2021 Second Quarter Investment Commentary

Contributed by: Center Investment Department

Markets and the economy are still riding the high of greater than expected fiscal stimulus at the beginning the year, an easy Federal Reserve, and economic re-opening. Generally speaking, when economies are expected to do well, stock prices will rise and bond yields are pressured upward which pushes current bond prices down. 2021 is following that pattern. Stock markets around the world continue to climb, and bond yields here in the U.S. are rising as well. To put performance in context, we look at a simple diversified portfolio benchmark consisting of 60% stocks (split between U.S.-S&P 500 and International-MSCI EAFE) and 40% bonds (Bloomberg Barclays U.S. Aggregate Bond Index). This benchmark portfolio is up just over 7% year-to-date as of June 30th, with the S&P 500 leading the way at +15.2%, international stocks (MSCI EAFE) at +9%, and U.S. Aggregate Bonds at a quiet -1.6%.

Gross Domestic Product has shown a sharp increase this year as well as inflation readings heating up (see our recent blog for more information).  Many American’s have received at least 1 dose of a COVID vaccine with high vaccination rates among our most vulnerable population 65+.  Over 80% of those individuals have received a vaccination.  Now that the 12 - 16 year old community can receive a vaccination we are only awaiting an approval of a vaccine for younger children.  It is likely we will see something later this year.

Federal Reserve (The Fed) Policy updates

Short term rates were left unchanged as expected and the monthly pace of asset purchases by the Federal Open Market Committee is unchanged.  Market expectations of future interest rate movements rely strongly on the “dot plot” which is a summary of individual projections of year-end target rates for each of the 18 senior Fed officials (even though not all of them get a vote).  Based on this, news headlines are suggesting the Fed is now targeting two rate increase by the end of the 2023.  When asked, Chairman Powell stated, “dots need to be taken with a big grain of salt.”  So it looks like the Fed maintains their outlook of keeping rates low through the end of 2023 but that the bond market may be pricing in rate hikes earlier than this.

Jobs

The Fed also notes labor force participation rates are lagging as evidenced by more job openings then people unemployed. 

Source: Bureau of Labor Statistics

This is, likely, still driven by pandemic-related issues like caregiver needs, ongoing fear of the virus and supplemental/extended unemployment insurance benefits.  As these abate we should see people returning to the workforce and the bottleneck in unemployment alleviated.  Additional government unemployment benefits were set to expire in 25 states at the end of June and the remainder of states by the end of September.  This should result in individuals returning to the labor force especially in the lower wage jobs.  We will be closely watching this to see if upward wage pressure is alleviated as people resume work.  If not, this could indicate a structural lack of labor participants and be a larger than expected driver of inflation.

Real Estate

The real estate sector benefits from the rising value of assets with rising rates as well as inflation-linked product prices and leases.  From a market standpoint, individual company level investments offer opportunity.  In other words, the sector currently favors stock pickers.  Investors who think inflation will be strong in the coming years target companies with properties that have shorter leases.  While anticipation for government-backed projects in the near future spotlight infrastructure companies.  However, what to buy is not what challenges investors when it comes to this sector.  The true challenge is understanding when to buy this sector.  For that reason, many experts like Michelle Butler, real assets portfolio specialist at Cohen & Steers, recommend having an ongoing real asset portfolio allocation to provide protection against unexpected inflation. 

From a political standpoint, our eyes are poised on Joe Biden’s American Families Plan and the implications it may have on real estate.  According to white house briefings, the American Families plan is “$1.8 trillion in investments and tax credits for American families and children over ten years. It consists of about $1 trillion in investments and $800 billion in tax cuts for American families and workers”.  One of the proposed ways of funding the plan is changing favorable tax treatment on 1031 exchanges. Traditionally, 1031 exchanges (like-kind exchanges) allow investors to defer real estate taxes by rolling profits into their next property purchase.  The new tax proposal seeks to remove tax deferments on property gains over $500,000.  While meant to largely impact the wealthiest of investors, some experts fear the proposal could also have a negative effect on small business owners.  Please note, these are just proposals and not legislation that has been introduced or passed at this point.  We are watching to see how this plays out.

Additional notes on inflation:

If inflation is less transitory and more persistent than expected it is important to understand the areas we think about leaning toward in portfolio construction.  Real Assets, Value stocks and active management within your bond portfolio to take advantage of areas like treasury inflation protection bonds can be very important.  Read all the way to the end of the above linked inflation blog to see what other asset classes might fare well in a low and rising inflationary environment.

Crypto Crash 2021

This isn’t the first time cryptocurrency has lost a majority of its value in a flash crash, and it won’t be the last. In 2012, 2015, and 2019 it fell more than EIGHTY PERCENT from its previous high. At $32,000 Bitcoin is currently about 50% off its previous high. Fun math check – in order to reach an 80% drawdown from its previous high, it would have to fall ANOTHER 60% from here. In an aggressive portfolio actively managed cryptocurrency can generate market crushing returns (or losses) depending on time of purchase and an investors ability to be disciplined in their selling strategy. Look out for a blog in the coming months for more on cryptocurrency trading, speculation, blockchain technology, and threats to the crypto industry.

