Second Quarter Market Review

Headlines in the second quarter kept market volatility elevated. The market moving headlines covered a wide range of economic and political topics. First quarter corporate earnings reported this quarter were outstanding. The Federal Reserve raised short-term interest rates by 0.25% as expected and projected two more rate hikes this year. The contentious G-7 meeting put trade and tariff disputes back in the limelight. China retaliated in response to the U.S. tariffs, and Trump threatened to double down on China. The North Korean summit calmed fears of a potential nuclear showdown. The court decision on the AT&T/Time Warner merger came down clearing the way for a takeover without conditions. Unemployment rates hit historic lows as the economy continued to move upward.

The third quarter will have its own version of breaking news which the market will need to sort out. Obviously second quarter corporate earnings growth will be closely watched, tariffs will be monitored and the mid-term elections will begin to take center stage. News happens, but markets generally move according to fundamental factors of earnings, valuation and economic activity. It’s from these fronts that our market optimism lives. Consumers with jobs and confidence are a powerful economic force. Couple this with lower taxes, less government regulation, strong corporate profits and low interest rates and you have a recipe for future prosperity.

After a tenuous first quarter, the global stock markets produced mixed results. On the winning side: U.S. stocks proved superior to international stocks and emerging markets, small and mid-sized U.S. companies outpaced large capitalization multinational companies, and growth companies outperformed value. After nine consecutive positive return quarters, the Dow Jones Industrial Average posted a negative return in the first quarter, but began a new winning streak in quarter two. An eight day losing streak near the end of the quarter downsized the results in the second quarter, but the index stilled managed a 1.26% gain. In addition to the Dow, the NASDAQ Composite gained 6.61% and the S&P 500 increased 3.71% this quarter. International stocks did not fare as well with potential tariffs looming. The two major international indices (MSCI Emerging Markets and MSCI EAFE) were down 7.96% and 1.24%, respectively, for the quarter.

In the bond market, prices rallied after the benchmark 10-Year U.S. Treasury bounced off a 3.11% high yield and returned to its comfort zone in the high two percent range, but still left interest rates higher for the quarter. The benchmark 10-Year U.S. Treasury yield moved up 11 basis points to yield 2.85%. The yield curve continued to flatten. The 2-Year Treasury rose by 25 basis points to end the quarter yielding 2.52%, and the 30-Year Treasury rose just one basis point to 2.98%. Owning bonds in your portfolio will not hurt you, nor will they help your assets grow. Their value will either be an insurance policy against a stock market correction or a source of liquidity and price stability.

Unfortunately, long-term investing does not result in values moving in a straight line higher. The market and portfolios go through periods of varying performance. The best defense against market volatility is proper diversification. Structure your portfolio for multiple objectives (growth, income and principal preservation) in allocated amounts that align with your risk tolerance and long-term financial goals. The right asset allocation allows your portfolio to weather all environments and will keep you invested for the long haul.


To expand on these Market Commentaries or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222

Posted on July 11, 2018 Read More

Assessing Performance

When discussing investments, a common and important question to ask is “How am I doing?” When investors examine returns, they are usually looking at a percentage return over a specified time frame. Understanding what that number means for them, however, can be a challenge. To give context to their returns, investors may turn to benchmarks or indices (like the S&P 500) to assess their performance relative to something else. While this can be an understandable approach, it can be misleading in certain circumstances and potentially risky if it leads to bad decision making.

As an example, consider the following two investors:

In the above example, how is Investor A doing? Investor B? The answer, as in many things, is “it depends”. For example, what if Investor A was fully invested in stocks when stocks were up 30% during the same period. Secondarily, what if Investor B was fully invested in bonds when the average bond performance was negative. Does that change the answer?

To add another layer, what if Investor A (100% stocks) is 80 years old and required consistent income and portfolio distributions to meet their expense needs. For Investor B (100% bonds), what if they are 25 years old, have a high tolerance for risk, and will not need distributions from these assets for another 40 years. Does it change the answer again?

The point of this exercise is not to further confuse the situation. It is simply meant to show that performance is relative, not only to benchmarks, but to each individual client financial objectives. An 80 year old investor who is reliant on portfolio distributions to meet their expense needs is significantly different from a 25 year old investor whose primary goal is to grow their assets. Therefore, their portfolio needs, and their overall performance, should also be judged very differently.

How investors determine their performance should be relative to their personal situation. Performance should be discussed in context of their investment plan, based on risk tolerance, time horizon, and income needs. Once an investor’s financial plan is built, there should be a clear understanding of what assets are in the portfolio and their primary objective. A simplified examination could look like this:

  • Cash: The purpose is for asset preservation and liquidity
  • Bonds: The purpose is for income generation and risk reduction
  • Stocks: The purpose is for long term growth, or a hybrid of growth and income, with increased risk

Without this understanding, investors looking to assess “how they are doing” may be misled by using one benchmark that doesn’t consider the client’s individual situation and objectives. Further, they may be led to action (“performance chasing” or “flight to safety”) that does not align with their long term objective and risk tolerance. Over time, this has the potential to detract from value.

To expand on these Market Reflections or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222.

Posted on June 26, 2018 Read More

We Like The Set Up

Last year international stock markets finally woke up after several years of underperforming their US counterparts. In 2017, both the emerging markets and the international developed market indices outperformed the S&P 500. Most stock market strategists and investors expected this outperformance to continue in 2018. Instead, international markets are down slightly and the US markets are up low single digits. What’s happened? Several things have contributed to the pause in performance this year including:

  • Trade policy concerns as the US and its trading partners propose new tariffs against each other
  • A strong dollar, which is a headwind for international stocks
  • European economic growth concerns if Italy leaves the Eurozone
  • US corporate profits have received a one-time boost due to tax reform while European profit growth has underwhelmed

The question is are these temporary issues for international markets or are they secular. In our opinion, the challenges are more short term in nature and we see opportunity in the international stock markets. Why?

We believe the international stock markets are at an earlier stage in their rising corporate earnings cycle and their overall valuations are cheaper. The chart below highlights the price to earnings (PE) multiple of international stocks (blue line) versus US stocks (red line). International stocks are currently about 15-20% cheaper than US stocks.

It’s always worthwhile to see if others agree with our viewpoints in case we’re missing something. We’ve indeed found that other firms concur with our thoughts on the international markets. For example:

Goldman Sachs Asset Management (GSAM) has a positive outlook on equities overall, but sees the emerging markets as the most attractive. See the table below highlighting the recent upgrade (red box) of emerging market equities:

State Street Global Advisors (SSGA) forecasts strong Emerging Market returns (red box) both in the next year and the next 3-5 years. See the bar charts below highlighting forecasted asset class returns:

Finally, JP Morgan Asset Management Group recently stated in their Global Equity View 2Q 2018 that
“emerging market equities remain a favorite and Europe is more appealing after recent underperformance.”

To summarize, we acknowledge that international stocks have been underwhelming in 2018 thus far. We’ve seen that in the underperformance of the G40i which is invested in international blue chip companies and also in the GTR which has been invested in the emerging markets. Looking at the back half of 2018 we are constructive on the opportunity in international stock markets, the G40i and the GTR. With healthy international economies and stock markets that are trading at a discount, we like the set up for the rest of the year.

To expand on these Market Reflections or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222.

Posted on June 13, 2018 Read More
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