First Quarter 2017 In Review

Wait, it's April already??

It's difficult to believe it's already April. As my Grandmother used to say, the Fourth of July is just around the corner.

Here's a three-point summary of the first quarter:

1. Markets are up in the U.S. thanks to expectations of lower taxes and less regulation. A strong technology sector helped, too.
2. The Federal Reserve continued on its path to rate normalization by raising the target Federal funds rate by 0.25%.
3. The broader economy is strong and showing signs of increased stability as job growth continues at a faster pace than in 2016, consumer sentiment strengthens, and home prices continue to rise.

Q1 2017 Numbers

The benchmark S&P 500 gained 5.5%, which isn't too shabby. This was bolstered by strong performance in the tech sector, but offset slightly by weak performance in the energy sector.

The average diversified U.S. stock fund, which is a more holistic measure of how we actually invest, gained 4.8%, slightly lagging the market. It's interesting to note investors are exercising caution and are more likely to invest in bonds rather than stocks. For comparison purposes, $112 billion flowed to bond investments versus #34 billion to stocks. This is in stark contrast to the last quarter of 2016 when investors flocked to stocks following the results of the U.S. election.

The average diversified international stock fund gained 8% in the first quarter. This is likely due in large part to a strong dollar, which incentivizes foreign companies to export goods to the U.S.

The average intermediate-term bond fund returned 1% during the first quarter, down from 3% in the previous quarter.

Expectations for the Second Quarter

Corporate earnings growth is forecasted by many analysts to rise about 9%. Many companies will report their first quarter earnings in the coming weeks, so we'll see if the forecasts match reality. If earnings match expectations, the market could continue to break records. Of course, there will always be unforeseen events that will shape investor behavior.

During the first quarter, the financial sector lagged all others except for energy and telecom. That could change in the second quarter as rising interest rates and decreased regulation should lead a rebound in the financial sector. 

Listening / Reading / Watching

Here's what has my attention right now:

• Anything related to Tesla because the company has a lot going on right now. Tesla's stock price is up 40% year-to-date, the Model 3 is entering the release candidate phase of development, and a new line of electric trucks will be unveiled in September. In addition, Tesla Energy is ramping up its Powerwall 2, Solar Roof, Powerpack, and a newly announced conventional solar array. As a company, Tesla recently became more valuable than Ford and GM, making Tesla the most valuable automaker in the U.S. That's crazy considering, among other things, Tesla's limited production capacity.
• Fortitude on Amazon Prime Video. Long-time readers probably know I'm a sucker for sci-fi. I recently stumbled across this series and I'm really enjoying it. Bonus: It was filmed in Iceland, so the scenery is gorgeous.

My Take on the Fourth Quarter of 2016 + Full Year

Year-End Surprises

2016 was filled with surprises (remember Brexit?), but it was the fourth quarter (Q4) which held three important and unexpected events:

1. The outcome of the U.S. presidential election. The election of Donald Trump shocked many Americans and, similar to Brexit, completely defied nearly all election polls.
2. Talking heads are wrong again. Commentators and analysts predicted Trump's win would cause financial markets in the U.S. to fall. In fact, a stock market rally occurred, pushing the Dow close to 20,000* by the end of the year.
3. A year-end rate increase. The Federal Reserve, after a year filled with much teasing, raised its key interest rate by 0.25%.

*I purposely used the Dow 20,000 event because I wanted to point out something I've never quite understood: The fascination with market milestones. Yes, it gives us a way to compare the Dow on, say, January 1, 2008, to the Dow on January 1, 2017 (12,800 versus 19,877, if you're interested). Everybody wants to see the market go up, but I believe it's more important to focus on your goals and your financial position in relation to them rather than an arbitrary number.

Q4 2016 Numbers

Q4 turned out to be good for U.S. stocks, but not so good for international-stock funds and bond funds.

The S&P 500, which is typically used as a benchmark for U.S. stocks, gained 3.82%. The average diversified U.S.-stock fund, which is a more appropriate measure of how investors actually invest, was up 7.1% during Q4.

International stock funds didn't fare as well as their U.S. counterparts. The average diversified international stock fund dropped by 2.6% during Q4.

The average intermediate-term, investment-grade debt declined by 2.7% during Q4.

Full-Year 2016 Numbers

Looking at the full year presents a brighter picture for the investment categories listed above.

The S&P 500 was up 11.96%, while the average diversified U.S. stock fund gained 10.8%. Those numbers are great considering we're 8+ years out from the last recession and we have yet to see a significant correction in the U.S. stock market. That said, I find it troubling that we've gone 8+ years without a significant correction.

If U.S. stocks roared during 2016, then international stocks whimpered. The average diversified international stock fund gained just 0.7% for the year.

Despite a Q4 decline of 2.7%, the average intermediate-term bond ended the year on a positive note with a gain of 3.0%.

The Year Ahead

So what's in store for 2017? I checked with my Magic 8 Ball and it said to ask again later.

I can't successfully predict what will happen to financial markets this year. No one can. It's true that financial markets have performed well since the election, but whether or not that continues depends on, among other things, policies put in place by the Trump administration.