Here are a few ESG investment focused recent additions to our website to check out:

The Center Social Strategy

ESG Investing: Why Everybody Is Talking About It

Not All ESG Funds Are Created Equal

The Center Social Strategy: How We Construct Values-Based Portfolios

 As always, don’t hesitate to reach out to us if you have any questions or would like to explore any of these topics further!  We appreciate the continued trust you place in us!

Angela Palacios, CFP®, AIF®, is a partner and Director of Investments at Center for Financial Planning, Inc.® She chairs The Center Investment Committee and pens a quarterly Investment Commentary.

Jaclyn Jackson, CAP® is a Portfolio Manager at Center for Financial Planning, Inc.® She manages client portfolios and performs investment research.

Nicholas Boguth is a Portfolio Administrator at Center for Financial Planning, Inc.® He performs investment research and assists with the management of client portfolios.

Opinions expressed are those of the author and are not necessarily those of Raymond James. All opinions are as of his date and are subject to change without notice. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The MSCI EAFE (Europe, Ausrtalasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 22 developed nations. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. Keep in mind that individuals cannot invest directly in any index, and index performances does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results. Bitcoin issuers are not registered with the SEC, and the bitcoin marketplace is currently unregulated. Bitcoin and other cryptocurrencies are a very speculative investment and involves a high degree of risk.

Second Quarter Investment Commentary 2020

Contributed by: Angela Palacios, CFP®, AIF®

As the economy slowly opened and our grocery store shelves were restocked, the second quarter became one of the best in decades.  Tailwinds such as government stimulus, positive trends in “flatting the curve”, economic reopening, good news on virus treatment, and hope of a vaccine gave investors the confidence they needed to flock back into stocks.  This comes in stark contrast to the first quarter with a dizzying correction for the S&P 500 down 34% in about one month.

Many are left wondering if this is too good to be true and there are several different and all very valid view points on this matter. 

How can equities be back to near-peak levels when we are still in a pandemic?

As indexes recovered much of what they lost in the first quarter, some investors are left scratching their heads wondering how this could be when businesses lost out on so much during the shutdown of the economy.  At first glance, this does seem to be strange.  There are several possible reasons this has occurred.

1. The hardest hit companies were small businesses not reflected in large indexes like the S&P 500.  When people couldn’t frequent their local small businesses for the goods they needed during the shutdown they turned to online shopping from big box places in droves.  So, what small businesses have lost, large businesses have gained (at least in the short term).

2. Government provided assistance in the form of forgivable debt to small businesses and issuing checks directly to individuals.  So, not only, were people stuck at home with nowhere to spend their income (other than fixed bills), but they were also given stimulus checks.  For many, this provided a much needed back stop to pay important bills like a mortgage or car payment.  However, the data also shows that much of this has been put away for a rainy day.  Check out the historical chart below of the M1 Money Stock (the amount of money held by individuals that is ready to spend. ie. currency and checking account deposits in the US).  We have never seen a spike of this magnitude.

As businesses have reopened, many goods and services are in high demand like automobiles and home improvement.  People are now spending the money they couldn’t spend while stuck at home and the market is pricing this into results that should be reflected in the next quarter’s earnings reports.

3. Lower interest rates mean home owners can refinance debt at lower interest rates, putting more money in their pockets and less in the bank’s pockets.  People can also buy new cars with 0% financing.  Lower interest rates also leave those seeking income on investments with very few places to turn other than equities to replace the loss in income.

What could cause the markets to head right back down?

I have this feeling that the economy is balancing on the edge of a knife right now.  The momentum is forward toward recovery but several risks could slow or undermine that momentum:

• A resurgence of the virus – COVID-19 alone isn’t the cause of a potential market pull back, but this does increase the probabilities of parts of the economy having to close for periods.  A good case in point is the recent closure of indoor bar service in parts of Michigan after several bar gatherings have been identified as sources of local spikes in cases.  I don’t think we will see widespread shut down of economies again but there will be pockets of this occurring.

• Expiration of supplemental unemployment benefits – If people are unable to go back to their jobs, or find new ones, the loss of the extra unemployment income at the end of July could be a significant hit to consumer confidence.  This means that the e-spending habits that are currently boosting the economy, could go away very quickly.  I view this as the largest risk to the recovery right now because unemployment is at 11.1% nationally with Michigan being one of the hardest-hit states for job loss.  As shown by the chart below, we have not experienced such widespread job loss in a recession in recent history.  The jobs data from the Bureau of Labor Statistics for June shows that we are adding a large number of jobs back so, for right now, we appear to be improving on this front.

• Governments failing to provide more stimulus if needed – How politics play out is always an unknown that cannot be predicted but if shutdowns become more widespread again, people will look to the government for more assistance.  If this isn’t provided we could see a swift correction.  I believe, if needed, we will see more stimulus in the future as the government has proven with it’s actions that it does stand ready to support the economy.

• How many small business will survive?  This is a question that only time will tell but the risk is high that many will not.  They represent a large employer in the economy so major closures will have a highly negative impact on employment numbers.

What are we doing in response?

