Monthly Market Commentary


A lot has happened in the last month. But, other than some bouncing around a little, not so much has happened to the S&P 500. As of mid-day March 30, the S&P 500, remains up more than 10% since the election.  It is down slightly from its peak but more or less equal to where it was in late February. Policy uncertainties have been a big market question since the election.  It is unclear how much of this bull market has been driven by consumer and business confidence versus belief that new policies will, on balance, be good for investors  (taxes, repatriation, deregulation, tariffs, etc.).

This bull market in equities has been a down market for bonds, particularly in high quality long term bonds and municipal bonds. Total Bond indices fell about 3.5% in the month after the election and recovered almost a third of that since then.  Short term and high yield fixed income has been generally less effected than long term very high quality bonds. Municipals have been hurt a bit by a view that a possible decline in tax rates could undermine their relative value. One way to look at this is that the value decline has, to one degree or another, offset the bond yields.  Why the bond bear market?  The economic recovery is strong enough and inflation is showing signs of rising to target levels giving the fed the confidence to raise short term rates.  It is also not uncommon for bonds, particularly high quality bonds, to move in a different direction than stocks hence their frequent use to stabilize portfolios.  There is also concern that the economy could overheat, perhaps prodded along by tax cuts and spending increases pressuring longer term rates.  So I remain cautious about long duration fixed income portfolios for now.

Over the last few months I have kept coming back to the substantial uncertainty about how much of the Trump agenda will actually be implemented and the unclear impact of that agenda on investments.  Based on the apparent inability of the Republican caucus to reach a consensus on the ACA repeal and replace, dramatic changes to health care seem less likely.  I will thank my brother for sending me some analysis that suggests that perhaps the markets look like they are discounting the probability of a dramatic upending of world supply chains with tariffs or a “border equalization tax.”   After Trump was elected, perhaps anticipating tariffs undermining exports to the United States, the Mexican Peso devalued about 18%.   It has now fully recovered. You tell me what that means?

As usual, there is a lot to keep our eye on around the world.  If Marine Le Pen wins the French elections, it could threaten the EU and roil the markets.  The polls, for whatever they are worth, suggest that she is likely to get into a runoff with dubious prospects there.

As always, I welcome healthy discussion and value your perspectives.


These views are my own and do not necessarily reflect the views of Waddell & Reed.  The opinions are subject to change based on market conditions or other factors, and no forward looking statements can be guaranteed. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon. You should consult with your tax, legal, and/or financial advisor prior to making any financial decisions.

Bond values fluctuate in response to the financial condition of individual issuers, changes in interest rates, and general market and economic conditions.  Investing involves risk and the potential to lose principal.   International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.

The S&P 500 index is unmanaged and cannot be directly invested into. Past performance is no guarantee of future results.


Wow.   Since the election, the S&P 500 is up more than 11% as of March 1, 2017. What is going on here and how should you think of this in the context of your portfolios?

What is going on?

Much of what is going on has little to do with Donald Trump or any of his proposed initiatives, in my opinion. The economy is generally doing well.  Employment and labor force participation rose in January above expectations.  We are finally seeing glimmers of wage growth and inflation finally approaching target levels.  The oil and gas sector, which had been battered, has recovered to the point where drilling and drilling employment are recovering. Business and consumer sentiment are both improving and are strong.   And a good “attitude” is quite important to both the markets and the economy. Funds flows to the markets are improving.  Both Chinese and European economic activity picked up materially in the 2nd half of 2016, not just from exports (much commodity price driven) but from firmness in domestic consumption and investment. 

Policy uncertainty and its economic consequences remain higher than any time that I can remember.  The markets are essentially telling us that the consensus view is that what is actually likely to be implemented will be neutral or maybe even positive.  The promise of lower taxes, cash repatriation, less regulation and a very plausible chance of classic (and perhaps ironic) Keynesian deficit spending stimulus (defense and infrastructure centric) are all potentially market positives.  Potential negatives include the possibilities of changes to health policy that could upend the healthcare markets, inflationary deficits, immigration policy which threatens housing markets and labor availability in agriculture, construction and service industries (and elsewhere) and risks of trade disruptions.  There is high uncertainty about what will actually happen as well as the second order consequences of entering uncharted territory.

