We hope you are having an enjoyable summer.
The US economy continues its pattern of slow growth and is moving towards higher levels of employment. Consumer confidence is at a 16-year high. Year-to-date, through 6/30/17 moderate balanced funds (60% equity/40% fixed income) were up about 7%. We use 6% – 7% as the annual rate in financial planning projections. The S&P 500 was up 9.3%. International equities were up 14.1%. The Barclays Aggregate Bond Index was up 2.2% despite several Federal Reserve rate increases.
Large US value companies significantly out-performed growth in 2016. Year-to-date, large US growth companies have out-performed value stocks by a wide margin. A handful of very large technology companies are having a big positive influence on indices like the S&P500. For the first time in many years, non-US companies are out-performing US companies. Balanced portfolios include international equities and we seek to maintain a proper allocation among the major asset categories as we monitor your portfolio.
Our Federal Reserve began tightening monetary policy in December of 2015 with the end of Quantitative Easing. Central Banks outside the US are still very accommodative. Low interest rates helps stock prices. The US markets have had years of out-performing non-US stocks with the result being that non-US stock markets look less expensive than ours. US investors in non-US funds are also getting a boost from the falling US dollar.
Market volatility has been very low as stock prices have risen. This has some investors thinking that we may be due for a pullback. Market corrections are possible at any time. Moderate corrections of 10% or more have historically occurred about once per year. The last correction was August of 2015. It is helpful to keep in mind that they are normal and short term events. This is one of the reasons we advocate for keeping a year’s worth of expenses liquid, as it avoids making sales when market values are down.
Making changes in your portfolio in hope of avoiding a loss doesn’t always work. We like the following soccer analogy:
During a penalty kick, a soccer goalie must make a split-second decision to stay put in the center of the goal, jump left, or jump right.
Behavioral economist Ofer Azar collected data on more than 300 goalies and discovered that goalies who jumped left stopped just 14.2% of the shots, those who jumped right stopped a mere 12.6%. But goalies who stayed put in the center of the goal were able to prevent goals 33.3% of the time. Amazingly, only 6% of the goalies chose that option.*
Azar interviewed the goalies about their decisions and found that emotions played an important role. The goalies revealed that they felt worse if the goal was made and they were standing still. In fact, taking action, even if it’s certain to lead to failure, was considered better that taking no action at all.
Azar applied his soccer research to the behavior of investors and found that when the markets are in turmoil, we have a powerful urge to “do something” even when that “something” doesn’t make a lot of practical sense. In the 2008 market meltdown, many investors gave in to the instinct to sell because it satisfied their desire for action. But those who stayed put benefited in the long run as the market recovered.
The bottom line: During times of market stress, it can be difficult and even seem counterintuitive to stay put, but that’s often exactly the best decision. Historically, the stock market delivers far more often than not. Working together with your adviser, we can increase the chances for investment success by resisting the temptation to “jump” to one side or the other when markets erupt in turmoil.
*Wray Herbert, 2010. “On Second Thought: Outsmarting Your Mind’s Hard-Wired Habits.” New York: Broadway Paperbacks. Vanguard.
We remain optimistic that some business friendly tax and regulatory reforms will be accomplished in 2017. Progress in these areas would help the economy accelerate and stimulate growth in corporate earnings. The level of corporate earnings relates directly to how expensive or reasonably priced the stock market is at a particular time. The stock market is widely regarded to be a predictor of future economic activity six to nine months in the future.
Tax reforms would benefit consumer spending. Government spending on infrastructure and the military would also directly impact our Gross Domestic Product. GDP is the most common measure of economic growth.
The trend for international equities to be in favor is likely to continue. Equities in general remain more attractive than fixed income for long term appreciation. On the fixed income side, the normal state of affairs is for long term rates to be higher than short term interest rates. Recent increases in short term rates have caused the yield curve to flatten. If job and wage growth causes inflation to rise, long term rates would be expected to also increase. Lower prices of crude oil, food, clothing, and used cars are currently contributing to lower Consumer Price Index (inflation) numbers. Some believe that inflation increases are unlikely until government fiscal policies change. A new trend towards higher long-term rates bears watching as we move into 2018.
Northeast Advisers (NAI) takes your privacy and security seriously. We have been using encrypted email when sending sensitive information to you. When receiving secured email from NAI, you will notice that the email is from email@example.com and not firstname.lastname@example.org. This is because the email is going through our encrypted mail gateway to ensure your personal information remains safe and secure. The secure gateway will prompt you to create a user id and password to access the information. If you are unsure if an email is from NAI, please call us to confirm or for assistance.
Please call anytime you would like to talk about your portfolio.
Michael Devine, MSFS, AIF ®/ Becca Cummings, CPA, AIF® / Eric Bleiler, CPA/PFS, CFP®