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How To Hold Steady When The Market Swings

How To Hold Steady When The Market Swings

I vividly remember a book series from my childhood called “value tales.” Each book chronicled someone famous and a trait that personified their success.

Now, years later, I’m reading those same books with my kids. We just read “The Value of Humor,” which profiles the life of Will Rogers. Rogers’ prime years were during the Great Depression, a time during which he lent his humorous take on society as a writer, radio personality and comedian, bringing light to an otherwise dark period in U.S. history.

After explaining the meaning of the Great Depression to my oldest son, he said, “I hope that doesn’t happen to us.”

With the Great Recession only seven years behind us, I think that eternal seeds of worry have been planted in the back of most investors’ minds. After a bumpy 2015, we have had a record-setting rough start to 2016; and those seeds of worry that were planted years ago are starting to sprout.

With oil near $30 a barrel threatening U.S. jobs in the energy patch, China slowing down, tensions rising across the Middle East, North Korea testing H-bombs, and American politics in the throes of a heated race for the White House, I’m often asked how I can stay calm through all of these unsettling times.

For me, the answer is that I know I own quality stocks and bonds that both produce income. It’s that simple. But what does quality really mean? Here are three things that help me identify quality:

1. A diversified income stream. Meaning that the company isn’t a “one trick pony” and ideally has multiple lines of business selling into many different industries.

2. They haven’t borrowed too much. A Wall Street analyst would refer to this as having relatively low and serviceable net debt. This simply means they have no problem paying their bills and haven’t overextended themselves with debt.

3. They consistently make a profit. There are several metrics that measure profitability, namely net income and free cash flow.

It doesn’t take a Great Recession for a company to fall off the tracks — think about Blockbuster. It was a one-trick pony (movie rentals) that had borrowed too much money. In late 2004, its total market value was around $1 billion, while its debt level was a whopping $1.3 billion. By 2010, the stock had essentially fallen to zero; and today nearly all 9,000 Blockbuster stores are gone.

If Blockbuster has an antithesis, it’s Procter and Gamble. P&G is deeply entrenched in the global economy and generates almost $84 billion in revenue from about 80 core brands including Bounty, Charmin, Crest, Dawn and Gillette. They generate 20 times the cash flow required to service their debts and also pay a nearly 3.4 percent annual dividend. These qualities don’t mean P&G’s stock price doesn’t fluctuate, but I do sleep better at night knowing these facts about their business.

P&G is just one example of a company that checks all three of my quality boxes. I’m not saying it’s a stock you have to own or even want to own, but using these basic criteria as a guide helps give me the resolve to feel comfortable about what I own regardless of how the stock market is doing.

I’m sure Will Rogers would have found some humor in what’s happened so far in 2016, but he’s also the same guy who said, “Everything is funny, as long as it is happening to somebody else.”

 

Read the original article in AJC.


 

Financial Market Fear: 2016 Isn’t Off To As Rough A Start As You May Think

Just a week into 2016, and the market is off to a difficult start. If it feels like déjà vu, it is. Chinese market volatility has once again reared its ugly head and is causing anxiety in the U.S. markets. As of Thursday’s close, the S&P 500 is down 10% from its May highs. While we don’t want to dismiss the turmoil, it is worth noting not much has changed from August. Meaning the economy continues to chug along and stock valuations are fair.

What’s different this time? First, oil continues to make new lows. Second, the Federal Reserve raised rates 0.25% in December. Let’s address both.

Oil prices are still low. Lower oil prices provide a tailwind for consumer spending, which accounts for 70% of U.S. GDP, and very rarely (arguably never) lead to recessions. The other piece of good news is oil’s decline has stemmed from oversupply and not lack of demand. Lack of demand sends worrying economic signs, not too much supply.

The Fed’s rate hike. Federal Reserve inaction/action over the past few years has produced market volatility. We expect this to continue, unfortunately. On the plus side, we also expect the Fed to move very slowly compared to prior cycles. This means while rates could rise over the next 12-24 months, our base case calls for a slow ascent and that the overall environment will remain accommodative.  

What’s the same this time? The U.S. economy remains on solid footing. Though we readily admit it’s acting more like the tortoise than the hare. GDP is growing in the 2.0%-2.5% range and is likely to do so again in 2016, disposable income has accelerated to near 4%, unemployment remains low fueled by solid job growth and the housing market is improving. These factors all pointing in the right direction lead us to the same conclusion from last time: a recession looks unlikely over the next 12-18 months.

The start to 2016 is not a welcome one, to be sure, but we think it has more elements of fear than fundamental merits. As always, we believe strongly that a balanced portfolio is key and are here to help.


 

Emotion Versus Fundamentals

Volatility is back in a major way. And it has investors wondering if there’s about to be a repeat of 2007 and 2008. Are we on the brink of another recession?

Our thought is that you shouldn’t jump to that conclusion so soon. The volatility is definitely there and we saw some major dips in the market throughout the past couple of months. However, just a few weeks ago we had the best stock market day of 2014. In fact, during mid-October, we saw the best week that the market experienced in nearly two years. Many of our clients will ask us how the market can be crashing one week with bad news globally, and then surge by 4 percent the next week? No one knows, on any given day, how or why the market will do what it does. But, as a long-term investor, it’s important to always remember the fundamentals. 

