Political Parties and their Impact on Your Portfolio

Contributed by: Jaclyn Jackson

Primary season could be worrisome for some investors as they try to figure out who will become our next president, how that person’s political ideologies will influence stock markets, and ultimately how that may impact their investment portfolio performance. I’ve explored the most common myth about political parties and its effect on the US stock market - the result is pleasantly surprising. 

Myth:  Big government ideologies held by Democrats make them worse for the stock markets while small government and small business driven ideologies make Republicans best for the stock markets. 

Bust:  Whether a Democrat or Republican is elected, historical data indicates that it has no statistically significant bearing on US equity markets. Illustrated below, both parties have experienced a similar amount of presidential terms with positive equity returns based on the Dow Jones Industrial Average from 1900-2012. 

Sources: Bloomberg, Oppenheimer Funds. As of 12/31/14.

Even though Democrats edge out Republicans by return percentage, there really isn’t much difference once you adjust for the normal variation in stock market returns. The results are reassuring; markets aren’t largely swayed by the president’s political party. 

Tips for Politic-Proofing Your Portfolio

While political parties don’t necessarily dictate market performance, they do generate policy plays that influence the economy. Divergent policy priorities around issues like individual taxes, the environment, healthcare, financial regulation, Fed policy, etc. could affect specific market sectors (i.e. healthcare, energy, utilities, and financials). 

Yet, investors can be confident in deploying two key strategies to help armor their portfolios against sector specific market fluctuations: diversification and long term investing. Diversification works to improve portfolio risk return characteristics by spreading investment exposure across different asset classes. In other words, it can assist in buffering your portfolio from concentrated portfolio swings to help achieve better risk-adjusted returns. Likewise, long term investing generally guards against short term sector movements by providing those who stick to their investment strategy less volatile returns over time. When you have a well suited, diversified long term investment strategy, you don’t have to fall into the trap of investing based on the political climate.

For more information of the benefits of diversified investing, click here.

Jaclyn Jackson is an Investment Research Associate at Center for Financial Planning, Inc. and an Investment Representative with Raymond James Financial Services.

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This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Jaclyn Jackson and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Past performance is not a guarantee of future results. The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stock of companies maintained and reviewed by the editors of the Wall Street Journal. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Investing involves risk and investors may incur a profit or a loss regardless of strategy selected. Diversification does not ensure a profit or guarantee against a loss. Holding investments for the long term does not insure a profitable outcome.

Sell in May and Go Away, Revisited

Contributed by: Angela Palacios, CFP®

Questions arising during this election year have prompted me to revisit an old topic. This election year seems anything but average (or at the very least entertaining), but what happens when you layer in the old debate of whether it is a good idea to, “Sell in May and go away.” Will this election year be different? 

Markets tend to have their stronger performance between October and May, which, despite a major bump in the road during January and February this year, has certainly held true in the past year. 

This chart is for illustration purposes only.

There are many theories as to why this could be true:

• Investors tend to fund their IRA accounts either early or later in the year.
• There could be lower summer productivity for business.
• And the most obvious, people prefer to be outside rather than inside investing their money (especially in Michigan).

However, this year could be different. If you look at monthly returns in Election years the above picture is contradicted.

This chart is for illustration purposes only

Strategies involving the short-term timing of the markets usually end up hurting investors rather than preserving or boosting returns, so take caution.

I am often asked if investing should be held off until after the election during years like this. However, I believe experience teaches us that we are better off if we keep our voting and investing decisions separate.

Angela Palacios, CFP® is the Portfolio Manager at Center for Financial Planning, Inc. Angela specializes in Investment and Macro economic research. She is a frequent contributor to The Center blog.

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Source: The Big Picturehttp://www.ritholtz.com/blog/

Any opinions are those of Angela Palacios and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Investing involves risk and investors may incur a profit or a loss.

The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results.

