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®



*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

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

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®


DWM’s “Spooky” 3Q15 Market Commentary

Nightmare on Wall StWith Halloween coming later this month, some people may perceive October as scary. But after the blood-bath that took place in the markets during the third quarter, August and September may well be claiming themselves as more frightening than Frankenstein and Dracula (or Freddy and Jason, for you 80s/90s movie buffs). In fact, it was the worst quarter that stocks have experienced since 3Q11. What is creating all of this horror one may ask? Well, the black cats are the uncertainty of what the Fed will do with interest rates and China’s economic slowdown (see our recent blog for more info). Fortunately, it’s not so gruesome for most of our clients, as they have well-balanced portfolios which also include fixed income and alternatives. These two asset classes can really help cushion the equity carnage in times like these.

Here’s how the major asset classes fared:

Equities: The MSCI AC World Equity Index suffered a 9.5% stabbing in the third quarter and has dropped 7.0% Year-To-Date (“YTD”). International funds had an even bloodier quarter, with the MSCI AC World Index Ex USA down 12.2% and now off 8.6% for the year.

Fixed Income: The Barclays US Aggregate Bond Index was up 1.2% and 1.1%, 3Q15 and YTD, respectively; and the Barclays Global Aggregate Bond Index +0.9% and -2.3%, respectively. Longer term bonds did the best, but not many people have much of that exposure going into the lurking rising interest rate environment. The lower the duration and lower the quality, the more ghastly it was for the quarter. High yields which correlate more to the equity market fared the worst, down 4.9%, as represented by the Barclays US Corporate High Yield Index.

Alternatives: We prefer alternatives that aren’t that correlated to the equity market for wicked times like these. Some alternatives did just that. For example, the BlackRock Long/Short fund was a positive at 0.7%, the Pioneer Insurance-linked Securities fund was up 4%, and the AQR Managed Futures fund was up over 6%. Unfortunately, not all of the holdings went a positive direction. MLPs have been under attack all year, as have many energy-related securities, but we think it is gravely overdone and there may be opportunity here. Gold is typically a great diversifier and behaves differently than equities, but it sold off in 3Q15. In any event, alternatives definitely fared better than equities, but unfortunately produced overall negative results in 3Q15, with the Credit Suisse Liquid Alternative Index down -2.5%.

So, is this Nightmare on Wall Street almost over? It should be noted that at the time of this writing, just a few days into the quarter, the markets have rallied. In fact, the S&P500 has risen 5.6% over the past five sessions, its’ best 5 day gain since December 2011. Ironically, in the ‘bad news is good news’ department, it was a weak jobs report last week that fueled the rally. See, the market is convoluted in that many times it reacts positively to bad news and vice versa. The weak jobs report was actually perceived as good because that means that weakness from abroad may be spilling over into the US, which cools expectations for a Fed increase in interest rates. And, as long as we stay in a low interest rate environment, that’s good news to stocks because the other asset classes aren’t as attractive on paper. Confused? Unfortunately, that’s how these markets work and why you want a professional wealth manager helping you.

Markets don’t always go up. And 2015 may go down as only the 2nd losing year for the stock market in the last 12. But that doesn’t mean that the Grim Reaper is lurking around every corner. It’s just part of a market cycle. By staying invested in a well-diversified portfolio made up of multiple asset classes, you can fend off the evil the market throws at you from time to time and come out unscathed. But you need to be disciplined and controlled, something a good Financial Sherpa can help you with. Don’t let emotions take over, which could haunt you for the rest of your life. Know that a disciplined investor looks beyond the concerns of today to the long-term growth potential of markets.

Here’s to a not-so-scary October. Happy Halloween!

DWM 2Q15 Market Commentary

Sideways fireworksIt was a special year for me. Instead of just my normal one annual firework viewing, I was able to see a number of displays this season including one in Kentucky, one in Wisconsin, and one in my hometown of Glen Ellyn, IL. On top of that I was able to witness the market fireworks that came early in June. Usually we wait until the 4th of July for fireworks. But not this year as the second quarter was chugging along somewhat quietly until “bang goes the dynamite” in the last week of June. The Greek turmoil was the cause of these fireworks and it sent global markets tumbling and cut the year’s gains to almost nothing. It’s unfortunate as we think that “Grexit” is overblown – please see our recent blog for more on Greece.

