4th Quarter Investment Commentary

Contributed by: Angela Palacios, CFP®, AIF®

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2017 in Review and Outlook for 2018

Fidget spinners, bitcoins, and Trump.  If you have young children, you could not miss the fidget spinner craze that hit in April of this year.  This simple toy rotates on a ball bearing.  By the time I got around to getting my 10-year-old child one in mid-May for her birthday, they were SO yesterday.  My major parenting fail of 2017!  In the financial world, another mania took over.  Bitcoin, while not brand new, certainly gained a ton of traction this year as an alternative cryptocurrency.  The price of Bitcoin surged from below $1,000 per bitcoin to more than $19,000!  This paved the way for many other cryptocurrencies (Bitcoin competitors) making their way to center stage with astonishing returns also.  If you want more information, check out this blog Talking Bitcoin, written by Nick Boguth earlier this year. 

The news cycle has also revolved around President Trump this year.  While failing to overhaul Obamacare or U.S. trade policy, he was successful in getting some long-anticipated tax reform through to round out his first full year as our President.

The past year turned out to be far more bullish than many expected.  International and emerging markets outpaced U.S. markets.  Growth investing beat value investing, while Bonds returned little more than their yield.  2018 has a tough act to follow!

Tax Reform and its Impact on the Economy

Although the tax cut seems to favor corporations, much of the net tax cuts are going to the individual.  The tax act should increase after-tax income for most American households both directly, through lower personal taxes, and indirectly, through the impact of higher dividends and stock prices resulting from the cut in corporate taxation.  As people spend more, GDP should increase and unemployment should continue to decrease possibly causing the wage inflation we have been waiting for.  This chart shows the level of unemployment (gray line) and the level of wage inflation the (blue line). The dotted lines for each color are average levels.  You can see that both are below their average levels.  Usually when unemployment is below average the wage growth line rises back to its long-term average level, but this has not happened yet.  Retiring higher-paid baby boomers are being replaced with lower-paid millennials entering the workforce and this has had a significant downward pressure on wages keeping it well below its long-term average growth rate. 

If wages finally start to increase, this could cause inflation to pick up somewhat. This would be a positive influence on the stock market in the short run.

Tax Reform and its Impact on Equities

Looking at the influence tax reform will have on corporations, smaller companies will likely see a more impactful tax benefit with the corporate tax rate cut to 21% (which consequently is just below the average of the countries in the OECD or the organization for economic co-operation and development).  Currently, small cap companies pay the highest tax rates.

After a strong year for equities, the impact of tax reform could be more muted than you might think as the markets already anticipated some corporate tax reform passing. Quite often, equity prices factor these events in long before the pen hits the paper.

Tax Reform and its Impact on Fixed Income

Bond markets will have mixed implications from tax reform.  Companies that over-levered and don’t have strong positive cash flow will be penalized.  This new law places limits on the interest that corporations can deduct.  This will likely affect companies who are issuers of high yield debt negatively.  While companies investing for growth by making capital expenditures will be rewarded as, they are now allowed to expense a larger amount of these capital expenditures.

Municipal bonds should fare well next year with limits being placed on state tax and property tax deductions, especially in states with higher tax rates.  Other opposing forces could affect supply within the municipal bond market in the coming year from tax reform.  The law eliminates the issuance of advance refunding bonds that are used to retire old debt.  These bonds help boost supply by 10-20% each year in the municipal bond market.  On the flip side, corporations will be less incentivized to hold onto municipal debt as their tax rates have been slashed. If they sell these bonds into the market place that could increase supply, which could lower bond prices.  However, these two forces may cancel each other out.  It looks like the elimination of advance refunding bonds will likely offset any boost in supply from corporations selling.

Interest rates on the rise

The Fed raised short-term interest rates again in December, which was highly anticipated.  They are planning to continue with three more rate hikes in 2018. The bond market already anticipates these rate hikes, which means they should be priced in.  Jerome Powell is set to take over for Janet Yellen in February as the new Federal Reserve Chairperson.  It is unlikely he will change the trajectory of increases expected in 2018. 

