Quarterly Review

Second Quarter 2018 In Review

One, Two, Three, Four, I Declare a Trade War

The primary question on investors' minds during the second had to be how far the trade war would go between the U.S. and its trading partners. During most of the quarter, it seemed one could reasonably expect markets to be down one day and then up the next. It got to the point that I often tried to predict the day-to-day headlines of The Wall Street Journal. My idea of fun is probably different from yours.

If the scope of the trade war was the primary question on investors' minds, the second was whether or not the Federal Reserve would raise interest rates. Spoiler: It did - and the Fed indicated there would be two additional rate hikes in 2018.

Let's look at the numbers.

Q2 2018 Numbers

The average diversified U.S. stock fund, which is a better measure of how we invest than the S&P 500 or the Dow, gained 3.7% during the second quarter, which brings the year-to-date return to 3.4%. Investors, still jittery about the long bull market and an escalating trade war with China couldn't get out of stocks fast enough. Nearly $59 billion flowed out of stock funds during the quarter.

International markets didn't fare well: The average diversified international stock fund declined by 2.1% in the second quarter, which brings the year-to-date loss to 2.7%. Investors were more optimistic about foreign stocks because $89 billion flowed into international stock funds during the quarter. Of course, international stocks will be affected by a trade war, so the shift to foreign markets may not help all that much in the long run.

The average intermediate-term bond fund lost 0.3% during the second, which brings the year-to-date loss to 1.7%. A whopping $128 billion flowed into bond funds during the quarter, again over concerns about the long bull market and trade war.

Expectations For The Third Quarter

When it comes to financial markets and investments, I honestly don't know what to expect. No one does. The best I can do is make a few educated guesses:

  1. The U.S. and its trade partners will continue to talk about tariffs, which will lead to retaliatory actions or threats of actions.
  2. Consumers and the global economy will be the casualties of a trade war.
  3. In the event of a trade war, investors should look to small-cap stocks, which are less likely to be vulnerable to trade spats.
  4. Since the Federal Reserve has already tipped its hand, and unless anything unanticipated happens, I believe it's safe to say there will be a rate increase during the third quarter.


As always, you should focus on what you can control. Make a financial plan that's right for your goals and financial situation. And stick to it.

Listening / Reading / Watching

Here's what has my attention right now:

  • The Three-Body Problem by Cixin Liu. Since I was going to spend two weeks in China, I decided to reread this excellent novel by China's most famous science fiction author. Go read it. Now.
  • The Dark Forest by Cixin Liu. And then I promptly started reading book two in the trilogy. Again, go read it. Now.
  • On to book three, Death's End.

First Quarter 2018 In Review

V is for Volatility

Spring has arrived! Unfortunately, volatility is back with a vengeance, too.

It's difficult to believe the U.S. bull market is more than nine (!) years old. Nine years ago my wife and I hadn't even welcomed our second child into the world. 

What's causing the volatility? Worries about inflation, the threat of a trade war with China, privacy concerns related to the mismanagement of consumer data by big tech companies, daily tweets from He-Who-Must-Not-Be-Named, and concerns that the actor playing young Han Solo doesn't really look or sound like everyone's favorite smuggler.

Okay, maybe that last one's a stretch. Let's look at the numbers.

Q1 2018 Numbers

Remember all the way back in 2017 when financial markets were posting strong returns? Sadly, that hasn't carried over into 2018. The most commonly used benchmark, the S&P 500 Index, posted a decline of 1.17%.

The average diversified U.S. stock fund, which is a better measure of how we invest than the S&P 500 by itself, lost 0.4%. Investors, wary of, among other things, a long bull market and a potential trade war with China, are exercising caution, with nearly $53 billion flowing out of stock funds during the quarter.

Losses weren't confined to domestic markets: The average diversified international stock fund declined by 0.6% in the first quarter. In a sign of investors' preference for foreign markets, $80 billion flowed into international stock funds during the quarter.

The average intermediate-term bond fund lost 1.4% during the first quarter. Nearly $75 billion flowed into bond funds during the quarter, likely due to concerns about volatility in stocks.

Expectations For The Second Quarter And Beyond

When it comes to financial markets and investments, I honestly don't know what to expect. I can make educated guesses, but anyone who tells you they know what is going to happen tomorrow, next month, or next year is lying.

The markets have come a long way since March of 2009, which has been wonderful for investors. I know there will be a correction at some point, but I cannot predict when it will happen or what will cause it.