Your Portfolios

It has been a great run for the S&P 500 since the election.  Not so much for fixed income investments.  Rising interest rates have eroded the market value of most long term bonds.  And most balanced portfolios are underperforming the S&P 500 because of participation in fixed income and overseas markets (where most are up but many are underperforming the S&P 500).

I have no idea how long or how far this market run will continue. I also believe that many market and economic trends transcend any policy uncertainty over the next few years.  So, in my view, the concerns are more midterm than longer term.  But, in my opinion, the policy uncertainties add an element to the range of potential market outcomes over the next few years that is greater than is typical.  What does that mean for you?  The most important thing is to be sure that you are comfortable with the level of risk and volatility you are exposed to, especially if you will need significant midterm access to your investments.

With fixed income, while most are predicting more fed rate hikes, remember that long term rates are more set by the market than the fed and now reflect the consensus of the market.  Hard to make a living outguessing interest rates.   To quote Ken Fischer, “Whatever you read lots about is surely priced in and easily ignored.”   That said, I see no reason to chase yield with very long term bonds and prefer looking to other means to increase yield.

As always, I welcome healthy discussion and value your perspectives.

These views are my own and do not necessarily reflect the views of Waddell & Reed.  The opinions are subject to change based on market conditions or other factors, and no forward looking statements can be guaranteed. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon.

Bond values fluctuate in response to the financial condition of individual issuers, changes in interest rates, and general market and economic conditions.  Investing involves risk and the potential to lose principal. 

The S&P 500 index is unmanaged and cannot be directly invested into. Past performance is no guarantee of future results.


Many of you have reached out in the wake of the Presidential election with concerns about its impact on your portfolios.

There is no doubt significant uncertainty about the potential impact of possible unprecedented policy decisions in the areas of health care, immigration and trade policy.  As well as on social issues with little bearing on the financial markets.  Current thinking is all over the place.   Some are recommending reducing the risk characteristics of portfolios focusing on fears of market disruptions in healthcare and trade while others think we are the cusp of a deregulatory, low tax, stimulative nirvana buoyed by the momentum growth under Obama.  A majority of investor and consumer surveys as well as the post- election markets all point to growing confidence.

All parties are in full agreement:  this Presidency is different.  If you read the various Wall Street reports, the consensus seems to be to expect modest growth in equities, slowly rising interest rates (with modest long term rate impact), but the reports are often caveated emphasizing material upside possibilities as well as significant downside vulnerabilities.

First, the fundamentals look quite good without the political uncertainty.  Years into the recovery from the financial crisis, the US economy looks healthy.  Job growth is steady, wages are (at last) starting to rise a bit, there is renewed life in the manufacturing sector and inflation remains low even as the fed starts, cautiously, to restore more normal interest rates. Equity multiples in the US and elsewhere are, for the most part, in line with historic levels.  Bonds that narrowly track interest rates have some vulnerability as the Fed starts to normalize rates slowly, but good (enough) yield can still be found. Persistent low inflation doesn’t risk upsetting corporate costs/earnings.  Both consumer and business sentiment has continued to improve accordingly.  The most common harbingers of a recession or market decline – an overheated economy, interest rates well in excess of where they are now or inflated asset prices – don’t seem to be immediately lurking.  

The Risks Seem Policy Related:  The new administration has promised a lot:  lower regulation, lower corporate and individual taxes, a deal on repatriation of oversees US corporate cash, a large infrastructure spend, a better answer on health care that will both save money and keep insurance available to all (details anyone?), some sort of restructuring of trade and tariff agreements.  Whatever one’s political views, this agenda is extremely large and fraught with execution risk.  It is not clear to me how much of this agenda will actually come to pass or the degree to which the economy will actually see game changing rules. That said they could be very significant.  There are certainly a number of obstacles:

  • Uncertain Congressional support.  The Republican Congress, whose traditions and views are still much more conventionally conservative, may resist some of Trump’s agenda.  Particularly if tying one’s fate to Trump is viewed as a risk in 2016 or 2018.  As I see it, either the economy will be quite good over the next 2-4 years or the Republicans will either lose their control of Congress or lose their appetite for supporting the dramatic changes that Trump promises.   Without political support, less change is likely to happen.


