October 2014

After a strong 2013, stock markets began 2014 on a more muted but still upward trend. By August it moved up to a new high, with the S&P 500 reaching 2000 for the first time. Stocks trended even higher in September. Since then, the markets slipped, with a sharp selloff and rebound in October. Investors are left asking the question, has the five-year bull run ended, or is there more room to go upward?

Recent volatility served as a reminder to investors that the markets’ natural state is one of instability. While the press has done its best to hype the recent volatility—even though it amounted to less than a -8% decline, fear keeps viewers glued to the screen and the advertiser dollars flowing—we find it important to remind ourselves that market volatility is and should be viewed as ‘normal’. What has been unusual is the distinct lack of volatility over the past few years. The last time the market dropped more than 10% was in 2011. Historically, these types of declines happened much more frequently. Our belief is that we should expect more volatility in the future than what we’ve experienced the last few years.

There are certainly reasons for concern in the world. Geopolitical tensions are high in Eastern Europe, the Middle East, and the South China Sea. Europe continues to face real challenges, and it appears to be where a bout of global economic weakness is concentrated right now. The US dollar has skyrocketed, but foreign markets have held up despite the negative impact on their value after factoring in exchange rates. At the time of this writing, it seems likely that US elections will give us another two years of divided government. With these uncertainties, the real surprise may be that the markets haven’t had significant volatility for so long.

We believe market timing is not possible. Stock markets frequently go through significant ups and downs. One’s time horizon is critical. Investors with extremely short time horizons may be forced sellers in market volatility such as we’ve experienced. This behavior can be extremely detrimental to the accumulation or protection of wealth. For long term investors, volatility typically represents opportunity. Our stock managers will buy companies they have been watching if prices fall to a level that justifies adding to positions. On the other hand, there doesn’t seem to be a strong case for optimism. After a strong 5-year run, prices for risk assets like stocks are no longer as attractive as they once were, and weak economic growth could dampen future returns even with heightened volatility.

With 10-year Treasuries yielding between 2% and 2.5%, they offer little growth potential after accounting for the negative impact of inflation. Yet high quality government bonds helped limit portfolio volatility by rising during the recent stock selloff, illustrating why they continue to play a role in a well-diversified portfolio.

In a low interest rate environment, investors need to be willing to take on risk in order to maintain the purchasing power of their portfolios and stay ahead of inflation. Even with higher volatility, we still expect stocks to deliver superior long term returns to bonds and other traditionally lower risk assets. We work with our clients to attempt to keep overall portfolio risk at a level they can be comfortable with (“risk tolerance”) and at a level they can afford (“risk capacity”) if and when markets do fall. Asset allocation and diversification are meant to dampen the swings caused by the markets and permit portfolios to hold a greater level of assets that provide long-term growth.

Several of our long term investment themes continue to play out. The revolution in energy continues. Cheaper energy is remaking the landscape of American industry as companies move production to our shores. Most recently, we see consumers benefiting from falling gasoline and natural gas prices. Perhaps this will also provide extra spending money for a robust holiday shopping season. A second theme remains innovation and technology. It has been observed that the rate of change is faster than any time in history with the exception of the industrial revolution. It is a very exciting time, and one that will provide both opportunities and uncomfortable change. Another theme that investors need to consider is the impact of the baby boomers retiring on demand, on the labor force, and on government budgets. Each of these provide risks to the status quo, and opportunity from those who can adapt to benefit.

While there are challenges, we think there are plenty of reasons for optimism. We will continue to emphasize risk control so we can own the assets that can provide real growth over time.

News at Kreitler Financial

Our Information Security event held in September was a terrific success, and we thank all of you that were able to attend it. Enclosed is a summary of the best practices that our speaker, SVP and Chief IT Security Officer at Raymond James, Andy Zolper, discussed. We hope you find these tips useful.

Bob is back from a knee replacement surgery that took place early in the summer. It went so well that his next adventure is hiking in the Andes of Patagonia this fall.

Charlie and Bob continue to pursue the most advanced portfolio construction techniques. Both participated in a Yale seminar on portfolio construction, attended by some of the top portfolio managers in world, and the Raymond James Conference for Professional Development. Bob attended a program at Wharton on portfolio risk management. Charlie participated in the Raymond James Portfolio Management Group symposium.

We are interviewing to fill our newly created Associate Financial Planner position. This person will work as a part of our team assisting all clients as an additional resource. We have met a number of highly qualified candidates and are optimistic.

Most exciting of all is that we plan to move into a new office two blocks away at 265 Church Street at the end of this year. As we hire additional team members to give our clients the best experience possible, we need to have adequate space. As it always has been, our growth will be at a deliberate rate to ensure that the quality of advice and the level of service are never compromised. We will send out our updated address information when the move dates are finalized.

Robert P. Kreitler, CFP®
Registered Principal
Charles F. Kreitler, CFP®
Financial Advisor

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 Robert P. 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. Inclusion of any index is for illustrative purposes only. Individuals cannot invest directly in any index. Past performance does not guarantee future results.

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