January 2016

In May of 2015, the US stock market reached record highs. Then, for the first time since 2011, a sharp correction began in August and continued in September. From there, the stock market never fully recovered. By the end of 2015, the Dow Jones Industrial Average was down 2.2%. The S&P 500 was down 0.7%. The NASDAQ was the bright spot with a gain of 5.7%.

The losses were frustrating, but not unexpected, as the bull market in stocks has aged. US economic growth is slow and fragile, as is economic growth around the world. In this setting, lower return expectations are recommended. As 2016 begins, a careful review of your IRA contribution data for 2015 is time well spent. At ASG, we stand ready to help you identify shortfalls. A prior year contribution is allowed up until the April 15 tax deadline. One sure way to offset a low return environment is simply to raise your savings rate.

A position in bonds provided a cushion to the aforementioned stock market downside, with the notable exception of some high yield products (which were clobbered). At ASG, we often promote a balance of stocks and bonds in portfolio design. However, what with historically low interest rates since the Great Recession, the safety of bonds is less robust than it used to be. In fact, bond prices may fall as the Federal Reserve slowly raises interest rates. They did so for the first time in almost 10 years in December.

Predicting the future price movements of stocks, bonds, and commodities has always been exceedingly difficult and many well-known hedge fund managers and traders found themselves on the wrong side of trades in 2015. Asset allocation and broad diversification are time tested principles of money management and any experiment with alternatives is best limited to a small percentage of your hard won net worth.

Of course, cash continues to play a vital role in money management even though it is yielding virtually nothing. At ASG, we recommend two years of living expenses (held in cash at your favorite local bank) for those who are nearing retirement. For conservative investors, a 5-10% cash position held in investment portfolios adds an extra layer of stability.

We urge you to keep sight of your financial goals in 2016. Despite a lower return forecast, the founder of Vanguard, Jack Bogle, recently said, “Invest we must.” Happy New Year!

 

Volatility 2015

A recent spike in volatility with a sharp downside bias has resulted in a long overdue stock market correction. China has been in the news as its large economy slows. Efforts by the centralized government there to contain stock market losses and reverse the economic decline have been unsuccessful, so far. The result is a threat to global growth, with emerging market economies particularly vulnerable.

This leads to questions about the strength of the US economy. The slow pace of GDP growth here following the Great Recession (2008-09) is well documented, despite extraordinary stimulus from the Federal Reserve. Low interest rates and quantitative easing have provided a powerful tailwind for stocks but the desired wealth effect has not produced a robust economy. The following chart from the Federal Reserve Board tells the story:

Year Projected GDP Actual GDP
2011 3.0-3.6% 1.6%
2012 2.5-2.9 2.2
2013 2.3-3.0 1.5
2014 2.8-3.2 2.4
2015 2.6-3.0 1.5 (first half)

 

What with a sluggish US economy and a slowing global economy, now may not be the ideal time for the Federal Reserve to raise interest rates. Uncertainty about the interest rate decision has added to stock market volatility. Under no circumstances does the Fed want to threaten the fragile recovery, but they are simultaneously determined to move interest rates up from zero.

Meanwhile, an oversupply of oil and soft demand has produced a treacherous drop in the price for the commodity. Lower gas prices are likely to show up this fall and consumers will welcome the extra cash. But, the recent boom in North American oil and gas exploration and production is in jeopardy, along with many good jobs.

At some point, the selling will be exhausted as investors holding weak hands wash out. For sure, there is less risk in the stock market now that a correction is underway. Sturdy investors know that as we go lower, long term return expectations improve. At ASG, we monitor your portfolio relative to the decline and welcome your calls, texts, and emails.

June 2015

Greece is among the many factors influencing the markets as we enter the second half of 2015. Powerful lessons about indebtedness, labor, pensions, and politics are available to anyone willing to have a close look. As politicians struggle to negotiate a deal that will avert a missed debt payment, much damage to the Greek economy has already been done. Many talented and educated young citizens have left Greece right along with bank deposits. In fact, a steady flow of withdrawals have left Greek banks so vulnerable to failure that it remains uncertain if they will open for business from day to day (banks closed as of June 29, 2015). Just like refugees from the war-torn Middle East, capital seeks a home where it is not abused.

There is an eerie similarity between Greece and bankrupt cities right here in the US. Detroit, Michigan is the most notable among them. Problems that lead to bankruptcy are multidimensional for sure, but underfunded pensions show up at the heart of the matter with remarkable persistency. Now, pension reform remains as unpopular as ever but even uninformed citizens eventually sense a false promise. The humble rules of arithmetic apply even as they are ignored by elected officials.

