2018 2nd Quarter Investment Commentary

Contributed by: Angela Palacios, CFP®, AIF®

Helping our clients achieve their goals is truly a team effort here at The Center.  You may not have met or spoken to the investment team here at The Center, but we are an important resource leveraged to help you achieve your goals.  Watch the video below to learn more about the investment team and how we help you reach your financial planning destination!   We are always here to help so please don’t hesitate to reach out to us! 

Rebalancing

The investment team monitors and rebalances your portfolio, in addition to portfolio construction.  It is equally important to continue to monitor portfolios and their compliance with your investing preferences and objectives as it is to determine what the proper investments are.  Rebalancing is a key part of this process.  See our recent blog post on how to rebalance a portfolio to understand the reasons and mechanics behind the process.  The most important way to be successful is to get invested and stay invested.  Rebalancing your portfolio on occasion will help you stay the course for the long-term.

Market Update

The story has stayed much the same over the past quarter with trade tensions remaining center stage.  Volatility remains, while trade war talks have spilled over into action and interest rates continue to rise.  Synchronized global growth is slowing but is not yet slow; so, do not expect growth to immediately fall off the cliff from a peak to a trough. 

U.S. markets remain in consolidation mode after a strong 2017 as investors waffle between getting comfortable with the lower rate of growth while having a strong economic and earnings outlook.  The U.S. market ended the quarter on a higher note up 3.43% for the S&P 500 despite the ups and downs throughout the quarter with China and U.S. relations.  Despite being up as much as 6.6% and down as much as 4.4% throughout the year so far we are up 2.65% through the end of the second quarter for the S&P 500. 

Bond markets have continued to struggle with bonds giving back what they are earning via interest payments, and then some, as the Bloomberg Barclays US Aggregate bond index is down 1.6% year to date.  Interest rates continue to increase at a well-telegraphed pace by the Federal Reserve with two more increases expected this year. 

In contrast to the U.S. market, international markets are struggling for the year with the MSCI EAFE posting a -2.75% so far.  In stark contrast, domestic small company stocks are enjoying a nice tailwind from the corporate tax reform so far this year.  The Russell 2000 is posting a startling 7.6% return year-to-date, all of which occurred in the second quarter.

Inflation continues its slow creep back into our economy with wages slowly starting to increase.  Just as slowing growth in the economy is not yet slow, rising inflation is not high inflation.  We are still at very low levels of inflation when you look at the history of our domestic economy.  Our investment committee has decided to add an allocation to an inflation-focused real asset strategy.  We want to add exposure within the portfolios to a strategy that would have the potential to respond more favorably than the broad equity markets to rising inflation. 

Preview of exciting changes

The investment team has been working on some exciting developments for your experience.  We will soon have a “Center for Financial Planning, Inc®” app for your smartphone where you can view returns, asset allocation and even your probability of success for your financial plan.  This new portal will be available to all who are interested.  More information and training on how to set up and view information will be coming later this year so watch your inboxes!  As always, please feel free to reach out if you ever have any questions.

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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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. Any opinions are those of Angela Palacios 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 no strategy can ensure success. The process of rebalancing may carry tax consequences. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional. Diversification and strategic asset allocation do not ensure a profit or protect against a loss. The S&P 500 is an unmanaged index of 500 widely held stocks. The Bloomberg Barclays US Aggregate Bond Index is a market capitalization-weighted index, meaning the securities in the index are weighted according to the market size of each bond type. Most U.S. traded investment grade bonds are represented. Municipal bonds, and Treasury Inflation-Protected Securities are excluded, due to tax treatment issues. The index includes Treasury securities, Government agency bonds, Mortgage-backed bonds, Corporate bonds, and a small amount of foreign bonds traded in U.S. The MSCI EAFE (Europe, Australia, Far East) index is an unmanaged index that is generally considered representative of the international stock market. These international securities involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. The Russell 2000 index is an unmanaged index of small cap securities which generally involve greater risks. Inclusion of these indexes is for illustrative purposes only. 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. Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. Holding bonds to term allows redemption at par value. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise.

What are Time-Weighted and Dollar-Weighted Returns?