  • Fear of leaving millions of Trump supporters without insurance or fears of disrupting the healthcare system to a recession causing extent may or may not soften the health care blow.  It is certainly easier to complain about the ACA and make political hay by attacking the ACA than reach an alternative consensus. Some Republicans are about reducing costs while Trump seems to promise better health care for all while cutting costs.  Sound good?  And the magnitude of the changes remain uncertain.  One recent Republican policy proposal includes letting the states that want to keep Obamacare keep it.


  • Fears of tariff induced inflation hurting consumers, particularly blue collar Trump supporters, may dampen the rush towards protectionism.   Add to that, risks of material changes in our international relations:  Stances toward Europe, Russia, NATO, One China Policy, Mexico, and the Middle-East.  I see more noise than clear signals so far.  One just doesn’t know.



Action Bias Can Hurt:  In October/November, many, of all political stripes, took “action” to adjust portfolios, mostly de-risking, in anticipation of an outcome perceived to be very risky (be it a Trump or Hillary victory). The actual outcome was unexpected, and so was the market reaction.  The opportunity cost was very large.  As it was for those who sold equities during the correction a year ago.  (Remember?)  That breeds humility.  So as boring as it may sound, staying the course over the long-term seems to work.  Of course past performance does not guarantee future results but one of the primary reasons that individual investors tend to underperform the market is that they are more subject to action bias.  That said, sleeping well at night is not unimportant so it is not unreasonable, particularly for investors with modest time horizons, to look at and be sure their risk exposure is consistent with their circumstances.   

For a longer term perspective, who knows what the next 30 years will bring?   We could go down a long term isolationist, nationalist pathway, ignoring climate change and cutting public spending.   Or Trump may simply prove a blip in the arc of history.  After all, if only Millennials voted, Clinton may have received more than 500 Electoral College votes.   And there may or may not be a political backlash in the months and years ahead.  Trump has a lot of huge promises to deliver on. 

The Future is Coming Hard and Fast:  Take a moment to reflect on how little we know about the future.  Technology is now advancing at a pace perhaps faster than our ability to absorb it. Consider that, a mere 10 years ago, we didn’t have the iPhone, Android, Twitter, Facebook, Uber, Airbnb or “The Internet of Things.” Worldwide, extreme poverty is at an all-time low.   Life expectancies are rising throughout the world and, Middle East and a few isolated pockets aside, the levels of violence are at an all-time low worldwide.  Over the longer term, consider the potential impacts of climate change and the infrastructure transforms in ways we can only imagine.  In this moment of political uncertainty, it is perhaps worth reflecting on the fact that perhaps the largest driving forces of change in the world, are not coming from Washington (or London or Paris or Moscow).

I look forward to hearing your views, especially those that diverge and challenge us to think more/harder/differently!

Until next month…

These views are my own and do not necessarily reflect the views of Waddell & Reed.  The opinions are subject to change based on market conditions or other factors, and no forward looking statements can be guaranteed. This is meant for informational and educational purposes only and is not meant as investment advice or a recommendation to engage in any investment or financial strategy. Investment decisions should always be made based on your specific financial needs, objectives, goals, time horizon and risk tolerance. 


October 1 Market Update

Since last month, there has been plenty of news to move markets and yet they are little changed from a month ago.  There has been market moving news in two areas: interest rates and election outlook. 

Interest rates increased and bond values fell as rumors swirled about a possible September Fed rate hike (which did not happen), then rates settled back down and bond prices increased back to about where they were a month ago.  You can read daily pieces from Fed watchers speculating this and that about future moves.  But the general consensus, reflected in relatively stable long term Treasury bond rates, is that, at least for a while, inflation will remain in check and long term rates will remain relatively stable while shorter term rates will rise slowly on the strength of decent employment and wage numbers while rate increases may be tempered by concerns that they may strengthen the dollar and hurt exports. 

Similarly, according to most prognosticators, Donald Trump’s chances have improved along with the Republican Party’s Senate prospects since the beginning of September.  By the time you read this, whatever is written here about the election outlook will be hopelessly out of date. There is an abundance of commentary out there on what the various possible election outcomes might do to the markets.  Trump: lots of economic uncertainty, good for oil/coal and bad for the Mexican Peso, less need for fancy estate planning, etc. etc.  Clinton: less economic uncertainty, rising minimum wage which may be good for autos and consumer spending, growth in renewable energy, possible increase in financial regulation, more value to careful estate planning, etc. etc.  Gridlock likely to keep the next President in check no matter who it is.  Increasing talk about infrastructure investment from both sides, etc.

