ZRC Wealth Management continues to grow and we are pleased to welcome two new clients to the firm this quarter. Thank you to those who continue to share what we do with friends and family.

Market & Investment Commentary

Stocks across the globe climbed higher in the second quarter of 2017. U.S. Stocks as a whole gained 3.0% during the quarter and are now up 9.0% through the first half of the year. Foreign stocks continued to shine, with International Developed Stocks returning 6.1% during the quarter and are now up 13.8% on the year. Likewise, Emerging Markets Stocks returned 6.2% on the quarter and are now up 18.4% on the year.

As anticipated, the Federal Open Market Committee (Fed) voted to raise interest rates by another 0.25% (quarter point) at their June meeting to a range of 1.00% – 1.25%. Despite this move, the prices of bonds actually held quite steady during the quarter and it turned out to be an excellent quarter for fixed income investors with U.S. investment grade bonds as whole returning 1.4% on the quarter and 2.3% so far this year. In June, Core Inflation (all items less food and energy) was just 1.7% over the preceding twelve months. Should inflation continue to be tepid the remainder of the year, it lessens the likelihood of the Fed raising rates a third time this year. With low inflation and money market and cash yields approaching 1%, it’s beginning to make more sense to keep excess reserves in cash. For the quarter, all ZRC managed client accounts posted solid gains.

The graphic below shows a snapshot of how different “styles” of U.S. stocks have performed so far this year (what is called a “Market Barometer”). There are several interesting trends here. One is that Large Cap Growth stocks (as represented by the box in the top row, second from right) returned 15.78% so far this year and Large Cap Value stocks (as represented by the box in the in the uppermost left hand corner) returned just 2.98%. This is a difference of 12.8%!

Similarly, Small Cap Growth stocks gained an impressive 11.64% so far this year. Whereas, Small Cap Value stocks actually lost money, posting a -0.52% return. A difference of more than 12.1% between the two styles. While we can’t predict the immediate future, when we see the performance of such styles diverge by this magnitude, it can present opportunities to profit from rebalancing into asset classes or investments that we believe are poised to do especially well in the future. The reason the Growth style has performed so well this year is that the three best performing sectors are all growth-oriented; Technology, Healthcare, and Infrastructure.

Over the last decade, Growth stocks have returned 4% more a year than Value stocks. However, going back to 1972 Value has outperformed Growth by almost 1% a year. For this reason, ZRC managed accounts are titled toward Value stocks and when this trend eventually reverses itself, we expect accounts to perform especially well.

At our client luncheons in May we discussed how U.S. stock market valuations are currently well above historical averages, but not yet at worrisome levels. The main reasons being;

  • The economy continues to improve and companies continue perform well.
  • The number of publicly traded U.S. companies has fallen significantly over the last ten years. In 1997 (the peak), there were more than 9100 U.S. – listed companies. In the ten years since, that number has fallen by 37% to about 5800.
  • There has been a decline in companies going public the last several years. With better access to private capital (venture, private equity, private listings, and debt) pre-IPO companies are staying private, longer (think AirBnB and Uber). Additionally, with many large companies flush with cash on their balance sheets, many are acquiring start-ups before they go public (such as Akamai acquiring SOASTA).

As the supply of publicly available shares to invest in has decreased and the demand by investors to own the shares of profitable and growing companies has increased, we would expect stock prices and their valuations to rise (what is referred to as “multiple expansion”). This explains a lot about current valuations. However, we remain especially watchful about our clients’ asset-class exposures and especially their allocations to U.S. stocks. Therefore, we will take regular opportunities to rebalance overweight stock positions into bonds and international equities – and thereby slightly de-risking portfolios.

Conferences and Meetings

Last month, Barry and Ryan attended the 45th annual Financial Planning Association NorCal Conference in San Francisco. The two-day conference held at the Palace Hotel is one the premier financial planning and wealth management conferences in the country. Speakers and topics included;

  • Sal Kahn, Founder and CEO Kahn Academy who spoke about reimagining education and improving financial literacy.
  • Laura Arrillaga-Andreesen, Founder and President – Laura Arrillaga-Andreessen Foundation who spoke about the current challenges of smaller not-for-profits and helping clients make more effective and impactful philanthropic decisions.
  • Michael Kitces, Pinnacle Advisory Group on saving taxes with asset location strategies as well as strategies to maximize the value of Roth IRA conversions.
  • Deborah Fox, Fox College Planning on helping parents evaluate the total costs of attending different schools and reducing out-of-pocket expenses.
  • Jeff Gundlach, DoubleLine Capital & Colleen Ambrose, American Century Investments on the California Municipal bond market and current opportunities and risks in bonds.
  • Elain Floyd, Horsesmouth on changes to Social Security and Medicare – and what retirees need to know.
  • Tim Kochis, Kochis Global about managing the risks and opportunities of concentrated stock positions.

To stay at the forefront of the wealth management profession, throughout the year each of us attends a number of conferences, professional meetings, and meet with the managers we invest with. Recently, Barry met with representatives of PIMCO to review the PIMCO Total Return Fund (among other strategies) in Newport Beach where PIMCO is headquartered. In November, Ryan attended an all-day investment forum in Blackrock’s San Francisco office (where their iShares division is based). In October, Barry attended a two-day investment and practice management conference at Dimensional Fund Advisors Austin, Texas headquarters.

If it has been some time since we reviewed your financial goals or something has changed in your financial life (you have been granted stock in your company, changed jobs, lost a loved one, or are nearing retirement) – please contact us to schedule a meeting. As always, we are here to be a resource to you and those important to you.

 

Sincerely,

Sources: Morningstar, Inc., Dimensional Fund Advisors, and FORTUNE

All investing is subject to risk, including the possible loss of the money you invest. Past performance is no guarantee of future returns. Diversification does not ensure a profit or protect against a loss in a declining market. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.