Speculating About Presidential Elections is Not Fruitful

So, I’m chatting with a buddy.  We are doing our best to maintain Social Distancing, wearing masks and sincere in our determination to avoid spraying potentially contagious droplets on one another.

My buddy opened up with “I am very worried about the stock market if Joe Biden gets elected”.  (“Market Worry” is not what we want our clients to experience.) Of course, just the day before, a conversation with someone else opened with the same worry about Donald Trump’s potential re-election.

To assist our buddy with calming the ‘Market Worry’ surrounding the upcoming Presidential Election I produced a slide titled ‘Markets Have Rewarded Long-Term Investors Under a Variety of Presidents’.  Upon even cursory examination it is revealed that­­, in spite of whether our President is a Republican or a Democrat, markets have trended up!

For further information – you might enjoy clicking through to this link:

Click Here to read more.

OUR VIEW:  Any prediction that the market will Decline (Or Advance) if a Democrat or Republican is elected is a Speculation with no basis in historical evidence.

My hope is that I was able reduce my buddy’s ‘Market Worry,’ which she cannot control, by pointing out that she has planned for market volatility by controlling what she can control. For retired investors, that could look like setting aside several years of expected ‘Cash Withdrawal Need’ in Short-Term, Investment-Grade, Globally-Diversified Fixed Income.

Think about it: If an investor were to set aside 15 years of spending in Fixed Income at age 65, and let the rest of her portfolio ride in equities, she would not have to worry much about short term stock market volatility. As the enclosed chart indicates, investors have historically had a good shot at positive returns over long periods of time.

My buddy then commented “I Feel Better About Not Outliving My Money”!  Hooray – Mission Accomplished!

Trusting you are living your life well, maintaining Social Distance and, finding comfort in a Purposefully Derived portfolio, I remain

On Behalf of the Firm,

Tom Warburton

Coronavirus and the Market

What is the impact of Coronavirus on my investments?

The term “novel coronavirus” is so new, some people have apparently wondered whether it is related to Corona beer. (It is not; it’s named after its crown-shaped particles.) And yet, how quickly it has grabbed global headlines. As the viral news has spread, so too has financial uncertainty. What’s going to happen next? Will it further infect our domestic or global economies? In case it does, should you try to shift your investments to remain one step ahead?

Our advice is simple: Do try to avoid this or
any other health risk through good hygiene. Wash your hands. Cover your mouth
when you cough. Eat well, exercise, and get plenty of sleep.

But do not let the
breaking news directly impact your investment strategy.

The keys to following an evidence-based investment strategy
are …

  • Having a globally diversified investment
  • Structuring your portfolio to capture a measure
    of the market’s expected long-term returns.
  • Tolerating a measure of this sort of risk to
    earn those expected long-term returns.
  • Identifying how much market risk you must expect
    to endure to achieve your personal financial goals and allocating your
    investments accordingly.

In other words, it may feel counterintuitive, but if you
have done the above you have planned for this type of contingency already. In
investing, there are things that you can control, and there are things that you
cannot. The impact of coronavirus to the market is something that we can’t
control; sticking to your plan is.

Admittedly, that’s often easier said than done. Here are a
few reminders on why sticking with an evidence-based investment plan remains
your best financial “treatment.”

“I’m assuming there will be no
apocalypse. And that’s almost always, if not quite always, a good assumption.” —
C. Bogle

If you’re not invested, your investments can’t recover. Few
of us make it through our days without enduring the occasional moderate to
severe ailment. Once we recover, it feels so good to be “normal” again, we
often experience a surge of energy. Similarly, markets are going to take a hit
now and then. But with historical evidence as our guide, they’ll also often
recover dramatically and without warning. If you exit the market to avoid the
pain, you’re also quite likely to miss out on portions of the expected gain.

Markets endure. We by no means wish to downplay the
socioeconomic suffering coronavirus has created. But even in relatively recent
memory, we’ve endured similar events – from SARS, to Zika, to Ebola. Each is
terrible, tragic, and frightening as it plays out. But each time, markets have
moved on. Whether coronavirus spreads further or we can quickly tamp it down, overwhelming
historical evidence
suggests capital markets will once again endure.

The risk is already priced in. The latest news on
coronavirus is unfolding far too fast for any one investor to react to it … but
not nearly fast enough to keep up with highly efficient markets. As each new
piece of news is released, markets nearly instantly reflect it in new prices. So,
if you decide to sell your holdings in response to bad news, you’ll do so at a
price already discounted to reflect it. In short, you’ll lock in a loss,
rather than ride out the storm.