Let’s frame interest rates and election uncertainty in the context of my quote of the month:

Whatever you read lots about is surely priced in (to the market) and easily ignored.

                                                          - Ken Fisher

Ken Fisher, in my view, is right on the money.  No matter how much your read, smart money managers are reading more, analyzing more quickly and moving faster than you or I possibly can.  For example, on the strength of a view than Clinton did well in the first debate, the Mexican Peso opened about 2.25% stronger vs. the US dollar on the next day.  Try to get out ahead of that.  Efficient market theory suggests that the probability of all sorts of uncertainties from interest rates to election outcomes are already built into the markets supported by the consensus of a  lot of expert investors.

I can’t help myself.  I read about the markets and things that might impact it in the short term every day.   But I am not sure that it does a lick of good.  Heeding Ken Fisher’s advice, I don’t get into a tizzy about it.  There are far more effective areas to focus on that might actually make a difference to your financial future than trying to outguess the market, particularly in the short term.  I am happy to discuss which of these areas may be relevant to you.

Until next month…

These views are my own and do not necessarily reflect the views of Waddell & Reed.  The opinions are subject to change based on market conditions or other factors, and no forward looking statements can be guaranteed. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon.


September 9 Market Update

This month, again, there is nothing dramatic to report. And no material changes from last month.

Brexit worries seem to have settled out for now.  Janet Yellen is encouraged enough by the economy to suggest that it may be time soon to raise short term rates, but the bond markets have responded with a “Ho, hum.”   Long term rates have moved almost not at all as inflationary expectations remain low.  The general market consensus seems to be that Trump will not win and the unpredictable consequences of his policy suggestions (if you can pin them down) need not be given serious consideration.   And that Clinton is likely to be president with a divided Congress likely with gridlock any material policy changes (other than the possibility of increased infrastructure investment) unlikely.  I am thrilled that the markets did wonderfully while I was away in the Wind Rivers.  Perhaps I should study the correlation of the markets with my vacations?

So, instead of focusing on the short term markets, this month, I will focus on the importance of time horizon and the possibility that we might be looking at lower returns in the decades ahead than we have seen over the last 30-80 years.

1. The importance of time horizon

  • As many of my clients know, one of the first conversation I always have is about time horizon.  The stock market is generally a not a place for money that you might need in the next year or two though it may be appropriate place for money that you are comfortable with not having access to for some time or potentially losing.


  • The challenge is that a long time ican be a really long time.   And if you are retiring soon, for example, market uncertainty complicates planning. 

(Source: Federal Reserve data base (St. Louis))

Many advisors will tell you that the market has been a good place to be for the long haul. The average S&P 500 return over the last 50 years has been about 9.6%.  But you should be aware that there have actually been 10 year periods where the S&P 500 has lost money (for example, 1999-2008).   This makes retirement planning challenging.  I am here to help you plan for these uncertainties.

2.    Is it reasonable to expect returns comparable to the last 50 years as we move forward?

  • The short answer is, probably not.  And for a lot of reasons. But the reality is no one really knows.
  • Don’t forget that asset values (reflected in the stock markets) include an inflation component. While the S&P 500 has offered a return of about 9.6% between 1966 and 2015, the real rate of return was closer to 5.8%. And today, inflation appears to be tamed and interest rates, reflecting those expectations, are at historic lows. Longer term, many analysts believe that interest rates/inflation are unlikely to go much lower and persistent low rates may eventually hurt personal, insurance company and pension balance sheets. And much or most of the benefit to corporate earnings may already be behind us.


  • The press is increasingly sprinkled with analysis wondering whether the rate of economic growth and concomitant investment returns, enjoyed in unparalleled amounts for the past 30-80 years, is drawing to an end.  


  • Serious scholars such as Robert Gordon of Northwestern University, are starting to question the limits of productivity growth associated with the internet revolution and other technological revolutions in supply chain management and other parts of the economy.  Larry Summers (Harvard) called it “secular stagnation” at a 2013 I.M.F conference, citing insufficient demand.  He proposed to accelerate infrastructure spending to stimulate otherwise stagnant demand. (Both Trump and Clinton seem to agree if we take their recent economic policy speeches at face value).  But the impact and outcomes remain, of course, uncertain.


