Summer 2018 Newsletter

The Smalley Investments team supporting local artists this summer in Lansing during ArtPath.

I hope you and your family had a great Independence Day.  Other than the fact that my poor dog hates fireworks, Independence Day never fails to be a highlight for us here at Smalley Investments.  Seasons change, and much like the Earth revolves around the sun, in my mind at least, the seasons revolve around summer.  There is no place I’d rather be in summer than Michigan. I hope you have some time to enjoy it.

About a week ago, my wife and I were getting our little cottage ready to rent out for the summer season.  As I was cleaning the rocking chairs, I remembered what my grandmother told me as a child: if you’re going to do something, do it well.  

Do you know how many spindles there are on a rocking chair?  And each one has four sides.  What I thought would take a couple minutes turned into a much longer ordeal when I applied Grandma Gertie’s saying to it.  But in the end, it was the right thing to do.  The chairs turned out great and the renters arrived in time to enjoy watching the fireworks on the porch.  

But along those lines, I am eager to report that we have made some recent additions to the Smalley Investments team.  As you may know, our goal is to provide outstanding and indispensable service to our clients.  Because we have been growing, it is time for us to add staff to continue the service that we provide, and enhance the services that we provide.

In May, Ryan Balks joined us as a Paraplanner.  For those of you not in the financial services industry, that title is given to someone whose focus is financial planning.  Ryan has almost 10 years of experience in working with clients to help them achieve their financial goals.  My objective in hiring Ryan is to have him assist me with building holistic financial plans for our clients in addition to asset management.  It’s not enough to have a well-diversified portfolio if it doesn’t help you accomplish your life goals.  Ryan will lead our planning efforts.  He will also be part of the wealth management team, providing the crucial research and follow up necessary for all of our wealth management clients.  I look forward to introducing you to him the next time you come into the office.

And if you happen to come in before the summer is over, you’ll also have a chance to meet our Summer Intern, Brennan Sanford.  Brennan is a senior at Michigan State University studying finance at the Eli Broad School of Management.  His main focus is helping us update some key software (hint, it might have something to do with financial planning…see above).  In the fall he not only heads back to school, but he will resume his co-captain responsibilities on the MSU hockey team.  Sounds like they will be pretty good this year, too.  

As for the markets, so far this year they’ve been a little flat.  That is not totally unexpected, given the great returns we enjoyed last year. Also, this year interest rates are going up and trade negotiations with our trading partners has turned a bit confrontational.  That may turn out beneficial in the end, but so far it has kept markets in check. That all comes at a time when the national economy is booming (have you seen how low unemployment is?), and corporate profits are up.  But the global economy is not firing on all cylinders.  And geo-political events could prove to be problematic by the end of the year, although they amazingly haven’t had much of an impact in the last 18 months.  As always, those are next to impossible to predict.  

But to bring this full-circle, what is much easier to predict than the short-term gyrations of the stock market, is the long-term probability of success in mapping out your family’s financial goals.  Call us to talk about how we can help you identify your goals and the best way to achieve them.  Financial planning can have a big impact on your goals and on your confidence.

In the fall newsletter, I’ll fill you in on the exciting things that Nicole is doing for our institutional clients.

If you have any questions or would like to schedule a meeting, give us a shout.  In the meantime, don’t forget the sunscreen!

- Joe Smalley

Securities and advisory services offered through Commonwealth Financial Network, member FINRA/SIPC, a Registered Investment Adviser.

Smalley Investments

213 East Saint Joseph Street

Lansing, MI 48933

517-487-4850

www.smalleyinvestments.com

National Championship + Market Thoughts

Anyone who knows me, knows I am a Spartan fan.  It’s been difficult the past few months to be a fan of Michigan State.  It seems that the hits keep coming.  All I want to do is to crawl under a rock and hibernate.  Especially today, when the Michigan Wolverines play for the National Championship. 

It’s the same way with the stock market.  Today, the market cratered on the news that the President is “going after” Amazon – whatever that means.  So, a stock that has lead the way is now under pressure.  As is Facebook and other tech companies that have seen their stock prices skyrocket over the past few years. 

But sticking your head in the sand is no strategy.  Instead of looking the other way when the market goes south, I prefer to look at my plan and to make revisions, if necessary. 

Here’s what I am doing right now:

• Looking to see when I’ll need money
  • If it is within the next 24 months, adjust the portfolio to free up cash
  • If it is between 2-5 years, make sure that it is in a lower risk/lower return asset class
  • If it is more than 7 years, keep it invested in stocks

• Looking at the asset allocation of the portfolio
  • Because of adjustments, the mix may have changed from the target
    • Adjust accordingly

• Creating an investment “wish list”
  • What stocks would I like to own that have been too expensive recently?
    • What is a good entry point to buy them?

• Reviewing my financial plan
  • Am I still on track to achieve my goals given the stock market pull back?
    • What changes do I need to make?
    • Add more money?
    • Work longer?
    • Reduce expenses?

Tomorrow there will be a new National Champion.  I know it will not be Michigan State.  And tomorrow the stock market may go down again.  But I also know that everything runs in cycles, and that I have a plan.  Patience is a virtue, especially when you are an investor or a sports fan. 

My plan for tonight is to watch the Tigers.  Thank goodness for baseball season…

Joe Smalley

Smalley Investments

213 East Saint Joseph Street

Lansing, MI 48933

517-487-4850

Securities & advisory services offered through Commonwealth Financial Network, member FINRA/SIPC, a Registered Investment Adviser.

Mission Possible

Market Commentary by Joe Smalley, Accredited Investment Fiduciary®

February, 2018

Today, as I write this, it is the day after Super Bowl 52.  The Philadelphia Eagles won a very exciting game.  It came down to the wire and looked a lot like one of several other come-back games that Tom Brady and the Patriots have orchestrated in recent memory.  But the 6-time champs came up short and the scrappy underdogs from Philly pulled off the victory.