Bottom line, market risks come in all shapes and sizes. This
includes the financial and economic repercussions of a widespread virus, be it
real or virtual. While it’s never fun to hunker down and tolerate risks as they
play out, it likely remains your best course of action. Please let us know if
we can help you maintain your investment plan at this time, or judiciously
adjust your plan if you feel it no longer reflects your greater financial

Daily Market Movement

So, a buddy comes in.  She’s been grinding her teeth over recent, seemingly extreme, market volatility – large moves to the upside and large moves to the downside. She’s wondering if this is something new, unusual or predictive such that we should be taking some trading action.

History reveals that large daily upside or downside moves occur with some regularity. A graph below reveals the “Distribution of US Large Cap Market’s Daily Returns from January 1990 – December 2018”.  An examination of this information reveals:

Exhibit 1: Distribution of US Large Cap Market’s Daily Returns from January 1990 – December 2018

Gray lines show two standard deviations from mean (-2.17%, 2.26%), which is a statistical measurement of historical volatility that represents 95% of all outcomes. A volatile stock tends to have a higher standard deviation from the mean.

In US dollars. US Large Cap is the S&P 500 Index. S&P data 2019 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. The information shown here is derived from the index. Past performance is not a guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Values change frequently and past performance may not be repeated. There is always the risk that an investor may lose money.

  • A 3%* market move up or down occurred on about 1% of trading days in the 29 years studied.
    • Given approximately 250 trading days annually – investors could expect 2-3 daily moves up and 2-3 daily moves down in the 3% range annually.
    • Some years there could be more and some years there could be fewer ‘big move days’.
  • More extreme percentage upside or downside moves do occur, but, even less frequently**.

Toward answering the question of “is this volatility unusual such that we should be taking some trading action”– we have found no statistically-significant evidence that short-term volatility – be that volatility modest or extreme – is predictive of future market direction. Advice to the contrary
is speculative.

Knowing that “volatility happens in the market”, we recommend for our clients All-Weather Wealth Management Plans designed to achieve our client’s long-term needs for currency while being able to withstand market moves to the downside or upside – be those downside moves short-term or protracted. Trusting this will find you well and not grinding your teeth over market volatility that is neither predictive nor unprecedented, we remain

Yours truly,

Warburton Capital Management

*As of August 14th, 2019, a 3% market move represents about 750 Dow Jones 30 Industrials points or 85 S&P 500 points.

**“Market movement” is referencing daily movement of the S&P 500 Index. All data is sourced from index history.

Imminent Yield Curve Inversion… Should I be Worried?

Warburton Capital Management

“Imminent Yield Curve Inversion”

So, a buddy comes in.  Our buddy says “Jim Cramer is ranting that the Imminent Yield Curve Inversion is a Harbinger of Doom for stock and bond investors”.  Conveniently, my buddies at DIMENSIONAL recently sent me a few slides relevant to this discussion…so…here we go!

First of all, What is a Yield Curve Inversion?  Essentially, a Yield Curve Inversion exists when 2-Year Treasuries yield more than 10-Year Treasuries.  Historically, yield curves have sloped upward (short-term rates lower than long-term rates), however, there have been many periods in the US and around the Globe when local yield curves have been flat or inverted. Yield curves provide us with a picture of how yields vary with bonds of similar credit quality – but different maturities – at a particular point in time.  Bond yields change and yield curves change shape hundreds of time each day as markets digest news and events around the world.

Exhibit 1 presents the US Treasury yield curve on the last trading day of September for the last three years.  Rates across the entire curve have moved higher since 2016, however, short-term rates moved up more than long-term rates leading to a “flattening” of the yield curve slope.


Exhibit 1: The US Treasury Yield Curve Has Flattened in 2018

US Treasury yield curve data (monthly) obtained from US Department of the Treasury website. Past performance is no guarantee of future results.



 The question posed by our buddy is whether yield curve inversions are a ‘Harbinger Of Doom For Stock/Bond Investors’.  While US yield curve inversions may concern investors – and excite Jim Cramer to rant/speculate about an Imminent Yield Curve Inversion And It’s Market Impact – the small and infrequent number of examples of these phenomena – in the US or around the world – makes it imprudent to conclude there is statistical significance, imply correlation or extrapolate causation.

Exhibit 2 illustrates the growth of a hypothetical $1,000 investment in the S&P 500 Index since June 1976 plotted against the difference between 10-year and 2-year Treasury yields. This difference or ‘term spread’ – term spread is the yield difference between bonds with different maturities but similar credit quality – is a commonly used measure of yield curve steepness.

(Indicated on the chart are the onset of the four periods when the yield curve inverted for at least two consecutive months as short-term rates began to exceed long-term rates.)