Americans can celebrate the Fourth of July knowing that they can create their own pensions with an intelligent investment strategy. Investing is fully democratized. In other words, anyone can become a member of the investor class. The sky is the limit for those who place individual responsibility above the divisive politics of the day.

In closing, we would be remiss if we did not mention the Federal Reserve. When the Fed will move interest rates from what is essentially zero is difficult to predict. Economists at the TD Ameritrade Institutional conference in January forecast September as the month in which the Fed would begin raising rates. The overall consensus is that the self-described data dependent Fed will raise rates slowly and over a longer period of time than in the past. Investors are well served to expect a temporary price decline in bonds as rates rise, as well as elevated stock market volatility. In the meantime, a properly balanced portfolio can absorb both. Now is as good a time as ever to review your portfolio with us to make sure you are on track to meet your goals. At ASG, we are committed to goals-based investing as we monitor portfolio performance and recommend adjustments accordingly.

Happy Summer!

March 2015

The Individual Retirement Account (IRA) was first introduced in 1974 with the enactment of the Employee Retirement Income Security Act (ERISA). As the 2014 tax year filing deadline approaches, IRA investing strategy is front and center in the minds of Americans willing to create their own financial independence. It would be an understatement to say that the IRA has grown in complexity since its inception. Of all the many different types of IRAs, perhaps the most important one is the Roth IRA. No other account type offers tax-free gains, tax-free distributions, and tax-free transfer to heirs. Income limits do apply and for 2014 begin at $114K for single filers and $181K for married couples filing jointly. Please see your ASG advisor for alternative strategies if your income prevents you from funding a Roth IRA.

Roth IRA contribution limits remain unchanged for 2015. For wage earners under the age of 50, the limit is $5,500. For workers above the age of 50, the limit is $6,500. This annual funding limit is separate from the limits of employer-sponsored retirement plans such as the 401(k). The rule of thumb for most investors is to fund the employer sponsored plan first and at a level that allows for taking full advantage of company matching contributions. Next, fund the Roth IRA. Lastly, go back to the employer sponsored plan to make additional contributions, if possible.

A prior year IRA contribution is allowable up until the tax filing deadline in April. Your advisor at ASG stands ready to help you determine your prior year funding level and beat the deadline, in case you are underfunded. There is some sense of urgency to build a meaningful Roth IRA balance now. We hope that the tax-free benefits of Roth IRA investing withstand the test of time, but just this year, the White House proposed a plan to eliminate the tax benefits of a popular college savings plan known as the 529. (The proposal was quickly withdrawn.) What with the government planning on running deficits over the long term based on population demographics, no one knows for sure how long the mighty Roth IRA might last.

Once a Roth IRA is fully funded, it must be invested in such a way as to optimize your individual risk/return profile. The corresponding asset allocation decision is among the most important decisions investors make. Once more, your ASG advisor stands ready to analyze portfolio construction and recommend adjustments for 2015, if necessary. In the meantime, we keep a watchful eye on the economic calendar, business news, and the current events that shape the markets.

December 2014

As the year winds down, Americans have unwrapped an early Christmas present in the form of lower energy costs. Oil is abundant supply, thanks in no small part to robust exploration and production right here at home. At the same time, global demand is slowing. The subsequent decline in the price of oil has been breathtaking. How deep and how long the sudden price drop goes is anybody’s guess. The immediate effect is more cash in our pockets and in our consumer driven economy; it might not take long for the extra cash to find its way to shops and restaurants.

A newly elected US Congress will start work early next year. It will take a mighty effort for our leaders to modify and improve laws on everything from health care to immigration. We keep a close eye on the intersection of government policy and investing, especially as it relates to retirement issues. A more business-friendly government would likely help US workers left behind in the wake of the Great Recession. Our consistent message is to control what you can.

After a sharp decline in October, the stock market went on to new record highs. The Dow Jones Industrial Average nearly reached 18,000 before concerns over slower global growth and geopolitics stole the show. When former Fed Chairman Alan Greenspan first used the phrase “irrational exuberance” to describe the rise of the stock market in the nineties, gains continued for another 4 years. Less generous returns in the years following a long bull market are equally likely. It may make more sense to adjust your expectations rather than your allocations, assuming that your asset allocation is appropriate for your age and your willingness to absorb temporary losses.

