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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 – May 2017

Posted by Koenig Investment on
 May 4, 2017
  · No Comments

Interest Rates

This year’s economic activity actually started in December with a Fed announcement.  They expected to raise interest rates ¼ point at three different times in 2017, for a total expected rate increase of ¾%.  We then saw a large jump in the January inflation rate.  This news created a bit of a scare in the bond market as several analysts felt the Fed had underestimated inflation.  There was much speculation that more than three rate increases would be appropriate for 2017.  Subsequently inflation figures for both February and March showed much more subdued levels of inflation.  January is now viewed as a temporary spike that has not changed the overall expectation for 2017.  Rates should rise this year, but at the moderate pace originally outlined by the Fed in December.

There are two important metrics to keep in mind when evaluating bonds – interest rates and duration.  Duration is linked to how long a bond has until maturity.  The longer the duration, the less valuable the bond is during times of rising interest rates since newer bonds issued will pay an investor a higher interest rate.  We’ve rebalanced bond exposure to shorten duration given the anticipated rate rises.  We have also added exposure to floating rate bonds as their values hold up better during periods of rising rates.  Unlike traditional fixed rate bonds, floating rate bonds are tied to a benchmark such as LIBOR, Fed Fund or prime rate.  These benchmarks can adjust quickly with changes in interest rates. 

International

International stocks have underperformed U.S. stocks for the past few years.  It may come as a surprise for some investors that international equities have outperformed U.S. equities year-to-date in 2017.  The latest GDP figures coming out of Europe and Asia are starting to perk up and show signs of increased growth.  These improvements are represented in foreign stock price increases.  As of 4/28/17, the S&P 500 year-to-date return was 7.16%, while developed international markets (represented by the MSFCI EAFE index) have returned 9.97%.  The MSCI Emerging Markets index – which would include companies in such countries as South Korea, China, South Africa, and India – has returned 13.88% YTD.  Even with the recent move up in foreign prices, we find that international markets still have more attractive valuations and more room for growth than their U.S. counterparts.  Throughout 1st quarter 2017 we have increased our equity weightings in both international developed and emerging markets positions to take advantage of these growth opportunities. 

 Election Reforms

A reasonable case could be made that investors have been accumulating stocks in the aftermath of the November election in anticipation of a number of economic policy changes.  There is a wide expectation of a significantly lower corporate tax rate in the near future.  A reduction in individual tax rates could see discretionary income increase if personal taxes are reduced.  An opportunity to see a repatriation of a significant portion of the $2.5 trillion in U.S. based company profits residing abroad could benefit the economy if handled carefully.  Healthcare reform could be done in such a way as to benefit the economy.  Lastly, widely discussed infrastructure spending would be a shot in the arm to several economic sectors. 

Despite the widespread investor anticipation of movement on each of these items under a Republican president, congress, and senate the actually progress has been fairly slow to date.  It was hoped that tax reform would largely take shape in April.  That has not happened.  While some progress has been made on outlining changes to both the individual and corporate tax structures, many details have yet to be hammered out.  Previous foreign profit repatriation resulted largely in company stock buybacks rather than capital expenditures.  A plan that would both allow for repatriation and ensure that companies use this move for job creation has yet to be worked out.  Proposed healthcare changes ran into a very fragmented Republican congress and are still in limbo.  Tax changes may very well see the same multiple camps arguing over details, each demanding their view be adopted.  There are also concerns over the president’s tax changes significantly adding to the national debt.  Many conservative members of congress were elected on their pledges of fiscal responsibility and will only accept revenue neutral changes.  Finally, infrastructure spending involves a significant amount of planning and getting bids from various construction firms.  Analysts now do not expect to see the beginning of an infrastructure plan until 2018 at least.

 Economic Outlook

The outlook for 2017 real gross domestic product (GDP) is in the 2-3% range.  If tax reform is delayed until late 2017 or early 2018, the probability favors GDP to track towards the lower end of the 2-3% range.  Recent quarterly earnings have generally been better than expected.  While there are always winners and losers each quarter, our research services have shown a much longer list of winners than losers each day figures have been reported.  This does not mean we are seeing strong growth.  Technology companies in particular reported greater earnings this past quarter and the sector is poised for growth, but other sectors show a lack of revenue growth.  That lack of growth does not bode well for future earnings.

In summary, we are in a fairly mature economy, and are now in the 9th year of an expansion phase.  That does not mean we see any indications of a near-term precipitous drop in market values.  U.S. stocks are a bit expensive by historic standards, but not excessively so.  We did see an uptick in sentiment after the election amongst sectors of the population that buy stocks.  These positive hopes have yet to turn into concrete reality that will drive economic growth.  Positive sentiment is an emotionally based metric and can erode as easily as it grows, but that does not mean we should expect to see a market crash.  We are in a wait and see period in which economic policy changes that could affect the economy in several ways are pending.  It can be frustrating to wait for more concrete direction, but waiting periods do eventually end.  In the meantime, we have adjusted bond and international holdings for clients to reflect the movement we have seen in those sectors.  We remain in a “plow horse” economy, with slow, steady growth.  While that is not exciting, it is not a bad place to be.