The Investment Committee is discussing topics like “How to invest through periods of low to negative interest rates?” and “How do we best help clients achieve their financial goals when deficits and current valuations could be a long term anchor to portfolio returns?”  Our Jaclyn Jackson, CAP® recently wrote the blog How To Invest In Turbulent Markets where she articulates what we can control, representing a great summary of what we do behind the scenes for our clients. 

Not long ago the markets and the economy seemed to be in freefall, but we just had one of the best quarters ever for market returns.  It is important to remember that investors look at whether things are getting better or worse; this is a large driver of markets.  At the end of the first quarter, things were getting worse and investors had no idea where a bottom could be or how long we would be shut down.  Since then, much has improved, we have more knowledge on this virus and the economy continues to improve which explains why the markets are up (even though the magnitude may not make intuitive sense).  These vast swings in sentiment have created many opportunities for changes in portfolios.  If you ever have questions regarding the addressed topics and how it relates to your portfolio, please don’t hesitate to reach out to discuss.  We are here for you and thank you for your continued trust.

Angela Palacios, CFP®, AIF®

Partner & Director of Investments

Angela Palacios, CFP®, AIF®, is a partner and Director of Investments at Center for Financial Planning, Inc.® She chairs The Center Investment Committee and pens a quarterly Investment Commentary.

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Opinions are those of the author and not necessarily those of Raymond James. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Past performance doesn't guarantee future results. Investing involves risk regardless of the strategy selected The S&P 500 is an unmanaged index of 500 widely held stocks that's generally considered representative of the U.S. stock market. You cannot invest directly in any index.

First Quarter Investment Commentary 2020

Contributed by: Angela Palacios, CFP®, AIF®

As the first quarter of 2020 comes to an end, COVID‐19 has brought the world together in an unusual way. We are now using strange new language like “social distancing” and “shelter in place”. Many of us are now meeting via Zoom (daily users of the videoconferencing platform skyrocketed from 10 million to 200 million). On the lighter side, #QuarantineMadeMeDoIt is trending on social media and we may be watching TV shows that weren’t worth our time before. Schools have been canceled in some states, forcing families to juggle their careers and childcare. Layoffs are a difficult reality for many at this time (luckily, not any Center employees due to smart planning!). We can only stay positive and hope that the drastic efforts to stop the spread of the coronavirus are effective. There is no doubt that COVID‐19 will make history books and there will be many lessons learned as we digest the far‐reaching consequences of this time.

How Did Markets Perform?

The spread of COVID‐19 began in China late last year and impacted their domestic markets, but not the global markets. As the virus spread globally, markets around the world reacted. With the virus came fear manifesting in many different ways, from hoarding toilet paper to hoarding cash. Investors were selling anything they could with a “sell first, ask questions later” mentality. The stock market saw wild swings that haven’t occurred since the 2008 recession. However, the current swings feel much worse because they happened over less time. The markets were generally either negative or positive in a large way each day with an average daily movement of 5% during March! The circuit breakers were triggered on 3 separate occasions, pausing trading for 15 minutes each time (this occurs when the S&P drops by 7% on any given trading day).

Here’s how various indexes closed the quarter:

Monetary Stimulus

The Federal Reserve (the Fed) responded first to COVID‐19 aiming to keep financial markets from spiraling out of control. While their actions could not prevent the economic downturn that is already upon us, the Fed could create more accommodative financial conditions that would help cushion the landing of a recession and support the economy’s eventual recovery. In the near term, the Fed’s actions have aimed to support smooth functioning in financial markets and ensure that the problems on Wall Street do not spill onto Main Street. Below is a timeline of their actions to help support the various functions of the financial markets.

Source: Performa, Federal Reserve

Take a look at the last point “What’s Next?” Well, the Magic 8‐Ball was correct. The Fed further expanded facilities to support municipal and high‐quality corporate bonds. They also purchased highly liquid fixed income exchange‐traded funds to further support the bond markets. These actions were straight from the toolkit developed through the financial crisis of 2008‐2009 (except for purchasing the exchange‐traded funds). Back then, it took the Fed nearly a year to deploy these actions. Thankfully, this year it was deployed in a matter of weeks.

Fiscal Stimulus

This accommodative policy from the Fed made it easier for large‐scale fiscal stimulus to be financed by cheap debt. The government responded with the CARES Act, a $2 Trillion stimulus package. It makes history as the largest stimulus package in the U.S. The goal is to inject a large amount of money into the economy to carry businesses and individuals through this hopefully short, but very challenging time. Learn more about the CARES Act here.

The rising national debt levels in the U.S. are a concern, however, there may be a reason to go into more debt. “If ever there is a time for the government to add to our debt, it is now,” says Kenneth Rogoff, a Harvard economist who often speaks on the risks of the spiraling national debt. He says, “We are in a war, the whole point of not relying on debt excessively in normal times is precisely to be able to use debt massively and without hesitation in situations like this”.

There is a risk of the national debt growing and burdening society in the years to come. This will be on our minds in the coming years. However, it is good to remember that our country’s debt burden, or interest, is a far smaller percentage of GDP than back in 1999. There are two reasons for this. Our GDP has grown since 1999 and interest rates the government pays on the debt are far lower. Think of how much more home you can afford when your mortgage interest rate is 2.7% instead of 6%.

