Update – Washington

The U.S. stock market has jumped since the November 8th election. We identified 4 initiatives on which the U.S. stock market is speculating to be successfully accomplished early in the Trump administration.

The 4 initiatives will have a tremendous influence on the “Heat Map” which forms the basis of our forward looking view of the U.S. economy. We consider the success or failure of the 4 initiatives to be “leading” indicators for the Heat Map.

Below are the 4 Trump administration initiatives upon which the stock market is speculating and what progress, if any, has been made:

  1. Tax cuts and tax reforms benefiting most individuals and businesses- NO PROGRESS RECENTLY. CUMULATIVE PROGRESS TOWARD GOAL: 0%

  2. Infrastructure spending of up to $1 Trillion over the upcoming 7 to 10 years.  NO PROGRESS RECENTLY. CUMULATIVE PROGRESS TOWARD GOAL: 0%

  3. Affordable Care Act amendment, reform or reorganization. BOTH THE HOUSE AND THE SENATE TOOK THE FIRST STEPS TO REPEAL THE ACT. NO REPLACEMENT HAS BEEN FINALIZED. CUMULATIVE PROGRESS TOWARD GOAL: 5%

  4. Roll back of government regulations and Executive Orders considered to be difficult for businesses. ROLL BACKS HAVE STARTED. CUMULATIVE PROGRESS TOWARD GOAL: 5%

As the action happens in Washington on these 4 initiatives, don’t be surprised if the political “tug and pull” contest results in a wilder than normal stock and bond market.

We will continue to report in future issues on the progress on each initiative.  

Update – Washington

The U.S. stock market has jumped since the November 8th election. Let’s identify and track the 4 initiatives upon which the U.S. stock market is speculating will be successfully accomplished early in the Trump administration.

The 4 initiatives will have a tremendous influence on the “Heat Map” which forms the basis of our forward looking view of the U.S. economy. We consider the success or failure of the 4 initiatives to be “leading” indicators for the Heat Map.

Below are the 4 Trump administration initiatives upon which the stock market is speculating and what progress, if any, has been made:

  1. Tax cuts and tax reforms benefiting most individuals and businesses- NO PROGRESS RECENTLY.  CUMULATIVE PROGRESS TOWARD GOAL: 0%

  2. Infrastructure spending of up to $1 Trillion over the upcoming 7 to 10 years.  NO PROGRESS RECENTLY.  CUMULATIVE PROGRESS TOWARD GOAL: 0%

  3. Affordable Care Act amendment, reform or reorganization. BOTH THE HOUSE AND THE SENATE TOOK THE FIRST STEPS TO REPEAL THE ACT. NO REPLACEMENT HAS BEEN FINALIZED. CUMULATIVE PROGRESS TOWARD GOAL: 5%

  4. Roll back of government regulations and Executive Orders considered to be difficult for businesses. NO PROGRESS RECENTLY.  HEARINGS AND CONGRESSIONAL APPROVAL (OR NOT) ON TRUMP APPOINTEES FORMS A LITMUS TEST FOR FUTURE EFFECTIVENESS OF THE TRUMP ADMINISTRATION.  CUMULATIVE PROGRESS TOWARD GOAL: 0%

As the action happens in Washington on these 4 initiatives, don’t be surprised if the political “tug and pull” contest results in a wilder than normal stock and bond market.

We will continue to report in future issues on the progress on each initiative.

Personal Notes

We have some very sad news. Betty Adam, a longtime, trusted employee, and a friend to many, has passed away after a long battle. For 22 years at Valley National, Betty contributed in a big way to the legacy of trust on which VN has been built. She stopped in to the office just last Wednesday to give us her warmest regards, and she was in full possession of dignity and pleasantness for which we will always remember her.

Update On Washington

The U.S. stock market has jumped since the November 8th election. Let’s identify and track the 4 initiatives upon which the U.S. stock market is speculating will be successfully accomplished early in the Trump administration.

The 4 initiatives will have a tremendous influence on the “Heat Map” which forms the basis of our forward looking view of the U.S. economy.  We consider the success or failure of the 4 initiatives to be “leading” indicators for the “Heat Map.”