And it was against all odds.  Consider:

·       Tom Brady has won more games than any other quarterback in the history of football

·       The Patriots have been to more Super Bowls in the past 10 years than most teams have been to the playoffs

·       The Philadelphia Eagles lost their starting quarterback in December and their backup quarterback played two really bad playoff games

But hard work, great defense, gutsy play calls, and execution when it mattered all combined for a winning formula.  It turns out that when you have a plan, are prepared, stay focused and remain disciplined, Mission Impossible can indeed turn into Mission Possible. 

Today, as I write this, it is also the Monday after a rally large Friday selloff in the stock market.  The Dow Jones Industrial Average lost 665 points Friday as investors were spooked by the potential for rising interest rates to stem the possibility of inflation. 

Translation: the market has been hot for a long time and the economy is improving, so the Fed will likely raise rates, which could cause inflation, so now might be a good time to take some profits. 

And because the stock market rarely bottoms on a Friday, there is carryover selling today, with the markets down another 4.5%. 

But let’s unpack why this is occurring.  Consider:

·       In March of 2009, the bottom was established by the financial crisis with the Dow closing at 6,443.

·       Since then the Fed lowered interest rates and began extraordinary measures to boost the economy

·       Asset prices, the economy, and the markets rebounded

·       The Dow Jones Industrial Average hit an all-time high last month at 26,616

·       Unemployment is still low, but wages have finally started to go up

·       The Fed is seeing a boost in the economy due to tax reform

·       All this is causing inflation fears because the economy is getting stronger

To be clear, we want the economy to improve.  When the economy does well, most Americans do well.  Jobs are good.  Wages improve.  Widgets are sold.  Services are booked.  Asset prices go up.  Stocks rise. 

The fear comes if the economy overheats and causes a bubble.  If inflation runs hotter than what the Fed can do to tamp it down.  Investors hate fear.  And selling begets selling.

But most of the economic indicators like recession risk, market risk, margin debt risk, and technical data risk are flashing green right now.  A couple yellow.  But none are flashing red at this time.   

The stock market runs in cycles.  Boom.  Decline.  Bust.  Recovery.    We’ve been in the boom section of the cycle for quite a while.  It’s healthy to have declines.  In fact, we have had 599 one-day pull backs of 2.5% or more.  And we will see more. 

So, what to do when the market goes down?  Oddly, the answer could be nothing.  If you are in a well-diversified portfolio that consists of stocks, bonds, and cash, you may be able to ride out the storm.

The most important thing is to make sure you have your money invested for your time horizon.  If you need money soon, by all means, keep it somewhere you can access it without a whole lot of volatility.  If you have time to invest for the long term, the stock market might be appropriate, but only if you can handle the swings. 

In this article from Tony Robbins which reminds people that corrections are normal, he quotes the legendary investor Warren Buffet: “the stock market is a device for transferring money from the impatient to the patient.”

In that vein, in order to capitalize on the old saying - buy low, sell high - you actually need to buy low. 

To get through this or any downturn, have a plan.  Stay focused on your goals.  Be prepared.  And remain disciplined.  If you’d like to discuss your plan, give us a call.

Oh, and guess which movie trailer was advertised on the Super Bowl last night.  Yep.  The new Mission Impossible. 

Joe Smalley

Smalley Investments

213 East Saint Joseph Street

Lansing, MI 48933

517-487-4850

Securities & advisory services offered through Commonwealth Financial Network, member FINRA/SIPC, a Registered Investment Adviser.

Market Update

Commonwealth's Chief Investment Officer, Brad McMillan, talks about a strong January, and about a bumpy start to February.  

This article from Commonwealth's Chief Investment Officer, Brad McMilan, goes over where the markets are and what is impacting them right now.  

3-2-1 - End of summer market commentary

By Joe Smalley, Accredited Investment Fiduciary ®

---

Politics and the markets go hand in hand.  One of my political heroes is Abraham Lincoln.  My wife and I are listening to Team of Rivals, by historian Doris Kearns Goodwin.  Great book.  Lincoln was exactly the right person at the right time to keep our then fragile country together.  There are so many great quotes of his that I love.  (See the end of the newsletter for some of my favorites.)  Even today, maybe especially today, this one speaks to me: 

"I will prepare and my time will come."

Since the financial crisis, all eyes have been on Washington, D.C.  First, there was the rescue of the financial system.  Then interest rates were lowered.  Then Quantitative Easing.  As the economy has improved, intervention has abated.  Corporate earnings and fundamentals started playing their roles again.  We had an election not too long ago, and Wall Street was mesmerized.  Now the Fed is easing and the global economy is turning around.  But we are not out of the woods yet.  Political tensions in North Korea, the Middle East, Russia, China, and now even on our very own streets, are causing fear and anxiety. 

Since the bottom of the financial crisis, the stock market has essentially gone straight up.  The Dow Jones Industrial Average fell to 6,500 in March of 2009.  It is now trading near it’s high – somewhere over 21,000 as of this moment.

The stock market is due for a correction.  And any little thing could cause that.  A fearful dictator on the Korean peninsula, a power-hungry Russian, a protest march in the US, a government shut-down, or a 3AM presidential tweet. 

Here’s the thing: we all know it is coming.  It may have just started.  Markets go up and down; that is what they do.  The question is not if it is coming, but when.  But even that is not the right question to ask.  The better one is: what should we do about it?

3 things to do before the next correction

In my opinion, there are three things everyone needs to do to prepare for the coming downturn:

1)  Determine your monthly expenses

a.    Add up your bills and what you spend your money on each month.

2)  Categorize every account and holding into one of three categories:

a.    Short term (Stuff you can get to if you need it within the next 24 months.  This is to pay your expenses [see item #1] and any big-ticket items you need to buy within the next 2 years.) 

b.    Medium term (For things that you’ll need money for within the next 10 years.  This one is tricky, because we can all pretty much figure out what we’ll need soon, and what we can anticipate for, say, retirement, but 6 years away is harder.)

c.     Long term (This is your 10 year+ bucket.)

3)  Shift money to the right spot

a.    Need more to cover short-term expenses? How’s your emergency fund? Do you have a stock wish list?  All of these might require moving some money around.  Just remember to factor in the tax implications of selling.  Rebalancing is a good thing to do, and now might be a good time to do it.  Remember, no one ever went broke taking a profit.

