Stock Markets

Equity market returns over several periods ending September 30, 2017 are shown on the graph to the right. Here are a few highlights:

  • Stocks provided above-average returns over the past quarter – REITs lagged.
  • Non-domestic markets led the way in recent periods; over longer periods it was domestic markets.  While it would be nice to know which will do best in the future, no one does. We have to remain committed to all markets.
  • Note how after falling short previously, emerging market stocks have snapped back in recent periods.

Bond Markets

Yield Curves show the yield of U.S. Treasury securities over several maturities, from the short term (one month) to the long term (twenty years).  How these curves have changed over the recent past is shown below.

  • Since September 2016 yields have increased across all maturities, which is not surprising given the announced goals of Fed officials. Yields and bond prices are inversely related (when yields go up, prices come down and vice versa), which explains negative bond returns over the past year.
  • Today’s Yield Curve is flatter than what we saw at the beginning of the year.  The Fed can control only short-term rates; long-term yields generally reflect market results.  A flat yield curve can indicate that the market doesn’t believe the Fed can increase rates down the road in a more difficult economic environment.  Look how yields on longer-term securities have fallen slightly even though short-term yields increased.

 

On August 2, 2017, the Dow Jones Industrial Average set a record, closing above 22,000 for the first time. People will debate the cause of the rally and how long it will last, but there is only one answer that matters to the prudent investor – time.

Markets go up over time. Over the last 90 years, the S&P 500 (a better gauge of the U.S. stock market than the Dow) has seen 11 “bear markets” during which the index fell by more than 20% of its value. In four of these instances, the index fell by 48% or more, with the largest fall (86%) coming during the Great Depression. Despite these large declines in value, if you had bought and held from 1927 through today, you would have realized an annualized 9.9% return. The biggest losers were not people who failed to foresee Black Tuesday, the 1973 oil embargo, the dot-com bubble, or the financial crisis. They were people who were not invested.

The stock market is notoriously difficult to predict. On August 13, 1979, Businessweek ran a famous cover story titled “The Death of Equities.” Businessweek cited inflation, changing regulation, and an increase in investment alternatives as the reason America should “regard the death of equities as a near-permanent condition.” Over the next 20 years, the Dow would grow from 839 to 11,497, and investors in the S&P 500 would receive a 17.7% annualized return.

Twenty years after the Businessweek story, Kevin Hassett and James Glassman wrote Dow 36,000, a book articulating why the Dow would triple by 2005. Hassett and Glassman argued the cost of equity should be on par with treasury yields, leading them to conclude the “single most important fact about stocks at the dawn of the twenty-first century: They are cheap… If you’re worried about missing the market’s big move upward, you will discover that it is not too late.” In January 2005, the Dow closed at 10,490. Dow 36,000 now sells used for $0.01 on Amazon.

In addition to being unprofitable, market timing is also mentally punishing. If you were to sell out of your position now and, in a year, the market was 10% higher (Dow 24,200), would you get back in or keep waiting for the fall? If, instead, it was 10% lower in a year (Dow 19,800), would you stay on the sidelines in anticipation of more declines, or would you conclude the market had bottomed out? The challenge with market timing is that you need to be right twice – when you sell and when you buy back in. And remember, these price changes don’t count the 2% annual dividend large-cap stocks are paying.

Is today’s market overvalued? Your conclusion depends on your perspective. Over the last 7.5 years the S&P 500 has seen 13.3% annualized appreciation, suggesting today’s market is overvalued. However, since 2000, it has returned 4.9%, suggesting it’s undervalued. Since 1990, the market has returned 9.6%, on par with its 90-year average.

You can play the same game with price-to-earnings (P/E) ratios. Currently, the P/E ratio of the S&P 500 is high by historical standards, suggesting the market is overvalued. However, stocks look forward, not backwards, and the forward-looking P/E ratio is slightly overvalued but much closer to “normal.” Lastly, the earnings yield of equities (P/E’s inverse) relative to yields on long-term bonds actually makes stocks look cheap. Are stocks overvalued? It’s anyone’s guess.

The Dow has reached a new high because markets go up over time. However, there are periods where they go down. If you can’t financially afford or mentally stomach a 40% or greater decline in your portfolio, you shouldn’t be 100% invested in stocks. Find a risk profile that matches your needs, diversify from the S&P 500 to other markets such as small cap stocks, international stocks, and bonds, and stick with your allocation. Trying to outsmart the market leaves most people feeling foolish.

This article by Ethan was featured in the Central New York Business Journal.

