DWM 1Q14 Market Commentary

Brett DetterbeckGrinding higher. That’s what the markets did in the first quarter of 2014, evidenced by both the S&P500 Equity Index and Barclays US Aggregate Bond Index, registering a 1.8% advance. There may be a sense of calmness now, but January tested investors’ nerves with stocks experiencing one of their worst months in a long while. What we liked seeing was how the liquid alternatives investments that we follow performed during that time.  As a group they had a positive result, thus behaving in a non-correlated manner to stocks which is exactly what we like to see.  Please recall that the use of multiple assets classes helps to smooth out overall results, which leads to better long-term results. January served as a good reminder why it is necessary to look beyond just the equities asset class.

That being said, we aren’t “Debbie Downers” on stocks. We think for most investors they should represent a majority allocation. Frankly, there is a lot of good news out there:

  • Continued low interest rates and the belief that, even as the Fed pulls back from its most aggressive measures (i.e. “tapering”), it will keep them low for an extended period.
  • US growth remains on track, enough to keep currently strong corporate earnings rising.
  • The job market is slowly but steadily improving.
  • Consumers and companies that delayed spending during the harsh winter may soon be playing catch-up from pent-up demand.
  • Housing is no longer a drag.
  • Political parties in Washington have actually been cordial lately, and somewhat productive.
  • Outside of the US, Europe’s economy is seen as slowly mending.
  • The violent swings in emerging markets have calmed after central banks moved swiftly to defend their currencies by raising interest rates thus luring investors with higher returns.

On the flipside, it’s not all coming up roses entering 2Q14:

  • The Fed has done a great job of late walking its tightrope on tapering. Nevertheless, nervousness comes hand in hand with the Fed’s plan to end unprecedented efforts to aid the economy which could lead to choppy waters.
  • The stock market is showing some strains. For example, many investors in the first quarter shifted from growth companies to value companies, suggesting that some sectors may have run their course.
  • From a fundamentals perspective, stocks in the S&P500 were trading at 15.2 times the next twelve month’s expected earnings, which is higher than the 13.2 times average of the past five years, and 13.8 times average for the last decade.
  • There has been a lot of soft economic news out of China. With China being the second biggest country in terms of GDP, the whole world can feel the effects of their hiccups.
  • Cold War nervousness – all bets are off if a huge geopolitical issue unfolds. Frankly, it was pretty amazing how investors shrugged off the Crimea headlines, but who knows what the next event will be and what it will bring.

It might be overwhelming to think about all the factors at play and how they can affect you and your portfolio. But no matter what the world throws at you, remember we cherish our role as our clients’ first-line of defense for their portfolio and helping them reach long-term goals. We take pride in filtering out the noise and keeping them abreast of what is really important.

Consider talking to a wealth manager like DWM today if you feel like you’re lacking that first-line defense and want help in achieving those long-term goals.

Brett M. Detterbeck, CFA, CFP®


DWM 4Q13 & 2013 Market Commentary

Brett M. Detterbeck, CFA, CFP®Happy New Year! The story of 2013 was how US stocks blew away market expert predictions by registering its best year since 1995. It has now been over 825 days without a 10% or greater drop for the S&P500, the 5th longest stretch in the last fifty years. Fueled by easy money policy from the Fed and improving signs in the economy, it was basically “off to the races” for most stocks in both 4q13 and all of 2013. Unfortunately, for the diversified investor, most other investments lagged far behind the big figures posted by US stocks, yet still helped produce what overall will be considered by most to be a very good year for their portfolio.

Let’s celebrate the honorable return achievements of 2013 before looking ahead to 2014.

US Stocks finished the year up 30%+ as evidenced by the S&P500’s 32.4%. Domestic markets trumped overseas ones as the MSCI World Index (ex-US) was only up 21.0% and the MSCI Emerging Markets Index was actually negative 2.6%. This really showcases what’s going on in the world right now: the US recovery is making strides while the rest of the world is still trying to find its legs.

