Investment Commentary - 3rd Quarter 2012

Stock returns as measured by the S&P 500 were in the hole for the quarter coming into June. They rallied somewhat for the month so that those invested accordingly had the potential to recover some.  This time of year also marks some of our most intense research activities including the Morningstar Investment Conference. I summed up our thoughts on portfolio positioning and the Eurozone in a special June update so I'd like to discuss some new trends and themes today.

A laundry list of news items are catching our attention today. They converge to create a growing tally of changes at the margin which may have investment implications for you.

• We've sent you several communications about the changes to General Motors and Ford pensions. Even if you are not directly impacted, there may see similar changes if you have a defined benefit plan. Analysts believe that this is the start of a new wave of offloading pension obligations and that more announcements from other companies may follow. Our experiences show that the decisions to take a pension or lump-sum buyouts is largely personal and complex based upon your overall financial situation.

• Around the world, interest rates have been falling as slowing growth in China and EuroCrisis have been answered by government intervention. This may be one of the reasons that the MSCI EAFE is flat on the year in spite of dire headlines overseas. While interest rates would be challenged to go lower in the US, there is some room for government intervention around the world, especially in emerging markets -- think of Brazil as an example.

• A surprising slowdown in overall US debt growth has been occurring under our nose. No, the US federal debt load keeps growing, but there has been measurable deleveraging on the state and household levels. Some of this has come through the painful process of personal bankruptcy and foreclosures. States and municipalities have been practicing their own austerity with layoffs and less borrowing.

• The Affordable Care Act was largely upheld by the Supreme Court last month. This will have implications for Americans of all walks of life. For some of you some of the implications will be investment-related due to the 3.8% surtax on investment income in higher earnings brackets. This increase on investment income may not be the end given the pending expiration of "Bush" tax cuts. The coordination between tax strategy and investment management will become more and more critical in coming years.

• Scandalous headlines resurfaced at big banks, most recently JP Morgan and Barclays. JPM disclosed that it had major losses due to poor risk controls in exotic trades. The Barclay's LIBOR scandal is in its early days and may be much larger than it appears on the surface. Essentially, Barclay's has admitted that it fudged reports of borrowing costs over the last five years. Many Americans may have been negatively impacted since adjustable loans linked to LIBOR are widespread for mortgages, student loans, and car loans.

  We live in a heavily regulated financial world. I know this as much as anyone as each of these messages to you is reviewed in-depth by a compliance department prior to publishing. If I had my druthers, my day would involve less red tape and easier direct communication with you. The continued misbehavior of corporations and individuals alike seems to justify at least some of this burdensome regulation.

As the election season heats up, Angie Palacios, CFP®, Portfolio Coordinator, has focused her MoneyCentered blog posts on politics and investing. Click here to read the series.

Speaking of politics, I recently heard Columbia University Professor of History Eric Foner in an interview discussing Abraham Lincoln's presidency and leadership strengths. He mentioned that one of Lincoln’s strongest character traits was the ability to change his mind on critical issues. “Lincoln was a flip-flopper, if you want to use the terminology of modern politics.” While a politician today is accused of something close to political treason each time they tweak or change their mind, I value the ability to keep an open mind as an investor.

We think long and hard about what would be best for you as our clients and what worked yesterday may not always work tomorrow. We take the changing investment landscape into consideration as we make investment decisions while we will stick with our process which encourages us to analyze and evaluate risks and opportunities for you. Perhaps if our elected officials were afforded the same flexibility there would be more compromise and less frustration with our nation’s capital. 

I always enjoy hearing from those of you who are reading these investment updates. Don't hesitate to let me know if you have any questions, comments, or suggestions for future topics.

On behalf of everyone here at The Center,

Melissa Joy, CFP®
Partner, Director of Investments
Investment Advisor Representative, RJFS

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The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Melissa Joy, CFP® and not necessarily those of RJFS or Raymond James. 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.

Investment Commentary - 2nd Quarter 2012

Stock investments roared into 2012 with the S&P 500 closing the first quarter up 12.59%. International markets also posted strong quarterly returns as investors seemed to feel that Greece compromises helped to avoid a chaotic default and seemed to buy some breathing room. The quarter was also notable formuted volatilityin equities. While stocks zoomed, bonds stalled and their returns were relatively unchanged.

Source: Morningstar Direct

Economic data seems to be disappointing bulls and bears alike. Pessimists are predicting recession, but leading indicators continue to suggest that things are getting better. Those more naturally optimistic are looking for better employment numbers and decisive growth. We break down unemployment trends here.For now, we think it’s best to be constructive and cautiously optimistic.

The exceptionally strong market returns of the last six months may mean that it’s time for a breather, or (in market speak) consolidation. Longer term, balance sheets and stock earnings continue to indicate corporate health. Another indicator, University of Michigan Consumer Sentiment, shows recovery off of depressed lows over the summer, but is below the 30-year average. Keep in mind that stock dividends are rivaling Treasury bond yields and we are comfortable maintaining neutral allocations to stocks.

