Schwartz Financial Weekly Commentary 10/2/17

The Markets

A lot happened during the third quarter of 2017, but not much changed.

The bull market in U.S. stocks continued to charge ahead. Traditional measures of valuation continued to suggest the market is overvalued, but some analysts argued it’s different this time. The Economist explained:

“The current [cyclically-adjusted price-to-earnings] ratio of 31 suggests that stocks are about 50% over-valued – a figure that has only been exceeded in the past 60 years during the dot-com bubble. Bulls argue that the S&P 500’s constituents can justify this heady valuation. Big American companies are wielding increased market power, enabling them to earn outsized profits at the expense of America’s customers.”

The bull market in U.S. bonds continued. Interest rates on 10-year Treasury bonds were lower at the end of September than they were at the start of the year, despite the Federal Reserve increasing rates in March and June. The Fed also has indicated it will soon begin to unwind its balance sheet, which includes about $4.5 trillion in Treasury bonds, mortgage-backed securities, and government agency debt.

Geopolitical tensions remained high, but investors were impervious to the potential effect of various conflicts on stock and bond markets. In August, Barron’s wrote:

“The biggest surprise of 2017 remains that geopolitical risk continues to not matter. Until Monday, North Korea’s nuclear missile program had again faded into the background as just another high impact/low probability risk with no discernible effect on market sentiment. Brexit, the changes in leadership roles in China after the 19th National People’s Congress, the possibility of a United States-China trade war, and the unpredictable nature of the Trump presidency are not weighing on stocks.”

The CBOE Volatility Index (VIX) keeps plumbing historic lows. The VIX reflects investors’ expectations for market volatility in coming months. The lower the Index reading, the lower volatility expectations are. The historic average for the VIX is about 19.

During 2017, the number of days on which the VIX finished below 10 – suggesting investors are exceptionally calm – increased significantly. In early June, the VIX had closed below 10 just 14 times since 1990. Six of those closes had occurred in 2017. By the end of September, the VIX had closed below 10 on 32 days since 1990 and 24 times in 2017.

We’re still waiting for inflation to move higher. At the end of the quarter, inflation appeared to be heading the wrong way. The core Personal Consumption Expenditures (PCE) index, which is the Federal Reserve’s favorite measure of inflation, came in at 1.3 percent, year-over-year. That’s its lowest level since October 2015, reported Barron’s. The Fed’s goal is to have inflation at 2 percent. It has raised rates during 2017 in anticipation of higher inflation rates, but those higher rates have yet to materialize.

Data as of 9/29/17 1-Week Y-T-D 1-Year 3-Year 5-Year 10-Year
Standard & Poor’s 500 (Domestic Stocks) 0.7% 12.5% 17.1% 8.4% 11.8% 5.0%
Dow Jones Global ex-U.S. -0.6 18.7 16.5 2.7 4.9 -0.9
10-year Treasury Note (Yield Only) 2.3 NA 1.6 2.5 1.6 4.6
Gold (per ounce) -0.9 10.7 -2.7 1.7 -6.4 5.6
Bloomberg Commodity Index -0.5 -3.5 -0.9 -11.2 -10.8 -7.2
DJ Equity All REIT Total Return Index 0.7 6.1 2.1 10.1 10.2 5.8
S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

the case of the swirling Euros. In mid-September, local authorities in Geneva, Switzerland were investigating an unexpected deposit. Reuters reported:

“…the first blockage occurred in the toilet serving the vault at [a] bank…in Geneva’s financial district, and three nearby bistros found their facilities bunged up with 500-euro notes a few days later…The cash was confiscated during the investigation and it was unclear who would get it if it was found to be lawful. There was no immediate reason to think it was dirty money…”

Whoever was responsible for flushing about $100,000 worth of 500-euro bills may have jumped the gun. The €500 note will be discontinued by the European Central Bank because authorities suspect it has been used to facilitate illegal activities, but production continues until the end of 2018.

The perpetrator hasn’t committed a crime, reported Bloomberg. While it’s illegal to mutilate or deface bills in the United States, that’s not the case in Switzerland. The European Commission isn’t concerned when small amounts of euro are damaged. Its rules for legal tender state:

“The destruction of small quantities of euro banknotes or coins by an individual should neither be prohibited nor penalized. The justification for the non-prohibition is the fact that the lawful owner of a banknote should be able to do what he/she wants with his/her own good as long as there is no impact on third parties.”

Why investigate if there is no crime? There’s nothing like a good mystery to occupy the mind!

Weekly Focus – Think About It

“The problem with putting two and two together is that sometimes you get four, and sometimes you get twenty-two.”