Below is an excellent graphic displaying tools that have been used and what options remain.

An Oil War

Our eyes aren’t only on the coronavirus pandemic. An oil war was brewing between Russia and Saudi Arabia. We are in the midst of a price war because both countries did not agree on a response to a falling demand. They decided, instead, to flood the world with an abundance of cheap oil. This pushed oil prices to their lowest levels in 18 years (of course when gas is cheap, we can’t go anywhere!). More seriously though, couple this with people consuming less oil because of the pandemic keeping us home and this has spelled disaster for energy company stock prices. As I write this, the price war appears to be de‐escalating and there are talks of cutting production to support oil prices.

The Economic Fallout

Despite the unprecedented response from both the U.S. government and the Fed, the pandemic will surely leave its mark on the economy. Early data is being released and it is ugly. Manufacturing/service activity has drastically slowed and unemployment is on the rise.

However, ugly was expected by markets and much of the ugliness has been potentially priced in. We may see the equity market lows retested (or even go a bit lower) in the coming weeks before everyone gets back to work and the economy restarts. This will be highly dependent on flattening the coronavirus curve. If we see positive results from the stay‐at‐home orders and the virus infection rates slow, the markets could recover in the coming weeks and months even as the economy falls into a recession.

What Is The Center Doing In The Meantime?

Accounts have had higher than normal activity this year due to the volatile markets. After a strong 2019, our process called for rebalancing from stock to bonds to keep recommended asset allocations on target. We monitor to make sure any upcoming cash needs are set aside ahead of time. After the sharp drawdown in markets, for many, we have needed to rebalance from bonds back into stocks. We have been able to proactively tax-loss harvest for those who needed it and identify investment opportunities to take advantage of.  For example, the Investment Committee is keeping an eye on U.S. Equities after reviewing the policy responses available to be deployed around the world. We feel the U.S. should be better positioned for recovery after the effects of the pandemic start to wear off.

In the Center’s 35 year history we have been through bear markets and surely will again after this. Bull markets follow bear markets and much of the recovery usually comes in the front end of the bull market and often well before the economy starts to recover. While we can’t predict when the next bull market will begin, your portfolio must be positioned properly for when that happens. It is important to stick to a thoughtful plan that was established during quieter/more rational times. Try to tune out the media and focus on your long‐term goals.

Thank you for the trust you place in us to manage your wealth and to advocate for your financial wellness. There could be no greater responsibility, especially during uncertain times. We strive to stay in touch and hope our communications via email, phone, and Zoom has been helpful. If you have questions or concerns please reach out to your planner! This is why we are here for you!

Angela Palacios, CFP®, AIF®, is a partner and Director of Investments at Center for Financial Planning, Inc.® She chairs The Center Investment Committee and pens a quarterly Investment Commentary.

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There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. This material is being provided for information purposes only. Past performance doesn't guarantee future results. Investing involves risk regardless of the strategy selected, including diversification and asset allocation. Holding investments for the long term does not insure a profitable outcome. You cannot invest directly in any index. The S&P 500 is an unmanaged index of 500 widely held stocks that are generally considered representative of the U.S. stock market. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represent approximately 8% of the total market capitalization of the Russell 3000 Index. The MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 22 developed nations. The MSCI Emerging Markets is designed to measure equity market performance in 25 emerging market indices. The index's three largest industries are materials, energy, and banks.

Market Performance and Viral Outbreaks

Contributed by: Angela Palacios, CFP®, AIF®

Recent market volatility caused by the spread of the coronavirus and a fear of a global economic slowdown has left many wondering if this has happened before and if so, is it different this time?  There have been numerous outbreaks in recent history that we can look at.  Below is a list of different outbreaks (many of which were far deadlier than the coronavirus) that occurred. Check out the return of the S&P 500 6 and 12 months after the epidemic.

But how about a short term global impact?  The chart below shows 1 month, 3 month, and 6 month returns of the MSCI World index.  Again, not the extreme reaction that we are feeling right now in markets. 

While there may have been short term volatility, in most cases it was short lived.

But you may still be thinking that it is different this time.   The world is far more dependent on global trade than it was during SARS in 2003 for example.  There will be some supply chain disruptions and we may not be able to source these goods from other locations quickly enough.  For example, Coca-Cola recently announced that there may be some supply disruptions in the artificial sweetener used in Diet Coke and Zero Sugar Coke…this could be devastating!  I may have to switch to drinking regular coke! Actually, I don’t drink very much pop but now that I know there could be a shortage I’m craving it!  Jokes aside, many industries may face this challenge until China is back up and running around the globe.  The trade war has actually done more to prepare us for this situation than, I think, anything could have.  Companies were already searching for supply sources outside of China or bringing production back into the U.S. after the implementation of tariffs last year.

The severity of the virus will dictate the eventual outcome. Right now investors are taking a “sell first and ask questions later” mentality. We have a lot to learn from the individuals in the U.S. under care of physicians here in the U.S. as to exactly how deadly this flu is under our system of healthcare which is one of the best in the world. Markets are selling off on a guess, right now, of where this could head. If history is any indicator, by this time next year, this should be a distant memory.

