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2016 Q1 Market Update 04/21/2016

State of the Markets

Despite a volatile start, the first quarter ended with modestly positive performance across most asset classes. The first six weeks of the year saw a significant dip in risk assets across the globe, followed by a significant rebound through the end of the quarter. It was a test of patience and endurance which, hopefully, is behind us.

The total returns for major asset classes are below.

2016.04.16 Q1 2016 Perf

January began with an acceleration of the negative outlook that dominated the headlines towards the end of 2015. The fear was that the global economy was slowing and likely to fall into a recession, while low oil prices were a sign that the worst was yet to come. However, this worst case scenario never materialized and the markets have since recovered.

The Battle between Fear and Greed is Never a Tie

We’ve written before that public markets are both a blessing and a curse. A blessing in that they allow us to buy or sell thousands of companies at a time with remarkable ease and efficiency. At a moment’s notice, we can purchase a diversified pool (mutual fund or ETF) of thousands of businesses for the price of a few cups of Starbucks coffee.

The curse is that we must suffer the insult of daily prices to participate in the ownership of publicly traded investments. Sometimes the fear and greed that drives daily price movements builds upon itself leading to major market swings (in both directions) that are not grounded in reality.

2016.04.16 Market Perf

The chart above covers the period from 2010 through the end of March, 2016 and shows both the S&P 500 (top) and the VIX index (bottom). The VIX, referred to as the fear Index, is a measure of volatility in the market and often spikes during market declines. Over this 6+ year advance, there have been multiple occasions when fear became the predominant influence and the market pulled back in anticipation of bad news. However, when these potential events (Greek default, European banking crisis, double-dip recession, Ebola epidemic, etc.) did not materialize or the consequences were less than expected, the markets recovered and resumed its upward trajectory based on long-term fundamentals.

DOL Issues Fiduciary Rule

On April 6th, the Department of Labor finalized a rule which has been years in the making. You may have seen provocative headlines such as:

New Fiduciary Rule for Financial Advisors Prohibit Conflicts of Interest

DOL Rule Forces Financial Advisors to Do What’s Best for Clients

Investment Advice Just Got a Lot Safer

Summary

I’ll cut to the chase before I go into the details. The rule requires that investment advice given on tax deferred accounts (IRAs and others) be held to a fiduciary standard. This will have significant impact on the investment business as a whole, but will have little impact on how Century Wealth Management operates or manages investments.

We are and have always been a fiduciary. By choice and by law, we put our clients’ interests ahead of our own. When Century Wealth Management was founded sixteen years ago, we did not have to choose to operate at this highest standard of care, but we did because it aligned with the vision of the firm we wanted to build. Our clients’ best interest will always be our priority.

Deeper Dive

The Department of Labor (DOL) has been responsible for the regulation of employer sponsored retirement plans since the passage of the Employee Retirement Income Security Act (ERISA) law in 1974. ERISA has strict rules about what can and can’t be done by those offering or servicing company retirement plans. Most parties involved with a company retirement plan are held to a fiduciary standard, which means putting the interest of plan participants first. Period. No exception.

While compliance with ERISA law and DOL rules can be a burden on those offering and servicing 401(k) plans, the plan participants have been served fairly well. Fees are generally low, investment choices are generally good, and if they aren’t, there is a swarm of class action lawyers who will be happy to take a look at your 401(k) statement.

Until now, the fiduciary standard of care existed only in the company retirement plan space and with firms, such as Century Wealth Management, registered with the SEC. Brokers (and even brokers holding themselves out as comprehensive financial advisors) are held to a much more flexible suitability standard. Suitability means they can offer products that are not necessarily in your best interest (higher fees and commissions) as long as the product meets your overall objectives.

There has been much debate about whether all investment advice should be held to a fiduciary standard. Most regulators and good actors within the industry think it should be, but the established brokerage firms like the “flexibility” of the current model. The SEC, which has supervision of the industry as a whole, has procrastinated for years on broadening the fiduciary obligation. This delay caused the President to step in and use the existing ERISA law to expand the fiduciary obligation from company retirement plans to Individual Retirement Plans (IRA) as well.

While no government regulation is perfect, we do consider this progress. This rule will stifle a lot of high-commission sales practices and make it harder for bad actors to prey upon uninformed consumers. Eventually, we expect the SEC to act, but for the time being, this is the lay of the land.

