REITs: How to Potentially Increase Portfolio Returns without more Risk

Dear Mr. Market

th-1Raise your hand if you would like the opportunity to increase the returns in your
portfolio without taking on more risk? There is indeed a way to help accomplish this and it’s not just by balancing between the two major asset classes of stocks and bonds; take a look at the third largest asset class there is: REITs (Real Estate Investment Trusts)

Most investors have little to zero exposure to REITs and they may be surprised to learn how important they can be to a healthy portfolio. This article will give you a better understanding of why adding REITs into your portfolio could improve your diversification, dividends, and ultimately your portfolio performance.

What are REITs and why use them? Continue reading

12 year-old baseball player helps Seal Beach financial advisor with 3 home runs!

Dear Mr. Market:

We typically write you letters to chew the fat about the stock market, the economy, and educational snippets on investing. Once in a while, however, it’s nice to learn about what goes on behind the scenes of a financial advisory firm. This past week, a truly special series of events transpired so we had to share them with you.IMG_0171

A 12 year-old baseball player, who may eventually become a financial advisor like his father, found a way to at least begin advertising for the firm! The young ballplayer brought attention to the My Portfolio Guide banner hanging in left field by hitting three home runs in one game! The magical moment has been published in several Southern California newspapers and young Lance can also savor the memory as it was all captured on video.

Click here to see the 3 homeruns on YouTube!

Lance Pixa has always been a solid baseball player with some notable accomplishments, like pitching two complete game no hitters, but what he did over a string of four days doesn’t happen too often at any level. He has had one of his best seasons this spring and last Sunday Lance hit his first over the fence homer at LAYB (Los Alamitos Youth Baseball). What made the moment more special was having his best friend, CJ Brown on first base when the ball left the yard and he was the first one to greet him at home plate. The following game, Thursday 4/6/17, Lance was up with CJ on first base again. This happened three more consecutive times and Lance hit 3 homers over the same part of the fence!IMG_0192

Lance Pixa plays for the LAYB Bronco Red Sox during the spring. This is also a special year for the league as they will be hosting the Bronco World Series in August. Along with this team Lance also plays for the OC Invaders which is a travel baseball team based out of Seal Beach. He and his teammates will be headed to Cooperstown, New York this summer to play in a national tournament and visit the baseball Hall of Fame. Lance lives in Seal Beach and is a 6th grader attending St. Joseph in Long Beach.

When asked what he wants to do when “he grows up”…the answer has changed over the years. As a little boy he used to tell people that his dream job was to be a tiger feeder at the zoo but “if that didn’t work out his backup plan would be to play on the Angels”. We won’t be one to kill dreams (or categorize them!) but for now this young man certainly created a memory that will last a lifetime. His father, Matt Pixa, will also not complain about the return on investment with all the attention the My Portfolio Guide banner received this past week!

March Madness: Final Four Investing Bracket 2017

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Dear Mr. Market:

Is your bracket already busted? This year’s March Madness tournament opened up with very few upsets until this past weekend. Much like the stock market, we see a similar trend happening right now. What follows is how we see things panning out but first, here’s a little background on how one of the most famous sporting events in the United States correlates to the investing landscape.

Seven years ago we became the first Registered Investment Advisor to use the NCAA basketball tournament as a way to show our readers a forward-looking view on the stock market! We break down and assign each of the four “regions” with an asset class and then pick teams (companies) that we think have the best chance at doing well relative to others.

CLICK THE LINK TO VIEW OUR Final Four Investing Bracket Picks 2017

Large Cap

Last year started off much differently than 2017 and as we wrap up the first quarter …some trends are emerging while others continue. If you eyeball the overall theme of this years bracket it will become clear that we’re picking some stocks that should continue to do well under the Trump administration. Whether you love him or hate him, ever since Donald Trump assumed office, the stock market has risen. The proverbial “Trump bump” is real and while we personally believe he needs to stay away from Twitter, there is no question that the stock market and certain economic sectors are primed to perform.

In particular we focused on sectors that should benefit from his proposed vision; stocks in finance, defense, industrials, materials, and energy could benefit from additional tailwinds the rest of the year.

