Webinar in Review: 2018 Investment Update

Contributed by: Angela Palacios, CFP®, AIF®

Late January, investor sentiment shifted from investors worried about missing out on the bull market to concerns that markets were overbought.  Volatility came stampeding back, bond yields continued rising and we even got a peek at some inflation creeping it’s way back into the economy.  This created a flurry of investor concerns and a basis for much of our discussion in our investment webinar to start the year off.

What are we watching out for in 2018?

A number of topics could be of concern this year.  A potential trade war, geopolitical concerns, inflation and bond yield spikes have the eye of our investment committee. 

While U.S. markets were looking a bit expensive at the beginning of the year, international markets were telling us a different story of opportunity.  Other themes we touched on included ESG and cost compression in the investment industry.

Regardless of what may come, it is important to keep a few points in mind.  Plan, don’t panic.  Planning is the cornerstone to everything we do for you.  Remember your financial plan is built with market volatility in mind.  It is expected within the plan.  It is important to keep this in perspective when headlines are doing everything they can to pull your attention away.  What we can control is maintaining appropriate levels of cash for your needs, managing as tax efficiently as possible so more dollars stay in your pocket and rebalancing to maintain a proper risk profile that is appropriate for you. 

What actions are we taking?

With the extended positive returns we have seen in U.S. markets prior to this year, we discussed strategies we are utilizing to rebalance.  A question we commonly received from you is “What prompts us to make a change in your portfolios?”  We took an in depth look at how we make changes in your portfolio and what triggers us to make these changes. 

If you would like to learn more about any of the topics touched on here, feel free to watch the webinar above!

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.

This information has been obtained from sources deemed to be reliable but its accuracy and completeness cannot be guaranteed. Opinions expressed are those of Angela Palacios and are not necessarily those of Raymond James. Investing involves risk, investors may incur a profit or loss regardless of the strategy or strategies employed. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. Investing in emerging markets can be riskier than investing in well-established foreign markets. Rebalancing a non-retirement account could be a taxable event that may increase your tax liability. You should discussion specific tax matters with the appropriate professional.

4th Quarter Investment Commentary

Contributed by: Angela Palacios, CFP®, AIF®

If you're interested in attending our Annual Client Investment Review Event at the Great Lakes Culinary Center on February 20th at 11:30am, please register here. If you can't attend, consider our Investment Review Webinar on Tuesday, February 20th at 1PM, please register here.

2017 in Review and Outlook for 2018

Fidget spinners, bitcoins, and Trump.  If you have young children, you could not miss the fidget spinner craze that hit in April of this year.  This simple toy rotates on a ball bearing.  By the time I got around to getting my 10-year-old child one in mid-May for her birthday, they were SO yesterday.  My major parenting fail of 2017!  In the financial world, another mania took over.  Bitcoin, while not brand new, certainly gained a ton of traction this year as an alternative cryptocurrency.  The price of Bitcoin surged from below $1,000 per bitcoin to more than $19,000!  This paved the way for many other cryptocurrencies (Bitcoin competitors) making their way to center stage with astonishing returns also.  If you want more information, check out this blog Talking Bitcoin, written by Nick Boguth earlier this year. 

The news cycle has also revolved around President Trump this year.  While failing to overhaul Obamacare or U.S. trade policy, he was successful in getting some long-anticipated tax reform through to round out his first full year as our President.

The past year turned out to be far more bullish than many expected.  International and emerging markets outpaced U.S. markets.  Growth investing beat value investing, while Bonds returned little more than their yield.  2018 has a tough act to follow!

Tax Reform and its Impact on the Economy

Although the tax cut seems to favor corporations, much of the net tax cuts are going to the individual.  The tax act should increase after-tax income for most American households both directly, through lower personal taxes, and indirectly, through the impact of higher dividends and stock prices resulting from the cut in corporate taxation.  As people spend more, GDP should increase and unemployment should continue to decrease possibly causing the wage inflation we have been waiting for.  This chart shows the level of unemployment (gray line) and the level of wage inflation the (blue line). The dotted lines for each color are average levels.  You can see that both are below their average levels.  Usually when unemployment is below average the wage growth line rises back to its long-term average level, but this has not happened yet.  Retiring higher-paid baby boomers are being replaced with lower-paid millennials entering the workforce and this has had a significant downward pressure on wages keeping it well below its long-term average growth rate. 