  • Further, the world faces some material demographic headwinds.  In addition to these productivity growth challenges, the world’s population is aging and population growth, one a major source of economic growth, is ebbing.  Fortunately for us, this is less of an issue in the US than it is in Europe, Japan and China.


What does all this mean to you? Don’t act precipitously, just realistically. Don’t build your personal financial plans around unrealistic return expectations.  Market fluctuations can be unpredictable.  Beware of the “perma-bulls” and “perma-bears.”  

Stick to the basics – consider a diversified portfolio designed for your situation.  

These views are my own and do not necessarily reflect the views of Waddell & Reed.  The opinions are subject to change based on market conditions or other factors, and no forward looking statements can be guaranteed. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon.

The S&P 500 index is unmanaged and cannot be directly invested into. Past performance is no guarantee of future results.

Diversification is an investment strategy that attempts to reduce risk within your portfolio but it does not guarantee profits or protect against losses.  


August 8 Market Update

Nothing dramatic to report since last month!  As of this writing, the markets are up and interest rates remain low.


Let’s begin with a little perspective on the markets  We are seeing historically low interest rates for a growing economy.  And the S&P 500 recently hit all-time highs.  So, are the markets overheated?  Economists and analysts are historically bad at forecasting so I would not dare.  However…let’s put it in perspective.   From 2000 to the end of 2015, the average annual returns of the S&P 500 (including dividends) have been very low by historical standards (about 4%).  Even if you argue that 2000 thru 2003 represented the end of a market bubble and look at S&P 500 returns from 2004 to 2015 the average annual returns were still only about 7.3%. Compare that to an average of more than 11% since 1950 and more than 9% since 1930.  Few forecast future average annual returns to reach these historical levels again for many reasons – demographic factors and low inflation to name two. But over the last decade and a half it is hard to argue that the market growth is notable considering these factors.


Economic fundamentals remain relatively strong.  While this may be a weak recovery by historical standards, it has been quite a long one.  The weakness and the length may not be unrelated.  Rapid economic growth can lead to overheated markets and inflation which can in turn generate rising interest rates and economic slowdown.  Other than real estate in some markets, there is little evidence of overheating in either the US or the world economies.  Those of us in Seattle need to remember that many other real estate markets have not yet recovered to their pre 2008 highs and many mortgages remain underwater.  In fact, deflation remains a concern.  US economic fundamentals remain intact, with the abatement of headwinds from a strengthening dollar and plunging oil prices.  US labor markets remain resilient supporting private consumptions as confirmed by reasonably strong retail sales. China’s economy seems to have stabilized, growing at 6.7% in July.  Central banks globally remain accommodative.  Few are forecasting a recession any time soon.  But… as is true with forecasting the financial markets, the so-called economic experts are notoriously bad at forecasting recessions.


Brexit??  What Brexit?? The markets went through a bit of a swoon (followed by recovery) over Brexit.  What exactly will happen and what the terms of separation remains a mystery. There is no clear consensus on long term economic implications, though the UK economy will likely suffer some.  But few believe it will have significant impact on the global economy.  For those of you old enough to remember him, the world economy is something of a Rube Goldberg puzzle.  What damages Britain could help other economies if, for example, a material piece of the UK financial service industry moves elsewhere.


And then there is the election…I will let you do your own forecasting there.   But there is plenty of reason to believe that, inflated campaign talk aside, we are not on the brink of any kinds of sweeping changes that will rock the investment world unless one party or the other sweeps both the Presidency and both houses of Congress.  Gridlock redux?


As most of you know by now, I am not big on forecasting market direction.  My only advice for now is to look at your fixed income portfolios, particularly if you are fixed income heavy. You may want to talk to your advisor about whether your portfolio allocations are still suitable for you.   


These views are my own and do not necessarily reflect the views of Waddell & Reed.  The opinions are subject to change based on market conditions or other factors, and no forward looking statements can be guaranteed. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon.

Indexes discussed are unmanaged and cannot be directly invested into. Past performance is no guarantee of future results.

