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Monthly Economic Update: October 2018

Developments that affected the economy & the markets in the past month. 

Wall Street maintained its optimism in September. While trade worries were top of mind for economists and investors overseas, bulls largely shrugged at the prospect of tariffs and the probability of another interest rate hike. The S&P 500 rose 0.43% for the month. On the whole, U.S. economic indicators were quite good, and some offered pleasant surprises.1

Domestic economic health. As many analysts expected, the Federal Reserve raised the main interest rate by 0.25% on September 26 to a target range of 2.00-2.25%. The word “accommodative” was absent from its latest policy statement, distinctly hinting at a shift in U.S. monetary policy. As September ended, the CME Group’s FedWatch Tool had the odds of a quarter-point December rate hike at 76.5%.2,3

On the last day of September, Canada joined the U.S. and Mexico in a new proposed trade pact representing an evolution of the existing North American Free Trade Agreement (NAFTA). The new accord, if approved by the governments of Canada, Mexico, and the U.S., would toughen intellectual property and trade secret regulations, require 75% of autos made in North America to use parts from North American manufacturers, stipulate new labor requirements for Mexican industry, and seek to crack down further on unsanctioned fish, animal, and timber imports.4

New data showed hiring bouncing back in August. The Department of Labor stated that the economy added 201,000 net new jobs in that month. Annualized wage growth reached 2.9%, the best number seen since the end of the Great Recession in 2009. The main jobless rate remained low at 3.9%; the underemployment (U-6) rate ticked down to 7.4%, a 17-year low.5

While wages grew 2.8% in the year ending in August, the Consumer Price Index rose only 2.7% in those 12 months. July’s CPI showed yearly inflation at 2.9%. Yearly core consumer inflation also declined 0.2% to 2.2% in the August CPI.5,6


Consumers saved some of what they earned in August. Personal income and personal spending were both up 0.3% for the month; retail sales, though, only advanced 0.1%; 0.2%, with automotive and gas purchases factored out.6

Households viewed the present and near future of the economy with considerable optimism. The Conference Board’s consumer confidence index came in at a remarkable 138.4 last month, up another 3.7 points. The University of Michigan’s barometer rose 4.6 points to 100.8 in its initial September edition, then leveled off to a final September mark of 100.1.6

Off Main Street, durable goods orders advanced 4.5% in August, more than reversing a 1.2% July decline. Industrial production rose 0.4%; factory output, 0.2%. Producer prices retreated 0.1% in August, sharply reducing their annualized gain from 3.3% to 2.8%. The Institute for Supply Management’s purchasing manager indices, gauges of business activity in the manufacturing and non-manufacturing sectors of the economy, looked good in August. The factory PMI climbed to a stellar 61.3 from its 58.1 July level, and the service sector PMI rose to 58.5 from the prior reading of 55.7.6,7

Global economic health.Economists, investors, and journalists in Asia-Pacific nations were anxious about what U.S. tariffs and continued Federal Reserve interest rate hikes might mean for the region’s economies. The Institute of International Finance said last month that foreign investment dollars flowing into emerging markets had shrunk alarmingly in mid-summer, from $13.7 billion in July to $2.2 billion in August. India’s rupee was down 12% against the dollar YTD in September; Indonesia’s rupiah, 9.2%. On the bright side, India’s annualized GDP was at 8.2% through the second quarter. In its latest forecast, the Asia Development Bank projects 5.8% growth for the Asia-Pacific region in 2019. If that holds true, that would be an 18-year low. The ADB projects China’s GDP to decline from 6.6% this year to 6.3% next year.8,9

Unlike the Fed, the European Central Bank left interest rates alone in September: its deposit rate remained -0.4%, and its main refinancing rate stayed at 0.0%. On September 13, the ECB announced it would keep interest rates at those levels through at least summer 2019 and end its asset-purchase program in December. The European Union had to deal with yet another economic drama last month as the populist government of Italy replaced a plan that would have reduced its budget deficit to 0.8% of GDP with one that would introduce a basic income, boost pensions, and generate a deficit of 2.4% of GDP for the next three years. While the tactic could help a strained Italian banking system, it could also make it tougher for Italy to service its national debt, which is now expanding 30% faster than its economy is growing.10,11

