Will the Bull Market Run out of Gas Soon?

 18 months ago, I wrote about “3 bull market killers still not being present” in this market, but now the landscape is changing ever so slowly.  I still get questions from clients and others regarding the market being high. I say, consider these factors:

•  The market’s nominal price has made over 50 new all-time highs since my last writing of this blog.
• 20 years from now, with an average annual gain of 9% per year, the equity market could be looking at a DOW JONES average in the 100,000 range – while 20 years ago, the Dow Jones was hovering around 4,000 (this is a hypothetical example for illustration purposes only. Actual results will vary).
• 12 of the last 20 years the Dow did not make a significant new high, but still averaged almost 10% a year.

Those numbers don’t tell the whole story. So when I’m asked, “Do we still have time before this bull runs out of gas?” I look at the gauge and start getting uncomfortable because of three markers.

3 Bull Market Markers to Watch

The three things that tend to kill a bull market are inflation, interest rates, and valuations. Only one of these is present now. First look at inflation, where we are tracking at one of the lowest rates in history -- less than 2% annually. Then check out interest rates, which are still at the lowest levels in history. Consider that the 10-year treasury at just over 2%. And finally, look at equity valuations -- these measures are just over the historical averages of 15 times earnings. 

History as our guide would tell us that until all three of the bull market killers are present this bull is still alive, but aging.

Matthew E. Chope, CFP ® is a Partner and Financial Planner at Center for Financial Planning, Inc. Matt has been quoted in various investment professional newspapers and magazines. He is active in the community and his profession and helps local corporations and nonprofits in the areas of strategic planning and money and business management decisions. In 2012 and 2013, Matt was named to the Five Star Wealth Managers list in Detroit Hour magazine.

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Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James. 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. Past performance may not be indicative of future results. C14-033941

Where are we in the full market cycle?

Cycles exist everywhere.  One of the first cycles we learn about as a child is the water cycle or the journey of a raindrop. There’s something about the circularity of cycles that I just love.

The economy and financial markets also cycle. An economic cycle is the periodic ebb and flow of economic growth like Gross Domestic Product or employment.  According to the National Bureau of Economic Research the average economic cycle lasts a little less than six years.  This span is measured both from one peak to the next peak or one trough to the next trough.  While six years is an average, the cycle can be much quicker or much longer than six years. 

The Cyle of Economic “Seasons”

The various stages of the economic cycle can be thought of like seasons of the year as shown in the chart below.  From winter, or recession, where jobs are lost and the economy is shrinking to summer, where growth is accelerating and jobs have been recovered. 

Every quarter we take a poll at The Center to see where team members think we fall in this spectrum.  Our consensus is that we believe we are in the midst of summer meaning that this bull still has some room to go as we are still lacking some keys signs of a maturing economy like inflation and volatility.

Stock Market Cycles

The stock market also goes through cycles and, along with it, investor emotions ebb and flow.  Usually the stock market cycle is slightly ahead of the economic cycle meaning that market indexes often peak before the economic cycle peaks.  Our latest survey of our employees placed the stock market cycle near excitement in the picture below.  At this point (excitement/thrill/euphoria) investors start to question why they don’t have more aggressive positions because they have clearly performed very well and many even start to shift their portfolios in this direction.  As Warren Buffett said”

“Be fearful when others are greedy and greedy when others are fearful.”

Refocusing on the Long Term

This is the point when it is most important to stay in a diversified portfolio, not abandon your long-term investment objectives while reaching for more returns. Rebalancing at these market extremes may go against what investors want to do, for example, selling your stock positions to buy more bonds right now or selling your bonds in 2009 to buy more stocks. However, going against these basic emotions have potential to be the best decisions you can make for your portfolio.  Navigating these emotions is the single most difficult road block to the success of an investment strategy.  While markets and economies will cycle as long as water continues to cycle, having sound financial advice during these market extremes can make big difference in the success of your long-term financial plans. 

