After a three-week run where all major U.S. indexes posted significant gains, we saw more mixed results last week. The Dow was up 0.10%, but the S&P 500 lost 0.97% and the NASDAQ was down 2.65%. The MSCI EAFE's measure of international developed markets also dropped 0.24%.
Rallies such as the one we've experienced since Donald Trump's election can't go on forever, so we aren't too concerned about these minor pullbacks. In fact, as we've recently said, when you look more deeply at the data, we see many reasons to believe that our economy is moving in the right direction.
Good News Last Week
Positive economic news for the U.S. continued to come in last week, including reports that:
- Unemployment dropped again to 4.6% - hitting its lowest level since August 2007.
- Manufacturing increased for the third straight month.
- Personal income increased 0.6% in October.
- Q3 GDP was 10% higher than previously thought.
Of course, despite the ongoing indications that our economy is doing well, everything isn't perfect in the U.S. We'd like to see the economy growing even faster than it is. And while unemployment is low, the measure of people who are underemployed is still too high at 9.3%.
Overall, we continue to see signs that our plow-horse economy may be picking up speed and building greater strength in the process.
Potential Risk: Italian Referendum
From our perspective, the most immediate risk to market performance could be the Italian Referendum. On December 4, Italians voted against Prime Minister Matteo Renzi's constitutional amendment that would have reduced their Senate's size and power while limiting the regional governments' strength. From Renzi's perspective, this move would stop the gridlock so common in Italy's government while helping to stabilize the country, improve investor confidence, and speed economic recovery.
As 2016 has shown us with the unexpected victories of Brexit and Donald Trump, populist sentiments are on the rise worldwide. The Italian "No" vote not only represents a concern with concentrating power in the federal government but also a general pushback against the ruling party and status quo.
Now that "No" has prevailed, we may see additional instability in Europe. Prime Minister Renzi has promised to step down, leaving big questions about who will lead Italy and how they will find a new leader. In addition, some of Italy's largest banks may now be at risk of insolvency, as they have fewer tools for lifting the $380 billion of bad loans that weigh them down.
No one knows what the long-term outcomes of this vote will be for Italy or Europe. We anticipate that some ripples of volatility may wash up on our shores in the process. We hope that, similar to Brexit, the initial market reaction will not last for long and that investors will quickly return to a focus on growth and fundamentals.
How to Move Forward With Confidence
From the first quarter's stock-market volatility to a number of surprising votes, this year has presented many opportunities for emotions to enter investing. We understand how tempting it may be to sell when equities aren't performing well - and to pursue greater growth when they are. Ultimately, emotions have no place in investing.
Recently, we've spoken to many clients who want to ride the post-election growth train. Just as we're here to help you from despairing when stocks tumble, we also want to help control euphoria when the markets rally. Rallies can't continue forever, and impulsive choices can challenge your security. As always, we want you to take the right amount of risk for your unique circumstances and stay focused on the long-term goals that we're pursuing together.
If you have any questions about how current events are affecting your financial life, we are here to talk. Contact us any time.
Quote of the Week
"Definiteness of purpose is the starting point of all achievement."
--W. Clement Stone
Golf Tip of the Week
Practice Proportionally
Did you know that over 60% of your strokes come from within 100 yards? While many golfers spend a lot of their time working on drives, most of your practice should be spent on your short game. Focus on chipping and putting drills since these two shots are essential to a solid short game.
Financial Question of the Week
Do you really need a financial advisor?
If there is one thing that many investors "know for sure," it's that the need for financial advisers went out the window with the advent of online trading and index mutual funds.
Is that true? Are advisers the 21st Century equivalent of the buggy whip?
Not according to a recent research report by Vanguard called "Advisor's alpha." Vanguard suggests that advisers can help add value if they "act as wealth managers and behavioral coaches, providing discipline and experience to investors who need it." Here are three areas where Vanguard suggests advisers can add value.
Avoiding bad behaviors
In the most recent version of the study, Dalbar showed that the 20-year average returns for the Standard & Poor's 500 Index and Barclays Aggregate Bond indexes were 8.21% and 6.34% respectively. You would expect the average investor return to be in the same general vicinity as the benchmarks. Instead, the average equity investor earned just 4.25% per year and the average fixed income investor earned just 0.98% per year over the same 20-year period.
Vanguard suggests that "Advisors, as behavioral coaches, can act as emotional circuit breakers in bull or bear markets by circumventing their clients' tendencies to chase returns or run for cover in emotionally charged markets."
Portfolio construction
Asset allocation is a critical element of portfolio return. Some studies conclude that as much as 90% of portfolio return can be attributed to asset allocation. Vanguard points out that many investors "neglect it on their own, overlooking its contribution to their long-term investment success."
Having a suitable asset allocation cannot only bolster returns, but it can have an important psychological effect as well. Vanguard suggests that knowing the allocation "was arrived at after careful consideration, rather than as a happenstance of buying funds with attractive returns ... can serve as an important emotional anchor during those all-too-frequent uprisings of panic or greed in the markets."
Tax-efficient strategies
Taxes can have a significant effect on portfolio return. This is especially true during retirement when investors begin to draw money from their accounts.
A competent adviser can help clients design a distribution strategy that takes taxes and other important considerations into account, which can increase financial security. Again, according to Vanguard: "A well-thought-out drawdown strategy can improve the likelihood that the client's assets will be able to support his or her financial goals through retirement and beyond, which is a significant - if hard to quantify - added value."
Depending on your situation, a full service wealth manager may be able add value in many more areas than the three listed above. If you or someone you know would like help to analyze your financial position and determine whether or not professional wealth management can add value, please contact my office for a complimentary review.
