Time for a financial caddie?

Caddie_Brett.jpg

“Pro Jock.” “Looper.” That’s what I strived to be in my early days of youth. Those that are familiar with the movie Caddyshack may recognize the reference and, yes, one of my first jobs was that as a caddie. And whereas the Caddyshack movie was quite whacky, in real life the lessons learned by growing up as a golf caddie were life lessons and things as a “financial caddie” I still exhibit today.

  1. Preparation / Guidance – a good golf caddie (“GC”) should arrive to the ball before the golfer and remove any surrounding debris and have yardage-to-the-green ready for the golfer. This is quite similar to how a financial caddie (“FC”) prepares his client for the next big shot in their life, by assessing the current investment environment and creating an Investment Policy Statement/target asset allocation mix and chart of course that can help the client navigate “all 18 holes”.
  2. Paying attention – a good GC needs to be paying attention to their golfer’s needs, i.e. is she cold and needs a jacket from the bag?, is her ball dirty and in need of cleaning?, is she familiar with what the next hole does? A good FC is one that is not only paying attention but being proactive with the client’s needs, i.e. running tax projections to make sure there are no surprises come tax time, running estate planning flow reports to make sure that the clients’ estate planning is in-line with their wishes, etc.
  3. Commitment – I remember some caddies that would quit – sometimes physically, sometimes mentally, sometimes both – out there. That’s bad caddying and a lack of commitment and perseverance. Some days will be beautiful, sunny ones but some will be stormy with difficult conditions. Like a good GC, a good FC makes you, the client, the priority and makes sure that our professional attention, focus and best efforts always have you in mind.
  4. Resourcefulness – Every “loop” is different, every golf shot is different, every round is different the same way in the financial world there are always new things being thrown at you. A good GC and FC will embrace change and always look for new possibilities to solve the problem, unravel the puzzle, and complete the task.
  5. Attitude – the good caddies know that they need to show up to the caddie shack early in the morning with a smile and a hard-working, respectful attitude if they want to earn the continual right of “toting the bag”. At DWM, one of our most valued qualities is a conscientious attitude used to apply diligence for the timeliness of project completion and adherence to punctuality in schedules in respect to the clients we gratefully

That being said, I’d like to share a wonderful experience with you. Schwab & Co invited my father/business partner, Les, to play in the Schwab Cup Senior Pro-Am last week. Pros like Bernard Langer, Vijay Singh, Fred Couples, Lee Janzen, and our new favorite, Brandt Jobe were all there. These are golfers my dad grew up watching and idolizing. Les was able to share the course with these guys and, after a 20+ year break, I came out of golf caddie retirement to strap on the bag one last time!

“So, I tell them I’m a pro jock, and who do you think they give me?” No, not the Dalai Lama, but Les Detterbeck, himself. Third generation of the first Lester. The long putter, the grace, not yet bald… striking. So I’m on the first tee with him. I give him the driver. He hauls off and whacks one – big hitter, the Lester – long, into a one foot crevice, a couple miles east of the bottom of the desert, right on the fairway. And do you know what the Lester says? Gunga galunga…gunga…No, actually he says, “give me the 4 wood” and the Lester proceeds to put it onto the green and two putt for a gross par, net birdie to start our Pro-Am team off in the right direction.

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It was exhilarating day to say the least. We didn’t win the event, but we had a once-in-a-lifetime day, coming just a couple weeks before Les’ 70th birthday. And whereas I doubt I will ever caddie for someone in an official tournament ever again, I know that I will always strive to do my best as a FINANCIAL CADDIE to the wonderful clients we currently serve and future ones.

Of course, this was the first time I had officially caddied in over twenty years. I thought I did a splendid job, my gift to Les for his 70th. Back in the 80’s, I’d be happy to earn $20-$40 for the round to go blow at the local music shop on a few CDs. But this time… there was no money; only total consciousness. So I got that going for me, which is nice.

(*If you haven’t figured by now, Caddyshack is the author’s favorite move of all time. Happy BDay, Les! Gunga Galunga!)

DWM 3Q17 Market Commentary

“Train Kept A Rollin’ All Night Long…” The US economic expansion continued on during the third quarter of 2017. It is the third longest expansion since World War II and is now closing in on 100 months.  There were plenty of negatives that tried to slow it down. Politically, we had the debt ceiling deadline, a failed attempt to repeal Obamacare, and a war of words with North Korea. Even the lives and economic losses from the likes of Hurricane Harvey, Irma, Maria, western wildfires and two Mexican earthquakes – amounting to what could be the most expensive year for natural disasters ever – couldn’t slow this train down.

Thing is: the positives outweigh those negatives. At the end of the day, the market is powered by companies’ earnings. And those earnings have been robust and are expected to continue to be! And it’s not just domestically; growth is accelerating at a global level with Eurozone businesses and households more confident about their prospects than at any time in more than a decade. Japan has shown decent growth and inflation this year. And emerging markets are enjoying better fundamentals with more credible politics. Choo! Choo!

We are big believers in asset allocation which is why we showcase the major asset classes each quarter. Here’s how each fared:

Equities: The S&P500 rose 4.5% on the quarter and is now up 14.2% year-to-date (“YTD”). Sounds excellent, but actually a more diversified benchmark, the MSCI All Countries World Index, which includes US large cap stocks, US smaller cap stocks AND international stocks, did much better, up 5.3% quarter-to-date (“QTD”) and now up 17.3% YTD. We’ve been saying for some time that domestic large cap stocks in general look pretty “frothy” and hence it’s not surprising to see this rotation out of domestic large cap stocks into other cheaper equities. The other thing at play is the renewed interest in the so-called “Trump trade”. The areas that moved post-Trump Presidential Election, like small cap and value, have ‘steamed ahead’ in the last few weeks from the renewed hope of possible tax cuts. In just September, the Russell 2000 outperformed the S&P 500 by 4.2% and the Russell 3000 Value outperformed the Russel 3000 Growth by 1.6%.