Dashiell Hammett, American author

Value vs. Growth Investing (9/29/17)

Name 1-Week YTD 4-Week 13-Week 1-Year 3-Year 5-Year
US Market 0.82 14.10 2.30 4.52 18.65 10.74 14.21
US Core 0.74 14.25 1.93 3.70 18.91 11.43 15.33
US Growth 0.80 21.07 1.29 5.33 20.90 11.32 14.23
US Large Cap 0.62 15.09 1.87 4.73 19.46 10.92 14.10
US Large Core 0.52 15.56 1.20 3.56 20.23 11.97 15.66
US Large Growth 0.70 22.28 0.90 5.61 21.90 11.81 14.59
US Large Val 0.65 8.02 3.63 4.89 16.38 8.95 12.12
US Mid Cap 1.03 12.18 2.89 3.73 16.25 10.12 14.81
US Mid Core 0.92 12.37 3.17 4.01 15.36 9.98 14.83
US Mid Growth 0.75 17.89 1.77 4.21 17.82 9.50 13.15
US Mid Val 1.47 6.44 3.85 2.88 15.42 10.82 16.52
US Small Cap 2.29 9.78 5.09 4.67 17.41 10.73 13.66
US Small Core 2.46 7.83 5.45 3.92 17.02 10.69 13.96
US Small Growth 2.15 17.66 4.12 5.40 19.38 11.35 13.37
US Small Val 2.27 4.21 5.82 4.75 15.55 10.07 13.58
US Value 0.92 7.43 3.82 4.48 16.15 9.42 13.12
 ©2004 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) is not warranted to be accurate, complete or timely. Morningstar is not responsible for any damages or losses arising from any use of this information and has not granted its consent to be considered or deemed an “expert” under the Securities Act of 1933. Past performance is no guarantee of future results.  Indices are unmanaged and while these indices can be invested in directly, this is neither a recommendation nor an offer to purchase.  This can only be done by prospectus and should be on the recommendation of a licensed professional.

 Office Happenings:

“Social Security Planning for Women”

 Our one and only Social Security Planning educational event for 2017 is now open for registration:

MLS_Women_Retirement+SS-NOV2017email

Regards,

Michael L. Schwartz, RFC®, CWS®, CFS

P.S.  Please feel free to forward this commentary to family, friends, or colleagues.  If you would like us to add them to the list, please reply to this email with their email address and we will ask for their permission to be added.

Michael L. Schwartz, RFC, CWS, CFS, a registered principal offering securities and advisory services through Independent Financial Group, LLC., a registered broker-dealer and investment advisor.  Member FINRA-SIPC. Schwartz Financial and Independent Financial Group are unaffiliated entities.

 

This information is provided for informational purposes only and is not a solicitation or recommendation that any particular investor should purchase or sell any security. The information contained herein is obtained from sources believed to be reliable but its accuracy or completeness is not guaranteed.  Any opinions expressed herein are subject to change without notice.  An Index is a composite of securities that provides a performance benchmark.  Returns are presented for illustrative purposes only and are not intended to project the performance of any specific investment.  Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly.  Past performance is not a guarantee of future results.

 

* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

 

* The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices. 

 

* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

 

* Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.

 

* The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.

 

* The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.

 

* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.

 

* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

 

* Past performance does not guarantee future results.

 

* You cannot invest directly in an index.

 

* Consult your financial professional before making any investment decision.

 

* To unsubscribe from our “market commentary” please reply to this e-mail with    “Unsubscribe” in the subject line, or write us at “mike@schwartzfinancial.com”.

Is This Your 401k?

If you were working with our office, the first week of every month you would receive an email letting you know which of the investments in your company 401k plan was doing better than the Russell 3000 and where your money should be invested in.  For most people your 401k plan is the largest part of your Retirement Plan and also besides your home the largest investment you will have.

According to the latest stats less than 12% of individual ever trade their investments in the 401k plans.  Shouldn’t you take better care of your retirement?

R Keegan Oct 17 401k_Page_1R Keegan Oct 17 401k_Page_2

Financial Independence For Woman

According to one study, 37% of women over the age of 65 live alone, either because they are divorced, widowed, or never married.  When it comes to managing money, these women usually have no one else to turn to but themselves.

Request our Ebook “Financial Independence For Women”  Free for the asking.  Request at mike@schwartzfinancial.com .

Financial Independence for Women 1_Page_01

Schwartz Financial Weekly Commentary 9/25/17

The Markets

Geopolitics, what is it good for? Absolutely nothin’!

In January, Robert Kahn of the Council on Foreign Relations wrote in Global Economics Monthly:

“Markets showed impressive resilience in the face of a range of geopolitical shocks in 2016, but recent market moves suggest this year could be different…It should be the year that global geopolitical risks provide the volatility in markets that I, and many other economists, have been predicting for some time.”

Kahn may share the bemusement of bond market prognosticators who have anticipated the end of the bull market in bonds for years and have yet to see their predictions prove out.

