Archive for investing

January 2022 Newsletter

Posted by Koenig Investment on
 April 8, 2022
  · No Comments

Major U.S. equity indexes enjoyed positive results in the final month of the trading year. As one indicator after another showed increasing inflation metrics during December, the S&P 500 continued to respond with fresh all-time highs. Broad, solid corporate earnings and a resilient consumer contributed to the S&P 500 finishing 2021 as the third consecutive year of double-digit percentage gains, even with uncertainties surrounding Omicron and inflation.

 

2021 Rewarded Long Term Investors

2021 featured spiking inflation, employment data zig-zags, higher interest rate anticipation, and proposed tax changes. All the while, the S&P 500 continued its upward trajectory during the year. We saw the emergence of meme stocks and other emotionally based investment trading.  Emotional investing tends to result in poorer long-term performance on average, and investors that held diversified portfolios faithfully were rewarded for their steadfastness in 2021.

As the year closed out, the large-cap S&P 500 led the way performance-wise when measured on a yearly basis, notching a 28.71% gain. The benchmark for international stocks (MSCI ACWI ex-U.S.) saw a gain of 7.82% for the year. Bonds did not fare well, with the U.S. Bond Aggregate Index declining -1.54% for the year. While it was certainly a year for the bulls, some sectors performed better than others, with technology leading the charge.

  

Fed Taper Acceleration, Rate Hikes on Table

The Federal Reserve announced it is speeding up its tapering operation, expecting to conclude the taper by March 2022 instead of June 2022 as previously announced. As a reminder, the Federal Reserve buys bonds (U.S. Treasury issuances and mortgage-backed securities) during times of financial instability in order to increase money supply and lower interest rates as a form of stimulus. Tapering occurs when the economy has begun to stabilize and this stimulus is no longer needed. A taper sets the stage for rate increases. The Fed now sees three rate hikes in 2022, though the potential for COVID to derail the Fed’s plan does exist.

U.S. 10-year note yields rose for the month of December, ending 2021 at 1.511%, up from 0.93% at the beginning of the year.

 

Build Back Better

An additional area of uncertainty is the second portion of the spending bills the federal government has proposed, known as Build Back Better. This legislation covers topics surrounding child and elder care, infrastructure to address climate change, and the tax changes needed to pay for these programs. It contains revisions around retirement account contributions, estate taxes, and capital gains taxes amongst its provisions. Whether this bill will pass, and what form any such final bill would take, are unknown at this point. Our office is watching the continued discussions and will reach out to clients with news about changes should they come to pass.

 

Retirement Contributions

The beginning of a new year means it’s time to review retirement account contributions. Are you taking advantage of your employer’s match? Have you contributed to your Roth or traditional IRA yet? The maximum contribution is $6,000 for both account types for 2022, $7,000 for workers age 50 and older. 401(k) contribution limits have risen to $20,500 ($27,000 if age 50 or above), SIMPLE IRAs to $14,000, and SEP IRAs to $61,000. HSA contribution maximums have risen to $3,650 for persons with individual plans, $7,300 for family plans (with an additional $1,000 contribution allowed for those age 55 and above). Please feel free to contact our office with any retirement planning questions you may have.

 

Summary

2021 was a good year for growth-oriented companies. Continued disruptions in typical living and working patterns due to COVID continued, creating opportunities for some companies and causing issues for others. We expect to see a continuation of this patchwork pattern for early 2022, with movement towards a new normal occurring later in the year.

We see indications of a general shift from growth towards value – companies that are often well-established, quietly making money. The anticipated rotation to value had a number of false starts during the year.  We still anticipate value to gain traction as the market rotates from high flying growth sectors. International sectors look attractive as the world rebounds from COVID disruptions. These valuations are at historic lows when compared to U.S. markets. We will continue to invest in high quality securities and maintain diversified portfolios to both give clients exposure to sectors that are expected to perform well and to protect against unforeseen downsides. We look forward to seeing what 2022 may bring.

 

 

 

The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different.  The information provided is not written or intended as tax or legal advice and may not be relied upon for purposes of avoiding any Federal tax penalties.  Individuals are encouraged to seek advice from their own tax or legal counsel.  Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel.  Neither the information presented nor any opinion expressed constitutes a solicitation of the purchase or sale of any securities.