Fixed Income:  During the quarter, the Fed announced that they are pushing ahead with an aggressive schedule for rate increases. We are happy to see the Fed take this path toward “normalization” while the economy is strong. The US needs to get back to higher rates so that the Fed has “some coal for their engines” if things go bad. That said, this announced path has succeeded in boosting inflation expectations, which has pushed up yields in both the 2-year and 10-year US Treasury notes, with the latter closing the quarter at 2.3%, its first quarterly gain of 2017. For the record, the Barclays US Aggregate Bond Index gained 0.9% in the third quarter and is now up 3.1% for the year. The inclusion of global fixed income assets led to better results with the Barclays Global Aggregate Bond Indexregistering +1.8% for 3Q17 and +6.3% YTD.

Alternatives:  Let’s take a look at a few ‘alts’ we follow. Gold gave back a little in September, but registered a +3.1% 3Q17 return represented by the iShares Gold Trust. With 2017 going down as one of the worst natural disasters year on record, the alternative exposure to reinsurance-linked securities (sometimes referred to as ‘catastrophe’ securities) took a hit. One would have thought oil would have suffered from the hurricanes as well, but demand was strong and with slowing US production, oil prices (WTI) ended the quarter up 12.2%. For the record, the Credit Suisse Liquid Alternative Beta Index, our chosen proxy for alternatives, was up 1.6% for the third quarter and 2.8% YTD.

For balanced investors, It’s been a pretty nice three quarters to start 2017. Looking forward, this bull market train can continue to roll, and a case can be made that returns can even get stronger given the great economic fundamentals around the globe. If Washington can get something done relative to a tax cut, look for stocks to accelerate into year-end.

Of course, there will always be (rail) road blocks. We are thrilled to see inflation measures move toward the Fed target range around 2%, but there are many out there concerned that inflation might ‘chug’ right through those target levels and create havoc on the back-end. Furthermore, the announced and about-to-start-very-soon Federal balance sheet reduction is an unprecedented experiment. And it’s not just the US attempting this.  Global central banks at some point need to do some house-cleaning and will be reducing their balance sheets as well. There is a huge risk something can go wrong and send this train off track. Lastly, we don’t think the markets are adequately pricing in the geopolitical risk out there, which some would say is approaching multi-decades high. Frankly, when a small probability risk is hard to price in, the market usually just shrugs it off. With trading activity so light recently and little risk currently priced into the market, things could get ugly very quickly if anything goes wrong.

In conclusion, these are challenging times. It’s not easy to navigate the terrain out there. So make sure you have good direction and management. Don’t fall victim to a bad conductor and wind up like Ozzy Osbourne “going off the rails of a crazy train!” Make sure that your engineer is keeping you on track. At DWM, we engineer our clients’ portfolios to ride safely through the peaks and valleys that this train has and will travel through. With the right team at the controls, you can make your journey a pleasant one.

Brett M. Detterbeck, CFA, CFP®

DETTERBECK WEALTH MANAGEMENT

DWM 2Q17 Market Commentary

“Let the Good Times Roll!” Yes, the 1979 song by Ric Ocasek and the Cars may describe the market’s attitude in the first half of 2017. “You Might Think” the markets are “Magic” or “All Mixed Up” – other classic Cars songs – but, nonetheless, investors should be pleased to see their mid-term results.

With the trading year half-way complete now, “It’s All I Can Do” to give you the major market stories in 2017:

  1. 1.All three major non-cash asset classes (equities, fixed income, and alternatives) are positive to start the year.
  2. 2.Large-cap equities have significantly outperformed small-cap equities, the largest outperformance to start the year in almost 20 years. Large caps, as represented by the S&P500, were up 3.1% for 2Q17 and up 9.3% Year-to-date (“YTD”) through June 30th. Small caps, as represented by the Russell 2000, were up 2.5% and 5.0%,
  3. 3.Growth is significantly outperforming value. In fact, it’s the biggest outperformance to start a year ever besides 2009. The S&P500 Growth Index was up 4.4% 2Q17 & 13.3% 1H17 vs the S&P500 Value Index, up 1.5% and 4.9%, respectively!
  4. 4.International stocks are outperforming domestic stocks. The last several years have seen the opposite, but now international is outperforming domestic in what may be a tidal change. The MSCI EAFE Index was up 6.4% for the second quarter and now 13.8% YTD!
  5. 5.Minimal volatility – Despite political noise and other headlines around the world, the equity market continues to move forward with little whipsaw. The CBOE Volatility Index, Wall Street’s so-called “fear gauge”, saw its lowest level in over two decades!

Let’s drill down into the various asset classes.

Equities: Obviously, we can see from above that returns in ‘equity land’ were quite decent. In general, stocks rallied on strengthening corporate earnings, improving economies both here and abroad, and continued support from central banks. Earnings from S&P500 companies increased 14%, the best growth since 2011.

Fixed Income: The Barclays US Aggregate Bond Index gained 1.5% in the second quarter and is now up 2.3% for the year. The Barclays Global Aggregate Bond Index produced even better returns, +2.6% 2Q17 and +4.4% YTD, thanks to stronger results overseas. Many bond investors, including DWM, have been surprised at the falling US government bond yields. The 10-year Treasury Note started the year at 2.45, peaked in March at 2.61, only to close the quarter at 2.30. Why aren’t rates going up? Much of it has to do with skepticism about the passage of Trump’s fiscal agenda. Amongst other things, there has not been the promised major tax reduction nor a flood of fiscal spending yet. As such, inflation expectations weakened in June. However, hawkish comments in the last several days from major central banks, including our US Fed indicating a strong chance that they will announce in September a decision to start shrinking its balance sheet, has caused a reversal in bond yields to start the third quarter. We see the Fed continuing to unwind the past years of stimulus via rate hikes or balance sheet reductions in a well-announced, controlled fashion.