First Quarter 2016 Investment Commentary

Contributed by: Angela Palacios, CFP®

The relatively benign appearing performance year-to-date of the S&P 500 of 1.35% does not tell the full story of the storm beneath.  Markets started out the year spooked by China and the prospects of four interest rate increases being projected by the Federal Reserve (the Fed).  Recessionary fears seemed to spike mid-February and then recede as economic data such as retail sales, manufacturing, employment, and consumer sentiment came in slightly better than expected or at least didn’t surprise to the downside. 

Janet Yellen, chair of the Fed, ended the quarter with a noticeably dovish speech justifying the Federal Open Market Committee’s lower path for rate increases by citing global growth risks.  The Fed now anticipates only two interest rate increases this year instead of their original four.  Meanwhile, interest rates overseas pushed farther into negative territory while the Bank of Japan introduced their own negative interest rate policy leaving the U.S. as one of the few havens in the world that is still providing yield. 

Last Year’s Losers are this Year’s Winners

2015 positive market returns were driven very narrowly by just a handful of stocks.  This year has turned on a dime with the worst performing companies of 2015 being the best performers in 2016.  The below chart breaks the S&P 500 up into 10 groups based on 2015 performance.  Group one represents the best performing stocks in 2015 and group ten represents the worst performing stocks in 2015.  The green and red bars represent performance from each of these groups during the first quarter of 2016.

*Bespoke Investment Group

Moderation in the U.S. Dollar

The dollar slowing its steady advance has helped to ease some of the headwinds for commodities, namely oil, as well as emerging markets debt and equities.  The dollar has given up some of its gains from 2015, due to lowered expectations of the Fed hiking rates.  It is quite common for currency markets to over-react to the monetary policy differences that we are seeing between the U.S. and other countries (negative interest rates overseas versus interest rate increases here at home) so we may yet see the dollar move back into slow strengthening mode.

Summer Real Estate Sizzles

Current housing markets seem to have a severe lack of supply of single family homes similar to the late 1990’s and early 2000’s.  Yet new homes being built are at much lower levels then they were during those years.  Prices will likely continue their upward trend of the past few years as demand continues to exceed supply.  Mortgage rates continue to be low especially after the Fed decided to put on the brakes of raising rates.  All of these factors should equate to a favorable market for home sellers. 

Here is some additional information we want to share with you this quarter:

Checkout the quarterly Investment Pulse, by Angela Palacios, CFP®, summarizing some of the research done over the past quarter by our Investment Department. 

In honor of the Game of Thrones premier, Angie Palacios, CFP®, has also discovered a Game of Negative Interest rates that’s playing out in our world right now. Check out Investor Ph.D.

Confused by interest rates and interbank lending? Nick Boguth, Investment Research Associate, breaks it down for you in Investor Basics by using Game of Thrones.

It’s tax season, which also means refunds may be coming your way! Check out these scenarios from Jaclyn Jackson, Investment Research Associate, and see what the smartest plan for your refund is!

Quarters like this one remind us of the importance of diversification.  While a well-diversified portfolio will likely never generate the highest returns possible it also shouldn’t generate the lowest returns.  The primary goal is to manage your risk and keep the end goal of your financial plan at the forefront.  The key to success in investing is developing that plan with realistic goals and then sticking to it even during times like February when it is tempting to deviate. 

We thank you for your continued trust in us to help you through all types of markets to reach your goals.  If ever you have questions, please, don’t hesitate to reach out to me, your planner or any other members of our staff.

Angela Palacios, CFP®
Director of Investments
Financial Advisor

Angela Palacios, CFP® is the Portfolio Manager at Center for Financial Planning, Inc. Angela specializes in Investment and Macro economic research. She is a frequent contributor to Money Centered as well as investment updates at The Center.

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The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete. Any opinions are those of Angela Palacios and not necessarily those of Raymond James.