 

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

December 2016

Posted by Koenig Investment on
 December 13, 2016
  · No Comments

The U.S. economy should finish 2016 with final GDP growth figures of 1.6-1.7%.1  This is hardly a barn burner, but has been a continuation of the slow, steady growth seen for several years.  Current 2017 forecasts estimate GDP in the 1.8-2.2% range.2  However, it would be wise to note that projections for future years have been somewhat optimistic since the recovery.  For example, The Wall Street Journal Economics Survey of December 2015 predicted 2.6% GDP growth for 2016.  We will have to wait and see how 2017 compares to the expectations.

2017 Expectations

The market will continue to focus on earnings, interest rates, inflation, and taxes as we move into 2017.  The year should keep analysts busy given the talk of significant changes to the tax structure.  President Elect Trump is proposing the lowering of personal and corporate taxes for most people and companies.  In addition, a proposal to allow U.S. companies to move foreign earnings held abroad back to the United States as a special, lower tax rate will be worth watching.  This proposal could bring back hundreds of billions of dollars to the United States.

Governmental spending at the state and local levels has been constrained by increased pension and healthcare costs for many areas of the country.  This has limited the spending of these local entities for other programs.  It is hoped that Trump stimulus programs could be a positive for state and local governments.  It is likely that such stimulus programs will contribute to the national debt.  Specific policy proposals will allow analysts to determine the probable effects of both spending and debt increases at that time.

Inflation and rising interest rates are areas to watch for as a drag on 2017 GDP.  A ¼ point rate increase (0.25%) by the Federal Reserve in December is widely anticipated.  Two further ¼ point increases in 2017 (as is anticipated) would bring the federal funds rate to 1.0% by year end.  Housing markets are expected to see less appreciation as a result.  Moving the national average for mortgage interest rates from 4% to 5% still leaves this rate historically low.  However, it is also a 25% increase in borrowing costs.  For example, a mortgage of $300,000 costs the borrower $12,000 annually at 4%.  It jumps to $15,000 annually at 5%.  This is enough of a change to price some buyers out of their local markets. The national real estate average shows price growth of about 6% last year.  Markets like Portland, Seattle, and Denver have seen much greater price rises.  Expectations are for these markets to slow their growth as buyers reassess what they can afford.

At the same time, the combination of full employment and likely increasing energy prices is expected to increase inflation in 2017.  Businesses are expected to raise wages, and prices, as they compete for skilled workers.  OPEC agreements to limit pumping are expected to hold and help drive up oil prices somewhat.  It is hard to gauge exactly how much impact any of these factors will have on next year’s economy, but all are expected to play a part.

The financial markets seem to be very confident that better economic news is just around the corner.  They seem sure that tax cuts and increased infrastructure spending is a done deal, despite any definitive proposals.  Some businesses are anticipating a reduction in regulations they have previously complained of.  The new optimism seems to be based on recent proposed appointments of anti-regulation proponents and the creation of the most conservative cabinet in decades.  The markets appear to be anticipating profits to be made from the changes these individuals – as well as other likely cabinet picks – would like to make to sectors of our economy.  New government policies, even with one party firmly in control, take longer to implement than most people expect.  Ideas get watered down and projects can take years to become shovel ready. 

Summary

The United States has been governed by a Republican Congress and President 22.5% of the time since the early 1900’s.  The Dow Jones Industrial Average has returned approximately 7% annually during those time frames.2  Markets don’t like uncertainty.  They began to move after the election results became clear and investors could trade based on likely governmental policy changes.  A number of analysts feel 2016 is finishing with some of next year’s expected gains already priced into the system.  We will have to wait and see which of these expectations become reality, and which have been unrealistic hopes.  It is certain that 2017 will be a year with some interesting changes to adapt to, and, hopefully, profit from.

We wish everyone a happy, enjoyable holiday season as we all reflect on 2016 and mull over the possibilities of 2017. 

  1.  http://news.morningstar.com/articlenet/article.aspx?id=784381; Economy Not as Strong as Consensus Believes, Robert Johnson 12/10/2016
  2. Bob Brinker’s Marketimer, 12/5/2016, Vol 31, No. 12
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 – November 2016

Posted by Koenig Investment on
 November 21, 2016
  · No Comments

Legacy Planning

We thought it would be timely to depart from our usual market commentary and instead explore services our office offers that you may not be aware of. Financial planning extends beyond upcoming life events such as a new home purchase, a child entering college, or entering retirement. Most clients desire to leave a legacy for children, extended family, friends, or charitable institutions. Laying the foundation for a transfer of wealth, particularly to younger generations, should occur well in advance of the need, yet these can be difficult conversations to begin. We often see that, without proper planning, family wealth depleted within a generation or two.

