Sevens Report Quarterly Letter
Better Communication. Stronger Client Relationships.
More Time for Your Business and Family.
All the scary headlines about banks runs, financial crisis 2.0 and a possible looming recession is making it harder for clients to avoid the urge to “get out” of markets and abandon their long-term financial plan.
That’s what I gathered from advisors I’ve spoken to over the past several weeks, as the eruption of the regional banking crisis following the collapse of Silicon Valley Bank and Signature Bank has rattled investors even more than before, with some pulling their money from the markets and their banks, and putting it into their mattresses!
To a point, I get it. The list of headwinds on stocks is long and growing:
- High interest rates
- Still high inflation
- Possible recession
- Earnings declines and now,
- Worst banking crisis since 2008!
Yet, despite all these risks and headwinds, the S&P 500 was resilient in the first quarter and since the lows in October the market performance has been much better than the scary headlines would imply!
Keeping clients focused on that positive market reality and demonstrating to them you, their advisor, understand the risks for their money and can navigate this market successfully is critical to 1) Keeping clients on their long term financial plans and 2) Avoiding panic decisions like going to cash that can jeopardize long term goals!
One of the best ways advisors can show clients that they do understand the risks to their assets and can navigate this market environment is with a focused, non-generic high-quality quarterly letter.
That’s why, in 2018, I created the Sevens Report Quarterly Letter – so that all advisors could easily, efficiently, and effectively communicate with their clients.
And, I think that is especially true given the scary headlines about bank runs, financial crisis, and recession circulating in the financial and mainstream media right now! Our Q1 2023 Sevens Report Quarterly Letter will explain what’s happening with the banks, put the risks facing investors in the proper perspective, and emphasize that markets remain resilient!
I know 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 those plans have weathered financial crisis, bear markets, and pandemics, and they will weather this most recent market turmoil!
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 Monday, April 3rd) 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 Monday, April 3rd we will be sending our Sevens Report Quarterly Letter for Q1 2023 to our paid subscribers so they can have their letter sent (or ready to be sent) within the first few trading days of the new 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 Q4 2022 Sevens Report Quarterly letter that was sent to paid subscribers on January 3rd so you can see exactly what the product looks and feels like:
Easing inflation pressures and a resolution of the fiscal turmoil in the United Kingdom fueled a strong rally in stocks and bonds early in the fourth quarter, but hawkish Fed guidance, disappointing economic data, and rising global bond yields weighed on markets in December and the S&P 500 finished the fourth quarter with only modest gains that capped the worst year for the index since 2008.
The end of the third quarter was volatile as global bond yields spiked in response to the spending and tax cut package proposed by former U.K. Prime Minister Liz Truss, and that volatility continued as the fourth quarter began with the S&P 500 hitting a new low for the year on October 13th. However, that market turmoil ultimately resulted in political change in the U.K. as PM Truss resigned on October 20th and was replaced by former Chancellor of the Exchequer Rishi Sunak, who immediately took steps to disavow Truss’ plan and restore market confidence in U.K. finances. In part due to a very short-term oversold condition and following a no-worse-than-feared third-quarter earnings season, stocks and bonds staged large rallies in mid and late October and the S&P 500 finished the month with a substantial gain, rising 8.1%.
The positive momentum for stocks and bonds continued in early November thanks to a growing number of price indicators that implied inflation pressures had finally peaked. The October CPI report (released November 10th) showed the first solid decline in consumer price data for the year and that was echoed by price indices contained in national and regional manufacturing reports, as well as other official inflation statistics. Both stocks and bonds enjoyed solid gains in response to the data because while inflation remained far too high on an absolute level, markets hoped these declines would result in the Federal Reserve not raising interest rates as high as previously feared. Those hopes were boosted after the Thanksgiving holiday when Fed Chair Powell stated that interest rates would only need to rise “somewhat” higher than previous projections. Investors took that “somewhat” remark as a sign that previous estimates for rate hikes were too aggressive and that extended the rally into early December. The S&P 500 ended November at multi-month highs with another solid monthly gain of 5.6%.
However, investor optimism faded in December as global central banks signaled that they were still committed to aggressively hiking rates, economic data showed clear signs of slowing growth, and several negative earnings announcements raised concerns of an earnings recession in 2023. First, at the December meeting, the Fed revealed that they expected rate hikes to take the fed funds rate above 5% (from the current 4.375%), which was higher than market expectations. Then, economic data released in mid-December, including regional manufacturing indices and the November retail sales report, showed economic activity was slowing. Finally, both the European Central Bank and the Bank of Japan surprised markets with hawkish policy decisions, providing yet another reminder to investors that rates will continue to rise in 2023 despite clearly slowing global economic growth and the increasing threat of recession. Stocks dropped from mid-December on, and the S&P 500 ended the month of December with a loss of 5.90%.