As the saying goes, “Don’t fight the Fed” and Operation Twist coupled with European Central Bank liquidity injections seem to be helping to support modest growth. On April 11th, Vice Chairman of the Fed, Janet Yellen, indicated that low rates could extend beyond 2014if the pace of growth fails to accelerate. For more on the impact of recent Quantitative Easing on stocks, click here.

The lackadaisical recovery and Fed accommodation may be buying time for bondholders as the Fed works to keep interest rates low. Data shows that investors have continued throwing money into bonds in spite of the threat of rising interest rates. This may be good news for stocks as strong returns were not driven by investors “crowding in”. Conversely, the nearly insatiable public demand for bonds gives us pause. Those relishing the relative comfort that bond investments have offered in the past thirty years may want to reconsider future assumptions. Learn more about our concerns in bond markets and how we’re investing here.

We’ve just completed a blog series that discusses components of our investment process that you might find helpful.

Introduction: The Investor’s Chief Problem

Strategic Allocation: Building Your Foundation

Tactical Allocation: Deck the Halls with Tactical Allocation

Types of Investments: Time to Declutter

Buy Process: Salad Surprise

Sell Discipline: The Gambler

Rebalancing: Game Plan

If you have topics you would like us to cover in the future, please let us know! As always, we appreciate the opportunity to meet your financial planning and investment needs. Thank you!

Sincerely,

Melissa Joy, CFS

Partner & Director of Investments

Financial Associate, RJFS

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any 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 Melissa Joy and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. 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. Past performance may not be indicative of future results. Please note that international investing involves special risks, including currency fluctuations, different financial accounting standards, and possible political and economic volatility. U.S. government bonds and Treasury bills are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise. All indexes are unmanaged and an individual cannot invest directly in an index. Index returns do not include fees or expenses. Dividends are not guaranteed and must be authorized by the company’s board of directors.

Hello 2012!

If you extrapolate last year's lessons, diversification could be seen as the biggest threat to a portfolio. Traditional US Large Company Stocks and US Government Bonds sprinted past limping "diversifiers" such as international stocks, non-traditional bonds, and alternative investments. Over history, clients have generally benefited from diversification. But this pillar of investment discipline turned into a headwind last year.

For equity investors, flat domestic returns did not tell the whole story. Consider that the return of the S&P 500 index last year was 2.1% including dividends. US Companies took a roller coaster ride to get back to their starting point - disappointing summer news was eventually overcome by maintained slow growth and exceptional corporate profits.

Source: Morningstar, Inc.

For investors,

staying the course was a challenging proposition last year. The return landscape was even more challenging for portfolios with exposure to international markets. A natural disaster and nuclear situation in Japan first set things on edge followed by enduring concerns about debt which continues to engulf the Eurozone.

Bonds were king in 2011

with long bonds issued by the US government ruling the roost. Key interest rates found new lows (insert hyperlink to interest rate chart from RJ). This was helpful if you were in the position to refinance your mortgage and was also helpful from a portfolio perspective. However, those investors who anticipate a rate rise in the future and have positioned portfolios to attempt to minimize the risks did not fully participate in the boom for fixed income investments.

Our resident economist,

Angela Palacios, CFP ®, notes that unemployment has continued its downward trend since August and is currently at 8.5% nationally which is the lowest level in more than three years according to the United States Department of Labor, Bureau of labor Statistics. Retail, manufacturing, transportation and health care are a few of the sectors enjoying job growth. Based on initial claims so far this month it also looks like we will see another decline in the rate even though it is normally high in the first two months of the year with temporary holiday workers being laid off. This reduction in unemployment is a lagging indicator of the economy showing the pickup in economic growth even though it may be slow.

Short-term lessons don't always help investors focused on the long-term results. We still believe there are critical benefits to diversification and maintain portfolios with a variety of distinctive asset categories and strategies. Our process-driven investment strategy is also designed to avoid performance-chasing sirens in favor of disciplined investing.

Sincerely,

Melissa Joy, CFS

Partner, Director of Investments

Financial Advisor, RJFS

Inclusion of these indexes is for illustrative purposes only. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. The S&P 500 is an unmanaged index of 500 widely held stocks that's generally considered representative of the U.S. stock market. The Barclays Capital Aggregate Index measures changes in the fixed-rate debt issues rated investment grade or higher by Moody's Investors Service, Standard & Poor's, or Fitch Investor's Service, in that order. The Aggregate Index is comprised of the Government/Corporate, the Mortgage-Backed Securities and the Asset-Backed Securities indices. The Russell 2000 index is an unmanaged index of small cap securities which generally involve greater risks. The Dow Jones Industrial Average (DJIA), commonly known as “The Dow”, is an index representing 30 stock of companies maintained and reviewed by the editors of the Wall Street Journal. Russell 1000: Measures the performance of the 1,000 largest companies in the Russell 3000 Index. MSCI EAFE (Europe, Australasia, Far East): A free-float adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States and Canada. The EAFE consists of the country indices of 21 developed nations. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any 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 Center for Financial Planning, Inc. and not necessarily those of RJFS or Raymond James. Diversification does not assure a profit or protect against loss. Investments related to a specific sector, where companies engage in business related to a particular industry, are subject to fierce competition, the possibility of products and services being subject to rapid obsolescence, and limited diversification. 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, including the loss of all principal.