Revolutionizing Finance: How AI Will Transform the Financial Services Market

The world of finance has become a fertile hunting ground for exploring the potential of Artificial Intelligence (AI) because information processing is the backbone of the global financial markets. In the past as well, all kinds of financial institutions have invested heavily in technology and data in order to develop some kind of strategic or tactical advantage. However, the changing competitive dynamics over the last few years provide some hints about what could happen as AI becomes a real, scalable solution.

In recent years, it has become abundantly clear that AI can disrupt industry dynamics very quickly and decisively. With technology playing an increasingly important role in critical decision making, the rise of automated, passive investing solutions are already very common. In the hedge fund space, quantitative methodologies have become the norm for stock picks and entry/exit decisions. The finance industry is often an early adopter for any new technology that could give managers and investors an advantage such a competitive landscape.

Importance of AI InvestmentManagement chart

Source: EnY’s Report: AI and the Investment Management Industry

The financial services industry stands on the cusp of a profound transformation, driven by the steady march of AI. As AI technologies continue to evolve and mature, their impact on the financial sector is becoming increasingly significant. Even though change is always slow (and the financial services sector would be the first to testify to that), this ace of disruption in technological advancements is almost unprecedented and AI could be the tipping point for a quicker change in the industry than ever before.

Robot hand and Human hand touching fingertips
AI: A possible game changer?

Information is power, it has been since the dawn of time, and there will always be a race for it. Venetian merchants used Galileo’s telescopes not to study the stars, but rather to study the cargoes of approaching ships a few hours before their competitors. Unsurprisingly, the most vigorous application of AI for investment managers is attempting to generate the holy grail of new insights for the investment process to improve the investment outcomes for clients.

In today’s information age, AI is playing an increasingly important role in shaping economic and financial sector developments and is seen as an engine of productivity and economic growth through efficiency, improved decision-making processes, and the creation of new products and industries. Right now, the world is still in the early stages of that progression but there are already different applications of AI through the value chain, all generating business. If computing power and data generation keep growing at the current rate, then ML (machine learning) could be involved in almost all of investment management in the near future, affecting other industries and having a real long-term effect on investment returns.

Source: EnY’s Report: AI and the Investment Management Industry

AI also is rapidly changing the financial sector landscape by reshaping the nature of financial intermediation, risk management, compliance, and prudential oversight. Generative AI (GenAI) especially holds certain key implications for service-based industries. At the heart of GenAI are large language models, which are neural network–based models trained on massive amounts of data, including text and documents, and capable of producing understandable and meaningful text or human languages. LLMs (large language models) enable a wide range of applications across various domains with significant implications for the global economy and financial sector.

GenAI will most definitely accelerate AI adoption in the financial sector and investment management. Competitive pressures have fueled rapid adoption. This could further lead to gains in efficiency and cost savings, reshaping client interfaces, enhancing forecasting accuracy, and improving risk management and compliance. GenAI could also deliver to cybersecurity benefits ranging from implementing predictive models for faster threat detection to improved incident response. However, the deployment of GenAI in the financial sector has its own risks that need to be fully understood and mitigated by the industry and prudential oversight authorities.

Robot with a brain and stockmarket charts in the background
A.I.’s impact on financial services and investment management

The ways in which AI is set to revolutionize the financial services market are as follows:

  1. Data-Driven Investment Strategies: AI’s ability to process enormous amounts of data in real-time gives investment managers a powerful tool for decision-making. Whether it’s analyzing financial reports, social media sentiment, or economic indicators, AI can quickly identify trends and correlations that may not be apparent to human analysts. This data-driven approach enables more informed investment strategies and better risk management.
  2. Predictive Analytics: One of AI’s key strengths lies in its predictive capabilities. Machine learning algorithms can forecast market movements, asset price fluctuations, and even macroeconomic trends with a high degree of accuracy. Investment managers can leverage these insights to adjust portfolios, optimize asset allocation, and make timely decisions to capture investment opportunities.
  3. Behavioral Insights: Understanding investor behavior is critical in investment management. AI can analyze investor sentiment, track behavioral patterns, and provide insights into market sentiment. This information can be used to fine-tune investment strategies and provide personalized recommendations to clients.
  4. Customer-Centric Personalization: AI-powered algorithms are redefining customer interactions in the financial services sector. This hyper-personalization enables the creation of financial products and services tailored to individual needs. Chatbots and virtual assistants powered by natural language processing are also becoming integral parts of customer service, offering real-time assistance and information, enhancing customer satisfaction, and saving costs.
  5. Algorithmic Trading: AI-powered algorithms are reshaping the landscape of trading and investment. Automated trading systems use AI to analyze market data, identify trends, and execute trades at lightning speeds. These algorithms can process vast amounts of information in real-time, enabling more informed and timely trading decisions. The result is increased efficiency, reduced risk, and the potential for higher returns.
  6. Enhanced Fraud Detection: Machine learning models can detect unusual patterns in transactions, flagging potentially fraudulent activities in real-time. By continuously learning and adapting, AI systems become more adept at identifying new and sophisticated fraud schemes, thereby reducing financial losses and bolstering security.
  7. Credit Risk Assessment: Traditional credit risk assessment models have limitations, often relying on historical data and fixed parameters. AI, on the other hand, can analyze a broader array of data sources to assess an individual’s creditworthiness. This allows financial institutions to make more accurate lending decisions and expand access to credit for individuals and businesses with limited credit histories.
  8. Regulatory Compliance: The financial services sector is heavily regulated and adherence to these regulations is critical. AI can assist in compliance efforts by automating the monitoring and reporting of transactions, ensuring that all activities are in line with regulatory requirements. Machine learning models can also help identify and mitigate potential compliance risks.
  9. Cost Reduction and Efficiency: AI can significantly reduce operational costs in the overall financial industry, but especially in investment management. Automation of routine tasks, such as data entry, document processing, and customer support, can free up human employees to focus on more complex and value-added activities. Additionally, AI-driven analytics can optimize resource allocation, leading to better cost management.
Risks of AI adoption

The AI life cycle can be broadly divided into three stages – proof of value, enablement, and ramp-up or go live. The proof of value stage solely aims at validating whether an idea is worth the additional investment and resources. The focus of the enablement stage is to quickly turnaround management support and resources to support technology development. An organization is ready to ramp-up or go live when a full product development plan and scope is in place, including the necessary technology assets and personnel. Throughout the entire process, it is important to keep in mind the principles of responsible and ethical AI to ensure that outputs are always fair and representative.

However, while following this process, there are many risks that an organization can face, especially in the financial services sector. With the algorithms making many decisions, it could be possible that the slightest oversight could have far reaching effects. It is important that companies remain cognizant of these and act accordingly. Some of the major risks of AI implementation are:

  1. Data Privacy and Security: AI systems require access to vast amounts of data to function effectively, and any data breaches or misuse of this information could result in significant financial and reputational damage.
  2. Bias and Fairness: AI algorithms can inherit biases present in the data they are trained on. In financial services, biased algorithms can lead to discriminatory lending practices or investment decisions, potentially violating regulations and harming customers.
  3. Regulatory Compliance: The financial sector is heavily regulated, and the use of AI introduces complexities in terms of compliance with existing regulations. Institutions need to ensure that their AI systems adhere to regulatory requirements related to data protection, transparency, and fairness.
  4. Ethical Concerns: AI raises ethical questions, especially in areas like robo-advisors. Decisions made solely by AI may lack human empathy or ethical judgment, and could potentially lead to undesirable outcomes for clients and breaking fiduciary responsibilities.
  5. Model Explainability and Systematic Risks: Many AI algorithms, such as deep learning neural networks, are often viewed as “black boxes” because it can be challenging to explain how they arrive at their decisions. Lack of model transparency can hinder trust and regulatory compliance. In addition, as the widespread adoption of AI in financial markets occurs, it could lead to correlated trading decisions based on similar algorithms, potentially increasing the risk of market crashes or sudden volatility. This is a major risk that could culminate due to the combined efforts of all industry players and their over-reliance on AI.
  6. Cybersecurity Threats: As AI evolves, so will the divergent uses of the technology. AI can be used by malicious actors to enhance cyberattacks. AI-driven attacks can be more sophisticated and difficult to detect, posing a significant cybersecurity threat to financial institutions and the information of those they serve.

To mitigate these risks, organizations must adopt a robust governance framework for AI, focusing on data governance, model transparency, and ethical considerations. Regular audits, ongoing monitoring, and collaboration between data scientists, compliance officers, and legal experts are essential for managing AI-related risks effectively. Additionally, staying informed about evolving regulations and industry best practices is crucial for navigating the growing AI landscape.

A red heart made of ones and zeros
AI in Finance: A cautious revolution in the making

The impact of AI on financial services and investment management cannot be overstated. It is transforming the industry by providing investment professionals with advanced tools to make decision making easier and more comprehensive. However, it’s important to acknowledge that AI is not a silver bullet. Investment managers must combine AI’s capabilities with human expertise to create a winning formula.

