Research | Merriman

Quarter in Review: Q1 2023 Market Update

by Kristi de Grys | Apr 18, 2023 | Advisors, Kristi de Grys, News, Research, Tech Focus

Optimism and fear drove markets in equal measure this past quarter. The year started off with a strong rally as the prevailing sentiment was that inflation was easing and if a recession did occur it would be mild. The MSCI All Country World Index (ACWI) ended the month of January up 7.17%. Doubts came creeping in late February and global stocks fell 2.9%. Then all-out fear drove markets sharply down in early March as the possibility of a full-blown banking crisis was raised with the collapse of Silicon Valley Bank and the regulatory takeover of Signature Bank. Quick action in the U.S. and abroad to stabilize the banking system allayed fears over the coming weeks and most segments of the market rallied to end the quarter in positive territory for the year.

While we can wish that the strong market ups and downs driven by the back and forth between optimism and fear would abate, that seems unlikely in the near term. Inflationary pressures appear to be easing but there is still a great deal of uncertainty about how things will play out in the short term. There is also the looming debate over the U.S. debt ceiling. No politician is motivated to have their political career wrecked by the economic fallout of a true default but there seems to be no doubt that there will be much political wrangling leading up to the final outcome. The lack of a clear path to resolution seems likely to drive volatility in the market. As we saw with the post-bank scare rally in late March, even in times of fear and uncertainty, markets can deliver positive returns.

We have seen continued strength in some sectors and major shifts in other areas. Even before the March banking scare, U.S. mega-cap growth stocks had been rebounding in ways not seen since late 2020. Ninety percent of the S&P 500’s gain in the first quarter came from the top 10 stocks and 50% from the top five. Whether this trend will continue or is simply driven by investors seeking perceived safety remains to be seen. While valuations of U.S. large-cap and U.S. growth stocks have fallen from their 2021 highs, by most measures, they remain above historical averages and above the valuations of small-cap and value stocks. While valuations can have some predictive power over long time frames, markets continue to remind us that in the short term anything can happen.

Disclosure: All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be taken as such. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. As always please remember investing involves risk and possible loss of principal capital and past performance does not guarantee future returns; please seek advice from a licensed professional.

Market Response to Russian Invasion of Ukraine

by Kristi de Grys | Mar 15, 2022 | Advisors, Kristi de Grys, News, Research

Russia’s threats and invasion of Ukraine have upset global markets and driven them lower to start the year. Losses and volatility are typical when the future course of events is highly uncertain. However, as shown in the graphic below, what happens in the short term usually has little bearing on future market returns.¹

Intra-year market declines are much more common than one might realize. Every year since 1979, the U.S. market (represented by the Russell 3000 Index) has experienced an intra-year decline of at least 2.7%. In 1987, the market experienced an intra-year decline of 33.1% but still finished the year with a positive return.²

We are biologically hard-wired to respond to uncertainty with action. When we were hunter-gatherers, uncertainty looked like a lion waiting in ambush and action was a beneficial response. When it comes to markets, the opposite is usually true. Time after time, we have seen that sticking with a carefully designed, diversified allocation through ups and downs yields a better outcome compared to selling out and trying to guess when to buy back in.

As we saw in March 2020, early in the pandemic, what feels like the worst of times can, in hindsight, be a market bottom followed by a strong rally. It is also very possible we will see further declines from here. There are many players whose decisions will influence the trajectory of events as well as new paradigms at play, like economic sanctions of unprecedented size and speed of application, and cyberoperations assisted by commercial companies. Given the complexity of the conflict, it is impossible for anyone to predict the outcome or its effects on the global economy.

What we do know is that diversified portfolios are designed to weather uncertainty, and that human ingenuity, perseverance, and adaptability have enabled businesses and their investors to prevail even through difficult times, especially when they are on the side of democracy and freedom. The Ukrainian businesses switching from making farm combines to tank-stopping hedgehogs and metal road spikes, and turning malls into logistics warehouses are great examples.

While our portfolios are diversified, the emerging market funds we recommend have less than 1% of their assets currently in Russian companies and as of March 4, our largest emerging market fund provider, Dimensional, has announced they will be divesting from all Russian assets. We anticipate the others will follow shortly. The markets are signaling that the biggest fear right now is inflation, especially if Western nations choose to cut off the flow of Russian energy. Historically, value stocks have done better in inflationary periods than other areas of the market and we are seeing this with our value positions outperforming the growth segments of the market. With their heavier exposure to natural resource companies, we anticipate this trend could continue if commodity prices and inflation continue to rise.

