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2017: Record Breaking Year

By | 2018, Money Moxie, Newsletter | No Comments

Entering 2017, I was more optimistic about the potential growth in stocks. In fact, my expectations were higher than 13 of 15 major investment companies. This optimism became a basis for staying invested throughout the year whether the market went up or down. The results were very positive.

I also assumed that at some point in 2017 we would wake up to some major down days. This never happened. The market just continued to climb all year long.

The S&P 500 (with dividends) rose every month last year for the first time ever! A positive return in January 2018 would bring the streak to 15 months in a row. Second place goes to a streak of 10 months stretching from December 1994 to September 1995.

These are powerful trends, considering the probability of any month being positive is around 60 percent. Strong momentum like this typically continues even after the streak is broken.

A second record was set that began in the final days of December. The Dow Jones Industrial Average had its quickest 1,000 point gain ever!

For three consecutive years I have accurately predicted the major actions of the Federal Reserve. I wrote: “This year, I am going to try something new: accepting the Federal Reserve’s forecast that it will raise rates 3 times in 2017.” That is exactly what happened.

I believe that keeping an eye on the Fed this year will be even more important than it was in 2017. You can see my analysis for 2018 here.

 

*Research by SFS. Investing involves risk, including potential loss of principal. Dow and S&P 500 indexes are widely considered to represent the overall stock market. One cannot invest directly in an index. Diversification does not guarantee positive results. Past performance does not guarantee future results. The opinions and forecasts expressed are those of the author and may not actually come to pass. This information is subject to change at any time, based upon changing conditions. This is not a recommendation to purchase any type of investment.

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2018: FOMO In the Stock Market

By | 2018, Money Moxie | No Comments

Protecting profit is profitable. Protecting fear is not. I keep this phrase on a sticky note below my computer to remind me that investment decisions based upon fear lead to mistakes. I have seen it during the major market meltdowns of 2000-2002 and 2008-2009. I have seen it in smaller drops, like January 2016.

There seems to be little fear of a market drop in 2018. I believe investors may now be protecting from another kind of fear and the consequences may again be surprising.

The Fear Of Missing Out (FOMO)—popular among youth today—describes investors worldwide. Stock markets have been so good people are asking, “Am I aggressive enough?”

Excitement and expectations have been rising and there has been a lot of money to be made. In just the first 10 trading days of 2018, the S&P 500 returned almost 5 percent! Worldwide averages were even higher! That is after returning over 30 percent over the last two years for U.S. large company averages. It is as though investors have accepted the massively positive moves as the new normal.

The market does not have to follow the economy perfectly. The market’s performance is also determined by how reality measures up to expectations. So, the most likely thing to go wrong this year may be a failure to meet lofty expectations.

Consider the awesome year-to-date returns. If the “5 percent in 10 trading days” were to continue for the rest of the year, then we would have a return in the S&P 500 of 217 percent! It’s not going to happen.

The best way to prevent a mistake is by not getting caught up in the FOMO. Don’t get too aggressive right when things could slow down.

While I believe a few surprises may cost those throwing caution to the wind, the market is unlikely to experience a major hiccup while the economy is still growing. That leaves us with plenty of reasons to stay invested in 2018.

*Research by SFS. Investing involves risk, including potential loss of principal. Dow and S&P 500 indexes are widely considered to represent the overall stock market. One cannot invest directly in an index. Diversification does not guarantee positive results. Past performance does not guarantee future results. The opinions and forecasts expressed are those of the author and may not actually come to pass. This information is subject to change at any time, based upon changing conditions. This is not a recommendation to purchase any type of investment.

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2017 A Banner Year! Where to from Here?

By | 2018, Money Moxie | No Comments

For answers about the 2018 stock market (S&P 500) we turn to Ed Hyman, Founder, Chairman, Head of Economic Research at Evercore, ISI, a top-ranked macro and investment firm. Hyman was voted #1 Wall Street Economist by Institutional Investor’s survey of professional investors for an incredible 37 years. His comprehensive, but succinct and easily digestible daily macro research is considered a must-read by professional investors.

To understand where we are growing, it helps to understand where we have been. A central thesis of Hyman’s is that the stock market drives economic activity. Since 1968–that’s a 50-year stretch–the S&P 500 has increased 20 percent or more only 12 times. Last year (2017) it came within a hair of doing so with its 19.4 percent gain.

In 10 of those 12 times, the economy was strong the following year. Taking out the effects of inflation, real GDP increased 2.7 percent or more. So 83 percent of the time economic activity was robust. The average for the 12 years after market advances of 20 percent or more was 3.4 percent real GDP growth.