First Quarter 2016 Investment Pulse

Contributed by: Angela Palacios, CFP®

We hit the ground running in the New Year with great insight from outside experts on a wide array of topics ranging from fixed income research to how to conduct a more successful investment committee meeting and nearly everything in between!  Here is a summary of some of the highlights.

Chris Dillon, a global fixed income portfolio specialist with T. Rowe Price

An hour spent listening to Chris was one of the most informative yet exhausting hours of the quarter!  He spent much of his time explaining global complexities within the fixed income markets and how they could affect investors in the coming months.  Of particular interest was a discussion on negative rates and his opinion that we will likely look back on these negative interest rate policies around the world as being completely ineffective.  Also discussed was the coming money market reform here in the U.S. with the formation of Prime Money Markets that will have floating pricing (Net Asset Values).  While these will mostly affect institutional level investors his recommendation was not to purchase these, but they could create a fundamental change in the market place presenting interesting opportunities for short term bond investors.

Bob Collie, Chief Research strategist, Americas Institutional, Russell Investments

Bob discussed the difficulty of working in committees as it isn’t something that comes naturally to most people.  He offered many questions to ask ourselves to understand how our own investment committee measures up to others.  These answers helped identify areas to focus on improving.  Since our investment committee meets at least once a month you can imagine the agendas are usually very packed.  We need to make the most of our time together overseeing portfolios.  Areas we are focusing on improving after listening to Bob have been visioning (what does success of committee work look like), dynamic discussions, and pre-reading of agenda items and background research so we all have time to formulate our points for the discussion ahead of time.  We have already noted improvements during the meeting and outcomes from the meetings.  Hopefully even more improvements are on the horizon!

Jeremy Siegel, Ph.D., Russell E. Palmer Professor of Finance at the Wharton School of the University of Pennsylvania and Senior Investment Strategy Advisor, Wisdom Tree

"Bubble, the most overused word in finance today."

He believes the market has an aggregation bias, if there are a few stocks or a sector that has large losses, like energy does now, the entire market can look skewed.  The energy sector is biasing the P-E index of the market upward making it look more expensive as a whole than it really is.  He thinks fundamentals have driven interest rates to zero rather than artificial means, the FED has simply followed suit reducing interest rates along the way.  Economic growth and risk aversion are the most important determinants of real rates.  Increased risk aversion, aging investors, a desire for liquidity and the de-risking of pension funds has increased demand for bonds forcing their yields lower.  Jeremy has always had a very bullish view on the markets and now seemed no different.  He feels returns over the coming years will fall in line with long term averages.

Angela Palacios, CFP® is the Portfolio Manager at Center for Financial Planning, Inc. Angela specializes in Investment and Macro economic research. She is a frequent contributor to Money Centered as well as investment updates at The Center.

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This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Angela Palacios and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Raymond James is not affiliated with and does not endorse the opinions or services of Chris Dillon, Bob Collie, Jeremy Siegel or the companies/organizations they represent. Investing involves risk and investors may incur a profit or a loss regardless of strategy selected. Past performance is not a guarantee of future results. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.

Investor Basics: Bank Loans, Interest Rates, and Game of Thrones

Contributed by: Nicholas Boguth

In the spirit of preparing for season six of Game of Thrones, this set of Investor Basics and Investor Ph.D blogs is aimed to discuss bank loans and interest rates with respect to the increasingly popular adventure/fantasy television series. Check out our Director of Investment’s blog “A Game of Negative Interest Rates” HERE.

There are three types of bank loans – 1: Central Bank Loans, 2: Interbank Loans, and 3: Consumer Loans. Each loan is between different parties and has a different interest rate.

Central Banks require commercial banks to meet reserve requirements to ensure their liquidity. At the end of every day, after all of a commercial bank’s clients deposit and withdraw money, if that bank has less than the reserve requirement then it has to borrow money to raise its reserves.