Below are the 4 Trump administration initiatives upon which the stock market is speculating and what progress, if any, has been made:

  1. Tax cuts and tax reforms benefiting most individuals and businesses- NO PROGRESS RECENTLY.  CUMULATIVE PROGRESS TOWARD GOAL: 0%

  2. Infrastructure spending of up to $1 Trillion over the upcoming 7 to 10 years.  NO PROGRESS RECENTLY.  CUMULATIVE PROGRESS TOWARD GOAL: 0%

  3. Affordable Care Act amendment, reform or reorganization. NO PROGRESS RECENTLY.  CUMULATIVE PROGRESS TOWARD GOAL: 0%

  4. Roll back of government regulations and Executive Orders considered to be difficult for businesses. NO PROGRESS RECENTLY.  HEARINGS AND CONGRESSIONAL APPROVAL (OR NOT) ON TRUMP APPOINTEES FORMS A LITMUS TEST FOR FUTURE EFFECTIVENESS OF THE TRUMP ADMINISTRATION.  CUMULATIVE PROGRESS TOWARD GOAL: 0%

As the action happens in Washington on these 4 initiatives, don’t be surprised if the political “tug and pull” contest results in a wilder than normal stock and bond market.

We will continue to report in future issues on the progress on each initiative. 

Valley National NOTES

One of the best personnel moves Valley National ever made was to recruit Laurie Siebert over 16 years ago.  Prior to joining Laurie had obtained her Certified Public Accountant designation, and was working for a local law firm.  Valley National was seeking a caring professional with income tax knowledge, great communications ability, and the desire for more knowledge.   It was a great match.  Once on board with Valley National, Laurie obtained her Certified Financial Planner and Accredited Estate Planner designations and hosted her own weekly radio program, “Your Financial Choices”.  In all facets, Laurie uses her own knowledge to help others by educating and providing guidance to Valley National’s clients.

And, Laurie has been active in the financial planning industry by currently serving as President of the Estate Planning Council of the Lehigh Valley and as the Personal Financial Planning coordinator for the PICPA’s CPA Journal.

Laurie has been generous with her time outside the office, too.  In addition to raising 3 children with her husband Carl, Laurie serves on the Leadership Team for the American Heart Association Go Red for Women Lehigh Valley, as a cabinet member of the Women’s Leadership Council of United Way of the Greater Lehigh Valley, and the organizing committee for TEDx Lehigh River.

Organizations are noticing:  BW NICE Lehigh Valley Chapter recently honored Laurie as its 2016 Businesswoman of the Year.  “BW NICE” stands for Business Women Networking Involving Charity & Education.  It brings women together to gain meaningful business connections, learn new ways to succeed and foster an empowering environment.  For details on BW NICE, click www.bwnice.org

Q&A with Liz Ann Sonders: What’s Behind the Recent Market Volatility?

Key Points:

  • Recent U.S. employment data has renewed the possibility of further Federal Reserve short-term interest rate increases.
  • The stock market appears reasonably valued, and higher valuations are unlikely without a return to positive earnings growth.
  • Some market participants have said low oil prices are sending a recessionary signal, but recessions historically have been preceded by oil price spikes, not crashes.

Global markets have been unusually volatile so far this year, including during the past few trading sessions.  Here is the take on the recent market action and economic news from Liz Ann Sonders, Chief Investment Strategist for Charles Schwab & Co.

The January U.S. employment report came out last Friday. Views on the data were mixed, with some apparently thinking the report renews the possibility of a Federal Reserve rate hike sooner rather than later this year. What was your take?

Liz Ann Sonders: The headline number was weak, but the underlying details were very strong.

The economy created 151,000 jobs in January—below expectations—while revisions shaved 2,000 jobs off the readings for November and December. However, the unemployment rate fell below 5%, a post-recession low, in spite of the fact that the labor force participation rate rose for a third consecutive month.

Household survey employment surged, with 25-to-34-year-olds making up the vast majority of people in new jobs. Part-time workers unable to find full-time work moved back toward a post-recession low. Finally, wages continued to rise, and hours worked were at a post-recession high.

It’s still possible, and some would say likely, that the Fed will not hike rates again in March, but the data renewed the case for continued tightening—likely a primary reason for the market’s slide.

Let’s turn to the U.S. stock market. Technology stocks are getting hit, some say due to steep valuations. What do you think about valuations?

Liz Ann Sonders: There are a wide variety of valuation metrics, often saying conflicting things about whether the market’s reasonably valued or not. My take is the market’s fairly valued, but conditions don’t exist for valuation expansion without stronger earnings growth.

We’re in the midst of earnings season right now, with many companies reporting their financial results for the past quarter. How is it going and what do you expect the rest of the way?