And here are 2 things to do when the next correction comes:

1)  Don’t panic

a.    As tempting as it might be, when the stock market corrects, don’t sell your quality long-term investments.  If they were purchased for a time horizon that is longer than 10 years, don’t alter your plans based on a downturn in the stock market.

2)  Buy low

a.    When the market corrects, if you have some powder dry, for your long-term investments, that is often the time to buy.

Finally, here is the 1 thing to do at any point – before, during, or after the next correction:

1)    Have a plan

a.    Creating a financial plan that can help you see what you have, where you have it, what you might need, and how much to save is always a good idea.  You can run various “what-if” scenarios and it can help you prepare for the ups and downs of the market.

These are all pretty general in nature.  To discuss the specifics of how best to prepare for your situation, please give us a call. 

As President Lincoln said:

Photo by stevanovicigor/iStock / Getty Images

Now is the time for some axe sharpening.

---

Here are some more of my favorite quotes from President Lincoln:

“My dream is of a place and a time where America will once again be seen as the last best hope of earth.” 

“Do I not destroy my enemies when I make them my friends?”

“You cannot escape the responsibility of tomorrow by evading it today.”

“We should be too big to take offense and too noble to give it.”

Joe Smalley is an Investment Advisor Representative located at 213 East Saint Joseph Street, Lansing, Michigan, 48933.  He can be reached at www.smalleyinvestments.com. 

Securities & advisory services offered through Commonwealth Financial Network ®, Member FINRA/SIPC, a Registered Investment Adviser. 

Investments are subject to risk, including the loss of principal. Because investment return and principal value fluctuate, shares may be worth more or less than their original value. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. Past performance is no guarantee of future results. Talk to your financial advisor before making any investing decisions.

All indices are unmanaged and investors cannot actually invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses. Past performance does not guarantee future results.

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SI Newsletter - Spring Training Edition

By Joe Smalley, Accredited Investment Fiduciary

My dad and I on our Spring Training trip a couple years ago.

For me, February is a tough month.  I’m a college basketball fan, not a pro basketball fan, and this year, unfortunately, my Spartan hoopsters are taking a cue from the football team.  But there is still hope for run in the big dance; unfortunately, that’s not in February.  I love hockey too, but like most fans, I don’t usually pay much attention until the playoffs – which is months away.  My only consolation is that as the calendar flips to March, my beloved baseball starts back up again.

When Spring Training starts, the world seems right again.  While the mighty Detroit Tigers were pretty quiet in the off-season, the big news is no news.  The Dodgers were interested in Verlander, but he stayed.  The Astros were interested in Miggy, but he stayed.  The Mets were interested in JD Martinez, but he stayed.  And both the Twins and the Padres were interested in Iglesias, but he stayed, too.  We will see how the starting rotation and the bullpen do this year – that, of course is the key to everything.  But not much changed in the clubhouse.

That is not true, however, of what is happening in politics.  With big changes in the White House, lots of waving of arms, gnashing of teeth, shaking of heads, wagging of fingers, and rolling of eyes is occurring.  The administration is changing policies, as loudly and bigly promised.  The Republican controlled Congress is gearing up to get bills passed and signed into law, which was considerably more difficult during the last administration.  And Democrats are taking a page out of the delay/stall/block playbook to oppose anything that the administration is trying to do, much like the Republicans did to President Obama. 

Meanwhile, the economy is chugging along.  Growth is growing.  Unemployment is improving.  Housing is steady.  And the Federal Reserve, after what seems like decades, is finally ready to raise interest rates to attempt to keep inflation in check, which has caused the stock market to continue its historic climb.  Since the bottom in March of 2009 when the Dow was at 6500, the markets have risen sharply.  The Dow today is over 20,000. 

So what could possibly go wrong?

Often times, it’s the thing you don’t see coming.  And it usually comes about as a reaction to something else. 

Here are a few things I’m watching:

• Tax changes
  • The administration has some they’d like
  • The Congress has others they’d prefer
• Geopolitics
  • Mexico
  • Middle East
  • Russia
  • China
• Regulation changes
  • Banking
  • Finance
  • Telecommunications
  • Energy
• Economy
  • Rates
  • Global

But of course, these are the things we’re watching, which means that it could be something else, entirely.  Or an unexpected reaction to one of the above.

I devour a lot of different commentaries.  Here are two interesting reads from two very different economists. 

The first one, Why Isn’t Political Turmoil Shaking the Markets, is from Brad McMillian.  Brad is good at giving us easy-to-read-and-understand bites of economic information on a daily basis.  This one is timely.

The second one, Tax Reform: The Good, the Bad, and the Really Ugly, is from economist John Maudlin.  John’s pieces are usually long and detailed, and this one is no different.

As you can see, they paint a very different picture.  So what is an investor to do?  Longtime readers will know what I am going to write before I can type the words:  diversification is important, invest with your time horizon in mind, and keep some powder dry. 

There is a saying on Wall Street, “being right but being early, is being wrong.”  Right now the trend is up.  It is hard to know when things will change.  Until then, stay the course.  If you are concerned, now might be a good time to pare back.  No one ever went broke taking a profit. 

Have a question about your portfolio?  Give us a call and we’ll schedule something up.  But now that the Tigers are playing baseball again, it just might have to be after the game. 

This informational e-mail is an advertisement, and you may opt out of receiving future e-mails. To opt out, please respond to this e-mail with ‘Opt Out’ in the subject field or follow the ‘Unsubscribe’ instructions as indicated in this message. Securities & advisory services offered through Commonwealth Financial Network, member FINRA/SIPC, a Registered Investment Adviser. Smalley Investments does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation.

Winter Newsletter

By Joe Smalley, Accredited Investment Fiduciary®

As I sit here in front of the fireplace in the glow of my tree listening to Christmas choral music while I write this, I especially feel the spirit of the season.  I love choral music.  I don’t know how many people know this, but I’ve been singing in choirs for pretty much my entire life.  It started in elementary school when my violin teacher politely told my mother that I wasn’t cut out for a strings instrument and that I might consider switching to choir.  That lead me to singing in musicals, high school honors choirs, a music scholarship to college, performing throughout Europe, and signing for church choirs in three different denominations.  It is amazing how one person’s suggestion forty years ago had such an immense influence on my life. 

