Post on 20-Jun-2020
Welcome to summer--the time of year marked with family vacations, often to destinations reached by car or plane. Perhaps your vacation includes boating. Whatever the case, rest and recreation are best when you know what the weather has in store for you.
As a youngster, I remember boating with my family in the summer. During one outing, an ominous storm quickly moved in after several sunny and fun hours, forcing us back to the marina.
As an inexperienced youth, I thought that the tailwinds from the incoming storm were a good thing. After all, it was making our boat go faster.
My exuberance for this tailwind-generated speed was met by my parents’ exasperation. They told us to get our life vests on. We then started a dangerous process of turning the boat around into the tailwind, which was now a headwind. How confusing. My questions were met with the sobering response that
CONFLICTING TAILWINDS AND HEADWINDS: WHICH WAY FORWARD?
From the Desk of the President and CIO
J. Reed Murphy
THE BOTTOM LINE
The economy and markets are facing a variety of positive tailwinds and negative headwinds.
Fiscal policies are stimulative, but occurring late in an economic cycle, which is increasing our national budget deficit and total debt.
Domestic economic growth is strong, while corporate earnings are picking up momentum. Yet domestic equity returns suggest Main Street is doing better than Wall Street.
Monetary policies are tightening, possibly starting a countdown to an inverted yield curve and the next recession.
Consumer and business sentiment remains high, yet tariffs, mid-term elections and the Mueller investigation may start to wear on nerves and animal spirits.
How are our top ten predictions for 2018 panning out?
How is it that domestic equities did better and worse than international stocks?
Portfolio Implications – Why so many moving pieces, and how should my portfolio be positioned?
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The quarterly market commentary is written for a wide variety of readers—those who want in-depth analysis and those who want an overview. Take a deep dive through the whole piece, or scan the key themes, market recap, or portfolio implications sections. We also include a “Did You Know” section where readers can answer fun and thought-provoking questions. Check our online magazine Of Significance at TCWealthPartners.com/DidYouKnow for answers.
BUILDING YOUR FUTURE
Quarterly Market Commentary — Summer 2018Exclusively for Retirement Plan Participants
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if we didn’t turn into the wind, we would lose control of the boat; we would be shipwrecked.
We survived, but not unscathed. I learned a lesson that day. Plan ahead, be aware of your surroundings, and be ready for anything. This is much like investing.
We are currently experiencing several conflicting tailwinds and headwinds – all worthy of close consideration.
TAILWINDS AND HEADWINDS For those unfamiliar with these terms in the context of financial markets, “tailwind” and “headwind” are used to describe themes or situations that are beneficial or detrimental to financial markets. Tailwinds are positive themes that “fill the sails” of the market and drive growth. Headwinds are often negative themes that push against growth.
Moving from metaphor to reality, there are a variety of significant
developments that are at play. Part of the reason there appears to be so many contradictory trends lies in the fact that we are un-orthodoxically pumping the fiscal pump (i.e., tax cuts, increased government spending) so late in an economic cycle. Many are questioning the wisdom (or lack of) of increasing budget deficits and national debt levels to historical levels so late in an economic cycle. Fiscal pumping usually occurs during a recession, not during times like these.
Corporate Earnings The recent tax cuts have helped create a spike in corporate earnings. Domestic corporate
revenue and earnings growth are expected to come in at 8.8% and 20%, respectively, for the second quarter ending June 30th. These would be the highest growth rates in seven to eight years. Moreover, S&P 500 earnings are expected to increase 20.5% for all of 2018 – up from estimates of 12% growth at the beginning of the year. This begs the question, “Why was the S&P 500 only up 2.4% for the first six months of the year?” Answer: The headwinds of a perceived potential top in corporate profitability and an expectation that
EXHIBIT 1: TAILWINDS & HEADWINDS
Fiscal policy stimulus (tax cuts, government spending)
Increasing annual budget deficits and total debt
Strong corporate earningsConcern for peaking corporate
earnings and profitability
Good unemployment numbersJob displacement, underemployment
and still low wage growth
Increasing economic growthMonetary policy tightening (increasing
interest rates, flattening yield curve)
High consumer and business confidenceTariffs, mid-term elections,
Trump/Mueller investigation
Tailwinds Headwinds
Source: TC Wealth Partners.