In short, you always want to remind yourself that there is an emotional toggle with investing. This toggle shifts between the emotions or sentiment that the collective marketplace is experiencing, versus, the fundamentals that fuel the market. The emotions could be anything from the fear of China slowing down to the European economy falling back into a recession. Another fear could be Ebola spreading and then causing a global economic impact. The fundamentals that fuel the market are things we think about when it comes to companies earning money or not earning money. It’s that simple. As a long-term investor, you want to pay attention to the balance of the fundamentals. 

Now, here we are in earning season where we get to hear about how companies are doing—a fundamental. After all, this is the lifeblood of the U.S. stock market. We’re about 40% through the earning season, and 70% of the companies that have reported so far have beaten expectations on the upside. Same thing with revenue, it’s coming in stronger than expected. These companies aren’t barely making it, they are actually selling more. 

So, before you worry about whether or not a recession is near, just remember the fundamentals and pay attention to emotion to determine if it’s necessary to can hone your strategy as a long-term investor.


 

Ebola and the Economy

Just last week I did a quick 24-hour round trip from Atlanta to New York City. Thursday was the first day that a case of Ebola was reported in New York.  Friday morning I tweeted a selfie “warm NY welcome photo” of me holding a copy of the New York Post with the headline “Ebola Here!”

Nerves will certainly continue about Ebola’s potential impact but so far here are the real effects that I’ve been able to measure:

So far, no impact on economic activity. Last week in New York my hotel was completely booked, both of my Delta flights were completely full, and New York City despite the past several weeks of Ebola news including Thursday’s reported case was as bustling as I’ve ever seen it. According to NYC & Co. (NY’s official tourism group) occupancy at hotels is still close to 90 percent. Those numbers were as low at 65 percent following the 9-11 terrorist attacks. Restaurants are still packed, flights still seem full, and the economy appears to be completely resilient to the threat.

However, the stock market has proven to be much more sensitive. Despite a strong week last week in the market, from mid-September to mid-October travel and hospitality related stocks suffered tremendously, even compared to the overall stock market decline we saw. From mid-September until mid-October the broad S&P 500 dropped about 9 percent at its worst measurement. However, travel and hospitality stocks fared far worse. Delta at one point was down nearly 25 percent, Southwest nearly 18 percent, Intercontinental Hotels 15 percent, and Royal Caribbean cruises down nearly 20 percent.

A very real impact for stocks, while the actually economic activity is seeming unscathed. Remember, fear of what could happen is usually much scarier than what will happen.  I want to remind you of this as you will continue to hear more about Ebola, and see continued sensationalism around the topic.

I personally sometimes get challenged for my lack of sensationalism and pessimism. When I talked about the Perfection Misconception a few weeks ago and the fact that we are not in a recession anymore and have not been since 2009 (which 72 percent of people in the US apparently didn’t even realize), I actually received emails, phone calls and online comments saying that I was crazy to say the economy is in good shape. Here’s the thing, though; I’m looking at facts. After looking at economic data points day after day, year after year and watching the stock market rise nearly 200 percent over the last five and a half years it’s difficult for me not to be optimistic about the economic repair we have experienced since 2009.

I think it’s time that we look at those cold hard facts, and take a step away from the pessimism of the media to really evaluate the risk of Ebola in the US. I’m clearly not a doctor, but from everything that I have read and researched, Ebola is only transferable through blood or bodily fluid and is not the kind of disease that would spread rapidly in the US.   However, almost every article you read about Ebola seems to include a small,almost innocent side note that goes something like, “Ebola is a tragedy and terrible and scary but it really shouldn’t be a problem for us here in the US…unless it becomes airborne and spreads.”

When a reporter or an economist gives their “disclaimer” about how bad things could get if Ebola becomes “airborne” they make you pause and question just how likely that is to happen. Could Ebola suddenly mutate and spread through the air like in the Dustin Hoffman and Rene Russo movie Outbreak? Does the author of the article know something that we don’t know?

The answer is no.  The reporter very likely doesn’t have some super secret knowledge on this disease that has not already been shared with us. It’s similar to the reporter saying, “You’re safe to sleep in your own home and your own bed tonight…unless you get swallowed by a sink hole that’s possibly lurking under your house.” Wait a minute; does the reporter know something that I don’t know?  When you hear this disclaimer, you might get scared into thinking, “Should I be worried about a sinkhole under my house?” Sound familiar when reading articles and disclaimers about Ebola “going airborne”?

An American man was killed a few weeks ago by a camel on a beach in Mexico. When you hear about Mexico now, you probably aren’t hearing a warning to stay away from camels. That’s because even though a guy was killed by one there recently, it’s still so unlikely that people aren’t disclaiming a spread of kicking camels in Mexico.

