Clients of the Firm,

As celestial bodies move past each other in the mysterious dance that is our solar system, we wanted to take a moment to offer thanks to our clients and partners.  

Yesterday marked the 20th anniversary of Wernau Asset Management’s founding as an independent firm.  Let me begin by thanking you all for your incredible partnership with us over these past two decades.  No company exists, let alone thrives, without its clients and their confidence and support.  We thank you and appreciate you.

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Clients of the Firm,

Midway through November 2023, the S&P 500 rallied to 4,500, within 6% of its highs set in early January 2022. The VIX sits at 13.96 and the 10-year Treasury yield is 4.47%, down from a recent high near 5%. A few large tech companies have led the equity charge boasting mid 20’s P/E ratios, strong profits and fortress balance sheets. Other sectors have fared less well, particularly banks which are experiencing unrealized losses associated with holding long duration bonds and the future specter of loan defaults in small business, credit card and commercial real estate.

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Clients of the Firm,  

Albert Einstein wrote, “He who can no longer pause to wonder and stand rapt in awe, is as good as dead; his eyes are closed.”  

As expected, the Fed voted to pause rates at current levels, but indicated they were prepared to increase rates one more time this year if incoming data warrants it.  Economic activity remains stronger than expected and this has led Fed officials to maintain rates at current levels supporting our “higher for longer, but not too high” rate thesis.  As a reminder, Fed officials began raising rates in March of 2022 and raised their benchmark federal-funds rate at their last meeting in July to a range between 5.25% and 5.5%.  

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Clients of the Firm,  

Many investors have been confused about recent market conditions as the matrix of risk has moved in a variety of ways over the past 18 months.  As I write this letter the, the S&P 500 is at 4,534 or about 5% below its all-time high set in January 2022. Forward P/E, based on a 2024 estimate of S&P 500 earnings at 242 is 18.69.  The VIX, a measure of volatility, has returned to the low teens at 13.74 and the ten-year Treasury yields 3.82%.  One-year Treasuries currently yield over 5%. 

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Clients of the Firm,  

Frequently, we are met with the profound musing of some pundit or another about the future path of the economy.  Often, these predictions are either excessively dire or overly rosy.  Market sentiment shifts as frequently as the winds off Gloucester harbor outside our office. Warm morning zephyrs are too often met with a cold northeast wind by market close.  When it comes to predicting short-term market outcomes, an investor’s compass can be equally unreliable. Therefore, we build arks for coming storms rather than trying to predict the weather.  For this we use value and GARP equity methodologies alongside active fixed income management.  We augment these strategies at times with macro and micro hedges to prepare for potential storms.    

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Clients of the Firm, 

The S&P 500 closed yesterday at 3,822 down -19.80% YTD.  The Bloomberg Long Term Corporate Bond Index is down -23.90% YTD, no better. Since 1965, only three other years were worse performers for the S&P 500 these were 1974, 2002 and 2008.   That said, the S&P 500 has moved about 10% higher than lows set earlier this year at 3,491. While this is encouraging, we still see potential valuation challenges as earnings in 2023 will likely be impacted by changing economic conditions.  In short, the multiple compression phase of the market correction appears to be waning, but the earnings recession may be about to begin.  The extent to which earnings materialize in 2023 will have much to do with market performance in what may turn out to be a surprisingly good year if history and the market’s forward pricing mechanism have anything to do with it.

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Clients of the Firm,

On September 28, 2022, the Bank of England chose to intervene in the GILTS (U.K. Treasury Bonds) market to prevent the insolvency of pension funds who were using a strategy called LDI to synthetically get exposure to credit markets. Synthetic exposure is achieved through swaps in this market, which are derivative instruments based on interest rates. Similar to the 2008 debacle of CDS counterparty insolvency, these instruments created a solvency threat to U.K. pension funds when jump conditions in GILT yields occurred as a result of a surprise tax cut stimulus announcement in addition to aggressive Fed and BOE tightening.

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Clients of the Firm,

Markets declined significantly today with the S&P 500 dropping -4.32% closing at 3,932 or -17.90% below the all-time high set in January 2022.

