Newsletter: Kickoff 2016

Global Markets: Oil, China & Interest Rates.

Over the course of the past two weeks we have witnessed increased volatility in the global equity markets and a historically weak start for the U.S. stock market. Prior to August of 2015, it had been almost four years since we had a correction  in U.S. equities, and last August’s market uneasiness turned out to be only temporary.  The current selloff has been swift and propelled us into a correction with Friday’s trading moving the S&P500 down 10% from recent highs in 2015.  So, two questions probably come to mind immediately. First, does this turbulence in the markets foretell more serious and lasting markets ahead, or will it be temporary such as the sharp decline and recovery we experienced last August?  Second, how will this market correction ultimately impact the value of our portfolios and our plans for the future?

No one has a crystal ball, so whatever economic forecast you hear on the radio, watch on television, or read in the newspaper, may, in the end, turn out to be accurate.  What I can say with confidence is that no matter what market conditions are presented, we will continue to look for opportunities, as well as, be defensive when needed to carry out our objectives of preserving capital and providing real growth on investment after taxes and inflation over the long-term.  We feel this is the most likely path to fulfilling your future goals and objectives for the portfolio.    

Now let’s take a quick look at some of the causes of the recent global storm on equities.  Oil—the increase in global oil supply and subsequent lack of increased demand have given rise to a slide in oil prices that have certainly made gas cheaper for the consumer; however, unlike other periods where lower gas prices have been a windfall for consumers to spend, this time around Americans are saving 40% of the windfall apparently still cautious from 2008 .  Falling oil prices have caused the composite earnings of the energy sector to be a drag on the S&P500  and as oil continues lower it carries the possibility of bankruptcies within the U.S. Oil Industry .  Consequently, oil and energy companies worldwide are reducing budgets and decreasing drilling to bring the supply and demand back into balance, thus affecting many related or supporting sectors of the economy—and their stock prices.  Complicating matters somewhat is the hostility between Saudi Arabia and Iran, which under typical OPEC Oil Production Agreements would prescribe both countries to cut production in order to stabilize or increase oil prices, but Iran has refused to agree to cut production.  Historically, Mideast turmoil would keep prices higher with the threat of disrupted oil supply, but now we are seeing the opposite effect.  All this coupled with the U.S. emerging as the world’s largest oil producer has led to the current global oil surplus, and investment in the energy sector has been hit hard .  Eventually we could get to a balance between oil supply and demand that will enable oil prices to stabilize and possibly rise.  Subsequently, we could see energy sector stocks, whose valuations may be construed as reaching historic lows by many measures, be in a position to once again move forward.

 

China—the economic slowdown has continued, and investors worry about a more prolonged decrease in the growth prospects in that country.  Compound that with the rising volatility of the Chinese currency, the Yuan Renminbi, in recent months, and China’s falling demand for oil  and you have a recipe for an added stimulus to a slower overall
global economy.  China, as one of the largest economies and leading manufactures in the world, is in the process of transforming from a primarily manufacturing and export economy to one more balanced between manufacturing and consumer propelled .   

Interest Rates—greatly anticipated throughout 2015, the Federal Reserve finally decided to increase short-term interest rates on December 16, 2015.  This was the first rate increase in nine years.  Although expected, investors now begin to wonder if an increasing rate environment will defuse the economic recovery here in the United States and just how fast interest rates will rise.  Fed Chairwoman Janet Yellen has indicated that the Federal Reserve interest rate increases will come slowly in the months ahead due in part to slow growth overseas and divergent monetary policies between the U.S. and other countries .  An analysis by the Federal Reserve Bank of St. Louis Review found based on past history of the last four business cycles, an economy can continue to grow well after rate increases begin .  A driver of stock market advances in recent years, monetary stimulus by the Federal Reserve comes to an end, thereby shifting focus on future U.S. equity gains to depend on earnings growth .  U.S. companies face difficulties in growing earnings with increased wage growth and a stronger dollar.  In fact, the U.S. dollar is up 23% in the last 18 months clearly affecting profits of U.S. exporters .

What we see as bright spots in the U.S. Economy heading into 2016 are that corporate earnings overall, despite the weakness in industrial and energy related sectors, are solid, led by home improvement warehouses, internet retailers, and auto sales.  U.S. consumers, which comprise 69% of the gross domestic product, are in relatively good shape with consumer spending up, unemployment down, low inflation and the household debt ratio continuing to decline .  We view Europe as providing potentially attractive valuations and dividends relative to comparable U.S. opportunities.  Furthermore, as the Bank of Japan continues to provide more economic stimulus in that country, we believe growth opportunities may be present in certain sectors .  Higher yield bonds and emerging market equities, both declining in 2015 by wide margins, may offer prospects for additional investment as we move through the year .  Residential real estate prices may continue to grow, due in part to job market strengthening, but growth is anticipated at a more moderate pace than in recent years due to continued tight supply and the possibility of increasing mortgage rates  .