Unlike the fun times in equity-land, bonds had a bleak turnout in 2013, with the Barclays US Aggregate Bond Index down 2.0%, its first losing year since 1999. Per our recent seminars, we have been “pounding the table” on bonds urging others to follow our lead and change up or decrease their bond exposure given the new rising interest rate environment we’re in. The 10-Yr Treasury Note is now hovering around 3.00%, its highest level since July 2011, having climbed 1.61% since the start of May, which is a pretty monstrous move in bond land. Given the inverse relationship between rates and bond prices, this made for a tough year. Fortunately, there were places within fixed income to find some modest returns including high yields (up 7.4% per the Barclays US Corp High Yield Index) and floating rate funds (up over 4% as exhibited by the ETF many of our investors hold, PowerShares Senior Loan Portfolio (symbol: BKLN)).

Most alternatives did not come close to faring as well as equities. There are not many benchmarks in this category but we like to look at the DJ Credit Suisse Core Hedge Fund Net Index which posted a 2.92% return for 2013 and the CPI which was up 1.5%. Many of the liquid alternatives securities we follow posted modest, albeit positive single-digit returns. The fact is: if all alternatives were up 30% like equities, they wouldn’t be doing their primary job at being a diversifier and protector for the overall portfolio. With five straight years of positive stock market returns with no meaningful correction and an unattractive bond market, we think this asset category is of utmost importance.

We’re cautiously optimistic looking forward to 2014, however we’d be surprised to see equities continue their recent trajectory. Furthermore, we would not be surprised for fixed income to post much-lower-than-historical-average-like returns. And we would expect alternatives to remain that diversifier and protector with results in the mid- to high- single digits.

Of course, a lot depends on how the economy fares and how market participants react to it. The key factors to look for are the following:

1) Housing recovery snap – home prices are back to pre-Financial Crisis peaks in many areas. However, with interest/mortgage rates much higher than just several months ago and expected to go higher, affordability is not what is was and buyers may get spooked.

2) CAPEX anyone? – will businesses continue to be wary about spending, either by hiring, adding new equipment, or other measures?

3) Washington gridlock – with the Federal borrowing limit set to be hit soon and many other political wrestling issues ahead, we’re sure to get more fireworks here which could cause some negative ramifications.

4) Fiscal Stimuli no more – the Fed has laid out a timetable to slow and ultimately end its current humongous bond buying program. What happens if there’s a sharp economic downturn along the way and how might that affect markets?

5) ex-US – we didn’t get the confidence-shaking headline international news stories in 2013 that were overkill in 2009-2012, but severe vulnerabilities still exist across the pond. It’s important to investors everywhere, including us here, that this global economic recovery continues.

In conclusion, on the investment management side, DWM looks forward in 2014 in continuing to do what we do best: preserving and growing our clients’ capital. We do that by controlling what we can control within a low-cost, properly diversified investment portfolio, consistent with clients’ long-term goals, and regularly rebalancing it. On the financial planning side, DWM looks forward in 2014 to working with clients to firm up their financial plans using our state-of-the-art dynamic financial planning software.

For those of you currently not using a wealth manager, we urge you to make 2014 the year you help yourself by getting one. Here’s to a wonderful and prosperous 2014!

DWM 3Q13 Market Commentary

Detterbeck_sample_for_title_page_(just_mountains)[1]It is hard to get excited about the near term outlook for financial markets given the negative news we constantly deal with. For example, the government is currently in shut down mode, we face another debt ceiling impasse in a few weeks, and the Fed has decided that the US economy isn’t strong enough for the Fed to taper bond buying yet. In the bizarro world of investing, traders actually like to hear “bad news” like that the economy isn’t that strong. Why? Because then the accommodative Fed policy can continue. And that is reason #1 behind the stock market rally since 2009 and why markets continued to be strong in 3Q13. Times will be a’changing when this artificial foot on the gas takes a break.

Almost all asset classes jumped in 3Q13. Equity markets, and not just the domestic ones, had big returns. The S&P500 was up 5.2% and diversified international stock funds were up 10.2%. Fixed income markets, after a disastrous 2Q13, bounced back nicely with the average taxable bond fund up 0.8% for the quarter. And the liquid alternative funds that we followed generally posted modest, yet solid returns.

To reiterate our view on investment management philosophy, we would like to point out a few things. First things first: it is not about which individual stock one holds. That is, its not whether you own Coke or Pepsi in your portfolio. If you want to play individual names, you certainly can, but we wouldn’t advise a big allocation to that. Why? Because it’s kind of like going to Vegas. Vegas is fun, but that’s gambling, not investing. DWM is about controlled investing. We don’t look to hit home runs. We look to preserve capital by protecting the downside and growing the portfolio in a controlled manner.