Key Match-up:

#9 Ford (F) vs. #6 Visa (V)

In the earlier rounds of the Large Cap region we see some interesting matchups that follow the theme of sectors and companies potentially benefiting from a Trump administration. United States Steel (X) is in the Basic Materials sector and should continue to do well but has already had a tremendous 12 months with a return of 121%! Conversely, Aecom (ACM) has lagged the broad market (+9% relative to the S&P 500 at +14%) but it’s a leader in the Industrials sector and could become a value play. Some aerospace and defense companies like Northrop Grumman (NOC), or our overall winner from last year, Lockheed Martin (LMT), will continue to be solid but eventually lose out to two companies affected in different ways by another factor; interest rates!

We believe that both Ford (F) and Visa (V) will enjoy tremendous years in 2017. Even though some speculate Ford could be adversely impacted due to increased interest rates, we believe this stock is an absolute steal at these levels. Ford trades at only around 10 times earnings and currently has an incredibly attractive dividend yield of 5.09%. This is a very well managed company trading under $12 per share and we realistically believe it could finish the year at our $14 price target.

Visa (V) is a stock that will almost certainly benefit from higher interest rates. Some may argue that Visa is a bit rich in its valuations after running higher almost 14% year to date. This may be true but the company is managed extremely well, has a tremendous business model and a market share that absolutely trounces all of its competitors.

Small and Mid Cap

The Small and Mid Cap region could be thought of as the area where an investor hopes to find a “Cinderella” team. If the way the NCAA tournament opened up is an indication of how the stock market may play out…tread carefully!

We actually are quite bullish for Small & Mid Caps in general but see some risks in trying to pick one stock over another. This is one of those years when playing the entire field is likely much more lucrative than trying to find the one stock that upsets all the favorites. In similar fashion, midnight came early for Cinderella in the tournament. For the third year in a row no mid-major colleges (in prior years it was George Mason, VCU, Davidson) survived to see the Sweet 16.

To follow-up on our analogy as it relates to picking stocks in this asset class, go with the field and take advantage of good odds that smaller sized companies should perform quite well in this business environment. From Election Day to the end of 2016 small caps jumped 14.6% relative to their larger peers (S&P 500) at 4.6%. With the hopes of corporate tax cuts and a focus on infrastructure spending we still believe that small and mid-sized companies will outperform. All that being said, you can expect a bit of a slow down as the group enters a consolidation phase and we see what policies Trump and the administration can actually implement.

Key Match-up:

#3 Masco Corporation (MAS) vs. #5 Vanguard Small–Cap Index Fund (VB)

As we noted earlier some companies could flourish with increased interest rates. In the first round we purposely match up #8 Zions Bancorp (ZION) versus #10 PacWest Bancorp (PACW) to showcase two smaller regional banks that were each recently dinged by about -6% but have had huge run-ups since the election. You can assure yourself that when interest rates rise, banks won’t necessarily increase the rates they give consumers. Banks will earn more on the loans they make and the interest they pay on deposits will increase at a slower rate which all leads to a net positive for profitability.

What stock might surprise them all in this region though? How about our #3 seeded Masco Corporation (MAS) which we actually have going right to the final. Granted, here’s a company that has trailed the broad market but we believe it’s in the right sector and positioned to benefit at the right time. Masco markets and distributes home improvement and building products and will do well with increased spending, new-home construction, and a stronger housing market. We see this company as having strong management and with some recent cost reduction initiatives, profitability will continue to improve.

International

We will never claim to have a crystal ball or break an arm patting ourselves on the back, but our winner in the International bracket should come as no surprise to our regular readers. In last year’s investing bracket we had Emerging Markets (VWO) seeded low as a #10 but they clawed their way to the Final Four. The premise there was a common theme for us in that everyone was sour on Emerging Markets and we saw an opportunity to pick up an investment that was cheap, out of favor, and one that could benefit from a reversion to the mean. What happened?

Although Emerging Markets was the worst performer in 2015 (-18%) it came back to gain over +9% in 2016 and currently leads all equity asset classes with a +12% YTD return!