In the meantime, you should focus on what you can control. Make a financial plan that's right for your goals and financial situation. And stick to it.

Listening / Reading / Watching

Here's what has my attention right now:

  • The Gone World by Tom Sweterlitsch. What if the United States managed to reverse engineer extremely advanced technology? And then started exploring the galaxy? And also mastered time travel? This book manages to answer all of those questions while keeping the focus on a murder investigation. Did I mention there are also alternate universes? It's great fun and I highly recommend it.
  • The Stone Sky by N.K. Jemisin. I don't even know how to describe this without spoiling anything. This is book three in a series called The Broken Earth. And you should read it. I'm sure you're thinking, "Great, another trilogy". Trust me, it's worth it. Jemisin is an amazing storyteller.

Fourth Quarter and Full-Year 2017 In Review

Goodbye, 2017!

Every year seems to pass more quickly than the one before it. 2017 was no exception. Let's take a look at what happened in the financial markets.

Q4 and Full-Year 2017 Numbers

The most commonly used benchmark, the S&P 500 Index, had another strong quarter, up 6.64%, which means the S&P 500 ended up 21.83% for the year. Not bad.

The average diversified U.S. stock fund, which is a better measure of how we invest than the S&P 500 by itself, gained 6.0% during Q4, putting domestic stock funds up 18.3% for the year. Investors, still wary of high valuations in U.S. stocks and a long bull market, are exercising caution, with $38 billion flowing out of stock funds during 2017.

The average diversified international stock fund gained 4.9% in the fourth quarter. This gain put international stock funds up 26.8% for the year. In a sign of investors' preference for foreign markets over domestic, $233 billion flowed into international stock funds during the year.

The average intermediate-term bond fund returned 0.4% during the fourth quarter, which put them up 3.6% for 2017. A whopping $379 billion flowed into bond funds during the year, likely due to concerns about the valuations of U.S. stocks.

Managing Expectations

The financial crisis may not have reached rock bottom until March of 2009, but it kicked into high gear in September of 2008. That means later this year it will have been ten years since the start of the crisis. We've experienced great returns since then. Well, I hate to be "that guy", but I'm going to remind you that markets don't always go up.

Those of you who read or watch Game of Thrones are familiar with the phrase "Winter is coming". For the non-nerds here this basically means one should always be prepared because the good times, or in this case, good returns, won't last forever.  Fortunately, we're only talking about investment returns, not White Walkers marching south with an army of the dead. And an undead dragon.

I wish I could tell you exactly when a correction will occur. I can't, but I'm bound to be right eventually. In the meantime, we can be thankful for years like 2017. In addition, we can "prepare for winter" by rebalancing our portfolios, maintaining a sufficient emergency fund, and sticking to our financial plans.

New Year's Goals

Goals, resolutions, or plans. I don't care what you call them; I think it's good to kick off the year with a few ways to challenge yourself. Here are my goals for 2018:

  1. I will draw and paint again. In fact, I just relaunched my videogame-themed art website, www.8bitart.com, where I'll post regular updates on my work.
  2. I will continue my Crossfit and yoga regimen. I started this routine in September of 2017 and I feel great. Bonus: No more back pain.
  3. I will pay less attention to social media sites like Facebook and Twitter. Social media is a vampire that sucks your time instead of your blood. I think we'd all be better off spending less time on those sites. Read a book. Play a board game. Paint a picture.

I hope you set some goals for yourself!

Third Quarter 2017 In Review

Heading Into the Homestretch

Fall is finally here, which means it's time for many of my favorite things: Cool weather in D.C., fall apples, Oktoberfest beers, Halloween, and scary movies.

Speaking of scary, October is usually thought of as a scary month for the stock market, but September actually has more historical down days in the markets. The good news is that I have nothing scary to report for September - or the third quarter.

Q3 2017 Numbers

The most commonly used benchmark, the S&P 500 Index, had another strong quarter, up 4.48%. That puts the S&P 500 up 14.24% through September 30th.

The average diversified U.S. stock fund, which is a better measure of how we invest than the S&P 500 by itself, gained 4.2%, which puts domestic stock funds up 12.3% through September 30th. Investors, still wary of high valuations in U.S. stocks and a long bull market, are exercising caution, with nearly $48 billion flowing out of stock funds during the quarter.

