The Quarter in Review | 2Q 2018

THE PAST QUARTER HAD ITS FAIR SHARE OF MARKET-MOVING EVENTS, INCLUDING ANOTHER FEDERAL (FED) RATE HIKE, A FLATTENING YIELD CURVE, GEO-POLITICAL EVENTS AND POTENTIAL TARIFF WARS.  After last quarter’s volatile downturn, second quarter results brought overall year-to-date market returns back into positive territory. This reflects the continued low inflationary expansion of the U.S. economy and the related strong growth in corporate profits. 

 EQUITIES The U.S. Stock market rallied, gaining 3.89 percent while the broader Bond Markets continued their slide, down 0.16 percent respectively. Internationally developed markets (Europe, Japan, Canada) were down marginally 0.75 percent for the period. Unlike the first quarter when they were the top performing asset class, Emerging Markets were the worst this quarter, selling off sharply, down 7.96 percent.  A globally diversified portfolio of 50/50 stocks/bonds earned a modestly positive result, up 0.57 percent for the quarter.

On the large cap side, growth stocks continued to outpace value stocks, 5.76 to 1.18 percent.  Whereas small cap stocks, value outperformed growth, 8.30 to 7.23 percent – a first in several years. 

 FIXED INCOME The Federal Reserve continued its plan to increase rates in a measured way, increasing interest rates by a quarter point in June with at least one more additional rate increase expected this year. 

The yield curve has been a popular discussion this year with questions about whether it will “invert”.  An inverted yield curve means short-term rates rise above long-term rates. When this happens, typically it is a strong predictor that within 18 to 24 months, the economy will enter a recessionary period.  Currently rates are tracking towards “inverting” by the end of this year. Even if that is the case, a recession would probably not begin until sometime in year 2020.

In addition to the U.S. Federal Reserve, the European Central Bank (ECB) announced its intention to cap its quantitative easing program, trending it down so it wraps up by year end. With this, the ECB may be in line to increase interest rates in Europe early next year.

 ALTERNATIVES Looking over other investment categories, the U.S. REIT index rebounded sharply from its sizable first quarter sell-off and was the top performing asset class for the period, up 9.99 percent. The Bloomberg Commodity Index eked out a small gain, up 0.40 percent for the period, as the small net change masked the volatility underneath the index. Oil surged, up 16 percent at one end of the spectrum, and soybeans were down 18 percent at the other.

 LOOKING FORWARD Both tax and regulatory reform provided a huge jolt to earnings in the first quarter and to estimates for the remainder of this year. When it comes to the connection between economic and/or corporate earnings and the stock market, it’s worth considering the often expressed view that “better or worse tends to matter more than good or bad”. This is true as it relates to earnings growth and their related stock prices. 

Comparisons will begin to get more difficult, so expect a slowing in the year-over-year growth rate in corporate earnings. In addition, there are some high hurdles that earnings growth will face in the near-to-medium term, including potential trade tariff hits, rising labor and input costs, the strong dollar and rising interest rates.

Another reason to expect bouts of volatility is that we are in a midterm election year. History has not been kind to midterm election years in terms of stock market weakness. As always, a disciplined approach and a diversified portfolio continues to be the best approach to these times.

INFLATION During uncertain or volatile times, I get the question, why do I need to take any risks with my investments?  One of the key reasons to not get too conservative is to protect against inflation. When prices of goods and services increase over time, consumers can buy fewer of them with every dollar.  This erosion of purchasing power of wealth is called inflation.  Therefore, a minimum of keeping pace with, if not ahead of inflation, is an important element of investing.  

Over time, investments in stocks have historically strongly outperformed inflation as outlined on the attached article from Dimensional Fund Advisors. Whereas investing in “low risk” investments such as short-term Treasury Bills have actually badly lagged inflation. The lesson here is that volatility is not the only type of risk that should concern investors. Ultimately, investors need to have a portion of their portfolio allocated to growth investments that can outpace inflation to help maintain their standard of living and grow their wealth. I hope you find the attached article educational and enlightening.

We greatly appreciate the opportunity to work with each of you and hope you have been enjoying your summer.  As always, if you have any questions or concerns, please contact us and we will be happy to discuss.

Please click here to read the complete TFA Quarter in Review | 2Q 2018.

 

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The Quarter in Review | 1Q 2018

STOCK MARKETS HAVE BEHAVED MUCH DIFFERENTLY IN THE LAST TWO MONTHS AS COMPARED TO THE PREVIOUS YEAR. The 5.6 percent rise for the S&P500 Index was the biggest January gain since 1997. This was promptly followed by the largest ever one-day spike in volatility and the first 10 percent correction in over two years. The correction in mid-February was then followed by an 8 percent rebound. A main takeaway from all of this and what we had highlighted to expect in our last quarterly review - volatility is back. Many factors are contributing to this including the Federal Reserve’s continued upward push of interest rates, inflation concerns, and potential protectionist actions by the current administration.  All of these factors adding to already heighted geopolitical risks.

In the first quarter, both the U.S. Stock and Bond Markets were down 0.64 percent, and 1.46 percent respectively. Internationally developed markets (Europe, Japan, Canada) fell even further, down 2.04 percent for the period. Emerging Markets were the only equity asset class achieving positive results up 1.42 percent for the quarter. A globally diversified portfolio of 50/50 stocks/bonds also had negative returns, down 0.19 percent for the quarter.

Even with increasing concerns about valuation levels, growth stocks continued to outpace value. Both small and large cap growth stocks achieved solid returns, up 2.30 and 1.42 percent respectively. Even though 10-year periods and longer have outperformed growth, value stocks languished again down over 2.5 percent for the quarter.

Looking over other investment categories, the U.S. REIT index had the biggest drop of any asset class for the quarter, down 7.43 percent. The Bloomberg Commodity Index eked out a small gain, up 0.40 percent for the first quarter led by price increases in corn, soybeans and oil.

The Federal Reserve, under the direction of newly installed Chairman Jerome Powell and with the backdrop of a strengthening US economy, increased interest rates by a quarter point in March. Rising interest rates and the expectation of two additional rate increases this year have been the drivers behind the bond markets negative returns.

