News

The Punch Bowl is Gone, Volatility is Back

Even though we think global recession risk remains low – at least for this year – markets are responding to "the punch bowl being taken away" (meaning, less accommodative monetary policies.) With less accommodative policies comes the possibility of less robust growth. And Trump’s newly minted tariffs on selected imports are not helping the situation.

Look Before You Leap...

When developing a financial plan, I tend to lean heavily on various insurance specialists as many of these products tend to be complex, warranting the expertise of a professional who “lives and breathes” insurance every day, all day. That said, I felt compelled to write this blog as I have seen one too many instances where an insurance product was sold to a person who didn't understand some of the product's complexities.

The Quintuple Bottom Line

Alexis Advisors is pleased to announce that we have just become a Certified Benefit Corporation! Certified B Corps are a different way of doing business - one that focuses on the "how" and "why" of business, not just the "what."  Becoming a Certified B Corp means we are now measured not just on our net profit, but on a quintuple bottom line.

Peer-to-Peer Lending: A Potential Opportunity for Borrowers & Investors

As most of my clients know, I would prefer that everyone carry a zero balance on their credit cards because having high-interest rate credit card debt is like rowing a boat with holes in the bottom. If you’re carrying a lot of credit card debt - or an investor looking for a way to earn a higher interest rate on your cash - you may want to explore Peer-to-Peer (P2P) lending.

S&P 500 Index Up +8.3% in October! Unfortunately, That’s Only Half The Story...

The media has been abuzz since the end of October given the stellar performance of the S&P 500 Index, up +8.3%, one of the best monthly returns in years. The media love a good story – actually, the media need a good story - and unfortunately, “up +8.3%” is only half the story. The catch is what happened in in the months prior to October.

The "Death Cross" Sounds Scary - Does This Mean We Heading Into A Bear Market?

There are two broad categories that investment managers typically assess when deciding to buy or sell a particular security:1) The Fundamentals – i.e., How strong or weak is the economy? How strong or weak are the financials of a company?2) The Technicals – i.e., Has the price of a particular index or stock moved above or below certain trend lines or thresholds?

I use quite a few technical indicators in my investment approach because “price never lies” – that is, if the price is going down, it’s going down, subjecting clients to the potential for wealth destruction.

However, there are hundreds, if not thousands, of technical indicators that can be assessed, making this business incredibly challenging to filter through the noise and figure out those that are potentially the most impactful.

In August, we had a "death cross" in the S&P 500 Index, among others. What is the "death cross?" Is it one of the more meaningful technical indicators? And what are the potential implications for the stock market?

Many money managers look at the 50 day moving average* crossing the 200 day moving average* (somewhat dramatically called “the death cross”) of the S&P 500 Index to determine the overall stock market trend. If such an event occurs, some investors believe that there is a higher probability of entering a bear market. (A bear market is often defined as an asset class being down -20%.)

While I don’t use this indicator in the buy and sell decisions for my client portfolios, I do track the "death cross" because this type of action may imply a change in price trend in the security or index being analyzed.

Take a look at the illustration below of the S&P 500 Index, its 50 day moving average (blue line), and its 200 day moving average (orange line):

Death Cross Example

Death Cross Example

As you can see, the “death cross” occurred in August, with a significant pickup in volatility over the quarter.

We will get to the potential implications of this below, but before doing so, let’s review where the major asset classes closed at the end of the third quarter.

  • US Equities The S&P 500 Index was down =6.94%, with an intra-quarter maximum peak-trough loss of -12.25%. From my perspective, this “blowing off steam” was long overdue with the August decline breaking the third longest-run on record without a 10% correction.

  • US Bonds The Barclays Aggregate Bond Index, a benchmark used widely to assess the overall US bond market, was up +1.23%. Personally, I was somewhat surprised that the index didn’t move up more given the typical inverse relationship between stocks and bonds during stock market sell-offs. However, this was likely due to the specter of higher interest rates, with the Federal Reserve Open Market Committee Meeting looming in early September.

  • International Equity Markets International markets fared worse than US equity markets, with the Morgan Stanley Capital Index (MSCI) Europe Asia Far East (EAFE) Index down -8.98%.

  • Emerging Equity Markets Emerging markets, as represented by the MSCI Emerging Market ETF, was down -11.69% on the quarter, continuing to suffer the fall-out from China’s equity substantial equity market decline, with the iShares China ETF declining 36.29% since peaking in late April.

  • Commodities Gold and Oil continued their decline. Gold, as represented by the SPDR Gold ETF continued its slide, down -4.90% for the quarter. Oil, as represented by the United States Brent Oil ETF lost an additional whopping -26.26% for the period.

So, you know the S&P 500 Index recently experienced a “death cross.” Can you guess which of the other asset classes above have experienced a similar pattern?

Answer: All of them! Yes, all of the major asset classes have experienced a “death cross” over the past year.

But, does that mean that you should put your money under the mattress?

While caution is warranted, and a reduction market exposure may be justifiable, moving to a money market fund is likely not the answer given the following.

Additionally, it’s important to note that not all “death crosses” are created equal. In order to not get bogged down, I am going to focus just on the “death cross” in the S&P 500 Index.

