Center Investing

Climate Change and What It Means for Investors

Jaclyn Jackson Contributed by: Jaclyn Jackson

Climate Change and What it Means for Investors

Coming in 1.71°F above its historical average of 59.9°F, June 2019 was the hottest June globally in 140 years of recorded data. June’s temperature increase is the latest in an upward trend that began in the 1970s. While debates hotter than any June persist about the validity of global warming, the fact remains that climate change carries significant implications for individuals, industries, and investors alike.

Global Temperature Differential Relative to June Historical Average

Industry and Economic Impact

Not convinced Mother Nature can wreak havoc on your day-to-day life? Just ask any New Yorker who recently experienced a heatwave, flooding, and power outages all in the same week. In fact, there’s no need to look that far; as of this writing, some Detroiters are still hoping to regain power after incredibly warm weather hit the region.

While it’s pretty clear how extreme weather conditions generate problems for energy companies, heatwaves can disrupt other industries. Manufacturing plants experience reduced production when temperatures soar above 90 degrees; fewer people look for homes, which affects the real estate industry’s most active season; and increased hospitalizations impact insurance companies. While these problems more directly speak to developed, urban areas and industries, they don’t even begin to define the potential implications of climate change around the globe.

Goldman Sachs summarized it best: “We believe that in addition to environmental impact, direct damage from mortality, labor productivity, agriculture, energy demand, and coastal storms may also significantly impact overall economic growth.”

Investors Demand More

It’s no wonder 477 global investors (including money managers and large pension funds around the world) issued a letter to governments attending the G-20 summit in Osaka, Japan. Commanding $34 trillion in assets, they’ve concluded that ignoring the Paris Agreement’s mission would create “an unacceptably high temperature increase that would cause substantial negative economic impacts.” Investors created the letter to petition government leaders to achieve the 2015 Paris Agreement goals, accelerate private sector investment into low carbon transition, and commit to improved climate-related financial reporting.

Be the Change

These investors also use their substantial financial weight to speak with companies in their portfolios about how they are addressing and alleviating industry-specific climate change issues. Individual investors can take a similar approach, by using their financial power to invest in mutual/exchange traded funds that evaluate the environmental, social, and governance (ESG) qualities of companies in their portfolios, as well as more traditional methods of research.

Are you ready to be the change?

Learn more about The Center’s Social Portfolio and ESG investing here.

Jaclyn Jackson is a Portfolio Administrator at Center for Financial Planning, Inc.® She manages client portfolios and performs investment research.


Investors should carefully consider the investment objectives, risks, charges and expenses of Mutual Funds and Exchange-Traded Funds (ETFs) before investing. The prospectus and summary prospectus contains this and other information about Mutual Funds and ETFs. The prospectus and summary prospectus is available from your financial advisor and should be read carefully before investing.

Opinions expressed are those of the author and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. 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. Investing involves risk and investors may incur a profit or a loss regardless of strategy selected. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

SOURCES: https://www.pionline.com/esg/investor-group-pleads-g-20-global-warming https://theinvestoragenda.org/wp-content/uploads/2019/06/FINAL-at-June-24-Global-Investor-Statement-to-Governments-on-Climate-Change-26.06.19-1.pdf

Investment Commentary: Second Quarter 2019

Center for Financial Planning, Inc.® Investment Commentary 2019

Mid-Year update

As summer feels like it is finally underway after a soggy start, the markets have had anything but a soggy start to the year. The first half of 2019 ended on a strong note, as the U.S. and China seemed to resume negotiations with a constructive air. This is the best first half of the year the S&P 500 has experienced since 1997, as it posted a 18.54% gain.

Interest rates

Bonds have also enjoyed strong results this year, with the Barclays US Aggregate Bond Index up 6.11%. The Federal Reserve left rates unchanged again in June, but has made a complete about-face over the first half of the year, from projecting multiple interest rate increases to a majority of officials now thinking rates will be lower by year-end.  This comes on the heels of steady interest rate increases since 2015. The dispute over trade policy between the U.S. and China and imposition of tariffs is the main stimulus behind this thinking. This change by the Federal Reserve of wanting to reduce rates rather than raise rates (also referred to as a more dovish stance) has given a strong boost to domestic bonds as well as emerging market debt. The market has already priced in two interest rate cuts by year-end and two more in 2020. While this aggressive rate cut schedule may not fully play out (just as the three rate increases forecast for 2019 at the end of 2018 did not happen), the Federal Reserve has clearly signaled a softening economy.

