interest rates

Schwab's IMPACT Conference: Top Five Takeaways

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I recently attended Schwab’s IMPACT conference in Washington DC. IMPACT is a conference for independent advisors that custody assets at Schwab (like Windermere). The three day agenda is filled with education sessions on the markets, economy, and our practices as well as high profile keynote addresses and opportunities to connect with money managers, Schwab personnel, and other service providers. It’s an excellent conference and I thought it was only fair to share some key takeaways from my time in our nation’s capital

1.) Polarized government - Greg Valliere has been following DC politics for over three decades and shares his input at IMPACT every year. His main point this year was that the center of politics has vanished. Both parties are more polarized than ever and there is increasingly less desire for any cross party negotiations. He anticipates the house will turn to democrats in the midterm elections but that the senate will stay with republicans, resulting in more gridlock and polarization in DC for the next two years. (Greg sends a daily email sharing his insights. You can subscribe here)

2.) Trade concerns abound - but China moves forward - Many speakers expressed concerns over the ongoing trade negotiations with China. Concerns are centered around the uncertainty it is causing in the markets, as well as the possibility that it will slow US growth and potentially lead to a recession sooner than would otherwise occur. Money managers focused on China expressed similar concerns over trade. However they presented a strong case for investment in China - largely driven by the consumer story. Chinese citizens are experiencing record earnings (up 120%), high savings (average 35% of income), and low levels of leverage. Chinese government is also still willing to be very accomodative and stimulative

3.) Words of Advice from Former White House Chief of Staff - Andrew Card (Cheif to George HW Bush) was joined on stage by Dennis McDonough (Chief to Obama) and the two shared stories and advice from their time in the White House - as well as gave their perspective on the current administration. Card offered some advice his grandma had given him that could arguably benefit most of us: “Taste your words before you spit them out - and don’t leave the room before you go out the door.”

4.) Fed on track - According to Former Chair of the Federal Reserve Janet Yellen, the Fed is on a reasonable track. Yellen’s tone was measured and thoughtful. She noted that in her view, the economy is doing very well and that a recession doesn’t appear imminent. However, she stressed that the Fed is seeking to keep economy from overheating (read - higher inflation) and will continue to raise rates gradually. Rates at the short-end, adjusted for inflation, are still effectively at zero and the Fed will likely target a real rate closer to 1% (which has historically been closer to 2%). Her main concerns include trade and the pressing need for entitlement reform

5.) Equity & Fixed Income Outlook - Schwab’s equity outlook was cautious. Concerns over trade and inflection points in certain economic data lead to a market weight to equity asset class in their view. Anticipation is that we have some runway left (especially post mid-terms which tends to be a strong cyclical period) but that we are late cycle. Over moderate term (6-18 months), prediction was that value, international, and large caps will lead. On Fixed Income side, Schwab anticipates ongoing volatility and spread widening. They stress that it’s time to add some duration (as long rates are close to near-term peak), focus on quality, and remain close to home (ie: US debt)

As always, it was a very worthwhile conference and we appreciate the ongoing guidance and support from Schwab in helping us better serve our clients

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

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Summer has finally arrived.  There is a seemingly endless list of things to do and places to be – leaving even less time than usual to focus on your money and the markets.  What key items should you be paying attention to?  We suggest keeping your “eye on the TIGER” - Trade, Interest rates, Growth, Earnings, and Recession.

Trade  - What started as a war of words (and tweets),  a “trade tiff” has escalated in recent weeks.  It is becoming more likely that a trade war will ensue on some level (if it hasn’t already).  This past weekend, the latest development was Trump leaving the G7 summit early and refusing to sign the joint communique.  Trump’s actions were largely in response to Justin Trudeau’s (Prime Minister of Canada) comments that Canada would “not be pushed around."  Trump remarked of the G7 that the US is “being taken advantage of by virtually every one of those countries.” 

Attention was quickly turned today to the summit between Trump and Kim Jong Un, a historic meeting that led to an agreement by North Korea to dismantle the country’s nuclear program.  Many details remain to be clarified however, this is a very encouraging sign for global relations.

It’s clear that the the US’ role on the global stage and trade equality remains top of mind for the administration and more is certain to come. 

Interest Rates – Interest rate levels serve as a key component in the pricing of financial assets, and as a result, they deserve your attention.  Interest rates have risen since the beginning of the year (Rate on 10 year US Treasury sits at 2.96% on 6/11/18, up from 2.4% as of 12/31/17).  The US Federal Reserve meets again this week and it is highly anticipated they will again raise rates (the 7th such hike since December 2015).

Perhaps of even more interest is the flattening of the yield curve (when short-term rates rise at a faster rate than long-term rates).  The spread between 2yr and 10yr US treasuries is a much-monitored measure and that spread is declining (rests at 0.43% as of 6/12/18). 

Also worth consideration are interest rates around the globe. Both Europe and Japan continue easy monetary policies (albeit at a slower rate), which will present an interesting dynamic as the United States continues to move the other direction (ie: tighter monetary policy)

Growth – 2017 was the year of “synchronized global growth.”  That phrase was repeated countless times as markets reached record levels.  Has that changed in 2018?  No.  There are 189 economies in the world, and 185 are growing (what are the four?  North Korea, Venezuela, Brunei, and Equatorial Guinea).  The US is no exception, with 4% GDP growth not out of the question.  Economies are advancing – and for now, are growing despite the risks posed from potential trade changes and rising rates.

Earnings -  We are coming out of a record setting earnings season in Q1 2018.  Year over year earnings growth for the S&P 500 was 26.6%.  Much of that gain was driven by the tax law changes;  however the fact remains that earnings are accelerating at incredible rates.  It is expected that we have seen the peak in earnings growth rates – but not yet a peak in absolute earnings levels.  With growing economies and improved cash flow for consumers (due to the tax cut and declining unemployment), companies across virtually every sector are seeing improvements in their earnings and that trend is expected to continue.

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Recession – As primarily equity investors, this is a major area of focus.   We are continually evaluating whether a recession appears imminent as that would present a material headwind for many companies in which we are invested and the markets in general.  How can we predict a recession?  We can’t – but we can observe economic data that has tended to be a very strong predictor of recessions in the past.  The data we use most frequently is the Index of Leading Economic Indicators.  It’s a collection of ten data points utilized to predict downturns in the economy.  We look both at the overall trend line, but also at each of the component parts and their trends.  We are focused on whether the data is getting better/worse, not so much whether its absolute value is good/bad.  Below is a summary of the latest reading of the data and as you can see, we are still in a “better” period

Enjoy your summer and be sure to keep your eye on the TIGER.

Invest on,

Pam