Sevens Report Quarterly Letter
Better Communication. Stronger Client Relationships.
More Time for Your Business and Family.
How bad has the market been in the first half of 2022?
It’s been one of the worst starts to a year on record!
The S&P 500 has only lost more than 15% through the first six months of the year five times since 1932. Barring a major rally over the next few days, 2022 will become the sixth time!
And, the fact that stocks are down shouldn’t surprise us. After all, this market and the economy are facing significant headwinds:
- The highest inflation rate since 1982 (above 8% per year).
- The most aggressive rate hikes since the early 1990s (1.5% of tightening so far with more to come)
- The highest geopolitical tensions in decades (between Russia and the West)
- Growing concerns about an imminent recession
- Worries about a corporate earnings recession
And, as we start the second quarter, none of these issues are close to being resolved, so at a minimum, we should prepare for more volatility.
Between the increase in market volatility and the seemingly relentless negative headlines, I’ve noticed an increase in the number of acquaintances and friends who are asking if they should just go to cash.
But, we know from market history that abandoning a long-term financial plan, even amidst intense market volatility, has always been the wrong move over the longer term, so one of the advisors’ biggest challenges in this market is to make sure clients don’t abandon their long term plan and pull money out of the market.
One of the best ways investors can keep clients focused on their longer-term goals is through effective communication that demonstrates to the client that his or her advisor understands the risks and opportunities in the markets and remains focused on the longer-term goals!
One of the most effective ways advisors can do that is through a quarterly letter.
But writing a quarterly letter is both time-consuming and difficult. That’s why many advisors don’t seize this opportunity to effectively communicate with their clients and show that they are on top of markets and monitoring risks to portfolios. A quarterly letter is one of the best ways an advisor can remind clients of the benefits of sticking to a well-designed financial plan – because in 2020 those plans withstood the worst pandemic in 100 years, and those plans will almost certainly withstand a hawkish Fed, high inflation, and geopolitical stress.
In 2018, I launched a new product designed to help advisors more efficiently and effectively produce a high-quality, value-add quarterly letter for clients.
It’s called the Sevens Report Quarterly letter, and based on customer feedback, 2020 made that product more valuable than ever, because while markets have recovered there’s still a lot of uncertainty ahead and clients want to know their advisor is in control of their portfolios.
An RIA subscriber sent us this when we released the Q1 2020 Quarterly Letter:
“I wanted to thank you both for the letter that was made available this week. I’ve seen really good response from clients. I know you all are very busy, so thank you and Tom for taking the time to provide us something extra.”
Bottom line, numerous studies have shown that consistent client communication leads to better relationships, more referrals and better client retention, but a generic, non-specific letter from a broker’s CIO isn’t going to cut it.
Especially in this environment, we know that writing a quarterly letter that leaves clients impressed and feeling good about the advisor/client relationships is difficult!
On average, the advisors we spoke to said they spent between six and 10 hours researching, writing, editing and proofing their quarterly letters. If you’re as busy as most of the advisors I know, that’s way too much time and stress to devote to a quarterly letter.
That’s why we write a complete and finished quarterly letter for our advisor subscribers.
On the first business day of every quarter (the upcoming quarterly letter will be sent on Friday, July 1st) we email current quarterly letter subscribers:
- A complete, edited and finished client letter, delivered in a word document so it can easily be edited.
- Instructions on how we think you should submit the letter to increase compliance approval.
- A comprehensive back-up sheet to send to compliance along with your letter that cites any statements and verifies all return data.
We know getting the letter through compliance can seem like a daunting challenge, but the overwhelming majority of our quarterly letter subscribers have their letters approved by compliance.
And, to provide you extra peace of mind, we offer a full refund if compliance rejects the letter for any reason!
We write a quarterly letter in the voice of an advisor, directed towards clients (and prospects), that our subscribers can edit (if they choose to) and send along as their own.
