Category Archives: Market Commentary

Market Commentary Q1 2021

An optimistic start to the new year

With a March 2020 COVID-induced market bottom in the rear-view mirror, global equity markets raced ahead over the next twelve months, setting new highs and finishing a solid first quarter of 2021. The S&P 500 index (U.S. Large Cap stocks) gained 56.4% over the past twelve months and 6% during the past three months. It set 17 new highs in the first quarter of 2021 alone and reached the 4,000 level for the first time. Mega-cap technology companies drove returns at first, part of the Work-From-Home trade that characterized so much of 2020. As the year wound down, it became apparent that the Democrat-controlled Federal government would make good on its promises of increased fiscal spending alongside continued monetary stimulus from the Federal Reserve.  With that uncertainty gone, prospects shot up for a much stronger U.S. economic recovery, and economically sensitive stocks such as U.S. Small-Caps assumed the leadership mantle. As measured by the Russell 2000, U.S. Small-Cap stocks were up 95% over the past year and up almost 13% for the past quarter. International stocks have a greater proportion of cyclical stocks than the U.S. market, which along with increased stimulus from overseas central banks/governments and a weaker dollar, pushed them higher. For the past twelve months, Foreign developed (Europe and Japan) gained 45%, while Emerging Market stocks returned 58%. U.S. real estate (equity REITs) made a strong comeback, as well, up almost 9% and 38%, respectively, for the past 3- and 12-months.

Bonds made headlines in the first quarter of 2021, but not in a good way. Afraid that inflation would pick up with strong economic growth, Treasury bond investors sold off the 10-year bond. This liquidation pushed its yield up to 1.75% at the end of the quarter, an increase of 0.84% and the biggest one-quarter gain since 2016. Prices for broader U.S. investment-grade bonds, including corporate bonds, declined as well, dropping 3.4% during the quarter. U.S. municipal and international bonds (USD hedged) held up much better.

What is your BFA Investment Committee’s outlook for the rest of the year?

Your BFA Investment Committee believes that forecasts for more robust global growth particularly bode well for equities outside of the U.S., which are already undervalued compared to U.S. stocks. Our clients should thus benefit from their allocations to foreign stocks. We will also continue to keep an eye on any rising prices for goods and services. U.S. households are flush with cash from fiscal stimulus.  Those savings, in addition to pent-up demand stemming from COVID-19 restrictions, could unleash inflationary pressures not seen for a long time. We also believe that the Federal Reserve may have to confront increasing bond yields. The Fed has been content to let market forces play out, but a steeper yield curve may force the Fed to push back more forcefully. Finally, our clients should benefit from a diversified fixed income portfolio, going beyond core bonds to take advantage of higher yields, geographical diversification, and the shelter of taxable income when practical. 

Financial Planning Concepts

Biden Tax Proposals – Forewarned is Forearmed!

U.S. tax rates today are among the lowest U.S. citizens have ever experienced. But the newly unveiled $2.3 trillion (with a “T”) infrastructure plan will require some significant revenue to offset the spending. Taxes are once again front and center, so it is time to revisit key components of President Biden’s proposed plan. Nothing is permanent yet but “forewarned is forearmed” and we want you to be ready.

1. Corporate tax increases seem most likely. The President has had a long-standing commitment to increase corporate taxes. The corporate tax rate could increase from 21% to 28% and there could be an increase in taxation of international corporate income earned by U.S.-based companies. These increases could take effect as early as January 2022. According to Forbes, analysts from Goldman Sachs have predicted that Biden’s entire tax plan would reduce 2022 earnings-per-share on the S&P 500 by 9%. 

2. Is your net worth greater than $3.5 million? Unified gift and estate tax exemption amounts could decrease from $11.58M to $3.5M for individuals and $23.16M to $7M for married couples. There is talk of doing away with several common estate planning strategies like GRAT’s, family limited partnership discounts, and limiting dynasty trusts and defective trusts, all very effective tools for high-net-worth families. Planning tip: Consider aggressively gifting now, since there are no claw-backs on the gifts. Review all trusts and estate plans and potential estate tax changes and consider setting up trusts now. Life insurance could help if illiquid assets exist in your estate and taxes remain a concern. 

3. Do you own taxable assets that have appreciated in value? The new plan could eliminate the step-up in basis at death and potentially create a taxable event at that time. While this could be the most challenging of all to pass, it could also be the most impactful. Planning tip: Consider “basis management” as an ongoing strategy to bring down gains in your portfolio, particularly if the step-up in basis is eliminated. This may include paying more attention to annual rebalancing, placing stocks that are anticipated to appreciate into retirement accounts and transferring low-basis stocks to lower-income family members (up or down). 

4. Is your income above $400,000? Watch for an increase of the top ordinary income tax rate for income over $400,000 to 39.6% from 37%. Planning tip: Consider all strategies to bring down income, including funding traditional retirement plans, opening profit sharing/defined benefit plans, bunching deductions, etc. There may be an increase in long-term capital gains rates from 20% to 39.6% on income $1,000,000 and over, plus the Medicare Tax of 3.8% on top of those amounts. 

5. Tax-deferred exchanges for real estate performed under IRC 1031 may no longer be available. IRC 1031 applies to like-kind real estate. Planning tip: Consider performing like-kind exchanges this year to defer the gains, but make sure that any transaction qualifies under any tax law changes. 

Market Commentary and 2021 Outlook

A new year and new look for this report

You will notice that your quarterly BFA report looks a little different than usual. As we mentioned last year, we have invested in a more robust portfolio accounting and reporting system. This new system gives us powerful reporting capabilities, and this report is just one example. Our goal in this report is to provide you information that reinforces our planning efforts and supplements your custodial statements’ content. This report will also tie in with the review reports you receive during your meetings with us. Let us know what you think!

What drove market returns in 2020?

The S&P 500 index (U.S. Large Cap stocks) gained 18.4% last year and set 33 new closing records in the process, driven in large part by mega-cap technology companies. U.S. Small-Cap investors, heartened by brighter prospects for economic growth and continued low interest rates, pushed the Russell 2000 up by 31.4% during the fourth quarter and 20% for the year. Foreign stocks finished the year in positive territory, as well, with Emerging Market stocks up over 18%. China and other Asian economies were the first to recover from the pandemic and drove the performance in international stocks. A weaker dollar in 2020 boosted foreign stock returns, too. Finally, investment- and non-investment-grade (i.e., high yield corporate) bonds across the globe were positive for the year, driven by price appreciation.