Economic Snapshot

If you look at the economy and set aside the risks from the trade war, you see a pretty strong current picture; however, some of the positive signs are getting less and less positive. The expansion we have been in for so long could continue a while longer, but it seems to have less wind in its sails than it did just a year ago.

Retail Sales have come in very strong for the first half of the year, on the heels of some of the strongest readings on consumer confidence since the mid-2000s.

The Unemployment Rate, 3.6%, is at the lowest level since December 1969. The labor market remains very tight, and wages are increasing at a pace higher than inflation. This supports the high consumer confidence number and consumer spending, which is such a large part of our economy.

Inflation remains subdued with both headline and core CPI coming in at 2% or less, despite the pickup in wage inflation. Tariffs could start to increase pressure here, but we haven’t seen this flow through to the data yet.

Housing prices have been on the decline over the past year; however, the Federal Reserve’s recent change in stance on interest rates could give another slight temporary boon to this market.

Risks that could increase market volatility

Another breakdown in U.S. China trade negotiations, which could cause an abrupt pullback in markets. The tariffs in place now would start to have longer-term impact on inputs for producing goods. Businesses impacted by the tariffs would have to either cut costs elsewhere – think layoffs and discontinuing of capital expenditures – or pass the price increase along to the end consumer. Either way, this alone could start to push the economy into recession. This wildcard could have far-reaching impacts on our economy and we are closely watching developments..

The Federal Reserve not following through on cutting interest rates, as the markets are currently anticipating. The futures markets have priced in nearly four rate increases over the next 18 months. If the Fed doesn’t cut rates, we may see market rates back on the rise, meaning a short-term potential slowdown in bond returns and some headwinds for emerging market debt.

An escalation in tensions between the U.S. and Iran, which has started to affect oil prices in a negative way, although prices are still lower than they were a year ago. A sharp increase in oil prices affects consumer confidence and spending, while also putting pressure on inflation to the upside. Oil rising very quickly to high levels is often an early signal of recession

Our investment committee meets monthly and informally talks every day, if needed, regarding developments in headline risks and the economy. Sometimes, these discussions result in action, and sometimes, we take a wait-and-see approach, with an eye toward certain indicators. Right now, we continue to monitor the inversion of the yield curve, as well as the weekly initial claims for unemployment insurance from the Federal Reserve Bank of St. Louis. Both data points can be leading economic indicators that may give us some early warning signs. While we think the year should finish in positive territory, we remain cautious with our outlook for 2020.

We continue to hear great feedback on our new Client portal! We have a new instructional video to help you learn how to navigate if you are already using the portal, but also to let you know what information you could see by signing up. If you are interested, please reach out to us so we can send you the link to activate it!

On behalf of everyone here at The Center, we hope you enjoy the rest of your summer!

Angela Palacios CFP®, AIF®
Partner
Director of Investments

Angela Palacios, CFP®, AIF®, is a partner and Director of Investments at Center for Financial Planning, Inc.® She chairs The Center Investment Committee and pens a quarterly Investment Commentary.


Any opinions are those of financial advisor and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. 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 Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond 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. Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it authorizes use of by individuals who successfully complete CFP Board's initial and ongoing certification requirements.

The Gambler

sell buy hold stocks

While I’m not a big country music fan, one of the few country songs I can sing along to is “The Gambler” by Kenny Rogers. While Kenny certainly knew how to make money, he also had a pretty good idea of how to keep it: “You gotta know when to hold ‘em, know when to fold ‘em, know when to walk away, and know when to run.” There’s a valuable lesson for investors in those lyrics. 

Most investors (and professionals, too) spend a lot of time deciding which investments to buy and little time understanding when to sell. It’s crucial to have a security selection process in place, and to understand what you own and why you own it, even if it is just an index mimicking strategy.

Part of your process, even before buying a security, should be to outline reasons you would hold the investment even through downturn periods. This can help you resist the temptation to sell in the wrong moments, for the wrong reasons. It is also important to establish factors that could cause you to sell.

At The Center, some of our reasons to potentially change strategies within a portfolio are: 

Security specific

  • Key personnel departure

  • Attainment of your price target

  • Increased correlation to other investments

  • Deviation from intended outcomes

  • Expenses

Goal specific

  • Change in circumstances (ie. entering retirement)

  • Change in risk tolerance

  • Change in the outcome needed to achieve long-term financial planning goals

Having these points in mind will make thinking about selling a position or changing your overall investment strategy (strategic allocation) easier and much less emotional. 

