2016: A Year of Surprises  

Brexit and the Trump victory were at the top of the surprise list, as pollsters got both predictions wrong up to and including the day of the voting. Markets acted very negatively after the British vote but European indices recovered most losses by year end.

In the U.S. election, initial negativity from the surprise Republican sweep was wiped out the next day as stock markets rallied led by industrials and banks. Government bonds had the opposite reaction as higher growth and inflation are expected with Trump's policies. Small Cap U.S. stocks, measured by the Russell 2000 index dropped 27% from June 2015 to February 2016 then soared 44% into year end. The 10 year U.S. Treasury yield went to 1.336% in July, 2016 and ended the year at 2.446%. This was in fact a multiple year double bottom in yield terms and likely marked the cyclical low. This jump and yields caused a principal loss of about 10% in the 10-year note and dragged down other fixed income investments and many yield oriented stocks.

Gold rallied 30% from Jan. – July, 2015 then dropped about 16% into year end. The U.S. dollar index- $DXY dropped almost 7% from Jan. – May, 2016 then rose 11% into the close of 2016 marking a 14-year high. Domestic stocks outperformed most asset classes.

If one stayed the course and weathered early year volatility, fears of China and European slowdown, combined with political uncertainty you prospered. Defensive investments did not pay off in 2016.

Key asset classes had mixed annualized returns as measured by various Vanguard funds listed below:

VGIT-- Intermediate Government Bond Fund +1.12 %

BND-Total Bond Fund +2.57%

VTEB-Tax Exempt Bond Fund +0.17 %

VGK- FTSE European Stock Fund -0.59 %

VOO- S&P 500 +11.96%

VWO- Emerging Markets Stock Fund +11.75%

We enter 2017 with the U.S. economic expansion closing in on its eighth anniversary, the third longest on record.  The longevity of this business cycle may portend a coming slowdown, potentially culminating in a mild recession and bear market in stocks in 2018. With that said, we support the view that business cycles do not die of old age. Energy-related capital spending is recovering. Business and consumer confidence are up. Animal spirts are rising with more pro-business policies expected from Republicans who have majorities in both houses.  

The financial system shows few signs of stress. The federal funds rate has a negative, real yield. The yield curve is upward sloping and credit is flowing.    

Fiscal policy is expected to turn simulative, with lower taxes, less regulation, and more infrastructure spending. 

Probable outcomes include:

Lower corporate taxes.

Repatriation of $2-4 trillion in cash held by U.S. corporations overseas.

Increased defense spending.

Deregulation with respect to banking and energy.

Support for Mr. Trump's agenda will not be unanimous. However, we are confident legislation and regulatory roll back will come about in the first 100 days of the new administration. For the stock market, earnings for the S&P 500 Index in 2017 may increase to around $131. This places the price/earnings ratio at about 17.3 times, forward earnings before any corporate tax cut. 

Every 1% decline in the corporate tax rate is said to generate an additional $1.30 in earnings. If the Trump Administration were to achieve its goal of a 15% corporate tax rate, this would imply as much as an additional $26 in earnings. 

Economists and the Fed expect no recession in 2017.

Real GDP growth and inflation of about 2% over the next 3 years is the base line forecast. I would not be surprised by higher growth along with higher interest rates as full employment is likely to raise wage levels.

The risks of course are there as well, if Mr. Trump starts a trade war with China, Mexico, or Japan. Adversaries will try to test his Presidential metal in the foreign affairs.

We see a positive return on stocks for the year ahead. Bond returns will be more difficult given rising short term rates as forecast by most experts.

We look forward to discussing with you, your account positioning,  and your investment goals as soon as possible. 

We wish you all a very happy, healthy, and prosperous New Year!

Doug Coppola

John Coppola

January 6, 2017

Communication is for informational purposes only & doesn't constitute offer to sell or a solicitation of an offer to purchase any interest in any investment vehicles managed by CFA or an associated person or entity. CFA does not accept any responsibility or liability arising from the use of this communication. No representation is being made that the information presented is accurate, current, or complete, and such information is always subject to change without notice. We do not provide legal, accounting or tax advice. Any statement regarding legal, accounting or tax matters was written about the explanation of the matters described herein & not intended or written to be relied upon by any person as definitive advice. Any discussion of U.S. tax matters contained within this communication is not intended to be used and cannot be used for avoiding penalties that may be imposed under applicable Federal, state or local tax law or recommending to another party any transaction or matter addressed.

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The long-awaited November election results surprised the world.

