Viewpoints are a series of white papers on the way we see life in this financial world we live in today. We hope you will enjoy.

Off to the Races

Written by Jim Underwood, CFA, Chief Portfolio Strategist

As we approach November 8th, I am repeatedly asked, “How will the outcome of the upcoming elections impact investment markets, and which is better for the stock market – Republican leaders or Democratic?” My honest, easy answer (or non-answer) is always – “it depends”. However, let’s see if any broad generalizations can be made based on historical observations.

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Please enjoy market commentary each quarter from Chief Portfolio Strategist James W. Underwood, CFA.

Global Syncronization

January 2018

The sluggish U.S. economy has been one of the few consistent positive contributors to global GDP growth in recent years; however, in 2017, the rest of the world finally joined the recovery party.  The Organization of Economic Co-Operation and Development (OECD) tracks economic activity across forty-five countries, accounting for more than 80% of global GDP.  In its November 2017 Economic Outlook, the OECD projected all forty-five countries would positively contribute to global growth for the year, a synchronization not seen in over a decade.  Additionally, not only are global economies projected to grow in 2017, two-thirds of the countries are expecting growth rates to accelerate for the year.

 According to the U.S. Bureau of Economic Analysis, real GDP growth in the U.S. accelerated from a fragile 1.2% annualized rate in Q1 to 3.2% by Q3.  The combination of steadily improving growth conditions, the anticipation, and subsequent passage of widespread tax reform and significant regulatory relief has caused small business optimism to soar.  The National Federation of Independent Business (NFIB) – Index of Small Business Optimism posted its strongest year in the survey’s 45-year history.

Equity Market Review

Money management behemoth BlackRock, Inc. reported that year-over-year profit growth in 2017 is expected to top 10% in every major region of the world. The widespread progress throughout the global economic and corporate landscape, combined with an expectation of continued improvement, provided an environment for extraordinary gains and unprecedented stability across nearly every major stock market.  The MSCI All Country World Index ($), which captures 23 developed markets and 24 emerging markets, climbed 24.6% for the year, experiencing only two days of market declines greater than 1% (15-year average: 23.7 days).   The largest one-day decline for the MSCI All Country World Index ($) in 2017 was -1.2% on May 17th, driven more by U.S. political dysfunction than global economic concerns.

U.S. Markets

With corporate profit margins near all-time highs, more of the top line growth fell to the bottom line.  Additionally, a weakening U.S. dollar resulted in greater currency translation profits for companies with overseas revenue, leading to robust earnings growth for corporate America.  Against this backdrop, for the first time ever, the S&P 500 was positive on a total return basis every month of the calendar year, continuing its many winning streak(s) – fourteen consecutive positive months, nine consecutive positive quarters and nine consecutive positive years.

Over the final quarter of the year, the S&P 500 climbed 6.6%, bringing its full year 2017 total return to 21.8%.  Cyclical sectors continued their outperformance during the fourth quarter, led by the Consumer Discretionary, Technology and Financials sectors.  On the opposite end of the spectrum, the interest rate sensitive, defensive-oriented Utilities sector ended the quarter up a modest 0.2%.  The remarkable results by the Technology sector in 2017 (+38.8%) has increased the sector’s representation in the S&P 500 to 23.8% and is approaching 40% in many growth-oriented indices.

The Technology sector’s strong quarter enabled Growth benchmarks to continue their dominance during the fourth quarter, capping a remarkable year which saw the Russell Growth indices outpace their value counterparts by more than 10% across the capitalization spectrum.  From a size standpoint, generally larger cap companies outpaced smaller cap companies assisted by an earnings bump associated with increased levels of overseas revenues.

Foreign Markets

The MSCI EAFE Index ($), the popular foreign equity benchmark for U.S. investors which tracks developed markets in Europe and the Far East,  rose 25.6% in 2017, benefiting from robust equity returns and a weakening U.S. dollar.   For the year, all 21 countries captured in the broad market index increased in value in U.S. dollar terms, including 20 double-digit advancers.  Markets across Europe experienced relative underperformance in local currency, but the strengthening euro more than offset any local market weakness, resulting in a 26.2% return for the MSCI Europe Index ($).  The Japanese market soared, buoyed by strong earnings growth and political stability, ending the year with a 24.4% return, as measured by the MSCI Japan Index ($).

Word of caution: while the market is riding a wave of rising optimism, I am reminded of Sir John Templeton’s famous quote: “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.”  I am certainly not stating that the rising optimism is excessive or unwarranted; however, the market’s unrelenting momentum feels a bit euphoric with markets potentially accelerating faster than economic fundamentals are improving.

Fixed Income Review

Throughout the fourth quarter and full year, bond investors experienced a flattening yield curve as the Federal Reserve continued their rate normalization program by raising the Fed Funds target range 75 basis points, while longer-term yields remained anchored by low inflation, reduced supply and elevated demand.  The Fed has forecasted three additional rate hikes in 2018; however, with an already flat yield curve would Jerome Powell, the incoming Fed Chair, be willing to invert the yield curve with Fed policy moves?  The market is skeptical.

