Mid Year Review - Slow but Steady?

In our December 2016 year end review we wrote, "No forecast now, no forecast until April.  We can't recall another time in the last 30 years that we were so uncertain about what to expect from the US government, and how that would affect the key drivers of stock market returns - revenues, earnings and interest rates.

Other analysts put out price targets for the S&P 500 of 2300-2450, which would imply gains of 3-9.5% from the current level of the S&P 500 at 2239.  The consensus for 2017 is that:

  • Inflation will rise from the current 2% annualized
  • Interest rates will continue to rise, with the Fed raising rates perhaps 3 times this year
  • The dollar will remain strong, depressing the value of overseas earnings and promoting imports over exports
  • A combination of deficit spending and new spending on infrastructure COULD enable the US economy to grow faster than the 2% annually of the last 8 years.
  • Wages will rise as labor markets tighten
  • Earnings in general will rise, particularly if corporate taxes are lowered

From year end through July 14th, the S&P 500 made 24 record highs and currently gains 9.85% YTD, so already above the most optimistic forecast at the start of the year.  

Read the full commentary here.

Implications of the Trump Presidency for US Stocks

After 107 days of the Trump Presidency, we believe that this administration is determined to be the wildest reality TV show of all time.  People say, "War is God's way of teaching us geography."  Perhaps Donald Trump is God's way of teaching us about the Federal Government?

The purpose of this commentary is explain the challenges of making radical decisions about the US tax code and economy without creating counter-productive secondary effects.  We will also project how these decisions affect specific sectors and industry groups.  We'll do our best to write about Trump while leaving partisan feelings to the side.

As we often tell our clients, emotions and news nuggets dominate day by day fluctuations in the US stock market.  Over longer time frames - quarters, years, decades - only revenues, earnings and interest rates matter.  Ultimately, we invest in the cash flow generated by US corporations, discounted by expectations of current and future interest rates.  Rising revenues and expanding earnings support the market; rising interest rates harm the market.  With this framework in mind, let's review everything we know about the Trump presidency so far.

Healthcare

Spending on healthcare represents 17.1% of the US economy, yet our health outcomes (obesity, child mortality, addiction rates and chronic disease) trail "socialist" countries that spend much less including Sweden (11.9%), France (11.5%), Canada, (10.4%) and Japan (10.2%).  These countries regarding health care spending as an investment in productive workers the way a manufacturer regards maintenance dollars spent on factory robots as an investment.

Americans don't regards healthcare spending as an investment, but as a cost.  Uniquely among major industrialized nations, the provision of healthcare in the US is attached to employment, which left 50 million Americans uninsured prior to the passage of the Affordable Care Act in 2010.  The ACA, with all its flaws, enabled 22 million to receive insurance, whether through purchasing policies through the exchanges, Medicaid expansion, or as young adults staying on their parents plan.  We have HNW clients who are enrolled in Obamacare because it's the most affordable option in their communities.

Conservatives hate the cost of the Affordable Care Act that is covered by a 0.9% increase in Medicare Tax for earned income in excess of $250K for a couple, $200K for an individual and a 3.8% surtax on the unearned income (interest, dividends, passive business income).  These taxes apply primarily to the top 2% of US earners and generate about $30 billion annually in tax revenues.

Given that Congress voted over 60 times to repeal the ACA between 2011-2016, observers assumed that repealing Obamacare would be the first act of the new administration.  Indeed the S&P 500 Health Care index, sold off through the summer of 2016, rallied just before the election anticipating a Clinton win, sank in the days after the election.

Read the full commentary here

The 2016 Year in Review

In January 2016, we projected that the S&P 500 would gain 5% for the year, but we noted we would revisit that estimate in July.  In July, noting that an earnings recession among US corporations was coming to an end, we elevated our forecast to 10%.  For the full year, the S&P 500 rose 12.0%, so close enough.  Full details of US and world Indexes are here:

 Within the major categories, Energy stocks rallied 27.4%, as oil rose from a mid January low of $26/barrel to a year end high of $54.  On January 23rd, we wrote:

We would like to think that financial markets are "rational" but every once in a while, markets fixate on ONE particular indicator. In the last three weeks, price direction in stocks became entirely correlated with the price direction in oil.  Nothing else - earnings, interest rates, labor markets, industrial production, housing markets - seemed to matter.  Last August, investors fixated on the Chinese markets, which dragged down US stocks 11% in a month.  When the fixation dissipated, US stocks gained back the entire loss in 2 ½ months.  We expect the same will happen over the next few months, so starting Monday we are putting all our spare cash to work.

