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Investment Newsletter - Q2 2018

2018 started as a roller-coaster. It continued a nice, slow rise through most of January, however, it then had a quick drop, followed by a series of ups and downs for the remainder of the quarter (as well as the beginning of this quarter). We give you more detail on it further below, and there is also a link that can be read from Russell Investments on their Q2 outlook, located on the right.  

In this issue of our Investment Newsletter:
  • An overview of recent market activity, along with Our Perspective...
  • A recap of the performance of major market indices from the past quarter and year-to-date. 
  • IRA contribution reminder
  • Spring cleanup
  • Upcoming Economic Calendar

You will find past investment articles , and recent stock market commentary and outlook , by clicking on the relevant Quick Links on the right , or peruse past investment topics by clicking the  Articles tab above or directly on our website. 

If there is a topic of interest you would like to see covered in the future, please reply back to this email to let us know, or click here . Likewise, i f you have any questions on this or anything else, feel free to reply back.
Our Annual ADV

As per Securities and Exchange Commission (SEC) requirements, attached is our annual ADV brochure.  To access this, please  click here . If you would like us to email or mail a hard copy, please feel free to call or email us to let us know.
Investment Topic:
Rising Interest Rates and the Bond Market: What is the Risk?
For our investment topic, Rising Interest Rates and the Bond Market: What is the Risk? we attempt to give a high-level overview of the topic. To learn more, please click here

Our Perspective on Recent Market News and Activity

Our synopsis of the past quarter, a look ahead, and putting it all in perspective:

The 1st Quarter of 2018 came in like a lion and went out like a lamb.  Perhaps more accurately, it went out as a sheep in wolves clothing.  It was also a quarter that finally saw the return of the dreaded "V" word, which stands for "volatility".  After a remarkable run of historically low volatility, and after the market set an all-time high on January 26, reality set in that markets simply do not just go up forever. The S&P 500 index rose 5.6% in January, which was the biggest gain for a January since 1997.  This was followed by a record one-day spike in the CBOE Volatility Index (VIX), the first 10% market correction since early 2016, and subsequent 8% rebound again. Those gains were not long lived, and this marked the first time in 10 quarters that either the S&P 500 (down -1.17%) or Dow (down -2.26%) posted a loss for a three-month period.  Just about all of the major market indices (see below) were negative for the quarter with MSCI Emerging Markets being one of the few in positive territory at +1.07%.  The U.S. 10-year Treasury yield rose 50 basis points to 2.90%, hitting its highest point since the "taper-tantrum" in late 2013.
There are several reasons as to why volatility is back, and in no particular order revolves around the following themes:  
  • The U.S. Federal Reserve (Fed) is picking up the pace of hiking rates, with most estimates in the 3-4 range for 2018, with one already completed. 
  • There is a fear of a trade war, as threats are increasing especially between China and the U.S.
  • Is this an all-out trade war or just a negotiating strategy?
  •  The challenge of late-cycle investing, in that equity valuations had been stretched. Some feel equities still look appealing amid a solid economic backdrop and earnings momentum supercharged by U.S. fiscal stimulus, with headwinds coming in 2019.
  • Worries about the economy overheating and the effects of potentially rising inflation. Inflation is perking up, led by the U.S. Still, it will likely take time for any overheating to challenge the Fed's gradual pace of interest rate hikes.
  •  Potential regulatory threats to firms such as Amazon, Google, Facebook, etc., which have been market out-performers over the recent market run. Monopoly concerns? Privacy concerns? Political revenge?   The market does not like uncertainty.
  •  The added complications are that the U.S. federal government has enacted substantial fiscal stimulus at a time when the economy is at full employment.
We are in agreement with others that the tailwinds are still outpacing the headwinds, and the outlook for corporate profits this year is particularly robust.  Will the coming earnings reports be enough to bring the market out of the current correction, or will the future guidance on earnings weigh more heavily?
Some interesting thoughts below about how "accelerating change" affects the modern investment landscape from Steven Romick, Portfolio Manager of the FPA Crescent Fund (FPACX):
"Accelerating change swirls around us, placing us in a middle of a vortex that is not without investment implications.  The existential risk to corporations is greater than it has ever been.  Businesses are disappearing.  Digital photos KO'd Eastman Kodak.  Mobile phones continue to cannibalized fixed wire lines, disconnecting the Old Bells.  Video on demand replaced Blockbuster.  Satellite television stole cable customers but now cable companies offering high-speed data, TV, home and wireless telephone service, a quadruple threat, have begun to take back share.  Advances in renewables affect the economics of companies dependent on fossil fuels.  Ride share today and autonomously driven cars tomorrow threaten auto manufacturers.  And Gutenberg's printing press is being mothballed thanks to PCs, cell phones, tablets, and e-readers.  The Internet and Facebook are spreading information (thankfully, some of it useful) at greater speed and volume than Herr Gutenberg could ever have imagined.  Corporate lifespans are getting shorter and shorter. 
Corporations in the 1960's would list on a stock exchange and be expected to remain in the index for at least five years before they were either required, bankrupt, or overtaken in market capitalization by other public companies.  That was expected to be the case more than 90% of the time but those odds have since fallen to the mid-60% range and are continuing to decline.
In the late 1970's and early 1980's, the average company had been in the S&P 500 for almost 40 years.  The fervor of the dotcom era temporarily gifted some businesses with very large market capitalizations crowding out more established companies from the index, pushing a company's average tenure from a little more than 30 years to the mid-teens in just a few years.  Many of those companies shrank or failed and the average lifespan creeped back up to about 25 years.  Now, however, many relatively young businesses have disrupted the economics of their older brethren.  Innosight, a management consulting firm, published a study that suggests that the average lifespan of a company in the S&P 500 index is expected to hit a new low of 12-13 years.

