April, 2018
By Darren Nyce, CFA
Senior Research Analyst, Castle Investment Advisors®, LLC

Oscar Money 4.2018

The movie industry has recently honored its best this-and-that for the year at the Academy Awards. As a financial guy who likes movies, I was interested in a Kiplinger article listing money lessons that can be learned from various Oscar-nominated films. These include:

  • The Big Short (2016) – All bubbles eventually burst
  • The Wolf of Wall Street (2014) – Hot stock tips from someone you don’t know aren’t so hot
  • Moneyball (2012) – Value investing can be a winning formula and numbers trump hunches

The complete list including some surprising entries like “Up” and “Out of Africa” can be found here: https://www.kiplinger.com/slideshow/saving/T023-S002-money-lessons-from-oscars-and-the-academy-awards/index.html

And unless you’ve spent your entire winter in a movie theater you’ve probably realized that market volatility has returned. After going through a calm 2017 during which the S&P 500 didn’t have a single day in which it moved 2% in either direction, in the first quarter of 2018 the market experienced 6 of those eye-popping days. Bumpier times are here. As such, the S&P 500 lost 0.8% for the quarter, breaking its streak of 9 consecutive positive quarters; only the second down quarter it has had in the past 5 years. As you can see in the chart below, bonds were also generally down for the quarter making it likely that investors saw lower month-end statement balances for the first time in a while.

Index      1st Qtr 2018      
Return
1 Year
      Return        
3 Year
     Annualized      
Return
5 Year
     Annualized      
Return
S&P 500 -0.8% 14% 10.8% 13.3%
Nasdaq Composite 2.6% 20.8% 14.3% 18.1%
Russell 2000 – Smaller Companies -0.1% 11.8% 8.4% 11.5%
MSCI EAFE – International -1.5% 14.8% 5.6% 6.5%
Barclays US Aggregate Bond -1.5% 1.2% 1.2% 1.8%

While market gyrations and the accompanying headlines can increase investor anxiety, stepping back and remembering that the goal of most investors is having an investment portfolio that thrives over decades, not days, helps put things in perspective. Don’t confuse mass media market commentary with financial advice – the former provides contextual information and entertainment; the latter should be personalized to your individual situation and goals.

Along these lines I recommend a recent blog by Josh Brown titled “Some Alternatives to Evidence Based Investing” where he lists some of your options if you don’t use a systematic approach to construct a durable portfolio.

http://thereformedbroker.com/2018/03/20/some-alternatives-to-evidence-based-investing/

Meanwhile, the economy continues its trend of slow growth. Responding to the recent tax cuts and more government spending, growth is expected to increase, at least in the short-term.
Unemployment has fallen to 4.1%, a dramatic difference from the 10% we were experiencing in 2009. This is one of the lowest rates we have seen in my lifetime (since 1969).

Civilian Unemployment chart

Of course, this is great news for those of us who like to have jobs, but there is another side to this coin. We mentioned the economy’s slow growth, it has been averaging about 2.2% annual growth during the current expansion. The drop of the unemployment rate from 10% to 4.1% has accounted for about one-third of the growth we have experienced. Most economists agree that an unemployment rate of 3.5% is about as low as possible. Without the stimulus provided by putting more people to work, overall economic growth will be harder to come by in the years ahead.

It is also logical to expect that along with a tighter labor market, the growth of wages paid should continue to increase.

The rise in Corporate profits was very solid in 2017 and with the benefit of significant tax cuts, 2018 should be excellent as well. The chart below shows the combined annual Earnings Per Share (EPS) for the companies in the S&P 500 as well as estimates for the future. This will create quite a high bar for earnings comparisons in 2019 and beyond. Especially in an economic environment that is likely to see higher wages, higher interest rates and slower growth.

SP 500 Calendar Year Chart

 In addition to the U.S., nearly all countries in the world are growing, but none are booming. This should provide a certain stability to the condition of the global financial markets, at least for now.