The average diversified international stock fund gained 5.9% in the third quarter. This gain puts international stock funds up an impressive 21.9% for the year. Emerging market funds are performing even better, up 26.5% so far. In a sign of investors' confidence in foreign markets, $48 billion flowed into international stock funds during the quarter.

The average intermediate-term bond fund returned 0.8% during the second quarter, which puts them up 3.2% from January 1st through September 30th. A whopping $95 billion flowed into bond funds during the quarter, likely due to concerns about the valuations of U.S. stocks.

Expectations for the Fourth Quarter

The President and Congress, having failed at two attempts to repeal and replace the Affordable Care Act, have moved on to tax reform. I assume we'll see more details about proposed changes to the tax code, but I'm not holding my breath.

When it comes to financial markets and investments, I honestly don't know what to expect. The markets have come a long way since March of 2009, which has been wonderful for investors. I know there will be a correction at some point, but I cannot predict when it will happen or what will cause it.

As we head into November - and prepare to celebrate Thanksgiving - let's be thankful for how our investments have performed over the past eight years. And let's also prepare mentally for things to change, because we know they will eventually.

Listening / Reading / Watching

Here's what has my attention right now:

Second Quarter 2017 In Review

Past the Halfway Point

It's another hot and humid summer in D.C. If you're in the D.C. region I hope you have plans to get away to a cooler climate (or just somewhere fun).

Here's a four-point summary of what happened during the second quarter:

  1. U.S. stocks continued to perform well, with health and biotech stocks leading the way.
  2. Bond funds were also in positive during the second quarter.
  3. Investors in foreign stocks were rewarded for their patience as international investments performed even better than domestic stocks.
  4. In June, the Federal Reserve raised the target Federal funds rate by 0.25%.

Q2 2017 Numbers

The benchmark S&P 500 gained 2.6% during the second quarter, which puts it up 8.2% for the first half of the year.

The average diversified U.S. stock fund, which is a better measure of how we actually invest, gained 2.7%, just slightly higher than the market. This puts domestic stock funds up 7.7% through the first half of 2017. Investors, perhaps wary of high valuations in U.S. stocks, are exercising caution, with $23 billion flowing out of stock funds.

The average diversified international stock fund gained 6.5% in the first quarter. This gain puts international stock funds up 15% for the year. In a sign of investors' confidence in foreign markets, $78 billion flowed into international stock funds during the quarter.

The average intermediate-term bond fund returned 1.4% during the second quarter and 2.4% for the first half. $93 billion flowed into bond funds during the quarter, likely because investors are worried about the valuations of U.S. stocks.

Expectations for the Third Quarter

Legislation coming out of D.C. may affect markets during the third and fourth quarters of 2017. This includes, but is not limited to, health care overhaul, infrastructure spending, and tax reform. Or our elected officials will continue to behave like children and nothing will be accomplished. My money is on the latter option.

Listening / Reading / Watching

Here's what has my attention right now:

  • Game of Thrones on HBO. Because winter is coming, of course.
  • I need recommendations for fun summer books! Have any good mindless page-turners? Let me know.

First Quarter 2017 In Review

Wait, it's April already??

It's difficult to believe it's already April. As my Grandmother used to say, the Fourth of July is just around the corner.

Here's a three-point summary of the first quarter:

  1. Markets are up in the U.S. thanks to expectations of lower taxes and less regulation. A strong technology sector helped, too.
  2. The Federal Reserve continued on its path to rate normalization by raising the target Federal funds rate by 0.25%.
  3. The broader economy is strong and showing signs of increased stability as job growth continues at a faster pace than in 2016, consumer sentiment strengthens, and home prices continue to rise.

Q1 2017 Numbers

The benchmark S&P 500 gained 5.5%, which isn't too shabby. This was bolstered by strong performance in the tech sector, but offset slightly by weak performance in the energy sector.

The average diversified U.S. stock fund, which is a more holistic measure of how we actually invest, gained 4.8%, slightly lagging the market. It's interesting to note investors are exercising caution and are more likely to invest in bonds rather than stocks. For comparison purposes, $112 billion flowed to bond investments versus #34 billion to stocks. This is in stark contrast to the last quarter of 2016 when investors flocked to stocks following the results of the U.S. election.

The average diversified international stock fund gained 8% in the first quarter. This is likely due in large part to a strong dollar, which incentivizes foreign companies to export goods to the U.S.

The average intermediate-term bond fund returned 1% during the first quarter, down from 3% in the previous quarter.