World markets. Benchmark performance varied widely in September. The biggest gain came in Argentina, where the Merval soared 33.67% (it ended the month up 30.73% year-over-year). Russia’s Micex rose 6.87%; the Nikkei 225, 5.73%; Brazil’s Bovespa, 2.41%. South Korea’s Kospi added 1.73%; the Shanghai Composite, 1.56%; Taiwan’s TSE 50, 1.08%. Less consequential gains came for the MSCI World (0.39%) and France’s CAC 40 (0.15%).12,13

There were significant retreats last month as well. In India, the Nifty 50 fell 6.88%; the Sensex, 6.86%. No other major index suffered a loss that large, but in Europe, Spain’s IBEX 35 slipped 2.26%; Germany’s DAX, 2.24%. Hong Kong’s Hang Seng lost 1.99% on the month. To our north, the TSX Composite gave back 1.73%. The United Kingdom’s FTSE 100 lost 1.40%; Australia’s All Ordinaries, 1.37%; Mexico’s Bolsa, 1.04%. MSCI’s Emerging Markets index declined 0.76%.12,13

Commodities markets. Three important commodities gained 5% or more in September. Copper futures advanced 5.47%, WTI crude gained 5.27%, and heating oil added 5.00%. Oil wrapped up the month at $73.56 on the NYMEX. Other gainers included coffee, +4.43%; platinum, +4.01%; natural gas, +2.74%; silver, +1.80%; soybeans, +1.38%; corn, +1.28%. An ounce of silver was worth $14.69 on the COMEX at the September 28 close.14

Other commodities made September descents: gold, -0.82%; wheat, -1.64%; unleaded gasoline, -1.73%; sugar, -5.19%; cotton, -5.58%; cocoa, -11.06%. COMEX gold was worth $1,196.20 an ounce on September 28. The U.S. Dollar Index was basically flat for the month, declining 0.16% to 94.99.14,15

Real estate. Existing home sales did not retreat in August; they did not advance, either. The National Association of Realtors pronounced them unchanged in the eighth month of the year, as its pending home sales index slipped 1.8%. New home buying improved 3.5% in August, according to the Census Bureau; that was a nice switch from the (revised) 1.6% decline in July.6

While residential construction activity picked up in August, another indicator hinted that the expectations of home sellers were being recalibrated. The Census Bureau said that groundbreaking increased 9.2% in August (though the number of building permits issued decreased 5.7%). All the same, September brought the release of the July edition of the 20-city S&P CoreLogic Case-Shiller home price index, which displayed an annual appreciation of just 5.9% – quite a drop from 6.4% just a month before. Mortgage rates jumped: between August 30 and September 27, Freddie Mac’s Primary Mortgage Market Survey measured the average interest rate for the 30-year FRM moving north from 4.52% to 4.72%. Mean interest rates for the 15-year FRM rose from 3.97% to 4.16% in that span, while the average interest on a 5/1-year ARM went from 3.85% to 3.97%.6,16

Looking back, looking forward. Two of the key Wall Street indices rose in September, while two others fell. The Dow Jones Industrial Average and S&P 500 respectively gained 1.90% and 0.43% last month; the Nasdaq Composite and Russell 2000 respectively lost 0.78% and 2.62%. These September ups and downs aside, the big three had an exceptional third quarter. Across Q3, the S&P improved 7.20%; the Dow, 9.01%; the Nasdaq, 7.14%. (The Russell rose 3.26%.) When the month ended, the four indices settled as follows: DJIA, 26,458.31; SPX, 2,913.98; COMP, 8,046.35; RUT, 1,695.10. Finally, the CBOE VIX declined 1.94% last month to a September 28 close of 12.61.1,17
















S&P 500






9/28 RATE











Sources:,, – 9/28/181,18,19,20

Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly. These returns do not include dividends. 10-year TIPS real yield = projected return at maturity given expected inflation.

