Archive for Economy and Investing

The Coming Bear Market

Economy and Investingon October 20th, 2017No Comments

This is the title of a recent article by economist Robert Shiller in which he discusses current economic and market conditions in the U.S. and compares them to prior times when markets declined. Shiller is notable for having published a book titled “Irrational Exuberance” in which he “predicted” the Great Recession. He seems to have been predicting another one ever since and runs the risk of exemplifying the broken clock syndrome. One thing that’s important to remember is that someone is always predicting bad things for the economy and the markets, every day, every year, so someone is always going to be able to claim prescience when the markets take a tumble. The reality is much messier, however, and prediction is usually a fool’s game. The economy and the markets are so complex and chaotic that they defy easy prediction. Even Shiller says not to base any investing decisions on his metrics, which leaves us wondering why he insists on regularly trying to scare people. For him, it seems, economics really is the dismal science.

Accepting as our starting point the folly of prediction, we can nonetheless examine conditions on the ground in order to assess the state of the world. First, the U.S. economy has been chugging along at a plus or minus 2% growth rate since the end of the Great Recession and doesn’t seem headed for anything but more of the same. The reason that economic expansions come to an end, historically, is that imbalances build up from one source or another. Low unemployment leads to wage inflation, for example, which spreads throughout the economy until the natural rise in interest rates – or a rise due to intervention by the Federal Reserve – tamps down economic activity, often leading to a recession. As we look around, we do find low unemployment, although it’s deceptive because the “participation rate” – the proportion of the workforce actively looking for employment – is also quite low by historical standards. Which means there’s a lot of room for new workers to decide to rejoin the game. In any case, we’re seeing modest rises in wages but nothing scary. Interest rates remain low and the Federal Reserve is being extremely circumspect in how it returns to a more “normal” monetary environment. The stock market has had an impressive rise and is sporting valuations, as represented by the price-to-earnings ratio, that are above average. Of course, when interest and inflation rates are well below average, you’d expect market valuations to be above average. And the rise doesn’t look like investors are building Castles in the Air, a phrase used by economist Burton Malkiel to describe conditions where investors are playing a greater fool game of buying just because they think prices will go up rather than on fundamentals. The reality is that earnings for U.S. corporations have been extremely strong.

Just as importantly, overseas markets, which represent half of your portfolio, are at a much earlier stage of recovery than the U.S. and have much further to go. And your overseas returns have been enhanced by a weakening dollar. Having said all that, it’s important to note that any significant decline in U.S. markets would likely be accompanied by declines worldwide. In the short-run, everything moves together but in the long-run, valuation levels will drive outcomes.

Finally, no matter what conditions look like, trying to time these things is not a winning strategy, especially if, as we do, you believe in the fundamental resilience and propensity for growth of your fellow human beings. And not only are human beings resilient, but so is your portfolio, which is designed to have a stable reserve that can carry you through six to seven years of a downturn if necessary. Which is to say, as long as you can weather a short-term decline – and you can – markets will always recover and grow in the long-run.

There will be a bear market, we just don’t know when, and nor should we care when, because it will only be a blip to be endured, not a permanent cause for harm.

Video: Yeske Buie Investment Philosophy and Process

Economy and Investing, Videos, Webinarson July 12th, 2017No Comments

Our approach to assembling and managing client portfolios flows from our Worldview – our grounded beliefs about how the world works – which gives rise to our investment philosophy and the systematic process by which it is implemented. Learn how we implement our evidence based process for assembling and managing client portfolios in this 19 minute video.

Related video: The Wisdom of Crowds

The 2017 Trends in Investing Survey

Economy and Investing, Yeske Buie in the Mediaon July 11th, 2017No Comments

Summary By: Lauren Mireles, RP®

The Financial Planning Association® (FPA®) and the Journal of Financial Planning recently released the results of their annual “Trends in Investing Survey”. The survey includes responses from over 300 advisors of various backgrounds and shows advisor data on investments used, diversification, asset allocation, rebalancing and more. One of the most notable data points is the resounding preference of ETFs for the third year in a row.

In his role as Practitioner Editor for the Journal of Financial Planning, Dave assisted in the development and interpretation of the survey. Helping to shed some light on the survey, Dave shared his thoughts with CNBC reporter, Sarah O’Brien.

