Coronavirus: The Market and What We Expect

Given all that has transpired over the last few days, we wanted to send out an update and provide our thoughts on what has transpired. As you know, the market has been historically volatile over the last 10 days and even more so this past week due to the unknown impact of the Coronavirus and its impact to the economy. Monday morning has provided more of the same as the Fed has lowered short-term rates to almost 0% and market volatility has continued. As we have said over the last few weeks we expected the market to most likely get worse before it got better and that is exactly what we are seeing. Last week the government announced a new series of travel bans, the NBA and NHL have suspended their seasons, a number of state and local governments have begun putting restrictions on large gatherings and events and major corporations have begun closing their retail stores.

All of this will impact our economy, but the length and depth is still unclear. We feel at this point there is a likelihood that the US Economy may enter into a “technical” recession (2 quarters of negative GDP growth) in Q2 and Q3, but that largely will depend on the continued spread of the virus in the US. If we begin to see the number of cases decrease in Q2 or early Q3, and restrictions begin to lift, the 3rd quarter could move out of negative territory and back to the positive, but we are a long way from being able to determine that right now. We feel it’s also possible that Q2 could be much worse than expected if travel bans and quarantines become more prevalent or restrictive.

So, is there good news in all this? We believe there are some positives.

1. This is very different than 2008 in that it is not a “financial crisis.” Banks are solvent and are not concerned about a liquidity crunch or crisis. Part of what made 2008 so bad was that the banks were on the brink of collapse and there was no money moving in the economy. In part our economy depends on the flow of money and in 2008 there was almost no money flow. Fortunately the Federal Reserve was able to step in and provide that necessary liquidity. We do not see this scenario in the capital markets right now. Cash is flowing and while the economy will slow down, we don’t see things coming to a complete stop. Additionally, the Fed has shown and stated that if a major credit issue does occur they will step in and provide liquidity.

2. Once we begin to see the number of new cases decline and event bans and other restrictions start to lift, we feel the markets should respond positively and most likely over a relatively short period of time. Again, unlike 2008, there is not a large systemic problem that needs to be corrected and flushed out. Spending should return. Things like air travel, vacations, postponed conferences should resume and the market respond in kind. An additional catalyst that could happen is a significant government intervention. While the government has stepped in to some degree last last week, it is unclear how far they are willing to go. Initially everything from a payroll tax cut to paid sick leave to further extreme measures have been mentioned. The Federal Reserve stepped in early last week and again over the weekend. We feel there could be additional support from them. The timing of this remains uncertain and the market does not like uncertainty, which is one of the factors contributing to volatility. We may see recovery in the 3rd quarter, but it could also be at some point in 2021 or possibly beyond.

It is important to focus on the long-term results of the market, and not focus on the short-term. Think of the missed returns and opportunity if at the end of 2008 a decision was made to pull out of the market. In early 2009 you would have avoided additional downside, but the market then rallied significantly finishing up over 26% for the year and up over 50% from the lows. We have been through volatility like this before and we don’t know where or when the bottom is, but sticking to the long-term plan becomes even more important even when it’s difficult to do so. We believe the markets will recover. Exactly when we don’t know, but as always we feel we are positioned to weather market storms and continue to be in the best position for the long-term. We are also not set in stone and set in our ways. As new information becomes available we will continue to evaluate and make informed decisions. 

If you have any questions please don’t hesitate to call. We would be happy to help in any way we can. 

The Cascade Team

Year-End Giving:


It’s hard to believe that 2019 is already coming to a close. It feels like just yesterday I was taking my boys to their first spring baseball practice or getting ready to light fireworks on the 4th of July. This year has flow by but as it draws to a close we once again begin the conversation with our clients around year-end charitable donations.

Every year we are asked by clients about giving, what organizations to give to and if we can help them move money from their investment accounts to their checking accounts. While we have a list of organizations we feel strongly about supporting, it’s the conversation about how to give that usually leads to the most important decisions.