That is the theme for today’s newsletter:  we each have an enormous impact on others.  Sometimes we know it, but most of the time, we have no idea.  That violin teacher probably does not remember me at all, let alone what she said that changed my path. Interwoven in this season’s commentary will be how we can change people’s lives – and sometimes even our own.

Now, on to some topical commentary.  The good news is that we all survived the election.  The bad news is that the country is still very much divided.  I suspect it would have been divided no matter the outcome, but we certainly can feel it now.  There seems to be a growing disparity between and among our fellow countrymen.  As discussed in our spring commentary, some of the root causes can be traced back to the financial crises.  It was not surprising that outside candidates were so popular.  Both Mr. Trump and Senator Sanders had the pulse of the country.  But it is hardly a phenomenon specific to the United States.  This summer Brexit showed that there are people who feel marginalized and gravitate to a more populist message.  The referendum in Italy two weeks ago confirmed that the wave is growing throughout Europe.  

What I find most interesting, however, is not the outcome of our presidential election, but that it took so many people by surprise, and Wall Street especially.  Baked into every stock market and economic forecast prior to the election was the assumption that Secretary Clinton was going to win.  Clearly that did not occur.  Monday morning quarterbacks are saying that the writing was on the wall all along (see above).  So now analysts and economists around the globe are changing their views and their outlooks.  The narrative is mostly that with a Trump administration, regulations will be cut, and growth will accelerate.  Instead of GDP growth at 1-2% annually, it could be in the 2-3% range.  Bulls argue that translates to higher stock prices.  Bears will point out that the market is long in the tooth and that we are due for a correction.  The challenge, of course, is that both could be true.  As with most things in life, it is all about timing. 

Have you ever heard of a Santa Claus rally?  Historically, stocks rally at the end of the year and going into the new year.  The thinking is that retailers are finally printing profits and that consumer spending will boost the economy.  This year is no different.  Consumer confidence is up.  Headwinds in commodity prices are fading.  And stocks are indeed up.  If you would like to review your portfolio in light of the election, the Santa Claus rally, or for any other reason, give us a call to schedule up a time to get together.

Getting back to the theme of this season’s commentary, our impact on others.  Like you, I have my favorite local charities.  Each year, Smalley Investments chooses charities to support in the name of our clients.  For Thanksgiving we provided resources to supply the St. Luke Soup Kitchen, which does a wonderful job providing hot meals to folks in Lansing who need them.  For Christmas, we are making a donation to Refugee Development Center, an organization that helps educate, orient, and support refugees in our area to become self-sufficient members of society. 

Americans are enormously generous.  Last year, Americans gave more than $373 million to charitable organizations.  By far, the vast majority comes from individuals and families.  Cash donations are the preferred method of giving, but not necessarily the most tax-advantageous. 

With the bull market now in its 7th year, perhaps you have some highly appreciated stocks or other assets.  By donating shares of a stock or mutual fund, you get the tax deduction for the current market value, and you pay no capital gains tax.  If the charity is a 501(c)3, they can sell the shares and also pay no capital gains tax.  It really is a win/win situation. 

Another tax-efficient strategy to donate to a charity or house of worship is to use your Required Minimum Distribution from your Individual Retirement Account.  Congress has (finally) permanently put in place a law that allows people to donate their RMD without increasing their adjusted gross income.  Another win/win.

Giving to others, of course, has benefits beyond tax deductions.  Research has shown that philanthropy satisfies a deep human need to help others.  I do believe that it is human nature to want to be generous.  At least, that is my hope. 

If, as you think about your tax situation and charitable intentions, you find that you’d like to do more, we can help you determine if it might be best for you to set up a donor-advised fund, a named fund at the Capital Region Community Foundation, or even your own private foundation. 

Whether you give of your time, your talents, your money, or your assets, you have a dramatic effect on those whose lives you touch.  Thanks for being the type of person who impacts those around you, whether you know it or not. 

Charles Dickens, the author of one of my favorite tales of the holidays, A Christmas Carol, sums it up best:

“ So may the New Year be a happy one to you, and happy to many more whose happiness depends on you!”

Charles Dickens

Happiest of holidays and Merry Christmas,

Joe

This informational e-mail is an advertisement, and you may opt out of receiving future e-mails. To opt out, please respond to this e-mail with ‘Opt Out’ in the subject field or follow the ‘Unsubscribe’ instructions as indicated in this message. Securities & advisory services offered through Commonwealth Financial Network, member FINRA/SIPC, a Registered Investment Adviser. Smalley Investments does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation.

Election Surprise: For the Economy, Maybe Just Another Bump in the Road

Here is a blog post from Commonwealth's Chief Investment Officer on the election and the economy.

Smalley Investments - Fall 2016 Newsletter

Hill above the bay in Harbor Springs, Michigan

By Joe Smalley, Accredited Investment Fiduciary®

*Note that there are 21 hyperlinks in this newsletter to stories on the various topics.  Feel free to check them out.

Change is in the air.  The leaves are beginning to turn color.  School has started.  Football is in full force.  (Don’t get me started on the Spartans.) Baseball has started the playoffs.  (Don’t get me started on the Tigers.)  Oh, did someone mention a presidential election?  (Don’t get me started on the election.)  But change is definitely in the air.

And there is change around the world, as well.  China is a growing world power.  Russia’s plans are always cryptic and of concern.  There is tension again in Kashmir, and also on the Korean peninsula.  But perhaps most importantly, the war in Syria continues to impact the entire world as migrants are fleeing in large numbers.  Europe has been struggling to climb out of recession, and now with immigration issues, Brexit, and German banks teetering, change seems to be in the air all over the globe.

And while there always seems to be something going on overseas that is of concern to the stock market, now all eyes are on the United States. 

