First Commonwealth Bank Corporate Banker, Patrick Thomas, and Assistant VP, Allisha Zeman, presented Laurel Highlands Workforce & Opportunity Center Board Chairman, Patrick Wallace with a $5,000 check from their Educational Improvement Tax Credit Program. This program sponsored by the PA Department of Community and Economic Development provides vital funding in support of educational institutions throughout the Commonwealth.

Shown from left to right: Patrick Thomas, Patrick R. Wallace..

This past Saturday, December 9th, 2023, we graduated our second class of Clinical Medical Assistants at the Laurel Highlands Workforce & Opportunity Center in Greensburg, PA.

My late father-in-law, Dick Dickert, used to say “You can change the world one life at a time”. Our second class of cohorts started with 12 individuals, 8 of which completed the 28-week program who became Certified Medical Assistants and the newest employees to our local medical system. As we pledged to eliminate every barrier that has precluded them from getting an education, these 8 individuals can now provide for themselves, their families, and our community...

A recent Wall Street Journal article declared “Your Investment Strategy is Broken”. This declaration was made as stock and bond prices have moved in tandem negatively in 2022 and during parts of this year. Traditionally prices of stocks and bonds tend to move in opposite directions, balancing out volatility through various economic conditions. That has not been the case over the last two years as the Fed aggressively hikes rates to fight inflation. Apparently the author of this article believes those are the only two asset classes and that centuries-long human nature has permanently changed in the last three years. I feel this is a sensationalist and dangerous message to be dispersing and would like to restate why our investment approach is not one that is, or can ever be, “broken”.

Our investment strategy approach starts out by incorporating an emergency cash fund. What allows our strategy to work is patience, diversification, and discipline. Having an emergency cash fund so as not to be forced to liquidate long-term holdings at the wrong time is foundational to this. Once we have an adequate cash position built up we begin tailoring a customized plan and building a budget so we can begin appropriately investing long-term funds. Today we are getting back to an environment where we can earn a reasonable yield on cash. That is a welcomed development especially when compared to the recent past where we were lucky to get a couple basis points of yield on idle cash. This provides us a good short-term solution and allows patience while thoughtfully deploying capital into each of your long-term investment programs. Having adequate cash reserves is paramount, but as we will outline later in this note, excess comfort comes at a high price in the investment world...

The US economy is currently in the late cycle of an economic expansion where economic growth is slowing, but it is still positive. This phase is typically characterized by rising inflation, tighter monetary policy, and increased volatility in the stock and bond markets, all of which you have seen over the last two years. We have been warning of this as several indicators have begun to point towards the US being in late cycle and many signaling the US entering a recession in the next 12 months. The root cause of these developments has been the fed’s monetary policy of raising rates to mitigate the impact of higher inflation.

In the face of rising inflation, the Federal Reserve has embarked on their most aggressive rate hiking cycle in decades which will eventually slow down the economy. On the other hand, record low unemployment, large fiscal deficits, and strong household balance sheets have buoyed the economy and markets. But still, looking ahead, every time the Fed has embarked on a tightening cycle, an economic slowdown has followed, and with it, market volatility. However, the unusual nature of this post COVID cycle has distorted the normalization of rates and its impact on the overall economy. Even though the timing of this economic cycle may be different from past cycles, the principles for managing it remain the same.

Part of our job as your advisor is not only managing assets but managing emotions. Markets by nature are unpredictable because ultimately it is people that are transacting assets. We have commented before on the “manic depressive” nature of investors whereas they become too fearful close to the bottom and too euphoric close to the top. This creates both difficulties and opportunities. The difficulties come because it is never pleasant to weather a sell-off and see negative numbers. The opportunities come because extreme pessimism during selloffs is what gives investors opportunities to deploy capital into assets at attractive prices below their intrinsic value. This can come in the form of excess cash, dividend reinvestment, or companies themselves deploying retained earnings. This also hinges on owning a diversified portfolio of proven enterprises that have strong balance sheets and provide cash flow to shareholders even through the trough of market cycles. This has always been our bias...

May 10, 2023

Twenty years ago today, Covington Investment Advisors was incorporated. The success we have had with and for our clients has allowed us to grow, hire more talent, continually enhance our technology and research, purchase and expand our building, expand our overall processes to customize your financial plans, providing best in class investment management services and results and contribute to our communities' societal needs.

