Happy Spring, Friends!
In many respects, First Quarter 2016 will be remembered for multiple unpredictable events from the drama witnessed in the race for the Whitehouse, to NCAA Tournament upsets, early April snowstorms across much of the Midwest and Northeast, and, of course, the volatile start we experienced in the financial markets. Where many of these events are concerned, we can exercise little or no control. Snow can be forecast, but can’t be prevented from falling. As voters, we have no control over a primary taking place in another state. And, as far as March Madness goes, who could have predicted that UNC’s double-clutch, game-tying 3-pointer (with less than five seconds to go) would be triumphantly answered by Villanova’s stunning, Championship-winning 3-pointer at the buzzer?
Interestingly, the financial markets represent one area where we can exercise a level of control. While no one can predict or effectively time the markets, investors can take steps to manage the amount of risk their portfolios are exposed to in any given period through professional advice that considers their individual goals, investment timeframe, and risk tolerance.
Consider this: an investor with a portfolio that simply mirrors a leading equity market index, such as the S&P 500, can expect to experience every bump along the road, during periods of volatility. And those bumps can hurt more than many people may realize over time. That’s because the greater the loss experienced, the higher the gain required to compensate for any loss in value. For example, a one-time loss of 50% in a portfolio valued at $100,000 would require a gain of 100% just to return to the original value before the loss occurred. To do so would require adopting a highly aggressive strategy. However, a strategy focused on aggressively chasing above-average market returns can potentially lead to even greater losses in volatile markets, resulting in a vicious cycle focused on chasing returns rather than a well-conceived strategy that seeks to manage risk.
Your PFS Team helps you manage risk in any market climate
At Planned Financial Services, our focus on helping to manage risk through professional asset allocation and active portfolio management seeks to limit your exposure to risk in all market climates. The experience and insight our team brings, combined with a disciplined planning process and the use of sophisticated Riskalyze software, allows us to effectively align your portfolio’s objectives with your individual tolerance for risk. While no growth-oriented strategy can (or should) eliminate all short-term market fluctuations, unlike a buy-and-hold or index strategy, our approach adjusts for market conditions, helping to manage the level of volatility your portfolio is exposed to in any given period with a goal to provide a smoother, more confident path to pursuing your individual objectives.
We believe an approach built on unbiased advice that is timely, relevant, actionable, and personalized to your goals and circumstances is more important than ever in today’s challenging marketplace. For additional thoughts and insights on factors and conditions driving current economic and market activity, be sure to read our Financial Markets Overview below and plan to join us on May 24th for our:
8th Annual Cleveland Economic Summit
You and your guests are invited to join us for our 8th Annual Cleveland Economic Summit on Tuesday, May 24, 2016 from 4:00 pm to 6:30 pm. Our late afternoon program will begin with a networking and cocktail reception featuring heavy hors d’oeuvres at one of Northeast Ohio’s most coveted treasures, the world renowned Cleveland Botanical Garden (Clark Hall). Complimentary parking will be provided at the onsite parking garage.
This year’s program will feature two distinguished speakers: LPL Financial Vice President and Market Strategist, Ryan Detrick, and Horizon Investments Chief Global Strategist and Washington-insider, Greg Valliere. They will join me in providing Ohio investors, business leaders, and taxpayers with keen insight on today’s dynamically-charged political and global economic landscape. You and your guests can expect to gain in-depth analysis and perspective on the key factors that will impact your business and investment decisions in the coming year, including:
- Election Year Policies & Politics: Sizing up the Washington factor and 2016 election cycle. What’s really at stake for local investors, taxpayers, and business leaders?
- Global Market Outlook: The increasing impact of geopolitical forces on your investment portfolio and business strategy, and why oil, China, and South Korea should matter to you.
- Interest Rate Environment: Will the Fed’s latest thinking help or hurt the recovery?
Please RSVP to reserve seats or a corporate table by May 18, 2016 to Michelle Velotta at 440.740.0130 ext. 221 or Michelle@PlannedFinancial.com. Space is limited so don’t delay!
Behind the Scenes at PFS
EO’s Octane magazine Features 10 Tips for Family Business Success
In March 2016, The Entrepreneur Organization (EO) featured my article: Top 10 Tips for Family Business Success in the most recent edition of EO’s Octane magazine. The magazine provides insights into the minds of entrepreneurial business leaders, and leverages their experiences to help entrepreneurs in every stage of their journey learn and grow. The value of this quarterly publication is derived from shared experiences, lessons learned, best practices, and tips from peers in varying industries and locations around the world. For more than a decade, I’ve been an active member of the Entrepreneur’s Organization, a global business network of 11,000+ leading entrepreneurs in 155 chapters and 48 countries.
Click here to access the March 2016 online edition of Octane magazine, or download a PDF of the article: Top 10 Tips for Family Business Success.
Join Us in Welcoming the Newest Addition to the PFS Family!