Regarding the popularity of ETFs for the third consecutive year, Dave shares:

“ETFs have gone from representing a very small part of [advisors’] tool kit to now representing a very significant part,” said certified financial planner David Yeske, managing director of Yeske Buie. “One of the things it suggests is that financial planners are ever more convinced that active management is hard,” said Yeske.

With the next most popular investment vehicle being cash and cash equivalents, Dave says:

As for the increase in cash-type investments, Yeske said it could signal that advisors are taking a more conservative stance on the market. “This makes me think that planners are feeling a sense of caution about the investment world and are building resilience in client portfolios,” said Yeske, who worked on the survey in his role as an editor at the Journal of Financial Planning.

For the first time, the survey explored portfolio diversification. Dave said of the results:

Yeske at Yeske Buie said that, in the short-term, it’s difficult to prevent portfolio volatility through diversification. “No matter how you diversify, everything will move [up or down] together in the short run,” Yeske said. “[…] diversity is more about achieving a certain amount of investment security and safety over the long-term.”

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Short Take: Is the Stock Market Expensive?

Economy and Investingon April 4th, 2017No Comments

Ever since the Dow crossed the 20,000 mark, we’ve been hearing from various quarters that the party is, most assuredly, over. As we noted at the time (Market Note: Dow 20,000), that milestone is just a number. And, of course, the Dow represents just 30 stocks in a  world in which 50,000 stocks are publicly traded, so it’s a bit of a stretch to use it as a proxy for “the market.”

More important is the notion of valuation, which is to say, how much do you have to pay to lay claim to a dollar of assets or a dollar of earnings? That’s a better predictor of future returns than the price of an index. And, perhaps unsurprisingly, the cheaper you can buy those assets or earnings, the higher the return you can expect. Those stocks that trade at low prices relative to earnings or assets are called “value” stocks, and we like them. A lot. So much so that we strongly tilt all of our portfolio allocations toward “value,” whether we’re talking about US Large or Small Company Stocks or the same categories in overseas markets. As a consequence, our portfolios don’t look like “the market,” especially if your idea of the market is the Dow or the S&P 500.

That the S&P 500’s current price-to-earnings (P/E) ratio (how much you have to pay to claim a dollar of earnings) is above 26, compared to a long-run average of 15, is one of the reasons some are suggesting that things may be getting a bit frothy. As we’ve previously noted, comparing the current P/E to the historical average isn’t something that should be done in a vacuum. That average is the result of periods like the late 1970s, when high interest and inflation rates drove the P/E to single digits, and periods like the present, where we’re still enjoying low interest and inflation rates. Having said that, let’s take a look at the current valuation levels of the average Yeske Buie portfolio.

One of the first things to notice is that the All Country World Index, our global stock market benchmark, sports a much lower P/E than the S&P 500, a level of 18 versus 26. This is reflective of the fact that stock markets outside the US have been slower to recover from the Great Recession and are not trading at above-average levels. The second thing to notice is that the Yeske Buie portfolio has a P/E that’s lower still at 16. This reflects our intentional tilt toward value stocks. You’ll also see that the average size of the stocks in our portfolio is much smaller than the benchmark as a consequence of our other intentional focus on small company stocks, which, like value stocks, are expected to produce higher returns over the long run.  A final point worth noting is that the low costs associated with the institutional class mutual funds we use results in aggregate weighted fund level fees that are are much lower than the average mutual fund’s fees as reported by Morningstar. It’s important to control what you can control when investing and expenses are one of those things.

So the next time someone says to you that the “market” is expensive, be sure to ask them, “which market?”

Around the World in 60 Minutes

Economy and Investing, Firm News & Events, Webinarson March 24th, 2017No Comments

The world is in a rare state of flux, with a populist, anti-trade president newly installed in the White House, and populist, anti-EU parties on the rise all across the European continent. Economic conditions in the US and abroad, meanwhile, are showing positive trends, but it’s still to be seen whether the Federal Reserve and European Central Bank can successfully walk the thin line between growth and inflation. In this one hour trip around the world, we share our analyses and recommendations for weathering whatever may come.