If it has to borrow money to raise its reserves, it has two options. It can either borrow from the Central Bank at the discount rate, or borrow from a fellow commercial bank that has excess reserves at the end of its business day. Commercial banks borrow from each other at the federal funds rate. Currently the discount rate is 1% and the federal funds rate is 0.5%. Obviously, commercial banks prefer to borrow at the lower rate, so interbank lending is much more common than borrowing from the Central Bank. Borrowing from the Central Bank is more of a last resort for commercial banks.

The third interest rate that banks deal with is the bank lending rate. This is the rate that we, the consumers, see when we walk into a commercial bank and ask for a loan. The discount rate and federal funds rate affect banks’ lending rates, but it is also influenced by how creditworthy the customer is, the banks’ operating costs, the term of the loan, and other factors.

For all you Game of Thrones fans, you can think of the Central Bank like the Iron Bank of Braavos. It is the most powerful financial institution in the world, but it only lends to those that can repay debts (e.g. the Central Bank only lends to commercial banks). Not just anyone can borrow from the Central Bank, but the Lannister’s can because “A Lannister always pays his debts.”  SPOILER ALERT coming for anyone who has not made it through season 5: Remember back to season 5 when the Iron Bank is forcing the Iron Throne to repay one-tenth of their debts? Lord Mace offers that House Tyrell could lend the Lannister’s some money so that they could meet the Iron Bank’s “reserve requirement” of one-tenth. This is interbank lending! Thankfully for us, the cost of borrowing money in real life is only the interest rate, whereas in Game of Thrones it could be one’s life.

Nicholas Boguth is an Investment Research Associate at Center for Financial Planning, Inc. and an Investment Representative with Raymond James Financial Services.

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This material is being provided for information purposes only. Any opinions are those of Nick Boguth and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete.

Chinese Stock Market Manipulation

Contributed by: Angela Palacios, CFP®

Since last summer the Chinese government has played a very active role in manipulating their own stock market. Which markets are affected can be very confusing as there are many different exchanges and types of shares that can be purchased.

Chinese Equity Markets: A Tutorial

The Shanghai exchange houses the A share stock market. These are the shares of Chinese companies that are available mostly to domestic Chinese investors (who in most cases are prohibited to invest outside of this market) and institutional investors granted special permission by the Chinese government, denominated in their local currency, the Renminbi. This currency is no longer pegged to just the U.S. Dollar but rather to a basket of currencies. See my colleague, Nick Boguth’s blog regarding the state of China’s Currency.

In contrast, the Hong Kong exchange houses the H share market which is shares of Chinese companies available to investors outside China and can be freely traded by anyone. H shares trade in Hong Kong dollars. In contrast to mainland China, Hong Kong dollars are still pegged to the U.S. Dollar.

B shares, while lesser known than A & H shares, are also available and these are Chinese companies with a face value in Renminbi, but trading in U.S. Dollars on the Shanghai exchange. These are available to foreign investors as well as Chinese investors who have foreign currency accounts.

There has been a huge difference in company prices that trade on both A and H share exchanges and there is no channel to arbitrage this away. A shares ran up coming into the summer of 2015 causing a huge imbalance when compared to the H share market. This means investors in the A share portion of the market were paying far more for a company than investors in the H share market. On the flip side the A shares have declined much more sharply than the H share market as well.

The Pressure in China Picks up

China is nearing the end of incredible growth. It built up far too much capacity and credit. As the economic slowdown in China began to accelerate, volatility in the stock market started to pick up in the middle of 2015 spilling over into our markets here in the U.S. The Chinese government has had to step in to stem the bleeding created by A share sellers. 

A Timeline of Market Manipulation

The government became a buyer of shares on the weakest days and then took even further steps last July suspending the holders of 72% of A share stocks the ability to sell their stock for six months. Investors that held at least 5% of a company’s outstanding stock was simply no longer allowed to sell it. Communism at its best! 