On Leap Day, PFS wealth advisor Cynthia Yang, CFA®, MA, and her husband Eric welcomed their new little bundle of joy, Gloria, weighing in at 7lbs., 11oz. on February 29, 2016. We’re happy to report that Mom, Dad, and baby are all doing well. Predictably—one out of three are getting adequate sleep.
Planned Financial Services was honored to be among an elite group of wealth advisory firms selected to attend* Barron’s Top Independent Advisors Summit in March. The Summit is an invitation-only event where experienced and successful independent financial advisors, industry executives, and investment companies gather to share advances and innovations in the industry while addressing some of its more pressing challenges like the new Department of Labor’s forthcoming rules on fiduciary guidance on retirement brokerage accounts, requiring a possible move to advisory accounts.
The conference not only offered a unique opportunity to share ideas and network, but provided highly detailed and thought-provoking perspectives from other advisor s on managing investments, serving client needs, and practice growth. In fact, much of the content was delivered by members of Barron’s Top Independent Advisors, making this conference a valuable opportunity to share thoughts and hear what is on the minds of leading practitioners in the industry as we move forward in today’s fast-paced and ever-changing business and investment environment.
EY Entrepreneur of the Year Nominee
I was recently honored to be recognized as a Northeast Ohio nominee for the prestigious EY Entrepreneur of the Year award, sponsored by Ernst & Young (EY). According to EY, awards are given to entrepreneurs who have demonstrated excellence and extraordinary success in such areas as innovation, financial performance, risk and personal commitment to their businesses and communities. Recognized as one of the most prestigious business award programs in the country, the EY Entrepreneur of the Year awards celebrate the country’s most innovative business leaders; award recipients will be announced in early June 2016.
PFS Business Structure Assessment
We continue to move forward with our exploration of business structures that can help to provide the greatest flexibility in meeting the changing and growing needs of our clients. As we mentioned earlier this year, we believe this assessment is necessary to enable us to effectively accommodate upcoming changes in the regulatory landscape, including the Department of Labor’s (DOL) new fiduciary rule, and overcome certain limitations on the part of broker-dealers in supporting our clients. (This is similar to the initiative we undertook in 2004, when we switched from WS Griffith Securities to LPL Financial as we outgrew the capabilities of WS Griffith.) While we do not expect our broker dealer relationship to change, how we provide registered advisory services can.
As we assess the best possible structure to serve your growing needs, we continue to focus on:
- Providing the flexibility our clients require to be able to custody assets at other custodians (outside of LPL Financial), as necessary.
- Retaining our ability to provide broad choice in investment and asset classes, especially in the alternative investment area, to help our clients better manage risk and thus add value and consistency across their portfolios.
- Creating parity and uniformity in fees and services across all client accounts. Modifications to our business structure will enable us to unify trading and registered investment advisory fees. This will ensure that clients who joined us as a result of our acquisition of Plax & Associates, as well as new clients who may join us as a result of any future acquisition, enjoy the same high level of service, access, and advice from our dedicated team.
We will continue to keep you posted on developments as we move forward with this initiative in 2016.
Website Development Update
We’re looking forward to the upcoming launch of our two dynamic website platforms to enhance the PFS client experience for you and the friends, relatives, colleagues, and business associates you refer to your PFS team. Please keep an eye out for our launch communications in the weeks ahead!
- The new Planned Financial Services site will retain its current site address, (PlannedFinancial.com), and update automatically upon launch. The site will provide individuals and families with an enhanced online experience, including a broad range of educational content, market research, and client scenarios delivered through different mediums, including video.
- Our new corporate retirement plan site will focus on bringing Simplicity in a Complex WorldTM, and will be rolled out simultaneously for our business and corporate clients.
The new sites will also be optimized for mobile access, making it easy for you to interact with us and access account information via your smartphone or tablet. Watch for updates and information about the site launches and any new content we add that may be of interest to you in the coming months.
Financial Markets Overview
We would love to say that this earnings season, which “unofficially” began on April 11, 2016, will bring better results than recent quarters, but that appears very unlikely. In fact, consensus estimates are calling for a 7% year-over-year decline in S&P 500 earnings for the quarter, the worst decline since the Great Recession and the third straight quarterly decline based on Thomson data (based on FactSet data, it’s the fourth). By most definitions, corporate America is in the midst of an earnings recession. On a brighter note, this quarter may mark an inflection point regarding the trajectory of earnings because the pressure on earnings from oil weakness and U.S. dollar strength is starting to abate.
In 2015, the combination of oil weakness and U.S. dollar strength wiped away high-single-digit S&P 500 earnings growth. Oil fell from over $100 per barrel in 2014 to as low as $26 in February 2016; while the U.S. dollar’s gains, which erode profits earned overseas, reached 20% during the second quarter of 2015. However, these drags have already begun to abate and are poised to potentially stage powerful reversals.
