October 25, 2016
Investment Committee Market Update
3rd Quarter Recap
After stocks suffered initial losses during the June U.K. referendum to leave the European Union (aka BREXIT), stocks rebounded slightly in the third quarter. Signs of stabilization in the global economy including lower bond yields, expectations of additional monetary accommodation, and stable global economic data seemed to sooth investor concerns. Here in the U.S., The Federal Reserve let the federal funds target rate range stand at a range of 0.25% to 0.50% during its July and September meetings, but gave a generally upbeat outlook for the economy in both announcements. While stocks gained 3.8% in the quarter, the S&P 500 earnings forecasts declined by 2%, extending our concerns regarding the earnings recession we are currently experiencing. In fact, this is now the sixth consecutive quarter of year-over-year earnings declines, the longest streak since this type of data was first tracked in 2008 by market data provider FactSet. Additionally, we received mixed economic data, with weaker numbers in August followed by a sharp rebound in September. In spite of the earnings recession and mixed economic data, the Standard & Poor’s 500 Composite Index still posted strong results in July before moderating in August and September. The Dow Jones Industrial Average rose 3% and the Nasdaq composite Index soared 10% in the 3rd quarter.
Looking ahead to the 4th quarter, we are looking to see if this erratic economic data adds to the confusion in the marketplace, which is coming during a time when the Fed is looking for the right conditions to implement another rate hike. On our end, we believe that the rebound in earnings is a key driver to returns both this year and next. Unfortunately we see no evidence that earnings are beginning to accelerate to the upside, and we are concerned that U.S. company earnings will continue to decline. Technically speaking we remain in a trading range with neither bulls nor bears able to generate any sustained momentum in either direction resulting in scenarios where one day things look bad and the next they look pretty good. Sooner or later, a trend will emerge and if we can identify that trend early, like we have so many times before, we can be opportunistically positioned ahead of the move in either direction.
Overall, we still remain neutral and focused on protecting against drawdowns (i.e. large 10% losses) in this environment while trying to take advantage of the opportunities that exist within the various sectors. Long-term planning clients should be content with holding a “larger than normal” percentage of cash, and expect more frequent portfolio adjustments (trading), until the indicators line up to create a more favorable reward-to-risk environment.
Many clients have expressed interest in learning more about our approach to asset management. Our goal is to focus our investment strategy in concert with our client’s stated financial goals. We aim to capitalize on short-term inefficiencies in the markets and avoid excessive drawdowns. We constantly seek to assess the risk/reward profile of the broad based markets and asset classes over shorter time periods in which we have a high degree of clarity and predictability. We then allocate our client’s investments in a way that optimizes our risk adjusted expected returns while avoiding unnecessary drawdowns. As many of you learned in both 2002 and 2008, simply allocating to many different asset classes as represented by a standard “buy and hold” strategy, where the risk to reward scenario is weak, leaves investors exposed to large drawdowns during bear markets.
Our approach to managing money is actually quite common in the institutional world, and it only looks unconventional when compared to the typical retail investors’ “buy and hold” approach. There is a gap between the returns of the institutional investor and those of the retail investor and we endeavor to change that. We want to give the average investor a “fair shake” by making available those same methods that routinely take advantage of the “little guys”. The ability to provide Gainplan’s clients with an institutional investment philosophy is one of the main reason I joined the firm three years ago. All of us here share the same vision of bringing intuitional level thinking to the retail space by combining both sophisticated financial planning and asset management strategies. Our objective is to take advantage of the individual investor’s small and flexible portfolios to gain an edge over the very same huge institutions that dominate Wall Street.
This commentary on this website reflects the personal opinions, viewpoints and analyses of the Gainplan LLC employees providing such comments, and should not be regarded as a description of advisory services provided by Gainplan LLC or performance returns of any Gainplan LLC Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Gainplan LLC manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.