The rate hikes have resulted in a flattening of the yield curve this year.  The charts show side-by-side where the yield curve started 2017 and where it is finishing 2017.  If you recall, an inversion of the yield curve, downward instead of upward sloping from left to right, or short-term rates higher than long-term rates, usually signals an oncoming recession.  While we aren’t there yet, this can happen quickly, so it is something we are keeping a close eye on.

Source: http://stockcharts.com/freecharts/yieldcurve.php

Low volatility

The exciting part of 2017 was the lack of excitement.  2017 saw incredibly low average daily moves in the S&P500.  You can see from the below chart that standard deviation, or the variation of price movement by percent, for the S&P 500 is well below the typical range.  It is currently below 6%, which has only occurred five times since 1940.  Typically, it is between 10% and 18% each year.

Source: https://www.mutualfundobserver.com/2017/09/historically-low-volatility/

During times like this, it is easy to get lulled into a false sense of security causing you to potentially reach for a little more risk to spice up your returns.  But, it is important to remember that your risk tolerance isn’t nearly as stable as you think it is.  Outside of our natural behavioral tendencies to want to chase great returns or hide from stocks after a sharp drawdown, our natural progression through life’s milestones can influence our tolerance for risk.  Milestones like a house sale, job change, or death of a loved one can influence our desire to take on risk just like the market performance and volatility.  This makes it hard to compare yourself and your portfolio’s returns to a static benchmark over the years.  Before making any drastic changes to your investment strategy, it is important to discuss with your financial planner the importance of a diversified portfolio that fits with your unique long-term goals and tolerance for risk. 

As we welcome the New Year, we don’t want to miss the opportunity to express our gratitude of the trust you place in us each and every day.  Thank you!

On behalf of everyone here at The Center,

Angela Palacios, CFP®, AIF®
Director of Investments
Financial Advisor

Angela Palacios, CFP®, AIF® is the Director of Investments at Center for Financial Planning, Inc.® Angela specializes in Investment and Macro economic research. She is a frequent contributor The Center blog.

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Check out our other Tax Reform articles:

Changes to Federal Income Tax Brackets

Changes to Standard Deduction, Personal Exemption, Misc. Deductions, and the Child Credit

Changes to State and Local Tax Deduction

Changes to Mortgage Interest Deduction (including Home Equity Loans and LOC Implications)

Changes to Estate Tax Planning in 2018 and Beyond

Changes to Charitable Giving and Deductions

Changes to Medical Deductions

Changes to Business & Corporate Tax, and Pass-Through Entities

The information contained in this commentary 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. Any opinions are those of the professionals at The Center and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. This material is being provided for information purposes only. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. Investments mentioned may not be suitable for all investors. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions. 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. The prominent underlying risk of using bitcoin as a medium of exchange is that it is not authorized or regulated by any central bank. Bitcoin issuers are not registered with the SEC, and the bitcoin marketplace is currently unregulated. Bitcoin and other cryptocurrencies are a very speculative investment and involves a high degree of risk. Investors must have the financial ability, sophistication/experience and willingness to bear the risks of an investment, and a potential total loss of their investment. Securities that have been classified as Bitcoin-related cannot be purchased or deposited in Raymond James client accounts.

 

Risk Expectations – Markets Go Down Every Year

Contributed by: Nicholas Boguth

Investing is risky: the price of securities can go down, but there are strategies to help mitigate this risk: diversifying and sticking to your plan.

The chart below shows the price return (gray bar) and the largest intra-year decline (red dot) of the S&P 500 since 1980. This is one of my favorite charts because it reminds me that stock prices have indeed gone down at some point during EVERY year, but ultimately returned a positive number a vast majority of the time.

It states an appalling statistic: the average intra-year decline of the S&P 500 over this period is more than 14%. I say appalling because despite the average decline being -14%, the average return by the end of each year is over 8%, and this does not even include dividends! This acts as a great reminder to stay invested and don’t change your plan when the markets take a dive.