Angela Palacios, CFP®, AIF®, is a partner and Director of Investments at Center for Financial Planning, Inc.® She chairs The Center Investment Committee and pens a quarterly Investment Commentary.

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There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Past Performance does not guarantee future results. One cannot invest directly in an index. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The MSCI World is a free float-adjusted market capitalization index that is designed to measure large and mid cap performance across 23 developed markets countries. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.

Markets Flash Fear as COVID-19 Approaches Pandemic Status

Contributed by: Raymond James

U.S. equity indices fell over 3% on continued news of the coronavirus’ spread.

As coronavirus cases continue to escalate in several new regions, like South Korea, Italy, Japan, Iran, Singapore and the United States, Raymond James Healthcare Policy Analyst Chris Meekins believes we are now in the midst of a COVID-19 pandemic. The word itself isn’t intended to cause panic, but rather to prompt increased awareness of the potential economic and health effects of this rapidly spreading virus. Meekins believes the United States now faces a 1 in 3 chance of a widespread outbreak given recent events.

Unfortunately, the illness – thought to have originated in Wuhan, an important Chinese manufacturing hub – has taken its toll on equity markets, causing disruption in several industries, including travel and energy, as well as major supply chains in India and China. Amid the trade war, supply chains generally migrated away from China to places like Vietnam, Thailand and Mexico; however, global supply chains are deep and complex, and disruptions have already led to halts in motor vehicle production in Japan and South Korea, explains Chief Economist Scott Brown. U.S. firms also face a loss of sales to the Chinese market, he notes.

In addition, oil fell on concerns over weakened Chinese demand and the risk of further demand impact outside the Asia-Pacific region. However, Raymond James energy equity research analyst Pavel Molchanov believes oil prices should recover by year’s end, overcoming the virus-related demand headwinds. The current production outage in Libya is also helping to “cancel out” some of the demand headwinds.

While volatility is likely to continue to weigh on certain sectors until the virus is contained, any pullback could be viewed as a potential buying opportunity within favored sectors as the overall fundamental backdrop remains supportive of equities, according to Chief Investment Officer Larry Adam. Opportunities to add fundamentally sound positions to your portfolio may present themselves over the near term. Your advisor will continue to monitor the news for indications of broader impacts and share any developments with you.

It’s hoped that the global response to contain the deadly respiratory disease proves effective soon and that increased public awareness will deter the spread of the virus. To learn more about how to protect yourself and your family, please visit cdc.gov for updates.

Investing involves risk, and investors may incur a profit or a loss. Sector investments are companies engaged in business related to a specific sector. They are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification. Investing in oil involves special risks, including the potential adverse effects of state and federal regulation, and may not be suitable for all investors. All expressions of opinion reflect the judgment of the Research Department of Raymond James & Associates, Inc., and are subject to change. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. This material is being provided for information purposes only. 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.

2018 2nd Quarter Investment Commentary

Contributed by: Angela Palacios, CFP®, AIF®

Helping our clients achieve their goals is truly a team effort here at The Center.  You may not have met or spoken to the investment team here at The Center, but we are an important resource leveraged to help you achieve your goals.  Watch the video below to learn more about the investment team and how we help you reach your financial planning destination!   We are always here to help so please don’t hesitate to reach out to us! 

Rebalancing

The investment team monitors and rebalances your portfolio, in addition to portfolio construction.  It is equally important to continue to monitor portfolios and their compliance with your investing preferences and objectives as it is to determine what the proper investments are.  Rebalancing is a key part of this process.  See our recent blog post on how to rebalance a portfolio to understand the reasons and mechanics behind the process.  The most important way to be successful is to get invested and stay invested.  Rebalancing your portfolio on occasion will help you stay the course for the long-term.

Market Update

The story has stayed much the same over the past quarter with trade tensions remaining center stage.  Volatility remains, while trade war talks have spilled over into action and interest rates continue to rise.  Synchronized global growth is slowing but is not yet slow; so, do not expect growth to immediately fall off the cliff from a peak to a trough. 

U.S. markets remain in consolidation mode after a strong 2017 as investors waffle between getting comfortable with the lower rate of growth while having a strong economic and earnings outlook.  The U.S. market ended the quarter on a higher note up 3.43% for the S&P 500 despite the ups and downs throughout the quarter with China and U.S. relations.  Despite being up as much as 6.6% and down as much as 4.4% throughout the year so far we are up 2.65% through the end of the second quarter for the S&P 500. 

Bond markets have continued to struggle with bonds giving back what they are earning via interest payments, and then some, as the Bloomberg Barclays US Aggregate bond index is down 1.6% year to date.  Interest rates continue to increase at a well-telegraphed pace by the Federal Reserve with two more increases expected this year. 

In contrast to the U.S. market, international markets are struggling for the year with the MSCI EAFE posting a -2.75% so far.  In stark contrast, domestic small company stocks are enjoying a nice tailwind from the corporate tax reform so far this year.  The Russell 2000 is posting a startling 7.6% return year-to-date, all of which occurred in the second quarter.