However, the intrinsic risks could pose material risks for financial sector reputation and soundness—and, ultimately, could undermine public trust, if not handled with maturity. Enterprise-level applications could help mitigate some of the risks inherent in public-level application, but this option may not be cost efficient for smaller financial institutions. AI use needs close human supervision commensurate with the risks that could materialize from employing the technology in financial institutions’ operations. Prudential oversight authorities will strengthen their institutional capacity and intensify their monitoring and surveillance of the evolution of the technology, paying close attention to how it is applied in the financial sector. They will improve communication with public and private sector stakeholders as well as collaborations with jurisdictions at the regional and international levels.

As AI continues to evolve and mature, it will become an indispensable part of the investment management toolkit. To harness the full potential of AI in finance, institutions must invest in talent with AI expertise, build robust data infrastructure, and prioritize ethics and transparency. As AI continues to evolve, it will undoubtedly reshape the financial services landscape. The firms that embrace it, invest in the right talent, build robust data infrastructure, incorporate it into their strategies, and prioritize ethics and transparency will likely gain a competitive advantage in the dynamic and ever-evolving world of investments.


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Disclosure

Howard Capital Management, Inc. (“HCM”) is an SEC-registered investment advisor with its principal place of business in the State of Georgia. SEC registration does not constitute an endorsement of HCM by the SEC, nor does it indicate that HCM has arraigned a particular level of skill or ability. HCM is not an accountant, or a tax accountant and this document is for information purposes only. Please consult a tax accountant for information pertaining to your account. HCM only transacts business where it is properly registered or is otherwise exempt from registration.
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Deep Impact: What really happens when banks fail?

The recent misfortunes of the Silicon Valley and Signature Banks are being identified as echoes from the financial crisis of 2008. Fears of a lasting economic downturn, impending stock market crashes, a debt crisis and government bailouts have investors worried whether the worst is still to come. Shareholders and depositors in the two banks in question have raised pertinent questions on the regulatory bodies like the FDIC and the auditory capabilities of the Federal Reserve. Not only has this sudden collapse affected a range of asset classes, but market leaders are suggesting that this could be the first of many more collapses in the months to come.

To fully understand how a collapse like this affects the economy and individual investors one must revisit the crisis of 2008 and draw lessons from that dark period.

The Great Financial Crisis of 2008

The crisis of 2008, which had far-reaching effects around the globe, was triggered by a combination of factors, including the housing bubble, the proliferation of subprime mortgages and the use of complex financial instruments, such as mortgage-backed securities, that were not well understood or regulated.

The overextension of credit by banks would be the first step in this crisis. Banks offered subprime mortgages to borrowers with poor credit histories, often with adjustable interest rates that could lead to payment shock when rates rose. As the housing market began to decline, many borrowers defaulted on their mortgages, leading to significant losses for banks and investors. The collapse of the subprime mortgage market triggered a broader financial crisis, as it undermined confidence in the banking sector and led to a credit crunch. The interconnectedness of the banking sector played a major role in the crisis, as the failure of one bank had a ripple effect throughout the system. The failure of Lehman Brothers was the significant event that sparked a global financial panic.

The fallout from that event led to an economic downturn that lasted for several years. The crisis caused a sharp decline in housing prices, a rise in foreclosures and bankruptcies, and a contraction in credit markets. Many businesses failed and unemployment rates increased in many countries. The years after 2008 were replete with stock market declines, banking system failures (including Lehman Brothers, Washington Mutual and Bear Stearns) and supremely controversial government bailouts. Finally, there were far-reaching sovereign debt crises in several countries, including Greece, Ireland and Spain. These crises had significant impacts on these countries’ economies, leading to major austerity measures and political unrest.

The banking sector’s excessive risk-taking and reliance on complex financial instruments played a pivotal role in the financial crisis of 2008. Opinion makers then stated that this crisis highlighted the need for better regulation of the banking sector to prevent similar events in the future.

Silicon Valley Bank: A brief history of prosperity and the sudden collapse

Silicon Valley Bank (SVB) is a commercial bank founded in 1986 and is based in Santa Clara, California. It primarily serves the technology, life science and venture capital industries. SVB operates across the United States, China, India, the United Kingdom and other countries. In addition, SVB has been recognized as one of the top banks in the United States and has received numerous awards for its banking services and commitment to innovation.

SVB’s collapse came all too suddenly as depositors sought to withdraw their deposits from the bank during a frantic 48 hours after learning the bank was in trouble after interest hikes by the Federal Reserve. Like many other banks, SVB had plowed billions into US government bonds during the era of near-zero interest rates. As the Federal Reserve hiked interest rates aggressively to tame inflation during 2022, the lagged impact of these hikes hit the startup-friendly bank really hard. When interest rates rise, bond prices fall. SVB’s portfolio yielded an average 1.79% return last week, far below the 10-year Treasury yield of around 3.9%.

With the Federal Reserve’s hiking spree seeing no end in the near term, tech startups had to channel more cash toward repaying debt. They were also struggling to raise new venture capital funding. This forced these companies to draw down on deposits held by SVB to fund their operations and growth. With this flurry of withdrawal requests, the bank quickly ran out of funds to service these requests. SVB’s stock plummeted 60% in one day and dragged other bank shares down with it, causing investors to panic.

SVB’s collapse could create systemic risks to the broader financial system, as the interconnectedness of the banking sector means that the failure of one bank can have ripple effects throughout the system. Some of these effects may include:

  1. Lack of Access to Capital: SVB provides funding to early-stage and emerging technology and life sciences companies. The collapse of the bank would reduce the available capital for these companies and may limit their growth potential.
  2. Slowdown in Innovation: The loss of funding and support from SVB could lead to a decrease in innovation and technological advancement.
  3. Job Losses: The technology and life sciences sectors are significant employers in the United States. Job losses in these sectors could follow, which would have a ripple effect throughout the economy.
  4. Economic Slowdown: The sectors that the bank supports are key drivers of economic growth. A decline in these sectors could lead to an economic slowdown or worse, a recession.
  5. Disruption in the Banking Industry: The collapse could lead to a loss of confidence in the banking system. This could have negative impacts on other banks and financial institutions, leading to a broader economic impact.
  6. Forced Bailout: The US government has previously bailed out large financial institutions, such as Citigroup and Bank of America, during the 2008 financial crisis. However, these bailouts were controversial, faced widespread criticism and decelerated overall growth. A bailout would only put more pressure on the tax system and invite the general public’s ire.

Note:SVB is not classified as a Systemically Important Financial Institution (SIFI) by the Financial Stability Oversight Council (FSOC), which means it is not subject to the same level of regulatory oversight and government support as SIFIs.

Finding a way back to prosperity

The need of the hour currently is to avoid a recession induced by this collapse. The Federal Reserve and Washington have a range of tools and policies at their disposal to help prevent another financial crisis like the one in 2008. Some tested ways to reduce the likelihood of another crisis include:

  1. Transparent government intervention: The government took significant steps to stabilize the financial system by providing bailouts to major financial institutions such as AIG, Fannie Mae and Freddie Mac in 2008. The Troubled Asset Relief Program (TARP) provided financial support to banks, and the Federal Reserve implemented quantitative easing policies to increase liquidity in the markets. If things were to get worse and the banking sector reaches the brink of collapse, such intervention could help avoid the worst outcome just about in time.
  2. Flexible fiscal policy: The government could take a flexible approach to fiscal policies to stimulate economic growth. The American Recovery and Reinvestment Act of 2009 provided funds for infrastructure projects, job creation and tax incentives for businesses that eventually helped get the economy back on track after a torrid year. However, in the current economic scenario, the large-scale spending bills (like the Inflation Reduction Act) already in place and inflation wreaking havoc on the economy, having a flexible approach might be more difficult.
  3. Investing in building consumer confidence: Winning over consumers is the most assured way to create a sustained recovery path for any economy. If consumer confidence improves, so will their spending and investing habits. As consumers power the economic machinery, it could be the platform needed for further government spending to support the ailing sectors.
  4. Seeking international support: The American financial and banking system does not operate in isolation from the rest of the world. Even now, the impact of SVB’s collapse has had far-reaching effects across geographic boundaries. Seeking international cooperation and support could help to stabilize the affected sectors and in turn, the economy. In 2008, the G20 countries worked together to implement policies that stimulated growth on a global level. Investing efforts in this route during dire circumstances wouldn’t be a bad idea.

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The Genesis and Failings of Market Predictions

In the year 1982, a leading global publication published a special dossier about what the world would be like in the year 2000. The publication invited a range of professional ‘futurists’ make their predictions. From a robotic revolution to the extinction of inflation to family experimentation practices, these predictions were published for all to read and gauge the future themselves. It’s not surprising that the most of the predictions remain unfulfilled till today. However, these futurists have not been completely discredited, nor have they become extinct. They live among us even today, with different roles and identities.

The practice of making predictions based on factual observations can be traced back to a time when markets didn’t even exist. From an instinctual perspective, making predictions is as much a part of human nature as is any other cognitive practice like rationalizing and reasoning. Over centuries, the art of making a prediction has undergone many-a transformation. This has been facilitated through philosophical, mathematical and even theological sciences. Even then, there still remains a strong element of uncertainty about the validity of making predictions. This is so because making predictions is essentially choosing one of two (or numerous) possible outcomes. There are some who will make the right choices and others who won’t. Those who make the right choice won’t be right all the time, and neither will the ones who made the wrong choice. However, the frequency or consistency in such a game of chance is anybody’s guess a.k.a. prediction.