Our ultimate goal is to diversify in order to reduce that average intra-year drawdown, without sacrificing too much return. It is not easy for most investors to stomach watching their money decline by 14%, which is why risk management is a key part of the investment process. The right amount of risk is going to be different for everyone; working with us to determine your financial goals and capacity/willingness to take risk is step one in building your personalized portfolio.

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 information has been obtained from sources deemed to be reliable but its accuracy and completeness cannot be guaranteed. 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. Dividends are subject to change and are not guaranteed. Diversification does not ensure a profit or guarantee against loss. There is no assurance that any investment strategy will ultimately be successful, profitable nor protect against loss.

Investing vs. Paying Off Debt

Contributed by: Matt Trujillo, CFP®

You can use a variety of strategies to pay off debt, many of which can cut not only the amount of time it will take to pay off the debt but also the total interest paid. But like many people, you may be torn between paying off debt and the need to save for retirement. Both are important; both can provide a more secure future. If you're not sure you can afford to tackle both at the same time, which should you choose?

There's no one answer that's right for everyone, but here are some of the factors you should consider when making your decision.

Rate of investment return versus interest rate on debt

Probably the most common way to decide whether to pay off debt or to make investments is to consider whether you could earn a higher after-tax rate of return by investing than the after-tax interest rate you pay on the debt. For example, say you have a credit card with a $10,000 balance on which you pay nondeductible interest of 18%. By getting rid of those interest payments, you're effectively getting an 18% return on your money. That means your money would generally need to earn an after-tax return greater than 18% to make investing a smarter choice than paying off debt. That's a pretty tough challenge even for professional investors.

And bear in mind that investment returns are anything but guaranteed. In general, the higher the rate of return, the greater the risk. If you make investments rather than pay off debt and your investments incur losses, you may still have debts to pay, but you won't have had the benefit of any gains. By contrast, the return that comes from eliminating high-interest-rate debt is a sure thing.

An employer's match may change the equation

If your employer matches a portion of your workplace retirement account contributions, that can make the debt versus savings decision more difficult. Let's say your company matches 50% of your contributions up to 6% of your salary. That means that you're earning a 50% return on that portion of your retirement account contributions.

If surpassing an 18% return from paying off debt is a challenge, getting a 50% return on your money simply through investing is even tougher. The old saying about a bird in the hand being worth two in the bush applies here. Assuming you conform to your plan's requirements and your company meets its plan obligations, you know in advance what your return from the match will be; very few investments can offer the same degree of certainty. That's why many financial experts argue that saving at least enough to get any employer match for your contributions may make more sense than focusing on debt.

And don't forget the tax benefits of contributions to a workplace savings plan. By contributing pretax dollars to your plan account, you're deferring anywhere from 10% to 39.6% in taxes, depending on your federal tax rate. You're able to put money that would ordinarily go toward taxes to work immediately.

Your choice doesn't have to be all or nothing

The decision about whether to save for retirement or pay off debt can sometimes be affected by the type of debt you have. For example, if you itemize deductions, the interest you pay on a mortgage is generally deductible on your federal tax return. Let's say you're paying 6% on your mortgage and 18% on your credit card debt, and your employer matches 50% of your retirement account contributions. You might consider directing some of your available resources to paying off the credit card debt and some toward

your retirement account in order to get the full company match, and continuing to pay the tax-deductible mortgage interest.

There's another good reason to explore ways to address both goals. Time is your best ally when saving for retirement. If you say to yourself, "I'll wait to start saving until my debts are completely paid off," you run the risk that you'll never get to that point, because your good intentions about paying off your debt may falter at some point. Putting off saving also reduces the number of years you have left to save for retirement.

It might also be easier to address both goals if you can cut your interest payments by refinancing that debt. For example, you might be able to consolidate multiple credit card payments by rolling them over to a new credit card or a debt consolidation loan that has a lower interest rate.

Bear in mind that even if you decide to focus on retirement savings, you should make sure that you're able to make at least the monthly minimum payments owed on your debt. Failure to make those minimum payments can result in penalties and increased interest rates; those will only make your debt situation worse.