In sum, 2022 was the most difficult year for investors from a return and volatility standpoint since the Global Financial Crisis. Multi-decade highs in inflation combined with historically aggressive Fed rate hikes and growing concerns about economic and earnings recessions to pressure both stocks and bonds. The S&P 500 posted its worst performance since 2008 while major benchmarks for both stocks and bonds declined together for the first time since the 1960s, punctuating just how disappointing the year was for investors.
Q4 and Full Year 2022 Performance Review
Unlike the first three quarters of 2022, when all four major indices saw quarterly declines, performance was mixed during the fourth quarter as the Dow Jones Industrial Average rose sharply, while the S&P 500 and Russell 2000 were solidly higher. Like most of 2022, however, the Nasdaq lagged and fell slightly in the fourth quarter. Expectations for higher rates, slowing economic growth, and underwhelming earnings weighed on the tech sector in the fourth quarter, which was the case for much of 2022. Conversely, less economically sensitive companies that trade at lower valuations than tech stocks outperformed again as investors continued to shift towards defensive sectors amid growing recession fears. On a full-year basis, all four major indices posted negative returns, with the Dow Jones Industrial Average relatively outperforming while the Nasdaq badly lagged the other major indices.
By market capitalization, large-caps slightly outperformed small-caps in the fourth quarter but modestly outperformed throughout 2022. Concerns about future economic growth and higher interest rates (which can impact small-caps disproportionately due to funding needs) were the main drivers of large-cap outperformance and small-cap underperformance throughout 2022. Small-cap stocks did show some resilience in the fourth quarter with the Russell 2000 index registering a solid gain as investors’ hopes for a peak in inflation and ultimately interest rates, led to some dip buying in the segment.
From an investment style standpoint, value massively outperformed growth all year and that trend continued in the fourth quarter. Underwhelming earnings weighed on tech stocks in the final three months of the year, while concerns about slowing economic growth combined with rising bond yields hit richly valued tech stocks throughout 2022. Value stocks, meanwhile, were viewed as more attractive in the market environment of 2022 due to lower valuations and exposure to business sectors that are considered more resilient than high-growth parts of the market.
On a sector level, 10 of the 11 S&P 500 sectors finished the fourth quarter with a positive return, although only two of the 11 ended 2022 with gains. Energy outperformed other sectors not just in the fourth quarter but for all of 2022. In the fourth quarter, energy stocks were helped by progress on the post-Covid economic reopening in China which increased energy demand expectations, while a falling dollar was an added tailwind for commodities including oil and gas. More to that point, the other strong sector performers in the fourth quarter were industrials and materials, which also benefitted from an improving Chinese demand outlook and a weaker U.S. dollar. For the full year, energy was, by far, the best-performing sector in the market as an early-year surge in oil and natural gas prices in response to increased geopolitical risks and reduced Russian supply helped push energy stocks sharply higher. Defensive sectors, specifically utilities and consumer staples, were the next best-performing sectors finishing the year with small gains and losses, respectively, again as investors rotated towards less economically sensitive corners of the market amid rising recession risks.
The tech sector and those sectors with overweight exposure to high-growth companies badly lagged in the fourth quarter and over the course of 2022. In the fourth quarter, communication services were only fractionally positive while the consumer discretionary sector posted a negative return on weakness in high-growth internet and consumer stocks. For the full year, those same two sectors posted the worst returns in the S&P 500, as investors shunned richly valued, growth-oriented tech companies.
Internationally, foreign markets handily outperformed the S&P 500 in the fourth quarter thanks to a large bounce in Chinese stocks as Beijing ended its “Zero-Covid” policy and commenced an economic reopening, while a falling dollar boosted global economic sentiment. Foreign developed markets outperformed emerging markets in the fourth quarter thanks in part to a large bounce in U.K. shares following the resignation of PM Truss and the abandonment of her fiscal spending and tax cut plan. For the full-year 2022, foreign developed markets registered solidly negative returns, but thanks to the fourth-quarter rally, relatively outperformed the S&P 500.