Key Match-up:

#4 China Fund (CHN) vs. #1 Vanguard Emerging Markets Index (VWO)

Last year the Vanguard Emerging Markets Index (VWO) was the Cinderella of our investment bracket. It was the lowest seed in the Final Four and made us look like we could pick a winner! This year VWO comes in as the #1 seed and we see them going all the way to win the whole tournament. Are we attempting to ride this winning horse too long?

Before we touch on emerging markets, let’s not ignore some other companies that could surprise people this year. For example, a fantastic way to insulate a portfolio from potential worries in Europe is to buy Japan. On an absolute basis, Japan may not be appealing but #2 seeded Sony Corp (SNE) could truly benefit from a strong dollar. Also look to buy European equities on weakness once the French elections are past us. We not only include a French exchange traded fund with iShares MSCI France Index (EWQ) but some French companies playing in the right space. Total SA (TOT) is a France based oil and gas leader that sports a huge 5.33% dividend. Prepare yourself for some shocks, like a potential “Frexit”, and even though the French economy is beaten up, there are some tremendous multinational companies based there which could prove to be immense bargains.

Even though there are some interesting countries to watch, and a couple that are receiving plenty of press with Trump as President (Russia and Mexico), we believe it will be China and its emerging market peers that drive markets in the International region of our bracket.

China initially looks to be a loser under a Trump agenda. He has not been shy about taking an “America First” stance on everything and has blamed unfair trade practices and gained considerable support from people who believe we’ve lost too many U.S. jobs to them. Fixing everything overnight with our connection to China and its immense economy won’t be as easy as waving a magic wand.

Ironically enough, emerging markets were rattled more than any other asset class after Trump won the election. There was quite a bit of initial doom and gloom amplified with worries over protectionism. Even if emerging markets cool down we see this area attracting more inflows from investors who have sat out some of the rally. Lastly, even though emerging markets come with more volatility and some very real unknowns with Trump’s trade stances, they are still cheap relative to other equity asset classes.

Bonds and Alternatives

We view this area of the bracket much like basketball analysts may have looked at the Atlantic Coast Conference (ACC). For those not in the know…the ACC has traditionally been the best conference in basketball and this year looked like it would be no different with nine bids in the field of 68.

After another positive year in the stock market, there are plenty of experts who constantly expect the worst. With no shortage of worrisome news it’s natural to wait for the other shoe to drop and go to areas that are historically safer than stocks. Bonds in 2017, however, will most likely perform much like the ACC after the first week of the tournament. The ACC only has one team left with North Carolina still alive and we simply see a similar result potentially panning out within the Bonds & Alternative asset class.

Key Match-up:

#9 Powershares Commodity Index Tracking Fund (DBC) vs. #3 SPDR Capital Barclays High Yield Bond ETF (JNK)

While it’s wrong to completely negate any asset class…even if it’s predicted to be a loser, we couldn’t be more clear with our advice on being cautious with traditional bond weightings. This is not a “stay away” warning but what we’re driving at is that even if Bonds have an outstanding year, it’s highly unlikely that it will be anything north of 3% returns. Over a rolling 12 month period bonds have basically lost -2% and are flat year to date.

All that said, we suggest keeping your bond exposure at the lower end of your recommended allocation but do not abandon the entire asset class. For example: If your portfolio model dictates a 40% weighting towards bonds, our suggestion would be to tap the brakes down towards about 30%. You may now likely ask where should the proceeds get allocated to?

Our answer for this is towards solid dividend producing blue chips in the sectors we covered earlier and towards the one asset class almost every investor needs but has minimal exposure or idea on how to implement. We are still huge proponents of increasing exposure to Alternatives. We’ve touched on this numerous times and most recently in the last edition of our free newsletter, “the Guide”.

Commodities in particular have huge promise in 2017. After a terrible 2015 commodities just enjoyed their best year since 2010 and it shouldn’t surprise you that most of the “weak hands” (including professional advisors) were not able to enjoy those returns. We see gains extending into 2017 and would keep a particular eye on industrial metals and energy commodities outside of oil. Natural gas was the top performing commodity in this space last year and still looks to be one of the leaders.