Q2 2018 Year 2018 Year 2019 Note
S&P 500 20.0% 20.5% 10.0%2nd highest quarterly result since Q3 2010. Highest quarterly revenue growth since Q3 2011.
Energy Sector 141.7% 100.8% 17.2% Highest growth sector for 2018
Real Estate (REITs) 5.7% 6.1% 6.3% Lowest growth sector for 2018
Source: TC Wealth Partners, FactSet.
EXHIBIT 2: DOMESTIC CORPORATE EARNINGS PEAKING?DOMESTIC EARNINGS GROWTH - S&P 500
Many are questioning
the wisdom (or lack
of) of increasing
budget deficits and
national debt levels
to historical levels
so late in an economic
cycle. Fiscal pumping
usually occurs
during a recession,
not during times
like these.
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year-over-year earnings growth will decelerate next year are a few of the bricks in the wall of worry. Many are wondering if this is as good as it gets.
Economic Growth It is apparent that economic momentum is picking up. Employment numbers are generally good. Wages are increasing, albeit at a slow pace. The housing market continues its upward momentum. Housing affordability is good, and home ownership is trending up after multi-year lulls. Consumer and corporate confidence is strong. GDP growth is improving with second quarter estimates as high as 3.8%. This leads to many saying that Main Street is actually doing better than Wall Street.
Monetary Policy & The Yield Curve However, there are headwinds as the Federal Reserve is tightening monetary policy. This brings us
to one of the most important and predictive metrics for economic growth and a potential recession - the yield curve.
The Fed has now raised short-term fed funds rates seven times during this economic recovery, including five in the last 18 months. The Fed uses the fed funds rate to either
stimulate or slow the economy by decreasing or increasing rates. It is customary for “the market” to react and adjust longer-term interest rates in accordance with “the Fed’s” short-term rate controls.
Herein lies the rub. It is healthy for the economy to have a large spread between short-term and
EXHIBIT 3: YIELD CURVE IMPLICATIONS
Yield Curve Type Description Impact
Normal
Short-term rates lower than longer-term rates
Stimulative for economic growth
Flat
Short-term rates in-line with longer-term rates
Less stimulative, but generally not restrictive
Inverted
Short-term rates higher than longer-term rates
Tightening/restrictive for economic growth
0
1
2
3
4
5
6
7
Short Term Long TermIn
tere
st R
ate
Yield Curve Structures
Normal Flat Inverted
Source: TC Wealth Partners, Bloomberg. Interest rate numbers are for illustrative purposes only.
The Fed has
now raised
short-term fed funds
rates seven times
during this economic
recovery, including
five in the last
18 months.
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-200
-100
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100
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Recessions US 10Yr Treasury & U.S. 2Yr Treasury Spread
EXHIBIT 4: YIELD CURVE INVERSIONS LEAD TO RECESSIONS
Source: TC Wealth Partners, Bloomberg. Spread between 10-year U.S. Treasuries and 2-year U.S. Treasuries. Red band indicates U.S. recessions.
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intermediate/long-term rates. Banks are the backbone of lending and a significant financial provider of economic growth. Banks need to borrow money at short-term rates and lend at higher long-term rates.
If the yield curve is normal, then short-term rates are lower than longer rates. If the yield curve is flat, then short-term rates are generally close to longer rates. If short-term
rates are higher than long-term rates, then you have an inverted yield curve. An inverted yield curve serves to choke off economic growth as banks aren't incented to lend. Recessions have historically occurred 18-months on average after such occurrences.
Exhibit 4 highlights the spread (difference in short-term and long-term) in rates. A spread below the
“0” line indicates an inverted yield curve. Recessions are highlighted by the gray bands.
Animal Spirits & Tariffs Economists are academicians. They apply scientific means to describe and predict what should happen according to theory. However, markets are made of human beings. Behavioral finance shows us that emotions (i.e. animal spirits) influence the economic behavior of consumers and investors. Here is where tailwinds and headwinds can go awry.