Exhibit 2: Relationship Between Yield Curve Inversions & US Stock Market Performance

Monthly Data: June 1976–September 2018


US Treasury yield curve data (monthly) obtained from FRED, Federal Reserve Bank of St. Louis. S&P 500 Index © 2018 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results.


The inversion prior to the 2008 financial crisis is interesting to review in terms of my unstated but implied ‘Yield Curve Inversions Are An Ineffective Market Timing Tool’ argument. The US yield curve inverted in February 2006, after which the S&P 500 Index posted a positive 12-month return. The yield curve’s slope became positive again in June 2007, well prior to the market’s major downturn from October 2007 through February 2009.

If an investor had interpreted the 2006 inversion as a sign of an imminent stock market decline – being out of stocks during the inverted period would have resulted in missing out on gains.  Conversely, if an investor bought stocks in 2007 when the curve’s slope became positive, that investor would have been invested during a substantial stock market decline.



 The small number of US yield curve inversions over the last 40 years makes it seemingly impossible to draw strong conclusions about the effect on stock market performance. Let’s look at other countries to observe the relation between inversions and subsequent market returns.

Exhibit 3 examines the US and five major developed nations since 1985 and shows the hypothetical growth of 1,000 units of each country’s local currency invested in the local stock market index a month before yield curve inversions began.

Exhibit 3: Stock Market Performance in Selected Developed Countries

Following a Yield Curve Inversion


Yield curve inversions based on 2-year and 10-year government bond yields for each country. Yields obtained from Reserve Bank of Australia, Bundesbank, Japanese Ministry of Finance, Bank of England, European Central Bank, and US Federal Reserve. Stock returns based on local currency MSCI indices. MSCI Australia Index (gross div., AUD), MSCI Germany Index (gross div., EUR), MSCI Japan Index (gross div., JPY), MSCI United Kingdom Index (gross div., GBP), MSCI USA Index (gross div., USD.) These countries were selected to represent the world’s major developed country currencies. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. MSCI data © MSCI 2018, all rights reserved. Past performance is no guarantee of future results.

71% of the time (10 out of 14 cases of inversion), local investors experienced positive returns in their home stock markets for the 36 months beginning one month before a yield curve inversion! By comparison, 77% of the time the US and these five major developed nations rewarded local investors with positive returns over 36 months during this same time period without regard to the shape of the yield curve!  (Kinda seems like the same number?  71% vs 77%?)

As I’ve pointed out, this data set is limited and we should not infer statistical significance.  This analysis of yield curve inversions in the US and five major developed countries does show that An Inversion Does Not Seem To Be A Reliable Predictor Of Stock Market Downturns – or – a “Harbinger of Doom” as Jim Cramer was quoted by our buddy as having said. While a yield curve inversion may be an indication of unusual credit markets, it doesn’t appear to be a statistically significant market timing tool. Stocks can rise – and the economy can grow – for many months when a yield curve becomes – and remains – inverted.


Yield Curve Inversions appear to be predictive of nothing.

None of what is currently manifested in the credit markets predicts market direction or looming trouble…in my always humble – and never guaranteed – opinion. So, what can we investors do if we are concerned about potential stock/bond market weakness today, tomorrow, next week, next month or at any time in the future brought on by whatever headline or economic phenomena thrusts itself onto our radar screen?

I know I am as boring as a wet ball of cotton, however, at Warburton Capital we continue to stake our reputations on and serve our clients by recommending derivation of a Purposeful Comprehensive Wealth Management Plan that includes the non-negotiable elements of Safe Assets Set Aside For Spending Needs and Discipline.

By developing and sticking to a long-term plan that reflects each investors’ uniquely personal goals, values, needs, resources and obligations, we believe each investor enhances the likelihood of achieving FINANCIAL SUCCESS – be that ‘Not Running Out Of Money’ or something even more ambitious like ‘Becoming Richer Than Warren Buffet’!

As regards my buddies’ love for Jim Cramer…I’m right there with him!  I love watching the entertaining and useless Jim Cramer.  Cramer is more fun than a barrel of monkeys, however, he ain’t even close to being as entertaining as a 120 decibel AC/DC Concert!  (Please, play ‘You Shook Me All Night Long’ one more time and turn it up!)

With appreciation to my DIMENSIONAL buddies for their timely/proactive delivery of the Yield Curve Inversion slides, and trusting this missive will find you enjoying life, ignoring the Headlines and not stressing out over the speculations of the Financial Press.


Warburton Capital Management

Market Volatility

Warburton Capital Management

“Market Volatility”

So, a buddy comes in.  Our buddy is concerned about recent market volatility and is wondering if his portfolio needs to be ‘adjusted’.