Contributed by: Center Investment Department

Monitoring investment performance is pretty important.  It can help identify positive or negative investment decisions and help determine whether your investment goals are on track.  For many investors, reading investment performance statements can be very confusing.  Your rate of return on one statement may look different from another.  The truth is that those differences can largely be attributed to the way the rate of return is calculated.  There are two basic performance calculation methods: the time-weighted rate of return (TWRR) and dollar-weighted rate of return (DWRR).

Key Differences

Each method is designed to measure different scenarios.  The time-weighted rate of return calculation method (top of diagram) was originally developed so fund managers could measure the performance of their portfolios independent of an investor’s actions.  It isolates the manager’s specific performance from investor timing of contributions and withdrawals. TWRR depends only on the length of time money has been in the portfolio and not on the size of the investment – hence the term “time-weighted.”  Performance is broken down into smaller pieces when cash flows occur and then linked together so the cash flow itself doesn’t have an impact on the return calculated. This way if an investor were to make a large deposit halfway through the year, the performance of the second half of the year doesn’t hold more weight than the first half. The opposite would be true for withdrawals.

In contrast, the dollar-weighted rate of return calculation method (also referred to as money-weighted return) measures the size and timing of cash flows, in addition to the investment performance of the funds chosen by the investor. Periods in which more money is invested contribute more heavily to the overall return – hence the term “dollar-weighted.”  Investors are rewarded more for larger investments made during periods of greater price appreciation or penalized less for negative returns that occur when a lower amount of money is invested.  The internal rate of return is synonymous with the dollar-weighted rate of return, but the term is typically used in corporate finance to predict the rate of growth a project is expected to generate.  It is the rate of return that equates the present value of costs and benefits of an investment.  You often see internal rate of return calculations used for private equity investments or when determining the viability of investing in a project.

Which Method Should You Monitor?

Dollar-weighted returns can be thought of as investor-centric because they do not isolate the portfolio’s underlying performance from an investor’s luck and timing. This is what is shown on Raymond James statements because it is a more helpful representation of what the investor actually experienced during the time period.

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 information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of professionals of the Investment Department at The Center For Financial Planning, Inc. and not necessarily those of Raymond James. 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. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

2018 1st Quarter Investment Commentary

Contributed by: Angela Palacios, CFP®, AIF®

Trade wars and tariffs have dominated the headlines over the past quarter. Volatility has increased for equity markets around the world because there are fears stemming from the possibility of a trade war.  To learn more about tariffs and what we think about how this could impact the markets click here.

The Federal Reserve (FED) raised rates as anticipated in March.  This is the first rate hike of the year.  There are two more rate hikes widely expected to come this year.  Gross Domestic Product (GDP) growth has been slightly ahead of what has been expected; so, this could hint at a faster rate hike path than anticipated.  Economists were expecting growth to come in at 2.7% for the 4th quarter and it came in at a revised 2.9%.  Good news for the economy as we are growing faster and seem to be on solid footing.  However, if the market thinks that the FED will start to raise rates faster in response to increased growth, this could negatively impact bond prices as their yields increase.  Both consumer spending and business investment have been strong.  Payroll taxes went down in February with the new tax reform which means we may have more money in our pockets, meaning we have the capacity, now, to spend even more.

The story is even better overseas as GDP growth has gone from mixed throughout the world (disappointing in most countries outside of the U.S. up until recently) to synchronized expansion.

Breaking a streak

The Dow Jones Industrials Average and the S&P 500 snapped an impressive nine-quarter streak of gains.  This has been the longest stretch of quarterly gains for the Dow for over two decades.  Prior long streaks were broken in 1997 (an 11 quarter rally for the Dow).  The S&P had a more recent impressive streak that also lasted nine quarters and was broken the first quarter of 2015.  Other markets including bonds and international were also down this quarter.  See the chart below for more details

The cash quandary

Have you noticed your money market or bank deposits rates spiking along with all of these rate hikes from the Federal Reserve?  If not, you aren’t alone.  Rates have continued to remain frustratingly low on our most liquid savings accounts.  While the FED has raised rates by .25% on six separate occasions since 2015, deposit rates have not moved much.  There are two likely reasons for this:

1. While the FED has raised short-term rates, long-term rates have not reacted as much. Since banks make money on the difference between the interest they charge on loans (which tend to be longer, think mortgages) and what they pay out in interest to their depositors, rates have stayed low for depositors. Banks have been unable to increase the rates they charge to loan individuals money and, therefore, they cannot raise the rates they pay on savings accounts.