Looking forward

The Trump administration recently announced a potential $50 billion worth of tariffs on Chinese imports creating concern that trade wars will derail economic growth. With perspective though, it would appear these salvos are more about positioning for negotiations than crippling the economy. 

The U.S. economy is on solid economic footing and there is reason to believe the economy will continue to be strong. 2018 will be the first full year impacted by the recent corporate tax cuts, and time will tell what impact these cuts have on driving growth. All indicators currently lead us to believe that unemployment will stay low, business confidence will remain at current levels and that the Federal Reserve will take a measured approach to increasing interest rates. 

That said, our concern is that corporate earnings growth realized in the latter half of 2018 will not meet the heighted expectations of investors. According to Thomson Reuters, the estimated first quarter year-over-year growth rate for the S&P500 is 18.5 percent which would be the highest rate of growth in seven years. This is coming off of seven consecutive quarters of accelerating economic growth, matching the longest streak in the last 70 years.    We expect overall corporate earnings to continue to be strong.  However, unless new records are set for consecutive quarters of accelerating growth, we would anticipate equity returns to be moderate in the second half of the year.

An outside perspective

Markets have been up and down this year, which can be difficult for many investors to live with. During periods like these, hearing stories about how other people deal with uncertainty can be helpful.

Dave Goetsch is an executive producer of The Big Bang Theory. Even though he and the other writers on the show make common sense out of complicated science for a living, Dave used to respond to market fluctuations with panic rather than logic. But his point of view changed fundamentally when he learned to have a different perspective on investing and discovered a new path for his financial life.

I would encourage you to read Dave’s story, as told through his Dimensional Funds relationship. I think you’ll find it to be a source of calm. It also showcases the benefits of having an investment philosophy you can stick with.

We greatly appreciate the opportunity to work with each of you and hope your 2018 is off to a great start. As always, if you have any questions or concerns, please contact us and we would be happy to discuss.

Please click here to read the complete TFA Quarter in Review | 1Q 2018.

 

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Recent Market Volatility

Volatility, which had been fairly minimal the last 24 months, came roaring back over the last week.  On Monday, the DOW experienced an 1,175 point drop, its largest single point fall ever.  From a percentage perspective, the drop was 4.6 percent.  While that also is significant, it was nowhere near a record. 

The stock market’s pullback began in earnest last week, as rising bond yields and a stronger-than-expected pickup in wage growth led some investors to express concerns that a long streak of tepid inflation could be drawing to a close. Job gains in January, as reported last Friday, fueled those concerns, turning a spotlight on the Federal Reserve and its timeline for interest rate hikes, raising the odds the central bank will increase its benchmark rate in March. The report also offered more evidence that the U.S. economy is gaining strength with wages climbing at their strongest pace since 2009. The fundamental backdrop of the economy has not changed though; strong corporate earnings, positive economic data coupled with business-friendly tax reform. Roughly 80 percent of S&P 500 companies that have reported results for the fourth quarter have posted sales that beat analysts’ expectations, on track for the most positive surprises since at least 2008, according to FactSet.

WHY THE SELL OFF?

If the economic fundamentals are good, then why is the market selling off?  As we have discussed individually in client meetings and in our ongoing communications, the market is trading at much higher multiples than historical norms. Secondly, the speed at which negative sentiment can perpetuate into the psyche of investors and ultimately the markets can be dramatic. This, coupled with emotional selling by investors focused on the short term, can create sizable market sell-offs.  Lastly, volatility in the markets, although unnerving at times, is part and parcel of investing.  We have not experienced this type of volatility lately so it feels different.

WHAT DOES “NORMAL” VOLATILITY LOOK LIKE?

JP Morgan maintains an interesting graph outlining intra-year volatility of the S&P 500 Index.  On the graph, the gray bars represent the percentage return of the Index for that year and the red dots represent intra-year percentage drops of the Index.  For example, in 1980 the S&P 500 Index returned 26 percent for the year but experienced an intra-year drop of 17 percent.  In 2017, the index returned 19 percent but only experienced an intra-year drop of 3 percent, unusually low volatility. As noted on the graph, over the last 38 years (1980 – 2017) the average “intra-year drop” in the S&P 500 was 13.8 percent.  Thus, in an average year the S&P 500 will drop almost 14 percent from its intra-year high to an intra-year low. Yet in 29 of the last 38 years the S&P 500 still realized positive returns for that year. 

Over the last few days, the S&P 500 has dropped over 7 percent from its all-time high reached earlier this year, so nothing out of line. In the short term, we do not know how long the current turbulence will last. Regardless, we will continue to focus on exercising prudent and disciplined judgment in managing client investments.

Staying disciplined to our investment principles is what allows us to act differently than the crowd and be able to focus on the long-term goal of growing your investments and achieving your financial goals.

In closing, we would like to reinforce that events like this will happen. In fact, we should all expect it. At times like this, we continue to recommend patience and discipline. However, we recognize that knowing volatility will happen does not remove the human emotional element of fear and concern that can arise during unpredictable market swings. 

Please let us know if you have any questions or would like to discuss in more detail.

 

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The Quarter in Review | 4Q 2017

AT THE BEGINNING OF 2017, A COMMON VIEW AMONG MONEY MANAGERS AND ANALYSTS WAS THAT THE FINANCIAL MARKETS WOULD NOT REPEAT THEIR STRONG RETURNS FROM 2016.  Many cited the uncertain global economy, political turmoil in the US, implementation of Brexit, conflicts in the Middle East, North Korea’s weapons buildup and other factors.  The global equity markets defied their predictions as major equity indices posted strong returns for the year. 

In the fourth quarter alone, the US Stock Market was up 6.34 percent, while Emerging Markets continued their year-long leadership position, up 7.44 percent for the period.  A globally diversified portfolio of 50/50 stocks/bonds returned 3.02 percent for the quarter and 12.14 percent for the year.