  • August 2011 The last time the death cross occurred in the S&P 500 Index was in August 2011, when investors were very worried about the prospects of global growth. The market stumbled a total of just under 20%, with just -6.74% occurring after the cross. After stabilizing – with signs that global growth was indeed intact – the market continued its uptrend, with the death cross reversing to illustrate this more positive trend.

  • December 2007 The opposite was true in December 2007, when the cross would have resulted in just a -4.31% loss, rather than the nearly 57% decline in the S&P 500 Index through March 9, 2008.

The clear difference between these two examples is what subsequently occurred to the global economy and earnings. In the first case, constructive fundamentals re-asserted themselves, propelling the stock market higher; in the latter, the fundamentals continued to deteriorate, ultimately resulting in the “great recession” of 2008/2009.

We acknowledge that US economic activity has slowed, reinforced by last Friday’s employment report showing that employment increased by only 142,000 jobs in September, well below expectations of more than 200,000/, as well as a stagnation in company earnings. And the steep declines in commodities has certainly contributed to a global slow down, as has the slowing demand from China and other developing economies.

In spite of this, we still see the glass as half-full. European and Japanese company earnings have continued to grow. Additionally, assuming that energy prices stabilize, the Federal Reserve decides to delay raising interest rates until signs of more robust economic growth appear, and the US dollar weakens, making our exports to other countries cheaper, we believe that we are not entering into a bear market.

This doesn’t mean, however, that we won’t see the probability of continued market volatility. And it doesn’t discount the importance of continuing to watch for ongoing price deterioration (continuation of the death cross pattern).  Additionally, as mentioned, while we do not use the 50 Day/200 day moving average cross to guide our investment decisions, our computer models have signaled a significant reduction exposure to global equity markets.

In closing, we believe technical analysis is a good tool for guiding investment decisions. However, the markets over the long run by fundamentals, not technical. If confidence in the global growth story resumes, our models will indicate such, and we will take action accordingly. In the meantime, as is typically is the case with the markets, patience is a virtue!

Want to learn more? Join the conversation.

Be well,

Roberta

*Moving Average  The simple moving average of a security or index is calculated by adding up the closing price for the security over a particular period (for example, 50 days or 200 days), then dividing it by the number of days in the period. The objective of creating a moving average is to show the price trend of the underlying security.

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Alexis Advisors, LLC is Registered Investment Advisor with the Commonwealth of Virginia. Information contained herein is for informational purposes only and is subject to various interpretations and timeframes, and should not be considered investment advice. Please contact Advisor promptly if there are any changes in your financial situation or investment objectives, or if you wish to impose, add or modify any reasonable restrictions to the management of your account. Since the confidentiality of internet email cannot be guaranteed, do no include private or confidential information such as passwords, account numbers, or social security numbers. Additionally, instructions having financial consequences such as trade orders, fund transfers, etc. should not be included in your email communications, as we cannot act on unconfirmed instructions received via email. Nothing in this transmission should be construed as an offer or solicitation to purchase or sell securities. Investments in securities and insurance products are not FDIC insured, not bank guaranteed, and may lose value. Advisor’s current Disclosure Brochure is set forth on Form ADV Part 2 and is available for your review upon request.

Understanding Active vs. Passive Investing: Why Should You Care?

There are many ways to manage money, but in general, investment management falls into two primary categories – passive management and active management.Passive management typically follows the tenants of Traditional Asset Allocation whereby you allocate a certain percentage to equities, bonds, cash and other asset classes, and stay invested in these asset classes regardless of market environment – that is during bull markets and bear markets.

On the other hand, active investment management typically applies – as the name suggests – an active approach to managing one’s positions. Rather than “buy and hold” investments, one “buys and sells” based on market conditions. For example, if the stock market is trending up, positions are bought or increased; if the stock market is trending down, positions are reduced or completely eliminated.

So which approach is better?

The answer to this question, like so many aspects of the markets, is “it depends:”

  • Are we in a bull market?If you assess performance during a bull market, then passive management tends to outperform active management. There are many reasons for this, which are outside of the scope of this blog – but in short, it often is very difficult to outperform the S&P 500 Index during a strong bull market.

  • Are we in a bear market?If you assess performance during a bear market, then active management tends to outperform due to the fact that the money manager has reduced or eliminated positions to the particular market that is trending down, be-it US equities, international equities, gold, energy, bonds, etc.

Another important question is:

  • What's your time frame? To get an idea of the potential efficacy of any investment approach, you need time. Many tend to view a "full market cycle" as a fair time-frame. A full market cycle includes a bull market and a bear market. According to Tobias Carlisle's* analysis, the average bull market is 67 months (approximately 5.5 years) and the average bear market is 43 months (approximately 3.3 years). If you assess performance over a full market cycle, then active management tends to outperform given the money-manager’s focus on managing risk – that is, mitigating losses during the bear market.

Of course, both active and passive management approaches can have many shades of gray - so one needs to take into account the investment manager’s specific approach and to recognize that there are no absolutes and no guarantees in this business. However, if you are taking a long-term view, it may be it's worth considering working with an advisor that has a focus on risk management - particularly as you approach retirement, where you don't have the the time to "discover" whether the investment manager's approach is going to support or detract from helping you reach your goals.