The science of leading economic indicators tells us that consumer and business confidence is high. Exhibit 5 shows that. As an example, the NFIB Small Business Optimism Index is at its highest level since September 30, 1983. However, there are several issues fraying at the nerves of the markets, including tariffs, mid-term elections, ongoing investigations by Special Counsel Mueller into all affairs involving
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1/2016
NFIB Small Business Optimism Index
EXHIBIT 5: OPTIMISM INDEX
Source: TC Wealth Partners, Bloomberg.
EXHIBIT 6: TARIFFS VS. RECENT FISCAL STIMULUS
Tariffs - Steel, Aluminum & China Stimulus - Tax Cuts Stimulus - Spending
Stimulus - Corporate Tax Repatriation
Series1 81.5 200 100 500
0
100
200
300
400
500
600
Bill
ions
($)
TTaarrii ss vvss.. RReecceenntt FFiissccaall SSttiimmuulluuss ((CCaalleennddaarr YYeeaarr 22001188))
Source: TC Wealth Partners, Strategas Research Partners.
An inverted yield
curve serves to
choke off economic
growth as banks
aren't incented to
lend. Recessions have
historically occurred
18-months on
average after such
occurrences.
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or resulting from the Russia investigation, including potential ties to the Trump Administration.
We have written extensively on the wisdom of tariffs and their potential impact. With the talk of tariffs on China having gone into effect on July 6th, we would be remiss to not address this again, albeit briefly. (Please reference our Spring Market Commentary and our Reed Between the Lines publications on March 23 and June 18 for more extensive insights.) The currently documented impact of tariffs amounts to over $80 billion. This is small in comparison to approximately $800 billion in fiscal stimulus for 2018 and even smaller than our $20 trillion economy.
However, these first derivative estimates are just that - a first derivative. If entire industries are negatively impacted (agriculture, auto, etc.) and tens or hundreds of thousands of people lose their jobs (as many companies are forecasting), then there could be a second
derivative and negative impact on optimism. Animal spirits may wane, which could create bigger negative economic outcomes.
MID-YEAR CHECK-IN In our January market commentary, we made ten predictions. As illustrated in Exhibit 7, it appears that our insights then are still valid today.
MARKET RECAP Volatility is back. On the domestic equity front, the S&P 500 has already seen 36 daily moves of a 1% or more price change compared to just eight in all of 2017. This annualized rate of 72 such moves is also well above all years going back to 2011 with one exception. The recent causes for this uptick are many, including the
EXHIBIT 7: TCWP’S TEN PREDICTIONS FOR 2018 REVISITED
Prediction Current Status
Tax Reform Policies Boost Economy/Markets
Correct. GDP growth is accelerating and corporate earnings estimates for 2018 have jumped from 12% at the beginning of the year to 20.5% currently.
The U.S. Economy Has a Better Year than 2017
Correct. GDP growth is picking up, unemployment is lower, etc.
Equity Markets March Higher but Volatility Returns
Correct. The S&P 500 was up 2.4% through June 30th. After years of historically low volatility, the S&P 500 dipped down 10% on two occasions. As of June 30th, we experienced 36 daily moves of 1% or more in the daily price of the S&P 500 – an increase of 350% over just eight 1% moves in 2017.
Interest Rates Rise, Challenging Bonds
Correct. The Barclays Aggregate Bond Index was down 1.6% through June 30th.
U.S. Becomes #1 Oil Producer, Surpassing Russia and Saudi Arabia
Open. It is certainly helpful that Saudi Arabia and Russia both adhered to OPEC production cuts until a recent decision to in-crease amounts modestly. We will see where the year ends, but it is likely that the U.S. has already passed both countries.
Trump Administration Takes on Tech
Correct, somewhat. President Trump has dogged Amazon. Congress is investigating Facebook and others over privacy issues. Time will tell if regulations are a byproduct. On the flip side, President Trump appears to be taking on China over intellectual property, but the casualties may include U.S. technology companies themselves.
Bitcoin Bubble Bursts
Correct. Bitcoin was down 77.6% through June 30th from its high in late December. Governments and companies continue to restrict its use and the currency is now under investigation for pricing manipulation. We like blockchain technology, but not Bitcoin or other cryptocurrencies.
Major Political Shake-up Occurs (You Pick)
Open. We don’t like to enter into politics, so we presented two options for readers to choose from. Incumbent parties routinely lose a large number of seats (House and Senate) during the mid-term election. This fall may be a repeat.