While it is usually best to buy and hold over longer periods of time, knowing when to hold ‘em and fold ‘em doesn’t come easily. But with some thought, you can make prudent decisions when you buy and when you sell, because you never want to have to walk away … or worse yet … have to run!

Angela Palacios, CFP®, AIF®, is a partner and Director of Investments at Center for Financial Planning, Inc.® She chairs The Center Investment Committee and pens a quarterly Investment Commentary.


Any opinions are those of Angela Palacios and not necessarily those of Raymond James. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Investing involves risk and you may incur a profit or a loss regardless of strategy selected. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

Investment risk is real. Here’s how we manage it.

The Center Contributed by: Center Investment Department

Investment risk is real. Here's how we manage it.

Investment risk is real. Every day. Every year. In up and down markets. Even in good times – when, for example, U.S. Equities are performing well – we all can use this friendly reminder:

The management of investment risk is constant in successful investing.

Benjamin Graham, known as the “father of value investing,” dedicated much of his book, The Intelligent Investor, to risk. In one of his many timeless quotes, he states, “The essence of investment management is the management of risks, not the management of returns.” To many investors, this statement may seem counterintuitive. Rather than an alarm, though, risk may serve as a healthy dose of reality in all investment environments.

Our Take on Risk

How do we at The Center attempt to manage risk as we steward approximately $1.1 billion in assets? We:

We have been managing client assets for more than 34 years. We fully understand and appreciate the importance of investment returns. We also know that risk is an important element when constructing portfolios intended to fund some of life’s most important goals, such as sending a child or grandchild to college, funding a long and successful retirement, having sufficient funds for long-term health needs, and passing a legacy to loved ones.

While no one can guarantee future investment returns, our experience suggests that those who follow our risk management tactics may better stay on track with their financial plans. 

If you are a client, we welcome the opportunity to talk more about how your portfolio is constructed. Not a client? We’d enjoy the opportunity to share our experience and review your goals and risk.


Any opinions are those of Center for Financial Planning, Inc.® and not necessarily those of Raymond James. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Investing involves risk and you may incur a profit or a loss regardless of strategy selected. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

2019 First Quarter Investment Commentary

2019 First Quarter Investment Commentary

I love this time of year. In Michigan, the sun starts shining, and we slowly start to come out of our winter hibernation. It is only this time of year when wearing shorts on a sunny, 45-degree day seems completely logical.

I am always surprised by how different March can be from beginning to end; the old saying I learned in first grade, “March comes in like a lion and goes out like a lamb,” is rarely wrong. It makes me think about how the first quarter of 2019 has come in like a lion and ended like a lamb. 

Much volatility marked the end of 2018. During the last quarter of the year, markets experienced a very sharp correction, pulling back almost 20% from peak to trough for the S&P 500. Then as 2019 ramped up, markets quickly recovered, and the 2018 correction became a distant memory nearly erased from our statements, melting away like the ice from all of those winter storms.

Through the first quarter of the year, the S&P 500 rallied over 13.5%, the MSCI EAFE returned nearly 10%, and the Barclay’s Aggregate US bond index earned a respectable 2.94%.

While the downside in most cases has been nearly recovered for a diversified portfolio, some scars remain and red flags of a weakening economy are popping up (no, they aren’t the kind of flags you see on the golf course).

Yield Curve Inversion?

You may have seen headlines debating the inversion of the yield curve. This is a highly watched recession indicator. Throughout 2018, the yield curve flattened as The Federal Reserve raised interest rates. This year, the flattening has slowly morphed into a potential inversion. In the yield curve chart below, on the left, you can see that very short term rates are higher than even the 10-year treasury rate. However, longer-term rates are still higher, and the two-year yield is not yet more elevated than the 10-year yield, which is the true definition of the inversion. The chart on the right shows how the yield curve looked leading into the 2008-2009 recession. You can see that the long-term rates were no longer upward sloping, but rather flat-to-downward sloping.

 
Source: https://stockcharts.com/freecharts/yieldcurve.php

Source: https://stockcharts.com/freecharts/yieldcurve.php

 

The yield curve isn’t a perfect indicator, as it does from time to time give false signals that are not followed by a recession. However, the flattening and inversion of the yield curve do indicate a shaky economy that is more susceptible to outside shocks.

