DWM 2Q18 MARKET COMMENTARY

‘Confusing’. If you look that word up in a dictionary, you’ll see something like “bewildering or perplexing” as its definition. Confusing could be a good way to describe the state of the market. On the one hand, you have a U.S. economy that may have come off one of its strongest quarters in years. On the other hand, there is continued threat of higher interest rates and a tumultuous trade war.

Before looking ahead, let’s see how the major asset classes fared in 2Q18:

Equities: Stocks were mixed in 2q18. Certain pockets did well whereas certain ones did not. For example, the Dow Jones Industrial Average Index was down 0.7% on the quarter and now in the red for the 2018 calendar year (-1.8%). The Dow’s multinational holdings are more prone to trade-related swings, whereas small caps*, up 7.8% for 2q18 & 7.7% YTD (Year-to-date as of 6/30/18), are not. Emerging stocks**, -8.0% 2q18 & -6.7% YTD, did not fare well. This brewing trade war between the U.S. and China, along with rising interest rates and the rising U.S. dollar, are causing many investors to flee from these so-called riskier areas. We think a good general proxy for global equities is represented by the MSCI AC World Index, which was up a modest 0.72% for the quarter, and now about flat (-0.2%) for the year.

Fixed Income: Yields continued to go up, boosted by the same concerns as last quarter: increasing expectations for growth and inflation in the wake of the recent $1.5 trillion tax cut. The Barclays US Aggregate Bond Index, dropped a modest 0.16% for the quarter and now down 1.6% YTD. TheBarclays Global Aggregate Bond Index fell 2.8% (and now down 1.5% YTD) as emerging market bonds suffered for same reasons as mentioned above for emerging market equities.

Alternatives: The Credit Suisse Liquid Alternative Beta Index, our chosen proxy for alternatives, registered a +0.4% for 2q18 and now off only 1.3% for the year. Gold*** suffered, -3.5%, however REITs**** and MLPs† had nice quarter returns of 5.8 and 11.5%, respectively.

Like others, you may be thinking something like this right now: “Thank you for providing color on the various assets classes, but I’m still confused. How did a balanced investor fare overall? And where do we go from here?”

Overall, most balanced investors had modest gains for 2q18 and are pretty close to where they were when they started the year.

As for looking forward, we think the area causing the most confusion and uncertainty is the tariff trade war issue. A lot of this is political noise which has weighed down stock prices. What has been, or will be, enacted is quite different than what is being discussed. We are hopeful that the countries can eventually reach a compromise on trade.

In the meantime, the US economy is red hot, with GDP nearing 5.0% and unemployment levels near lows not last seen since 1969. The upcoming earnings season should be exquisite! But all of these positives get analysts worried that the economy may overheat. The Fed’s goal is to raise interest rates enough to keep enough pressure on the brakes of this economy to control inflation, but not too much where it comes to a screeching halt. That being said, inflation is a little bit above the Fed’s target level and as such we would expect to see the Fed continue to raise rates gradually, perhaps for the next 4 -5 quarters. They’ll most likely need to stop at some point as the economy cools when some of the Tax Reform stimulus wears off in the second half of 2019. It’s not an easy job.

“I’m still confused – should we be worried about a recession in the near future?” While we don’t see it happening any time soon, it definitely is an increased possibility, and at some point, will inevitably occur. The goal is to be prepared for it. Don’t let emotions get in the way. Stay diversified and stay invested. Trying to time the market is a losing proposition. A good wealth manager can help you stay disciplined.

The good news is that the next recession will most likely be milder than the last couple for a few reasons including the following:

  • Economies, both here and abroad, are simply more stable than in the past.
  • Valuations are fine today. The forward 12-month PE (Price-to-Equity Ratio) of the S&P500 is right in-line with its 25-yr average of 16.1. International stocks, as represented by the MSCI ACW ex-US Index are even cheaper, trading at a 13.0 forward PE.
  • The Fed certainly does not want another 2008 on its hands. They will continue to be friendly to market participants.

SP GRAPH EDITED

 

Still confused? Hopefully not. But if you are, talk to a wealth manager like DWM. If you look at antonyms for confusion, you will see words like “calm”, “peace”, and “happiness”. That’s what our clients want and what we seek to provide them.

Brett M. Detterbeck, CFA, CFP®

DETTERBECK WEALTH MANAGEMENT

 

**represented by the Russell 2000 Small Cap Index

**represented by the MSCI Emerging Markets Index

***represented by the iShares Gold Trust

****represented by the iShares Global REIT

† represented by the UBS AG London BRH ETracs Alerian MLP ETF

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 Fall 2014 Seminar Recap

BMD seminarWe just wrapped up our fall seminars which focused on Pullbacks, Corrections, Bear, and Bull markets. Both venues – Palmetto Brewery in Charleston and Emmett’s Brewery in Palatine – served as great places to not only deliver an important financial presentation, but also as fine places to just hang out and visit with one another.