Commodities saw gains in the fourth quarter as both oil and gold logged positive returns. A falling dollar paired with an improving outlook for Chinese demand as the government moved towards reopening their economy pushed oil higher throughout the quarter. Gold, meanwhile, saw steady gains in the final three months of the year thanks primarily to the decline in the U.S. dollar. For 2022, commodities posted a large, positive return due to the significant gains in oil futures and other energy commodities that came in response to geopolitically driven supply concerns following Russia’s invasion of Ukraine. Gold, however, saw only a slightly positive return for 2022 as sharp rises in the U.S. dollar and Treasury yields midyear weighed on the yellow metal, limiting gains.
Switching to fixed income markets, the leading benchmark for bonds (Bloomberg Barclays US Aggregate Bond Index) realized a positive return for the fourth quarter but declined sharply for the full year of 2022, as more-aggressive-than-expected Fed rate hikes combined with decades-high inflation pressured most bond classes.
Looking deeper into the fixed income markets, longer-duration bonds outperformed those with shorter durations in the fourth quarter, as bond investors reacted to more-resilient-than-expected economic data. For the full year, shorter-term bonds handily outperformed longer-duration bonds as they were less impacted by Fed rate hikes and spiking inflation.
Turning to the corporate bond market, both higher-yielding, lower-quality corporate bonds and investment grade bonds posted similarly positive returns for the fourth quarter, as investors reacted to the possible peak in inflation. Lower-yielding and safer investment-grade corporate debt underperformed for the full year, however, as investors shunned those bonds for shorter-duration debt and corporate debt with higher yields.
Q1 and 2023 Market Outlook
Markets ended 2022 on a decidedly negative note and the December losses helped to ensure that 2022 was the worst year for stocks since 2008 and the worst year for bonds in multiple decades, as both asset classes posted annual declines for the first time since the 1960s.
The losses in stocks and bonds were driven by decades-high inflation, a historic Fed rate hike campaign and geopolitical unrest. But while those factors were clear negatives for asset prices in 2022, it’s important to note that as we enter 2023, the market is approaching a potentially important transition period that could see each of these headwinds ease in the months ahead.
First, inflation has shown definitive signs of peaking and declining. The Consumer Price Index has fallen from a high of 9.1% in June to 7.1% in November, while other metrics of inflation have registered similar declines. Now, to be clear, inflation remains much too high in an absolute sense, but if price pressures ease faster than expected, that will present a positive surprise for markets in the first several months of 2023.
Second, after a historically aggressive rate hiking campaign in 2022, the current Fed hiking cycle is likely nearly complete. In December, the Federal Reserve signaled that it expected the peak interest rate to be just 75 basis points higher than the current rate. That level could easily be reached within the first few months of 2023 and the Fed ending its rate hike campaign will remove a significant headwind from asset prices.
Finally, while both economic growth and corporate earnings are expected to decline in 2023, those negative expectations have been at least partially priced into stocks and bonds at current levels. As such, if the economy or corporate America proves to be more resilient than forecasts, it could provide a positive spark for asset markets in early 2023.
As we start the new year, we should expect financial media commentary to be focused on the 2022 losses and current market risks, including earnings concerns and recession fears. But the market is a forward-looking instrument, and while there are undoubtedly economic and corporate challenges ahead in 2023, some of those best-known risks are partially priced into markets already, and the truth is that there are potential positive catalysts lurking as we start a new year.
More broadly, market history is clear: Declines of the magnitude we saw in 2022 are usually followed by strong recoveries, not further weakness. The S&P 500 hasn’t registered two consecutive negative years since 2002, while bonds, represented by the Bloomberg U.S. Aggregate Bond Index, have never experienced two negative consecutive years. And that reality underscores an important point, that market declines such as we witnessed in 2022 have ultimately yielded substantial long-term opportunities in both stocks and bonds.
The stagflation of the 1970s and sky-high interest rates of the early 1980s eventually gave way to the strong economic growth and market rally of the 1980s. The dot-com bubble burst of the early 2000s was followed by substantial market gains into the mid-2000s. The financial crisis, which remains the most dire economic situation we’ve experienced in modern market history, was followed by strong rallies in the years that followed, and not even the worst global pandemic in over 100 years could result in sustainably lower asset prices.
As such, while we are prepared for continued volatility and are focused on managing both risks and return potential, we understand that a well-planned, long-term-focused, and diversified financial plan can withstand virtually any market surprise and related bout of volatility, including multi-decade highs in inflation, historic Fed rate hikes, geopolitical unrest, and rising recession risks.
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 intense volatility is 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.
We remain vigilant towards risks to portfolios and the economy, and we thank you for your ongoing confidence and trust. Please 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