Sunday, February 25, 2018

It’s Not All Doom and Gloom

The latest stock market volatility, combined with the Florida school shootings, the daily soap opera in the White House and the crappy weather in the East and Midwest could give even the sunniest of us the late winter blues.

Fortunately there’s hope. The U.S. overachieved its way to Winter Olympic medals in our non-core sports such as curling, bobsledding and cross-country skiing. We dodged another interest rate hike and the equity markets showed resilience once again in what many pundits assured us was the start of the Long, Long, Long Overdue Correction.

Our client, Matt Topley, chief investment officer of Valley Forge, Pennsylvania-based Fortis Wealth and author of the popular View from the Top blog, said there are a number of simple reasons why the recent market volatility is not a bear market in the making:

1. If we were moving into a truly defensive market, Topley said we would be seeing rotation out of aggressive sectors like technology and consumer discretionary and into defensive sectors like utilities and consumer staples. During the recent 10-percent market pullback, the (risk-on) tech and consumer discretionary sectors went down the least.

2. “Yes, we’re in the later innings of a long bull market,” said Topley, “but the stock market is driven by earnings growth and 80-percent of S&P companies are beating their revenue estimates—even without the tax cut.”
3. Wage growth peaked at 4 percent leading up to the last three recessions—it’s barely growing at 3 percent today, observed Topley.

4. Another fear driver during this selloff has been a flattening yield curvea situation in which long-term debt is not yielding much more than short-term debt of the same credit quality. But, Topley said equities tend to do well leading up to a flattening or inverted yield curve. “An inverted yield curve—when short-term debt is yielding more than long-term debt--is one of our firm’s five key recession indicators, but we are not in the danger zone yet,” said Topley.

5. There was absolutely no retail investor panic during the latest correction. In fact, the average American was buying stock during the recent market pullback. The “buy the dip” mentality is still intact, said Topley. “For a true bear market to ensue, retail investors have to throw in towel and sell in volume.”

Last week’s stock market volatility has caused many to wonder if the real estate market has also hit its near-term peak. Randy Hubschmidt, who manages Fortis’s Real Estate Fund, said many investors have asked him if it’s time to take some chips off the table and diversify into other sectors of the real estate market.

“Multifamily housing should remain strong as new tax laws make single family ownership less attractive and as downsizing Boomers migrate to urban markets vacated by Millennials who are finally settling down, starting families and moving to the Burbs,” said Hubschmidt. “There is still plenty of upside left for properties that can be upgraded quickly and cost effectively and can be repositioned in the market.”

Rays of hope on the tax reform front

While nearly half of you (45%) told us in our unscientific reader poll that you were dissatisfied with the Trump tax reform package, there are still some less known provisions that should cheer up taxpayers from Red states to Blue states.

Our client, Blake Christian, CPA, of HCVT in Long Beach California shared this sampler from a recent interview in US News & World Report:
·         529’s plans can now be used for K-12 educational expenses (not just for college) to the tune of $10,000 per year.
·         For 2018, the Child Tax Credit (CTC) doubles to $2,000 per qualified child from $1,000.  In addition, now up to $1,400 of the CTC for each child is potentially refundable, explained Christian, even if the taxpayer has a tax liability less than the credit amounts.  “For the 2018 year, taxpayers may also be eligible for up to $500 per non-child dependent.”
·         The American Opportunity Credit of $2,500 per year is now available for couples earning less than $180,000 per year who are financing an undergraduate’s education.
·         Achieving A Better Life (ABLE) accounts are designed for families with dependents who experienced disabilities prior to turning 26.  Christian said that in such cases “the ABLE accounts allow family and friends to fund up to $15,000, up $1,000 from 2017, annually and these funds grow tax free and are also excluded (up to $100,000) from impacting various federal and state benefit programs.”

AI is NOT taking over everyone’s jobs

Our client Anthony Glomski, founder of Los Angeles-based AG Asset Advisory and author of the new book, Liquidity & You, said non-linear thinking has always been an asset in business.  “Thinking globally and outside the box,” or “seeing the big picture” are clichés rooted in truth.  As we enter the era of automated automation, these abilities are the key advantage we’ll (presumably) maintain over exponentially learning machines.” Technical expertise will become obsolete more quickly and it is still unclear how this plays out for workers and businesses; and on what timeline. “It seems likely, however, that opportunities and success will follow for individuals and enterprises that can best perceive, anticipate, strategize, and adapt,” added Glomski.
Conclusion

As my dad always reminded me, things are never as good as they seem when you’re on a roll and they’re never really as bad as they seem when you’re down in the dumps. As always, the truth lies somewhere in the middle. Be smart. Trust your instincts and keep your eyes focused on the big picture that lies ahead. As my boyhood basketball idol, Charles Barkley, famously said, Sometimes that light at the end of the tunnel is actually a train.

Let’s hope the powers that be who are guiding our government, financial markets and economy have their eyes wide open as they lead us into the future.