Republicans held majorities in the House and Senate and unexpectedly won the Presidency.

Mr. Trump's odds were 4-1 in betting pools on election day and soared to 12-1 early that evening.

The DJIA dropped 800 plus points in the overnight futures markets on Nov 8, but began to rally the next morning. Despite dire warnings by many, the DJIA rallied 5.8 % for the month. 

The SPX closed at record highs, up 7.58 % year to date and up 3.4% in November alone.

The shocking result caused a massive migration from bonds into stocks causing the third worse selloff in 30 years for US Treasuries.

November was the worst month ever for the Bloomberg Barclays Aggregate Total Return Index with a 4 % loss. 

Sentiment swiftly changed from low interest rates forever to faster GDP growth, higher rates are here to stay and inflation is coming soon.

More money was lost in bond markets than was made in stock markets.

Trump's policy proposals, previously ignored by the media, focus on reduced tax rates for corporations and individuals. He proposed a $1 trillion spending plan to modernize our infrastructure.

Repeal and replacing Obamacare takes pressure off small business and will aid job creation as employers no longer fear new full time hires costing them too much. 

With lower regulatory burdens anticipated on banks and manufacturing we saw an industrial and finance stock run heretofore absent for years.

Defensive stocks, even with good yields swooned, along with foreign stocks due to U.S. dollar strength.

Gold and municipal bonds plunged as safe havens were suddenly out of fashion. 

Growth stocks took a back seat to small cap value stocks and cyclical sectors.

This is what a bond yield tantrum, like 2013 looks like on the chart below.   

In summary, a sea change in markets and perception for growth prospects has occurred with the election results.

Bonds are no longer as safe a haven as they once were. Rates look like they bottomed in July 2016 at 1.33 % on ten year UST’s.

Hopes for a stronger for longer economy have improved given this business-friendly administration.

We are more bullish on stocks looking ahead and more concerned about long dated bonds.

Risk is back on for emboldened investors but it won 't be a straight line to higher prices.

The business cycle has not been repealed. We have not had an economic downturn in 8 years. Our national debt has doubled under President Obama. President Trump's new spending must be financed with more deficits. 

We are adjusting portfolios to reflect new realities.

All the best for a wonderful holiday season!

 Doug Coppola

John Coppola

December 1, 2016 

Communication is for informational purposes only & doesn't constitute offer to sell or a solicitation of an offer to purchase any interest in any investment vehicles managed by CFA or an associated person or entity. CFA does not accept any responsibility or liability arising from the use of this communication. No representation is being made that the information presented is accurate, current, or complete, and such information is always subject to change without notice. We do not provide legal, accounting or tax advice. Any statement regarding legal, accounting or tax matters was written about the explanation of the matters described herein & not intended or written to be relied upon by any person as definitive advice. Any discussion of U.S. tax matters contained within this communication is not intended to be used and cannot be used for avoiding penalties that may be imposed under applicable Federal, state or local tax law or recommending to another party any transaction or matter addressed. Please Access Your Advyzon Web Portal to View Your Account & Monthly Fee

The long-awaited election results came in on November 8-9 and the whole world was surprised.

Republicans held majorities in the House and Senate and most unexpectedly won the Presidency.

Mr. Trump's odds were 4-1 in betting pools election day and soared to 12-1 early that election evening.

The DJIA dropped 800 plus points in the overnight futures markets on Nov 8 but began to rally the next morning as the DJIA rallied 5.88 % in the month. The SPX closed at record highs up 7.58 % year to date and up 3.4% in November alone.

The shocking result caused a massive migration from Bonds into stocks in the third worse selloff in 30 years for US Treasuries.

Sentiment swiftly changed from low rates for as far and long as the eye could see, expected to be continued with a Clinton win, to faster GDP growth expectations. Trump's policy proposals very much ignored in the media are for lower tax rates for corporations and individuals along with a $1trillion fiscal spending plan on infrastructure.

Throw in lower regulatory burdens on industry and banks and we got a bull run the likes we have not seen in years.

Financials and Industrials soared while defensive groups with good yields swooned.

Gold and Bonds plunged as safe havens were suddenly out of fashion.

All the best for a wonderful holiday season!