For anyone who is looking to follow or disregard the plethora of predictions that are made every day, it is advisable to understand what governs such predictions and why they are so popular.

Five Famous Predictions That Never Happened
  1. In the 80s, Nobel Prize-winning economist Paul Krugman predicted that the internet was just another fad and would have no discernible impact on investing.
  2. Nobel Prize-winning economist Paul Samuelson was certain that the Soviet economy would surpass the American Economy by 1990.
  3. Just before the 2008 economic meltdown, AIG had endorsed and promoted the Credit Default Swaps (CDS), which was a prominent cause of the market crash and led to the $85 billion bailout for them.
  4. Economist Irving Fisher predicted the stock market was on the verge of a boom, 9 days before the great market crash of 1929 and lost most of his wealth in the process.
  5. In 2007, former Fed Chair Alan Greenspan claimed that interest rates would be in double digits to control inflation, but a year later Fed fund rates were at historical lows.
Making a Prediction: An erroneous human tendency

The start of this practice is probably anyone’s guess. In recorded history though, the end goal guiding the making of predictions has generally been to attain a strategic advantage over the competition. Whether it is in financial markets, war or sports, predictions are a guesstimate that have a tendency of giving confidence to those who are hopeful of a positive outcome. On the contrary, people also have a general tendency to ignore the possible outcomes that are not so positive, even though it might be most probable.

When Nostradamus, the French polymath, wrote his predictions in the form of prose, he did not write any specific details. Yet, today, people attribute many historical events (including 9/11 attacks, the atomic bomb and the rise of Adolf Hitler) to the predictions made by him. It is also important to note that there are many predictions of his that have not manifested in any way or form. That doesn’t make his supporters and followers discredit his work though. They continue to look for patterns where none might exist. Similarly, there are many who came before and after Nostradamus, making claims about future events and the people involved who are revered in different walks of life, including business, politics and economics.

The truth is human beings are geared to widely accept certain visions of the future that suit their view of things, even if those visions improbable or impossible. It confirms how one analyzes the world one is familiar with and wants to believe that their view is correct. When that hypothesis fails, it is put down to chance or an anomalistic inconsistency in one’s analysis. In light of this, in today’s information age, it is not unusual to find a range of predictions on a daily basis about almost anything and everything happening in the world. Even though these predictions may border on being totally ridiculous, it can find its own stream of subscribers who believe that a particular outcome would suit their worldview.

The questionable foundation of general predictions

“Predictions fail because the world is too complicated to be predicted with accuracy.”

Dan Gardner, Author of Future Babble

Experts have been trying to forecast the price of oil since the inception of the industry in the 19th century and they continue their hot streak of being wrong till today. Modern futurists use retrospective quantitative methods to predict socio-political scenarios decades into the future (known as cliodynamics) yet all they have achieved is the creation of a broad, over-arching theme that captures only part of any future. For decades, there have been innumerable predictions of the Dow Jones Industrial Average index either soaring through the proverbial ceiling or crashing with devastating effects. Just like in the case of cliodynamics, only a miniscule part of the prediction has actually occurred, enough to be branded as an inaccurate prediction.

This further begs the question, how does one qualify to be an expert? What is the criteria that separates the ones who make consistently successful predictions from those who are much less accurate in doing so? As it turns out, there is no such criteria and those who are considered to be ‘investing gurus’ are barely ever absolutely right with their predictions. According to a study by CXO Advisory Group which collecting predictions from 68 different forecasters, after study 6,500 different predictions, it was found that, on average, a forecaster will be correct 46.9% of the time. In other words, if the example of a coin toss were considered where the chances are 50-50, an average person would likely beat the average ‘market guru.’

Dr. Tetlock, The Hedgehog and The Fox

From 1984 till 2003, Dr. Phillip E. Tetlock, a political science writer and revered author, conducted one of the most comprehensive studies of analyzing expert predictions. He assembled a group of 284 experts from a myriad of fields, including government officials, professors, and journalists. They had a diverse range of opinions, from Marxists to free-marketers. In this 20 year period, Dr. Tetlock collected over 28,000 forecasts about the future, including questions about inflation, economic growth, the price of oil, the stock market, elections and the global order of power.

As he validated and analyzed the data sets that he had collected over 2 decades, the final result that he arrived at was that ‘the average expert was as accurate as the famous symbol of random guessing – a dart throwing chimpanzee.’ Of course, some did better than others but they were all far from perfect when it came to making predictions. However, there was a critical pattern he identified while studying these predictions. The way these experts were making predictions had a strong correlation with their individual style of thinking.

In order to simplify this observation, Dr. Tetlock drew inspiration from an essay written by a political theorist and writer, Sir Isaiah Berlin. The essay was titled ‘The Hedgehog and The Fox’ which divided writers and thinkers into hedgehogs (who view the world through the lens of a single defining idea) and foxes (who draw on a wide variety of experiences and for whom the world cannot be boiled down to a single idea).

In Dr. Tetlock’s analysis, the hedgehogs were those who use one big idea (usually an analytical tool) to make forecasts. They preferred simplicity and clarity, so they preferred to keep information pared down to what they thought was the bare essentials. They like using words like ‘certain’ and ‘impossible’ and are usually the ones on television. The foxes, on the other hand, gathered information from many sources, looked at issues with more than one analytical lens, readily admitted mistakes, and were comfortable with complexity and uncertainty. They often said ‘maybe’ and they were humble about their ability to see into the future.

The study also showed an inverse relationship between fame and accuracy. The more famous the person, the less accurate their prediction would be. One would assume that this finding would keep the inaccurate hedgehogs out of the limelight and the focus should remain on the humble foxes. However, hedgehogs are brimming with confidence and make absolute declarations, something that dispels uncertainty. The fox talks about probabilities and possibilities. For the general viewing audience, it’s always more attractive to have their concerns and uncertainties absolutely dispelled, even if it is through a hedgehog analysis which is less accurate than a dart throwing chimpanzee.

The role of bias in analyzing predictions

“Everything makes sense in hindsight. We cannot suppress the powerful intuition that what makes sense in hindsight today was predictable yesterday.”

Daniel Kahneman, Behavioral Scientist, Nobel Prize winner

In the path breaking study called Prospect Theory by Daniel Kahneman and Amos Twersky, the study of human decision making under conditions of risk was thoroughly analyzed. The study’s findings run contrary to the normative implications inherent within classical subjective expected utility theories. This theory gave validation to the idea that risk taking and risk averse behavior occurs not in isolation, but in conjunction with individual behavioral dispositions. These dispositions are driven by the biases individuals may have.

When it comes to making market predictions, such biases play an important role in influencing the final decision of an individual. Some of the prominent cognitive biases that affect predictions are as follows:

  1. Overconfidence bias: Overconfidence is one of the cognitive biases that underlie the illusion of validity. Overconfidence bias can be defined as an unwarranted and often times illogical faith that an investor has in their ability to predict the market. This bias is remarkably prevalent in the investment community. James Montier, former co-head of global strategy at Société Générale, once conducted a study with over 300 professional fund managers to measure the scale of behavioral biases. He asked if they believe themselves to be above average in their ability. 74% of fund managers responded in the affirmative, believing they were above average at investing. And of the remaining 26%, most thought they were average. In short, virtually no one thought they were below average.
  2. Confirmation bias: The illusion of validity persists because people fall prey to the confirmation bias; they focus on information that is consistent with their beliefs while neglecting inconsistent information. As physicist Robert Park once said, “People are awfully good at fooling themselves. They’re so sure they know the answer that they don’t want to confuse people with ugly-looking data.” This bias is more prevalent in market predictors with higher perceived knowledge about the market and higher strength of belief (i.e., sentiment). They will also have a negative interaction effect between the perceived knowledge and the strength of prior belief on confirmation bias.
  3. Representative bias: Representative bias occurs when the similarity of objects or events confuses someone while thinking about the probability of an outcome. According to Kahneman and Tversky, representative bias badly affects people’s decisions during their opinions building and reasoning. This may mislead investors and forecasters to believe they have already processed the information correctly right before they make a decision. While making a judgment, they are likely to ignore other related factors which may affect the value of the investment. Because of the representative bias, forecasters may ignore the law of small numbers where they incorrectly consider a small sample size as being representative of the population. Even though these numbers may reflect the current trend, they cannot possibly describe the properties of a whole population.
  4. Hindsight bias: Hindsight bias leads people to exaggerate the quality of their foresight. It is a behavioral trait where one becomes convinced they accurately predicted an event before it occurred. Based on this, they make predictions about the future. Once an event is part of history, there is a tendency to see the sequence that led to it as inevitable, as if uncertainty and chance were banished. Armed with such a bias, one can become overconfident of one’s foresight and make exaggerated predictions. Those who have hindsight bias, it is common to hear the phrase, “I knew it all along.”
The role of bias in analyzing predictions

It is easy to suffer the pitfalls of following the predictions of the numerous ‘hedgehogs’ that populate mass media nowadays. The markets, just like the future, will forever remain unpredictable. All the predictions that are made, whether scientific or instinctual, are essentially rooted in some form of cognitive bias and are probably driven by the possibility of making some personal gain. To base one’s investment decisions on ‘expert’ predictions is akin to sailing in a storm without a life jacket.