What is the outlook for 2021?

Your BFA Investment Committee believes that the global distribution of the COVID-19 vaccine will take longer than many investors are expecting. As a result, the rebound in economic activity will stall (but not decline) in the first quarter of 2021 and then accelerate during the rest of the year. It will be essential to remain balanced among growth and value stocks, both in the U. S. and abroad. Also, we believe that emerging market economies and particularly China will continue to be a bright spot in the global markets, especially if the U. S. tones down trade rhetoric under President Biden. We expect the Federal Reserve to keep fixed income yields, across the curve, at low levels. We have already diversified U. S. core bonds to include a fixed-income manager who has a flexible mandate so he can cautiously go where the yield is. Rebalancing your portfolio is vital, so we are doing another round this month to sell Equities and purchase Fixed Income to bring the Equity allocation back down to its target weight (i.e., sell high and buy low). Finally, we have had several clients ask if a Democratic-controlled Federal government will negatively affect their portfolio. We have managed situations like this before and are not concerned. Fortunately, we know that markets historically take in stride which party controls the Presidency and Congress. Your portfolio is well-positioned for whatever may happen, including any correction in U.S. Large Cap stocks in 2021.

Financial Planning Concepts

How should I plan for the policies of the new administration?

The Biden administration intends to hit the ground running on several policy changes that will directly impact your financial plan. Right now, it is impossible to know how Congress will view the policy changes and if he will have enough support. Nevertheless, some of the policies could significantly change how you pursue your financial plan and having a strategy in place now is critical. Here are 3 important considerations for your financial plan:

#1 Will my income taxes go up?

Probably, but maybe less than you think. First, Goldman Sachs believes the President will be focused on vaccine distribution and COVID relief stimulus that will slow the implementation of additional taxes early in 2021. However, there are a few things to remember, in case they get to the tax law changes this year: 1) The top tax tier above $400,000 per year is expected to rise to 39.6%. Remember, this is about what the rates were in 2016. 2) Payroll taxes will increase for those making more than $400,000 per year, as well. 3) For those who have income above $1MM, capital gains taxes will increase to ordinary rates. This is significant for those selling businesses and high-income households and will make investment-tax-planning more critical. 4) The State and Local Tax deduction cap is likely to be removed, reinstating this great tax deduction for those who pay property taxes, etc. 5) Finally, corporate taxes are expected to increase and a new minimum corporate tax instituted. All in all, we will not know until the proposals make it through Congress and the result could be much different than proposed. Just be prepared.

#2 Is inflation going rise?

The stimulus we have seen and the resulting increase in the money supply may fuel inflation for the first time in years. JP Morgan is predicting 3% inflation soon due to the pent-up demand. It may be necessary to update your inflation assumptions in your financial plan to reflect the new outlook and to maintain your equity exposure to combat the additional inflation.

#3 Is my estate plan at risk?

Biden is proposing changes to the estate tax system that will change the way capital assets are taxed and the number of estates that will pay estate taxes. First, they have proposed the elimination of the “step-up” in basis for inherited capital assets. This means that if there is any appreciation in an asset (stock, real estate, business, etc.) it will be taxable to the heirs at the original basis. This is a truly significant change to the current system. Also, they intend to lower the exemption amount that may be passed tax-free in your estate. The new amount may change back to $5MM per person or even to $3.5MM per person. When combined, these two changes could significantly increase the taxes to your heirs. If these changes occur, you will likely need to update your estate plan right away. We are conducting estate plan reviews now to prepare, so please let us know if you would like for us to review your plan.

Market Commentary Q3 2020

Global equity markets continued their recovery in the third quarter of 2020.

The S&P 500 index (U.S. Large Cap stocks) finished the third quarter up almost +9% and set a new record in the process. Year-to-date through September 30, the S&P 500 is up +5.6%. The largest technology companies comprise almost 25% of the index and drove returns. For example, Amazon.com Inc. is up +70.4% year-to-date while Apple Inc. is up +58.6% year-to-date. Other index components have more room to go to recover their losses from earlier in the year. Assuming every holding in the S&P 500 has equal weight, the index was up +6.8% for the quarter but down -4.8% year-to-date. U.S. Small Cap stocks gained +5% for the quarter. Equity gains were not limited to U.S. stocks, as Foreign developed (Europe and Japan) stocks were up almost +5%. Emerging market stocks outperformed their U.S. and foreign developed counterparts during the quarter, gaining +9.6%. A continued weakening of the U.S. dollar (-3.6% for the quarter) boosted Foreign stock returns. Non-investment-grade (i.e., high yield) U.S. corporate bonds continued their recovery, gaining almost 5% during the third quarter.

Finally, U.S. Core and International bonds were up +0.6% for the quarter. The 10-year Treasury yield barely nudged during the quarter, ending at 0.68%.

Here are the broad index returns through the Third Quarter of 2020*:

U.S. Large Cap Stocks +5.6% U.S. Real Estate -17.9% Allocation 30%-50% Equity +1.0%
U.S. Small Cap Stocks -8.7% U.S. Aggregate Bonds +6.8% Allocation 50%-70% Equity +1.3%
Foreign Developed Stocks -7.1% International Bonds (Hedged) +3.0% Allocation 70%-85% Equity -1.3%
Emerging Market Stocks -1.2%

What does the BFA Investment Committee think will drive volatility for the rest of the year?

We expect market volatility to pick up as we get closer to the U.S. Presidential and Senate elections. The markets do not like uncertainty, and the election results may not be final until days or months following the actual voting. While the markets may react negatively to these developments, we believe the reaction will be short-lived. Research shows that the political party in power, either in the Presidential or Congressional branch, is not a major market driver. We also expect an increase in market volatility if the U.S. government does not provide further fiscal stimulus. Chairman Jerome Powell of the U.S. Federal Reserve has been quite vocal about the fragility of the economic recovery and the need for ongoing fiscal stimulus in addition to the monetary stimulus provided by the Federal Reserve. Many investment analysts and economists expect Congress to reach a deal, even if it means doing so after the election.

Volatility could also pick up if the global economy, particularly the U.S., cannot sustain the recovery.