Other considerations

When deciding whether to pay down debt or to save for retirement, make sure you take into account the following factors:

• Having retirement plan contributions automatically deducted from your paycheck eliminates the temptation to spend that money on things that might make your debt dilemma even worse. If you decide to prioritize paying down debt, make sure you put in place a mechanism that automatically directs money toward the debt--for example, having money deducted automatically from your checking account--so you won't be tempted to skip or reduce payments.

• Do you have an emergency fund or other resources that you can tap in case you lose your job or have a medical emergency? Remember that if your workplace savings plan allows loans, contributing to the plan not only means you're helping to provide for a more secure retirement but also building savings that could potentially be used as a last resort in an emergency. Some employer-sponsored retirement plans also allow hardship withdrawals in certain situations--for example, payments necessary to prevent an eviction from or foreclosure of your principal residence--if you have no other resources to tap. (However, remember that the amount of any hardship withdrawal becomes taxable income, and if you aren't at least age 59½, you also may owe a 10% premature distribution tax on that money.)

• If you do need to borrow from your plan, make sure you compare the cost of using that money with other financing options, such as loans from banks, credit unions, friends, or family. Although interest rates on plan loans may be favorable, the amount you can borrow is limited, and you generally must repay the loan within five years. In addition, some plans require you to repay the loan immediately if you leave your job. Your retirement earnings will also suffer as a result of removing funds from a tax-deferred investment.

• If you focus on retirement savings rather than paying down debt, make sure you're invested so that your return has a chance of exceeding the interest you owe on that debt. While your investments should be appropriate for your risk tolerance, if you invest too conservatively, the rate of return may not be high enough to offset the interest rate you'll continue to pay.

Regardless of your choice, perhaps the most important decision you can make is to take action and get started now. The sooner you decide on a plan for both your debt and your need for retirement savings, the sooner you'll start to make progress toward achieving both goals.

Matthew Trujillo, CFP®, is a Certified Financial Planner™ at Center for Financial Planning, Inc.® Matt currently assists Center planners and clients, and is a contributor to Money Centered.

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You should discuss any tax or legal matters with the appropriate professional.

Investment Commentary: 3Q 2017

Contributed by: Angela Palacios, CFP®, AIF®

This summer came and went with no shortage of topics for investors to worry about.  Low inflation, natural disasters, and geopolitical tension kept the headlines busy.  Despite all of this, the quarter ended on a positive note.  The uptick in markets was spurred on by a wide-spread pick up in global growth.  Recession risks continue to remain muted as dovish global central banks continue to inject liquidity in the system, or only very slowly begin to pull back on the injections.  In general, economic data remains strong.   We remain watchful for a slowing, particularly in manufacturing, business and consumer confidence, as these are early indicators of the tide of the economy turning. However, they are still positive.

Diversification is coming back into style as international and emerging markets continue to perform stronger than their domestic counterparts this year.  The S&P 500 Index ended the quarter returning 14.24% through the 30th of September.  International markets are truly the bright spot with the MSCI EAFE returning 19.96% and the MSCI EM Index returning 27.78%.  Bonds ended the third quarter with a respectful 3.14% return coming from the Barclays US Aggregate Bond Index.

Rates remain unchanged

In September, the Federal Reserve (Fed) kept rates unchanged, but also announced additional information on how it will begin to unwind the $4.5 trillion balance sheet in October. 

The Committee intends to gradually reduce the Federal Reserve's holdings of treasury securities and agency securities--agency debt and agency mortgage-backed securities (MBS)--by decreasing the reinvestment of the principal payments it receives from securities holdings. Each month, such payments will be reinvested only to the extent that they exceed a pre-specified cap. The caps will rise gradually at three-month intervals over a 12-month period and the maximum value of the caps at the end of the 12-month period will be maintained until the size of the balance sheet is normalized. (https://www.federalreserve.gov/monetarypolicy/policy-normalization-qa.htm)

This plan to shrink the balance sheet seems to reflect the Fed’s positive view of the U.S. economy.