That means you can:
- Use it “as is.” Meaning put it on your letterhead, get the approval, sign it, and ship it right out the door.
- Edit it as you see fit, using the content in conjunction with your own takes.
- Send it to anyone you like: clients, prospects, family and friends.
And, since we send you the content, it can be approved by compliance because it is coming from YOU.
On Friday, July 1st we will be sending our Quarterly Letter for Q2 2022 to paid subscribers so they can have their letter sent (or ready to be sent) within the first few trading days of the third quarter.
Sevens Report Quarterly Letter template will contain:
- A macro “look back” at the most-recent quarter that will explain what factors drove the markets.
- Important performance data for major asset classes and various indexes.
- A look ahead in the coming quarter including general analysis of risks and opportunities (but, no predictions).
- And, like the Sevens Report, it’ll be well-written, simplified, and brief.
But we can only explain the letter so much. To get the real value of our letter, you need to see it for yourself.
So, we’ve included our Q1 2022 Sevens Report Quarterly letter that was sent to paid subscribers on April 1st so you can see exactly what the product looks and feels like:
After a historically calm 2021, volatility returned in the first quarter of 2022, as inflation surged to 40-year highs, the Federal Reserve promised to raise interest rates faster than previously thought, and Russia surprised the world with a full-scale military invasion of Ukraine, marking the first major military conflict in Europe in decades. Those factors fueled a rise in volatility and pushed stocks lower in the first three months of the year.
Broad market volatility began to pick up during the first few days of 2022 as inflation readings hit multi-decade highs, confirming that price pressures were still accelerating. That prompted multiple Federal Reserve officials to signal that interest rates will rise faster than markets had previously thought, including a possible rate hike in March. The prospect of sooner-than-expected interest rate hikes weighed on the sectors with the highest valuations, specifically growth-oriented technology stocks. The steep declines in the tech sector exacerbated market volatility in January. Additionally, while the fourth-quarter earnings season was solid, there were several large, widely held technology companies that posted disappointing results or forecasts, and that also contributed to general market volatility. Finally, in late January at the FOMC meeting, Fed Chair Powell clearly signaled that the Fed would be raising rates at the next meeting (in March) confirming to investors that interest rates were going to rise much more quickly than had been assumed just a few months prior. The S&P 500 ended January with the worst monthly return since March 2020 (the onset of the pandemic).
Volatility remained elevated in February with the market’s primary concern shifting from monetary policy to geopolitics as Russia amassed troops on the Ukrainian border, prompting warnings from the United States and other Western countries of an imminent invasion. The rising threat of a major military conflict in Europe for the first time in decades further weighed on stocks in early February. That additional uncertainty, combined with still-stubbornly high inflation readings and continued warnings from Fed officials about future interest rate increases kept markets volatile throughout most of the month. Then on February 24th, Western warnings of a Russian invasion of Ukraine were fulfilled as Russia invaded in the early morning hours. The conflict sent essential commodity prices such as oil, wheat, corn, and natural gas surging as commodity producers and end users feared production disruptions and reduced supply. As one would expect, markets dropped in response to the invasion, and not just because of rising geopolitical concerns, but also as investors realized higher commodity prices will only add to existing inflation pressures, and in turn, possibly pressure corporate earnings and consumer spending. Geopolitical uncertainty combined with lingering inflation concerns and anxiety over the pace of Fed rate hikes weighed on stocks again in February, and the S&P 500 declined for a second straight month.