Most economists expect a significant bounce in third-quarter U.S. Gross Domestic Product (GDP). Still, there is concern that employment will not reach pre-pandemic levels for several years, and thus, consumer spending will taper off. However, the Federal Reserve has promised to continue its extremely supportive monetary policy. Global governments and central banks have learned valuable lessons from their initial responses to COVID-19 and should continue to act expeditiously to support their economies. Finally, work continues on a COVID-19 vaccine. Although there is uncertainty around when and how the vaccine will be safely distributed worldwide, unprecedented cooperation between global governments and private corporations has given both citizens and investors hope for economic activity accelerating to pre-pandemic levels. Given these challenges and opportunities, your BFA Investment Committee is cautiously optimistic and maintains its portfolio allocations and fund line-up. We are currently holding cash in place of U.S. high yield bonds, and it could be early next year before we re-enter the U.S. high yield corporate bond sector.

We will increase our focus on tax planning in the fourth quarter for client portfolios. Mutual funds are required to distribute their realized capital gains by year-end, with most of those distributions occurring in December. We will analyze our client holdings for material distributions (i.e., 5% or more of net asset value) and may take action to avoid those distributions. We will also look for opportunities to harvest further capital losses in client portfolios. Given the specter of higher capital gain taxes, loss carryforwards have become even more valuable. These actions could save on taxes for you.

You Are Not Alone

Is there any question that “The Year 2020” will go down as one of the most challenging times in history? Certainly not. But you may wonder why you feel so out of sorts. You should know that most of us are experiencing a nagging sense of disorientation about ourselves and the world around us. It is with good cause.

Consider the stressors we are all experiencing: The pandemic is resurging in many states when we thought the worst was behind us. Most of us are beyond tired of social distancing, and the uncertainty surrounding an effective vaccine seems to add little hope. To add insult to injury, the economy has suffered tremendously under the weight of social distancing strategies, is showing timid signs of recovery and there are millions out of work. While you may not personally experience it, you know it is there and you can feel it.

And now the election is here. The current state of politics in America creates its own burden of mental uncertainty. Deep inside, we all know that there are many things that need fixing in the U.S. and are eager to get something done. But collaboration is difficult in a winner-take-all, zero-sum game. Is there any real solution?

More than any other time, you should know that there is hope. In difficult times, you will hear people seek hope by quoting the Bible saying, “This too shall pass.” While somewhat accurate in sentiment, the phrase is not actually in the Bible. However, there is a scripture that says, “Rejoice in hope, be patient in tribulation, be constant in prayer.” Tribulation is inevitable but we can celebrate in that true hope of a better future; chances are, you are among the fortunate ones now. With patience (and a little time) we WILL see it pass. And through prayer, all of us can find peace, compassion, grace and, of course, hope.

Most of all, we need to care for one another, and we want you to know that we care about YOU. If you are inclined to get in touch and share your uncertainties about the future, we can promise a deep interest in your situation and your concerns. We may not have all (or any) of the answers. But there are times when a good conversation about what is important in life can result in better insights, and sometimes, a sense that we are not alone in our uncertainties.

We look forward to talking with you again soon!

*U.S. Large Cap=S&P 500, U.S. Small Cap=Russell 2000, Overseas Stocks=MSCI EAFE, Emerging Market Stocks=MSCI Emerging Markets, U.S. Bonds=Barclays Aggregate Bond Index, International Bonds=Barclays Global Aggregate ex-U.S. USD-Hedged, US Real Estate=MSCI US REIT: Data Source: Morningstar®. Allocations=Morningstar® U.S. Fund Allocation Categories: Data Source: Morningstar®. Index returns are for illustrative purposes only and do not represent actual performance of any investment. Client returns will differ from the results shown. Index performance returns do not include any management fees, transaction costs or expenses. The performance data quoted represents past performance and does not guarantee future results. The investment return and principal value of an investment will fluctuate; thus an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than return data quoted herein. Indexes are unmanaged and one cannot invest directly in an index. Please review your allocation regularly and notify BFA immediately if your circumstances should change. The foregoing content reflects the opinions of BFA and is subject to change. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct.

Market Commentary Q2 2020

The equity markets made a dramatic recovery in the second quarter of 2020.

The S&P 500 index (U.S. Large Cap stocks) finished the second quarter up 21%, its biggest quarterly gain since 1998. As of the end of June, the S&P 500 was only 3% below its value at the beginning of 2020. The largest technology companies drove returns, although the rally became more widespread as the quarter progressed. U.S. Small Cap stocks did even better during the quarter, up 25.4%. Foreign developed (Europe and Japan) and Emerging market stocks had stellar quarterly returns, as well, up 14.9% and 18.1%, respectively. They outperformed their U.S. counterparts in late-May and June in part due to a weaker U.S. dollar boosting foreign stock returns. Even non-investment-grade (i.e. high yield) U.S. corporate bonds gained 9.6% during the quarter. These returns are remarkable given the world-wide economic downturn and global economies continuing to struggle with re-opening businesses given continued spikes in COVID-19. Additionally, racism and inequality protests around the world stole the headlines from COVID-19 during the quarter but the markets continued to march on.

U.S. Core and International bonds had an uneventful second quarter, gaining 2.9% and 1.8% respectively, and bond yields continue to be at historic lows. The 10-year Treasury yield is 0.66% on June 30th.

Here are the broad index returns through the Second Quarter of 2020*:

U.S. Large Cap Stocks -3.1% U.S. Real Estate -19.0% Allocation 30%-50% Equity -2.7%
U.S. Small Cap Stocks -13.0% U.S. Aggregate Bonds 6.1% Allocation 50%-70% Equity  -3.6%
Foreign Developed Stocks  -11.3% International Bonds  2.3% Allocation 70%-85% Equity -6.7%
Emerging Market Stocks -9.8%

 

Why are equity investors so optimistic?

The unprecedented intervention by global central banks and governments to assist businesses and individuals during the pandemic have given investors the confidence to re-enter risk assets such as equities and corporate credit. Along with familiar interest rate cuts and quantitative easing programs, central banks like the U.S. Federal Reserve have implemented “new” tools such as the outright purchase of bond exchange-traded funds (ETFs). Global governments have also responded with massive stimulus spending. In fact, most economists and investment analysts expect a second-round of stimulus from the U.S. Congress by the end of summer. Time will tell.

Investors are also anticipating a speedy recovery and an effective vaccine but could be disappointed. Unfortunately, business re-openings are having spotty success and the unemployment rate is not expected to be back to pre-recession levels for another couple of years. Additionally, many health care professionals, health care stock analysts, and economists do not believe that a vaccine is imminent. It could still be another 8-10 months before a vaccine is ready and available for global distribution. Cautious optimism is likely best right now.