Proposed tax changes being debated

Political stakes are high for President Trump to score a legislative win on what remains of his campaign promises.  In late September, he unveiled a proposal to slash taxes for individuals and businesses.  To simplify the tax code, Republicans have proposed condensing from seven tax brackets down to three (12%, 25% and 35%), doubling the standard deduction to help tax payers eliminate the need to itemize, and “significantly increasing” the child tax credit while also adding a new tax credit for the care of non-child dependents (elder-care situations).

Currently, many taxpayers use itemized deductions, claiming write-offs for things like charitable contributions, interest paid on a mortgage, state and local taxes. If the standard deduction becomes larger, fewer taxpayers will need to itemize, reducing the incentive to hold a mortgage or contribute to charity.

President Trump is also proposing to cut the corporate tax rate from 35% down to 20%.  A new tax rate would be established for pass-through entities which represent about 95% of businesses in the United States.  Generally when corporate tax rates are cut, markets perform very well in the year following the tax cut. The chart below demonstrates that after the rate cut for corporate taxes (Orange area below the line), the following 1 year returns on the S&P500 are quite positive (blue bar above the line).

Michigan 529 plan changes

In September, the Michigan 529 Advisor Plan, transitioned its program from Allianz Global Investors to Nuveen Securities, LLC.  Account numbers stayed the same and investments mapped over to similar strategies; if you had one of these accounts, the transition was seamless.  Some of the benefits of the change include an expanded investment line-up, more leading edge investment managers and lower fees.  If you have any questions don’t hesitate to reach out!

After several years of equity volatility near historic lows, this quarter we again experienced the speed and scale at which geopolitics can possibly move markets. We remain committed to the view that managing volatility is at the heart of proper portfolio design.  It is a responsibility we take very seriously and we thank you for the continued trust you place in us to help you with these decisions!

On behalf of everyone here at The Center,

Angela Palacios, CFP®, AIF®
Director of Investments
Financial Advisor

Investment Pulse: Check out Investment Pulse, by Nick Boguth, a summary of investment-focused meetings for the quarter.

Investor Ph.D Series: How Currency Movement Effect International Investments

Investor Basics Series: Nick Boguth, Investment Research Associate, talks about exchange rates.

Of Financial Note:  Jaclyn Jackson, Portfolio Coordinator, shares a look at the asset flow for 3rd quarter.

Angela Palacios, CFP®, AIF® is the Director of Investments at Center for Financial Planning, Inc.® Angela specializes in Investment and Macro economic research. She is a frequent contributor The Center blog.

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This information does not purport to be a complete description of the securities, markets, or developments referred to in this material; it 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 are not necessarily those of Raymond James. This information is not a complete summary or statement of all available data necessary for making and investment decision and does not constitute a recommendation. Investing involves risk; investors may incur a profit or loss regardless of the strategy or strategies employed. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. Investing in emerging markets can be riskier than investing in well-established foreign markets. Asset allocation and diversification do not ensure a profit or guarantee against loss. Past performance is not a guarantee of future results. 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 21 developed nations. The MSCI Emerging Markets is designed to measure equity market performance in 25 emerging market indices. The index's three largest industries are materials, energy, and banks. 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 Barclays Capital US Aggregate Index is an unmanaged market value weighted performance benchmark for investment-grade fixed rate debt issues, including government, corporate, asset backed, mortgage backed securities with a maturity of at least 1 year. Please note direct investment in any index is not possible. Index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary.

Investor Ph.D: How Currency Movement Effect International Investments

Contributed by: Angela Palacios, CFP®, AIF®

Investors with the patience to hold on to their diversified portfolio that maintains a component of international have likely been rewarded this year.  Before this year, investors challenged the advice of diversifying their portfolio away from the U.S. as international investments, represented by the MSCI EAFE, noticeably lagged U.S. returns in recent years.  The chart below shows how the MSCI EAFE has performed vs. the S&P 500.  When the gray shaded area is above 0, this represents a time when the prior three years of returns have been dominated by the MSCI EAFE outperforming the S&P 500.  When you drill down into specific extended time periods when this happens, you can see that much of the returns come from the impact of the currency return (the lighter green portion of the return).  You see in recent years the S&P 500 has significantly outperformed international investments. 