Let’s take a closer look into each asset class:

Equities: The most popular index, but generally not the best one for proxy use, the S&P500 managed to eke out a small gain for 2Q15, +0.28%, and is now up only 1.23% for the year. The MSCI ACWI Investable Market Index, a benchmark capturing ~99% of the global equity markets, registered 0.35% for the quarter and has returned 2.66% Year-To-Date (“YTD”). International funds continue to outperform domestic ones in 2015.

Fixed Income: It was a difficult quarter in bond land as we saw the Barclays US Aggregate Bond Index fall 1.68% and 0.10%, 2Q15 and YTD, respectively; and the Barclays Global Aggregate Bond Index drop 1.18% and 3.08%, respectively. Corporate bonds really suffered as represented by the iBoxx USD Liquid Investment Grade Index, off 3.82% for the quarter and now down 1.31% for the year.

Alternatives: It wasn’t a great quarter for stocks or bonds and unfortunately not a good one for alternatives either. A lot of the areas that did well in the first quarter stumbled this time around, for example, managed futures and real estate. MLPs were also down but we believe MLPs are mistakenly getting lumped into the “sell-anything-related-to-oil” trade. There were some bright areas. For example, there are insurance-linked (“catastrophe”) funds that continue to chug along with positive returns. They have really no correlation whatsoever with the financial markets as they are tied to natural events instead. We love non-correlation like this!

So at the half way point of 2015, many investors are sitting with small, albeit positive net gains for the calendar year. We are cautiously optimistic about the second half as there are many positives out there including:

  • The US economy is definitely headed in the right direction – unemployment and wage data keep improving. We are expecting a modest pick-up of growth in the second half.
  • Even with the Fed poised to start raising rates later this year – a sign of US economy strength – comfortably low US inflation should continue and is good news for American businesses and consumers. It also lends support for stocks.
  • Outside of the US, central banks are easing which usually is a catalyst for global markets.

That being said, beyond Grexit, there are other headwinds including:

  • China’s stock markets have been in extreme whipsaw lately. Hopefully there is no spillover effect for the rest of the world.
  • Large cap domestic stocks as represented by the S&P500 are a little pricey. The S&P500 finished 2Q15 at 17.9 times Trailing Twelve Months (“TTM”) earnings. That’s higher than the 15.7 average for the last ten years and higher than the 17.1 at the start of the year. Frankly, US stocks have risen so fast since the financial crisis of 2008 that future gains are likely to be weaker than historical averages. (On the flip side, a lot of the international markets look relatively cheap.)
  • The Fed, via its unprecedented QE program, has created this artificial low rate environment which has led to recent major volatility in bonds. Not only should we expect this to continue, but it to lead to increased volatility in other asset classes. Furthermore, nervousness is abundant as the Fed tries to unwind this artificial un-natural setting.

In conclusion, the “fireworks” may continue and keep us on our toes. The market doesn’t always go up. We need to remember to be patient when quarters, and perhaps years, like this come along. It’s important to stay disciplined, to stay focused on the long-term, stay invested, and not let emotions drive irrational behavior based on short-term events.

In closing, the best firework display I saw this year was the one last week in Kentucky. It was amazing! Besides being kicked off by a 15 minute video that gave thanks to our troops, the fireworks were synchronized to music from AC/DC to the theme song from Frozen, “Let it go!” Unlike the other fireworks events I attended, only this one had a unique set of fireworks that actually go up, make a huge bang, and then go sideways. Yes, sideways, as in totally horizontal for some time. Frankly, I think it may be appropriate if our markets moved like these fireworks: up for a short while and a healthy move sideways…

Brett M. Detterbeck, CFA, CFP®


DWM 1Q15 Market Commentary

brett-blogBoring. That’s what we could call our investment style, but we like it that way. In baseball terms, which seems appropriate given Opening Day 2015 is upon us, we are all about cranking out consistent singles and doubles; we are not interested in striking out going for that home run. We use low cost securities that give us broad diversified exposure to many asset categories. This disciplined approach will take away the volatility found in speculative investors’ portfolios, provide more stable returns, and help one achieve their long term goals. It isn’t flashy, but it’s a tried and tested process that works.

