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SPECIAL REPORT: Staying on Defense

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Two months ago we sent a Special Report titled A Time for Caution.  At that point, the year 2016 had just opened with serious weakness.  Crude oil was plunging and pulling down other financial markets with it. Now oil is climbing again. Is the time for caution past?

In a word, we think the answer is “No.”  We still see many reasons to stay defensive as we approach quarter-end. In our view, the risk of serious loss is still unacceptably high.  Our managed account programs remain defensively positioned.

Unlike some money managers, at Republic we are not dogmatically bearish or bullish.  We recognize that markets go through boom-bust cycles, and we try to stay on the right side of them.  We believe this gives us the best chance of earning acceptable long-term returns.

 
Among the many factors we consider, five are currently telling us to be cautious.  We’ll discuss each in turn below.


Market Downtrends

Financial markets fluctuate from day to day, but over time they move in discernable trends.  Right now, U.S. stock market benchmarks are falling into downtrends.  You can see this in the S&P 500 (large cap) and Russell 2000 (small cap) indexes.

                                 Data source: Bespoke Investment Group


Both indexes reached all-time highs in mid-2015 and subsequently moved downward. The negative trend is steeper for the Russell 2000, but both are well below last year’s high points.

In a healthy bull market, we would expect to see these major benchmarks recover from downdrafts quickly and move to new highs.  Neither is happening.  This tells us the stock market still faces substantial selling pressure.

Worse, the weakness is worldwide.  This Bloomberg screenshot shows how most world markets are down this year, many by double digit percentages even after meaningful moves off of mid-February lows.


The only green spots are indexes in Canada, Mexico and Brazil.  All three of those countries have other issues that make investing in them problematic.  As a practical matter, stock markets around the globe are either flat or declining.


Flight to Safety

U.S. Treasury bonds are the ultimate in safety because the federal government can always repay its debts.  It can raise taxes if necessary.  That’s why Treasury yields are always lower than corporate bond yields of similar maturity.

What are Treasury yields telling us now?  The chart shows a downtrend extending back to 2011, with another leg down in early 2016.  Interest rates on the 10-year bonds are now well below 2%.

Yields fall when more people want to buy Treasury bonds.  It means they are willing to give up the higher yield of corporate bonds in exchange for the safety of Treasury bonds.  The “Yield Spread” chart shows this differential. You can see it has been declining since early 2014 and is now below 1%.  A falling yield spread often precedes recessionary periods, as shown in the gray vertical bars.

With this happening at the same time stock prices are struggling, it looks like investors are choosing safety over both yield and capital gains.  This could change, of course, but for now the bond market is telling us something important – and it isn’t good for stocks.


Weak Corporate Profits

Stocks are valuable because they represent part ownership of a business.  They give the owner a share of the company’s profits, or at least hope for profits in the future.  Shares in a company that are not making money now, and have no reasonable hope of turning a profit in the future, are less valuable.

In a bull market the opposite is more common.  Companies see steady growth in both the top line (sales or revenues) and the bottom line (profits or earnings).  Ideally you want to see both the top and bottom lines growing.  Investment analysts recognize that companies can have a soft quarter, or that some businesses are seasonal.  For this reason, they typically look at the “year over year” change: the 4th quarter of 2015 vs. the 4th quarter of 2014.

By that standard, the 500 large companies that comprise the S&P 500 Index don’t look very impressive.

 
With 494 of the 500 having reported their most recent quarter, aggregate year-over-year sales growth (or lack thereof) was -4.0% and earnings “growth” was -7.5%.  The average company saw slower sales and less profits than the same period a year ago.

Not surprisingly, the sector breakdown shows the worst pain was in energy and materials companies, along with the utilities sector.  Collapsing oil prices since 2014 wreaked havoc on the domestic energy sector.  Worse, it is starting to spill over into the financial sector since much of the activity in new U.S. shale fields was debt-financed.  Many oil drillers and producers are hard-pressed to keep up their loan payments, even after laying off workers and cutting every cost they can.

There is a solution: convert the debt financing to equity.  Banks are already pushing their energy customers to do this.  Weatherford International, for instance, intends to issue new stock and use the proceeds to pay back its JPMorgan Chase credit line.  The notable part is that JPMorgan Chase is also underwriting the stock offering.  The banks are offloading risk from their own balance sheets and forcing shareholders to bear it.

There are some bright spots in the earnings picture.  The telecom, health care, and consumer discretionary sectors show some growth, but even in those sectors the good news of a small number of outperforming stocks skews the rate of change to look more positive.  

