Newsletter: Summer 2016

Global Markets

Although 2016 began wildly in the global equity markets, including a historically weak start for the U.S. stock marketi, most developed markets around the world have actually posted small gains so far this year. As of Friday May 27th, the

Dow Jones Industrial Average, the S&P 500, and the MSCI-EAFE (international) indexes have each advanced roughly 2%, while the Russell 2000 (small stocks) and the NASDAQ indexes have each progressed more than 3%ii year to date.

Overall global growth has been rather benign during the last five years, with U.S. equities showing the only oasis during that time. However, during the past two years even the U.S. equities have gone flat while volatility has increasediii. Europe and Japan have begun a period of quantitative easing, similar to the plan the U.S. government deployed here in recent years, which should help to support these economies although at the expense of lower global bond yieldsiv. China continues to deal with a growth slowdown in that country and is using debt to bridge their budget deficit. We continue to see political uncertainty in countries such as Brazil, recession in countries such as Greece and terrorist activity throughout world that could impede global growth. However, estimates for 2016 World GDP growth are in the 2.5 to 3.0% range despite the present challengesv.


Index 1 year return* 2 year avg return* 5 year avg return*
S&P 500 -0.40% 4.66% 12.29%
S&P Mid Cap -2.14% 4.04% 11.04%
Russell 2000 (small cap) -7.71% 0.49% 8.47%
MSCI EAFA (international) -11.97% -7.52% -0.75%
MSCI Emergin Markets -19.55% -11.66% -6.18%
Barclays Aggregate Bond 0.42% 0.46% 0.62%
Barclays High Yield Bond -10.53% -7.52% -2.39%

*arithmetic avg. price only divs not included
*source: as of 5/27/2016


Gross domestic product (GDP) is one of the primary indicators used to evaluate the financial health of a country's economy. The United States GDP is the total dollar value of all private and public consumption, government outlays, investments, and exports minus imports that occur within our countryvi. U.S. GDP is estimated on an annualized basis, at the end of each quarter, then revised up or down as the data becomes more reliable. GDP, which is commonly referred to as the size of the nation’s economyvii, is utilized by economists, businesses, government organizations, and investors to compare and analyze the health and strength of the economy based on GDP figures from other periods.

"An investment in knowledge pays the best interest." - Benjamin Franklin

Gross domestic product in the U.S. for the first quarter of 2016 was a very minimal .8% and that, coupled with the past two years (2014 & 2015) of 2.4% GDP growth seems to indicate that the U.S. economy is moving forward, albeit not particularly at a robust rateviii. In fact, we have now experienced ten years in a row of less than 3% real GDP growth in the U.S. for the first time in our historyix. The longest previous run of consecutive sub 3% real GDP growth was only four years, and that was during the Great Depression (1930-1933)x. By comparison, the average real GDP growth rate in the U.S. from 1947 to 2016 was 3.23%xi. Now, if you’re an optimist on the economy there are a number of signs that show we can move more energetically upward from here. Conversely, if you’re negative on our economy there are some signs that we could slip back into recession. So, as we head into the summer mid-point of the year, signals are mixed.

Opposing Perspectives

An Optimistic View. Europe and Japan are in the early stages of their quantitative easing programs with the objective to backstop their economy and pre-empt recession. Stronger European and Asian developed markets should benefit emerging markets; plus, higher oil prices for many of the emerging economies that export oil should generate needed growth in those countriesxii. U.S. GDP growth is expected from 1.7 to 2.0% in 2016xiii. In the U.S., retail sales and housing starts are up 3% year over yearxiv. Sales of existing homes are up 6% from a year ago with the average selling price increasing 4%xv. The non-manufacturing purchasing managers index (PMI), which is considered a forward indicator of future GDP levels, revealed an expanding economyxvi in April. The purchasing managers index surveys businesses each month to inquire about business activity, new orders, employment, order backlog, inventories, supply fulfillment, imports, export orders and pricesxvii.

