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.

DWM 1Q16 Market Commentary: Are You Getting Enough Sleep?

satisfying sleep2It’s all perspective: If you had fallen into a deep sleep on December 31 and woken up March 31 and looked up your portfolio balance, it was like nothing really happened. Maybe up one or two percent. Decent start to the year…

But for those of us that woke up every day and are required to watch along closely, you know that 1Q16 was anything but tame.

January and the start of February were downright ugly for the stock markets with the Dow Jones having its worst start ever and the S&P500 torpedoing into correction status. But things turned on a dime in mid-February and markets rallied. The big catalysts being: monetary easing by central banks, firming of oil prices & other commodities, a healthy US labor market and a weakening dollar.

Let’s take a look at the scoreboard:

Equities: The MSCI AC World Equity Index registered +0.2%, essentially unchanged (or “unched” in trader lingo). Value lead growth for the first time in a while. In another show of turning tides, the S&P500 didn’t take top billing this time, up a modest +1.3%. Mid Cap stocks as represented by the S&P MidCap 400 Index fared quite well, up 3.8%. The equity markets abroad were rather mixed: more developed international equities had a rough showing, -3.0% as represented by the MSCI EAFE Index; while emerging markets proved to the big winner, up 5.0% as represented by the MSCI Emerging Markets Investable Market Index.

Alternatives: The big standout in alts: Gold – as represented by the iShares Gold Trust ETF, up 16.1% – had its best quarterly gain in three decades. Then again, some absolute return strategies were challenged by the whipsaw and fell into the red. In general, as a group, alternatives were also about “unched” using the Credit Suisse Liquid Alt Beta Index, -0.6%, as a proxy. More importantly, they played their role this quarter: They did a decent job protecting the first several weeks of the quarter when the equity markets were swooning. From empirical studies, we know that by minimizing the overall portfolio’s downside during times like these, the portfolio can sooner recover and achieve new highs that much quicker.

Fixed Income: We saved the strongest asset class on the quarter for last. Fixed income powered by dovish central bankers and declining yields had a pretty remarkable quarter. The Barclays US Aggregate Bond Index, the most popular bond benchmark, was up 3.0%. And like with equities, emerging markets stood out as evidenced by the JPMorgan Emerging Markets Bond Index, +5.3%. Fixed Income really hasn’t been the first pick from the litter for many asset managers in a long while, but this quarters shows why it deserves a place in everyone’s portfolio, even if it’s just a small allocation.

Here are some general comments looking forward denoted by negative (“-“) or positive (“+”) influence:

  • (-) Economies around the globe remain sluggish.
  • (-) Some areas within equities seem expensive. For example, the S&P500’s TTM P/E is 18.2, higher than its 10-year average of 15.8. Other areas, particularly emerging markets are the opposite – they’re downright cheap even after this quarter’s rally.
  • (+) The U.S. Fed in this quarter communicated that they are dialing back their pace of raising rates, which the markets definitely welcomed. Probably only one more, if any, tightening this year.
  • (+) Energy has bounced off lows. The market has already beaten up those companies that rely on higher oil prices. All the while, the consumer still is enjoying this “gasoline holiday”.
  • (?) Upcoming Presidential election hasn’t seemed to scare the market much so far, but volatility could increase as time marches on and uncertainty remains.

Probably the biggest thing is the change in tone: there is a much better tone of the markets than when we wrote our last market commentary. There’s hardly any recession talk now compared to a lot of it then. However, we still have a lot of the same uncertainty. And our markets are more correlated – meaning they move more in tandem – than ever. One big geopolitical or some strange unforeseen event or maybe an altercation of a current event can switch the tone immediately…at least for the short term. And, folks, anything can happen in the short-term.

So for those that like action, strap on the seat belt and enjoy the ride. Or for those that would rather relax, enjoy a nice long sleep and check your portfolio account balance next quarter. You may just sigh another breath of healthy fresh air and go back to bed. Sorry, long-term disciplined investing can be quite boring, but can be quite profitable.

To finish – and in another sign of positivity – Go Cubs! This is the year!

DWM 2015 Year-end Market Commentary

Uncertainty imageIf you had to summarize the markets in 2015 with one word, it would be “uncertainty”. Much of the reason for the poor performance of stocks, fixed income, and alternatives can be chalked up to uncertainty…uncertainty of what the Fed was going to do with interest rates, uncertainty to when oil supply and demand will come into balance, and uncertainty surrounding China’s economy. In last quarter’s market commentary, we wrote about having just finished an awful August/September stock market drubbing, only to see equity benchmarks almost fully recover in October. Unfortunately, the good vibes didn’t last long as another sell-off commenced in December after the Fed raised interest rates for the first time in over nine years. The end result: 2015 going down as the first losing year since 2008 for many investors.

Here’s how the major asset classes fared in 2015:

Equities: The MSCI AC World Equity Index registered -2.4%. Emerging markets really took it on the chin, losing 14.9%, as represented by the MSCI Emerging Markets Index as falling commodity prices and the strengthening US dollar hurt these countries’ economies. On paper, the big cap US market benchmarks appeared to do better with the S&P500 only down 0.7% before reinvested dividends, but that is skewed by the outperformance of some of the largest capitalized names like Facebook, Amazon, Netflix, and Alphabet (formerly Google). Remove those names and the S&P500 would have similar figures to the Russell 2000 Small Cap Index (-4.4%) or the Russell Mid Cap (-2.4%).