 

Recession Warning

The U.S. economy goes through expansions and recessions.  The length varies but historically recessions occur every 5-10 years.  As of this month, it has been 6 ½ years since the last recession ended in September 2009.  That means we are well into the economic danger zone.

Moreover, the current expansion has been far weaker than normal.  Millions of people are still unemployed, underemployed at far less than their prior wages, or working part-time because they can’t find full-time jobs.  Inflation is supposedly minimal, but the actual “cost of living” for middle class Americans is anything but flat.  Rapidly rising health care and housing costs, not to mention taxes, are offsetting the benefit of lower fuel prices for many people.

The chart below shows the relationship between corporate profits and stock prices.  Since 1985, every time profit growth (the dark line) declined for more than two quarters, stock prices (gray line) responded with a 20% or greater drawdown.  There was usually a time lag in between, but falling profits are not consistent with rising stock prices.

 
This ought to concern anyone with money in stocks because the last quarter of 2015 marked a fourth consecutive year-over-year profit decline.  Looking at revenue, which in many ways is a better indicator, it was the fifth consecutive quarterly drop.  Either this time is an exception to the longstanding pattern, or further price weakness should be expected.  We think the latter is more likely.


Flailing Central Banks

In theory, central banks like the Federal Reserve, Bank of Japan (BOJ), and European Central Bank (ECB) use monetary policy to encourage economic growth, reduce unemployment, and control inflation.  In practice, central banks seem to be losing their touch.

The Fed, for example, has been trying to stimulate the economy with near-zero short-term interest rates since the 2008 financial crisis.  They also tried three rounds of “quantitative easing” to inject liquidity into the economy.

Did it work?  Few people think so.  At best, you could argue the economy would be even worse if the Fed had not acted, but they definitely didn’t create a boom.

The same is happening in Europe and Japan.  Just this week, the ECB pushed its interest rate on bank reserves to -0.4%.  That’s right, they have negative interest rates.  Banks must pay the ECB to hold their reserves.  The idea is this will encourage banks to lend money into the economy instead of keeping it parked.  It hasn’t worked out that way so far.

The central banks are actually working against each other.  The BOJ and ECB are reducing their key interest rates while the Fed is in the process of raising ours.  We’ll find out next week if the Fed tightens another notch.  For them to raise rates while the economy is so close to recession is very strange and possibly counterproductive.  After years of dramatic measures with little discernable effect, investors and traders are losing confidence in the institutions that are the foundation of modern banking.

The political side is also creating uncertainty.  In Europe, the Syrian refugee crisis is straining the European Union.  The United Kingdom will soon hold a referendum to withdraw from the alliance completely.  This plus the theatrics of the U.S. presidential election add to the overall risk aversion and pessimism in the markets.

 

Conclusion

We spend a great deal of time trying to sort out all these competing factors.  It is as not an exact science.  We never expect to buy precisely at the bottom and sell precisely at the top.  Our goal is to capture some of the gains (or avoid the losses) between the two extremes.

Our ultimate goal is to achieve your long-term investment goals.  You engaged us to make these difficult decisions, and we will always do our utmost to get them right.  We appreciate your confidence.  As always, we are glad to discuss your individual situation at any time.  Feel free to reach out by phone or e-mail if you have any questions.



IMPORTANT DISCLOSURE INFORMATION: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Republic Wealth Advisors), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from Republic Wealth Advisors. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Republic Wealth Advisors is neither a law firm nor a certified public accounting firm and no portion of this commentary content should be construed as legal or accounting advice. If you are a Republic Wealth Advisors client, please remember to contact Republic Wealth Advisors, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of the Republic Wealth Advisors’ current written disclosure statement discussing our advisory services and fees is available upon request.

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Three Reasons Not to Buy & Hold

Three Reasons Not to Buy & Hold

By Frederick M. Hanish

We financial advisors repeat a mantra almost every day. “Think long-term,” we say. While usually good advice, it is also incomplete. Think long-term about what? And how long should we think about it? Those are important points, too.

Often the long-term mantra comes out in defense of a “buy and hold” investment strategy. Historical data shows the stock market, broadly defined, has returned healthy average annual gains over long periods. So the best strategy is to buy an index fund and just stick with it.

This make sense in theory, and has in fact worked for some people. In my experience it more often leads to disappointment and subpar results.

I’ve thought about this a lot, and I see three big problems with buy-and-hold investing.

Problem #1: Successful Buy and Hold Requires Superhuman Patience

Historical stock market returns are compelling if you expect the same results in the future. Can you? No one knows the answer because no one knows the future. At best, we can assume that returns over the next 30 years will resemble those of the last 30 years. Maybe they will, but we don’t know it yet.