The market is a pendulum that swings back and forth.  It will come back our way as it always does. 2017 saw solid returns and exceptionally low volatility.  A mix of more muted returns and "normal" volatility challenge this dynamic in 2018.  As such we continue to feel the prudent plan is to continue to utilize lower than historical asset class returns in our financial planning conversations with our clients.  

Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns.
Major Market Indices

Below is the Q1 '18 price return and year-to-date performance of some of the major indices:

Index Q1 2018 2018 YTD (same as Q1)
US Treasury 3 Month T-Bill
0.41% 0.41%
Barclay's US Aggregate Bond Index
Barclay's Municipal Bond Index
-2.14% -2.14%
S&P 500 Index (US Large Cap)
Russell 1000 (US Large Cap)  -1.14% -1.14%
Dow Jones Industrial Average -2.26% -2.26%
Russell Mid Cap  -0.88%  -0.88%
Russell 2000 Index (US Small-Cap)  -0.40% -0.40%
MSCI EAFE International: Developed Markets
-2.20% -2.20%
MSCI International: Emerging Markets
1.07% 1.07%
Bloomberg Commodity Index
-0.79% -0.79%
Credit Suisse Long/Short Equity*
*as of 11/30/17
1.13% 1.13%
DJ US Select REIT Index -8.35% -8.35%

Quick Links

Recent reports and/or articles of interest:

Stay Connected
IRA Contribution?

If you are eligible to make IRA contributions for 2017 (Traditional IRA, Roth IRA, SEP-IRA), and have not done so, the deadline of April 17th, is fast approaching. Many firms request that it be submitted by April 10th.  If you are unsure about your eligibility to contribute, please let us know and we will explore your individual circumstance. 

Spring Cleanup

The spring is a great time of year to go through your file folders, and eliminate old papers that you may no longer need to hold onto (make sure to shred anything with personal information). For instance, the IRS requires you to keep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later, if you file a claim for credit or refund after you file your return. You need to keep records for 7 years if you file a claim for a loss from worthless securities or bad debt deduction. For more information on this subject from the IRS,  click here .

On the Investment Horizon
Upcoming Key Dates on the Economic Calendar 

  • First Friday of each month: Unemployment report for the prior month, released at 8:30AM.

  • Wednesday, April 11: Federal Open Market Committee (FOMC) releases minutes of previous meeting at 2PM
  • Friday, April 27 at 8:30AM: GDP, 1st quarter (advance estimate). 

  • Tuesday May 1 - Wednesday, May 2: The Federal Open Market Committee (FOMC) meets, and releases their announcement on Wednesday at 2PM. 
  • Wednesday, May 23: Federal Open Market Committee (FOMC) releases minutes of previous meeting at 2PM
  • Monday, May 28: Memorial Day - Market are closed. 
  • Wednesday, May 30 at 8:30AM: GDP, 1st quarter (second estimate); Corporate Profits, 1st quarter (preliminary estimate).

  • Tuesday June 12 - Wednesday, June 13: The Federal Open Market Committee (FOMC) meets, and releases their announcement on Wednesday at 2PM.
  • Wednesday, June 13 at 2:30PM: Fed Chair Jerome Powell to hold his quarterly press conference to explain the FOMC's latest quarterly economic projections.
  • Thursday, June 28 at 8:30AM: GDP, 1st quarter (third estimate); Corporate Profits, 1st quarter (revised estimate).

  • Wednesday, July 4: Independence Day - Market are closed. 

If you desire an appointment, have any questions on any of this material, or any other financial subjects may relate to your own financial circumstance, please reach out to us at the contact information below:






Brian Cohen, CCO; email:; phone: 631-923-2487
Joe Favorito, CFP®; email:; phone: 631-930-5336

Direct office email: 

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