Expectations for the Second Quarter

Corporate earnings growth is forecasted by many analysts to rise about 9%. Many companies will report their first quarter earnings in the coming weeks, so we'll see if the forecasts match reality. If earnings match expectations, the market could continue to break records. Of course, there will always be unforeseen events that will shape investor behavior.

During the first quarter, the financial sector lagged all others except for energy and telecom. That could change in the second quarter as rising interest rates and decreased regulation should lead a rebound in the financial sector. 

Listening / Reading / Watching

Here's what has my attention right now:

  • Anything related to Tesla because the company has a lot going on right now. Tesla's stock price is up 40% year-to-date, the Model 3 is entering the release candidate phase of development, and a new line of electric trucks will be unveiled in September. In addition, Tesla Energy is ramping up its Powerwall 2, Solar Roof, Powerpack, and a newly announced conventional solar array. As a company, Tesla recently became more valuable than Ford and GM, making Tesla the most valuable automaker in the U.S. That's crazy considering, among other things, Tesla's limited production capacity.
  • Fortitude on Amazon Prime Video. Long-time readers probably know I'm a sucker for sci-fi. I recently stumbled across this series and I'm really enjoying it. Bonus: It was filmed in Iceland, so the scenery is gorgeous.

My Take on the Fourth Quarter of 2016 + Full Year

Year-End Surprises

2016 was filled with surprises (remember Brexit?), but it was the fourth quarter (Q4) which held three important and unexpected events:

  1. The outcome of the U.S. presidential election. The election of Donald Trump shocked many Americans and, similar to Brexit, completely defied nearly all election polls.
  2. Talking heads are wrong again. Commentators and analysts predicted Trump's win would cause financial markets in the U.S. to fall. In fact, a stock market rally occurred, pushing the Dow close to 20,000* by the end of the year.
  3. A year-end rate increase. The Federal Reserve, after a year filled with much teasing, raised its key interest rate by 0.25%.

*I purposely used the Dow 20,000 event because I wanted to point out something I've never quite understood: The fascination with market milestones. Yes, it gives us a way to compare the Dow on, say, January 1, 2008, to the Dow on January 1, 2017 (12,800 versus 19,877, if you're interested). Everybody wants to see the market go up, but I believe it's more important to focus on your goals and your financial position in relation to them rather than an arbitrary number.

Q4 2016 Numbers

Q4 turned out to be good for U.S. stocks, but not so good for international-stock funds and bond funds.

The S&P 500, which is typically used as a benchmark for U.S. stocks, gained 3.82%. The average diversified U.S.-stock fund, which is a more appropriate measure of how investors actually invest, was up 7.1% during Q4.

International stock funds didn't fare as well as their U.S. counterparts. The average diversified international stock fund dropped by 2.6% during Q4.

The average intermediate-term, investment-grade debt declined by 2.7% during Q4.

Full-Year 2016 Numbers

Looking at the full year presents a brighter picture for the investment categories listed above.

The S&P 500 was up 11.96%, while the average diversified U.S. stock fund gained 10.8%. Those numbers are great considering we're 8+ years out from the last recession and we have yet to see a significant correction in the U.S. stock market. That said, I find it troubling that we've gone 8+ years without a significant correction.

If U.S. stocks roared during 2016, then international stocks whimpered. The average diversified international stock fund gained just 0.7% for the year.

Despite a Q4 decline of 2.7%, the average intermediate-term bond ended the year on a positive note with a gain of 3.0%.

The Year Ahead

So what's in store for 2017? I checked with my Magic 8 Ball and it said to ask again later.

I can't successfully predict what will happen to financial markets this year. No one can. It's true that financial markets have performed well since the election, but whether or not that continues depends on, among other things, policies put in place by the Trump administration.

Now that I've gotten that disclaimer out of the way, I believe the following sectors have the most potential for change in 2017:

  1. Energy. Companies related to traditional forms of energy, such as oil and natural gas, will probably perform well under a government dominated by Republicans. Unfortunately, that means renewable forms of energy could be negatively impacted if government subsidies are reduced or eliminated. On the bright side, Elon Musk recently accepted an advisory position in the Trump administration. I trust his input will have a positive impact on energy policy as well as autonomous cars and AI.
  2. Pharma/Health Care. President-elect Trump has already talked about finding ways to cut drug prices, which would be good for consumers but also negatively impact drug companies. On the other hand, regulatory cuts, which Republicans are known to champion, could actually help drug companies if it means they could speed up the time it takes to get drugs to the market.
  3. Infrastructure. Spending on roads, bridges, and maybe even a Great Wall could be a boon to companies related to constructions and infrastructure development.
  4. Defense. Republicans typically increase defense spending, so I expect companies in this sector to perform well.
  5. Blue Chip Stocks. Large established companies could be positively impacted if corporate tax rates are reduced, as promised by President-elect Trump.

