Mid Year 2017 Client Letter

MidYear 2017 Client Letter

3 Reasons the Stock Market Is So High Right Now

We are currently in the midst of one of the longest bull markets in history. If this continues, the period of sustained growth that began in 2009 may very well be the longest ever. The S&P 500 (SPX), which many investors use as a gauge for the performance of the broader U.S. equity market, seems to reach new highs every day. The market’s growth has persisted with few meaningful corrections. In fact, the SPX is up nearly 200% from February 2009 lows. It’s a big deal.
What are the factors driving this growth? The question is incredibly complex, and doesn’t have a silver bullet answer. However, there are some interconnected concepts that many believe have spurred this growth, including:
1. Interest Rates Have Been at Record Lows for a Decade. Money Is Cheap.
In addition to nearly all other developed Central Banks, the Fed has expanded the money supply, dramatically cut interest rates, and kept them at historic lows for the better part of a decade. This is unprecedented in modern history. The FRB took these steps as part of its dual mandate to spur growth in the American economy, and it’s been pretty controversial. Many disagree about the advisability, success and long term implications of these “loose” monetary policies, but one thing is undeniably true – money is cheap, very cheap. With low interest rates, banks are encouraged to lend. Corporations find it attractive to borrow because they can do so with low rates. Individuals are not incentivized to save because cash itself provides little to no return. In order to put their money to work, many investors have turned to U.S. Equities.
2. Investors Have Shifted From Bonds to Equities to Find Income and Yield in This Low-Interest […]

6 Tips For Increasing Your Net Worth

Your net worth can tell you many things, but it is simply a way to gauge your own financial success.
Many have calculated their net worth and come to the conclusion that it is in need of a little spit-shine, yet improving it can seem very difficult. However, it only requires some guidance and a little willpower.
Pay Off Your Debt
Money you owe is money that could be used to grow your net worth. Pay off all your debt as soon as you are able, but be aware of penalties that can be applied for early payment (like with mortgages). Identify high-interest debt and target that first, paying off lesser debt along the way.

Consolidating your debt by taking out a loan at a lower rate to pay down high-yield debt is a tried and true strategy. The bottom line here is to know what you owe and have a plan for paying it back. Make extra payments where possible and work to reduce your overall debt burden.
Max Out Your Retirement Contributions
Many private employers provide retirement plans that have desirable tax characteristics and other tax-advantaged accounts (ex. a Roth IRA) are available. In fact, many employers have matching programs that will help you grow your contribution faster.

By not taking advantage of such programs, you are leaving money on the table. Retirement contributions create a two-fold benefit. They defer your taxable income to your lowest earning years and increase your available generative assets. Taking action now for your retirement will help slow one of the biggest impediments to growth of your net worth: taxes.
Cut Expenses By Realizing Expenses
Nobody likes to hear that they spend too much and need to cut back. We all know that eating out at restaurants or buying the latest gadgets catches […]

The foundations of investing

Research shows that investors who stick with a disciplined long-term investing strategy tend to outperform those who constantly jump in and out of the market. But sometimes taking the long view can be challenging—particularly during tumultuous times in the financial markets or even in your own life.

Emotions—excitement when the market is up or fear when the market is down—can wreak havoc on your investment decisions, leading you to buy high and sell low or miss out on rapid recoveries that begin during uncertain times. However, history shows that when investors attempt to time the market to maximize gains and minimize losses, they often end up doing the exact opposite.

Over the 20 years through 2015, the average equity fund investor underperformed the S&P 500® Index by nearly 4% annually, because of a combination of making bad decisions about when to invest, fees, and fund selection—in short, such investors strayed from their disciplined investing strategies. Put simply, letting emotions govern your investment decisions can jeopardize your long-term returns.

“When you make an emotional decision, it might feel satisfying in the moment, but you may be sacrificing your long-term goals,” says Larry Rakers, group leader in Fidelity’s Strategic Advisers group.

