Market Commentary

1st Quarter 2017 Market Commentary

January 2017 Market Commentary

The year in review and what might be ahead

2016 has come and gone. It started out in a very rocky fashion, with comparisons to 2008 that were too numerous to count.

Let’s be clear. As I’ve emphasized in past commentaries, markets don’t always trade in a quiet and orderly fashion. But, just because we run into turbulence doesn’t mean it’s time to retreat into cash. Volatility has been and always will be part of the investment landscape. It’s how we manage and mitigate risk that is critical.

I’ve talked about the hazards of timing the market in the past. So here is another way to look at it. In order to successfully time the market, you have to be right twice–getting out near the top and getting back in somewhere near the bottom.

There isn’t anyone who can accomplish such a feat and do it consistently. (more…)


November 2016 Special Election Market Commentary

I am not talking about the popular 80’s rock anthem by Europe.

By the time many of you read this we will have a new President. The markets will react accordingly based off of these results. My crystal ball is quite cloudy these days so I can’t tell you who will win. I can tell you that as a nation we have survived 56 of these and I anticipate we will survive number 57.

I always caution against watching stocks on a daily basis, because it’s too easy to get caught up in the daily volatility that inevitably will occur. If we go back to last summer’s late August swoon, it might have been tempting to bail when shares were near their bottom and financial reports bordered on hysteria.


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The Pink Elephant and a European Bank

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3rd Quarter Market Commentary

October 2016

It is hard to believe that we are entering the 4th quarter of the year.  September has come and gone and we have exited the month following a period of unusual complacency.

Complacency is Wall Street speak for days upon days when the major market indices trade within an unusually narrow range.

LPL Research put out a piece in September pointing out that the S&P 500 range for August was the seventh narrowest since 1928.

One thing that is absolutely certain – periods of sheer boredom for the short-term trading crowd will eventually come to an end. We don’t know when, but it will happen. In this case, a modest bout of volatility returned to the market by mid-September.

Much of it was related to interest rate worries and chatter from various Federal Reserve officials.

Table 1: Key Index Returns

  MTD % YTD % 3-year* %
Dow Jones Industrial Average -0.5 +5.1 +6.6
NASDAQ Composite +1.9 +6.1 +12.1
S&P 500 Index -0.1 +6.1 +8.8
Russell 2000 Index +1.5 +10.2 +5.2
MSCI World ex-USA** +1.0 +0.6 -2.3
MSCI Emerging Markets** +1.1 +13.8 -2.9

Source: Wall Street Journal, MSCI.com

MTD returns: Aug 31, 2016—Sep 30, 2016

YTD returns: Dec 31, 2015—Sep 30, 2016

*Annualized

**USD

I’ll steer clear of the Fed in this month, but I did want to go into a bit of detail on a couple of items, including what I sometimes like to refer to as the “pink elephant in the room.”

You know, something that everyone at the cocktail party is aware of it, but we all decide it’s best to pretend it’s not there with us.

Today’s pink elephant – the upcoming election.

No doubt, politics can fuel all types of emotions. We sometimes feel strongly about certain issues or certain candidates. It’s not uncommon to think, “How can anyone see things differently than I do?!”

And that’s when the fireworks begin.

So, recognizing that we all have our own political views and filters, including myself, I want to cautiously tiptoe into the minefield and help you see the election through the lens of the market. Admittedly, it’s a very narrow lens, but then, I am not a political analyst.

I am a financial advisor, your financial advocate, and it is my sincere desire to earn a trusted role as your financial confidant. For some of you, I already have. I am here to join you on life’s journey toward your financial goals, not pontificate on what are, admittedly, the important issues of the day.  With that said.

Your vote counts

The election is on everyone’s mind. I have had several clients call me wanting to discuss the potential market scenarios related to the election.

In what was the first of three scheduled debates, the two major candidates came to blows on September 26.

If you happened to see some of the snap polls that were conducted immediately following the debate, Hillary Clinton came out on top (CNN). For that matter, most professional pundits saw it the same way.

During the debate, I noticed that Dow Jones futures, which, among other things, is a gauge that gives us an idea how stocks will open the next day, rose by about 100 points (MarketWatch).

The positive reaction extended into the next day, telling me that the professional investment community was pleased with Clinton’s performance.

Please stay with me and let me explain.

As a dispassionate observer who is interested in viewing the election only through the objective prism of the market (admittedly a very narrow prism), the professional investment community sees continuity in a Clinton win, even if some in the community are more likely to subscribe to the economic and tax ideas of a Republican.

It’s that continuity that appeals to the desire for certainty. As I’ve mentioned many times in the past, short-term traders fear heightened uncertainty. It’s the vagueness of some of Trump’s ideas, coupled with his rhetoric, that fuels uncertainty.

