Letter to Clients: 3rd Quarter 2015

Dear Clients and Friends:

Remember when it was so cold at the beginning of the year? As the mercury reaches the top of the thermometer, it is hard to remember when we never thought it would rise off the bottom. Behavioral scientists refer to this phenomenon as recency bias and it is just as applicable to investing as it is to the weather.

From an investment perspective, the Great Recession is all too familiar and many investors are skittish and afraid. The huge market drops and near economic collapse seem all too recent and with the headlines filled with stories of Greece, interest rates, and the political chatter of the 2016 Presidential race seem to do little to put our fears at ease.

The economy thus far; 2015

Since the Great Recession, the economy has slowly and steadily grown but not without a few bumps along the way. The first part of 2015 seemed to be one of those bumps. As we reached the halfway point of the year, the economy seems to be exiting the funk it entered just a few months ago.

You can see it in the pick-up of job creation in April and May. You can see it in the faster pace of housing sales in the all-important spring selling season. And you can see it in willingness of consumers to spend.

That’s a plus for S&P 500 company profits which are forecast to rise a modest 2.2% in Q2 versus one year ago, compared to an estimated decline of 2.8% expected at the start of the quarter.

Source: Wall Street Journal, MSCI.com *Annualized **USD

An island of instability

But the U.S. economy, despite its might and size, is not the focus of the financial community right now. Instead, the financial world is looking at Greece. Greece is a small nation in southern Europe. In 2014, the U.S. exported $773 million in goods to Greece. That compares with a U.S. economy that totals over $17 trillion.

Greece is a beautiful country that is rich in history and culture. However, simply from an economic standpoint, Greece won’t have any effect on the real U.S. economy. In 2013 Greece had a Gross Domestic Product (GDP) of approximately $242.2 Billion USD. Detroit’s GDP in 2013 was $224.7 Billion USD. When Detroit went bankrupt it caused a lot of commotion and got a lot of press, but it had very little impact on the U.S. Economy as a whole. From an economic perspective, Greece’s impact should be about the same as Detroit’s.

Let’s look at the history:

December 2009 Credit ratings agencies downgrade Greece on concerns that it could default on its debt.

May 2010 Europe and Greece reach a $146 billion rescue package, which is conditional on austerity measures – first bailout.

March 2012 Private-sector creditors agree to massive restructuring and some write-downs of debt, which frees up more funds – second bailout.

January 2015 Greek voters choose an anti-austerity party that resides on the far left. Alexis Tsipras becomes prime minister.

February 2015 Greece and eurozone creditors extend bailout agreement until the end of June; both agree that any new funds will include reforms.

May 2015 Greece quells fears of an imminent default, authorizing a big loan payment to the International Monetary Fund (IMF).

June 2015 Greece defers a series of debt payments to the IMF until the end of June; it misses a 1.5 billion euro payment to the IMF due June 30.

Sources: NY Times, CNNMoney

Should the latest blow-up be a surprise? Not for students of economic history. You see, since Greece became an independent nation in 1829, it has been in default or rescheduling its debt 51% of the time through 2006. This most recent crisis started in 2009, so financial markets have had plenty of time to prepare.

What is different this time around is that Greece no longer has an independent currency – the drachma. Instead, it is part of the 19-nation European bloc that shares the euro.

No nation that has traded in its old currency for the euro has ever torn up the contract or has been forced to give up the euro. Such an event, if it were to occur, would create a heightened level of uncertainty because markets are woven together.

Short-term, stocks do not like added uncertainty and that accounts the nearly 2% selloff in the Dow at the end of the second quarter. Putting that into perspective, a 350 point daily loss in the Dow does grab headlines but it is modest when compared with the 4.4% drop registered the day after Lehman Brothers collapsed in September 2008. Furthermore, the dollar, which we might have expected to surge on safe-haven buying, was little changed against the euro.

The June 29 drop in stocks may have just been an excuse to sell, since the decline was preceded by an inordinate amount of complacency in markets over the last couple of months. While Greece has been in the headlines, there had been a general expectation that we’d eventually get some type of “kick-the-can-down-the-road” deal, and eventually a deal was reached.

The financial plans we recommend take into account bumps in the road. Because no knows the future with certainty, it sometimes surprises us when we get big daily moves. Stepping back and taking a broader perspective, it really shouldn’t. As we have counseled on repeated occasions, look past the daily gyrations and keep your focus on the financial plan. The long-term, disciplined investor is the one who has historically been rewarded. The childhood story of the tortoise and the hare comes to mind.

Investor, know thyself!

A good financial plan is not about maximizing efficiency, or minimizing costs. A good financial plan serves as a roadmap from where you are, to where you want to be.

A young person that is, say, 28 years old and has accumulated $25,000 in his or her 401(k) probably won’t need the cash for 40 years. Such an investor has the time horizon that lends itself to a more aggressive posture.

An investor in retirement or closer to retirement may not have the stomach to handle a steep drop in the market. A more conservative approach has historically prevented such an investor from realizing steep gains in a roaring bull market, but he or she is much more likely to sleep well at night when (not if, a correction is inevitable) stocks drop sharply.

While markets have been reasonably calm over the last four years we will eventually hit a rough patch. Stocks will recover from the inevitable decline. That has been the trend over the last 200 years but we want to be sure you are comfortable with such volatility. If not, let’s talk.

In closing, I want to express my gratitude for the trust and confidence you’ve placed in my firm. It is something I never take for granted.

I trust that you have found this summary to be beneficial and educational. I always emphasize that as your financial advisor, it is my job to partner with you as you travel down the road to your financial goals. If you ever have any questions about what I’ve conveyed in this message or want to discuss anything else, please feel free to reach out to me.

Sincerely,

Art Dinkin, CFP^®