Stock Markets

Stocks rebounded nicely. Tech stocks (FANGs – Facebook, Amazon, Netflix, Google) after leading the way down in last year’s fourth quarter (off 22%) led stocks back up (up 23%). A global stock portfolio earned about 12% this quarter and domestic stocks continued in the forefront.

Looking past this quarter, non-domestic markets have fallen short of domestic market returns.  There is no reason to think this pattern will continue. Stock markets seemed to have calmed a bit, and some of the uncertainties that have plagued stocks in the recent past seem to be coming into sharper focus.  Trade negotiations with China are moving along in a more positive vein and stocks continue to respond nicely to positive news about any possible resolution.

Concerns of looming deficits due to tax cuts appear to have moved to the back burner as inflation and interest rates remain at historically low levels. Markets continue to shrug off any dysfunction in Washington.  Yet, concerns remain. How Brexit (Britain leaving the European Union) eventually plays out remains a mystery.

Bond Markets

Bonds, especially longer-term bonds, are up this month, which is consistent with declining yields, at longer maturities.  Look below to see how bond yields beyond a year are below last quarter and a year ago.  The ten-year yields are below one-month yields – the lowest is at the 5-year mark. This pattern is unusual. Perhaps the best explanation is as simple as this: in a world of low and negative interest rates, U.S. Treasuries are the “best deal in town” for safe assets.

Interest Rates

Interest rates are historically low and have confounded many observers – more than a few predictions have gone awry, and crafting a compelling story to explain why there is little difference between short-term and long-term rates remains elusive.  Additionally, by historical standards the Fed has massive levels of Treasuries and Mortgage-backed securities on its balance sheet, which it must deal with, creating even more uncertainty.

Interest rates are important to the economic landscape. They are the price of capital – interest is what must be paid to use someone else’s money. The Fed only controls short-term rates.  Longer-term rates are where supply and demand for capital intersect. Demand depends on the expected payoff for putting capital to work; supply depends on what you expect to earn for giving up the use of your money. The horizon for suppliers and users of capital is distant – slight changes in interest rate’s can have a significant effect.

Stock prices are the present value of all future cash flows, which theoretically go on forever.  Falling interest rates translates into rising values of these cash flows.  The historically low levels and generally downward trend in interest rates help to explain the long-running bull market.

Bond returns are affected by both absolute levels and changes in interest rates – rising rates produce lower bond prices and returns; falling interest rates work in the opposite direction.  The longer the maturity, the greater the impact of changing rates.  Declining yields at the long end mean better returns for longer-maturing bonds.

Where interest rates go from here is anybody’s guess.  However, right now there doesn’t seem to be much pushing rates up, especially with an expected slowdown in worldwide growth.  All indications are for rates to remain low with little difference between short and long rates for a while.

Jack Bogle

Jack Bogle, the godfather of index funds and founder of Vanguard, passed away in January at age 89.  His influence on the investment world over the past forty years is immense; his accolades are well-deserved. Jack Bogle’s unwavering commitment in his ideas alone set him apart.  While the underlying concepts behind index funds are now the mainstream, they surely weren’t when he first championed them.  Jack Bogle clearly did more than anyone for small investors.  The notion behind Index Funds (achieving market results at the lowest cost to have the best chance for long-term success) is equally applicable to all investors – both large and small.

Many of us are familiar with insurance for your home, auto and life, but the reality is – we don’t often know our specific coverages until we need to make a claim.  Insurance has become so specific it’s worthwhile to contact you carrier and become more familiar with exactly what your policy is going to cover in a time of need. In our society, there is insurance for your pet’s medical bills, canceled vacations, or a defective home appliance. If you have an insurable interest in something, there’s likely a policy out there to cover you.  However, one of the most overlooked types of insurance is one that protects your income, or lack thereof, in the event of an extended long-term disability.

When you hear that a friend or family member is “on disability” many of us assume that most, if not all, of their income is being replaced, but that is not usually the case.  Generally, there are two types of disabilities;  “Permanent” or “Non-Permanent”.  Some common disabilities are “short-term” such as maternity leave or “longer-term” such as a chronic illness that prevents someone from returning to work in any meaningful way; but I will focus on long-term disabilities here.

Under limited circumstances, a person can file for Social Security Disability Income (SSDI) and be approved for benefit payments for the rest of their life or until they reach their Full Retirement Age (FRA). Upon reaching their FRA the benefits convert from SSDI to Social Security Retirement benefits. There will be a gap if your FRA is 67, and your LTD policy only pays benefits until the age of 65, another reason to pause and consider the consequences and impact on your life.