A weakness in the U.S. dollar has contributed to the outperformance year-to-date by the MSCI EAFE (as of 9/30/2017 the MSCI EAFE was up XX% vs. the S&P 500 was up XX%).  When the dollar is in a cycle of weakening against foreign currencies, there is a natural tailwind helping performance.  Coupled with the global economy strengthening and political risks receding due to a failed populist movement in Europe, this could be a continuing recipe for international investing tailwinds.

Take a look at the impact on stock markets around the globe during these periods of different U.S. dollar trends:

Source: http://awealthofcommonsense.com/2017/04/how-the-dollar-affects-the-stock-market/

When the U.S. dollar index is retreating, Foreign and Emerging markets have outperformed and vice versa.  If the U.S. dollar continues its current trend of weakening or even levels out, we could continue to see the performance story dominated by foreign investments.

Angela Palacios, CFP®, AIF® is the Director of Investments at Center for Financial Planning, Inc.® Angela specializes in Investment and Macro economic research. She is a frequent contributor The Center blog.

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This information has been obtained from sources deemed to be reliable but its accuracy and completeness cannot be guaranteed. This information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Opinions expressed are those of Angela Palacios and are not necessarily those of Raymond James. There is no assurance the trends mentioned will continue or the forecasts provided will prove to be correct. Investing involves risk, investors may incur a profit or loss regardless of the strategy or strategies employed. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. Investing in emerging markets can be riskier than investing in well-established foreign markets. 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 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 21 developed nations. The MSCI Emerging Markets is designed to measure equity market performance in 25 emerging market indices. The index's three largest industries are materials, energy, and banks. Please note direct investment in an index is not possible. 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.

Investor Basics: Exchange Rates

Contributed by: Nicholas Boguth

An exchange rate is just the price of one currency in terms of a different currency. For example, as I wrote this blog on 9/29/17, the USD/EUR exchange rate was .85. This means that 1 US Dollar would buy 0.85 Euro.

Exchange rates fluctuate though, and this is where things get complicated for investors. Inflation, interest rates, asset flows, trade, and economic stability are all factors that move exchange rates. Below is a chart showing just how much the exchange rate between the US Dollar and the Euro has fluctuated in the past 10 years.

Now these exchange rates may not directly affect you in your day to day purchases, but if you are invested internationally, exchange rates affect your portfolio. Head on over to our Director of Investments Angela Palacios’s blog (coming on Thursday!) to read about exactly how exchange rates have affected returns recently.

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

Financial Note: Asset Flow Watch 2017 3Q

Contributed by: Jaclyn Jackson

One of the most common ways to monitor consumer confidence and investor sentiment is to watch fund inflows and outflows.  Market analysts use fund flows to measure sentiment within asset classes, sectors, or markets. This information (combined with other economic indicators) help identify trends and determine investment opportunities.

July trends picked up where June left off, as international equities and taxable bonds continued to receive inflows. 

Most of these flows came through passive funds, but active flows were still positive.  Conversely, US equities saw outflows as valuations appear to be fair or high (depending on whom you ask) and administration confidence declines.  Accordingly, The International Monetary Fund decreased their US GDP growth forecast from 2.3% to 2.1%.  In terms of internationals, investors are opting for developed markets through foreign large blend funds.  Ultimately, this is a play for Europe.  The International Monetary Fund increased its expected growth rate from 1.7% to 1.9% in Europe.   Investors also sought out emerging market funds as the MSCI Emerging Markets index has double-digit returns year to date (28.3% returns YTD at the end of August).

In August, international equity inflows were positive but less positive than in July. 

The slowdown reflects lackluster corporate earnings internationally and uncertainty about North Korea.  Nonetheless, internationals remain compelling to investors with rebounds from Japan and Europe progressing.  MSCI EAFE returns have remained ahead of the S&P 500 in 2017.  Taxable bonds, specifically intermediate-term bond funds, remained the leading category group for inflows. Intermediate bond funds hit the “sweet spot” for many investors because they are usually not as severely impacted by rising rates as long term bonds and typically generate more return than short term bonds.  From January 1st through August 15th, intermediate bonds gained 3.2% beating both the Bloomberg Barclays US Bond Index and 2016 returns.  Differing from June and July, investors are trending back towards active management for their bond funds.