Of course, the presidential election is the first thing on everyone’s mind – not just investors.  But instead of getting into the politics of it, let’s look at it from an investor’s perspective. 

Mostly, it doesn’t matter who wins the White House.  Historically, the stock market moves on the economy, more than on politics.  And the Federal Reserve has a large impact on interest rates, which impacts the economy.  Because the markets tend to be tied to the economy, the stock market tends to do better during economic expansions.  It just so happens that historically, that has been when a Democrat was in the White House.  Other studies show that the market does better when there is divided government.  You may be tempted to sit this election out.  I get it.  But remember that not everyone has the privilege to cast a vote for their leaders. 

But stocks, in a perfect world, move on fundamentals.  On earnings.  On sales.  If a company sells more widgets, their stock tends to go up.  If they sell less, it goes down.  Right now, corporate earnings are declining.  But the stock market is at or near it’s all-time high.  There is a disconnect between earnings and the stock prices. 

So what is an investor to do?  According to some studies, the economy follows presidential cycles, and therefore can be timed.  Now, the study suggests, is a time of decline.  According to their theory, the best time to invest is the second year of a new president’s term.

The thing is, timing the market is difficult. 

So here’s the key:  know your time horizon.  Invest accordingly.  If you need money in the next 2 years, you should probably keep it in cash.  Bonds are good for income.  Stocks for growth.  But stocks are volatile and should only be invested if you have a long time until your goal.  And a diversified portfolio is key.  That old saying “don’t put all of your eggs in one basket” comes to mind.    

But if you have a diversified portfolio, you may be less than satisfied with returns recently.  That’s because several asset classes have been hit rather hard in the past 18 months – emerging markets come to mind – and their losses have erased the gains in the other asset classes. 

“You don’t pull up your carrots to check to see if they are growing.”

Don’t get too discouraged.  And don’t pull out or make big changes because returns are a bit flat.  You don’t pull up your carrots to check to see if they are growing. 

Similarly, the best time to invest is when you have the money to invest.  Do yourself a favor: invest on a monthly basis.  Do it.  Get in the habit and save and invest each and every month.  When you can, increase the amount you put away.  Seriously, if you don’t do anything else I tell you to, do this.  Compounded interest is so important. 

Like a relief pitcher, resolve, perseverance and a short memory will serve you well as an investor. 

Here is an appropriate quote from the famous investor Warren Buffet:  “I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”  That seems like a good way to think about long-term investing.

So, as we roll into the fall, change is upon us.  The Spartans will hopefully find their way to a bowl game this year.  The Tigers will get some much needed rest.  And the election will soon be over. 

Fall is a good time to review your investments to make sure that they are aligned with your goals.  I’m not sure it makes a lot of sense to change your long-term asset allocation unless your situation has changed.  Of course, if you have any questions or would like to talk things through, please give us a call. 

And remember this pearl of wisdom from Franklin D. Roosevelt: “Nobody will ever deprive the American people of the right to vote except the American people themselves, and the only way they could do this is by not voting.”

Hold your nose if you have to, but please vote in November. 

Diversification does not assure a profit or protect against loss in declining markets, and diversification cannot guarantee that any objective or goal will be achieved.

Systematic investment plans do not assure a profit or protect against loss in declining markets.

Emerging market investments may involve higher risks than investments from developed countries and also involve increased risks due to differences in accounting methods, foreign taxation, political instability, and currency fluctuation.

Investments are subject to risk, including the loss of principal. Because investment return and principal value fluctuate, shares may be worth more or less than their original value. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. Past performance is no guarantee of future results. Talk to your financial advisor before making any investing decisions.

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Securities & advisory services offered through Commonwealth Financial Network, member FINRA/SIPC, a Registered Investment Adviser.

My Take on Brexit

by Joe Smalley, Accredited Investment Fiduciary®

Britain voted yesterday in a referendum to leave the European Union.  Not a whole lot of people saw that coming.  But we live in the world as it is, not as we would like it to be.  So, what now?

Some perspective:  even though the US stock market is down more than 500 points right now, it is good to remember that it was up 230 points yesterday in anticipation of the vote going the other way.  So since Wednesday, the market is only down a couple hundred points, which is about 1%.  Not a terribly big swing.

Investors also have a pretty short-term memory.  We had the Greek crisis, the Asian financial crisis, and even the US financial crisis.  The market bounced back after every one of those events.  Overreacting in the moments after a big geopolitical event is usually not a good idea.

Great Britain is the world’s 5th largest economy.  You might think that the vote is going to have a big impact on the world economy.  But their Gross Domestic Product is less than 4% of the world’s.  The US, in comparison is 25%. 

“The key point to this situation, though, is that the vote was the beginning of the process, not the end.”

The key point to this situation, though, is that the vote was the beginning of the process, not the end.  There is a long period of time to see how Britain negotiates with Europe to figure out what to do next.  It may not be as bad as people think it will be.

Markets are assuming that the European Union will disband.  While that may happen, it is unlikely.  And if it does, another coalition, agreement, trade deal, or alliance will come about to take it’s place.  As Mohamed El-Erian calls it, a Plan B needs to be contemplated. 

He goes on to say, however, that over the long-term, with uncertainty comes opportunity. 

So what now?  If you have some cash that you are ready to deploy, let’s talk about how we can add to your portfolio over the coming days, weeks, and months.  If the volatility is too much for you, let’s discuss making your portfolio more conservative. 

This is a good time to think about your different types of money:  money for the short-term, money for the medium-term, and money for the long-term.  If you need money for the short-term, it should not be invested in things that have a lot of fluctuation. 

I’m a horrible golfer, but a golf analogy is appropriate.  Don’t use a putter when you’re teeing off.  Likewise, don’t use a driver to get out of the sand trap.  Different clubs are for different shots.  The same is true with investments.  Use short-term investments for short-term needs, and long-term investments for long-term needs. 

As always, if you have questions or want to go over your situation, please contact us.

Hope to see you on the golf course soon!

Investments are subject to risk, including the loss of principal. Because investment return and principal value fluctuate, shares may be worth more or less than their original value. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. Past performance is no guarantee of future results. Talk to your financial advisor before making any investing decisions.