(Click the bracket icon in the bottom right corner of the video to enlarge)

ADDITIONAL MATERIALS:

Fundamentals of Fixed Income

Economy and Investingon February 8th, 2017No Comments

Written By: Ryan Klemm

At Yeske Buie, we use a few bond funds to obtain exposure to fixed income investments for our Clients. While fixed income may not be the most exciting piece of your portfolio, it is a necessary part of a sound investment strategy. The more “exciting” pieces of your portfolio are the stocks which typically receive much of an investor’s attention due to their role in creating higher returns as a percentage of the entire portfolio. However, fixed income positions, or bonds, play an equally important role  because of their ability to help reduce the volatility of returns and the emotional volatility that comes with investing. They do this by diversifying your portfolio to create a buffer that provides a safety net and by earning a steady return through long-term holding strategies to reduce the overall risk in your portfolio.

But, what is a bond and how do we use bond funds in your portfolios?

Bonds represent an obligation for the borrower to pay a set amount of interest (current income) and to repay the original borrowed amount (principal) at the loan’s maturity date. Individual bonds can be selected to increase your exposure to the fixed income market, however there is a more efficient way to obtain the same exposure. The creation of bond mutual funds have made it easier for an individual to own a piece of hundreds of different fixed income obligations. With bond funds, the investor loses the fixed interest payment, however they greatly increase their exposure and therefore enhance the diversification of their overall portfolio. Bonds are inherently subject to interest rate risk and not all asset classes react the same way to interest rate movement. The ability to increase exposure of fixed-income positions through a bond fund ultimately allows for the smoothing of volatile returns in a changing economic environment. The chart below shows the performance of stocks in comparison to bonds if you had invested $1 back in 1926. The lines representing stocks are constantly rising and falling through their path to an increased return, however if you look at the bond’s path through the same timeframe it is a lot smoother. Bonds act as the “stable reserve” in your investments.

It is important to keep in mind that not all bond funds are created equal. When choosing a bond fund, there are some things to look for when determining which fund bests fits your needs. With the expected return on bonds already being relatively lower, you should ensure that the fund you choose has a low management fee. Expense ratios are a useful tool when comparing different funds and can be used as a deciding variable when investing. The percentage the manager takes ultimately affects your overall return. Next, look at the quality of the fund you’re purchasing and the exposure the fund manager has taken to the overall bond market. Looking for funds that have bonds with short-term to intermediate-term maturities and investment quality ratings is important to the overall financial health of your portfolio. High Yield or “Junk Bonds” create an opportunity for increased return, however the default risk is much greater than choosing a more highly rated bond.

When it comes to your portfolio, we use a few bond funds to obtain exposure to fixed income investments. For Clients who are still working and accumulating assets, the bond funds provide a pool from which we can take money and rebalance the stock funds. For a retired Client, we view the bonds as a reserve that provides liquidity for spending needs. Within the context of our Safe-Spending Policies, a client in retirement holds six years’ worth of spending in that “stable reserve.” In times of market turmoil, spending needs are strictly covered by the bond funds, giving the stocks time to recover and enabling us to avoid “selling low”.

Fixed income may not be the most exciting piece of your portfolio, but it is a necessary part of a sound investment strategy. As always, if you have any questions about any of the funds in your portfolio, we’re always here to talk!

Market Note: Dow 20,000

Economy and Investingon January 26th, 2017No Comments

The Dow closed above 20,000 for the first time on Wednesday, repeating the feat the following day. There are headlines any time the Dow crosses a 1,000 mark and that’s especially true of this latest milestone. Here’s our take.

First of all, and to state the obvious, 20,000 is just a number, no matter how much those four zeros excite the eye. Still, it’s hard not to ask what, if anything, do such milestones portend for the future. Not very much it turns out. If you look at the performance of the S&P 500 since 1926, it provided a positive return 80% of the time in the year following a new monthly high. Not much different than the 75% of the time it produced a positive one-year return following any month. Obviously, the stock market has a bias toward positive returns, notwithstanding the occasional reversal.

None of this means we can’t make quantitative assessments based on valuation levels, of course, and the Dow and S&P 500 are unquestionably at above average valuations just now. The current price-to-earnings ratio (P/E), a common valuation metric, is about 25 for the S&P 500, versus a long-run average closer to 15. There are two things worth noting: first, this is not a static number; one-year forward looking earnings estimate put the P/E closer to 17. It’s also worth noting that the average P/E is a function of both good periods and bad, with the P/E having sunk as low as 7 during the high interest and inflation rates of the late nineteen seventies. With interest and inflation rates currently low, albeit rising, and the economy chugging steadily along, including a nice uptick in the third quarter of last year, an above average valuation is not that surprising.