As of writing this, October 4th, 2017, September flows mimic July and August with outflows from US equities and continued inflows to international equities and taxable bonds. 

There are also positive inflows for municipal bonds and alternatives.  Outflows from the US are mostly from growth (especially large growth) and US large blend funds.  International equities experienced outflows last week, but are net positive for the month.  Bond inflows are steady with investors largely continuing to invest in intermediate term bond funds as wells as modestly investing in high yield municipals funds and national intermediate municipal bonds.

Bonds Lead the Pack

Even as rates rise, investors continue to pour assets into bond funds. Why is that the case? Income and diversification seem to motivate the trend.  Even if interest rates rise and bond prices go down, investors still want the guaranteed income stream bonds provide.  Some may also feel they can pick up higher payouts from new bond issues as interest rates increase.  In terms of diversifications, investors have seen gains from their US equities and feel like it is time to rebalance into a true stock diversifier; bonds.

Jaclyn Jackson is a Portfolio Administrator and Financial Associate at Center for Financial Planning, Inc.®

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This information does not purport to be a complete description of the securities, markets, or developments referred to in this material; it 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 Jaclyn Jackson and are not necessarily those of Raymond James. This information is not a complete summary or statement of all available data necessary for making and investment decision and does not constitute a recommendation. Investing involves risk, investors may incur a profit or loss regardless of the strategy or strategies employed. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. Investing in emerging markets can be riskier than investing in well-established foreign markets. Asset allocation and diversification do not ensure a profit or guarantee against loss. Past performance is not a guarantee of future results. 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 21 developed nations. The MSCI Emerging Markets is designed to measure equity market performance in 25 emerging market indices. The index's three largest industries are materials, energy, and banks. 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 Barclays Capital US Aggregate Index is an unmanaged market value weighted performance benchmark for investment-grade fixed rate debt issues, including government, corporate, asset backed, mortgage backed securities with a maturity of at least 1 year. Please note direct investment in any index is not possible.

Investment Pulse: 3Q 2017

Contributed by: Nicholas Boguth

We’ve been busy here in the Investment Department! Check out some of our research highlights from the third quarter.

Angela Palacios, Director of Investments at The Center, attends Capital Group Advisor Forum

Angela traveled to Capital Group’s headquarters in California, to look under the hood at their investment strategies focusing on their process, people and investment outlooks.  You may know the strategies as the American Funds family. The discussion spanned from macro-economics to fixed income and equity discussions. On the macroeconomic front they discussed their recession outlook. Anne Vandenabeele, Economist, stated that expansions don’t die of old age, they die because imbalances build up in the economy or the Federal Reserve raises rates too quickly. They don’t see either of these scenarios right now. Most severe bear markets are when you have a bear market combined with a recession. While there may be a bear market in the next several years they don’t see a recession occurring at the same time. 

Clayton Shiver, Portfolio Manager at Stadion Money Management

Part of our investment process is to stay on top of investment products being offered in the marketplace. Nick Boguth met with Clayton Shiver to discuss Stadion’s alternative product platform and understand the team’s investment process. Clayton discussed their three sleeve alternative approach that included an equity, income, and trend sleeve implemented with the buying and selling of stocks and options in order to generate very different potential returns from the S&P 500 or Barclays US Aggregate Bond Index.

Matt Lamphier, Portfolio Manager at First Eagle

Matt Lamphier, director of research for the Global Value team at First Eagle Investment Management, joined us at our office for a jam-packed hour of investment updates. We discussed First Eagle’s investment process, outlook, and rationale behind their investments. Matt stressed the importance of being a value investor, and choosing companies that will outperform over the long term. One surprising statistic that Matt shared was that the average timespan of a stock in their portfolio is over 10 years!

What to expect next time…

We have a busy schedule next quarter and are looking forward to sharing highlights from our upcoming conferences including: Thornburg Investment Management, First Eagle, and Investment News.

