Here's To Your Wealth
 May, 2016
The Markets: 
If you still want to participate in the axiom "sell in May and go away" you haven't missed your chance.  In May, most U.S. stock market indexes were relatively unchanged (see the chart below.) 

The clear loser in May was the emerging market sector which continues to be plagued by concerns that the Fed will raise interest rates. A rise in rates may strengthen the dollar and thereby raise the cost of the debt carried by emerging market countries, which is usually denominated in U.S. dollars. Perhaps surprisingly to some, a year-to-date performance winner has been high yield bonds which are rebounding nicely following a dismal late 2015.  As we have extensively written, high yield bonds were negatively impacted by last year's plunge in oil prices and lately they have been buoyed by oil's rise. 

We have also underscored the recent, high correlations between oil prices and stock prices.  As anyone who has visited a gas station lately can attest, prices at the pump have risen sharply in 2016.  Now that oil is priced more in line with recent averages, we expect the correlation between crude oil prices and stock prices to weaken and we expect that the primary U.S. stock market driver will be corporate earnings.  Over the long term, earnings have been traditionally viewed as the best determinant of a stock's value.  Strong earnings are a reflection of a strong economy and are also bullish for stock market and they refute the notion that we might be headed into a recession.
All the silliness of the political season aside, if anything concerns us more than earnings reports it will be an unexpected, outlier type event.  It is difficult to time and plan for these "black swan" events, but other than an economic recession, it is usually an unexpected event that can rattle the markets.  Of course, interest rates and Federal Reserve Bank (the Fed) forecasts can also continue to drive headlines, but even if the Fed hikes rates at their next meeting in June, we are not concerned about its impact on stock prices for several reasons:

1) Higher interest rates may actually help financial stocks.

2) Rates are historically so low that we would need to see sustained rate hikes for us to be concerned.

3) We do not believe there will be a sustained rise in interest rates largely
because the rest of the world is not experiencing our economic growth and many central banks are in fact cutting their rates.  If the Fed acts alone, it may dramatically increase the strength of the dollar, and that could make our exports less attractive overseas and bring us into a recession.

4) We don't think the Fed will take aggressive action during an election year (and some will say not during the tail end of this administration.)

The continuing, rampant market pessimism might make a casual observer think we are near all-time lows instead of all-time highs.  Keep in mind that historically, market pessimism is a bullish factor. That is why we are refusing to respond to fear and headlines and we continue to look at the fundamentals and maintain a long-term discipline.

Please call us with any questions you have on your personal situation.

Quote of the Day:
 "Remember that you are a Black Swan."
    - Nassim Nicholas Taleb, The Black Swan: The Impact of the Impact of the Highly Improbable
Mark Avallone and the Potomac Wealth Advisors Team
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Potomac Wealth Advisors, LLC
15245 Shady Grove Road, Suite 410
Rockville, MD  20850
Phone: 301-279-2221
Fax: 301-279-2230
Securities and Investment Advisory Services offered through H. Beck, Inc., Member FINRA/SIPC. 6600 Rockledge Drive, 6th Floor, Bethesda, MD 20817 301.468.0100. Potomac Wealth Advisors, LLC is not affiliated with H. Beck, Inc. 
This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results.  This information should not be relied upon by the reader as research or investment advice regarding any funds or stocks in particular, nor should it be construed as a recommendation to purchase or sell a security.  Past performance is no guarantee of future results.  Investments will fluctuate and when redeemed may be worth more or less than when originally invested. Diversification and asset allocation do not guarantee against loss. They are methods used to manage risk.
*The Dow Jones Global Indexes (DJGI) is a family of international equity indexes, including world, region, and country indexes and economic sector, market sector, industry-group, and subgroup indexes created by Dow Jones Indexes a unit of Dow Jones & Company best known for the Dow Jones Industrial Average.


The indexes are constructed and weighted using market value-weighted index. They provide 95 percent market capitalization coverage of developed markets and emerging markets. More than 3000 DJGI indexes provide data on more than 5500 companies around the world. Market capitalization is float-adjusted


*The DJIA is a widely followed measurement of the stock market. The average is comprised of 30 stocks that represent leading companies in major industries.   


* The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. 


*The NASDAQ Composite Index is a market-valued weighted index, which measures all securities listed on the NASDAQ stock market.


*The S&P Mid Cap 400 Index This Standard & Poor's index serves as a barometer for the U.S. mid-cap equities sector and is the most widely followed mid-cap index in existence. To be included in the index, a stock must have a total market capitalization that ranges from roughly $750 million to $3 billion dollars. Stocks in this index represent household names from all major industries including energy, technology, healthcare, financial and manufacturing.


*The Russell 2000 Index is a small-cap stock market index of the bottom 2,000 stocks in the
* The MSCI EAFE Index is a stock market index that is designed to measure the equity market performance of
developed markets outside of the U.S. & Canada. It is maintained by MSCI Barra, [1]a provider of investment decision support tools; the EAFE acronym stands for Europe, Australasia and Far East.


* The MSCI  Emerging Markets Indexs a float-adjusted market capitalization index that consists of indices in 21 emerging economies: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.  


*The Merrill Lynch US High Yield Master II Index (H0A0) is a commonly used benchmark index for high yield corporate bonds. It is administered by Merrill Lynch . The Master II is a measure of the broad high yield market, unlike the Merrill Lynch BB/B Index\ which excludes lower-rated securities.  

* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.


*The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful. 


* Consult your financial professional before making any investment decision.

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