Final Four Summary:

The fun part of producing this article each year is that it allows us to share some of our thoughts, strategies, and the investment themes we believe will likely play out in the months ahead. It’s all done with the caveat that we may only own a handful of the 48 investments listed on our bracket. Truth be told…most experts who pick stocks are no more successful than you would be doing the same job! The real winners are the ones who are able to pick enough stocks in the right areas and maintain the proper asset allocation relative to their investment goals.

Obviously every tournament (in the case of March Madness) only has one final winner. With this exercise, however, we are able to build an intelligent portfolio that will have a number of “winners” along with some stinkers. As an investor you actually have the opportunity every year to own multiple “teams” in different “regions” (asset classes).

Long story short, don’t fixate on the one stock that wins it all; take a look at the whole picture. Looking back at our bracket from last year we had the following in the 2016 Final Four:

(1) Lockheed Martin (LMT) +21.96%

(2) Merck Absolute Return Currency Fund (MABFX) +2.71%

(3) United States Cellular (USM) -13.61%

(4) Vanguard Emerging Markets Index (VWO) +16.51%

This is a small sample size but it serves our point perfectly; you end up with two winners, one loser, and one that was fairly flat.

Granted, investing intelligently is a bit more complex than this but the majority of people make it far more stressful and confusing than it ever needs to be. 2017 will bring you so many worrisome headlines that you will always be on edge. We inevitably will see at least one correction where the market dips more than -10% from its peak but by the time the ball drops in Times Square on New Years Eve…2017 will most likely end up positive again.

Always expect the unexpected but don’t be surprised if we end up with over +9% returns on the S&P 500 this year. Lastly, to be fair to our loyal clients and assure them that we don’t give away the “secret sauce” to all readers of “Dear Mr. Market”…there is one stock that didn’t make it to the Final Four but almost every one of our portfolios will own it in the next few weeks. There are never any guarantees on an investment but this is one where we’re putting our money where our mouth is!

If you’re curious to know which one it is and if it’s a fit for your portfolio…feel free to reach out to us! Otherwise…good luck in your own brackets and enjoy the rest of the Big Dance!

6 Steps to overcome Investing Paralysis by Analysis

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Dear Mr. Market:

It sure seems as though you’re stuck in a rut. Just a few weeks ago Wall Street traders were donning embroidered hats with “Dow 20,000” on them in anticipation of reaching this stock market milestone. As investors approach proverbial milestones, their thinking and decision making process often begins to falter. How was your mindset when the Dow Jones cracked 14,000 in October of 2007 versus not too long afterward when it was at 6,600 in March of 2009?

The number of investors that are still sitting in cash from way back then is mind boggling! Do you take a long time making decisions? Are you worried about making the wrong choice with your investments and therefore don’t take any action? Do you analyze all the options but later on kick yourself seeing that so many opportunities have passed you by?

If any of these questions resonate with you, it’s likely that you suffer from paralysis by analysis! Here are a few steps to consider and break free of this condition:

  1. Crystalize the objective – The first step in overcoming paralysis by analysis is to truly understand your goal and timeline. Not everything is accomplished in one day. Your end goal will come to you by taking action but you must avoid being overwhelmed with a multitude of choices or an instant desire for perfection.
  1. Rip the Band-Aid off! – This is obviously much easier said than done. Advising someone who overanalyzes and is prone to being indecisive, will not likely yield in a comfortable transition. There are occasions, however, where “going all in” makes sense. Practice taking small action steps that lead you to becoming confident and decisive. Once you realize that making small mistakes doesn’t always derail the end goal, you will be that much closer to breaking free of larger decisions that demand your action.
  1. No rearview mirror needed – Paralysis by analysis can creep into your portfolio if you continuously kick yourself for past mistakes. We can learn from history but hanging on to the past can have serious negative consequences. History doesn’t necessarily repeat itself and sometimes a fresh start is exactly what you need to break through. Be forward looking as opposed to focusing so much on what has or has not happened before.
  1. Tip-toe in the water – The typical investing approach to “tip toeing into the water” is basically dollar cost averaging. As opposed to going all in at once you may be more comfortable with more of a phased or stair-step strategy. Another way to implement a plan like this is to invest your idle cash in thirds towards your established target allocation. Ideally you should select trigger points when the market is showing weakness. Keep in mind that once you begin this course of action you must commit to completing it.
  1. Declutter! – Most people can’t park their car in their own garage due to all the junk that has piled up over the years. Your investment portfolio and the decisions (or lack thereof) can become very much like an unusable garage! Simply get rid of what you don’t need. If you have investments that aren’t in line with a solid plan…dump them now and don’t look back. If you’re interviewing financial advisors and there are clearly some poor choices, don’t even meet with them. Why spend time and not advance a decision due to energy being wasted on distractions?
  1. Delegate it to a pro! – Let’s put it this way…. If you had a financial advisor who got nervous at key stock market milestones and stayed in cash far too long while the market took off to set new record highs….you would fire them, right? If that financial advisor is YOU…it might be time to fire yourself! You may be very intelligent, perform tremendous due diligence (almost to a fault), and of course have your best interest in mind; but if you don’t have a clear and decisive investment strategy, you’re simply not capable of optimally managing your investments.