As part of our philosophy, we believe:

  1. Traditional capital markets (like equities and fixed income) work and generally price securities fairly. (Which is why we use generally passive instruments in our equity and fixed income models.)
  2. Diversification is key. Comprehensive, global asset allocation can neutralize the risks specific to individual securities. (Which is why we don’t utilize individual stocks.)
  3. Risk & Return are related. The compensation for taking on increased levels of risk is the potential to earn greater returns.
  4. Portfolio Structure explains performance. The asset classes that comprise a portfolio and the risk levels of those asset classes are also responsible for most of the variability of portfolio returns.
  5. We can increase returns and minimize downside through portfolio design using our special blend of both passive (found generally within our equity and fixed income models) and active (found generally in our alternatives model) investment styles.

As one can see above, our approach involves the understanding of asset allocation – a portfolio’s mix of equities, fixed income, alternatives, and cash – and what mix is appropriate for the client based on their risk tolerance and other unique factors.

Given all above, to understand performance is to understand how the asset classes within your portfolio are doing. Hence, we find it prudent to incorporate a discussion on how each of the major asset categories (equities, fixed income, and alts) are doing within these market commentaries. The same way a baseball manager may look up and down his line-up, seeing what is working, what isn’t, and why? That being said, let’s take a closer look into how each asset class fared in the latest quarter:

Equities: The MSCI ACWI Investable Market Index, a benchmark capturing ~99% of the global equity markets, registered +2.3% for the quarter. International (+4.9%), small cap (+4.3%), and mid cap (+5.3%) outperformed large cap (+1.6%) this quarter. The S&P500/large cap has outperformed the other styles for a good while now, and as we have said many times before: expect reversion to the mean. Well, it’s happening. Traders and investors are noticing that the S&P500 is getting a little expensive, trading at 16.7 times forward 12 months forecasted earnings which is above the 10 year average of 14.1. The economies overseas may not be as strong as here in the US, but most are modestly improving and frankly international markets are cheap. Also there are many multinational companies that lie within the large cap space – with the dollar surging, the profits of these big boys are decreased.

Fixed Income: Most bond investments had modest price increases with the Barclays US Aggregate Bond Index up 1.6%. However, international markets didn’t fare as well as shown by the Barclays Global Aggregate Bond Index being down 1.9%. So what’s going on? Outside of the US, many central banks around the world are cranking up the easy money policies, bringing yields on overseas bonds down, in some cases to negative yields. US bond yields are very low but are higher than their international counterparts, so foreign buyers continue to buy our US bonds, thus pushing prices up. In fact, US Government bonds rose for the 5th straight quarter in a row as the yield on the US 10-yr Treasury Note fell from 2.17% at end of 2014 to 1.93%, confounding many traders that expected yields to rise in response to possible higher interest rates and improving signs in the US economy. We do think yields on the US government bonds should rise soon as the Fed has indicated an interest rate increase occurring in the near future. They’ve also made many traders happy when they said the cycle upward, once started, will be a slow one.

Alternatives: Nice start for the Credit Suisse Liquid Alternative Beta Index (+2.8%) and many of the liquid alternatives we follow. Of course, oil was down big, however if your current exposure to commodities was via a managed futures vehicle, you were most likely “short”. Which means that with commodities going down last quarter, you most likely profited. In fact, the AQR Managed Futures Fund which we follow was up 8.5% this quarter. Other notable alternatives include: 1) real estate, up +5.4%, as represented by the SPDR Dow Jones Global Real Estate Fund, and 2) a global tactical fund called John Hancock Global Absolute Return, which was up 3.7% on the quarter and invests by tactically trading (going long and short) equities, bonds, and currencies (e.g. betting the US dollar versus the Euro).

In our last quarterly commentary, we said to expect more volatility and indeed that’s what happened in 1Q15, as evidenced by the S&P500 closing up or down more than 1% nineteen times. But by continuing with our “boring” style, the expected increased volatility in equities won’t significantly affect our batting line-up. In fact, our ball club is built to endure whatever is thrown at it. By having diversified players (i.e. investment styles like equities, fixed income, and alternatives) focused on things that can be controlled, we’re confident this team can bring home the championship!