Most people who give to charitable organizations don’t know that they will accept stock or other appreciated assets as donations. Most major charitable organizations are set up to receive stocks, bonds, mutual funds, ETF’s and in some cases other types of assets as donations. Donating assets rather than writing a check could save you hundreds, if not thousands of dollars in taxes. Let’s take a look at a real life example.

Many of our clients over the last number years have bought Apple Computer. If we use a purchase date of January 2, 2017 for our example and you purchased 100 shares you would have invested $11,700. Fast forward to 2019 and those 100 shares of Apple would now be worth over $26,500, an almost $15,000 gain. 

At this point if you are making a donation to your favorite charity you would have two options. Unfortunately many people in that situation would just sell shares of the stock in the amount of their donation and write a check, but there’s a much better way to do it.

Let’s say you wanted to make a $10,000 year-end donation to the charity of your choice. To net $10,000 of cash you would likely have to sell over $13,000 to net the $10,000 after taxes, a 30% increase. You would be selling about 50 shares of Apple, or about half of your position.

The other option would be to gift the shares of Apple. Using the same $10,000 amount you would simply gift 38 shares of Apple. By gifting the appreciated shares there is no sale that takes place and you are not liable for the capital gains that would have normally been incurred on a sale. Since the charity is a non-profit they also will not pay the taxes on the gains. It becomes a win-win for both you and the charity. Additionally it saves having to sell 12 additional shares just to pay the taxes. If we assume the same growth rate over the next 3 years for Apple those 12 shares could be worth nearly $8,000, that’s a significant amount of money to keep in your pocket. Or maybe a provide a future tax free gifting of shares…

As you think about year-end giving please consider a stock or other in-kind gift. If you have any questions please reach out to us. We’re happy to help and wish you all the best this Holiday Season.


The Cascade Team

Gold: A Key to Riches or a Yellow Brick Road to Losses?

“Should I buy gold?” or “I heard that now is a good time to buy gold…”  is typically how the conversation starts. We are frequently asked by clients about gold and if there is a place for it in their investment allocation. While there is definitely a place for gold the most important question we ask is “why do you want to own gold?” In our opinion there are two primary reasons. Let’s take a closer look at each.

Reason One: An Economic Collapse

The argument usually starts with, if everything goes to hell in a hand basket then at least gold will be worth something. We couldn’t agree more. If you’re truly looking for protection in a major economic collapse then we absolutely support anyone looking to buy gold, but don’t buy gold investments, buy the actual raw material. You can buy gold bars, mini bars, coins, jewelry, there are a lot of different options. We would steer clients towards coins because they are small, easy to store and easy to actually use if needed. Most of all they are easy to purchase.  It is very unlikely this will ever be the case and most people actually don’t think along these lines, but if you want to be prepared, go for it. The reality is if you do by a bag of gold coins, lock them in your safe and forget about them for the next 20 years it will probably work out to be a fine investment. Just don’t buy them for that reason.

Reason Two: An Investment That’s Not a Stock/Diversification

This is the primary reason we get asked about buying gold. Clients want to have something that’s tied to a commodity and not corporate earnings and shareholder equity. We often find two things with this strategy: One, most people buy a gold ETF that is full of gold companies, thus defeating the purpose. Two, you may not be getting the diversification, or reduction in risk, you’re thinking. Here’s why.  

When you buy a gold mutual fund or ETF (Exchange Traded Fund) it is typically full of companies that mine gold, are part of the manufacturing process, etc. While these companies will typically trade higher and lower as the price of gold rises and falls, they are subject to the same scrutiny of every other publically traded company. If gold rises by 5% in a quarter, but the company looses 12% due to mining operations, much, if not all, of their gains could be wiped out. Again, you are not getting the diversification you are looking for. You end up buying more stocks that happens to be in the gold business.