What is the BFA Investment Committee’s outlook and strategy lately?

We believe that current U.S. equity valuations are excessive and that volatility in equities will increase as reality sets in for investors. Data suggests that this will be a much?more drawn out recovery than originally expected. Thus, we are anticipating a correction (i.e. 10% or more drop in value) by year-end in US equities. We are currently holding cash in lieu of U.S. high yield bonds and it could be early next year before we re-enter the U.S. high yield corporate bond sector. Also, we believe that Emerging markets, particularly those in Asia, are poised to outperform U.S. and foreign developed stocks. They should continue to benefit from positive structural changes, including participation in “new economy” sectors such as digitalization and technology and from revamped regional trade agreements which will help smooth out bumps in the supply chain. Valuation discounts of emerging market equities to U.S. equities are at all?time highs and the portfolio is weighted appropriately.

The recovery in equities during the second quarter gave us the opportunity to identify those Equity allocations that had grown above their maximum weights. We sold Equities and purchased Fixed Income to bring the Equity allocation back down to its target weight (i.e. sell high and buy low) and to protect the gains that you have recently realized. We also added a new investment-grade bond fund in U.S. core bonds that should boost yield in our fixed income portfolios while maintaining that sector’s role as ballast for the portfolio.

Finally, as a fee-only fiduciary firm, we always have your best interest at heart and believe in full disclosure of our compensation. To this end, we have included a copy of our new Client Relationship Summary, on file with the SEC and in plain English, which provides a summary of our relationship with you, our clients. Please review it and let us know if you have any questions. Also, please let us also know if there are any changes in your financial situation or investment objectives or if you wish to impose, add, or modify any restrictions to your accounts.

As 2020 rolls on, we know that a number of uncertainties in the markets, economy, and political landscape continue to exist. Please know that your BFA Investment Committee continually monitors these landscapes and will make any adjustments as necessary. If you have any questions or need reassurance, please let us know. We look forward to talking with you again soon!

*U.S. Large Cap=S&P 500, U.S. Small Cap=Russell 2000, Overseas Stocks=MSCI EAFE, Emerging Market Stocks=MSCI Emerging Markets, U.S. Bonds=Barclays Aggregate Bond Index, International Bonds=Barclays Global Aggregate ex-U.S. USD-Hedged, US Real Estate=MSCI US REIT: Data Source: Morningstar®. Allocations=Morningstar® U.S. Fund Allocation Categories: Data Source: Morningstar®. Index returns are for illustrative purposes only and do not represent actual performance of any investment. Client returns will differ from the results shown. Index performance returns do not include any management fees, transaction costs or expenses. The performance data quoted represents past performance and does not guarantee future results. The investment return and principal value of an investment will fluctuate; thus an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than return data quoted herein. Indexes are unmanaged and one cannot invest directly in an index. Please review your allocation regularly and notify BFA immediately if your circumstances should change. The foregoing content reflects the opinions of BFA and is subject to change. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct.

Market Commentary Q2 2019

The markets keep rolling along. Every asset class finished the first half of 2019 with gains.

After a rough May, stocks rebounded in June and the S&P 500 index (U.S. Large Cap stocks) turned in its best first-half performance since 1997. Real estate stocks continued their winning streak, as well, with both U.S. and Global REITs up 16-17% year-to-date. During the same time, U.S. Core bonds were up over 6% and Foreign and Emerging market stocks gained 14% and 11%, respectively. Even commodities participated in the rally, earning 5% over the first six months of 2019.

Bond and stock investors have diverging views of the U.S. economy. In June, the Federal Reserve discarded their “patient” stance and hinted they would lower rates by year-end. There are two ways to interpret this news: U.S. bond investors have focused on a looming recession, continued low inflation, and possible interest rate cuts. The demand for bonds has significantly lowered bond yields. U.S. stock investors, on the other hand, have viewed mixed economic indicators through rose?colored glasses, are anticipating an end to the trade wars and have driven stock returns to record levels. Only time will tell who is correct.

U.S. Large Cap Stocks 18.5% U.S. Aggregate Bonds 6.1% Global Real Estate 16.2%
U.S. Small Cap Stocks 17.0% International Bonds 5.4% Allocation 30%-50% Equity  9.8%
Overseas Stocks  14.0% Commodities  5.1% Allocation 50%-70% Equity 12.2%
Emerging Market Stocks 10.6% U.S. Real Estate 17.1% Allocation 70%-85% Equity 13.6%

Economic Outlook

The U.S. economy is slowing down.

In July, the current U.S. economic expansion became the longest in U.S. history. However, signs of slowing momentum continue to mount as evidenced by the gradual decline in the annualized U.S. Gross Domestic Product (GDP) figures for the past 12 months:

2018 – Q1: 2.2%, Q2: 4.2%, Q3: 3.4%, Q4: 2.2%
2019 – Q1: 3.1%, Q2: Various analyst estimates for 2nd quarter 2019 GDP are still positive but in the sub-2% range.

Global economic growth is slowing, as well.

Like the slowing U.S. economy, global economic growth projections continue to be revised downward due to threatened tariffs, or those already in place, driving reductions in trade. Brexit (the divorce between the United Kingdom and the European Union) and its October deadline have also raised trade worries in the European markets. In response, global central banks have begun to lower interest rates and/or ease financial conditions. Despite the short-term risks, however, attractive valuations suggest that investments in European and emerging-market stocks will still significantly outperform U.S. stocks over the next five to 10 years.

Global economic reports continue to be mixed but you can count on the media to focus on the bad news. Recessions and their corresponding market declines are inevitable, but it is impossible to forecast when a recession will hit. We will continue to monitor the economic and market environments for you and will adjust as needed.

*U.S. Large Cap=S&P 500, U.S. Small Cap=Russell 2000, Overseas Stocks=MSCI EAFE, Emerging Market Stocks=MSCI Emerging Markets, U.S. Bonds=Barclays Aggregate Bond Index, International Bonds=FTSE WGBI, Commodities=Bloomberg Commodity, US Real Estate=MSCI US REIT, Global Real Estate=S&P Global REIT: Data Source: Morningstar®. Economic Data: Litman Gregory Analytics and Vanguard Investments. Allocations=Morningstar® U.S. Fund Allocation Categories: Data Source: Morningstar®. Tax Planning Data Source: KPMG 2019 Tax Planning Guide. 1“Important”: ssa.gov/oact/NOTES/as120/LifeTables_ Body.html, 2https://www.onefpa.org/MyFPA/Journal/Documents/March2017_Contributions_Blanchett.pdf#search=annuity. Index returns are for illustrative purposes only and do not represent actual performance of any investment. Client returns will differ from the results shown. Index performance returns do not include any management fees, transaction costs or expenses. The performance data quoted represents past performance and does not guarantee future results. The investment return and principal value of an investment will fluctuate; thus an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than return data quoted herein. Indexes are unmanaged and one cannot invest directly in an index. Please review your allocation regularly and notify BFA immediately if your circumstances should change.