2. Deposits at banks in small savings accounts are at an all-time high. This money tends to be steady even if the interest rate paid at the bank down the street is higher. So banks don’t have to raise the rates they pay to keep the assets. It is too much of a bother to close your account, withdraw the money, open a new account and deposit the money for a .1% boost in the interest rate.

Technology volatility

Technology stocks are catching headlines recently as Facebook had a breach of privacy and Apple and Alphabet suffer from fears of tightening regulation.  The recent darlings of the stock market suffer because investors are calling in to question all of these technology companies that gather our personal data to enhance our user experience.

Midterm Elections

While it is still early in the year, midterm elections are starting to heat up.  Democrats are out of power, and the midterm elections tend to favor the party that is out of power.  Currently, we have a strong economy, and that is a factor that can influence whether voters go out to the polls and for whom they vote. A stable economy tends to encourage the status quo vote. The increased stock market volatility could favor the party that is out of power, though.  While I’m not here to debate who will and won’t win, I am interested in how(or if) that could affect your portfolios.  Generally, it isn’t a good idea to make changes within a portfolio based on politics.  Politics are emotional, and it is rarely a good idea to mix these sensitive emotions with our investment dollars.  We generally recommend not to make any major changes to a portfolio driven solely by an upcoming election. 

In times of market distress including the areas outlined above that cause temporary volatility in markets, investors need to focus on the basics:

• sticking to a diversified portfolio

• maintaining appropriate cash reserves

• rebalancing

If you ever have any questions on these or other topics don’t hesitate to reach out to us!

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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https://finance.yahoo.com/news/dow-streak-quarterly-gains-risk-184351660.html https://am.jpmorgan.com/us/en/asset-management/gim/protected/adv/insights/should-i-hold-cash 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 companies engaged in the communications and technology industries are subject to fierce competition and their products and services may be subject to rapid obsolescence. 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. 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. 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 Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The Bloomberg Barclays U.S. Corporate High Yield Bond Index is composed of fixed-rate, publicly issued, non-investment grade debt, is unmanaged, with dividends reinvested, and is not available for purchase. The index includes both corporate and non-corporate sectors. The corporate sectors are Industrial, Utility and Finance, which include both U.S. and non-U.S. corporations. The IA SBBI US IT Government Bond Index is an index created by Ibbotson Associates designed to track the total return of intermediate maturity US Treasury debt securities. 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.

 

Trade War or Negotiation Tactic?

Contributed by: Center Investment Department

In March, President Trump announced tariffs for the steel and aluminum industry (25% tariff on steel and 10% tariff on aluminum) outside of the approval from his advisors.  He stated these tariffs are to protect industries in the U.S. and protect national security. Trump’s campaign focused a lot on trade with China and Mexico. This announcement lead to the departure of Gary Cohn who held the top economic advisor position to the President.  Since then, potential exemptions or grace periods for some countries were created softening his initial threat.  These exemptions are designed primarily for Canada and Mexico with whom; by the way, we are in the middle of re-negotiating NAFTA (North American Free Trade Agreement).  This exemption is contingent on a NAFTA deal.  This type of threat is exactly the type of shock and awe we have gotten used to from the President as a bargaining chip.  While the stock market initially had a strong negative reaction as this news came out, it has since recovered.  The market also took in stride the news of Gary Cohn departing and threats from other countries to retaliate with their own tariffs.

Following is some insight from our team into what tariffs are and why we need to pay attention to a potential trade war and how it may affect portfolios.

What are tariffs?

Let’s start from the top – a tariff is a tax placed on imports from another country. The idea is to make goods from other countries more expensive to encourage consumers to purchase domestic goods.

Who wins and who loses?

Winners:

• + Domestic industries whose competition has been limited

• + Workers in those domestic industries

• + The government which collects the revenue from the tariff

Losers:

• - Foreign exporters whose goods are less attractive to the domestic country

• - Domestic consumers who see prices rise

• - Secondary industries who rely on the imported product (in the case of steel think automobiles, heavy duty equipment, etc.)

On what products/countries does the U.S. currently impose tariffs?