If wages finally start to increase, this could cause inflation to pick up somewhat. This would be a positive influence on the stock market in the short run.

Tax Reform and its Impact on Equities

Looking at the influence tax reform will have on corporations, smaller companies will likely see a more impactful tax benefit with the corporate tax rate cut to 21% (which consequently is just below the average of the countries in the OECD or the organization for economic co-operation and development).  Currently, small cap companies pay the highest tax rates.

After a strong year for equities, the impact of tax reform could be more muted than you might think as the markets already anticipated some corporate tax reform passing. Quite often, equity prices factor these events in long before the pen hits the paper.

Tax Reform and its Impact on Fixed Income

Bond markets will have mixed implications from tax reform.  Companies that over-levered and don’t have strong positive cash flow will be penalized.  This new law places limits on the interest that corporations can deduct.  This will likely affect companies who are issuers of high yield debt negatively.  While companies investing for growth by making capital expenditures will be rewarded as, they are now allowed to expense a larger amount of these capital expenditures.

Municipal bonds should fare well next year with limits being placed on state tax and property tax deductions, especially in states with higher tax rates.  Other opposing forces could affect supply within the municipal bond market in the coming year from tax reform.  The law eliminates the issuance of advance refunding bonds that are used to retire old debt.  These bonds help boost supply by 10-20% each year in the municipal bond market.  On the flip side, corporations will be less incentivized to hold onto municipal debt as their tax rates have been slashed. If they sell these bonds into the market place that could increase supply, which could lower bond prices.  However, these two forces may cancel each other out.  It looks like the elimination of advance refunding bonds will likely offset any boost in supply from corporations selling.

Interest rates on the rise

The Fed raised short-term interest rates again in December, which was highly anticipated.  They are planning to continue with three more rate hikes in 2018. The bond market already anticipates these rate hikes, which means they should be priced in.  Jerome Powell is set to take over for Janet Yellen in February as the new Federal Reserve Chairperson.  It is unlikely he will change the trajectory of increases expected in 2018. 

The rate hikes have resulted in a flattening of the yield curve this year.  The charts show side-by-side where the yield curve started 2017 and where it is finishing 2017.  If you recall, an inversion of the yield curve, downward instead of upward sloping from left to right, or short-term rates higher than long-term rates, usually signals an oncoming recession.  While we aren’t there yet, this can happen quickly, so it is something we are keeping a close eye on.

Source: http://stockcharts.com/freecharts/yieldcurve.php

Low volatility

The exciting part of 2017 was the lack of excitement.  2017 saw incredibly low average daily moves in the S&P500.  You can see from the below chart that standard deviation, or the variation of price movement by percent, for the S&P 500 is well below the typical range.  It is currently below 6%, which has only occurred five times since 1940.  Typically, it is between 10% and 18% each year.

Source: https://www.mutualfundobserver.com/2017/09/historically-low-volatility/

During times like this, it is easy to get lulled into a false sense of security causing you to potentially reach for a little more risk to spice up your returns.  But, it is important to remember that your risk tolerance isn’t nearly as stable as you think it is.  Outside of our natural behavioral tendencies to want to chase great returns or hide from stocks after a sharp drawdown, our natural progression through life’s milestones can influence our tolerance for risk.  Milestones like a house sale, job change, or death of a loved one can influence our desire to take on risk just like the market performance and volatility.  This makes it hard to compare yourself and your portfolio’s returns to a static benchmark over the years.  Before making any drastic changes to your investment strategy, it is important to discuss with your financial planner the importance of a diversified portfolio that fits with your unique long-term goals and tolerance for risk. 

As we welcome the New Year, we don’t want to miss the opportunity to express our gratitude of the trust you place in us each and every day.  Thank you!