Through the years, October has tended to be one of the more turbulent months for equities. The historic standard deviation for the Dow Industrials in October is 1.44%, as opposed to 1.05% for the other eleven months. Yes, two of the most unsettling drops in Wall Street history happened in Octobers – but even with Black Monday and the 1,000-point slides of late 2008 factored out of calculations, volatility in the tenth month of the year remains historically above average. (Only one bear market out of the past 35 has begun in October, in case you are wondering.) This October may break the pattern and be remarkably placid; the past can be a faulty tool indeed for predicting the future. Whether stocks rollercoaster or not this month, investors may want to scale back bullish expectations. Wall Street looks forward to the fourth quarter, year after year, but the trajectory of any gains in Q4 might be flatter than some investors anticipate, since stocks advanced so much in Q3. Still, bullish sentiment is hardly flagging, and the oncoming earnings season could spark a fall rally.21 

Upcoming economic releases.What will investors pay attention to as the rest of October unfolds? The September Challenger job-cut report and August factory orders (10/4), the Department of Labor’s latest employment report (10/5), September’s Producer Price Index (10/11), September’s Consumer Price Index (10/12), the University of Michigan’s preliminary October consumer sentiment index (10/13), September retail sales (10/15), September industrial output (10/16), September residential construction activity (10/17), the Conference Board’s latest leading indicators index (10/18), the NAR’s newest existing home sales snapshot (10/19), September new home sales (10/24), the NAR’s latest pending home sales index and September durable goods orders (10/25), the initial estimate of Q3 GDP from the Bureau of Economic Analysis and the final University of Michigan consumer sentiment index for October (10/26), September personal spending and the September PCE price index (10/29), a new consumer confidence index from the Conference Board (10/30), and the October ADP payrolls report (10/31).

Will stocks ride a tremendous earnings wave to great October gains? Or are we in for turbulence due to events we cannot yet see? Time will tell. Regardless of how the markets perform this month, you are probably thinking ahead toward 2019, and also, thinking about the end of 2018 – and considering investment, tax, and risk management moves you might want to make while the timing is right. Please feel free to call me or email me, so that we can talk about them. In early November, I will summarize the economic news of October for you.  


This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. The information herein has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All market indices discussed are unmanaged and are not illustrative of any particular investment. Indices do not incur management fees, costs and expenses, and cannot be invested into directly. All economic and performance data is historical and not indicative of future results.The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is a market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. The Standard & Poor's 500 (S&P 500)is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The CBOE Volatility Index®(VIX®) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. NYSE Group, Inc. (NYSE:NYX) operates two securities exchanges: the New York Stock Exchange (the “NYSE”) and NYSE Arca (formerly known as the Archipelago Exchange, or ArcaEx®, and the Pacific Exchange). NYSE Group is a leading provider of securities listing, trading and market data products and services. The New York Mercantile Exchange, Inc. (NYMEX) is the world's largest physical commodity futures exchange and the preeminent trading forum for energy and precious metals, with trading conducted through two divisions – the NYMEX Division, home to the energy, platinum, and palladium markets, and the COMEX Division, on which all other metals trade. The MERVAL Index (MERcado de VALores, literally Stock Exchange) is the most important index of the Buenos Aires Stock Exchange. The MICEX 10 Index is an unweighted price index that tracks the ten most liquid Russian stocks listed on MICEX-RTS in Moscow. Nikkei 225 (Ticker: ^N225) is a stock market index for the Tokyo Stock Exchange (TSE). The Nikkei average is the most watched index of Asian stocks. The Bovespa Index is a gross total return index weighted by traded volume & is comprised of the most liquid stocks traded on the Sao Paulo Stock Exchange. The Korea Composite Stock Price Index or KOSPI is the major stock market index of South Korea, representing all common stocks traded on the Korea Exchange. The SSE Composite Index is an index of all stocks (A shares and B shares) that are traded at the Shanghai Stock Exchange. The FTSE TWSE Taiwan 50 Index consists of the largest 50 companies by full market value and is also the first narrow-based index published in Taiwan. The MSCI World Index is a free-float weighted equity index that includes developed world markets and does not include emerging markets. The CAC-40 Index is a narrow-based, modified capitalization-weighted index of 40 companies listed on the Paris Bourse. The Nifty 50 (NTFE 50) is a well-diversified 50-stock index accounting for 13 sectors of the Indian economy. It is used for a variety of purposes such as benchmarking fund portfolios, index-based derivatives and index funds. The BSE SENSEX (Bombay Stock Exchange Sensitive Index), also-called the BSE 30 (BOMBAY STOCK EXCHANGE) or simply the SENSEX, is a free-float market capitalization-weighted stock market index of 30 well-established and financially sound companies listed on the Bombay Stock Exchange (BSE). The IBEX 35 is the benchmark stock market index of the Bolsa de Madrid, Spain’s principal stock exchange. The FTSE 100 Index is a share index of the 100 companies listed on the London Stock Exchange with the highest market capitalization. The DAX 30 is a Blue-Chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange. The Hang Seng Index is a free float-adjusted market capitalization-weighted stock market index that is the main indicator of the overall market performance in Hong Kong. The S&P/TSX Composite Index is an index of the stock (equity) prices of the largest companies on the Toronto Stock Exchange (TSX) as measured by market capitalization. The FTSE 100 Index is a share index of the 100 companies listed on the London Stock Exchange with the highest market capitalization. The All Ordinaries (XAO) is considered a total market barometer for the Australian stock market and contains the 500 largest ASX-listed companies by way of market capitalization. The Mexican Stock Exchange, commonly known as Mexican Bolsa, Mexbol, or BMV, is the only stock exchange in Mexico. The MSCI Emerging Markets Index is a float-adjusted market capitalization index consisting of indices in more than 25 emerging economies. The US Dollar Index measures the performance of the U.S. dollar against a basket of six currencies.Additional risks are associated with international investing, such as currency fluctuations, political and economic instability and differences in accounting standards. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. MarketingPro, Inc. is not affiliated with any person or firm that may be providing this information to you. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional.