Bond values fluctuate in response to the financial condition of individual issuers, changes in interest rates, and general market and economic conditions.  Investing involves risk and the potential to lose principal. 


2016 MidYear Outlook

The first half of 2016 gave us a choppy ride as news about global economic growth, interest rates, oil prices, Brexit and the upcoming elections added to stock market volatility. The investment team at Waddell & Reed thinks several of these factors will continue to get the market’s attention in the near term. They have identified six issues to watch for the remainder of the year. Find the team’s analysis and outlook here:  Read More

My favorite investing quote of the month comes from legendary investor Sir John Templeton:

Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria”

Reflect on this quote relative to the market cycles that you have seen in your lifetime. Then ask yourself where we are today in the pessimism to euphoria scale.

As I reflect on the markets, what gets my particular attention are the historically low interest rates and flattening yield curve. Rates are actually negative in much of the EU today and near record lows in the US. 30 yr. Treasury bond yields have fallen to around 2.14% as of 7/11/16!  What is going on here and why is it so important?

The low rates and flat yield curve are driven by three things. 

  1. Inflation expectations remain very low.  Low yields with low inflation can be little different for an investor than higher yields with higher inflation. Central banks around the world have been unable to stimulate economies to the point where inflation ticks up to target levels.  Deflation is increasingly a concern.

  2. Central Banks around the world, driven by concerns about the economic recovery and low inflation/deflation, are continuing to use interest rates as a stimulus.  The latest drop was driven in part by Brexit.  Not only did uncertainty drive capital to safer investments like government bonds but Brexit impact is leading to talk of more quantitative easing and still lower rates,. 

  3. Reflecting on Sir John’s quote above, there is enough concern, pessimism and skepticism out there that the world is so awash in capital looking for safe harbor investments like government bonds that investors are willing to bid bond prices to levels consistent with historically low yields. I am not in the business of forecasting interest rates but conventional wisdom is that rates will remain relatively low unless and until inflation and world economic growth pick up.

The conventional wisdom seems to be that low (relative to history) long term rates will be around for a while.  But who knows?  Just take with caution advice from anyone who tells you to expect a return to “normal” interest rates unless they are also addressing “normal” inflation and “normal” economic growth and “normal” stock market performance all in a world that looks different from the past.

These falling bond yields generally speaking have had positive impact on the value of high quality bonds by increasing their market value, particularly for longer duration bonds. Since much of the year to date bond return has been from appreciation rather than yield, YTD returns may not be indicative of longer term performance. The story is more complex for lower quality bonds and other income generating instruments (high dividend stocks, lower quality bonds, international bonds, etc.) Low rates complicate seeking yield and income and challenge traditional “rules of thumb.”. You may want to discuss the implications and alternatives with your financial advisor, particularly if fixed income plays a major role in your portfolio. 

These views are my own and do not necessarily reflect the views of Waddell & Reed.  The opinions are subject to change based on market conditions or other factors, and no forward looking statements can be guaranteed. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon.

Bond values fluctuate in response to the financial condition of individual issuers, changes in interest rates, and general market and economic conditions.  Investing involves risk and the potential to lose principal. 


Brexit Revisited (6/29/2016)

·       Brexit Regretxit: Like many of you, I spent much of the past 4 days reading political, economic and financial analysts trying to make sense of the UK’s surprise vote to leave the European Union. I won’t repeat the quickly assembled conventional platitudes here. I will say that this is a great time to focus on the distinction between information (abundant), speculation (abundant) and knowledge (in very short supply). Analysts feel compelled to deliver information, but I am struck by the collective lack of knowledge.  These are unchartered waters. The possible political outcomes vary widely and the economic and market implications are uncertain.  So be wary of convictions quickly pronounced.  What we don’t know is way in excess of what we do know.  We need to learn/re-learn together in the coming weeks/months.

·       What we don’t know:  the political outcome, the implications for UK political unity, the implications for European unity, the nature and outcome of an exit negotiation.  A lot depends on what kind of terms are negotiated. The range:


o   A “good deal” (with limited implications for the UK economy vs. remaining in the EU)?,

o   A “bad deal” (with bigger implications for the UK economy) to deter others from making the same decision?


We, especially don’t know the second order implications that the range of outcomes many assert.  The impact on British, EU and world GDP, if any, is entirely speculative.