So far in 2017, investor confidence has remained impervious to geopolitical threats. Bloomberg reported, while diplomats at the United Nations stress over North Korea’s threat to drop a hydrogen bomb, Russia’s provocations along the borders of Eastern Europe, rising Middle East tensions, and conflict between the United States and China in the South China Sea, investors remain relatively sanguine.

The CBOE Volatility Index, or VIX, which measures market expectations for near-term volatility in the Standard & Poor’s 500 Index (S&P 500), finished below 10 on Friday. Historically, the VIX has finished below 10 on just a few days in its history. While the very low level of the VIX doesn’t tell us much about the future, Barron’s reports it indicates investors are not too concerned about “what’s happening now and what has happened.”

That contention appears to be supported by U.S. stock market performance. Despite hostile rhetoric between the United States and North Korea last week, the S&P 500 and Dow Jones Industrial Average both finished slightly higher.

Data as of 9/22/17 1-Week Y-T-D 1-Year 3-Year 5-Year 10-Year
Standard & Poor’s 500 (Domestic Stocks) 0.1% 11.8% 14.9% 87.9% 11.4% 5.1%
Dow Jones Global ex-U.S. 0.4 19.4 15.7 2.0 4.7 -0.6
10-year Treasury Note (Yield Only) 2.3 NA 1.6 2.6 1.7 4.6
Gold (per ounce) -2.1 11.7 -3.3 2.2 -6.0 5.9
Bloomberg Commodity Index -0.4 -3.0 -0.8 -10.6 -10.3 -7.1
DJ Equity All REIT Total Return Index -2.5 5.4 0.5 9.8 9.6 5.9
S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

it’s the ig nobel awards! On September 14, the 27th First Annual Ig Nobel Prize Ceremony kicked off with a flight of paper airplanes.

The winners were chosen by the publishers of the Annals of Improbable Research, which reviews, “Real research, about anything and everything, from everywhere. Research that’s maybe good or bad, important or trivial, valuable or worthless.” The most important characteristic of the works published is they make people laugh and think.

The evening’s entertainment included ceremonial bows from returning Ig winners John Culvenor, who received the 2003 Physics Prize for analyzing the forces required to drag sheep across various surfaces, and Deborah Anderson, who received the 2008 Chemistry Prize for testing whether a dark cola is an effective spermicide.

This year’s winning research explored diverse and improbable ideas, including studies entitled:

  • Didgeridoo Playing as Alternative Treatment for Obstructive Sleep Apnoea Syndrome: Randomised Controlled Trial, which discovered that, “Regular didgeridoo playing is an effective treatment alternative well accepted by patients with moderate obstructive sleep apnoea syndrome.”
  • Never Smile at a Crocodile: Betting on Electronic Gaming Machines is Intensified by Reptile-Induced Arousal, which showed that, “At-risk gamblers with few self-reported negative emotions placed higher average bets at the EGM after having held the crocodile when compared to the control.”
  • Is That Me or My Twin? Lack of Self-Face Recognition Advantage in Identical Twins concluded that, “identical twins cannot tell themselves apart, visually.”
  • On the Rheology of Cats, which explored whether a cat can be both a solid and a liquid and determined, “much more work remains ahead, but cats are proving to be a rich model system for rheological research.”

Each of the 10 Ig Nobel winners was given 60 seconds to explain themselves before being awarded a bust replica of a human head with a question mark on top of it, a certificate signed by a Nobel Laureate, and one trillion Zimbabweans.

Russian-born physicist Andre Geim was the first scientist to win both awards. He received a 2000 Ig Nobel Prize for his work using magnets to levitate frogs, and a 2010 Nobel Prize for discovering graphene (a new form of carbon).

Weekly Focus – Think About It

“Like a welcome summer rain, humor may suddenly cleanse and cool the earth, the air, and you.”

Langston Hughes, American poet

Value vs. Growth Investing (9/22/17)

Name 1-Week YTD 4-Week 13-Week 1-Year 3-Year 5-Year
US Market 0.21 13.17 2.52 3.35 17.22 10.00 13.71
US Core -0.23 13.41 2.07 2.68 17.41 10.65 14.87
US Growth -0.12 20.10 2.03 3.28 19.17 10.83 13.66
US Large Cap 0.06 14.37 2.15 3.49 18.15 10.32 13.68
US Large Core -0.59 14.96 1.45 2.52 18.93 11.32 15.29
US Large Growth -0.39 21.44 1.54 3.35 20.21 11.46 14.05
US Large Val 1.21 7.32 3.51 4.60 15.45 8.14 11.77
US Mid Cap 0.44 11.04 3.03 2.90 15.01 9.18 14.18
US Mid Core 0.41 11.35 3.28 3.27 14.00 9.08 14.23
US Mid Growth 0.63 17.01 2.94 3.13 16.61 8.78 12.59
US Mid Val 0.25 4.90 2.84 2.20 14.24 9.60 15.75
US Small Cap 1.07 7.32 4.96 3.24 14.13 9.04 12.69
US Small Core 1.42 5.24 4.61 2.46 13.21 8.85 12.94
US Small Growth 0.54 15.19 4.80 2.92 15.63 10.01 12.47
US Small Val 1.28 1.89 5.55 4.48 13.28 8.21 12.57
US Value 1.03 6.46 3.52 4.12 15.10 8.46 12.65
 ©2004 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) is not warranted to be accurate, complete or timely. Morningstar is not responsible for any damages or losses arising from any use of this information and has not granted its consent to be considered or deemed an “expert” under the Securities Act of 1933. Past performance is no guarantee of future results.  Indices are unmanaged and while these indices can be invested in directly, this is neither a recommendation nor an offer to purchase.  This can only be done by prospectus and should be on the recommendation of a licensed professional.