January is a good time to meet with your advisor to set goals for 2015. We always welcome your calls. For now, we wish everyone a holiday season filled with joy.

Here are the dates we’re following into 2015:

January 1                   Happy New Year!

January 9                   Unemployment Rate

January 14                 Retail Sales

January 16                 Consumer Price Index

Asset Strategies Group, LLC / an Independent Investment Advisor Firm

September 2014

As autumn arrives, the Federal Reserve will end its stimulus program with a final $15 billion purchase of US treasury and mortgage-backed securities. From there, monetary policy is expected to normalize gradually with a rise in short-term interest rates forecast for the middle of 2015. Following the Great Recession, US economic expansion remains slow characterized by weak job growth. Slack in the labor market is one of the many data points used by the Fed to determine policy change. For now, policy remains accommodative.

What with higher interest rates off the table until next year, the stock market continues to set record highs. The biggest initial public offering of stock in history with Chinese e-commerce giant Alibaba added to the excitement. A further advance would not come as a surprise in the short run, but stocks are at least fairly valued at this point in the market cycle.

Higher yields in the bond market will cause a drop in prices similar to what happened in 2013 when the Federal Reserve first announced its plans to remove stimulus. Selling bonds in this setting is not typically recommended just as it is often unwise to sell stocks in a price decline. In fact, what with the US nearly at war again in the Middle East, now may prove to be a good time for the safety of an appropriate allocation to bonds.

US and foreign military strikes on the Islamic State in Syria and Iraq may continue for some time, according to President Obama. In the face of danger, the deep divide in Congress seems to have softened a little and lawmakers have voted to keep the government open. Unfortunately, with the urgency of the foreign policy agenda, domestic issues such as comprehensive tax reform and immigration have taken a back seat.

Through it all, ASG will keep an eye on the political and economic headline news events that move the markets. Notable dates on the calendar are as follows:

September 30 Consumer confidence
October 3 Unemployment rate
October 31 Happy Halloween!
November 4 Mid-term elections / Election Day

June 2014

As our great country gets ready to celebrate Independence Day, we face a series of difficult problems at home. Among them is the persistent issue of retirement readiness. Although paycheck-to-paycheck life is the order of the day for many Americans, it doesn’t have to be. The timeless personal financial principles of debt reduction paired with a robust savings and investment plan through a workplace 401(K) and/or an IRA are alive and well for those who choose it.

Good personal finance is a little like good personal hygiene. It is up to individuals. In other words, it is difficult to legislate. Besides, lawmakers are so busy struggling with internal problems at the Veteran’s Administration, the State Department, Border Patrol, and the IRS that if we wait for Washington to solve problems related to financial literacy, the wait will likely be very long. With the help of your adviser, you are well served to take matters into your own hands.

Meanwhile, geopolitical risk has intensified considerably. The newest threat is from ISIS militants in Iraq while conflicts in Syria and Ukraine remain unresolved. The chaos in Iraq has caused the price of oil to rise and corresponding higher prices at the pump will ultimately cause pain for both US businesses and consumers. Thankfully, an effort to build energy independence is well under way. The bigger threat, of course, is that the violence in the Middle East will somehow be exported to the West.

As we approach the second half of the year, the US economy has likely pulled itself out of a first quarter decline. The stock market has recorded one record after another. The bond market provided additional tailwind, despite warnings of higher interest rates from many analysts and economists. Monetary policy at the Fed remains accommodative, although the Central Bank continues to reduce bond buying by $10 billion per month and is on course to finish the program later this year.

At ASG, we keep a close eye on both portfolio performance and the economic calendar. Stocks, bonds, and cash are the building blocks for an asset allocation model that is customized for age and risk profile. What with the DJIA very close to 17,000, now is a good time for a mid-year review with your adviser. At ASG, your call is always welcome.

Happy summer!

March 2014

Recent stock market volatility serves as a timely reminder of the risks that investors must face head on. The Bear Market bottom reached a 5 year anniversary in March. With the cyclical nature of capital markets in mind, we continue to favor a balanced approach to investing with strategic asset allocation as the centerpiece.

Stocks aren’t cheap. Geopolitical tension is heightened with Russia and Ukraine. The Fed continues to taper its purchase of US government and mortgage-backed debt. A Malaysian jetliner is still missing. And through it all, Warren Buffet recently advised his heirs to invest in the US stock market. With so many competing factors to consider, it is no wonder that the investor class is smaller than it used to be. When it comes to allocating capital in the stock market, we just ask that investors take an honest look at both time horizon and risk tolerance.