Angela Palacios, CFP®is the Portfolio Manager at Center for Financial Planning, Inc. Angela specializes in Investment and Macro economic research. She is a frequent contributor to Money Centered as well asinvestment updates at The Center.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Angela Palacios and not necessarily those of Raymond James. 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. Investing involves risk and investors may incur a profit or loss regardless of strategy selected. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Angela Palacios and not necessarily those of Raymond James. 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. Investing involves risk and investors may incur a profit or loss regardless ofstrategy selected. C14-031971

Investment Commentary - September 2014

Clients and Friends,

While much of our communications with you in the last few months have been about The Center’s recent move, our intensive investment focus is always present. The last few months were marked by many insightful conversations with portfolio managers and investment professionals. This reminds me that at our core, our investment process is focused on good old fashioned research whether it comes to the way we construct asset allocation mixes or how we select investments for your portfolios.

Here is some news for you from our investment team:

• We’re more than halfway through 2014 and the financial markets have picked up where they left off last year. Not only are stocks measurably higher this year, but bonds have made a rebound with positive returns as well. We’ve got a new one-page investment dashboard that sums up the current investment world. We’ll update this one-pager each quarter going forward. Let us know what you think of the new look and feel.

• Angie Palacios, CFP® provides a great recap of the Morningstar Investment Conference which is held in Chicago each June. This is a can’t-miss conference each year and 2014 was no exception. She includes notes about employment predictions for the US economy and focus on international as some of the key takeaways this year.

• Our quarterly investment pulse includes recaps from four meetings held here and around Detroit and highlights the extraordinary access we’re able to get to investment professionals because of size and reputation. I particularly enjoyed a meeting with Joseph Brennan and Lee Norton from Vanguard. The discussion was broad and interesting including how Vanguard, known for their preference for indexes, identifies active investment managers for their offerings.  With several other top-notch investors giving us time for lengthy discussion, you can see the quality of discourse we are privileged to entertain.

• Matt Chope shares insight from a conversation with one of his favorite investors – Charles de Vaulx – who is a portfolio manager with IVA.

Do you have investment-related questions for us? Please don’t hesitate to let me or your financial planner know. Thanks again for your trust and commitment to The Center for the opportunity to work with you to pursue achievement of your financial goals!

On behalf of everyone at The Center,
Melissa Joy, CFP®
Partner, Director of Wealth Management
CERTIFIED FINANCIAL PLANNER™

Melissa Joy, CFP®is Partner and Director of Investments at Center for Financial Planning, Inc. In 2013, Melissa was honored by Financial Advisor magazine in the Research All Star List for the third consecutive year. In addition to her contributions to Money Centered blogs, she writes investment updates at The Center and is regularly quoted in national media publications including The Chicago Tribune, Investment News, and Morningstar Advisor.

Financial Advisor magazine's inaugural Research All Star List is based on job function of the person evaluated, fund selections and evaluation process used, study of rejected fund examples, and evaluation of challenges faced in the job and actions taken to overcome those challenges. Evaluations are independently conducted by Financial Advisor Magazine.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Melissa Joy and not necessarily those of Raymond James. 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. Investing involves risks and investors may incur a profit or a loss regardless of strategy selected.

Is now the time for Active Management to shine?

 What is active and passive management?

Active management is an investing strategy in which investment professionals strive to outperform specific benchmarks. Passive management is an investing strategy that attempts to mirror the return pattern of a specific benchmark.

Can active managers actually outperform benchmarks?  The debate between active and passive management is not new, but in my research on these two very different management styles, I uncovered something that actually caused my jaw to drop.  I found research from Vanguard showing that just as markets are cyclical, there are cycles to management.  Sometimes active management wins, but passive management outperforms at other points, as shown in the chart below.  Over the past 10 years, every time interest rates went up (the orange line), the percent of active fixed income managers that beat their index also went up (the yellow line). 

Benchmark used: Barclays U.S. Government Bond Index

Over the past 10 years (and looking beyond this chart, the past 30 years) interest rates have been on a downward march, making it difficult for active managers to add value over their fees for a very long time.   There have been brief periods of rising rates though as shown in the chart above.  

What does this mean now for portfolios now?

Interest rates are near 30 year lows.  While I don’t believe they will go much lower they should soon start to trend upward…though it could be tomorrow, next month or a year from now.  A bet on passive investing in fixed income, at this point, is against the odds in an environment with such low and potentially increasing rates.  Active managers may have their chance to shine after what has seemed like a period of prolonged underperformance to their benchmarks.

Angela Palacios, CFP®is the Portfolio Manager at Center for Financial Planning, Inc. Angela specializes in Investment and Macro economic research. She is a frequent contributor to Money Centered as well asinvestment updates at The Center.

