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April 2022 Newsletter

Posted by Koenig Investment on
 April 13, 2022
  · No Comments

The year has started off with a relatively volatile market, with the S&P 500 (a widely used gauge of broad stock market activity) down almost 10% by the end of January.  We saw additional up and down price swings throughout the quarter, with the S&P 500 ending down 4.6% as of March 31st.  There are several reasons for this activity.  As we have noted before, markets do not like uncertainty.  This quarter has seen uncertainty over lingering effects of COVID on the supply chain, the effects of the war in Ukraine on oil and commodity prices, continued concerns over inflation, and interest rate hikes.  Value and dividend paying stocks have performed better during this cycle as investors seek stability and certainty in uncertain times.

Inflation and interest rates

Inflation remains high at 7.9% as of the February Consumer Price Index.  Analysts do expect this to drop closer to 3% by the end of the year, in part due to the expected effects of interest rate increases.  The Federal Reserve has already begun to raise rates and has outlined a plan to continue to do so throughout the year.  The average 30-year fixed mortgage rate has increased from 2.84% in August 20211 to 4.86% as of April 20222, with expectations this will continue to rise as the Fed continues to raise rates.  This limits the amount many home buyers can borrow, resulting in cooling pressures on the housing market. 

We are seeing some initial signs of inflationary pressure easing.  Home prices are cooling in some markets.  Purchases of new appliances, home furnishings, and renovations should slow alongside housing.  Used car prices, while still high, have now fallen for the last two months.3  Supply chain pressures have eased for some industries as well.  While we are still early in this process, we are seeing signs of a return to pre-pandemic spending patterns that will ease some inflation concerns. 

Energy prices remain an area of uncertainty.  Russia is a large producer of natural gas and oil.  The sanctions levied against their producers as a result of their recent invasion of Ukraine has already caused energy prices to increase.  Additional sanctions are possible.  The impact of oil and gas prices on inflation is difficult to predict as this is tied to war, global demands, and alternate energy infrastructure builds that take time to implement.  Increased supply from OPEC is always a possibility, but this coalition has noted a preference for maintaining higher prices and an unwillingness to increase output to offset market losses from Russia.

Secure 2.0 Act

The Secure 2.0 Act is likely to pass near its current form.  This will delay the age at which retirement account owners are required to take mandated distributions, allow workers very near retirement to contribute more to their retirement accounts, and allow employers to help employees with student loans save for retirement, amongst other provisions.  We are monitoring these changes and will let you know if any affect you personally once the law has been finalized and passed.

Online security

We continue to see spoofing, phishing, and other scams proliferate online.  Here are some general rules of thumb to keep in mind for your safety:

  • Do not click on links from unknown sources. Links in e-mail and text messages can be used to install spyware and other malware onto your device.  The same applies to links in poorly maintained websites.  Know what you are clicking on before you click.
  • Scammers lie. They will pretend to be from a company or person you trust in order to abuse that trust.  If you are unsure of an e-mail link, do not use it.  Go directly to the company website instead.  Do not assume someone calling you is from the company they say they are.  Take down the information they give you and call the company back using the phone number listed on their website.  Independently verify who you are interacting with via some other channel than how they have contacted you.
  • Do not rush. We all make more mistakes when we are in a hurry.  Scammers use this to their advantage.  They make up false consequences to prod you to make quick decisions.  Take your time instead.
  • Neither e-mail nor text messaging are secure methods of communication. Do not send account numbers, credit card information, social security numbers, etc. via e-mail or text.  Use secure portals, encrypted communications, or tell the provider the information on the phone instead.

Summary

The outlook for 2022 is difficult to predict.  There are a variety of economic influences both domestically and abroad that will impact market returns.  While analysts and news outlets speak of likely outcomes, all are speaking with varying degrees of uncertainty.  For now, corporate earnings and job demand remain strong as our economy enters a period of monetary tightening.  Our office continues to focus on our client needs, planning for the unexpected, and maintaining diversified portfolios to help achieve account objectives and long-term financial goals.

As a reminder, the federal tax filing deadline is April 18th this year.  You can top off IRA or HSA contributions for 2021 at this time if you have yet to file.

 

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 2022 Newsletter

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

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

 

2021 Rewarded Long Term Investors

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

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

  

Fed Taper Acceleration, Rate Hikes on Table

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

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

 

Build Back Better

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

 

Retirement Contributions

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

 

Summary

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

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

 

 

 

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

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.

Newsletter – November 2018

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

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

Interest Rates

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

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

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

Earnings

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

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

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

The Rest of the World

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

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

Summary

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

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

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

Newsletter – April 2018

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

Pausing to Smell the Roses

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

Earnings, GDP, PE

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

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

SOURCE: Seeking Alpha3

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

The Rest of the Data

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

SOURCE:  MacroTrends4

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

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

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

Summary

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

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

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

Newsletter – January 2018

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

Year in Review

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

2018

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

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

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

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

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

Summary

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

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

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

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

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

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.

 

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.

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