Mid-term Elections and the Market: 2018 Outcome

Contributed by: Center Investment Department

Voting day came and went much as the markets had anticipated.  Democrats flipped the House of Representatives over to their control while the Senate maintained and even strengthened their republican majority.  From a legislative policy perspective, we expect the republican agenda to slow.  Mid-term election implications may include:

• The President can continue to act alone regarding trade policies but had bi-partisan support for cracking down on China’s trade and intellectual property practices anyway

• Democrats are going to scrutinize and investigate President Trump, his cabinet officials and executive actions…yes, even more!

• Any further tax cuts are unlikely

• Democrats will likely get to work on some infrastructure spending

• Affordable Care act will be strongly defended

While markets care about legislation and the far-reaching impact those decisions make, long-term markets are agnostic to election results. Information and how markets digest the information affect investment outcomes more than politics.  Frankly, markets do not really care which side is in control.  In fact, the new balance of power sets a similar stage for the strongest historical performance in the S&P 500 for a republican president.  Want to learn more, check out this blog, “Mid-Term Elections and the Market.”

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Any opinions are those of the author and not necessarily those of RJFS. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Investing involves risk and investors may incur a profit or a loss. 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.

Mid-Term Elections and the Market

Contributed by: Kali Hassinger, CFP®

Elections and the stock market are two topics prime for speculation.  The media will speculate on who will win elections, and then again speculate on how those outcomes will affect the markets!  With this double layer of uncertainty and recent market volatility, investors can be left with feelings of unease.  Currently the Republican president is backed by a Republican-led Congress; however, this year's midterm elections have the balance of power on the ballot.  35 Senate seats are up for grabs, and Democrats would need to gain two seats to take control.

Although there is no way to say how the markets will be affected by either outcome with certainty, history can help to keep us grounded.  The chart below shows us the average annual S&P 500 performance by the presidential party and the majority Congressional party.  Regardless of the power make-up or split, the index has averaged positive returns. A party split (i.e., Republican president and Democratic Congress or Democratic president and Republican Congress) has delivered better performance than when a single party controlled both branches of government.

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 year following midterm elections has historically had the best stock returns of the president's four-year term, even when a president's party loses seats in Congress.  The last time the S&P 500 declined in the year after midterm elections was 1946, but, although a guide, history is not a fortune teller. 

We cannot control the election results or the market, but we can control our vote and how we handle our investments.As always, we preach sticking to your financial plan without making changes to your portfolio out of fear or uncertainty.Our team remains aware of the political and economic landscape, but your portfolio is always constructed with your long-term goals in mind.

Kali Hassinger, CFP® is an Associate Financial Planner at Center for Financial Planning, Inc.®

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Source: https://www.wsj.com/articles/midterms-are-a-boon-for-stocksno-matter-who-wins-1538645400 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.

2018 Third Quarter Investment Commentary

Contributed by: Angela Palacios, CFP®, AIF®

Diversified portfolios continue their uphill battle as the U.S. Stock market continues to be one of the few sources of positive returns this year.  In August, the current bull market became the longest on record since World War II by avoiding a 20% drawdown during that time.  Recently, the equity markets fell sharply even though the near-term prospects for the economy remain strong, but there are concerns about the November election, trade policy disruptions, FED policy and labor market constraints. Increased volatility and see-sawing markets are likely to continue in the near term.

*annualized

Bonds have continued to be under the pressure of gradually rising interest rates.  Since December 2016, the Fed has raised short-term rates by .25% during 8 of the last 15 meetings.  The last time we experienced rising interest rates was 2004-2006.  During this period, the Fed raised short-term rates by .25% in 17 consecutive meetings in contrast!  This time, they are taking a far more measured pace trying to increase borrowing costs for businesses and consumers to keep the economy from overheating.

International and especially emerging markets are struggling the most this year due to trade war concerns and a strong U.S. dollar even though they were the darlings of 2017.

Trade War Tracking

Since the trade war is at the top of the headlines each day, I thought it would be interesting to share a scorecard.  The below chart shows the tariffs that are still only in the proposal state (diagonal lines) and tariffs that have been put into place. You can see that only a small amount had been implemented before September. On September 21st, the next $200 Billion of tariffs were put into place (China 301 Part 1).  These are tariffs on an extensive list of goods and will start at a 10% tariff, escalating to a 25% tariff in January 2019.  China retaliated by placing tariffs on another $60 Billion in U.S. goods.  This list was smaller and the amount of tariffs placed on them was lower than the market anticipated which is why we didn’t see any negative reactions from the stock market during this round.

