What the Fed’s actions mean for us

Given the expectation for the Fed to continue to increase “rates” over the course of this year, we thought it would be helpful to provide some context on just what this means. The rate being described here is the federal funds rate, which is the benchmark or central interest rate in the U.S. financial market. This rate influences a myriad of other rates, including the prime rate, mortgage rates, rates on loans and savings, just to name a few, and is therefore vital to consumer wealth and confidence.

Now some background information. To begin, we start with the Federal Open Market Committee, or FOMC, which is the policymaking body or committee within the Federal Reserve System that makes key decisions about interest rates and the growth of the U.S. money supply. The Federal Reserve, or the Fed (U.S. Central Bank) was given the responsibility for setting monetary policy by the Federal Reserve Act of 1913 to serve as the country’s central bank. Monetary policy encompasses the measures employed by the government to influence economic activity, specifically by manipulating the supplies of money and credit and by altering the rates of interest.

As part of its monetary policy, the FOMC meets eight times during the course of a year to set the target federal funds rate. The federal funds rate, or fed funds rate, represents the interest rate that depository institutions (think banks, savings and loans, credit unions) charge each other for overnight loans. Please note that depository institutions are required by law to meet minimum reserve requirements equal to a certain percentage of their total deposits in an account at a regional Federal reserve bank – to cover withdrawals by depositors and other obligations. So, in respect of these reserve requirements, it may be necessary/desired to borrow/lend excess reserves from/to one another. The rate that the borrowing depository institution pays the lending depository institution is determined between the two and the weighted average of all these types of negotiations is called the effective federal funds rate. The effective funds rate is basically determined by the market but is influenced by the Fed via the above-mentioned target fed funds rate.

Please note that the federal funds rate differs from the discount rate (also referred to as the discount window), which is the interest rate that the Federal Reserve bank (i.e., one of the 12 regional Federal Reserve banks) charges on loans to commercial banks and other depository institutions. The discount rate is set by the Fed’s board of governors. Lending at the discount rate is part of the Fed’s function as the lender of last resort, and represents an important monetary policy tool. This lending by the Fed to depository institutions plays a significant role in supporting the liquidity and stability of the banking system and the effective application of monetary policy. Sometimes, banks borrow money from the Fed to avoid liquidity issues or cover funding shortfalls. The Fed funds rate is usually lower than the discount rate.

The current fed funds target rate is 1.50% to 1.75%, having been increased by 75bp (or 0.75%) at the most recent FOMC meeting that took place in June, which represented the largest rate move since 2000. The move was prompted by escalating inflation pressures (recent 40-year high inflation as measured by June 2022 CPI of 9.1% – highest since December 1981, driven largely by food, gas and energy costs). There remain four FOMC meetings in 2022 (July, September, November, December). The probability of another 75bp hike at the July 26-27 FOMC meeting is currently 98%.

The Federal Funds rate and the Prime Rate track along with each other very closely.

Short- and mid-term ARMs (adjustable-rate mortgages), such as the 5/1 ARM (fixed rate for the first five years then switching to an adjustable rate for the remainder of the term) shown in the graph above, are also affected by trends in short-term interest rates. As lenders’ cost of obtaining funds to lend changes, some of those reductions or increases are passed to borrowers in the form of lower (or higher) starting rates.

Long-term rates, such as 30-year fixed-rate mortgages, give less consideration to short-term rates, responding instead to economic growth and inflation pressures. Mortgages more closely follow other long-term rates, such as the yield of the ten-year Treasury Constant Maturity (theoretical value of a U.S. Treasury that is based on recent values of auctioned U.S. Treasuries).

All of these factors have weighed on the stock market. But the steps the Fed has taken have been necessary and should result in lower inflation and a stable dollar over time. This will not keep investors and the market from worrying over what the next few months will bring, but smart moves today will help support a healthy and growing economy in the future … a benefit for everyone.

Finding a way forward

There are many experts coming out with estimations before the June Fed meeting. We would like to provide some context and perspective about what the Fed is considering.

In economics and investments, most of our education involves looking at past events so we can learn from them, especially to help avoid making the same mistakes in the future. But unfortunately, we are in uncharted territory. This environment is like no other. And while looking at prior Fed activity is instructional, the Fed never convened following a global pandemic or while the US supported a state in Europe at war with Russia. Today is unique and so must be the Fed’s response, building a potential path forward with the world as it is today, and not as it was.

