Newsletters


2018 Third Quarter

Kreitler Financial:

Our Views on the Investing Landscape

September 2018 marks the 10-year anniversary of the 2008 Financial Crisis, during which the longstanding Wall Street firm Lehman Brothers failed in spectacular fashion. By March of 2009, the S&P 500 had fallen 57% from its October 2007 peak, the worst decline since the Great Depression.1 We remember these difficult times all too well, and if we did not, the financial press would certainly make sure that we did with anniversary articles.

Less discussed is how much better things have gotten since then. The economy and markets made up their losses and then continued upward. According to the Federal Reserve, household net worth has increased from its pre-crisis peak of $67 trillion in 2007 to over $100 trillion at the start of 2018. In August, the Department of Labor reported unemployment overall was its lowest since 2000 and that youth summer unemployment was the lowest in 52 years. The economy grew at a strong 4.2% rate in the second quarter according to the Federal Reserve.

Here in the United States, the bull market in the S&P 500 continues upward, and depending on the definition ranks among the longest bull markets in modern financial history. US markets have now reached a milestone, the longest bull market in history, although that statement depends on the definition you use. Some will point out there were three bull markets that were longer if you use only month-end returns, and that all the other US indices slipped into a bear market briefly in 2011 save the S&P 500 which declined -19.4%, just short of the -20% typically called a ‘bear market’. Quibbling aside, this has been a very good market for investors.

Recently the strongest performers have been a small group of large technology companies. Small companies have also done well under the belief they will benefit most from current policy. While we do not rule out the possibility of a market drop in the near term, we believe the US market can continue its bull run. The labor market is stronger than it has been in years, giving workers leverage to negotiate wages. These workers then have greater spending power. Corporate bond yields remain relatively low, allowing companies to borrow and to invest inexpensively. These forces may sustain the economy and market for some time. Historically, bull markets have ended when investors begin to forecast a recession. Interest rates begin to rise and choke off investment, but for the moment, the probability of this scenario seems low as technology and a strong dollar help to keep a lid on inflation.

Global markets are having a more difficult year. In 2017, these markets lead the US by a significant amount, especially in emerging countries where the MSCI Emerging Market Index rose 34.4% that year. This same index was down -8.9% through August 31, 2018.2 Long term, we continue to believe emerging markets will deliver outperformance, and these types of swings are expected.

While financial markets in the US continue their strength, the world itself seems as uncertain as ever. How can investors reconcile this?

By far, the more talked about side of the equation is the negative news. Political uncertainty in Washington continues. The Trump administration continues to rattle the sabre of tariffs, although this has not yet raised from the level of trade skirmishes to that of an all out trade war. Prices for individual stocks are no longer cheap. More and more we hear market observers argue that the old rules for valuation no longer apply, especially for tech companies, because “it’s different this time,” a phrase that makes us wary.

Could political shocks, trade wars, or other events shake the markets and upset this bull market? Politics and foreign affairs have historically caused bouts of volatility and occasionally steep declines in financial markets, but these have usually not been sufficient to end secular bull markets. (A secular bull market is one that typically plays out over many years, and may be punctuated with short market declines and even bear markets.) A major and durable change in global trade, however, could be a threat. We would view the development of an all-out trade war as negative to both the economy and the markets. We are witnessing the impact in many emerging market countries and their stock markets, due to uncertainty on trade and concerns about Turkey’s financial and economic health. Long-term investors may view this as an attractive opportunity because although these countries are growing at a faster rate than their developed countries, they constitute only 10% of global financial markets.3

Investment Strategy

How should an investor reconcile the constant bombardment of both positive and negative news? The markets are the ultimate scale, attempting to predict the future. To date, US stock markets have held up well. This is why diversification, regular monitoring, and a disciplined approach to rebalancing are so important. Market drops are inevitable, but the timing of this is impossible. Long-term investors have historically been well compensated for their willingness to tolerate short-term volatility, because the market delivers its upside performance unevenly and attempting to time it is usually a route to underperformance. Even markets in the late stages of a bull phase can continue for some time and make very strong gains.