As our clients know, we are active money managers. Much of this is informed by my experience in institutional money management, having worked for nearly a decade in on Wall Street, in Connecticut and London primarily for active money managers.

Personally, I believe one of the most important components to building wealth is to manage risk – to strive to mitigate losses.  Managing losses means that you seek to preserve your capital – which means that, over time, you will likely have the ability to compound your money. Compounding just means "making money on your money,” and is an important component of building wealth.  If you lose 50% of your assets during a big bear market, you obviously can’t compound on the 50% you lost!

In addition to the potential for compounding, another possible benefit of active investing is that the approach tends to be very disciplined and quantitatively driven –using price trend data and computer-driven models to help guide when to buy and when to sell. Applying this kind of discipline, often takes some of the stress out the equation – for both the money manager and the client. The client knows that during bear markets, their investment advisor has a discipline – has rules – regarding reducing their exposure to the markets that are in free-fall.

Below is an example of one of the models I use for managing client assets. The analysis illustrates the growth of $10,000 by “buying and holding” the S&P 500 Index Exchange Traded Fund (ETF) versus taking a active, modeled approach.  Investing in the S&P 500 Index ETF by itself, an initial investment of $10,000 jumps to an impressive $287,473 (blue line); but the modeled** approach, where I switch to Treasury Bills (or similar) on model sell signals, takes one up to a hypothetical $2,046,954 (black line). (Please note, I do not  currently employ a Long/Short*** approach, which is illustrated by the red line.)

Active vs. Passive Investing Illustration - Growth of $10,000

Active vs. Passive Investing Illustration - Growth of $10,000

A couple of points to note:

  1. This example illustrates the potential benefit of active management over several bull and bear market cycles.

  2. The analysis does not include trading costs or tax implications. However, personally, I would rather pay taxes on $2,046,954 compared to $287,473.

From my perspective, the analysis suggests that active investment management - striving to manage losses, no matter what the asset class****  – may have real potential to beat passive index investing, over time.  I frequently tell my clients that this is why they pay me – to seek to be a good risk manager.  As mentioned, unless you are a very good stock picker (which I try to be in my two stock portfolios), it is tough to beat the S&P 500 Index during a bull market. But during significant market declines, I believe having a disciplined approach in an effort to avoid significant wealth destruction may be worth considering.

Want to learn more?  Join the conversation.

Be well,

Roberta

-------------------------------------------------------

Notes:

* Tobias Carlisle is the founder of Greenbackd, a blog dedicated to deep value, contrarian investing. A contrarian, deep value investment approach strives to "buy when other investors are selling, and sell when other investors are buying," with the objective of buying when investments are inexpensive, and selling them when they become expensive relative to historical norms.

** A "model" typically refers to in investment methodology that uses computer systems to help indicate when to buy and when to sell specific securities.  Models are built with the goal of optimizing the risk-versus-reward (loss-versus-gain potential) of an investor's portfolio. Models may include security price data sets, fundamental data sets ( Price-to-Earnings ratio, Federal Reserve interest rate stance, etc.), or a combination of the two. One potential benefit of using a model is that it can be back-tested to see how the model would have performed in the past. While results can never be guaranteed, applying such an approach seeks to increase confidence in one's investment strategy, and again, optimize the risk-versus-reward in one's portfolio.

*** When an investor goes "long" on an investment, it means that he/she has bought a stock believing its price will rise in the future. Conversely, when an investor goes "short" he/she is anticipating a decrease in share price.  "Short selling" is the selling of a stock that the seller doesn't own, which can be a risky proposition.  There are, however ETFs that "sell short" inside of the ETF, limiting one's risk to his/her initial investment, and allowing him/her to strive to profit from a decline in price.

***** Would you really have wanted to be a "buy and hold" investor of energy stocks over these past couple of years? On 9/6/13, crude oil prices peaked at $110.53 per barrel; crude opened today at $45.47 per barrel, a decline of nearly 59%, with many energy stocks following suit.

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Alexis Advisors, LLC is Registered Investment Advisor with the Commonwealth of Virginia. Information contained herein is for informational purposes only and is subject to various interpretations and timeframes, and should not be considered investment advice. Please contact Advisor promptly if there are any changes in your financial situation or investment objectives, or if you wish to impose, add or modify any reasonable restrictions to the management of your account. Since the confidentiality of internet email cannot be guaranteed, do no include private or confidential information such as passwords, account numbers, or social security numbers. Additionally, instructions having financial consequences such as trade orders, fund transfers, etc. should not be included in your email communications, as we cannot act on unconfirmed instructions received via email. Nothing in this transmission should be construed as an offer or solicitation to purchase or sell securities. Investments in securities and insurance products are not FDIC insured, not bank guaranteed, and may lose value. Advisor’s current Disclosure Brochure is set forth on Form ADV Part 2 and is available for your review upon request.