October 2021 Newsletter

Posted by Koenig Investment on
 October 20, 2021
  · No Comments

In what is typically known as the worst month of the year for stocks, September did not disappoint. Negative news coming out of China was the focus during the month.  Headlines noted fear over Evergrande–a Chinese real estate investment holding company–potentially defaulting. The news weighed heavily on Chinese stocks Spillover effects trickled through markets worldwide, including here at home. In addition, the talks of a government shutdown (again), infrastructure bill challenges, government spending/debt ceiling disagreements, and a more hawkish Fed all contributed to the tone last month.

Increased volatility was on display throughout September, and many market participants expect it to continue through October – the most volatile month of the year historically. Here’s how the major U.S. stock indices performed in September: the S&P 500 shed 4.76%, the Nasdaq 100 lost 5.73%, while the Dow Jones Industrial Average decreased by 4.29%. While many market participants expect continued volatility, remember that volatility can create potential opportunities for some investors. These are the times to remember why we are engaged in long-term investing and long-term strategy.

Fed Tapering

The Federal Reserve announced that tapering of their asset purchases is in the cards but did not signal precisely when it would begin. The tapering could begin as soon as November. This asset purchase tapering is a gradual process that will most likely last until mid-2022. Fed projections are for an increase to the benchmark overnight lending rate over the next several years. The consensus is for the Fed Funds rate to increase from current levels (0% – 0.25%) to 1.75% by 2024. Half of the Federal Reserve members now see the first interest rate hike in 2022–but we do not know exactly when the first increase will be as of yet.

Bond Yields Rise Slightly

The Fed kept the overnight lending rate unchanged at their September meeting–just as the market expected. However, the Ten-year note yield ($TNX) and 30-year bond yield ($TYX) increased during September. Mortgage demand fell as 30-year mortgage rates rose to near 3.00%. 

Inflation

The heavily watched Consumer Price Index (CPI) showed that prices increased 0.4% from August to September, primarily driven by higher energy and food prices.  Consumer prices are 5.4% higher versus a year ago, the highest since January 1991. The IMF’s recently released report on global economies expects to see U.S. inflation drop to a more typical 2% by the middle of 2022. 

Supply chain issues have persisted, and perhaps you have noticed this during your routine shopping. Analysts are predicting continued supply chain issues through the holiday shopping season.  This does not mean an expectation of completely bare shelves, but is a warning that specific or preferred items may not be in stock.  

Year-End 

It’s hard to believe we are already counting down the final months of 2021. This also means it’s not too early to start planning for year-end deadlines. Consider reviewing your IRA, Roth IRA, 401(k), and HSA contributions.  If you have an RMD and have not already taken it, our office will be reaching out to you soon to schedule yours.  

Whether you have a simple investment question or you need help reviewing your entire financial picture, we are here to help. Our office welcomes the opportunity to work directly with your tax preparer or legal professional to help assist in your planning needs. 

 

July 2021 Newsletter

Posted by Koenig Investment on
 July 12, 2021
  · No Comments

We wanted to reach out and provide you with some updates as we head into the second half of the year. We are back at work in our Medford office, continuing to schedule phone and Zoom meetings for clients who prefer to maintain social distancing. Please feel free to reach out to the office to schedule a review of your portfolio or financial situation at your convenience.

Continued Economic Recovery

Major market indices enjoyed a fruitful June, building on their year-to-date (YTD) figures. The S&P 500 is up 14.4% YTD as of June 30th. The bond market (Barclay’s Aggregate Bond) gained back ground from April lows to end the month with a -1.60% YTD figure. The bond market has gained ground as fears of rapid inflation have subsided. Rising rates do tend to cause short-term bond price declines. The expectation of eventual rising rates are likely to provide a headwind to broad market bond prices over the near future.

The jobs data has been heavily in focus. Weekly reports have fluctuated between higher and lower figures as compared to expectations. Overall, hiring is up and workers are returning to the labor market. Not every industry is finding enough workers to fill as many positions offered as they would like, but this is to be expected from an economy that is restarting from pandemic shutdowns. Hiring is expected to increase as children return to school and parents can shift from childcare responsibilities to paid work. Changes to unemployment compensation and a lessened risk of virus exposure are additional major factors that will help push workers to return to the labor market. A number of workers are shifting between industries or employers, looking for higher wages or a better work conditions from employment. It will take some time for these shifts to slow and a more normal hiring pattern to resume.  Lastly, it remains to be seen how much of an effect virus induced early retirement will affect the labor market. The key component to all of these factors is time.