Brett M. Detterbeck, CFA, CFP®, AIF®


DWM 4Q14 & 2014 Market Commentary

brett-blogDiversification. We talk a lot about it. It’s basically our religion when applying reasoning to investing. Diversification is a technique that reduces risk by allocating investments among various financial asset classes, investment styles, industries, and other categories. It aims to maximize return by investing in different areas that would each react differently to the same event. Most investment professionals agree that, although it does not guarantee against loss, diversification is the most important component of reaching long-term financial goals while minimizing risk. As great as “diversification” is to CFA Institute practitioners, it might be just a long winded word to someone that doesn’t enjoy the occasional financial periodical. In fact, to that someone, diversification may seem pretty silly in a year like 2014 where really only a couple areas of the market stood out and made everything else seem trivial.

What am I talking about? Well, if you haven’t heard by now, the S&P500 just racked up another double-digit year, gaining 13.7% in 2014. However, the rest of the equity markets, weren’t close to this. In fact, the average US stock fund was only up 7.6% and the average international stock fund was down 5.0% for 2014. In other words, besides a few dozen mega-cap stocks that powered the market-cap-weighted S&P500, most stocks were up for the year, but only modestly.

Frankly, like I’ve said before, the S&P500 is not the best benchmark for a diversified investor. A better barometer or benchmark may be the MSCI ACWI Investable Market Index which captures large, mid and small cap representation across 23 developed markets and 23 emerging markets countries. With 8603 constituents, the index is comprehensive, covering ~99% of the global equity investment opportunity set. For 2014, this index was up 4.16%.

Changing gears, let’s talk about bonds. Like equities, developed international exposure didn’t help much shown by the Barclays Global Agg Bond Index only posting a 0.59% return on the year. Here in the US, it unexpectedly turned out to be a decent year for bonds with the average taxable bond fund notching a 2.8% return. Long-term US Treasuries, which everyone was afraid of going into this year, did really well (+5.1% for the Barclays US Total Treasury Index) because interest rates went down instead of up as almost everyone was predicting. In fact, the yield on the 10-year Treasury Note started 2014 right at 3.0% and just dipped under 2.0% at the time of this writing! One should not expect a marked rise in US rates any time soon and the basic reason is a lack of inflation. Remember the days when we fought inflation?! Well, now it’s looking like central banks around the world need to worry about deflation. Case in point: the US has not been able to get to its 2% CPI inflation target, the biggest culprit being oil down over 50% from its June 2014 peak. New Fed Head Janet Yellen has laid the groundwork for the central bank to raise interest rates around midyear 2015, but she’ll need the economy to keep cooperating to do so.

Liquid Alternatives were a mixed bag this year. Real estate securities had a great year as most real estate related funds were up well over 10%. Managed Futures also were a bright spot with our fund of choice AQR Managed Futures, up over 9% for the year. If you were long-only commodities, it was a terrible year with energy down big with the oil drop. And some hedge fund type strategies that employ a very active approach had difficult times. For example, a manager betting on rising rates and increased inflation going into 2014, most definitely was a loser. Like any other actively managed investment, the liquid alternative managers need to be monitored closely. Again, alternatives are a prudent part of someone’s overall portfolio because of the extra diversification it brings to the table. For the record, the Credit Suisse Liquid Alts Beta Index was up 3.6%.

Turning the page to 2015, we can only truly count on one thing: increased volatility. Volatility has been very low the last few years and that most likely will change as this bull market which started in 2009 has created equity prices in the US that are above historical fundamental standards. And whereas the US economy is now on a roll – evidenced by the best hiring stretch since the 1990s boom, record auto sales, unemployment falling to 5.8%, job openings near a 13 year high, and the number of Americans working surpassing its prerecession high – there are also significant headlines our global economy still faces. Some of these concerns include China’s slowing growth, Europe’s flirtation with recession, Russian instability, a US labor force participation rate that is near the lowest since the 1970s, US wage growth which remains weak, and US part-time workers that want, but can’t find, full-time work.

We would also like to point out how there is a relation to inflation and returns. When inflation is higher, expected returns are higher and vice versa. Inflation has averaged over 4% per annum over the last 40 years, e.g. a “balanced” portfolio with a historical nominal return may be around 7.3%, but adjusted for inflation, the real return is actually 3.1%. We are in a hugely different inflation environment now where inflation is much lower, hence expected returns will also be lower. Our clients know first-hand that it is the real return that is they key and what it used for their planning scenarios.