I do not hesitate to say we have formed the best-in-class advisory firm as we are not a broker dealer, nor are we affiliated with one. As an independent advisor, we have an open architectural structure to find the best financial solutions for you. We cut out all the unnecessary middlemen and their fees and we refuse any form of commissions. We are a fee-based only advisory firm. We do not sell products; we provide customized financial plans structured and managed on a separate account basis driven to address your individual investment and family needs. As a federally registered investment advisor with the Securities & Exchange Commission’s (SEC) oversight, we are a corporate fiduciary held to the highest standard of care...

Financial advisors and their clients must stand guard at AI’s gate.

In a quote whose origin has been misattributed to Mark Twain and Benjamin Franklin, it was Christopher Bullock writing in 1716’s “The Cobbler of Preston” who first noted, “’Tis impossible to be sure of anything but death and taxes.”

Fast forward 307 years, and we are forced to include computer-generated misrepresentations. And this modern malady is legion, and insidious, in so many things we do...

Business cycles are intervals of expansion followed by slowing growth or a recession in economic activity. These cycles are driven by many macroeconomic factors, but our government policies serve as the governor to the economic engine.

Current Fed policy measures are being implemented to break the current economic expansionary phase of this economic cycle. Yes, the Fed wants to break this exuberant economy and slow it down to mitigate the pressures of accelerated inflation. With the government actions to save us from COVID the economy has been running too hot. 500,000 new jobs created in January followed by 300,000 new jobs in February with 10.8 million current job openings posted the Fed has no choice but to take aggressive action to normalize growth and purge excesses from the economy.

Warren Buffet said it best about the effects of such measures: “It is at these times that when the tide of economic expansion runs out to sea we see who is swimming naked.” When liquidity, or access to capital, is fluid and cheap all kinds of companies thrive. When capital is pulled from the economy and becomes expensive profit margins suffer. Strong businesses with sound fundamentals survive while the weak and unproven enterprises perish. This is why I have always professed that we invest in proven enterprises with strong economic fundamentals...

At Covington our primary focus has been meeting our clients’ financial goals and secondarily to make a difference in our community. Meeting our clients’ financial goals has enabled us to participate in a number of community efforts for the betterment of the human experience. On November 11^th, 2022, I had the privilege of hosting a ribbon cutting ceremony at the newly established Laurel Highlands Workforce & Opportunity Center celebrating the Center’s successful operations and its first class of cohorts studying to become Medical Assistants. The Center is located at 310 Donahoe Road, Greensburg, PA 15601. Feel free to visit the website at https://lhwoc.org for more information.

Patrick Wallace (middle) cuts the ribbon at the Laurel Highlands Workforce & Opportunity Center ribbon cutting ceremony. ..

More Pain To Endure

There is no doubt that this has been one of the most difficult years in recent memory for many investors. Nearly every equity index has fallen below the definition of a traditional bear market, a decline of 20% or more. Equally difficult has been the performance of the bond market which is supposed to insulate portfolios from market volatility. Even commodities, which started the year strong with heightened geopolitical activity, have begun to roll over. Crude oil has fallen -25% during the third quarter of 2022 and -35.7% since its March peak. Under restrictive Fed policy to mitigate heightened inflation, we will have to endure the pain until the Fed completes their mandate of price stability.

What has been behind the weakness in the market is above average inflation and a major shift in Fed policy. Nominal GDP has been very strong, up 8.5% in the first quarter and up 6.6% in the second quarter. After inflation though, real GDP is trending negative. Inflation, as measured by the Consumer Price Index, has come down from its peak of 9.1% in June of 2022 but still remains up over 8%, well above what the Fed considers its “neutral” rate of around 2.5%. In response to stubbornly high inflation, the Fed Funds rate has been increased five times so far in 2022 to a range of 3.00% to 3.25%. We anticipate two more hikes before year end which will leave the Fed Funds rate at a target of around 4.5%. We anticipate Fed policy may be able to transition sometime in early 2023 depending on the inflation data...

More Pain To Endure

There is no doubt that this has been one of the most difficult years in recent memory for many investors. Nearly every equity index has fallen below the definition of a traditional bear market, a decline of 20% or more. Equally difficult has been the performance of the bond market which is supposed to insulate portfolios from market volatility. Even commodities, which started the year strong with heightened geopolitical activity, have begun to roll over. Crude oil has fallen -25% during the third quarter of 2022 and -35.7% since its March peak. Under restrictive Fed policy to mitigate heightened inflation, we will have to endure the pain until the Fed completes their mandate of price stability.