thelegendarybrucelee

 

 

 

 

 

Dean Foods: What did Santa wash down his cookies with?

unknown-4Dear Mr. Market:

Normally we write you a series of letters about the stock market or the economy. As we wrap up 2016, however, we decided to share an article that was recently published on Seeking Alpha. The proverbial ‘Santa Claus rally’ seems to perhaps have taken place before Christmas this year but what opportunities might there be going into 2017?

This interview reviews questions around a stock we’re interested in adding to some portfolios; Dean Foods (DF). Enjoy!

Summary

  • Despite trading at 52-week highs (and ~30% gain over the last three months), DF is still undervalued relative to peers.
  • As the clear market leader in fluid dairy, DF enjoys significant economies of scale – a critical advantage in a commodity-related business.
  • “Skating to wear the puck is going” with leading position in healthy dairy products such as TruMoo.
  • Friendly’s ice cream acquisition was immediately accretive, highly complementary, and further cemented its growing position in branded ice cream.
  • Takeover rumors that surfaced in October provide a floor for the stock.

What is one of your highest conviction ideas right now?

As plain and simple as a glass of milk might sound, we really like Dean Foods (NYSE:DF) right now. With a new year upon us and investors scouring for names that might benefit with a new administration, sometimes the best answer is to look at leading companies that are not in the spotlight but right in your fridge!

Can you provide a brief overview of what the company does?

Dean Foods is a leading U.S. processor and distributor of milk and other dairy products. The company has been around since 1925 and is headquartered in Dallas, TX. DF is surprisingly much larger than its next closest competitor but if you ask most investors to name any companies in this space they may not have a grasp of the landscape. Several of DF’s products are sold under licensed brand names and they have over 50 private-label brands in grocery stores nationwide. DF delivers their products via one of the most extensive direct store delivery (DSD) systems in the U.S.

What led you to take a position?

We actually owned DF several years ago and then sold the position. The catalyst for the sale was the divestiture of WhiteWave Foods Co. (NYSE:WWAV) in July of 2013. From a fundamental standpoint some of the same pricing concerns, intense competition, and inflationary concerns were swirling around the company as they are now. Ironically enough, talks of another potential acquisition also recently surfaced with a report in October of Hongsheng Beverage being potentially interested in buying DF.

Your investment decision-making process involves being value or growth agnostic – what value and growth qualities does DF have?

In our opinion, the greatest advantage of being style agnostic is that it allows you to scan the entire universe for companies and also avoid any preconceived biases. Albeit possibly warranting an entire discussion on its own…the value versus growth debate will always remain, but in general we believe value stocks will outperform over longer periods of time. There is of course always a reversion to the mean but 2016 has clearly seen value trounce growth.

DF just released its third quarter earnings and from a growth perspective it continues to perform well. The company actually has a healthy long-term earnings growth rate of 12%. From a valuation perspective, we believe this is where DF should attract some attention. We believe the company was extremely undervalued in August and early September and even after about a 31% bump since then, we think the stock has much more upside. S&P Capital IQ currently has a fair value calculation of $26 for DF.

Continue reading

Tax code changes in 2017, how will they impact you?

