Sunday, August 2, 2020

Small-Caps, Mid-Caps, and Large Caps. What are they and why does it matter?

You may have seen the terms large-cap, mid-cap, or small-cap on an investment statement or a list of available investment options through an employer’s retirement plan. The term “cap” refers to a company’s market capitalization. That is the value of all the outstanding shares of the company’s stock. A small-cap is a company with a market capitalization of between $300 million and $2 billion. Although $300 million to $2 billion is a lot of money, most small-cap companies aren’t household names. A mid-cap company is one with a market capitalization of between $2 billion and $10 billion. Here you will find companies that many have heard of, but whose products or services are used less frequently or by a limited number of people. Above $10 billion is where we find the large-cap companies. These are generally household names. You would recognize the names of most of these companies, and many people regularly use their products or services. There are also less often used terms, mega-cap, and micro-cap. Mega-cap refers to companies with a market capitalization of over $200 billion. Micro-cap describes companies whose stock may be publicly traded but whose market capitalization falls below $300 million.


Market capitalization contributes to the risk, reward, and role of an investment in a portfolio. Smaller companies may not have the resources of larger companies and are more likely to struggle during periods of economic uncertainty. During periods of economic growth, it is easier for a smaller company to grow on a percentage basis than it would be for a larger company. Low-interest rates can provide favorable conditions for smaller companies to grow, as a smaller percentage of their revenue is allocated to debt service. In contrast, larger companies usually have more access to capital and are often considered to be a better credit risk. Understanding the role market capitalization plays in a portfolio can improve investment selection, portfolio construction, and may lead to better investment outcomes.

Wednesday, July 22, 2020

Are We in A Bubble?

Are We in A Bubble?


Today some are comparing the rise in Technology stocks to a bubble. Are we in a bubble? In 2000, I was a business student at Clemson University. I recall sitting in a grocery store parking lot, listening to a business news report. This was before we had market news and the internet on our cell phones. I don’t recall the name of the company being discussed, but some of the numbers caught my attention. I quickly grabbed my financial calculator and found that the company’s stock price was more than 100 times its expected earnings for the next year (the historical average is about 16 or 17). The company had a web address but didn’t even have a building. We now refer to this period as the Dot Com Bubble.


What is a bubble?


A bubble is an increase in asset prices to levels that aren’t justified by conventional methods of valuation, followed by a rapid contraction. Economists have identified five stages of a bubble.


1.     Displacement – This is a period where investors are initially attracted to a concept or the idea of something tied to an asset. We saw this during the Dot Com Bubble, where investors fell in love with any company with Dot Com in their name. Following the Dot Com Bubble, there was a sharp decline in mortgage rates that eventually led to the Housing Bubble.

2.     Boom – Excitement gains momentum, and prices begin to rise. The Fear of Missing Out sets in, and more investors are attracted. Media attention fuels widespread interest as prices continue moving higher.

3.     Euphoria – At this stage, investors’ enthusiasm for the investment theme reaches a fever pitch. There seems to be no price too high as described by the “greater fool” theory suggesting there will always be someone who will buy the asset at a yet higher price.

4.     Profit Taking – There comes the point when some investors recognize the bubble, believe it’s about to pop, and are willing to sell. Trying to time this phase is a fool’s errand. As economist John Maynard Keynes said, “the markets can stay irrational longer than you can stay solvent.”

5.     Panic – As the selling begins, prices start to fall, and investors all run for the same exit door at the same time. Panic selling exacerbates the price decline, and the bubble pops.


The first recorded economic bubble, known as “Tulip Mania,” occurred in the Netherlands between 1636-1637. During this period, the Dutch Republic was an economic and financial superpower. Tulips were considered a luxury and a sign of wealth. Owning Tulip bulbs became a status symbol, and the prices of various varieties began to rise. At the peak of frenzied buying, a single Tulip bulb could cost ten times an average worker’s annual salary or as much as a house. As quickly as it started, in February of 1637, Tulip prices plummeted, and fortunes were lost. Today we recognize that the prices paid for Tulips during the Tulip Mania were outrageous. At the time, many investors thought the prices were quite reasonable. Tulip Mania demonstrates how difficult it can be to recognize a bubble during a period of euphoria.


“History Doesn’t Repeat Itself, but It Often Rhymes” – Mark Twain.


I don’t think we’ll see a repeat of the Dot Com Bubble. Lightning rarely strikes twice in the same place. Today technology is an intricate part of our lives and the global economy. Unlike 2000 most of the companies in the technology sector are real businesses with real revenue and actual earnings. The issue is that much of recent market gains have been narrowly concentrated in just a handful of technology companies. It’s yet to be seen if earnings will rise to justify current valuations. At some point, fundamentals always matter. Having an investment strategy based on economic fundamentals and reasonable valuations will help an investor avoid being caught in a bubble when it pops.


A video companion can be found at

Saturday, April 4, 2020

2020 CARES Act FAQ's

In March, President Trump signed the Coronavirus Aid, Relief and Economic Security (CARES) Act.

I want to make sure you're aware of the provisions that may benefit you. Below are FAQs related to each of the key portions of the legislation.

Information for Individuals

Information for Small Businesses

Information about Retirement Accounts

Information about the SBA Loans - Paycheck Protection Program 

Friday, July 26, 2019

Are we Due for a Recession?

