Nola Kulig
Kulig Financial Advisors
Longmeadow, MA, 01116 USA
413-565-2839
Add to Contacts

2017 Q3 Market Review: Markets Continue to Rise Despite Geopolitical Turmoil and Natural Disasters

November 1st, 2017

This is our review of the markets for third quarter and year-to-date 2017. Long term readers know that we do not believe in making forecasts, instead commenting on cross currents influencing the markets. As usual, our goal is to look at recent market results, put them in perspective, and see how that experience should set our expectations going forward.

We look at the following topics:

  • 2017 Q3 and Year-to-Date Markets Review
    • Summary of Returns
    • What Does all This Mean?
  • Conclusion

2017 Q3 and Year-to-Date Market Review

Summary of Returns

The S&P 500 Index finished the quarter at a record high. Notably, the closely followed gauge of 500 large U.S. stocks ran up its quarterly winning streak to eight consecutive quarters (MarketWatch data http://www.marketwatch.com/story/us-stocks-set-for-weaker-open-but-monthly-gains-set-to-remain-intact-2017-09-29).

It’s done so in the face of three devastating hurricanes—Harvey, Irma and Maria, dysfunction in Washington, unsettling news from North Korea, and gridlock in Washington.

But in many respects, it shouldn’t be all that surprising; economic fundamentals are actually supportive of good stock performance.

Stocks take their longer-term marching orders from corporate profit growth. And profits are driven primarily by economic growth at home and abroad.

Currently, we’re in the midst of a synchronized global expansion, which has created a strong tailwind for earnings.

Moreover, interest rates remain near historic lows, and the Federal Reserve hasn’t been shy about signaling that any rate hikes are expected to come at a gradual pace.

If I had to concoct a recipe for bull market, I’d go heavy on profits, economic growth, and low interest rates—Oh, wait a minute—that’s today’s environment!

The markets focus on these factors to the exclusion of nearly everything else, like the massive damage to lives and property in Texas, Florida, and Puerto Rico. Short term, the economic data is taking a hit from the storms. Longer term, the markets are saying it is unlikely to have much impact on the economic trajectory. (Please note that some of your dollars were donated from Kulig Financial Advisor’s profits and were matched by TD Ameritrade, your custodian if you have ongoing investment services with us.)

While North Korea’s quest for an ICBM that can strike the U.S. is also very unsettling, short-term investors seem to be pricing in the unpredictability of the rogue regime. More importantly—speaking strictly from an investment perspective—investors aren’t anticipating a disruption in the economic cycle.

So, while we should be prepared for more troubling news, it simply isn’t affecting U.S. economic activity.

 

Market Returns

Market

Index

September

Q3 2017

YTD 2017

Stocks        
Large Cap S&P 500 Index

0.3%

3.0%

11.9%

Midcap S&P Midcap

-1.5

0.9

5.3

Small Cap S&P Small Cap

-2.6

1.3

1.1

Non-US Developed Markets MSCI EAFE

0.0

2.7

17.1

Emerging Markets MSCI Emerging Mkts.

2.2

9.4

28.3

US Bonds Bloomberg Barclays US Aggregate

0.9

1.2

3.6

REITs S&P US REIT

-0.4

3.1

2.8

MLPs Alerian MLP

-4.9

-4.3

-6.3

Gold S&P GSCI Gold Sub index Total Return        -2.8 3.0 10.7
Commodities S&P Dow Jones Commodity Index TR

3.3

7.2

-3.8

Sources: AJO Partners, Factset, S&P Dow Jones Indexes

What Does All This Mean?

Many of you have asked if the steady climb upward in stocks and their accompanying high values mean it is time to take some risk off of portfolios. This is an excellent question, and while we have discussed what this means for individual portfolios, it provides an opportunity to discuss our investment philosophy.

