Taxes for AFO Clients: We are nearly done working on taxes for our Affordable Family Office clients. Every year they seem to be more complicated and record keeping becomes more onerous. Later this month we will be emailing everyone a tax organizer to help you keep track of tax deductible expenses.
Todd Costigan, CPA will be assisting D3 throughout the year focusing on client taxes and working on special projects.
Annual ADV update Completed: Michael Meyers, our Chief Compliance Officer, has completed the annual update to our ADV. An ADV is a disclosure document required to be filed with the Securities and Exchange Commission (SEC) on an annual basis. We are also required by the SEC to make the ADV available to our clients and prospects.
There are only two significant changes to our ADV. We increased the price of our Goal Planning Service and added Kirsten Simon and deleted Sharon Wallyn as Investment Advisor Representatives. Kirsten’s resume can be found in the Brochure Supplement. Please use this link to our website if you want to review our updated ADV.
Share Class Conversions: As we shared last month, we have switched to lower cost share classes for a few mutual funds. This should show up on your Fidelity statements as a “Securities transferred out/securities transferred in” line item. Call Don, Adam or Brett if you have any questions.
The first quarter of 2017 has been a “risk on” quarter, with the S&P 500 up about 6%, the EFA (international stock index) up about 7%, and the Barclay’s Aggregate bond market index up less than 1%. A few more observations regarding the current state of the U.S. economy and stock market are listed below:
- Some of our clients have brought up concerns that the market is overvalued. The current forward P/E ratio for the S&P 500 is at 17.5x, which is slightly above the 25-year average of 15.9x, but not approaching levels of concern. No area of growth, value, or market capitalization looks extremely cheap or overvalued.
- S&P 500 corporate profits had taken a tumble over the last 2 years after peaking in the 2nd Quarter of 2014. The primary culprit of the earnings slowdown was due to the strong dollar and weak energy prices. These two factors stabilized last year and will potentially set up tailwinds for stronger corporate earnings growth in 2017.
- This is 3rd longest economic expansion in the U.S. since 1900. However, growth during this expansion has been much slower than the average expansion, averaging 2% per year vs. the long term historic average of 3% per year. Because this expansion has been a tortoise rather than a hare, we think there is still the opportunity for economic expansion in the U.S. We would have a lot more confidence in this assessment, if the economy could get a boost from an economic stimulus package.
- U.S. corporations’ cash on their books is still near all-time highs. If companies deploy their cash, it could be another tailwind for U.S. economic growth.
- We expect tightness in the labor market to lead to higher wage inflation. This has the potential to cause inflation of goods and services in the U.S. This should provide further justification for the Federal Reserve to continue rate hikes in 2017, which would be a headwind for fixed income returns in the short/intermediate term.
- Household interest bearing assets are estimated to be roughly 3x interest bearing liabilities, meaning a rise in interest rates should benefit consumers and consumer spending.
- Housing affordability (defined as mortgage payments as a percent of household incomes) remains well below long term averages, indicating that housing demand has the ability to withstand a rise in interest rates.
We are in the process of conducting our quarterly review of our preferred investment list. Our goal is to ensure that our clients are in the best products within each asset class. We have had a surprising lack of short term market volatility. From a historic perspective, the average intra-year stock market drop since 1980 has been 14.1%. We have yet to see a peak to trough decline of more than 3% in 2017. If history is a guide, we should expect and mentally prepare for higher short term market volatility, which has been mostly non-existent for over a year.
In our opinion, current economic fundamentals and stock market valuations do not point to a recession or an imminent bear market. Unless we see an economic stimulus package, slow, steady growth continues to be our outlook. We do expect market volatility to pick up sometime in the future but we will continue to look at long term economic fundamentals rather than short term market movements when making portfolio management decisions. Your financial plans are long term in nature and your investment portfolio should reflect that same perspective.
Thank you for letting us serve your financial planning and investment management needs. Let us know if any of your friends or relatives have similar needs.