In early January 2016 this ban on sales was set to expire and there was much worry that volatility would come back, which it did. At this point, January 4, 2016, the government put controversial breakers in place to halt trading in case of extreme selling on the A share market, disbanding them only four days later after the widespread panic this caused. They ended up suspending/halting trading twice in this short time. In contrast, H share markets were down also on these days but far less than the A share markets before the halt.

In place of the circuit breakers, China came up with a plan to restrict stock sales again by these large shareholders. At this point a stockholder who owns more than 5% of a company is required to sell shares only through private transactions to help avoid shocks to the market.

With so much intervention we are left wondering if a free market even exists over there and if there ever was one to begin with. Thankfully the selling pressure has slowed and markets both there and here have quieted down a bit. As always though, it will be interesting to watch how events and markets unfold the remainder of this year!

Angela Palacios, CFP® is the Portfolio Manager at Center for Financial Planning, Inc. Angela specializes in Investment and Macro economic research. She is a frequent contributor to Money Centered as well as investment updates at The Center.

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“The ABCs of China’s Share Markets by Mark Mobius http://www.cnbc.com/id/

http://www.voyagercapitalmgt.com/an-update-on-china/

http://www.bloombergview.com/articles/2015-07-09/china-shows-how-to-destroy-a-market

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. Any opinions are those of Angela Palacios and not necessarily those of Raymond James. Opinions expressed in the attached articles are those of the authors and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. Please include: Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members.

March Madness: How the Tournament Reflects your Investments

Contributed by: Nicholas Boguth

I usually don’t think about investments when March Madness rolls around, however this year the correlation is hard to get out of my mind. The past year in the markets has mimicked the past year of NCAA men’s basketball. The markets have been volatile since mid-2015 because of China’s shaky economy and the pending rate hike here in the U.S. In August, we watched the S&P 500 drop almost 200 points and investors wondered, “What is going on?!?!” At the same time, the men’s basketball rankings have been more volatile than they ever have been historically. North Carolina owned the #1 ranking title in the preseason, and then was quickly edged out by Kentucky, who got pushed out by Michigan State, then Kansas, then Oklahoma, then Villanova, and finally back to Kansas leaving basketball fans thinking, “What is going on?!?!”

Now it’s March, which means it’s time to fill out your bracket. There are a total of 63 games that will be played to determine the champion. Correctly predicting the outcome of all 63 of those games is about as likely as getting struck by lightning 5 times this year. Warren Buffet, who in the past has offered $1 billion to anyone who filled out a perfect bracket, must have gotten bored with that challenge and instead is offering $1 million every year for life to any of his employees that correctly guess every game in the first 2 rounds correctly (still extremely unlikely). So, what will your strategy be when filling out your bracket?

There is no guaranteed way to make money when investing, just like there is no guaranteed way to pick the final four teams of the tournament correctly. Sure, you can pick the four #1 seeds and hope that they make it to the final four, just like you can look back and pick the 4 investments or securities that performed the best last year and hope that they outperform again this year, but as we all know from the infamous investing disclaimer, “past performance is no guarantee of future results.” In fact, only picking the #1 seeds in the bracket has left you with the correct final four just ONE time in the entire tournament’s history.

So, odds are that you are not going to pick every winner of the tournament. As investors, there is also a slim chance that you pick every one of your investments correctly and every one of them increases year after year. This is why diversification is key—Jaclyn Jackson recently explained this concept in more detail (which can be found here).That is where talking to a NCAA bracket specialist or an investment professional can help. The correct diversification can ultimately help you reach your end goal, no matter who the #1 seed is.

Nicholas Boguth is an Investment Research Associate at Center for Financial Planning, Inc.

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Any opinions are those of Nick Boguth and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

Economic and Investment Update for 2016

Contributed by: Angela Palacios, CFP®

In early February, Melissa Joy, CFP®, Partner and Director of Wealth Management at The Center, was joined by David Lebowitz, Vice President and Global Market Strategist for J.P. Morgan, to discuss timely economic and market updates.