In the US, Large cap growth stocks led the returns, up 7.86 percent for the quarter and 30.21 percent for the year.  By comparison, Large cap value stocks as represented by the Russell 3000 value index, returned just 13.2 percent for the year.  Small cap stocks under-performed large cap stocks by a similar margin.  However, of note, over almost every full market cycle, small cap and value stocks have outperformed their counterpart large cap and growth stocks. 

Despite strong returns, the US ranked in the bottom half of countries for the year, placing 35th out of 47 countries in the MSCI All Country World Index.  Thus, reinforcing our continued call for holding diversified portfolios, not just by stock size or industry, but also geographically.

In 2017, the global economy showed strong growth, with 45 out of 47 countries tracked by the Organization for Economic Cooperation and Development (OECD) on pace to expand and the markets reflected this.  Non-US Internationally Developed countries (Europe, Japan, Canada) logged a 24.2 percent return for the year. Country level returns were even more dispersed during the fourth quarter, ranging from 9.28 percent gain in Singapore to a -2.91 percent loss in Sweden.  Emerging Markets had an even more impressive year, up 5.28 percent in the quarter and 37.2 percent return for the year. 

In Fixed Income, through actions of the Federal Reserve, the yield curve flattened as interest rates increased on the short end and decreased on the long end of the curve.   Both US and International fixed income markets posted positive returns in 2017.  The Bloomberg Barclays US Aggregate Bond Index gained 3.54 percent, while the global bond index gained just 1.13 percent. 

Looking over other investment categories, the US REIT index was up 1.98 percent for the quarter and 3.76 percent for the year.  The Bloomberg Commodities Index returned 4.7 percent for the fourth quarter but just 1.7 percent for the full year.

LOOKING FORWARD, in the near term, positive developments currently far outweigh the negatives.

World economies seem to be gaining rather than losing steam and do not appear likely to be running out anytime soon.  Unemployment in the US is down to 4.1%, the lowest level in 60 years, nearing “full employment” (albeit with a lower level of participation rate than historical norms).  Recent corporate tax law changes have now put the US on a more equal footing and should result in increased profits.  Just recently, Apple announced it would be bringing back the vast majority of the $252 Billion in cash held abroad to make a sizable investment in the United States. Even though the Federal Reserve has announced plans to continue rate increases in 2018, low inflation levels mean this will continue at a measured pace which the markets tend to like.  Lastly, corporate earnings continue to grow at a healthy pace.

Even with all of the positive news and momentum, there are a number of areas about which to be concerned.  The recovery that started in 2009 has become one of the longest in history (now at 103 months old) which makes most wonder, how long can this last?   Market valuations are now among the highest ever no matter how you want to calculate it.  Lastly, market volatility has been almost non-existent.  2017 was the first year in history in which the S&P 500 did not decline from high to low by more than 3 percent at least once.  The last period with any significant market volatility was January 2016 when the market dropped by more than 7 percent over a two-week period.  Market volatility is part of investing; one would reasonably expect volatility to return to a greater degree in 2018.

The year of 2017 included numerous examples of the difficulty of predicting the performance of markets, the importance of diversification and the need to maintain investment discipline.  Does January’s strong performance indicate 2018 will also be a good investment year?  That is difficult to say.  Attached is an article titled "As Goes January, So Goes the Year?" from Dimensional Funds addressing just that question; we believe you will find it of interest.

We wish all of you a blessed and fulfilling 2018 and greatly appreciate the loyalty and trust you have placed in us.  As always, if you have any questions or concerns, please contact us and we would be happy to discuss.

Please click here to read the complete TFA Quarter in Review | 4Q 2017.

 

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Summary of Tax Bill and Recommended Considerations

On December 19, 2017, Congress passed the final version of the Tax Cuts and Jobs Act.  The Senate passed it early on December 20, 2017. 

The final bill cuts the corporate tax rate from 35 percent to 21 percent beginning in 2018. The top individual tax rate will drop to 37 percent. The tax bill cuts income tax rates, doubles the standard deduction, and eliminates personal exemptions. The corporate cuts are permanent, while the individual changes expire at the end of 2025.

Here's a summary of key aspects of the Bill:

Income Tax Brackets

The final tax bill keeps the seven income tax brackets but lowers tax rates.

These rates revert to the current rate in 2026. Until then, the plan creates the following chart.

Income Tax Rate

Income Levels for Those Filing As:

Current          Tax Bill              Single                                              Married-Joint

10%                 10%                   $0-$9,525                                       $0-$19,050

15%                 12%                    $9,525-$38,700                              $19,050-$77,400

25%                22%                    $38,700-$82,500                           $77,400-$165,000

28%                24%                    $82,500-$157,500                          $165,000-$315,000

33%                32%                    $157,500-$200,000                       $315,000-$400,000

33%-35%        35%                    $200,000-$500,000                     $400,000-$600,000

39.6%             37%                    $500,000+                                     $600,000+

The bill eliminates most itemized deductionsThat includes moving expenses, except for members of the military. Those paying alimony will lose their deduction, but those receiving alimony will no longer be taxed on the income. This change begins in 2019 for divorces signed in 2018.

It keeps deductions for charitable contributions, property taxes, mortgage interest, and retirement savings. It limits the deduction on mortgage interest to the first $750,000 of the loan. Interest on home equity lines of credit can no longer be deducted. Current mortgage-holders aren't affected. 

It keeps the deduction for student loan interest

Taxpayers can deduct up to $10,000 in state and local taxes. They must choose between property taxes and income or sales taxes. 

The bill expands the deduction for medical expenses for 2017 and 2018. It allows taxpayers to deduct medical expenses that are 7.5 percent or more of income. Currently, people can deduct medical expenses that are 10 percent or more. At least 8.8 million people used the deduction in 2015. 

It doubles the standard deduction. A single filer's deduction increases from $6,350 to $12,000. The deduction for Married and Joint Filers increases from $12,700 to $24,000.  It reverts back to the current level in 2026. As a result, 94 percent of taxpayers will take the standard deduction. The National Association of Home Builders and the National Association of Realtors opposed this. As more taxpayers take a standard deduction, fewer would take advantage of the mortgage interest deduction. That could lower housing prices. But this could be a good time to do that. Many people are concerned that the real estate market is in a bubble that could lead to another collapse.

