DWM 4Q12 Market Commentary

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Happy New Year! After a relatively strong first three quarters for both the equity and fixed income markets, fourth quarter readings were pretty muted. Frankly, that’s pretty good considering all of the headwinds we faced going into this last quarter of 2012. Probably the biggest story of all was the so-called “fiscal cliff”. It reminded us of all of the Y2K scares of a decade or so ago. Legislation to forestall this “cliff” passed before trading could start in the new year, and the market reacted by sending up stocks nicely. Ironically, this cliff agreement offered little to address our significant long-term debt issues. The proverbial “can” in WashingtonD.C. was indeed kicked down the road again. 

 Let’s celebrate the honorable return achievements of 2012 before looking ahead to 2013. 

Stocks finished the year up about 16% in most areas (S&P500: 16.0%, S&P600 Small Cap: up 16.3%, S&P400 Mid Cap up 17.8%, and MSCI World Index (ex-US) up 16.4%), reflecting a nice, unusual level rise across almost all equity investment styles.

Bonds showed some fair returns for calendar year 2012: Long-term Treasuries up about 3.5%, the US Aggregate Bond Index up 4.2%, and Munis up a solid 6.8%.

Commodities (which DWM classifies as alternatives) did not produce much evidenced by the Dow Jones-UBS Commodities Index falling 1.1% on the year. Also in the alternative area, some illiquid investments like equipment leasing and private timberland REITs did not provide as much bang for the buck this year. DWM expects these investments to recover as the global economic recovery continues. On the other hand, there were niches in the alternative landscape that fared quite well like public REITs and some absolute return strategies. A few noteworthy liquid alternative funds to mention are Marketfield Long/Short (up 13%+), RiverNorth/Doubleline Strategic Income (up 12%+) and Pimco All-Authority (up 17%+). A portfolio of liquid alternative funds continued in 2012 to help investors’ overall portfolios with solid results and non-correlation benefits in respect to the rest of the portfolio holdings.

All in all, 2012 was a rewarding year for most investors that weren’t sitting in cash. 

Looking forward to 2013, headwinds include lack of household income growth, lackluster consumer confidence, and further Washington political theater.In fact, the latter is a major problem as Congress continues to kick the can down the road. The cliff agreement was no “grand bargain” or a deal looking at both tax revenue and spending cuts in a way that can get our Federal deficit under control any time remotely soon. Certainly, Moody’s didn’t like it, basically putting the US on notice that it will most likely cut its AAA rating if it can’t make something happen soon. And something will need to happen quickly as the federal borrowing limit (aka “debt ceiling”) will be reached around the end of February. Remember the ludicrousness that played out in 2011 the last time we came close to hitting the ceiling?!? Expect more of the same. Long story short, Washington policy stalemate will continue to be a major story.

There are some real positives domestically like the recovering housing market, expanding manufacturing activity, and improving trade balance. But things aren’t so rosy overseas where the Eurozone is still in recession and China’s financial sector looks dicey. For a world where we are becoming more and more connected, we should all hope for a successful global economy. 

In conclusion, 2012 results show that positive results can occur in what may seem like shaky times. DWM cherishes the opportunity of providing its clients with solid investment results and sound financial planning that can help people achieve their long-term goals. DWM wishes a prosperous and healthy 2013 for you and your family.    

Brett M. Detterbeck, CFA, CFP®

 

DETTERBECK WEALTH MANAGEMENT

DWM 3Q12 Market Commentary

 

fiscal cliff, multiple asset allocationWith current readings of anemic economic domestic growth, a recession widening in Europe, and a possible “Fiscal Cliff” on the way, it’s ironic how well the stock market and frankly most markets have done in 3Q12 and year-to-date (YTD) 2012.  It certainly didn’t hurt in mid-September when the Fed announced QE3 which is yet another round of government bond-buying designed to jumpstart the US economy and job market. Just how effective is this prolonged monetary policy? Weak US economic data, political unrest in the Middle East and Africa, even a slowdown in growth in China, are just a few of many things that show the situation really hasn’t gotten much better. At some point, the market will no longer reward this so-called “Quantitative Easing”.

But let’s talk about the good news for a little bit – the 3Q12 results:

The average US diversified stock fund posted a 5.3% return for the third quarter and is now up close to 13% Year-To-Date (“YTD”)! Results were also quite nice outside of the US with diversified international stock funds averaging 6.8% in the 3Q12 and now up almost 11% YTD. DWM equity portfolios enjoyed these run-ups.