The advisable way to achieve one’s investment return goals is to have a clear objective and an innate ability to shut out the noise made by the so-called market gurus. Instead of listening and acting on the words of the ‘hedgehogs,’ it is more prudent to follow the analysis of the foxes who gear themselves for an uncertain future. These foxes will be advisors and managers who prefer diversification of risk and do not make claims about knowing what comes next. Instead of relying on instincts and emotions, an investor must trust those who take a calculated approach to mitigating possible losses and acting in time as the market moves.

While it might be considered a lot more amenable to do away with market gurus altogether, it is not possible in the current structure of information dissemination and market speculation. In certain markes, like Prediction markets where one trades the outcome of events and market prices indicate what all the investors think the probability of the event is, the role of the guru/expert is almost non-existent. There are many proponents for such markets but they remain a laggard to the popular markets where ‘crystal ball’ predictions still attract a majority of investors. These markets also have the largest market capitalizations and will always remain difficult to transform.

In order to facilitate diversification, there exists a broad range of assets and asset classes in the world now. It would be the rarest of rare occurrence for all of them to boom or go bust at the same time. By planning one’s investments wisely across these classes, based on a sound investment plan, would most likely achieve the long-term gains that any investor dreams of. While ignoring market predictions may not be easy, avoiding making knee-jerk investment decisions based on them can be easily avoided through discipline and consistency.

In Warren Buffet’s now famous article “The Superinvestors of Graham and Doddsville,” he presents indisputable data about how a specific number of asset managers who shared a common teacher have consistently managed to outperform the index over decades. None of them claim to have any supernatural prediction powers and neither do they boast of knowing something that others do not. They have followed their tested methods over a long time frame to achieve a goal they set for themselves. They dedicated their lives to achieving those goals and stayed true to the practices taught to them by Benjamin Graham. In the concluding paragraph of the article, Warren Buffett detailed an undeniable reality of the world which encapsulated the distracting and irrelevant nature of market predictions:

“There seems to be some perverse human characteristic that likes to make easy things difficult… It’s likely to continue that way. Ships will sail around the world but the Flat Earth Society will also continue to flourish.”

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Focus on the Data—Not the Drama. How Advisors Can Educate Clients on Today’s Turbulent Market

Stock market volatility has reached a fever pitch in recent months, as has investor anxiety. We don’t expect it to dissipate any time soon. The markets are not trading on fundamentals. Instead, they’re trading on investor sentiment and emotions fueled by outside noise.

How did we get here, and how should advisors work with their clients to focus on the data, not the drama?

Not Your Father’s Stock Market

There are a few things investors need to understand about this stock market that make it considerably different from 15 or 20 years ago. One thing we know is the markets don’t work and function the way they did before. The velocity with which stock markets move is much faster. The upward and downward swings are happening with much greater speed.

A significant part of that transformation over the last decade is the dominance of automated trading. As much as 85% of market trades today are executed by computerized trading or automated machine execution. That’s a far cry from just ten years ago when automated trading accounted for about 20% of trades. Automated trading not only contributes to the higher velocity of trading—but is also a primary contributor to the more significant market selloffs and runups we’ve been experiencing. Couple the increased velocity with the tens of millions of investors accessing hundreds of millions of pieces of data 24/7 at digital speed, and you have a market that can, and will, quickly react to new information or the instant investor sentiment changes.

The media has exacerbated the problem in its seemingly hyperbolic headlines and 24/7 new cycle. The thirst for advertising dollars often makes the media focus on bad news simply because it sells better than good news. Much of the information investors get from the media is centered on driving clicks or viewership, not necessarily on conveying optimal investment advice.

The Challenge for Advisors: Control Client Performance Expectations

Between the stock market volatility and the constant drumming from the media, investors have been pulled in many different directions, often causing them to change their expectations and become emotional about the market.

Emotions often lead to poor investment decisions, which then may lead to underperformance. Current investor losses may have little to do with asset allocation, diversification, or fund choices. Losses may have more to do with suboptimal buy and sell decisions driven by emotions.

Advisors have historically been challenged to meet client expectations. Past experiences or current circumstantial pressures can be driving forces behind shifting expectations. It’s much more of an issue when clients’ expectations whipsaw along with the market. You’re familiar with the concept: “Keeping up with the Joneses.” Applying this theme in a behavioral finance context, and you have what is referred to as “Anchoring Bias,” where investors errantly anchor portfolio return expectations to recent market highs, instead of taking a holistic view of their progress towards their long-term financial goals.

How are advisors supposed to manage that? 

The key for advisors is to get control of client expectations through communication and education—and put current market events in perspective. Advisors can work to help their clients avoid common behavioral biases during periods of heightened market volatility by educating them on three critical points:

  • Volatility is not only normal, it also may be good for investment returns
  • Volatility and risk have separate meanings
  • Ignore the noise
Volatility Is Normal

Investors need to understand that market volatility is a normal part of markets. Market pullbacks between 5-10% are a common occurrence, and not unusual to see multiple market pullbacks within the same year. These recalibrations typically occur when the market is overbought or the release of new fundamental news. Investors should in fact consider welcoming market pullbacks because they often help the market reset proper valuation and present investors with a good buying opportunity.

Market Corrections (10-15% declines) are also normal, and while not as prominent as Market Pullbacks, can be viewed in a similar light, but with more caution. When clients are concerned about volatility, it helps to put it in perspective. Remind them that since 2000, the S&P 500 has gained, on average, more than 8% one month following a market correction bottom, going on to then gain more than 24% the following year. So, not only have corrections been short-lived, but they have also been a precursor to significant market gains in their aftermath.

Consider that, in each year since World War II, the market has experienced an average intra-year decline of roughly ~14%, with the market ending the year lower only every third year. As the graphic below shows, the market finished the year in the positive.

Source: Bloomberg

When looking at periods of volatility over a historical timeline of the stock market, it’s clear that stocks can be volatile for periods of time. But over the long-term they historically appear more stable, steadily producing positive returns over time.

The two charts below examine the relative volatility of stock market returns of 5-year rolling returns versus 30-year rolling returns.

A critical takeaway is to educate clients on the importance of following their financial plans and drive awareness of investor behaviors that lead to poor investment decisions during periods of normal market volatility. Reviewing and analyzing a client’s progress towards specific goals should be a primary benchmark for determining changes to an investors financial plan, not TV headlines.

Volatility And Risk Are Not the Same

Investors’ greatest fear is losing money; it’s natural to equate volatility with market risk. However, volatility and risk are not the same, and it’s critical to educate clients on the difference.

Market risk is the chance that by being in the market, you will lose money—though true losses are only realized when a security is sold for a loss. Investors suddenly spooked into bailing out of the market after it has already declined 10 or 15%, could be subjectively “sounding the horn” on a financial plan, still in the 2nd quarter.

Volatility on the other hand, is a range of expected returns or price changes for a particular security, relative to its average – also known as Standard Deviation. Securities with a larger range tend to be larger swings in price and returns, through changing market conditions.

Also, it’s important to remind your clients that volatility is a two-way street. There can be as much volatility to the upside as to the downside. However, investors tend to only focus on the latter, which is why their investment performance can suffer. According to DALBAR’s Investor Behavior Study, twenty years of investor data shows that those who abandoned the market to avoid its worst days almost invariably miss the market’s best days as well. That makes it difficult to overcome the losses incurred and hurts overall investment performance.

Consider this graphic, which shows how your returns would have been impacted on a $10,000 investment if you missed the market’s 5, 10, 30, and 50 best days. What makes it worse for investors is, typically, the market’s best days have occurred near some of its worst days, which is why it’s essential to stay the course during periods of extreme volatility.

Source: FactSet. Returns are based on the S&P 500 Total Return Index. Past performance is not indicative of future returns. An individual cannot invest directly in an index. Data is as of January 31, 2022.

Ignore The Noise

When it comes to investing, the media noise can be deafening. Helping clients understand, while all the significant news events of today may seem consequential, they often have little if any impact on reaching their long-term investment goals. A sudden 1,000-point drop in the market today can certainly be uncomfortable. But through full market cycles, they may barely register as an afterthought on a 5-, 10- or 20-year performance timeline.

It’s critical to have a component to your investment management process that keeps the negative news out of perspective. That will help replace the emotional buy and sell decisions that come with outside market noise, creating more explicit client expectations and potentially more consistent outcomes.

The Bottom Line

We have a phrase at Howard Capital Management, “Focus on the data, not the drama.” We want to make sure we’re making investment decisions on the information we know, not what we think is going to happen.

Right now, there are a lot of unknowns. We are looking for the trends; we concern ourselves with the data, the math, and probabilities.

We trade based on our proprietary HCM-BuyLine®, which is designed to identify clear market trends and seek optimal portfolio allocations through buy and sell decisions based on those trends. Emotions have no place in our process.

The HCM-BuyLine®

The HCM-BuyLine® has been identifying and confirming trends for three decades, enabling Howard Capital Management to sidestep catastrophic market declines in 2000, 2008, and 2020. To learn more about the HCM-BuyLine® and how it is used to tactically manage mutual funds and ETFs, please click here.