Inflation has obviously been a big topic in the news over the past few months. There is simply more money in the economy right now due to various stimulus efforts. These additional funds are chasing fewer goods as manufacturing comes back online and transportation of goods is restarted. We are also seeing shifts in buying patterns across larger than usual sections of the consumer market as people shift to post-pandemic life. These changes have combined to push up prices in some areas, but we are also seeing offsets in slowing sectors. For example, lumber made many headlines with spectacular price increases in 2020 and into early 2021. Those prices have now retreated significantly as stockpiling and home improvement activity has decreased. Not all sectors will see such dramatic swings, but we will continue to see shifts as spending habits change. The next CPI (Consumer Price Index) reading is on July 13th. We will continue to watch these readings for signs of inflation, be they transitory or more long lasting.

Interest Rate Hike Potential 

The markets were recently shaken by the potential rise in interest rates in early 2023. The announcement of higher interest rate guidance seemed to come as a surprise to many market participants. In a truly healthy economy, rates should not be this low. While the announcement may have been unwelcome news for some, we believe most market participants knew it was coming sooner or later. Whether we see measured increases begin in 2022 as some analysts have speculated, or further out into 2023, rate increases are to be expected when at historic lows. Measured increases will have effects on the market, but the effects are expected to be measured as well.

The Summer Stock Market

Historically, the market is a bit softer during the summer months, though there’s always the possibility that this year could be the exception. The market is looking for continued solid jobs data and some news on the inflation front. Restarting an economy does not happen in a day. Supply chain bottlenecks for some goods, uneven hiring, consumers and workers reevaluating priorities, and outbreaks of COVID in unvaccinated communities both here and abroad are all issues that should be expected to affect the path of economic recovery. 

Keeping tabs on the long-term is where success historically lies in the markets. Client portfolios remain positioned for the long-term. We will continue to evaluate recovery impacts on market sectors and how that affects portfolios. As always, please feel free to reach out with any questions you may have.

 

 

The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different.  The information provided is not written or intended as tax or legal advice and may not be relied upon for purposes of avoiding any Federal tax penalties.  Individuals are encouraged to seek advice from their own tax or legal counsel.  Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel.  Neither the information presented nor any opinion expressed constitutes a solicitation of the purchase or sale of any securities

Market Brief – January 2019

Posted by Koenig Investment on
 February 6, 2019
  · No Comments

The month of January has seen a rebound in stock prices after a very rough December.  December saw a market awash in pessimism.  Part of this pessimism was based on worries over continued interest rate increases by the Federal Reserve.  This concern has diminished in January.  In general, analysts and investors are no longer concerned over a Federal Reserve rapidly increasing interest rates to a level that would send the economy into a recession.  The Federal Reserve has recently communicated a much more modest outlook for rate increases than they had late last year.

The biggest single driver of stock prices are corporate profits.  2018 profit growth came in at around 11-12% when backing out the benefits of the corporate tax cut.  2019 earnings are projected to be about 6%.  That is about half of 2018’s rate.  By historic standards, 6% growth is good.  We would encourage clients to keep this in mind when reading financial news.  To reiterate, 2019 is expected to see a lower rate of growth than 2018.  That does not mean a contraction, slowdown, recession, or any other negative activity.  It just means a slower growth rate.

In summary, the month of January has seen a significant portion of December’s market declines reversed.  This is due in large part to earnings releases that note revenues, sales, etc. during the last quarter, but also provide guidance for the next.  About a quarter of companies have released these figures so far, with the bulk of releases coming out over the next 2 weeks.  The main takeaways right now are that the market has largely gained back the declines experienced in late 2018 and that earnings are largely expected to continue to grow during 2019, although at a lower growth rate than in 2018.

Market Brief – December 2018

Posted by Koenig Investment on
 December 21, 2018
  · No Comments

As we head into the end of year holidays most friends and clients are focused on spending time with their families and friends.  The recent volatility in the stock market can be a worrisome distraction from this focus on community.  We wanted to take a moment to share some of what we are seeing, and hopefully eliminate some of this distraction for you.

The stock market is reacting negatively to this week’s Fed decision.  Just a few months ago the majority of analysts expected the Federal Reserve to raise interest rates by ¼% in December, and then to follow-up with three or four more ¼% rate increases in 2019.  This week’s announcement both implemented the expected ¼% increase for December and reduced the planned 2019 increases to two (from three to four).  The Fed is very careful in how they phrase all statements released after their meetings. Investors and analysts were hoping this release would mention future rate hikes would be “dependent on data” or “if conditions warrant.”  No such verbiage was a part of the statement.  This lack of flexibility has caused worry over the Fed continuing to raise rates even if we do begin to see an economic slowdown.  That worry has negatively affected the stock market.  Fed moves during expanding market cycles that result in stock market declines have happened in the past.  This is normal activity.