Conclusion

After a rocky start to 2016, we are hopeful that the economy will find stronger footing, followed by a recovery in corporate earnings, which will set the stage for a modest advance in equity prices for the rest of the year.

2015 Q4 Capital Markets Review 01/15/2016

Each quarter we summarize market conditions and trends in our Quarterly Market Review. The review provides detailed information about global capital markets including a timeline of events over the previous quarter. It begins with a global overview, then features the returns of stock and bond asset classes in the US and international markets.

QMR 2015 Q4 Cover

2015 Q4 Market Update 01/13/2016

State of the Markets

Welcome to 2016. Out with the old and in with the new.

Equity markets started off the final quarter of 2015 with a strong recovery from September’s correction, but then drifted mostly sideways and lower through the final months of 2015. This resulted in a relatively strong fourth quarter but a lackluster year for stock markets around the world. As has been the case in the recent past, the U.S. equity market performed better than international markets, which performed better than emerging market equities. The U.S. bond market delivered a small but positive return in the wake of the long awaited 0.25% rise in short-term interest rates initiated by the Federal Reserve in December.

The total returns for major asset classes are below.

2015.21.31 4Q

Last year’s returns are already somewhat overshadowed by the first week of January, which saw equity markets once again retreat on worries that China’s slowing economy and devalued currency will impact the rest of the world. As I write this letter (6 trading days into the 2016), global equity markets are down approximately 6%.

You may hear (supposed) experts proclaim that January sets the tone for the year and these results all but guarantee a bad outcome for 2016. As is usually the case, it is easier to pontificate than to check the facts.

2016.01.13 January versus Full Year

As the chart above illustrates, in the 36 years from 1980 and 2015, the S&P 500 suffered a negative January on 14 occasions. Of those 14 instances, about 60% resulted in a positive return for the year, so as uncomfortable as this last week has been, it does not predetermine the outcome for the year.

2015 – Year in Review

While there were no huge bumps in the road during 2015, it felt like there was not much in the way of good news either. The fact that investment returns were slightly negative did not help. We took all the risk but got none of the reward.

Overall the year reminds us of a classic children’s book called “Alexander and the Terrible, Horrible, No Good, Very Bad Day” in which Alexander, a boy in grade school, sufferers through one small mishap after another until they add up to….well, the title of the book. So, what were the small mishaps encountered last year? There were a number of them:

  • Significant declines in oil and gas prices caused a ruckus in the energy sector
  • Continued strength in the U.S. dollar negatively impacted exports and corporate earnings throughout the year, resulting in a year over year decline in U.S. corporate earnings
  • China’s economic growth slowed to the 6% range
  • The Federal Reserve’s arduous path to normalizing interest rates – choosing not to raise rates in September after signaling the opposite, then increasing rates by 0.25% in December
  • Continued conflict in the Middle East and the ongoing refugee crisis
    This is by no means a complete list of 2015’s ordeals, but there is no single issue that would or could tip the U.S. economy into a recession or justify a bear market in stocks. In fact, nothing on this list is anywhere near the severity of what we faced in 2007/08 (collapsing home prices, mortgage defaults, bank insolvency, etc.) and several could even be interpreted as being good for the economy in the long run.

This is by no means a complete list of 2015’s ordeals, but there is no single issue that would or could tip the U.S. economy into a recession or justify a bear market in stocks. In fact, nothing on this list is anywhere near the severity of what we faced in 2007/08 (collapsing home prices, mortgage defaults, bank insolvency, etc.) and several could even be interpreted as being good for the economy in the long run.

That said, we saw quite a bit of volatility throughout the year and a typical balanced portfolio likey wound up slightly below where it started, which is never an enjoyable scenario. However, I would much rather slog through a stagnant year then suffer through a significant correction. Hopefully, this “pause” will allow fundamentals to catch up to prices and set the stage for more growth in the future.