The CPI report was released this morning showing continuing high inflation of 8.3% versus the prior month’s 8.5% read. Energy and food continue to be some of the most inflated classes of expenses, despite recent declines in gasoline and crude oil prices. Importantly, the core inflation rate rose to 6.3%, worsening from the prior month.

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Clients of the Firm,

Markets fell today, marking a pivot in sentiment and reflecting future interest rate expectations on the back of hawkish comments by Fed Chair Powell at the Jackson Hole Symposium. The text of his comments by be found here: https://www.federalreserve.gov/newsevents/speech/powell20220826a.htm

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Clients of the Firm,

The first quarter of 2022 marked the first significant stock market correction in 18 months driven by the war in Ukraine and the commensurate inflationary pressures on the economy and corresponding Fed action to combat it. In February 2022, Russia invaded the Ukraine throwing recent post-cold war security norms to the wind. The battle has been bloody and filled with alleged atrocities that have not been seen in Europe for many years. From a human perspective, our thoughts are with those suffering.

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Clients of the Firm,

The 4th Quarter of 2021 has begun with continued volatility and equity markets hovering just below all-time high levels set a few weeks ago. As autumn bursts with color in New England, the market has again embarked upon an upward climb against a wall of worries. We have chosen to highlight two of the concerns in this note and some investment strategies to address them.

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Clients of the Firm,

We are soon concluding the 2nd Quarter of 2021 and another good period for U.S. domestic equity performance. Travel is reopening in the United States and we expect robust consumer and energy demand to continue through at least the summer months. COVID-19 levels in the United States are persisting at low levels. While an increase in unvaccinated areas from variants is expected, we do not expect another national shutdown domestically with vaccination rates at very substantial levels. As life returns to a new normal in the United States, we can turn our attention to earnings and economics in the quest for successful investment outcomes.

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Clients of the Firm,

The first quarter of 2021 is ending. A year out from the peak U.S. shutdown, we sit on the precipice of a new era peering into the post-vaccine U.S. economy, albeit with the lingering impacts of the pandemic.

U.S. vaccination rates are accelerating, but due to variants and testing of school age children so are case counts. Experts warn that a new wave of COVID-19 may still be in our future, yet pandemic fatigue and state re-openings seem to be ignoring that message.

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Clients of the Firm,

Today was a historic day in the battle against COVID-19 as the first post-clinical trial person, 90 year-old Margaret Keenan, received the Pfizer vaccine at University Hospital in Coventry, England. The United States FDA meets tomorrow and Thursday and is expected to approve the vaccine for emergency use with doses administered as early as next Monday, according to reports. Earlier today, the FDA staff report released its findings, which confirmed the historic efficacy of the vaccine resulting in what one analyst termed a "gleeful" response from experts. The briefing document may be found here: Vaccines and Related Biological Products Advisory Committee December 10, 2020 Meeting Briefing Document- FDA.

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Clients of the Firm,

The rally on July 6, 2020 put the stock market within less than 2% from being flat for the year. This is an almost unbelievable result given the backdrop of challenges faced in 2020 and a significant testament to market confidence in the Fed and Treasury actions along with a litany of other action steps and conditions that have propped up markets, which I will discuss below. As we begin the second half of the year, it is appropriate to take stock (pun intended) of where we have been in order to assess where we might go and the risk attitude we should adopt on our journey.

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Clients of the Firm,

Fall has arrived and with it a shift in the winds of politics has grabbed most headlines.  Markets have been swayed by every breaking news event, ranging from whistleblowers and impeachment inquiries, to China trade talks and candidate health issues.  Certainly, there is no lack of news cycle to move markets.

Rather than focus on these short-term headline risks, this letter will focus on the coming shift in money management dynamics driven by three important macro policy issues.  These issues are: the future capacity of central banks to influence markets and asset prices, the need for fiscal stimulus to offset it (the funding of which may attempt to re-balance the wealth gap) and the negative drag of global protectionism and consequent currency war.  The resultant policy implications are uncertain and long-tailed, but merit examination as we plan for future investments, asset allocations and risk management.

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