Doug Coppola

John Coppola

December 1, 2016

Communication is for informational purposes only & doesn't constitute offer to sell or a solicitation of an offer to purchase any interest in any investment vehicles managed by CFA or an associated person or entity. CFA does not accept any responsibility or liability arising from the use of this communication. No representation is being made that the information presented is accurate, current, or complete, and such information is always subject to change without notice. We do not provide legal, accounting or tax advice. Any statement regarding legal, accounting or tax matters was written about the explanation of the matters described herein & not intended or written to be relied upon by any person as definitive advice. Any discussion of U.S. tax matters contained within this communication is not intended to be used and cannot be used for the purpose of avoiding penalties that may be imposed under applicable Federal, state or local tax law or recommending to another party any transaction or matter addressed.

The S&P 500 closed October 30th at 2126.15, down 1.9% on the month and up 4.1% on the year. The DJIA is up 4.1% and NASDAQ up 3.6%.

​The ​Core PCE Price index is running +1.7% year over year.

The U.S. Two-Year Note yields 0.85%.

The Ten-Year U.S. note yield is 1.83% and the 10 Year German Bund is +0.16%, up 28 basis points this month.

Global interest rates rose sharply in October, as the lows on yields for 2016 and perhaps this interest rate cycle may have been seen this summer.

Q3 could be the first time the S&P 500 Index has seen year over year earnings growth since Q1 2015, ​per Fact Set.

All eleven sectors have contributed, led by financials. ​

The Fed meets ​next week, but is expected to stay any interest rate hikes until the December meeting, which according to latest statistics has a 78% chance ​for a rise in the Federal funds rate.

With the election on November 8th this "soap opera" race will conclude in a week.

However, if Ms. Clinton is elected as markets expect, with ​the FBI probe still

​underway, all parties might have to wait for the final episode until January.

Having ​weathered the weakest cyclical part of the market year with higher profits in the offing, stocks may well rise into year end. Average gains in the last two months of the year are typically ​+​3.8%.

​With inflation pick​ing up due to wage increases, bonds should have a harder time than stocks holding on to their yields. That of course is conventional wisdom.

However, there is not much conventional about these economic or political times​

If you have any questions or concerns about your accounts, please set up a meeting or conference call.

Happy Halloween!

Doug Coppola

John Coppola

October 31, 2016

Communication is for informational purposes only & doesn't constitute offer to sell or solicitation of an offer to purchase any interest in any investment vehicles managed by CFA or an associated person or entity. CFA does not accept any responsibility or liability arising from the use of this communication. No representation is being made that the information presented is accurate, current or complete, and such information is at all times subject to change without notice. We do not provide legal, accounting or tax advice. Any statement regarding legal, accounting or tax matters was written in connection with the explanation of the matters described herein & not intended or written to be relied upon by any person as definitive advice. Any discussion of U.S. tax matters contained within this communication is not intended to be used and cannot be used for the purpose of avoiding penalties that may be imposed under applicable Federal, state or local tax law or recommending to another party any transaction or matter addressed.

Stocks were down 0.1% in August after hitting all-time highs of 2193 for S&P 500 then closing at 2170, l up 6.2 % year to date. 

Ten year U.S. treasury yields rose from 1.33% July levels, to 1.57% on August 31. The Fed continues to talk about raising the Fed funds rate by year end. The biggest monthly sector loser was Utilities Select SPDR or (XLU), which dropped 5.5%.  

Despite constant chatter from talking heads, we expect no action on rates until we are past the November elections.

GDP seems to be picking up in the second half and corporate profits, while still anemic, are moving in a positive direction.

September is typically a down month for the stock market. BREXIT losses have been erased as dire predictions have not come to pass.

The EU continues to demand more taxes from successful companies like Apple even as the Irish tax authority says the company does not owe $14 billion claimed due by the bureaucrats in Brussels.

 The U.K. vote has brought all these issues to the forefront for discussion. 

We are concerned that investor sentiment has turned too bullish of late. Equity mutual funds continue to shed assets in favor of index ETFs and bond funds.

We have seen a mild selloff in precious metal prices and more in metal stocks after a big rally. The US dollar has risen over the past 2 months.

On the positive side, we see no recession in sight. We see a flatter but not inverted yield curve. We expect only a slow rise in inflation and rates, between now and year end. Valuations for stocks while high are supported by low bond yields and easy earnings comparisons moving forward.

Both the ECB and Bank of Japan continue to print money and buy more financial assets to prop up weak economies.

Emerging markets have rallied off winter lows. Collectively they have lower P/E ratios and higher growth rates than developed markets. European and US bank stocks have rallied off lows.

Prior to the November election, we expect lots of negative ads and some surprises that may roil markets.

Stocks appear to offer better long term prospects than bonds which have become expensive.

If we experience a market drop this Fall, we expect it to be fleeting.

Goldilocks continues to romp free from interference by the 3 bears.