Oil prices have moved from $26 a barrel in January 2016, back to near $50 per barrel in May. The collapse in oil prices depressed business spending, especially in the energy sector which spilled over into the U.S. economy in general. The U.S. dollar’s strength, which had increased more than 25% during the previous five yearsxviii, has begun to decrease thereby boosting exporters and multinational corporationsxix. Unemployment is below the historical median currently at 5% and the U.S. has created roughly nine million new jobs since President Barak Obama took office in 2009xx. Additionally, U.S. wages have increased more than 2% in each of the last two yearsxxi and roughly 3% per year during the last 8 yearsxxii creating a tighter labor market. Consumer spending has increased, but at a slower pace than wage increases, due at least in part, to more restrained use of mortgage and credit card debtxxiii, thereby placing consumers in a better personal financial position. The inflationary environment remains below historical averages with the 12 months ending in April up just 1.13%xxiv which may seem somewhat low due to the drop in energy prices. Commodity prices, which had been on a five-year retreat after a period of over productionxxv seeing many basic resources and energy prices cut in half, have now begun to rebound amid a weaker U.S. dollar and increased demand.

“Great opportunities may come once in a lifetime, but small opportunities surround us every day.” –Rick Warren, Pastor & Author of “The Purpose Driven Life”

The Pessimistic Perspective. It could be argued that much of the moderate recovery we have experienced since 2009 has been driven by government monetary policy and historic infusions of capital in the form of quantitative easing. If so, great, that is what it was designed to do, but now we have begun to back away from that monetary stance by reducing stimulus and increasing interest rates, so that the economy must run on its own fundamentals to create growth. Some economists believe that we will not be able to sustain meaningful growth in the absence of government stimulusxxvi.

"In investing, what is comfortable is rarely profitable." –Robert Arnott

The sovereign debt crisis in Europe, in countries such as Portugal, Ireland, Italy, Greece and Spain, has affected the European economy by reducing overall demand, especially in the aforementioned countries that are saddled with high debt levelsxxvii. The United Kingdom has a referendum in June to discuss continued membership in the European Union (EU). A move out of the EU by the United Kingdom may ignite volatility until its impact is assessed by other global economiesxxviii.

The Chinese economy has grown exponentially during the past 30 years, now second in the world, and so has the wealth of its middle class population. The Chinese government wields financial controls and restrictions on its citizens, allowing them very few options for investment except for Chinese real estate and stocks that have appreciated significantly during the past decade. The risk is of a serious correction in China that could spill over into recession in that country thereby affecting the rest of the world economiesxxix.

In the U.S., student debt has now topped more than 1.3 trillion in 2016xxx, and this impacts the economy in two ways; first, most student loans are backed by the U.S. government and the loan default rate on these loans is 11.6% thereby putting the tab on taxpayersxxxi. Second, more than 43 million Americans have student debt possibly delaying or impeding them from buying a first home or making other consumer purchases that would normally boost the economyxxxii. Although the U.S. unemployment rate is currently at 5%, it may not tell the whole story. Many workers are underemployed with temporary or part-time work, and still others are out of the workforce and off the government’s unemployment rate radar due to long-term unemployment. The labor force participation rate, which measures how many people in the potential workforce are actually working, has declined to levels not seen since in 40 yearsxxxiii at roughly 62%. This may indicate a higher actual unemployment picture than is depicted.

"When everything seems to be going against you, remember that the airplane takes off against the wind, not with it." –Henry Ford

Many U.S. States and territories have budget deficits that are expanding due to increased spending on legacy items such as pensions and benefits, healthcare (especially with the expansion of Medicaid), and infrastructure, with aging roads and bridges in many states. Medicaid spending increased 15 percent and added 6.3 million people in 2015, which now supports 15.3 million with healthcare, or about one in 20 Americansxxxiv. Medicaid accounted for a mammoth 27.4 percent of total state spending in 2015xxxv. Lastly, recent economic data during the last few quarters show corporate profits, real GDP growth, retail sales, wholesale sales and U.S. exports have been slowing, which may or may not develop into a longer-term trend at this point.

