Wealth Management Blog

Posts tagged Economy

Mr. or Mrs. President?

By JJ Burns

November 4, 2016

Everyone is afraid of something.  It’s true.  The visceral reaction to threats, real and imagined, has driven human behavior for millions of years.  As time has passed, our species has evolved from fearing simple threats from predators and harsh climates to fearing more sophisticated threats.  We have mostly conquered our ‘lizard brain.’  The lizard brain (so called because it is believed that reptiles survive almost solely on its impulses) is the amygdala, which controls emotions such as fear, our survival instincts, and memory.  Controlling fear is how our ancestors emerged from the cave and conquered predators and darkness.  Now, millennia later, what are we most afraid of?  According to Chapman University’s 2016 ‘Survey of American Fears,’ Americans are most afraid of government corruption than any other of the additional 79 topics in the survey.  That’s right: we are more afraid of our own government than we are of death, disease, loneliness, war, climate change, going bankrupt, snakes and public speaking.  This year, it appears, we are also afraid of our future.

Some of our recent discussions with clients have surfaced their biggest fear: the outcome of our national elections on November 8.  As we might expect, investors are worried about the future because of heightened dislike for many of the candidates and an uncertain future for the economy, the markets, and their portfolios.  Their collective lizard brain says sell stocks and hide, much like our primitive ancestors, and emerge when the perceived threat has passed.  As we often say, we understand this reaction.  We know that the markets, like people, hate uncertainty.  We also know that managing our emotions – especially conquering fear – in trying times is the key to success in any endeavor.  So it is today.

Remember that the market has weathered many crises since 1900: two world wars, the Roaring ‘20s, the Great Depression, the first big market crash in 1929, oil shocks, wars in Korea, Vietnam and the Middle East, the 1987 flash crash, the Tech Bubble, high inflation, low inflation, terrorist attacks on U.S. soil, the Financial Crisis, a government debt downgrade, landing a man on the moon, the Ebola and Zika scares, ISIS, the beginnings of climate change, banking crises, the rise of the internet, the rise—and fall—of communism, and so on.  Through all these events, capitalism has survived and adapted and moved forward.  We believe it will again regardless of Tuesday’s election results.

Here’s our brief summary of the main issues to consider when thinking about the election and the post-election markets:

  • The U.S. economy is chugging along in a low-growth/low-inflation environment.  A recession is not on the IMMEDIATE horizon, interest-rate hikes are expected to be modest and drawn out, and the job and housing markets are stable.  Preliminary Q3 GDP came in at +2.9%.  As we write this, October’s payrolls number was good and included prior-month positive revisions, unemployment dropped to 4.9% and wages showed their highest year-over-year increase since 2009 (ending at +2.8%).  Even market news is good: S&P 500 earnings results thus far for the third quarter of 2016 are showing improvement over the past six quarters.  These data show expected improvement for the current quarter and into 2017.

  • The Fed is expected to use the calm after the election storm to raise short-term rates by 0.25% in December, with two additional +0.25% hikes expected next year.
  • The markets, and a narrow majority of the electorate, appear to favor the Democrat candidate.  Mrs. Clinton has proffered a platform of change, but nothing that we see as too radical.  We expect that, should she win and the U.S. Senate change control, that modest incremental legislation will be enacted to (among other things) change the tax code, work on regulatory and immigration reform and review U.S. trade pacts.  The markets have, and should continue to, respond modestly.
  • Many of our clients have stocks and bonds in their portfolios.  The stocks are expected to provide long-term growth to keep ahead of inflation; the bonds provide income and act as ballast when markets are especially volatile and investors seek safety.  Adjusting this mix by using rebalancing opportunities is our best tool to keep our strategic focus and avoid costly tactical mistakes.  This is what we do.

Investors need to battle their lizard brains and keep their focus on the future, not the short term.  The initial fear trade is to sell and go to cash; a tried and true short-term palliative, selling stocks and sitting in cash is good for short-term peace of mind but not a long-term planning strategy.  Our clients know that we believe in globally diversified portfolios, that we focus on the long-term, and consider strategy over tactics to ensure that portfolios are built to stand the weather of time rather than simply avoid today’s storm.

As always, we appreciate your confidence and would be happy to discuss any of the issues raised here or answer any questions you may have.

Brexit: What It Means For You

By JJ Burns

June 24, 2016

In an expectedly close but surprising vote, the U.K. has completed a referendum to endorse a withdrawal from the European Union (EU). Today’s market reactions are the usual result from market uncertainty around economic issues—sell-offs in “risk assets" such as stocks and currencies and a flight to quality in “safe-haven” currencies and bonds (e.g. the U.S. dollar and Treasuries). Early analysis of the results indicates, however, that the LONG-term results may not be as severe as feared.