Furthermore, even backward-looking analysis makes some important assumptions. For instance, it assumes that you would have remained fully invested through numerous sharp downturns. That would probably not have happened unless your stomach is made of iron. It is very hard to “think long-term” and hold on when half your life savings just went up in smoke – as happened to the S&P 500 in 2008-2009.

The much more common scenario, at least in my experience, is that people start out planning to buy and hold, but then change their minds at exactly the wrong time. They hit a rough stretch, lose hope and then sell right at the bottom. The market then recovers without them and the entire plan is kaput.

I think it is far better not to get in these extreme loss situations in the first place. We can never eliminate all risk, but we can try to minimize it.

Problem #2: “Average” Returns are Rare

Go back to when modern stock indexes were invented in the 1920s and you will find stocks returned about 10% annually since then. Bonds averaged about 5%. These are mathematical facts.

Most investors understand that any given year can be above or below average, but they expect to see their accounts reflect the long-term averages within a few years. They are almost always disappointed because “average” almost never happens.

The following chart, prepared by Vanguard Funds, shows the actual annual returns for stocks and bonds from 1926-2014. The shaded bars represent “average” territory. Note how few dots land inside the gold vertical bar. Those are the years in which stock returns were between 8% and 12%. It happened only six times in this 89-year period.
 
Notice also how many dots are to the left of the gold bar. Those are years in which returns were significantly below average. There are also many above-average years, of course, but it is random chance whether you will see them first.

If you are lucky enough to have a string of good years, you face another problem.

Problem #3: Losses Can Take Years to Recover

Suppose you set out to buy and hold stocks, and your first year brings a 10% loss. That’s not too bad, you think. You expect to make it back quickly so you stick with the program.

Year 2 brings a 10% gain. You’re back where you started, right? No. You are still down 1%. You need more than 10% to recover because you are starting from a smaller base. In this example, you need an 11.2% gain to reverse that 10% loss.

This gap grows quickly as losses get worse. Lose 20% and you’ll need 25% just to get back where you started. The chart below shows you the pattern.
 
As you can see, recovering from a 50% loss requires you double your remaining capital. Such losses have happened in the stock market. Recovery is possible but tends to take years.

We have a different philosophy at Republic Wealth Advisors. We want to help our clients avoid these painful losses and the mental stress that goes with them. Our goal is for you to sleep well every night, knowing you are on track to achieving your long-term goals.



IMPORTANT DISCLOSURE INFORMATION: Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Republic Wealth Advisors), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Republic Wealth Advisors.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Republic Wealth Advisors is neither a law firm nor a certified public accounting firm and no portion of this blog content should be construed as legal or accounting advice.  If you are a Republic Wealth Advisors client, please remember to contact Republic Wealth Advisors, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of the Republic Wealth Advisors’ current written disclosure statement discussing our advisory services and fees is available upon request.


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Plow Horse Economy Stuck in the Mud

Plow Horse Economy Stuck in the Mud

Remember when the economy was booming? It is probably a faint memory, at best. The U.S. economy has been stuck in either recession or slow growth for almost a decade now.

Some regions and industries have seen rapid growth. Silicon Valley, the cloud technology sector, and (until recently) shale energy production have all been bright spots. Nevertheless, most of the domestic economy has had to settle for steady but slow “Plow Horse” growth in recent years.

I began using the Plow Horse metaphor back in 2013. Reading old stories is always a little humbling, but most hold up well.

(7/26/2013) What Works in the Plow Horse Economy
(10/16/2013) Seasonal Trends Favor the Plow Horse Market
(12/26/2013) Plowhorsing into 2014
(2/26/2014) Wintry Weather Can’t Stop the Plow Horse Economy
(6/25/2014) Plow Horse Economy Breaks into Gallop
(10/8/2014) Economy Shifting from Plow Horse to Race Horse
(11/26/2014) The Plow Horse Economy Goes Shopping
 
I didn’t mention the Plow Horse much in 2015, perhaps because the economy was already slowing down. Now it is stuck in the mud.

 
Recent economic reports show a remarkable resemblance to this unlucky horse. New data from the Commerce Department said the U.S. economy grew at a 1% annualized pace in 2015’s last quarter. Consumer spending was lower than expected and business investment sank.

Meanwhile, the Conference Board’s Leading Economic Indicators index fell in January for the second month in a row, signaling the economic expansion will remain modest at best. Meanwhile, the Consumer Confidence Index fell to a seven-month low this month as Americans grew more pessimistic about job prospects and business conditions.