The bill repeals the Obamacare tax on those without health insurance. Without the mandate, the Congressional Budget Office estimates 13 million people would drop their plans. The government would save $338 billion by not having to pay their subsidies.

It eliminates personal exemptions. Taxpayers currently subtract $4,150 from income for each person claimed. Families with many children would pay higher taxes under the bill despite the increased standard deductions. 

The bill doubles the estate tax exemption to $11.2 million for singles and $22.4 million for couples. That would help the top 1 percent of the population who pay it. These top 4,918 tax returns contribute $17 billion in taxes. The exemption reverts to current levels in 2026.

It keeps the Alternative Minimum Tax. It increases the exemption from $54,300 to $70,300 for singles and from $84,500 to $109,400 for joint. The exemptions phase out at $500,000 for singles and $1 million for joint. The exemption reverts to current levels in 2026.  

Child and Elder Care Deductions 

The final bill increases the Child Tax Credit from $1,000 to $2,000. Credit is refundable up to $1,400. It increases the income level from $110,000 to $400,000 for married tax filers.  

The bill allows parents to use 529 savings plans for tuition at private and religious K-12 schools. They can also use the funds for expenses for home-schooled students.

It allows a $500 credit for each non-child dependent. The credit helps families caring for elderly parents. 

Business Taxes

The final tax bill lowers the maximum corporate tax rate from 35 percent to 21 percent, the lowest since 1939. The United States has one of the highest corporate tax rates in the world. But most corporations don't pay that much. On average, the effective rate is 18 percent.

It raises the standard deduction to 20 percent for pass-through businesses. The deductions are limited once the income reaches $157,500 for singles and $315,000 for joint. Pass-through businesses include sole proprietorships, partnerships, limited liability companies, and S corporations. They also include real estate companies, hedge funds, and private equity funds

The bill limits corporations' ability to deduct interest expense to 30 percent of income.

It allows businesses to deduct the cost of depreciable assets in one year instead of amortizing them over several years. It does not apply to structures. To qualify, the equipment must be purchased after September 27, 2017, and before January 1, 2023.

The bill eliminates the corporate AMT.  The corporate AMT had a 20 percent tax rate that kicked in if tax credits pushed a firm's effective tax rate below that level.

It advocates a change from the current "worldwide" tax system to a territorial system. Under the worldwide system, multinationals are taxed on foreign income earned. They don't pay the tax until they bring the profits home. As a result, many corporations leave it parked overseas. Under the territorial system, they aren't taxed on that foreign profit. They would be more likely to reinvest it in the United States. This will benefit pharmaceutical and high-tech companies the most.  The tax bill allows companies to repatriate the $2.6 trillion they hold in foreign cash stockpiles. They pay a one-time tax rate of 15.5 percent on cash and 8 percent on equipment.

Additional Details

The tax plan helps businesses more than individuals. Business tax cuts are permanent, while the individual cuts expire in 2025.

Among individuals, it would help higher income families the most. Everyone gets a tax cut in 2019. But in 2021, taxes will increase on those making $30,000 or less. The lower tax rate won't make up for the deductions and credits they lose. By 2023, costs will rise on everyone who makes less than $40,000 a year.

The increase in the standard deduction would benefit 6 million taxpayers. That's 47.5 percent of all tax filers, according to Evercore ISI. But for many income brackets, that won't offset lost deductions.

The bill ignores the lowest-income families. That's because more than 70 million Americans don't make enough to pay taxes. The plans also don't help the third of taxpayers who have incomes that fall below current standard deduction and personal exemptions. 

It is estimated the bill increases the deficit by almost $448 billion over the next 10 years. The tax cuts themselves would cost $1.47 billion. But that's offset by $700 billion in growth and savings from eliminating the ACA mandate. The Tax Foundation said the plan would boost GDP by 1.7 percent a year. It would create 339,000 jobs and add 1.5 percent to wages.

The bill could help immigrants who were protected by Deferred Action for Childhood Arrivals. One of Trump's immigration policies is to end the program in March 2018. Senator Jeff Flake, R-Ariz., got Senate leaders to agree to make the program permanent in exchange for his vote.

Recommended Considerations

There are certainly a number of factors to consider and each individual or couple’s situation will be different.  However, there are a few key areas you might want to discuss with your CPA/ tax preparer to see if they make sense for your personal tax situation in order to take action on or before December 31st.

  1. Consider accelerating certain deductions into 2017
    • Payment of property taxes  
    • 4th quarter 2017 estimated state and local income taxes (typically due Jan 15, 2018).  
    • Charitable contributions (if you will no longer be itemizing your taxes in 2018)
  2. Possibly deferring income (where legally possible) into 2018 where lower tax rates may apply

Again, we just want to thank you for affording all of us at Trinity the opportunity to serve you.  We hope you have a great 2018!

 

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Year-End Charitable Planning

As we approach this Thanksgiving, I want to personally thank you for trusting Trinity to guide you in your financial endeavors and helping you pursue your financial goals.  We are grateful for the opportunity to be working with each of you.

This is the time when many individuals start to consider end-of-year giving. Each year, many of you turn to us for guidance to help invest in what matters most to you. As a result of our ongoing commitment to responsible philanthropy, we believe it is important to understand how financially responsible each organization is and how they manage what is entrusted to them.

When evaluating organizations from a financial responsibility perspective, there are a number of questions you might want to consider before giving. For example:

  • What percent of the contributions received go towards the programs they offer versus for fundraising or administrative expenses? Organizations where 85 percent or more of funds received go towards actual program expenses are typically well-run organizations. If only 50 percent goes towards the organizations programs, that would give me pause.
  • What is the CEOs compensation, does it appear reasonable given the size and scope of the organization?
  • Have they filed all of their respective financial documents with the IRS in a timely manner (FORM 990 for a charity)?
  • Are their financial statements and tax returns filed by a reputable public accounting firm?

Many organizations will post their annual report (IRS Form 990) on their website, which will answer some of these questions.  However, if financial information is not directly available from the charity, GuideStar and Charity Navigator rate non-profit organizations on various financial metrics and can serve as a portal to identify organizations that align with your interests.