What The Heck Is Impact Investing?

social impact

social impact

The power of philanthropy, nonprofits and government have been used in the past to drive social change. While these resources have made significant strides, they may not be enough to solve some of the world’s toughest problems.The ever-growing impact investing movement - innovative for-profit enterprises that generate financial returns while seeking to have positive social consequences - has the potential to steer new resources and new thinking to organizations that are driving social change.  In other words, business, entrepreneurs and the power of markets have the opportunity to drastically increase the talent and resources available to solve critical problems.

I have always believed that the private sector can be a force for good, and believe that impact investing and social entrepreneurship provides a significant opportunity to bring the innovation, incentives and resources from the business sector to the social sector.

Since launching Alexis Advisors, LLC in 2013, my vision has included figuring out a way to have a positive impact on our community, outside of the conventional realm of just providing financial planning and investment management services.

In an industry that is often filled with “noise” and rife with lack of transparency, I have consistently focused on the question, "How can I use my business as a force for good? How can I use my business to advocate for the individual investor and small business owner? How can I increase transparency? increase clarity?...so investors are more informed consumers of financial services and products?"

Since starting the firm, I have done this in a few of ways:

  1. Firm Name The firm is not named after me, but named to highlight the firm’s mission. Alexis is Greek for “helper, defender and advocate". I see myself not just as a financial advisor, but as an advocate for working professionals, their families and local, small businesses - who are often at the mercy of being sold financial products, rather than offered unbiased advice.

  2. Firm Structure I structured the firm as a fee-only Registered Investment Advisor, not as a broker. As a result, the firm is governed by fiduciary requirements, not just suitability requirements. As a financial fiduciary, the firm is held to a very high standard, and is legally required to put our clients’ interests before our own.

  3. Education & Advocacy Many financial advisors provide financial education on investment options, the stock market and retirement planning. I, of course, provide these services. However, the firm's structure enables me to provide consumers insights on some of the potential conflicts of interest in the industry, as well as on questions to consider when purchasing financial products.

  4. Be Intentional, Be Informed From the beginning, the company's first core tenet has been “be intentional about your life choices, and informed about your money.” As a long-time meditator and yoga practitioner, I believe that in most cases, life choices should come before money choices. However, I often see individuals doing the opposite - putting money before life choices. There are certainly times when this necessary, but in an effort to raise awareness and support individuals on this path of "being intentional and informed," Alexis Advisors gives a portion of its net profits to The Chrysalis Institute and to Junior Achievement of Central Virginia. These organizations align well with this core tenet, with Chrysalis providing tools and resources to support individuals in being more intentional, and Junior Achievement providing excellent resources to support financial literacy for children.

I certainly have more to do to support Alexis' overarching mission of having a positive impact on those in our community.  To that end, I have begun the process of applying to become a Certified B Corporation.

Certified B Corporations are leading a global movement to redefine what business success means – that is, rather than just using private business to make money, using business as a force for good - to effect change in our community.  To become a Certified B Corp, a company must meet rigorous standards of social and environmental performance, accountability, and transparency.  By voluntarily meeting higher standards of transparency, accountability, and performance, Certified B Corps are distinguishing themselves by offering a positive vision of a better way to do business. By taking this step, Alexis Advisors will measure what matters - have metrics in place to help it meet social impact goals, and support the broader impact investing ecosystem.

Today, there is a growing community of more than 1,000 Certified B Corps (18 in Richmond, VA) from 33 countries and over 60 industries working together toward one unifying goal: to redefine success in business, encouraging companies to compete not just to be the best in the world, but to be the best for the world.

Impact investing and social enterprises illustrates  that it’s possible to build businesses that provide both social and financial returns – using business and the private sector to support the social sector or consumer-focused initiatives.

Want to learn more?  Join the conversation.

Be well,

Roberta

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Alexis Advisors, LLC is Registered Investment Advisor with the Commonwealth of Virginia. Information contained herein is for informational purposes only and is subject to various interpretations and timeframes, and should not be considered investment advice. Please contact Advisor promptly if there are any changes in your financial situation or investment objectives, or if you wish to impose, add or modify any reasonable restrictions to the management of your account. Since the confidentiality of internet email cannot be guaranteed, do no include private or confidential information such as passwords, account numbers, or social security numbers. Additionally, instructions having financial consequences such as trade orders, fund transfers, etc. should not be included in your email communications, as we cannot act on unconfirmed instructions received via email. Nothing in this transmission should be construed as an offer or solicitation to purchase or sell securities. Investments in securities and insurance products are not FDIC insured, not bank guaranteed, and may lose value. Advisor’s current Disclosure Brochure is set forth on Form ADV Part 2 and is available for your review upon request.

Is It Time To Yield for A Grexit?

