,
Ted Smith, Danica Goshert, Charles Stewart, Dan LaNasa, Garrett Williamson and the entire IEM team
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Integrated Equity Management
8009 34th Ave South
Suite 1550
Bloomington, MN 55425
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