Should you want to talk through different gifting options, please know that we are happy to have those conversations. Please note that all year-end gifting paperwork must be submitted to Charles Schwab by Friday, December 15th.  If you have any questions about this process, please don't hesitate to let us know.

Again, thank you for affording all of us at Trinity the opportunity to serve you. May you be blessed as you spend time with family and friends this Thanksgiving holiday.

 

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Trinity Financial Advisors named a Five Star Wealth Manager

We are pleased to announce that for the second year in a row, Trinity Financial Advisors LLC has been named a Five Star Wealth Manager.

To earn this designation, Five Star Professional partners with local publications (Columbus Monthly) to identify and independently assess wealth managers against 10 objective criteria such as client retention rates, client assets administered, professional credentials, and a favorable regulatory and compliance history. It is an honor to have been chosen among hundreds of wealth managers and recognized as a firm known for our knowledge, quality service, and experience, and to be counted among the two percent of wealth management firms in the central Ohio market to earn the Five Star designation in 2017.

While it is a privilege to be recognized for our work, what encourages us most is your continued trust in our firm.  For that we are grateful.

As seen in the October 2017 issue of Columbus Monthly

 

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The Quarter in Review | 3Q 2017

THE ECONOMY CONTINUED ITS SLOW, LOW-INFLATIONARY EXPANSION AND THE EQUITY MARKETS CONTINUED TO GAIN GROUND. Real Gross Domestic Product (GDP) expanded by an estimated 2.5 percent and inflation hovered around 2 percent. We are now more than 100 months into the current period of economic expansion, the third longest on record. Corporate earnings grew by an estimated 2.8 percent, the fifth sequential quarter with revenue and earnings growth.

Looking at stocks, the broad U.S. markets (Russell 3000 Index) gained 4.57 percent in the third quarter, now up more than 14 percent year to date.  Reversing a year-long trend, in the third quarter, small cap outperformed large cap stocks and value outperformed growth stocks.

As nice as the returns have been domestically, international stocks this year have performed even better. Stocks of Internationally Developed Countries were up 5.62 percent in the quarter. Emerging market stocks continued their year-long leadership position, up 7.89 percent for the quarter.

Looking over the other investment categories, real estate, as measured by the U.S. REIT index, posted a modest gain during the year’s third quarter, now up 1.75 percent for the year. The Bloomberg Commodity Index gained 2.52 percent for the quarter, but remains down (negative) for the year. 

Interest rates increased across the U.S. fixed income market for the quarter. The yield on the 10-year Treasury note increased by 2 bps to 2.33 percent. The 30-year Treasury bond yield increased by 2 bps to finish at 2.86 percent. In terms of total returns, short-term corporate bonds gained 0.59 percent, and intermediate-term corporates gained 1.05 percent.

One might envision that the frustrations around stifled government policy (failed attempts to repeal the Affordable Care Act) would greatly concern investors. Uncertain resolution in the ongoing conflict with North Korea also looms.  In addition, stock valuations are stretched with the S&P 500 trading over 22 earnings, putting it in the top 20 percent of market multiples over the last 50 years. Yet the stock markets continue to strongly perform.

LOOKING FORWARD, we believe that the slow growth, low inflation trajectory will continue a while longer. As a result, in the near term, the Federal Reserve should be able to maintain a very measured pace to interest rate increases.

In addition, if you look past the headlines, the underlying fundamentals of our economy are still remarkably solid. Corporations continue to report better-than-expected earnings this season, which means that American business is still on sound footing. Unemployment continues to trend slowly downward and wages slowly upward. The economy as a whole grew at a 3.1 percent annualized rate in the second quarter, which is at least a percentage point higher than the recent averages and marks the fastest quarterly growth in two years. If a new business-friendly tax package gets passed in Congress, as is currently being promoted, one could expect to see business growth continue.

Predicting future events correctly, or how the market will react to future events, is a difficult exercise. It is important to understand however, that market volatility is part of investing.  This month we crossed over the 10-year anniversary of when the “Great Recession” began in October 2007 and the markets dropped by more than half during an 18-month period. Being a decade removed from the crisis may make it easier to take the past in stride.

Attached is an article from Dimensional Funds titled “Lessons for the Next Crisis” outlining how those who had an investment plan and were able to stick with it weathered the crisis well. This is why we find it so critical to have regular and ongoing discussions regarding current and intermediate cash flow needs, investment goals and risk tolerances as part of your overall financial plan.

Please click here to read the complete TFA Quarter in Review | 3Q 2017.

 

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The Quarter in Review | 2Q 2017

THE SECOND QUARTER WAS A CONTINUATION OF LOW VOLATILITY AND GRADUAL GAINS IN THE EQUITY MARKETS.  The ramp in stock prices has again created two varying perspectives.  Bulls point to continued economic growth and strengthening corporate profits; Bears believe the market has gone up too much, too soon, and is due for a correction. 

Revenue and earnings of the S&P 500 companies have grown steadily, now three quarters in a row reaching new highs.  Early reports of Q2 earnings appear to be continuing that trend.  Strong consumer and small business confidence may start to wane, though, if there continue to be delays with healthcare, regulatory and other perceived pro-growth policies.

DURING THE SECOND QUARTER, INTERNATIONAL AND EMERGING MARKETS CONTINUED THEIR LEADERSHIP RETURN POSITIONS FOR THE YEAR up 5.63 and 6.27 percent respectively for the quarter.  International soundly outperformed U.S. stocks which were up 3.02 percent.  A 50/50 globally diversified portfolio returned 2.30 percent for the quarter and 5.93 percent for the year.

Healthcare, Industrials and Financial Services stocks led the way from a sector perspective all up over 4 percent for the quarter.  The energy sector experienced a difficult sell-off, down over 7 percent for the period.  Large-cap and growth companies generated the highest returns continuing their trend from the first part of the year.

To no one’s surprise, the U.S. Federal Reserve held off on raising short-term rates after two quarter point raises in the last six months and continued with language that they would raise rates at a gradual pace.  The Fed also stated that they would begin to reduce their balance sheet relatively soon, presumed to be at their September meeting. 