Equity markets faced substantial obstacles during the second quarter (Q2). The optimism that pervaded during Q1 – with international (non-US) markets finally “catching up” to US markets – dissipated during Q2, likely due to ongoing concerns over a Greek default and potential exit from the European Union (“The Grexit”), concerns that Puerto Rico will default on its debt, as well as significant gyrations in Chinese equities. Despite the barrage of bad news on the international front, the S&P 500 Index managed to eke out a 0.2% gain for the first half of the year, with the biggest dip occurring during from 12/29/14 – 1/15/15, down -4.7%. The S&P 500 Index has now gone 914 days without a 10% correction, it’s third longest on record.* Against this backdrop, where do we go from here? Before we look forward, let’s look at how a few of the major asset classes have fared:

  • US Equity Markets Pre-election years are historically bullish for stock markets. However, given international stressors, it’s not surprising that the S&P 500 Index posted its worst start to a pre-election year since 1947. As our clients know, we tend to go by the “weight of the evidence” when making investment decisions – that is, using quantitative models to determine what to buy and when to add to or reduce positions. We do the same when assessing the overall stock market’s health. One of the charts that we watch closely is a momentum indicator, which looks solely at the price action (“the tape”) of a broad universe of US stocks. As you can see (chart below), the indicator is still at a healthy 68%, meaning that over two-thirds of US stocks across various sub-industries are still trending higher. One can never apply just one indicator when striving to make “a call” on the market; however, this particular price momentum indicator supports a continuation of the long-term uptrend.

Big Mo

Big Mo

  • US Bonds The Barclays Aggregate Bond Index, a benchmark used widely to assess the overall US bond market, slipped -1.7% in Q2 and -4.7% for the first half of the year. Long-term Treasury Bonds, which tend to be more volatile than shorter maturity bonds, tumbled even more – down -8.3% in Q2, their worst quarter since Q3 1981. Yield and associated price action of Long-term Treasury Bonds tend to reflect the bond market’s inflation fears; as such, the sell-off Long-term Treasuries is likely telling us that the bond market is foreshadowing concerns about future inflation.

  • International Developed Markets After the MSCI Europe Asia Far East (EAFE) Index posted its best Q1 since 1998, it prices faltered in Q2 likely due to “Grexit” fears. Despite this, however, the EAFE was the top performing asset class year-to-date with the EAFE Exchange Traded Fund up $2.65 or +4.4%.

  • Emerging Markets Likewise, the MSCI Emerging Market Index was up sharply in April, but gave back most of these gains in May and June.

So, is the weak start to the year a dangerous omen once seasonals kick in – that is, once we move into September and October, when volatility historically tends to pick up? Or is the price action a sign of the market’s resiliency? We believe that, for the moment, caution is likely warranted. From our perspective, not much has changed over the last quarter to make us more bullish. If anything, there has been a deterioration in the outlook, particularly as it relates to international markets:

  1. Uncertainty about Greece Will Greece default on its debt? Will it leave the European Union? While no one yet has the answers, if it turns out to be “yes,” we have no roadmap or history to point to that helps us better understand the potential impact on US and international markets.

  2. Uncertainty about Puerto Rico Will Puerto Rico default on its debt? According to an article on Market Watch titled 3 Things to Know About Puerto Rico’s Debt Crisis, about 60% of Puerto Rico’s bonds are held by traditional municipal bond investors, and the rest is in the hands of hedge funds and other crossover investors.” As the article points out, hedge fund managers may be inclined to sell their positions, rather than taking a “wait and see” approach. This has the potential to increase market volatility if managers decide to sell their positions “en masse.”

  3. China Suddenly In A Bear Market After a meteoric rise, the Shanghai Index (China’s main equity index) peaked on June 12th and by the end of the quarter, had lost over 24% of its value. In just over 2 weeks, the index officially entered a bear market, which is typically marked by a 20% loss.

  4. US Equity Market Valuations The S&P 500 Index continues to be in overvalued territory. The Value Line Price-to-Earnings (P/E) Ratio that we typically reference is still hovering above 19, near historic highs. This indicates that many stocks continue to be expensive.

  5. Uncertainty About US Interest Rates The Federal Reserve continues to take a “data dependent” approach regarding the timing of raising interest rates. Pundits continue to make calls on this, but the fact is, no one knowns. If history is a guide, then the first couple of rate hikes should not be too destabilizing to the equity markets. But as with everything in the markets, there are no guarantees that history will repeat itself – or even rhyme.

Bull markets typically don’t die of old age, and typically “don’t go out with a whimper, but rather a roar.” If some the international concerns right themselves, the market could move higher. Even so, we will still find ourselves with lofty US P/E ratios and the specter of higher interest rates. So, until some of the uncertainty outlined above is resolved, we think it is likely worth yielding for the moment. Our portfolios reflect only a moderately bullish stance. Depending on the portfolio’s risk versus reward objective, each is holding some cash and/or very short-term (low price volatility) bond ETFs.

As always, we will continue to primarily follow the discipline of our models to help us decide when to buy – and when to reduce exposure to the stock markets in our portfolios.

Feel free to join the conversation!

Be well,

Roberta

*Source: Ned Davis Research

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Alexis Advisors, LLC is Registered Investment Advisor with the Commonwealth of Virginia. Information contained herein is for informational purposes only and is subject to various interpretations and timeframes, and should not be considered investment advice. Please contact Advisor promptly if there are any changes in your financial situation or investment objectives, or if you wish to impose, add or modify any reasonable restrictions to the management of your account. Since the confidentiality of internet email cannot be guaranteed, do no include private or confidential information such as passwords, account numbers, or social security numbers. Additionally, instructions having financial consequences such as trade orders, fund transfers, etc. should not be included in your email communications, as we cannot act on unconfirmed instructions received via email. Nothing in this transmission should be construed as an offer or solicitation to purchase or sell securities. Investments in securities and insurance products are not FDIC insured, not bank guaranteed, and may lose value. Advisor’s current Disclosure Brochure is set forth on Form ADV Part 2 and is available for your review upon request.

