CAPITAL MARKETS SUMMARY
U.S. equity markets exhibited relatively strong performance throughout the quarter. The S&P 500 did not exhibit a single 1% day (up or down), a streak that has been ongoing since June 25th. This is only the 6th time since 1958 when any calendar quarter saw such little daily price volatility.
As the market stands today, the current price/earnings multiple on the S&P 500 is 16.8x expected forward earnings, which is noticeably higher than the 10-year average of 14.5x according to FactSet. With a forward P/E of 16.8x, the market is assuming 1) that S&P 500 earnings will grow by 10% in 2019; 2) inflation is not a threat and that long-term interest rates will remain lower than long-run averages; and 3) the US Economy will continue to grow by 2-3% over the next year and that any international challenges (i.e. Brexit) will be isolated offshore. The expectations supporting this claim are seen by many as fairly weak, at best.
While earnings have been relatively high, the assumption of continued growth of 10% has many skeptical that this market can justify its forward valuation. But perhaps one of the more alarming new behaviors exhibited by the capital markets is the changing relationship between US bonds and equities from negative to positive. Bonds, which historically have a negative correlation to stocks dating back to 1928. This relationship appears to be changing, as can be exhibited by the fact that both stock and bond prices fell noticeably on October 4th. Should October prove to be a volatile month, a portfolio of typical US bonds (measured by US Treasuries which are down 8% on the year), may prove to be a less than reliable backstop to any adverse market performance.
With this in mind, it is evermore imperative that investors look to diversify through assets that continue to exhibit zero or negative correlation to equity markets and bonds. TSPG has always, and will continue to, place an emphasis on a healthy inclusion of alternative assets into portfolios that do just that, in order to provide reliable and safe returns in all environments, particularly ones where the waters are as unchartered as those we are seeing now.
NEWS FROM THE INVESTMENT COMMITTEE
I am often posed the two following questions, “why TS Prosperity Group” and “what sets you apart from my broker?” Those are great questions, and to answer I first have to tell you a story.
The guest list was ready and the landscaping was perfect for our upcoming Labor Day barbeque. The only thing left to do was to see Jim, a good friend and owner of the local family-owned butcher shop. He and his wife were on our guest list for the barbeque.
I mentioned to Jim that my wife and I had been having some stomach problems. I knew I could rely on Jim to give a good suggestion to help solve our problem. “Your family has gone through a lot of beef this summer so, why don’t we try some of this chicken?” Jim said as he pointed to the end of the counter. I took his recommendation and we ate chicken for our Labor Day celebration.
A few months later, my wife and I were still experiencing our stomach issues. We felt that our issues were coming from our diet but were unable to figure out what the problem. We felt Jim gave sound advice and had always tried his suggestions in the past. We felt that he had our best interest at heart, however, this time, we decided that we were going to see a registered dietician.
As we went into Sarah’s office (the local dietician), we were greeted warmly. She efficiently went right to work taking numerous tests and asking many questions. At the end of the session and after looking at our entire health picture, her recommendation was that we need to cut back on our protein intake for a while and focus on fruits and vegetables. We took this advice and found our stomach issues were quickly resolved.
You may be asking, what does your butcher have to do with investments? Let’s circle back to the original inquiry of “why TS Prosperity Group” and “what sets you apart from my broker?” The answer lies in my experience with Jim, the butcher and Sarah, the registered dietician.
Jim was trying to do what was in our best interest but was limited in his recommendations. He only had the meat in front of him to sell and his expertise with those options as his recommendation. We still appreciated Jim and his advice, however, he was simply limited in what he could and could not offer to resolve our dietary issues. On the other hand, Sarah had nothing to sell us. She simply took tests and told us to cut back on the meat all together. She had endless choices of nutrition to recommend and had a picture of our overall health.
An investment broker is similar to Jim. They are experts with a few mutual fund families and try to do what is in your best interest, but are limited to those funds they know best. Additionally, when a prospective client comes in and I review their current investments, I usually find expensive hidden costs. Some of these funds may appear diversified, yet often times many of the eggs are in the same basket. With this limited scope, often they recommend what their company has made available to their clients.
At TS Prosperity Group, we serve like Sarah. We are required by law to provide fiduciary care and always do what is in the client’s best interest. We will only offer potential solutions based on a client’s bigger financial picture.
Just like Sarah, we take a look at your financial situation and run tests along with reviewing your goals. We can select from the endless amounts of investments choices and look to see what will help accomplish your goals. This includes funds with the best combination of highest return for the amount of risk along with the lowest fees.
Many times, we find that prospective clients have not adequately planned for all aspects of their family’s financial future. At TS Prosperity Group, it is great to help clients navigate the holistic picture while allowing them to sleep better at night. This includes looking at the holistic picture of tax planning (minimizing taxes now and later), investment planning (reducing risk without giving up return), estate planning (keeping the most amount of wealth in the family and not going to taxes and other legal fees), and more.
NEWS FROM THE FIDUCIARY OFFICERS
Is There an RMD in Your Future?
As we roll with the change of seasons into the last quarter of 2018, it is time to consider your strategy for addressing the Required Minimum Distribution (RMD) from your traditional IRA or 401(k) plan. As you may know, whether you need funds from your retirement accounts or not, once you reach age 70 ½ the IRS requires that you take these mandatory taxable withdrawals. Failure to do so may result in a penalty of 50% of the value of the RMD.
Remember, if you own multiple IRAs you can aggregate the RMDs and distribute the total from one or more of those accounts. Just make sure the other custodians are not taking automatic withdrawals. Many people withhold taxes from their RMDs. If you choose not to do so, it is important to set-aside enough to pay your tax bill when you file.
If you do not need your RMD to cover your expenses, you may consider reinvesting the funds into your TS Prosperity Group taxable investment account or making a charitable contribution to your church or non-profit of choice. If you are interested in establishing a taxable account, please contact your fiduciary officer.
Consult your CPA or make an appointment with your TS Prosperity Group Fiduciary Officer soon to discuss the best approach for you to take with your RMD. The annual deadline for distribution is December 31st.
TS Prosperity Group Events – October 2018
The Game of Life: Insurance, Wills, POAs
October 17, 2018, 5 - 6:00 p.m.
This is a financial education course hosted by TS Bank and taught by Travis Castle, an insurance professional, in conjunction with Mary Jewel, a TS Prosperity Group representative.
If you are someone who buys a lottery ticket, you’re probably someone who doesn’t mind taking a risk to win millions of dollars. But do you feel the same way about risking your current assets by not carrying the right amount of insurance or the right kind of insurance? Are you willing to risk what you’ve built up over a lifetime to someone acting on your behalf as Power of Attorney (POA)? Are you willing to risk family relationships and unintended recipients of your estate by not having a will that carries out your wishes? If you’re more a lottery ticket gambler than your own estate gambler, then you’ll want to come and hear about how you can win your own personal lottery.