Market Update for the Month Ending May 31, 2016

Presented by Joe Smalley, Accredited Investment Fiduciary®

Another weak first quarter for the U.S. economy, but signs of spring

The gross domestic product (GDP) report, released at month-end, showed that the U.S. economy had grown marginally faster, 0.8 percent, in the first quarter of 2016 than the 0.5-percent uptick initially estimated. This was consistent with the experience of the last two years, where a weak first quarter was followed by faster growth. In line with that, May’s economic data was mixed. Overall, however, the month’s numbers suggested that growth should increase substantially going forward.

Weak data came from manufacturing and capital investment, with the ISM Manufacturing survey indicators still hovering between expansion and contraction. In addition, orders for durable goods and capital equipment continued to run below expectations and are either flat or down over the previous 12 months. The effects of the strong dollar and low oil prices on the U.S. industrial economy linger, and even though those headwinds are fading, we have not yet seen significant improvement.

Offsetting this is substantial improvement in the service sector and consumer demand, which each constitute a much larger share of the economy. The ISM Nonmanufacturing survey rose more than expected, and the most forward-looking component, the new orders index, hit a six-month high. At seven-eighths of the economy, the service sector matters.

Similarly, in April, as announced in May, consumer spending rose by the most in two years, with upward revisions to previous months also reported. Consumer spending represents two-thirds of the economy, so faster growth should lift overall growth in the second quarter. Housing sales also surprised to the upside across the board, with new home sales particularly strong, as illustrated in Figure 1. 

A strong end to a weak month

U.S. financial markets ended strongly in May, as economic reports improved and the Federal Reserve (Fed) suggested that the economy had healed enough for it to start raising rates. After dropping between 1 percent and 2 percent mid-month, stocks rallied at month-end. All major U.S. equity markets posted gains, with the Dow Jones Industrial Average up 0.49 percent, the S&P 500 Index up even more at 1.80 percent, and the Nasdaq doing better yet, increasing a surprising 3.62 percent.

The good performance in May was driven by unexpectedly positive corporate earnings news. Although down 6.7 percent, first-quarter earnings declined less than the 8.8-percent drop expected. Moreover, for first-quarter earnings reported by the end of May, seven of ten sectors had posted higher growth rates; this, too, was a consequence of positive earnings surprises.

Despite the less-than-stellar overall earnings results, many companies did do well. Almost three-quarters of companies, 72 percent, beat earnings expectations, which was above the average percentage of beats in past quarters. In addition, six of ten sectors showed revenue growth and four of ten sectors showed earnings growth. While results for the first quarter of 2016 were weak, conditions improved substantially—especially looking forward to the rest of the year—and the market reacted accordingly.

Technical factors remained supportive for U.S. markets. All three major indices finished May well above their 200-day moving averages, with the Nasdaq making that technical leap toward month-end, improving on its results for April.

Developed international markets didn’t fare as well as their U.S. counterparts, experiencing a similar pullback during the month but a smaller rally at month’s end. Even though the MSCI EAFE Index was down about 2 percent in mid-May, it finished the period with only a 0.91-percent loss. Just as with U.S. markets, the catalyst for the EAFE rally was improving economic and company news. This was offset, however, by continued political worries in Europe and disappointing news from Japan. Nevertheless, technical factors for the index improved, and it closed slightly above its 200-day moving average, suggesting that fundamental market trends may be getting better.

Emerging markets, as reflected in the MSCI Emerging Markets Index, were hit even harder than developed markets but managed to recover from a 7-percent loss mid-month to drop “only” 3.71 percent at month-end. Continued concerns about an expensive dollar and its effect on emerging markets, exacerbated by worries about a potential Fed rate increase, drove markets down. Here the technical picture was also better, as the index did move slightly back above its 200-day moving average.

Broad fixed income markets also had a weak May, with the Barclays Capital Aggregate Bond Index reporting a small 0.03-percent gain. U.S. Treasury rates dropped slightly, helping the performance of U.S. government debt, but the release of hawkish Federal Open Market Committee (FOMC) minutes increased volatility during the month. High-yield, as represented by the Barclays Capital U.S. Corporate High Yield Index, performed well, rising 0.62 percent.

Another weak first quarter for the U.S. economy, but signs of spring

The gross domestic product (GDP) report, released at month-end, showed that the U.S. economy had grown marginally faster, 0.8 percent, in the first quarter of 2016 than the 0.5-percent uptick initially estimated. This was consistent with the experience of the last two years, where a weak first quarter was followed by faster growth. In line with that, May’s economic data was mixed. Overall, however, the month’s numbers suggested that growth should increase substantially going forward.

Weak data came from manufacturing and capital investment, with the ISM Manufacturing survey indicators still hovering between expansion and contraction. In addition, orders for durable goods and capital equipment continued to run below expectations and are either flat or down over the previous 12 months. The effects of the strong dollar and low oil prices on the U.S. industrial economy linger, and even though those headwinds are fading, we have not yet seen significant improvement.

Offsetting this is substantial improvement in the service sector and consumer demand, which each constitute a much larger share of the economy. The ISM Nonmanufacturing survey rose more than expected, and the most forward-looking component, the new orders index, hit a six-month high. At seven-eighths of the economy, the service sector matters.

Similarly, in April, as announced in May, consumer spending rose by the most in two years, with upward revisions to previous months also reported. Consumer spending represents two-thirds of the economy, so faster growth should lift overall growth in the second quarter. Housing sales also surprised to the upside across the board, with new home sales particularly strong, as illustrated in Figure 1. 

Figure 1. New Single-Family House Sales, Monthly Percentage Change,
2012–Year-to-Date 2016

Figure 1

The growth in consumer spending was driven by continued expansion in the employment arena. Although job growth ticked down in April, to 160,000, the average hours worked rose, resulting in an increase in overall labor demand. Wage growth also continued, rising to 2.5 percent over the past year.

