Photo by Hillary Ehlen
As an investment professional with more than 30 years of experience managing assets for individual and institutional clients, Thoreson Steffes Trust Company Co-founder Rick Thoreson knows a thing or two about finances and the stock market.
One of the things we do differently than the vast majority of financial advisors is invest directly in individual stocks. When a client gets nervous about the market, it helps to focus them on how the company is doing from a fundamental standpoint separate from the stock of the company or the stock market.
Fargo Inc! sat down with Thoreson to discuss the current volatility of the market and what people can do to stay on top of their investments.
How would you describe the current volatility of the market today?
Rick Thoreson: Very natural. Last year was uncommonly non-volatile, and I have to admit I’m a little puzzled why it was all such a mystery.
I think what happened is a natural phenomenon. We went through 2017 and bonds returned less than 3 percent, while stocks earned 20 [percent]. If you’re managing a pension fund and you started the year at a 60% stock, 40% bond target allocation, at the end of the year, you were close to 70/30 because stocks went up so much more than bonds. During January they reassessed their risk profile and rebalanced back to their target, meaning they sold stocks to buy bonds. That pushed stock prices down and increased volatility. As a result, and unlike 2017, there were far fewer investors available to ‘buy the dips’ so we didn’t get the immediate bounce we’ve got used to last year.
Have you had any clients ask or be worried about market volatility?
RT: Not really. We have clients who will ask or comment, and it’s funny because they seem more interested in my losing sleep than their own anxiety. “How are you doing? Market has sure been volatile lately.” Yeah, but only by comparison to recent history. And a lot of it is the news cycle. Bloomberg and CNBC have to talk about something, so if the market’s down 1 percent, they play it up big, but it’s really pretty normal.
What advice do you have for people who are uneasy or unsure about the market or their investments right now?
RT: Relax. Before February, we had only 11 trading days out of the previous 300 where the S&P 500 moved more than 1 percent. That’s unusual, and periods like that are often followed by periods of heightened volatility. In the month of February, on 12 of 19 days, the S&P 500 gained or lost more than 1 percent. Mostly lost. We had more volatility in the month of February than we had in the previous year. I think we’re just getting used to it again.
Why do you think it was like that in February?
RT: I think a lot of it was just that rebalancing: people taking money out of stocks and putting it into bonds. As a money manager, if I’m managing a balanced portfolio for a client, we rebalance the portfolio periodically if there’s a stark difference in performance between stocks and bonds. But large institutional investors tend to employ multiple managers and may only rebalance once or twice per year. I think they collected manager reports and then decided to take money away from equity managers and shift it to bond managers, especially since interest rates had risen and bonds were more attractive than they had been.
There’s an old adage that says ‘you sell in May and go away.’ And that’s kind of the seasonality of the stock market. Wall Street traders and fund managers are like everyone else; they like summer vacations, so activity tends to decline over the summer. It tends to be in the fourth quarter that’s the most volatile and the first quarter. The first quarter is when they set the stage for the upcoming year. The fourth quarter has a heightened volatility when some managers do a bit of ‘window dressing.’ By that I mean if they didn’t own Amazon and Amazon was doing very well, a manager might add it late in the year. That way it’s in their holdings list when they report to clients, and they can talk about how Amazon is disrupting traditional retail. It makes them look smarter to their clients, but it doesn’t change their results. In fact, it’s usually counterproductive because clients are smart enough to know that if you owned Amazon and it was up 50 percent in a year, yet you underperformed the index, well the rest of your stock selections must have had problems. I think the best managers talk about their mistakes as much or more than their winners. That’s how they get better. They try to avoid repeating their mistakes.
When might the market start to even out again, or can you talk a bit more about that natural progression?
RT: I don’t know that it really will. I think last year was abnormal. I think this is normal. The biggest difference this year is we have Donald Trump, and that creates a whole news cycle of his own making. He’s a very untraditional President, and the markets are still trying to adjust. Now that corporate tax cuts are done, investors will adjust to a higher level of earnings but they still have Trump’s tweeting to deal with.
When the stock market was really volatile in the 2008/2009 recession, you had some clients that you had helped ease their fears by saying that they’re investing in a business, not the stock market. Do you follow that same line of thinking today?
RT: Oh yeah. That’s one of the reasons that many of the banks are following what most brokerage firms did a long time ago. You notice very few brokerage firms use the term ‘stock broker’ anymore. They refer to themselves as financial advisors because they’ve gotten away from recommending individual stocks. They’ve become managers of managers: selecting mutual funds or boutique investment managers. If the manager they’ve selected doesn’t meet expectations, they replace that manager. And there’s nothing wrong with that approach. You could argue it gives them more time in front of their clients. One of the things we do differently than the vast majority of financial advisors is invest directly in individual stocks. When a client gets nervous about the market, it helps to focus them on how the company is doing from a fundamental standpoint separate from the stock of the company or the stock market. If the business is doing well and the stock is fairly valued or undervalued because of what the broader market is doing, then you should be okay. If a client owns only mutual funds or separately managed account (SMA), that’s a much harder conversation.
How do you keep clients informed and aware of their investments and the market and making sure they really understand what they’re doing with their money?
RT: One of the things we do is we write an investment policy statement for every client that is typically 10-15 pages long. It gets deep in the weeds and defines what our responsibilities are in terms of whether or not we’re going to vote the proxies on their stock, how often we’re going to provide reports, how often they want to meet with us face to face. It also describes in detail what their goals are and why they’re investing. We have them complete a risk tolerance questionnaire, and we target an appropriate asset allocation for their goals. Then we revisit that investment policy statement with them whenever their circumstances have changed, but at least every three years.
Clients have so many ways to stay informed. It’s interesting with Bloomberg, Fox Business and CNBC, clients often heard news before I did. I finally put a television in my office so that I can keep up with what clients are hearing. They’re getting so many different opinions that there’s an information overload. And then you have that news cycle of hyping small events and making them bigger issues than they really are. So we encourage clients to call us if they have any questions.
What does the future of the market look like?
RT: I think we’re going to end the year higher than we are today, but I think summer’s going to be a little slow. I think we’re going to have a good fourth quarter. I think growth is going to be higher than people expect. Most economists are still saying around 2 or 3 percent. I think it’s going to be closer to 3. In the long term, corporate tax cuts will help more than most people appreciate. A lower tax bill results in higher earnings, which should lead to higher stock prices. People often think corporate tax cuts benefit only the top 5 percent, but that’s not true. The higher after-tax earnings boost stock prices, which benefits pension funds, college endowment funds, 401k plans, IRAs and college saving plans, in addition to just personal holdings. Our citizens are not adequately funding retirement. According to The Pew Charitable Trusts, which publishes research on states financial health, ND and MN state pension funds are both funded under 70 percent. Rising equity prices benefit much more than that top 5 percent.
What worries me is whether, between the spending bills that Congress has passed and the individual tax cuts, we’ve made it far more likely we have a recession before the next presidential election. They’ve juiced the economy in the short run. The average taxpayer is getting more on his paycheck and he’s likely to spend it. While that results in growth in the economy, it doesn’t repeat because now he’s spending at that higher level, and growth, by definition, is change in the level of activity. Likewise, due to tax changes, companies may invest more in the next two years, but that spending may come at the expense of future capital investment. So the economy may grow in faster 2018 and ‘19, but it may pull economic activity forward. Our deficits are going to be higher and interest rates are likely to follow, so we’re more likely to see a recession by 2020.
Thoreson Steffes Trust Company
210 Broadway North, Fargo