In addition to changes in the sectors listed above, I believe it's possible the Federal Reserve will once again raise the target interest rate - as long as the economy continues to improve.

Educated guesses, like the ones listed above, are the best I or anyone can do. What I can say for sure is that I'll stay on top of current events and adapt to whatever changes come our way in 2017. It'll be great.

Listening / Reading / Watching

Here's what has my attention right now:

  • Catching up on a backlog of periodicals such as The Journal of Financial Planning and Bloomberg Businessweek.
  • Finally getting around to finishing The Fireman by Joe Hill. If you like stories about a spore that causes spontaneous combustion in humans, then this story is for you! Hill is the son of Stephen King and he has inherited his father's knack for telling a twisted tale.

Third Quarter 2016 In Review

Third Quarter 2016 In Review

Investors were on edge at the start of the third quarter after it became clear the UK would withdraw from the European Union. Fortunately, the crisis passed without major declines in the stock markets. That left investors to worry about volatility caused by an increasingly unhinged US presidential election. We all know things haven't improved on that issue. Thankfully, it's almost over. At least I hope it is.

The good news was that both domestic and international markets posted decent gains during the third quarter. The S&P 500 gained 3.85% and the average diversified U.S.-stock fund returned 4.8%. The MSCI EAFE, which is the benchmark used to track developed international markets, gained 6.43% and the average international stock fund was up 6.2%.

The average
intermediate-term bond fund was basically flat, with a return of 0.8%. Despite the low returns, investors flocked to bond funds, which saw inflows of $65 million. US stocks and international stocks saw outflows of $68 million and $19 million, respectively. The large outflows out of stocks and into bonds demonstrate that investors are still wary of what's to come in the stock markets. One analyst even referred to this seven-year run as "the most hated bull market ever". It appears investors want to park their money in “safe” investments.

In September, the Federal Reserve decided not to raise interest rates but left the door open for a rate increase in December. Maybe.

I expect markets to be volatile in the coming weeks. That's because we just entered earnings season, which will provide insight into how publicly traded companies are performing. Oh, and there's the election to consider. Expect markets to bounce around depending on what the candidates say and what new information is released about them. Hang in there!

My Takeaways From The NAPFA Fall Conference

I attended the National Association of Personal Financial Advisors (NAPFA) fall conference on October 13th and 14th. Here are some of the highlights from NAPFA's annual fall conference:

  • A different perspective on retirement. The nature of retirement is changing as people live longer, healthier lives. The idea of retiring to play golf or pursue other leisure activities doesn't always bring happiness. Staying productive, perhaps working part-time or pursuing a new career may be a better approach. I like the idea of creating an Autonomy Fund rather than a Retirement Fund in order to achieve this goal. I plan to implement this approach into my practice.
  • Financial exploitation of seniors is a problem. To clarify, the session I attended on this topic did not teach us how to exploit seniors. Instead, it gave us tips for identifying exploitation as wells as tools and organizations we can use to stop it from happening.
  • A looming exodus of fee-planners. There will be quite a few planners retiring in the next 10-15 years - and there aren't enough planners to replace them.
  • How to identify super trends that affect financial markets. I really enjoyed this session! We discussed how changes in, among other things, global age wave, globalization, artificial intelligence, autonomous cars, and urbanization will affect the world. The goal is to determine how we can help our clients by planning for changes that will ultimately ripple through the economy. Bonus: I added some great books to my reading queue.
  • This presidential election is a mess. Okay, I already knew that. Judy Woodruff of the PBS NewsHour spoke about the current election. After that, she led a great discussion about how we got to this point and what could happen depending on who wins in November. Of course, all of this was from a financial perspective.

Listening / Reading / Watching

Here's what had my attention this week:

  • News about the election. It's a trainwreck that I can't stop watching.
  • Westworld on HBO. I'm in sci-fi nerd heaven right now. Who wouldn't want to watch a series about androids who appear to have realized their sole purpose is to entertain their guests' dark fantasies? So far, there's been some excellent commentary about the nature of violent open-world video games.