Markets remained volatile in early March, as hopes for a relatively quick ceasefire in Ukraine faded and commodity prices stayed elevated. Shortly after Russia’s invasion, the developed world united in a never-before-seen way against Russia, imposing crushing economic sanctions on the Russian economy. But while that demonstrated important unity against Russian aggression, it became clear that the sanctions would also have a negative impact on Western economies, especially in the EU, and that raised concerns about a global economic slowdown. However, stocks did mount a strong rebound in late March thanks to incrementally positive geopolitical and monetary policy news. First, the Ukrainian resistance stalled the Russian advance, and while the situation devolved into an intense humanitarian tragedy in Ukraine, fears of the conflict extending beyond Ukraine’s borders faded over the course of the month. Then, on March 16th, the Federal Reserve raised interest rates by 25 basis points, the first-rate hike in over three years. But the rate hike was no worse than markets feared, and that provided a spark for a “relief rally” in stocks that produced a solidly positive monthly return for the S&P 500 and carried the major indices to multi-week highs by the end of the quarter.
In sum, the first quarter of 2022 was the most volatile quarter for markets since the depths of the pandemic in 2020, as numerous threats to economic growth emerged. As we start the second quarter, investors will need to see incrementally positive progress across geopolitics, monetary policy expectations, and the outlook for inflation if the late-March rally is to continue.
First Quarter Performance Review
All four major equity indices posted negative returns for the first quarter of 2022, although the S&P 500 and the Dow Industrials saw only mild losses compared to the Nasdaq and Russell 2000. Investors rotated out of growth-oriented, high-P/E technology stocks and into sectors that were more exposed to the traditional economy which, generally speaking, trade at a cheaper valuation relative to the tech sector. That rotation benefitted the Dow Jones Industrial Average primarily while the Nasdaq Composite badly lagged both the S&P 500 and the Dow.
By market capitalization, large-cap stocks outperformed small-cap stocks in the first quarter, and that was to be expected given the geopolitical uncertainty and rising interest rates. Small-cap stocks typically are more reliant on debt financing to sustain their businesses, and therefore, rising interest rates can be a headwind on small-cap stocks. Additionally, investors flocked to the relative safety of large caps amid the rise in volatility over the course of the quarter.
From an investment style standpoint, value massively outperformed growth in the first quarter as select value ETFs registered positive returns over the past three months. Elevated volatility, geopolitical uncertainty, and the prospect of quickly rising interest rates caused investors to flee richly valued, growth-oriented tech stocks and rotate to more fairly valued sectors of the market.
On a sector level, only two of the eleven sectors in the S&P 500 finished the first quarter with a positive return. Energy was the clear standout as the sector benefitted from the increase in geopolitical uncertainty and subsequent surge in oil and natural gas prices in response to the Russia-Ukraine war. Utilities, a traditionally defensive sector, logged a modestly positive return as investors rotated to defensive sectors in response to elevated market volatility and geopolitical uncertainty. Finally, financials relatively outperformed the S&P 500 and saw only a small loss as the sector has historically benefited from rising interest rates, although concerns about exposure to the Russian economy weighed on many financial stocks in February and early March.
Sector laggards included the communication services, tech, and consumer discretionary sectors as they saw material declines in the first quarter thanks primarily to the broad rotation away from the more highly valued corners of the market. Specifically, internet stocks weighed on the communications sector, while online retail stocks were a drag on the consumer discretionary sector. Away from tech and tech-related sectors, most other sectors in the S&P 500 saw modest declines that did not stray too far from the performance of the S&P 500.
Internationally, foreign markets declined in the first quarter. Geopolitical uncertainty hit foreign markets early in the quarter, erasing what was moderately positive performance until that point. Emerging markets slightly lagged foreign developed markets due to a stronger U.S. dollar and rising geopolitical risks, but the underperformance was modest.
Commodities registered massively positive returns in the first quarter primarily thanks to rising geopolitical risks. Oil, wheat, natural gas, corn, and other essential commodities surged on a combination of actual production outages related to the Russia-Ukraine war (which reduced current supply) and buyers locking in supply for fear of any future production disruptions should the war continue for months or spread beyond Ukraine’s borders.
Switching to fixed-income markets, bonds registered some of the worst performance in years during the first quarter with most major bond indices declining as investors exited fixed-income holdings in the face of high inflation and as the Federal Reserve consistently signaled that it was going to raise interest rates faster than investors had previously expected.