Hopefully you can find peace of mind knowing that your Merriman portfolio will weather the current storm. If you want to act, you can feel confident in your ability to donate in support of humanitarian aid or the valiant fight of the Ukrainian people, or take action to help reduce dependence on Russian energy.

Sources:

¹ Vanguard

² Dimensional Fund Advisors.

Disclosure: The material is presented solely for information purposes and has been gathered from sources believed to be reliable; however, Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal, or accounting advice, and noting contained in these materials should be relied upon as such. Past Performance is no indication of future results. The Russell 3000 Index is a market-capitalization-weighted equity index maintained by FTSE Russell that provides exposure to the entire U.S. stock market. The index tracks the performance of the 3,000 largest U.S.-traded stocks, which represent about 97% of all U.S.-incorporated equity securities. Any reference to an index is included for illustrative purposes only, as an index is not a security in which an investment can be made. Indices are unmanaged vehicles that serve as market indicators and do not account for the deduction of management fees and/or transaction costs generally associated with investable products.

Thinking Through Cryptocurrencies | Part 3

by Lev Marcus | Aug 10, 2021 | Investing 101, Lev Marcus, Merriman's Take, Research, Tech Focus

It seems like everyone nowadays is talking about cryptocurrencies. Whether it’s the proselytizers on CNBC or the techie next door, it feels as if everyone is either talking about or buying into this next big thing.

Trying to adequately explain an emerging technology and it’s economic impact in less then a few thousand words is bound to neglect certain facets of the subject. This series attempts to cover the technical specification of cryptocurrencies, how they can be viewed in an investment environment, the narratives that accompany this new technology, and the future impact, applications, and risk of the cryptocurrency universe.

If you missed Part 1 or Part 2, check them out. In Part 3, we consider what the future could look like.

What Might the Future Look Like?

Cryptocurrencies are experiencing a golden age where new types of assets and new uses for blockchain technologies are emerging every day. However, in this case, widespread use does not automatically translate to amazing long-term investment returns. Sustaining long-term high investment returns requires a combination of low supply and high demand.

When it comes to low supply, there is certainly a limit to the amount of a given cryptocurrency. However, new cryptocurrencies can and have continued to be created. Dogecoin was launched in 2013 and now has a circulation value which has exceeded $80B. Polkadot was launched in 2017 and has a circulation value that has exceeded $10B. When supply dwindles and prices rise, entrepreneurial spirits enter markets and create supply, especially when the barriers to entry are relatively low.

Cryptocurrencies have a few hurdles ahead of them. The most notable of these is the possible environmental impact of cryptocurrency mining. According to Digiconomist, the annualized carbon footprint of Bitcoin mining is comparable to the country of Hungary and is growing every year. As more and more individuals flock to the cryptocurrency space, the power necessary to rectify transactions grows. There are new cryptocurrency assets such as Cardano that seek to use optimized protocols to decrease the power required. However, because most cryptocurrencies utilize a proof-of-work methodology, there is a lower limit on the computation required for the cryptocurrencies to remain secure. This means that there will always be a certain energy requirement for these cryptocurrencies.

Bitcoin has also made a name for itself in non-reputable markets such as money laundering, drug trade, and even human trafficking. Blockchain analysis company Chainalysis tracked just under $930,000 worth of Bitcoin and Ethereum payments to specific addresses associated with child sexual abuse material. This was a 32% increase in payments from 2018 and a total of a 310% increase since 2017. Financial institutions in the U.S. filed over 2,000,000 suspicious activity reports (SARs) in 2019. The increasing use of cryptocurrencies in illegal transactions makes it harder for U.S. organizations to trace the financial trail.

Chainalysis also reported on Bitcoin use in terrorism financing. Known terror organizations would create campaigns to “donate to the jihad” with QR codes leading to Bitcoin addresses.

It’s important to point out that while these illegal organizations did use Bitcoin, there are other non-cryptocurrency methods that they could have used. Before Bitcoin, and even today, many black-market or illicit deals are done in cash. Former Treasury Secretary Larry Summers endorsed an idea published by Harvard president emeritus Peter Sands to all but get rid of cash. A case study in Missouri looked at the mid-1990s transition from distribution of federal welfare via cashable check to a preloaded debit card. Researchers found that crime in areas that moved away from cash dropped roughly by 10%.

