Financial Note: Asset Flow Watch 2017 3Q

Contributed by: Jaclyn Jackson

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

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

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

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

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

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

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

Bonds Lead the Pack

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

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

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This information does not purport to be a complete description of the securities, markets, or developments referred to in this material; it has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete. Any opinions are those of Jaclyn Jackson and are not necessarily those of Raymond James. This information is not a complete summary or statement of all available data necessary for making and investment decision and does not constitute a recommendation. Investing involves risk, investors may incur a profit or loss regardless of the strategy or strategies employed. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. Investing in emerging markets can be riskier than investing in well-established foreign markets. Asset allocation and diversification do not ensure a profit or guarantee against loss. Past performance is not a guarantee of future results. The MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 21 developed nations. The MSCI Emerging Markets is designed to measure equity market performance in 25 emerging market indices. The index's three largest industries are materials, energy, and banks. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Barclays Capital US Aggregate Index is an unmanaged market value weighted performance benchmark for investment-grade fixed rate debt issues, including government, corporate, asset backed, mortgage backed securities with a maturity of at least 1 year. Please note direct investment in any index is not possible.

Investment Pulse: 3Q 2017

Contributed by: Nicholas Boguth

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

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

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

Clayton Shiver, Portfolio Manager at Stadion Money Management

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

Matt Lamphier, Portfolio Manager at First Eagle

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

What to expect next time…

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

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

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The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Nick Boguth and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Raymond James is not affiliated with Anne Vandenabeele, Clayton Shiver, Stadion Money Management, Matt Lampier and/or First Eagle Investment Management.

Irma’s Devastating Winds Don’t Devastate The Market

Contributed by: Nicholas Boguth

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

How did the market respond?

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

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

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

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The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Nick Boguth and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results.

4 steps to our Due Diligence Process

Contributed by: Angela Palacios, CFP®, AIF®

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

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

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

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

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

  • Manager tenure of 10 years or more

  • Bottom half of expense ratio in category

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

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

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

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

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

  • Review of upside-downside capture.

  • Review asset flows by category and individual security.

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

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

You can also view a simplified graphic on this process:

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

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

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

Adjusting the Secret Sauce in your Financial Plan

Contributed by: Laurie Renchik, CFP®, MBA

Investing in your financial future is a journey that doesn’t start or stop at retirement. Creating financial independence to support your future is a work in progress practiced over a lifetime. While it is reasonable to assume that the approach for a 35-year-old may not be appropriate for a 55-year-old, there is a common thread that emerges regardless of age. As priorities shift and circumstances change, financial plans and investment portfolios need periodic adjustments to stay in sync with your life. If your life journey is anything like mine, some plans work out perfectly and others may require course corrections to stay on track. I have found that the secret sauce is not just THE financial plan; but rather the consistent financial planning process along the way.

Let’s consider a 55-year old with a plan to retire in five years at the age of 60. In this transition period, the focus is shifting from saving and accumulating to preparing to withdraw income from retirement accounts; commonly referred to as the distribution phase. Having the confidence to retire without worry of spending down the nest egg too quickly is a common concern for folks in this transition phase. Sustaining the nest egg especially in the face of events that are beyond control—like market corrections, changing economic backdrops, and business cycles—are why financial plans and investment management go hand and hand.

I have found that considering a range of “what-if” scenarios in order to address concerns before retirement is a productive approach to addressing an unknown future that could unfold during your retired years.

1. Market corrections:  In the early years of retirement, a portfolio that goes down in value during a market correction may suffer initially and cause stress for the recent retiree.
   
   ACTION: Don’t panic. When things go in directions we don’t like, the natural inclination is to take action. To avoid a reactive response, start out with a properly diversified portfolio which includes appropriate asset allocation, ready cash on hand to support income needs, as well as a process for monitoring the big picture. Review your plan for confirmation.    
    

2.  Inflation is higher than expected: With inflation, things cost more over time eroding the value of savings especially when considering a 30 or 40-year retirement.
   
   ACTION: We don’t know how much inflation will spike or fall in the future. Model a range of scenarios in your baseline income assumptions to understand the potential impact. Revisit the areas of rising costs in your plan as part of your review process. Your financial plan should be built to withstand uncertainties.
    

3. Lower than anticipated market returns: A plan that is monitored consistently and customized to your long-term retirement goals can include the analysis and financial independence calculations to easily take into consideration lower than expected returns. 