Empirical studies show that what it is all about is how much you have allocated to the different asset classes. That is, how much you have in stocks, bonds, and alternatives. Keep in mind that these asset classes all behave very differently.

  • Stocks historically offer the greatest rate of returns, but come with the most volatility. Furthermore, some market timers would tell you that stocks are “long in the tooth” right now given the amazing run they’ve been on since bottoming out in early 2009.
  • Fixed Income has historically been viewed as a “safe haven” and has provided 7-9% returns over the last 30 years. Yet that coincided with a steady declining interest rate environment that is most likely now over. Fixed income still provides a significant role in everyone’s portfolio as a diversifier and capital preservationalist, but expected returns going forward should be significantly lower than the high single-digit percentage rate that investors have become accustomed to.
  • Lastly, alternatives provide an additional asset class that can produce new sources of returns with lower correlation and reduced volatility. We expect volatility and returns to be somewhere between what you would expect of stocks and bonds, with an extra bonus emphasis on downside protection.

We all should be glad that these asset classes operate very differently as it provides the “smoothing effect” on the overall portfolio. Because of this, overall portfolio returns may lag what equity markets do in bullish times, but more importantly, they shouldn’t experience huge downside losses when times get rough. And without those big holes – like the 35-50% holes all-out equity investors found themselves in 2008 – it takes a much smaller time to dig out and hence geometric compounding can do its thing, leading to ultimately better long term results.

That said, we have enhanced our quarterly reports by breaking out asset class performance. Clients will see this near the end of their reports. We also are providing an Asset Allocation “soil chart” which shows the client’s asset allocation over time. We think this helps explains exactly how and why the overall “household” portfolio is performing the way it is.

Drop us a line if you have any questions on asset allocation or investment philosophy. Or even better; come to one of our upcoming seminars this month focusing on how to invest in a rising interest rate environment, followed by an hour of fun. In Charleston October 23rd, and Palatine October 30th. We hope to see you soon!

Brett M. Detterbeck, CFA, CFP®


DWM 2Q13 Market Commentary

Brett DetterbeckI lead this quarter’s market commentary with a discussion on fixed income as, contrary to CNBC jabber, there are a lot of investors with a considerable amount of exposure to fixed income, an asset class that historically has been viewed as a safe haven. For many older investors, it has been the asset class that meant a modest return with little risk (at least relative to equities). But that paradigm has shifted with interest rates finally bouncing off historic low levels.

Here’s what you need to know: bond prices and yields move in inverse directions. A bond typically will lose 1% in price for every year of duration that it has left for every percentage point rise in interest rates. Which is what makes this latest quarter so painful for bond investors – rates jumped on Fed Head Bernanke’s talks about possibly winding down the central bank’s easy money bond-buying policy. The 10yr US Treasury note rose from 1.84% at the beginning of the quarter to 2.49% at the end of the quarter. To prove the point above, a fund utilizing 10 year Treasuries like the Vanguard Intermediate Term Treasuries Fund had a negative 2.75% return for the second quarter. Corporate bonds fared even worse, down a staggering 3.3% as represented by the Barclays Investment Grade Corporate Bond Index. 3.3% may not sound much in stock terms but that’s a big move in bond land for one quarter. The Fed is walking a tight rope trying to communicate the right message to the market players while at the same time trying to nurse this economy back to health not only in the short term, but also the long term. A tough job indeed.

So, now to stocks – if all one watched was CNBC, you’d believe that everything is great. That is, domestic stocks (represented by the S&P500) had another positive quarter, up 2.4% and up over 12% year-to-date. But, domestic stocks were frankly the island in the 2q13 storm. A run down of the list of major benchmarks reveals a lot of negatives:

    • MSCI All Cap World Index ex USA:  -3.12%
    • MSCI EAFE Index:  -0.98%
    • MSCI Emerging Markets Index:  -8.08%
    • SPDR Global Real Estate Index:  -5.03%
    • DJ UBS Commodities Index:  -9.45%
    • Barclays Capital US TIPS:  -7.05%
    • JPMorgan Emerging Markets Bond:  -6.03%

To reiterate, there was a lot of correlation amongst markets, with most of it being down. Moreover, many liquid alts traded down albeit not as much as the uglier ones above. So, for most diversified investors with a balanced portfolio designed for the long-term, it was a negative return quarter.