Our buddy opened up with “The markets are crashing.  Maybe I need to sit in cash and wait for the market to turn around?”As is the case with our buddy, the recent increase in volatility of global stock markets has resulted in investor High Anxiety(Are you old enough to remember the 1978 Mel Brooks movie bearing this title?  It wasn’t about stocks…but…anxiety is anxiety!)

As I compose this missive on Sunday, October 28th, the Russell 3000 is down by 1.06% YTD – not really a dramatic YTD outcome.  More significantly, from its all-time intra-day high on September 20th thru October 26th, the US market (again, as measured by the Russell 3000 Index) fell 10.0%. Is this a dramatic decline?  I view it as precisely a routine correction, however, I do realize that any correction is ‘less than ideal’ for investors that only expect the markets to go up!

Today, investors are wondering what the future holds and if they should make changes to their portfolios.  While it may be difficult to remain calm during any market decline, it is important to remember that volatility is a normal part of investing – excepting in low returning instruments. It develops that, for long-term investors, reacting emotionally to volatile markets may be more detrimental to portfolio performance than any mark correction.

Let’s Explore Intra-Year Declines

 Exhibit 1 on the following page shows calendar year returns for the US stock market since 1979 as well as the largest intra-year advances/declines that occurred during those years. During this period the average intra-year decline was about 14%. In about half of the 39 years observed we witnessed declines of more than 10%.  About a third exhibited declines of more than 15%.

Curiously, despite substantial intra-year declines, calendar year returns were positive in 33 out of the 39 years examined.  This illustrates how common market declines are and how difficult it is to say whether any intra-year decline will result in a negative return over the calendar year.

Exhibit 1: US Market Intra-year Gains and Declines vs. Calendar Year Returns


In US dollars. US Market is measured by the Russell 3000 Index. Largest Intra-Year Gain refers to the largest market increase from trough to peak during the year. Largest Intra-Year Decline refers to the largest market decrease from peak to trough during the year. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes.

Let’s Explore How Reacting Can Impact Performance

If one were to try – and many do try – to ‘Time The Market’ in order to avoid the drawdowns associated with volatility, would this help or hinder long-term performance?  If current market prices aggregate the information and expectations of market participants, stock mispricing cannot be systematically exploited through market timing. In other words, it is unlikely that investors can successfully time the market, and if they do manage to, that success may be a result of luck rather than skill. Further complicating the prospect of market timing being additive to portfolio performance is the fact that a substantial proportion of the total return of stocks over long periods comes from just a handful of days. Since investors are unlikely to be able to identify in advance which days will have strong returns and which will not, the prudent course is, likely, to remain invested during periods of volatility rather than jump in and out of stocks? Otherwise, an investor runs the risk of being on the sidelines on days when returns happen to be strongly positive.

Exhibit 2 helps illustrate this point. It shows the annualized compound return of the S&P 500 Index going back to 1990 and illustrates the impact of missing out on just a few days of strong returns. The bars represent the hypothetical growth of $1,000 over the period and show what happened if you missed the best single day during the period and what happened if you missed a handful of the best single days. The data reveals that “Being on the sidelines for only a few of the best single days in the market would have resulted in substantially lower returns than the total period had to offer”.

Exhibit 2: Performance of the S&P 500 Index


In US dollars. For illustrative purposes. The missed best day(s) examples assume that the hypothetical portfolio fully divested its holdings at the end of the day before the missed best day(s), held cash for the missed best day(s), and reinvested the entire portfolio in the S&P 500 at the end of the missed best day(s). Annualized returns for the missed best day(s) were calculated by substituting actual returns for the missed best day(s) with zero. S&P data © 2018 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. One-Month US T- Bills is the IA SBBI US 30 Day T-Bill TR USD, provided by Ibbotson Associates via Morningstar Direct. Data is calculated off rounded daily index values.


While market volatility can be nerve-racking for investors, reacting emotionally and changing long-term investment strategies in response to short-term market declines could prove more harmful than helpful. By adhering to a Purposeful Investment Plan – developed to achieve a particular investors goals and derived well in advance of periods of upward or downward volatility – investors may be better able to remain calm during periods of short-term uncertainty.

As regards my buddies’ concerns about “Markets Crashing”, we were able to talk him down off the ledge by pointing out that he had a sufficient amount of assets purposefully dedicated to short term investment-grade bonds such that his Spending Currency is assured for two decades.  (Our buddy is comfortable with a twenty-year bet on the markets with a portion of his wealth.)

Trusting this missive will find you enjoying life (rather than stressing out over market volatility) and comforted knowing that you have a Purposeful Investment Plan in place to provide you with a couple of decades of Spending Currency in retirement.


Warburton Capital Management