Outside of stocks, we have been cautious on bonds for some time. With interest rates near historical lows, we began moving client bond portfolios into shorter duration positions, which may perform better if interest rates rise. For the moment, the broad bond market has seen modest declines in 2018. The driver has larger been interest rates, as the 10-year Treasury continued to rise from its July 6, 2016, (during Brexit) low of 1.38% to just going above 3%. We still have fairly modest expectations for returns for bonds going forward, but bonds will continue to play an important role in portfolios providing liquidity when needed and helping to hedge against stock market swings, both of which may allow investors to seek higher returns over time by holding greater amounts of riskier, growth seeking assets like stocks. Continuing to hold a long-term view remains a powerful way to deal with short-term volatility.

We have one other observation in the investment world related to the 10-year anniversary since the start of the financial crisis. We are starting to see investment products and strategies reporting 10-year numbers that no longer contain the full impact of the 2008-2009 bear market because the early months are rolling out of the reporting time frame. Investors will need to perform additional due diligence to truly understand how various strategies might perform in challenging markets going forward, especially if those strategies have never been tested in challenging times.

Things you need to know

In October, Raymond James will roll out its new online experience for clients, Client Access. The new design incorporates an improved look and feel, and it provides additional ways to chart and review portfolio information. You can preview the updates by visiting https://raymondjames.com/investoraccess

These changes do not affect our Kreitler Financial client portal.

For Connecticut business owners, consider discussing the new pass through entity tax that was enacted in June 2018 with your tax advisor. The new law taxes profit at 6.99% and is paid by the business. Owners can then claim a partial credit on their Connecticut income tax return for the business tax paid. For some business owners, this may result in a savings on Federal income taxes owed.

Happenings at Kreitler Financial

Our team continues to grow at a healthy, measured pace. As we have built our capabilities to meet our clients’ planning and investment needs, this has provided us the capacity to grow and we are actively seeking new individuals and families as clients. In doing this we will continue to serve our clients with the same high level of service they are accustomed, along with new capabilities out of the investments we are making.

We added two additional professionals to our team this August to expand our capabilities.

Michelle McNulty joined Kreitler Financial as our Director of Finance. In this role, she will have primary responsibility for Kreitler Financial’s finances and day-to-day business administration. Michelle has more than 30 years of financial and accounting experience. Prior to joining Kreitler Financial, she was the CFO/Controller for privately held companies, where she was responsible for all aspects of financial reporting, budgeting, and forecasting, as well as financial and internal controls.

Dwayne Tyril joined the team as a Branch Associate. Dwayne is a member of our investment Committee. He assists with monitoring client portfolios, researching and implementing asset allocation changes to our models, due diligence of investment managers and products, and other responsibilities. Dwayne has 10-years industry experience, most recently as an investment analyst at the Commonfund where he worked on trading, asset allocation, and portfolio analysis for institutional clients.

Please take a moment to join us in giving a warm welcome to Michelle and Dwayne at your next opportunity.

We also continue to develop our expertise through ongoing learning. Charlie attended Raymond James Chairman’s Council Retreat, during which the top advisors from Raymond James Financial Services gather to share their best practices with one another. Kersti and Sandy travelled to Raymond James conferences in Philadelphia and St. Petersburg to sharpen their skills with Raymond James new technology.

With warm regards,

Charles F. Kreitler, CFP®
President
Robert P. Kreitler, CFP®
Founding Partner

1Source: S&P Dow Jones Indices
2Source: MSCI
3Source: MSCI
The MSCI Emerging Markets is designed to measure equity market performance in 25 emerging market indices. The index's three largest industries are materials, energy, and banks. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Charles and Robert Kreitler, CFP and not necessarily those of Raymond James. The information has been obtained from sources considered reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Diversification and asset allocation do not ensure a profit or protect against a loss. Investing involves risk and investors may incur a profit or loss regardless of strategy selected. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. RJFS does not provide tax advice. You should discuss any tax matters with the appropriate professional. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

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