In conclusion, now perhaps more than ever is a good time to be working with a wealth manager to keep you on track to reach your long-range goals and to prevent you from taking on unnecessary risk, like loading up in any one stock or investment style. Investing is like a marathon. You want to be well prepared, resilient, disciplined and focused in order to complete the long race. Sprinting, like short-term investing or investing in the latest fad, is really a different sport entirely, and for a lot of people, a way to quickly hurt themselves. Just as a marathoner in training benefits from a good running partner or coach, your long term results can be enhanced with the right financial advisor.

Here’s to an excellent 2015.

DWM 3Q14 Market Commentary

brett-blogWhat a difference a quarter, err a month, makes… After a modest but solid start for most areas of the market in 2014, September was the proverbial splash of cold water on one’s face. Almost all investment styles were hit relatively hard except for some areas within alternatives and the munis within fixed income. Unfortunately, many of the gains built up in July and August and from earlier in the year were trimmed or eliminated. Volatility, which we haven’t seen much of in a long time, finally picked up as investors got exceedingly nervous about expected rate increases from the Fed, not to mention some disappointing reports on US manufacturing, home prices, and consumer confidence. Then there are also tensions with Russia and continued economic weakness in Europe, Japan, and China. Investors continue to shrug many of these concerns off as evidenced by the relatively old age of this current Bull Run which started back in 2009, but could it be that we are finally heading for a “correction”?

Let’s look at the quarterly results and get back to that question later.

  • Equities: According to Lipper, the average diversified U.S. Stock fund dropped 1.9% in the third quarter and brought the trailing twelve month (“TTM”) return to 12.0%. International stocks (represented by the MSCI World ex-US Index) were slammed in the third quarter, down 5.7%, and are now only up 4.9% in the last year. Basically, diversification away from large cap, which empirical studies show to benefit long-term returns, did not help in the short-run.
  • Fixed Income: The average taxable bond fund was down 1.1% for the quarter as international and high-yields significantly underperformed, however remain up 3.6% for the last twelve months. Yields have remained low so far this year, yet rates are expected to surpass 1% in 2015 from its current near-zero level, and approach 4% by the end of 2017.
  • Liquid Alternatives: As readers of our blogs know, a major purpose of having alternatives is to add diversification/protection benefits to your overall portfolio. In a month or quarter like this where most areas of the traditional market are heading south, one would like to have an asset class that’s totally uncorrelated, and thus heading in a better direction. Unfortunately, in the short term this isn’t always the case as evidenced by many of the most common forms of liquid alternatives losing some ground. (The Credit Suisse Liquid Alternative Beta Index was -0.4% for the quarter and now +4.8% TTM). That being said, an example of a good non-correlated fund and something that helps offset the damage elsewhere would be the AQR Managed Futures Fund (symbol: AQMNX). This fund was up 3.5% in September and up 5.33% for the quarter!

Of course, many of you may have not heard about how poorly most markets performed in September given how focused the media is on large-cap domestic stocks. Definitely CNBC and other major media outlets like to focus on the biggest stocks (i.e. those within the S&P500) and only a fraction of its time is spent reporting on other cap styles within equities and other asset classes like bonds or alternatives. It’s what happens when large caps are in vogue and diversification doesn’t appear to be doing its job.

However, we know better than to get caught up in the short term. As a CFA charterholder, one becomes very familiar with the empirical studies showing that the best way to invest for the long-term is to diversify and mitigate concentrated risk to any one particular area. Diversification benefits don’t always show up in small time periods (quarterly, yearly) but they pay off over the long-term. We live in a world that moves very quickly these days, but patience in investing is something that is prudent. Getting swept up in, and being over-exposed to the latest fad and chasing short-term performance are not rewarded in the end. The key is staying fully invested in accordance with an appropriate, well-diversified asset allocation based upon your risk tolerance. Using an experienced wealth manager like DWM can help you stay disciplined.

Here’s to an interesting final quarter for 2014!