About Vance Howard

Vance Howard’s vision for HCM originated after seeing the devastating financial losses investors suffered during the stock market crash of 1987, an event precipitated by computer program trading and investor panic. In an effort to the help investors monitor changing market conditions, he developed the HCM-BuyLine®, a proprietary math-driven indicator, designed with the goal of reducing the impacts of emotional investment decisions.


About Howard Capital Management

Howard Capital Management, Inc. (HCM) is a SEC-Registered Investment Advisory Firm founded by Vance Howard, which offers professional money management services to private clients, financial advisors, and registered investment advisors through a suite of separately managed accounts, retirement tools, self-directed brokerage accounts, proprietary mutual funds, and ETFs. As of December 31, 2021, Howard had assets under management of $5 billion.

For more information, financial advisors should contact their wholesaler by contacting Howard Capital Management at howardcm.com or 770-642-4902.


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How to Respond to the Impact of Inflation on Today’s Stock Market

Look for the Silver Lining

The bears have current control of the market. Inflation will be with us for some time, and preservation of capital is critical.

The HCM-BuyLine®, Howard Capital’s proprietary math-based indicator, recently turned negative for the first time since the start of the pandemic in February 2020, which recommended our portfolios move a portion to cash and/or short-term bonds.

The inflation bear, too, is most definitely real, and it’s not transitory. During 2021, this higher bout of inflation has been felt at the grocery stores and gas pumps. Now it’s being felt by the markets. It was only a matter of time before the markets buckled under the weight of rising inflation and the prospects of higher interest rates.

Are we in a longer-term bear market or is this just a nasty correction? Only time will tell, of course, but for now the trend is down and fighting the trend can be expensive and painful. We will let the market find its base, and when the HCM-BuyLine® turns positive, we will re-enter.

How Did The Markets Get Here?

The Federal Reserve has put quantitative easing on steroids since the beginning of the pandemic, ballooning the federal balance sheet to nearly $9 trillion. This was done to increase the money supply and stimulate economic growth during the COVID pandemic. As the growth of production of goods and services slowed, the money supply growth eventually overtook it, causing the price of goods and services to be bid up. When too many dollars are facing too few goods, the result is inflation.

Then add in supply chain issues and increasing wages. Payroll has gone up as employers have had to pay more to get people to come to work. That has contributed heavily to inflationary pressures on the market. There are still four to five million people not working right now.

Often ignored in the inflation equation is the velocity of money—the rate at which money is exchanged in the economy. Following the financial crisis in 2008 and the COVID pandemic in 2020, consumers were more inclined to save their additional dollars out of caution. During COVID, savings increased because many services were no longer available for purchase, such as travel and restaurants.

Now, as many COVID restrictions have been lifted, consumer activity has reached pre-pandemic levels, increasing the velocity of money, but setting the stage for a more prolonged inflation, which we think could be with us for the next 12 to 18 months.

How Should Advisors and Their Clients Respond?

Whether we’re in for a repeat of the 1970s will depend on how the Federal Reserve responds to inflationary pressures. The Fed was a little late to the game and missed a rate hike opportunity in January. The Fed now has to walk a tightrope with future rate hikes later this year. Rising rates too quickly could potentially hurt markets, but not acting at all is only fueling the inflation problem, which is now at a 40-year high. The Fed is in a no-win situation of having to make some difficult decisions that may sting a bit. The latest indications are that it will hit the brakes on printing money in March.

The basic arrow left in the Fed’s quiver is to raise interest rates, which we expect them to do three or four times in 2022.

Some equities could hold up better than others. High-dividend-paying and big-value stocks have been performing relatively well so far.  Look for value stocks and cyclicals to potentially outpace growth stocks, while an increase in interest rates later this year could mean a strong headwind for tech stocks. Energy stocks may also do well. But in a deep and sustained selloff, most stocks will likely get caught up in the contagion.

Advisors and their clients need to avoid making decisions based on emotions as it invariably leads to bad outcomes. Some specifics:

  • Know that the market fluctuations are normal. Declines of 5% have happened on average three times a year; declines of 10% on average have historically occurred every 16 months; and declines of 15% have happened every three years. Stay the course.
  • Aim to maintain enough investment power to get back in the market at lower prices when the market turns positive.
  • Seek to avoid going to long-duration bonds, especially those relying on their investment capital in retirement. Once interest rates start rising, bond prices may become an instant loser.
  • Consider short-duration bonds or even cash. Cash isn’t ideal because, at a 7% inflation rate, people would be losing 7% of their money. But it may be the best of the options.
  • Avoid interest rate-sensitive stocks like utilities.

The world is not going to end. It’s just going to be a bit more volatile than usual. It’s like being in an airplane. It doesn’t mean we don’t land safely, but advisors and their clients might want to tighten their seat belt along the way.

Reasons To Be Positive

There are several reasons to be optimistic right now. COVID may finally be waning, the economy has remained strong, and virtually anyone who wants a job can get one. Investors have had three excellent years in a row, so a downturn is to be expected. These market cycles run about three years, and they never last long, maybe six to twelve months at worst. This is completely normal market action.

Indeed, market selloffs may be healthy because they may allow for valuations to normalize.  Note that volatility and risk are not the same. Risk refers to the permanent loss of capital. Volatility is simply the price fluctuation of a security. Firms with non-volatile stock prices may not generate a profit. Embracing volatility may lead to great buying opportunities for high conviction picks and how positive returns are generated. Advisors and their clients may want to welcome volatility—because it’s how positive returns are generated. For those reasons, embrace volatility and avoid letting emotions drive their investing decisions.

The HCM-BuyLine®

The HCM-BuyLine® has been identifying and confirming trends for three decades, enabling Howard Capital Management to sidestep catastrophic market declines in 2000, 2008, and 2020. To learn more about the HCM-BuyLine® and how it is used to tactically manage mutual funds and ETFs, please click here.


About Vance Howard

Vance Howard’s vision for HCM originated after seeing the devastating financial losses investors suffered during the stock market crash of 1987, an event precipitated by computer program trading and investor panic. In an effort to the help investors monitor changing market conditions, he developed the HCM-BuyLine®, a proprietary math-driven indicator, designed with the goal of reducing the impacts of emotional investment decisions.


About Howard Capital Management

Howard Capital Management, Inc. (HCM) is a SEC-Registered Investment Advisory Firm founded by Vance Howard, which offers professional money management services to private clients, financial advisors, and registered investment advisors through a suite of separately managed accounts, retirement tools, self-directed brokerage accounts, proprietary mutual funds, and ETFs. As of December 31, 2021, Howard had assets under management of $5 billion.

For more information, financial advisors should contact their wholesaler by contacting Howard Capital Management at howardcm.com or 770-642-4902.


Risks and Other Disclosures

Howard Capital Management, Inc. (“HCM”) is registered with the SEC and only transacts business where it is properly registered or is otherwise exempt from registration. SEC registration does not constitute an endorsement of the firm by the Commission, nor does it indicate that the advisor has attained a particular level of skill or ability. Changes in investment strategies, contributions or withdrawals, and economic conditions may materially alter the performance of your portfolio. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for an investor’s portfolio. Past performance may not be indicative of future results.

HCM Indicator. The HCM-BuyLine® (Indicator) our proprietary indicator is used to assist in determining when to buy and sell securities. When the Indicator identifies signs of a rising market, HCM then identifies the particular security(ies) that HCM believes have the best return potentials in the current market from the universe of assets available in each given model and signals to invest in them. When the Indicator identifies signs of a declining market, the Indicator signals to move clients’ investments to less risky alternatives. Not every signal generated by the Indicator will result in a profitable trade. There will be times when following the Indicators results in a loss. An important goal of the Indicator is to outperform the market on a long-term basis. The reason is the mathematics of gains and losses. A portfolio which suffers a 30% loss takes a 43% gain to return to the previous portfolio value. The Indicator is a reactive in nature, not proactive. They are not designed to catch the first 5–10% of a bull or bear market. Ideally, they will avoid most of the downtrends and catch the bulk of the uptrends. There may be times when the use of the Indicator will result in a loss when HCM re-enters the market. Other times there may be a modest positive impact. When severe downtrends occur, however, such as in 2000-2002 and 2007-2008, the Indicator has the potential to make a significant difference in portfolio performance. Naturally, there can be no guarantee that the Indicator will perform as anticipated. The Indicator does not generate stop-loss orders that automatically sell securities in the portfolio at a certain price. As a result, use of the Indicator will not necessarily limit your losses to the desired amounts due to the limitations of the Indicator, market conditions, and delays in executing orders.

Please remember to contact HCM, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you want to impose, add, or modify any reasonable restrictions to our investment advisory services.  Please Note:  Unless you advise, in writing, to the contrary, we will assume that there are no restrictions on our services, other than to manage the account in accordance with your designated investment objective. A copy of our current written disclosure Brochure discussing our advisory services and fees continues to remain available upon request. LARL.HCII.022822

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Bullish or Bearish on Equities in 2022? Buckle Up for a Bumpy Ride

How Advisors May Mitigate Potential Losses for Clients

To put the stock market’s performance of late in perspective, the S&P 500 index nearly doubled from 2019 through 2021, up more than 90% in just three years. That’s despite the S&P 500 Index suffering one of its steepest declines in history, erasing more than 30% from investors’ portfolios in just 22 trading days after February 20, 2020. But that historic COVID-related event was also followed by one of the sharpest and quickest market recoveries in history. From there, the market resumed its climb to record highs through 2021.