Now that I've gotten that disclaimer out of the way, I believe the following sectors have the most potential for change in 2017:

1. Energy. Companies related to traditional forms of energy, such as oil and natural gas, will probably perform well under a government dominated by Republicans. Unfortunately, that means renewable forms of energy could be negatively impacted if government subsidies are reduced or eliminated. On the bright side, Elon Musk recently accepted an advisory position in the Trump administration. I trust his input will have a positive impact on energy policy as well as autonomous cars and AI.
2. Pharma/Health Care. President-elect Trump has already talked about finding ways to cut drug prices, which would be good for consumers but also negatively impact drug companies. On the other hand, regulatory cuts, which Republicans are known to champion, could actually help drug companies if it means they could speed up the time it takes to get drugs to the market.
3. Infrastructure. Spending on roads, bridges, and maybe even a Great Wall could be a boon to companies related to constructions and infrastructure development.
4. Defense. Republicans typically increase defense spending, so I expect companies in this sector to perform well.
5. Blue Chip Stocks. Large established companies could be positively impacted if corporate tax rates are reduced, as promised by President-elect Trump.

In addition to changes in the sectors listed above, I believe it's possible the Federal Reserve will once again raise the target interest rate - as long as the economy continues to improve.

Educated guesses, like the ones listed above, are the best I or anyone can do. What I can say for sure is that I'll stay on top of current events and adapt to whatever changes come our way in 2017. It'll be great.

Listening / Reading / Watching

Here's what has my attention right now:

• Catching up on a backlog of periodicals such as The Journal of Financial Planning and Bloomberg Businessweek.
• Finally getting around to finishing The Fireman by Joe Hill. If you like stories about a spore that causes spontaneous combustion in humans, then this story is for you! Hill is the son of Stephen King and he has inherited his father's knack for telling a twisted tale.

Third Quarter 2016 In Review

Third Quarter 2016 In Review

Investors were on edge at the start of the third quarter after it became clear the UK would withdraw from the European Union. Fortunately, the crisis passed without major declines in the stock markets. That left investors to worry about volatility caused by an increasingly unhinged US presidential election. We all know things haven't improved on that issue. Thankfully, it's almost over. At least I hope it is.

The good news was that both domestic and international markets posted decent gains during the third quarter. The S&P 500 gained 3.85% and the average diversified U.S.-stock fund returned 4.8%. The MSCI EAFE, which is the benchmark used to track developed international markets, gained 6.43% and the average international stock fund was up 6.2%.

The average intermediate-term bond fund was basically flat, with a return of 0.8%. Despite the low returns, investors flocked to bond funds, which saw inflows of $65 million. US stocks and international stocks saw outflows of $68 million and $19 million, respectively. The large outflows out of stocks and into bonds demonstrate that investors are still wary of what's to come in the stock markets. One analyst even referred to this seven-year run as "the most hated bull market ever". It appears investors want to park their money in “safe” investments.

In September, the Federal Reserve decided not to raise interest rates but left the door open for a rate increase in December. Maybe.

I expect markets to be volatile in the coming weeks. That's because we just entered earnings season, which will provide insight into how publicly traded companies are performing. Oh, and there's the election to consider. Expect markets to bounce around depending on what the candidates say and what new information is released about them. Hang in there!

My Takeaways From The NAPFA Fall Conference

I attended the National Association of Personal Financial Advisors (NAPFA) fall conference on October 13th and 14th. Here are some of the highlights from NAPFA's annual fall conference:

• A different perspective on retirement. The nature of retirement is changing as people live longer, healthier lives. The idea of retiring to play golf or pursue other leisure activities doesn't always bring happiness. Staying productive, perhaps working part-time or pursuing a new career may be a better approach. I like the idea of creating an Autonomy Fund rather than a Retirement Fund in order to achieve this goal. I plan to implement this approach into my practice.
• Financial exploitation of seniors is a problem. To clarify, the session I attended on this topic did not teach us how to exploit seniors. Instead, it gave us tips for identifying exploitation as wells as tools and organizations we can use to stop it from happening.
• A looming exodus of fee-planners. There will be quite a few planners retiring in the next 10-15 years - and there aren't enough planners to replace them.
• How to identify super trends that affect financial markets. I really enjoyed this session! We discussed how changes in, among other things, global age wave, globalization, artificial intelligence, autonomous cars, and urbanization will affect the world. The goal is to determine how we can help our clients by planning for changes that will ultimately ripple through the economy. Bonus: I added some great books to my reading queue.
• This presidential election is a mess. Okay, I already knew that. Judy Woodruff of the PBS NewsHour spoke about the current election. After that, she led a great discussion about how we got to this point and what could happen depending on who wins in November. Of course, all of this was from a financial perspective.

Listening / Reading / Watching

Here's what had my attention this week:

• News about the election. It's a trainwreck that I can't stop watching.
• Westworld on HBO. I'm in sci-fi nerd heaven right now. Who wouldn't want to watch a series about androids who appear to have realized their sole purpose is to entertain their guests' dark fantasies? So far, there's been some excellent commentary about the nature of violent open-world video games.