Being trapped in place may be preferable to going backwards, but it is not a position anyone envies. Nor is it easy to escape alone. A horse in this position will go nowhere until he gets help from shovel-wielding humans.

Who will help the Plow Horse Economy? In normal circumstances we would say the Federal Reserve, but its shovels are proving less effective these days. Quantitative easing had little impact outside the financial markets. The much-awaited December interest rate liftoff already looks like a mistake. Fed officials are openly wondering if a negative interest rate policy is the answer. Central banks in Europe and Japan are having little luck with NIRP, but are trying it for lack of any better choices.

Of course, it is quite possible for the stock market to move higher even if the economy moves sideways. A company’s stock price reflects the current value of its future profits. Unfortunately, those future profits look significantly less certain.

Wall Street’s quarterly earnings season is wrapping up right now and the results look terrible.

 
Only three of the ten sectors show positive earnings growth over the last year. In the Energy sector, sales dropped 34% and profits dropped 74%.

Some analysts argue we should look at the picture “ex-Energy,” since everyone knows the oil patch is in trouble. I think this is wishful thinking. Other sectors aren’t being demolished as badly as Energy, but we still see plenty of pain. Financials, Materials, Consumer Staples and even Technology are struggling to stay above water.

For the S&P 500 index as a whole – with 435 companies reporting – sales dropped 4.2% and earnings fell 6.5% since the same quarter a year ago. These earnings (or lack thereof) are a prime reason stocks retreated in January and have not recovered as we approach the end of February. We may not be in an economic recession yet, but the earnings recession is undeniably here.

In theory, the stock market is forward-looking. Prices reflect not only past experience but future expectations. Is there reason to believe corporate profits will pick up soon? I’ve seen many bullish arguments but none that strike me as plausible.

Two consecutive quarters of declining profits are a strong indicator of market weakness. We’ve now had three such quarters.


Data source: Hedgeye.com

When I combine this with the other technical indicators we’ve found reliable, I see abundant reasons to be cautious. This is why we began moving our Republic managed accounts into defensive positions back in December and they remain there today.

I would love nothing more than for the Plow Horse to shake off the mud and gallop once again. I’m confident he will, too – but he probably needs to rest a while first.



IMPORTANT DISCLOSURE INFORMATION: Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Republic Wealth Advisors), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Republic Wealth Advisors.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Republic Wealth Advisors is neither a law firm nor a certified public accounting firm and no portion of this blog content should be construed as legal or accounting advice.  If you are a Republic Wealth Advisors client, please remember to contact Republic Wealth Advisors, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of the Republic Wealth Advisors’ current written disclosure statement discussing our advisory services and fees is available upon request.




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What in the World is Happening?

What in the World is Happening?

You may think the sky is falling if you’ve paid much attention to financial news this month.  That is an exaggeration, but world markets certainly look weak despite occasional relief rallies. Our Republic managed accounts are still in defensive positions, waiting for this storm to pass.

How long must we wait? Markets didn’t reach this position overnight, and won’t escape from it overnight, either. The major economic trends that created the situation take time to adjust.

Let’s take a step back and review the big picture.

Two years ago the world economy was in a mild but steady “Plow Horse” recovery. Crude oil was over $100, reflecting both strong demand and tight supplies. In the background, U.S. and Canadian shale production was ramping up quickly.

By mid-2014 this new production and slowing growth in China were having a noticeable impact on the energy market. Prices weakened and then began falling quickly. The OPEC countries, led by Saudi Arabia, chose to maintain high production levels and let prices fall.

With lower energy prices raising the threat of deflation, European and Japanese central banks reacted by loosening interest rates, in some cases into negative territory.

At the same time, low oil prices put energy companies in a tough spot. The logical move would have been to reduce production at sites the low prices had rendered uneconomic. Yet those operating on borrowed money needed cash flow to make their debt payments. So production remained high, which helped push prices even lower.

We have now reached a new stage in which banks and bond holders fear defaults on their loans to energy companies. They are right to be nervous, too; leverage will increase the severity of their losses.

The downturn that began in energy has evolved into a banking crisis. Traders are openly questioning the stability of major European institutions like Deutsche Bank (DB). The European Central Bank’s negative interest rates and bond-buying stimulus program aren’t helping very much.

On this side of the Atlantic, the Federal Reserve under Janet Yellen appears to have raised interest rates at exactly the wrong time. The disconnect between the Fed and other central banks is aggravating currency differences. Yet after agonizing for months, the Fed seems reluctant to change course now.