The S&P 500 last year had another distinction. According to Hyman’s team, 2017 was the first year ever that the S&P 500 posted positive total returns–that’s including dividends–every month. The previous closest perfect year was 1995, which had only one down month. The market that year (1995) was up 34 percent. The following year (1996) it gained 23 percent, dividends included, and real GDP was a gang buster 4.5 percent.

Bullish Best Wishes in 2018,

Roger M. Smedley, CFP®
CEO

The S&P 500 is widely considered to represent the U.S. stock market. One cannot invest directly in an index. Investing involves risk, including potential loss of principal. Past performance does not guarantee future results. The opinions and forecasts expressed are those of
the author and may not actually come to pass. This information is subject to change at any time, based upon changing conditions. This is not
a recommendation to purchase any type of investment.

Source: WealthTrack, Episode #1429, Broadcast January 5, 2018

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What’s Up with the Stock Market?

By | 2017, Executive Message, Money Moxie, Newsletter | No Comments

Dear Friends and Financial Partners!

In spite of turmoil, tragedy, and terror, the U.S. stock market has not been suppressed during the last 12 months. Rising jobs and wages continue to support strong economic growth. In the U.S. we are experiencing the lowest unemployment in 17 years, according to the Bureau of Labor Statistics. Simultaneously, we have the highest consumer confidence in 17 years, according to The Conference Board Consumer Confidence Index®. Keep in mind that seventy percent of the U.S. economy is driven by consumer spending.

This rise in the stock market is not limited to the United States. It is a global phenomenon. The stock markets of Britain, France, Germany, and a host of other countries are also performing well.

Here’s how the S&P 500 has performed in the last two years. In 2016, the S&P 500 reached 18 new highs and was up 9.54 percent. This year, through November 30th, there have already been 57 record highs for a return of 18.26 percent. The Dow Jones Industrial Average and the NASDAQ have also set new record highs this year.

Dealing with the Wall of Worry
Many of us will readily recall Black Monday, October 19, 1987 when the Dow Jones Industrial Average (DJIA) dropped 508 points and finished the day at 1,738.74. That’s a decline of 22.61 percent. Thirty years later, on October 19, 2017, the DJIA finished the day at 23,557.99 points. That’s a compounded interest rate of 9.08 percent per year. (By the way, most people forget that even with that large of a drop in 1987, the year finished up a positive 2.26 percent.)

Gross Domestic Product (GDP) is one of the most important indicators used to gauge the health of our economy. GDP is the value of all finished goods and services produced by the U.S. Here’s the GDP by quarter in 2017: 1st Quarter—1.6 percent, 2nd Quarter—3.1 percent, and 3rd Quarter—3.3 percent. Wow! It has been several years since GDP has been this high. Researching money managers around the country, most managers believe that this climb in the stock market can continue and, yes, that there may be a Santa Claus rally in the works.

Bullish Best Wishes in 2018,

Roger M. Smedley, CFP
CEO

*Consumer Confidence Index is a registered trademark of The Conference Board.
**The S&P 500, NASDAQ and Dow Jones Industrial Average indexes are widely considered to represent the U.S. stock market. One cannot invest directly in an index. Investing involves risk, including potential loss of principal. Past performance does not guarantee future results. The opinions and forecasts expressed are those of the author and may not actually come to pass. This information is subject to change at any time, based upon changing conditions. This is not a recommendation to purchase any type of investment.

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How Financially Disastrous Are Natural Disasters?

By | 2017, Money Moxie, Newsletter | No Comments

Since our last Money Moxie®, we have seen two massive hurricanes lash the U.S. coast. In spite of these and other risks, the stock market has continued to add to its 2017 gains. What’s going on? Is the market’s response rational?

Counting on rational behavior —or even reasonable behavior—from investors during a crisis could be costly. So, even if you don’t expect to be directly impacted by a hurricane or other disaster, you may still feel some financial fallout.

Gas Prices: Hurricane Harvey pushed gasoline futures up 10 percent in trading on the New York Mercantile Exchange as investors anticipated refineries would shut down. The increase soon spread. According to AAA, the national average rose from $2.35 to $2.66 a gallon—a 13 percent increase.

Employment: Economic suffering is also evident in employment. Following Hurricane Harvey, the Labor Department reported the largest one-week jump in initial jobless claims since superstorm Sandy. Two weeks after Sandy (2012) and Katrina (2005), jobless claims soared higher by 23 percent and 30 percent, respectively. So, the full impact of Hurricane Irma on this measurement is still coming.