Of course, this is not an endorsement of either candidate. Let me also emphasize, short-term market volatility shouldn’t determine how you and I vote in November. The nation faces much more pressing issues.

Instead, it is more akin to the idiom, “Better the devil you know than the devil you don’t,” at least in the eyes of Wall Street.

I do, however, want to monitor important events that may create some ripples in the financial waters, even if those ripples are brief in nature.

That leads to my next point. Keep your eye on your longer-term financial plan. While we’ve seen very little volatility tied to the election, it’s possible things could get a bit bumpy as we approach election day.

You’ve heard me reiterate time and time again: Markets go through choppy periods over the short term, but a disciplined approach is the straightest line to your financial goals.

Trying to time the highs and lows in stocks is much like trying to guess the string of plays your team will call as it hopes to charge down the field and score a touchdown. Or, it’s analogous to trying to guess what the score might be midway through the fourth quarter, when your team sports a 21-9 lead heading into the locker room at halftime.

I enjoy listening to the keen insights of sport professionals during the halftime show. But none of them offer up a prediction of the final score. As baseball great Yogi Berra was fond of saying and I’m fond of quoting, “It’s tough to make predictions, especially about the future.”

The German version of too big to fail

Investors are living in the shadow of 2008. While the wounds have healed for those who maintained a disciplined approach, the scars may still run deep.

And that means some investors have a tendency to look over their shoulder, always wary that another crisis is lurking, ready to ambush them.

The latest such instance hails from Europe – Germany to be specific.

Deutsche Bank (DB $13) is Germany’s largest bank. With assets that tower nearly $2 trillion, it is Europe’s fourth largest bank by assets (Statista.com).

Safe to say, it’s too big to fail.

Unlike their U.S. counterparts, which diligently raised capital in the post-2008 era, Europe’s banking system is in a much more fragile state. And right now Deutsche Bank is the poster child for ailing European banks.

At the end of the second quarter, the International Monetary Fund said Deutsche Bank posed the greatest risk to the global financial system (Wall Street Journal). In part, problems spring from profitability issues and the lack of a solid capital buffer.

Fast forward to mid-September, when Deutsche Bank was asked by the U.S. Justice Department to pay a $14 billion fine for selling to toxic mortgage securities (Wall Street Journal). It was a punch to the gut for a bank that was already wobbly.

Then, two ill-timed stories hit the wire near the end of September. German Chancellor Angela Merkel reportedly ruled out any state assistance for the bank (denied by both parties), and about ten hedge funds that do business with the bank moved to reduce their exposure (Bloomberg).

Today, it is an issue of confidence.

The bedrock of the financial system

The foundation, the bedrock, the cornerstone (I can’t over emphasize this) of the global financial system is confidence.

Simply put, you and I hold our cash in banks. At any time, we have the confidence we can walk into our local branch and withdraw the entire amount.

But, if everyone shows up at once, it would be amount to a run on the bank.

If confidence evaporates and it happens to a ‘too-big-to-fail bank,’ tremors can quickly spread around the globe, as we saw in the wake of Lehman’s failure. It’s like throwing a giant wrench into the gears of the financial system.

I don’t believe Deutsche is a Lehman moment

Bad things can happen; I won’t deny that. I really do understand that some of you have concerns. If you would like to talk, you know I am always available to address any issues.

What ails Deutsche Bank also dogs many of Europe’s large banks, all of which are grappling with a number of headwinds.

However, I believe the 2008 crisis was a once in a lifetime event. Investors must be careful not to believe the sky is falling every time rain makes its way into the forecast. Such a posture will lengthen the path toward your financial goals.

What’s different today, you ask? Unlike 2008, central banks and governments are painfully aware of the carnage that was sparked by Lehman’s disorderly demise.

Additionally, U.S. banks are much better positioned today. The economic fundamentals aren’t deteriorating, and banks aren’t floundering under the weight of toxic assets.

While EU banking rules have been designed to limit taxpayer support of large institutions (Financial Times), it’s hard to see a situation where Germany would allow a disorderly dissolution of its largest bank. Such an event would wreak havoc on its economy.

Moreover, firewalls are now in place that weren’t available in 2008.

It’s not that we can’t see some volatility if problems persist, but U.S. fundamentals, which have helped support shares during periods of recent volatility, remain intact.

I hope you’ve found this review to be educational and helpful. As I always emphasize, it is my job to assist you. If you have any questions or would like to discuss any matters, please feel free to give me a call.

 

The economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.

No strategy, such as diversification, can assure success or protect against loss in periods of declining values.