Market Commentary Q1 2019

What a start to the new year! In a switch from 2018, every asset class finished the first quarter of 2019 with gains. In fact, U.S. Large Cap stocks (propelled by a resurging technology sector) and U.S. Real Estate had their best quarters since 2009, up 14% and 16%, respectively.

U.S. stock indexes have now recovered almost all of their declines from the latter part of 2018 but have yet to reach their record highs from last fall. Bonds participated in the rally, as well, with U.S. Core bonds up 3%. U.S. oil prices gained 32% in the first quarter, helping Commodities to earn over 6% during that time.  Foreign stocks (including emerging markets) gained 10% during the quarter, during what has been a challenging time for them, especially for developed markets. 

The markets mainly focused on three developments during the quarter. First, the U.S. Federal Reserve signaled its intentions to stop raising short-term interest rates and to slow the pace at which it was shrinking its $4 trillion asset portfolio.  Central banks across the globe, including in China and the Eurozone, also announced similar plans to stop tightening, or in some cases to put in place stimulus measures, to offset declining economic growth. Bond prices rallied as a result, pushing bond yields lower. Real estate stocks also rallied, as did small company stocks, whose earnings benefit from lower borrowing costs.

Second, news reports kept hinting that the U.S. and China were close to resolving their trade conflict, which affects other countries than just those two. Emerging market stocks in particular benefitted from these positive reports. Negotiators continue to meet to iron out their differences.

Third, disappointing Brexit and economic news from the Eurozone (mainly relating to difficulties in its members’ manufacturing sectors) kept coming during the quarter, creating headwinds for foreign stocks. However, foreign stocks did not have the headwind of the dollar this quarter, which was flat against a broad basket of currencies.

U.S. Large Cap Stocks 13.7% U.S. Aggregate Bonds 2.9% Global Real Estate 14.4%
U.S. Small Cap Stocks   14.6% International Bonds 1.7% Allocation 30%-50% Equity   7.1%
Overseas Stocks   10.0% Commodities 6.3% Allocation 50%-70% Equity  8.9%
Emerging Market Stocks 9.9% U.S. Real Estate 15.9% Allocation 70%-85% Equity 10.3%

Economic Outlook

What about the yield curve? The range of bond yields for short-term to long-term maturities has been flattening during the Fed’s interest rate hikes over the past few years, but the short-end of this “curve” had not yet inverted since 2007, meaning a higher yield on the 3-month Treasury bill versus the 10-year Treasury note. As most news outlets reported on March 22, 2019, the yield curve did invert, although the actual spread was only 0.022% and the inversion righted itself by early April. It is true that the 3-month Treasury yield has exceeded the 10-year Treasury yield ahead of every recession since 1975.

However, there have also been two false positives—an inversion in late 1966 that was followed by economic growth, and a largely flat curve, like the current one, in late 1998 that also wasn’t followed by a recession. Also, many analysts and fund managers believe that the power of an inverted yield curve to predict a recession is no longer as robust given the Fed’s interference in the credit markets from its almost decade-long Quantitative Easing (i.e. buying government bonds for their balance sheet to increase the money supply and lower yields). Finally, it is nearly impossible to predict the actual timing of a recession, and a study by Credit Suisse shows that the S&P 500 has risen around 16% in the 18 months following a curve inversion, going back to 1978.

So what are we to think and do?  First, ignore the 24/7 news. Second, know that we will eventually experience a recession, and the stock and credit markets will continue to chug along with some potholes (possibly deep) in the road. Third, know that your Brown Financial investment committee is monitoring economic and market developments on an ongoing basis and is committed to diversified portfolios that should help you navigate the road ahead.

This Is Important

There is good news and bad news associated with recent research. The good news is, according to Social Security Administration research1, you are expected to live longer after age 65 than any previous generation; approximately seven years longer for males and five years longer for females compared to those retiring in 1900. The bad news? You are responsible for paying for it.

In a 2017 study published in the Journal of Financial Planning, Blanchett, Finke and Pfau make the case that “historically high stock and bond prices will lead to lower future investment returns” which, when combined with a longer life expectancy, will make it harder than ever to navigate retirement successfully. Their conclusion2 is to either save more or delay retirement to compensate for the low-return environment.

But what if you have already retired? There is a solution: They suggest utilizing “the potential benefits of strategies that provide greater value in a low-return environment, such as the ability to earn mortality credits through later-life annuitization.” This simply means that you can buy “insurance” to protect your retirement income. This insurance comes in many forms but ultimately can provide a substantial increase in the sustainability of your savings and give you an increased sense of peace of mind that you will not outlive your nest egg. Nearly every retiree can benefit from this protection, but historically, you could only buy this protection from a commissioned insurance broker. Now we can provide these strategies to you on a fee-only, fiduciary platform. If you are concerned and would like to learn more, please let us know.

We truly appreciate the opportunity to work with you and look forward to talking with you again soon!

Market Commentary: 4Q 2018

In a complete reversal from 2017, 2018 saw the bull market in US large cap stocks almost come to a halt amid a return to volatility.

Equities set several records during the fourth quarter, and none of those records were good. Global equities, real estate, and commodities were all negative for 2018; the last time this happened was in 2008. December 2018 was one of the worst Decembers for US equities since the 1930s. Also, US small cap stocks officially ended its almost 10?year bull market in December 2018 by declining more than 20% from its August peak. The main thing that 2017 and 2018 have in common is that most asset classes moved in one direction—a pattern that’s not seen in a typical year. In 2017, markets seemed to overlook the looming economic challenges. But markets finally reflected those challenges in their prices in 2018. While we don’t like the downturn, we are not alarmed by it. 

