February, 2017
Statement Commentary
Emotionally Involved
I just finished watching Super Bowl 51 and the New England Patriots won again. While I
am not a big fan of either team, I do enjoy seeing former Badgers do well and James
White had an historic night that should have resulted in his being named MVP or CoMVP with Tom Brady but it wasn’t to be. In any event, how many people can say they
scored the game winning touchdown in a Super Bowl? I wasn’t emotionally involved in
the game until I saw how well he was doing and then was not happy when he didn’t get
rewarded for his efforts. Sometimes investing is the same way. It is easy to get caught
up in the emotion of investing and then not get “rewarded” for our efforts. We’ll take a
quick look at some of the emotions of investing and also a look at what is going on in the
economy right now.
One of the hot topics in the investing world right now is investor behavior. This is really
a study of how investors react emotionally to various events and has been a growing hot
topic since the Great Recession. The topic is relevant for all of us because we all react
differently to events and that affects what we invest in, when and how we make buying
and selling decisions, and ultimately our results. Political events, lingering fear over past
events (stock market crash of 1987 or the Great Recession), terrorist attacks, the
evening news, and economic news all play a role but we need to be careful not to give
these issues too much weight as we make investing decisions. While I don’t pretend to
know the future, I do know that there is almost never a bad time to invest IF you have a
long-term time horizon and you do so with a relatively complete knowledge of why you
are investing and what you are investing in. This means making proper asset allocation
decisions based on your risk tolerance level (meaning don’t under or over invest just
because of emotions), income and/or principal needs, age, and other factors. Then,
once invested, proper monitoring of your portfolio and making reasonable adjustments
over time is necessary but not every day. Finally, not letting outside influences exert too
much control over your investing decisions is a wise strategy.
It is important to review these things from time to time because we can get caught up
too easily in what is going on around us and lose sight of what we are trying to
accomplish. For example, the markets have had a relatively calm period lately as
measured by the VIX which is a volatility index for the stock market. The VIX is at its
lowest level since 2014 and recently had its sharpest 12 week drop ever. Should be
good news and time to jump right in, right? Well, maybe. But could it just be the calm
before the storm? This is where one needs to be mindful of one’s strategy and purpose
for investing otherwise it might be too easy to let emotions dictate strategy. For who
knows what is coming. Is the nation’s GDP going to rise faster or slower than expected,
will policies out of Washington be market friendly (deregulation, repatriation) or
unfriendly (protectionism, tariffs), and/or will the low unemployment rate cause wages
to rise causing inflation to kick in faster and higher than desired? These are all shortterm issues that could become long-term ones and need to be considered analytically
more than emotionally.
The markets have generally hovered around the 20,000 level on the Dow and 2.5% on
the 10 year Treasury for the last few weeks as investors try and gauge the effect of
many of the factors described above. Likewise, the Fed is also considering these factors
as it determines when, how often, and by how much to raise interest rates. It appears
that the Fed is likely to raise rates in March and could possibly raise rates four times this
year vs. the three times they previously announced. The uptick in inflation and the
continued steady improvement in factory output would seem to be indicative of an
improving economy. Additional insight as to what the Fed might do and the strength of
the economy can be seen by looking at the Atlanta (another Super Bowl tie-in!) Federal
Reserve’s forecast GDPNow. The Atlanta Fed uses 13 different factors to forecast GDP
each quarter. They make an initial forecast at the beginning of each quarter and adjust
it periodically as the end of the quarter approaches. While forecasting error is to be
expected, the level of that error is fairly minimal by about the 65th day in the quarter.
Their forecast for the first quarter of 2017 as of February 1, 2017 was 3.4% which was
up from previous estimates in the high 2% range. The increase was due to higher
readings on factory output, construction spending, personal consumption spending, and
real private fixed investment growth. All are good signs for the economy but
considering that we are only a third of the way through the first quarter of 2017 it is to
be assumed that the forecast will be adjusted over the next month or so. If these
numbers hold true, however, it would seem very likely that the Fed would raise rates in
March. Given that the Fed forecast at least three rate increases this year, the markets
shouldn’t be too surprised if the Fed were to take action.
Finally, the outlook for the markets in 2017 continues to be a mixed bag as all eyes will
not only be on the Fed but also the tight labor markets, inflation, earnings, and political
maneuvering. Most forecasts are for the equity markets to have a decent year with
returns in the mid to high single digits domestically. International equities may get a
pick up due to higher commodity prices and improving economies world-wide. The
fixed income side of the equation is a bit murkier as any interest rate increases could
dampen returns but the effects should be minimal if the Fed, and the markets, don’t
overreact and raise rates too much and too fast. As stated before, income investors
should start to see a slight uptick in returns from CD’s, money market accounts, and the
like as well.
While we have seen stocks move higher since the election, we are optimistic for this
year due to the likelihood that earnings will tick-up and that economic data seems to be
improving. Therefore, we are pushing our portfolios back to being fully invested from
their slight defensive posture….but….we are also utilizing some new tools that may offer
an added degree of safety. On the fixed income side, we will continue to add individual
holdings and also look at some new ideas aimed at reducing risk without sacrificing
yield.
Even though James White had a fantastic Super Bowl, my guess is that if you asked him
about it, he would say that he isn’t focused just on that game but his career as a whole.
As investors we should keep the long-run (big picture) in mind as well and a good way to
do so is by reviewing your current financial circumstances to determine if your needs for
the coming year and beyond are being met. This review should include a look at your
investment objectives, allocations, risk tolerance, and preferences and make changes
accordingly. We welcome the opportunity to meet with you to do just that. To
schedule an appointment, please stop by our office in Madison or call our Wealth
Management department at (608)826-3570 to schedule an appointment.
As of January 31st, 2017…..
Dow Jones Industrial Average up 0.62% YTD
S&P 500 up 1.90% YTD
S&P 400 up 1.68% YTD
S&P 600 down -0.40% YTD
NASDAQ up 4.35%
Barclays U.S. Agg. Bond Index up 0.20% YTD
EAFE up 2.87% YTD
Inflation (CPI) 2.1% (as of December 31st)
Unemployment 4.7%
Thank you for your business – we look forward to speaking with you soon. (Note – this commentary used various
articles from Morningstar, the Wall Street Journal, Investor’s Business Daily, Northern Trust, CNNMoney.com,
msn.com, Kiplingers.com, nytimes.com, Fidelity Investments, American Funds, LPL Financial and other tools as sources
of information)