As we have stated many times in the past, corporate earnings are the biggest drivers of stock market activity.  Most corporate earnings releases are due to be released in early January.  A few companies have released in December.  Walgreen’s noted year over year earnings growth of 14% and an annual revenue increase of 10%.1  Federal Express said they are still expecting high single digit growth in 2019 earnings compared to 2018.2  Both companies noted positive figures for domestic growth, but slowing conditions outside of the United States.  Nike soundly beat expectations and expects their “momentum” to continue into next year.  January releases are expected to show domestic corporate profits are growing, with some indications for further growth in 2019.  Uncertainty regarding events like Brexit, in conjunction with political instability in some regions, will likely continue to place downward pressure on foreign markets until these issues are resolved. 

The broad market is very nervous at the moment.  Many investors recall past downturns and worry we may be entering another.  The U.S. financial system is in much better shape than it was in 2008.  In mid-2017, 30-year mortgages were about 3½ % while today they are around 5%. Unemployment at 3.7% is the lowest since the late 1960’s, but has likely achieved a low point.  Inflation around 2% is actually a bit lower than where we would be in a more mature expansion.  Valuations on U.S. stocks are around 14 ½ to 15 times earnings compared to 28 times earnings in early 2000.  We do expect to see lower growth figures released in January 2019 compared to January 2018 as the effects of the tax cut fade.  Profit growth in 2019 will be lower than in 2018, but it will still be growth.  There is no expectation that profits will contract, merely that they have come off of their 2018 highs.  International markets are expected to see further weakness.

We hope this information helps you better understand where the markets are now, as well as what further market related news you may encounter over the holidays.  We wish you the happiest of holidays!

Newsletter – November 2018

Posted by Koenig Investment on
 November 8, 2018
  · No Comments

October has lived up to its turbulent reputation and given us a fair amount of movement to analyze.  It can be difficult to know why the market has moved in any given time frame.  The good news is that the recent pullback in the market is expected to be temporary by the majority of analysts.  Here are some of the factors affecting current market behavior.

Interest Rates

You’ve likely heard news about the federal funds rate recently.  This is a common interest rate banks charge each other for overnight loans.  This rate then affects the rates consumers pay when banks lend to them.  The Federal Open Market Committee implemented 3 rate increases of 0.25% each to the federal funds rate in 2017.  There have been 3 more 0.25% increases in 2018, bringing the current rate up to 2.25%.  They would like to see this rate closer to 3% in order to give the committee room to lower the rate during the next economic slowdown. 

Both housing and auto sales have been impacted by these higher rates.  30-year mortgage rates are up a full percentage point in 2018, as compared to year-end 2017.  Rising rates allow investors to shift their stock exposure, while still earning some interest.  For example, we’ve seen 1-year CD’s and other short-term savings vehicles increase yields to around 2% annually.  Investments leaving stocks does place downward pressure on stock prices.  The rate increases have been measured and expected.  They are largely priced into the markets, but investors should not be surprised when the market moves some with each new rate increase. 

Bond funds have a portion of their portfolio maturing throughout the year.  As a bond bought 2 years ago matures, it is replaced with a bond yielding higher interest.  The bond funds we typically use in client portfolios have seen their interest income increase.  This will likely continue in 2019 as newly released bonds will continue to pay higher rates.  Rising bond yields mean retired clients can more comfortably cover a 4% withdrawal rate.

Earnings

The biggest driver of stock market performance is earnings, and expected earnings growth.  2018 is shaping up to be one of the best years on record for profit growth in several decades.  We have seen earnings releases with growth in same store sales, overall revenue, and/or earnings followed by a stock price drop.  Although this is typically unusual, it is rational in the current environment.  The most recent tax cut boosted corporate earnings, providing a nice tailwind in an already positive earnings environment.  However, that was a one-time boost that will not be repeated. 

As of November 2nd, 74% of S&P 500 companies had reported 3rd quarter results.2  78% of companies reported greater than expected earnings, and 61% greater than expected sales.  The blended third quarter earnings growth rate is 22.5%.  That is up from 19.3% at the end of September.  Financial news often mentions the “PE ratio” when talking about overall markets.  PE stands for price-earnings and reflects what an investor is willing to pay for a stock based on the earnings.  A stock with a PE of 10 means investors are willing to pay 10 years’ worth of the company’s earnings in order to own the stock today.  If a company is earning $100 annually, then the investor is willing to pay $1,000 for the stock.  The PE ratio for the S&P 500 is 15.6.  That is right in the middle of the 5-year and 10-year averages of 16.4 and 14.5 respectively.  None of this data points to an overvalued market.