Dear Mr. Market:

tax1You’ve posted some very impressive performance since Donald Trump’s victory in the recent presidential election. While the debate will continue in regards to what changes will take place with the new regime in Washington D.C., individuals are contemplating how they will be impacted. What can you expect and how might you be able to make some strategic moves to take advantage of these changes? Let’s specifically look at what Trump and his team are proposing to change with the current tax laws and how it will impact your finances both today and in the foreseeable future.

With Trump in the White House and Republicans taking control over both the House and Senate, tax cuts are virtually a sure thing. Our current tax codes have individuals paying rates on a graduated level with seven brackets ranging from 10% to 39.6%. What many don’t realize is that with ‘Obamacare’ the top tax bracket pays an additional 3.8% on net investment income which brings their rate to 43.4%. Here are some key points to keep in mind as we move into 2017 and the potential changes:

  • Individual Tax Brackets: Look for a reduction to three tax brackets: 12%, 25% and 33% along with elimination of the additional ‘Obamacare Tax’. Currently qualified dividends and long-term capital gains are taxed at 15% or 20% depending on income along with the additional 3.8% previously mentioned. Expect to see the top rate remain at 20% and the additional tax for healthcare removed.
  • Estate Tax: Trump certainly did not hold back his feelings regarding the ‘death tax’ during his campaign! Currently individuals can pass up to $5,450,000 to their heirs tax-free and for a married couple it’s twice this amount. After that threshold an estate tax of 40% is imposed. Trump would like to completely eliminate the current estate tax structure and make radical changes to it.
  • Overseas Profits: Trump made no effort to hide the fact that he wants jobs and funds that have moved overseas to come back to U.S. soil. Currently billions of dollars from U.S. based companies with foreign divisions are not captured with current tax laws. Trump has proposed a 10% repatriation tax on profits derived from these companies and suggested that this charge could be paid over a 10-year period. He has stated numerous times that he expects this to drive a huge inflow of business and profits back to the U.S.
  • Business Taxes: Expect to see legislation that will cut the current rate of 35% all the way down to 15%. For those that operate as a partnership, Limited Liability Corporation (LLC) or S corporation, they could possibly see the same rate as corporations. Of all the proposals that Trump has mentioned this one could have the most profound impact with the potential of a tax rate cut from 43.4% (39.6% plus ‘Obamacare’ 3.8%) all the way down to 15%; particularly if these savings find their way back into the U.S. economy.

All of these rumored changes will not take place until 2017 so what can individuals do to prepare for their 2016 taxes? Below is a quick checklist of some year-end tax tips that everyone should be aware of:

  • Consider working with a professional: There are numerous software and service solutions available these days but with all the changes in tax codes it is prudent to consider working with a tax professional. You might pay more for this but the peace of mind it offers is worth every single penny.
  • Required Distributions: If you are required to take an RMD (Required Minimum Distribution) you have until the end of the year to complete it. The penalty for failing to do so is 50% of the amount not distributed. Also be aware that non-spousal inherited IRAs have unique distribution requirements.
  • Maximize Retirement Savings: If you have not contributed the maximum amount to your traditional IRA or pretax contributions to an employer-sponsored plan, consider doing so to reduce your 2016 taxable income.
  • Tax Harvesting: Take a moment to look at the moves made within your taxable accounts this year. If you have considerable gains consider selling positions that have losses to offset the tax liability. Also be aware of any tax loss carry forwards that you might have from previous years to manage your current taxable gains.
  • Defer Income to 2017: With the potential changes we discussed earlier many individuals might find themselves at a lower tax bracket next year. Consider pushing items like: a year-end bonus, payments for services, business and rental income into next year if possible.
  • Increase Tax Withholdings: If you are going to owe federal income tax for this year consider bumping up your withholding for the remainder of the year. This can be done with a Form W-4 through your employer.
  • Plan Ahead: Waiting until the last-minute is not a plan! Take the time to put together your tax information, know your current situation and how it might change in the future. If this is an overwhelming process for you…we would encourage you to go back to our first point and consider working with a professional!

screen-shot-2016-12-02-at-9-27-05-amThe winds of change are blowing in Washington D.C. and the impact that they could have on your personal finances could be “HUGE” or should we say “YUGE”… (pun intended)! Be aware of your current situation and how the newly proposed legislation will affect you going forward. If you find that you need help, consider asking for a referral from other professionals you currently work with. We also are here to help and encourage you to contact us at (888) 47-GUIDE or (888) 474-8433.