DWM 2Q14 Market Commentary

brett-blogIt’s unusual when nearly all asset classes move in one direction and even more unusual when that direction is up. But that’s what has happened so far in 2014 with stocks having another good quarter, alternatives having a solid quarter, and most surprisingly bonds having a stellar quarter. The primary driver behind the rallies in both stocks and bonds remain the aggressive efforts of global central banks to keep printing money in efforts to keep sluggish economies moving in the right direction. In other words, results have been good but one can’t help but feel like this rally is mostly due to artificial catalysts. And what happens when those aren’t good enough to propel us forward? Back to that question in a little bit.

Let’s look at the numbers:

    • Stocks have been on a roll with the S&P500 notching its sixth consecutive quarterly gain. The average diversified US stock fund returned +3.4% in 2q14 and is now up 4.9%.
    • In the fixed income markets, bonds prices surprisingly rallied as evidenced by the US Barclays Aggregate Index registering +2.0% for the quarter and up 3.9% Year-To-Date (“YTD”). This unexpected bond rally so far this year is from generally declining bond yields as evidenced from the 10 Year US Treasury rates falling from 3% at the start of the year to about 2.5% at quarter end. Almost everyone had expected rates to move higher, but the reverse happened when central global banks pushed looser monetary policy in response to slow economic indicators. That being said, with little further room for yields to fall, we expect rates to gradually move back up with the Fed moving toward higher rates in 2015.
    • Many liquid alternatives fared very well in the second quarter. Here are some of the ones we follow and use within our DWM Liquid Alternatives Model:
      • *JPMorgan Alerian Master Limited Partnership Index (symbol: AMJ) – up 7% 2Q14
      • *SPDR Gold Trust (GLD)– up 3.5%
      • *SPDR DJ Global Real Estate (RWO) – up 7.4%
      • **Pimco All Asset Authority (PAUDX) – up 3.9%
      • **RiverNorth DoubleLine Strategic Income (RNDLX) – up 3.3%

* denotes an alternative asset
** denotes an alternative strategy

Another important factor is that housing appears relatively strong. The Case-Shiller 20-city Home Price Index rose 10.8% in the year ended in April. However this has been driven by a lot of cash buyers. As many people with great balance sheets know, the mortgage approval process is complicated, lengthy, and no fun these days. Furthermore, the strength is showing up in pockets – one suburb may be hot, but another nearby may not be moving at all. If you’re considering a real estate transaction, make sure you have done your due diligence and it’s also a good idea to get your real estate broker and financial advisor helping you together.

As we move into the second half of 2014 (crazy how fast this year has gone!), we look to history to give us a relative view of what to expect. For example, the current S&P500 bull market is now over 5.3 years old. The longest bull market since 1950 lasted 9.5 years, so we may have some time left. Furthermore, the S&P500 has gone over 1000 calendar days without a double-digit pullback, the fifth longest stretch without a 10% or greater drop in the last 50 years. Some fear that this represents the “calm before the storm”; on the other hand, perhaps we are in a “Goldilocks” environment and this low volatility environment can continue on.

It definitely is not all roses out there. Interest rates are still low, but trending up, meaning inflation could be right around the corner. Jobs look better on the surface, but the wage growth isn’t really there as companies continue to squeeze productivity out of their workers. That means Americans won’t spend money like they use to, and hence economic growth could be kept in check. Case in point of this comes from the final 1Q14 GDP reading which showed negative growth of 2.9%. This was worse than expected and the worst reading since 1Q09, the height of the recession. The report showed that consumer spending, the main component within the GDP calculation, fell from 3 to 1 percent. Sounds serious, but in 2014-style, investors simply shrugged it off saying, hoping, that it was due to the harsh winter weather. The 2Q14 reading to be released at the end of July will need to show serious improvement or we doubt the market will just shrug it off again. The nation’s quarterly growth has only been as bad as or worse than this reading only 18 times in the last 67 years.

To sum it up, 2014 has not been flashy but it has been a profitable one for most investors so far. There is a lot of noise out there, but no one knows exactly what is going to happen next. There are both many headwinds and many tailwinds. That said, make sure you and your portfolio have a captain to steer you through those winds. One that will help you stay well-diversified and employ strategies that can help in all market scenarios, be it up, down, or sideways. We at DWM have a lot of experience navigating these terrains. We looking forward to continuing the journey with our crew and reaching new heights.