David kicked off the presentation by answering 3 questions:

1. Where are we in the (current economic) cycle?

2. What should we watch out for?

3. Where are the opportunities?

J.P. Morgan built a strong case for the U.S. Economy sitting at positive GDP growth (Gross Domestic Product), the improving job market, as well as, corporate profits, and subdued inflation for the foreseeable future.

David also pointed out items to watch out for, such as low oil having a positive effect on consumer’s wallets, the continued higher volatility we are currently experiencing is more in line with history rather than the low volatility environment we have become accustomed to, and being careful of investment biases sneaking into your portfolio causing undue risk.

Opportunities are still out there for investment growth but David stressed that the ride is as important as the destination. A balanced portfolio is like a sword and a shield for investors. Your sword, or equities, has the potential to give you the long term growth needed to help reach goals but your shield, or fixed income can help give you the defense to make your investment journey more comfortable.

Melissa continued with several history lessons stressing the importance of patience and that it often pays off when investing. She discussed top headlines in the news such as the elections and interest rate hikes and how these items will affect investors over the coming year.

Below is a link to the presentation slides referenced throughout that emphasize the key points Melissa and David discussed. As well, there is the recording of the webinar that Melissa and David held, that has further information and discussion.

• Watch the full webinar presentation below

• February 2016 Webinar slides

• J.P. Morgan Guide to the Markets is a widely popular presentation on the state of the economy and various markets.  By clicking on the link you will be taken to the guide in it’s entirety.

Angela Palacios, CFP® is the Portfolio Manager at Center for Financial Planning, Inc. Angela specializes in Investment and Macro economic research. She is a frequent contributor to Money Centered as well as investment updates at The Center.

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Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members.

Fourth Quarter Investment Commentary

Contributed by: Angela Palacios, CFP®

2016 kicks off with much of the same challenges as have plagued us for the second half of 2015.  The S&P 500 was up for the seventh straight year but that is where the excitement ended.  Broad markets delivered lackluster or negative returns.  The S&P 500 needed all of its dividends to get to a positive 1.38% return for 2015 while the Russell 2000 and MSCI EAFE representing small company stocks and international markets were down 4.42% and .82% respectively.

Volatility really picked up in the third quarter with a large drawdown while in the fourth quarter made up some ground.  We expect volatility to continue into the New Year as the year end brought no significant changes to our outlook.

Liftoff from Zero

The Federal Reserve Board (FED) continues to ease their foot slowly off the accelerator after years of easy money.  In December, The FED increased short term rates for the first time in nearly a decade.  This move was highly anticipated and thus bonds did not have a large knee-jerk negative reaction.  Bond markets had already priced in the rate move before it happened.

Looking forward, The FED is forecasting 4, quarter point rate increases for a total of a 1% rate increase in 2016.  The markets, as measured by interest rate futures, disagree as they are forecasting only .5% increase this year.  If The FED actually increases rates by 1% the bond market will adjust prices to reflect this leading to slight negative pressures on the prices of bonds.  Interest rates on bank accounts will lag behind the increases and likely only move upward slightly and slowly while mortgage rates should also increase slowly.

A bright spot in the bond market

The outlook for municipal bonds continues to be positive.  Puerto Rico announced a default on January 1 of $37 Million in debt but this was widely anticipated and didn’t spread into other markets.  Many municipalities continue to improve balance sheets with increased tax collection and the market as a whole seems to be on solid footing.

Bond Market Illiquidity

The negative performance in energy prices has led to increasing spreads between high yield bonds and investment grade fixed income.  When this occurs, prices on high yield bonds go down and they become harder to sell.  Over the past several years, investors have reached for yield in this category not understanding the risks involved.  This highlights the importance of understanding exactly what exposure you are taking on when investing in fixed income.