Oil – How Low Can it Go

The price of crude oil has fallen from over $100 to about $30 per barrel over the last 18 months. This low price of oil, while good for consumers, seems to be of significant concern for both the economy and the stock market for several reasons:

  • Demand for oil and gas is seen as a leading economic indicator and thus a decline in price is seen as potential evidence of a slowing economy
  • Low oil prices have resulted in a significant decline in earnings for oil producers which has had a negative impact on corporate earnings overall
  • Low oil prices has made production unprofitable in some areas of the country which has resulted in shuttered wells and laid off workers
  • Low oil prices has adversely affected countries whose economies are highly dependent on oil and gas production

All of the above is true. However, just as trees don’t grow to the sky, oil prices will not fall to zero. Ultimately, the price of oil is driven by four things – supply, demand, inventory, and value of the U.S. dollar. Changes at the margin of all four have recently worked in favor of lower prices, but as production is cut, demand increases, and inventories are depleted, the opposite should be true in the not too distant future (see the chart below). As the saying goes “there is no cure for high prices like high prices” and the opposite will be true as well.

2016.01.13 January versus Full Year

Conclusion

2015 was a lackluster year and 2016 is (so far) off to a shaky start. Times like these can wear on the patience of long-term investors, but we are hopeful that we will see a return to the trends of modest economic growth, improved corporate earnings, and low inflation – an environment that should be conducive to positive investment returns going forward.

 

Thoughts on Giving 11/17/2015

As Thanksgiving approaches, the world stands with a heavy heart contemplating the recent tragedy in Paris and the ongoing violence throughout the Middle East. As Charles de Gaulle said when reflecting on the tremendous sacrifices made during World War II, “It is not tolerable, it is not possible, that from so much death, so much sacrifice and ruin, so much heroism, a greater and better humanity shall not emerge.” It is our hope that our humanity will not be defined by the hate and violence of such misfortune, but instead by our response.

For many, Thanksgiving marks the beginning of a season of generosity that flourishes through year-end. With that in mind, and in response to the tragedies noted above, we wanted to offer some ideas on ways to give back and how to maximize your charitable intentions.

Charity Begins Online

GoodShop – is an easy to use shopping site that lets you shop at your favorite online stores while allocating a small portion of your spending to the charity or school of your choice. There is a great selection of stores and the process is easy. Just select your charity, click through to the retailer’s site and shop. GoodShop takes care of the donation. Not every charity participates, but if you have holiday shopping to do online, this is a great way to put your efforts to good work. It’s a win-win for everyone.

Amazon – offers a similar service through Amazon Smile. By logging into Amazon through the Smile portal and specifying the charity of your choice, you can proceed with your Amazon shopping and the charity will receive 0.5% of the value of items purchased.

Charitable IRA Distributions

In previous years, the law has allowed IRA owners over age 70 1/2 to donate up to $100,000 directly from their IRA to qualified charities. This strategy has strong tax benefits for those who meet the age requirements, are charitably inclined, and don’t need the distribution themselves. While the law expired in 2014, Congress has been known to renew these provisions very late in the year (and even retroactively in January).

If you would be inclined to make such a gift, you can proceed as if the law is in place and have a portion of your RMD sent directly to the charity of your choice. Then, if Congress passes the law, you will get the ideal tax treatment the law allows. If not, you will still get to claim the charitable deduction based on the amount donated.

Make Giving Easy

Donor advised funds – make giving to charity as easy as online banking. Once an account is funded; log in, select the charity, specify the amount, click submit, and you’re finished before your coffee gets cold. Donor advised funds exist in a variety of forms – local community foundations (Memphis has three: Community Foundation of Greater Memphis, Hope Christian Community Foundation, and Jewish Foundation of Memphis), or funds offered through Fidelity, Charles Schwab, Vanguard and others.

The video below does a good job of describing the benefits of using a donor advised fund for family giving.

donor advised

Donation of Appreciated Securities

At the intersection of investments, taxes and charitable giving, lies an exciting opportunity – exiting for us at least. If you have taxable investments with embedded gains you can give them directly to charity, which has significant tax advantages. Not only do you receive the charitable deduction for the donation, but you eliminate the capital gains tax liability associated with the investment. If you were planning to make the gift in cash, you can use the cash instead to repurchase the investment. The net result – you’ve made your gift, received your charitable deduction, and have the same investment portfolio but with a new, stepped-up cost basis.

Using a donor advised fund as a conduit for the donation of appreciated assets can provide even more flexibility. If you’d like to know more, please give us a call.

Wishing you and your family a peaceful and wonderful Thanksgiving!

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