Inflation continues its slow creep back into our economy with wages slowly starting to increase.  Just as slowing growth in the economy is not yet slow, rising inflation is not high inflation.  We are still at very low levels of inflation when you look at the history of our domestic economy.  Our investment committee has decided to add an allocation to an inflation-focused real asset strategy.  We want to add exposure within the portfolios to a strategy that would have the potential to respond more favorably than the broad equity markets to rising inflation. 

Preview of exciting changes

The investment team has been working on some exciting developments for your experience.  We will soon have a “Center for Financial Planning, Inc®” app for your smartphone where you can view returns, asset allocation and even your probability of success for your financial plan.  This new portal will be available to all who are interested.  More information and training on how to set up and view information will be coming later this year so watch your inboxes!  As always, please feel free to reach out if you ever have any questions.

On behalf of everyone here at The Center,
Angela Palacios, CFP®, AIF®
Director of Investments
Financial Advisor 

Angela Palacios, CFP®, AIF® is the Director of Investments at Center for Financial Planning, Inc.® Angela specializes in Investment and Macro economic research. She is a frequent contributor The Center blog.

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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 opinions are those of Angela Palacios and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and no strategy can ensure success. The process of rebalancing may carry tax consequences. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional. Diversification and strategic asset allocation do not ensure a profit or protect against a loss. The S&P 500 is an unmanaged index of 500 widely held stocks. The Bloomberg Barclays US Aggregate Bond Index is a market capitalization-weighted index, meaning the securities in the index are weighted according to the market size of each bond type. Most U.S. traded investment grade bonds are represented. Municipal bonds, and Treasury Inflation-Protected Securities are excluded, due to tax treatment issues. The index includes Treasury securities, Government agency bonds, Mortgage-backed bonds, Corporate bonds, and a small amount of foreign bonds traded in U.S. The MSCI EAFE (Europe, Australia, Far East) index is an unmanaged index that is generally considered representative of the international stock market. These international securities involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. The Russell 2000 index is an unmanaged index of small cap securities which generally involve greater risks. Inclusion of these indexes is for illustrative purposes only. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. Holding bonds to term allows redemption at par value. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise.

Why I Disliked my Diversified Portfolio in 2014

Let’s face it; we live in a headline kind of world these days. One of the fastest growing media outlets, Twitter, only allows 140 characters. They might as well rename it “Headwitter”! I was reminded of the power of headlines recently as I was reviewing my personal financial planning; reflecting on the progress I have made toward goals such as retirement, estate, tax, life insurance, and investments. And, after reviewing my personal 401k plan, and witnessing single digit growth, my immediate reaction was probably similar to many other investors that utilize a prudent asset allocation strategy (40% fixed income and 60% equities). I’d be less than candid if I didn’t share that my immediate thought was, “I dislike my diversified portfolio”.

The headlines suggest it should have been a better year. However, knowing that the substance is below the headlines, and 140 characters can’t convey the whole story, my diversified portfolio performed just as it is supposed to in 2014.

The Financial Headlines

The financial news -- whether it be radio, print, or social media -- almost entirely focuses on three major market indexes; the DJIA, the S&P 500 and the NASDAQ. All three are barometers for Large Stocks in the United States; they are meaningless for additional assets found in a diversified portfolio such as international stocks, small and medium size stocks, and bonds of all varieties. It is true that large US stock indexes were at or near all-time highs throughout 2014.  It is also true that many other major asset classes gained no ground or were even negative for the year including: high yield junk bonds, small cap stocks, commodities, metals, energy, international stocks and emerging markets. Moreover, even within US large stocks there was vast disparity as large cap value stocks lagged large growth stocks by almost 50%!

How to Dig Deeper into Strategy & Outlook

Our firm utilizes a variety of resources in developing our economic outlook and asset allocation strategies including research from well-respected firms such as Russell Investments and Raymond James. Review the “Russell Balanced Portfolio Returns” graphic that provides a useful visual on how a variety of asset classes have performed since 2005. (Click below image to enlarge.)

This chart shows the historical performance of different asset classes, as well as an asset allocation portfolio (35% fixed & 65% diversified equities). The asset allocation portfolio incorporates the various asset classes shown in the chart and highlights how balance and diversification can help reduce volatility (risk) and enhance returns.Risk adjusted returns are always a worthy goal and, as I have written in the past, risk is always present and matters.

Do you recall 2008-2009 or how about the lost decade of 2000-2010? If you “see” a pattern in asset class returns over time, please look again. There is no determinable pattern. Asset class returns are cyclical and it’s difficult to predict which asset class will outperform in any given year. A portfolio with a mix of asset classes, on average, should smooth the ride by lowering risk over a full market cycle. I’d suggest if there is any pattern to see, it would be that a diversified portfolio should provide aless volatile investment experience than any single asset class. A diversified portfolio is unlikely to be worse than the lowest performing asset class in any given year, and on the flip side it is unlikely to be better than the best performing asset class. Just what you would expect!