Consumer Spending: Nearly 70 percent of the U.S. economy is driven by stable consumer spending. When gas prices rise nationally and employment falls locally, there is less money for discretionary spending. The city of Houston, for example, has nearly 3 million workers and contributes around $500 billion to the economy. (Internationally, that places Houston’s economic value above that of the entire country of Sweden.)

Destruction and Reconstruction: Destruction is not counted in economic output. It shows up only as falling wealth. Reconstruction, often financed by debt, will eventually have a large impact on growth and cause a bump for inflation.

The overall impact could subtract around one half of a percent from U.S. growth. Fast forward 6 months and there should be a boost that approximately evens things out.

Investors concerned with natural disasters would be wise to maintain perspective. The lasting impact will be evident in the higher debt and human costs. Ultimately, this impact on individual lives is the most devastating.

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2017 Predictions

By | 2017, Money Moxie, Newsletter | No Comments

Market movement since Election Day has been massive and investors see this as confirmation of just how good Republicans are going to be for the economy. How could so many investors be wrong? Actually, fairly easily.

Right or wrong, investors should be careful not to get carried away. There is a high amount of uncertainty and no way to know what the future will bring.

(1) Trump Rally
The big move in stocks in November and December has been an acceleration of the positive momentum already taking place in the economy. It has been characteristic of many presidential election years with a good economy.

It is completely normal to get excited, but don’t let it lead to overconfidence. Few things last forever and most years have their ups and downs.

It is not unusual to see inauguration day (Friday, January 20, 2017) mark a change for investors as they realize the new president does not have a magic wand.

(2) Dow 20K
The Dow stock index has been flirting with 20,000. It just could not quite get there in 2016. In 2017, I believe it will! And it will likely cross that mark many times.

The first time the Dow reached 10,000 came in March of 1999. Over the next 11 years, it crossed that level on 34 days until it surpassed it a final time in the summer of 2010.

It’s hard to fight gravity and it’s hard to turn a large ship. There is so much positive momentum right now that I expect it to continue. Unemployment is falling. Wages are rising. Confidence is climbing.

One unknown is the impact of policy changes on global trade, which may decline this year as the United States turns its focus inward.

(3) Fed Does Its Job
The Federal Reserve is likely to “take away the punch bowl just as the party is getting started.”

For two consecutive years I have accurately predicted that the Fed would be more cautious than its own forecast. This year, I am accepting the Fed’s forecast that it will raise rates 3 times in 2017.

Of course, no one knows with certainty because with each rate hike, I expect investors will become more concerned.

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2016 Review

By | 2017, Money Moxie, Newsletter | No Comments

“If you want to see the sunshine you have to weather the storm.” In its first 3 weeks, 2016 delivered investors more than a 10 percent loss–the worst start in 80 years. Our natural human instinct at such moments is to feel that it will continue, but predicting the markets is extremely difficult.

In a dramatic turnaround, the U.S. stock market rose in February and March–recording the best recovery in 83 years.

(1) Fed will move slowly. The Federal Reserve planned to raise rates 4 times in 2016. This aggressive forecast in combination with falling oil prices spooked investors. Then came the uncertainty of Brexit and the U.S. elections. By year end, the Fed raised rates just once (in December).

(2) Election years are not recession years. I expected the economy to grow and for the market to continue to rise as our bull market entered its 8th year.

This positive outlook proved beneficial in the early days of 2016 when the resolve of many investors was tested. The market turned positive and remained there for most of the year.

(3) United States grows and the dollar slows. A strong U.S. dollar is not as good as it sounds. Sure, it’s great for Americans traveling overseas, but it presents challenges for large U.S. companies and investors.

The year began with too much strength: From July 2014 to January 2016, our dollar rose against every major currency around the globe! It gained 20 percent versus the euro and 54 percent versus the Russian ruble!

Fortunately, the U.S. dollar spent 9 of the last 12 months below January 2016 levels. That gave investors more opportunity as we invested globally.

This international diversification helped a great deal until a great divide formed in November.

These investments have taken a break as U.S. stocks rose in November, but I believe the worldwide economy still looks positive and may offer benefits to investors again in 2017.

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Stocks Predict Elections

By | 2016, Money Moxie, Newsletter | No Comments

Yes, stocks can help predict who will be the next President of the United States. While this particular election season has been filled with an unusual amount of conflict, the stock market has been surprisingly calm.

What does this calm predict? Very little, so far. Direction of the market in the final 90 days is what matters.

election-prediction

In 19 of the 22 presidential elections the change in the stock market in the 90 days preceding the election has correctly revealed the winner.

When the market rises during these 90 days then the incumbent’s political party wins. When the market falls then the opposite occurs.

In August, the market was flat, which means that this election may be closer than some polls currently predict. Of course, there are no guarantees.