Liz Ann Sonders: The earnings “beat rate”—that is, the number of companies whose reported earnings beat expectations—is currently at 69%, the strongest since the third quarter of 2010. However, the revenue beat rate is still depressed at 46%.1 Materials, technology and health care have had the highest beat rates, with utilities exhibiting the lowest beat rate of the 10 equity sectors.

Over the past four weeks, analysts have raised earnings-per-share forecasts for 347 companies within the S&P Composite 1500® Index, but lowered them for 882 companies—the most negative reading since October 2011.

One important note: Earnings are likely to remain under pressure as long as deflationary winds keep blowing. Pricing power—which, of course, is affected by inflationary or deflationary trends—becomes increasingly important in a slow-growth environment, and one in which labor costs are rising.

Finally, annualized six-month forward earnings expectations for the S&P 500® Index remain in negative territory. This is why you hear talk of an “earnings recession.” What’s import to realize is that earnings recessions often correspond to economic recessions, but not always.

In cases where earnings recessions didn’t correspond to economic recessions, what were some of the common characteristics?

Liz Ann Sonders: The common characteristics of the past four earnings recessions dating back to the mid-1980s that were not accompanied by economic recessions were a surging U.S. dollar and/or plunging oil prices—both of which we’ve experienced recently. Clearly, the energy and manufacturing sectors are hurting, but ultimately the damage there should be offset by the benefit of lower oil prices to the consumption-oriented U.S. economy.

What’s your take on investor sentiment?

Liz Ann Sonders: Not just recently, but over the past several years, the volatility of investor sentiment has generally matched the market’s volatility. Very little movement is needed on the downside, in terms of market performance, to turn sentiment extremely bearish.

One survey I look at is put out by the American Association of Individual Investors (AAII), and that survey recently hit an extreme of low bullishness, while bearishness had spiked. Bullishness, at the recent low, was the lowest since just after the market crash of 1987. Investors are extremely pessimistic—typically, or eventually, a contrarian signal.

You don’t think a recession is on the horizon, but the recession drumbeat is getting louder. What’s behind the noise?

Liz Ann Sonders: Don’t get me wrong—recession risk is elevated, just not glaring yet. Although the U.S. economy remains bifurcated—manufacturing is in recession, but services are hanging in there—talk of recession got louder after the latest reading from the Institute of Supply Management on services came in weaker than expected.

Many suggest the weakness in oil is sending a recession signal. However, it has always been the case historically that spikes in oil prices, not crashes, preceded recessions. It would be unprecedented to have cheaper oil “cause” a recession. The energy and manufacturing sectors have taken it significantly on the chin, but energy sector employment represents only 0.5% of total employment and energy sector capital spending (capex) represents only 4% of total capex. Manufacturing in the aggregate is only 12% of the U.S. economy.

Market-based measures of the economy—for instance, yield spreads, the shape of the yield curve and stock market prices—are sending louder recession signals, while high-frequency economic-data-based leading indicators—like unemployment claims and some housing-based data—are not yet waving a red flag. Overall, the leading economic indicators have not rolled over to the extent typically seen before recessions.

Bear Markets In Times Of NO RECESSION

Despite sinking 2.2% last week, the Standard & Poor’s 500 has yet to drop the necessary 20% for designation of a “Bear Market”. Still, the popular benchmark is more than halfway there, and as much as we hate to admit it, we should at least consider the possibility that this is the start of something more than your run-of-the-mill correction.

When you’re stalked by a bear in the woods, it’s probably not wise to pause and ponder whether it’s, say, a black bear or a grizzly. Not so when the S&P 500 starts falling. At that point, it’s important to ask, “What kind of bear market are we in”?

It isn’t an academic question. Most bear markets occur in tandem with a recession. That was the case with the bear market that started in October 2007 and saw the S&P 500 tumble nearly 60%. It was also the case during the dot-com bust, when stocks lost about half of their value. Of the 15 bear markets that have occurred since 1928, 10 fit this pattern. These bear markets tend to be long—a median of just over 20 months—and deep—the S&P 500 has dropped 44% on average.

If one looks only at the headlines, it’s easy to imagine the worst. China’s stock market is in free fall, pushed lower by investors who fear the total collapse of the world’s second-largest economy. The junk-bond market, meanwhile, appears to be signaling a 20% chance of recession, even if you strip out the beleaguered energy sector. Manufacturing in the U.S. is slowing, and in what was a decent start to earnings season, Michael Ward, CEO of railroad operator CSX (ticker: CSX), mused that his company is feeling pressures it has never felt outside a recession. If this isn’t just another growth scare, then the road ahead will no doubt be a painful one.