Doug Coppola

John Coppola

September 1, 2016

Communication is for informational purposes only & doesn't constitute offer to sell or solicitation of an offer to purchase any interest in any investment vehicles managed by CFA or an associated person or entity. CFA does not accept any responsibility or liability arising from the use of this communication. No representation is being made that the information presented is accurate, current or complete, and such information is at all times subject to change without notice. We do not provide legal, accounting or tax advice. Any statement regarding legal, accounting or tax matters was written in connection with the explanation of the matters described herein & not intended or written to be relied upon by any person as definitive advice. Any discussion of U.S. tax matters contained within this communication is not intended to be used and cannot be used for the purpose of avoiding penalties that may be imposed under applicable Federal, state or local tax law or recommending to another party any transaction or matter addressed.

The S&P 500 closed up 6.34% year to date and 3.56% in July alone. The Barclays U.S. aggregate bond index is +5.98% year to date.

Brexit fears did not last long. Negative interest rates in Japan and Europe continue as U.S. ten year bonds closed with a 1.45% yield. Also, 30-year Treasury bonds finished July with   a 2.18% yield, near historic lows.

After two political conventions the race for the Presidency is less than 100 days away.

All politicians make promises but few keep them. The Congressional Budget Office reported in July that federal debt held by the public surged to 75% of GDP from 39.3% in 2008, according to the Wall Street Journal op-ed on Aug 1. The C.B.O. projects a jump to 86% by 2026 and 110% by 2036 higher than the historic peak of 106% after WW II.

"Low yields are hell on savers but they have allowed Mr. Obama and the Washington crowd to party like it's 1995; the year the government paid $232 billion in net interest, more than the $223 billion it paid last year, even though publicly held debt has more than tripled in 20 years."

"As a share of GDP, the U.S. is paying less in interest than the average over the past 50 years, even as debt has skyrocketed."

This is the result of repressed interest rates, compliments the FED and other Central bankers.

Global government debt has piled up with little negative consequence.

Bond gurus like Bill Gross of Janus and Jeff Gundlach of Doubleline Investments are sounding alarm bells on long dated assets including Treasuries and everything that trades off Treasury debt yields, except real estate and gold.

Bulls on the other hand argue that while we have been in a drawn out profit slowdown, the bottom in profits was reached late last year and earnings are improving.

Richard Bernstein argues that pessimism is rampant, stocks move on earnings increases and earnings are about to increase after 4 quarters of decline.

Earnings comparisons get easier in the second half of this year and in 2017. While P/E 's are high they are supported by rising earnings. Consensus forward earnings estimate on the S&P 500 is anticipated to be $126.50 a P/E ratio of nearly 17 times, higher than the 5 and 10 year averages.

We have lived through a collapse in oil prices and other commodities over the past 2 years. Oil prices went from $116 to $26 at the recent lows then rallied to $52 and dropped back to $40 this week.

We saw the SPX peak in May 2015 at 2134, surpassed last month after massive pessimism on the British vote to leave the EU proved to be fleeting.

Smart people are clearly divided in their opinions. Interest rates at historic lows have driven both stock prices and long duration bonds higher.

A subtle currency war is going on with China, Japan and Europe vis some vis the U.S. dollar.

At this point most prognosticators think bonds have done all they can, as far as capital appreciation is concerned. There are exceptions like Gary Shilling who sees even lower yields ahead.

Stocks will likely rise further, if earnings increase and P/E ratios remain elevated.

If we go into a U.S. or global recession, which JP Morgan rates at only a 30% probability, all bets are off.

Central bankers and the politicians, expect low interest rates for the foreseeable future.

Elections are looming in the U.S. and Europe which may change the investors calculations.

We shall monitor markets closely for evolving opportunities.

Doug Coppola

John Coppola

August 3, 2016

Communication is for informational purposes only & doesn't constitute offer to sell or a solicitation of an offer to purchase any interest in any investment vehicles managed by CFA or an associated person or entity. CFA does not accept any responsibility or liability arising from the use of this communication. No representation is being made that the information presented is accurate, current or complete, and such information is at all times subject to change without notice. We do not provide legal, accounting or tax advice. Any statement regarding legal, accounting or tax matters was written in connection with the explanation of the matters described herein & not intended or written to be relied upon by any person as definitive advice. Any discussion of U.S. tax matters contained within this communication is not intended to be used and cannot be used for the purpose of avoiding penalties that may be imposed under applicable Federal, state or local tax law or recommending to another party any transaction or matter addressed.