Reviewing credit sectors, spreads narrowed during the year, approaching 10-year lows, rewarding investors for taking risk within the bond market.  Leading the way were investment-grade corporate bonds which climbed 1.2% for the quarter and 6.4% for the full year.  In aggregate, the broad investment-grade bond market gained 3.5% in 2017 as measured by the Bloomberg Barclays U.S Aggregate Bond Index.

Satellite Strategies

Emerging markets were the big winner within the Satellite asset classes for the quarter and the year, rising 37.8% in 2017.  International small cap was another 2017 top performer gaining 32.4%.  On the negative side, MLPs faced significant headwinds throughout the year, declining 6.5%.

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Securitas, derived from the latin word for security, is an Article Series by Welch Hornsby, meant to help raise your awareness of the importance of information security.

Smartphone/Tablet Theft 2nd Quarter 2016 Security

Written by Jon Atchison, Information Security Coordinator

While you may not see the stories on major news networks, smartphone theft is big business and you would be surprised to learn that in 2013, 
3.1 million smartphones were reported stolen in the United States. It may also come as a surprise that nationally, just under a third of all robberies involve a smartphone of some kind.

A stolen smartphone (or tablet) represents a win-win for the thief because they have your device and in many cases, they get the information inside that device. Identity theft (and fraud) often begins from within a stolen device. Remember that ID theft is merely the stealing of your information. ID fraud occurs when the would-be thief uses your information for financial gain (loans, lines of credit, using your credit card to purchase groceries or gas).

So, ask yourself, “What if my iPhone or iPad (or computer) was stolen? Would I know what to do? Could I track and erase the data on my device?” In answering these questions, the first suggestion would be to learn about your technology and any such capabilities. Knowledge of how you can protect, track and erase your device is an essential first step. Having this knowledge will give you confidence when creating a plan in case your device is lost or stolen. In this article, you will find two scenarios where having a plan is crucial.

  • What to do when a personal device (computer/tablet/smartphone) has been stolen.
  • What to do when someone has used my identity to make a purchase or secure a loan.
    • Stolen card numbers are a more likely event and represent an easier mark for the thief. Stealing enough information about you to secure a loan is a different problem altogether.

Another suggestion would be to prepare yourself for a potentially daunting exercise in perseverance and patience. Living through either scenario is not going to be fun – but executing a well-prepared plan will make the experience much more manageable.

Scenario #1 – Your tablet/phone was lost or stolen while on vacation (or from any location). We will use an Apple product as an example.

Don’t panic – I say that because I assume you have already placed a passcode on the device. This is the FIRST line in the defense of your identity/privacy. If your iPad/iPhone or other tablet has no barrier between it and the general public – everything is fair game to the lucky thief.

Make a Call – If you suspect theft, notify the local authorities and try to retrace your steps in an effort to identify where the device went missing. Also, call your investment advisor, banker, CPA, etc to notify them of the potential theft. Many phishing emails originate from a client’s stolen device.

Track your device – Apple gives you the ability to locate your devices (iPads, Macs, iPhones) via the www.icloud.com. I encourage you to learn more about how Apple and Android help protect you and the information on your devices.

Change your passwords – Strongly consider changing any password associated with email located on your device. Other password changes could involve banking/credit card apps and shopping apps as well. Definitely change the account password for your AppleID (or Google Play if applicable).

Notify your banks and credit card companies – If you had your bank account(s) and credit card data integrated into your phone through their apps, notify them immediately and request that an alert be placed on your account. They may offer other helpful suggestions as well.

Scenario #2 – What to do when someone has used my identity to make a purchase or secure a loan.

There are fantastic resources that I would like for you to consider when thinking about your response to personal identity theft. The first link below is a more concise approach titled, “What To Do Right Away.” You might want to print this out and have it ready just in case…

https://bulkorder.ftc.gov/system/files/publications/pdf-0204_identitytheftwhat_to_do_right_away_0.pdf

The second link is “Taking Charge: What To Do When Your Identity is Stolen” and will help you build a personal recovery plan.
https://www.consumer.ftc.gov/articles/pdf-0009-taking-charge.pdf

I encourage you to spend some time in these documents and work through them to build a greater awareness of where you have the most exposure.

Identity thieves and fraudsters gain the most from victims who are not prepared. A victim who has a plan, knows their technology and who to call can mitigate much of the risk that comes from a stolen device. Being able to quickly respond to these events will save you time, money and hopefully some sanity.
A premium is often placed on investing in financial markets, our careers and healthy lifestyles. While these are worthy endeavors, we live in a world that requires more diligence in protecting and caring for our privacy and identity. The former usually takes time to realize a return, if any. I believe the latter will most certainly benefit you not only in the short run, but in the long run as well.

Written by Jon Atchison
Information Security Coordinator for Welch Hornsby, Inc.

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