Market Commentary – February 25, 2019

Investors were pleased with the Federal Reserve’s (Fed) new approach to its balance sheet.
The Fed delivered its semi-annual Monetary Policy Report to Congress last week. The report recapped the events of late 2018 and reiterated the Fed’s intention to “…be patient as it determines what future adjustments to the federal funds rate may be appropriate to support the Committee’s congressionally mandated objectives of maximum employment and price stability.”

In other words, rate hikes are on hold for now.

The Fed also addressed issues related to its balance sheet, which grew from $900 billion at the end of 2006 – about 6 percent of the United States’ gross domestic product (GDP) – to almost $4.5 trillion at the end of 2014 – about 25 percent of U.S. GDP. (GDP is the value of all goods and services produced in the United States in a given period.)

The balance sheet more than quadrupled during the past decade because the Fed began buying Treasuries and mortgage-backed securities, a policy called quantitative easing, in an effort to restore the U.S. economy to health, according to The Hutchins Center of the Brookings Institute.

Friday’s report indicated the Fed will not shrink its balance sheet to pre-crisis levels, reported Erwida Maulia for Financial Times. Markets responded positively to the news:  “U.S. stocks and Treasuries were comfortably higher at midday on Friday as the Federal Reserve signaled it will hold a much larger balance sheet in the long term than it did before the financial crisis, helping ease investor concerns about tightening financial conditions.”

Investors also remained optimistic about trade talks between the United States and China. Major U.S. stock indices finished the week higher.

As levels continue to rise, people and companies around the world are likely to be affected. Morgan Stanley reported, “Many coastal cities around the world that look attractive to real assets investors – for example, Miami, New York, Boston, Osaka, Guangzhou, and Mumbai – are particularly vulnerable to flooding and other weather-related problems. And, infrastructure assets favored by investors, like airports, cell towers, and oil and natural gas pipelines, are often located in places prone to storms and extreme heat…Insurance will continue to be an important safeguard, but a limited one.”

Protecting property and improving infrastructure is likely to change demand for specific goods and services. Sarah Green Carmichael of Barron’s reported, “As we rush to protect basements and beach houses, companies in the home-improvement retail sector should benefit…So should companies that make products to cope with flooding, such as commercial-grade water pumps…Upgrades to infrastructure also mean good news for the construction sector…”

The textile industry – think fabrics and clothing – may also be affected since major exporters like Bangladesh, Indonesia, and the Philippines, which supply 10 percent of the textiles and clothing imported by the United States, are vulnerable to coastal flooding.

Sea level is a macroeconomic issue. It has the potential to affect output and income across the global economy. Investment managers who take a top-down approach to investing consider the ways in which macroeconomic factors, like changing sea levels, could affect the market as a whole, as well as the share prices of specific companies. Bottom-up investors take a different approach. They consider company fundamentals, such as management team and earnings growth potential, first.

Weekly Focus – Think About It
“They always say time changes things, but you actually have to change them yourself.”
–Andy Warhol, American artist

Best regards,
John F. Reutemann, Jr., CLU, CFP®

P.S.  Please feel free to forward this commentary to family, friends, or colleagues. If you would like us to add them to the list, please reply to this email with their email address and we will ask for their permission to be added.

Investment advice offered through Research Financial Strategies, a registered investment advisor.

S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

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* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.  However, the value of fund shares is not guaranteed and will fluctuate.
* Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.
* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.
* All indexes referenced are unmanaged. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.
* The Dow Jones Global ex-U.S. Index covers approximately 95% of the market capitalization of the 45 developed and emerging countries included in the Index.
* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
* Gold represents the afternoon gold price as reported by the London Bullion Market Association. The gold price is set twice daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy ounce.
* The Bloomberg Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
* The Dow Jones Industrial Average (DJIA), commonly known as “The Dow,” is an index representing 30 stock of companies maintained and reviewed by the editors of The Wall Street Journal.
* The NASDAQ Composite is an unmanaged index of securities traded on the NASDAQ system.
* International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
* Past performance does not guarantee future results. Investing involves risk, including loss of principal.
* You cannot invest directly in an index.
* Stock investing involves risk including loss of principal.
* The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee it is accurate or complete.
* There is no guarantee a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
* Asset allocation does not ensure a profit or protect against a loss.
* Consult your financial professional before making any investment decision.
* To unsubscribe from the Weekly Market Commentary please reply to this e-mail with “Unsubscribe” in the subject.