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November 22, 2016

The Intriguing Post-Election Rally  

Why did some sectors rise more than others?  
Provided by Aldo Waker, AIF, AAMS  
Wall Street likes certainty. When startling financial, political, or societal events occur, volatility usually follows, and the major indices may fall.   In late October, the Dow Jones Industrial Average went on a multi-day losing streak as Donald Trump caught up to Hillary Clinton in the polls tracking the presidential race. Wall Street had been anticipating a Clinton victory; suddenly, that looked less certain. The Dow gradually sank below 18,000. When Trump won, however, the Dow did not drop further. It rallied for seven days and notched four record closes.1,2   
What sparked the Dow’s rally? One, a new presumption of massive federal spending on infrastructure and defense. In August, Trump pledged he would “at least double” Clinton’s proposed federal stimulus if elected, which would mean committing more than $500 billion to repair the nation’s highways, bridges, and ports. He has also talked of greater military spending. Many, if not all, of the 30 companies making up the Dow could play significant roles in such efforts. Two, a Trump presidency is perceived as pro-business, with the potential for decreased regulation, renegotiated trade agreements, and tax cuts.2,3  
The small caps also soared after Trump’s win. The Russell 2000 advanced 9% during November 9-17, leading some investors to wonder what the small caps had in common with the record-setting blue chips. The quick answer is that these small-cap firms have greater exposure to the U.S. economy than they do to foreign economies. Bulls believe that these firms will be particularly well positioned if infrastructure spending increases.4  
Why did the S&P 500& Nasdaq Composite lag the Dow & the Russell? The S&P rose 1.8% from November 9-17. This returned the index to the level at which it had been for most of the third quarter.4,5  
A closer look at the S&P’s recent performance reveals a striking gap between its industry groups. Its financial sector climbed 10% in the eight days after Trump’s victory, aided by hopes for friendlier bank regulation in the new administration. By November 15, its YTD performance was 17% better than that of the S&P’s worst-performing sector, utilities. This degree of difference had not been seen in the index since 2009. Basically, a major rotation happened, taking invested assets out of certain sectors and into other sectors presumed to benefit from the policies of a Trump presidency.2,6  
Hearing about the Dow’s surge, some investors assumed their portfolios would see large, abrupt gains – but in any sector rotation, money flows away from some industry groups toward others. In the three days after Trump’s victory, the Dow had gained 2.81%; the S&P, 1.16%; and the Nasdaq, 0.84%. While the Dow is only comprised of 30 companies, the S&P and the Nasdaq are much broader benchmarks, exponentially larger in their scope. Both the Nasdaq and the S&P contain many tech companies – and, broadly speaking, Silicon Valley was not high on Trump.7   
Investors scratching their heads at recent portfolio performance would also do well to remember that large caps are just one of six asset classes. The gains for U.S. equities stood out globally after the election; there were losses in emerging and developed markets abroad, and losses in the debt markets. As assets in many portfolios are allocated across various asset classes to try and manage risk, this helps to explain why many retail investors saw only small gains or no gains at all immediately after November 8. They were not invested merely in the member firms of the Dow Jones Industrial Average.7   
Will this rally continue? It’s difficult to say. As you know, history provides information of the past, and no assurance of future returns. While it’s possible that the new administration’s policies will bear out this goodwill, it’s also possible, after the administration convenes, that there is a new perspective. Time will tell.         
Aldo Waker may be reached at (512) 771-7557 or
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.  
Securities offered through Sigma Financial Corporation * Member FINRA/SIPC Investment Advisory Services offered through Sigma Planning Corporation,  A Registered Investment Advisor.       
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June 24, 2016

