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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.

 

October 2016 – U.S. Employment

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

The employment situation in the United States has slowly, but steadily, been improving since the 2008 recession.  The below graph shows initial jobless claims numbers from 1967 through October 2016.  As you can see, current initial jobless claims are at the lowest level seen since 1973.United States Initial Jobless ClaimsThe U.S. economy added 156,000 new jobs in September.2  Larger employers (those employing 500+ workers) recently outpaced smaller firms in job creation.  Individual sectors do differ in their employment outlook.  For example, energy has seen a contraction in employment over the past year while trucking companies note difficulty filling positions even while offering signing bonuses of $5,000 or more.  The overall unemployment rate did rise slightly to 5%.  However, that rise has largely been attributed to previously discouraged workers reentering the labor market and is not an indicator of a softening job market.

Some workers are still struggling despite current job growth rates.  Figures noting people who gave up looking for work or who can only find part-time jobs remain flat at 9.7%.3  Much of this can be attributed to the “skills gap”, meaning workers without advanced skills do still have difficulty finding full employment.  This figure is not expected to change meaningfully as employers having difficulties filling job vacancies have noted the need for skilled workers within their industries.

A tighter labor market for skilled workers is driving wage inflation.  Hourly wages have grown by 2.6% over the past year to $25.79/hour, just below the post-recession high.3  The numbers of hours worked per person has also increased.  An improvement in both average hourly wages and hours worked is encouraging.  Several economists think we may begin to see worker shortages by next spring.  Pay increases are expected to continue as companies seek to either fill vacancies or retain skilled workers.  This trend is being watched carefully as it may spur an increase in overall inflation, leading to interest rate increases by the Federal Reserve.  A ¼ point rate hike is likely in December given these employment trends.  The employment trends noted above have been gradual, meaning the upward inflationary pressure and need for the Fed to respond have also been slowly growing.  A continuance of current labor market trends is likely to make the Fed more comfortable with future rate increases.  However, while these are positive trends with steady momentum, they are still slow moving.  While this does make future rate hikes more likely, it is not overwhelming pressure on the Fed to raise rates.  While we do expect to see interest rates rise in 2017, we do not expect to see large increases.

In summary, the U.S. job market has basically recovered to pre-recession levels.  Workers can expect raises as their skills are more in demand and valued greater.  The economy is likely to see some upward inflationary pressure due to the tightening job market.  We can expect the Fed to respond with measured interest rate increases.  Unskilled workers still face employment challenges and are likely to continue to do so.

1)  http://www.tradingeconomics.com/united-states/jobless-claims

2)  http://www.ftportfolios.com/retail/blogs/economics/index.aspx

3)  http://www.morningstar.com/news/market-watch/TDJNMW_20161007241/update-us-adds-156000-new-jobs-in-september.html

 

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 – July 2016

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

We’re in the midst of 2016 second quarter earnings releases and I wanted to share with you the picture of the U.S. economy that is becoming clearer as companies release data.  Overall earnings figures are a bit better than expected.  In general, companies made more money last quarter than most analysts expected.  The consensus amongst most analysts is for a better than expected second half of 2016 than originally noted in January.  Both plow horse and tortoise metaphors are common in reports as they sum up thoughts on the current state of the economy.  While this often makes for bland reading and tame headlines, it is good news that should be welcomed as slow growth means less volatility in how companies operate.  Companies that are growing slowly and adding jobs at low, steady rates are less likely to overproduce and need to cut those jobs in a hurry when facing some contraction.  This lower volatility within operations helps keep the company, and the economy as a whole, chugging along a slow growth path.

There are several data points analysts are pointing to as they upwardly revise their expectations for the rest of 2016.  Unemployment is decreasing, year over year retail sales are up, housing starts continue to increase, and average worker pay – a previously worrisome weak spot in the recovery – is increasing.1  In fact, the current economy is basically meeting the definition of full employment.2  The one figure that has been noted again and again in these analyses is the ISM Manufacturing Index.  This index is a survey of purchasing managers around the country and tends to quickly reflect any changes in employment, production, inventories and new orders.  This index rose from 51.3 in May to 53.2 in June.3  Historically, such rises indicate a period of economic growth.  Lastly, investors are largely bearish at the moment.  The contrarian view is often correct as we do typically see a rising market when investors are pessimistic and expect a pullback.  The combination of all this data points to an economy continuing on a path of slow, steady growth.  While there is nothing especially exciting to report, this should nonetheless be welcome news embraced by the average investor seeking portfolio growth and lower volatility.

 

 

  1. http://www1.realclearmarkets.com/2016/07/27/fed_policy_not_in_tune_with_data_181382.html
  2. http://money.cnn.com/2016/05/23/news/economy/us-full-employment-williams/
  3. https://www.instituteforsupplymanagement.org/ISMReport/content.cfm?ItemNumber=30524

 

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.