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Source: “The Active-Passive Debate: Market Cyclicality and Leadership Volatility”, Vanguard Research July 2014

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James. 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. Every investor’s situation is unique and investors should consider their investment goals, risk tolerance and time horizon before making any investment decision. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Indexes are unmanaged and cannot accommodate direct investment. C14-027422

Searching for yield outside savings accounts, CDs or treasuries

 A few nights ago my 7-year-old daughter and I sat on her bed and opened up her “Ariel the Mermaid” coin bank as it was starting to overflow.  While we were rolling up the coins she asked, “What are we going to do with this money?”  I explained we are going to the bank and deposit it into her account and, in exchange for holding it, they will pay her more money.  Her eyes lit up and she asked how much. Putting it as simply as possible, I explained that her $20 bill would earn about $.05 in one year.  She looked at me with her brow furrowed and said why would I do that? 

Why, indeed, is a good question many savers are asking themselves today.  People are feeling compelled to take much more risk in order to earn what a simple savings account was paying me when I was a teenager.

Seeking Higher Returns

During the recent Morningstar Investment Conference, many portfolio managers were expressing concerns on this vey topic.  Investors have gravitated toward high yield and floating rate bonds at alarming rates in the past few years in the absence of a reasonable interest rate from the savings accounts, CDs or treasuries. The chart below shows how many billions of dollars have flowed into strategies that invest in floating rate (blue bar) and high yield bonds (gray bar) each of the last ten years. You can see the spike in the past five years as rates were driven to historical lows by the Federal Reserve.

1^st Quarter JP Morgan Guide to the Markets; Flows include ETFs and are as of May 2014. Past performance is not indicative of comparable future results.

Many investors don't realize that high yield bonds are highly correlated to stocks and when stocks go down these types of bonds will also likely take a hit.  Even more concerning managers like Ben Inker of GMO and Michael Hasenstab of Franklin Templeton, see a lack of liquidity in this market.  This means if they do start to go down and people start running for the exits, there may be no willing buyers in the marketplace until the prices get low enough, resulting in potentially amplified losses to the investors left holding the bonds.  Suddenly the 4.9%* interest rate doesn't sound high enough for taking on that level of risk.  These types of investments should be no substitute for a regular savings account even though the interest rates are embarrassing!

So while my daughter may never know compelling savings accounts yields in her childhood, I still find teaching her this simple process of money and saving an invaluable lesson to start at a young age!

*Yield on Barclays Capital Corporate High Yield Index as of 6/30/2014

Angela Palacios, CFP®is the Portfolio Manager at Center for Financial Planning, Inc. Angela specializes in Investment and Macro economic research. She is a frequent contributor to Money Centered as well asinvestment updates at The Center.

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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 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. Bonds are subject to interest rate risks. Bond prices generally fall when interest rates rise. High-yield (below investment grade) bonds are not suitable for all investors. When appropriate, these bonds should only comprise a modest portion of your portfolio. All indexes are unmanaged and an individual cannot invest directly in an index. Index returns do not include fees or expenses. The Barclays Capital High Yield Index covers the universe of fixed rate, non-investment grade debt. Pay-in-kind (PIK) bonds, Eurobonds and debt issues from countries designated as emerging markets (e.g., Argentina, Brazil, Venezuela, etc.) are excluded, but Canadian and global bonds (SEC registered) of issuers in non-EMG countries are included. Original issue zeroes, step-up coupon structures, and 144-As are also included. Michael Hasenstab, Ben Inker and GMO are independent of Raymond James. C14-022057

Strategy for an Intra-Year Market Drop

 With minutes remaining in the game, my youth hockey team had just scored, sending the nail-biter state championship into overtime. I was 11 then, and I remember the packed stands full of parents waving signs and pom poms. The other teams were even cheering us on. Only a few minutes into overtime, I watched the puck deflect off our own player's skate into the net, ending the game and our season in agony. Through the tears and heartbreak, I'll never forget what coach said to us, "we didn't play our game." Not the most comforting line after such a loss, but it was 110% true.

That year, our team had been undefeated until our final opponent took us down. The reason we were so successful was because we had a game plan that worked for us and we stuck to it. It wasn't anything fancy; we just did the simple things really well and were consistent. If we had our backs against the wall or faced adversity during a game, we stayed true to what we knew about winning. But that's not what we did when it mattered most. We let a very good team get into our heads and it caused us to make bad decisions. We didn't stick to the game plan that had provided us with so much success through the season - something that can also easily happen to investors during a market pullback or a time where there is fear and uncertainty. 