Any investor who spends even a modest amount of time reading financially-based magazine articles, or occasionally watches or listens to financially-based TV or radio programs, can’t escape all the pronouncements financial advisors make to prospective clients. So, if you are new to Rockbridge, I thought it would be fun to share a few promises with you. Here are five promises of what Rockbridge will not do with clients or prospective clients:

  1. Make Short-Term Stock Market Predictions

We don’t guess the hourly, daily, quarterly or even annual direction of the stock market or the Fed’s action on interest rates. We don’t think others should either since even the so-called experts are wildly incorrect most of the time, and when they are right, it was more likely luck, not skill.

  1. Tie Stock Market Results to Political Events or Partisan Grips on Congress or White House

While many of us have political leanings or biases of who may be better for the economy (and eventually the stock and bond markets), we don’t believe either major political party provides compelling evidence for a more healthy economy or better results for your portfolio.

  1. Make Changes to Your Portfolio Every Time the Market Swings

Volatility is inherent in the markets – so are daily fluctuations. We believe in keeping asset class target allocations within acceptable parameters, but we will not make knee-jerk reactions to events on a daily basis. Portfolio rebalancing occurs when one asset class substantially outperforms or underperforms and target weightings have a higher than acceptable variance.

  1. Select Only “Good Investments” and Avoid All Those “Bad Investments”

Far too many times I have been asked individually if I can steer someone “into just the good investments.” The fact is, we are deeply rooted in an efficient market theorem, and the best method for participation is low-cost, broad-based index components (either mutual funds or ETFs) using both long domestic and international strategies. We keep a tight handle on our portfolio models and don’t stray to the esoteric or exotic (such as short selling or options contracts) based on a hunch or gut instinct. We know that each strategy we employ will not perform identically to another – the results will rotate in and out of “desirability,” but we focus on how they perform together over long periods of time.

  1. Focus Solely Only On Your Investment Performance or Increasing Your Portfolio Size

While achieving suitable investment performance is often a vital aspect of appropriate financial planning, yearly results are not the most critical measure of a financial advisor’s value or worth to you or your family.  Meeting expected performance should be in the context of achieving your overall financial goals – there are far more important topics to be concerned with rather than losing sleep over a friend or neighbor’s investments “doing better” than your own. We enjoy robust returns as much as anyone else.  However, neglecting tax implications or appropriate insurance coverage and dismissing proper retirement planning or estate planning efforts will impact a family on a much deeper level than worrying about what everyone else is earning from their investments. Trust me, most of the time, your friends or neighbors have no idea what their actual returns are and rarely will they review an actual performance report with their advisor – much less with you.

Philanthropy does not always make the list of critical priorities when planning for the future, a process often dominated by other pressing needs like education and retirement.  Yet for those blessed with some success, and financial resources that exceed what we need to survive, philanthropy can be a way to give back, pay it forward, or just do something good for other people.

Philanthropy – Goodwill to fellow members of the human race; the effort or inclination to increase the well-being of humankind, as by charitable aid or donations.

The Central New York Community Foundation is celebrating 90 years of philanthropy in Central NY.  The slogan for the celebration is “Here For Good,” which is intended to carry a double meaning – here to make the community a better place and here for the long term.

Community foundations now serve communities across the U.S., and it has been my privilege to serve on the board of The CNY Community Foundation, where I have been able to observe first-hand the impact it has on people’s lives.  It is now responsible for a pool of charitable capital that surpasses $226 million.  Over the course of its history nearly $170 million has been invested in the Central New York community.  That history includes many stories of transformed lives and improved communities. Some of those stories are told in a recent publication and are also available online at:  https://cnycf90.org/.

Community-wide Impact

The Community Foundation plays a role in some big, community-wide initiatives, like “Say Yes to Education,” which provides a path to college for Syracuse City School District students.  Say Yes funds several support programs and after-school programs for school students and ultimately funds last-dollar college scholarships for those who go on to college.  The Community Foundation provides leadership for many aspects of the program and administers the Say Yes Scholarship Endowment Fund, which is now fully funded at $30 million.

Legacy

The act of giving can be very rewarding, as we see the impact on those less fortunate, or envision the impact on future generations.  The Community Foundation can help donors work through the process of creating Legacy Plans that identify their motivations for giving, document their giving stories, and preserve their charitable legacy.  One such story is told in the 90th Anniversary publication about the Martha Fund, established to honor Martha Blumberg, a bright, talented young woman who died far too young.  The Martha Fund was established by her mother’s will to honor Martha’s zest for life, and since 2013 the fund has awarded nearly $300,000 to support children’s art programs, health services and learning activities.

Looking Ahead

It is easy to lose sight of philanthropy amidst our day-to-day struggles, so when you do hit the pause button, and make plans for your financial future, keep in mind the resources available to make philanthropy a part of your legacy.