Indeed, we nailed the low for 2016.

Full commentary here:

Presidential Election Recap, and What Comes Next

Our job is to make good decisions in an environment of permanent uncertainty.  To succeed at this task, we must revisit our past research, ESPECIALLY when we are wrong.  What went wrong with our analysis of the election?

First let's consider what we got right:

  • Clinton was the ultimate Democratic nominee
  • The Republicans did indeed organize a circular firing squad, producing a nominee NO ONE expected (not even Trump.)
  • We noted that if Clinton couldn't put away Sanders, the email server or the Clinton Foundation issues she would struggle.
  • In particular, we identified the division of the country into "haves" and "have-nots."  In principal the combination of

low unemployment
low inflation
low gas and fuel prices
record GDP
record number of workers employed
stock market at record highs
real-estate prices approaching record highs

should have ensured a slam dunk for the party in power.  However, the gains unevenly favored "coastal elites" over the "Rust Belt" working class.

  • These factors created an opportunity for Trump to win, even if we regarded that outcome as low probability.
  • Ultimately, electoral college math would prevail

Here's what we got wrong:

  • The final electoral college count!

Read complete commentary:

Hey "Millennial," Give Yourself a Break, You Were Dealt a Tricky Hand

The media does not generally portray millennials in a positive light. This holds true for perceptions of the savings habits of millennials. Millennials are still seen as the generation living in mom's basement. Whether they are doing so because they are, in fact, diligently saving, or because they are "failure to launch” kids is not usually specified. The other point that often goes unmentioned is that millennials will need to save more than previous generations, as well as work harder in order to save more. Interest rates are low and investment savings are not returning the high yields seen by previous generations. Between the major limitations of low interest rates and crippling student loan debt, most millennials are struggling to save. 

When it comes to accruing savings, millennials are swimming against the current, but they are swimming very, very hard. They are not getting into credit card debt at the rate of previous generations, which shows a wariness and sophistication with which millennials are not credited enough in mainstream media. The money they put away is not going to work as hard for them as the money put away by their parents and grandparents. As a result, millennials are being called on to put away more and more towards retirement than any previous generation. Not only are the low interest rates holding them back, but there is a very real threat that social security will run out long before full retirement age, leaving millennials to fund 100% of their own retirement.

Read the entire article on LinkedIn

Confounding All Expectations, Donald J. Trump Elected US President

As of Monday evening, one day before the election, all 15 major political forecasters tagged Clinton for the win. FiveThirtyEight.com was the most conservative, forecasting an electoral split of 272-268 in favor of Clinton with a 66% probability of success. The mood among Republican operatives, even the candidate himself, was despondent. No candidate in modern electoral history who polled so badly post Labor Day had ever won.

And yet, by 10PM last night, Trump won the three major states (Ohio, Florida and North Carolina) he had to win to stay competitive, plus enough of 6 more states to exceed 270 electoral votes by 2:30 AM. Clinton holds a 100K lead in the popular vote, which may flip in favor of Trump as states finalize vote tallies. The final electoral count will be 320 Trump to 218 Clinton. Republicans retain control of the US Senate and House of Representatives, plus choose the next Supreme Court Justice.

Clinton was the policy wonk to the end, but could not overcome three instances of bad judgement:

  1. Using a private email server for State Department business
  2. Allowing the Clinton Foundation to solicit gifts from foreign governments while Secretary of State
  3. Accepting 6 figure speaking fees from Wall Street banks

The optics were horrible, shifting 1-2% of voters in critical states and delivering Florida, Pennsylvania, Wisconsin, Michigan and New Hampshire to Trump at the buzzer.

Read the full commentary here:

Trump's Victory Polarizes Investors as Financial Advisers' Clients Adjust

If the 2016 U.S. presidential race was a tale of two countries, its aftermath has become a tale of two investors.

Financial advisers and investment houses across the country have been besieged Wednesday by investors looking for reassurance, guidance on whether to sell or stay put and advice on how to play Republican  Donald Trump's upset win over Democrat  Hillary Clinton.