U.S. Takes First in the Winter Olympics
Wrong. Okay, can you blame us for rooting for the home team?
Chicago Cubs Beat Houston Astros in World Series
Open. Both teams look to be strong contenders. Time will tell.
Volatility is back.
On the domestic equity
front, the S&P 500
has already seen 36
daily moves of a 1%
or more price change
compared to just eight
in all of 2017.
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headwinds that we have noted.
The quarter was also marked with some reversals in the equity markets. After a tough first quarter, domestic large and small-cap stocks generated positive 3.28% and 7.66% returns for the quarter, respectively. However, the biggest reversal took place in the MLP sector as investors
shook off a tax ruling that had less or no impact on many companies in the sector than an original reaction suggested.
Also, investors liked that energy market prices climbed higher and that many energy companies are reporting stronger earnings and fundamentals. Please see Exhibit 2 for energy sector earnings expectations for the second quarter and all of 2018 of 141.7% and 100.8%. MLPs posted a 11.8% return for the quarter.
While international markets in the aggregate appeared to lag behind the returns of our domestic market, in reality, they did not. In local currency terms, the MSCI EAFE index (international developed markets) outperformed the S&P 500 in absolute returns. However, when considering the impact of the rising U.S. dollar headwind, the returns of international developed markets were down -1.24% instead of being up 3.75%.
U.S. equities have done well after a turbulent first quarter and settled into better fundamentals and strong corporate earnings. On the international front, there has been a deceleration in some economic data. After shrugging off a rising U.S. dollar and interest rates in previous occurrences, emerging markets (-7.96%) sold off this past quarter. On another reversal front, global infrastructure was up 4.51% for the quarter.
Fixed income continues to be a challenge as the U.S. Federal Reserve increases short-term interest rates. International central banks (in aggregate) have also changed direction and started to reduce rate cuts and/or started to increase rates. International bonds were down -2.78% for the quarter, while the broad U.S. fixed-income market was down -0.16%, bringing it to a negative -1.62% for the year. Securities with less interest rate sensitivities, such as floating rates, have done better and generated a positive return (2.16% year-to-date).
PORTFOLIO IMPLICATIONS Pulling all this together, we provide portfolio implications for the following investment categories.
The tailwinds of economic growth spurred by fiscal policies will be helpful this year, but may begin to fall off in 2019 and 2020. During this period, the base case is that corporate earnings will decelerate, interest rates will be higher, and according to conservative predictions, our national debt
EXHIBIT 8: MARKET VOLATILITY INCREASING AFTER YEARS OF CALM
Average(2010 - Present)
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 20182018
Annualized
1% Total Moves 70 103 107 126 82 42 32 29 66 134 118 76 96 50 39 38 72 48 8 36 72
1% Negative Moves 35.3 54 54 73 37 21 18 13 35 75 56 37 48 21 17 19 31 22 4 16 32
1% Positive Moves 35.1 49 53 53 45 21 14 16 31 59 62 39 48 29 22 19 41 26 4 20 40
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
160.0
Num
ber o
f Occ
uren
ces
Number of 1% Daily Market Moves(S&P 500)
Source: TC Wealth Partners, Bloomberg.
U.S. equities have
done well after a
turbulent first quarter
and settled into better
fundamentals and
strong corporate
earnings. On the
international front,
there has been a
de-acceleration in some
economic data.
will be much more substantial. The questions to monitor are, “How strong will the tailwinds and headwinds be?” and “What impact will they have on the economy and markets during this time?” We remain constructive, but cautious.
Equities Domestic equity valuations are much more attractive and no longer expensive on a historical absolute basis. Valuations are also forgiving relative to current interest rate and inflation levels. However, with inflation and interest rates on the rise, domestic equity valuation multiples (i.e., PE ratios) could decline, putting a pinch on future returns.
While international developed and emerging market returns have lagged behind the U.S. for the first six months of the year, their earnings and valuations are still compelling. This is despite some slowing in economic momentum in recent months, the European Central Bank signaling a reversal in quantitative easing, and some hiccups in emerging markets due to a stronger U.S. dollar and rising interest rates.