The U.S has tariffs in place on thousands of products including animals, food, other commodities, but most tariff revenue in the U.S. comes from apparel and cars (https://www.cnbc.com/2016/12/07/trump-tariffs-countries-and-products-that-pay-the-highest-us-tariffs.html). The countries that pay the most to the U.S. from tariffs are China, Vietnam, and Japan. Canada and Mexico import more than every other country besides China, but do not come close to duties paid compared to the other countries because of current agreements through NAFTA.

China is currently the world’s largest producer of steel, but according to the International Trade Administration (https://www.trade.gov/steel/countries/pdfs/imports-us.pdf), less than 2% of the U.S.’s steel came from China. Mexico and Canada are large exporters of steel to the U.S., but are currently exempt from the tariff, for now, while NAFTA negotiations are underway.

The impact on markets and portfolios

Steel and aluminum market capitalization is less than $50 Billion (or about 1/10 the market cap of Facebook Inc.), so direct implications on stock prices may not be the cause of much worry. The fear comes from the uncertainty of a global trade war. Countries can retaliate and place tariffs of their own on products imported from the U.S., which could disrupt any number of markets.

So what is going to happen? Whenever you restrict the flow of goods and services, you risk causing inflation and a deterioration in global trade. Low and rising inflation is usually good for stock markets, and we are starting from a place of low inflation.  Initially, there could be some market jitters as inflation creeps back up.as we witnessed in early February but those should abate as investors realize that inflation is still quite low.  The deterioration in global trade is what could have a more significant impact on stock and bond markets.  The question of whether or not this is just a bargaining chip for President Trump remains to be seen.  If this is the case, it will likely not be pushed to the point where it starts to meaningfully affect global trade. The last time the U.S. took a similar step to impose tariffs on steel was back in 2002 and retaliatory actions from other countries caused President Bush to halt the practice after only 19 months.  In an economy that has a strong fundamental footing, as the U.S. does now, higher inflation and even interest rates should not be too punitive for stocks.  We recommend maintaining a well diversified portfolio in this environment.  If you have any questions, don’t hesitate to reach out!

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The information provided 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 deemed to be reliable but its accuracy and completeness cannot be guaranteed. Opinions expressed are those of the team of Center for Financial Planning and are not necessarily those of Raymond James. There is no assurance that any forecasts provided will prove to be correct. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Please note, direct investment in any index is not possible. Past performance is not a guarantee of future results. Diverisification does not ensure  a profit or guarantee against loss. Links are being provided for informational 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.

Does Staying the Course Pay Off for your Investment Strategy?

Contributed by: Center Investment Department

Almost every year, it seems there is some reason to be concerned with markets.  When market volatility strikes, we often get questions from investors as to whether or not they should sell their portfolio.  Russell Investments does a great job illustrating portfolio performance during the market’s many ups and downs in the chart below.  They look at a hypothetical portfolio of 60% stocks and 40% bonds faced with three alternative investment paths as of Sept. 30, 2008 (two weeks after the collapse of Lehman Brothers).

The starting point for the $100,000 hypothetical portfolio is Oct. 9, 2007, the market peak before the great recession. Over the next year, you would have watched the S&P 500 drop over 20%.  The three choices as of Sept. 30, 2008 are:

1. Stay invested, and make no changes (orange line).

2. Move to 100% cash, and remain in cash (light blue line).

3. Move to 100% treasuries, and remain in treasuries (grey line).

The chart shows the clear winner – stay invested and make no changes. Even though you had to stomach even more downside initially, as well as a menu of other market-altering headlines in the following years, when sticking with a 60/40 diversified portfolio, investors recovered a greater percentage of their lost value— and at a faster rate—than going to cash or treasuries.

Now imagine the potential magnification of the success of the orange line if you were saving regularly during that same time period through a vehicle like your 401(k).  While it may have been difficult to stay the course, 2008 offered a buying opportunity that eventually supported portfolio performance success through 2017.  Planning without panicking is the key.  Make sure you develop a sound savings plan and stick to it regardless of what markets may throw our way!

This information has been obtained from sources deemed to be reliable but its accuracy and completeness cannot be guaranteed. Asset allocations are presented only as examples and are not intended as investment advice. Investing involves risk, investors may incur a profit or loss regardless of the strategy or strategies employed. Future investment performance 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. Please note, direct investment in any index is not possible.