The second thing to consider is are you truly getting the diversification and reduction in risk you really think you are? There are ETF’s that are solely based on the price of gold. IAU, iShares Gold Trust, is one example. But, look at the charts below. The first chart compares the S&P 500 to IUA over the last 12 months. The blue line is the S&P 500 and the Gold line is well, Gold. As you can see total returns over the period are not that much different (5% vs. a 2% respectively), but what typically surprises clients is the volatility of gold.  During the run up of early last year and the subsequent fall in the fall of 2018, the two largely moved in opposite directions, which is what you would hope for in a diversification strategy., but their volatility was almost equal.

Now consider the second chart. This shows again the S&P 500 over the last 10 years.  Two things to point out: First, largely until 2011 gold and the market moved in very close proximity, the gold line and the blue line almost overlap. Not much diversification. After that point look at how the gold line moves. Pay less attention to its overall direction, but more to the size of the peaks and valleys. They are frequently two and three times that of the S&P. Second, it is worth noting the difference in return over the last 10 years, 133% vs. 44% cumulative return over the period.

This could flip flop the next decade, which brings us back to our original question of “why do you want to buy gold?” The advice we give clients is if it is for the “just in case scenario”, go for it, but buy the coins. If it is for diversification purposes or chasing return, we hope you now know that it might not be all that you’ve heard.

Hopefully that’s some advice that’s worth its weight in gold…

The Cascade Team

Cascade 2018 Year in Review and 2019 Outlook

If there was one theme that stood out in 2018 it was the return of volatility. Last year marked one of the wildest rides we have seen in nearly a decade and was quite a deviation from what we have experienced over the past two years. 2018 marked the first time since 2008 that the S&P 500 had a negative return and not to be outdone, the DOW and Nasdaq both landed in negative territory for the year. The S&P returned -4.38%, the DOW was off -5.63% and the Nasdaq was down -3.83%.  Each of these indexes were positive going into the fourth quarter, but as investor sentiment weighed in and things like trade worries with China, Fed interest rates and BEXIT began to play out investors became more and more cautious and the market reacted sharply. In the fourth quarter the S&P lost nearly 15%. As we stated in our December letter we felt some of this was cause for concern, but for the most part it was an over reaction to economic uncertainty. This has borne itself in the first month of 2019. In January the S&P was up over 7.5% and the first few days of February has only continued this trend. So where does that leave us for 2019 and beyond?

Our CIO Thane Cleland had this to say:

“If Q4 estimates hold true, 2018 S&P 500 earnings will be up over 20% compared with 2017; a fantastic performance.  When you combine 20+% earnings growth with -5% (losses in) stock prices, you get a steep decrease in valuation.  The S&P 500 price-to-earnings multiple (P/E) fell 16% in 2018 landing at a very reasonable 14.2 times.  This is a level below both the 5-year and the 10-year averages. This tells us the market is discounting more economic roadblocks in the future.”

In other words stocks are cheaper now than they have been. If all of the issues come to fruition, which we feel is doubtful, then we could see further declines and volatility, but if they don’t, again the more likely outcome, then this should prove to be a positive year in the overall economy and the markets.

Thane also shared what we view are the most important issues that could affect the markets in 2019.

1. BREXIT:  “The UK is currently in an extremely difficult position.  On March 29th they will no longer be in the European Union.  The past two years have been spent on negotiations between UK Prime Minister Theresa May and the European Union to strike an agreement for the UK’s exit from the union.  The proposed deal is not what the British people expected and in the view of many, leaves the UK in a worse position than staying in the union.  The deal went to a vote of Parliament and was soundly defeated.  Time is running short and options are deteriorating.  PM May is trying to negotiate a better deal with the EU, but the EU is not inclined to listen.  The UK can ask for an extension of the March 29th deadline, but ALL 28 members of the EU must agree and that is a very tall order.  Lastly, the UK could take a second referendum to the people and see if they want to change their mind about leaving the EU.  This seems the only likely way to avoid the economic disaster that would ensue if they leave without any deal.  We get the feeling PM May is going down routes that she knows will fail and taking the clock down to the final seconds which will force the people of the UK to repeal their decision to leave the union two years ago.  If that is true, it would likely produce a reversal and the best outcome for all parties involved.  However, it is a dangerous game of chicken where failure would produce the worst possible outcome of a “no deal” exit. “