What has been behind the weakness in the market is above average inflation and a major shift in Fed policy. Nominal GDP has been very strong, up 8.5% in the first quarter and up 6.6% in the second quarter. After inflation though, real GDP is trending negative. Inflation, as measured by the Consumer Price Index, has come down from its peak of 9.1% in June of 2022 but still remains up over 8%, well above what the Fed considers its “neutral” rate of around 2.5%. In response to stubbornly high inflation, the Fed Funds rate has been increased five times so far in 2022 to a range of 3.00% to 3.25%. We anticipate two more hikes before year end which will leave the Fed Funds rate at a target of around 4.5%. We anticipate Fed policy may be able to transition sometime in early 2023 depending on the inflation data...

Last fall we advised you that we were expecting an adjustment period for the capital markets [see blog here]. An adjustment to slowing economic growth, decelerating corporate earnings, higher inflation, and new Federal Reserve policy measures. Market valuation models are adjusting to these new circumstances. Ultra-low interest rates, massive fiscal and monetary initiatives elevated valuations beyond actual long-term earnings potential. Under the Fed’s efforts to contain inflation, valuations will now align to actual long term economic growth expectations which remain attractive. The economy is still expanding at historical trend line GDP growth of 3% and corporate earnings are more representative of expectations at 8%.

..

Market and Economic Observations

December 10, 2021

Covington recently presented their observations on the market and economy at our annual shooting event held at Pike Run Country Club. Please find our presentation commentary below...

Last week, we had the pleasure of hosting our first board of directors meeting for the Laurel Highlands Workforce & Opportunity Center in their new building located at 310 Donohoe Road, Greensburg PA. My wife and I founded the non-profit organization to remove the barriers of structural poverty for individuals who are under and/or unemployed, or are in transition of employment. Our vision for the center is to serve as a hub of human services that will provide for the betterment of the human experience.

It is our hope to simultaneously address the labor needs of the businesses located in Westmoreland County. Our efforts will be collaborative, multi-faceted, and modeled after Bill Strickland’s Manchester Bidwell Center. To accomplish our mission we plan to leverage the talent and skills of our Board of Directors. Anne Kraybill, Executive Director of the Westmoreland Art Museum will be developing our arts program along with developing a music and video learning program with Endicott Reindl of the Westmoreland Symphony Orchestra. Dr. Christine Oldham, retired Superintendent of the Ligonier Valley School District, will be developing our curriculum and oversee our third-party childcare program. Dr. Dan DiCola will be our medical director and be developing our medical training programs. Tay Waltenbaugh will be supervising our social services programs, and Greg Daigle, while serving as our Director of the Center, will coordinate our manufacturing training programs for local businesses. Michelle Mcfall will serve as our student recruiter and Melissa Hipple will be serving the center as our medical program instructor...

In anticipation of heightened volatility, I wanted to touch base with you as I see the current economy and markets at an inflection point. Year to date global equities have continued their strong momentum from last year with many indices posting double digit gains so far in 2021. The S&P 500, the market index comprising of the largest US companies, has notched over 40 closing all-time highs in 2021 with one of the strongest recoveries coming out of a recession on record.

If you recall, early in this market rally from the March 2020 lows the central narrative surrounding the economy was that markets were disconnected from fundamentals and thus ripe for a “double-dip” sell-off. This did not end up being the case as economic data on almost every front has come in stronger than expected and 2021 corporate earnings are projected to come in 21% higher than 2019 levels. In fact, economic data has come in so strong that now inflation and overheating are a central risk to markets. And while the virus is still moving throughout the world, the vaccine rollout continues to progress, and the world is reacclimating to daily life.

Volatility has also been relatively tempered as the S&P 500 has gone over 200 days without at least a 5% drawdown from its peak. This market action has historically been an exception, not the rule...

The economic momentum continued its recovery from the pandemic induced lockdowns in the 1^st quarter 2021 with real GDP expanding at an annual rate of 6.4% in the first quarter of 2021. Massive spending measures by the government, unprecedented Fed policy measures, overall strong employment recovery and greater vaccination rates drove strong economic activity, delivering strong S&P 500 operating earnings largely above expectations up 34.1% year over year trending at $187.43 from $139.00 at year end. Inflation reached 2.6% in the first quarter due to reopening demand along with material and product shortages. Consumer spending expanded 10.7% at an annual rate in the first quarter supported by strong household income as federal stimulus checks continue.