It Was the Best of Times...

Do you remember the opening lines of A Tale of Two Cities by Charles Dickens? 


"It was the best of times. It was the worst of times."


With such a close vote in Great Britain to exit the European Union, if you are in Britain you probably believe one or the other of those two sentences.


There is no doubt that there will be some challenging times ahead for the UK and the other EU countries. However, there will also be some very good investing opportunities for us here in the US. When there is a shock in the system, it's time to start looking for stocks on sale.


If you are a client, you know that I have my "green book" of 150-200 stocks that I follow intently every day. That means I read and analyze their financial statements, I follow decisions made by the management team throughout the year, I look at the company's fundamentals and analytics, and I read every word of analysts' quarterly reports.


This morning, I analyzed those stocks even deeper for both a drop in price and a rise in dividend yield. Those that hit the marks I set for them, are now locked in my crosshairs. I will continue to dig and analyze them in the coming days and weeks.


I encourage you to do the same thing. Today may or may not be the day to buy. Next week may or may not be the week. But, if you are a serious investor, this is the time to make a list of your favorite stocks and set your mark for when to buy them. 


Yes, we still have challenges here at home such as slow wage growth the rising dollar, etc. But, opportunities are also developing. The widening of the Panama Canal, for one. 


It's important not to panic. Although these may be the worst of times for some, and that is truly unfortunate, at the same time these are the best of times for others. The stock market is made up of those two sides: a strategic seller and a strategic buyer. As I've said before, panic is not an investing strategy.


<span style="font-family:; font-size: 12pt;" times="" new="" en-us;mso-bidi-language:ar-sa"="" roman";color:#333333;mso-ansi-language:en-us;mso-fareast-language:="" "times="">So, stop picking what stocks to sell and start picking what stocks to buy.



January 31, 2016

Are You an Optimist or a Pessimist?

After raising interest rates for the first time in almost a decade last month, the Federal Reserve (Fed) met last week and unanimously decided to hold them constant for now. Optimists will focus on the Fed's remarks that they saw strength in many areas of the US economy including housing, household spending, business investment, and the labor market.

On the other hand, pessimists will focus on the Fed's remarks that they also saw declining exports and slowing inventory investment, and said that US economic growth actually slowed late last year. The miss was a combination of slower consumer spending, weak fixed investment, inventory headwinds, and a very weak state and local government spending figure. Regardless, the Fed's view on the US economy is encouraging to optimists, and stood firm in its belief that the economy will continue to expand at a “moderate pace”.

The Fed's relatively positive outlook stands in stark contrast to the recent volatility we've seen in many financial markets around the world. Part of this may be because the areas that appear to have caused concern in the markets recently (such as Chinese growth, movement by the Japanese Central Bank, rising oil inventories), are less immediate concerns to the Fed given their domestic agenda. Still, these global developments cause many people to believe we are heading towards a recession.

So, can the markets predict a recession?  As the economist Nouriel Roubini has joked, the stock market has predicted “twelve of the last eight recessions”. What this means is that even though the stock market can be a leading indicator of economic decline, it can also be misleading. Historically, there have been several downturns in the stock market that wrongly predicted a coming recession. In fact, at times, these downturns lead to several years of continued growth.