Yet despite the chaos at home and abroad, there is a very good chance that the U.S. will avoid a recession in 2016. The economy is still cranking out close to 200,000 jobs a month, and labor growth shows little sign of slowing, says RBC Capital Markets economist Tom Porcelli. He notes that the Labor Department’s Job Openings and Labor Turnover Survey showed there are 2.5 times as many job openings as people collecting unemployment insurance. And while all of the manufacturing surveys point to continued weakness, manufacturing makes up just 12% of the U.S. economy. The services sector makes up 86%, and the nonmanufacturing sectors appear to be holding up just fine. In the past, the strength in the services sector helped the U.S. weather weakness in manufacturing, as was the case during the emerging market crisis of 1998-99. “There are issues to be sure,” Porcelli says. “But the U.S. economic backdrop is relatively sound.”

But if it isn’t a recession, why is the market freaking out? Chris Verrone, head of technical analysis at Strategas Research Partners, argues that the market is starting to price in some sort of financial crisis that will most likely occur in the energy and commodity sectors, where bond prices have fallen and the cost of credit-default swaps—which pay out if a company can’t pay its debt—have spiked. The collapse of China’s currency is also a fear, as the markets fret that it will reverberate through the developing world, and ultimately take down the global economy. At this stage, it doesn’t matter whether the fears are overblown. Market participants believe them, and that could cause a bear market even if they never materialize.

NONRECESSIONARY BEAR MARKETS tend to be shallower and recover more quickly. The most famous case was the 34% drop in the S&P 500 in 1987—the one that included the 21% drop on Black Monday, Oct. 19—but there have been four others, including 2011, when the S&P 500 fell 22% from its May high to its October intraday low, and the 23% tumble during the emerging market crisis of 1998. These bear markets tend to be shorter—a median of five months—and the drops smaller—“just” 26% on average. These, Verrone says, “are the road maps we should be familiar with.”

If there’s a silver lining, it’s that the market is a lot cheaper than it was a few months ago. The S&P 500 trades at 15.9 times 12-month forward earnings forecasts, notes Bank of America Merrill Lynch strategist Savita Subramanian, back where valuations were at the beginning of 2014. That means there are values to be had. She recommends looking at cash-rich companies, which have outperformed companies with heavy debt loads by 4.8 percentage points so far this year; investment-grade companies, which have outperformed their junk-rated counterparts by four percentage points; and high-quality companies, which have outperformed low-quality by four percentage points. Don’t expect that to change until the selling pressure finally comes to an end.

Then again, maybe we’ll get lucky. Maybe this is neither a black bear nor a grizzly but a koala—not a bear at all.

(Source, in part: Barrons On-Line)

Common Behavioral Mistakes Made By Investors

At times like this, investors should be reminded of behavioral tendencies which lead to knee jerk reactions and mistakes.