TAGS, Anthony Glomski, Blake Christian, Charles Barkley, Matt Topley, Randy Hubschmidt

Tuesday, February 06, 2018

What Super Bowl 52 Taught Us About Calculated Risk

I remember one chilly Tuesday as an elementary schooler in Philadelphia. We were allowed to stay home because the hometown Eagles beat Dallas on Monday Night Football the night before. It wasn’t for the East Division title or National Conference championship. It wasn’t even for the final playoff spot. We simply beat Dallas during the peak of the hated Cowboys’ dynasty. That single game made the “Iggles” otherwise forgettable 2-12 season a huge success. At least in the eyes of Principal Warnick.

Fast-forward 40 years later. The Lombardi Trophy finally rests in Philadelphia. Never happened before. In case you missed it, the Super Bowl went down to the final play with the NFL’s winningest quarterback (Brady), coach (Belichick) and franchise (Patriots) trying to pull out one more miracle comeback from their bag of tricks. Eagles Nation was bracing for yet another gut-wrenching disappointment, but the football gods finally got over their grudge against the guys in green. Brady’s 50-yard Hail Mary pass got lost among a sea of arms, legs, hands and elbows and fell harmlessly near the end zone and the clock ran out. No flags on the play! No review! No Buffalo Bills comparisons.

For once, the guys in green and black came out on top. Nick Foles, the humble backup quarterback-turned-Super Bowl hero, simply said, “I didn’t try to be Super Man out there.” Just play the game and trust your teammates, is essentially what Foles added. I don’t think it was an intentional dig at the Hall of Fame-bound opposing quarterback, but Brady didn’t exactly congratulate the Eagles for their victory in his terse, post-game press conference.

Side Note: New York Giants fans, to their credit, have been very gracious to yours truly for the unlikely win by their bitter NFC East rivals.

Not your dad’s NFL title

Sure the Birds won the NFL title back in 1960, but there were only about 10 teams in the league and no such thing as a Super Bowl. I wasn’t born yet, but my dad told me pro football wasn’t that big a deal. You could get cheap walk-up tickets the day of the game at creaky old Franklin Field. He doesn’t recall a ticker tape parade in the Eagles’ honor. It’s going to be a little different on Thursday morning with over 2 million green-clad supporters on hand to salute their heroes and/or take advantage of the free Bud Light along the South Philadelphia parade route.

Living between NYC and Boston the past two decades, I’ve endured countless Super Bowl victories, World Series titles and Stanley Cup hoists by the hometown teams. In 1994, I accidentally stumbled into the NY Rangers parade in lower Manhattan and sort of got caught up in the excitement. It didn’t last. I’ve tried to root for the hometown boys, but old habits are hard to break. Do I have a perpetual chip on my shoulder? Yep. Does the city of Philadelphia? Yo!

We like it that way. The Eagles (and their raucous) fans will never be confused with the Chicago Cubbies and Boston Sox--“lovable losers” who endured over a century of futility before using sophisticated analytics and a business-like approach to the game to end their respective championship droughts. Eagles fans taking losing very personally.

Underdogs, Not!

Sure, the Eagles wore the underdog label like a badge of honor, but they are a shrewdly run organization that spends big bucks to sign high priced stars, between (and during) each season. Sure they started the season at 60-1 odds to win the Super Bowl. But, The Philadelphia Eagles Professional Football Club, Inc. uses sophisticated data mining and decision-making algorithms to exploit opponents weaknesses and to determine when to gamble on gutsy 4th down plays and two-point conversion attempts….and when not to.

Data analytics is also what allowed the Eagles to diversity their portfolio of players with enough “Next Man Up” talent to overcome the loss of nine opening day starters, including their MVP quarterback Carson Wentz.

As with the stock market, information moves at lightning speed in the NFL. Most teams will start emulating the Eagles’ use of data analysis, calculated risk taking and roster-stacking. They may not be able to manufacture the same team chemistry, but it won’t be easy for Philly to stay ahead of the pack, even with a full healthy roster next year. That’s what makes the Patriots’ recent dynasty so impressive in this data-driven free-agency environment.

Conclusion

As with the long-running bull market, the Patriots dynasty may be losing some steam, but the team will be back among the contenders next year--with or without the game’s greatest quarterback and supporting cast. Same goes for stocks. In fact, 80 percent of you told us in our fall 2017 Wealth Advisor Confidence Survey that you expected a 10-15 percent correction in 2018. That’s what gave me the courage to post Is the Miraculous Market/Economy Coming Back to Earth?  last Monday when the Dow was over 26K.

Stocks will take some healthy hits this year, but in the long run, they’ll remain the top contender in the asset-class competition for investors’ money. Just remember they’re a risk asset, not a savings bond. You can review this call as often as you like. It won’t be overturned. Principal Warnick said so.

TAGS: Stock market correction, Super Bowl, Bill Belichick, Tom Brady, Carson Wentz, Nick Foles, Philadelphia Eagles, risk management

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