Webinar in Review: 2018 Investment Update

Contributed by: Angela Palacios, CFP®, AIF®

Late January, investor sentiment shifted from investors worried about missing out on the bull market to concerns that markets were overbought.  Volatility came stampeding back, bond yields continued rising and we even got a peek at some inflation creeping it’s way back into the economy.  This created a flurry of investor concerns and a basis for much of our discussion in our investment webinar to start the year off.

What are we watching out for in 2018?

A number of topics could be of concern this year.  A potential trade war, geopolitical concerns, inflation and bond yield spikes have the eye of our investment committee. 

While U.S. markets were looking a bit expensive at the beginning of the year, international markets were telling us a different story of opportunity.  Other themes we touched on included ESG and cost compression in the investment industry.

Regardless of what may come, it is important to keep a few points in mind.  Plan, don’t panic.  Planning is the cornerstone to everything we do for you.  Remember your financial plan is built with market volatility in mind.  It is expected within the plan.  It is important to keep this in perspective when headlines are doing everything they can to pull your attention away.  What we can control is maintaining appropriate levels of cash for your needs, managing as tax efficiently as possible so more dollars stay in your pocket and rebalancing to maintain a proper risk profile that is appropriate for you. 

What actions are we taking?

With the extended positive returns we have seen in U.S. markets prior to this year, we discussed strategies we are utilizing to rebalance.  A question we commonly received from you is “What prompts us to make a change in your portfolios?”  We took an in depth look at how we make changes in your portfolio and what triggers us to make these changes. 

If you would like to learn more about any of the topics touched on here, feel free to watch the webinar above!

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.

This information has been obtained from sources deemed to be reliable but its accuracy and completeness cannot be guaranteed. Opinions expressed are those of Angela Palacios and are not necessarily those of Raymond James. 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. Rebalancing a non-retirement account could be a taxable event that may increase your tax liability. You should discussion specific tax matters with the appropriate professional.

Market Pull Backs: Painful in the Short Term, Normal in the Long Run

Contributed by: Nick Defenthaler, CFP®

As I’m sure you’ve noticed as of late, global markets have not been very cooperative with investors. It almost seems like a broken record from past market declines when you turn on the television or read the paper and the majority of headlines you see and hear about are market driven – many with a “doom and gloom” sentiment. While market declines are rarely a fun thing to experience, they are normal, virtually unavoidable and come with the territory if you want to be invested long-term with the goal of growing your portfolio. To be honest, I think we’d be more nervous if they didn’t occur! Pullbacks like we’re experiencing right now tend to bring things back to reality a bit and keep markets in check. Although some pain can be felt short-term, typically investors are rewarded for going through such rollercoasters when things eventually improve. 

Check out the graph below provided by JP Morgan which tells an intriguing and comforting story over the last three and a half decades. Since 1980, every single year experienced a market pull back at some point which averaged -14.2%. However, over the course of those 35 years, 27 of them ended the year in positive territory! I really think this helps to put things in perspective when the markets get rocky, like we’re currently experiencing.    

This chart is for illustration purposes only. Past performance is not a guarantee of future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions.

Also keep in mind that the chart above is for a 100% stock index. When you utilize a more diversified, balanced portfolio strategy, like the majority of our clients, the effect typically means less volatility which in turn translates into less potential upside required to get back to where we were before the selloff. To use a baseball analogy, we’re focused on hitting singles and doubles because those are what usually lead to actually scoring runs. Those who swing for the fences and hit occasional home runs or grand slams are usually the ones who have the most strike outs and worst batting averages. 

The bottom line is this – while market pullbacks can make us nervous and uneasy, they’re a completely normal part of the market cycle. As an investor, staying true to a disciplined investment process and keeping your long-term goals in mind should help get you through the difficult times and put you in a strong position when things recover.

Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc.® Nick works closely with Center clients and is also the Director of The Center’s Financial Planning Department. He is also a frequent contributor to the firm’s blogs and educational webinars.

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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 Defenthaler 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. Diversification and asset allocation do not ensure a profit or protect against a loss.

4th Quarter Investment Commentary

Contributed by: Angela Palacios, CFP®, AIF®

If you're interested in attending our Annual Client Investment Review Event at the Great Lakes Culinary Center on February 20th at 11:30am, please register here. If you can't attend, consider our Investment Review Webinar on Tuesday, February 20th at 1PM, please register here.

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.