View on Emerging markets

Emerging market challenges continue into 2016.  Manufacturing in China continues to slow as well as their Gross Domestic Product growth, GDP, but the government is intervening in their stock market trying to prove they can provide a floor to asset prices. China’s slowdown has had a negative impact on commodity prices along with the glut in the oil market causing oil prices to be at their lowest levels since early 2009. 

These pressures have been brutal to emerging market country currencies that depend on exporting commodities.  In order for there to be a turnaround in this space we would need to see a change in investor sentiment, stronger economic growth, and a weakening of the U.S. dollar which we don’t see as likely in the near term.

The Economy

Locally our economy continues its slow grind in the positive direction.  Consumer spending remains strong with low gas prices and strong job growth increasing households’ purchasing power.  Housing is a bright spot and as rates increase borrowing terms may be relaxed a bit by lenders which would be helpful.  Inflation may start to pick up slightly from very low levels now.  As energy prices find a bottom this would cease being a negative effect on inflation and may even start to add to year-over-year inflation as we start to rise off the bottom.

Here is some additional information we want to share with you this quarter:

Checkout my research summary in the quarterly Investment Pulse.

I delve into Out of the Box Investing with a look at alternative investments.

Melissa Joy, CFP®, Partner, chimes in with a timely reminder of 5 Questions to ask yourself when stocks are down.

Nick Boguth, Client Service Associate, giving his insight on Style Box Investing basics.

Check out an article on Diversification from Jaclyn Jackson, Research Associate, to help better understand the benefits.

Vice President and Global Market Strategist for J.P. Morgan, David Lebovitz, and The Center's Melissa Joy, CFP®, will discuss timely market and economic insights. REGISTER for the webinar!

Careful diversification and financial planning are tools to help support investor patience in choppy markets.  Don’t forget Warren Buffett’s wise advice, “The stock market is a device for transferring money from the impatient to the patient.”  Patience remains a cornerstone to our investment process here at The Center. We appreciate your continued trust.   If you have any questions or would like to discuss further, do not hesitate to reach out to us!

On behalf of everyone here at The Center,

Angela Palacios CFP®
Director of Investments
Financial Advisor

Angela Palacios, CFP® is the Portfolio Manager at Center for Financial Planning, Inc. Angela specializes in Investment and Macro economic research. She is a frequent contributor to Money Centered as well as investment updates at The Center.

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David Lebovitz and JP Morgan are not affliated with Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Angela Palacios and not necessarily those of Raymond James. Past performance may not be indicative of future results. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Investing in emerging markets can be riskier than investing in well-established foreign markets. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. There are special risks associated with investing with bonds such as interest rate risk, market risk, call risk, prepayment risk, credit risk, reinvestment risk, and unique tax consequences. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represent approximately 8% of the total market capitalization of the Russell 3000 Index. The MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 22 developed nations. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary.

Don’t Lose Faith in Diversification

Contributed by: Jaclyn Jackson

As investors, we’ve always been taught that portfolio diversification is essentially for good portfolio performance.  Yet, we’ve experienced three consecutive years that have some of us second guessing that old adage.  Case and point, evaluating the broad bull market from March 2009-December 2012 and the mostly flat market from December 2012–September 2015, it is clear that sometimes diversified asset classes perform well and at other times they do not.  During the period of March 2009 through November 2012, diversification generally helped returns.  From December 2012 until August 2015 diversification away from any “core” asset classes generally hurt returns.

Source: PIMCO

Source: PIMCO

Core asset classes (top) reflect the overall positive direction of the most common markets during both periods. Comparatively, diversified asset classes (bottom) generally helped portfolio returns from 2009-2012 as indicated by the blue lines showing positive returns, but thereafter generally detracted from returns as indicated by the red bars with low to negative performance. Based on this data, it’s easy to consider using a core-only investment strategy without the frills (or frustrations) of diverse investments.  However, there is one key point that we can draw from the diversified asset graph; unlike core assets, diversified assets don’t move in tandem with the market.  Believe it or not, that’s actually what’s great about them.