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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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 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. The Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond 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. Raymond James is not affiliated with Anne Vandenabeele, Clayton Shiver, Stadion Money Management, Matt Lampier and/or First Eagle Investment Management.

Irma’s Devastating Winds Don’t Devastate The Market

Contributed by: Nicholas Boguth

Hurricane Irma, one of the strongest and longest-lasting hurricanes ever recorded, recently passed leaving a long path of destruction behind it. People from the Caribbean to Florida prepared for the beast of a storm prior to labor day weekend, but there is only so much that could be done before its 180+ mph winds tore through the Virgin Islands on Wednesday the 6th, Cuba on Friday, and finally Florida and Georgia by Sunday. Entire islands were left in shambles across the Caribbean, Florida and Georgia sustained major damage, and millions of people are left without power and water.

How did the market respond?

We are constantly reminded that the markets do not like uncertainty, and this rings true when you look at short periods of volatility, but look at all of the uncertainty that we’ve seen in the past 15 years. Since ’02, we’ve had 3 presidents from republican, to democrat, back to republican, Congress party control flipped multiple times, we’ve seen 2 major wars, devastating natural disasters, massive oil spills, major business and even city bankruptcies, and a “Great Recession”. What did the S&P 500 do over the past 15 years? It is up about ~9% annualized, which is right on par with the average return of the S&P over the past 100 years.

Reminder: be a long term investor. Do not try to time the market, and if you ever have any questions – we are here to help!

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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The information contained in this blog 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. Any opinions are those of Nick Boguth and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. 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.

4 steps to our Due Diligence Process

Contributed by: Angela Palacios, CFP®, AIF®

My friend’s wife is constantly putting him on a diet. He often appeases her by ordering taco salads instead of a traditional entree.  She assumes he’s eating healthy, but little does she know: some taco salads can pack as many as 1,700 calories and over 100 grams of fat! His wife might need to do her homework.

As important as it is to the success of dieting to understand what you are eating, it is equally important to understand what you are buying when investing.  Once you have identified your appropriate mix of asset classes for your risk tolerance and time horizon (your strategic allocation), it is time to start doing your homework to identify the appropriate securities to fill each asset bucket. 

Here is a summary of the steps we follow at The Center:

• Qualitative Review: We generate ideas through reading, conference attendance, peer networking and searches in Morningstar Direct.  The following criteria serve as a starting point.

  • At least $50 Million of Assets Under Management (AUM)

  • Manager tenure of 10 years or more

  • Bottom half of expense ratio in category

  • Manager invests in their strategy ($1 Million and up preferred)

• Quantitative Review: We review the performance and risk characteristics of investment options within the category.  Criteria may include but are not limited to:

  • Review of rolling returns to identify performance standouts over different time periods – 1, 3, 5, and 10 years.

  • Review of performance during difficult time periods (bear markets or periods of performance difficulty for the asset category).

  • Review of rolling statistics including standard deviation, alpha, beta, Sharpe and information ratio relative to best-fit benchmarks.

  • Review of upside-downside capture.

  • Review asset flows by category and individual security.

• Due Diligence Questionnaire & Manager Interview:  Center for Financial Planning’s Due Diligence Questionnaire is submitted to the short list candidates for completion.  Manager interviews for active strategies are conducted via phone conference or in-person interview. 

• Mock-up in portfolios: Position is added into a mockup of the portfolio to identify if intended outcome is achieved and what degree of exposure is required to help attain the desired outcome (percent allocated within the portfolio).

You can also view a simplified graphic on this process:

You can do your investment “waistline” a favor by doing your homework. Don’t be fooled by taco salads, make sure you are getting what you want when it comes to investing by having a defined buying process, or talking to your financial planner about establishing one that is appropriate for you!

Angela Palacios, CFP®, AIF® is the Director of Investments at Center for Financial Planning, Inc.® Angela specializes in Investment and Macro economic research. She is a frequent contributor The Center blog.

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Any opinions are those of Angela Palacios and not necessarily those of Raymond James.