Investing in foreign developed and emerging market stocks appears wise, despite their underperformance in 2018. Conflict with our international trading partners continued to be a big factor in foreign stock underperformance this year. Also, global central banks have begun mirroring the US Federal Reserve policy of tighter money conditions. Both have weighed on equity prices across the globe. However, foreign developed and emerging market stocks held up better than US stocks during the fourth quarter. Additionally, after the dollar’s strong performance the past several years, the inflated U.S. budget deficit and the overvaluation we see in U.S. stocks, we believe the U.S. dollar is a risk factor that investors would be wise to avoid. Our allocation to foreign stocks provides our portfolios with protection and diversification away from the U.S. dollar. 

Here are the broad index returns through the Fourth Quarter of 2018*:

U.S. Large Cap Stocks -4.4% U.S. Aggregate Bonds 0.0% Global Real Estate -4.8%
U.S. Small Cap Stocks -11.0% International Bonds -0.8% Allocation 30%-50% Equity -5.0%
Overseas Stocks -13.8% Commodities -11.3% Allocation 50%-70% Equity -5.8%
Emerging Market Stocks -14.6% U.S. Real Estate  -5.8% Allocation 70%-85% Equity -7.9%

Economic Outlook

Many analysts are forecasting lower US GDP growth for 2019. The US economy is in the late stage of its expansion, ahead of Europe, the UK, and Japan, who are still in the middle stage of their expansions.  Additionally, going forward, US corporate earnings will not have the bump from tax cuts as they did in 2018. However, one wildcard continues to be the Federal Reserve’s campaign of rising interest rates. Recent indications from Fed officials, including Chairman Jerome Powell, suggest that the Fed is now more flexible regarding future rate increases and could even take a pause if economic conditions warrant. Inflation is projected to remain tame and unemployment is expected to remain low. It truly is a mixed-bag regarding the US economy in 2019.

Headlines are now turning from the US to Overseas. Brexit (the withdrawal of the United Kingdom from the European Union on March 29th) has been getting much press lately. The worst-case scenario would be that the UK leaves the EU without the necessary treaties and agreements in place and the British start to experience economic hardships like higher inflation and unemployment. Although UK stocks only comprise about 1-3% of our portfolios, we will continue to monitor the situation and adjust, if necessary. Another headline that keeps popping up is the projected slowdown in global growth beginning in 2019. However, the most current forecasts by both the World Bank and The Conference Board predict a drop in World GDP of only 0.2% over the next two years; clearly not the earth-shattering decline the media trumpets. Despite the risks we see over the short term, we have high conviction that our investments in European and emerging-market stocks will earn significantly higher returns than U.S. stocks over the next five to 10 years.

Over the next year, the range of potential equity market outcomes is just as wide as it was going into 2018. Our approach and preparation remain the same. We construct and manage portfolios to meet our clients’ longer-term return goals, which means successfully investing through multiple market cycles, not just the next 12 months.

Tax Planning – 5 Strategies for 2019

The first quarter is the time to begin tax planning for the year. Here are five things to remember for your 2018 tax return and to lower your taxes in 2019:

  1. If you are over 70 ½ years old and taking minimum required distributions from your IRA, consider a qualified charitable distribution (QCD) for your charity and church giving. When you use the QCD to give your gifts you lower your adjusted gross income. If you performed a QCD in 2018, remember to remind your tax preparer that the contribution is NOT tax-deductible.  
  2. Prior to the changes introduced by the new tax law, allowable itemized deductions were subject to phase-out for taxpayers whose income exceeded certain thresholds. The new tax law abolishes this limitation on itemized deductions for tax years 2018-2025. This makes giving during years of high income even more powerful.
  3. Starting in 2018, tax-free distributions from 529 plans can also be used to pay up to $10,000 of expenses per student per year for elementary and secondary schools. Alabama also provides a state income tax deduction for contributions to the state plan of up to $10,000.
  4. It may be time for you to update your will. Because the tax laws significantly increased the amount that can be passed tax-free to your heirs, the provisions in your will may no longer apply. Check with your estate planning attorney to see if it makes sense for you to have an update.
  5. Decide if this is the year to “bunch” your deductions. Remember that the standard deduction for couples will be $24,400 this year. In order to maximize the benefits of the higher deduction, alternate years of giving and deductible expenses to exceed the standard deduction every other year. 

We truly appreciate the opportunity to work with you and look forward to talking with you again soon!

*U.S. Large Cap=S&P 500, U.S. Small Cap=Russell 2000, Overseas Stocks=MSCI EAFE, Emerging Market Stocks=MSCI Emerging Markets, U.S. Bonds=Barclays Aggregate Bond Index, International Bonds=FTSE WGBI, Commodities=Bloomberg Commodity, US Real Estate=MSCI US REIT, Global Real Estate=S&P Global REIT: Data Source: Morningstar®. Economic Data: Litman Gregory Analytics and Vanguard Investments. Allocations=Morningstar® U.S. Fund Allocation Categories: Data Source: Morningstar®. Tax Planning Data Source: KPMG 2019 Tax Planning Guide. Index returns are for illustrative purposes only and do not represent actual performance of any investment. Client returns will differ from the results shown. Index performance returns do not include any management fees, transaction costs or expenses. The performance data quoted represents past performance and does not guarantee future results. The investment return and principal value of an investment will fluctuate; thus an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than return data quoted herein. Indexes are unmanaged and one cannot invest directly in an index. Please review your allocation regularly and notify BFA immediately if your circumstances should change.

Market Commentary: 3Q 2018

The third quarter saw stock market performance vary widely across global markets.

The US market was propelled by continued strong profit growth, thanks in large part to the Trump corporate tax cuts. S&P 500 operating earnings per share grew 27% year over year in the third quarter and a record-high 80% of S&P 500 companies reported earnings that beat the consensus expectation. The S&P 500 index hit a new all-time high in late September.

Emerging market stocks fell 1.0% and developed international equities had a slight gain of 1.4%. There are always multiple factors behind short-term market moves, but the intensifying trade conflict between the United States and China was an important one for foreign markets and specifically EM stocks in the third quarter. Another factor was the US dollar, which appreciated against other currencies again this quarter. This currency appreciation created a drag on foreign stock market returns for dollar-based investors.

In the bond markets, the yield on the 10-year Treasury rose to 3.05% at the end of the third quarter, flirting with a seven-year high. As such, the core bond index had a negative 0.5% return in September and was flat for the quarter.