However, Howard Capital Management sees a strong likelihood for volatility and a possible correction or bear market during 2022.

In fact, a market correction may have already begun. Howard Capital Management’s proprietary math-based indicator, the HCM-BuyLine®, has turned negative for the first time since February 2020 at the start of the pandemic.

Let the Math of the Markets, not Emotions, Drive Investment Decisions.

Howard Capital Management’s HCM-BuyLine® enables the firm to mathematically determine what the market, a particular sector, or specific stock is doing and which way a trend is breaking.

For example, according to the HCM-BuyLine®, when the intermediate trend in the stock market is positive based on mathematical indicators (i.e., a 15-day to 20-day moving average crossover, a multitude of new 30-day and 52-week highs), there shouldn’t be any reason not to be 100% invested in equities.

Conversely, if indicators turn negative, with more 30-day and 52-week lows, advisors should likely know something is wrong, and the trend may be breaking. The key is to let the math of the markets, not emotions, dictate how to respond.

Risk mitigation starts with analyzing and quantifying the trend of the market—whether it’s up or down—before acting. Then, take an active approach to pinpoint the trends in different sectors. The stock market is comprised of many different sectors, each with its own patterns and technical indicators. If the trend turns negative in one sector, it may likely turn positive in another.

An investment strategy should be agile enough to identify those changing trends and act on them in a timely manner. An active management strategy is not just about capturing returns during upswings wherever they are occurring, it’s also about sidestepping market declines. How active management is implemented can potentially make a huge difference for investors.

Whether trading the market as a whole or a particular sector, it’s essential to trade what is happening now, not what advisors or their clients think will happen. Investment decisions and attempts to time the market are common pitfalls often influenced by human emotions and can be a far riskier approach to meeting their long-term goals.

What makes Howard Capital Management different is how we employ our active strategy. We make decisions based on quantitative, mathematical calculations to determine current probabilities of major market moves and the likelihood of a sustained trend in either direction. By following a disciplined rules-based process, we aim to help investors avoid making emotional investment decisions and keep them on track with their long-term goals.

What to Expect in 2022

Howard Capital Management anticipates volatility similar to the fourth quarter of 2021. Though volatility is never fun, it is a natural part of market behavior. It can also lead to great buying opportunities, which is what we saw in 2020 and has helped generate the outsized returns of the previous three years. Consequently, by using a tactical risk management approach, advisors may be able to make volatility work to a client’s advantage.

The equity market may see a few more years of double-digit positive returns, but it is likely to be a very bumpy ride, which is why technical analysis—understanding the price movements of securities—should be the backbone of an investment strategy.

Capturing gains and minimizing losses is important to many investors, however, many of these same investors do not have a strategy or system to achieve their goals efficiently and often try to time the market. Any pullbacks or corrections in a strong uptrend should be viewed as opportunities to find bargains along the way. Conversely, if the market turns bearish, moving assets into cash or short-term bonds may help preserve capital to then be deployed for the next upturn.  Howard Capital Management is not afraid to make these decisions mathematically, following a strict system to remove such inefficiencies and complexities.

Inflation: A Negative Headwind

Today’s surging inflation is the likes of which Howard Capital Management has not seen for decades. Inflation is an incredibly negative headwind, and most money managers, advisors, and clients today have never had to factor it into their strategies.

Sustained inflation is going to impact different sectors in different ways, presenting opportunities with some. For example, while past is not prologue, banks and financials have historically performed well in inflationary environments, as have energy stocks. Utilities are another sector that have also previously held up well.

High-quality tech stocks have also historically tended to hedge against inflation. Many analysts believe that inflation-induced higher interest rates and costs hurt the valuations of tech stocks. But companies with a software-based business model, pricing power, low debt, and fair valuations may be an inflation hedge. Technology still drives this economy, and while they may have a bad month or a bad quarter, technology stocks have in the past seldom had bad long-term performance.

The greater risk in an inflationary environment is in the bond market. Long-term bonds have shown greater volatility than stocks like Microsoft or Apple. The 20-year Treasury has been nearly as volatile as the S&P 500. Imagine how they may perform when the Fed starts raising interest rates in 2022. If that happens, investors may not want to own 10-year or 20-year Treasury bonds or long-term corporate bonds.

There hasn’t been a bear market in bonds for over 30 years, so it’s long overdue. Then again, Howard Capital Management hasn’t seen inflation like this in more than three decades. Investors holding long-term bonds are likely to see their portfolios lose value in the coming years. A tactical risk management move for bond investors would be to move into short-term bonds and high dividend paying stocks.

Effective Risk Management does Matter for Returns

Risk management matters. It’s about how clients avoid the market’s worst days while seeking gains from its best days. It’s also about how clients preserve capital when the markets move downward, so it can then be deployed productively where the market is working best.

With the HCM-BuyLine®, it’s not about guessing which way the market is going to move—because no one can predict the market’s direction. Instead, it’s about applying a technical, non-emotional methodology that can follow market trends. One method of attempting to making money in any market environment is identifying the trends and following them with conviction.

The HCM-BuyLine® has been identifying and confirming trends for three decades, enabling Howard Capital Management to sidestep catastrophic market declines in 2000, 2008, and 2020. To learn more about the HCM-BuyLine® and how it is used to tactically manage mutual funds and ETFs, please click here.

The bottom line is investors should be tactical enough to act as trends break in any sector to sidestep declining performance and move money to sectors where the market is working best. Howard Capital Management does not know which sector at this time, but there will be sectors that may make a positive impact in 2022, either because of or despite higher inflation.

In summary, we believe advisors and their clients should trust in a system that removes emotion in a highly emotional market and let the market unfold as it will. No one knows what tomorrow brings but, Howard Capital Management will continue to trade our system and move in or out of equities when indicated.


About Vance Howard

Howard Capital Management, Inc. (HCM) is a SEC-Registered Investment Advisory Firm founded by Vance Howard, which offers professional money management services to private clients, financial advisors, and registered investment advisors through a suite of separately managed accounts, retirement tools, self-directed brokerage accounts, proprietary mutual funds, and ETFs. As of December 31, 2021, Howard had assets under management of $5 billion.


About Howard Capital Management

Howard Capital Management, Inc. (HCM) is a SEC-Registered Investment Advisory Firm founded by Vance Howard, which offers professional money management services to private clients, financial advisors, and registered investment advisors through a suite of separately managed accounts, retirement tools, self-directed brokerage accounts, proprietary mutual funds, and ETFs. As of December 31, 2021, Howard had assets under management of $5 billion.


Howard Capital Management, Inc. (“HCM”) is an SEC-registered investment advisor with its principal place of business in the State of Georgia. SEC registration does not constitute an endorsement of HCM by the SEC, nor does it indicate that HCM has arraigned a particular level of skill or ability. HCM only transacts business where it is properly registered or is otherwise exempt from registration.  Howard Capital Management, Inc. (Howard CM) offers its investment methodology through multiple programs that may invest in exchange traded funds, variable annuities, Bonds and Mutual Funds. There is no certainty that any investment or strategy (including the investments and/or investment strategies recommended by the advisor), will be profitable or successful in achieving investment objectives.

When the HCM-BuyLine® indicates a bull market, HCM then identifies the particular mutual funds, ETFs or individual stocks that we believe have the best return potentials in the current market from the universe of assets available in each given program and invests in them. When the HCM-BuyLine® indicates a bear market, HCM moves clients’ investments to less risky alternatives.  Howard CM’s performance results: 1) are presented net of advisory fees of 2.2% paid monthly in arrears, 2) are net of transaction fees and commissions, 3) are not net of custodial fees, and 4) reflect the reinvestment of dividends and capital gains. Past performance is not a guarantee or a reliable indicator of future results. Therefore, no current or prospective client should assume that the future performance of any specific investment, investment strategy (including the investments and/or investment strategies recommended by the advisor), will be profitable or equal to past performance levels. LARL.020922

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Investing Under a Potential Biden Presidency

WRITTEN BY: VANCE HOWARD & WILL STARK

In most people’s minds, the outcome of Presidential and Congressional elections determines the direction of public policy for the next handful of years. It seems that this year, the outcome of these elections holds far greater weight than just legislative changes. There is increasing uncertainty about whether a clean result will even be generated, let alone what the impacts of those outcomes are. While the outcomes of these elections are not always straightforward, we at Howard Capital Management, Inc. would like to offer a few key trends that investors can use to potentially profit from a shift in power.

Cyclical Outperformance

Based on historical market trends, cyclical sectors tend to perform slightly better during Democratic regimes. The themes for 2020 and the next 2-3 years are likely to continue in the direction of cyclical sectors like Technology, Consumer Discretionary and Energy while the US economy is in a recovery phase. However, if a “Blue Sweep” were to occur, we wouldn’t be surprised to see a broad market selloff. These reactionary selloffs are usually prompted by increased regulatory and geopolitical uncertainty, of which we seem to have no shortage of recently.