So how can you manage the negative impact of emotional decision making on your portfolio? Creating a disciplined investment plan that suits your individual goals, risk tolerance, and life situation; choosing an appropriate mix of investments; and finding the right way to manage your investments can help give you the confidence to stick to your plan, even in times of market turbulence or upheaval in your personal life.
Step 1: Create a tailored investment plan.
In order to determine whether you’re on track to meet your savings goals, you first have to […]

SEC Cracks Down On “Fake News”

With the recent crackdown on political “fake news”, where a handful of media mega-corporations such as Facebook and Google have emerged as the ultimate arbiter of what is real or isn’t, in the process unleashing allegations of conflicts of interest, it was only a matter of time before the SEC got the hint and brought the hammer down. That time is now, because as Reuters reports, the SEC announced a crackdown against “pump and dump” stock promotion schemes in which writers were secretly paid to post hundreds of bullish articles about public companies on financial websites.

Some 27 individuals and entities were charged with misleading investors into believing they were reading ”independent, unbiased analyses” on websites such as Seeking Alpha, Benzinga and Wall Street Cheat Sheet.
The SEC said many writers used pseudonyms such as Equity Options Guru, The Swiss Trader, Trading Maven and Wonderful Wizard to hype stocks. It was not immediately clear if bearish “pseudonymous characters” were also responsible for talking down stocks.
While not as pervasive as alleged “fake news” in the political realm, the SEC said had it identified more than 450 problem articles, of which more than 250 falsely said the writers were not being paid.

Unlike traditional cases where the SEC alleges fraud, usually involving trading on inside information, in this case the crackdown is not against improper market information but misrepresentation of conflicts of interest and marketing.

“This is different from the fraud cases that you usually see us bring,” Stephanie Avakian, acting director of the SEC enforcement division, said on the conference call. “Here, we allege that the fraud was in presenting the analysis as impartial,” she said. “It was bought and paid for.”

Amusingly, the SEC also issued an alert warning investors that articles on investment research […]

Millennials Are Risk Averse and Hoarding Cash

The young and the restless (never mind the reckless) aren’t that way anymore. The newest generation of generational studies show that Millennials are increasingly risk averse, hoarding cash instead of making investments, even more than older generations. That comes as a surprise, as traditionally, older generations tend to be more risk averse.

In research that stretches from ages 25 to 74, BlackRock’s Global Investor Pulse Survey looks at all but the youngest Millennials (age 25-35), plus Generation X (ages 36-51), the Baby Boomers (ages 52-70), and the very youngest members of the Silent Generation (ages 71-74).

The BlackRock findings reveal that while 59% of Millennials have started some form of saving for their retirement, they are reluctant to actually invest their savings. This is not good news for their future: It means they’re shutting themselves off from the higher returns investments yield long-term over cash and also squandering away the big compounding advantage of starting retirement planning early in life.
The Shrinking Appetite for Risk
BlackRock researchers report that, on average, Americans hold 58% of their assets in cash. That number is 65% for Millennials, a slight drop compared to 69% recorded last fall, but decidedly higher than the cash allocation recorded for other age groups – Gen X (59%), Baby Boomers (54%) and Silent Generation (47%).

Another survey, the Global Investment Survey, conducted by Legg Mason, also uncovered an increasingly risk-averse mentality among Millennials. It found that 85% of Millennials considered themselves “conservative” when it came to their risk tolerance, while a majority subset of that group pegged themselves as “very conservative.” By contrast, fewer than a third of Baby Boomers surveyed classified themselves as very conservative investors.

This diminished risk appetite is reflected in the investing patterns among young people. The Legg Mason […]

Fiduciary Rule Survives for Now

The Labor Department cleared a landmark retirement-savings rule to take effect next month, ending a stretch of uncertainty for brokers and investors after President Donald Trump called for a review of the Obama-era regulation with an eye toward repeal or revision.

The so-called fiduciary rule—which aims to eliminate conflicts in financial advice and ensure that brokers put the interests of retirement savers first—was originally due to come online in April but was delayed for 60 days as part of the review. Labor Department Secretary Alexander Acosta surprised many across the brokerage and insurance industries by recommending, in a Wall Street Journal opinion piece late Monday, against a further delay in the rule.

While Mr. Acosta preserved the possibility of revision or repeal of the rule as the Labor Department continues its economic review, the decision to let the regulation come into effect June 9 effectively makes it harder to reverse later. This is because firms across the country have to communicate compliance changes to clients, including disclosures about how clients are charged and commitments to put customers’ interests first.

The so-called fiduciary rule, six years in the making and unveiled by the Labor Department last spring, holds brokers and advisers who work with tax-advantaged retirement savings to a fiduciary standard as opposed to the previous suitability standard. That means they must work in the best interest of their clients and generally avoid conflicts, which can come about with the commission-based compensation common among brokers and insurance agents.