Looking deeper into the bond markets, shorter-term Treasury Bills outperformed longer-duration Treasury Notes and Bonds as high inflation and the threat of numerous future Fed rate hikes weighed on fixed income products with longer durations.
In the corporate debt markets, investment-grade bonds saw materially negative returns and underperformed lower-quality but higher-yielding corporate debt, which also declined but more modestly so. This underperformance in investment-grade debt reflected the impact of rising Treasury yields, while the outperformance of high-yield corporate bonds served as a reminder of the still-positive outlook for the U.S. economy and corporate America, despite the macroeconomic headwinds of inflation, geopolitical unrest, and rising interest rates.
Second Quarter Market Outlook
As we start a new quarter, markets are facing the most uncertainty since the pandemic, as headwinds from inflation, less-accommodative monetary policy, and geopolitics remain in place.
Inflation still sits near a 40-year high as we start the second quarter and with major commodities such as oil, wheat, corn, and natural gas surging in response to the Russia-Ukraine war, it’s unlikely that key inflation indicators like the Consumer Price Index will meaningfully decline anytime soon. Until there is a definitive peak in inflation, the Federal Reserve is likely to continue to aggressively raise interest rates, and over time, higher rates will become a drag on economic growth.
The Federal Reserve, meanwhile, has consistently warned markets that aggressive interest rate hikes are coming in the months ahead, and this quarter we expect the Fed will reveal its balance sheet reduction plan, which will detail how the Fed plans to unload the assets it acquired via the Quantitative Easing program over the past two years. If the details of this balance sheet reduction plan are more aggressive than markets expect, or the Fed commits to more rate hikes than are currently forecasted by markets, that could weigh on stocks and bonds alike.
Finally, the Russia-Ukraine war continues to rage on, and the geopolitical implications have spread beyond the battlefield, as relations between Russia and the West have hit multi-decade lows. Meanwhile, crippling economic sanctions against Russia remain in place, while commodity prices are still very elevated, and the longer those factors persist, the greater the chance we see a material slowdown in the global economy.
But while clearly there are risks to portfolios as we start the new quarter, it’s also important to note that the U.S. economy is very strong and unemployment remains historically low, and that reality is helping support asset markets. Additionally, interest rates are rising but remain far below levels where most economists forecast that they will begin to slow the economy. Finally, consumer spending, which is one of the main engines of growth for the U.S. economy, is robust, and corporate and personal balance sheets are healthy.
In sum, the outlook for markets and the economy is uncertain, and we should all expect continued volatility across asset classes in the short term. But core macroeconomic fundamentals remain very strong while U.S. corporations and the U.S. consumer are, broadly speaking, financially healthy. So, while risks remain, as they always do, there are also multiple positive factors supporting markets, and it is important to remember that a well-executed and diversified, long-term financial plan can overcome bouts of even intense volatility like we saw in the first quarter.
At John Doe Advisors, we understand the risks facing both the markets and the economy, and we are committed to helping you effectively navigate this challenging investment environment. Successful investing is a marathon, not a sprint, and even temporary bouts of volatility like we experienced over the past three months are unlikely to alter a diversified approach set up to meet your long-term investment goals.
Therefore, it’s critical for you to stay invested, remain patient, and stick to the plan, as we’ve worked with you to establish a unique, personal allocation target based on your financial position, risk tolerance, and investment timeline.
Rest assured that our entire team will remain dedicated to helping you successfully navigate this market environment.
Please do not hesitate to contact us with any questions, or comments, or to schedule a portfolio review.
Let Us Do The Work
We view the start of the new quarter as a perfect opportunity to show clients that you’re not about to get blindsided by higher rates or rising inflation, and that a sound financial plan can weather any financial storm (including a historic pandemic).
And, in doing so, you can remind them just how valuable your services have been as you helped them navigate the most volatile year in the markets since the financial crisis!