Ben Casselman put the equity market volatility in perspective: "Set aside the psychological importance of the New Year and what we're really talking about is a market that lost 9 percent in 12 trading days. That's hardly unprecedented. We had equally bad 12 day stretches in 1950, 1955, 1957, 1962, 1966, 1970, 1973, 1974, 1978, 1979, 1981, 1987, 1997, 1998, 2000, 2001, 2002, 2008, 2009, 2011 and 2015. That list includes some brutal recessions and memorable crashes, but also several incidents that proved little more than blips."

Just as the stock market can be ineffective at predicting recessions, so can many experts. Research by Prakash Loungani from the International Monetary Fund found that many economists have a terrible record of forecasting recessions.  For example, they failed to predict the 2008-9 recession even in September 2008 when it was already in progress. This is one reason why you design asset allocation strategies for the long-term rather than make frequent adjustments based on short-term predictions.

The trick is not to be the hottest stock picker, a great forecaster, or develop the best investment model.  The trick, regardless of being an optimist or a pessimist, is to survive. Although we can't control the direction of the market, we can control what we do about it. Panic is not an investment strategy. An investment strategy requires a disciplined approach to asset allocation involving diversification and periodic rebalancing based on your specific investment horizon.

Performing that trick requires a strong stomach for being wrong, because we are all going to be wrong more often than we would like. But it helps to know that sometimes being wrong is inevitable and normal, not some terrible tragedy, not some failure in reasoning, not even bad luck in most cases. Being wrong comes as a result of an activity whose outcome depends on an unknown future.

The simple fact is that over time, the economy and financial markets spend a lot more time expanding than they do contracting.  Optimism is the correct default setting, but pessimism can be as big of a sales pitch as anything, especially if it's around emotional topics, like money. Has anyone ever seen the pitch to buy "gold" as your only insurance when the financial world is scheduled to collapse?

The financial markets are constantly forcing us to call into question our own process and strategy. This is probably the best and worst part about investing. The markets either keep you honest and humble, or they can drive you crazy and cause mistake after mistake.

So, are you an optimist or a pessimist?  Does it matter?  How about just being a smart, disciplined investor.


December 13, 2015

The price of oil will go up… and down.  Really.

I recently heard a joke:

A Texas Wildcatter was distressed about the drop in oil prices.  So, he kneels down to pray: "God, please tell me, will the price of oil ever go up again?  And if so, when?"  God comes down from above and answers, "My son, the answer to the first question is: Yes.  The answer to the second question is: Not in my lifetime!"

The price of oil recently fell to below $40 per barrel, attracting everybody's attention, given that oil was trading at over $100 per barrel just one year ago. The reasons for this are complicated, and a recent NY Times article[1] pointed out that among them are concerns of oversupply following a meeting among members of OPEC. The global oil cartel recently chose to continue producing oil at high volumes in order to protect their market share.  Saudi officials have said that if they cut production and prices go up, they will lose market share and that will merely benefit their competitors.

Most analysts agree that at least for the immediate future, the Saudis will resist any sharp changes in policy, especially as it tries to navigate multiple foreign policy challenges, like the chaos raging in neighboring Yemen.

There are also a number of conspiracy theories floating around.  Some oil executives are quietly saying that the Saudis want to hurt Russia and Iran, and so does the United States — motivation enough for the two oil-producing nations to force down prices.  After all, dropping oil prices in the 1980s did help bring down the Soviet Union.

However, most experts agree that there is no evidence to support the conspiracy theories.  Saudi Arabia and the United States rarely coordinate smoothly and the Obama administration is hardly in a position to coordinate the drilling of hundreds of oil companies seeking profits and answering to their board of directors and shareholders.

The stark reality is that the IMF (The International Monetary Fund) estimates that the revenues of Saudi Arabia and its Persian Gulf allies will slip by over $300 billion this year. If prices remain low for another year or longer, the Saudi newly crowned King Salman may find it difficult to persuade other OPEC members to keep calm against the financial strains of low oil prices.

Falling oil prices are also not good for energy companies.  Stock prices of companies in this sector have dropped dramatically.  Chevron and Royal Dutch Shell recently announced cuts in payroll to save cash, and they are in far better shape than many smaller independent oil and gas producers that are slashing dividends and selling assets as they bleed cash and report net losses.