If we (meaning both you and Kulig Financial Advisors) have properly assessed risk tolerance and capacity when the portfolio was built, and done some other planning, then we shouldn’t need to make radical changes to your portfolio for several reasons:

  • If you have followed our counsel, those still working have sufficient emergency reserves and insurance in place; if you are retired, you have either sources of guaranteed income (like pensions and Social Security) or cash to cover several years’ expenses. If that is the case, then your longer term portfolio truly is for more discretionary expenses, and a market decline won’t impact your ability to keep the lights on or put food on the table.
  • We believe it is extremely difficult to predict future market direction, and the only real option anyone has is to maintain a carefully selected risk level for a portfolio. With the stock market mostly up since the 2008 crash, it would have been easy to say that stocks were highly valued for a while and that it was time to get out. With hindsight, that would have been a mistake.
  • While we don’t believe in market timing, we do favor rebalancing to your target allocation for stocks and all other assets. Those of you who have assets managed or advised on by us have in fact been taking profits out of stocks and placing them in lower risk or lower priced assets. In some cases this meant buying international stock markets which were underweighted and which have lower stock values. For others, it has meant buying bonds from time to time. The re-allocations depended on the starting positions for each portfolio. Again, these changes were guided by your asset allocation, not a short term forecast of a US stock market decline.

We hope this puts risk in a perspective that takes into account your individual financial situation and portfolio design. Those are the major reasons to make changes to portfolios, and they do not change that often.

Conclusion

We would reiterate to make sure you are at your recommended risk level and asset allocation for your portfolio. If you are, then all is well, and you can focus your attention elsewhere. If not, please make adjustments so that you are. And last but not least, if you are not sure, please call and let’s see where you need to be.

Thank you very much for your trust and confidence.

 

2016 Q4 Market Review: A Year of Thwarted Forecasts

January 23rd, 2017

This is our review of the markets for fourth quarter and year of 2016. As you know, we do not believe in making forecasts, but we comment on cross currents influencing the markets. As usual, our goal is to look at recent market results, put them in perspective, and see how that experience should set our expectations going forward.

We look at the following topics:

  • 2016 Q4 and Year-to-Date Markets Review
    • Summary of Returns
    • The Markets’ Twists and Turns in 2016
  • What Does all This Mean?
  • Conclusion

2016 Q4 and Year-to-Date Market Review

Summary of Returns

As I write this review of the markets in 2016, some trends from the fourth quarter are already waning. Nonetheless, looking at what we experienced last year may be instructive as we look at the year ahead.

Last year was a tough one for prognosticators and strategists. There were so many twists and turns from a macroeconomic and political perspective that many experts, pollsters and forecasters had their hands full. Those activities are usually fraught with peril, as the error rate is high, but last year seemed worse than usual.

By now, it is old news how wrong the experts were about Brexit and the US election outcome. Not only that, but if they managed to call the Trump victory correctly, they usually got the market’s reaction wrong. Rather than nose diving, the stock market took off and headed for record territory.

Some additional observations from the table of returns, which follows:

  • The 12-month return for the S&P 500 Index of 12.0% was well above the long-term historical average since 1926 of 10.1%
  • In the US, small cap companies led the way, followed by medium-sized companies.
  • Style indexes are not shown, but value trumped growth (pun intended).
  • Emerging markets did well for the year, despite declining after Trump’s election win.
  • Developed markets outside the US rebounded in the fourth quarter, but still turned in a poor year.
  • High quality bonds did poorly, based on an outlook of increasing rates.
  • US Real estate investment trusts (REITs) did surprisingly well, considering their higher yielding nature and a consensus outlook for higher rates.
  • Master limited partnerships continued to benefit from both a firming in energy prices and investors’ hunt for income.
  • Commodities in general did well, with a firming US economy and an emerging consensus of further growth and firming inflation.
  • Despite declining in the fourth quarter, gold held onto positive results for the year.
Market Returns
Market Index December Q4 2016 2016
Stocks        
Large Cap S&P 500 Index 2.0% 3.8% 12.0%
Midcap S&P Midcap 2.2 7.4 20.7
Small Cap S&P Small Cap 3.4 11.1 26.6
Non-US Developed Markets MSCI EAFE 3.4 -0.7 1.0
Emerging Markets MSCI Emerging Mkts. 0.2 -4.2 11.2
US Bonds Bloomberg Barclays US Aggregate 0.1 -3.0 2.7
REITs S&P US REIT 4.7 -3.0 8.5
MLPs Alerian MLP 4.4 2.0 18.3
Gold S&P GSCI Gold Sub index Total Return -1.9 -12.7 7.8
Commodities S&P Dow Jones Commodity Index TR 1.3 3.8 13.3