It’s important to remember that anything could happen, whether it’s the stock market crashing, a sink hole appearing under your house, a camel killing you on a Mexican beach, or Ebola even becoming airborne. Just because it could happen doesn’t mean it will, so don’t let media disclaimers, pessimism, or sensationalism scare you into quarantining yourself from the world.   It’s better for your mental health and your wallet in all these situations to remember the Perfection Misconception, and not let these possibilities dominate your life.

 

Read the original article here.


 

CIA Presents at the Federal Reserve Bank and Southeastern Accounting Show

The Capital Investment Advisors team was recently engaged in a series of events on topics around retirement, paying off debt, and investing at various events around Atlanta.

On August 26 our Chief Investment Strategist Wes Moss, presented to employees at the Federal Reserve Bank of Atlanta and shared tips on how to retire sooner and how to retire happy.

On August 27-28, our team attended the Southeastern Accounting Show, a continuing education forum and conference highlighting the hottest topics in the accounting profession. This conference is hosted by the Georgia Society of Certified Public Accountants (GSCPA) who also invited Wes Moss to give the keynote address.

 


 

Wes Moss Becomes Financial Planning Expert with About.com

Join our team in congratulating our Chief Investment Strategist, Wes Moss, who is now a Financial Planning Expert with About.com

As the expert, Wes will be contributing articles frequently and giving advice in categories that include: Budgeting, Saving Money, Personal Finance, Planning for Life Stages, Credit & Debt Management, Retire Happy, and Self-Employment.

Read some of the latest articles here:

5 Ways to Use Your Inheritance Wisely

4 Steps to Pay Off Your Mortgage

5 Easy Steps to Start Saving Today

4 Big Money Saving Tips for Families


 

Rebuilding on the Horizon

They’re back. The cranes have once again arisen on the Atlanta skyline. And it doesn’t fall short of indicating that there has been some sort of economic recovery that is attracting developers to finish old projects or start on new projects in the Atlanta area.

The rise of the crane makes us wonder if we’re on the brink of another real estate or economic boom.  If we were judging just based on the growth rate of the numbers of cranes in the sky, then maybe the argument would be valid. And we are in a position where we are paying close attention and cautious when it comes to the amount of new residential projects taking place, not just commercial. The good news is that existing and pending home sales are trending higher for the year and home prices continue to be in an uptrend. Mortgage rates are also falling this year, which provides opportunities for new home buyers at lower costs. 

For our younger generation, the idea of buying a new home in years past made many feel weary. After all, this is the same generation that has been burned by two stock market crashes and a less-than-welcoming employment market. Nevertheless, they’ve shown resiliency and are now talking about and acting on purchasing homes. These individuals have brought the words “home purchase” back into their vocabulary.

From the aspect of investing in real estate within the equity markets, it has paid off handsomely. VNQ, the Vanguard REIT index, is up nearly 20% for the year. The Dow and S&P 500 are up 0.52% and 5.77%, respectively. 

As we head towards the end of the year, real estate seems to be poised for a longer term uptrend despite the crane rising again in Atlanta. The future of real estate may be good with a young generation ready to buy. And from an investment standpoint, taking profits from a space that has dominated so far this year may not be a bad idea.


 

Performance in a Rising Rate Environment

With all the fluctuations associated with the markets over the past few weeks, we wanted to address this.

This is a rare time where the volatility associated with markets is not dealing with the typical stock market, but instead the interest rate and income/bond market. We saw rates spike from 1.66% on 5/1/13 to 2.16% on 5/30/13. This move of 0.5% in just one month is an extremely rare occurrence and a response to the Fed discussing potential tightening towards the end of the year. We are monitoring investor sentiment associated with the Fed’s recent actions and also gauging the possibility of future shocks. The CIA Investment Committee believes that the recent spike is not going to be the norm, but instead a knee-jerk reaction to the recent commentary.  Our position on interest rates remains the same as in recent months: we expect rates to rise over a long time-horizon as opposed to retreating. This is aligned with the signals given by the Fed that an easy monetary policy will be a slow multi-year unwind. 

The media is referring owning bonds (and thus other income investments) a “bond bubble”. The are calling it a bubble because rates are at historically low levels and only have one direction to truly go from the bottom…..UP!  We agree with this, but if you see from our research regarding “other” asset classes that provide yield, rising interest rates do not always signal negative returns for all dividend-yielding asset classes.  Keep in mind that bonds will likely experience a challenging environment while rates rise over the next decade or more, but this is why we suggest owning multiple asset classes for yield such as MLPs, REITs, preferred stocks, closed end funds, dividend-paying stocks, etc. to balance the effect.

We are confident that our income strategy is poised to perform as expected in these types of rising interest rate environments. Avoiding unexpected shocks in equity or income markets is not what we are trying to accomplish with our client portfolios.  Our goal is to match a client’s current or future income needs with a diversified mix of assets that aim to deliver results (income or growth) over a long-time horizon.  There will always be times when markets jump and jive and this cannot be avoided without exiting the markets with perfect timing or completely altogether.  See attached a recent study we have composed to understand how the non-fixed income asset classes held within our income “bucket” perform during recent periods of rising rates.

Are you interested in knowing more? Take a look at our chart that addresses bond bubbles and rising interest rates.


 

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