Staying Focused & Disciplined

The current environment reminds me of the strong US stock market experienced in the late 1990’s.  During that time, unfortunately some folks were willing to abandon discipline because of increased greed or conversely, increased fear. Currently I sense an interesting phenomenon, an increase in fear. Not of markets going down, but rather a fear of being left behind in such a strong US stock market. As important as it is not to panic out of an asset class after a large decline, it remains equally important not to panic into an asset class. I believe maintaining discipline in both environments is critical to investment success.

Like the late 1990’s, many folks have taken note of the S&P 500’s outperformance of many other asset classes over the last five years and wonder why they should invest in anything else. The question is understandable. If you find yourself asking the same question, you might consider the following:

• The S&P 500 Index has had tremendous performance over the last five years, but it’s difficult to predict which asset class will outperform from year to year. A portfolio with a mix of asset classes, on average, should smooth the ride by lowering risk over a full market cycle.

• Fundamentally, prices of U.S. companies are hovering around the long-term average. International equities, particularly the emerging markets, are still well below their normal estimates and may have con­siderable room for improvement.

• U.S. large caps, as defined by the S&P 500 Index, have outperformed international equities (MSCI EAFE) four of the last five years. The last time the S&P outperformed for a significant time 1996-2001, the MSCI outperformed in the subsequent six years.

Managing Risk

Benjamin Graham, known as the “father of value investing”, dedicated much of his book, The Intelligent Investor, to risk.  In one of his many timeless quotes he says, “The essence of investment management is the management of risks, not the management of returns.”  This statement can be counterintuitive to many investors.  As I have shared before, risk does not have to be an alarm; rather a healthy dose of reality in all investment environments. That’s how we meet life’s financial goals. Diversification is about avoiding the big setbacks along the way – it doesn’t protect against losses – it is used to manage risk.

So, if you are feeling like I did initially about your portfolio, hopefully after review and reflection you might also change your perspective like I did from “I dislike my diversified portfolio” to “My diversified portfolio - just what I would expect”. As always, if you’d like to schedule some time to review anything contained in this writing or your personal circumstances, please let me know. Lastly, our investment committee has been hard at work for several weeks and will be sharing 2015 comments in the near future. Make it a great 2015!

Timothy Wyman, CFP®, JD is the Managing Partner and Financial Planner at Center for Financial Planning, Inc. and is a frequent contributor to national media including appearances on Good Morning America Weekend Edition and WDIV Channel 4 News and published articles including Forbes and The Wall Street Journal. A leader in his profession, Tim served on the National Board of Directors for the 28,000 member Financial Planning Association™ (FPA®), trained and mentored hundreds of CFP® practitioners and is a frequent speaker to organizations and businesses on various financial planning topics.

Required Disclaimer: 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 Tim Wyman 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. The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stock of companies maintained and reviewed by the editors of the Wall Street Journal. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The NASDAQ Composite Index is an unmanaged index of securities traded on the NASDAQ system. MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 22 developed nations. Inclusion of these indexes is for illustrative purposes only. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Diversification and asset allocation do not ensure a profit or protect against a loss. Raymond James is not affiliated with Benjamin Graham.

View from the Morningstar Conference

Nearly 2,000 people gathered at McCormack Place in Chicago this June.  The views of the Chicago skyline, while beautiful, were not the views I flew to Chicago to see.  Advisors, asset managers and press gather once a year at this conference to listen to some of the greatest minds in investing share their views of the markets and economies around the world.  This is one of my favorite conferences of the year. 

We heard from legendary investors including Michael Hasenstab, PIMCO's Bill Gross a.k.a. The Bond King, and AQR's Cliff Asness a.k.a. The Father of Momentum Investing.

Bill Gross: The New Neutral

Keynote speaker, 70-year-old Bill Gross did not disappoint.   Very aware that his image has been dinged in recent months with the departure of his heir apparent Mohammed El Erian, and subsequent departure of $50 billion of money flowing out of his flagship product, he took the stage wearing sunglasses and spent the first 10 minutes of his speech poking fun at himself while jokingly trying to brainwash the crowd and press Manchurian Candidate style.  All fun aside, he came to the conference to coin a new phrase the “New Neutral".  He is encouraging investors to look at interest rates from a different, more muted perspective.  What does this mean for investors?  Overall lower return expectations going forward for stocks and bonds.  This is an extension of PIMCO’s 2009 “New Normal” which stated that economic growth will be sluggish as it has been.

Employment Outlook: Labor Shortages?

Bob Johnson, Morningstar's very own economist, predicted that next summer at this conference the hot topic of discussion will be labor shortages.  He explained that the unemployment rate remains high despite the extremely large amount of open requisitions for new job postings.  He argues that there is a mismatch in job skills causing the unemployment rate to stagnate despite companies needing to hire so many.  He goes on to explain that the Federal Reserve cannot fix this skill mismatch, only the private sector, corporations and individuals, can acquire the necessary skills needed to match people to the needed job openings.

International Opportunities

Emerging markets and Japan were hot topics of discussion.  "Go anywhere" Investment managers, with the world as their oyster, prefer to access emerging markets through companies domiciled in developed markets that derive most of their revenues by selling to emerging market consumers.  Japan was a hotly debated topic, with about half of the experts loving it and half not wanting to touch it with a 10-foot pole.