One of the most important factors for economic growth is to have increases in productivity and a growing population, specifically a growing middle class. These characteristics are more pronounced
in emerging markets than in developed countries, hence higher economic growth patterns. Exhibit 10 illustrates the long runway for economic growth through a growing middle class in just a few representative emerging markets.
We continue to believe that a healthy allocation to international developed and emerging markets is warranted.
Fixed Income Bonds are expensive and with expected rising interest rates, the landscape requires acute management. While short-term rates may climb domestically, longer-term rates should be somewhat contained as foreign demand for higher yielding U.S. Treasuries creates upward pressure on prices and downward pressure on rates.
In addition, the Fed’s plan to reduce the size of its balance sheet may also create some downward pressure on bond market prices and an inverse reaction of higher interest rates. This adds to the inverted yield curve trend.
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EXHIBIT 9: ASSET CLASS RETURNSPRIMARY MARKET RETURNS AS OF JUNE 30, 2018
Source: TC Wealth Partners, Bloomberg.
EQUITIES 3 Mo YTD 1 Yr 3 Yr 5 Yr 10 Yr
Policy - Global Equities 0.53 -0.43 10.73 8.19 9.41 5.80
Domestic Large Cap 3.28 2.36 13.71 11.23 12.72 9.46
Domestic Small Cap 7.66 7.47 17.13 10.52 12.02 10.15
International Developed -1.24 -2.75 6.84 4.90 6.44 2.84
Emerging Markets -7.96 -6.66 8.20 5.60 5.01 2.26
Real Estate - Global 2.03 -2.27 2.98 2.89 2.87 1.49
Real Estate - U.S. 9.44 0.94 3.04 6.33 6.47 6.13
MLP 11.80 -0.63 -4.58 -5.93 -4.09 6.46
Infrastructure 4.51 -0.82 3.37 5.43 8.01 8.57
FIXED INCOME 3 Mo YTD 1 Yr 3 Yr 5 Yr 10 Yr
Policy - Global Bonds (USD) -2.78 -1.46 1.36 2.58 1.50 2.58
Domestic U.S. Aggregate -0.16 -1.62 -0.40 1.72 2.27 3.72
U.S. Corp High Yield 1.03 0.16 2.62 5.53 5.51 8.19
U.S. Floating Rate 0.70 2.16 4.37 4.21 4.00 5.19
International Developed (USD) 0.27 1.74 3.62 3.99 4.42 4.56
International Developed (Unhedged)
-5.02 -0.80 3.31 3.82 1.13 2.04
Emerging Market Debt (USD) -3.54 -5.23 -1.60 4.63 5.15 6.75
Tax Exempt (Munis) 0.76 0.18 0.43 1.61 1.96 3.18
While international
developed and emerging
market returns have
lagged behind the U.S.
for the first six months
of the year,
their earnings and
valuations are
still compelling.
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(The Fed increased its balance sheet through programs such as quantitative easing to restore liquidity and confidence in the markets during and after the recent recession.)
This balance sheet reduction could also provide the same tightening effect as an actual Fed rate hike. Either way, the Federal Reserve would prefer to keep consumer and government debt service levels down through lower long-term interest on our high debt loads.
We continue to be less than content with historically low yields and the risk/return profile. We continue to underweight international bonds. We are also utilizing floating rate and opportunistic fixed-income managers who take advantage of various fixed-income investments that provide good risk management and potential positive returns in rising interest rate environments.
Exhibit 12 illustrates the advantages
of using non-traditional bonds during rising interest rate environments. For example, floating rate bonds provide diversification benefits as their structure provides protection against rising interest rates, while also providing attractive
yields. The general bond market as represented by the US Aggregate would expect a -5.9% drop in price and a total return of -2.6% after accounting for its yield component, while the floating rate does much better.
Source: BLS, Federal Reserve, FactSet, J.P. Morgan Asset Management. Real 10-year Treasury yields are calculated as the daily Treasury yield less year-over-year core CPI inflation for that month except for June 2018, where real yields are calculated by subtracting out May 2018 year-over-year core inflation. U.S. Data are as of June 30, 2018.