Sources: AJO Partners, Factset, S&P Dow Jones Indexes

The Markets’ Twists and Turns in 2016

When we see the extremely strong finish for stock markets in 2016, it is worth recalling that it started out in a very rocky fashion, with comparisons to 2008 that were too numerous to count.

Markets later had to deal with the UK’s decision on whether to stay in the European Union. Pollsters predicted the country would remain, but instead we got Brexit, which is still a long-term proposition in terms of its eventual impact. We counseled maintaining your asset allocation through this period, and not making any brash moves. While the markets initially reacted strongly, once they got over the shock, they began to function normally again.

In fact, in the months leading up to the November US presidential election central bank policy produced considerable calm in the markets. In our last quarterly review, we questioned how long the “eerie calm” could last, as an environment where trading volume is low and most asset classes rise together cannot go on indefinitely. But it is impossible to forecast when and how it might end.

When it did end, it was fortunately to the upside. When Donald Trump won the election, stock markets initially lurched downward. Then they turned sharply upward, and the rest, as they say, is history. A consensus view emerged that Trump policies of infrastructure spending, reduced regulation and tax reform would kick start the US economy out of the low growth rate it has experienced since the Great Recession. Rather than deflation, we might need to focus on the potential for inflation, and with it, higher interest rates. The focus moved decidedly from Fed watching to Trump watching.

The only problem with this consensus view is that we aren’t there yet. As I write, Trump will be taking office in a few days, his cabinet still needs approval, and he has already had to revise some policies. Since we have a democratic government, his proposals will be subject to considerable debate, even though we have a Republican majority in both houses and a Republican president. In just the last week, the “Trump trade” has begun to recede, as markets got ahead of themselves. While we may ultimately get to where Trump wants us, the markets may have already fully priced most of that scenario into asset values.

What Does All This Mean?

The unpredictability of last year was a textbook example of why investors need fully diversified portfolios. If one had taken forecasters seriously, a lot of money could have been left on the table or outright losses experienced.

For example, a prospect (now client) came to see me in November, just prior to the election. He was getting to know several advisors as part of his selection process. One had recommended that the client liquidate a good portion of his portfolio on the supposition that if Trump won, it would negatively impact the markets. What did I think?

Long term readers of this newsletter and clients already know how I responded. Extreme changes in your asset allocation are rarely warranted, if you have carefully selected it based not only on your aptitude for risk, but as important, your capacity to bear risk.

Moreover, forecasting in general has a low batting average, especially in the political or macroeconomic realm. These are very difficult issues to fully analyze and get right. Not only that, but one can construct a completely cogent and thorough analysis and yet misread what market consensus really is, or how much is in asset prices.

I responded that the advisor in question could possibly be correct, but there was an equal chance he could be wrong. So to make an extreme change in a portfolio with no hedge in case of a potentially faulty forecast is a risky approach. If there is one thing I have learned, it is how often the markets can fool us. Also, we should avoid building what might be called a “single scenario” portfolio—one that has to have a specific set of conditions met for it to be correct. Instead, it should be as much as possible an “all weather” portfolio, with components that will help it weather different types of markets, since we can never really be certain in advance what may come our way.

So my new client did not liquidate most of his portfolio and is better off for it. We did, however, make some other adjustments based on his unique needs and circumstances.