  1. Overreaction/availability bias. In financial terms, overreaction is the tendency to react in the right direction—but excessively so. Example: An investor who pulls all of their money out of the stock market at the first sign of bad news. “It’s like the investing equivalent of a person who gets upset by a small thing and loses their temper completely,” said Hersh Shefrin, a professor of finance at Santa Clara University’s Leavey School of Business and author of Beyond Greed and Fear: Understanding Behavioral Finance and the Psychology of Investing. Overreaction is often related to availability bias, which is the habit of overweighting easily available information. It can be something as small as a client seeing a dip in the account balance on their monthly statement. “If the client is prone to overreaction, something small like that can cause them to question their entire investment strategy,” he said. Availability bias makes the situation worse, since the client will likely put too much weight on information that’s new or easily available, rather than taking a step back and looking at the bigger picture. “Both of these biases tend to lead to mispricing in the market,” Shefrin pointed out. “People assume that stocks that have done really well will continue to do so for a long time, and vice versa.”
  2. Focusing on short-term performance. Human beings tend to overweight the importance of whatever’s going on right now. Simply put, we’re wired to be short-term thinkers, and overcoming that tendency is a difficult—but not impossible—task. Investors may feel the pain of a loss in the moment more acutely than they’ll appreciate a gain over time. That’s not surprising, as Shefrin said, “When you lose, it hurts today.” Of course, common sense reminds us financial markets tend to reward patience. But it can be hard for investors to truly believe in a reward that’s years in the future. This behavioral bias is compounded by the fact our media consumption now means we’re bombarded with messages about short-term developments in the financial markets. News spreads through the Internet so quickly, it feels like things can turn on a dime.
  3. Following the herd. Warren Buffet made his billions by blazing his own trail. And while most investors would like to follow the same path as the Oracle of Omaha, the truth is the average investor is more likely to simply follow other investors. Herd behavior can lead to all sorts of unfortunate consequences, most disastrously when an investor buys when the market is high and then sells in a panic when things start to go the other direction.
  4. Confirmation bias. When you have a strongly held belief, it’s easy to see validation everywhere. This habit of noticing information that affirms your beliefs and opinions while also ignoring or denying contradictory information is known as confirmation bias. It’s powerful in part because it’s reassuring: “Once you’re comfortable with an idea, you feel better when you hear information that tells you you’re right,” Shefrin explained. While confirmation bias plays a role in everything from politics to medical diagnosis, it can be especially damaging when it comes to making financial decisions. That’s because people in the grips of confirmation bias truly believe that they’re making an informed decision—and they don’t realize the information they’re basing their choices on has been skewed by their own preconceptions.

Cybersecurity: raising awareness of vulnerabilities in sharing personal information

Helping clients prepare for their financial future goes beyond getting to know them and understanding their goals. Plenty of work goes on behind the scenes. Our staff regularly attends continuing education and training. Most recently, training included raising awareness of vulnerabilities in sharing personal information. This IS something we can share – ways to limit your exposure:

  1. Identifying numbers – avoid taking the bait over the internet or telephone when asked to provide identifying numbers such as driver’s license, Social Security, passport, etc.
  2. Password and signatures – do not send documents containing your signature or passwords over unsecured email or other personal information that will help a scammer recreate your identity.
  3. Addresses – our addresses are so readily identifiable today and if matched to personal information announcements such as vacations or events, we have opened ourselves to unwelcome visitors. Avoid announcing your schedule.
  4. Current, previous or alternate names – again, readily identifiable information that a scammer may use to their advantage in becoming familiar with your past to provide security answers, such as maiden names.
  5. Employment details – descriptions of your new job or promotions may target you for manipulation by those posing as vendors or co-workers to take advantage of your access to sensitive information. Don’t expose yourself before you even get started.
  6. Demographics – a web search lets just about anyone know where you live but why advertise it? Social websites where you show your age, gender and lifestyle could invite others wanting to be part of it, including those with nefarious intentions.
  7. History – similar to maiden names used in security questions, information about your hometown, old schools, addresses, hometown, employment can all be pieced together to create a fairly complete picture for impersonating you or compromising your security.
  8. Appearance – back to social media and exposing your lifestyle. Those pictures of yourself can be snipped and used to create a fake profile. Further, they may expose others in the photos including family and friends. Think twice about being included in others’ photos that might get posted and announce your whereabouts or reflect your lifestyle. Tell your children as well.

Use common sense in sharing personal information virtually. Scammers are counting on innocent people not imagining the extremes to which they will go in taking advantage of identity vulnerabilities. Valley National Financial Advisors take securing your personal information seriously. We need your help in protecting it as well. With everyone doing their part, we hope to limit exposure to any compromise.

Personal Notes

THINGS ARE BETTER THAN THE NEWS MEDIA WOULD HAVE YOU BELIEVE. Modern media is overwhelming pessimistic. They focus on sensationalism, scandal, gossip and tragedy. Modern news and media outlets “preferentially feed us negative stories because that is what our minds pay attention to.” Apparently there is a good reason for this; our senses bring in far more data than we can possibly process, and, because survival is the most important driving factor in our evolution, this data is fed first through an ancient sliver in the temporal lobe called the amygdala. The amygdala is our early-warning detector, sorting through data to see what might harm us. It is therefore entirely explicable that we preferentially look at negative news, and almost as obvious that profit-driven media outlets would capitalize on this instinct.

How and why the world is going to become a better place? Highly respected forward thinkers have studied trends and see a bright future particularly due to exponential technological growth. These trends show how life expectancy, global connectivity, access to resources and general quality of life are all on an upwards curve.

HAVE A HAPPY, HEALTHY & PROSPEROUS NEW YEAR!