Alternatives:  The Credit Suisse Liquid Alternative Beta Index, our chosen proxy for alternatives, was up 0.4% for the second quarter and 1.1% YTD. This benchmark gives one a good feel for what alternatives did in general. Of course, there are many flavors of alternatives so drilling down into the category can reveal very different results. Furthermore, alternatives can take the form of either alternative assets and/or alternative strategies. “Traditional” alternative assets like gold* and real estate** fared well through the first half, up 7.8% and 3.2%, respectively. However, another “traditional” alternative in oil (a commodity) suffered, falling back into bear territory. US fracking companies continue to pump at lower prices frustrating OPEC’s goal of price stability via OPEC member supply cuts. A couple of alternative strategies fared differently: managed futures*** have shown losses in the first half, down -5.6%; whereas merger arbitrage**** has had a decent gain of 2.2%. These examples show how alternatives behave independently, thereby providing the ability to reduce the volatility of one’s overall portfolio.

It has been a solid first half for most balanced investors. Looking forward, it’s hard to say what path the markets will take. They could continue this nice trajectory upward – did you know that US stocks were up in January, February, March, April, and May? This is significant because, historically, when US stocks are up in the first 5 months of the calendar year, the average return for US stocks for the full calendar year was +28.8%! This first-five-months-up event has only happened 12 times and in all 12 times, the year ended up in double digits!

However, domestic stocks are getting expensive. The S&P500 now trades at 18x projected earnings over the next 12 months, its highest level in 13 years. Overseas stocks are still a relative bargain compared to the US and one of the reasons for their recent and expected-to-continue outperformance. Furthermore, where the US has raised short-term interest rates four times since the end of 2015, international central banks have been and will remain relatively more accommodative for the near future.

The other scary thing is that the equity and bond markets are sending mixed signals. If bond yields stay down, that would tell us that the bond market sees tepid economic growth, which could be true if all of the pro-growth Trump agenda plans do not come to fruition. For now, the equity markets are signaling otherwise – that this bull market has legs based upon strong corporate results and improving fundamentals. No, Mr. Ocasek, the signals from the bond market and equity market are not “Moving In Stereo.” Only time will tell to see what market is signaling correctly. In the meantime, the goal is to have a portfolio in place that can weather any storm. At DWM, we think our clients’ portfolios are well-positioned for what the markets will throw at us. We look forward to the journey. In fact, and finishing with one last Cars’ classic, “Let’s Go!”

Brett M. Detterbeck, CFA, CFP®

DETTERBECK WEALTH MANAGEMENT

*represented by the iShares Gold Trust

**represented by the SPDR Dow Jones Global Real Estate ETF

***represented by the AQR Managed Futures Strategy Fund

****represented by the Vivaldi Merger Arbitrage Fund

DWM 1Q17 Market Commentary

Did you know that after 146 years, the Ringling Bros and Barnum & Bailey Circus is shutting down? No worries. It seems our friends in Washington are taking it over as it has been a circus-like atmosphere filled with noise for the last few months. Ironically, for the market, it’s been just the opposite, with 1Q17 going down on record as one of the “quietest” quarters in the last 30 years, as represented by the S&P500 posting an average daily move of just 0.32%. But even though the stock market was calm, that does not mean it didn’t produce. Because it did, with the three major asset classes – equities, fixed income, and alternatives – all up.

What’s interesting is that it was not a continuation of the “Trump trade” that has powered the recent advance. After the November election, shares of financials and smaller US stocks jumped based on hopes that looser regulations and tax cuts would benefit banks and more domestically oriented companies. However, so far the Trump administration has not lived up to the campaign hype. The failure of the Republicans’ health-care bill has led investors to question if this administration can push anything through, including any significant shift in U.S. trade policy. That has led to a sector rotation within the equity asset class. Things that were strong post-election like financials and small caps are being sold for US multinationals, particularly those in the trade-sensitive technology sector, and emerging markets. This shows in the following results:

Equities: The MSCI AC World Equity Index had a great start to 2017, up 6.9%. Domestic large cap stocks as represented by the S&P500 came in at a solid 6.1% as large caps dominated small caps*, up only 2.5%. The big winner was emerging markets**, up 11.5%.

Fixed Income: The Fed lifted rates during the first quarter based upon promising US economic forecasts. The personal consumption expenditures price index, which is the Fed’s preferred inflation gauge, ticked in at over 2% for the first time in over five years. It wasn’t too long ago that people were worried about deflation, so this achievement is very good news. The Barclays US Aggregate Bond Index gained 0.8% in the first quarter. The Barclays Global Aggregate Bond Index enjoyed slightly better returns, +1.8%, thanks to stronger results overseas. Again, emerging markets was the place to be, up 4.2% as represented by the PowerShares Global Emerging Mkts Sovereign Debt ETF.

Alternatives:  The Credit Suisse Liquid Alternative Beta Index was just above break-even, +0.1%.  The handful of liquid alternatives (which could be an alternative asset or strategy) that DWM follows fared better. Alternative assets like gold*** surged 8.4% and MLPs**** advanced 2.6%. An alternative strategy like the RiverNorth DoubleLine Strategic Income Fund, which takes positions in the inefficient closed-end space, registered a 1.4% return. The only real losing alternative category we follow were managed futures funds (an example of alternative strategy), like the AQR Managed Futures Fund which lost 1.0%. These funds struggled from the rotation change mentioned above. It should be noted that these type of funds exhibit extremely low correlation to other assets and can provide huge protection in down times.

Put it together and it was a very handsome start to 2017 for most balanced investors.