Investing involves risk, including loss of principal

The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors. All indexes are unmanaged and an individual cannot invest directly in an index Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. Past performance is no guarantee of future results. The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index. The MSCI EM (Emerging Markets) Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the emerging market countries of the Americas, Europe, the Middle East, Africa and Asia. The MSCI EM Index consists of the following emerging market country indices: Brazil, Chile, Colombia, Mexico, Peru, Czech Republic, Egypt, Greece, Hungary, Poland, Qatar, Russia, South Africa.Turkey, United Arab Emirates, China, India, Indonesia, Korea, Malaysia, Philippines, Taiwan, and Thailand

The Russell 2000 Index is an unmanaged index generally representative of the 2,000 smallest companies in the Russell 3000 index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index. The MSCI World ex USA Index captures large and mid cap representation across 22 of 23 Developed Markets (DM) countries*–excluding the United States. With 1,023 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.


Brexit, Freedom and Your Money

2nd Quarter Market Commentary

July 2016

A European political earthquake that’s felt at home

Like many of you, my family and I had a wonderful time celebrating the Fourth of July holiday weekend. When I was growing up, the Fourth seemed mostly about barbeques, friends, hanging out at the pool, and fireworks.

Through my adult years, however, I’ve come to better appreciate what Independence Day really means. We have a degree of freedom in our nation that few today and even fewer throughout recorded history have enjoyed. And that freedom came (and still comes) at a steep price.

We have the freedom to speak our mind, the freedom of religion, the freedom to assemble, and the freedom to question our government.

In addition, we have the freedom to choose our own leaders – from the local city council to the president of the United States.

Some of us are looking forward to the upcoming election and are excited about the prospect that a woman may lead the greatest nation that has ever graced the face of the Earth. Others may be eager to cast their vote for a political newcomer, hoping to shake things up in Washington.

But I am also a realist and am painfully aware that many folks aren’t very enthusiastic about the choices that We the People have.

It’s not always perfect, but if you really reflect on it, we, as a nation, govern ourselves. And this grand experiment in democracy has been exported around the world in many forms.

Political tremors create economic waves

This leads us to Europe–and the United Kingdom in particular. On June 23, the UK voted in a nonbinding referendum to exit the 28-nation economic and political bloc called the European Union. Though “Brexit” was chosen by a narrow margin, the people had spoken.

Given it’s a nonbinding referendum, British lawmakers could ignore the results. While there has been some talk that a UK exit will never happen, at this juncture, it doesn’t seem likely the referendum will be ignored.

Nonetheless, a victory by the “Leave” camp wasn’t supposed to happen. While the vote was expected to be close, pollsters, analysts, and even the bookies who took bets all projected “Remain” would squeak through with a win. In advance of the vote, stocks rallied in anticipation “Leave” would go down to defeat.

Whether good or bad, continuity usually benefits markets because it provides certainty.

Recall from some of my past newsletters that markets hate heightened uncertainty. More accurately, short-term traders dislike added uncertainty and are much quicker to hit the sell button than longer term investors, who are more tolerant of disappointments.

Why might this be viewed as heightened uncertainty? Well, we’re in uncharted waters. No nation has ever asked to leave the EU.

Could Brexit fuel other separatist movements and create additional economic uncertainty in Europe? Might we see the euro currency, which is shared by 19 nations, begin to unravel?

How might this pressure an already fragile European banking system? And will the dollar begin to strengthen as global investors see the relative safety of the U.S. as a shelter from the stormy global environment?

While these are longer-term concerns, there were a couple of immediate casualties. British Prime Minister David Cameron, who was adamantly opposed to Brexit, quickly resigned, and the British pound fell to its lowest level in over 30 years (Bloomberg).

Meanwhile, expectations of a second rate hike by the Federal Reserve have dimmed considerably. Of course, rate hike sentiment could change again, but for now, prospects for a 2016 rate increase are low (CME Group).

Brexit 101 – what’s it all about

In some respects, the vote boiled down to economic uncertainty versus national sovereignty.

You see, the EU is both an economic and political union. Member states enjoy the benefits of free trade, i.e., the free flow of goods and services across borders. Now that the UK appears poised to exit the EU, trade deals and the vast complexities of an exit must be negotiated.

Further, large companies that set up shop in London, using their address as a gateway into the EU, may find other host countries more beneficial. Simply put, layoffs and empty buildings dampen investment and consumer spending, which, at worst, can lead to a recession.

But membership has its costs, and nations in the EU sometimes find themselves burdened by the whims of the European Parliament.

Today, immigration is the biggest concern facing UK voters, and member nations must accept anyone who is a citizen of the EU.