HERE’S WHAT HAPPENED

U.K. and Commonwealth voters, by a slim margin, voted to leave the EU. Prime Minister David Cameron immediately resigned, and a new government will be installed in the fall.

WHAT HAPPENED IN TODAY’S MARKETS?

  • Stocks and other assets such as currencies, have sold off around the globe. The U.K. and other EU countries have been hard hit, while the U.S. decline has been muted. Leading up to this, the global markets were rebounding over the last couple weeks.
  • The U.S. dollar and Japanese yen have strengthened; the Euro has declined a bit, and the sterling has substantially declined against the dollar.
  • There has been a flight to quality in bonds, particularly U.S. Treasury Bonds.
  • Gold has been priced up, while oil has declined.

WHY WERE MARKETS VOLATILE?

  • Many believed that Britain would remain in the EU and short-term traders made heavy bets in currencies and other “risk assets.” In fact, markets rallied into the vote as the DJIA was up over 250 points yesterday. Interest rates were moving higher.
  • The markets were surprised once the votes were tallied and markets reversed their trend, giving back most of these gains. The behavior was violent as Britain leaving the EU is a significant event. 
  • The U.S. markets declined as the thought process that European companies are trading partners of the U.S. This could be negative for some businesses.

WHAT ARE THE LONGER-TERM EFFECTS?

  • Britain represents 4%-5% of global GDP. Net results may not be that significant. 
  • The U.K. will need to implement policies to provide liquidity and ease interest rates. 
  • The sterling will fall, U.K. inflation will increase due to increased import prices, and U.K. GDP will likely decline in the near-term. A recession is possible in Britain.
  • The U.S. will be relatively insulated. The Fed will likely delay interest-rate hikes.
  • Global growth may be affected to some degree. This event is not a ‘Lehman moment’ that accelerated the global Financial Crisis. As one pundit noted, “…markets adapt. Policymakers adjust.  Businesses will change course while they continue to seek profits. Prices will reset. Opportunities will emerge.”

WHAT SHOULD BE DONE IN MY PORTFOLIO?

  • Our principles of portfolio construction are based on each of our client's unique personal goals. Their plan is well thought out and balanced by diversified asset allocation. 
  • Changing your portfolio based on a reaction to market events rarely leads to productive long-term results. 
  • All of our plans are built upon the certainty that we will go through negative events and market fluctuations.
  • All of our portfolios contain an anchor of high quality bonds and bond funds, which help to limit declines in significant market events, and did so during the Brexit vote today. Our bonds are doing exactly what we want in uncertain times. 
  • We expect short-term stock volatility and will be partially offset by bond and commodities gains. Today’s market moves are short-term reactions, and most currency and bond markets have moved in orderly fashion (i.e. no extreme drops). And, as our pundit notes, “The long-term political, economic and financial repercussions of the ‘Leave’ vote are incalculable at this point.” 
  • While the Brexit vote has been surprising and unsettling, most of the effects will be felt in the U.K. and Europe. We don’t see any required portfolio moves at this point; most of the trading is just that—trading. Long-term investors should stay focused, and we’ll update you as events progress.

As always, if you have any questions or wish to speak to us directly please feel free to call us.

Financial Lessons from Charles Dickens’ “A Christmas Carol”

By JJ Burns

December 24, 2015

Famous miser Ebenezer Scrooge was introduced to readers in Dickens’ 1834 classic tale of redemption that takes place on Christmas Eve.  Scrooge has lived a life focused on growing his financial wealth with little regard for life outside his counting house.  In one remarkable evening, on a Christmas Eve seven years after the death of his partner Jacob Marley, he is visited by Marley’s Ghost and three other Spirits.  Their visits offer Scrooge an opportunity to objectively look at himself and others from an abstract point of view, and revisit his past actions and beliefs.  The now-famous result is well known, but we might ask, how does this apply to investors?

Seven years ago this very day, in the throes of the Financial Crisis, here’s where the markets sat compared to where they are today:

The global economy in 2008 was mired in slumping markets, broken banking systems, panic selling in every market segment and plagued with a lack of financial controls.  More pain and dislocation in the job and securities markets were waiting for investors in 2009 and beyond.  It was a very difficult period to navigate, from both an emotional and analytical perspective.

Now let’s fast forward to 2015.  Many investors are disappointed by market returns this year.  There are no global tailwinds at play (other than low oil prices), and different regions and countries are executing different monetary and fiscal policies.  We are truly in a state of global flux.  But we also think that as U.S. investors take stock of the year, there is certainly more to be thankful for in 2015 than during the Crisis.  We don’t mean to imply that everything related to the U.S. markets and economy has been rosy during the recovery, but the U.S. is certainly in a better place than many other areas of the world.  We can also confidently predict that we don’t know what will happen next year or the year after, but at this writing, we expect continued modest recovery in global growth and in modest returns for stocks and bonds.