Looking forward, we are encouraged as we believe economic growth will continue to advance not only in the US but also globally. Consumer and business owner sentiment is very strong. American factory activity has expanded significantly in recent months.

Concerns include:

  • Elevated US equity valuations: Current valuations of 29x cyclically-adjusted price-to-earnings (CAPE) are much higher than the long-term average of 18x. This doesn’t necessarily mean a huge pullback is in front of us, but it could be pointing to a much more muted return profile. Frankly, we would view a small pullback as a healthy development.
  • Pace of Fed rate hikes: We think the Fed has done a decent job handling and communicating rate changes. They need to continue this practice and avoid further acceleration to avoid making investors nervous.
  • The return of volatility: After the record “calmness” mentioned above, volatility most certainly will rise. Hopefully, it advances in a manageable fashion.
  • Heightened Political risk: 2016 was full of political surprises and more are possible in 2017 given the rise in populism and the heavy global calendar. See below.

I’ve written a lot of these quarterly market commentaries and I cannot remember one so consumed with political policy. There’s a lot of uncertainly right now. But what is certain is that we live in some interesting times. Every day brings a new headline, and a lot of them are political. So far, the market has worked through it handsomely. Let’s hope our strong economic outlook continues to offset any ugliness coming out of the Barnum & Bailey Circus…err, I mean, Washington.

Brett M. Detterbeck, CFA, CFP®

DETTERBECK WEALTH MANAGEMENT

 

*represented by the Russell 2000 Index

**represented by the MSCI Emerging Markets Index

***represented by iShares Gold Trust

***represented by the ALPS Alerian MLP ETF

DWM 2016 Year-End Market Commentary

Over the holidays, I heard a lot of people whine about 2016 and how they were happy that it was over. Obviously, as a Cubs fan, I am biased. 2016 delivered a gift that has been waited upon for decades! One more time, “Go Cubs Go, Go Cubs Go, Hey Chicago, What Do You Say…” Sorry, I digress. Really, beyond breaking goat curses, what’s not to like about a year like 2016 when all major asset classes were up? For all the doom and gloom, not only early on in the year when stocks were getting hit in January, but also later in the year with Brexit and then during our “nasty” US Presidential Election, 2016 turned out to be a pretty darn good year for most investors.

Let’s review:

Equities: The graph above shows the performance of the MSCI AC World Equity Index, which finished the year up 7.9% in 2016. You can see that it was rough going early on and definitely some blips here and there, but ultimately a solid showing. Large caps did well, as represented by the S&P500, up 12.0%. But the big winner was in domestic small cap value where the Russell 2000 Value notched in a 31.7% return! Mid cap* stocks also shined, up 20.2%. Emerging markets** sold off in 4q16 after the Trump victory, but still finished up 11.2%.  Value continued to outperform growth, in some cases, by a 2 to 1 margin. At DWM, our clients follow a diversified strategy within their equities portfolio which feature the areas above and a value tilt.

Fixed Income: 2016 was another positive year for bonds, but ended with a thud, if you’re looking at the most popular bond benchmarks. The Barclays US Aggregate Bond Index lost 3.0% in the fourth quarter, finishing 2016 up 2.7%. The Barclays US Aggregate Bond Index had a horrendous 4q16, down 7.1, and finished +2.1%. Why the fourth quarter sell-off? Well, the Trump victory caught a lot by surprise and created a “rotation” of assets in the markets. In other words, with Trump’s pro-growth/ decreased regulation / America-first agenda, people traded out of bonds (that can get hurt from this new expected inflation brought on by growth), and traded into domestic equities particularly smaller caps and industries currently weighed down by regulation like financials and those that will benefit from infrastructure spending. The 10-yr Treasury Note yield which went as low as 1.3%, with some even worried about potentially going negative, spiked up, closing at 2.4% to end the year. That, folks, is a huge move for bonds, but is something that can happen when rates have been held down artificially for so long, and forecasts what we may be in store for. These upward moves in yield bring downward moves in prices. With the Fed signaling three rate increase of 0.25% each in 2017, traditional bond index investors could be seeing flat to even negative returns in 2017 and beyond! Bonds are no longer the safe haven they have generally been for the last three decades. This is not your Grandfather’s Oldsmobile! If you’re heavily invested in bonds, make sure you are working with a professional wealth manager that can position the portfolio appropriately or you could be caught with your pants down. Here at DWM, we aren’t a bond “closet indexer” which means the components that make up our clients’ bond portfolio are quite different than that of those indices mentioned above. Furthermore, we feel we can better position the portfolio for this new environment by adjusting the duration – or sensitivity to rates – to a very low measure. Our DWM clients have benefitted from this approach.

Alternatives:  In general, alts had a positive performance in 2016. The Credit Suisse Liquid Alternative Beta Index which was up 5.4% for 2016. Winners included precious metals like gold**** +8.3%; MLPs +14.8%; and catastrophe insurance-linked bonds notching in at 8.8%. But all was not peachy. Hedge funds*** as of the latest data available (11/30/16) were only about flat on the year. And many managed futures had negative showings, having a particularly tough time with the trend reversals following Trump’s victory.

So after a year where a balanced investor may have had registered a handsome high-single digit return, now what? It really is hard to forecast what will happen in 2017 as nobody knows exactly how this new Trump agenda will play out. We do know that the latest US quarterly GDP reading was the best in two years at 3.2%. US unemployment at 4.7% is hovering around its nine-year low. US companies are coming off the sidelines and are starting to invest their cash piles. Beyond this recent optimistic attitude domestically, investors are even encouraged with the outlook in the Eurozone, Japan, and China, more so than just several months ago. Brighter economic fundamentals could lead this stock market even higher.