ACTION: Build in a margin of safety in your baseline assumptions as a buffer to absorb the impact of lower than expected market returns. Put yourself in the best position to achieve your goals by prioritizing in advance where you can make incremental changes so that clarity and purpose are fundamental to your decision. 

Life has a wonderful, unpredictable way of introducing lots of sticky details into the mix. Your financial planner can help with the details and changes needed to take care of your nest egg by working with you to adjust the secret sauce as needed along the way.

Laurie Renchik, CFP®, MBA is a Partner and Senior Financial Planner at Center for Financial Planning, Inc.® In addition to working with women who are in the midst of a transition (career change, receiving an inheritance, losing a life partner, divorce or remarriage), Laurie works with clients who are planning for retirement. Laurie is a member of the Leadership Oakland Alumni Association and is a frequent contributor to Money Centered.

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Asset allocation and diversification do not ensure a profit or guarantee against loss.

Is it Time for You to “Come Clean” with Your Financial Planner?

Contributed by: Sandra Adams, CFP®, CeFT™

Recently, I had an awakening experience with a long time client.  For years, my client has been very focused on investment returns and fees.  We began working together during the downturn in 2008 (he had been with the firm, but working with another planner for years before that).  This client is always worried about losing too much or not taking enough risk; when in reality, he needs no more than his current risk profile to help reach his goals.  I struggle to find ways to prove to him how solid his financial and investment plan is.

During our recent meeting, our conversation took a different turn than conversations of the past.  He got very emotional and disclosed to me that money really makes him very anxious.  He went on to tell me about some very personal things that have happened in his past, both with personal relationships and in his business life that made him distrust his ability to make good financial decisions.  To this day, he still gets nervous about every financial decision, and is never sure he is making the right one – he is always waiting for the something to go horribly wrong. 

Our meeting lasted much longer than normal and he apologized for “breaking down”.  I, in turn, thanked him for giving me the profound insight I needed to serve him better as his planner.  I now understand his view of money, and can find ways to address his fears and anxieties like I never could have before.  I thanked him for having enough trust in me to share his story.

Many of us have “money” stories that are not kind – those that cause us to feel fear and anxiety, and those that may still interfere with our ability to make rational financial decisions. 

If you have things in your history that you feel impact your financial decision making, share them with your financial planner.  With the understanding of your money fears, your financial planner will be able to assist you, on an even deeper level, in making the best financial decisions for your future.

Sandra Adams, CFP® , CeFT™ is a Partner and Financial Planner at Center for Financial Planning, Inc.® Sandy specializes in Elder Care Financial Planning and is a frequent speaker on related topics. In addition to her frequent contributions to Money Centered, she is regularly quoted in national media publications such as The Wall Street Journal, Research Magazine and Journal of Financial Planning.

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Any opinions are those of Sandra D. Adams and not necessarily those of Raymond James. 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.

ESG Investing: The Little Engine That Could

Contributed by: Jaclyn Jackson

As children, many of us were made familiar with The Little Engine That Could, a story about a small railroad engine that overcame the seemingly impossible challenge of pulling heavy freight cars up and over an intimidating mountain. As we witness the unraveling of many government policies, alliances, and programs helpful to ESG (Environmental, Social, Governance) investing such as dismantling carbon dioxide mitigation, leaving the Paris Agreement global pact, looming EPA budget cuts, etc., it would appear that an insurmountable amount of challenges could hurt ESG investment product performance.

Yet, like The Little Engine, the trend towards ESG investing is plugging ahead with great intensity. In fact, the recent focus on these issues has fired up investors and fund companies.  Leading research firm, Morningstar, has seen a four-fold increase in the use of ESG data in its cloud-based research platform used by asset managers, advisory firms and independent wealth managers since Trump’s election.  Net flows into ESG products in the first 6 months of 2017 have been greater than both 2014 and 2015.  With a dozen new open-end sustainable mutual funds, 2017 flows are also positioned to beat 2016 numbers.

Performance

Excluding ethical motivations, ESG transparency helps investors get a unique, “under the hood” analysis of company risk (or stability) that complements traditional research methods. For example, ESG risks are sometimes more prominent in foreign markets (autocratic governments, human rights issues, wage disparities, etc.).  The graph below demonstrates that ignoring ESG factors may lead to reduced returns for investors in emerging markets.