On the other hand, low oil prices is good news for others.  Most households are likely to spend $750 less on gasoline this year because of the drop in oil prices.  And companies that use oil in their products and services such as airlines, manufacturing, and chemical companies, will experience a financial windfall because of cheaper production costs.

Which brings me to my point:  The fall in oil prices and their subsequent effects is a great example of how a diversified portfolio can help manage risk.  What hurts one sector of the economy, or stock market, can help another.

What can be helpful in situations like this is a concept called “value investing”.  This is not an attempt to predict the future of oil prices, but looking to add undervalued stocks to your portfolio based on current metrics.  Many of those undervalued stocks currently happen to be in the energy sector.  Value investing is an approach I always look to implement when building a portfolio or when rebalancing across asset classes.

In fact, Fama and French[2] found that holding undervalued stocks (as assessed on a price/book value basis) historically boosted returns by 0.42% per month or 5.1% a year, on average, relative to holding a portfolio of stocks having an average valuation using the same approach.

So, we know the price of oil will go up again.  When?  It shouldn't matter to investors having a long term investment perspective and a well-diversified portfolio.  After all, as God implied in the joke, the history of oil is of booms and busts followed by more of the same.


[1] Clifford Krauss, Oil Prices: What's Behind the Drop? December 7, 2015, NY Times


December 5, 2015

Don't Fight the Fed

In the US this week we saw healthy employment data, combined with some evidence of a softer manufacturing sector. The European Central Bank lowered interest rates and extended its asset purchase program out to March 2017. These efforts are intended to stimulate the European economy. 

The US Federal Reserve Board meets in a couple of weeks, and is expected by many to raise interest rates. This is in part due to the positive economic data we have seen of late. What does this mean for you? 

The first thing to note is that trying to predict the Fed is never a good idea. Forecasters have anticipated the Fed raising rates for the past several years only to be proven wrong. For example, many thought rates would rise in September and that did not happen. We saw similar forecasts in 2014 and even 2013. So even though a rate increase may seem probable this December, these events are far from certain. Trying to adjust a portfolio based on predicting short-term events can lead to higher trading and tax costs, and not necessarily better investment outcomes. 

It is also important to remember that international diversification is an integral part of a portfolio. While European and Chinese central banks have been easing their monetary policies, the US appears poised to tighten. It's clear that the global economies, at least in the developed markets, are at diverse points in their economic business cycles. Even though you will likely see more headlines about what is happening to US interest rates, remember that an international portfolio is exposed to a broad set of global events. This correlation may help smooth investment outcomes and volatility of an investor's portfolio over time. 

I believe the reason the Federal Reserve is considering higher interest rates is because the US is experiencing relatively low unemployment and potentially increasing inflation for the intermediate term. Both of these are generally considered signs of a healthy, growing economy, and economic growth can be an important contributor to stock market growth. 

According to research published in the book Invest With The Fed, (R. Johnson et al, McGraw-Hill, 2015), returns of equities and bonds have historically “remained” positive during periods of tighter monetary policy.  I emphasize the word “remained” because the author does goes on to say, “in periods when the Fed has been lowering rates, the S&P 500 earned an annualized return of 15% versus about 6% during periods when the Fed has been raising rates.”

So, if the Fed does raise rates this month, remember that it is in response to the positive scenario of a strong US economy. For now, I suggest investors keep expectations tempered until we see what the economic data looks like in the coming months.

What is SRI?

November 13, 2015

I've been asked many times about socially responsible investing. Recently, I answered a question on Nerd Wallet regarding this topic and am posting here for those of you who may be interested.

Sustainable, responsible and impact investing (SRI) is an investment discipline that considers environmental, social and corporate governance (ESG) criteria to generate long-term competitive financial returns and positive societal impact. That's the “technical” definition. But, just as there is no single approach to SRI, there is no single term to describe it. Depending on their emphasis, investors use such labels as: “community investing,” “ethical investing,” “green investing,” “impact investing,” “mission-related investing,” “responsible investing,” “socially responsible investing,” “sustainable investing” and “values-based investing,” among others.