Here are the broad index returns through the Third Quarter of 2018*:

U.S. Large Cap Stocks 10.5% U.S. Aggregate Bonds -1.6% Allocation 30%-50% Equity 1.1%
U.S. Small Cap Stocks 11.5% International Bonds -3.6% Allocation 50%-70% Equity 3.1%
Overseas Stocks -1.4% Commodities 11.8% Allocation 70%-85% Equity 3.9%
Emerging Market Stocks -7.7% U.S. Real Estate  2.1%

Economic Outlook

The longer-term growth outlook remains intact for Emerging Market and US stocks.

Conditions in emerging markets still appear favorable. Given the negative headlines concerning emerging markets in recent months, there are several points worth highlighting based on additional research and analysis in this area. First, the prospect of an expanding trade war between the United States and China intensified in the third quarter and has caused investor sentiment to turn against emerging markets. Uncertainties remain, but logic suggests that a full-fledged trade war is unlikely since it’s in neither country’s interest. Second, a strong US dollar, as we’ve seen lately, lowers EM stock returns for US dollar–based investors and negatively impacts emerging markets with dollar-denominated debt. However, the US fiscal stimulus (tax cuts) implemented at a time when the economy is at or near full employment will likely cause fiscal deficits and debt levels to rise. This should be a longer-term headwind for the US dollar and a positive for EM stocks. Finally, the economic crises in Argentina and Turkey have made headlines. However, these economies and their financial markets are very small and the risk of contagion to other, more meaningful emerging markets is low. In contrast to the late 1990s EM crisis, most other EM countries’ fundamentals are healthier and their prospects positive.

The US market is a horse of a different color.

No one knows exactly when this record-longest and second-strongest US bull market will end. The fiscal stimulus from the tax cuts has goosed corporate earnings growth this year, but those benefits will fade soon. And as is often the case at turning points in financial markets, it is precisely because the recent cycle for US stocks has been so strong and market participants view the US as the best game in town, that the outlook for the next phase of the cycle is darkening. There are three things to anticipate: 1) S&P 500 earnings growth expectations are now exceedingly high and the US economy is operating at or near full capacity and full employment. These conditions are unsustainable and a negative for future stock returns. Strike one. 2) The tight labor market has finally translated into wage increases. History and economic theory suggest wages will continue to rise, negatively impacting corporate profit margins and earnings growth. Rising wages could also cause companies to raise prices, stoking inflation and forcing the Fed to tighten even more. Strike two. 3) The recent rise in the dollar is likely to be another headwind for US multinational corporate profits, as it was in 2015 when the dollar rose. Trade wars, if they continue to escalate, will also have a depressing effect on sales growth and margins—both are negative for earnings and stock prices. Strike three. So, US stocks are over-earning but still expected to grow earnings even faster than normal over the next year and are expensive based on the most reliable valuation metrics. That is not a recipe for good returns looking forward.

In times of unusual volatility, it is critically important to keep the longer-term perspective and diversification in mind. It is easy to be fooled by temporary divergence in the performance of the various asset classes, but a disciplined, fundamental approach will ultimately win in the end.

New Insurance Partner

BFA has established a partnership with a commission-free, low-cost insurance provider for our clients. By cutting commissions, this company can lower the costs of life and long-term care insurance as well as some annuity products. If you or anyone in your family has an insurance need, please let us know and we will be happy to help you access this low-cost provider.

We truly appreciate the opportunity to work with you and look forward to talking with you again soon!

*U.S. Large Cap=Russell 1000, U.S. Small Cap=Russell 2000, Real Estate=Dow Jones US Real Estate Index, Overseas Stocks=MSCI EAFE, Emerging Market Stocks=MSCI Emerging Markets, Commodities=S&P GSCI, U.S. Bonds=Barclays Aggregate Bond Index, International Bonds=JP Morgan EMBI Global Core: Data Source: Blackrock Benchmark Returns Comparison September 2018. Economic Data: Litman Gregory Analytics. Allocations=Morningstar® U.S. Fund Allocation Categories: Data Source: Morningstar®. Index returns are for illustrative purposes only and do not represent actual performance of any investment. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.

 

Market Commentary: 2Q 2018

The second quarter reinforces the random nature of short-term performance.

As we pause to reflect at the midpoint of the year, 2018 has served as another reminder to investors that over the short term, markets are driven by innumerable and often random factors that are impossible to consistently predict. In the first quarter, US stocks experienced their first major losses since 2016 and a return to more “normal” market volatility. Many market prognosticators speculated that this could indeed be the end of the nearly decade-long US bull market.

Fast-forward through three more eventful months and US stocks have been the net beneficiaries, gaining 3.4% on the back of a surging dollar while the rest of the world has slowed. The dollar’s 5% appreciation translated into a meaningful return headwind for dollar-based investors in foreign securities as foreign currencies depreciated against the dollar. Developed international stocks fell 1.8% and European stocks declined 1.6% for the quarter. Emerging market (EM) stocks fared the worst, dropping 9.6% in dollar terms. 

In bond markets, the benchmark 10-year Treasury yield pierced the 3% level in May, hitting a seven-year high. Yields then fell back, ending the quarter at 2.85%. The core investment-grade bond index had a slight loss for the quarter and remains in negative territory for the year. 

Here are the broad index returns through the Second Quarter of 2018*:

U.S. Large Cap Stocks 2.9% U.S. Aggregate Bonds -1.6% Allocation 30%-50% Equity -0.7%
U.S. Small Cap Stocks 7.7% International Bonds -6.0% Allocation 50%-70% Equity -0.1%
Overseas Stocks -6.7% Commodities 10.4% Allocation 70%-85% Equity 0.4%
Emerging Market Stocks 5.9% U.S. Real Estate 1.4%

Economic Outlook

It was a difficult quarter for equity holdings, particularly in the emerging markets.

In 2016, as the global economy began firing on all cylinders for the first time since the financial crisis began, EM stocks surged, gaining 12% in 2016 and 32% last year. EM stocks then bolted out of the gates in 2018, with an additional 11% return through late January. Since then, however, these holdings have declined sharply, and returns are now in negative territory for the year. The selloff in EM stocks appears to have been driven by a combination of investor concerns about 1) a potential trade war with China, the European Union, Mexico, and Canada; 2) how EM economies will manage a deceleration in global growth outside the United States; and 3) a stronger US dollar coinciding with rising US interest rates and tightening Fed monetary policy. 