Is "Cash King?"... Or is "Cash Trash?"

Investing in the markets can turn a rational person into an irrational one.  The tug of war between fear and greed is ever present. On the greed side of the equation, the investment community has coined the term FOMO (Fear of Missing Out) – fear of missing out on a bull market run; during a bear market, there is a different kind of fear – fear of wealth destruction.Conventional wisdom among most traditional investors is that one should be fully invested at all times. Many simply cannot justify keeping their money in cash earning less than 0.02%.  From their perspective, they are forgoing the long-term growth opportunities associated with investing in equities. And they are losing purchasing power, given the yield on cash is a paltry 0.02% - not enough to keep up with the current rate of inflation.

We, on the other hand, believe that using your hard-earned money to purchase a stock should be no different from considering when to buy just about anything. A sensible consumer does not run out and spend all of their money to buy a television or a house when they are at their most expensive.

We suggest a similar approach when considering stocks – instead of buying at peak prices, we believe it’s worth considering waiting until stocks “go on sale” before making your purchase. In the meantime, you hold cash or cash equivalents so you can have some “dry powder” ready when stocks go on sale.

An Aging, Expensive Bull Market

So this begs the question – is the market “old” and is it “expensive”?

From an “age” perspective, this is a fairly “old bull”, currently running just over seven years. But bull markets don’t typically die of old age.

However, stocks are expensive from an historical perspective, currently trading roughly at valuations seen only four times over the last 115 years – in 1901, 1929, 1966 and 2000.  And over the weekend, Goldman Sachs joined this discussion, stating that the typical stock in the S&P 500 trades at 18.1 times forward earnings, which ranks in the 98th percentile of historical valuation since 1976.

S&P 500 Index PE

Market tops can be frustrating – drawn out, with price spikes, and increased volatility. And seldom do bull markets end without other important warning flags. For example, deterioration in breadth is one area that money managers focus on–that is, is there an increasing number of stocks moving down compared to those moving up?  Right now, market breadth remains constructive.  However, with market valuations stretched, just like a hot air balloon that is over-inflated, it may not take much to tip the balance.

We have no preconceived notion of when this bull market will end or what the trigger will be. It could be any number of factors.  One possible culprit is the Federal Reserve’s interest rate policy.  Chairwoman Yellen continues to intimate that rates will rise this summer, or in the fall.  From an historical perspective, the first one, two or three interest rate hikes have seldom killed a bull market.  But, like all debates related to the market, opinions vary.  Some think that this tightening cycle will be different in a very negative way, given the Fed’s big balance sheet, no past experience with increases starting from near zero interest rates, and a Fed that is dangerously late in changing policy. Others agree that it will be different, but in the opposite way – that the tightening cycle will be gentle and prolonged.  My guess is that this debate will continue for months, if not years.

Right Now, Cash Is King in Our World

During the past few months, we have maintained a cash/defensive position between 10 - 20% in our moderately aggressive equity ETF (exchange traded fund) portfolios. This is primarily driven by current market valuations – and the fact that we want to have some cash on the sidelines to buy, as and when the market gets cheaper. However, we have increased our cash position in our two stock portfolios – partially due to taking profits on existing positions, but also due to the fact we can’t find any good deals out there!

By our own standards, our current allocations to cash/short-term instruments do not represent our target for bear market, defensive allocation. Rather, we view our current holdings as a waypoint for our safety-first strategy. We believe our clients primarily pay us to manage risk – to strive to mitigate the wealth destruction that occurs during bear markets.

Perhaps, you’re opposed to holding cash for the reasons stated in the beginning of this blog. If, however, you are holding cash, suddenly the purchasing power of your cash will be increased dramatically, as and when the next bear market arises.

In closing, given current market valuations, we are inclined towards “cash is king” - not trash.  Feel free to join the conversation!

Be well!

Roberta

 

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Core Tenets

Alexis Advisors, LLC is Registered Investment Advisor with the Commonwealth of Virginia. Information contained herein is for informational purposes only and is subject to various interpretations and timeframes, and should not be considered investment advice. Please contact Advisor promptly if there are any changes in your financial situation or investment objectives, or if you wish to impose, add or modify any reasonable restrictions to the management of your account. Since the confidentiality of internet email cannot be guaranteed, do no include private or confidential information such as passwords, account numbers, or social security numbers. Additionally, instructions having financial consequences such as trade orders, fund transfers, etc. should not be included in your email communications, as we cannot act on unconfirmed instructions received via email. Nothing in this transmission should be construed as an offer or solicitation to purchase or sell securities. Investments in securities and insurance products are not FDIC insured, not bank guaranteed, and may lose value. Advisor’s current Disclosure Brochure is set forth on Form ADV Part 2 and is available for your review upon request.