Fixed Income: Fixed income investors aren’t jumping for joy at this year’s end. The Barclays US Aggregate Bond Index was up just a tiny bit, +0.6%; but the Barclays Global Aggregate Bond Index declined 3.2%. It was worse off in the high yield aka “junk” market which finished the year -4.5%. This index was weighed down by energy companies where long term solvency has come into question given these extremely low oil prices.

Alternatives: In theory, asset allocation using a diversified approach helps investors over the long run. This was a very untypical year in that the three major asset classes (equities, fixed income, and alternatives) finished the year with very similar small negative results, with the Credit Suisse Liquid Alternative Index down -1.0% for the year. We wouldn’t expect that trend to continue for 2016. For more detailed info on alternatives, please see our blog from last month at http://www.dwmgmt.com/why-alts/ .

At the time of this writing, the stock market is not off to a good start in 2016, with the Dow tumbling more than 1000 points in the first week, as the uncertainty of the Fed, China, and oil continues. But let’s chat about those three items.

  1. The Fed and interest rates: The Fed has indicated that it wants to keep raising, but at a very gradual rate. The last thing they want to do is harm the economy or US or global growth. In fact, Fed officials expect that rates will still be below 3.5% in late 2018. So this is not the same thing as slamming down on the brakes when going 80mph.
  2. China’s slow-down: This is not a one-time 2015/2016 event. China is undergoing a necessary and positive adjustment, shifting from an economy based on heavy manufacturing towards one based on service. This will take years to convert so investors should simply expect these type of headlines and not fear them.
  3. Oil prices: Consumers are loving these lower prices at the gas pump, but it’s creating havoc in the global markets. There’s a disequilibrium: demand is up, but supply is up more, way more! Many energy companies are suffering. Imagine if your paycheck got cut in half or more. It’s very hard to live on severely reduced income. You still have the same fixed costs. So what do you do? You can borrow money and hope for prices to recover, but they may not and you may go bankrupt. This ballgame is only in the middle innings and could get uglier. Fortunately, for the US consumer, these lower oil prices means extra money in our pocket which most likely leads to spending and boosting our economy even more.

2016 isn’t another 2008 in the making. Major market declines typically occur when the economy is heading south. That’s not the case as the US economy is one of the world’s healthiest right now: there’s strong job growth, solid inflation-adjusted wage growth, and cheap gas prices. For diversified investors, there are opportunities in areas where selling has been overdone and market cycles start to reverse. It’s been a rough start in 2016, but a long-term investor remembers to stay the course, be disciplined, and be rewarded in the end.

Uncertainty is the one thing that is certain about financial markets.  Expect it, but don’t fear it.

Brett M. Detterbeck, CFA, CFP®

DETTERBECK WEALTH MANAGEMENT

Why Alts?

2015-12-27 Janet PAINT (002)We get this question a lot, particularly as the events of the Great Recession fade away in our mental rearview mirror and the current equity bull market plods on.

Drop a dime in the jukebox and throw on “What Have You Done for Me Lately” by Janet Jackson as that is what many investors are asking about alternatives (“alts”) these days. In most cases, the answer is “not much, Janet (or Miss Jackson if you’re nasty).” But that shouldn’t cause us to change course and remove this extremely valuable asset class from your portfolio.

In fact, this is exactly the time when alts are essential to a diversified portfolio. Let’s reiterate why alts are such an important portfolio component: they are in there as a diversifying complement to the rest of your portfolio asset classes; the zig to their zag. This diversification comes in quite handy when equity returns decline, volatility increases, and interest rates rise. All of which are happening now.

So, you’re correct Miss Jackson, alts have not done much for us lately. But, as we pointed out at our fall seminars, what happens lately doesn’t dictate what will happen in the future. Recency bias is the erroneous significance that people put on recent events. As humans, we are innately emotional and hard-wired to think that these recent events will continue indefinitely. But that’s not how market cycles work. Many times, the best performer in one calendar year is one of the worst the following year. For example, REITs (Real Estate Investment Trusts) were one of the top performers in 2006 only to be at the bottom in 2007. Emerging markets were one of the best performers in 2007, only to be the worst performer in 2008. On the flip side, investment grade bonds were near the bottom of the class in 2010, only to be one of the better performers in 2011. International stocks were near the bottom in 2011 only to be one of the best performers in 2012. Hence, just because equities (and large caps in particular) have had several relative strong years in a row and alts have had muted results, doesn’t mean that will be the case for the next several years.

From 2009 through early this year, equities were providing the bigger returns and a well-diversified investor benefited accordingly. But things are changing. The Fed just raised rates, oil continues to slide, consumers aren’t spending as much, and investors could see 2015 as the first negative calendar year total portfolio return since 2008.

And speaking of 2008, let us not forget how gruesome that year would have been for many investors if not for the alternative asset class that kept returns in check. Alts like precious metals, currency strategies, and others were actually up in a time when equity benchmarks were down huge!

A basket of alternatives that DWM follows hasn’t exactly been “chart-toppers” the last few years. But that’s okay. We don’t expect for these to be double-digit return producers. As a whole, we are expecting the alternative asset class to return somewhere around 4-7% per annum for the next several years. But more importantly, our expectations for alts is that they won’t be down dollar for dollar when equities have a 10% or worse correction.

And that’s the real beauty. By using alternatives and avoiding a blow-up like many hard-core equity investors did in 2008, you don’t have a huge hole to dig yourself out of. The bigger the hole, the harder it takes just to get back to break-even, move forward, and secure those long-term financial goals of yours.

So, you’re right Miss Jackson. Alts haven’t done much for us lately. But, if you don’t fall prey to recency bias, you may understand that it is what they may do for us soon that can be so important.