A lot of things drive market valuations, and not all of them involve investor expectations for earnings and interest rates. There’s also this thing called “sentiment” that can have a notable influence on valuations. Nonetheless, our starting hypothesis, as ever, is that investors are buying and selling at prices they believe will generate an attractive return going forward. Unpleasant surprises can upend those beliefs and send prices down, but over the long-run, betting against the collective wisdom of the market hasn’t been a winning proposition.

Overseas markets, meanwhile, are still sporting below-average valuations, which could suggest significant upside, especially if higher economic growth finally takes hold. There are headwinds, to be sure. The full effect of the U.K.’s Brexit vote has yet to be seen and is likely to be negative, though that assessment could be confounded if the country can maintain its dominate position in financial services after exiting the EU. It’s easy to stop a bushel of wheat or container of coal at the border, but financial services tend to be delivered over the Internet, where domicile may be less of an issue.

The other developments to watch are elections in the Netherlands, France, and Germany, where populist, anti-EU politicians are making a strong showing. Elections may also be called in Italy before the year is out, so politics will take center stage in the second largest market after the U.S. On the economic front, the EU has a good shot at boosting exports and sparking higher growth if the dollar remains strong. The greenback’s strength has been underpinned by the Fed’s stated commitment to a program of steadily rising interest rates, something that’s likely to continue, though we discovered last week that the new president is capable of sending the greenback into a tailspin with an offhand comment. So this will be another economic variable to watch.

So, enjoy the charts and fun facts that will no doubt fill the weekend papers in honor of the Dow’s latest milestone (it took 76 years to first cross the 1,000 mark!), but know that 20,000 is not a call to action, it’s just a number.

2016 Market Review: The Year of Living Dangerously

Economy and Investingon January 12th, 2017No Comments

The markets, which is to say investors, hate surprises, though that’s pretty much all we get day-by-day. It’s called news.  But some years carry bigger surprises than others and 2016 surely falls into that category. From economics to markets to politics, 2016 provided one plot twist after another. As far as markets are concerned, the year ended well, notwithstanding a bit of a roller coaster ride along the way. Herewith, we offer a brief recap of what happened in the economy, the markets, and your portfolio, with a nod to the year to come.

The Roller Coaster

The year opened with markets sliding worldwide. Our core stock portfolio fell by more than 6% in January before sliding another half percent in February, only to spring back with an 8% gain in March.  And although there were three more down months through the balance of the year, the real theme was Onward and Upward.  For the year as a whole, our core stock portfolio (which excludes bonds) was up nearly 14%, proving yet again that the markets are like San Francisco weather: if you don’t like what you’re seeing, just wait around a little while.

The Mighty Dollar

Before moving on to a breakdown of results by asset class, or investment category, it’s worth saying something about the dollar, which surged by nearly 20% against other major currencies back in 2014 and has remained strong ever since.  The changing value of the dollar relative to other currencies is noteworthy for us, as half of our portfolios are invested overseas.  All other things being equal, a rising dollar takes away some of the returns we earn on non-US investments when those returns are translated back into dollars, and a falling dollar does the opposite, boosting those overseas returns. The dollar continued our roller coaster theme by falling 7% during the first half of the year, only to rise 11% over the remainder, for a net 3% gain on the year. While the dollar is probably overvalued by most fundamental measures, these don’t mean much in the short run.  In the long run, however, we can expect an eventual tailwind for our overseas investments as economic fundamentals reassert themselves.  Until then, it’s a good time to travel overseas.

The Results

As you’ll see from the breakdown below, with the exception of Emerging Markets, which made a strong comeback in the latter half of the year, the biggest gains were to be found in the US. And the star of the show was surely small company stocks, which racked up gains of nearly 30% for the year, the best showing for US small caps since 2013, when they rose by more than 40%. The remaining categories chalked up gains ranging from 5% to 12%, with those non-US returns being shaved just a bit by the small net rise in the value of the dollar.