We’ve seen rough quarters before. Indeed the second quarter was a challenging one, but a prudent investor does not fixate on the short-term. Markets like to overshoot and most likely many of these negatives above will turn into positives in the near future. As much as CNBC and other headline news may make you think about plowing everything into large cap domestic stocks, empirical studies prove that that doesn’t work in the long-run. One needs a diversified portfolio made up of multiple asset classes and investment styles. As always, our focus remains long-term. With kudos to the Chicago Blackhawks winning the 2013 Stanley Cup, I bid you adieu with the following hockey analogy: It’s not about where the puck is now, but where it is going to be.

DWM 1Q13 Market Commentary

Brett DetterbeckRemember how ‘scary’ the Fiscal Cliff ordeal was just a few months ago?! Well, not only did stock markets shrug that off, but they also shrugged off a spending-cuts-sequester, higher tax rates, and further turmoil in Europe to soar to all-time record highs. Amazing really. “How is this happening?” one might ask. The simple reason is: Federal stimulus. The Fed Quantitative Easing bond-buying program continues to keep interest rates low, thus reducing the attractiveness of ‘safer’ investments such as Treasuries, and hence propelling ‘riskier’ assets such as stocks.

And did they ever propel! The S&P500 was up over 10% for the first quarter. Small Cap and Mid Cap fared even better, up 11.8% and 13.5%, respectively. Domestic certainly outperformed international markets as Eurozone worries continued. (For example, you may have heard about the tiny island in the Mediterranean called Cyprus who has a big banking presence. Unfortunately, both its banks and its government are a mess. To fix it, depositors with over $100K will have to give up some of their hard-earned money. This is the first time that depositors have had to share the pain in the modern era so it’s a big deal. The fear is that if they can put this in place within Cyprus that it could happen anywhere else in Europe, creating tremendous anxiety.) The MSCI ex-US was “only” up 4.7% and emerging markets were actually down 3.5%.

Fixed income on the other hand did not do much, with the well-known Barclays US Aggregate Bond Index about flat (-0.1%). Investment models that employed more than just the basic “Agg” type of exposure – like high yield (up 2.9%) and currencies (up 4.2%) – were able to produce small albeit positive fixed income results.

We urge clients to have a minority stake in alternatives, typically 10-30% depending upon their profile. Many investors may be familiar with the famous “alts” like commodities (essentially flat for 1q13) and real estate (up over 7% as represented by the SPDR Dow Jones Global Real Estate ETF ).  But many aren’t familiar with the majority of alternative vehicles and strategies out there.  For some quick education, here’s an example of an alternative publically traded mutual fund we utilize: Pioneer Floating Rate (symbol: FLARX), a fund which holds bank loans. What makes this fund so attractive is that unlike traditional fixed income funds where there is an inverse relationship between interest rates and price, this fund actually benefits when rates go up. Why? Bank loans are tied to interest rates in that they can go up when rates go up. Thus, this fund offers not only a decent current yield but is poised for appreciation when rates do in fact start marching higher.

1Q13 is a good reason why we don’t try to “time” the market. Many going into this New Year said that equities after a strong 2012 were poised for a correction particularly given all the global economic headwinds. Yet, here we are in April with a strong first quarter stock market showing and a good start to 2Q13. By not avoiding any one particular asset class and having at least a portion of your portfolio within all of the three major asset classes (equities, fixed income, and alternatives), an investor employing relatively little risk should benefit with stable, steady returns. This is the benefit of having a diversified, multi-asset class portfolio, with 1Q13 being a perfect example.

As we prepare for Spring – I know both our Charleston and Chicagoland clients are waiting patiently (Will it ever get here?) – we also look forward to what the markets will bring us in 2Q13. Will the US continue to show healthy signs of improvement like we’ve been seeing in the housing market? Will the sequester slow the US down? Will there be an equity correction of some sort after this tremendous rally? Will Europe ever recover? How much will Europe woes affect us here in the US? And the questions go on and on, but ultimately lead to “How does this affect me?” As our client’s wealth manager, we know that’s the most important question and one of the reasons why we are here: to filter out the noise and make the correct portfolio management moves to ultimately enhance your personal and family’s wealth and well-being. Protecting and growing these portfolios and helping clients attain their long-term financial goals are what we take pride in.

Happy Spring!

DWM 2Q12 Market Commentary

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

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

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

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

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

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

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