Bonds chugged along with the riskier debt securities seeing more inflows and thus better returns. This was evidenced by the Barclays Capt’l US Aggregate Bond Index being only up a respectable 1.6% for the quarter (and almost 4% YTD) yet the Barclays US High Yield Index up 4.5% for the quarter (and 12% YTD). It should be noted that DWM fixed income portfolios have really enjoyed great performance both on the quarter and YTD and as such is reflected in your overall return. 

 Our DWM Liquid Alternatives portfolio showed it participates in bullish quarters like this, up around 3.6% for the qtr and up almost 9% YTD. This alternative part of the portfolio will really be needed when, not if, equities markets (and fixed income markets for that matter) turn bearish. 

Nice results, huh?! Unfortunately, that’s where most of the good news ends. Besides some improving housing data, which simply shows a bounce off a very low bottom, it really isn’t pretty out there. Now is not the time to “get out the Dom Perignon” and start dancing in the streets. Now is the time, for those who aren’t DWM clients, to make sure you have reviewed your financial plan, your risk tolerance, and your portfolio asset allocation to make sure it’s ready for the challenging near-term future. DWM clients already have these areas covered. We have many potential big risk events on the horizon: the Presidential Election, a possible replay of the debt ceiling debacle, and then the possible Fiscal Cliff, which is the term referring to the simultaneous spending cuts and tax increases that are slated to take place at the end of 2012 unless Congress takes action and actually comes to agreement on something. 

Frankly, this is a good example to show it’s impossible to time the stock market, as it does not necessarily operate in-line with fundamental data. It’s another reason why a well-diversified, low-cost, multiple asset allocation approach like ours is so prudent in times like these. Rather than trying to “time it”, we use disciplined strategies and vehicles to produce stable and steady returns over time, thereby helping you achieve your long-term financial goals. 

Hope to see you at one of our Fall seminars in either Charleston or Palatine where we will discuss these important items in more detail.  

Brett M. Detterbeck, CFA, CFP®

 

DWM 2Q12 Market Commentary

Detterbeck Wealth Management sherpaAfter the investor party that took place in the 1st quarter, 2q12 started like a bad hangover with most stock indices getting hit hard in May. Fortunately the best month of June (at least for the S&P500) since 1999 helped recoup some of the early losses. 

For the record, the average US diversified stock fund posted a -4.6% return for the second quarter yet remains up 7% so far this year! That’s pretty amazing given the soft economic conditions here in the U.S. and the turmoil overseas. And speaking of overseas, the international markets continued to lag the domestic markets in the second quarter as evidenced by diversified international stock funds dropping 7.1%, yet still up 3.8% Year-To-Date (“YTD”). It should be noted that international outperformed domestic in the month of June, a trend we expect to continue. Another note was value outperformed growth in 2Q12. 

With stocks trending down most of the quarter, investors gravitated to safety as expressed by the relatively strong showing in the bond world. The Barclays Capt’l US Aggregate Bond Index was up 2.1% for the quarter and now up 2.4% YTD. Yields on 10-year Treasury notes fell to 1.5% last week, near the lowest levels in generations, reflecting market dreariness about the economy and also possibly the anticipation of more action by the Fed. 

Turning toward alternatives, our DWM Liquid Alternatives portfolio did its primary job of protecting first, participating-in-upside second, up almost 1% for the quarter and now up almost 5% on the year. During the quarter, we successfully merged in alts like real estate, gold, and other commodities that were held in strategic models into the LA portfolios for more-focused strategy tracking moving forward.    

Going forward, there are many challenges: 5 of 17 Eurozone countries have received a financial bailout in the last 2½ years with more on the horizon. Let’s face it, its not just the PIGS (Portugal,Ireland,Greece, and Spain) that we need to worry about; the whole Eurozone faces recession. Move Far East, and even China is slowing down. Back in the homeland, our latest readings show slowing new orders, production, etc. Three years after the end of the nation’s most recent recession, the U.S.employs almost 4 million fewer Americans than when the recession began and 12.7 million people remain jobless. And the worst is that Joe Consumer is not spending as much as he did just last year. In the political arena, we are now in the Presidential Election wait-game with not much getting done in Washington D.C.before that wraps up. And frankly there’s a lot that needs attention politically… Did you know that Federal spending on Social Security, Medicare and Medicaid has risen from 16% of total government spending in 1967 to 41% of spending in 2011 and the percentage is only going to go higher unless serious changes are made?