In the midst of all this, corporate earnings weakened faster than stock prices, meaning we now have a stock market whose value is out of sync with its profit level. Prices must fall to restore balance – and they are.

Unfortunately, excess works both ways. Irrationally high markets often correct themselves by going irrationally low. Eventually they find a happy medium, but the process can take months or even years.

Again, we don’t know how long the current weakness will last. We have little confidence that governments and central banks will respond correctly. That is one reason we have shifted our managed accounts to cash and other less-volatile assets. We believe it is possible to achieve positive returns even in environments like this one.

What we will not do is simply ignore risks and expose your hard-earned assets to potentially major bear market losses. Staying in the right position amid fast-changing conditions is difficult. We don’t expect to always buy at the bottom and sell at the top – nor do we need to. We believe a balanced, risk-managed strategy can deliver superior results over time, and that is what we always strive to deliver.




IMPORTANT DISCLOSURE INFORMATION: Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Republic Wealth Advisors), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Republic Wealth Advisors.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Republic Wealth Advisors is neither a law firm nor a certified public accounting firm and no portion of this blog content should be construed as legal or accounting advice.  If you are a Republic Wealth Advisors client, please remember to contact Republic Wealth Advisors, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of the Republic Wealth Advisors’ current written disclosure statement discussing our advisory services and fees is available upon request.




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Eye on Money: Planning Your Estate

The March/April 2016 Eye On Money is now available on RepublicWealthAdvisors.com, featuring stories on:

  • How to protect your loved ones' financial future
  • Financial tips for engaged and newlywed couples
  • Why to consider a 529 college savings plan
  • Key Social Security claiming strategies eliminated
  • Answers to common IRA questions
  • Decoding stock data

Download PDF (1.4 MB)

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January Triple Failure Could Mean A Rough Year for Stocks

January Triple Failure Could Mean A Rough Year for Stocks

We all know markets go up and down. Human nature tends to make people overly euphoric in good times and excessively depressed in bad times. Looking back at history helps remind us of this.

This time three years ago, I wrote Market Starts 2013 with a January Trifecta. The U.S. stock market had started the year strongly. In particular, three historically reliable seasonal indicators looked bullish.

•    Stocks had rallied in the last five trading days of December 2012 and the first two days of January in a fabled “Santa Claus Rally.”

•    The January “First Five Days” period also looked strong.

•    Finally, the full-month “January Barometer” ended on the bullish side.

I noted in the 2013 article that, according to Stock Trader’s Almanac, there had been 27 instances since 1950 in which all three January indicators were bullish. The S&P 500 ended the year higher in 25 of those years and had an average 17.4% gain, even including the two exception years.

This told me that if 2013 followed precedent, we could expect above-average returns from the stock market. Sure enough, the S&P 500 gained 32.4% that year.

The bar chart below gives you a closer look at January performance and how it relates to the full year. You can see how, more often than not, a blue diamond above the zero line coincided with a positive full year (the blue bars).
 
Now let’s fast-forward to 2016. What do those same indicators tell us now? This year they are flashing “Caution: Danger Ahead.” All three January indicators ended bearishly this time.

This is only the eighth time since 1950 in which all three indicators were negative and the Dow Jones Industrial Average dropped below its December low point. What happened in those years?

According to Stock Trader’s Almanac, full-year results in the previous seven instances were mixed, with the S&P 500 rising four times and falling three times.

One of those three negative years was 2008, which brought the financial crisis and a 38.5% loss for the S&P 500. We have no reason to think a similar calamity is coming this year, but we have several reasons to think caution is a good idea.

•    Financial markets are still trying to process the 70% collapse in crude oil prices since mid-2014. The consequences are still trickling through many asset classes and could bring yet more turbulence.

•    Saudi Arabia and other oil-producing nations are replacing lost oil revenue by liquidating assets in their sovereign wealth funds. This creates selling pressure in asset classes with little connection to energy.

•    Banks with outstanding loans to troubled energy companies are beginning to raise loss reserves in anticipation of possible defaults. This cuts into bank earnings and reduces their ability to make other loans.

•    Other commodity prices are falling as well, with mining companies in particular facing steep trouble maintaining revenue goals. This also affects companies selling capital equipment to resource producers.

•    The U.S. dollar has been very strong and may get stronger still if the Federal Reserve follows through on plans to raise interest rates in 2016. This is negative for U.S. companies that sell their products and services overseas.