Our office can help. We are a neutral third party who can explore the best way to discuss your wants and needs with family, attorneys, or other relevant parties. Addressing topics related to multi-generational family trusts, or even who to contact and where to find important documents in case of unexpected events, can provide clarity and assurance in advance of emotionally fraught times. Please let us know if you are interested in beginning a conversation between you, your heirs, and our office.

Quick Office Guide

We have attached a summary some people may find helpful when speaking about us to family, friends, or service providers.  It is a quick explanation of who we are and what services we provide.  Please feel free to send or print a copy of this page for your family members, close friends, CPA, attorney, or anyone else you feel should know about our office.  Let us know if you would like us to mail you hard copies of this explanatory page and we will be happy to do so.

We wish everyone a happy, enjoyable holiday season.  

Quick Office Guide

 

Market Brief – November 2016 

Posted by Koenig Investment on
 November 10, 2016
  · No Comments

Election Impact – Tuesday’s dramatic U.S. presidential election result has shocked the world.  A number of clients have expressed high levels of anxiety due to the outcome.  It is important to reiterate that elections by themselves do not decide policy outcomes, nor do they generally direct the long-term health of the economy and the businesses that operate within it.   Without knowing which policy proposals will eventually be enacted – and how implementation may play out – making preemptive, emotionally charged investment decisions is more likely to hurt one’s portfolio than help. 

We have carefully analyzed the performance of the stock-based mutual funds we own for their performance during the 2008-2009 sell-off, choosing funds that held up better than their peers and/or benchmarks during the downturn.  One can never assume past performance will be repeated in the future.  However, past activity can be a guide to probable reaction to similar future events assuming no great change in mission statement or portfolio manager(s). 

 Diversification – We cannot emphasize enough the importance of having a healthy level of respect for the highly unpredictable nature of the markets over the short-term.  We have learned this lesson over 30 years of managing money.  The start of this year saw equity markets decline across the globe.  Markets had regained the ground lost and returned to a 1-year high by May.  Then June saw a sharp Brexit related decline that now appears as a small blip on history graphs.  Managed futures holdings provided valuable diversification benefits and reduced risk to client portfolios during these events as they have almost no correlation to broad stock market activity.  A diversified portfolio, like that of most of our clients, should hold asset strategies that have positive expected returns and either low or no correlation to each other over the long-term.  As a reminder, correlated assets move with each other, while non-correlated assets move independently of each other.  For example, stocks and bonds tend to move separately, or even opposite of each other.  There are significant benefits to adding assets that have very low or no correlation, even if their expected returns are somewhat lower than that of existing holdings.  Managed futures is just one example of how we gain diversification and lower risk by adding assets with low correlation to an existing asset mix.

 Bonds – Bonds are another diversification tool we use in client portfolios.  We expect a gradual increase in interest rates over the next year.  Shorter term bonds and bonds with the ability to increase their interest rates, such as floating rate bonds, are sectors we are comfortable holding in client portfolios.  Bonds are lower risk assets to hold in case of a stock market sell-off, acting as a shock absorber as money flows from the stock market to bonds.  As with managed futures, we have been adding to these asset categories over the past year.  Media reports of a change in Federal Reserve policy regarding raising interest rates due to the election outcome are speculative in nature at this point in time.  This is currently an area of unknown policy shifts.

Summary – We have entered a period of uncertainty linked to possible and probable policy changes.  We do not know the nature of these changes yet. Trump’s most recent speech referenced infrastructure spending increases, indicating this is a likely front burner topic to be addressed by the new administration.  A measure of clarity in this and other areas will be obtained over the next 60 days as the outline of the new administration takes shape.  We have already seen some positive activity as the steep market drop predicted by after-hours and international trading failed to materialize.  Many stocks within the financial and energy sectors have seen large gains since the close of the election.  In contrast, tech based companies have seen some declines to their valuations.  It is too early to react strongly to any of the changes expected to materialize from this election.  It would not be prudent to react until new policy positions are noted and the details of these changes are fleshed out.  There will undoubtedly be a number of new positions to parse over the coming weeks, but we are not there at this point in time.  Now is the time to reflect on what this election shows about the country as a whole and to prepare for the general changes ahead.

 

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Koenig Investment Advisory, LLC is a registered investment advisor in the States of Oregon, Washington, California, and Colorado. Advisory firms with five or fewer client households are exempt from registration in such states. The advisor may not transact business in states where it is not appropriately registered, excluded, or exempted from registration. Individualized responses to persons that involve either the effecting of transaction in securities or the rendering of personalized investment advice for compensation will not be made without registration or exemption.