Given the mix of generally positive fundamentals and the growing consumer willingness to spend, economic growth is likely to accelerate in the second quarter. Forecasts for GDP growth now range up to 2.9 percent—and possibly higher. Though this estimate may be too optimistic, signs of spring are definitely visible, and faster sustainable growth becomes increasingly likely in the second half of the year.

Central banks and interest rates

As previously noted, even the Fed is starting to believe that the economy is healing. After years of discouraging FOMC meeting minutes, the most recent release came as a surprise, commenting that the economy was considered to be at full employment and inflation was considered to be moving in the right direction. This unanticipated positive view was accompanied by a clear statement that rate increases were quite possible this year and could come earlier than expected—maybe as soon as the end of June.

The implications of the FOMC statements are positive for the economy but mixed for markets, as higher interest rates might act as a headwind going forward. With that said, continued stimulus by foreign central banks is likely to constrain rate increases. Consequently, the combination of Fed confidence in the economy and continued low rates suggests that interest rates will remain supportive of the economy for at least the next couple of months, which should also help to sustain economic growth.

International risk remains

Although conditions in the U.S. are improving, at the international level risks remain. Europe is the focus for the moment. The most immediate risk is the June 23 referendum in the United Kingdom regarding whether Britain should leave the European Union (EU). The success of the anti-EU parties in demanding such a referendum there could encourage this possibility in other countries. Should the referendum pass—and polls indicate that it is possible though not likely—significant market turbulence is possible.

Another concern in Europe is the return to center stage of negotiations over Greek debt. With the International Monetary Fund and Germany at odds again, and with Greece possibly unable to comply with EU fiscal requirements, expect more headlines. Nevertheless, even if Greece were to default, systemic risk is much lower now than in the past, though uncertainty may still rattle markets.

The other major international risk is China. Growth continues to disappoint, and China’s government continues to increase stimulus. At the same time, concerns are increasing again about China’s ability to manage its economy and, especially, its currency. Perhaps in response to domestic concerns, China has become much more aggressive with respect to other countries, expanding its installations in what the U.S., for one, considers international waters in the South China Sea. This will continue to raise political concerns in addition to very real economic ones.

U.S. economic growth continues and on a sustainable basis

With the U.S. economy on the mend and the bulk of the risk coming from international issues, we seem to be returning to normal. We are not quite there yet, but we are indeed getting closer.

Normal does not mean, however, that risks have vanished; they have simply changed. With the Fed getting closer to raising rates, the risks associated with those higher rates are garnering more attention. In addition, the previously mentioned British referendum and Greek debt woes represent immediate risks. Moreover, the risk associated with China’s slowing growth, though less immediate, is potentially just as real a concern. Finally, although the U.S. recovery is expected to continue and even accelerate, that is neither guaranteed nor something that will go on forever.

Cautious optimism remains the appropriate outlook for investors. As always, maintaining a big-picture perspective and diversified portfolio is the best way to meet financial goals. Enjoy the current improvements but stay focused on the long-term horizon rather than on intermediate events—good or bad.

All information according to Bloomberg, unless stated otherwise.

Disclosure: Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. All indices are unmanaged and investors cannot invest directly into an index. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. It excludes closed markets and those shares in otherwise free markets that are not purchasable by foreigners. The Barclays Capital Aggregate Bond Index is an unmanaged market value-weighted index representing securities that are SEC-registered, taxable, and dollar-denominated. It covers the U.S. investment-grade fixed-rate bond market, with index components for a combination of the Barclays Capital government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities. The Barclays Capital U.S. Corporate High Yield Index covers the USD-denominated, non-investment-grade, fixed-rate, taxable corporate bond market. Securities are classified as high-yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below. 

Joe Smalley is a financial advisor located at Smalley Investments, 213 East Saint Joseph Street, Lansing, MI 48933.  He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser.  He can be reached at 517-487-4850.

Authored by Brad McMillan, Senior Vice President & Chief Investment Officer at Commonwealth Financial Network.

© 2016 Commonwealth Financial Network®

Market Thoughts - Spring, 2016

By Joe Smalley, Accredited Investment Fiduciary®

As many of you know, in certain portfolios we have been sitting on cash for a while waiting for a buying opportunity.  On Tuesday, we may finally get that opportunity. 

If you’d like to invest some cash that you have been sitting on, please give us a call to review your situation.

In the spirit of the great political debates that we have been privileged to watch this spring, I thought I would do a compare and contrast piece on the four top issues that I’ve been looking at to determine a good entry point for additional investment:

·      Oil

·      Europe

·      US economy

·      US political landscape

In this long-read piece, I have included hyperlinks to 42 additional resources and stories.  If you read each and every article, it will only take you half a day to finish this market update.  But I assure you, they are all very interesting and give different perspectives on the various topics. 

Enjoy!

#1: Oil

Since the end of last year, oil prices have been hugely volatile. 

I don’t think it is any coincidence that after Saudi Arabia’s biggest buyer North America became a net exporter of oil, and China, Saudi Arabia’s second largest customer, recently signed a long-term contract to purchase liquified natural gas from Russia, the House of Saud decided to bring down the price of oil.  In fact, that is precisely what Abdel al-Jubeir, the Saudi foreign minister, said back in January.  “People should go back to Adam Smith and basic economics.  It’s about supply and demand.”  Of course, it will also hurt their biggest rivals, Iran.  It also has a devastating effect on Russia’s economy.  And let’s not forget that the invisible hand sometimes smacks you on the nose.  The downturn in oil prices has impacted the oil industry in the US, with thousands of jobs being lost.  Experts differ as to what the consequences will be over time.   

But as oil prices fell from $72 per barrel to less than $30 per barrel, it brought the stock market down with it.  Usually uncorrelated, the two have recently moved in tandem.  It appears that oil may have reached the bottom in January, and has now risen back above $35 per barrel.  That is very good news if you own stocks. 

Bullish:  Oil found a bottom and bounced off of it.

Bearish:  Iran’s production has yet to hit the market.

#2:  Europe

Europe is a wonderfully idyllic place to visit on vacation.  But politically and financially, they are a bit of a mess.  Think of it, when we went through our financial crisis, we totally revamped the banking system, strengthened controls, and increased capital requirements to ensure that a similar event could not happen in the future. 