A study done by European Centre for Corporate Engagement (ECCE) also supports correlation between good ESG practices and financial performance for emerging-market companies.  Even in the case of developed markets, Hermes' global equities team research found that avoiding companies with bottom-decile corporate governance rankings could increase returns by 30 basis points (bps) per month.  To boot, research by index provider, MSCI, indicated that a company’s efforts towards sustainability, such as fair labor practices, good environmental stewardship, and diverse internal leadership, improves returns.

Is it Just Smart Business?

Going back to our metaphor, imagine that the Little Engine was little by design.  While the Little Engine had fewer cylinders and less horse power, it also burned less fuel.  Since the Little Engine was smaller, it weighed less and minimized wear and tear on the parts that supported it. Perhaps the company that owned or built the Little Engine designed it to save money on fuel, have fewer repairs, and prevent EPA emission fines from cutting into profits. 

This begs the question, Are companies that manage environmental, social, and governance factors just practicing smart business strategy?  Phil Davidson, co-manager of American Century Equity Income, stated it best in a Barron’s article, “Cutting corners on environmental issues, for instance, can lead to lawsuits, fines, and damages. Businesses that use less water and less power have lower costs and operate more efficiently. Good corporate governance plays a winning hand in capital allocation and is critical to corporate longevity. If a company is being managed for the short term to maximize revenue, that’s not sustainable.” 

Here to Stay

Despite political noise, it seems some fund companies and investors alike continue to embrace ESG strategies.  Research indicates monitoring risks factors that may affect the sustainability of a company may prove to support higher potential returns.  Perhaps ESG strategies are finally “up the hill” as they seem to be a more common part of one’s investment strategy.

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

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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. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Jaclyn Jackson and not necessarily those of Raymond James. 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 information is not intended as a solicitation or an offer to buy or sell any security referred to herein. Investments mentioned may not be suitable for all investors. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Investing in emerging markets can be riskier than investing in well-established foreign markets. Investing involves risk and investors may incur a profit or a loss. 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. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions.

Webinar in Review: A Beginners Guide for Those Just Starting Out

Contributed by: Emily Lucido

With a little bit of wit and a whole lot of information, Kali Hassinger, CFP® and Josh Bitel, Client Service Associate, recently presented a webinar that provided young folks with a broad guide for how to start their financial lives off on the right foot. As we found out during the presentation, making smart choices early can make life easier in the long run.

Although Millennials have an average debt of 50% in just student loans, they are doing better than most people might think. About 80% have a budget and 72% are saving for retirement. (Source: http://bit.ly/2bBC3vG). If you are a Millennial and are reading and thinking, “I’m not saving for retirement and I don’t have a budget,” that’s okay! Even by taking small steps now, you can make a huge difference rather than waiting. There are a lot of different factors to think about when tackling financials in the “real world.” The first step is to get organized.

Spending vs. Saving

You can spend smarter by following these tips below:

• Stay Organized - which can include setting up account notifications & alerts

  • These notifications can be set up for when you complete a transaction, or if your balance falls below a specific amount (you can set the minimum balance amount yourself)

  • The notifications can also be good for detecting fraud

• Applications & Technology

  • There are a ton of free apps out there that can help with any situation, just google your need and you can find something suitable for you

• Figuring out your Credit Score

  • Credit Karma gives you free access to your credit score and is highly secure

  • What determines your credit score?
    ~ Check out our blog that breaks down your credit score composition!

  • When building credit and using credit cards, you want to make sure to use only around or below 30% of your available credit

  • Watch for annual fees on credit cards; see if opening the card is worth the annual fee you will end up paying

  • Set up auto pay on all your bills with your credit card to benefit with cash back and rewards

  • To avoid ATM fees, go to the store and buy something small (like a pack of gum) and then get cash back on that purchase

• Student Loans

  • Student loans are something you want to start paying down right away – and if you can make more than just the minimum payment, try to do that

  • Make sure your payments are being allocated toward your highest interest loan

  • A good resource to show you every student loan you have, whether federal or private is, Annualcreditreport.com

Saving is so important, and to start sooner can make such a big difference in the long run. These tip s help with how to smartly save money:

• Cash Savings

  • In case of emergency it’s good to have six months of living expenses in a savings account

• Investing Early

  • The graph below demonstrations how investing your savings early can really benefit you in the long run

  • In the example below Chloe started investing from age 25 and almost reaches $2 million dollars by the age of 65, while we see Noah saves from age 25 (the same amount of money) and just let it sit in cash and only obtained about $653,000 by the age of 65.