The Fed funds rate (the rate member banks of the Fed charge to each other) is 1%, and the Fed is using this rate to try to get inflation under control. Inflation is commonly measured by Personal Consumption Expenditures (PCE) which is currently 8.6% and the Consumer Price Index (CPI) ex food and energy, which is currently 4.5%.

Economic theory says that raising the Fed funds rate higher than “inflation” is the surest method for getting inflation under control. But that would require the Fed to push interest rates over 8%, which is almost ridiculous considering the Fed is unlikely to push rates to even 4%. We have had an unusual period where inflation has not been a factor for over 20 years. And the Fed has been good at stimulating the economy during this period, but now they need to learn a new trick … unstimulating the economy without pushing it to recession.

When the Fed meets for two days, it can feel like the Cardinals are gathering to pick a Pope. We wait for smoke signals as if they are going to tell us what’s “really” happening. But the Fed comprises government employees who have a responsibility to control inflation while ensuring maximum employment. They don’t have a mandate for maintaining stock market values.

The Fed is scheduled to raise rates 0.5% in June and 0.5% in July, followed by another 0.25% in September and 0.25% in October. Most analysts expect the Fed to raise rates by 1.5% in total before the end of the year. With current rates at 1%, that would bring us to 2.5%. The market is reacting accordingly, fearful of the unknown, wondering if the Fed might have to raise rates more than expected.

Because the Fed has been slow to acknowledge inflation (for nine months, the Fed has called the price increases “transitory”), they are now sensitive to being late to the party. At 8.6%, inflation measured by PCE was still too high despite the actions the Fed has already taken. And the volatility we have experienced in the stock market comes as investors wonder if the Fed pushing rates to 2.5% will be enough, or if they might have to go as high as 4.5%. Extra increases are what economists, investors and some Fed members have talked about, but few people have been listening. And while these changes in Fed policy are significant, they are not life changing.

We are sharing these details so an increase in interest rates of 0.75% in June or July, or more increases in the fall, won’t trouble you, should they occur. Certainly, those buying a house or car will pay more in a higher rate environment. And borrowing, which has been uncharacteristically low for a long time, has changed; the days of “free money” are possibly ending. The Fed will continue to raise rates until they get the desired effect, but some investors are fearful of these changes. These changes in response to inflation and a tough economy have also made for a rough market. But as Walt Disney so eloquently put it, “After the rain, the sun will reappear. There is life. After the pain, the joy will still be here.”

The future is uncertain. We can search for answers as the problems become clear. The volatility of markets will always be present at different levels, with uncertainty being one catalyst. And it’s important to understand a situation from a historical perspective, but we also must realize that our markets will probably look different in the future. Information travels much faster now and investors’ reactions to changes also affect investments and markets at lightning speed. But these are immediate reactions, emotionally charged and often overblown. For a long-term investor, volatile market swings are tough to watch, but they are not of much consequence over time. And our investments—companies chosen because they represent the very best combinations of quality, value and opportunity—are the best way forward in uncertain times such as these.

Innovation and valuation

The phone rang. Mike unzipped his North Face, apparently unconcerned with the temperature even though was ten degrees below zero. He fished around in his pocket and pulled out the phone, grinning as he glanced at the screen.

“You’ll never guess where we are,” he said into the speaker.

“Where?” the voice at the other end said.

Mike looked around. “The top of Highline.”

A moment passed while the caller collected his thoughts. “You’re in Vail?”

“Not just in Vail … we’re on the mountain!”

“Your phone works there?”

The boy said the words I still couldn’t get past my lips. From the moment the phone rang, I could hardly believe my ears. Getting a call when you’re standing at the top of a mountain in Colorado may not seem like a big deal today. But this was 1994. Cell phones were expensive, few people had them and they barely worked in the city. Getting a call while standing cliff side in the middle of nowhere was unimaginable.

The 1990s were incredible years for innovation and development, not just for mobile tech, but for the Internet as well. Of course, at the time, cell phones were luxuries. The Internet was too slow to be entertaining and had little use beyond email. At best, most people figured it was just going to be another marketing channel for businesses—an alternative to advertising through television, radio and print media. But especially for those of us in our twenties and thirties, we knew something important was happening around us. We just didn’t know how big it was going to be.