The reversal has begun quicker for the dollar. After annual increases between 12% and 20% during each of the four quarters of 2015, which delivered estimated 3–6% hits to S&P 500 earnings, the U.S. Dollar Index gained just 2% during the first quarter of 2016. If the dollar stays flat between now and year-end, 2–3% year-over-year declines will be an earnings tailwind during the remaining three quarters of the year.
The oil reversal should take longer to play out, but the annualized declines have started to moderate and could reverse during the second half of the year if oil prices move reasonably higher from current levels. If oil prices remain at current levels the rest of the year, year-over-year declines in average oil prices would continue through 2016. However, should oil prices return to the mid- to high $40s as we expect, oil may potentially begin to experience annual gains during the third quarter of this year.
Consensus estimates are already reflecting energy’s return to year-over-year earnings gains in the fourth quarter of 2016, and oil prices are currently up about 40% off of their February 2016 lows, so the wait for better earnings news from the sector may not be too far off. Corporate America has already lost its ability to use currency as an excuse, while the oil excuse is beginning to lose credibility. Hopefully, less reliance on these excuses will enable markets to obtain better and more useful information about business conditions.
What we’re watching and why
Whether earnings declines potentially trough this quarter, should these two drags continue to fade, is the key question for us this earnings season. Given how far 2016 estimates have fallen (down
5.6% year to date), they may at least hold steady as companies report results (a rise is seen as unlikely). Remember, many of these management teams delivered their 2016 expectations to investors in late January and early February 2016 when recession fears peaked, stocks and oil bottomed, and the U.S. dollar was near recent highs. Conditions are better now, suggesting the tone of guidance may be more positive. Some other things we will be keeping a close eye on this earnings season include:
- Profit margins - Wage pressures have increased gradually and have started to impact profit margins. We will be watching for signs of further pressures that could lead to margin compression. To date, corporate America has done a terrific job maintaining high profit margins.
- Capital allocation decisions - We would like to see companies deploy more capital to invest in future growth, which investors may view as a positive signal for the future. We are fine with companies returning capital to shareholders, but we would like to hear that companies are making capital spending a bigger priority.
- Emerging markets demand - China, which has been seeing some improvement in economic conditions, is always worth watching. But U.S. companies may continue to be impacted by weakness in the commodity-producing regions and geopolitical hotspots overseas such as Brazil, Russia, and South Africa.
We believe energy, financials, and healthcare are the key sectors to watch.
- For energy, we would like to see evidence of further U.S. production cuts beyond the 8% drop already experienced.
- The quarter may prove difficult again for financials given lower interest rates and financial market volatility.
- Healthcare results should be strong again, but scrutiny over high drug prices may persist.
A few thoughts on divergent profit measures…
The large gap between operating earnings and GAAP earnings has been receiving a lot of attention from the financial media, and becoming a concern among some investors that it may signal even more earnings troubles ahead. The biggest reason for that gap has been the energy downturn, which has led to significant downward adjustments of oil and gas reserves valuations. The impacts of the energy downturn are well known and the associated risks were seemingly more than priced in when oil prices bottomed earlier this year. The gap between earnings measures was the effect, not the cause, and does not suggest increased earnings quality concerns are warranted, in our opinion.
Other similar periods that saw significant divergences in these earnings measures included the bursting of the internet bubble and the financial crisis, when acquisitions, intellectual property, and financial assets were significantly devalued. During these periods, the gap between the operating measure and GAAP earnings has ranged as high as 30% depending on the data source used for the operating earnings calculation.
Earnings results will not be exciting, but the quarter may mark a trough in the earnings trajectory as the drags from oil and the dollar begin to abate. We continue to believe mid-single-digit earnings growth in the second half of 2016 is achievable, consistent with consensus estimates, and we hope to get more support for that view over the next four to six weeks.
We believe the key to weathering challenging market conditions is a commitment to a well-formulated plan and a long-term focus, which includes avoiding the temptation to adopt a herd mentality or make decisions based on emotions, both of which can easily derail your strategy as you pursue your life plans.
At Planned Financial Services, your Return on Life® is our top priority. We continue to make necessary adjustments to client portfolios, while providing clients with the education and information needed to retain a long-term perspective and focus on their individual goals along the way.
We thank you for your continued trust in your experienced team and remind you that if you need additional help or someone you know needs our advice, we are only a phone call away at 440.740.0130. We are always honored to help our clients’ friends and business associates take greater control of their future with the guidance from the PFS Team. We welcome and are grateful for the many introductions our clients continue to provide.
Real People…Real Answers.
Health, Happiness, and Good Fortune,
President & Founder
CPA, MT, PFS, CDFA, AIF
Securities and advisory services offered through LPL Financial, a Registered Investment Advisor, member FINRA/SIPC. Financial planning services offered through Planned Financial Services, a Registered Investment Advisor and separate entity from LPL Financial.