Conclusion

Last quarter, we noted in that we expected volatility to rise as markets sort things out. Factors contributing to that view were that we were in an election year where the race was hotly contested, and there was some uncertainty regarding Federal Reserve policy.

Now that the election is behind us, things look no more certain than they did last year, despite the market’s reaction to the Trump victory. Now we will really see what the new administration can do, how the economy will fare, what the Fed will do, etc. And let’s not forget factors outside the US—the state of China’s economy, rising nationalism in Europe, and central bank policy outside the US.

Need I say more to make the case for a diversified portfolio?

We would reiterate to make sure you are at your recommended risk level and asset allocation for your portfolio. If you are, then all is well, and you can focus your attention elsewhere. If not, please make adjustments so that you are. And last but not least, if you are not sure, please call and let’s see where you need to be.

Thank you very much for your trust and confidence. We look forward to working with you in 2017. Happy New Year!

2016 Q2 Market Review: Brexit Creates Market Uncertainty

July 13th, 2016

This is our second quarterly review of the markets for 2016. As you know, we do not believe in making forecasts, but we comment on cross currents influencing the markets. As usual, our goal is to look at recent market results, put them in perspective, and see how that experience should set our expectations going forward.

We look at the following topics:

  • 2016 Q2 Markets Review
    • Summary of Returns
    • A European Political Earthquake that’s felt at Home
  • What Does all This Mean?
  • Conclusion

2016 Q2 and Year-do-Date Market Review

Summary of Returns

Volatility continued into the second quarter after a tumultuous start to the year. How quickly investor focus has changed from China’s slowdown to Brexit, the UK’s decision to withdraw from the European Union. Consensus thinking that the Fed would hike interest hikes also shifted to perceptions of “lower for longer” given uncertainties abroad. Commodities came roaring back, and along with them, the junk bond market, which had sunk in the first quarter, since many energy companies had borrowed high yield debt.

Barron’s put it well, when it said “A perusal of returns for the first half shows an investment world turned upside down. Investors have been turning to stocks for income, while bonds have been the biggest source of capital gains.”

Overall, investors made a flight to quality in uncertain times, which boosted high quality bonds, US stocks and gold as safe havens. Given perceptions of a more relaxed Federal Reserve policy, income securities of all types did very well. Some additional observations are from the table of returns, which follows:

  • Despite volatility surrounding Brexit, US stocks ground out gains for June, the second quarter and the year.
  • US midcap and small cap companies have had the advantage for the quarter and the year-to-date.
  • Non-US stocks have continued to trail US stocks given concerns with Brexit.
  • Emerging markets solidified gains last quarter, and they now have lead for the year-to-date. Part of this is due to the rebound in commodity prices.
  • Bonds of all types turned in strong results not only for the quarter, but for the year-to-date. Long-term Treasury securities, which are not shown in our table, were particularly strong, gaining 15.1% for the first six months, as measured by the Barclays Aggregate Government Treasury Long Index.
  • Real estate investment trusts (REITs) have turned in rather astounding returns this year, continuing on strength late last year.
  • Master limited partnerships have had a terrific rebound after a terrible year in 2015 and a tough start to 2016. They benefitted from both a rebound in energy prices and investors’ continuing hunt for income.
  • Commodities in general had another solid quarter, solidifying their gains for the year-to-date.
  • Gold had another terrific quarter, leading to a large gain for the year-to-date.
Market Returns
Market Index June Q2 2016 2016 YTD
Stocks        
Large Cap S&P 500 Index 0.3% 2.5% 3.8%
Midcap S&P Midcap 0.4 4.0 7.9
Small Cap S&P Small Cap 0.6 3.5 6.2
Non-US Developed Markets MSCI EAFE -3.4 -1.5 -4.4
Emerging Markets MSCI Emerging Mkts. 4.0 0.7 6.4
US Bonds Barclays US Aggregate 1.8 2.2 5.3
REITs S&P US REIT 7.0 6.6 13.3
MLPs Alerian MLP 5.1 19.7 14.7
Gold Dow Jones-UBS Gold Sub index Total Return 8.5 6.8 24.3
Commodities Dow Jones-UBS Commodity Index TR 4.0 13.5 14.2

Sources: AJO Partners, Factset, Dow Jones Indexes

A European Political Earthquake that’s felt at Home

On June 23, the UK voted in a nonbinding referendum to exit the 28-nation economic and political bloc called the European Union. Though “Brexit” was chosen by a narrow margin, the people had spoken.