At the Raymond James national conference in Washington D.C. in May, I listened to a JP Morgan presentation about past, present, and projected market conditions. The most intriguing fact I heard was this:

Since 1980, the average intra-year market decline has been 14.4%. However, 27 out of those 34 years, the market has closed the year positive.

So what does that tell us? To me, it highlights the importance of having a game plan and a strategy and sticking to it. The market will not always move in a straight line up like we have seen over the past few years, so being prepared for bumps along the ride is imperative. As my hockey team experienced, when you begin to deviate from a disciplined strategy, bad things can happen.

Making knee jerk decisions during difficult times can cause you to stray off your path to financial independence. This is when we, your financial planners, step in as coach to talk you through the game plan that we have helped you establish. It is a team effort and working together through the good times and bad is what we do best for our clients.

Nick Defenthaler, CFP® is a Associate Financial Planner at Center for Financial Planning, Inc. Nick currently assists Center planners and clients, and is a contributor to Money Centered and Center Connections.

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Past performance may not be indicative of future results. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Keep in mind that individuals cannot invest directly in any index. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of RJFS or Raymond James. C14-019163

What should I do with bonds if interest rates go up?

 Lately the bond markets have been making headlines.  It’s no secret that we, as a country, are in a historically low interest rate environment and, as a result, a lot of so-called “experts” are talking about rising interest rates in the near future.  These experts usually go on to state that if interest rates begin to rise and you have bonds you could face substantial losses.  Unfortunately, like many things in finance, this type of blanket statement is misleading because not all bonds are created equal! 

Traditional Bonds

First, let’s dissect their argument to understand why an investor might lose money in a rising interest rate environment. Bonds are typically issued by a government, a municipality, or a corporation.  These entities need money for a variety of purposes and one way they can get that money is by taking a loan from investors.   In exchange for an investor loaning that money to these entities, there is a promise to pay back the original loan amount (principal) as well as an interest rate paid on that principal over the life of the loan.  The challenge and the risk to current bond investors is that if interest rates begin to rise, the traditional bonds they hold might not look as attractive to new potential investors.  If you think about it, why would I, as a new potential investor, want your bond paying an interest rate of 3.5% when I can buy a new bond from the same company (or government/municipality) paying 4.5% today?  Assuming all else is equal except the rate of interest, then I think the answer is pretty clear. It would be silly for me to purchase a bond paying 1% less. 

So how does the bond holder with the unwanted 3.5% bond get rid of it?  The answer is he has to sell it at a reduced price.  This reduction in price is the big risk that experts keep referring to.  It’s important for investors to remember that if you hold individual bonds you will get your principal back at maturity as long as the company stays in business and doesn’t default.  Regardless of what your statement says the bond is worth at any given time, that value or number only applies if you choose to liquidate the bond at that exact point in time.  

Hopefully, this very simplistic example helps you understand the inherent risks involved with more “traditional” bonds and a rising interest rate environment.  As I said, not all bonds are created equal, and some types will probably benefit from a rising interest rate environment. 

Floating Rate Bonds

It’s probably clear by now that the biggest issue, in a rising interest rate environment, is the fixed rate of interest that “traditional” bonds pay.  If rates started to rise, and the interest rate on your bond rose along with it, then you probably wouldn’t have to discount your bond much, if at all. 

So are there bonds out there that can rise as overall market rates rise?  Yes! They are called floating rate bonds.  A floating rate bond typically “resets” its interest rate annually, although some will reset more frequently.   Because of this “reset” floating rate bonds can be a very attractive investment option when overall interest rates are projected to rise in the near term.  Please keep in mind that floating rate bonds aren’t without risk of loss…the point is just that they typically maintain their secondary market value even when interest rates rise.

Now that you have read this, the next time you see the headlines that claim bonds are bad and to avoid them like the plague, you should have a good sense of what type of bonds they are referring to.  Also, know that it is still possible to make money in bonds in a rising interest rate environment!  Floating rate bonds may or may not be suitable for your portfolio.  In order to make that determination you would need to perform a total portfolio analysis in coordination with your financial professional.