Click to Enlarge Image

The Outlook

Valuation levels in US markets are higher than the long run average, prompting some to ask whether the party is over. We have two observations on that point: first, valuation levels don’t exist in a vacuum, they’re also a function of interest and inflation rates, both of which are still very low. And while both interest and inflation have started rising and will likely accelerate in the coming year and beyond, stimulative economic policies may well keep a firm foundation under the market and even pave the way for continued growth.  More importantly, for truly global investors, it’s worth noting that markets outside the US are sporting valuation levels well below their long-run average, suggesting plenty of upside if global growth continues.

For a more detailed look at the outlook for 2017 and beyond, please join us for a live webinar on January 18:

Will the Trump Administration Be GREAT for Your Finances?

Happy New Year from the Yeske Buie Team!

Will the Trump administration be GREAT for your finances?

Economy and Investing, Firm News & Eventson December 15th, 2016No Comments

As Inauguration Day nears, the following questions may be on your mind. What impact will the new administration’s proposals have on the economy and the markets? How will rising interest and inflation rates impact your finances? What will happen to markets outside the US? And what about Social Security and Medicare? We invite you to join us on Wednesday, January 18th at 11:00am PT / 2:00pm ET as Dr. Dave Yeske hosts a free live webinar where you will learn:

  • What actions to take now to build more resilience into your financial affairs.
  • Strategies for dealing with rising interest rates.
  • How to plan for coming changes in the tax and estate laws, and more!

Register for the webinar today using the link below and if you have any friends, family, or colleagues who may find this seminar valuable, please feel free to share the link with them!

Will the Trump Administration be GREAT for your Finances?

Cheers to Investing

Dimensional Fund Advisors, Economy and Investing, Yeske Buie Millennialon November 17th, 2016No Comments

Holiday turkeyRecently, our strategic partners at Dimensional Fund Advisors (DFA) shared with us a playful comparison between the process of making wine and investment management. We hope you enjoy the following piece by Vice President of DFA Australia Limited, Jim Parker.

A host of variables can determine whether a wine is great, good, mediocre, or undrinkable. These include the quality of the grapes, soil, position of the vineyard, weather, irrigation, and timing of the harvest.

And picking the grapes isn’t the end of it. The harvest must be sorted, the grapes crushed and pressed, then fermented, clarified, aged, and bottled. At any stage of the process, a lack of attention to detail can spoil the final outcome.

As in winemaking, investment management requires attention to detail—researching and identifying the dimensions of expected returns, designing strategies to capture the desired premiums, building diversified portfolios, and implementing efficiently.

Just as winemakers don’t have any say over the weather, investment managers can’t control the markets. Not every harvest will produce an excellent vintage, but expert professionals can still maximize their chances of success by putting their greatest efforts into things they can influence.

For winemakers, that may be taking extreme care in picking the grapes at a time that delivers the desired balance of acidity and sweetness. For investment managers, it can mean precisely targeting the desired premiums while ensuring sufficient diversification to lessen idiosyncratic risk in the portfolio.

Winemaking is as much an art as a science. While fermentation comes naturally, the winemaker must still guide the process, using a variety of techniques to ensure the wine is as close as possible in style and flavor to what he is seeking to achieve.

Similarly in investment, real world frictions mean that basing one’s approach purely on a theoretical model is unlikely to be successful. For instance, tradeoffs must continually be made between the expected benefits of buying particular securities and the expected costs of the transactions. Managing the effects of momentum and being mindful of tax considerations are among the other issues to be balanced.

Just as in viticulture, investment outcomes can also be affected by any number of external events—such as the imposition of capital controls in an emerging market, or changes in regulation, a severe financial crisis, or  a major geopolitical event.

Dealing with uncertainty and navigating the “unknown unknowns” are part of the job. So investment managers must build into their processes a level of resilience— through diversification for instance—so they have sufficient flexibility to work around unforeseen events.

Ultimately, the benefits of discipline and attention to detail are easy to overlook. Great ideas count for a lot, of course. But great ideas without efficient implementation can mean even the best grapes in the world go to waste.


“Our deepest fear is not that we are inadequate. Our deepest fear is that we are powerful beyond measure. It is our light, not our darkness that most frightens us. We ask ourselves, Who am I to be brilliant, gorgeous, talented, fabulous? Actually, who are you not to be? Your playing small does not serve the world. There is nothing enlightened about shrinking so that others won't feel insecure around you. We are all meant to shine. And as we let our own light shine, we unconsciously give others permission to do the same. As we are liberated from our own fear, our presence automatically liberates others.” ~Marianne Williamson