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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Check out our other Tax Reform articles:

Changes to Federal Income Tax Brackets

Changes to Standard Deduction, Personal Exemption, Misc. Deductions, and the Child Credit

Changes to State and Local Tax Deduction

Changes to Mortgage Interest Deduction (including Home Equity Loans and LOC Implications)

Changes to Estate Tax Planning in 2018 and Beyond

Changes to Charitable Giving and Deductions

Changes to Medical Deductions

Changes to Business & Corporate Tax, and Pass-Through Entities

The information contained in this commentary 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 the professionals at The Center 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. 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. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. Investments mentioned may not be suitable for all investors. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. 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. Prior to making an investment decision, please consult with your financial advisor about your individual situation. The prominent underlying risk of using bitcoin as a medium of exchange is that it is not authorized or regulated by any central bank. 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. Investors must have the financial ability, sophistication/experience and willingness to bear the risks of an investment, and a potential total loss of their investment. Securities that have been classified as Bitcoin-related cannot be purchased or deposited in Raymond James client accounts.

 

Angela Palacios & Melissa Joy attend Morningstar Investment Conference

 

Our Investment Department capped off a busy investment research spring by attending the Morningstar Investment Conference in Chicago this June. The annual conference features portfolio managers, thought leaders in the investment profession, and academics on timely topics.

“This is always a highlight of the year for the investment department. We see more portfolio managers and friends in our business than at any other time,” said Melissa Joy. “I especially enjoy the conference because it is exclusively focused on investing so you have three days to think deeply about the investment landscape today.”

Highlights this year included a variety of opinions on the EuroZone, discussions on the impacts of trading costs to portfolios, and one-on-one discussions with portfolio managers. The Center has been at the conference for each of the last 10 years.

Angela Palacios attended a pre-conference training on our new investment research software, Morningstar Direct. This upgrades our investment research capabilities going from a database of only the US public investment universe to an institutional investment platform that offers global investment research with rigorous analytics. 

Angela said “It was a great opportunity to attend a training and user conference for our new software.  I’m confident the software will streamline our research process and give us more accurate and in-depth knowledge to make investment decisions.” She was able to hear from Senior Research Analysts and Economists with Morningstar and also speak with other firms with a dedication to investment research.

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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. Any opinions are those of Melissa Joy and Angela Palacios and not necessarily those of RJFS or Raymond James

Angela Palacios's First Triathlon Experience

 Earlier this year, I decided I wanted to get into a sport that would increase my athletic abilities and give me more incentive to work out on a daily basis throughout the summer, which is usually filled with indulgent summer BBQs.  I decided a triathlon was what I wanted to try.  Prior to training, I had not run more than a mile or two in more than 10 years and had never swam any distance. 

Juggling a career, 5-6 days of training per week, and a family, I learned to plan my workout efficiently and stagger them to avoid injury.

I trained for 5 months and about a week before the race on June 20^th I was going nuts with anticipation for the race.  Race day came faster than I could’ve ever imagined. I arrived at the event two hours early to register and get my gear set up. Honestly, I had no idea what to expect. I knew I could do each event by itself with relative ease or even two of the events back-to-back. The big question was how my body would respond to all three bricked together. Especially on a day when it was over 90 degrees at the 6 pm start time.

I did a short swim to shake off the nerves because you start in the water. With less than a half an hour to start, I was suited up and waiting in a huge line to jump into the 80 degree lake for my first triathlon!

The swim started with chaos. I decided to ease off and let everyone get situated. After about three minutes, I found myself in a steady pace.  From that point on, the swim was comfortable besides getting hit in the head once. I finished the swim with plenty of energy and made the dash through the transition area to get set for the bike. When I got all my gear on, I took off.

It was hot, so our trainers instructed us to hydrate well on the bike. I was surprised that the bike racers were pretty spread out; you weren’t competing for space on the road like I thought you would be. I finished the bike with enough energy to make the transition into the run.  Going into the transition area I realized I forgot to leave my running shoes untied so I lost time getting the knots out before I could put them on.  I bet I will never do that again!

I realized shortly after the adrenaline abated from running through the crowd and high fiving my daughter and husband that my legs felt like cement.  I really started struggling with the run around mile two and a teammate noticed. She ended up slowing down to encourage me onward for the rest of the 5k, making me run faster than I ever have to finish the race strong despite having the urge to throw up (thanks Nancy)!  I finished in 1 hour 37 minutes.