There is also tremendous uncertainty surrounding the Energy sector and whether a Biden Presidency would add or detract from that sector. Generally, when we see peaks in uncertainty there is a subtle correlation with positive future returns. We must consider the possibility that, if we see a Blue Sweep the “Green New Deal” policies have a chance of being implemented earlier than expected. Thus, renewable, and sustainable energy sub-sectors could seek to benefit from this regulatory initiative. For Energy specifically, it’s currently plowing through its third-lowest support point since the bottom in late March. It’s far too early to tell which way the sector will go, but it’s a sector that could show tremendous promise in the next 18-24 months.

Technology has held up extremely well through 2020 and considering how COVID-19 will affect the working world for the foreseeable future, we maintain the view that Technology will continue its relative outperformance of other cyclical sectors. While most are concerned about extended EPS ratios, anti-trust suits, regulatory probes, etc. the investors that have ridden the Technology wave through 2020 have profited greatly. Whether it’s time to take gains off the table is something else investors should ponder. Biden has explicitly stated he will raise the capital gains tax to the ordinary income rate for those earning more than $1mm.

Contrarian View

The outcome of the Congressional elections is as important – if not more so – than who is sitting in the Oval Office in January. The probability of a “Blue Sweep” brings far more uncertainty to the markets than a Biden presidency and mixed Congress would. Two of the worst scenarios for market growth historically occur with a Democratic President/Mixed Congress or Republican President/Mixed Congress. Contrary to popular belief, a gridlocked Congress is relatively stable for the markets as they know exactly what they’re getting, nothing.

What Can I Do Now?

Knowing that volatility is expected to rise over the coming weeks, what are investors to do? Our simple answer: Do not make knee-jerk reactions on your own and trust the professionals and systems they have developed to withstand whatever may come to pass. At the end of the day, a contested election result is not a given; a decisive result is also not a given but is certainly possible. They key now is to remain focused on what you can control: your emotions, your strategy, and your goals.

Howard Capital Management, Inc. has seen uncertainty come and go. The only things we can say for certain is that the HCM-BuyLine® has been aiming to mitigate downturns for clients since 1997, and we will continue to respect and implement its decisions. Regardless of how events unfold, we must be strategic and tactical to bring our best defense against a market that does not think or feel.


Disclaimer

This communication is issued by Howard Capital Management, Inc. It is for informational purposes and is not an official confirmation of terms. It is not guaranteed as to accuracy, nor is it a complete statement of the financial products or markets referred to. Opinions expressed are subject to change without notice. Howard Capital Management, Inc. may maintain long or short positions in the financial instruments referred to and may transact in them as principal or agent. Unless stated specifically otherwise, this is not a recommendation, offer or solicitation to buy or sell and any prices or quotations contained herein are indicative only. Our proprietary indicator, the HCM-BuyLine®, identified changes in the market trend. Buys and sells may or may not have occurred on the exact dates shown. These dates do not necessarily reflect transactions applied to every individual account. Also, certain products, custodians and portfolios may have a delay in execution. When the HCM-BuyLine® indicates a bull market, HCM then identifies the particular mutual funds, ETFs or individual stocks that we believe have the best return potentials in the current market from the universe of assets available in each given program and invests in them. When the HCM-BuyLine® indicates a bear market, HCM moves clients’ investments to less risky alternatives. Not every HCM-BuyLine® buy and sell will result in a profitable trade. There will be times when following the indicator results in a loss. However, there have been situations in the past in which HCM reduced clients’ exposure to equities during market downturns by following an HCM-BuyLine® signal, thereby preserving capital. Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Howard Capital Management), made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Therefore, no current or prospective client should assume that the future performance of any specific investment or investment strategy will be equal to past performance level or that it will match or outperform any particular benchmark.  Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Howard.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. To the extent permitted by law, Howard Capital Management, Inc. does not accept any liability arising from the use of this communication. A copy of Howard’s current written disclosure statement discussing our advisory services and fees are available on our website http://www.howardcm.com. LASS.102820 HCM.102820.50


The Current COVID-19 Economy

Everywhere we look articles mention an impending “new normal,” and through our masks we respond that we are braced for one. In this economy, there are many sides to the COVID-19 story. For many, 2020 was a year worth waiting for; school, big travel plans, attractive stocks, mergers, tech innovations; you name it. However, all the anticipation for a great year came to a screeching halt, and these past few months have not been easy on anyone.

Due to financial strain, the average American has experienced cutbacks in spending, leisurely activities, and socialization. Once the world begins to establish its new normal, the economy is expected to slowly creep into a new type of luster. Although the pandemic has thrown the economy off course, small businesses, stocks and technology are using these times as a way to brainstorm new innovations and remain optimistic.

SMALL BUSINESSES

Small businesses that do not fall under the “essential” category have experienced a unique type of hit during the COVID crisis. Many retailers maintained the ability to sell online, which did not require those businesses to create any model changes. However, with the economy coming to a halt, consumers are generating less earnings than usual. Boutique retailers supply a mixture of high-end, bespoke, or specialty lines. Without customers or events, funding is sure to see an unprecedented dip. Mom-and-pop shops are not usually household names, which often put them at the backburner of consumer’s minds during uncertainty. What seems to be swept under the rug is the fact small business operation is a key component to the economy bouncing back, as they make up 40% of total business revenue.

Restaurants supply takeout or delivery, but again with consumers earning less, they have less to splurge on dining experiences. Even though restaurants are still operating and serving, alcohol sales always add to restaurants revenue. Seeing as curbside doesn’t also mean bar-side, restaurants are sure to experience a dip, as well.

When people aren’t earning, they aren’t spending. As unfortunate as this is, it could lead to small businesses functioning higher through online services, orders and deliveries. As social as humans are, survival comes as a higher priority. Events and gatherings inspire spending, and until larger gatherings trend again, goods may sit on the shelves for an unpredictable amount of time.

In part of these occurrences, workers around the globe are reallocating their time as well as their efforts to lock in a more secure future. If this pandemic has taught us anything, it’s that we have savings accounts and assets for a reason.

STOCKS

To say stocks are struggling right now is an understatement. The United States implemented a stimulus package over a month ago, and Japan and the European Union are sitting on their own stimulus packages. Investor confidence is at a new low, however, their market holdings are at an all-time high. Compared to 2009’s $2.5 trillion in market holdings, 2020 is looking at around $3.2 trillion. As of May 20th, money market assets are at $4.8T, which is an all-time high for institutions and retails. Which instils an optimism easily forgotten by the average broker.

The month of May launched with the S&P 500, Russell 2000 and Nasdaq 100 down roughly 15%, 29%, and 4%. The Russell 2000 is in accordance with small business numbers, and the deterioration is unavoidable. On the inverse, through Nasdaq 100 we see tech companies are faring just fine. Small business breaks a real sweat, but tech doesn’t need as much footwork. Ergo, the tech industry has already hit the ground running through this pandemic, and it’s going to gain more traction as the world reopens. Innovation is regularly snatched up and utilized to ensure business runs as quickly and efficiently as possible. In addition, for all the gamers out there, enhancements in experience have been on the up rise as well.

GOODS AND ENTERTAINMENT

These past few months have roped the world into an entirely new “work from home” culture. The average worker is commuting less, taking a look around their living space, and making improvements. The words “improvement” and “self-care” have become both marketing tools and triggers simultaneously. The “self-care” industry is, for lack of a better synonym, booming.

Social media has been flooded with posts and promotions regarding skin care, fitness, nutrition trends, and home improvement, allowing marketing messages to touch more consumers throughout the day.

Consumers are easily bored by nature and are always reaching for something new to occupy their minds. The film industry is at an unnatural standstill but is absolutely anxious to return to work. Pre-production practices and deal making is still in full swing, however physical production and animation studio procedures are facing new restrictions. When physical production is available again, there’s no doubt the leading streaming services will be overwhelmed with new material by 2021. However, for now, entertainment circulates through YouTube channels, Instagram Live, Facebook Live and good old-fashioned news outlets as filming can be done from home by the show hosts, celebrities and influencers.

TECH’S “HANDS-OFF” EVOLUTION

Internet technology has already experienced shifts in previous years due to digitization. Mediator software and video conferencing applications such as Zoom, Google Hangouts, Microsoft Teams, etc., have risen in popularity simply to enhance convenience. These next few months, maybe even years, might prove further digitization due to sanitary reasons. Meetings would be quicker and easier to maintain if the majority were moved to virtual modes. When working from our private phones, tablets, or computers, direct human contact is unnecessary, thus creating a cleaner work environment.

Small business owners are also using technological innovation for product launches, promotions, webinars, increased online presence, and even seamless check outs. The platforms that business owners use today, like Shopify, Woo Commerce, Square Space are designed to be intuitive and extremely user friendly, making it easier than ever to buy and brand products as well as communicate with consumers and audiences.

As communication and transactions transition to online interaction, the medium platforms will experience higher security enforcement to combat hackers. Moving everything online is risky business since data can be lost or stolen by a few carefully crafted codes. Consumer’s minds will need to be at ease by implementing higher online security when maintaining their assets.