It’s this open-door immigration policy that has rubbed some folks the wrong way. As a colleague who is both a citizen of the UK and the U.S. explained to me, many in his home country dislike EU rules that require British taxpayers to finance welfare benefits to those who immigrate to the UK.

In a nutshell, what voters viewed as onerous regulations and their impact on national sovereignty trumped the economic uncertainty a Brexit might cause.

Let’s not discount the positives at home

Many of the themes that have kept stocks near highs continued to play out over the quarter that just ended. On the plus side, U.S. economic growth appears to have accelerated in Q2 and interest rates remain low. While Brexit may muddy the picture, earnings are forecast to begin rising again in Q3 (Thomson Reuters).

Meanwhile, the increase in oil prices has not only reduced the strong headwinds in the troubled energy sector, but it has reversed the surge in yields among junk bonds. Still, a fill-up at the gas station remains quite reasonable.

Moreover, the dollar’s recent stability reduces the drag on revenues from firms that do a significant amount of business overseas. When U.S. companies sell goods around the globe, they must translate those sales back into stronger dollars.

A rising dollar is gift for Americans traveling overseas, but it puts a dent in the bottom line of multinationals.

Table 1: Key Index Returns

MTD % YTD % 3-year* %
Dow Jones Industrial Average +0.8 +2.9 +6.3
NASDAQ Composite -2.1 -3.3 +12.5
S&P 500 Index +0.1 +2.7 +9.3
Russell 2000 Index -0.2 +1.4 +5.6
MSCI World ex-USA** -3.3 -4.8 -0.8
MSCI Emerging Markets** +3.3 +5.0 -3.9

Source: Wall Street Journal, MSCI.com

MTD returns: May 31, 2016—Jun 30, 2016

YTD returns: December 31, 2015–Jun 30, 2016

*Annualized

**in US dollars

What’s an investor to do?

Control what you can control – the investment plan – and be very careful about making a rash decision based on an emotional selloff. Stocks took a beating in the wake of the Brexit vote but quickly recovered nearly all of their losses by the end of June.

I understand that most investors don’t fully understand the impact of what just happened in Europe in relation to their investments. Honestly, many analysts would concede there are unknowns.

My goal, however, is to keep you focused on your financial goals and objectives. Emotionally based decisions rarely work out in your favor.

Whether large or small, whether highly sophisticated or simply a novice, investors price stocks through their collective buy and sell decisions. When new information is disseminated in the marketplace, stocks may react either positively or negatively, depending on how the information is viewed.

By itself, the UK’s economy won’t send the U.S. economy into a recession.

But Brexit creates a new level of uncertainty and risk. However imperfectly, investors attempt to discount the event, pricing in how it may affect the U.S. economy and corporate profits.

If you ever have questions or concerns, or just want to talk, my team and I are always available.

Final thoughts

Democracies can sometimes be messy. What just happened in the UK and the gridlock in Washington are just a couple of examples.

I believe Winston Churchill described it well when he said, “Democracy is the worst form of government, except for all the others.”

While we do not know where the waves of populism that are swelling in the U.S. and Europe may take us, they represent the will of free citizens. Democratic freedoms enable the ordinary to do the extraordinary; to innovate, create wealth and fuel new economic growth. True, free elections aren’t always neat and tidy, but history strongly suggests they are a vital ingredient for long-term economic success.

I hope you’ve found this review to be educational and helpful. As I always emphasize, it is my job to assist you.

Thank you very much for the trust and confidence you’ve place in my team and my firm.

 

The economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.

No strategy, such as diversification, can assure success or protect against loss in periods of declining values. Investing involves risk, including loss of principal

The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors. All indexes are unmanaged and an individual cannot invest directly in an index Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. Past performance is no guarantee of future results. The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index. The MSCI EM (Emerging Markets) Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the emerging market countries of the Americas, Europe, the Middle East, Africa and Asia. The MSCI EM Index consists of the following emerging market country indices: Brazil, Chile, Colombia, Mexico, Peru, Czech Republic, Egypt, Greece, Hungary, Poland, Qatar, Russia, South Africa.Turkey, United Arab Emirates, China, India, Indonesia, Korea, Malaysia, Philippines, Taiwan, and Thailand

The Russell 2000 Index is an unmanaged index generally representative of the 2,000 smallest companies in the Russell 3000 index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index. The MSCI World ex USA Index captures large and mid cap representation across 22 of 23 Developed Markets (DM) countries*–excluding the United States. With 1,023 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.


1st Quarter 2016 Market Commentary

Unless you have been living under a rock or in a coma and just waking up you have seen the crazy roller coaster that has been the stock market in the first quarter of 2016.


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