Sources:
https://www.federalreserve.gov/monetarypolicy/2019-02-mpr-summary.htm

https://www.federalreserve.gov/monetarypolicy/2019-02-mpr-part2.htm#xsubsection-1553-1b5b0b6b

https://www.investopedia.com/ask/answers/what-is-gdp-why-its-important-to-economists-investors/

https://www.brookings.edu/blog/up-front/2017/08/18/the-hutchins-center-explains-the-feds-balance-sheet/

https://www.ft.com/content/a80b032e-36c2-11e9-bb0c-42459962a812

https://www.marketwatch.com/story/stock-index-futures-point-higher-on-optimism-over-us-china-trade-talks-2019-02-22

https://science2017.globalchange.gov/chapter/12/ (Key Finding 1 and Key Finding 2)

https://tidesandcurrents.noaa.gov/sltrends/sltrends.html

https://www.morganstanley.com/ideas/real-assets-climate-resilience

https://www.barrons.com/articles/why-sea-level-rise-could-be-good-for-ford-and-home-depot-51550149200

https://www.merriam-webster.com/dictionary/macroeconomics

https://www.investopedia.com/articles/investing/092215/bottomup-and-topdown-investing-explained.asp

https://www.goodreads.com/quotes/tag/change

 

Advised Brokerage Accounts Are Better Diversified, Reports Schwab

Charles Schwab’s has published its’ latest SDBA Indicators Report, a highly regarded, industry-leading benchmark on retirement plan participant investment activity within approximately 137,000 self-directed brokerage accounts (SDBAs).  The report stated that participants who worked with an advisor had a more diversified asset allocation mix, higher balances, and less exposure to individual stocks compared to non-advised participants.

While only 19 percent of SBDA participants chose to use an advisor, they reported an average balance of $449,552 – nearly twice as much as the $234,643 reported by non-advised participants.  SDBAs are brokerage accounts within retirement plans. These include 401Ks and other types of retirement plans, which participants can use to invest in exchange-traded funds, stocks, bonds, mutual funds and other securities that are not part of their retirement plan’s core investment offerings. 

“The report highlights the benefits of working with an advisor. In general, participants who had professional help were more diversified across all of their holdings. In addition, advisors typically rebalance a portfolio more often and keep their clients invested”
-Schwab

Allocation Trends
In advised accounts, mutual funds continued to hold the highest percentage of participant assets at approximately 50 percent. ETFs were the second-largest allocation, followed by equities, cash and fixed income.

Conversely, non-advised participants allocated nearly 35 percent of their portfolio to individual equities. This was followed by mutual funds, cash, ETFs and fixed income.

When comparing equity holdings, both advised and non-advised participants held Apple, Amazon and Berkshire Hathaway as their top three holdings; however, non-advised participants’ positions in Apple and Amazon were nearly double compared to participants who used an advisor. Additionally, advised participants invested in more blue-chip, value companies, whereas self-directed investors allocated to more growth stocks.

“The report highlights the benefits of working with an advisor. In general, participants who had professional help were more diversified across all of their holdings. In addition, advisors typically rebalance a portfolio more often and keep their clients invested,” said Larry Bohrer, vice president, Corporate Brokerage Retirement Services at Charles Schwab. Generally, payroll contributions into SDBAs are allocated to cash. From there, it is up to the participant or advisor to invest. As the report shows, advisors kept clients’ cash allocations low, while individual investors left more of their SDBA in cash pending investment decisions.

Other Highlights

  • The average SDBA account balance for all participants in the third quarter of 2018 was $265,902, up 3.5 percent from the second quarter of 2018 and up 24 percent from the third quarter of 2017;
  • Advised accounts averaged 9.5 trades in the third quarter compared to 5.5 trades by non-advised participants;
  • Baby Boomers represented the majority of advised accounts (45.4%), followed by Gen X (42.2%) and Millennials (8.5%).

About the SDBA Indicators Report

The SDBA Indicators Report includes data collected from approximately 137,000 retirement plan participants who currently have balances between $5,000 and $10 million in their Schwab Personal Choice Retirement Account. Data is extracted quarterly on all accounts that are open as of quarter-end and meet the balance criteria.

Market Volatility – Precautions are useless after a crisis!

As you probably know, there has been a lot of market volatility in recent months. Being a financial advisor, I get asked a lot of questions, even from people who aren’t my clients! Some ask if it’s a good time to invest in the markets, or if they should be sticking their money under a mattress. Others ask me about what the future holds for the economy. But the most common question I get is this:
“What,” they say, “is the number one financial tip you can give me?”
Here’s my answer:

Precautions are useless after a crisis!

