Here's To Your Wealth
  September, 2016
The Markets: 
 
After some August doldrums, September is witnessing a return to higher stock market volatility.  While it's probably prudent for long-term investors to stay the course and not get too fancy with market timing, for those with shorter time horizons or lower risk tolerances it might be prudent to carefully examine what is inside their investment portfolios. 

We are looking at four main areas of concern:

1)  Weakening global economies.  In June, The World Bank downgraded its 2016 global growth forecast to 2.4 percent from the 2.9 percent pace projected in January. http://www.cnbc.com/2016/06/07/world-bank-cuts-global-growth-forecast-on-weak-demand-commodity-prices.html. This slow global economic growth continues despite the massive easing by Central Banks around the world. This continued slow growth puts into question how effective low interest policies are for long term economic growth.

2)  An uncertain Fed leaning towards hiking rates. While we don't see the Fed embarking on a frequent and sustained rate hike trajectory, the jitters the market exhibits when any Fed Governor speaks reflects investor concerns with how any rate rise will affect stocks (in the short run). Interest rate hikes may also strengthen the dollar which we feel can negatively impact exporters and slow our domestic economy. But in the long run, we view any Fed action to restore a more normal structure of interest rates as something that will be healthy for the markets. Rates around the world are near all-time lows and yet the world economy is stagnant. Just look to Japan to see how effective 30 years of low interest rates has been for their moribund economy.

3)  A fully valued - or even overvalued - stock market. Price to Earnings multiples, also known as P/E ratios are above historical market averages.  For example, the P/E ratio on the S&P 500 index is approaching 17, which is slightly above the long term historical average (since 1990) of 15.9. Price to Book ratios (P/B) are also inching up and stock prices of the S&P 500 index are now approaching 3 times book value (versus below 2 coming out of the 2008 decline). To clarify, the P/E ratio is the price of a stock divided by the company's earnings per share, while P/B ratio is a company's stock price divided by the book value per share. We expect valuation metrics such as P/E and P/B ratios to inflate as stock prices run-up, but these levels may indicate that the market may have run up a bit too far.

4)  Uncertainty with our elections. There are several scenarios the markets will not like regardless of who is elected. If Trump is elected, we face a high amount of uncertainty. Consistency in policy hasn't been a hallmark of his candidacy so Wall Street doesn't really know what his policies will be. If he pursues trade wars with China and Mexico that may not be good for stocks. Furthermore, the polarized nature of his candidacy will make unity difficult and we may continue to have divisiveness and gridlock out of Washington.

Alternatively, If Hillary is elected in a landslide and the Democrats take the Senate, Wall Street could be looking at an empowered left. Hillary has had to appease the far left in her party (the Bernie Sanders voters) and that voice will be echoed in Congress by Elizabeth Warren. Some of Warren's rhetoric and proposals are far to the left of just about anything we have seen in our countries history and reflect more of what we have seen in failed socialist countries. The U.S. stock market, particularly financial stocks, may take a hit if Hillary doesn't legislate more from the center.

However, there may be mitigating factors to these scenarios coming out of the election.  For example, Paul Ryan the likely Speaker of the House in 2017, has kept his distance from Mr. Trump and as a result will not be beholden to his policies.  And the incoming Democratic Senate Leader, Chuck Schumer, is from New York and he has been friendly to Wall Street in the past.

All this uncertainty leads us to have some concern about the near term performance of the stock market and other risky assets like high yield bonds. Investors should review their portfolios to see if their investments are aligned with their true risk tolerance and remember that stock market investing is very difficult to time in the short run and that a long term perspective is usually needed to look past periods of uncertainty.
 
Please call us with any questions you have on your personal situation.
 
  
Quote of the Day:
 "The future is no more uncertain than the present." - Walt Whitman
   
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
Email:  clientservices@potomacwealth.com
  
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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