Another inherent risk to the cryptocurrency markets that has increased its probability of late is Bitcoin or other cryptocurrencies becoming illegal to own. China has recently banned financial institutions from offering services involving cryptocurrencies. The U.S. government also showed its ability to pursue Bitcoin transactions after the Colonial Pipelines hack in spring of 2021. The hack, which yielded hackers $4.4 million was recovered as the government pursued the digital addresses associated with the hackers. The combination of Chinese regulation and the ability of governments to track and recover stolen or ransomed cryptocurrency assets is a direct blow to the claim that cryptocurrencies are outside of government control.

So where does this leave the average investor when it comes to Bitcoin? As an emerging asset class, it’s possible that the Bitcoin narrative is a self-fulfilling prophecy. In a period of low interest rates and inflation concerns, there are some good arguments as to why putting a small portion of a portfolio in cryptocurrency assets might provide some benefit, just as a small allocation to gold can provide benefits in certain macroeconomic environments.

Cryptocurrencies are volatile and may provide some correlation benefit with a small, value-tilted portfolio. The recent rapid increase in price across the cryptocurrency universe is fairly concerning as no other time in history has seen an asset class that has grown at such a rapid rate relative to inflation. It is also important to remember that in the case of gold rushes, it was the merchants who traded in goods who on average made the most profit, not the miners themselves.

We at Merriman do not shy away from new or emerging asset classes. Historically, we have either started new funds or have been some of the first investors in an asset class. The research and portfolio management team at Merriman has been monitoring the cryptocurrency market for many years.

As long-term investors, we try to develop our portfolios to maximize the probability of getting higher returns than the market. While Bitcoin and other cryptocurrency assets have shown extremely high returns for the past decade, this is not necessarily indicative of future returns. As said on almost every investment document, “Past performance is no guarantee of future results.”. At this moment in time, the cryptocurrency market is too risky and speculative to recommend in our portfolios. This stance may change in the future are the market evolves. Even though we do not recommend holding cryptocurrencies in our portfolio, it is OK to buy a little with some play money. It’s fine to play roulette at a casino as long as you only bet what you are willing to lose.

At Merriman, we will continue to monitor and research cryptocurrency assets so that if an expected return benefit appears, we can implement it for our clients.

Disclosure: The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such.

It is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment product. Opinions expressed by Merriman are based on economic or market conditions at the time this material was written. Economies and markets fluctuate. Actual economic or market events may turn out differently than anticipated. Any reference to an index is included for illustrative purposes only, as an index is not a security in which an investment can be made. Indices are unmanaged vehicles that serve as market indicators and do not account for the deduction of management fees and/or transaction costs generally associated with investable products. As always please remember investing involves risk and possible loss of principal capital and past performance does not guarantee future returns; please seek advice from a licensed professional. Advisory services are only offered to clients or prospective clients where Merriman and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Merriman unless a client service agreement is in place. All composite data and corresponding calculations are available upon request.

Thinking Through Cryptocurrencies | Part 2

by Lev Marcus | Jul 27, 2021 | Investing 101, Lev Marcus, Merriman's Take, Research, Tech Focus

It seems like everyone nowadays is talking about cryptocurrencies. Whether it’s the proselytizers on CNBC or the techie next door, it feels as if everyone is either talking about or buying into this next big thing.

Trying to adequately explain an emerging technology and it’s economic impact in less then a few thousand words is bound to neglect certain facets of the subject. This series attempts to cover the technical specification of cryptocurrencies, how they can be viewed in an investment environment, the narratives that accompany this new technology, and the future impact, applications, and risk of the cryptocurrency universe.

Recent Market Conditions

Economist Robert Shiller, the 2013 Economics Nobel Prize co-recipient, noted a similarity between the current Bitcoin movement and the bimetallism movement of the late 1800s. Shiller’s recent book Narrative Economics focuses on the stories or ideas that we tell ourselves that influence our economic decisions.

The narrative of Bitcoin is a fascinating story to tell. It starts with intrigue as the founder (or founders) of Bitcoin, Satoshi Nakamoto, has never been identified or even confirmed to exist. This creates a great human-interest story and helps to grab the attention of individuals.