In addition to these larger investing and macro-economic themes, I also find value in speaking directly with portfolio managers about their investing processes and trying to discover new strategies that may be beneficial to our clients’ portfolios.  There is never a shortage of ideas after a few days spent at Morningstar listening and learning!

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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Please note that international investing involves special risks, including currency fluctuations, different financial accounting standards, and possible political and economic volatility. Investing in emerging markets can be riskier than investing in well-established foreign markets. Investing involves risk and investors may incur a profit or a loss. Bob Johnson, Michael Hasenstab, Bill Gross, Cliff Asness are independent of Raymond James. Any opinions are those named herein and not necessarily those of RJFS or Raymond James.

June 2012 Investment Update

The year opened with a quarter of exceptional returns for markets such as the S&P 500. This rising tide was quickly curtailed in April and May. The ongoing European troubles have reached a new crescendo. Withering employment and housing numbers in the US added fuel to the fire in May.

The situation in Europe is complicated and includes both real economic challenges and unresolved political questions. The combination has led to a slow-moving crisis without the sign of an end. The primary issues we're watching today:

• Greece Unraveling. We do not know of any credible experts who think that Greece is solvent today. The insolvency is a foregone conclusion but related political upheaval has escalated the crisis. We now look to June 17 elections to determine remaining support for continued membership in the EU. A so-called "Grexit" would be unprecedented and would bring even more challenges to Greek recovery.
• Contagion in Spain & Italy. While Greeks have been wreaking havoc on their banks by hoarding Euros, Spain and Italy seem to be experiencing their own quiet bank run. Unemployment rates are very high in Spain and Italy and borrowing costs continue to rise for the governments. Earlier in the year, the ECB fiscal relief program infused money into banks, but did little to fix their exposure to bad sovereign debt along with other bad loans. Finding a way to secure investor sentiment in these economies remains critical.
• Slowing Growth. The odds of a European recession are high and growing. Meanwhile, signs of slowing growth are cropping up in places like China and here in the US.
• End of US Stimulus. "Operation Twist" is scheduled to wind down this spring and summer. We have long seen 2013 as challenging regardless of the presidential victor because of agreed-upon fiscal cuts plus tax breaks which are scheduled to expire. Add to that the need to rehash the debt ceiling discussion, and we know the US Government and Economy will be in headlines that rival Europe in the coming months. With US interest rates at record lows (going back to WWII), a new Fed program to buy even more treasuries would seem to offer very little in the form of help for investors.

What actions should investors take? We can share some strategies that we’re using with our clients from a financial planning and wealth management perspective.

• Work with a professional who is looking forward with today’s situation in mind. The challenges listed above have been on our minds and on the minds of our portfolio managers regardless of market returns. We discuss these issues on a daily and weekly basis within the firm as well as with money managers and peers. For many managers, a European outcome may be a "United States of Europe" approach with more centralized EU power. This, they say, will not happen without considerable effort and time.
• Look at your risk orientation. In 2011, we considered significant changes to positions for our clients in anticipation of sustained volatility (which we saw last summer and seems to be popping up again). From our point of view we may continue to see more uncertainty this summer and through the presidential election cycle in November. We have been underweight dedicated international positions and our managers have tilted portfolios toward Asia and away from Europe. We have incorporated alternative strategies which have historically had a less direct relationship to the whims of stocks and bonds. This is not a blanket prescription but our point of view. You should know your own posture in terms of investment mix.
• Stick with your plan. Because of the changes last year, we continue to be comfortable with portfolio positions today and do not anticipate a significant overhaul to portfolios. That said, our focus on monitoring investment mix in light of current scenarios is as vigilant as ever. If you have started a plan, you need too much change or doubt may result in a drag on your portfolio’s returns.
• Rebalance when appropriate. If markets continue to decline, we may rebalance portfolios into the assets that have declined. This is by design and meant to position investments through a forward-looking lens rather than the natural human tendency of focusing on the rear-view mirror. Ultimately, we believe that volatility will lead to buying opportunities.
• Talk to someone when you have concerns. Working with a CERTIFIED FINANCIAL PLANNER™ is a partnership. A financial planner can help uncover your concerns and find answers for your fears! Most importantly, when your financial situation is changing, make sure to update your overall financial plan and analyze your investment mix based upon the new information.

As the summer gets going, you should be able to enjoy barbecues with family and friends rather than worry about the ups and downs of stocks and bonds. Ultimately, you are investing so that you can achieve your financial goals. If you ever have questions about investing or comprehensive financial planning, don’t hesitate to contact us.

Sincerely,

Melissa Joy, CFP®
Partner, Director of Investments
Investment Advisor Representative, RJFS

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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 Melissa Joy and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. Past performance may not be indicative of future results. Please note that international investing involves special risks, including currency fluctuations, different financial accounting standards, and possible political and economic volatility. Alternative investments are available only to those who meet specific suitability requirements, including minimum net worth tests. There are special risks involved with alternative investments, including investment strategies, and different regulatory and reporting requirements. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates Investing involves risk and you may incur a profit or loss regardless of strategy selected.