During the quarter, the US Bond Market had solid but unspectacular growth, edging up 1.45%, whereas the Global Bond Market fell 0.6 percent. Corporate bonds led the category, up almost 2.5% for the quarter.  Lagging inflation expectations led to a sell-off for Inflation Protected Securities which were down 0.43 percent.

 LOOKING FORWARD, we anticipate continued economic growth but also increased volatility in the markets.  If revenue and earnings were not experiencing such strong growth, we would be more concerned about equity valuations.

As mentioned last quarter, we're sharing more robust PDF attachments. While you’ll notice the charts you’re accustomed to seeing with our Quarter in Review, we’ve added a few more perspectives and breakdowns of quarterly results to provide you with more detail in a way that isn’t overwhelming.

We appreciate all the positive feedback we received from the Fiduciary Rule commentary we sent out earlier this month, and will continue to provide timely articles and commentary that we believe will be educational and informative.

In fact, we have attached an enlightening article titled “Getting What You Don’t Pay For”.  Over time, investment funds annual expense ratios and trading costs can have a real impact on a portfolio’s value.  At Trinity, the funds we utilize from Dimensional, Vanguard and iShares provide high quality diversification at some of the lowest costs in the industry.  We have found - in building client portfolios - that high quality and low cost do not have to be mutually exclusive.

Please click here to read the complete TFA Quarter in Review | 2Q 2017 .

 

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The Fiduciary Rule

There has been great deal of news lately about the Fiduciary Rule that the Department of Labor put into effect a few weeks back.  From the news, a number of questions may come to mind with this newly passed but highly debated rule.  Questions such as:

  • Is Trinity Financial Advisors (Trinity) a fiduciary?
  • What does this newly enacted rule really mean?
  • What potential impact does it have on my accounts and investments?  

To address the more personal questions, Trinity, is and has always been a Fee-only, Registered Investment Advisory (RIA) and fiduciary practice.  Therefore, we have already been carrying out the tenants of the recently enacted rule. 

 What is a fiduciary?

In a financial context, a fiduciary is required to act in the best interest of the person or party whose assets they're managing. Many people mistakenly think that all financial industry professionals are bound to this standard, but that's not the case.

For example, investment professionals who are not bound to a fiduciary standard have been known to recommend investment products because they offer the highest commissions or fees, not because the investment is in the best interest of the client.

Registered Investment Advisors are bound to a fiduciary standard that was part of the Investment Advisors Act of 1940.  In addition to putting the best interests of client ahead of their own, fiduciaries must also:

·         Act with prudence; that is, with skill, care, diligence and good judgment of a professional;

·         Make sure all investment advice is accurate and complete, to the best of their knowledge;

·         Avoid and disclose all potential conflicts of interest;

·         Clearly disclose all fees and commissions; and

·         Make investment recommendations that are consistent with the goals, objectives, and risk tolerance of their clients.

The fiduciary standard is much stricter than the "suitability standard" that applies to brokers, insurance agents, and other financial professionals. All the suitability standard requires is that as long as an investment objective meets a client's needs and objectives, it's appropriate to recommend to clients.

Who does the fiduciary rule effect?

The fiduciary rule is designed to make all financial professionals who provide retirement planning and investment advice or work with retirement plans accountable to the fiduciary standard, as opposed to the more relaxed suitability standard.

The point of the fiduciary rule is to ensure that financial planners and other related professionals will be legally obligated to put their clients' best interest first – not just to find investments that meets the clients' objectives. The rule covers professionals who work with defined-contribution retirement plans like 401(k)s and 403(b)s, as well as defined-benefit plans (pensions) and IRAs. 

Trinity has always been a fiduciary, we’ve been implementing this rule since our founding and for the entire time you’ve been a client with us. This recent news of the Fiduciary Rule does not impact your accounts at Schwab or how you work with us. To be clear, nothing changes.

Summary

There was strong opposition to this new standard from many people in the financial industry. Many retirement planning professionals are obviously not big fans of the fiduciary rule. They would rather be held to a suitability standard as the fiduciary standard will cost them money, both in terms of commissions and the added cost of complying with the new regulations.

The fiduciary rule is a positive development for investors. It has the potential to better protect millions of investors from paying unnecessarily high commissions on investment products, and from buying investment products and making decisions that aren't in their best interest. 

Hopefully it gives you peace of mind knowing your advisor, Trinity, has been and always will be a fiduciary practice.

If you have any further questions regarding this or any other issue, please don’t hesitate to contact us.

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The Quarter in Review | 1Q 2017

THE WORLD'S MAJOR ECONOMIES PERFORMED QUITE WELL in recent months despite the influence of political and policy upheaval.  Brexit and the outcome of the U.S. election have yet to produce the negative financial outcomes some had feared.  The transition in the White House did not disrupt the market uptick which began shortly after the Presidential election.

Soft data (business and consumer surveys) surged in November and have held on through April as expectations around tax and regulatory reform have driven markets higher.  Conversely, hard data (housing, industrial, labor, household and retail data) has been more mixed.  What gets lost in the political rhetoric, and what continues to fuel the recent stock rally, has been the sustained strengthening of corporate earnings.  With 299 of the S&P 500 companies reporting, combined Q1 revenues and earnings have grown by 8 and 12 percent respectively.  This is a continuation of growth seen in both the third and fourth quarters of 2016.

DURING THE FIRST QUARTER, THE U.S. STOCK MARKET (RUSSELL 3000) WAS UP 5.7 PERCENT.  Nations outside the U.S. had an exceptionally strong quarter with the International Develop (MSCI World) up 6.8 percent and the Emerging Markets (MSCI Emerging Markets) led all indices up 11.4 percent.  After lagging during 2016, International stocks soundly outperformed U.S. equities.  A 50/50 globally diversified portfolio returned 3.54 percent for the quarter.

Technology, Consumer Cyclical and Healthcare stocks led the way from a sector perspective.  Large-cap and growth companies generated the highest returns during the quarter.  This is a change from the previous quarter when small-cap and value stocks were the winners.