In conclusion, we’re at a very interesting time. It’s only several days until Trump takes office and when his administration and Republican congressional majorities start trying to do all of these pro-growth/pro-economy measures. The markets are up since Election Day because investors have bought into the theory that they will indeed be successful in cutting taxes, loosening regulations, and providing fiscal stimulus. If they are successful, the legs on this bull market will continue to grow. If they are unsuccessful, America might not be so great again. Only time will tell. In the meantime, DWM will continue to monitor all client portfolios in pursuit of protection and growth in this new environment.

As I could hear Joe Maddon, coach of the Chicago Cubs saying, “2016 was a pretty darn good year. Now let’s go out and do it again!” Hey Joe, at DWM, we’re up to the challenge!

Brett M. Detterbeck, CFA, CFP®, AIF®

DETTERBECK WEALTH MANAGEMENT

*represented by the Dreyfus Mid Cap Index Fund

**represented by the MSCI Emerging Markets Index

***represented by the GSAM Hedge Fund Index as of 11/30/16 (latest available)

****represented by the iShares Gold Trust

† represented by the Alerian MLP ETF

‡ represented by the Pioneer Insurance-Linked Interval Fund

“You’re Hired!”

trump-youre-hired-002“You’re hired!” was something The Apprentice reality show viewers heard at the end of every season as someone emerged from a group of highly different “characters” and was chosen as the winner. In a surreal twist, Donald Trump, the star of that show, has just been hired as our next President after a surprise victory over Hillary Clinton highlighting a populist uprising defeating the status quo.

No, November has not been just a bizarre dream; although on paper, both the Chicago Cubs winning the World Series and Donald Trump winning the US Presidency, seems about as outlandish as a UFO. These events have actually happened! Donald Trump will be our next President for at least the next four years and the Cubs most certainly will become a dynasty during that time. We are in for change. But is change necessarily a bad thing? At this point, the voters have voted and we no longer have a choice. Hence, time to embrace that change. However, what does it mean for you and your money?

First off, this is not Brexit #2. Recall that the markets fell significantly following the surprising June 2016 Brexit “Leave” victory, only for the market to recover fully in several days’ time. Yes, there were times last night when market futures were down big, but it didn’t prevail. Markets opened in steady fashion this morning and are up, not down, close to 1% as of this writing.

That, too, may come as a shocker to many as until now the market had been fluctuating based on Hillary’s success chances. See, the market had been pretty cool with status quo and hesitant of uncertainty, which Trump would undoubtedly bring to the table. But if we look at what Trump will be working on in the early months of his Presidency, we can see that it’s quite possible that it provides positives:

  1. Putting forth a giant infrastructure agenda in the likes of Eisenhower
  2. Working on trade reform which will most likely lead to inflation and thereby helps the banks
  3. Working on healthcare reform – most likely replacing the Affordable Care Act with something that – well, let’s face it – has to be better
  4. Decreasing regulation which will make many corporations and financial markets happy
  5. Working on tax reform – both individual and corporate, including repatriation (bringing back perhaps trillions of dollars of American companies that are currently overseas)

Many of these are pro-growth / pro-economy and the market likes that. Furthermore, for those that feared the Trump bulldog approach, the bark we heard on the campaign trail will be bigger than the bite as there are roadblocks to the rhetoric. The legislative and judicial process tends to mute campaign promises. Trump will not enjoy unlimited power. Smart negotiations will likely be made.

The fact of the matter is that this is a healthy economy in the US right now and poised to get better. GDP is up, unemployment is down. It’s not as “gloomy” as one may feel. This new business-friendly administration coming in will look to keep that going.

In conclusion, polls and markets will remain unpredictable. Don’t let politics overrule how you invest. Here at DWM, we’ve constructed portfolios for our clients to stand the test of time. Sure, we’ll have blips here and there like Brexit and the one we were bracing for this morning that didn’t happen. Volatility will always be a part of investing. The key is to remain invested in a diversified fashion for the long-term and don’t let your emotions turn into knee-jerk reactions you’ll ultimately regret. Last night’s event may have been a bit of a shocker, but the sun did indeed come out this morning and is shining down on America. We are in for a little change. But we should embrace this change and come together as a country to make it stronger than it has been. Hey, if the Cubs can do it, why not the good ole US of A?!? “Holy Cow” as Harry Caray would say!

DWM 3Q16 Market Commentary

wall-street-vs-main-streetWith all the uncertainty in the news today, a human being might emotionally feel quite anxious. If you hadn’t looked at your portfolio in a while, you may assume it’s not doing so great. But your portfolio does not have emotions and, if properly constructed, is capable of producing in all environments. In fact, if your portfolio did have emotions, it would probably be feeling quite happy as 2016 has so far been a pretty good year performance-wise, at least the portfolios we supervise. The thing is that Wall Street and Main Street don’t operate on the same level. Main Street may be feeling a little down, but Wall Street on the other hand may shrug off those fears and look at the opportunities. Or vice-versa. Case in point: The recent negative feelings of Main Street don’t resonate with the recent positive results stemming from Wall Street.

After a wild finish for stocks in 2q16 thanks to the surprising June 23rd Brexit vote, the US stock market calmed down and continued upward as represented by the S&P500 gaining 3.9% for the third quarter. Other equity markets did even better like small caps* and emerging markets**, both up 9.0%. Outside of equities, both fixed income and alternative markets generally charged ahead, adding to this upbeat 3q16 report.

Let’s start with the results of the major asset classes:

Equities: The MSCI AC World Equity Index registered +5.3% for the quarter and is now up 6.6% on the year. International small cap value***, up 10.5%, was one of the best places to be in the second quarter. That said, the stars of the year remain the mid cap space****, +12.1%, and emerging markets**, +16.0%. The S&P500 underperformance trend continues.