January 2016

Posted by Koenig Investment on
 February 23, 2016
  · No Comments

China’s Economy

We ring in 2016 with a good dose of market volatility. The five year graph of the Shanghai Composite Index shows a bit of a decline in 2011, fairly flat in 2013 through mid-2014, and then a steep rise starting in mid-2014.  This rise coincided with the Chinese government encouraging citizens to buy stocks, even as monthly economic statistics were showing the economy was slowing and economic data was coming in below forecasts. Unlike the United States and Europe where pension funds, university endowments and mutual funds make up a large portion of stock ownership.  China is almost all affluent, individual investors.  Given this dynamic greater volatility is almost a given.

SOURCE: https://www.quandl.com/data/YAHOO/INDEX_SSEC-Shanghai-Composite-Index-China

In the latter part of the 1990s corporations were moving manufacturing to China from the United States and other countries to take advantage of lower labor costs.  This mass influx of manufacturing drove the Chinese economy for the last 15 years, resulting in annual GDP growth of 8-10%.  This is an almost unheard of figure, and one that eventually has to moderate.  Growth in the Chinese middle class has been fairly rapid and consumer spending will be a larger portion of their economy going forward.  The Chinese government is trying to transition from primarily a manufacturing and exporting economy to be more of a consumer based economy.

Currency – We continue to see China’s currency (Yuan) be devalued against the U.S. Dollar and Euro.  Although currency instability has rattled markets, it does have a positive impact on U.S. corporations purchasing Chinese products.  Walmart specifically should be a big beneficiary, as a weakening Yuan reduces the costs of Walmart’s extensive purchases from China.

Markets – The Chinese government has looked somewhat clumsy in their actions in dealing with a slowing economy and a stock market that had a huge one year run up from mid-2014 through mid-2015.  They imposed a circuit breaker to shut down the stock market if it dropped by 5%.  It took 29 minutes to reach that point during one day this week.  The government has now withdrawn that rule.  In addition, most of the individual investors within the Chinese market are also Chinese citizens.  Their market rules make entry of foreign money difficult to say the least.  This has created a situation in which large numbers of persons relatively new to stock market investing have driven up market prices to unsustainable levels.  We are seeing a drop in price as the President, Xi Jinping, has begun to change the government’s oversight of the markets.  These are long-term oriented reforms that are painful in the short-term, but should give better results than the patchwork stimulus implemented over the past summer.

While the volatility in the Chinese stock markets is attention grabbing, it likely would not impact the average investor elsewhere.  You may recall stories in the 1980’s about Japan’s rapidly growing economy.  Their economy was growing by leaps and bounds until 1989.  Their market peaked in that year and has never fully recovered.  Most U.S. companies and households did not notice this slowdown in the 1990’s even though Japan was a U.S. economic partner.  China is 0.7%1 of the U.S. export market.  A slowdown in the Chinese economy is likely not going to be felt in the broad U.S. economy.  It is simply not large enough to be felt.

United States Economy

Employment – December employment figures released today show a gain of 292,000 jobs. This beat a consensus estimate of 200,000 jobs.  The employment figures for October and November were both revised upward by 50,000.  Almost all sectors of the economy posted job growth except energy.  The unemployment rate remained steady at 5%.2

Corporate Earnings – Corporate profits are the life blood of stocks.  GDP projections are holding steady at low, but positive numbers. Some sectors are seeing typical cyclical contraction, but a company that made money in 2015 is likely to continue to make money in 2016. I would guess the year over year growth in 2016 will be a bit lower than recent years but still growing.

Starting the middle of January we will start to see the release of 4th quarter corporate earnings results.  These results should help support the markets.  In manufacturing employment gains in chemical and plastics are offsetting job losses in metals and energy. Retail sales show a migration of consumers to online firms over traditional brick and mortar retail.

Construction – Construction continues to hold up well in both commercial and residential.  New home starts for November rose 10.45% from October and 16.48% since one year ago.3  US existing home median sales prices are up 6.32% over the one year period.4  Housing is no longer a drag on the overall economy, but rather a healthy sector contributing to overall growth.

Summary

Bright spots in the market in 2015 were technology companies, including biotech.   Several companies have interesting new drugs, devices, or other technology based products that are likely to help company earnings.  REITs are another area to watch.  REITs tend to perform well in rising interest rate environments.  We’ve seen some healthcare REITs whose valuations have dropped far enough during the past year that early 2016 is an attractive entry point in these offerings.  Overall, the U.S. economy is in good shape.  The market activity in China is interesting to follow, but will not have a material impact on the economy here.

 

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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