As expected the U.S. Federal Reserve increased rates for the third time in less than 18 months.  Two additional increases are expected before the end of 2017.  The March increase had already been priced in the fixed income markets.  During the quarter, the US Bond Market edged up 0.8% whereas the Global Bond Market fell 0.4 percent.

LOOKING FORWARD, we anticipate a stable economy and some level of continued strengthening in corporate revenues and earnings.

We're sharing a more robust PDF attachment this quarter. While you’ll notice the charts you’re accustomed to seeing with our Quarter in Review, we’ve added a few more perspectives and breakdowns of quarterly results to provide you with more detail in a way that isn’t overwhelming.

Finally, we all want absolute certainty in our investment results, but we also want the types of returns that only comes from taking some higher form of risk. We have attached a recent article that we believe you will appreciate as it relates to this investing conundrum, aptly titled the "The Uncertainty Paradox."

Please follow these links to read the write ups referenced:  The Uncertainty Paradox and the Quarter Summary.

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The Quarter in Review | 4Q 2016

Here is our professional insight and opinion on market results in the fourth quarter as well as what’s happening in the investment world. In this issue of our letter, The Quarter in Review, we’re highlighting specifics on:

  •  2016 A Year of Surprises
  •  Economic Growth Continues
  •  Patient Investors Rewarded
  •  A Look Forward

Please follow the following links to read more about the Quarter in Review and referenced WSJ article

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The Quarter in Review | 3Q 2016

Here is our professional insight and opinion on market results in the third quarter as well as what’s happening in the investment world. In this issue of our letter, The Quarter in Review, we’re highlighting specifics on:

Please follow this link to read more about the Quarter in Review and referenced article on presidential elections

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The Quarter in Review | 2Q 2016

Here is our professional insight and opinion on market results in the second quarter as well as what’s happening in the investment world. In this issue of our letter, The Quarter in Review, we’re highlighting specifics on:

  •  Volatility Surges Due to Surprise Brexit Vote
  •  Earnings of U.S. Companies Decline for Fourth Straight Quarter
  •  Interest Rates Hold Steady
  •  A Look Forward

Please follow these links to read more about the Quarter in Review for the 2nd quarter of 2016 and the referenced article on GDP Growth & Equity Returns.

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UK Referendum: What Happened, the Impact and Market Reaction

On June 23, citizens of the United Kingdom (UK) voted to leave the European Union (EU). Britain's decision, one of the most significant by a Western country in the past several decades, reverses course of expansion for the EU which had grown to 28 countries.  This action had significant impacts on the global markets over the last few days.  Here is a link to the summary providing additional background on what happened, the impact and our thoughts on the market’s reaction.   

Please follow this link to read more about the UK Referendum.

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Why Should I Diversify?

As individual investors, we all have the inclination to focus on and compare ourselves and our portfolio to the highest levels of performance, including what's performing well at the moment. This is human nature – coupled with influences from media – that drives us to look for immediate gratification versus longer term rewards.

U.S. vs. International Markets

One recent comparison issue as it relates to stocks has been comparing returns of U.S. versus International stock markets. Over the last six years, the S&P 500 (a U.S. stock index) has had an annualized return of 11.6 percent while the MSCI World ex USA has returned 2.26 percent and the MSCI Emerging Markets Index has had a -2.28 percent return. So the question may arise: why do I own International stocks that underperform?

As noted in the first article from Dimensional Funds (see link below), failing to diversify can be quite costly over the long term. During the recent period of 2000-09, often called the lost decade for U.S. stocks, the S&P 500 had a negative cumulative return of -9.1 percent. Over that same period, the MSCI World ex USA Large Cap Value Index returned 48.7 percent; the MSCI World Ex USA Small Cap returned 94.3 percent; and the MSCI Emerging Markets Index return a whopping 154.2 percent. It would have been quite disappointing to be all in with U.S. stocks during that decade.

A further point to consider is that based on market capitalization, the U.S. accounts for only 52 percent of the global stock market. This figure may be a surprise to many who have always thought the U.S. market made up a larger majority of the global markets. The point here is a vast number of investment options and opportunities exist outside of the U.S. that should be considered in constructing a portfolio.  While the performance of different country stock classes will vary, there is no reliable evidence that performance can be predicted in advance. Therefore, maintaining some level of global stock diversification – even during down times – leads to stronger total returns over longer periods of time.

Stocks vs. Bonds

A second point of investing diversification outlined by one of J.P. Morgan's global market strategists (see link below) relates to portfolios with different allocations of stocks and bonds. When markets are rallying and folks are feeling more "confident" the common question arises: why do I have a particular allocation to bonds when they are not doing so well?  A classic comment is I am "underperforming" the market. Then when stock markets are selling off (such as the first two months of 2016), the question should I get out of the stock market altogether? is a familiar one. As the saying goes, there is no free lunch. Risk and reward go hand in hand.  A more meaningful set of questions should revolve around this mindset: am I best positioned given my financial goals, risk tolerance and this particular stage of life?

A more conservative portfolio will never outperform an all-equity portfolio during rising markets. Then again, it will never go down as much during market selloffs.  We consistently try to educate clients to avoid comparing their portfolios to the extremes – such as the stock index when markets are surging or bond index when markets are falling. Instead, comparing portfolios to benchmarks that are proportionate to their agreed-upon portfolio mix is a much more prudent approach.

As noted in the Barron's article, since March 2009 a balanced investment approach has underperformed an all equity portfolio. However, if you look at how three different stock/bond portfolios (40/60, 60/40 and 100 percent stock) performed during the financial crisis of 2007-09, a very different story emerges. All three portfolios declined during the market meltdown, the 40/60 portfolio lost less than a quarter of its value whereas the all stock portfolio lost more than 50 percent of its value.

As one might expect, the recovery period for each portfolio was very different as well. A portfolio with 40% stocks and 60% bonds fully recovered its losses less than nine months after the crisis ended, a 60/40 portfolio took about a year and a half before fully recovering.

Please see links to the two articles referenced: 

Comparatively, a 100 percent stock portfolio took more than three years to get back to even – more than double the recovery period of the 60/40 portfolio and almost four times as long as the 40/60 portfolio.