Fixed Income: The Barclays US Aggregate Bond Index, the most recognized bond benchmark, was up 0.5% in 3q16 and now up 5.8% for 2016. Unfortunately, that benchmark doesn’t allocate to the two hot spots in bond land this year: high yield bonds, +5.6% and 15.1%, quarter-to-date and YTD, respectively, and emerging markets debt, +4.8% and 16.6%. Hence, it is prudent to construct fixed income portfolios that contain more than treasury, investment-grade corporate, and agency exposure like the “Agg” and invest into other areas that can provide diversification and potentially better returns.

Alternatives: The Credit Suisse Liquid Alternative Beta Index was up 2.1% for the quarter and 3.2% YTD. Of course, one of the key benefits of alts is that they generally don’t trade in symphony with the rest of the market. But that doesn’t mean they necessarily will go down when equities and fixed income are up, like they were in this quarter. Alts beat to their own drum. What we think is important for our clients is designing an alternatives model with multiple non-correlated alternative assets and/or strategies that collectively produce consistent positive returns.

By looking at the above results and doing some simple math, we can theoretically see that an investor; with a balanced portfolio of, say 50% in equities, 25% fixed income, and 25% alternatives; could have overall net results of 6-8% YTD. And there’s still a quarter to go in 2016! Of course, nothing is guaranteed and there is certainly “uncertainty”. Whereas Wall Street may shrug off lots of things Main Street would not, here is the short list on what is keeping those traders up at night:

  1. The Election – this really is something that is causing more anxiety for Main Street than it is Wall Street. As crazy as it may seem, the market can actually see “good” in either of the major candidates. What the market doesn’t like is a surprise. If results came out opposite of the polls ala Brexit, it could get ugly, i.e. markets would trade lower. We don’t see that happening though.
  2. The European banking sector – Is Deutsche Bank with its thin capital issues the next Lehman Brothers? We don’t think so, but those banks all trade with one another and if one major bank fails, there can be a contagion effect that could even affect us on the other side of the globe.
  3. The economy – If you looked at the companies within the S&P500 and used that as a yardstick for the US economy, you might get a little alarmed to know that 3q16 will almost certainly be the sixth consecutive quarter of falling earnings. That hurts valuations now but we’re cautiously optimistic that that trend will end soon. When actual earnings (and estimates) start to rise, the market could continue to climb (even) higher.
  4. The Fed – What’s next for the Fed? There are two more meetings this year. We think one 25 basis points rate hike is already “baked” into the market. In other words, traders are expecting it. As long as the Fed keeps communicating clearly, they and their actions shouldn’t cause that much disruption.

In conclusion, Main Street is not Wall Street. For many, this Presidential Election is bringing a lot of unnecessary anxiety and we can certainly understand why. Of course, the market is generally efficient by constantly looking ahead at expectations and adjusts accordingly. Unless there are major surprises, it tends to shrug off news that can make Main Street nauseous. So if it’s getting to be too much for you, feel free to turn off the media noise and keep it off until November 9th, the day after the Election. Wall Street will keep doing its thing. More importantly, DWM will be doing its thing, keeping our clients’ portfolios prepared for what’s next.

Brett M. Detterbeck, CFA, CFP®

DETTERBECK WEALTH MANAGEMENT

 

*represented by the Russell 2000 Index
**represented by the MSCI Emerging Markets Index
***represented by the DFA Intl Small Cap Value Fund
****represented by the Dreyfus Mid Cap Index Fund
† represented by the Barclays Capital US Corporate High Yield Bond Index
‡ represented by the PowerShares Global Emerging Markets Sovereign Debt ETF

Elder Abuse: What You Need to Know & Be On the Alert for

thunder0Over the weekend, my younger son and I watched a fun animated movie called Thunder & the House of Magic. Part of the plot of the movie: a nice, old, wacky magician, who has some “cognitive decline,” is in jeopardy of losing his home.  Why: the magician’s scheming nephew sees his chance to cash in by selling his uncle’s mansion, tricking the old man into signing what turns out to be a power of attorney.  What happens: Thunder the cat saves the day.

It wasn’t the greatest movie and hasn’t won any awards, but it was entertaining for us. Moreover, it touched upon a growing epidemic in the US: elder abuse.

Elder abuse is an intentional act, or failure to act, by a person in a position of trust, that creates a risk of harm to an aging adult. It can be physical and/or emotional. From a financial perspective, exploitation occurs when there is unauthorized, illegal, or improper use of an aging adult’s resources by a person in a position of trust. According to the National Adult Protective Services Resource Center, 90% of elder abusers are family members (like the movie) and less than 5% of cases get reported to any agency.

Elder abuse is prevalent because of “diminished capacity” in our senior population. Diminished capacity is a mental condition that affects a person’s ability to understand their own decisions or acts. One of the most common example of diminished capacity in aging adults is dementia. Dementia describes a set of symptoms that may include confusion, memory loss, emotional disturbances (e.g. anxiety, paranoia, depression) and difficulties with thinking, problem solving, and/or language. Alzheimer’s is the most common form of dementia and impacts 1 in 9 Americans over age 65. It’s diagnosed among 20% of Americans over age 70 and 33% over age 85. It’s a slow, progressive, irreversible disease with, so far, no cure.

Unfortunately, there are bad, greedy people that take advantage of these seniors, and like the nephew from our cat movie, are on the attack for what they think is an easy pay-day. Sometimes it’s a “new friend” that spends a lot of time developing the relationship and justify in their heads that their behavior is okay because of their time spent paying attention to the aging adult. Unfortunately, in all cases, potential elder abuse is something we need to monitor.