Against that backdrop, Netscape made its debut. The company had a web-browser and was one of the first of its kind to help people get connected to the Internet. It was a big deal for the company to go public. Money managers fell over themselves, clamoring to get shares for their funds. And the big investment banking firms of the day had a party doling out shares to their favorite customers. But the company was less than two years old, and it was far from profitable. Investors didn’t really know what the company’s business model was either. Netscape was a strange new company in a rapidly developing market and the biggest question everyone had was how much the shares would cost.

Days before the offering, investors were expecting to buy shares for $14. But at the last minute, bankers upped the price to $28. Within minutes of the start of trading, the market for Netscape took off and that same day, shares traded into the high $70s before settling into the mid $50s by the closing bell.

On its face, the Netscape IPO might seem like an incredible success. After all, investors more than doubled their money in one day. But the founders of the company left a lot of money on the table by selling their shares for $28 when the market was willing to pay significantly more. The investment bankers responsible for the deal didn’t even come close to understanding what the company was worth, and it showed.

The challenge of knowing what an investment is worth is not unique to companies like Netscape. It’s a challenge that has confounded investors for hundreds of years and even with the advancements in technology and investment theory we have had, they are challenges we still face today.


On a normal day, stocks can gain or lose 2-3% as investors react to news. But lately, stocks have been more volatile, some gyrating 5-10% or more in a single day. By historical standards, this is a volatile market, and it has everything to do with the growing number of concerns weighing on investors’ minds.

The rising price of oil, a war in Europe, tensions with Russia and China, economic malaise in the US and the UK and inflation running at near historically high levels—maybe the market could shrug off one or two of these issues, but investors are obviously having trouble digesting all of them at once, especially when they are interrelated. All these issues affect corporate revenues, profits and ultimately the prices we are willing to pay for shares of their stocks. And inflation? Well, inflation makes it hard to answer the question “what is a dollar worth?” A dollar certainly doesn’t buy what it did 18 months ago, and if it’s hard to know what a dollar is worth, it’s equally hard to know what dollar-denominated assets like stocks should be worth too.

We expect the Fed will solve the inflation problem—it is their prime directive. This will answer the question of how high interest rates must go and should also give insight into the relative health of the US economy. Solving inflation won’t help solve the high price of oil or fix tenuous relations with trade partners, but even with a few answers, understanding the value of assets like companies and real estate becomes easier.


There are some things we can get away with as investors during exuberant times that we can’t when the future is cloudy. This doesn’t mean that we can be sloppy as investors because that’s never the case. But it does mean that when the economy is humming, we can own faster growing companies even if they aren’t very profitable. Companies in growth mode can plow much, if not all, of their profits into growing their businesses when they expect times to be good. That was the environment we enjoyed for much of the last decade.

When the economy slows, growth companies often must be less aggressive, focusing more on financial stability and corporate profits. We are in one of those environments now, and as you may have noticed, we have made a few changes to our portfolios to reflect this condition.

Earlier this year, we distanced ourselves from China—moves that made a tremendous amount of sense given the Chinese government’s unwillingness to play well on the world’s stage. More recently, we made a few changes toward companies with stabler balance sheets and cash flows, and less risk of declining profitability while the economic malaise continues. Among the incomers is Estee Lauder (EL), the quintessential upscale body care company that has shown resilience through even some of the toughest global economic conditions, Merck (MRK), a drug manufacturer with a pipeline of highly profitable and protected drugs, and Lam Research (LRCX), a semiconductor tools company that is unique in both its scale and its product offering. These companies have growth potential, but they are highly profitable and can absorb some trouble if it takes longer than wanted to get the economy moving in the right direction again.

Inflation primer

Treasury Inflation-Protected Securities, or TIPS, are U.S. government bonds that are indexed to inflation. TIPS provide protection against inflation (or the rise in price of goods and services), intended to protect investors from a decline in the purchasing power of their money. If inflation rises or increases, the principal value of TIPS adjusts upward to reflect that inflation increase. Conversely, if there is deflation, the opposite occurs and the principal value adjusts downward to reflect that deflation. Please note that we are talking about inflation and deflation as measured by the Consumer Price Index (CPI). Inflation results in a rise in the CPI, whereas deflation results in a decline in the CPI. Importantly, the initial interest rate or coupon of the TIPS will not change, but the principal amount will change, resulting in higher or lower interest or coupon income (fixed interest or coupon rate multiplied by the adjusted principal value). The inflation adjustment to the principal is cumulative.