Many people think diversification is meant to improve returns, but it would be useful to reframe that idea; diversification is meant to improve returns for the level of risks taken. In other words, diversified investments work to balance core investments during down or volatile markets.  Let’s look back at the market bottom of 2009.

The graph illustrates that a non-diversified (stock-only) portfolio lost almost double the amount of a diversified portfolio.  Moreover, the diversified portfolio bounced back to its pre-crisis value more than a year before the stock-only portfolio.  This type of resilience is especially important for retired investors that rely on income from their portfolios. 

Not only is portfolio diversification useful for people who’ve met investment goals, it is equally helpful to long-term investors.  For investors still working toward financial goals, portfolio diversification can help produce more consistent returns, thereby increasing the prospects of reaching those goals.  The diagram below ranks the best (higher) to worst (lower) performance of 10 asset classes from 1995-2014.  The black squares represent a diversified portfolio.

Source: SPAR, FactSet Research Systems Inc.

The black squares generally middle the diagram.  As evident, the range of returns for a diversified portfolio was more consistent than individual asset classes.  Returns with less variability are more reliable for setting long-term investment goals.

Admittedly, portfolio diversification over the last three years has made it difficult for many to stick with their investment strategy.  Yet, portfolio diversification still holds merit: it can help mitigate portfolio risk; it can boost portfolio resilience; and it can provide investors the consistency necessary to set and meet financial goals.

Jaclyn Jackson is a Research Associate at Center for Financial Planning, Inc.

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This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Jaclyn Jackson and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Diversification and asset allocation do not ensure a profit or protect against a loss. Investing involves risk and investors may incur a profit or a loss regardless of strategy selected. Past performance is not a guarantee of future results. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary.

The historical performance of each index cited is provided to illustrate market trends; it does not represent the performance of a particular MFS® investment product. It is not possible to invest directly in an index. Index performance does not take into account fees and expenses. Past performance is no guarantee of future results. The investments you choose should correspond to your financial needs, goals, and risk tolerance. For assistance in determining your financial situation, consult an investment professional. For more information on any MFS product, including performance, please visit mfs.com. Investing in foreign and/or emerging market securities involves interest rate, currency exchange rate, economic, and political risks. These risks are magnified in emerging or developing markets as compared with domestic markets. Investing in small and/or mid-sized companies involves more risk than that customarily associated with investing in more-established companies. Bonds, if held to maturity, provide a fixed rate of return and a fixed principal value. Bond funds will fluctuate and, when redeemed, may be worth more or less than their original cost. Note that the diversified portfolio’s assets were rebalanced at the end of every quarter. Diversification does not guarantee a profit or protect against a loss. to maintain the equal allocations throughout the period. Standard deviation reflects a portfolio’s total return volatility, which is based on a minimum of 36 monthly returns. The larger the portfolio’s standard deviation, the greater the portfolio’s volatility. Investments in debt instruments may decline in value as the result of declines in the credit quality of the issuer, borrower, counterparty, or other entity responsible for payment, underlying collateral, or changes in economic, political, issuer-specific, or other conditions. Certain types of debt instruments can be more sensitive to these factors and therefore more volatile. In addition, debt instruments entail interest rate risk (as interest rates rise, prices usually fall), therefore the Fund’s share price may decline during rising rate environments as the underlying debt instruments in the portfolio adjust to the rise in rates. Funds that consist of debt instruments with longer durations are generally more sensitive to a rise in interest rates than those with shorter durations. At times, and particularly during periods of market turmoil, all or a large portion of segments of the market may not have an active trading market. As a result, it may be difficult to value these investments and it may not be possible to sell a particular investment or type of investment at any particular time or at an acceptable price. https://www.mfs.com/wps/FileServerServlet?articleId=templatedata/internet/file/data/sales_tools/mfsvp_20yrsb_fly&servletCommand=default