2019 earnings are forecast to be about 10% higher than 2018.7  This is about half of what we saw in 2018, but higher than what we’ve seen in most years since the immediate recovery from the 2008-2009 recession.  The 10% growth in earnings is expected to provide a combination of some stock price growth and some lowering of PE ratios.

The Rest of the World

Foreign actively does effect the markets, and is the cause of some of the recent pullback.  Budget issues in Italy, and the EU in general, escalating tension between Turkey and Saudi Arabia, the trade dispute with China, and concerns over the Chinese economy have all affected the U.S. stock market recently.3  We should not be surprised over market moves as the Brexit process continues.  Activity in the Middle East will continue to affect oil prices, and how those prices impact the overall market. 

International holdings represent a much smaller area of stock market exposure in client accounts than U.S. holdings.  This sector had strong performance in 2017, but declined this year.  Underperformers in one year often outperform the next, and is part of why we maintain diversified portfolios.  We do not see any areas of great concern internationally in terms of stock market effect. 

Summary

Most U.S. investors today recall the market decline of 2008-2009.  Many also recall 2000-2002.  This understandably leaves some investors nervous when the market declines.  Both of those markets were impacted by bubbles bursting.  For example, tech stock valuations were far greater in 2000 than they are now, with a NASDAQ PE ratio of 175 in March 2000.4   The current PE is around 20.5  While investors have various concerns over the future of the market, valuations are not extended. 

Markets will decline in value and that can be nerve wracking.  This is why we design portfolios that are blends of equity, bond, value, and growth securities for clients.  The S&P 500 declined by about 9% from October 9th through October 29th.6  Client accounts with a diversified portfolio did not see this level of decline.  As of November 5th, the S&P 500 had regained about half of the drop, and is widely expected to continue to recover lost ground.  Analysts continue to see companies making money, and opportunities to share in this environment through the rest of 2018 and well into 2019.  We do not see any reason to exit the market at this time, but rather view this as normal cyclical activity.

The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different.  The information provided is not written or intended as tax or legal advice and may not be relied upon for purposes of avoiding any Federal tax penalties.  Individuals are encouraged to seek advice from their own tax or legal counsel.  Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel.  Neither the information presented nor any opinion expressed constitutes a solicitation of the purchase

Newsletter – April 2018

Posted by Koenig Investment on
 April 30, 2018
  · No Comments

Pausing to Smell the Roses

Economic news often looks towards the future as investors try to predict both the best places to invest and avoid.  Today’s successes are often overlooked as investors look for clear indicators of trends and future activity.  Sometimes it is best to stop and look at the current environment, appreciate what is going well, and wait to judge the future.  The overall U.S. economy is doing quite well at the moment and there is no reason to expect this to change in the near future. 

Earnings, GDP, PE

We are now well into 2018 first quarter earnings release season. The picture being painted is one of solid growth and earnings.  The earnings growth rate has been much higher than anticipated, with the highest earnings growth reported since the third quarter of 2010.1  In fact, one research service we use predicted an earnings growth rate of 17.3% for the quarter as late as April 6th.  This has now been revised upwards to 23.2%.1 

As earnings rise they change the price-earnings (PE) ratio for companies.  This ratio explores how long it would take an investor to recoup their principal based on current company earnings.  Low PE ratios mean investors can expect principal recovery much quicker, high PE ratios mean investors are paying a premium for stocks and can be an indicator of a bubble.  As you can see from the below chart, current PE ratios are right in line with the recent historical average.

SOURCE: Seeking Alpha3

Finally, GDP is a good indicator of the health of the economy as a whole.  2018 first quarter GDP stands at 2.3% versus 1.2% for the first quarter of 2017 and 0.6% for the first quarter of 2016.2  The first quarter tends to be the low figure for the year, so it can reasonably be expected that GDP will increase before the end of the year. 

The Rest of the Data

If the key metrics noted above are all positive, why the fear and worry in the news?  The first reason would be inevitability.  The stock market will eventually see a decline.  It goes through up and down cycles, meaning wait long enough and you will see prices fall.  One should pay attention to changes and not expect good times to last forever.  Let’s explore a few topics of worry in the news recently.  A good place to start is the slow ratcheting up of interest rates by the Fed. 