Many argue this is not a true inversion, and only time will tell. But this indicator does cause us to think a recession could be coming. If the inversion increases, caused most likely by long-term rates falling farther, that would increase our certainty. However, a recession generally follows an inversion by nine months to a year.

The delay happens because an inversion causes banks to tighten their lending standards. Banks make money by lending at a higher long-term rate, paying us on our short-term cash at a lower rate, and keeping the difference as profit. Paying us at a higher rate and loaning at a lower rate makes loans far less profitable. With no room for error in making a bad loan, bank standards become very strict. This alone slows the economy in many ways.

Raymond James Chief Economist Scott Brown recently cited the chart below: “In a simple model of recessions, the current spread between the 10-year Treasury note yield and the federal fund’s target rate implies about a 30% chance that the economy will enter a recession in the next 12 months. At this point, a broad-based decline in economic activity does not appear to be the most likely scenario, but the odds are too high for comfort and investors should monitor the situation closely in the months ahead.” (Source: http://beacon1.rjf.com/ResearchPDF/2019-03/a514efab-1484-4425-9c7a-9db0e0689423.pdf)

 
20190416c.jpg
 

Auto loans showing signs of concern

Auto loans, which hit us close to home in Michigan, have shown early warning signs of trouble. Despite a low unemployment rate and growth in the economy, many people still struggle to pay their bills. As of February, seven million Americans were at least three months behind in their car payments. While the government shut down may be a contributing factor, that is still a shocking statistic and one million consumers higher than in 2010, the last peak coming out of the great recession. The loans in arrears based on percentage don’t look quite as shocking, but the numbers are creeping higher.

 
20190416d.jpg
 

While these and other red flags signal an economic slowdown, we are not yet ready to confirm they signal a recession. Our investment committee is discussing areas of concern within portfolios and where we may want to make adjustments. Areas considered ripe for change include the bond positions.

We have an overweight to what we call “strategic income”, higher yielding positions that carry more credit risk than interest rate risk. While this overweight has worked for many years, we may soon reduce it back to our long-term target and add this into the Core bond portion of the portfolio. Core bonds tend to behave positively in turbulent markets and benefit from the “flight to safety” trade.

Within the core bond space, we have held shorter duration bonds which, during a rising interest rate environment, have less downside pressure as rates rise. Now that the Fed has signaled an end to raising rates for the time being, we have also looked at taking on more duration risk in that portion of the portfolio. When equity markets correct, longer duration bonds tend to perform more positively.

Headline updates:

Brexit receives an extension as Parliament in Britain seized control of the process when the Prime Minister failed, yet again, to put forth a plan lawmakers could support. This resulted in an extension until April 12; in all likelihood, another will be granted.

The Mueller investigation results have come to a close. According to Ed Mills, Raymond James Managing Direct of Washington Policy, “The conclusion of Special Counsel Robert Mueller’s investigation finding no coordination or collusion with the Trump campaign related to Russian election interference, and a Department of Justice verdict seeing no case for obstruction, offers a significant near-term political boost to President Trump, alleviating one of the big unknown DC policy risks on the market. It also has the potential to have a real impact on the President’s remaining first-term agenda, particularly on trade negotiations with China or domestic issues such as the budget or infrastructure.” (Source: http://beacon1.rjf.com/ResearchPDF/2019-03/e0fc4341-4031-486e-a5fa-bcf05d9d7c2b.pdf)

The Federal Reserve officially paused its rate-hiking cycle through 2019. The Fed also has decided to slow, and eventually stop, reducing its balance sheet by selling off the Treasuries it owns. Low rates for longer terms seems to be the theme for the near future. This affects how we will position our bond portfolios. The investment committee will this month discuss the potential of adding more duration to our core bond portfolio. This area also tends to behave positively during market pullbacks and recessions and, usually, the more duration, the better.

Trade talks with China seem to be moving in the right direction, with very slow progress. This will likely continue to hang over the markets for months to come. The next leg up of the equity markets could depend on progress here.

Negative yields around the world again, still? As of the end of February, 17% of the world’s investment-grade debt is trading with negative yields. In Europe, as of the end of March, more than 40% of government debt was trading at a negative yield – making U.S. bonds still the best kid on the block. (Source: Natixis) 

If you are interested in learning more about our process, please don’t hesitate to reach out with a phone call or email or visit the investment management page of our website. We thank you for your continued trust in us!