Heron Financial Group received emails from distraught clients Tuesday night as the election unfolded and called them back as quickly as possible Wednesday. The New York advisory firm said it had received more calls than usual Wednesday morning-even more than after the U.K.'s June vote to exit from the European Union-from its clients, who are overwhelmingly Hillary Clinton supporters.

David Edwards, the firm's president, found himself consoling a tearful female client Wednesday morning.

"It certainly was a shock to the system," he says.

A few clients have asked Mr. Edwards to sell everything. For one client, he is raising $100,000 "just so he can sleep at night," Mr. Edwards said.

However, he has been able to discourage most others from selling. "You want to sell now and buy when things are better?" he's telling clients seeking to sell. "You want to sell low and buy high?  My job is to prevent you from doing that!"

Read the entire commentary here:

4 Trading Days Till US Presidential Election: We Are NOT Invoking Our Doomsday Plan

At this point, everything that can possibly be said about this election has been said. Whether you dislike Trump more than Clinton, or dislike Clinton more than Trump, the horrible, miserable conclusion is just days away.

Investors clearly prefer a Clinton win over Trump. A Clinton Presidency would do little to rock the status-quo, since it’s unlikely that a Republican controlled House of Representatives would allow the passage of ANY substantial legislation. 

Markets have been unsettled for 7 straight trading days as Clinton’s early October polling advantage shrank, particularly after FBI Director James Comey’s oddly timed announcement regarding emails of Huma Abedin on the laptop of estranged husband Anthony Weiner. After selling off 3% in the last three days, US stocks are now 4.1% below the July high, though up 5.2% on the year. Our forecast for all of 2016 remains at 10%.

We reassured many concerned clients that if Trump appeared likely to win, four days in advance of the election we would sell all the stocks and equity mutual funds in their retirement accounts in anticipation of a 10% correction in stocks. We wouldn’t sell equity exposure in taxable accounts because the capital gains taxes would generally exceed 10% of the value of the positions.

Read the full commentary here:

Fee-Only Wealth Advisor Doubles Managed Assets in Less Than Three Years

NEW YORK (October 15th, 2016) - David Edwards, founder,  Heron Financial Group | Wealth Advisors, a New York-based Registered Investment Advisor, continues to educate current clients and prospects on how to plan, grow and keep more of their financial assets. A slate of activity at industry and business events shows the dedication that Edwards and his team demonstrate in their quest to promote the "Joyful Planning" concept. Edwards took on leadership roles in the financial services industry, accepting advisory positions and speaking engagements with key industry associations. Edwards brings that exposure back to the firm to provide better service for Heron clients.

"As a fiduciary to our clients, we always act in their best interests. We remain committed to leading our profession in best practices and technology. This combination of good advice and good service resulted in exceptional growth within our firm," said Edwards. Heron Wealth grew from $122 million in assets as of January 2013 to $260 million through September 2016. "We plan to double assets over the next three years, double again within seven years to $1 billion. We will continue to deliver the high touch experience our clients expect, but also derive the revenues necessary to support our continued investment in human capital, technology, cybersecurity, compliance and operations," added Edwards.

Recap of recent leadership events:

Heron Wealth Founder David Edwards Promotes "Joyful Planning"

NEW YORK (October 3rd, 2016) - David Edwards, founder,   Heron Financial Group | Wealth Advisors, a New York-based Registered Investment Advisor, continues to educate current clients and prospects on how to plan, grow and keep more of their financial assets.  A slate of activity at industry and business events shows the dedication that Edwards and his team demonstrate in their quest to promote the "Joyful Planning" concept.  Edwards took on leadership roles in the financial services industry, accepting advisory positions and speaking engagements with key industry associations.  Edwards brings that exposure back to the firm to provide better service for Heron clients.

"As a fiduciary to our clients, we always act in their best interests.  We remain committed to leading our profession in best practices and technology.  This combination of good advice and good service resulted in exceptional growth within our firm," said Edwards.  Heron Wealth grew from $122 million in assets as of January 2013 to $260 million through September 2016. "We plan to double assets over the next three years, double again within seven years to $1 billion.  We will continue to deliver the high touch experience our clients expect, but also derive the revenues necessary to support our continued investment in human capital, technology, cybersecurity, compliance and operations," added Edwards.

Read the entire commentary here.