The rotation into cyclical – value stocks which started last September continued in the first quarter which helped thrust the S&P 500 to new highs despite consolidation in the mega caps. Equity markets are priced to perfection, however, on the assumption rates will remain low for a long time. I think you could see a serious correction in asset prices if the Fed must tighten monetary policy to combat inflation. The Fed has warned asset valuations are high and vulnerable noting the economy is a long way from their goals. While high priced stocks could eventually earn the profit necessary to justify today’s valuations under a completely opened economy, what happens when the fiscal stimulus is turned off? And how will the markets react to the beginning of the Fed tapering? Additionally, while the virus remains the greatest threat to the economy, what Black Swan events are unforeseen due to the excessive liquidity in the economic system and how will current inflation pressures play out in the economy?

The pandemic lockdown induced recession appears to have ended May 2020 looking at the Leading Economic Index and the ISM Purchasing Managers Indexes. Now we are at the beginning stages of a new cyclical bull market exhibited by an acceleration after the economy troughs. In this phase of the business cycle, the Fed keeps rates low while credit conditions trough allowing stocks to advance sharply until interest rates rise. U.S. stock sectors that perform well in the early cycle are typically materials, financials, industrials, information technology and consumer discretionary stocks.While economic growth looks good short term and earnings have rebounded strongly recently what happens when growth moderates after a fully opened economy returns to trend line growth? Asset prices will have to correct under a reversion of the means representing historical multiples...

Covington Investment Advisors, Inc. is pleased to announce that Cindy Jones has earned the Chartered Financial Analyst (CFA) designation.  This designation requires successfully completing a series of three exams covering a wide range of topics related to financial analysis.  In addition to passing the exams, other requirements include having relevant work experience, submitting professional references, and adhering to the Code of Ethics and Standards of Professional Conduct of the CFA Institute.  Additionally, she holds the Series 65: Uniform Investment Advisor Law license.

Cindy joined Covington in 2012 as Assistant Portfolio Manager and currently holds the positions of Portfolio Manager and Chief Compliance Officer.  She earned a Bachelor of Science degree in Applied Mathematics with additional studies in Computer Science and Statistics from the University of Pittsburgh. ..

Although we try each year to forecast and plan for what the market will hold for us, 2020 again proved that a new year almost always brings surprises in one form or another. Being prepared with a plan as we have for you, and sticking to proven investment principles including creating diversified portfolios has proven once again the keys to achieving long-term financial goals. Please find attached our Economic Outlook for January 2021. 

2021-Economic-Outlook.pdf..

Covington Investment Advisors, Inc. is pleased to announce that MaKenzie Maust has joined its full-time staff effective July 1, 2020.  MaKenzie will be the Operations Associate responsible for Office Management including accounts payable and accounts receivable and will also train and assist with Compliance and Client Services.  She is a 2020 graduate of Indiana University of Pennsylvania with a Bachelor of Science degree in Accounting.

We feel MaKenzie will be a great asset to our company.

 ..

As you may recall, in early 2017 we started the initiative to combat the Opioid Epidemic in our area and were seeking a Federal High Intensity Drug Trafficking Area (HIDTA) Designation for Westmoreland County. When we started this initiative, the overdose rate of deaths in our county was growing at 46% per year. The complete costs associated with these deaths is immeasurable in terms of the families affected and the lost contributions these individuals may have had in our communities.

Although our original efforts were thwarted due to political reasons, I am pleased to say that Westmoreland County has finally been designated a HIDTA by the White House’s Office of National Drug Control Policy. Westmoreland joins three other Southwestern PA counties (Allegheny, Beaver, and Washington) in receiving dedicated federal resources to coordinate federal, state, and local government to fight drug trafficking and abuse.

The HIDTA designation will allow Westmoreland County to have access to critical federal  funding to ramp up prevention efforts, decrease the availability of illicit drugs, to investigate and prosecute the leaders of drug trafficking organization and allow enhanced training opportunities for law enforcement. Overall, the funding will allow for a more cooperative effort between the local, state, and federal partners to combat the opioid epidemic and drug trafficking. ..