Many think that the UK will be hurt, though many also doubt that the damage will be significant.  Investment and hiring may freeze up while things shake out.  But be cautious about underestimating the resiliency of the relatively robust UK economy.  Heck, it is even conceivable that the UK will not end up exiting. Technically, the vote was not binding on the Parliament and nothing technically happens without a Parliamentary vote (though most members expressed a willingness to reflect the will of the people (before the Brexit votes were actually cast).  There may even be a revote.  In Britain, there is a petition for a revote that gathered more than 3 million signatures in three days.

And what about the potential positive impact of lower interest rates that appear to be a result of the Brexit vote?  Some are speculating that mortgage rates may reach an all-time low.

See what I mean:  information is not knowledge!  And speculation is not wisdom.


·       What we do know: Markets have been correcting. Equity markets hate uncertainty almost as much as bad news. And it is hard to imagine that the uncertainty is not greater today than it will be in the weeks and months ahead. Global equity markets and European currencies may or may not continue to fall, though a fair chunk of that, so far, may have been an unwinding a short-lived speculative bubble as most all the “betting” markets were clearly predicting a different result. There has been a predictable flight to quality: gold, the US Dollar, non-European fixed income markets, cash, as well as managed futures and volatility asset classes (like the VIX). Most analysts also believe that the Fed will, again, hesitate to raise interest rates in this environment of uncertainty and most also suspect that investment and hiring in Great Britain may slow at least during an assessment period..


·       US Equity Markets: While few dare to offer meaningful predictions for the UK and Europe (many think it will hurt growth, trade, and trade, especially in the UK and especially for British financial institutions, though whether the impact will be significant is unknown), I do sense an emerging view that, through the noise, economists do not think this will, in and of itself, trigger recession in the US (though there is a range of views out there). Many economists see no reason to believe that hurt earnings will be materially  in the US.  With that view in mind, at some point, the market sell-off becomes a buying opportunity.

·       Volatility isn’t recession:  There were many events since 2010 that caused market volatility to spike: US credit rating downgrade, Greek credit crisis, Ebola, plummeting oil and commodity prices, slow-down in China, etc. Remember? How many of these volatility spikes generated recession? None. The point is clear enough: don’t confuse the headline of the day as doomsday. Just because lightening up on equities would have been a good idea the day before the Brexit vote it does not necessarily mean that doing so is such a good idea after the market decline that followed.  My view: don’t act precipitously. Keep an eye on fundamentals. All research suggests that while sentiment can and does move markets wildly in the short run while the long run is owned by macro-economic and corporate fundamentals.

These views are my own and do not necessarily reflect the views of Waddell & Reed. Forward looking statements should not be read as a guarantee of future results.  All comments are subject to change based on market conditions. For a Waddell & Reed analysis see this link and read down.  If you do not want to receive these emails, let me know.


Brexit Update June 24, 2016


Anybody notice the seismic Brexit vote?  On Thursday the UK voted to leave the EU. The S&P 500 fell more than 3% today while at the same time bond (and gold) values rose.  Historically, when there is a sell-off that is where a lot of the money often goes.  And there is all kinds of chatter out there about the potential political implications - is this a harbinger of a breakup of the UK or EU?? What does that even mean??  Are the nativist forces that propelled the anti EU vote relevant to the US elections?? Etc. Etc.

Waddell & Reed put together a summary (below) that seems as good as any of the commentaries I have read this morning.   So I will keep my own comments more general:

1.           Before the vote, the polling was very close.  Had the vote been different, it is possible that the markets would have reacted differently.  Notably, the market rose significantly on Thursday reflecting a view that the vote would turn out differently.

2.           It is very difficult, if not impossible, to get out ahead of the news as an investor.  By the time the vote outcome was clear, the market had already fallen in after-hours trading.  Yesterday the market reflected a best guess about the vote.  Over the long run, it is quite challenging to outguess the generally wise market consensus.

3.           There are quite a few unknowns and there is quite a bit of uncertainty.  When the market is hit with surprises, there can be more volatility for a period as things shake out and implications are studied. Today, for example, the S&P 500 has bounced up and down multiple times.   I would not be surprised to see some volatility in views about the impact of the vote and in the markets in the days ahead. The VIX, a measure of investor sentiment about volatility, jumped quite a bit today. 