EXTRA PLANNING IS THE NEW NORMAL

Any consumer or worker has been posed with a blanket question of, “What if?” So far, 2020 has been a year of issues which require solutions. Now owners, workers, and individuals are on a constant hunt for solutions. Watching devastation and a plummeting market has left people afraid for their future, but even in fear and frustration they are fighting for security while remaining hopeful.

Resources:

Market Watch: https://www.marketwatch.com/story/stock-winners-and-losers-in-the-post-covid-19-work-from-home-world-2020-04-24

Barron’s: https://www.barrons.com/articles/stocks-in-a-stalemate-as-s-p-500-remains-stuck-at-3000-51590598725?mod=hp_LEAD_1

Barron’s: https://www.barrons.com/articles/americas-small-businesses-are-sputtering-why-that-matters-for-the-economy-51590141602


Disclaimer

This communication is issued by Howard Capital Management, Inc. It is for informational purposes and is not an official confirmation of terms. It is not guaranteed as to accuracy, nor is it a complete statement of the financial products or markets referred to. Opinions expressed are subject to change without notice. Howard Capital Management, Inc. may maintain long or short positions in the financial instruments referred to and may transact in them as principal or agent. Unless stated specifically otherwise, this is not a recommendation, offer or solicitation to buy or sell and any prices or quotations contained herein are indicative only. Our proprietary indicator, the HCM-BuyLine®, identified changes in the market trend. Buys and sells may or may not have occurred on the exact dates shown. These dates do not necessarily reflect transactions applied to every individual account. Also, certain products, custodians and portfolios may have a delay in execution. When the HCM-BuyLine® indicates a bull market, HCM then identifies the particular mutual funds, ETFs or individual stocks that we believe have the best return potentials in the current market from the universe of assets available in each given program and invests in them. When the HCM-BuyLine® indicates a bear market, HCM moves clients’ investments to less risky alternatives. Not every HCM-BuyLine® buy and sell will result in a profitable trade. There will be times when following the indicator results in a loss. However, there have been situations in the past in which HCM reduced clients’ exposure to equities during market downturns by following an HCM-BuyLine® signal, thereby preserving capital. Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Howard Capital Management), made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Therefore, no current or prospective client should assume that the future performance of any specific investment or investment strategy will be equal to past performance level or that it will match or outperform any particular benchmark.  Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Howard.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. To the extent permitted by law, Howard Capital Management, Inc. does not accept any liability arising from the use of this communication. A copy of Howard’s current written disclosure statement discussing our advisory services and fees are available on our website http://www.howardcm.com. LASS.102820 HCM.102820.50


What the Cares Act Means for the Economy

In a unanimous vote to support individuals, businesses and hospitals from the distress of Covid-19, the CARES Act, or the Coronavirus Aid, Relief and Economic Security Act, was signed by the President on March 27, 2020, making the 800 page bill and $2.2 trillion economic stimulus package the single largest relief bill in U.S. history. The CARES Act is meant to be a helpful response to this pandemic, but the aspects of the bill are intricate with many key takeaways to understand. 

 

How the largest components of the stimulus package have been roughly allocated:
  • $300 billion – One-time cash payment [tax rebates] to eligible taxpayers if filed a 2018 or 2019 tax return
  • Single taxpayer: $1,200 (incomes up to $75,000-$99,000)
  • Joint taxpayers: $2,400 (incomes up to $150,000-$198,000)
  • Children: additional $500 per child (under the age of 17)
  • $260 billion – Expanded unemployment insurance to expand eligibility and offer workers an additional $600 per week for four months
  • $376 billion – Small business relief through the SBA (U.S. Small Business Administration) for companies with 500 employees or less to prevent layoffs and business closure and maintain payroll for up to 8 weeks of cash-flow assistance
  • $349 billion for the Paycheck Protection Program, PPP, allows the SBA to make forgivable loans up to $10 million for coverage of employee salaries, paid sick/medical leave, insurance premiums, mortgage, rent and utility payments
  • $27 billion for relief through the Economic Injury Disaster Loan (EIDL) emergency advance, and additional new loans and grants for small businesses
  • Additional business tax-credits and payroll tax breaks are available; however, they are not available for businesses who secure PPP
  • Business payroll tax can defer their employer portion, half being due on December 31, 2020 and the latter half December 31, 2022
  • $500 billion – Expanded lending for large businesses and local governments
  • $46 billion is meant to assist aircrafts, air cargo carriers, and national security
  • $454 billion in Federal Reserve lending to support other businesses, non-profit organizations, states, and municipalities
  • $150 billion – Coronavirus Relief Fund to States, Territories, and Tribal governments for public health emergency expenditures (min. $1.25 billion for small population states)
  • $153 billion – Supplemental funding for community and private health systems, Medicare and telehealth will see an expansion
  • $100 billion for hospital assistance (to include expense reimbursement)
  • $27 billion for vaccine development, treatment, expanded Covid-19 testing, medicine and supplies (ventilators and masks)
  • $20 billion for veterans
  • $4.3 billion for the CDC
  • $1.3 billion for community health centers
  • $49 billion – Agriculture and nutrition programs
  • $45 billion – FEMA
  • $27 billion – Elementary, secondary and higher education 

 

Who Provides the Loans?

The Secretary of Treasury has the authority to provide loans or guarantee loans to states, municipalities and other eligible businesses. A variety of regulations have been loosened against prior legislation imposed through the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Economic Stabilization Act of 2008, and others. 

What Does This Mean for Retirement Plans?

Distributions: Coronavirus-related distributions for qualified retirement plans will not be penalized by

10-percent early withdrawal penalty (591/2 for IRAs, 401(k)s, 403(b)s). Distributions may be made up to $100,000 made on January 1, 2020 and thereafter. The funds will be taxable up to three years and the taxpayer may contribute the funds back to an eligible retirement plan within three years to avoid taxes.

Required Minimum Distributions (RMDs): RMDs are suspended for the calendar year for 2020 for defined contribution plans and IRAs.

What is the Defense Production Act?

The 2020 stimulus bill also expands the Defense Production Act, which is an initiative meant for building defense equipment for military purposes. The CARES Act offers a two-year period where the government may exceed the $50 million expenditures limit and correct any shortfall production experienced during the pandemic. 

The Response to the Stimulus Package

The Senate and the Congress passed another bill for $484 billion, adding $310 billion of new funding for the SBA’s Payroll Protection Plan (PPP). Of that, $10 billion has been allocated for Economic Injury Disaster Loan (EIDL) and $50 billion to boost the small-business emergency grant and loan program. Agriculture will be defined as a small-business, and some of the money will be earmarked for banks with less than $50 billion in assets. $75 billion has been added to the $100 billion in the original CARES Act for hospitals and $25 billion is included for testing ranging from grants to states and CDC and NIH for research and development. Moving forward, Congress is likely to shift from crisis relief to economic stimulus.

The total unemployment rate is still increasing. As of April 23, 2020, The Department of Labor published unemployment insurance claims numbers totaling roughly 26.5 million claims, representing 16.2% of the labor-force. These numbers are staggering compared to 2008’s 15.3 million. For now, the long run is the most important time frame to give focus and the stock market’s volatility will continue to respond to any and all optimism or digressions in the news. The collapse of oil and weak earnings has pushed the market all over the place. Another 2-4 weeks of pullback/consolidation is to be expected; however, it appears the bottom has been set in the 2200 area on the S&P 500 back in March. This pullback might be the last low entry point to buy for 2020. Time will tell.

HCM04820-13


Disclaimer

This communication is issued by Howard Capital Management, Inc. It is for informational purposes and is not an official confirmation of terms. It is not guaranteed as to accuracy, nor is it a complete statement of the financial products or markets referred to. Opinions expressed are subject to change without notice. Howard Capital Management, Inc. may maintain long or short positions in the financial instruments referred to and may transact in them as principal or agent. Unless stated specifically otherwise, this is not a recommendation, offer or solicitation to buy or sell and any prices or quotations contained herein are indicative only. Our proprietary indicator, the HCM-BuyLine®, identified changes in the market trend. Buys and sells may or may not have occurred on the exact dates shown. These dates do not necessarily reflect transactions applied to every individual account. Also, certain products, custodians and portfolios may have a delay in execution. When the HCM-BuyLine® indicates a bull market, HCM then identifies the particular mutual funds, ETFs or individual stocks that we believe have the best return potentials in the current market from the universe of assets available in each given program and invests in them. When the HCM-BuyLine® indicates a bear market, HCM moves clients’ investments to less risky alternatives. Not every HCM-BuyLine® buy and sell will result in a profitable trade. There will be times when following the indicator results in a loss. However, there have been situations in the past in which HCM reduced clients’ exposure to equities during market downturns by following an HCM-BuyLine® signal, thereby preserving capital. Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Howard Capital Management), made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Therefore, no current or prospective client should assume that the future performance of any specific investment or investment strategy will be equal to past performance level or that it will match or outperform any particular benchmark.  Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Howard.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. To the extent permitted by law, Howard Capital Management, Inc. does not accept any liability arising from the use of this communication. A copy of Howard’s current written disclosure statement discussing our advisory services and fees are available on our website http://www.howardcm.com. LASS.102820 HCM.102820.50