July 2019 marks the 121st month of the current economic expansion making this the longest in US history or at least for the 150+ years we've measured business cycles. You may hear people talk about being due for a recession. Being due for a recession uses the same logic as being due for a hurricane, tornado, or a significant snowstorm. It suggests that because things have happened with a frequency in the past, they must occur at the same rate in the future. The frequency of past weather events is not part of the current weather forecast, and the frequency of previous recessions is not part of the current economic outlook. Most of the time, the economy is expanding. The last recession, "The Great Recession" lasted 18 months. The ongoing economic expansion has lasted a decade.  To draw another analogy. When you drive a car, you may drive at different speeds. Sometimes you're accelerating; sometimes you're decelerating, but you are moving forward more than you are in reverse. If you are concerned about the economy, let's talk about it. You may have more risk in your portfolio than you are comfortable with.

I've also created a YouTube video to accompany this post. 

Thursday, July 11, 2019

Chairman Powell's Congressional Testimony

Federal Reserve Chairman Jerome Powell concluded his bi-annual report to Congress today as required by the Humphrey-Hawkins Act. His primary concerns were with issues around trade uncertainties, global manufacturing, global growth, and low inflation.

Chairman Powell described the US economy as being in "a very good place." and told Congress, "We want to use our tools to keep it there. It is very important that this expansion continue as long as possible."

In his Senate testimony, Chairman Powell talked about the Fed's concerns about persistently low inflation in the US. Low inflation has been a chronic economic problem in Japan and Europe for decades.  He cited these concerns as a reason for growing support for rate cuts. Cutting interest rates is a tool the Federal Reserve uses to boost inflation. Based on Chairman Powell's testimony, and recent comments from other Fed Governors, Investors believe a July rate cut is nearly guaranteed.

Given the current state of the US economy, it is unclear what effect a rate cut will have. The current unemployment rate is 3.7% and recently ticked up as more people have entered the workforce. Inflation is below the Federal Reserve's 2% target as it has been for some time. A rate cut under these economic conditions demonstrates the weight The Fed places on its inflation target.

Wednesday, July 3, 2019

Market Update 07-03-19 - Markets at New High

The Dow Jones Industrial Average, S&P 500 and Nasdaq Composite indexes all closed at record highs today. We’ve had several weak jobs reports showing that the rate of job growth is slowing. Market participants believe that the slowing pace of job creation gives the Federal Reserve reason to cut interest rates when they meet later this month. Lower interest rates can reduce borrowing costs for businesses and individuals. In theory, this can lead to economic growth. Lowering interest rates is one of the tools the Federal Reserve has used in the past to encourage economic activity and pull the economy out of a recession. It is unclear if lower interest rates will have the same effect when the economy is not in a recession. If the Federal Reserve decides not to cut interest rates as expected, you could see markets reverse course and give back much of the recent gains.

Tuesday, June 25, 2019

The Walt Disney World Barometer - What the Walt Disney World resort can tell us about the economy

The Walt Disney World Barometer

By most estimates’ consumer spending drives more than 70% of the US Economy. This makes the Walt Disney World Resort in Orlando, FL, an excellent barometer of what’s going on with the consumer and implications for US GDP. I have been a Walt Disney World enthusiast most of my life. I’ve watched the resort expand as new parks and attractions have been added, and Disney has grown its inventory of intellectual property. For full disclosure, at the time of publication, I own shares of Walt Disney Company stock and have purchased shares in the accounts of my clients.

Four things make the Walt Disney World resort a great economic barometer.

1.)    Discretionary Expense - Vacations are a discretionary expense. Unlike food, clothing, and paying the utility bills, vacations are a lower financial priority and a luxury for many people.  During times of economic stress, the family vacation is often the first casualty, and rightly so. The advice I give clients, and we use in our own home is to periodically assess all discretionary expenses and decide what needs to be changed or eliminated. During times of economic uncertainty, vacations are a significant budget item that can be cut and have a considerable impact on the family budget. A busy Disney World Resort suggests a healthy consumer.

2.)    Future Expense - Disney World vacations are usually planned far in advance. Looking at crowd levels in the parks, hotels, and restaurants gives us insight into how the consumer feels about their intermediate financial conditions. If a person feels insecure about their job security or their ability to find a job, they are less likely to commit to considerable discretionary future expenses.

3.)    International Audience - Walt Disney World is a global destination. I am always aware of the indications of the number of international visitors. I watch for tour groups whose leaders will carry pennants from their home country. I will quiz the people at the front desk of hotels about their vacancy levels and the percentage of international guests. I listen for the accents of people around me, and much to my wife’s dismay, engage them in conversation to glean insight. The number of international visitors can be an indication of the health of the consumer in other countries. I would also point out that the currency exchange rate between the US Dollar and other currencies also influences tourism.

4.)    Discounts - Disney has their finger on the pulse of the consumer. Watching their marketing, the number and depth of discounts offered can tell us something about the health of the consumer. Walt Disney World is a massive operation. To give some perspective, Walt Disney World is roughly the size of San Francisco. Disney has over 30,000 hotel rooms, over 300 dining outlets, and more than 70,000 employees. In a typical year, over 50M people will visit the Walt Disney World Resort. If Disney anticipates consumer weakness, they are incented to offer discounts to maximize the utilization of their facilities and maintain their workforce.

For a sense of the financial health and attitude of the consumer, there are few better gauges than what’s happening at the Walt Disney World resort. Regardless of when you may be reading this, if you would like to know my take on what Walt Disney World is currently telling us about the economy just ask. I’ve usually been there recently.

For more information on this topic I invite you to watch this 5-minute YouTube video