In case you missed our October seminars entitled “Is it Time for a Pullback, Correction, or a Bear Market?”, here is a quick recap:

  • Pullbacks, Corrections, and Bear Markets all signify a move down of 5, 10, or 20%, respectively, from a recent peak. They may sound scary but a Pullback/Correction might actually be a very healthy thing because it may signify that the underlying asset’s valuation is getting back in line with fundamentals. In other words, Pullbacks and Corrections are different from Bear markets in that they may be simply a “pause” that refreshes an otherwise healthy Bull!
  • Diversification plays a huge role to a balanced portfolio. The end of September and beginning of October saw a significant Pullback in equity indices, e.g. Russell 2000 Small Cap, S&P500, etc. However, other asset classes were not exhibiting same price movements. In fact, some fixed income indices experienced no pull back and traded at all-time highs. Alternatives also experienced non-correlation benefits. The media (i.e. CNBC) would have you believe that investing begins and ends with only large cap domestic stocks. Diversified investors don’t need to get caught up in their obsession.
  • History shows that Bull markets typically last greater than 5 years on average and Bears about a quarter of that. Bear markets experience more volatility, given the fear that usually surfaces during these times. Bull markets don’t end based on a particular time frame, but instead end from an external shock (e.g. overvaluation/bubbles, inflation, etc).
  • Bull & Bear markets are driven by greed and fear as much as economic fundamentals. Humans are not wired for disciplined investing, hence investors can help themselves gain discipline by using a wealth manager like DWM to focus on the things that one can control, and avoid emotional, poor decisions based on things one cannot control.
  • Trying to predict short-term markets is virtually impossible. Markets don’t necessarily correlate with current economic data. The world has changed and old formulas and rules of thumb may not apply. Global concerns can cause investors’ appetite for risk to diminish overnight. However, over the long-term, the markets have rewarded discipline, through world events of all types.
  • Trying to time the market is a fool’s game. Studies show that missing just a few days of strong returns can drastically impact overall performance.
  • Your financial adviser should help you focus on what you can control. This includes creating both a financial plan and an investment plan. You also need to stress test these plans. And, then you need to review your risk profile- which is a combination of risk capacity, risk tolerance, and risk perception.
  • The markets cannot be controlled, but asset allocation can be. Asset allocation is the primary driver of returns. Once you have your risk profile, you are in a position to construct an appropriate asset allocation target mix. Use of multiple asset classes (equities, fixed income, alts) lead to non-correlation benefits. Non-correlation leads to a smoothing effect to your return profile which means smaller downsides. Smaller downsides lead to better geometric compounding, hence better LONG-TERM RESULTS. The chart below shows the impact of downside volatility and why one wants to avoid that.
  • Seminar slideFocus on things you can control:
    • Create an investment plan to fit your needs and risk tolerance
    • Identify an appropriate asset allocation target mix
    • Structure a well-balanced, diversified portfolio
    • Reduce expenses through low turnover and via passive investments where available
    • Minimize taxes by asset location, tax loss harvesting, etc.
    • Rebalance on a regular basis, taking advantage of market over-reactions by buying at low points of the market cycle and selling a high points
    • Stay Invested

Using a dedicated and caring financial advisor can keep you focused on the above items and more. Most importantly, an advisor like DWM can keep you and your portfolio disciplined so you can reach your long-term financial goals.

LGD seminar2

Is the Bull Market Turning to Bear?

bears stalk goldilocks marketStocks tumbled again last week. The last three weeks have seen a major pullback in equities of all types. The DJIA is now in negative territory for the year, the MSCI global index is at 1.14% ytd, small caps, the big winners last year, are now down 8.57%. The S&P 500 index is the one “bright spot” in equities, up 4.78% ytd.

This a big change. For several years, we’ve been in a “Goldilocks” economy, “not too hot, not too cold” which has produced calm, growing equity markets. Now, many investors are wondering if this pullback (a drop of 5% or more) will turn into a correction (10% or more loss) or a crash (20% or more fall) and signal the start of a bear market. Of course, every financial pundit has their own opinion which they are happy to share. Truth is, no one knows the future. We don’t.

However, we do know that there have been 12 pullbacks since March 2009 when this bull market started. The last correction was in 2011. The current bull market is now in its 68th month, which places it about in the middle in length and magnitude of the 17 bull markets since 1871.

We also know that at times like this people often lose track of the long-term. We humans don’t like uncertainty. Studies show we are not generally wired for disciplined investing. Therefore, when people follow their natural instincts, they tend to apply faulty reasoning to investing. These reactions can hurt performance.

We further know that markets have rewarded discipline. $10,000 invested in 1970 in the global equity markets would be worth $430,000 today ($370,000 net of inflation).

So, instead of following one’s emotions at a time like this, we suggest that you focus on what you can control:

  • Creating an investment plan to fit your needs and risk tolerance
  • Structuring a balanced portfolio using equities, fixed income and alternatives
  • Diversifying broadly
  • Reducing expenses and turnover
  • Minimizing taxes
  • Staying invested
  • Rebalancing regularly

A key point in these times is to review your risk profile. There are three components: First, your risk capacity, or financial ability to withstand risk. Second, your risk tolerance, which is your comfort level for risk. And, lastly, your risk perception, or how risky you feel about the current investment environment. For the long-term, you should focus on your risk capacity and risk tolerance and not your current risk perception.

We will be reviewing all of these important points and more at our DWM client seminars on 10/21 in Palatine and 10/28 in Charleston. And, of course, we’re available to our clients 24/7 to help you keep focusing on the key areas needed for long-term investment and financial success.