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2018-Q3 Market Commentary

| July 13, 2018
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First Half of 2018 and looking forward to the rest of the year
The Market Giveth and the Market Taketh Away

The first half of the year has been one of feast or famine in the markets. With equity markets up early in the year followed by a near 10% decline over the following two months and then up one day and down the next. US markets were generally positive, with Large Cap Growth and Small Cap companies leading the way. International and Emerging Markets stocks were both negative for the first half, as was the Barclays Bond index.  Asset Allocations (blend of all the above) were all negative for the first six months of 2018.

When we look at valuations today along with expected returns over the next 7 to 10 years, we find a market that is generally fully valued. Whether we look at Price to Book, Price to Earnings, Shiller CAPE model, the Q Ratio, or any other tested reliable metric, we find that market expected returns over the next 7 to 10 years ranges anywhere from FLAT to around 5%. That is a nominal return which includes the effect of inflation.  If we back out inflation, we find the numbers are NEGATIVE to around 3%.  Not exactly anything to write home about. While don’t always tell you what you want to hear, you will always hear the truth from us. Keep in mind, those are point-to-point numbers and so they don’t tell you anything about what happens in between today and 7 or 10 years in the future.  Realistically you will not see low single-digit return numbers every year. You will likely see a really bad market, some so-so markets, and a couple of good markets; with the end result being something less than we all would hope for.

This is why our model was built to try to avoid the worst part of the bad market while enjoying most of the good years. As our cycle has been longer than most (we are closing in on the longest uninterrupted “bull market” in modern history), it is easy to become complacent and get used to higher returns and better times based on recent experience. As we’ve said before, if you make your decisions based on TIME, MONEY, Wall Street Journal, CNBC etc., by the time you read how great the markets are or how bad things have been, the market will have already priced that news into prices of stocks, bonds, commodities, and everything else.  The “market” is a powerful discounting mechanism and one of the reasons most individual investors “underperform.”  It takes a lot of courage and fortitude to go against the grain, because it doesn’t feel good at the beginning and you certainly don’t get positive reinforcement from the herd. But like Warren Buffett says, “Be greedy when others are fearful and be fearful when others are greedy.”  Where are the “others” today?  Fearful or Greedy?  It’s a bit of a mixed bag, but many of the indicators we look at are leaning toward greedy and causes us to pay extra attention to the extremes.

We see bubbles all over the place.  Real Estate, Art, Collectible Cars, Stocks, Bonds. Now is the time to be watchful of these bubbles and to have a plan in place should any of these bubbles start to pop. We don’t think that is imminent, but with trade tensions, huge budget deficits, political tensions with other nations, employment very low, wages starting to go up, and the Federal Reserve raising short term interest rates to slow the economy, there are plenty of things that could derail the good times that we perceive today.  Our job, as you have entrusted to us, is to watch all these signs and to compile them into a collective opinion, and to have a process in place to take care of you, your family, and all that is important. Money is very important in this context. It’s not “why” we do things, but it is “how” – and we want to protect the “how” so that you can pursue your goals and live out your values.

The next six months are probably going to be similar to the last six months. A lot of volatility, a contentious election season, 1-2 more interest rate hikes, an economy that looks like it is humming along, more trade tension (wars), and a market that is trying to digest all the news today as well as discount what the world will look like 6-9 months in the future. Long story short, we would expect the market to grind its way higher, but probably not at the rate we all would like it to. We are concerned about the latter half of 2019 and into 2020, as that likely could be the point where markets have priced in all the good news and the only news left is bad news. Hopefully, like the past, our process will protect your wealth for the things that are truly important to you.

As always, we encourage you to call or email if you wish to have a longer discussion surrounding these or any topics – and certainly we look forward to speaking with you. If you have friends or family that you would like to pass this along to, please do.

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