EXHIBIT 11: 10-YEAR U.S. TREASURY RATE
-5%
0%
5%
10%
15%
20%
'58 '63 '68 '73 '78 '83 '88 '93 '98 '03 '08 '13 '18
Sep. 30, 1981: 15.84%
Nominal and real 10-year Treasury yields
Jun. 30, 2018: 0.64%
Jun. 30, 2018: 2.85%
Nominal 10-year Treasury yield
Real 10-year Treasury yield
Average(1958-YTD 2018) 6/30/2018
Nominal yields 6.06% 2.85%
Real yields 2.37% 0.64%
Inflation 3.69% 2.21%
The Federal Reserve
would prefer to
keep consumer
and government
debt service levels down
through lower long-term
interest on our high
debt loads.
Source: TC Wealth Partners, JP Morgan, Brookings Institute.
India China Brazil Mexico South Korea
1994 1% 0% 28% 44% 86%
2017 12% 30% 52% 70% 90%
2030 79% 72% 61% 79% 88%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Perc
ent o
f Tot
al P
opul
atio
n
EXHIBIT 10: EMERGING MARKET MIDDLE CLASS GROWTH - DRIVER OF ECONOMIC GROWTH
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Complementary Strategies Given the state of equity markets and the unappealing fixed-income outlook, it is important to cast a wider net and consider non-traditional strategies to provide returns and manage risk. To address this need, we continue to look at other less-traditional and lower/non-correlated strategies, such as tactical allocators and lower-risk-mitigating strategies.
While sailing on placid waters sounds appealing, we may be in store for a
more exciting river raft ride. There are plenty of countervailing winds to navigate. Now is not the time to be lackadaisical. Rest assured, we are reading between the lines in an objective manner to provide insights for you that will help us collectively get it right.
Please pass this message along. Our passion is to help others reach their goals and find comfort with their financial well-being.
Be sure to visit our website (tcwealthpartners.com), subscribe to “Reed Between the Lines,” or follow Reed Murphy on Twitter at @BTLReedMurphy if you want to receive regular updates throughout the quarter on his perspective regarding investments and other subject matters.
Thank you for your continued support.
Source: Barclays, Bloomberg, FactSet, Standard & Poor’s, U.S. Treasury, J.P. Morgan Asset Management. Sectors shown above are provided by Bloomberg and are represented by – Broad Market: U.S. Aggregate; Municipals: Muni Bond 10-year; High Yield:Corporate High Yield; Floating Rate: FRN (BBB); Yield and return information based on bellwethers for Treasury securities. Change in bond price is calculated using both duration and convexity according to the following formula: New Price = (Price + (Price * - Duration * Change in Interest Rates)) + (0.5 * Price * Convexity * (Change in Interest Rates)^2). Chart is for illustrative purposes only. Past performance is not indicative of future results. Data are as of June 30, 2018.
EXHIBIT 12: IMPACT OF RISING RATES ON BONDS
-1.9%
-8.1%
-17.1%
-5.9%
-5.9%
-4.0%
-0.1%
0.6%
-5.3%
-14.1%
-2.6%
-3.3%
2.5%
3.0%
2y UST
10y UST
30y UST
US Aggregate
Munis
US HY
Floating Rate
Impact of 1% Increase in Interest RatesTotal Return (inc yield)Price Return
While sailing
on placid waters sounds
appealing,
we may be in store
for a more exciting
river raft ride.
25 YEARS OF SERVING Stewarding institutions' and families’ resources from generation to generation.
Twenty-five years ago, Michael Jordan and the Bulls gave Chicago its first Three-Peat. On June 18th of that same year, we opened our doors as the Trust Company of Illinois.
Our 25th anniversary is a significant milestone. The core values that created and sustained Trust Company of Illinois for 25 years are hard coded into our wiring. They define how we will deliver on our promises for the next quarter century.
As TC Wealth Partners and Trust Company of Illinois move into the next 25 years, we intend to assist our clients in making their generational transitions. It’s always harder than it looks. Such transitions require thought, patience and a deep commitment to an institution or a family legacy and its core values. It’s an enormous responsibility to steward the resources and values for and to the next generation – and for generations to come.
One resource we provide our clients is our online magazine, Of Significance. In our most recent article, “5 Reasons to Hire a Family Office Corporate Trustee,” President and CIO J. Reed Murphy explains how hiring a professional trustee takes the pain out of estate planning—and can even preserve family unity.