We can also use Dickens’ three ‘spirits’ to help set our behavior and our expectations going forward:

PAST

  • DON’T focus on GREED (at any price) and FEAR (panic selling) due to lack of planning
  • DO focus on long-term results that are right for you,  NOT the short term noise

PRESENT

  • DON’T tinker and chase returns based on “feelings” and avoid short term opportunism
  • DO be aware and rebalance to your correct allocation as your plan calls for

FUTURE

  • DON’T ignore the lessons of the past and what the real data says
  • DO focus on what can be controlled – allocations, investments and EMOTIONS

Scrooge’s transformation occurred on many levels; most of us have a lot to be thankful for, too, and we hope that Dickens’ message of charity and forbearance resonates at this time of year.  

We offer best wishes for a peaceful and grateful holiday, and a Happy New Year!

Does China Matter?

By JJ Burns

September 16, 2015

World stock prices have been volatile lately, and China’s crashing stock market has been in the front seat of the roller coaster. Many investors are worried that China’s economy is slowing down significantly faster than reported, and that a hard landing in the world’s second-largest economy will pull the global economy into recession with it. 

For years, China has been the main economic-growth engine for many developed and emerging markets around the world. Latin America, most of Asia, parts of Africa and beyond have supplied the raw materials needed to fuel the economic boom in China. Mega-cap multi-national companies from developed economies have also prospered by tapping into China’s industrial revolution. Despite China’s impressive economic growth over the years and its impact on countries around the world, investing in China has been unconventional and guarded.

With the support of the central government, local investors swiftly bid the market up this year.  The Shanghai market was up nearly 60% during the first six months of 2015 alone. Yet, the explosive growth had almost no impact on U.S. stocks. The S&P 500 traded sideways during the period. Moreover, when the Shanghai market tanked in July, U.S. stocks continued to be flat.  The chart below is a terrific pictorial on what a classic bubble looks like; happily, it didn’t involve U.S. stocks.


Source: CNNMoney, For Informational Purposes Only

U.S. stocks didn’t react to China’s news and markets until recently.  We believe the recent correlation to China’s stock market is temporary, and that U.S. investors have become more sensitive to other risks as we approach a key Federal Reserve meeting on interest rates. The Fed has indicated that it plans to raise rates at some point this year, and the September meeting has been targeted by many analysts as the date of the first increase in over a decade.

The potential of raising interest rates in the U.S., while China is retrenching and pulling many emerging markets down with it, has become a reason to take profits for many investors. However, the recent volatility has also spurred a wave of new money entering the markets. U.S. stocks have avoided a correction (a drop of at least 10%) since 2011. A four-year run without a correction is unusual for the U.S., and there seems to be pent up demand on the sidelines that has been waiting for entry points.

The Chinese Transition Redux

The points below are a few basic elements to summarize the ongoing dialogue we will see about China over the coming year.  The media will likely focus on these issues:

  • Chinese economy moving from export based economy to a balanced economy – “a consumer driven economy.”
  • The transitional changes will be challenging and investments in China will be volatile.
  • China’s attempts to stabilize markets have not been as effective as hoped.
  • Reduced appetite for commodities and thus lower worldwide inflation is likely.

The U.S. Federal Reserve may be on hold for a while longer.  Low inflation is good, but deflation is not. If the Fed raises rates in September, it could be taking a big risk of tipping prices into a deflationary zone and strengthening the U.S. dollar. If the Fed leaves interest rates unchanged, Fed members will have more time to analyze data and let the economy further develop some employment and price trends.

We know volatility can be unsettling; regardless, our long-term outlook is still positive. We believe investors who have sufficient diversification and flexibility in their portfolios should be able to successfully navigate these choppy waters. To see if your portfolio is properly balanced based on your long-term goals, contact our team to assess your needs. Now is the time to review your situation and make adjustments accordingly to help mitigate your downside risks.

Getting Greedy…Again

By JJ Burns

August 19, 2015

Everyone remembers the Financial Crisis.  The passage of time makes it seem like a bad dream now, but its lessons should still resonate with all of us.  Since the markets and the economy have substantially recovered from this terrible time, we’ve shifted our focus to following U.S. stocks for the past few years, and this shift has lulled many investors into complacency about double-digit returns.

We focus on the S&P 500 Index because it is a very popular market barometer.  However, it is a benchmark for ONLY U.S. stocks, which are just one component of a properly diversified portfolio.  The S&P 500 should not be the sole index that we follow.  Non-U.S. stocks, bonds and real estate are a few of the asset classes we invest in, and they have decidedly different characteristics and performance compared to the S&P 500.  That said, what’s ahead for prospective returns for the S&P 500?