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When Will Stocks Go Higher?

By | 2016, Money Moxie, Newsletter | No Comments

Stocks got off to a rough start in January and February as investors began to fear another recession. At the same time, consumers continued to keep the U.S. economy moving in the right direction. This divergence caused us to ask, which one is right? Are things getting better or worse? If the market is going to improve how strong will it be? Below is a list of what I think we need for stocks to move to new highs. Feel free to check the boxes if they become a reality.

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(1) Oil prices stabilize.
Investors need a dose of reality: low oil prices are good for the economy. Falling oil prices often follow, but do not lead to, recessions. What we need is for prices to stop declining so rapidly.

Oil is falling because the global supply is much
greater than demand. Even at these low prices, producers need to pump oil for cash. Fortunately, the decline is slowing. This is because demand and supply are getting close to a balanced level.

Global oil demand is at 96.5 million barrels/day and growing at 1.5%. Global supply is at 96.9 million barrels/day and is currently falling at a rate of -0.5%. This does not mean prices will move significantly higher, but they may stop falling.

With sanctions lifted, Iran could boost supply by 4 million barrels/day. Demand won’t grow fast enough to balance that much oil for a few years.

So, get used to low oil prices. They may be with us for a while–probably until several indebted producers cease oil production. At that point, oil prices could rise a little, fear over corporate debt should ease, and stocks will be more likely to climb.

(2) Political frontrunners emerge.
Who will be the next President of the United States? Investors are uncomfortable with this uncertainty, but they don’t have to wait until Election Day to feel better. With each election primary, the uncertainty diminishes.

(3) The Fed acknowledges global volatility.
What happened to “data dependence”? With its December rate hike the Federal Reserve announced that it intends to slowly raise rates in 2016 and 2017. It defined slowly as four rate hikes of 25 basis points each.

Rather than applaud transparency, investors have questioned the Fed’s determination.

Globally, central banks are doing the opposite: dropping rates to levels below zero in order to encourage risk taking, economic growth, and job creation.

(4) Evidence of consumer spending increases.
Will consumers continue to hold up this economy? The U.S. consumer represents 70% of the U.S. economy. China, on the other hand, represents approximately 2% of direct trade with the United States. That means that the consumer is 35 times more important.

Consumers are stronger than any time in the last 25 years. They are pocketing roughly $1,000 a year in energy savings. In 2015, spending increased 3% while purchases rose for autos (+5.8%) and homes (+7.5%).

With all of the good news about the consumer, the main concern is if these numbers are peaking. I think not. Unemployment is low (4.9%). Job postings are high (5.4 million). Wages and salaries increased by a reasonable and healthy level (+2.9%).

The final bit of good news on the consumer is that their debt-to-income levels are near their lowest point since the government started tracking them in 1981. That means there is still room for this 70% of the economy
to grow.

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The Irony and The Ecstasy

By | 2016, Executive Message, Money Moxie | No Comments

Dear Valued Financial Partners and Friends,

The evening news often features the familiar image of the New York Stock Exchange (NYSE). It typically shows a group gathered on the balcony overlooking the trading floor ringing the opening or closing bell.

The irony. I’ve always shared a chuckle with Sharla’s husband, Rich, for his astute observation: “When the stock market drops significantly, why do the people on the balcony clap so enthusiastically during the closing bell?” Great question. (Actually, it’s because their company is being featured or recognized.) But the celebrating of a down day is truly ironic!

More irony. The stock market dislikes uncertainty. However, it is that very uncertainty that creates the opportunity for profits over the long run. The irony: The stock market, or more correctly, the market of stocks, thrives on uncertainty.

The ecstasy. Here’s what Jeremy Siegel, PhD, said in the foreword of the 5th edition of his book, Stocks for the Long Run: “…there is overwhelming reason to believe stocks will remain the best investment for all seeking steady long-term gains.”

Most of us are worried about our money lasting as long as we do. If we are too conservative or if we are too aggressive in our investing, we could easily end up with the same outcome—not having adequate funds. If we are too conservative and are averse to taking any risk, then our investments cannot keep up with inflation. If we are too aggressive and take too many chances, then we may forfeit what we have because we have risked too much.

For most of us seeking stock market gains, the stock market could be considered boring. It’s like watching paint dry or grass growing. However, time and patience work wonders. Keep Jeremy Siegel’s professional research and expert opinion in mind.

The ecstasy can come from sound investing and prudent financial planning. Remember, as a nationally recognized wealth manager, Smedley Financial’s motto is, “Your financial success is our passion!”

Bullish Best Wishes,

Roger M. Smedley, CFP®
President

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