While we are also actively negotiating trade policies with many countries, the focus and largest amount of potential tariffs are against Chinese imports.   According to the office of the U.S. Trade Representative “The United States will impose tariffs on…Chinese imports and take other actions in response to China’s policies that coerce American companies into transferring their technology and intellectual property to domestic Chinese Enterprises.  These policies bolster China’s stated intention of seizing economic leadership in advance technology as set forth in its industrial plans, such as ‘Made in China 2025.’”

While markets are more volatile this year seeming to be swayed by the latest tariff headline daily, local markets are still boasting 10.56%  returns on the S&P500 for the year through the end of September. This says to us that markets think this trade war is survivable and possibly even beneficial to the U.S.  While tariffs are generally a negative for an economy over the long-term, investors often, only see the short-term benefits these types of strong-arm policies can bring. 

The point of free trade is that each group of producers focus on what they are best at and can produce the most efficiently (also at the lowest price/best quality).They can then sell their products and use the money to purchase what they need from the most efficient producer.This process usually stretches your dollar the farthest when it comes to purchasing power.Tariffs place an additional tax on the consumer as they usually result in higher prices for us or reduced margins for companies (or a combination of the two).We don’t share the markets rosy outlook, as we believe this trade war will result, eventually, in inflation and supply chain disruptions.It takes time to ramp up production domestically of products that become too expensive to import.When companies face the uncertainty of what retaliatory actions are coming next, they are apprehensive to make the investments required to ramp up local production in the first place. 

Unemployment

We also have to consider that the unemployment rate is back to very low levels (blue line shows below 4% unemployment) and participations rates (gray bar) remain steady.  Where are we going to get all of the new workers required to start producing items locally rather than importing? 

We don’t think this is how Trump foresees the end game.  He hopes to force China to remove the tariffs they have historically imposed on our goods to put us on a level playing field of no tariffs, no subsidies and preventing intellectual property drain.  Whether he is right and China will be forced to come to the negotiation table remains to be seen.  Volatility should continue at slightly higher levels if this trade war continues to ramp up.

Politics

Mid-term elections are coming up, and that always puts politics at the top of everyone’s minds.  There is also fear of impeachment that we often hear from clients and how that could affect portfolios.  Impeachment is the process where the House of Representatives through a simple majority brings charges against a government official.  After the government official is impeached, the process then moves to the Senate to try the accused.  This must pass the Senate by a 2/3’s majority vote.  If this happened, President Trump would be removed from the office, and the Vice President would take his place. 

There is little to refer to in recent history to understand how markets would react here in the U.S. if this were to happen.  Bill Clinton was impeached in 1998, and Richard Nixon resigned during the Impeachment proceedings but was never actually impeached.  There have been recent unsuccessful attempts to impeach Donald Trump, George W. Bush, and, yes, even Barack Obama.  When Bill Clinton was impeached markets were down in bear market territory (over 20% peak to trough on the S&P 500) for a short time before it rallied back.  The Russian Ruble Crisis also occurred at the same time, so it is hard to say that the impact to markets was solely due to the impeachment process. So while President Trump likes to boast that the “Markets will crash and that everyone will be poor” if he were impeached that is likely not the case. 

While we don’t think this has a high likelihood of happening, if it did, short-term volatility would probably occur while there is uncertainty and this is one of the many reasons why we maintain a diversified portfolio.  If stocks retreated, it is likely that our bond portfolios would perform well and even a possibility that international investments would strengthen in the face of a weaker dollar.  We believe a diversified portfolio with short-term needs set aside in cash or cash equivalents is one of the most effective solutions to an extremely rare event like this.

While this bull market may be getting old, it is important to remember they do not simply die of old age; rather they are killed by recessions.The yield curve is getting dangerously close to inverting but has not, thus not signaling a recession…yet.We are keeping a close eye on the yield curve and trade war as these items could quickly spill us over into a risk of recession. Markets can breeze along seemingly unconcerned by these types of risk until they aren’t.When sentiment swings from optimistic to pessimistic, it can happen almost overnight.As a result, we continue to maintain that having a diversified portfolio is extremely important.We are actively taking advantage of rebalancing opportunities to make sure your portfolios are prepared.If you have any questions or would like to speak with us more on these topics, please don’t hesitate to reach out to us!

Thank you for your continued trust!

On behalf of everyone here at The Center,

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

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 foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Angela Palacios and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns.

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.