2. INTEREST RATES:  “The US Federal Reserve has been on a predictable and well telegraphed campaign to normalize interest rates from the excessively stimulative policies that have been in place since 2008. When the cracks in our expected growth outlook showed up in late September/early October, there was significant chatter about skipping the expected December rate increase.  President Trump took notice of the market sentiment and made several statements regarding his displeasure with Fed Chairman Jerome Powell and recommended a pause in the tightening process.  Chairman Powell verbally assured the markets that the Fed Chair is a non-partisan position and only the Federal Reserve is responsible for monetary policy decisions.  In early December, the fed raised the fed funds rate for the fourth and final time in 2018 and the markets reacted negatively in fear that the fed is getting too restrictive too quickly given the other headwinds our economy could face over the next several quarters.  In January however chairman Powell stated that the Fed is now in more of a wait and see mode for 2019. The markets responded very positively to this news and was the largest contributor to the positive returns we saw in January. We expect the fed to raise rates in 2019, but at a slower pace and probably less than expected.”

3. CHINESE TRADE:  “Far and away the most important issue facing short, intermediate, and long-term GDP growth prospects for the US and the rest of the world revolve around the growing trade war between the US and China.  Both sides have been imposing an increasing number of tariffs on individual goods, but the real issue revolves around the theft of intellectual property and the circumvention of sanctions on third party governments.  China has ignored the world’s patent laws for many years and most countries have turned their head to the issue because they are afraid of missing out on the world’s largest growth opportunity.  China admits that learning from the west and copying our success is a preferred model for growing their economy into what could eventually become the biggest and most powerful in the world.  The US has taken a stand against the disregard for international law and the consequences are yet to be determined for both sides.  The trade war escalated exponentially on December 5th when Canada announced they had arrested Meng Wanzhou, the chief financial officer of the Chinese company Huawei Technologies.  Huawei is the largest consumer electronics company in China (think of them as the Chinese version of Apple).  Not only is Ms. Wanzhou the CFO of Huawei, she is the daughter of the founder and a bit of a celebrity.  China has arrested two Canadian businessmen and sentenced to death a Canadian citizen convicted of a drug offense in China in retaliation for Canada’s actions.  The US is seeking extradition to the United States so Ms. Wanzhou can face charges that Huawei has been stealing American telecommunications technology and lying about its relationship with its Iranian subsidiary. The Chinese parent company claimed that it had sold its Iranian division, when actually it had kept control and ownership of it.  The two sides have agreed to a 90-day moratorium on any new sanctions or increasing any existing sanctions.  That period is up on March 31st and little-to-no progress has been made on any fronts.  This conflict has the potential to take significant growth out of the global GDP and is the most critical issue facing our economy.  Stay tuned.”

Each of these has the potential to change the direction of the overall economy and the markets this year. Our general feeling is that Britain will not let the calendar roll over to April 1st with no plan in place, the Fed will use caution this year as it implements monetary policy and China and the US will come to some form of agreement for both the short and long term.

As we sum up expectations for 2019 we share this quote: “We’ve been in such a state of euphoria that even a return to moderate growth may feel like a recession.” We couldn’t agree more. Overall we expect the economy to return to more moderate grow. GDP should be between 2 and 2.5%, corporate earnings should grow close to 8% and we should continue to see unemployment remain at historic lows. All of these are very healthy numbers by themselves, it’s when compared to 2017 and 2018 they look small. As we return to more normal growth it will feel different, but we believe the outlook for 2019 is positive.

We do believe we are positioned well to weather short-term volatility and still achieve your long-term goals. As always if you have any questions about anything above we welcome your call.

Best Regards,

Bryan and the Cascade Team