Source:  Wall Street Journal

Trump Turmoil?

From an economic standpoint, we haven’t lost anything. The economy is growing, employment remains strong, and corporate earnings are on the rise. The fundamentals, which drive markets, are also strong. What we have lost is, possibly, a modicum of future expectations—not something we have now, but something we hoped for in the future. It’s not great, but it’s not a disaster either.
What makes this drop more worrying is that markets have been remarkably calm recently. With the news from Washington full of drama, with markets dropping, and with worries high, it is easy to fall into the old mantra I mentioned the other day: “When in danger or in doubt, run in circles, scream and shout.”
Looking at the big picture, based on sound fundamentals and continuing growth, the market should remain solid, despite short-term volatility. Looking at the big picture, today’s volatility—and today’s news—is noise. Looking at the big picture, to get a bigger and sustained drawdown, we need things we don’t have: a recession, spiking interest rates, or spiking oil prices. Looking at the big picture, conditions remain quite positive.
Yes, we might see a bigger drawdown, but it is likely to be both limited and reasonably short-lived. There will be a time to worry, but right now, despite the very real issues being debated, we are still in a good place as investors.
Remain calm and carry on.
Source:  Brad McMillan, Commonwealth Financial Network

Why US stocks shrug off political drama

The U.S. stock market has been resilient to the ongoing political drama in Washington DC and beyond.

Why?  The fundamental pillars of support for US stocks (earnings) are as strong as they’ve been in years. According to the earnings analysts at Factset, the estimated earnings growth rate for the S&P 500 is 9.1%. If 9.1% is the actual earnings growth rate for the quarter, it will mark the highest year-over-year earnings growth reported by the index since 2011.

With more Trump-related drama stealing all the headlines, U.S. stocks quietly power on to fresh all-time highs.

At the start of the week, 91% of the companies in the S&P 500 had reported their First Quarter 2017 (Q1) earnings, and if anything, profits are exceeding the already lofty early indications of six weeks ago. According to FactSet’s data, 75% of reporting S&P 500 companies have beat earnings per share (EPS) estimates and 64% have beaten revenue estimates (both figures are well above their 1- and 5-year averages). Impressively, the expected earnings growth for the S&P 500 is tracking at 13.6% year-over-year, which if realized, would be the strongest growth in earnings since Third Quarter 2011.

Of course, much of this growth is attributable to the energy sector, which actually reported a loss on a sector-wide basis in Q1 of last year. Still, even if the energy sector were completely excluded, the S&P 500 earnings growth would be tracking at a still impressive 9.4%. Revenue growth has been similarly strong, both with and without the energy sector.

Perhaps most importantly for forward-thinking investors, analyst projections are optimistic for the rest of the year as well and for all of 2017, analysts are projecting earnings growth of 9.9% and revenue growth of 5.3%.

While valuations for U.S. stocks are stretched […]

The #1 money mistake

If your outflow exceeds your income, then your upkeep will be your downfall.
The first step to gaining wealth is spending less than you earn — it’s vital to making any financial progress. So when you over-spend, you’re doing the most damage possible to your finances.

Here’s what the book “Stop Acting Rich” says about the issue:

“Most people will never earn $10 million in their lifetime, let alone in any single year. In fact, most households (97%) are unlikely to ever earn even $200,000 or more annually. So what if you are unlikely to become rich by generating an extraordinarily high realized income? The only way you will become rich is by being like those millionaires at the other end of the continuum: by living well below your means, by planning, saving, and investing.”

There are two types of over-spending that can ruin your finances:

• Over-spending on the little things – the small amounts that seep out of your pockets here and there and eventually become large.

• Over-spending on the big things – homes, cars, boats, cottages, and so on.

The top complaint from people who don’t have balanced budgets is, “I don’t make enough money.”

In the vast majority of cases (probably 95% or more), it’s not the amount these people make – but the amount that they spend that’s the problem. (In some cases it’s true that people simply don’t make enough money to save, invest, etc. As such, they need to concentrate on increasing their income as much as they need to control over-spending.)

The author writes:  ”My wife and I once counseled a guy who made $130,000 a year. This was back in the early ‘90’s, so $130,000 was worth something (it’s still pretty good today.) […]