Here are the common signs of elder abuse:

  • Neglect
  • Physical or emotional abuse
  • Blocked access to assets or belongings (e.g. the wacky magician was stuck in the hospital not knowing that the nephew was showing the house to would-be buyers)
  • The aging adult’s regular habits change.
  • A previously uninvolved relative, caregiver, or “new friend” makes decisions on the aging adult’s behalf.
  • The aging adult becomes isolated from professional advisors and even family.
  • Unexplained disappearance of valuable objects, financial statements, cash
  • Unexplained or unauthorized changes to wills or other estate planning documents
  • The aging adult exhibits strange behaviors, such as:
    • Unpaid bills and changes in spending habits
    • Unexplained change in professional advisors (e.g. doctor, CPA, attorney, etc)
    • Unexplained asset transfers
    • Atypical cash withdrawals/wire transfers
    • Checks written to “Cash”

DWM looks at every client transaction and will flag anything that looks out of the ordinary. As such, wealth managers can often serve as the first line of defense for addressing some aging client issues. But that doesn’t mean loved ones shouldn’t be on alert. If you suspect an incident of elder abuse, contact your local Adult Protective Services who will investigate. Here’s the link: http://www.napsa-now.org/get-help/help-in-your-area/

Given the increased focus to elder financial abuse prevention, regulators are adding enhanced scrutiny in this area, and laws and regulatory monitoring are progressing. The SEC came out with a recent Bulletin encouraging investors to plan for possible diminished financial capacity, stressing the importance of such planning tools as:

  • organizing important documents
  • providing financial professionals with trusted emergency contacts
  • creating a durable financial power of attorney

Our clients know that as part of our estate planning review, DWM requests and monitors these three important tools.

The good news is that people are living longer. The bad news is that some of the older population, particularly the ones with serious cognitive decline, are vulnerable to this elder abuse phenomenon. Be sure to keep your eyes and ears open to prevent this from happening. Stay in touch with your elder loved ones and look for the common signs. And if you do see the signs, take action immediately…just like Thunder the cat…so like the movie there is a happy ending!

DWM 2Q16 Market Commentary

brett-blogWe’ve eclipsed the half way point of 2016; kids are out of school, people are gearing up for vacations, and temperatures are soaring. There are a couple more amazing things of note: 1) It’s July and the Cubs are still in 1st place! 2) Given all the uproar about everything from interest rates to oil to the election and to, most recently, Brexit; investor returns in general are not only positive, but pretty decent.

Think about it: we’ve been bombarded with negative news all year and the second quarter was no different. We had terrorism issues not only abroad, but here on American soil. We had job creation falter with May readings showing the worst month of employment gains since 2010. There’s economic weakness abundant around the globe. To top everything off, on June 23, we had Brexit – the UK referendum that shocked many when results showed more votes to actually LEAVE the European Union than remain! A sell-off in stocks ensued and had some feeling like it was 2008 all over again.

Well, it wasn’t. Markets reversed and many equity benchmarks are actually higher at this time of writing than they were before Brexit. (For more on Brexit, see our last week’s blog by clicking here.) In fact, in the US, the S&P 500 ended the week after Brexit up 3.3%, finishing the quarter with a 2.5% gain. In Europe, the EuroStoxx600 and the FTSE100 finished the week up 3.2% and 9.9%, respectively, in an apparent turnaround of investor confidence.

Investors also flocked to bonds during the quarter and even more so since the Brexit vote, with bond yields setting lows around the world. The Brexit vote actually helped solidify investors’ expectations for global central banks to keep rates down. And since yields move inversely to bond prices, bond investors did very well during this time period.

Let’s look at some numbers:

Fixed Income: The Barclays US Aggregate Bond Index, the most popular bond benchmark, was up 2.2% and now up 5.3% for 2016 – not many would have predicted that at the start of the year. Really almost everything within bond land did well. Corporates, in particular, did great as evidenced by the iBoxx USD Liquid Investment Grade Index registering 4.1% for the quarter & now up 9.0% YTD.

Equities: The MSCI AC World Equity Index registered +1.0% for the quarter and is now up 1.2% on the year. With the Brexit vote, European stocks struggled (MSCI Europe down 2.7% for the quarter & down 5.1% YTD), but emerging markets have done quite well with the MSCI Emerging Markets Index up 0.7% for the quarter and now up 6.4% YTD.  In terms of domestic cap style; in general, mid cap has outperformed small cap which has outperformed large cap. And value continues to outperform growth in a big way this year.

Alternatives: The Credit Suisse Liquid Alternative Beta Index aims to replicate the returns of the broad hedge fund universe using liquid securities.  It came in -0.7% for 2q16 thus indicating that those type of alternative strategies didn’t fare as well as some of the other alternative strategies we follow. For example, it was another stand-out quarter for gold* (+7%), real estate** (+3%), and MLPs*** (+19%). These alts are all up big YTD as well (24%, 9%, 11%; respectively).

So, a diversified investor with exposure to the three major asset classes may see returns somewhere between 3 and 5% for this first half of 2016 – 6-10% annualized – amongst all this so-called uncertainty.  Not bad!

We are also cautiously optimistic about the second half of 2016, however, the negativity and the uncertainty (CNBC’s word of the year so far) will definitely continue:

  • Brexit has really only started – this may take over two years to play out and even though Brexit fears have been shrugged off for now, they could come back. Clearly, European GDP and thus global GDP will be affected.
  • Central banks could be running out of ammunition if things do indeed get worse. Interest rates are NEGATIVE in Europe and Japan. How low can they go? And how much fire power really remains?
  • Here in the US, inflation remains well below the Fed’s 2% preferred target.
  • China growth problems and oil price volatility could resurface.
  • Profits at companies in S&P500 have fallen for four consecutive quarters and are expected to fall another 5% this quarter. Hard for stock prices to continue to go upward in that type of environment.