From 2012 to 2014, SRI enjoyed a growth rate of more than 76 percent, increasing from $3.74 trillion in 2012. More than one out of every six dollars under professional management in the United States today—18% of the $36.8 trillion in total assets under management tracked by Cerulli Associates—is involved in SRI.

Some people believe that SRI focused companies have worse returns than non-SRI. Well, some companies do and some don't. When they do have worse returns, my clients who are committed to SRI prefer to sacrifice a small amount of return for the ability to sleep at night. My job as an investment advisor, is to manage risk so that the sacrifice remains small or is eliminated.

Many people think that when you invest in SRI you can keep money from going to bad companies. Not true. When you buy stock you are usually not buying directly from the company -- you are buying from other investors. Investors like us just keep exchanging the stock among ourselves, and the company doesn't see any of the money. (Except when the company issues new stock, which is rare.) So really, we use SRI to make money, but also to also support those "good" companies who we believe are doing what is in our own personal best interests.

So what criteria do I use to distinguish a "good" company from a "bad" company? I classify companies into categories such as these:
1. Companies whose very product or service is questionable from a client's perspective (e.g., weapons manufacturers and tobacco companies).
2. Companies whose product or service is benign, but who have poor records in areas such as the environment, minority advancement, community involvement, or charitable contributions.
3. Companies whose product or service is laudable, but have poor records in the areas mentioned above.
4. Companies whose product or service is benign and have acceptable records on social responsibility.
5. Companies whose product or service is laudable and have acceptable records on social responsibility.

Some say that no large company is completely clean -- some are just "less bad" than others. For example, the largest plastics recycler in the world is also the largest producer of virgin plastic. And why producing bicycles is a laudable goal, critics allege that a major bicycle manufacturer uses sweatshop labor to produce its bikes. The point is, that as long as you are informed you can decide whether the company is "good" or "bad" for you.

There are still other complications. Over the years some small eco/responsible companies I follow invariably seem to get bought out by a larger company, or themselves grow bigger and then attract multinational investors who may not share the same values as you. Others go out of business.

Everyone has their own values and draws the line in different places. Some people will invest in anything and everything, some will invest in only certain companies which they feel are acceptable, and some people want nothing to do with corporate investing at all. In my practice, I help those in that middle category, who want to invest but are choosy about which companies they'll invest in.


A Quickie Will Cost Couples

This week, the budget deal that moved quickly through Congress puts an end to "file-and-suspend," a strategy for couples that boost lifetime Social Security retirement benefits by hundreds of thousands of dollars.

File-and-suspend - a little-known strategy until a few years ago - has been quickly gaining popularity because it allows married couples to have the best of both worlds.

The strategy calls for the higher-earning spouse to file for Social Security benefits at his or her full retirement age, and then suspend it to allow the benefit to grow, until as late as age 70. The lower-earning spouse is then able to claim spousal benefits at his or her own full retirement age, and later shift to their own full benefit, if it is larger. (A spousal benefit is half of the primary earner's benefit.)

It is estimated that the “file-and-suspend” strategy adds $9.5 billion in annual benefit costs to the program according to the Center for Retirement Research.  So, the White House targeted it for elimination in the budget plan issued last year, calling it an aggressive move used exclusively by high-income households to "manipulate" benefits. The budget deal approved by the House this week would clamp down on the practice for anyone who turns age 62 after calendar year 2015.

File-and-suspend has been at the top of the list for reform over the past year -- and it was thrown into this deal as part of the political back room negotiations that yielded the crucial agreement to beef up Social Security's disability insurance trust fund.

That fund was on track to run out of money next year, which would have produced an immediate 19 percent cut in disability benefits; that problem has now been pushed out to 2022.  The budget deal reallocates funds from Social Security's retirement trust fund -- a move pressed for by disability advocates and the White House but resisted by Republicans.

The original bill language also implied that benefits would be ended for spouses who already were receiving benefits under a spouse's suspended filing.  That would have been horrendous for those people currently relying on benefits – not to mention the  administrative nightmare it would have presented to the Social Security Administration.

Congressional sources say that was never the intent, and that the language in the bill is being revised to say that only new file-and-suspends are disallowed, beginning 180 days after the bill is signed into law. That opens a window for six more months for people to file and suspend, if they choose that strategy.