LWP Investment Committee Strategies

As you might expect, we continually monitor the investment markets on your behalf. In addition, we convene the “the braintrust” of the Laurel Wealth Planning (LWP) Investment Committee every four months and when key events occur in order to analyze the investment markets; develop strategies for you; and set direction.

Investment Committee Outlook

We are in a sweet spot in the economic cycle. The U.S. and global economy is growing fast enough such that recession does not appear to be on the horizon, and yet not so strongly that we expect significantly higher inflation. In the U.S., politics seems to dominate the headlines, and yet the global economy is a mammoth vehicle that started gaining traction in about mid-2016. Per the Wall Street Journal, “It’s tempting to see surging U.S. stock prices and business confidence as all coming in response to President Donald Trump’s election. But the upswing is global: In Europe, Japan, China and elsewhere, business surveys and markets have turned markedly more optimistic. This is partly because investors hope that any fiscal stimulus (i.e., tax cuts, infrastructure or military spending) Mr. Trump enacts will spill over to other countries. Yet a confluence of other factors is also at work: Oil prices are on an upswing . . . [and] Chinese and European economic activity picked up in the second half of last year.”*

Investment market performance for 2017 (as of Feb 16)**

Many areas of the stock market – U.S. and international – have started the year strong. International emerging markets have posted especially strong results after a difficult four years. Many types of bonds have “settled down” after their pullback in late 2016. This is especially good news as we believe that they have largely priced in approximately two interest rate increases this year.

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Investment performance year-to-date has brought good news, but, of course, there are uncertainties:

  • The U.S. stock market has priced in a substantial reduction in corporate taxes, as well as some level of deregulation and additional federal government spending on infrastructure. If any of these do not materialize, or occur too slowly, we may see a pull back.

  • U.S. business is concerned about a “border adjustment”-- a type of tariff on imports with the goal of protecting jobs here -- that Congress is considering. Key concerns follow:

    • Tariffs have industry and job winners and losers. For example, GE is behind the border adjustment but retailers are not.

    • Tariffs can have long-term consequences because other nations often counter with their own tariffs, making it more costly – and challenging -- for us to sell our goods abroad. Per www.marketwatch.com, in 2014 the 500 largest U.S. companies (represented by the S&P 500) earned almost 50% of their revenues from abroad. That 50% number represents a large number of current U.S. jobs – and a portion of current portfolio values. You can well imagine that industries that may be impacted by any border adjustment are not silent as Congress considers this issue.

  • Washington has energy to reform and potentially reduce individual income taxes. Such change could reduce the value of the tax-free interest on municipal bonds. Many of these bonds pulled back after the election last November in part due to this risk. However, they have steadied year-to-date, due to: 1) having priced in an amount of tax reduction, 2) the potential difficulty of accomplishing all of the legislative initiatives currently discussed in Washington, 3) and possible corporate tax reform having a positive impact on municipals (due to a potential loss of the interest expense deduction to corporations, creating more demand for municipals). More on municipals below.

  • Of course, we face uncertainties not only from inside the U.S., but outside, and from any surprise outcomes.

Investment Committee Highlights

The Investment Committee reviews the quality of currently-recommended investment tools and strategies. As you might guess, this is an in depth, analytical process. We’ll focus on highlights here.

The investment committee sees opportunity over time, but heightened risk. For that reason, as suitable, we continue to recommend that both stocks and bonds be weighted at target.

U.S. stocks are somewhat overvalued, making this a good time to make charitable gifts of stock, or free up cash for 2017 needs beyond those we’ve already discussed.

  • If you have a charitable fund, please let us know if you’d like to contribute more securities this year, or begin contributions for the year now.

  • Also, please let us know any cash needs for 2017 that we’ve not yet discussed.

Tariffs and tax reduction may create some corporate winners and some losers. Actively- managed funds are better positioned to take action on these scenarios than are index funds. We believe that portfolios currently are properly weighted in terms of actively-managed and index tools.

Municipals may face a changing tax environment. Yet, for higher-tax-bracket taxpayers, especially residents of high tax states such as Minnesota, California, and New York (we serve clients across the country), municipal, i.e., tax-free bonds, will still likely offer value. With that in mind, we have reviewed your portfolio as compared to our understanding of your personal income tax rate. We will be contacting certain clients who may want to “lighten up” on municipals.

After a four-year struggle, emerging markets (the economies in Asia, Central and South America, India, and parts of Africa) are up +9% for the year (as represented by the MSCI Emerging Markets Index). Most portfolios already have a modest position, as suitable, in emerging markets, but in some cases we recommend taking further advantage. On another note, we recommend, as suitable, replacing the Parnassus Fixed Income (Bond) Fund, a socially responsible tool, with a socially responsible bond tool with a currently-better track record.

Please let us know any and all questions. We always enjoy hearing from you.

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*Wall Street Journal, February 16, 2016, “All Around the World Risks Begin Receding.”

**Data from Morningstar.

The information in this post is not intended as a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Expressions of opinion are as of this date and are subject to change without notice. This information is not intended for a solicitation or an offer to buy or sell any security referred to herein. Investments mentioned may not be suitable for every investor. Investing involves risk and investors may incur a profit or a loss, including the loss of all principal. Please note that international investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. This may result in greater share price volatility. These risks are heightened in emerging markets. Diversification does not assure profit or protection against loss. Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. Holding bonds to term allows redemption at par value. Bond prices and interest rates have an inverse relationship. Dividends are not guaranteed and must be authorized by the company’s board of directors. Market performance results were obtained from Morningstar.com.

S&P 500: Representing approximately 80% of the investable U.S. equity market, the S&P 500 measures changes in stock market conditions based on the average performance of 500 widely held common stocks. It is a market-weighted index calculated on a total return basis with dividend reinvested.

Russell 2000 TR: The index measures the performance of the small-cap segment of the US equity universe. It is a subset of the Russell 3000 and includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.

MSCI EAFE (Europe, Australasia, Far East) Index: A free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. As of June 2, 2014, the index consists of 21 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom.

MSCI Emerging Markets Index: The index measures the performance of the large and mid cap segments of emerging market equity securities. It is free float-adjusted market-capitalization weighted.

BBg US Corp A+ 1-5 Year: This index tracks the returns of publicly issued, fixed-rate, nonconvertible, dollar-denominated, SEC-registered, investment-grade corporate debt with maturities between one and five years and a minimum quality of A. The returns for the index are total returns, which include reinvestment of dividends.