Should You Look Before You Leap Into Annuities?

Regardless of the product under consideration, I think it is usually a good idea to educate yourself about how your money is being invested - hence my first Core Tenet, Be InformedI am frequently asked if annuities are a good retirement planning tool. Of course, the answer is "it depends" - like all aspects of financial planning, it depends on one's personal circumstances.

Annuities can be particularly confusing, but it's worth taking the time to understand why you are buying the product, as well as what you are buying - that is, the specific product features.

There are three common types of annuities:

  • Fixed annuities generally guarantee a fixed or minimum rate of return over a specific time period. Most reset the rate of return at the end of a pre-determined time-frame.  In most instances, a fixed annuity can be compared to buying a CD.  Given today’s low interest rates, fixed annuities yields are low, and as a result may be impacted by inflation – that is the dollar amount may stay the same, but the value is eroded by inflation. (Remember the “nickel loaf of bread?”  Me neither, but this is an example of inflation - that a nickel doesn’t have the same purchasing power as it did in the past.)
  • Variable annuities (VAs) allow premiums to be invested into a limited number of sub-accounts (similar to mutual funds), which may include stock, bonds, and cash. VAs may also offer a guaranteed minimum rate of return, even if the underlying investments underperform.
  • Equity Indexed annuities contain features of both fixed and variable annuities, offering investors a return based on a specific benchmark, such as the S&P 500 Index.

On the surface, these products may seem appealing and simple - you pay the insurance company a premium either via lump-sum (typically called an “immediate annuity”) or periodic payments (typically known as a “deferred annuity”). In return, your money grows on a tax-deferred basis, and you may receive a steady stream of payments over time.

Below the surface, however, these products can be complex and may require digging deep to understand the cost versus potential benefit.

Ask Questions

The most logical place to start is by asking:

  • Why am I buying this product? Is it to move a taxable account into a tax-deferred status? Is it to receive a guaranteed income payment? Other?
  • Do I understand the tax implications of moving money into an annuity?
  • Is there a surrender period?
  • What are my total costs?

Some annuities can be expensive, depending on the provider and the riders purchased.  An example of base VA fees (*), as well as fees associated with riders (**) that may be added on, is displayed below.

Typical Annual Fees for Variable Annuities

As you can see, the costs can add up:

  • Mortality & Expense (M&E) Fees  Insurance companies charge a fee for assuming the risk of the annuity. These fees may also be part of the commission received by the advisor for selling the annuity.
  • Administrative and Operating Fees  Account maintenance fees, such as bookkeeping.
  • Sub-Account/Fund Expenses  Fees associated with the sub-accounts/mutual funds.
  • Optional Death Benefit Rider  Adding this rider provides a death benefit to the contract holders’ beneficiaries.
  • Optional Lifetime Withdrawal Benefit Rider Adding this rider delivers a guaranteed income stream for the remainder of the contract holder’s life.

A final question worth considering is, “How is the risk being managed in the account?”  VAs, like most other investment accounts, are subject to the whims of the markets.  So, it’s typically a good idea to ask how the risk (volatility) is being managed – and if there are additional fees being charged for these investment advisory services.

Our Offering

As a fee-only Registered Investment Advisor, we strive to be transparent in how we do business. We charge an annual fee for managing client assets, and an hourly fee for financial planning services.  We don’t receive any other fees or commissions.

If we think a client may benefit from a VA, we have a solution – one that is transparent, relatively inexpensive and simple to understand.  Jefferson National’s VA product costs $140 per year, plus the cost of the sub-account/funds – many of which range between 0.75% - 1.00%.  There are no riders or other bells and whistles, and as a result, the product is relatively easy to understand, with the primary objective being to move a taxable account into a tax-deferred status.  Additionally, Jefferson doesn’t pay commissions to advisors for placing business with them, likely reducing the potential for conflicts of interest.

But even with these seeming advantages, the individual first and foremost needs to ask, “Does this product make sense for my particular situation?”

In closing, we believe all consumers of financial services should be informed.  An annuity may be the right product for you – we just suggest that you put a bit of time and effort into understanding the details.

If we can assist, please contact us. We are here to be a resource!

Be well,

Roberta

 

* / **Source: Ken Fisher: Annuity Insights: Your Guide to Better Understanding Annuities. *Securities & Exchange Commission (SEC), Variable Annuities: What You Need to Know. **Insured Retirement Institute’s 2011 IRI Fact Book

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Core Tenets

Alexis Advisors, LLC is Registered Investment Advisor with the Commonwealth of Virginia. Information contained herein is for informational purposes only and is subject to various interpretations and timeframes, and should not be considered investment advice. Please contact Advisor promptly if there are any changes in your financial situation or investment objectives, or if you wish to impose, add or modify any reasonable restrictions to the management of your account. Since the confidentiality of internet email cannot be guaranteed, do no include private or confidential information such as passwords, account numbers, or social security numbers. Additionally, instructions having financial consequences such as trade orders, fund transfers, etc. should not be included in your email communications, as we cannot act on unconfirmed instructions received via email. Nothing in this transmission should be construed as an offer or solicitation to purchase or sell securities. Investments in securities and insurance products are not FDIC insured, not bank guaranteed, and may lose value. Advisor’s current Disclosure Brochure is set forth on Form ADV Part 2 and is available for your review upon request.