‘Twas the Day of the Election…Stock market rally or sell-off?

 

img_59101Dear Mr. Market:

It’s that time of year again….here comes the holidays. One of the most famous Christmas poems ever begins like this:

‘Twas the night before Christmas, when all thro’ the house

Not a creature was stirring, not even a mouse;

The stockings were hung by the chimney with care,

In hopes that St. Nicholas soon would be there;

What if we changed a few words to reflect what Mr. Market will be thinking about instead of sugarplums and Christmas stockings? What is he thinking on Election Day?

‘Twas the day of the Election, when all through the nation

Every citizen was encouraged to get to a voting station;

Constant stories of Wikileaks and groping

Had every American and the stock market moping;

The media was franticly filling their time with endless chatter

All in hopes that our eyeballs would think a new President would matter;

Whether you’re liberal or conservative we all want a sound future for our girls and boys

As it relates to the stock market it simply prays for an end to this noise;

So goodnight to all and may you wake tomorrow

Knowing full well that some will be joyful and others in total sorrow.

We’ve obviously abbreviated our stock market poem to center on the real question so many investors have: Will this election result drive the markets higher or lower?

If you’ve studied the stock market long enough you’ll know that the one thing that makes it nervous is uncertainty. Prior to yesterday’s strong market rally, stocks logged a nine-day losing streak, which was the longest consecutive slump in 30 years. For months the market had baked in an almost guaranteed Clinton victory but with the advent of another FBI probe into her email practices, the possibility of Trump winning began to create uncertainty again and rattle the markets.

As we noted in the most recent edition of our newsletter, the Guide, we believe the way we search and interpret the news will have an impact in how weak hands play their cards at the table. In other words, if you came into this election as a hardcore fan of Trump or Clinton and the results don’t go your way, you will naturally be more inclined to think doom is lurking around the corner. The reality is that with the absolute circus and divisive lead-up that this election has brought us, we’re bound to see about half of the country in tears. Will that impact the stock market though?

Yes…of course it will, but not in the way you may expect. In the short-term you will see a fairly sharp rally or sell-off so your best play (if you’re a trader) would be to take advantage of the volatility. If Clinton wins you will see the markets bump up nicely but then flatten out towards year-end as the reality of four more years of similar economic policies get extended. If Trump wins, it’s our opinion that the market will sell off in a fairly sharp manner but that you’ll see a rebound that will negate much of that. Like him or not, one thing that his potential presidency would bring is change. Lastly, once the short-term effects are played out, the other main guarantee is that whoever wins will face political gridlock. (you can take that to the bank!)

Over the longer-term you will see Mr. Market adjust to what he is given. As alluded to previously, the one thing that will be alleviated is uncertainty. If your investment time horizon is longer than the end of this week, however, you should be allocated properly in advance of any unforeseen event. We’re currently positioned to take advantage of surprises we don’t know about but also very aware of the reality that the markets will eventually gravitate to focusing on actual economic growth or lack thereof.

We believe the market has pleasantly surprised most investors this year. Although we predicted a low to mid-single digit type year back in January…most of the investing world was on the other end of that spectrum. After steep corrections in late 2015 and the worst start to any year in history, it may have understandably been difficult to listen to our advice. So, what’s the advice now?

We’ve lowered exposure to both stocks and bonds as we wrap up this year. Many of our portfolios have at least 15% (and many upwards of 30%) allocated to assets that have low to zero correlation to the market.

Lastly…what if neither win? Albeit an unlikely scenario, there are some that want to hang on Trump’s vague allusion to “keeping the country in suspense” if he loses and doesn’t want to concede. In our opinion this was more of his brash and not too polished debate skills and there would be someone in his ear to settle down his ego with the reality of a loss.

i_voted_sticker-r9e8abad0ab5d4e9fbe7d9321b3b15060_v9waf_8byvr_324We’ll have a “winner” of some sort tomorrow and that will allow Mr. Market to digest what
he’s dealing with over the next four years. Give him some certainty, so get out and vote!