We follow the human-interest story by delving into the complexity of cryptographic hash functions and network protocols that few understand. This complexity and need for experts to understand presents the next draw of Bitcoin.

Similar to young people of the late 1800s and their enthusiasm with the abstruse monetary economics of bimetallism, Bitcoin advocates take pleasure in the fact that it is only a select few (including themselves) that understand this complicated subject.

Bitcoin and cryptocurrencies have also caught the eye of various pop culture icons. In January of 2020, Bitcoin rose 20% in a matter of hours after Elon Musk famously changed his Twitter Bio to #bitcoin. Jack Dorsey, the CEO of Twitter and Square, has been a vocal supporter of Bitcoin and even sold his very first tweet in the form of a Non-Fungible Token (NFT) for 1,630 Ethereum (or $2.9 million). This allure of seeing individuals with household names using cryptocurrencies provides yet another boost in the awareness and interest created by the narrative of Bitcoin and cryptocurrencies.

Add to this the fact that in the past eight years (11/5/15 – 4/26/21) Bitcoin has had an annualized return of 82%. This has led to many sites and brokerages promoting advertisements showing these high levels of returns without mentioning the fact that Bitcoin has also suffered three 75% corrections in the 10+ years of its existence. Unfortunately, our human brains were wired millions of years ago and tend to value recent information over past information. Throughout history, this wiring has led to commodity fads. One of the earliest and most spectacular was “tulip mania,” a three-year period in the mid-1600s when tulip bulbs appreciated at an annualized rate of 200% per year.

While we have seen many of these types of narratives before, the combination of them in Bitcoin provides something attractive and seemingly new; and the ease and accessibility has never been higher, facilitating high demand. Financial applications such as PayPal can give just about anyone with a few bucks access to buying this exciting new asset class.

Stay tuned for the last installment where we discuss the future of cryptocurrencies. And if you missed our first installment, you can find it here.

Disclosure: The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such.

It is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment product. Opinions expressed by Merriman are based on economic or market conditions at the time this material was written. Economies and markets fluctuate. Actual economic or market events may turn out differently than anticipated. Any reference to an index is included for illustrative purposes only, as an index is not a security in which an investment can be made. Indices are unmanaged vehicles that serve as market indicators and do not account for the deduction of management fees and/or transaction costs generally associated with investable products. As always please remember investing involves risk and possible loss of principal capital and past performance does not guarantee future returns; please seek advice from a licensed professional. Advisory services are only offered to clients or prospective clients where Merriman and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Merriman unless a client service agreement is in place. All composite data and corresponding calculations are available upon request.

An Interview With Dennis Tilley

by Merriman | Jul 22, 2021 | Dennis Tilley, Research

Our very own Director of Alternative Investments, Dennis Tilley, was interviewed by Technical Analysis of Stocks and Commodities. Read his interview about portfolio management and the benefits of market timing vs buy-and-hold strategies here.

If you would like to read more detailed thoughts from Dennis, you can find more at his blog Asset Class Trading.

Disclosure: All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such.

Thinking Through Cryptocurrencies | Part 1

by Lev Marcus | Jul 13, 2021 | Ask Merriman, Investing 101, Lev Marcus, Merriman's Take, Research, Tech Focus

It seems like everyone nowadays is talking about cryptocurrencies. Whether it’s the proselytizers on CNBC or the techie next door, it feels as if everyone is either talking about or buying into this next big thing.

Trying to adequately explain an emerging technology and it’s economic impact in less then a few thousand words is bound to neglect certain facets of the subject. This series attempts to cover the technical specification of cryptocurrencies, how they can be viewed in an investment environment, the narratives that accompany this new technology, and the future impact, applications, and risk of the cryptocurrency universe.

What Is a Cryptocurrency?

The first cryptocurrency, Bitcoin, was originally imagined as a system of value exchange that could bypass institutions and instead allow users to make transactions on a peer-to-peer basis. For such a network to succeed, there had to be a way to verify the veracity of the transaction for both parties.

This is where the revolutionary technology called the blockchain comes in. The blockchain can be visualized as its name suggests: a chain made up of individual blocks of transactions. At its heart, this is what Bitcoin is: a series of transactions leading up to the current moment. When an individual buys Bitcoin, they are simply adding their name to the transaction list (or ledger), saying, “I have bought x number of Bitcoins.” Of course, it’s not as simple as adding a line.