Because of the economic growth and stability, the Federal Reserve has been comfortable continuing to move interest rates back toward a more normalized level. The Fed did raise rates in March and is expected to do so again another 2 or 3 times this year.

Federal funds rate chart

Rising interest rates often present some challenges to bond investors. Most Castle clients will see among their bond investments things like Floating Rate Bonds, Convertible Bonds, and High Yield Bonds which have tended to do a little better as interest rates rise.

As expectations for 2018 earnings have increased, this has brought down the market’s valuation to a near normal level. Nerdy math alert: Forward P/E = stock market price divided by estimates of the next 12 months earnings; thus, a lower price or a higher earnings projection makes a lower P/E. This makes it more comfortable to be a stock investor this year, as there continues to be no signs of an imminent recession. But attention must be paid (and performance expectations adjusted) to the years following 2018 as continued earnings growth at this level will be challenging to maintain. As always you are encouraged to remain diversified and long-term focused.

I’d like to conclude this quarter’s letter with a personal note. My dad passed away earlier this year. Though he was not the kind of father to pull me aside and dispense quips of wisdom, he did teach me many important lessons most often through his actions. So as a tribute to him, I pass a few of these lessons along:

  • Protect your family, love your spouse
  • Hard work is good
  • You reap what you sow
  • Experiences are often more valuable than things
  • Cereals should be combined
  • Steak should be pink
  • Don’t strike out looking
  • Read the Bible
  • Live adventurously
  • Live up to the legacy you have received – leave a legacy to follow
  • Pay attention to the weather
  • Great things come from little beginnings - an entire stalk of wheat was once contained in a tiny seed
  • There are a variety of ways to be smart
  • Be someone’s mentor
  • Life is sometimes rough; comebacks will be needed

Thanks for reading, let your family know that you love them. Have a great spring. 

        DarrenSignature

Disclosures: 
Tax, legal, and estate planning advice contained in this article is general in nature. Always consult an attorney or tax professional regarding your specific legal or tax situation. This article was prepared for informational purposes only and does not constitute an offer to buy or sell, or a solicitation of any offer to buy or sell the securities mentioned herein. Information presented does not involve the rendering of personalized investment advice, but is limited to the dissemination of general information regarding products and services. It should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. Any strategy discussed herein may not be suitable for all investors. Before implementing any strategy, investors should confer with their financial advisor. No current or prospective client should assume that the future performance of any specific investment, investment strategy or product made reference to directly or indirectly, will be profitable or equal to past performance levels.

The movie industry has recently honored its best this-and-that for the year at the Academy Awards. As a financial guy who likes movies, I was interested in a Kiplinger article listing money lessons that can be learned from various Oscar-nominated films. These include:
The Big Short (2016) – All bubbles eventually burst
The Wolf of Wall Street (2014) – Hot stock tips from someone you don’t know aren’t so hot
Moneyball (2012) – Value investing can be a winning formula and numbers trump hunches
The complete list including some surprising entries like “Up” and “Out of Africa” can be found here: https://www.kiplinger.com/slideshow/saving/T023-S002-money-lessons-from-oscars-and-the-academy-awards/index.html
And unless you’ve spent your entire winter in a movie theater you’ve probably realized that market volatility has returned. After going through a calm 2017 during which the S&P 500 didn’t have a single day in which it moved 2% in either direction, in the first quarter of 2018 the market experienced 6 of those eye-popping days. Bumpier times are here. As such, the S&P 500 lost 0.8% for the quarter, breaking its streak of 9 consecutive positive quarters; only the second down quarter it has had in the past 5 years. As you can see in the chart below, bonds were also generally down for the quarter making it likely that investors saw lower month-end statement balances for the first time in a while.
Index 1st Qtr 2018 Return 1 Year Return 3 Year
 Annualized
 Return 5 Year 
Annualized Return
S&P 500 -0.8% 14% 10.8% 13.3%
Nasdaq Composite 2.6% 20.8% 14.3% 18.1%
Russell 2000 – Smaller Companies -0.1% 11.8% 8.4% 11.5%
MSCI EAFE – International -1.5% 14.8% 5.6% 6.5%
Barclays US Aggregate Bond -1.5% 1.2% 1.2% 1.8%
 
