Letter to Clients: 1st Quarter 2017
Dear Clients and Friends:
Happy New Year! Social media has been filled with the undertone that 2016 was not a good year. Perhaps in some ways it wasn’t. Sometimes I wonder if so much additional stimulus combined with the fact that bad news travels fast just makes it seem like bad things are happening more often. Regardless, I am filled with optimism for 2017.
One of the reasons I am so enthusiastic for the New Year is to announce that our staff is growing. As of January 1st we welcome T. Scott Nevitt to DV Financial. Scott has previous experience as a Financial Advisor but decided about a year ago to focus on his insurance practice as well as a gym he owns. As Scott and I have known each other for many years, he transitioned his financial practice to me. While reviewing 2016, it seems everyone has been happy with the process. We have welcomed some great new clients who are benefiting from our services and Scott has been able to reallocate his time towards his primary passions.
In 2017 we officially added Scott to our staff as our Business Development Associate. In this capacity Scott will continue to advocate and refer clients and associates to DV Financial. We can also utilize his experience in supporting and maintaining client data and plans.
Please join me in welcoming Scott to the DV Financial team.
The Year in Review
2016 has come and gone. It started out in a very rocky fashion, with comparisons to 2008 that were too numerous to count. As we have emphasized in past summaries, markets don’t trade in a quiet and orderly fashion. Just because we run into turbulence doesn’t mean it’s time to retreat into cash. Volatility has been and will always be part of the investment landscape. It is how one manages and mitigates risk that is critical.
We have talked about the hazards of timing the market in the past and here is yet another way to look at it. In order to successfully time the market, you have to be right twice–getting out near the top and getting back in somewhere near the bottom. There isn’t anyone who can accomplish such a feat consistently.
As we enter 2017 the markets are calm and near highs. Last year, the S&P 500 Index rose by 12%, including reinvested dividends, according to Morningstar. It is the sixth year in eight that the closely watched index of large-company stocks went up by more than 10%. Going forward, the only guarantee is that there are no guarantees; future volatility is inevitable.
But you have a tremendous recourse at your disposal. We are always here for you. If you see something in print or on the Internet that causes you concern, please don’t hesitate to reach out to us. We are always happy to answer any questions or address any concerns you have.
Key Index Returns[i]
Looking ahead
The year is starting in an upbeat fashion. The economy is moving ahead at a modest pace, interest rates remain low, and the odds of a recession are low. Moreover, Thomson Reuters forecasts S&P 500 profit growth of 12.5% this year, and consumer and small business confidence is up sharply in the wake of the election[1].
However, economic skies are never fully clear and we are continuously monitoring the landscape. For starters, the forecast for corporate profits is predicated, among other things, on continued economic growth. The late-year optimism that pushed the major indexes to new highs was aided by optimism that tax reform, regulatory relief, and infrastructure spending are on their way.
What shape will tax reform and new spending take? Compromises will be needed and major new spending, if it passes the Republican Congress, could have huge lead times. President Elect Trump has toned down his anti-free-trade rhetoric alleviating, but not completely eliminating, worries among investors.
All of his tough talk on trade may just that, tough talk; a strategy to position negotiations for favorable new trade deals. However, we learned from the 1930s that a breakdown in global trade could have serious consequences. The infamous Smoot-Hawley Tariff Act, which created new barriers to imports, was passed as the Great Depression was getting under way. The Act created retaliation and the resulting trade war that enveloped the world only worsened the Depression. We are in no way are we forecasting a downturn of that magnitude, but instability among the nation’s key trading partners would likely add unwanted volatility.
Evidence reveals that over the past 50 years, bear markets have been primarily associated with recessions[2]. Other predictive factors we look for are: significant rapid upward movement in oil prices, S&P 500 P/E ratios nearing two standard deviations above long term averages, and significant or unexpected Federal Reserve tightening.
There have been 10 bear markets starting with the Great Depression. All but two of them have been associated with at least two (and usually three) of these four factors[3]. Currently, none of these critical four factors are present. The very nature of cycles is that a new recession and bear market is, eventually, inevitable. While changes to your personal situation may warrant a change to your plan, a disciplined approach has historically borne the greatest dividends.
Final Thoughts
This being the first client letter of 2017, I want to thank you again for the opportunity to serve as your financial planner. We received many surveys back after last quarter’s letter and hope to put together some fun client events this year. We appreciate all your feedback!
Never hesitate to reach out to any of us if you have any questions about our recommendations or why we believe they are best for your particular situation. Or for that matter, call us if you’ve come across something else and just don’t think you know enough to ask the right questions.
We are here to assist you in any way that we can. We appreciate your trust and confidence and continue to strive to exceed your expectations.
Sincerely,
Art Dinkin, CFP®
[1] Conference Board, National Federation of Independent Business [2] St. Louis Federal Reserve, NBER data [3] J.P. Mogan Asset Management
[i] The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is a market value weighted index with each stock's weight in the index proportionate to its market value.
The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 actively traded “blue chip” stocks, primarily industrials, but includes financials and other service-oriented companies. The components, which change from time to time, represent between 15% and 20% of the market value of NYSE stocks.
The Nasdaq Composite Index is a market-capitalization weighted index of the more than 3,000 common equities listed on the Nasdaq stock exchange. The types of securities in the index include American depositary receipts, common stocks, real estate investment trusts (REITs) and tracking stocks. The index includes all Nasdaq listed stocks that are not derivatives, preferred shares, funds, exchange-traded funds (ETFs) or debentures.
The Russell 2000 Index is an unmanaged index that measures the performance of the small-cap segment of the U.S. equity universe.
The MSCI All Country World Index ex USA Investable Market Index (IMI) captures large, mid and small cap representation across 22 of 23 Developed Markets (DM) countries (excluding the United States) and 23 Emerging Markets (EM) countries*. With 6,062 constituents, the index covers approximately 99% of the global equity opportunity set outside the US.
The MSCI Emerging Markets Index is a float-adjusted market capitalization index that consists of indices in 21 emerging economies: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.
Investing internationally carries additional risks such as differences in financial reporting, currency exchange risk, as well as economic and political risk unique to the specific country. This may result in greater share price volatility. Shares, when sold, may be worth more or less than their original cost.
This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Past performance does not guarantee future results.