Not a Bear

At the time of writing, the S&P500, Nasdaq, and MSCI World have all experienced significant declines from their recent highs. This has led to widespread worry among investors, who fear that the market will continue to decline. However, at Interlaken Advisors, we believe that this market correction is actually bullish for stocks, as Sir John Templeton once famously said, "Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria." By closely monitoring investor sentiment, we are able to forecast market conditions.

Despite a number of headline anxieties that are currently plaguing investors, we remain optimistic about the future of the market. One concern is the drop in oil prices, which has led many to fear a global recession. However, we believe that the total world consumption matches total production, which makes it unlikely that there will be a massive stock build of crude. Furthermore, the US is a net importer of oil, which means that cheaper oil prices are actually a tailwind for US GDP and companies. We can look to the oil-price decline from 2014 to 2016, which also worried investors at the time, but ultimately did not cause a global recession.

Another anxiety is China's bear market and slowing GDP growth, which some investors worry will infect the rest of the world as it sinks. However, we believe that the tariffs from the Trump administration amount to less than .3% of global GDP, and China has been in and out of bear markets for decades. Their economy is shifting from supply and production to services based, which means that their GDP has been shrinking for years. We believe that these worries have been priced into current analyst predictions.

Investors also worry about the Federal Reserve's continued rate hikes, which have occurred eight times since 2015. However, we believe that rate hikes only become problematic when they invert the yield curve, which is not currently the case. We do not see the current rate hikes or the next predicted rate hike in December as problematic for the market.

Finally, there is the political divide between the two parties in Congress, reducing the chances for any major legislation to pass through. However, we believe that the market likes gridlock and that this is nothing new for America. Despite the headlines of subpoenas and possible indictments, we have seen two presidents impeached by the House of Representatives in the past, neither of which passed through the Senate. During the Clinton impeachment, the stock market initially fell, but eventually created all-time highs. During Nixon's resignation, which occurred before impeachment was possible, stocks fell hard due to high oil prices and inflation.

While the current correction may be uncomfortable, we remind investors that corrections can occur with or without reason, and attempting to time the market in the short term to avoid swings typically hurts portfolios more than helping. We believe that the bull market should resume soon, as bear markets generally stem from large, unseen negatives that cut trillions from global GDP, rather than from known cynical narratives that are already priced into current expectations. The LEI continued to expand in October, despite the stock sell-off, and GDP continues to grow, the yield curve remains normal, and inflation remains relatively low.

Nothing herein is intended to be investment advice. Investment in the stock market involves risk of loss. Past performance is no guarantee of future returns. The content contained in this article represents only the opinions and viewpoints of the Interlaken Advisors editorial staff.

Direct and Digital Transformation

In the 1970s, Charles Schwab disrupted the advice industry by offering prices as low as $70 per trade, undercutting traditional Wall Street brokerage firms. Since then, Schwab has grown to over $2 trillion in assets, including its RIA business. Today, discount brokerages such as E*TRADE, Vanguard, and Fidelity are continuing to lure assets away from large, traditional Wall Street firms by appealing to customers who want lower fees or more control over their savings.

We may be at another turning point in the market following the financial crisis, as a wave of new startups is trying to redefine or refresh traditional models of wealth management. Their services are priced to sell, and traditional firms have not been able to deliver the same quality of customer experience as these startups, in part due to their inability to adapt their infrastructure quickly and their reliance on the slow pace of adoption of the new players and their offerings. Many of these emerging players cater to the "mass affluent" investors with $100,000 to $500,000 in investable assets, who the traditional private banks and retail brokerages have struggled to serve effectively.

While new fintech companies in the market serve various customer types and needs, we have observed a convergence in what these players offer. For example, SigFig initially offered customers the ability to aggregate their investments and monitor their portfolios, but has since expanded to include an automated investment management product to diversify its revenue stream. Covestor started out as a "peer platform," but has added features of a "holistic aide," offering a needs analysis that helps customers narrow down which investment managers are best suited to their needs. Learnvest has evolved from a "holistic aide" that connects investors with advisors to a "neo-traditional" offering, launching an institutional business serving asset managers.

The rise of these emerging players has served as a wake-up call for traditional wealth management firms. We believe that the best of the incumbent firms will figure out how to adapt their businesses to acknowledge the power of digital technologies and business models, while leveraging their brand and reputation, which continue to be critical in wealth management. In future articles, we will continue to track the progress of these disruptive models and assess their underlying economic rationale and sustainability.

Please note that nothing in this article is intended to be investment advice. Investment in the stock market involves a risk of loss, and past performance is no guarantee of future returns.

Nothing herein is intended to be investment advice. Investment in the stock market involves risk of loss. Past performance is no guarantee of future returns.

Consumer Behavior And The Race To The Bottom

Consumer products manufacturers can enhance their revenue and profit growth by reassessing their pricing and promotional strategies, according to Interlaken. The company has found that moving away from heavy discounts on products can benefit all parties involved: manufacturers, retailers, and consumers.

Despite the pressure from retailers to promote and offer discounted prices on their portfolios, many manufacturers are facing the reality of increasing input costs. However, there is evidence that consumer buying behavior is gradually shifting away from an indiscriminate search for the next deal.

While headline price changes still impact consumers, many are beginning to move away from being solely driven by low prices. In fact, consumers often perceive price increases to be higher than reality. A recent Wells Fargo US food consumer survey found that 78% of respondents reported material grocery inflation over the last six months, while actual prices were only up 0.2%.

As many consumer goods categories rely heavily on promotions, average selling prices (ASPs) are often significantly lower than recommended retail selling prices. With the reduction in consumer bargain-hunting behavior, manufacturers can increase margins by raising ASPs through more effective use of promotions.

By creating more balanced promotional plans, manufacturers can expertly trade off promotional frequency and depth to still offer value to consumers while preserving margins for themselves and retailers. This type of plan can be particularly effective in low growth categories and in markets where big retail is dominant, such as the US, UK, Australia, and Germany.

For this approach to succeed, manufacturers must do six critical things:

1. Use smart analytical techniques to understand consumer needs, behaviors, and economics.

2. Develop strong promotional evaluation and modeling capabilities to understand the impact of individual promotional mechanics on manufacturer economics, retailer economics, and consumer behavior.

3. Create strategies that result in a positive economic equation for retailers and convince them of this.

4. Understand competitor behavior and create risk mitigation plans against contingencies.

5. Balance total brand support carefully between promotions, above-the-line spend, and shopper marketing activity to shift emphasis from “trading” to “brand building.”

6. Work collaboratively across functions, including Marketing, Sales, Strategy, and Finance to deliver all of the above.

Nothing herein is intended to be investment advice. Investment in the stock market involves risk of loss. Past performance is no guarantee of future returns.