SOURCE:  MacroTrends4

The above graph is a chart of the 10-year Treasury rate over the past 50+ years (recessions noted in grey).  As you can see, we are currently in a period of historically low rates.  It’s also clear that we had higher rates in the 1990’s, a time of good performance by the stock market.  A rise in rates tends to slow housing sales and some business expansions as credit tightens.  However, these will be slow changes that are already widely expected and factoring into the decisions of families and companies.  Interest rate rises have been slow, and are expected to remain so.  Slow change allows for adjustment and is not the same as an unexpected market shock.  Interest rates are not expected to rise to a level that will prohibit borrowing, but rather to return to more historical norms.  This is good news for savers and an anticipated change for future borrowers.

Other articles point to a few large companies lowering guidance as a sign we’ve reached peak earnings.  It’s true that Caterpillar recently noted 2018 earnings may be their best and 2019 will likely be lower.  At the same time, Boeing both had good earnings and upwardly revised estimates through 2019.5  The fate of one company is not the fate of the economy as a whole.  Aggregate S&P 500 earnings estimates for 2019 have been revised upwards as companies release figures and give forward guidance.  That means companies generally do not see 2018 as a year of growth plateau, but rather as part of an upward trajectory that is expected to continue into 2019.

The last area of worry for some pundits is both wages and inflation.  We are seeing an uptick in both categories.  These are areas to watch for future developments that may provide drags on the economy.  We’re not there yet though.  Inflation remains at about 2.0%6 and wage growth is still at a lower rate than before the recession7.  Rising wage growth and inflation can be expected to limit the acceleration of economic growth, but are not expected to be a drag on the economy.

Summary

Some clients reading this may be wondering why their portfolios are not skyrocketing upwards given that the economy is doing well.  The stock market is considered a leading indicator and typically moves in advance of economic news.  The S&P 500 was up every month in 2017.  That is unusual.  Much of the good news noted above has already been priced into the market, allowing account values to increase in 2017.  The 2018 market is expected to increase more slowly, with more volatility than 2017.  Investors are looking to sell companies that have not benefited as much from economic growth, capture gains, and move on to other companies with rosier outlooks for the year.

The overall U.S. economy is doing quite well.  Persons looking for a job can probably find one with relative ease.  Borrowing costs remain historically low.  Companies are making money and looking to make more over the next year or so.  Of course, the market will eventually change and we will continue to watch for indicators of that change. 

The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different.  The information provided is not written or intended as tax or legal advice and may not be relied upon for purposes of avoiding any Federal tax penalties.  Individuals are encouraged to seek advice from their own tax or legal counsel.  Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel.  Neither the information presented nor any opinion expressed constitutes a solicitation of the purchase or sale of any securities.

Newsletter – January 2018

Posted by Koenig Investment on
 February 27, 2018
  · No Comments

Year in Review

2017 has been a year of surprises.  An anticipated market pullback did not materialize this year.  Instead, we saw a year of above average growth in market price.  The S&P 500 (a widely followed basket of 500 U.S. company stocks) ended at 2673.61, a gain of 21.83% on the year.  A round-up of statistics shows GDP remained at a steady rate with the third quarter at 3.2%1.  Unemployment is at historically low rates, with December’s figure at 4.1% per the Bureau of Labor Statistics (BLS).  Lastly, foreign companies did well in 2017.  The International Monetary Fund (IMF) shows most mature economies with slow growth, while developing countries typically saw higher growth rates that bode well for their economies.2  2017 markets reflected this growth as the international sector posting its biggest gain since 2009. 

2018

What can we expect of the new year?  A recent issue of a research service we subscribe to summed up bull vs. bear market conditions in a helpful manner.  The market tends to contract when we see a combination of tight money, rising rates, high inflation, and rapid growth.  We do not currently meet these criteria.  The Fed is slowly scaling back measures taken during the recession at a measured pace.  Money supply is slowly tightening as the Fed increases interest rates.  Rates are inching up and do not have us in an era of either tight money or truly rising rates.  Inflation remains low, with the personal consumption expenditure (PCE) price index at 1.5%3.  GDP continues at measured rates in the 2-3% range each quarter.  The outlook for 2018 real gross domestic product (GDP) is in the 2-3% range as well.  All of this together shows a picture of slow, steady grow rather than the beginnings of a pullback.  There remains the possibility of a correction in the market, with analysts looking towards a temporary event like we saw in early 2016 rather than a sustained bear market.