Market Volatility
Market declines are inevitable and do not last forever.  We expect higher long-term returns on stocks than we do from cash and bonds, and for that, we also expect greater volatility based on historical data.  Over the past 114 years, market declines of 10% occur about once every 115 days .  The last time we experienced a pullback in the U.S. stock market of this magnitude (10% or greater), prior to August 2015, was in October 2011 .  The average length of a 10% correction is about four months  before prices begin to return to previous levels.  Market declines of 15-20% occur on average every 2-4 years  during the prior 115 years.  Declines can sometimes cause imprudent behavior by filling and consuming investors with dread and panic.  History has shown that stock market declines are a normal part of the investment cycle.  Market declines have varied in intensity and frequency, but the market has always recovered from declines.  Although past results don’t guarantee future results, remembering that downturns have been temporary in the past may help quell your fears.


Short-term market timing does not work.  Short term market timing is the elusive “holy grail” or “fountain of youth” of investing—something you want very much, but that is very hard or impossible to get or achieve.  If anyone could do it consistently—sell right before something goes down, and buy right back before it goes back up—the rewards would be great, but typically investors end up with sub-par performance due to the extreme difficulty with getting the short term timing (day trading) wrong .  

Although the Holy Grail/Fountain of Youth most likely does not exist, the benefits of a long-term disciplined investment plan are compelling, but the generally higher returns associated with investing in stocks over the long-term is dependent on sticking with your investment plan through both good and bad times in the markets.


The importance of diversification. After studying the most brilliant and successful minds in the investment field over the past 27 years—both past and present—the one vital and common lesson learned is that diversification through asset allocation works to mitigate volatility over the long-term by diversifying into separate asset classes with varying correlation to one another.  We were taught as youngsters by our parents and grandparents “don’t put all your eggs in one basket” which is a straight forward translation to allocate your investment funds into different asset classes within your portfolio.  The idea is that they all don’t go up or down at the same time—and this could not ring louder at this time.  While this may not be the case on a day-to-day basis, a mix of different types of assets provides a smoother and more stable ride for your portfolio over the long-term .  However, investment disciplines do not work all the time in every economic environment.  In fact, in a recent Bloomberg News article, it was argued that asset allocation in 2015 had one of the worst results in nearly 80 years with most major asset classes finishing the year with tepid results, with no asset class offering superior relative returns to lift the overall diversified asset allocation portfolio return.

“The Market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.”
—Warren Buffett

Our Leshnak Wealth Portfolio Models are globally diversified and strategically constructed, with a tactical component.  We have a bias toward value which prescribes a requirement for dividend yield from our investment positions.  In simple terms, we have investment positions in eight asset classes: domestic equities, foreign developed stocks, foreign emerging market equities, domestic bonds, foreign bonds, cash equivalents, commodities, and real estate.  How much of each asset class (if any) we hold in the aforementioned asset classes is based on your unique risk tolerance, financial resources and personal goals and objectives.  Furthermore, we have a portion of each portfolio that is tactical and flexible.  This allows the manager to move assets into the sector(s) that best fit current market conditions based on their methodology.  Our portfolio construction has two other vital components—we want dividends from each position so no matter what the market is doing day to day, we still have a dividend coming into the portfolio for income or to reinvest.  Lastly, we overweight value versus growth in our allocation models which we believe puts us in the position of the “turtle”, in the proverbial tortoise verses the hare scenario, over the long-term with equities.


As your financial fiduciary, our team cares deeply about your financial well-being, and it is in times like these that it is important to stay disciplined and refrain from making decisions that may be detrimental to your wealth.  Our Leshnak Wealth team will monitor for rebalancing opportunities that may add value to your portfolio, or to be defensive as conditions might warrant.  As always, please call with questions or if you wish to discuss your specific portfolio in greater detail.