Europe waited five years to do these things, and some think they didn’t go far enough. 

When we went through our fiscal crisis, our one country with two parties could not come up with a solution.  We created a super committee.  It was unable to come up with a compromise.  The White House and Congress were at odds.  One country.  Two parties.  No fix.

The European Union has 17 voting countries, each with several political parties.  The odds are not in their favor for finding a solution.  Here is a wonderful timeline on the European financial crisis from the BBC.  In fact, some are saying that Europe is one crisis away from imploding. 

And although Europe was slow to the stimulus party, it seems that at America’s urging, the European Central Bank is finally coming around to using that lever to get their economy moving.  Last week, the ECB announced that they are lowering interest rates and increasing the buyback of assets. 

Bullish:  Europe is bringing out their big guns to grow their economy.

Bearish:  If Britain leaves the EU, others could follow.  Immigration is becoming more of an issue in Europe, brining in additional workers in need of jobs, when in some countries, the unemployment rate is already over 20%. 

#3: US economy

It has been said that the economy in the United States is analogous to owning the best house in a bad neighborhood; it’s not necessarily good, but it’s better than the others.  (See Europe, above.)

But in December, the Federal Open Markets Committee, after 9 years of easing, raised rates as a nod that the US economy was improving.

Shortly after that, with commodity prices getting hammered and the stock market falling, the Fed reversed course.  In February, the Fed saw more downside risk to the economy than upside.    

The Federal Reserve Bank of New York posts a snapshot of the economy on their website.  They highlight both positive signs (housing, payroll growth), and signs of softness (manufacturing, inflation, consumption slowing).

But last week, a new jobs report showed that US economy added 242,000 new jobs in February.  The unemployment rate stayed at 4.9%.  These were better than expected, and showed that the economy’s trajectory was not heading down, as was feared. 

(Here’s a little sidebar.  The unemployment rate that is always reported is from the Bureau of Labor Statistics.  For technogeeks like me, it is the U3, which is just one of the many different ways that the BLS slices and dices metrics.  But it only measures a handful of workers.  To be fair, it is the gauge that has always been used, so it is helpful to continue to report on it.  But perhaps a better benchmark may be the U6, which includes all people who are out of work.  Here is a comparison of the U3 versus the U6.  Although the percentage is significantly higher, the trend is similar to that of the U3; things are getting better.)

Bullish:  The US economy continues to expand.

Bearish:  The US economy is expanding at a much slower rate.

#4: US political landscape

Earlier, we touched on the inability of Congress and the White House to reach an agreement on the fiscal debate.  Historians will argue about his legacy, but when President Obama was first elected, he pledged to work with Congress.  That did not happen.  It is difficult to pinpoint the start of the trouble with Congress, but in this Christian Science article, they attempt to highlight some of the issues.  In his last State of the Union address, Mr. Obama discussed his regret for the political rancor on his watch.

Regardless of which side of the political aisle you are on, one thing is clear, the wealth gap has widened significantly in the past decade.  And here are two unanticipated consequences of the Fed’s decision to lower interest rates to spur the economy:

1.     The Fed backstopped asset prices (the Bernanke put), so that people who owned assets like stocks and real estate, saw their net worth increase dramatically.

2.     At the same time, people who did not own assets, did not see their net worth increase.   In fact, only one-third of moderate income earnings have savings accounts.  Over the last decade, those accounts earned less money, as the Fed lowered interest rates.

A logged-jammed government seething with rancor combined with an economic period where wages and asset prices have been suppressed and distorted is a perfect environment for outsider political candidates running for our country’s highest office. 

Interestingly, however, there are two candidates on opposite sides of the political spectrum that fit that bill. 

Bernie Sanders has promised to level wages, tax the rich, and equalize opportunities. 

Donald Trump, however, promises to make America great again, but rather than give specifics, he taps into anger and a strong man persona.

Hillary Clinton and John Kasich typify traditional Democratic and Republican candidates, but each are finding it difficult to tap into the enthusiasm and populist appeal that Sanders and Trump are currently enjoying. 

But with Super Tuesday behind us, two candidates are racking up the delegates.  Hillary Clinton has amassed a large number of delegates, and importantly, the majority of super delegates.  Barring catastrophe, she will be the Democratic nominee.   

On the Republican side, it is mathematically possible for the remaining four candidates to find a path to the nomination.  But if Trump can pull off victories on Tuesday in Ohio and Florida, he will become the Republican nominee.  

Bullish:  On Tuesday we could have a clear idea of who the nominees for president will be.

Bearish:  If Trump loses Ohio and Florida, we could see brokered convention in Cleveland.

(If it ends up being Clinton vs. Trump in November, as of today, the polls favor Clinton by 6%.)

Conclusion

Since last fall, in some of our client accounts we have been sitting on cash waiting for a buying opportunity.  Specifically, we were waiting for four things to improve:

·      The price of oil to stabilize

·      Improvement in Europe

·      Continued economic growth in the US

·      Political clarity with regard to the candidates for President

While challenges remain with these issues and others (Russia, Syria, China, Brazil to name a few), on Tuesday we could see all four of the above issues clear up.  As such, we will likely be adding to equity positions starting this month. 

For more market commentary, check out Commonwealth’s Chief Investment Officer, Brad McMillan’s blog The Independent Market Observer.  Here is his latest article.   

It is important to mention that all situations are unique and you should seek guidance in implementing your strategy based on your goals, time horizon, asset allocation, and risk tolerance.  If you want to discuss these, please give us a call.

Thank you,

Joe Smalley

Joe Smalley is a financial advisor located at 213 East Saint Joseph, Lansing, Michigan, 48933.  He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 517.487.4850 or at www.smalleyinvestments.com.

Market Thoughts for February, 2016

Commonwealth's Chief Investment Officer talks about the volatility in the markets.

2016 Market Commentary

As I sat at my desk originally writing this on Christmas Eve, the sun was shining and the temperature in Lansing was 58 degrees.  The unseasonably warm weather tempted me to believe that the cold was not coming.  Today, as I am ready to send