There is an expectation of greater earnings due to the recent corporate tax cut, although much of this is seen as already priced into the market.  Increased earnings will largely result from balance sheet reshuffling in the form of debt reductions, stock buybacks, and mergers or acquisitions4.  These will be one-time events that will solely enhance 2018 earnings.  Analysts expect the resulting gains to be temporary, lasting perhaps 12-18 months.  This, in conjunction with historically high consumer sentiment, bodes well for the 2018 market. 

It is helpful to pick a company benefiting from the tax changes in order to see the details.  Bank of America has been in the news recently as they announced an additional employee bonus of $1,000 for about 145,000 employees5, a total cost of $145 million.  Goldman Sachs estimates that Bank of America will see earnings grow by 14% due to the cut.  That would translate into earnings increases of about $2.5 billion.  Roughly 6% of the $2.5 billion received by the corporate tax cut will go towards employee wages.

Bank of America also noted a $5 billion increase in stock buybacks, above the $12 billion repurchase amount announced earlier in the year.6  Stock buybacks are used to increase earnings per share, which results in higher stock prices.  In summary, Bank of America will spend an extra $145 million on employee wages and spend $17 billion on stock buybacks in 2018.

The real world results from the tax cut will become clearer in 2018 as accountants have more time to delve into the provisions.  As with any change, there will be winners and losers due to the changes. The overall effect does appear to be a boost for a number of companies that will increase near-term earnings.

Summary

Foreign markets saw meaningful progress in 2017 from both consumer spending and corporate profits.  We believe many international markets are 3 or more years behind the U.S. in their economic activity.  We expect to maintain a fair degree of international exposure in client accounts in order to capture this growth.

There are a number of fiscal unknowns due to the changing of the U.S. tax code.  Accountants all over the country are working hard to analyze the impacts.  However, the bottom line for stock market growth is always corporate earnings.  Earnings have been rising and are expected to continue to do so.  There will likely be a modest boost to corporate earnings and overall economic activity this year due to the cuts.  The full impact of these changes will become clearer as we move through the year. 

We agree with analyst expectations of low level growth within the domestic market next year.  We will continue to posture client accounts to capture some of this growth, while protecting against downside events.  It is important to maintain downside protection in portfolios given that growth is expected to be limited.  We may see a pullback in the markets in 2018 or an unplanned outside event that causes disruptions.  We would view these events as acquisition opportunities.  Overall, we expect 2018 to be another year in the plowshare economy.

The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different.  The information provided is not written or intended as tax or legal advice and may not be relied upon for purposes of avoiding any Federal tax penalties.  Individuals are encouraged to seek advice from their own tax or legal counsel.  Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel.  Neither the information presented nor any opinion expressed constitutes a solicitation of the purchase or sale of any securities

Market Brief – Brexit June 2016

Posted by Koenig Investment on
 July 28, 2016
  · No Comments

I wanted to take a moment to comment on the Brexit leave vote and its effect upon world markets today.  Part of the movement we’ve seen in the markets is due to the surprise nature of the vote.  Polls had predicted British voters would opt to remain a part of the EU.  That drove gains in the stock market yesterday that are largely being reversed today.  The rest of the drop we’ve seen today can generally be linked to the uncertainty regarding how British decoupling from the EU will effect various corporations, as well as entire economic sectors.  There are questions regarding how difficult the EU will make the exit in order to deter other countries from making the same move.  UK companies will continue to trade with mainland counterparts as they have been doing since ancient times.  There will need to be adjustments in how economic activity is conducted though.  Times of change are always unsettling and markets generally do not respond well to change.  We expect to see the broad market regain ground as a path forward for affected companies is determined.

While volatility in the markets is often unsettling to watch, it does provide opportunities for account growth.  For example, we expect managed futures and fixed income positions to gain ground in the next few days, oil and gas sector assets to remain largely unaffected, and stock based assets to decline less than the broad market.  Please do expect some short-term volatility within your accounts.  We will be making adjustments to accounts if appropriate in order to capture price change opportunities if they fit with your overall financial profile and risk tolerance.

While the broad market has ended the day well in the red, that is not an indicator of long-term problems within the U.S. markets or economy.  The current unemployment rate is 4.7%.1  This figure needs to be put into the context of the people it does and does not capture as the official definition of “unemployed” does not necessarily match the common definition.  However, the current figure is seen to more accurately portray the current employment situation than it did during the recession and immediate aftermath.  I would note that the average unemployment figure since 1950 is a much higher 6%.2  The bottom line is that volatility creates opportunities and we do not see today’s drop materially affecting what you can expect from your accounts over the long-term.