Bitcoin works by having computers (or nodes) confirm and document transfers. When a transaction between Person A and Person B occurs, this transaction is sent out over the Bitcoin network. These nodes then verify that Person A has the right amount of Bitcoin to transfer to Person B by looking at the blocks of historical transactions on the chain. Once the majority of nodes on the network (50%) verify that a transaction can take place, it is added to the blockchain transaction log.

This verification process is where Bitcoin miners come into the picture. Miners provide the computers and computer power needed to verify transactions. They provide this service and get “paid” for it by having the opportunity to mint a new Bitcoin. To mint a new Bitcoin, a miner must verify 1MB worth of transactions and find a solution to a cryptographic hash function, which is the difficult part. The Bitcoin miner who verifies the transactions and is the first one to determine the target hash is the one who gets to include a new transaction for themselves, essentially minting a Bitcoin. While cryptocurrencies differ in the exact way that they go about transactions and the minting of new coins, the Bitcoin method is a solid enough base to understand cryptocurrencies at their base level.

Where Do Cryptocurrencies Fit in the Investment Landscape?

Cryptocurrencies, especially Bitcoin, are sometimes referred to as digital gold. Like gold and other currencies, they are something that derives their value from the belief that they can be exchanged in the future for something else of value and that the future value will be greater than the present value. The term that is frequently used is “a store of value.” Perceptions of value can change much more quickly than physical objects, which leads to the volatility that has always been present in currency markets, digital and fiat.

One of the advantages of cryptocurrencies, unlike gold or silver, is the ability to store value in an even more concentrated physical form. A 100-gram gold bullion cost about $6,000 dollars in 2020. This gold bullion could be slipped into your pocket or placed in a safe. A small flash drive, smaller than the gold bullion, could essentially hold billions of dollars in Bitcoin.

As with gold, there is a physical limit to the number of Bitcoins that can be produced. There can only be 21 million Bitcoins in the current Bitcoin network. So far, almost 19 million have been mined. Many believe this commodity-like supply will result in the value of Bitcoin rising with inflation—or possibly even faster.

Cryptocurrency advocates have discussed how this feature also makes digital currencies immune to the hyperinflation that can result from governments printing money. On the one hand, that is true. However, on the other side of the coin, the creation of a new Bitcoin or other cryptocurrency via mining injects new money into the supply. And as has been seen with gold historically, short-term, localized abundance of even a limited supply commodity can result in hyperinflation. The famous 1849 Gold Rush in California is a perfect example of the phenomenon. The prices for various goods like eggs, bread, and boots in the local area rose to more than three times the original price. Allowing for the lower accuracy of CPI data from the late 1800s, there is general consensus that the various gold rushes of the era from the U.S., Australia, and South Africa all resulted in increased inflation rates. So, while cryptocurrencies may be more immune from government influence, it is unlikely that they are immune to supply and demand shocks.

Other types of cryptocurrencies, such as Ethereum or Cardano, offer different use cases by allowing the creation of new cryptocurrency assets or non-proof-of-work methods. The full effect of these other types of cryptocurrencies remains to be seen. One Ethereum-based crypto asset that has seen a lot of recent attention is the rise of Non-Fungible Tokens (NFTs). These tokens represent a unique digital item and are not interchangeable. This has created a marketplace for artists to sell digital items with the authenticity guaranteed by the blockchain. Many of the applications of varying alternative cryptocurrencies are still being figured out at this time. It has yet to be seen whether these become alternate stores of value or simply new, more efficient ways to transact.

Watch for the next installment where we discuss cryptocurrencies and recent market conditions.

Disclosure: The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such.

It is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment product. Opinions expressed by Merriman are based on economic or market conditions at the time this material was written. Economies and markets fluctuate. Actual economic or market events may turn out differently than anticipated. Any reference to an index is included for illustrative purposes only, as an index is not a security in which an investment can be made. Indices are unmanaged vehicles that serve as market indicators and do not account for the deduction of management fees and/or transaction costs generally associated with investable products. As always please remember investing involves risk and possible loss of principal capital and past performance does not guarantee future returns; please seek advice from a licensed professional. Advisory services are only offered to clients or prospective clients where Merriman and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Merriman unless a client service agreement is in place. All composite data and corresponding calculations are available upon request.