Most importantly, I encourage you keep perspective on your investing and financial goals. Make sure you are invested for the time horizon and goals that each of you have.  

Waddell & Reed Analysis:

Brexit a go. Now what?

In rather shocking display, the U.K. voted to leave the European Union (EU) by a 52% to 48% margin. The global market place has been fairly nervous about a “Brexit,” though we feel it is best for investors to keep things in context. While the stock markets initially reacted negatively, and we expect more volatility, the situation is evolving and will need to be closely monitored going forward.

The upcoming formal legal process of withdrawing from the EU – an approximate two year negotiation process – should provide a clearer impact of the “yes” referendum vote. While we ride out the near-term volatility, our outlook regarding global growth this year remains modest, though the Brexit vote has created uncertainty about U.K. economic growth, and we believe the decision to leave the EU could push the U.K. into recession in the short term. It also could open the door to other countries questioning their membership in the EU and potentially do harm to Europe's economy overall. At Ivy, we've done our due diligence studying the potential impact of a Brexit. Our key takeaways include:

Brexit outcome – The vote to leave the EU was clearly a surprise to investors. Markets had rallied the past few days in anticipation of a “stay” vote. Markets have fled to safety as most investors were leaning the wrong way.

Brexit – a difficult process. We believe the U.K.'s departure from the EU will be a drawn out and difficult process. The vote highlights the global trend towards rising nationalism, and sets the stage for the U.K. to set its own immigration and trade policies. The U.K. will have to set new trade deals with the EU and the rest of world, resulting in potential losses in exports and investment flows. 

More to leave? Vote to leave sets the stage for the possibility of additional departures from EU. There is a growing risk of fragmentation across the EU. We are keeping a close eye on Scotland and Spain.

Central bank policy – vote likely takes future U.S. Federal Reserve rate hikes off the table over the short term.  We believe the Bank of England will provide necessary liquidity to halt funding stresses.  The volatility and decline of the British pound will likely result in further quantitative easing. We believe a weaker euro is likely overtime.

GDP growth outlook – U.S. market may retain its relative appeal, with domestically-focused stocks likely enjoying support relative to multinationals. We expect a drag in Europe GDP growth stemming from risk-off environment and delayed CAPEX spending.  

We encourage investors to not overreact to current situation. We believe the markets have proved amazingly resilient over the past decade despite significant bouts of volatility and ongoing macroeconomic and geopolitical headwinds.


Past performance is not a guarantee of future results.

The opinions expressed are those of Waddell & Reed Investment Management Company and are current through June 24, 2016. These views are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed.

This information is not intended as investment advice or a recommendation to purchase, sell or hold any specific securities, or to engage in any investment strategy.

Waddell & Reed, Inc.  MFA11424 (06/16)




Market Update 2016 Q1

For printable full version and disclosures, click here.

The Markets (as of market close March 31, 2016)

The first quarter of 2016 started with a whimper as equities suffered several weeks of losses. However, as

March came to a close, several of the indexes listed here recovered enough to finish the quarter in positive

territory. The Dow picked up 260 points to close 1.49% ahead of its fourth-quarter closing value. The S&P

500 also finished the first quarter slightly better than it ended the previous quarter. However, the NASDAQ,

Russell 2000, and Global Dow each ended the quarter behind their respective December 2015 closing

values. March proved to be a good month for equities, as each of the indexes listed here yielded positive

returns, led by the Dow and the Russell 2000, each of which gained more than 7.0% over February.

The debt side of the ledger also produced a mixed bag of revolving returns as 10-year Treasury yields fell

to their lowest end-of-quarter levels since the fourth quarter of 2012. Yields on long-term Treasuries

opened the quarter at around 2.25%, but ended it at 1.79% as money moved in, driving prices higher and

yields lower.

Gold was a winner in the first quarter, moving from $1,060 at the beginning of the quarter to over $1,233 by

March 31--a gain of over 16% for the quarter. Crude oil (WTI), on the other hand, began the quarter selling

at around $37 per barrel, then fell to under $30 per barrel by mid-January, only to rise to close to $40 per

barrel by mid-March, ultimately closing the quarter at $37.49 per barrel as of the 31st.

For more detail, disclosures, etc. click link