Further, if you look at performance over a longer period from 2000-15, the balanced portfolios outperformed the all equity portfolio with less volatility.

Some Final Thoughts

Over longer periods of time, investors can benefit by having consistent exposure to both U.S. and International stocks. We can say with certainty that, yes, there will be further recessions on the horizon. While nobody can predict the future to know exactly when, maintaining a steady allocation of bonds help portfolios weather the storm of those volatile times.

Every client has a different and unique personal situation. A number of factors go into determining an appropriate portfolio - financial goals, stage of life, size of asset base and personal risk tolerance are a few of the items considered in helping to best determine and recommend an appropriate investment mix.

Our objective at Trinity is to invest and manage an appropriate portfolio specific to your goals, and to educate you along the way so you can remain composed during periods of uncertainty. We believe this long-term perspective helps you to have a healthy and informed attitude about risk and volatility. As your investment partner, we're committed to keeping you on track and moving towards achieving your stated goals.

Please see links for the articles referenced:  Dimensional and Barons

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The Quarter in Review | 4Q 2015

Here is our professional insight and opinion on market results in the fourth quarter as well as what's happening in the investment world. In this issue of our letter, The Quarter in Review, we're highlighting specifics on:

  • Overall market performance
  • Fed Raises Interest Rates
  • International Markets
  • Caution and Preservation

Please follow this link to read the full article.  

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The Quarter in Review | 3Q 2015

Here is our professional insight and opinion on market results in the third quarter as well as what's happening in the investment world. In this issue of our letter, The Quarter in Review, we're highlighting specifics on:

  • Overall market performance
  • Return of Volatility
  • Merger & Acquisition Activity Heats Up

Please follow this link to read the full article. 

IMPORTANT NEWSLETTER DISCLOSURE INFORMATION

Recent Market Volatility

With the associated headlines of last week’s stock market performance, and its continued retreat on Monday, we believed it prudent to send a note addressing recent economic developments and our related positioning of portfolios.

The current selloff is a result of failed global growth expectations, particularly in China, and China’s initial resulting policy response, which was disappointing to some investors. In our recent quarterly letter we highlighted the volatility occurring on China’s stock market. More recently, China announced a devaluation of its currency sparking concerns that their growth was a bigger issue than thought. It is important to note that China is not the sole reason for the recent global stock market performance but more the lightning rod of overall global economic growth not meeting “hoped for” expectations.

MARKETS AND THE MEDIA

Undoubtedly, the ugliest part about the recent week is the speed at which negative sentiment can perpetuate into the psyche of investors and ultimately the markets. There are institutional traders poised to take advantage of market uncertainty (both up and down). The speed and capital behind these traders is large and can cause significant short-term volatility. This, coupled with emotional selling by investors focused on the short term, can create sizable market sell-offs. Helping perpetuate these sell-offs is a confluence of media outlets sensationalizing every market movement in a hope to attract viewership. During these times we remind ourselves that media companies make money by selling advertising to a large viewership, not investing money.

HOW TODAY’S CONSERVATIVE APPROACH LEADS TO TOMORROW’S OPPORTUNITY

 This year we have been positioning client portfolios more conservatively as our outlook on the markets and economy have generally followed a cautious tone. In short, we continue to be underweight in riskier assets such as emerging markets and high yield. In addition, we have trimmed equity exposure in portfolios and reallocated those monies to fixed income, providing additional benefits to the portfolio when markets stumble. Lastly, a number of the active managers we utilize have built up cash reserves within their portfolios. Most notably, FPA Crescent, a substantial holding in client portfolios, has built a 40% cash / bond position to take advantage of opportunities like this.

Although our portfolios may be more conservatively positioned, they will undoubtedly decline in the short term as markets decline from the current moves being seen. We have entered a phase in the market where growth has become a major focus of returns in the aggregate. When those growth expectations fail to manifest themselves, selloffs will ensue.

Staying disciplined to our investment principles is what allows us to act differently than the crowd and be able to focus on the long-term goal of growing your investments. Unfounded media hysteria is likely to continue, especially among short-term traders and “market experts” whose goal isn’t to affirm your balanced portfolio, but rather to leverage the moment for exposure and awareness.

WHAT DOES “NORMAL” VOLATILITY LOOK LIKE?

JP Morgan recently released an interesting graph (see attached PDF) outlining intra-year volatility. As noted on the graph, over the last 35 years (1980 – 2015) the average “intra-year drop” in the S&P 500 was 14.2 percent.  Thus, in an average year the S&P500 will drop over 14 percent from its’ intra-year high to an intra-year low. Yet in 27 of the last 35 years the S&P500 still realized positive returns for that year. Over the last few weeks, the S&P 500 has dropped approximately 11 percent from its intra-year high, so nothing out of line. In the short term, we do not know how long the current turbulence will last. Regardless, we will continue to focus on exercising prudent and disciplined judgement in managing client investments.

In closing, we would like to reinforce that events like this will happen. In fact, we should all expect it. However, we recognize that knowing volatility will happen does not remove the human emotional element of fear and concern that can arise during unpredictable market swings.

Please follow this link to see the annual returns and intra-year declines in a chart format.

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Why Morningstar’s Rating of Dimensional Funds Matters

Dimensional Funds (which we use at the core of client portfolios) recently received Morningstar's Top Stewardship rating of "A".   A number of factors are scored by Morningstar in assessing and rating fund families such as:

  • Does the firm exhibit a culture that is shareholder friendly?
  • Are fund manager incentives aligned with those of its investors?
  • Are fund fees below industry norms?
  • Does the firm follow a consistent and disciplined investment process?
  • What is the turnover rate of fund managers?
  • How strong is their Board of directors?
  • Does the firm have any regulatory issues or shareholder lawsuits?

Only a small handful of fund families received a similar "A" rating.  We are pleased to utilize funds from Dimensional knowing their strong focus on investor stewardship.  Dimensional Funds are offered only through select investment firms that meet their stringent criteria and Trinity is honored to meet those high standards and offer their highly respected funds to you.

Please follow this link to read Morningstar's article they released regarding DFA's disciplined approach.

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