The good news is that almost all of the major global central banks are taking steps to bolster economic output. U.S. Fed Head Bernanke said last month “We are prepared to do what’s necessary”. We think they’ll keep this attitude for the near future and hence don’t anticipate rates/inflation moving up any time soon. This should create an environment where stocks are volatile, bonds have modest returns, and alternatives are the key driver in your portfolio’s total return.  

In conclusion, here are a few more general comments on the stock market. Of course, stocks (equities) only represent a minority allocation for our clients’ portfolios. Diversification amongst stocks, bonds, and alternatives is the key to achieving a stable, long-term return. But equity is the asset class that gets the most headlines. So I thought it would be fun to remind people that as gloomy as the stock market may seem, the S&P500 is now entering its 41st month in the current bull market and has gained 115% (total return) since bottoming 3/09/09. Here’s another tidbit: The average bull market for the S&P500 since 1950 has lasted 58 months. It’ll be fun to see if this current run, even though it may not feel like one, can eclipse the average. As a reminder, if you haven’t already done so, please download the DWM Mobile App to your smartphone so you can see your portfolio at any time and take advantage of the many features within. Enjoy your summer and we hope to connect with you again soon! 

 

 

What Would You Do With A Windfall of Money?

Money windfallDid you know that 90% of lottery winners are bankrupt within 5 years? Or that 70% of all wealth transitions fail? The reason is that most people are resistant to change and only a minority can handle it.

The questions that normally surface when coming into large sums of money can be both technical like:

  • “What should I do next?”
  • “Who can help me?”
  • “Who can I trust?”

and emotional like:

  • “How did I get this money?”
  • “How has this changed my life?”
  • “Why are people treating me differently now?”

Frankly, new wealth presents challenges that can be disorienting and possibly dangerous. It can bring on a feeling of identity dissolution – the end of your old self. In particular, if there is suddenly no economic need to work, you may need to redefine yourself. This can affect your career, relationships, and lifestyle (like home, community, and location).

There are many possible sources of wealth. You can be born to it, like a trust fund. You can inherit it as a result of someone’s death. You can win it. You can create it from the sale of a business, idea, or as an entertainer. You can earn it through stock options. You can sue for it. You can marry into it.

The ability to keep this windfall depends a lot on from where the money came. If it came via inheritance from an unexpected death, it may be seen as “blood” money and the heir will tend to lose it quickly. Money “earned” from a business sale, for example, tends to stick better.

Besides the source of the money, people’s reactions are shaped by a number of influences:

  • The windfall amount relative to your current income/net worth.
  • Your age and stage in life.
  • Your career satisfaction.
  • Your class background.
  • Your current community and social network.
  • Your family dynamics.
  • Your money style. For example, if you’re already frugal, you may have a better chance of keeping the money and vice-versa if you’re loose with money.

People who receive a windfall have a tendency to make irrational, impulsive decisions in the first few months after coming into this new-found money. Some examples of this include:

  • The desire to get rid of money via gifting.
  • Going on a spending spree.
  • Giving up control of funds.
  • The urge to move.
  • The urge to change work.
  • Feeling stuck or frozen.
  • Hanging on to inherited stock for sympathetic reasons even though you know you’d be better off diversified.
  • Doing nothing.

This emotional period can basically mirror the stages of grief. Our job as advisors is to anchor our client during this “wave” of emotions and listen to them. We help them understand their decision-making approach, focusing in on the decisions they would have made before getting this money. We can help the client realize the true value of the money. We help build the client’s support team which includes their estate planning attorney, CPA, etc. We help set goals to enable the client to “live a life that is about fulfilling their greatest potential.” And most importantly, we can urge the client to take ample time to make solid, not hasty, decisions.

Coming into a great deal of money sounds fantastic at first, but empirical studies show that without proper planning it can lead to many painful experiences and put people in worse shape emotionally, financially, and/or physically, than they were to begin with. By working with an advisor that cares, you may be part of the small minority who don’t lose their windfall and actually prospers!