So, why be cautiously optimistic? There is some positive economic data out there including:

  • US consumer confidence is strong.
  • Retail sales continue to escalate steadily.
  • The Case-Shiller Home Price Index reported an April rise of 0.5%, with prices increasing on a seasonally adjusted basis in most cities.
  • There are pockets of strength to be found here in the US and around-the-world. Lots of exciting opportunities abound that keep hungry investors and companies enthusiastic!

Like we have said before, the key is to stay disciplined to your diversified game plan. Stay invested in accordance to a long-term asset allocation target mix which is in-line with your risk tolerance, and don’t let emotions control you. Unfortunately, that can be difficult to do on your own or if you have improper assistance.  On the other hand, if you have an independent, unbiased wealth manager like DWM, they can help you accomplish this by making the appropriate changes when and where necessary to lead you to the higher ground. Let us know if you have any questions on the way.

  • *represented by iShares Gold Trust
  • **represented by SPDR Dow Jones Global Real Estate
  • ***represented by Alerian MLP

Have You Saved Enough For Your (Grand)Child’s College Expenses?

 

anatomy of piggy bankHappy May 29th – a few days past – otherwise known as 529 day. According to the College Board’s “Trends in College Pricing” report, the cost of attending a four-year university rose roughly 3.5% from 2015 to 2016. Costs just keep going up. Have you done enough educational planning for Junior? Take a breath of fresh air and then check out how much college will cost at these schools for the upcoming 2016-2017 school year:

Average Cost of College 2016 2017 final

For those of you with younger ones or planning for a family, fortunately, there is still time! Read on as this blog is for you as it focuses on what may be the best college savings program out there: 529 College Savings Plans!

The 529 is a great opportunity for parents, grandparents, or other family members looking to help a child make college a reality someday. Studies show that children with money set aside for college are seven times more likely to actually go there.

529 Plans are state-sponsored investment programs that qualify for special tax treatment under section 529 of the Internal Revenue Code. These plans typically involve an agreement between a state government and one or more asset management companies. The contributor (e.g. parent, grandparent, etc.) of the account typically becomes the account owner and the account owner controls withdrawals of assets. The person for whom the plan is set up becomes the beneficiary (e.g. Junior).

Tax-Free Growth.  Earnings in a 529 plan grow federal tax-free and will not be taxed when the money is taken out to pay for college. The 529 account remains under the control of the account owner rather than transferring to the child at the age of majority as in the case of an UTMA/UGMA. Any U.S. citizen can participate in a 529 and the funds can be used at any accredited college or university.

Quality investment options.  Most 529 programs have a couple dozen quality equity and fixed income investment choices to choose from. Most programs will also allow you to choose an age-based asset allocation model which makes the underlying portfolio become more conservative as the beneficiary approaches college age. Or you create your own portfolio to match your risk tolerance (whether it be more conservative or aggressive) and expected timing of funds. A wealth manager like DWM can help you decide.

Contribution limits.  Unlike other tax-advantaged vehicles, 529 have no income limitations on who can contribute, making them available to virtually anyone. Contribution limits to 529 are determined by each 529-sponsoring program independently, but most are quite attractive with limits over $300,000 per beneficiary. To reach that total, a married couple can contribute as much as $140,000 within a single year (the limit is $70,000 for individuals) and, as long as no more is contributed in the following four years, the entire amount qualifies for five years of the gift-tax exclusion. (This type of 5year “front running” can be a great estate planning strategy for grandparents as well.)

Tax benefits.  There is no federal tax deductions or credits for 529s, but there typically is at the state level. Contributions to a 529 are fully deductible in South Carolina and up to $10,000 per year by an individual, and up to $20,000 per year by a married couple filing jointly in Illinois assuming you use an in-state program – Bright Start & Bright Directions in Illinois & Future Scholar in SC are all excellent choices. Contributions remain tax-free if used for qualified education expenses.

What’s a Qualified Education Expense?

-Tuition

-Required books, equipment, supplies

-Computer technology

-Room and board for ½+ time student

-Special needs expenses of a special needs beneficiary

Non-Qualified Withdrawals. Non-qualified withdrawals will not get the special tax treatment. With a few exceptions, such as when the beneficiary receives a scholarship, the earnings portion of non-qualified withdrawals will incur federal income tax as well as a 10% penalty.

Effect on Financial Aid. A 529 account is counted as an asset of parent if the owner is the parent or dependent student. This is typically more beneficial than other vehicles when calculating the expected family contribution figure.

What happens if the beneficiary decides not to attend college?

The tax laws make it easy on the family if the beneficiary for some reason doesn’t go to college or use the 529 earmarked funds. The account owner can simply change the beneficiary by “rolling over” the account to a “family member” of the original beneficiary with no penalty whatsoever. The definition of “family member” includes a beneficiary’s spouse, children, brothers, sisters, first cousins, nephews and nieces and any spouse of such persons; but typically and most logically it’s one of the original beneficiary’s siblings. Or the account owner can use the funds themselves – it’s always fun to go back to school and learn! Or the least likely option is “cash out and pay”, where the account owner can redeem assets for himself/herself as a non-qualified withdrawal and pay ordinary income taxes and a 10% penalty.

529s vs other college savings plans. Downsides of the others:

  • UTMA/UGMA: 1) Control/custodianship within an UTMA/UGMA terminates at age of majority (21 in Illinois & 18 in South Carolina), and 2) kiddie tax considerations and capital gain considerations upon liquidation
  • Coverdell Education Savings Accounts (“ESAs”) – maximum investment is only $2,000 per beneficiary per year combined from all sources within ESAs whereas 529s are typically $300K+ per beneficiary.

Conclusion. There is over $230 Billion in 529s now up from less than $10B in 2001. The reason for this growth is people catching on to what really is a great tax-free funding vehicle for an important future educational need. Prepare for that financial burden today by saving early and saving often with a 529 account. Give us a call to help get you started or talk more about educational planning in general.