TIPS pay interest two times per year, at a fixed rate, i.e., the interest rate does not change, but the interest payment varies with the adjusted principal value of the bond. The fixed rate is applied to the adjusted principal. So, the amount of interest could be higher if the adjusted principal increases because of an inflation change, or could be lower if the adjusted principal decreases due to a deflation adjustment. Upon maturity of TIPS, the investor receives the adjusted principal or the original principal, whichever is greater (even if a deflation adjustment caused the adjusted principal balance to fall below the original principal).

So let’s look at how adjustments work under both an inflation change and a deflation change. Using an example of an investor purchasing $1,000 in TIPS at the beginning of a year with a coupon rate of say 2%, if CPI measures no inflation, the investor will receive $20 in coupon payments for that year. Assuming inflation rises by 2%, the $1,000 principal of the TIPS would adjust upward by $20 to $1020 (2% inflation x $1,000 principal) and the coupon payments would total $20.40 for that year. If deflation materialized, say to the tune of -4%, the $1,000 principal of the TIPS would adjust downward by $400 to $960 (-4% deflation x $1,000 principal) and the coupon payments would total $19.20 for that year. Even with deflation, at maturity, the holder will receive the greater of the adjusted principal of the TIPS or the original principal. The investor is never at risk of losing the original principal if held to maturity. So, in the example of the 4% deflation adjustment, resulting in the adjusted principal of $960, the investor would receive $1000 principal upon maturity. Please note, however, that if sold before maturity in the secondary market, there is the possibility to receive less than the initial principal.

CPI inflation adjustments are made semiannually and the inflation adjustments of a TIPS bond are considered taxable income by the IRS even though an investor would not see that money until the bond is sold or it reaches maturity (please note that TIPS are exempt from state and local income taxes, but are taxable at the Federal level). Holding TIPS bonds in a retirement account could help to minimize the tax impact.

The difference or spread between the yield of a TIPS bond and the yield of a traditional Treasury bond of comparable maturity is known as the breakeven rate. This breakeven rate represents the inflation expectation or inflation outlook over the life of the bond. Accordingly, the yield on a TIPS bond is equal to the traditional Treasury bond yield minus the expected inflation rate. But note that the spread between TIPS and traditional Treasury bonds is not a faultless predictor of inflation, as both instruments are subject to market forces and investor emotions. If the CPI were to average more than that spread or difference over the life of the bond, then the TIPS would deliver a higher total return than the traditional Treasury bond. However, if expected high inflation fails to materialize, then the TIPS could underperform traditional Treasury bonds.

When the traditional Treasury bond is trading at a yield below the expected inflation rate, the yield on a TIPS bond declines into negative territory. A phenomenon known as “the flight to safety” or “the flight to quality” explains why investors sometimes accept negative TIPS or any other treasury yields. In times of marked economic uncertainty, investors’ fear of losing their investments frequently overwhelms their desire for tolerable returns.

Considering the recent escalation of inflation pressures on goods and services and the related mounting consumer concerns, as well as the likelihood of questions and interest that may arise around these securities, we thought it was important to provide an overview of TIPS. Circa Capital currently has no bond portfolio exposure to TIPS and we do not anticipate that changing over the near-term. Negative yields, heightened interest rate risk and concerns around accurately forecasting inflation rate adjustments in the future supports our preference of utilizing traditional Treasury bonds (via Vanguard ETFs) over TIPS. We will continue to monitor inflation and its impact on TIPS and their performance relative to traditional Treasury bonds to determine if allocation change/modification is warranted.

~ James Callahan, CFA

Volatility – the price of admission

Photo by Arthur Osipyan on Unsplash

When we think about the prices of items that we purchase, there is always a question about how much “value” we are receiving. Investments are no different. When you own a company, in theory, you are receiving a share in the company’s future cash flows. This sounds great when the company makes money. But what about when the economy is slowing? Less cash flow means a lot less stock price.