Given that it is a nonbinding referendum, British lawmakers could ignore the results. While there has been some talk that a UK exit will never happen, at this juncture, it doesn’t seem likely the referendum will be ignored.

Nonetheless, a victory by the “Leave” camp wasn’t supposed to happen. While the vote was expected to be close, pollsters, analysts, and even the bookies who took bets all projected “Remain” would squeak through with a win. In advance of the vote, stocks rallied in anticipation “Leave” would go down to defeat. With hindsight, the markets were complacent.

Recall from our past posts that markets dislike uncertainty. More accurately, short-term traders dislike added uncertainty and are much quicker to hit the sell button than longer term investors, who are more tolerant of disappointments.

Why might this be viewed as heightened uncertainty? Well, we’re in uncharted waters. No nation has ever asked to leave the EU.

Could Brexit fuel other separatist movements and create additional economic uncertainty in Europe? Might we see the euro currency, which is shared by 19 nations, begin to unravel? How might this pressure an already fragile European banking system? And will the dollar begin to strengthen as global investors see the relative safety of the U.S. as a shelter from the stormy global environment?

While these are potential outcomes, we also see analysts asking what if Brexit doesn’t happen? Is it possible that the UK will not act on Article 50, which would be required to begin their exit process? As a result of the Brexit vote, will the EU become more willing to be less bureaucratic with its member countries, making it easier for the UK or other countries to stay?

As with many other macro events, there really is no way to predict how events may turn out.

What Does All This Mean?

Immediately following Brexit, we wrote that we did not recommend making changes to portfolios in reaction to the UK vote for many reasons; many analysts pointed out that the economic impact in the US could be relatively small, even if it was a much bigger deal for UK citizens.

Indeed, in the volatility following Brexit, clients of ours benefited from holding high quality bonds as a bulwark against stock volatility. You may also recall that we sent some capital market history showing that stocks tend to rebound following large jolts such as Brexit created. So far, that is how it has played out. We think this continues to validate having a well diversified portfolio and resisting the temptation to trade based on short term events.

In addition, many of the themes that have kept stocks near highs continued to play out over the quarter that just ended. On the plus side, U.S. economic growth appears to have accelerated in Q2 and interest rates remain low. While Brexit may muddy the picture, earnings are forecast to begin rising again in Q3 (Thomson Reuters).

Meanwhile, the increase in oil prices has not only reduced the strong headwinds in the troubled energy sector, but it has reversed the surge in yields among junk bonds. Still, a fill-up at the gas station remains quite reasonable, helping US consumers.

Conclusion

As we noted in previous quarterly market reviews, we expect volatility to continue as markets sort things out. Not only do we have shifting perceptions of Federal Reserve policy and the state of the EU to sort out, but we are also in a presidential election year. We would reiterate to make sure you are at your recommended risk level and asset allocation for your portfolio. If you are, then all is well, and you can focus your attention elsewhere. If not, please make adjustments so that you are. And last but not least, if you are not sure, please call and let’s see where you need to be.

I hope you’ve found this review to be educational and helpful. If you have any questions or would like to discuss any matters, please feel free to give me a call.

Thank you very much for your trust and confidence.

Investment advisor representative of an investment advisory services offered through Garrett Investment Advisors, LLC, a fee-only SEC registered investment advisor. Tel: (910) FEE-ONLY. Kulig Financial Advisors may offer investment advisory services in the state of Massachusetts and other jurisdictions where exempted.