Start With Your Money Mantras

Money mindfulness is an easy concept to grasp, but tough to put into action. It takes real courage to scratch below the surface to understand your money behaviors and attitudes - where they came from, and how to adjust them.Understanding your "money mantras" - your money messages - is great first step. Mantras that were reinforced while growing up can have a significant effect on your current money relationship.

Click the button below to access a quick and easy tool for better understanding your money mantras.

click here button

If we can assist, please contact us. We are here to be your advocate and a resource!

Be well,

Roberta

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Core Tenets

Alexis Advisors, LLC is Registered Investment Advisor with the Commonwealth of Virginia. Information contained herein is for informational purposes only and is subject to various interpretations and timeframes, and should not be considered investment advice. Please contact Advisor promptly if there are any changes in your financial situation or investment objectives, or if you wish to impose, add or modify any reasonable restrictions to the management of your account. Since the confidentiality of internet email cannot be guaranteed, do no include private or confidential information such as passwords, account numbers, or social security numbers. Additionally, instructions having financial consequences such as trade orders, fund transfers, etc. should not be included in your email communications, as we cannot act on unconfirmed instructions received via email. Nothing in this transmission should be construed as an offer or solicitation to purchase or sell securities. Investments in securities and insurance products are not FDIC insured, not bank guaranteed, and may lose value. Advisor’s current Disclosure Brochure is set forth on Form ADV Part 2 and is available for your review upon request.

Shake, Rattle & Rotation

The U.S. stock markets have been trading in fairly narrow range since year-end with the S&P 500 Index ranging between approximately 2000 and 2100. Most economic data has been positive, with unemployment continuing to decline – the rate stood at 5.5% as of the last Friday’s report, compared to 6.6% in January 2014 and 8% in January 2013.Additionally, inflation has been nearly non-existent, largely driven by energy prices falling off a cliff.  And finally, the Federal Reserve has maintained a cautious stance, choosing not to increase interest rates, and intimating that any near-term increases will likely be incremental.

So, with such a positive landscape of declining unemployment, low inflation and low interest rates, what is keeping the U.S. stock market stuck in third gear?

The answer may have to do with rotation -  many institutional investors are seeing better deals elsewhere in the world. The U.S. market is relatively expensive, with the price-to-earnings (P/E) ratio of the S&P 500 Index at near record highs, as indicated by the following chart.

S&P 500 Index Historical P/E Ratio

Most money managers typically consider relative value when trying to figure out where to invest their money. As Ned Davis Research pointed out recently, “on an aggregate basis, money has been coming out of domestic equity Exchange Traded Funds (ETFs) (-$10.5 billion) since the start of the year and has gone into European ($21 billion) and International funds ex-U.S. ($16.3 billion).”

While it’s tempting to run to your advisor and suggest that s/he over allocate to non-U.S. funds, there is a wrinkle that may be worth considering.

Most mutual funds are priced in U.S. dollars, rather than in their local currency. This means that when the U.S. dollar is going down relative to other currencies, foreign funds tend to benefit. However, the opposite is also true – a stronger U.S. dollar can hurt the performance of international funds.

As you can see from the chart below, which is an ETF that represents the U.S. dollar against a basket of currencies, the dollar has been appreciating since July 2014, largely driven by the expected increase in U.S. interest rates. While this hasn’t precluded international funds completely from appreciating, it has damped the performance.

US Dollar Index Exchange Traded Fund (UUP)

There are ways around this, however. One approach is to consider a U.S. dollar hedged mutual fund or ETF. Such funds do exactly as their name implies - they hedge the exposure of a rising U.S. dollar, offering a "pure play" on the underlying asset. Again, I suggest speaking with your advisor - and we are always more than happy to assist.

The above is not to say that the U.S. markets can’t or won’t continue higher. Markets can stay extended for months or even years. However, we do think it's likely worth considering investing in or adding to US dollar hedged international funds as there may be more opportunity overseas for a while.

As always, if you have questions or if we can help in any way, please just send an email or give a call.

Otherwise, until next month.

-Roberta

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Core Tenets

Alexis Advisors, LLC is Registered Investment Advisor with the Commonwealth of Virginia. Information contained herein is for informational purposes only and is subject to various interpretations and timeframes, and should not be considered investment advice. Please contact Advisor promptly if there are any changes in your financial situation or investment objectives, or if you wish to impose, add or modify any reasonable restrictions to the management of your account. Since the confidentiality of internet email cannot be guaranteed, do no include private or confidential information such as passwords, account numbers, or social security numbers. Additionally, instructions having financial consequences such as trade orders, fund transfers, etc. should not be included in your email communications, as we cannot act on unconfirmed instructions received via email. Nothing in this transmission should be construed as an offer or solicitation to purchase or sell securities. Investments in securities and insurance products are not FDIC insured, not bank guaranteed, and may lose value. Advisor’s current Disclosure Brochure is set forth on Form ADV Part 2 and is available for your review upon request.