These macro developments, specifically the risk of a US trade war with China and the rest of the world, are indeed risks to EM stocks in the shorter term. However, these are not new risks and are not likely to overwhelm the attractive fundamentals, valuations, and potential longer-term returns of EM stocks. Analysis suggests that emerging markets are fundamentally better placed today than in past cycles. The sector composition of EM indexes has changed meaningfully over the past decade, from traditional heavy-cyclical industries like materials and energy to more growth-oriented technology and consumer-driven sectors that are less sensitive to shifts in global growth.

It is understandable that fears of a global trade war are rattling financial markets.

Any resolution of the current trade tensions is a meaningful uncertainty—our relationship with China being the most fraught—with the potential to seriously disrupt the global economy at least over the shorter to medium term. President Trump’s unconventional negotiating approach adds an additional wildcard dimension. The process is likely prone to several more twists and turns before things become clear. It is in the best interest of both the United States and China to negotiate a resolution and prevent trade skirmishes from becoming an all-out trade war. However, the potential for a severely negative shorter-term shock to the global economy and risk assets (like stocks) can’t be dismissed. Even absent an actual trade war, the negative impact on business and consumer confidence from the uncertainty and fear of a trade war is a risk to the remaining longevity and strength of the current economic cycle.

Globally diversified portfolios are structured to perform well

Globally diversified portfolios are structured to perform well over the long term while providing resiliency across a range of potentially negative short-term scenarios.Should the current trade tensions resolve and the global economic recovery continue, outperformance should come from international and emerging market stock positions and flexible bond funds. Alternatively, should a bear market strike, “dry powder” in the form of lower-risk fixed-income and alternative investments should hold up much better than equities. This capital will be put to work aggressively following a market downturn by reallocating to equities at lower prices. The portfolios are built to weather the volatility.

We truly appreciate the opportunity to work with you and look forward to talking with you again soon!

*U.S. Large Cap=Russell 1000, U.S. Small Cap=Russell 2000, Real Estate=Dow Jones US Real Estate Index, Overseas Stocks=MSCI EAFE, Emerging Market Stocks=MSCI Emerging Markets, Commodities=S&P GSCI, U.S. Bonds=Barclays Aggregate Bond Index, International Bonds=JP Morgan EMBI Global Core: Data Source: Blackrock Benchmark Returns Comparison June 2018. Economic Data: Litman Gregory Analytics. Allocations=Morningstar® U.S. Fund Allocation Categories: Data Source: Morningstar®. Index returns are for illustrative purposes only and do not represent actual performance of any investment. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results. Long-term care data: Genworth 2017 Cost of Care Survey, conducted by CareScout®, June 2017, genworth.com/aging-and-you/finances/cost-of-care.html

 

Market Commentary: 1Q 2018

Welcome back!  Volatility returned to the financial markets this quarter. U.S. and overseas stocks surged in January, corrected sharply in early February and then rebounded into mid-March. They dipped again into quarter-end, buffeted by a potential trade war and a Facebook data scandal. But despite the volatility, they ended down only 0.7% and 1.5% respectively. Emerging-market stocks held true to their higher-volatility reputation. They shot up 11% to start the year, fell 12% during the mid-quarter correction but finished the quarter with a positive 1.4% return. Unfortunately, core bonds didn’t play their typical “safe-haven” role in the first quarter, since Treasury yields rose across the maturity curve. True to form, core bonds also posted a 1.5% loss.

Here are the broad index returns through the First Quarter of 2018*:

U.S. Large Cap Stocks -0.7% Emerging Market Stocks 1.4%
U.S. Small Cap Stocks -0.1% Commodities 2.2%
U.S. Real Estate -5.9% U.S. Aggregate Bonds -1.5%
Overseas Stocks -1.5% International Bonds -2.0%

Economic Outlook

There are two primary observations about the quarter’s rocky ride. First, the recent 400-day long S&P 500 rally, that occurred without a single 3% decline from its high, was not normal. It was the longest streak in 90 years of stock market history. Comparatively, stock market declines of 10% or more are normal and have occurred in over half of all calendar years since 1950. The market has simply returned to “normal.” Second, despite the dramatic news headlines and market volatility, the economic news that contributed to the recent selloff was that the economy might be getting a bit too strong and the tight labor market could finally translate into higher wage growth and broader inflationary pressures. Fundamentally, the U.S. and global economies still look solid. Global growth may no longer be accelerating, but it remains at above-trend levels and the likelihood of a recession over the next year or so still appears low.

Be prepared for another bear market. The Trump tax cuts and new fiscal spending bill will likely stimulate more spending, deficit-financed measures that are likely to be inflationary. As a result, monetary policy and overall financial conditions will gradually tighten to compensate for the rising inflation. Consistent with the historical pattern, economic activity and asset prices will probably decline and the U.S. economy will slide into a recession and a full-blown bear market, a 20%-plus decline in stock prices. We are not there yet, but it is coming.

 What is the best defense? First, it is worth remembering that a five-year or longer time horizon is the basis for any reasonable expected-returns analysis. It is over those longer-term periods that valuation (i.e., what you pay for an investment relative to its future cash flows) is the most reliable predictor of returns. Over the shorter term, markets and economies are reliably unpredictable and are driven by innumerable and often random factors (i.e., noise). Because of this, in the investing world, we are often our own worst enemies. We tend to fall prey to short-term performance-chasing, our natural inclination to “do something,” emotional responses and other behaviors that hurt us as investors. The best defense is having a sound, fundamentally-grounded investment process (like ours) that will work for the long term and sticking with that process through periods of volatility. Second, this may be the appropriate time to consider your capacity (and patience) for a protracted bear market and larger stock declines. It is easy to forget the experience of negative returns during periods of extraordinary growth. Now may be a good time to reconsider your tolerance for volatility (risk) and manage within your boundaries. Of course, we are happy to help.

 

*U.S. Large Cap=Russell 1000, U.S. Small Cap=Russell 2000, Real Estate=Dow Jones US Real Estate Index, Overseas Stocks=MSCI EAFE, Emerging Market Stocks=MSCI Emerging Markets, Commodities=S&P GSCI, U.S. Bonds=Barclays Aggregate Bond Index, International Bonds=JP Morgan EMBI Global Core: Data Source: Blackrock Benchmark Returns Comparison March 2018. Economic Data: Litman Gregory Analytics. Allocations=Morningstar® U.S. Fund Allocation Categories: Data Source: Morningstar®. Index returns are for illustrative purposes only and do not represent actual performance of any investment. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.