These are definitely interesting times. My financial services career started in 1987, and I have seen a lot of changes and ideas/concepts come and go. I have watched events and people defy logic for a period of time only to witness that the market universe’s balance will eventually prevail. I have watched people jump into investments because of the “returns” without properly evaluating actual profits. I have heard many times from investors that they "will know when to get out” only to see them get caught in a crowded exit. I have seldom seen “betting the farm” work well, especially over time. There is no such thing as passive investing: Interest Rates, Economics, and Political realities are constantly changing and all should be considered regularly. The below charts and comments are intended to help form questions regarding current events; shed some light on reality; and, hopefully, help all of us ponder what is really important going into the new year.
We work daily on providing stability for our clients. We prefer to target our allocations with the goal of beating inflation while preserving capital, giving our clients real spending power.
Since 2014 (over the last three years)
- The United States has increased the money supply by 23% to 26%
- The Consumer Price Index (CPI) has increased by over 5%
Since 2014 (over the last three years)
- The S&P Index has gained over 20%
- The majority of S&P stocks have been trapped between a 50-day moving average of 1950 and 2175 with many trending to the negative
- The S&P in 2015 had two corrections of over 8%: don’t forget the 2000 – 2002 correction of over 49% or the 2007-09 correction of over 56%
- The S&P Index since the election had gained over 3.5% in two months but without a revolutionary breakthrough in world growth
Since 2014 (over the last three years)
- United States Treasury Notes had gains of over 6% before the election
- United States Treasury Notes have lost over 4% since the election
- Federal Reserve raised rates .25 points in December: did this cause this type of drop, or is there selling happening which makes rates rise and price go down?
Since 2014 (over the last three years)
- Performance Chart below includes Dow Jones Industrial, S&P 500, Russell 2000, NASDAQ, Barclays US Aggregate Bond
- All indexes show flatness between March 2015 to Nov 2016 (over 1.6 years)
All of the above charts were created on January 1st, 2017.
Is this growth coming from debt only? Return on Investment Expectation?
dshort.com December 2016 dshort.com January 2017
US Federal deficits (Debt Load) means the “Fed” can't raise rates significantly because the government can’t afford to pay the interest on the national debt without accelerating the issue.
https://www.cbo.gov/publication/51908
In Summary
Since 2014
- The United States has increased the money supply by over 23% with only 5% inflation, yet the S&P gained 20% on a mostly service-based economy. (Read Real vs Normal Rate of Return Blog)
- The majority of S&P stocks have been trapped between a 50-day moving average of 1950 and 2175 with the majority trending to the negative, while many companies have been doing stock buy-backs which support price.
- United States Treasury Notes had gains of over 1.4%. There are parts of the world living with negative interest rates which I still scratch my head over.
- Consumer Debt is back to record levels (see above) along with governments and corporations.
In 2015 there was a 15% correction. Remember the beginning of 2016? January and February were not looking bright (are you prepared to sleep through 10% or greater corrects?).
The federal reserve says its target is 2% annual inflation; however, the CPI average is just over 1.6% and yet they run the risk of slowing the economy by raising interest rates. At best, with full market risk (100% exposure to S&P), someone might have gained 15% total (20% S&P gain - 5% inflation = 15% net) over the last three years or 5% annually. Is it worth being over-allocated and throwing risk to the wind? We do not think so. We work daily on providing stability for our clients and prefer to target our allocations with the goal of beating inflation while preserving capital, giving our clients real spending power.
Risk vs Reward: What do you observe concerning return and risk? We would like to hear from you. All questions and comments are welcome!
Our mission in the Wealth Management business is to provide you with the clarity, confidence, and commitment to help you achieve your financial goals, giving you a new-found understanding of how much is possible.
This is just for educational purposes, and I am not making any specific recommendations. This is simply a guide to assist you in thinking about your own personal position, how much risk you are willing to take, and what your expectations are.
Charts are for illustrative purposes and are not intended to suggest a particular course of action or represent the performance of any particular financial product or security. Past performance is not a guarantee of future results. Data and rates used were indicative of market conditions as of the date shown. Opinions, estimates, forecasts, and statements of financial market trends are based on current market conditions and are subject to change without notice. References to specific securities, asset classes and financial markets are for illustrative purposes only and do not constitute a solicitation, offer, or recommendation to purchase or sell a security. Past performance is not a guarantee of future results.