Look, I know some of you are not planning on writing a quarterly letter at all.
If you’re in this camp, I’m worried you’re making a colossal mistake, especially with so much uncertainty looming. Potentially, you’re leaving yourself exposed to losing clients to advisors who may communicate more effectively!
Whether you use our service, please consider writing a letter this year as clients are surely very nervous given the recent volatility.
The rest of you are probably doing it, but begrudgingly.
It could take a day, a few days, or even a week or more to fine-tune and write this type of commentary. Again, quarterly letters in the last few years were easy as markets were calm, but the trading environment has changed drastically in the last month, and trying to explain this market to investors will be as hard as it has been in years.
Plus, you may be circulating it around the office for input and re-working it further after that. Your compliance department will probably want to inspect it, too!
To top it off, you might still be unsure if it’s any good.
And the ultimate kick in the teeth is fearing what your clients think upon reading it.
No one likes this process, and that’s why we provide:
- A high-quality letter. With strengthening the client relationship as the main goal, it will be written in a clear, concise, and plain-English format (similar to how we write Sevens Report and Sevens Report Alpha).
- A timely letter. Sevens Report Quarterly Letter is always delivered to paid subscribers on the first trading day of the new quarter.
- A turnkey solution. You can literally put your firm name, address, and logo on it, sign it, convert it to a PDF, and let it fly. Naturally, if you want to make any edits to it, feel free. That’s perfectly okay.
As I said earlier, this product has been a tremendous success, as it’s helping advisors: 1) Improve client communication, 2) Save Time, and 3) Reduce Stress.
And our quarterly letters have passed compliance at the biggest firms on Wall Street!
But, don’t take it from me, hear it directly from our subscribers (and your competition):
Thank you for this quarterly letter service. This is my first one and it is very helpful for my practice, and not to mention extremely well written. You and your team have been a very beneficial partner since I use your sevens report daily in my discussions with clients, and now parlaying this quarterly letter has been a great asset.
Thanks Tom!
M..J. RIA
“I really like this. I’m so glad I can lock this in and not have to worry about doing this in the future.”
W.V. UBS Advisor
“I love this.”
B.C. Stifel Advisor
Tom,
“I'll give this a try. I value my time at $1000/hr. If this saves me ten hours...you can do the math.”
J.R. Raymond James Advisor
Now is the time to ensure you have a turnkey quarterly letter, ready to send to clients to help turn this historic volatility and uncertainty into an opportunity to create a strong client/advisor bond.
Quality Research at a Compelling Value
In doing market research, we could only find one other firm that was writing a quarterly letter commentary for advisors.
The problem was you could only get it as part of a bundle of other products and the cost was $5,000/year!
I know for a fact that some advisors who use this particular group offered to pay $2,500 per year for the quarterly commentaries, separately. But, this firm hasn’t obliged.
Frankly, I think either of those amounts is outrageous.
So, I’m undercutting the competition on the cost by 80% per quarter. Or by 82%, annually.
Now, that’s a serious discount.
A Sevens Report Quarterly Letter subscription costs just $250/quarter (cancel any time, but no refunds on the current quarter’s letter) or $915 if you pay annually (you save $85 with this option).
The way we see it, if we help you retain just one client or grab one additional allocation by sending these quarterly letters to clients, it will more than cover the cost!
I see this as a win-win because we use our strength (writing about the markets) to help you:
- Save time (small survey of advisors averaged 6-10 hours working on their quarterly letters)
- Show you’re on top of markets with impressive market analysis
- Improve communication with clients and prospects
- Strengthen relationships
- Win additional assets from existing clients or prospects
And the best part is, it will be coming directly from you.
It will allow you to spend more time doing what you do best and doing what you want.
I look forward to welcoming you aboard and sharing our valuable research with you soon.
Best,
Tom Essaye
Editor
Sevens Report