• Retirement Savings

  • Although retirement might seem far away, it is important to be forward thinking and plan ahead

  • Employer plans are a great opportunity to save money if your company offers one - always remember to contribute at least the match if you can

• If your employer doesn’t offer a retirement plan you can still invest through a Roth IRA or Traditional IRA. Depending on your situation a Roth or an IRA could work for you.

• Taxes – some quick tips

  • The more money you make, the more you pay in taxes!

  • You can write off student loan interest of up to $2,500 per year

  • TurboTax® is a great online resource for doing your taxes with a 100% accurate calculation guarantee

• Insurance

  • Insurance is something that is so important – but something that can be overlooked when we are young

  • Staying on your parents health coverage until age of 26 is great – but don’t just assume it’s the best option because you aren’t paying anything

  • Remember to get renters insurance when living in an apartment – you never know when you might need it!

The last thing to remember is the 28/36 Rule. Your housing expenses should not exceed 28% of your gross monthly income while your total debt payments should not exceed 36%. Remember, the earlier you start saving the better – and any place you start at is good.

Take 30 minutes to view the webinar below and get the full details of Kali and Josh’s discussion. If you have any questions, please reach out to us -- we’re here to help!

Emily Lucido is a Client Service Associate at Center for Financial Planning, Inc.®

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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 Emily Lucido and not necessarily those of Raymond James. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. You should discuss any tax or legal matters with the appropriate professional. Prior to making an investment decision, please consult with your financial advisor about your individual situation. 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.

2nd Quarter Investment Commentary

Contributed by: Angela Palacios, CFP®, AIF®

You may have noticed 2017 has been an easy year to open your statements. Markets around the world have been trending in a positive direction with only short-lived bouts of risk aversion. As a whole, volatility is extremely low and getting lower by the day it seems. U.S. markets have enjoyed positive returns of 10% for the S&P 500 so far this year as of June 30, 2017. The Barclays US Aggregate Bond Index has also been up 2.27%.  Overseas has been the big story of the year with the MSCI EAFE returning 14.1% and the MSCI Emerging Markets Index returning about the same. This strong increase has occurred despite headwinds from Brexit negotiations that are beginning and are expected to be challenging as well as concerns over high and quickly growing debt levels in China.

The Federal Reserve has approved one more rate hike this quarter, during June, which was fully anticipated by markets. One more has been telegraphed by the Fed for this year and would likely come late fall/winter if it does at all. This last potential rate hike of 2017 will depend on the strength of economic data over the coming months.

The Economy

Our domestic economy continues to grow slowly but steadily. Wages are growing, although, at a pace slower than historical averages. Inflation has been more subdued than expected, in large part because wage growth has been muted. Unemployment has continued to fall, and it has become harder to fill open job positions. Low unemployment ultimately should result in wages increasing, but, so far, we have not seen an impact here in a meaningful way.  Energy prices increased over a year ago, and rent and housing costs are on the rise. These last two points serve to take away some of our discretionary spending money which is important to bolster Gross Domestic Product growth that has come in below the Fed’s expectations of 2.2% so far this year. 

Brexit – One year later

A little over one year ago, the British voted to exit the European Union on June 23rd, 2016.  As you may recall, this created quite a bit of volatility in the market leading up to and immediately after the decision. The British government stepped in quickly, vowing to support liquidity at banks and emphasized it would be an orderly divorce. This action assuaged fears resulting in the markets here in the U.S. as well as overseas bouncing back to where they had been prior the decision.  So one year later, what has the impact been?

1. The British pound is about 15% cheaper than where it was last year. While a cheaper pound helps boost the country’s exports, it, unfortunately, serves to increase the price of imports causing inflation within the country. If you were ever going to take a trip to England, now may be a good time as our dollar is much stronger than it has been in recent years!

2. Business investment in the U.K. has softened dramatically due to the uncertainty surrounding potential future tariffs. The Gross Domestic Product growth has also slowed as a result.

3. Immigration is falling into the U.K. meaning many jobs are having a hard time finding workers for farming and construction positions.

Affordable Care Act—Repeal?