•    China’s breakneck growth is slowing down as the country’s leadership tries to shift from manufacturing for export to a more consumer-driven economy. This could affect many different markets due to China’s enormous size.

•    Corporate revenue and profits have been weak for several quarters now, with all the above factors playing a part. Profitability needs to pick up soon before stock valuations discount it by moving significantly lower.

None of these problems are insurmountable, but they illustrate how stock prices won’t automatically move higher this year.

The good news is that oil prices seem to have stabilized around $30. If it has reached bottom, the industry has a chance to catch its breath and restructure itself for a “new normal” environment. A recovery there would go a long way toward resolving the other question marks.

At Republic our strategy is to seek out growth opportunities in defensive segments that can perform well even if stocks are generally weak. We watch many indicators and reevaluate daily.

Whether history repeats itself or not, we will continue making the best decisions we can, consistent with current market conditions and your individual goals. We believe this is the best way to achieve your long-range objectives.


IMPORTANT DISCLOSURE INFORMATION: Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Republic Wealth Advisors), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Republic Wealth Advisors.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Republic Wealth Advisors is neither a law firm nor a certified public accounting firm and no portion of this blog content should be construed as legal or accounting advice.  If you are a Republic Wealth Advisors client, please remember to contact Republic Wealth Advisors, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of the Republic Wealth Advisors’ current written disclosure statement discussing our advisory services and fees is available upon request.

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Tips to Start Tax Season Right

Tips to Start Tax Season Right

Now is the time of year when your mailbox fills with tax statements, W-2s and 1099 forms - the raw data that will eventually comprise your tax return. We hope your numbers add up to a generous refund.

The tax code is an ever-changing landscape that is best explored with professional advice. Here are a few points to remember as you pull information together for your tax preparer.

Later Filing Date: April 15 falls on a Friday this year, but it happens to be a local holiday in the District of Columbia. The IRS headquarters staff will be off duty that day so the entire country will have until Monday, April 18 to file individual returns or request an extension. Maine and Massachusetts residents get yet another day because they have Monday official holidays.

Higher Penalty for Uninsured: The Affordable Care Act requires most Americans to either purchase qualifying health insurance or pay a penalty on your tax return. The amount is higher than ever this year.

Under the law, uninsured taxpayers must pay the higher of a “flat-dollar amount” or “percentage of income” test. The flat-dollar amount is $325 per adult plus half the adult amount for each uninsured child under age 18. The total household penalty is capped at $975 for the flat-dollar amount.

For the percentage of income calculation in tax year 2015, take your taxable income and multiply by 2%. The amount is capped at $2,484 for an individual and $12,240 for a family of five.

Higher Roth IRA Limits: Contribution limits for Traditional and Roth IRAs remain at $5,500 per person, or $6,500 for individuals age 50 and over. You can contribute additional cash to a Roth IRA for tax year 2015 only if your 2015 income is below certain limits.
If your income exceeds these limits, you can contribute to a Traditional IRA and then convert it to a Roth IRA later. This can yield considerable savings over time. Ask your Republic advisor for more information on retirement planning.

Higher Personal Exemption Thresholds and Income Brackets: The personal exemption amount is $4,000 in tax year 2015. This amount begins to phase out at certain income amounts, as shown below.

The income threshold to land in the 39.6% highest tax bracket rose slightly for tax year 2015.
 
Adjustment to Standard Deductions: Individual taxpayers can choose to either itemize deductions or accept a standard deduction amount. You can choose whichever is most beneficial to you. Most homeowners and higher-income taxpayers are better off itemizing, but here are the standard deduction amounts.
 
If all this seems complicated, you’re right. The ever-changing tax code is complicated. This is why we highly recommend Republic clients work with a professional CPA to prepare their tax returns. A good accountant can often save you enough in taxes to pay the fee for preparing your return – and will be especially helpful if the IRS ever audits your return.

We are not accountants at Republic Wealth Advisors but we will gladly introduce you to tax professionals with whom we have worked before.


IMPORTANT DISCLOSURE INFORMATION: Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Republic Wealth Advisors), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Republic Wealth Advisors.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Republic Wealth Advisors is neither a law firm nor a certified public accounting firm and no portion of this blog content should be construed as legal or accounting advice.  If you are a Republic Wealth Advisors client, please remember to contact Republic Wealth Advisors, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of the Republic Wealth Advisors’ current written disclosure statement discussing our advisory services and fees is available upon request.


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2016 Key Financial Data Card

We have a newly updated 2016 Key Financial Data card for you. It is a handy resource to have as you plan the year ahead and prepare for tax filing time. You can download the PDF here.