Angela Palacios, CFP®, AIF®
Partner
Director of Investments

Angela Palacios, CFP®, AIF®, is a partner and Director of Investments at Center for Financial Planning, Inc.® She chairs The Center Investment Committee and pens a quarterly Investment Commentary.


Any opinions are those of Angela Palacios and not necessarily those of Raymond James. 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. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. The case study included herein is for illustrative purposes only. Individual cases will vary. Prior to making any investment decision, you should consult with your financial advisor about your individual situation. 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.

The S&P 500 index is comprised of approximately 500 stocks and is widely seen to be representative of the U.S. market as a whole. The MSCI EAFE index 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 Bloomberg Barclays US Aggregate Bond Index is a broad-based index that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. These indexes are unmanaged and cannot be invested into directly. Past performance is no guarantee of future results.

What Is Tactical Allocation and Why Would I Use It?

The Center Contributed by: Center Investment Department

20190319.jpg

You’re probably familiar with strategic investing, picking the amounts of stocks, bonds, and cash that create the foundation of your portfolio. But you may also want to consider another layer of portfolio management.

Investors who overweight or underweight asset classes as perceived market opportunities arise are implementing a tactical allocation.

Typically, a tactical allocation overlays a strategic allocation to help reduce risk, increase returns, or both.

While we believe that the relationship of valuation between markets over long periods will be efficient and will correspond to fundamentals, we also know that over shorter periods, some markets may become overvalued and other asset classes will become undervalued. It makes sense at those times to use a tactical allocation strategy. When executed correctly, a somewhat modified asset allocation may offer better returns and less risk.[1]

A tactical asset allocation strategy can be either flexible or systematic.

With a flexible approach, an investor modifies his or her portfolio based on valuations of different markets or sectors (i.e. stock vs. bond markets). Systemic strategies are less discretionary and more model-based methods of uncovering market anomalies. Examples include trend following or relative strength models.

With a tactical allocation, keep in mind less can be more. Successful execution of these methods requires knowledge, discipline, and dedication. The Center utilizes tactical asset allocation decisions to supplement our strategic allocation when we identify a compelling opportunity. Our Investment Committee arrives at these decisions based on many factors considered during our monthly meetings.

Want to learn more? Reach out to your financial planner or a member of the Investment Department team to learn how The Center uses tactical allocation to manage your portfolio.


[1] All investing involves risk, and there is no assurance that this or any strategy will be profitable nor protect against loss.

Opinions expressed in the attached article are those of the author and are not necessarily those of Raymond James. 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. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to

Event in Review: 2019 Investment Outlook

With market volatility back, we came together to discuss what occurred in 2018 (particularly in the last quarter) and what we are thinking about for 2019.  If you weren’t able to attend, don’t sweat it, we have the cliff notes for you!

2019 Investment Outlook

On February 27th, 2019, Angela Palacios CFP®, AIF®, Director of Investments, CERTIFIED FINANCIAL PLANNER™, Nick Defenthaler CFP®, Senior Financial Planner, CERTIFIED FINANCIAL PLANNER ™, and Nick Boguth, Investment Research Associate teamed up to tackle these pressing questions and more.

Here is a recap of key points from the “2019 Investment Update”:

  • What spooked the markets last year:

    • Decelerating global growth lead by China

    • Declining earnings growth expectations

    • Higher short term interest rates in the U.S. and other parts of the world

    • Valuations started 2018 in elevated territory

    • UK BREXIT

    • Italian debt concerns

    • Trade issues

    • Government shutdown

    • Mueller investigation

  • What worked last year:

    • High quality fixed income rallied in this market

    • Bond duration – the more the better

    • Defensive & Low volatility stocks held up better than broad markets

    • Dividend paying stocks held up better than non-dividend paying stocks

    • Large cap equities held up better than small cap equities

    • In the last quarter of 2018 emerging and international developed markets held up better

  • Is a recession on the horizon: Recessions are mainly caused by four reasons throughout the world (Inflation, Reduction in exports, Financial Imbalance or commodity price crash). Currently inflation is benign here in the U.S., exports are healthy, financial excesses aren’t present (equity valuations and household debt are moderate), and our economy is highly driven by commodities.  So at this point it looks unlikely in the next year.