Office Happenings:

Hurricane Season and Your 401k

“We’ve had three 100-year floods in the last 18 months. This one looks like a 1,000-year flood.”
– Congressman Pete Olson of Texas (source: NPR)

The historic amount of rainfall caused by Hurricane Harvey last month caused flooding in the city of Houston. This storm marked the third flood event to hit the Houston area in as many years (Memorial Day floods in 2015 and 2016 accounted for the first two).

Every time I read or hear about sophisticated assumptions about future weather patterns I am reminded of the computer models used to predict stock market risk.

The current generation of robo-advisors use Modern Portfolio Theory to construct individual company 401(k) retirement plan mutual fund portfolios with the lowest possible risk.

Just in case you are interested, the financial industry jargon for the lowest possible risk for a given level of expected return is standard deviation.

The robo-advisor “sales pitch” for Modern Portfolio Theory is that it will weather any stock market storm in a company 401(k) retirement plan account. This investment management process will “diversify away” potential historic company 401(k) retirement plan principal losses.

If you are a long-time resident of the Houston area, you have been warned on three separate occasions over the last few years was to evacuate areas of the metro. For those few citizens who lacked those skills, mandatory evacuations were ordered.

If you choose to live in Houston, you will live to see more historic flooding. You can’t diversify your way around that fact. At some time in your future another evacuation will save your life.

Fortunately, there are equally sophisticated computer model tools that will help individual company 401(k) retirement plan participants identify heightened risk levels in changing stock market environments.

These tools don’t rely on historical correlations. Instead, they help identify the realities of lower stock prices caused by more sellers than buyers. These tools don’t have to predict. They just need to react to what is going on in the stock markets.

It is much too late now for Houston residents to buy flood insurance. Just like it is much too late for Florida residents to buy hurricane insurance. It is not too late to put in place a stock market risk management game plan for your company 401(k) retirement plan account.

Computer models can provide more than enough time to alert you to “get out of the way” when you need to. Diversification does not get you out of the way. Instead, you sit and take it and hope for the best.

Make sure that you have more than enough time to safely evacuate with a large part of the last several years of your company 401(k) stock market investment gains.

If you are a set it and forget it investor (index funds) here is an article you might want to take a few seconds to read.

http://www.marketwatch.com/story/the-shocking-truth-about-stock-returns-in-this-century-2017-09-22?mod=mw_share_facebook

Give our office a call at 215-886-2122 to see how we can provide you a monthly breakdown of the investments in your 401k plan.

Regards,

Mike

Michael L. Schwartz, RFC®, CWS®, CFS

P.S.  Please feel free to forward this commentary to family, friends, or colleagues.  If you would like us to add them to the list, please reply to this email with their email address and we will ask for their permission to be added.

Michael L. Schwartz, RFC, CWS, CFS, a registered principal offering securities and advisory services through Independent Financial Group, LLC., a registered broker-dealer and investment advisor.  Member FINRA-SIPC. Schwartz Financial and Independent Financial Group are unaffiliated entities.

 

This information is provided for informational purposes only and is not a solicitation or recommendation that any particular investor should purchase or sell any security. The information contained herein is obtained from sources believed to be reliable but its accuracy or completeness is not guaranteed.  Any opinions expressed herein are subject to change without notice.  An Index is a composite of securities that provides a performance benchmark.  Returns are presented for illustrative purposes only and are not intended to project the performance of any specific investment.  Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly.  Past performance is not a guarantee of future results.

 

* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

 

* The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices. 

 

* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

 

* Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.

 

* The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.

 

* The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.

 

* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.

 

* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

 

* Past performance does not guarantee future results.

 

* You cannot invest directly in an index.

 

* Consult your financial professional before making any investment decision.

 

* To unsubscribe from our “market commentary” please reply to this e-mail with    “Unsubscribe” in the subject line, or write us at “mike@schwartzfinancial.com”.