The steadiness of cash flows matters to investors and companies know this. Companies want investors to see them as solidly profitable, growing, and able to deliver enhanced products and services. Running a company comes down to managing the business through changing economic environments (i.e., pandemics and recessions). The ability for us to understand our companies starts with understanding the value the shares represent and continues with understanding the quality of the company’s earnings. In both areas, there is a need to balance risk and safety.

Investment theory states that to achieve higher returns, investors must take higher risk. If investing was riskless, then everyone would buy, and the advantages would disappear quickly as prices rose. As investors, we must take a long-term (i.e., 7-10 years) view of the companies we own and the economies they operate within. Conventional wisdom states that when you are in a storm, it is best to get out of the rain. And people have the tendency to look at the current state and assume it will continue (recency bias). But in investing, this is often short-term thinking, and it’s counterproductive. We have to step back and to realize that all storms end and the sun will come out!

As an example, consider the VIX index, a measure of expected volatility in the stock market over the next thirty days.

The pattern over the prior year shows three peaks on December 6, January 23 and March 7. The blue and red lines are the 50 and 200-day moving averages, respectively. Higher volatility (a higher VIX index) usually equates to more fear among investors and lower stock prices. And because the blue line is increasing faster than the red line, we know that volatility and fear have increased recently. There are two reasons for this; the Fed announced multiple interest rate increases and Russia invaded Ukraine.

US markets have had unusually high levels of liquidity for many years. By raising interest rates, the Fed hopes to combat inflation. But this often leads to other problems, like a slower economy. And while Russia’s invasion of Ukraine doesn’t seem like it should affect the US economy, it does. Because Russia supplies much of Europe’s natural gas, sanctions and shortages have disrupted the flow of oil and gas everywhere.

We will continue to watch these global events as they unfold, and we are always mindful of how economic events are likely to affect the companies in our portfolios. We have even taken advantage of the recent turmoil in the market to make a few adjustments to our portfolios. After all, volatility can be an opportunity, especially when it gives us the chance to buy more quality companies at lower prices.

There was a saying made popular during World War II, “keep calm and carry on”. Perhaps during these trying times, rather than inventing new sayings and slogans, we would do better to embrace the insights of older generations who faced and overcame significant challenges. Stay safe!

– Steve Davenport, CFA

The power of compounding

As a prominent historical figure, there are few who could match the accomplishments of Ben Franklin. Founding Father, Diplomat, Scientist, Inventor, Politician and Publisher exemplified some of the roles he occupied during his remarkable life. Beyond helping to draft the Declaration of Independence and the U.S. Constitution, helping to negotiate the Treaty of Paris, which ended the Revolutionary War, publishing Poor Richard’s Almanack and inventing bifocal glasses, Ben Franklin’s understanding and demonstration of the power of compounding underscored his financial acumen and provides a valuable financial lesson for all.

When he died in 1790, Ben Franklin bequeathed in his will, 1,000 pounds sterling, which was the equivalent of $4,444, to each of the cities of Boston (his native city) and Philadelphia (his adopted city). This act allowed him to sponsor civic virtue and satisfy his fascination with the power of compounding interest. He requested that for the first hundred years, each of the 1,000 pounds sterling would accrue interest and be used to fund loans for young married tradesmen starting out in business. At the end of 100 years, the cities would be allowed to spend 75% of the principal of the money on public works. The remaining 25% was to remain invested until another 100 years had passed, at which time the cities would be allowed to spend that on whatever they wanted. Franklin’s objective was to help people understand the importance of compound interest. As Franklin himself liked to describe the benefits of compounding, “Money makes money. And the money that money makes, makes money.”

The compounding paid off for both cities. By 1990, over $2 million had accumulated in Franklin’s Philadelphia trust. Franklin’s Boston trust fund had grown to $4.5 million, more than twice the amount in the Philadelphia trust fund. Ben Franklin’s financial lesson proved enormously astute.

Granted, nobody has even 100 years to compound investments, let alone 200, but the concept of starting early, investing regularly, staying disciplined and patient, and allowing compounding to do the heavy lifting cannot be understated when it comes to investing. Most investors have a 30-year to 40-year horizon. Saving and investing regularly is imperative to achieving financial goals. Remaining disciplined during times of market stress and not trying to time the markets are critical components of wealth building. Staying disciplined, invested and re-investing can prove hugely beneficial over the long-term due to compound interest and compound returns.