As we celebrate 25 years of serving individuals and families, we are already at work on the journey towards the next 25.
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RETIREMENT PLANNING INSIGHTS
YOUR GUIDED PORTFOLIO: AN UPDATEIn early May of this year, the GuidedPortfolios in your retirement planwere adjusted to take advantage ofmarket conditions and our outlook.As a reminder, each portfolio investsin mutual funds that invest in eitherstocks (equities), bonds (fixedincome), or complementary(alternative) assets. Here is asummary of the changes made:
We eliminated our real estate (realestate investment trusts; REITs)allocation in all portfolios (Conservative, Balanced, Growth, and Stock Focused). This was done primarily based on softening fundamentals in the sector and the desire to reduce our interest rate exposure (REITs tend to struggle inrising interest rate environments) andour overall risk profile (REITs tend tohave higher volatility than overallequities). As a further measure toreduce volatility and interest rateexposure, we also removed our high-yield bond manager.
We reduced our exposures to thisasset class last year after veryattractive returns and took thisopportunity to eliminate our
exposure as valuation levels arerich. High-yield bonds are morevolatile than the broader fixed-income market. With these proceedswe added an opportunistic bondstrategy. The strategy is built to andhas outperformed the broad marketin flat and rising interest rateenvironments.
With the proceeds from the realestate liquidation, we added a mid-to-large cap growth strategy in ourBalanced, Growth and StockFocused portfolios. The fund ismanaged by an exceptional teamwith an outstanding track record.The strategy leverages the team’sstock picking skills through aconcentrated portfolio of stocks withtypical over weights in promisingareas in healthcare, technology andindustrial sectors. From a portfolioconstruction standpoint, it is a goodcomplement to the other strategiesused in domestic equities.
Continuing with portfolio constructionupdates, we reduced the allocation toour value-leaning dividend growthequity manager and increased the
allocation to our core passive equityindex manager in the Balanced,Growth and Stocks Focusedportfolios. In our Conservativeportfolio we increased our exposureto our passive index manager,maintained exposure to our dividendgrowth manager and did not add themore aggressive mid-to-large capgrowth strategy.
In international equities, we allocatedapproximately half of our allocationfrom our existing emerging marketmanager to a new manager. The preexisting strategy’s higher quality,lower risk approach of investing inconsumer based themes has notbeen rewarded as much as thebroader emerging market. So, wesplit the allocation with a passive andmore benchmark oriented strategy.By doing so, portfolios shouldparticipate more in upward marketmoves, while still having somedownside protection through thepreexisting fund.
Current portfolio allocations areavailable at www.tcwealthpartners.com/guidedportfolios
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DID YOU KNOW?Test your market and economics knowledge, and then visit our blog Of Significance at TCWealthPartners.com/DidYouKnow to see our answers!
HEADWINDS AND TAILWINDSUsing sailing terms as metaphors for markets got us thinking about the history of other popular phrases. Which of the following are purported to have nautical origins?
A. “Limey”B. “Skyscraper”C. “Three Sheets to the Wind”D. All of the above
FIFA WORLD CUP FEVERFIFA World Cup titles are of course won by countries, but which are the only continents to have World Cup winning countries?
A. South America, North America, EuropeB. South America, EuropeC. Europe, South America, AsiaD. Europe, Asia
WORLD CUP MEETS INVESTINGKeeping with the summer sports theme, which one of the following countries involved in this year’s World Cup is not included in the standard definition of emerging markets?
A. ArgentinaB. MexicoC. BrazilD. Colombia
WORLD CUP MEETS INVESTINGIn our commentary we note that current tariffs amount to an $80 billion impact. Given recent comments from the President and officials in Beijing, this number could continue to grow. According to estimates, how many products could be included in the trade war globally if these comments become policy?
A. 2,500B. 5,000C. 6,500D. 10,000
Investment advisory services provided through TC Wealth Partners, LLC, an investment advisor registered with the U.S. Securities and Exchange Commission. Trust services and retirement plan services are provided by the Trust Company of Illinois, a trust company chartered by the Illinois
Department of Financial and Professional Regulation. Past performance is not indicative of future results.