You’re probably wondering what I mean. It’s simple. When is the worst time to buy a home security system? After a break-in. When’s the worst time to check your tire pressure? After you’ve already had a blowout. When’s the worst time to put your seatbelt on?
You get the idea.
It’s a fundamental fact of life, and it extends to your finances, too. I can’t say for sure when the next bear market will come – and the recent volatility is not necessarily an indication that a bear is just around the corner. What I can say, however, is that a bear market is inevitable, because the markets can take hits just like everything else.

Whether the next bear market comes this year or next, there’s only one thing to do about it, and that’s to have a plan. But a plan is nearly useless after the fact.
We’ve known this lesson since we were kids. Aesop, that ancient master of common sense, says it better than I can in his story, “The Caged Bird and the Bat.”

A singing bird was confined in a cage which hung outside a window and had a way of singing at night when all other birds were asleep. One night, a bat came and clung to the bars of the cage. The bat asked the bird why she was silent by day and sang only at night.
“I have a very good reason for doing so,” said the bird. “It was once when I was singing in the daytime that a fowler was attracted by my voice. He set his nets for me and caught me. Since then, I have never sung except by night.” The bat replied, “It is no use your doing that now when you are a prisoner. If only you had done so before you were caught, you might still have been free.”

As your financial advisor, one of my most important responsibilities is to help you do now what people in the future will wish they had done earlier. That includes preparing for more market volatility.

By reviewing your portfolio, your goals, your current vulnerability to risk, and your overall finances, we can do what needs to be done now rather than waiting until it’s too late. We can plan for the future before the future becomes the present. We can take precautions before the next market crisis. Please fill the questionnaire out and return it to me as soon as possible. By doing this, we can determine:
• Whether it’s time to focus on preserving your money over growing your money.
• Whether you currently own investments not under my management that are unsuitable for your financial goals – especially with more volatility knocking on the door.
• How the recent volatility may be affecting you and what we can do about it.

Market volatility is on the rise. By taking suitable precautions with your money, you’ll find that it’s always there to support you.
Because, after all… Precautions are useless after a crisis.

As always, thank you for your business! We look forward to hearing from you soon.

Valentines Day Thoughts

Me and You. True Love. Be Mine.
People have been giving candy hearts with little messages on them for Valentine’s Day for over 100 years. But most likely not this year. A new company purchased the rights to the sweets but announced they would not have enough time to make them for this Valentine’s Day.1
For the first time in over a century, everyone will have to celebrate Valentine’s without the day’s most popular candy.2

A crisis? Not really. When I saw the news circulating on the internet, it got me pondering about something called The Five Love Languages. You see, there’s a theory that every person expresses and experiences love in different “languages”. To put it simply, each of us has our own preferred way of receiving love from others.

For example, some people feel the most loved when they hear words of gratitude and affirmation.
You inspire me.
I love you.
Thank you.

Others feel the most loved when they receive acts of service.
Breakfast in bed.
Folding the laundry.
Watching the kids so he/she can sleep in.

Some feel most loved when they receive gifts.
That new book they’ve been wanting to read.
Flowers.
Their favorite chocolate.

 

Others simply want to spend quality time with their spouse or partner.
Conversation.
Date night!
A weekend away at a B&B.

 

For the rest, there’s no stronger sign of love than physical touch.
A passionate kiss.
A long hug.
A tender massage.

 

First proposed in 1995 by author Gary Chapman, the theory has inspired many people to practice expressing love for their partner in the way that means the most to them. But here’s the amazing thing. Whichever love language you or your significant other prefers, they all have something in common: They are all so easy to speak!

That’s the thing about true love: It doesn’t take much to express it!

How difficult is it to tell someone you love them every day?
How much time does it take to do the dishes?
How much effort does it require to spend an intimate evening with the person who means more to you than anyone else?

The answer: Not difficult/Not much time/Not much effort at all.

Most of the time, we make a big deal about the pageantry and traditions of Valentine’s Day, when really, the day is simply an opportunity. An opportunity to do something, give something, or say something in a way that means the most to the person who matters the most.

And that’s why Valentine’s Day doesn’t need candy hearts. Because, in the end: Candy hearts take months to make, but connecting hearts takes only seconds or minutes.
On behalf of everyone at Research Financial Strategies, I wish you and yours a lovely Valentine’s Day!