The chart below illustrates and helps to visualize the power of compounding by showing the monthly savings required to reach $1 million at retirement (assumed to be 65 years of age) at various ages. The earlier one starts, the longer the compounding runway, and the smaller the monthly savings required to reach $1 million.

Source: Business Insider

However, it is equally important to note that compounding can also work against you. An example of this would be when high-interest credit card debt builds on itself over time. Here, compounding serves as a powerful inducement to pay off your debts as soon as you can and start saving and investing your money early.

And, if further confirmation of the power of compounding is needed, it is rumored that Albert Einstein described compound interest as the eighth wonder of the world and said that those who understand compound interest, earn it. Those who do not, pay it.

~ James Callahan, CFA

Leaving Little to Chance

On the list of past predictions about the future that came true, one often rises to the top because of its relevance today. In a 1909 interview with the New York Times, inventor Nikola Tesla said, “It will soon be possible to transmit wireless messages all over the world so simply that any individual can own and operate his own apparatus.”

The development of wireless communications revitalized a stagnant telecom industry in the 1990s. Today, mobile phones and wireless communications are the norm. Of course, it took more than eighty years for Tesla’s prognostication to come true. Soon, in this case, meant decades, not years. But that is the problem with many predictions—it’s not so much a matter of if they will come true, it’s when.

There is little difference between December 31 and January 1, the end of one year and the beginning of another. After all, it is just one more day. But each new year brings with it a host of new predictions from everyone with a platform. This is especially true with people associated with the stock market, the economy, and those with vested interests in the fields of technology and business.

Back in my mutual fund days, we used to play a game. At Christmastime each year, the portfolio managers would make predictions about what the new year would bring. They would try to predict which companies and industries would perform the best, where the stock market would end, and what direction interest rates would trend. Then they’d tuck away their predictions, revealing them at Christmastime the following year. Some predictions happened quickly, some not at all, and some, now with the benefit of hindsight, only came to pass many years later. But we always had a big laugh about how many unexpected things happened—things we never could have imagined.

As we look forward to 2022, there are countless predictions about how much interest rates will rise, whether the economy will grow, if the Fed will get inflation under control and how well we will get along with some of the bigger bullies on the block, namely Russia and China. Especially with investments, relying too heavily on near-term predictions often leads to disappointment. Even though we know interest rates are likely to rise, the economy is likely to grow, and inflation is likely to shrink, we can’t know how soon or by how much. And perhaps most importantly, investing based on hoped-for outcomes with economic conditions that are beyond our control doesn’t put an investor in a position of strength.

The wiser approach to investing is to take a longer view. In that sense, there are some themes we think are likely to drive future growth in the economy and long-term returns in the stock market. In transportation, electric vehicles are becoming mainstream especially as more manufacturers enter the market. In communications, companies are making it easier and safer for us to stay informed and connected. In healthcare, precision medicine is making treatments more specific, safer and less costly. In banking, protocols for transferring money faster and more securely are giving a stodgy industry new life. These are just a few examples, but taking a long view allows us to ponder and profit by the astonishing achievements of industrious people.

We cannot know what this year will bring. We cannot control what the Fed or Congress will do. But we can buy exceptional companies managed by smart people, companies that offer products and services that are necessary and desirable, companies that don’t just survive economic turmoil, they thrive in the wake of it. By investing this way, we control what we can, leaving as little as possible to chance.

Around the Tree

I came to Atlanta from Boston 16 years ago. I still get the comment, “you aren’t from around here, are you?” because I have a Boston accent—I work hard to hide it, but it still comes through sometimes. When I arrived in 2005, I noticed how many of my neighbors had also relocated from other cities to Atlanta. Now, I feel more like a native while Northerners keep coming down. I love the weather here and the friendliness of the people. I have raised my kids here, and this past spring, my youngest, Jack, will graduate from SMU in Dallas.

I met Travis at a CFA Society Atlanta event almost ten years ago. We stayed in touch and in October, I joined him at Circa Capital. For the last 20 years, I have been helping families preserve wealth and generate income through the use of equity options—investments that allow you to buy or sell a security for a specific period of time. Some clients work at a company their entire career and acquire a large amount of stock. I help these clients manage their concentrated stock, applying special techniques to help them reduce risk or generate income.