The S&P 500 has grown an average of 16.24% per year for the past 5 years, according to Morningstar data (through 7/31/2015, including dividends). At that rate, the S&P is doubling every 4.4 years. That’s unusually fast. Since 1926, the S&P 500 has doubled every 7.1 years, with an average return of about 10.09% per year (including dividends but not adjusted for inflation).  It’s unlikely that an investor has his/her entire portfolio invested in an S&P 500-like investment, but it is a good proxy for what the large-cap sleeve of a diversified portfolio might have done.

At this point in the recovery, a 16% annual growth rate is most likely not sustainable for the S&P 500 index, but many investors are now expecting at least that.  Some are also thinking they should be able to beat the index regularly even if it’s growing at 15%. This expectation can produce complacency or excessive risk-taking, more commonly called greed.  Both mindsets typically lead to disappointment and costly lessons.

We firmly believe that investor behavior, not analysis, is what drives markets.  Yes, short-term decisions are based on some data review, but look at the recent market volatility around earnings releases.  We’ve seen some sharp sell-offs in individual U.S. stocks because they didn’t meet already lowered expectations for quarterly earnings.  Markets are being driven by bad news and fear.  In this uncertain environment with so much going on in the global financial world, we urge everyone to remember what happened in 2008-09 and prepare for more realistic returns in the years ahead, including some potential down years.  As a refresher, here’s a brief market review ‘by the numbers’:

  • -53%: That’s the amount the S&P 500 declined during the heart of the crisis.  It’s measured by the drop in prices (without dividends) in the index value from its high on May 19, 2008 to its low on March 9, 2009.  It was one of the worst declines in market history.
  • 3.2 years: Based on the S&P price index, that’s how long it took to recover from that gut-wrenching drop in value.  The S&P price index exceeded its pre-crash high on May 12, 2012.
  • +211%:  The growth in prices from the low to the end of July 2015.  If we include reinvested dividends, the return jumps to +256%.  On an annualized basis, the S&P 500 grew at a 19.42% rate for prices, and 21.96% with dividends.  That’s a very strong bull.

To put all this in perspective, here’s a brief table with S&P 500 returns across three different periods:

We’re happy U.S. stocks have done so well over the past few years, but we need to remember that stocks don’t just go straight up.  Without the periodic ups and downs in the market, prices and values would be meaningless.  Let’s add a little more perspective and review the types of declines the S&P 500 has had since the end of World War II.

  • There have been 75 declines in the 5%-10% range since 12/31/1945. That’s an average of about one per year since 1946. These types of declines are common and typically speed bumps in the market.
  • There have been 25 declines in the 10%-20% range, or about one every 2.75 years. These declines are more serious, but manageable for investors who are prepared and appropriately positioned for long-term targets.
  • There have been 8 declines in the 20%-40% range and 3 declines over 40%. These big drops mean that you shouldn’t be surprised to see a decline of at least 20% in the S&P 500 every 6.27 years.  Realistically, you should be prepared for a 30% drop in the S&P at some point as a long-term investor.

It shouldn’t be a surprise that the U.S. equity market is volatile and sometimes drops in value.  The good news is long-term investors have recovered from most of these declines in a relatively short period of time. The 5%-10% declines took an average of just one month to recover; 10%-20% declines took just 3 months to recover; 20%-40% declines took a little more than a year to recover, and 40%+ declines needed almost 5 years to recover.  The key concern we have is that investors might be getting a little ‘fat and happy.’  Recent returns have promoted this mindset and are skewing decisions by causing people to don rose-colored glasses.  At this point, assuming that this level of returns will continue, or that ‘taking risk’ and investing in the market now will provide immediate growth, is a dangerous fallacy.

At JJ Burns & Company, we believe that a well-managed portfolio mitigates risk while also recognizing that risk and volatility are not synonymous.  A single index is NOT an appropriate portfolio benchmark; your long-term goals are, and one year is a small time period in your investing life.  Properly managed portfolios are diversified and help clients avoid behavioral-finance traps that have been proven to produce unappealing returns.

If you’re concerned about risk in your portfolio, feel free to schedule an appointment with our team. Investors who review their long-term goals now and make adjustments for increasing volatility are more likely to reach their benchmarks and sleep better at night.

Unless otherwise stated, performance numbers refer to indexes, which cannot be invested in directly and have no fees or trading expenses associated with them.  All index data provided by Morningstar, Inc.  S&P data provided by Standard & Poor’s Index Services Group. © Indices are not available for direct investment; their performance does not reflect the expenses associated with the management of an actual portfolio.
Past performance is no guarantee of future results. This information is provided for educational purposes only and should not be considered investment advice or a solicitation to buy or sell securities.  Investing risks include loss of principal and fluctuating value. Small cap securities are subject to greater volatility than those in other asset categories. International investing involves special risks such as currency fluctuation and political instability. Investing in emerging markets may accentuate these risks. Sector-specific investments can also increase these risks.