Looking back at week one, I couldn't believe how far I'd come. It seems amazing that I had just completed a triathlon when just a few months ago I couldn't even keep a jog for more than 2 miles.  Not only have I accomplished something that once seemed daunting, but I’d learned that I’m often capable of much more than I think I am, I only need to try! Despite the grueling work it takes to get ready for a triathlon, I’m already looking forward to my next one in July!

Angela Palacios Training for Not 1, but 3 Triathlons!

What was I thinking? CFP Angela Palacios, our Portfolio Coordinator, makes a commitment to healthy living that has her diving into a summer of triathlons.

Summers are my favorite time of year.  My family and I are fortunate enough to have a pool in our backyard and a great place for a summer BBQ with our friends…unfortunately, we have a great place for summer BBQs with our friends.  That means there is always a party and reason to celebrate with chips, meat, desserts and beer at our house!  This invariably ends up in my clothes fitting a bit snugly come September.

Well, this year I decided no more!  So instead of just deciding to cut back on indulging so much each weekend, like a normal person would do, I decided to commit to doing 3 sprint triathlons this summer (.5 mile swim, 12 mile bike and 3.1 mile run).  Since I have never done anything like this in my life, I’m still not sure what I was thinking but after several months I have learned how to swim (other than just floating around on a pool toy), ride a bike (which I haven’t done for over 20 years), and run (which I have never been a big fan of).  After logging 12.4 miles in the pool, 163 miles on my bike and 48 miles on foot so far in training, I feel as though I may actually be able to do this. 

My first triathlon is June 20^th at Island Lake Recreation Area and my ONLY goal for the first one is to finish. We’ll see after that if I set any more lofty goals for the next two in July and August. 

Hopefully at the end of all this I will be in better shape at the end of the summer than I am now and will be setting a great example for my daughter Lilly that you can truly do anything you set your mind to!

Center Team Attends Invitation-only Raymond James Investment Conference

Angela Palacios, Melissa Joy, and Tim Wyman. The three headed to St. Petersburg, Florida January 25^th and 26^th to attend the Portfolio Manager Group investment conference. Top industry experts talked portfolio monitoring, analyzing risk in portfolios, and even about the current political environment’s impact on investments.

“It is very energizing spending time with a group of peers and sharing ideas,” Angela said of the conference. “It provides valuable insight into how to better serve our clients.  Also, it is always a great opportunity to hear from economists and money managers in person as this is key to our investment decision process.”

Melissa and Tim joined the experts at the podium, sharing The Center’s processes in the portfolio monitoring space. Tim explained the history of The Center’s Investment Process and Melissa detailed ten tips for monitoring investments for clients. The audience was particularly interested in learning about our Due Diligence Questionnaire, which is a pre-requisite for investment in our model portfolios. Our investment communication process and firm-wide investment strategy were also well-received.

The advisors at the conference are part of an ongoing Institute of Investment Management Consulting group (IIMC) that was formed last year.  The goal of the IIMC is to provide institutional quality education for investment management. 

Learning from peers and sharing with others puts our process to the test. By that standard, our trip was an overwhelming success. And, coming from Michigan, the weather wasn’t half bad either.

Matt Chope and Angela Palacios Sharpening the Saw in Seattle

Matt Chope and  Angela Palacios recently attended a three-day user conference in Seattle for Tamarac, our portfolio rebalancing software provider.  The meetings were held September 14–16. 

They were joined by 220 advisors, thought-leaders, and product experts from around the country.  Together they collaborated on ways to leverage our current software, learned operational best practices, and gained insights into new technology opportunities.   This collaboration is a result of The Center's ongoing commitment to utilize technology to better serve our clients.

Matt commented:  “To remain competitive, the best financial planning firms need to obtain a better return on information.  We are encouraged by our technology partner's work in this area.  They are forging on, working tirelessly toward better integration of information systems.  These systems will allow for smoother functioning of client information, with the goal of enhancing better decision making.  They are also designing a platform to develop better workflows for our staff and provide better service and overall client experience.”