Matthew Trujillo, CFP®, is a Registered Support Associate at Center for Financial Planning, Inc. Matt currently assists Center planners and clients, and is a contributor to Money Centered.

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As with any fixed income investment, there is a risk that the issuer of a floating rate investment will be unable to meet its payment obligations. In addition to the risk, floating rate bonds also face the following risks:

Reference rate risk: While the market value of a floating rate bond under normal circumstances is relatively insensitive to changes in interest rates, the income received is, of course, highly dependent upon the level of the reference rate over the life of the investment. Total return may be less than anticipated if future interest rate or reference rate expectations are not met. It is also important to note that since short-term rates are usually lower than long-term rates, the initial coupon of a floating rate bond is typically lower than that of a fixed-rate bond of the same maturity.

Call risk: A floating rate bond may be issued as either non-callable or callable. If a callable floating rate bond is called by the issuer prior to maturity, the investor may be unable to reinvest funds in another floating rate bond with comparable terms. If the floating rate bond is not called, the investor should be prepared to hold it until maturity.

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. 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. C14-013999

A Timely Reminder About 529 College Savings Plans

With school now out for most universities, who would want to talk about college planning?  But I couldn’t pass up 5/29 without discussing 529 plans!  All corny jokes aside, a 529 college savings plan is a fantastic vehicle to utilize for higher educational costs and something that all parents that plan on sending kids to school should at least consider.   

A 529 is a state sponsored educational savings account where the money in the account grows tax-deferred.  One of the major benefits of the account is that the funds are not taxed upon withdrawal (even growth), as long as they are used for qualified educational expenses (tuition, room & board, books, etc.)  A 10% penalty and ordinary income taxes would apply to any earnings portion of non-qualified distributions.  Many states (including Michigan) also offer a state tax deduction on contributions, up to a certain limit, which is an added bonus for the owner of the account.    

To maximize the benefits of a 529 plan, young parents can establish the account early for their children to allow for many years of potential growth. Typically, as the child approaches the first year of college, the plan becomes more conservative.  If other family members would like to assist with college expenses, they too can open an account for the child.  The child is the beneficiary of the account and the account owner or “custodian” is the person in charge of the account.  Unlike an UGMA or UTMA (which used to be a very popular savings account for school), the child does not automatically have access to the account at age 18 or 21. The custodian has complete control.  The beneficiary can also be changed on the account at any time, but typically this occurs if the child gets a scholarship or decides to not attend college.  This provides flexibility so the money can still be utilized for educational expenses for another child or family member.

As with any financial planning decision, a 529 may or may not make sense for your personal situation.  However, it is a great tool and resource to consider when taking on the challenge of saving for college.  If you ever have any questions about college planning or would like to dig a little deeper, don’t hesitate to contact us. That’s why we’re here!

Nick Defenthaler, CFP® is a Associate Financial Planner at Center for Financial Planning, Inc. Nick currently assists Center planners and clients, and is a contributor to Money Centered and Center Connections.

Investors should carefully consider the investment objectives, risks, charges and expenses associated with 529 college savings plans before investing. More information about 529 college savings plans is available in the issuer’s official statement. The official statement is available through your financial advisor, and should be ready carefully before investing. Rules and laws governing 529 plans are varied and subject to change. There is a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Before investing, it is important to consider whether the investor’s or designated beneficiary’s home state offers any state tax or other benefits that are only available for investments in such state’s qualified tuition program. Investors should consult a tax advisor about any state tax considerations of any investment in a 529 plan before investing. C14-015839

Trades in a Flash: The High Frequency Trading Debate

Imagine making a trade in less than the blink of an eye. That’s called High Frequency Trading (HFT) and it has generated a lot of buzz lately. HFT trades are executed between 2 and 7 milliseconds … we’re talking one thousandth of a second (1/1000).  There are as many milliseconds in one second as there are as many seconds in 16.67 minutes.   

High Frequency Trading Changing the Spreads?

There is a pretty lively debate going on right now between proponents of HFT and some outspoken critics.   Proponents of HFT claim that it’s good for the markets because it creates a lot of liquidity and volume for exchanges so the spreads aren’t as wide for different types of securities. For instance, if you wanted to buy Ford stock back in the 90’s the bid (what someone was willing to buy it for) and the ask (what someone was willing to sell it for) may have been as much as .125 or .25.  However, nowadays, if you look at the bid/ask spread for most heavily traded stocks (such as Ford) it’s usually as little as one penny.  The proponents of HFT claim that these “tight” spreads are because of all the activity and volume their computers bring to the markets.