  • Yield curve: Flattened dramatically last year while the 2 and 5 year treasury bond yields did invert.  A traditional inversion is between the 2 and 10 year and is the signal usually watched for to telegraph a coming recession. We are keeping a close eye on this as this is becoming a potential concern.

  • Tax reform recap: Nick Defenthaler gave us an update on tax reform looking at the changes to income tax brackets, changes in the standard deduction and deductibility of state and local income taxes. If you’d like to hear more on this please listen in on our Year-end tax planning webinar for the details!

  • Client Portal: A Center for Financial Planning, Inc.® app??!!! We hope you are as excited as we are! Nick Boguth gave a quick demo of our new client portal and document vault. If you are interested in learning more or want to sign up for this service just reach out to your planner!

Angela Palacios, CFP®, AIF® is a partner and 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.

Job Transition and Your Investments

The Center Contributed by: Center Investment Department

We at The Center know that people can be overwhelmed with difficult decisions, especially during stressful life events such as job loss or change.

Job Loss, Job Transition and Your Investments

GM recently announced plant closings and layoffs across the country, which will affect thousands of workers. This hits close to home for those of us in the Motor City and reminds us to look at your investment portfolio, ensure proper allocations, and ask these questions:

Am I close to retirement?

It may be time to scale back your portfolio’s risk. If you are invested within a target date retirement fund, this may already be happening for you.

How long before I have to use this money?

With funds you won't need for more than 5-10 years, you may want to ensure you are taking enough risk to help meet your goals. If you are invested within a target date retirement fund, this may already be happening for you.

What is my ability to take risk?

You may be able to take on more risk if you don't depend entirely on your portfolio. In this case, a target date fund may not be appropriate.

Do I get uneasy or worried when my portfolio drops by a certain percentage and feel the need to take action?

If this affects your decision making, even under normal circumstances, guidance from an advisor during a time of change may help alleviate additional stress.

What Can I do?

Review the investments in your account and your beneficiaries. We often neglect our 401(k) accounts in times of change.

Maintain a diversified portfolio to help stay on track for your retirement goals. Some plans offer an overwhelming number of choices, while other plan offerings seem insufficient to diversify a portfolio. Your advisor can help with your comprehensive investment strategy, especially during challenging times.

When you’ve spread assets among multiple financial institutions, maintaining an effective investment strategy – one that accurately reflects your goals, timing, and risk tolerance – may become difficult. Consolidate, and your financial professional can help ensure these assets are part of an overall allocation strategy that reflects your current financial situation and long-term retirement goals.

For more information on consolidating retirement accounts, read “Simplifying Your Retirement Plans.”


Any opinions are those of the author and not necessarily those of RJFS or Raymond James. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Expressions of opinion are as of this date and are subject to change without notice.

Every type of investment, including mutual funds, involves risk. Risk refers to the possibility that you will lose money (both principal and any earnings) or fail to make money on an investment. Changing market conditions can create fluctuations in the value of a mutual fund investment. In addition, there are fees and expenses associated with investing in mutual funds that do not usually occur when purchasing individual securities directly.

2018 Fourth Quarter Investment Commentary

2018 4th Quarter Investment Commentary, Volatility, Interest Rates, Shutdown Slowdown, China Trade Negotiations, Global Concerns

The 2018 wild ride!

We’d love to see you at our investment outlook event on Wednesday, February 27th from 11:30am-1pm for lunch and a full update on 2018 and the year ahead.  You can register here

How times have changed! As I write this, I often like to look back and see what I was thinking about last year at the same time.  In the fourth quarter of 2017, we were talking about how low volatility had been for an extended period and that it was unlikely to continue.  Unfortunately, we were right.  In 2017, we had only eight sessions where the S&P 500 moved up or down more than 1% (versus the average which is 53 days in a given year since 1958)!  In 2018 the number of days up or down more than 1% numbered closer to 60.  While more than average, this is closer to average volatility than we had grown accustomed to.  December is usually the least volatile month on record but this time registered more than it’s share of wild swing days for the year. 

