View from the Chair: Windermere's Market Perspectives (January 2018)

Mirror Lake, at the start of my Yosemite backpacking trip

Mirror Lake, at the start of my Yosemite backpacking trip

I covered a lot of hiking trail this year.  A 3-day backpacking trip in Yosemite (with ~3,000 feet of vertical elevation gain),  a one-day 30 mile hike in Devil’s Lake for Cystic Fibrosis, desert hikes in Arizona, and a multi-day fall getaway to Jackson Hole, Grand Teton, and Yellowstone National Park.  All were spectacular - but at times during each of those journeys, a certain question crossed my mind  - have we reached the top of the mountain yet?

Many investors have to be asking themselves the same thing as they sit a top the summit that is year-end 2017, Are we at the top?

Investors and markets climbed an incredibly long distance in 2017 - with almost every asset class reaching new heights.  Take your pick.  US equity markets (as measured by the S&P 500) were up over 19%.  Emerging markets (as measured by the MSCI EM index) were up over 37%.  US investment grade corporate bonds returned almost 4%. 

What led to this ascent?  We’ve been discussing these items all year in our blog posts  - but just to recap the wonderful year that was, you had a confluence of many bullish factors, including:  1) synchronized global growth 2) ongoing low interest rates – both globally as well as in the US 3) ongoing attractiveness of equities (due to point #2) 4) US political actions, including tax reform passed in the last parting breaths of 2017 5) strong earnings, both in the US and abroad and 6) relatively stable geopolitical relations (despite tweets and rhetoric that lead to concerns otherwise)

View from atop a hike in Sedona, AZ

View from atop a hike in Sedona, AZ

So here we sit - on top of the investing world and wondering “is this the top of the investing mountain? Can we possibly climb any higher or go any further?” 

The simple answer – as it was when I was hiking this year – yes

The more detailed answer:  Yes, we can (and need to) climb higher.  Just keep in mind - the path that got us to this point won’t take us the rest of the way.  We need to consult our map, adjust our course, restock our supplies and energy, and keep going – one step at a time. 

Let’s take that advice in its components, as it relates to investing in 2018 and beyond

Consult our map

We’re reached a new place in the markets and the economy – one that we haven’t seen before.  2017 is behind us and we are entering new terrain.  However, like all points in markets, there are charts and data we can study and learn from to help us find our way from here. 

Looking at the “maps” as they stand today, few key highlights: 

  • Recession indicators are not present at the moment (we are trending that way but for now, there are no immediate signs)
  • US equity fund flows were net negative for most of 2017 (lots of cash on the sidelines)
  • Commodities appear to have bottomed in late 2017– and are coming on strong
  • Synchronized global growth is expected to continue into 2018
  •  US GDP is expected to rise in the upcoming year
  • Unemployment is approaching historic low
  • Inflation is beginning to trend upwards
  • US interest rates are continuing to rise
  • The yield curve is flattening but is not yet inverted
  • The US dollar continues to show weakness
  • International interest rates are also starting to rise – albeit slowly
  • International equity valuations remain lower than their US counterparts

Adjust our course

View from the top of the steepest ski slope in the US, Jackson, WY

View from the top of the steepest ski slope in the US, Jackson, WY

After digesting what the data is telling us, it is clear that what brought us to this point may not help us reach the summit in 2018.  How do you adjust course?  This depends on your exact destination (as dictated by your specific portfolio and overall objectives and goals). 

For our clients, we are undergoing a detailed review of not only their asset allocation (based upon the above data, as well as their individual goals), but also of their individual holdings and sector exposure.  All parts of their portfolio need to be reviewed and adjusted to position them for the trail ahead

Restock Supplies and Energy

Before hitting the trail for 2018, as investors, it’s essential to be sure you have what you need for the journey. 