Is High Frequency Trading Essentially Front Running?

The critics of HFT say that these computers and algorithms are engaging in front running.  That’s an illegal practice involving having prior knowledge that a large trade is going to take place, and just before that trade happens you go in and buy the stock yourself.  When the large trade is placed, it will naturally eat up all of the available shares at that price point, and push price slightly higher allowing the front runner an opportunity to exit with a few pennies profit.   

So why should we care?  If you are a long term investor, the simple answer is that paying a few extra pennies for your Google or Apple stock probably doesn’t matter. However, if you are a day trader, then I hate to break it to you, but the deck may be strongly stacked against you.

Matthew Trujillo is a Registered Support Associate at Center for Financial Planning, Inc. Matt currently assists Center planners and clients, and is a contributor to Money Centered.

In reality, this practice mostly impacts those who are in the actual business of trading stocks. And more narrowly, the debate concerns a particular segment of traders who leverage speed to gain an advantage. Raymond James has long held that investing in the markets, with the assistance of an advisor, can help clients best meet their long-term goals through strategic, customized financial planning. We encourage our clients to buy and sell in context of those long-term plans, rather than make quick trades. 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. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of RJFS or Raymond James. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. C14-009411

The Investment Pulse: What we’ve heard in the First Quarter

At The Center each of us spends a substantial amount of time reading, listening to speakers and attending conferences. The goal is to provide our clients with the best possible advice. Here’s a brief summary of the high points the Investment Department has heard this year so far.

Municipal Bonds

In January, Melissa Joy and Angela Palacios spoke with a Municipal bond specialist from T. Rowe Price. We discussed the current environment and what may affect municipal bonds looking ahead.

• Distressing news from Detroit and Puerto Rico last year caused retail investors to flee from municipal bonds in general, creating what many believed to be an excellent investment opportunity.

• This caused unusual cross-over buying which means that investors that typically only invest in taxable bonds were compelled by valuations and yield to purchase tax free bonds for portions of their portfolios. Banks are even utilizing municipal bonds as part of their liquid investment buckets. These are rare events.

• Tax filing time creates buying opportunities for municipal bond investors as taxes are top of mind in the March/April time frame when checks are being written to pay for taxes due.

Stock Market Valuations

There has been much heated debate as to whether the stock market is over or under valued on the fifth anniversary of the bull market. We attempt to review varying arguments in order to make educated decisions on the allocation of our portfolios. One extreme yet interesting view-point comes from Eric Cinnamond, Portfolio Manager for an Aston/River Road fund. Eric has strict valuation guidelines as to what he will and will not pay for small companies and is willing to hold cash in absence of opportunities.

• He has more cash than he ever thought he would have, currently 70% of his allocation. He feels valuations are very bloated and that for valuations to continue to expand, the U.S. economy will have to continue running at peak profits with no recession indefinitely (he did state that these valuations can continue for quite some time before correcting).

• When we get to these points in the market cycle, you start to hear the question, “Is it different this time?” Cinnamond says he is getting this question a lot lately because of his contrarian viewpoint.

• He will continue to hold cash as dry powder to deploy in the event of a market pull back and stands by his process.

Bond Giant Woes

In mid-January, PIMCO announced that Mohamed El-Erian resigned his role as co-Chief Investment Officer and Chief Executive Officer for PIMCO funds. While he had only an indirect impact on our PIMCO holdings we are continuing to watch further developments at PIMCO. Bill Gross & Rob Arnott remain the key managers to the PIMCO strategies we utilized for clients. While it currently appears Bill Gross is a difficult personality to work with he continues to provide excellent returns compared to the bond market in general.

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 Angela Palacios and not necessarily those of RJFS or Raymond James. 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. Municipal bond interest is not subject to federal income tax but may be subject to AMT, state or local taxes. Income from taxable municipal bonds is subject to federal income taxation; and it may be subject to state and local taxes. Municipal securities typically provide a lower yield than comparably rated taxable investments in consideration of their tax-advantaged status. Investments in municipal securities may not be appropriate for all investors, particularly those who do not stand to benefit from the tax status of the investment. Please consult an income tax professional to assess the impact of holding such securities on your tax liability.