1 “America’s favorite Valentine’s Day candy is unavailable this year,” CNBC, January 23, 2019. https://www.cnbc.com/2019/01/23/americas-favorite-valentines-day-candy-is-unavailable-this-year.html
2 “Most Popular Valentine’s Candy by State,” CandyStore.com, January 17, 2019. https://www.candystore.com/blog/holidays/valentines-candy-popular-states/
3 “The Five Love Languages,” Wikipedia, https://en.wikipedia.org/wiki/The_Five_Love_Languages

Make Sure Your Smart Home is Safe from Cyber Attack

Whether you own a house or rent an apartment, building a smart home is easier than it has ever been. Homeowners and renters can purchase kits that integrate specific smart items or they can select smart home products, such as light bulbs, crockpots, coffee makers, thermostats, vacuums, ovens, doorbells, mailboxes, window shades, and security cameras. After downloading the appropriate apps, anyone can connect everything together through a Wi-Fi network.1, 2

Smart digital assistants (SDAs) are the handy commanders of the smart home. Analysts estimated, by the end of 2018, SDAs would be active in almost one-half of American homes.3

These devices won’t take down the holiday decorations, but they will instruct the dishwasher to wash the dishes, tell the sound system what you want to hear, and inform the smart feeder it’s time for Fido’s supper. If you’re a road warrior, you can connect your automobile. If you work long hours, you can connect your office, too.4

Here’s the thing.

While smart homes offer tremendous convenience – and can be a lot of fun – they also have the potential to make Americans vulnerable to cybercrime. According to research published by ScienceDirect, security experts anticipate smart homes will become targets for cybercriminals because they are easy to infiltrate.5 For example, hackers could:

  • Access your smart thermostat and determine when you’re on vacation6
  • Retrieve information (passwords and financial or personal data) shared through a digital assistant6
  • Unlock your smart door with no sign of forced entry7
  • Hijack security cameras to spy on your home7

Just about everything in a smart home can be hacked, and criminals try all the time. Norton reported, “At times of peak activity, the average IoT [Internet of Things] device was attacked once every two minutes, according to the 2017 Internet Security Threat Report, published by Symantec.”6

Securing your smart home
When building a smart home, it’s critical to look beyond cutting-edge gadgetry and give serious thought to system security. Here are six tips for securing your smart home:

Build a strong foundation. Your router is the front door to your smart home and it should be solid and equipped with strong locks – it is your smart home’s foundational item. It connects all of your devices to the Internet. When you move money from one account to another using a home computer or smartphone, the data flows through your router. When you stream shows and movies, this data also flows through your router. You can’t afford to ignore it.6   The first thing to do is make sure your router is encrypting data. Norton suggests selecting Wi-Fi Protected Access 2 (WPA2) to protect your data. Choose a router that supports WPA2, and then take a few extra minutes to set it up.

Consumer Reports suggested several steps that can help keep data private. First, ensure your router software is up-to-date. Second, choose strong passwords. Typically, routers will have two passwords, one to control the router’s settings and a second one to provide access to smart devices. Third, turn off any router features you don’t use.4

Set your network to private. Smart devices have default settings. Some devices default to optimize privacy and security, others do not. Instead of assuming manufacturers have your best interests in mind, review the privacy settings for devices as you connect them.6

Choose 2FA. If the app for your smart device offers two-factor authentication (2FA), use it. In order to make changes, you will have to log in and then confirm your log in by entering a code that’s sent via text or email. If you get a code and didn’t try to log in, you know someone is trying to access your system.6

Give guests a network of their own. If you have a smart home, Norton suggests setting up a separate network for visitors. You cannot be certain whether someone else’s devices are secure. By having guests log on to a separate network, you protect your home and connected devices.6

Upgrade your devices. You probably won’t be passing smart devices from one generation of the family to the next. In fact, you shouldn’t.6

Prepare for a power outage. Many smart devices work when the power goes out. Make sure you know which of yours will and which won’t. For example, did your smart thermostat or smart door lock come with regular or rechargeable batteries or some other type of backup?8

It’s particularly important to understand how your home security system will respond. Systems that rely on Voice-over-Internet-Protocol (VoIP) and the Internet must have online connections or they don’t work. Your security cameras may also have issues during power outages, although a battery bank backup could solve the problem, according to MakeUseOf.com.8

Don’t let the excitement of building a smart home cause you to lose sight of the importance of home security. When your household devices communicate with one another, keeping your data safe presents a whole new set of challenges.

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