If stocks are the performance driver of investment portfolios, bonds provide the ballast. In January, when stocks had a rough start to the year, bonds rallied. Even as interest rate normalization policy threatens bond prices, the decline is likely to be temporary. The role of bonds to moderate stock market risk is of higher importance than the unknown future movements of interest rates and the corresponding bond prices.

Cash as an emergency reserve and as a small tactical component of investment portfolios is as important as ever. Investing is often counterintuitive, and we are always looking for opportunities to put cash to work when stocks or bonds are on sale. We monitor accounts with respect to these fundamental investing principles and look forward to the following important dates on the economic calendar:

April 22 Existing Home Sales
April 30 FOMC Interest Rate Decision
May 2 Unemployment Rate

Please know that client account reviews are always welcome and we place high value on time spent together.
Happy Easter!

December 2013

As we approach 2014, we are impressed with the stock market performance of the last 12 months. The bull market that began in March of 2009 has overcome many obstacles, including the recent threat of US military involvement in Syria and a government shutdown in October. Even as old records fall, there may be room for upside in 2014, especially if the US economy continues to gain strength.

The bond market, on the other hand, has struggled with a Federal Reserve policy shift towards a gradual removal of economic stimulus and rising interest rates. Many investors sold bonds this year and those funds may look to find a home in the stock market. This classic performance chasing behavior may push the stock market even higher and market timing efforts often end badly. We continue to stand by the tried and true strategic asset allocations that match up with your age and your appetite for risk.

Cash will likely continue to underperform the rate of inflation through 2015, according to current Fed policy. Despite this reality, the role of cash remains important, especially for those nearing retirement. We continue to recommend robust emergency cash reserves (held at your favorite local bank) for all of our clients. An allocation to cash in investment accounts provides an extra level of safety too, especially as stocks get more and more expensive. A year-end review with your advisor is highly recommended to help you determine the right stock/bond/cash mix for 2014 and the beyond.

As we summarize 2013, a bipartisan budget agreement has passed into law. It falls well short of the comprehensive reform required to shore up long term US budget deficits, but it is a remarkable achievement considering the deeply divided political landscape. The largest municipal bankruptcy in US history (Detroit) should serve as a powerful reminder of what can and does happen when promises are made that have no mathematical chance of delivery.

ASG is in the business of continuous improvement. With this important concept in mind, the Founding Partners will once again attend the annual TD Ameritrade Institutional National Conference held in Orlando on January 29 through February 1. We are eager to work with you in 2014. In the meantime, we wish all of you the best the New Year has to offer.

September 2013

What with Labor Day behind us, it is time to welcome fall. August was a challenging month for investors and challenges lie ahead for both stock and bond markets. Unemployment remains elevated and GDP is weak. The economy may be closer to stall speed than escape velocity. What with the specter of US military involvement in Syria, now might not be the time to follow the herd into flight from bonds and bond funds. A spike in bond yields and a corresponding drop in bond prices had many investors headed for the exits once again.

The spike in yield came on the heels of an announcement by Fed Chairman Ben Bernanke that the Federal Reserve may initiate a policy of gradual withdrawal from the stimulus known as quantitative easing. In other words, the Fed would begin to purchase less US Treasury and mortgage-backed debt every month. As previously written, this policy shift may be positive overall if the US economy can finally stand on its own. Adding considerable uncertainty at the Fed is the unanswered question of who will succeed Ben Bernanke when his term expires in January of 2014. Time will tell.

Against this backdrop, now is a good time to review your investment strategy and asset allocation decisions with your advisor. A portfolio allocated between stocks, bonds, and cash, according to your age and your appetite for risk, is meant to be held in all kinds of economic and political settings. At ASG, our philosophy is “monitor and adjust” not “set and forget”. That said, most adjustments are minor and on the periphery versus all or nothing bets on an unknown future. As we approach the fourth quarter of 2013, we will be watching the following dates with keen interest:

September 11 Anniversary 9/11 Terrorist Attack
September 18 FOMC Rate and QE Decision
October 1 Federal Budget Deadline
October 4 Unemployment Rate

In closing, we are excited to share our new logo with you. Our unique brand is designed to evoke the path to financial independence upon which our firm is founded. We are deeply grateful for your trust in us and we will work tirelessly to help you achieve your goals.

Happy Fall!