Few things to consider:

  • Challenge your thinking - It's easy to ignore new information when you're coming off a record year.  Stay aware and stay engaged 
  •  Raise cash –  Don’t assume that names or asset classes that did well last year will automatically be winners again this year.  Look at each holding and ask if you would buy it again today – or if another idea will serve you better.  Sell and redeploy as needed
Jenny Lake, Grand Teton National Park

Jenny Lake, Grand Teton National Park

  • Invest new cash – Have additional cash you can invest today or average in over the year?  Consider putting it to work 
  • Evaluate your employer plan contributions – Have a 401k or 403b thru work?  The start of the year is a great time to increase that percentage (Of course, consult your financial and tax advisor prior to making any changes)
  • Don’t go it alone – Hiking alone is never safe.  And in my opinion, neither is investing.  Don’t falsely assume after a steady climb in 2017 that investing is “easy.”  2018 may just prove you very wrong.  Find an investment advisor you trust to help guide you along

Keep going – One Step at a Time

Is this the top?  I have no way of knowing that – and neither does anyone else investing in the markets.  What I do know for sure is that time in the markets matters far more than timing the markets when it comes to the long term compounding of wealth.

The key is to start – and to keep going.  You can’t get on and off the trail part way up the mountain.  You deserve to finish what you started.   You can keep going – one step at a time – no matter what the trail brings.  The true summit is up there.  You just have to keep on climbing.  Don’t stop now.  I promise you the view from the top is well worth it. 

The "Grand Canyon" of Yellowstone

The "Grand Canyon" of Yellowstone

The 2018 trail awaits.  You’ll see me out there climbing and when you do, please stop and say hello.

Invest on & best wishes for a smooth & rewarding climb in 2018,

Pam

Top of Mind (Q4 2017)

Each quarter, we will share three things that we are keeping Top of Mind

Here's our latest list:

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1.) What will the future bring? None of us know the answer to that question.  However, that doesn't mean we can't look forward and form our own best guess of what tomorrow may bring.  Many investment/market thought leaders do just that each January, taking their shot at predicting what the next year will bring, including Bob Doll of Nuveen, Byron Wien of Blackstone, and Jeffrey Gundlach of Doubleline.  Ian Bremmer, founder of Eurasia group, shares his outline of the top risks of 2018.  What do you see for the year ahead?

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2.) An alternative for charitable gifting.  As you have likely heard, with the new tax bill, the manner and timing of which individuals gift to charity may change.  While it is a somewhat complicated topic, here is the shortened version:  With the standard deductions increasing (and certain itemized deductions being capped or eliminated), a strategy may emerge that individuals "double up" charitable contributions in one year (and then take a year off).  This would allow their itemized deductions to exceed the standard in the "double up" year and give them the full tax benefit of the charitable gift in the.  An efficient way to accomplish this idea (ie: multi-year gifting in one calendar year) is to utilize a donor advised fund.  These funds, available thru the major broker/dealer firms, like Charles Schwab, allow you to gift an amount to the fund in a given year (at which time you receive the deduction) - and then allocate those funds to various charitable organizations over future periods of your choosing.  It is also very easy to donate appreciated stock to these accounts.  Of course, we understand charitable gifting has a higher purpose and may not be driven by tax consequences alone.  But to some, it's an important consideration.  And of course - as with all topics discussed in our newsletters, we caution you that you should speak to your advisors and determine what is best in your unique situation.  This does not in any way represent tax or charitable gifting advice. 

 

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3.) The independent difference - It can be difficult to tell financial advisors apart.  How does a firm like Windermere (an independent Registered Investment Advisor) differ from a Broker/Dealer or from a financial planning business or from a mutual fund company?  A new advertising and educational campaign from Charles Schwab & Co., Inc (Windemere's chosen custodian) is making every effort to inform investors of the differences and what they should look for in selecting when selecting an advisor.  You can take a look at the campaign here (and you may also see it on your TV soon!).  Windermere is proud to be an independent advisor and would also be more than happy to discuss the differences with you