In addition to my work with clients, I am also very committed to helping young adults achieve financial literacy, so they can start their working lives with a plan. I believe all of us in the finance industry owe it to our communities to pass along our knowledge and experience, giving the next generation of investors the skills they need to succeed.

When I think about the Circa Capital motto, “Growing and Preserving Wealth,” I believe James’ and my backgrounds align more with Preserving wealth, while Travis’ expertise is more aligned with Growing wealth. All three of us are familiar with the markets and I am excited that we can bring a tremendous amount of experience and energy to helping our clients.

As we get into December, we look back on the year that has been, even as we look forward to the holiday season and the new year. Twenty twenty-one has been another year filled with the challenges of COVID. Even so, the markets were stronger than their historic average, increasing 24% year-to-date through November.

Perhaps a surprise to everyone, the most successful sector year-to-date was energy and the least successful was consumer staples. This highlights how difficult it is to predict what will work and what won’t. It also supports our decision to be balanced across sectors, and this year, that strategy has certainly worked.

There are a lot of reasons to celebrate for those with a well-balanced portfolio. GDP is growing and unemployment is declining. Of course, there are areas of concern also—inflation, stimulus politics, and the central banks. There will always be areas to watch and opportunities that present themselves to long-term investors.

“It’s not what’s under the Christmas tree that matters, but who’s around it.” ~ Charlie Brown

Last month, I experienced the wedding of my daughter, Meghan, in Houston. She is the oldest of my kids and the first to be married. It was a very exciting time for our family, and everyone there seemed so happy to be celebrating after such a long time away from each other. It really feels like we are starting to appreciate who we have with us, and enjoy the moments!

There is a lot to be thankful for as we end 2021. The new year will be here quickly and we hope you and your family can stop, enjoy and celebrate the season.

~ Steve Davenport, CFA

Giving Thanks

I have heard it cynically said that one of the quickest and easiest ways to make a lot of money is to borrow it and not pay it back. Regrettably, loaning money, like investing in stocks, entails risk. But unlike a stockholder who enjoys ownership in a company, a bondholder is a lender to a company, and therefore has a higher priority than stockholders for a claim on a company’s assets.

When a company borrows money, it often issues bonds that typically fall within the category of corporate debt. Many factors determine the cost of that debt to the company. The bondholder receives interest and expects to receive the principal they gave the company when the bond matures. Bonds don’t often provide the growth of stocks, but they deliver a relatively safer source of total return and offer the potential for capital preservation.

Another potential benefit of bonds is diversification. Given their dissimilar responses to market events, stocks and bonds have a lower correlation and, therefore, can be complementary. Stocks are the riskier of the two asset classes, and they tend to be more volatile. While bonds usually offer a smaller return, that return may be more stable. Treasury bonds offer a reliably lower correlation to stocks than corporate bonds and have the added benefit of no state and local taxes, no credit risk, no liquidity risk and no default risk relative to corporate debt.

We believe an allocation to bonds (via ETFs and mutual funds) in a diversified portfolio is essential to reducing risk and volatility and preserving capital. We believe these allocations should emphasize U.S. Treasuries, high quality tax-efficient municipal bonds and high-quality corporate bonds—principally investments with a low probability of default.

As a new member of the team, I would like to express my genuine appreciation for the trust you place in Travis, Steve and me, to oversee your hard-earned capital. As a New Englander, as a CPA and as a former corporate bond research analyst, I am guided by the principles of conservatism and pragmatism in my role. To me, this means striving to preserve the capital that you worked so hard to attain, by investing in the highest quality bonds we have available. With historically low interest rates, growing inflationary pressures and a rapidly changing economy, it is our belief that a focus on the preservation of capital and purchasing power is imperative.

Collectively, we continue to strengthen Circa Capital in various ways, including the recent acquisition of a Professional Liability (Errors & Omission Insurance) Policy. Despite it not being required for advisory firms, we deemed this level of protection indispensable, considering what you have entrusted us with. Our belief is that the quality of our operations must be consistent with the quality of the investments and strategies we recommend and use for clients.

It is our sincerest wish that you all get to enjoy time with family and friends over the coming Thanksgiving Holiday. The past twenty months may have been challenging for all of us, but perhaps that will strengthen our appreciation for the most important things in life, and things we may have previously taken for granted.

~ James Callahan, CPA, CFA