 

 

  1.  http://www.bls.gov/news.release/empsit.nr0.htm
  2. http://www.tradingeconomics.com/united-states/unemployment-rate

The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different.  The information provided is not written or intended as tax or legal advice and may not be relied upon for purposes of avoiding any Federal tax penalties.  Individuals are encouraged to seek advice from their own tax or legal counsel.  Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel.  Neither the information presented nor any opinion expressed constitutes a solicitation of the purchase or sale of any securities.

March 2016

Posted by Koenig Investment on
 March 7, 2016
  · No Comments

Volatile Markets

This year has begun with market activity that has left many investors nervous.  Although economists noted the overall U.S. economy was performing at a decent level throughout January and February, the markets reacted sharply to fears over China and lower oil prices.  The S&P 500 declined by a little more than 10% as of mid-February, leading to talk of recession in some media outlets.  Economists as a whole did not endorse this speculation, but could not definitively say if or when the market would recover.

The decline in overall stock prices occurred in tandem with a falling of oil and other commodity prices.  Many parts of the world are expected to have slower economic activity in 2016, with China most notably experiencing slower economic growth.  Declines in commodity prices appeared to be a reaction to various projections of slowing overseas activity.  Data on the economy led to an uptick in commodity prices in late January and into early February.  The broad stock market followed suit and gained back some of the ground lost earlier in the year.  As of March 6th, the S&P 500 has regained most of its earlier declines, now posting a modest year-to-date decline of less than 2%.

It is difficult to call either a market high or low until well after the fact.  While few are willing to definitively state that the bottom has been reached and passed, a number of analysts are now stating we have likely passed the bottom.  There are a number of reasons for them to begin to make this call.  Both Canada and Australia have economies heavily reliant on commodities.  Canada has a large oil sector and mining is important to the Australian economy.  Both currencies took a hit starting in 2014 as we saw non-oil commodity prices begin a decline.

The graphs of both the Canadian and Australian stock markets mirror their currency graphs with declines from mid-2015 and then bouncing back in February.  Commodity based company stocks such as Freeport-McMoran (copper), Alcoa (aluminum), and indices like the Dow Jones U.S. Steel Index all show declines beginning in the summer or fall of 2015, with bottoms in late January.1 While it is too soon to definitively call a bottom to recent commodity and market activity, a number of signs are pointing towards this being the case.

United States Economy

Employment – The unemployment rate continued its slow decline to 4.9% in February.  This was accompanied by a small increase in the labor force participation rate, meaning that the decline in unemployment is a result of increased employment and not workers giving up on looking for jobs.2  In fact, the discouraged workers (defined as persons no longer looking for work as they believe they will not find any) figure is down 18% from the previous February.

An interesting development in the current labor market is wage growth.  The average wage in February 2016 is 2.2% higher than for February 2015.3  Costco is a notable example of this upward wage pressure, making national news with their increase of a minimum wage to $13/hr.  They are not the only company to note pressure to increase wages in order to stem employee turnover and attract desirable workers.

Corporate Earnings – Corporate profits remain steady overall.  We are seeing a smaller group of companies project earnings growth in 2016 compared to the number of companies projecting growth in 2012 and 2013.  This is a more mature market that is holding steady.  Dividend paying stocks remain attractive as investors seek alternatives to low interest rates paid by bonds.

Other sectors – Statistics for the overall U.S. economy continue to portray a boring, yet positive picture.  The economy is continuing its slow, steady growth with healthy levels of new-vehicle sales for February, greater than expected existing-home sales for January, and manufacturing and purchasing data in line with a GDP growing at about 2% annually.

Summary

2016 has gotten off to a volatile start, with markets regaining much of the ground lost in early 2016.  Commodities look to have been oversold in this period.  Recent price rebounds in commodity prices have been led by currency and stock market reversals in Canada and Australia, historically a signal of stabilizing or growing commodity prices.  The U.S. economy is in better shape, continuing its slow, steady growth.  We expect 2016 to continue to show steady U.S. growth and a recovery within a number of commodity sectors.

 

The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different. The information provided is not written or intended as tax or legal advice and may not be relied upon for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a solicitation of the purchase or sale of any securities.The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different.  The information provided is not written or intended as tax or legal advice and may not be relied upon for purposes of avoiding any Federal tax penalties.  Individuals are encouraged to seek advice from their own tax or legal counsel.  Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel.  Neither the information presented nor any opinion expressed constitutes a solicitation of the purchase or sale of any securities.

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