Investment Outlook:

Don had the opportunity to meet and listen to three very prominent thought leaders in the investment arena this past week.  The presenters were David Rosenberg, economist; Ian Bremmer, global geo-political strategist; and Brian Singer, dynamic allocation strategist.

The key takeaways were as follows:


  • The Winter weather during the first quarter was a 2 standard deviation event compared to a normal Winter.  It had a significant slowing effect on the economy which should be reversed in the second quarter. The third quarter of 2014 will be key for the year.
  • Chance for a recession in 2014 is close to 0%.
  • The labor market is tighter that most people realize.  Look for consumer spending and capital spending to pickup in 2014.


  • Macro-economic risks around the world are lower than they were  last year at this time.
  • Geo-political risks have increased significantly as a result of Russia’s global expansion efforts and the United States global contraction efforts (backing out of the Iraq and Afghan wars).

Risk Management

  • Focus on changing uncertainty, an unknowable unknown, which cannot be managed to risk, a knowable unknown that can be managed.   The biggest uncertainty and threat to the world economy is a trade war.
  • We currently live in a complex adaptive system and the key to projecting volatility will be estimating how well the system absorbs shocks.  Game theory is a decision modelling approach to evaluate situations where historic data is not available or relevant (i.e. baby boomer retirement).
  • Invest dynamically because compensation for risk is constantly changing over time.

Adam’s Most Recent Key Economic Analysis:

With over 60% of S&P 500 constituent companies reporting earnings, 69% have beaten earnings per share (EPS) estimates. So far, EPS grew 5.2% from last year; half of that growth coming from revenue growth, and the other half coming from margin expansion, or cost cutting.

The Labor Department reported today that the U.S. economy added 288,000 jobs and that the headline unemployment rate dropped to 6.3%.  As the economy continues to improve, and the U.S. gets closer to full employment, this should create more revenue growth, which is where we expect the majority of earnings growth to come from moving forward.

Although we believe equities offer better return opportunities than fixed income in this economic environment, it is important to manage U.S. equity return expectations moving forward.  Equity returns generally come from three areas: earnings growth, dividends, and multiples.

  • Earnings Growth – Given the slow and steady expected economic growth, and no apparent recession in sight we expect earnings growth to remain in the mid-single digit range moving forward.
  • Dividends – Dividends and dividend equivalents (share buybacks) have consistently added about 2.6% of total return to the S&P 500 over the last two years.  Because cash balances remain elevated, we expect this figure to remain the same, or slightly increase going forward.
  • Multiples – With the forward price to earnings multiple (P/E ratio) of the S&P 500 hovering around its 15 year average of 15 times earnings, it is clear that U.S. equities are no longer on sale.  While multiples could expand, we do not expect, and will not rely on multiple expansion as a driver of returns for 2014.

Investment Strategy:

Nothing over the past month has changed our slow, steady growth thesis. We have completed our quarterly review of your investments and will be making some minor changes.  We have identified some alternative, tail risk management opportunities that we will be doing further research on.  If the economy continues to add jobs at an increasing pace, we will start to see interest rates rise sooner than later.

If you know of anyone that has questions about their financial future, please refer them to D3 for an hourly second opinion. As always, thank you for your confidence in D3 Financial Counselors where “We serve our clients by providing Integrity, Trust, Wisdom and Confidence.”

                             By: Donald Duncan MBA, CFP®, CPA, CFA™ – April 9th, 2014