Monthly Archives: June 2018

The Markets This Week

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by Connor Darrell, Head of Investments

It was a busy week for financial markets, with a mixed bag of positive economic news and disruptive political developments.  On the positive side, the US unemployment rate continued to track lower, reaching 3.8% in May.  Unfortunately, that news was offset by two major developments in the global political landscape.

First, markets opened sharply lower on Tuesday as Italian political negotiations sparked fears that Eurosceptics (those who are opposed to European Union membership) were set to take control of the government.  The political situation in Italy remains complex and the long-term outlook uncertain, but those fears were somewhat alleviated later in the week as a more favorable consensus was reached on the re-establishment of the government following March’s inconclusive election results.

Then on Thursday, the topic of tariffs once again dominated financial news headlines when the Trump Administration announced that it would allow the temporary tariff exemptions (Initially granted when the 25% steel and 10% aluminum tariffs first took effect in March) for Canada, Mexico, and the EU to expire.  According to Goldman Sachs Investment Research, those countries accounted for approximately 40% and 48% of 2017 US imports of steel and aluminum respectively.  Canada and Mexico immediately responded with retaliatory measures and stocks slid lower on the news.

Amid the conflicting signals, US equities outperformed, and bonds generated small gains as investors sought refuge from some of the volatility.

The Numbers & “Heat Map”

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THE NUMBERS

Sources: Index Returns: Morningstar Workstation. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. Three, five and ten year returns are annualized excluding dividends. Interest Rates: Federal Reserve, Freddie Mac

US ECONOMIC HEAT MAP
The health of the US economy is a key driver of long-term returns in the stock market. Below, we grade 5 key economic conditions that we believe are of particular importance to investors.

CONSUMER SPENDING

A+

Consumer spending is expected to remain healthy as individuals with lower tax rates spend their windfalls.

FED POLICIES

C-

The Federal Reserve increased the Fed Funds Rate by 0.25% in March, and is expected to implement at least 2 more hikes this year. Rising interest rates tend to reduce economic growth potential and can lead to repricing of income producing assets.

BUSINESS PROFITABILITY

A

Q1 Earnings were very strong, with US companies reporting YoY earnings growth of 25%.

EMPLOYMENT

A+

The unemployment rate has dropped below 4% for the first time since 2000. Additionally, there are over 6 million unfilled job openings throughout the economy; close to an all-time record.

INFLATION

B

Inflation is often a sign of “tightening” in the economy, and can be a signal that growth is peaking. The inflation rate remains benign at this time, but we see the potential for an increase moving forward. This metric deserves our attention.

OTHER CONCERNS

INTERNATIONAL RISKS

5

The above ratings assume no international crisis. On a scale of 1 to 10 with 10 being the highest level of crisis, we rate these international risks collectively as a 5. These risks deserve our ongoing attention.

The “Heat Map” is a subjective analysis based upon metrics that VNFA’s investment committee believes are important to financial markets and the economy. The “Heat Map” is designed for informational purposes only and is not intended for use as a basis for investment decisions.

A Tale of Two Styles: Value vs. Growth

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by Connor Darrell, Head of Investments

You often hear the terms “value” and “growth” thrown about when discussions of equity markets are taking place. We thought it might be helpful to discuss some of the differences between the two terms and the trends that have been observed in recent years.

Value and growth are merely two different investing styles that focus on different factors in deciding which stocks to buy. Value investors are typically more focused on stocks that are considered relatively inexpensive in terms of the price of earnings or assets on the company’s balance sheet. Growth investors tend to focus on future earnings growth prospects rather than the price paid for a security and will be willing to pay more for a company that has a perceived advantage in this regard. Often, a stock will not fit perfectly into one category, and will exhibit characteristics of both styles.

Throughout history, the two approaches have gone in and out of favor. Value stocks have outperformed in some periods, and growth stocks have outperformed in others. What is interesting however, is that the divergence between value and growth has seemingly become more pronounced during the course of the current bull market. Since the market bottomed in early 2009, growth stocks (as measured by the Morningstar US Growth Index) have returned an annualized 19.25%, while value stocks (as measured by the Morningstar US Value Index) have returned an annualized 15.99%.  =While this may not seem like a large difference at first glance, over 9+ years, this amounts to approximately $115,340 of additional appreciation on an initial $100,000 investment; a staggering number.