New Look & Logo
As you are reading this letter you will notice we are rolling out our new marketing brand, logo and tag line to better reflect our business purpose to our clients and prospective clients.  Leshnak Wealth brings together two words you are familiar with- “Leshnak” leads the team responsible for setting policy, values and vision for the firm.  “Wealth” encompasses you, your family and your lifetime accumulation of assets that enable you to live, thrive and give back as you see fit and on your timetable. The three leaf logo represents the three aspects of wealth management: plan, grow, protect.  We plan together for your goals and objectives, your aspirations for your family, and your deepest dreams and desires.  We do our utmost to grow your portfolio pursuant to your risk tolerance, time horizon and objectives by establishing a portfolio that endeavors to optimize return and lower volatility.  Our undertaking is to protect you, your family and your nest-egg against life’s unforeseen events.  Our mission remains the same as it has been for more than 28 years— “We strive to help clients make smart financial decisions so they can spend more of their time enjoying life with peace of mind and security.”
–Bob Leshnak, January 14, 2016


“With every new wave of optimism or pessimism, we are ready to abandon history and time-tested principles, but we cling tenaciously and unquestioningly to our prejudices.”
― Benjamin Graham

The investment decisions are those of Robert M. Leshnak, Jr., CLU, ChFC, CFP®, MS, EA as of 1/14/2016 and are subject to change.  The information contained herein is only intended for Leshnak Wealth clients invested in the Leshnak Wealth Portfolio Models.  No forecasts or recommendations are guaranteed.  The technical data utilized as part of the investment decisions does not guarantee future positive results. Performance, especially for short periods of time, should not be the sole factor in making investment decisions.  The information contained herein does not constitute client specific investment advice or take into account a specific client’s particular investment objectives, strategies, tax status, resources, or investment time horizon. No investment strategy such as asset allocation, diversification, tactically overweighting sectors, or utilizing fundamental and technical analysis can always assure a profit, nor always protect against a loss.  The information presented is not intended to be a substitute for specific individualized tax, legal, or financial planning advice.  The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time.

Cordially Yours, 
Bob
Robert M. Leshnak, Jr., CLU, ChFC, CFP®, MS, EA
Registered Principal, FSC Securities Corporation
Managing Partner, Leshnak Financial Group, LLC

 

Driebusch, Corrie, “Bad Week for Stocks Dims Outlook”; Wall Street Journal 1-9-2016

We define “market correction” as a 10% decline from the previous high in the stock market (S&P500).

Driebusch, Corrie, “U.S. Stocks Slide in Global Rout”, Wall Street Journal, January 16, 2016

Sharma, Ruchir, “The Commentary. Global Slowdown Hits the U.S.”; Wall Street Journal; Jan 13 2016.

Green, Byron, “2016 The State of the Market Address”; January 15th, 2016, Green Investment Management, Inc. Market Commentary. 

Olson, Bradley & Ailworth, Erin, “Oil Drop Sparks Bankruptcy Fears”, Wall Street Journal; January 12, 2016.

Sharma, Ruchir, “The Global Slowdown Hits the U.S.”; Wall Street Journal; Jan 13 2016.

Sharma, Ruchir, “The Global Slowdown Hits the U.S.”; Wall Street Journal; Jan 13 2016.

Green, Byron, “2016 The State of the Market Address”; January 15th, 2016, Green Investment Management, Inc. Market Commentary.

Hilsenrath, Jon, “Janet Yellen Emphasizes Slow Pace of Rate Increases”; Wall Street Journal, Dec. 3, 2015.

Green, Byron, “2016 The State of the Market Address”; January 15th, 2016, Green Investment Management, Inc. Market Commentary

Green, Byron, “2016 The State of the Market Address”; January 15th, 2016, Green Investment Management, Inc. Market Commentary.

Green, Byron, “2016 The State of the Market Address”; January 15th, 2016, Green Investment Management, Inc. Market Commentary.

“Seek Bright Spots in Uncertain Markets”; American Funds 2016 Investment Outlook; Jan 2016. 

“Seek Bright Spots in Uncertain Markets”; American Funds 2016 Investment Outlook; Jan 2016.

“Seek Bright Spots in Uncertain Markets”; American Funds 2016 Investment Outlook; Jan 2016.

Mertz Esswein, Pat, “Housing Outlook 2016”, Kiplinger’s Personal Finance, Jan 2016.

“Keys to Prevailing Through Stock Market Declines”; American Funds Investor Resource: A Guide to Market Fluctuations; Aug. 2015; americanfunds.com

“Keys to Prevailing Through Stock Market Declines”; American Funds Investor Resource: A Guide to Market Fluctuations; Aug. 2015; americanfunds.com

“Keys to Prevailing Through Stock Market Declines”; American Funds Investor Resource: A Guide to Market Fluctuations; Aug. 2015; americanfunds.com

“Declines Have Become Common and Temporary Occurrences”; American Funds Client Conversations; Jan. 2016

“Keys to Prevailing Through Stock Market Declines”; American Funds Investor Resource: A Guide to Market Fluctuations; Aug. 2015; americanfunds.com

Vanguard Principles for Investing Success; 2014, pages 29-32; vanguard.com

Vanguard Principles for Investing Success; 2014, pages 8-16; vanguard.com

“The Year that Stocks, Bonds and Cash Failed to Thrive”, Investment News, January 4, 2016.

 

Newsletter: Kickoff 2016