There are two primary types of insurance policies:  group LTD insurance offered by your employer or a private policy that you purchase on your own.  More importantly, there are two methods for paying for LTD insurance that determine how your benefits will be taxed.  Premiums can be paid with after-tax income (non-deductible) or pre-tax income (deductible).  Group LTD policies typically have lower premiums than individual policies, but typically offer lower benefits, or may be combined with other disability benefits (i.e. Worker’s Compensation or SSDI).

For a private LTD policy that you own and pay for, the benefits are excluded from your taxable income. On the other hand, if you are covered under a policy that your employer pays for (with pre-tax income), expect the benefit payments to be considered taxable income.  This is where it can get confusing.  Your employer may offer access to a group plan but require that you pay the premiums on an after-tax basis.  In this case, you may have the benefits “reduced”, “offset” or “integrated” by other non-salary payments you are eligible to receive, such as Worker’s Compensation (if the injury took place while on the job).  The important thing to note is that LTD benefits provided in a group plan are typically computed after Worker’s Compensation, SSDI and/or pension payments are calculated. You can see that the carrier is not going to allow you to collect as much as you may have originally believed and it’s unlikely you will receive more than 60% of your wages with a combination of Worker’s Compensation, Pension and LTD benefits.

LTD policies can be complex when it comes to understanding basic coverage, exclusions and elimination periods (which may be up to 180 days or more).  This is only meant to serve as a primer and general overview of LTD.  As with life insurance, we at Rockbridge generally recommend owning a private policy that is not affected by employer changes.  Private policies are typically more expensive and require an underwriting process that evaluates your age, health and medical history. The fact is, the loss of your future earnings is something you may wish to consider insuring against, for the financial well-being of your family, especially if you are under age 60.  If you feel the need to review your situation and perform an LTD needs analysis, please contact your advisor at Rockbridge.

It’s no secret that since the Financial Crisis value stocks have underperformed growth stocks.   Many theories exist as to why this has happened, none of which can be confirmed as truth.  This begs the question “what does this last decade of value underperformance mean?”  The answer, truthfully, is that it means nothing.

For starters, value stocks have outperformed growth stocks over long periods of time.   Because of this, we have a mix of value and growth stocks in our portfolios, with a tilt towards value stocks.  What we do know is that there have only been three significant periods where value stocks have underperformed growth stocks in the last 90 years.  One of those three periods happens to be 2008(ish) to today (see chart below):

Source: Kenneth French’s Data Library, 1926-2017

Although there is uncertainty around how long these periods of value underperformance last, history suggests the frequency of a positive value premium has increased when you look at longer-term data (see chart below).

Source: Dimensional Fund Advisors

What does all this mean?

Quite frankly, it’s unlikely to expect value stocks to underperform growth stocks.  It’s even more unlikely to endure this underperformance over long periods of time.

This value premium isn’t all that steady or predictable, but a consistent investment approach that maintains an emphasis on value stocks will allow investors to more reliably capture the premium over the long run.

If you’re like most people, you know that planning to achieve your financial goals involves more than just budgeting and saving for retirement. You’ve undoubtedly received financial advice, solicited or otherwise, from some combination of family, friends, coworkers, or even just from the myriad financial planning advertisements on TV and online. With all of this information out there, it’s no wonder that there’s more than a little confusion as to what financial planning is all about.

At Rockbridge, we view financial planning as the ongoing process of identifying goals, evaluating strategies to achieve those goals, implementing the action items necessary for those strategies to be effective, and monitoring the results.

This process sounds simple enough, but how do you know where to begin? How do you identify which goals are relevant to the planning process? Should they be specific or broad? Should you focus on short-term or long-term goals, and how do you prioritize them? What happens if your goals change?

Often it takes a major life event to draw attention on our true financial goals. While there are any number of events that may impact a person’s financial objectives, there are a handful of life events that, we as advisors, get a lot of financial planning questions about. These events include:

  • Getting married
  • Buying a house
  • Having a child/adopting
  • Changing jobs or starting a business
  • Retiring

Visit our blog at, where we will be rolling out dedicated posts discussing many of the common (and sometimes not so common) planning considerations associated with these life events.

As always, reach out to your Rockbridge advisor with any questions regarding your specific situation.