The reasons behind the difference can be explained by the rise of widely held “glamour” stocks in the IT and Consumer Discretionary sectors, which are dominated by social media, search engine, and online retail companies, and are massive components of most growth indices. However, before investors rush to purchase these stocks, we caution that over the long-term the playing field tends to level itself out. Over the last 20 years, the Morningstar US Core Index, which maintains a blended portfolio (containing both value and growth stocks) has outperformed both the value and growth style indexes.

As asset allocators, we can and should use all the data available to us to try and tilt a portfolio toward styles and sectors that are likely to enhance returns, but to jump into one style or sector with both feet can be a perilous proposition. When it comes to investing, a balanced, stable approach tends to win out in the end.

Did You Know…?

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by Jaclyn M. Cornelius, CFP®, EA, Vice President

If you are not currently maxing out your 401k/403b, consider increasing your contribution.  One of the easiest ways to do this is when you get a raise.  Consider increasing your retirement plan contribution by half the amount of your raise;  you keep half and save the remainder.

FOR EXAMPLE

If you are currently making $60,000 and contributing 3%, you would be contributing $1,800 annually to your 401k.

If you get a 2% raise, you now would make $61,200. If you do not make any change to your 401k contribution, that automatic amount would only increase by $36 annually out of the additional $1,200 you are making.

If you were to increase your 401k contribution percentage to 4% after your salary increase, your annual 401k contribution would be $2,448 (a $612 increase in your 401k savings over a year versus that $36).

The current IRS 401k contribution amount is $18,500 (plus the IRS allows you to add an additional $6,000 if you are age 50 and over).

Make sure you consult with a financial advisor before making decisions that could impact your long-term financial plans.

“Your Financial Choices”

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The show airs on WDIY Wednesday evenings, from 6-7 p.m. The show is hosted by Valley National’s Laurie Siebert CPA, CFP®, AEP®. This week Laurie will discuss:

“Talking with Lehigh Valley SCORE – mentoring, workshops and resources for business startups.”

Laurie will take your calls on this or other topics. This show will be broadcast at the regular time WDIY is broadcast on FM 88.1 for reception in most of the Lehigh Valley; and, it is broadcast on FM 93.9 in the Easton and Phillipsburg area– or listen to it online from anywhere on the internet. For more information, including how to listen to the show online, check the show’s website www.yourfinancialchoices.com and visit www.wdiy.org. 

PLUS, this Thursday at 6 p.m. during Lehigh Valley Discourse “Lessons with Leaders” on WDIY, catch Laurie’s interview with J.B. Reilly, JD, CPA, President & CEO of City Center Investment Corporation.

Valley National News

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June 2018 – Valley National Financial Advisors welcomes Michael Warch as the firm’s newest Senior Associate. Mike comes to the team with five years of experience working on financial advisory teams.

Mike will work out of Valley National’s Bethlehem office as part of a service team supporting clients in the areas of wealth management and financial planning, as well as continuing professional development through the firm’s Entry Level Professional (ELP) program. The ELP program, now in its sixth year, is specifically designed to prepare the next generation of Financial Advisors at Valley National with key skills and knowledge.

“Our ELP hiring has become very competitive, and we are pleased to be able to attract talented professionals like Mike who already have some experience in our industry,” said Matthew Petrozelli, Chief Executive Officer. “Valley National takes great care in the selection and professional development of our next generation of leaders. That is one of the reasons why our relationships with clients and their families pass the test of time.”

Mike has his Series 7, Series 63 and Series 65 securities licenses, and Pennsylvania Life and Health Insurance license. He plans to pursue the Certified Financial Planner professional designation. Mike has a B.S. from Fairfield University with a double major in Finance & Accounting.

Mike resides in Allentown and is engaged to be married in October. He is an avid Mets, Jets, Islanders, and Notre Dame fan. On the weekends, you can find Mike on the golf course, playing all types of sports, or at the park with his lab named Colby.

Mike can be reached at mwarch@valleynationalgroup.com or at 610-868-9000 x 117