Letter to Investors: January, 2018
Updated: Sep 26
Annual letter to investors recapping the past 12 months and our outlook for the new year.
Dear colleagues, clients and friends,
At the end of each year, after we’ve had time to rest, relax and celebrate with our friends, family and those closest to us, we begin to usher in our resolutions for the new year. We resolve to be fit, to read more, to spend more time with our families, and focus our attention on our future desired outcomes. These resolutions are projections of our experiences in our past and are taken in context of where we’ve been and where we want to go.
In light of the new year, we want to take stock of the past 12 months, where we’ve been and what that means for where we want to be in 2018. Economic data, market performance, legislation and global monetary policies provide a backdrop for 2017 and can help us to interpret and position ourselves for the next 12 months.
2017 – A year of surprises…the good kind. If you were like me, watching the election results as S&P 500 futures plummeted, you may have expected 2017 to be a volatile year, rife with political controversy, monetary tightening, low inflation, and low investor confidence. Though the underlying economics were favorable to analysts, the market did not seem to have confidence in the data. The equity markets responded strongly after the election. To date, the Dow Jones, S&P 500 and Nasdaq have all reached record highs. Strong corporate earning and favorable interest rates helped to spur equity valuations. Returns were strong across the board with most asset classes posting positive returns for the year.
The VIX or "Fear Guage"
As the markets climbed through the year, they did so steadily and without disruption. There was a lull in volatility. The VIX, commonly referred to as the “fear index”, plotted values that were half of it’s 10 year average. The market moved steadily and upward, with only 8 days that posted a market movement of more than 1%. There were 48 such movements in 2016.
As indexes continue to push higher, we want to keep things in perspective, and remember our core principles. There are not often times that the market generates strong growth during a period of historically low volatility, and we do not expect this pattern to continue. We expect risk to increase, and shift our focus to our individual portfolios.
Diversification of risk, shifting gains, rebalancing, reassessing our strategy in light of goals and objectives and positioning non-correlated asset classes should be discussed at the individual level, in detail.
2018 Outlook – Economic indicators are positive: Economic indicators suggest that the economy is healthy, with a high probability of the current bull market continuing. Analysts expect 2018 will experience similar growth to 2017, with wildcards such as geopolitics and global monetary policy creating an environment for an uptick in volatility.
The Fed has targeted an additional 3 rate hikes for 2018 along with their current strategy to unwind the federal balance sheet. We maintain our position that this is not a favorable environment for fixed income, especially those with longer durations and suggest reviewing these allocations regularly. The U.S. will lead in rising interest rates as the European Central Bank tapers its bond buying programs.
Bull markets have no regard for time as we, humans, project. As markets climb, we speculate, judge and second guess. Surely this bull market can’t last forever. And most likely, it will not. Excessive inflation, bursting bubbles and spikes in crude oil are potential causes for a bull market to lose its steam. The current GDP growth and low inflation suggest that this bull market still has legs. Analysts agree that equity markets are fairly valued, and expect high dispersion and decreasing correlation among equities – which, we believe, creates an opportunity for active investors to outpace passive.
Federal Reserve Dot Plot
Tax Changes: With full steam and without full comprehension, our congress pushed through a new tax bill, and though dubbed the simplification of the tax code, this piece of legislation is far from that. This is a large piece of legislation and it will need interpretation from the IRS and perhaps congress. The agreed upon facts are listed for you below. It is important to discuss these topics in detail with your tax advisor on the impact this legislation may have to you and your financial strategy.
Corporate tax rate cut to 21%
Partnerships and pass-through entities will have a different tax structure
Deduction of income (20%)
Capital gains and surtax remain the same
Carried interest will still be carried as capital gains
Standard deduction doubled
Estate and gift tax exemption raised to $11.2MM
State and Local taxes and real estate tax deduction limited to $10,000
Mortgage deduction limited to $750k acquisition indebtedness
Alimony is no longer deductible
Municipal bonds retained their tax favored status
Opportunities: We believe that 2018 will provide investors with opportunities, and as the underlying economic, political and social environment shifts, so to will our outlook. We believe the tax law will significantly impact corporate earning in the near-term for U.S. equities, though we expect to see a larger impact on small and mid-cap companies, strong dividend paying companies may redistribute those corporate earnings through their dividends to shareholders.
We expect fixed income to provide portfolio stability, though long-term interest rates are having a dampening effect on income yields. High yield bonds and dividend paying stocks may help to increase income, and allocations to these asset classes should be kept in context of portfolio strategy and individual risk tolerance.
As we begin this new year, we wish you and your loved ones a successful and a fulfilling 2018. We will be in touch with planning opportunities and to review your current strategy. If you’d like to chat about any of the topics above in particular, please let us know and we will add it to our agenda moving forward. We look forward to talking with you soon.
Warm Regards, Michael Olivia and Bill Combs
Resources: All information was gleaned from publicly available sources and through interviews, conversations and web conferences with the following investment management firms and analysts:
BNY Mellon Wealth Management
City National Rochdale
Disclosure: Registered Representatives and Financial Advisors of Park Avenue Securities LLC (PAS). OSJ: 5280 Carroll Canyon Road, Suite 300, San Diego, CA 92121 619.684.6400. Securities products and advisory services offered through PAS, member FINRA, SIPC. Financial Representatives of The Guardian Life Insurance Company of America® (Guardian), New York, NY. PAS is an indirect, wholly-owned subsidiary of Guardian. WestPac Wealth Partners, LLC is not an affiliate or subsidiary of PAS or Guardian. Insurance products offered through WestPac Wealth Partners and Insurance Services, Inc., a DBA of WestPac Wealth Partners, LLC. This Material is Intended For General Public Use. By providing this material, we are not undertaking to provide investment advice for any specific individual or situation, or to otherwise act in a fiduciary capacity. Please contact one of our financial professionals for guidance and information specific to your individual situation. Guardian, its subsidiaries, agents, and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. | Michael Olivia CA Insurance License #0E57168 | William Combs CA Insurance License # 0I49903 | 2022-140694 Exp. 9/24 All investments contain risk and may lose value.