Quarterly Investment Update
October 14, 2015
US Stock Market
• The stock market is expected to experience slow growth in the intermediate time period
o Analysts predict only 2.2% GDP growth as a result of ongoing tax policy issues, high debt levels, and slow increase in the employment rate. They expect mid-single digit growth for the S&P 500 during this time period.
o During times of slower economic growth, sound investment management is the key to pursuing higher than average returns.
• Over the past three months, small and mid-cap stocks are underperforming large cap stocks.
o Mergers and acquisitions are taking place more frequently in this arena as companies consolidate to create efficiencies.
• Growth in the industrialized world has slowed down, and a great deal of this is due to aging populations.
o The populations of industrial countries are aging. In 2010, 13% of the US population was over age 65, and it will be 21% by 2050. China is now aging as badly as Japan.
o During the 60s, 70s, 80s, Germany, France and Italy were growing fast, and piling on social benefits which they can now no longer afford. We are seeing the effects of this now.
• Analysts believe there is a good run coming in Europe, but lower average growth after that.
o Within the Eurozone, UK, Ireland, and Spain are the expected growers over the next few years.
o India has potential because they have an entrepreneurial spirit and great business openness, but their infrastructure is lagging and bureaucracy makes things very difficult. It will likely grow faster than China for the next couple of years.
• We believe starting yield predicts total return over time better than any other measure.
• Our choice has been to shorten duration for lower yield vs longer duration for relatively higher yield (where principal is more sensitive to interest rate movements).
• This is not a time to reach for yield.
• Quality fixed income is the most market defensive in my opinion.
• We believe that it has been a smart play to get defensive early and choose your own time to accept lower return, loss will come eventually anyway. This is the rationale that we’ve used for going more to cash recently.
We created a new asset allocation model – “Enhanced Principal Stability”. It is an attempt to bridge the gap between a traditional savings account and our Principal Stability model.
Overall, due to the recent market volatility, we are making only a small change to our investment models. We are moving a slight percentage from bonds to equities.
These opinions are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
Stock investing involves risk including loss of principal. The prices of small cap stocks are generally more volatile than large cap stocks.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Franklin Wealth Management, a Registered Investment Advisor. SolomonWood Financial Advisors and Franklin Wealth Management are separate entities from LPL Financial.