While market gyrations and the accompanying headlines can increase investor anxiety, stepping back and remembering that the goal of most investors is having an investment portfolio that thrives over decades, not days, helps put things in perspective. Don’t confuse mass media market commentary with financial advice – the former provides contextual information and entertainment; the latter should be personalized to your individual situation and goals.
Along these lines I recommend a recent blog by Josh Brown titled “Some Alternatives to Evidence Based Investing” where he lists some of your options if you don’t use a systematic approach to construct a durable portfolio.
http://thereformedbroker.com/2018/03/20/some-alternatives-to-evidence-based-investing/
Meanwhile, the economy continues its trend of slow growth. Responding to the recent tax cuts and more government spending, growth is expected to increase, at least in the short-term. 
Unemployment has fallen to 4.1%, a dramatic difference from the 10% we were experiencing in 2009. This is one of the lowest rates we have seen in my lifetime (since 1969).
                                    
Of course, this is great news for those of us who like to have jobs, but there is another side to this coin. We mentioned the economy’s slow growth, it has been averaging about 2.2% annual growth during the current expansion. The drop of the unemployment rate from 10% to 4.1% has accounted for about one-third of the growth we have experienced. Most economists agree that an unemployment rate of 3.5% is about as low as possible. Without the stimulus provided by putting more people to work, overall economic growth will be harder to come by in the years ahead.
It is also logical to expect that along with a tighter labor market, the growth of wages paid should continue to increase. 
The rise in Corporate profits was very solid in 2017 and with the benefit of significant tax cuts, 2018 should be excellent as well. The chart on the next page shows the combined annual Earnings Per Share (EPS) for the companies in the S&P 500 as well as estimates for the future. This will create quite a high bar for earnings comparisons in 2019 and beyond. Especially in an economic environment that is likely to see higher wages, higher interest rates and slower growth.
 
 
 
 
 
 
 
In addition to the U.S., nearly all countries in the world are growing, but none are booming. This should provide a certain stability to the condition of the global financial markets, at least for now.
Because of the economic growth and stability, the Federal Reserve has been comfortable continuing to move interest rates back toward a more normalized level. The Fed did raise rates in March and is expected to do so again another 2 or 3 times this year.
 
          
 
 
 
 
 
 
 
 
                              
Rising interest rates often present some challenges to bond investors. Most Castle clients will see among their bond investments things like Floating Rate Bonds, Convertible Bonds, and High Yield Bonds which have tended to do a little better as interest rates rise.
As expectations for 2018 earnings have increased, this has brought down the market’s valuation to a near normal level. Nerdy math alert: Forward P/E = stock market price divided by estimates of the next 12 months earnings; thus, a lower price or a higher earnings projection makes a lower P/E. This makes it more comfortable to be a stock investor this year, as there continues to be no signs of an imminent recession. But attention must be paid (and performance expectations adjusted) to the years following 2018 as continued earnings growth at this level will be challenging to maintain. As always you are encouraged to remain diversified and long-term focused.
I’d like to conclude this quarter’s letter with a personal note. My dad passed away earlier this year. Though he was not the kind of father to pull me aside and dispense quips of wisdom, he did teach me many important lessons most often through his actions. So as a tribute to him, I pass a few of these lessons along:
Protect your family, love your spouse
Hard work is good
You reap what you sow
Experiences are often more valuable than things
Cereals should be combined
Steak should be pink
Don’t strike out looking
Read the Bible
Live adventurously
Live up to the legacy you have received – leave a legacy to follow
Pay attention to the weather
Great things come from little beginnings - an entire stalk of wheat was once contained in a tiny seed
There are a variety of ways to be smart
Be someone’s mentor
Life is sometimes rough; comebacks will be needed
Thanks for reading, let your family know that you love them. Have a great spring.