2017 Fourth Quarter

Kreitler Financial:

Here in New Haven, a spectacular September is now falling into a seasonally cooler October.

It’s beautiful! Financial markets in the US continue to hit new highs. The US economy measured as GDP expanded at 3.1% in the second quarter, better than expected and faster than the average since the Great Recession. Global growth accelerated as well. All this good news seems at odds with the steady beat of negative news in the popular press, a good reminder that they are paid to keep us watching and that negative news sells.

Market Update

Some investors have been rewarded so far this year for their willingness to disregard the noise in the 24/7 news cycle. All the major asset classes have positive returns through September 30, 2017. Stocks in the US performed well, with the S&P 500 up 14.2%. Global equities continued their uptrend, with the MSCI EAFE up 20.5%. MSCI Emerging Markets index rose an impressive 28.1% in spite of the pessimism and fear of trade wars after the 2016 election. This is an example of the importance making decisions based on the long-term. Rather than selling based on the news du jour, our clients benefited from the unexpected strong returns relative to the broader global markets by maintaining emerging market exposure throughout the entire period.

Where else should investors take a skeptical view of popular news? With markets continuing to push new highs, there are daily commentaries in the news that valuations have become too stretched and a pullback is near. The implication seems to be that now is a time to be pessimistic and move to cash. (We recall the old joke about various commentators having predicted “7 of the last 2” bear markets.) In reality, history shows us that pullbacks in stock prices happen all the time and should be viewed as completely normal. History teaches us that those who are willing to accept that risk of volatility have been handsomely compensated for their patience. We continue to reinforce the importance of taking a long-term view for both investment management and financial planning.

A significant change in financial markets is the Federal Reserve initiating the process of winding down Quantative Easing they started in 2008. Starting this October, the Fed is not replacing bonds in their portfolio as they come due, which should slowly reduce the size of their balance sheet over the course of years. This should put upward pressure on interest rates over time, but the pace of this change is an experiment. We will not be surprised if one of the results is higher volatility in interest rates, a change from what investors experienced in recent years in the “lower for longer” environment.

Politics and Policy

Speaking of skepticism, there seems to be more than enough of it poured onto Washington and Hartford. Connecticut is still operating without a budget as of this writing. The state is grappling with very difficult choices on how to reduce spending. Some towns may see education funding from the state reduced, and we are starting to hear suggestions that special property tax

assessments may be necessary to plug the gap, particularly in Fairfield County. We continue to be optimistic that solutions will be found eventually, and perhaps the budget impasse is a sign that a serious conversation is really in progress. However, solutions are evasive, and we don’t have confidence our state politicians will be able to make real progress in the near term.

In Washington, the political climate continues to be as negative as we can recall. The markets have moved from reacting to everything that President Trump says to largely ignoring the daily comments and focusing instead on real actions. Despite the spectacle of the political process and legislative circus around issues like healthcare reform, the Trump administration has implemented significant changes. The most impactful so far has been a number of changes unwinding regulatory actions taken under the Obama administration, and the markets reacted positively to this. Our readers have varied viewpoints on whether these actions are positive or not.

Washington has now turned to tax reform. The Republicans have big ambitions, but the only thing that is certain is that any final bill will not look like the initial proposal. One thing that we are monitoring is the proposed elimination of deductions such as state and local taxes. Residents in high-tax states such as Connecticut will be particularly affected by this. If this were passed, there may be significant tax planning decisions to be made before the end of 2017 that we suggest you discuss with your tax advisor.

Washington Update at the New Haven Lawn Club

If Washington politics and policy are confusing to you, you’re not alone. To help bring some clarity to what is happening we invite you to join us for an entertaining and informative discussion with Andy Friedman of the Washington Update on October 24 at the New Haven Lawn Club from 5-7 pm.

CNBC calls Andy Friedman “one of the nation’s most sought-after speakers on all things political.” An expert on political affairs, Andy explains the ever changing, sometimes confusing, and often crazy world of Washington in a straightforward bipartisan manner. He is known for predicting the outcomes of Washington deliberations and providing investors with strategies to consider in light of the changing political landscape.

We hope you will be able to join us for what is sure to be an entertaining and informative evening. Please contact Amy Alfano at 203-867-4396 for more information and to reserve your space as attendance is limited.

New Reporting Solutions

This month, we are releasing our new portfolio reporting solution to clients, an effort more than a year in the making. It adds new capabilities and enhancements while retaining the best characteristics of our prior generation tools, such as the important ability to manage client portfolios held across multiple financial institutions and to optimize after-tax performance by taking advantage of each investment asset and account’s tax treatment. This adds significant complexity to portfolio management, but we believe that customizing portfolios for clients in this fashion can improve portfolio outcomes.

The new reporting system brings four immediate benefits to our clients.

1) Improved Consolidated Statements: Clients will get their first view of the revised consolidated portfolio statements in October. As with our previous consolidated reports, the emphasis continues to be a high-level executive summary to assist in decision making, followed by greater detail for background. We expect in the future to include additional useful information in the reports, such as estimates of realized capital gains.

2) Enhanced Client Portal: A new portal with a fresh, interactive design and greater reporting capabilities is available to all clients. The portal is designed to complement the consolidated reports with a similar graphical design and data. Cyber security is a priority, so the portal design includes features such as two-factor authentication to protect sensitive information. Please contact us to request access.

3) Continuous Portfolio Monitoring: Portfolio composition drifts over time as a result of market performance and other factors. Our portfolio management now monitors client portfolios on a continuous basis to ensure they are aligned with their objectives and to capitalize on market and tax opportunities. Historically, portfolio management relied on periodic (calendar-based) reviews, but we believe an approach that utilizes the advantages of both periodic and market-driven portfolio management can provide the best outcomes.

4) More robust data collection: Improvements include tracking investments down to the position level with daily performance, as well as tax information such as capital gains and dividends. This high level of granularity also provides us the opportunity for improved portfolio analysis capabilities. This is probably the least visible change, but is the foundation for the additional enhancements.

Happenings at Kreitler Financial

Jake Ness earned the CERTIFIED FINANCIAL PLANNER™ designation, a testament to his continued professional growth and commitment to the high fiduciary standards we share. Please join us in congratulating Jake when you next see him.

Sandy Blanchard and her family celebrated the birth of another grandchild this summer. Congratulations to the entire family.

Charlie was honored to make the Raymond James Chairman’s Council for another year. The recognition is a testament to the effort and talent of our entire team.

With warm regards,

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

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 to be 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. The Russell 2000 index is an unmanaged index of small cap securities which generally involve greater risks. The MSCI EAFE is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The MSCI Emerging Markets Index is designed to measure equity market performance in 25 emerging market indexes. The Barclays Capital US Aggregate Bond Index is a broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM passthroughs), ABS, and CMBS. Inclusion of any index is for illustrative purposes only. Individuals cannot invest directly in any index and index performance does not include transaction costs or other fees, which will affect actual investment performance. Past performance does not guarantee future results. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise. 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. Investments mentioned may not be suitable for all investors. There is no guarantee that any statements, opinions or forecasts provided herein will prove to be correct. Raymond James is not affiliated with Andy Friedman.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

[BH1] Source: AAII Journal August 2014 issue, interview with Jeremy Siegel, Professor of Finance at Wharton, on his book “Stocks for the Long Run”.
[CK2] If asked for a source, this is in a Nick Murray newsletter. We are not permitted to quote the newsletter, but we can use it to find his source. The Newsletters are saved under /library/investment newsletters/murray, nick/

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