ObamaCare is facing a threat of repeal in the Senate. The Senate majority leader, Mitch McConnell, is working to revise the bill to be looked at again in July after it met resistance from some members of the Republican Party. If he can’t create a bill all Republicans can agree on, then they will be forced to seek a more bi-partisan supported bill, further delaying any change. If repealed, volatility would likely increase in the healthcare sector, but the market effects would be very dependent on the terms that pass. This is something we will continue to keep our eyes on.

While it has been a tranquil year thus far, it is important not to let the resilience in stock markets lull you into a false sense of security. It is easy to forget what downside volatility feels like when we haven’t experienced a meaningful pullback in so long. Rebalancing your portfolio and keeping risk in check is important particularly in this stage of a bull market, when it may be tempting to reach for more. Check out our recent Mid-Year Investment Update webinar if you want to hear more information on these topics as well as other headlines this quarter!

On behalf of everyone here at The Center,

Angela Palacios, CFP®, AIF®

Director of Investments
Financial Advisor  

Investment Pulse: Check out Investment Pulse, by Angela Palacios, CFP®, a summary of investment-focused meetings for the quarter.

Investor Ph.D Series: Why paying a premium for bonds may be ok.

Investor Basics Series: Nick Boguth, Investment Research Associate, introduces us to bond options.

Of Financial Note:  Jaclyn Jackson, Portfolio Coordinator, continues her series on behavioral investing here.

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 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 Angela Palacios and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The MSCI EAFE Index is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 21 developed nations. The MSCI Emerging Markets Index is designed to measure equity market performance in 25 emerging market indexes. The index’s three largest industries are materials, energy, and banks. 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. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Rebalancing a non-retirement account could be a taxable event that may increase your tax liability. Please note that 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.

Source: http://www.independent.co.uk/news/business/news/brexit-latest-news-business-economic-costs-banks-one-year-vote-anniversary-eu-exit-a7802596.html

Investor Ph.D.: Paying a Premium

Co-Contributed by: Angela Palacios, CFP® and DewRina Lee

We aren’t talking Healthcare or Prada even, though you pay premiums for both. Rather, we are discussing why investors may pay a premium for bonds. Bonds are frequently purchased at prices below or above par; that is, at a discount or a premium. Bonds trade at a discount when the coupon rate is lower than the market interest rate, and they trade at a premium when its coupon rate is higher than the market interest rate.

For the purpose of this blog, we will be focusing mainly on the reasons behind why someone may choose a premium bond.

Take the following scenario:

Intuition seems to indicate that when deciding between a discount bond at a price of $970 and a premium bond at a price of $1,030, an investor should take the discount option. It’s always more fun to buy that Prada purse when it’s on sale right? But, there are times when you may want to pay the higher price, for example, if you want the latest season’s purse rather than last seasons.

But enough about my purse addiction, let’s get back to bonds. If the bond matures at $1,000, a discount bond holder who bought at $970 will be pocketing $30 while a premium bondholder who paid $1,030 will be losing $30, right? Not exactly. The higher price a premium bondholder has paid is made up for by the higher interest payments they will earn along the way. In many cases, the additional cash flow more than pays for the cost of the premium price paid up-front. Take a look at the following example:

Additionally, due to its larger cash flows, the time it takes to repay the initial investment is shortened. With all else equal, the higher the coupon rate, the shorter the duration. As such, premium bonds can be more defensive in a rising interest rate environment and potentially less volatile. Also, this larger cash flow allows investors to reinvest more in new bonds to capture potential rate increase. By no means does this mean that premium bonds are immune to rising rates; however, they may offer a way to capture the higher yields with some degree of downside protection in a declining market.

So why pay a premium? In essence, there are a few advantages of buying premium bonds:

• Higher coupon rate

• Shorter duration to pay off your initial investment

• Less sensitivity to fluctuations in interest rates

• Opportunity to reinvest at a potentially higher rate.

Of course, there are additional risks and financial objectives that are personalized to each individual. Contact your financial planner to figure out how bonds may fit into your personalized financial plan!

Angela Palacios, CFP® 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.

DewRina Lee is an intern at Center for Financial Planning, Inc.®

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This 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 complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investments mentioned may not be suitable for all investors. Opinions expressed are those of Angela Palacios and DewRina Lee and are not necessarily those of Raymond James. 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. There are special risks associated with investing with bonds such as interest rate risk, market risk, call risk, prepayment risk, credit risk, reinvestment risk, and unique tax consequences. The example provided is hypothetical and has been included for illustrative purposes only, it does not represent an actual investment.