The Key Financial Data card includes current tables for:

  • 2016 Tax Rate Schedule
  • Standard Deductions & Personal Exemptions
  • Tax Rates on Long-Term Capital Gains and Qualified Dividends
  • Exemption Amounts for Alternative Minimum Tax
  • Gift and Estate Tax Exclusions and Credits
  • Education Credits & Deductions
  • Tax Deadline Dates
  • Retirement Plan Contribution Limits
  • Individual Retirement Account Contribution and Income Limits
  • Health Savings Account Limits
  • Deductibility of Long-term care premiums
  • Medicare Deductibles
  • Social Security Benefits and Taxation Amounts
  • FICA and Medicare Tax Rates
  • Medicare premiums
  • Life Expectancy Table

Feel free to share the Key Financial Data card with any family and friends who can use it. Click here to download the PDF.

 

 

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A Time for Caution

The stock market’s New Year hangover we mentioned last week is proving hard to overcome. Just two weeks into 2016, the S&P 500 stock index is down 8%. Crude oil did even worse, plunging almost 22% since New Year’s Eve.

We are, of course, watching events closely and taking action to protect our managed portfolios. We began assuming a defensive posture several weeks ago as our technical indicators weakened. They turned even more bearish in early January, prompting us to further reduce our equity exposure.

In times like this, it is important to step back and see where we stand in long-term perspective. The chart below shows the S&P 500 for the last five years.

 
 
As you can see, the market trended steadily upward for most of this period. In 2015 it appears to have topped out around the 2,100-point level. This week’s decline brought the index back near the panic low set during the August China-related selloff.

We won’t be surprised to see at least a brief pause in this area, but the long-term damage is serious. This morning BlackRock CEO Larry Fink said in a news interview that stocks could fall another 10% and oil prices could test $25 per barrel. Our analysis says much the same. Now is a time for great caution.

Some investment strategists point out that economic fundamentals still look generally positive, at least in the United States. They are correct - but they view the situation from a high-level perspective. Down here on the ground, it is not so easy to ignore the booming fireworks.

This does not mean we should react out of fear, greed or any other emotion. Our disciplined approach has served us well for many years and we see no reason to abandon it. The forthcoming three-day weekend may give market participants a much-needed break and let cooler heads prevail next week. Alternately, it may help the fear spread.

We have learned over the years that avoiding major losses is the best way to achieve long-term success. A strong defense is the best offense. Instead of accepting major losses and trusting a bull market will help us recover, we try to avoid such losses in the first place. That is what we are doing right now.

The next events to watch will be overseas on Monday, while U.S. markets are closed, and then our own market open on Tuesday. The news media will no doubt run many doom-and-gloom stories over this MLK weekend. As you read them, bear in mind that Republic is on the job and making prudent decisions to help protect your capital and reach your long-term financial goals.

As always, we are glad to discuss your individual situation at any time. Feel free to reach out by phone or e-mail if you have any questions.

IMPORTANT DISCLOSURE INFORMATION: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Republic Wealth Advisors), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from Republic Wealth Advisors. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Republic Wealth Advisors is neither a law firm nor a certified public accounting firm and no portion of this commentary content should be construed as legal or accounting advice. If you are a Republic Wealth Advisors client, please remember to contact Republic Wealth Advisors, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of the Republic Wealth Advisors’ current written disclosure statement discussing our advisory services and fees is available upon request.

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A Volatile New Year

Flipping the calendar to 2016 brought many changes.  Kenjol changed its name to Republic, the U.S. entered an election year, and global markets woke up with a nasty New Year’s Eve hangover.  The headache is not going away, either.

Market woes actually date back to December.  Bankers and money managers had been holding their collective breath in anticipation of a Federal Reserve rate hike.  The Fed obliged, but it wasn’t enough.  World stock markets sold off in late December and the selling pressure has continued into the New Year.

As you may know, we pay close attention to seasonal patterns.  Financial markets go through recurring cycles, just as the weather does.  These are useful but not perfect indicators.  Last year in New York City, for instance, the temperature was in the 70s on both Independence Day and Christmas Day.  Both were exceptions to the rule.

Recent market performance is also an exception.  Historically, stocks usually rise in the period from just before to just after New Year’s Day.  That didn’t happen when we entered 2015, and it certainly didn’t happen this year either.  This negative “Santa Claus” move coupled with a down first week of January historically has not boded well for future market returns.