Our Outlook & Gameplan

Although I am an optimist at heart, our investment approach is neutral as we strive to take advantage of the opportunities presented and play defense as conditions warrant. Right now we are cautionary but optimistic as we look to the remainder of 2016 and into 2017. The contrarian portion of our Leshnak Wealth Portfolio Model favors international developed and emerging markets equities, commodities, natural resources, and high yield bonds. These are the areas that have fared the worse the past five years. Conversely, the momentum or tactical portion of our portfolio is mixed allocating to such sectors as energy, technology, consumer discretionary, healthcare, financials, and real estate, as well as, defensive cash positions and consumer staples.

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. Moreover, 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, the Leshnak Wealth team cares deeply about your financial well-being, and 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.

FSC Securities Corporation

AIG Advisor Group, the parent company of our broker-dealer FSC Securities Corporation, has been sold to a holding company formed by a private equity firm and other investment groups. This change in ownership should be seamless and has no impact on you or our relationship with our transfer agent, or with our firm, Leshnak Wealth. A change in a broker-dealer ownership requires that regulatory notifications be made directly to you from FSC. You will receive this notification over the next few weeks, and there is NO ACTION required on your part. Leshnak Wealth became affiliated with FSC Securities in 1997, and since that time FSC had been bought twice before; SunAmerica Life, and then again by AIG.

–Bob Leshnak, June 1, 2016

We wish you and your family a safe and enjoyable summer.

Cordially Yours,


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


The investment decisions are those of Robert M. Leshnak, Jr., CLU, ChFC, CFP®, MS, EA as of6/1/2016 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.


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

ii Mench Financial, Inc. Memorial Day Newsletter; major indexes quoted as of 5/27/2016.

iii Green, Byron, “Ongoing challenges, leavened with encouraging signs”; May 18th, 2016, Green Investment Management, Inc. Market


iv Green, Byron, “Ongoing challenges, leavened with encouraging signs”; May 18th, 2016, Green Investment Management, Inc. Market


v “System says slow”; 4/16/2016 and “2016’s global wealth forecast”; 12/31/2015


vii “What is GDP and why is it so important?”; Investopedia

viii Gillespie, Patrick, “U.S. economy grinds to near halt at end of 2015”; January 29, 2016

ix Woodhill, Louis; “Barack Obama’s Sad Record on Economic Data”;; 2/1/2016.

x Woodhill, Louis; “Barack Obama’s Sad Record on Economic Data”;; 2/1/2016.

xi “US GDP Growth Rate 1947-2016”;

xii Green, Byron, “Ongoing challenges, leavened with encouraging signs”; May 18th, 2016, Green Investment Management, Inc. Market Commentary.

xiii; May 2016 and “Economic Forecasting Survey”; May 2016

xiv US Census Bureau; May 2016

xv; May 2016

xvi Institute for Supply Management; May 2016


xviii, US Currency Index 5/30/2016.

xix “Ongoing Challenges, Leavened with Encouraging Sings”; Green Investment Management Market Commentary 5/18/2016.

xx “Obama’s Numbers”; January 2016

xxi US Bureau of Labor Statistics; 4/29/2016.

xxii “Obama’s Numbers”; January 2016

xxiii Green, Byron, “Ongoing challenges, leavened with encouraging signs”; May 18th, 2016, Green Investment Management, Inc. Market


xxiv May 2016

xxv Kymar, Kalyan; “Commodities on Comeback Trail, Says Analyst: Right Time To Invest”; 6/3/16 and 6/3/2016

Kalyan Kumar on Jun 3, 2016

xxvi Hayes, Adam CFA,“6 Factors That Point to Global Recession in 2016”; Investopedia, 3/8/2016.

xxvii Hayes, Adam CFA,“6 Factors That Point to Global Recession in 2016”; Investopedia, 3/8/2016.

xxviii Green, Byron, “Ongoing challenges, leavened with encouraging signs”; May 18th, 2016, Green Investment Management, Inc. Market


xxix Bureau of Labor Statistics

xxx and

xxxi and


xxxiii Cannon, Lou, “Economic, Political Uncertainty the 2016 Outlook for States”; State Net Capitol Journal, 12/20/2015

xxxiv Cannon, Lou, “Economic, Political Uncertainty the 2016 Outlook for States”; State Net Capitol Journal, 12/20/2015

xxxv Cannon, Lou, “Economic, Political Uncertainty the 2016 Outlook for States”; State Net Capitol Journal, 12/20/201