Volatility

While we tend to love unlimited volatility on the upside, we greatly dislike downside volatility. According to behavioral finance experts Daniel Kahneman and Amos Tversky we hate the downside about twice as much as we love the upside or loss aversion.This is a concept that is embedded deeply within our investment strategy. We work to design portfolios that prevent you from making short-term decisions that contradict your long-term goals. Diversification is a key part of this process. Up until the last quarter of 2018, this was a strategy that had long been out of favor in this bull market for US Large companies. However, we started to see the benefits return. Below is a chart showing returns for 2018 broken down a few different ways and for several different benchmarks. The first section is Year-to-date (2018 full year) returns. For the year, the Barclays Aggregate was the clear winner as it was up slightly (blue bar). However, for the first three quarters of the year, it was the clear loser except for emerging markets (EM had been 2017’s, clear winner). It wasn’t until the last quarter, when volatility struck, that bonds were able to shine. The S&P 500 (US large companies) and Russell 2000 (US small companies) indexes were the exact opposite story. For the first three quarters of the year, the rally continued in a strong way with these markets up well over 10%. Once volatility struck, this meant these markets also had the farthest to fall and experienced the most downside in the last quarter of the year giving back all of their prior returns and then some for the year. It is an excellent reminder of the importance of diversification.

Source: Morningstar Direct

Source: Morningstar Direct

So what has this market so spooked?

Interest rates

The Federal Reserve raised rates for the fourth and final time of the year in December but also lowered its expectations for rates moving forward. Economic data is little changed, but The Fed’s reaction to the data shifted more dovish. The Fed is concerned that by raising too far, too fast they will invert the yield curve.  They recognize it may be necessary to slow down.   The yield curve hasn’t inverted quite yet (this is defined by the two-year being higher than the ten-year yield) but it has gotten much closer to this scenario.  This is generally a good indicator that a recession is on the horizon but has not given this signal yet.

Shutdown Showdown

Democrats took control of the House on January 3rd as the government shutdown continued.  President Trump and the Senate don’t seem to be willing to bend on their request for money for the border wall while Democrats just as strongly oppose.  Ultimately, one side will have to bend to get the government fully back up and running and neither seem to have any incentive to make this happen yet.  Markets generally aren’t rattled by government shutdowns unless they are prolonged. However, right now, everything seems to be rattling the markets.  I don’t think you can specifically point to the government shut down as being a leading market concern but it is definitely on the scorecard.  The longer it extends, the more it will erode consumer and investor confidence too.

China Trade Negotiations

Trade negotiations seem to be moving along, but this is a slow process.  U.S. based companies are starting to report reduced sales into China, so we are beginning to see a direct effect to stock prices of domestic companies.  There is talk of a hard deadline in these discussions of March 1st because if some negotiations have not come to a close by then, the U.S. will impose another round of tariffs on Chinese imports. 

Global concerns

Brexit negotiations continue to stir up markets as it is not going as well as planned.Article 50 of the Lisbon Treaty was invoked on March 29, 2017.The UK has two years from this point to leave the European Union.So the deadline is fast approaching on March 29, 2019.Here is a helpful timeline of what is to come. Brexit is sure to cause some waves in the next few months.

 
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To top off the global concerns, the Italians are making headlines again with debt concerns.  And just as interest rates are rising here at home, they are starting to rise overseas.  Finally yet importantly, the result of the Mueller investigations will come out soon.  This could cause a temporary shakeup in markets depending on what their findings are.

It is interesting to note that these headlines have existed for much of the year.  Up until early October, the US stock market seemed to brush them off in the wake of lower taxes.  However, lower taxes could only distract for so long until these headlines started to spill over into investor sentiment, which became clear in October.  It is important to remember to stay invested even through volatile events.  Missing the biggest up days can be devastating on your long-term returns and, true-to-form, we experienced many of those for 2018 when the markets appeared at their bleakest moments in the fourth quarter.  It is quite common that the largest up days occur during periods of downside volatility. 

We are happy to discuss your portfolio with you at any time you may feel uncomfortable with market swings.  We are monitoring your investments, making periodic changes when warranted and pro-actively rebalancing to take advantage of swings in the markets, both up and down.

We thank you for your continued trust.  Have a wonderful 2019!

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.


https://www.zerohedge.com/news/2018-12-04/neutoric-market-sp-has-risen-or-fallen-1-or-more-20-days-quarter https://www.bbc.com/news/uk-politics-32810887 Freedom Presentation by Nick Lacy, CFA, Chief Portfolio strategist.
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 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 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.
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Any opinions are those of Angela Palacios and not necessarily those of Raymond James. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete. Expressions of opinion are as of this date and are subject to change without notice.
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Mid-term Elections and the Market: 2018 Outcome

The Center Contributed by: Center Investment Department

Mid-term Election and the Market: 2018 Outcome

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.”


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.