The parallels to last year aren’t imaginary.  The S&P 500 index fell 2.73% in the first three market days of 2015.  For the same period in 2016, the index also fell exactly 2.73%.  History seldom repeats itself quite so neatly, of course.  We don’t expect another topsy-turvy year that ends roughly where it started.  The question is whether this year will be better or worse than last year.


As you can see in the chart, the S&P 500 started last year near the 2050 level, moved slowly upward for several months before falling out of bed in late summer, and then struggled to end right back near that same 2050 mark again.  It was a wild ride that went nowhere.

The big drop in August rattled nerves.  In a radio interview at the time, our David Levy said this:

HOST: Obviously, pulling the covers up over our head is not a good option, so what should we be doing?

LEVY: Typically, we think we should be doing something, and in many cases that’s really the problem.  When we see extreme moves in the market like we saw at the open this morning, really the best course of action is to do nothing.  Fear is a powerful emotion and it can get in the way of making logical decisions.  So in many cases it’s probably most prudent to take a step back, take a deep breath, and really evaluate what’s changed and what course of action you may need to take going forward.

That was good advice last August and still applies today.  Reacting out of fear is almost always a mistake.  We have to think logically and calmly. What has changed?

Several factors are combining to keep markets weak:

•    China is dealing with a growth slowdown while also trying to let its Renminbi currency float with market forces.  The transition is necessary but often uncomfortable.  China’s stock market may be taking another leg down after a rough 2015.  This has a spillover effect on other world markets, including the U.S.

•    Even outside China global economic growth looks tepid at best.  Last night the World Bank said this year could bring a “perfect storm” for developing economies like Brazil, Russia, India and China.

•    Low inflation and mediocre manufacturing activity in the U.S. and Europe indicate the slowdown may be starting to affect producers and consumers, even in relatively strong economies.

•    Weakness in transportation stocks and container shipping rates is another sign that global trade in all kinds of goods is not growing, and may well be falling.

•    Slower growth combined with a worldwide crude oil glut has pushed oil prices below $33, with little sign of a near-term recovery.  This is bad for an already-battered energy sector and trickles through to other industries as well.

•    Diminishing demand for raw materials like iron ore is wreaking balance sheet havoc on major mining and commodity producer stocks.

The above factors combine to create serious questions about corporate profitability. Many investors grossly underestimated the impact that a stronger dollar, weaker crude oil and lower global growth would have last year. It is far from certain whether current stock prices reflect economic reality.

On a short-term basis, U.S. stock benchmarks look very oversold.  We will not be at all surprised to see a bounce higher in the next few days.  The bigger question is whether the bounce is sustainable or whether further downside will ensue.  Much depends on new information we will receive as January unfolds:

•    Tomorrow morning, the Labor Department releases its monthly employment report.  We will see if the job market is still improving and, perhaps more important, whether wage pressure indicates the recovery is sustainable.

•    Quarterly earnings reports over the next few weeks will tell us more about 2015 results and management expectations for 2016. S&P 500 earnings have declined four consecutive quarters and revenues dropped three straight quarters. We need to see these trends stabilize and reverse if stocks are to move significantly higher.

•    The Federal Reserve holds its next policy meeting on Jan. 26-27.  The futures market shows most traders don’t expect any additional action at this meeting (and not until June as of today), but that could change if incoming economic data weakens much further.

We will be watching these events as well as monitoring many technical indicators as we always do.  This week we took steps to reduce stock exposure in our managed account programs.  At Republic, we do this by shifting assets into various defensive and uncorrelated market segments.  We can also hold cash, but with money market rates near zero, we prefer to use other alternatives with attractive risk/reward characteristics.

Stock valuations will be the key over the next few weeks.  The fundamental measure we watch show the market either near its fair value or slightly overvalued.  This suggests more choppiness probably lies ahead.  If so, we will likely remain defensive.  This may include raising additional cash and/or repositioning assets from stocks to alternative investments. 

These are difficult decisions and you place your trust in Republic to make them wisely.  We appreciate your confidence and will do all we can to remain worthy of it.  As always, we are glad to discuss your individual situation and see if any adjustments would make sense.  Feel free to call us any time.


IMPORTANT DISCLOSURE INFORMATION: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Republic Wealth Advisors), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from Republic Wealth Advisors. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Republic Wealth Advisors is neither a law firm nor a certified public accounting firm and no portion of this commentary content should be construed as legal or accounting advice. If you are a Republic Wealth Advisors client, please remember to contact Republic Wealth Advisors, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of the Republic Wealth Advisors’ current written disclosure statement discussing our advisory services and fees is available upon request.

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Tel: 512-506-9395 | 281-408-2538
Toll-free: 866-453-6565
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