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Fourth Quarter Investment Commentary

Looking Back: 2017 Market Review

The fourth quarter capped yet another stellar year for U.S. stocks. Larger-cap U.S. stocks (Vanguard 500 Index) gained 6.6% for the quarter and ended the year with a 21.7% total return. This was the ninth consecutive year of positive returns for the index. The market’s 1.1% gain in December crowned 2017 as the first year ever that stocks rose in each and every month. The broad driver of the market’s rise for the year was rebounding corporate earnings growth, supported by solid economic data, synchronized global growth, still-quiescent inflation, and accommodative monetary policy. U.S. stocks got an additional catalyst in the fourth quarter with the passage of the Republican tax plan, presumably reflecting investors’ optimism about its potential to further boost corporate after-tax profits, at least over the shorter term.

Foreign stock returns were even stronger, with developed international markets gaining 26.4% (Vanguard FTSE Developed Markets ETF) and emerging markets up 31.5% for the year (Vanguard FTSE Emerging Markets ETF). In the fourth quarter, however, these markets couldn’t match the S&P 500, gaining 4%–6%.

Moving on to bonds, the core bond index fund (Vanguard Total Bond Market Index) gained 3.5% in 2017. This return was close to the index’s yield at the start of the year, as intermediate-term interest rates changed little during the year with the benchmark 10-year Treasury yield ending at 2.4%. Although the Federal Reserve raised short-term rates three times (75 basis points total), yields at the long end of the Treasury curve declined and the yield curve flattened. Corporate bonds across all credit qualities and maturities had positive returns. High-yield bonds gained 7.5% (ICE BofA Merrill Lynch U.S. High Yield Cash Pay Index) and floating-rate loans rose 4.1% for the year (S&P/LSTA Leveraged Loan Index). Investment-grade municipal bonds (Vanguard Intermediate-Term Tax-Exempt) rebounded from a flat 2016, returning 4.5%.

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Monthly Market Brief-January 2018

Each month, our Heritage Investment team publishes a market brief to provide an overview of the major factors influencing the US economy, including a summary of key sectors and the current positives & challenges.

Click Market Brief January 2018 for updates.

Here are some key highlights:


  • Non-farm payrolls rose 148000, still favorable though lower than expected. Unemployment stable at 4.1%.
  • Fifth month of solid growth in manufacturing payroll, 25000 in December and 31000 in November. Proving to be the driving force for the economy. Best run for manufacturing payrolls in 3.5 years. Construction payrolls are also on a five month winning streak, led by increasing sales of new homes. Housing and construction sector accelerated into year-end as proven by their strong payroll gains.
  • Oil prices steadily moving close to $60 which is the highest since 2014. Higher prices will likely inflate imports (worsening the trade deficit), but is also expected to boost retail sales and manufacturing (specifically energy equipment). Talks about the administration lifting restriction on offshore drilling could increase supply and put downward pressure on the oil price.


  • Trade deficit deepening: Deficit increased to $50.5 billion in November compared to $48.9 billion in October. Partly attributed by the increase in imports on consumer goods and oil imports.



Monthly Market Brief-December 2017

Each month, our Heritage Investment team publishes a market brief to provide an overview of the major factors influencing the US economy, including a summary of key sectors and the current positives & challenges.

Click Market Brief December 2017 for updates.

Here are some key highlights:


  • Sales of new homes increased 6.2% in October to 685000 – a new high! This is not signaling to a housing bubble since the sales surge is not coupled with a price surge. Median price of a new home is up only 3.3% on the year.
  • Rising consumer confidence is at a new expansion high (129.5 in November). Largely due to optimism in the job market and expected stock market gains.
  • The stock market highs may partly be due to expectation of corporate tax cuts and their on going effects. GDP growth has been 3% last two quarters while consumer spending as of October has been at 4.2%, posing no threat of over heating.


  • International trade deficit is expected to widen in October to $47.1 billion, up from September’s $43.5 billion, due to falling exports and a jump in imports of consumer products.
  • Growth in corporate profits have continued to lag the growth of the stock market. Pre tax profits packed in 2012 and really have expended only 10% over the past 5 years.


Monthly Market Brief-November 2017

Each month, our Heritage Investment team publishes a market brief to provide an overview of the major factors influencing the US economy, including a summary of key sectors and the current positives & challenges.

Click Market Brief November 2017 for updates.

Here are some key highlights:


  • Despite the hurricane disruptions, Payrolls rose 261,000 in October. In just under 4 years, unemployment gone down from 7% in 2013 to 4.1% in 2017
  • Dow’s bullish run (up 19.1% YTD) and confidence in the job market has been fueling this year’s increasing consumer confidence.
  • The US economy has been resilient, real GDP increased at an annual rate of 3% in the third Quarter of 2017, primarily due to an increase in consumer spending, inventory investment, business investment and exports. This back to back quarterly growth of 3% is a first in three years.
  • Total exports obtained new highs, rising at 2.3% and were largely driven by financial and information services. The decline in dollar has made US products less expensive to foreigners.
  • Another positive is the contraction in imports. Consumer imports and vehicle imports have both been slowing, two trouble spots that have traditionally deepened the deficit.


  • Another positive is the contraction in imports. Consumer imports and vehicle imports have both been slowing, two trouble spots that have traditionally deepened the deficit.

Good Intentions Can Diminish Over Time

Moore for Your Money
By Byron Moore

Question: My plan is to leave everything to my wife after I’m gone and she’s doing the same with me. Then when the second one of us is gone, the kids will get everything more or less equally. That’s what our wills say. We are both in second marriages and both us have our own set of children. But they are all adults, on their own and doing fine. Everyone gets along fine. Isn’t this simple approach the best?

Answer: Your plan strikes me as loving, well-prioritized, simple… and potentially disastrous.

I’ve got no issues with what you intend to do, nor with the intentions of everyone involved. But good intentions have a way of diminishing over time and under stress. Your children are grown. You gave them a home and an upbringing and that’s now bearing the fruit of stability and independence in their own lives as they start their own families. You want to be sure your wife is taken care of if you pass before she does.

But your good-hearted intentions are no guarantee that those intentions will be followed. Consider just a few things that could prevent your intentions from becoming reality.

Lawsuit. I’ve had more than one widow in my office whose husband died as a result of an accident. In one case I recall, the fault of the accident was clearly the husband’s, who had died in the accident. Imagine losing your spouse in an accident, then being sued for his or her causing the accident!

If you simply leave everything of yours to your wife, those assets may be vulnerable in the event of a lawsuit.

Next spouse. People have been known to get married after the death of a spouse. You may swear up and down you won’t, but… see my earlier comments about good intentions. If you or your wife remarries, will they then leave “everything” to that next spouse? Maybe. But isn’t “maybe” a problem? Do you really want someone you’ve never met to inherit what you and your wife have built together?

Future outlaw. Your adult children are all getting along well now. That’s wonderful. But have you ever known of couples that divorce after 20 or 30 years of marriage? I’ve got a whole list of them. After you and your wife are gone, do you want to leave your life’s wealth to your children, who might then have split it with a spouse that splits?

Financial rookie. I have no idea if this caution fits your situation or not. But many couples have one spouse who “handles the money” with little or no interest or involvement by the other. I’ve seen plenty of examples both ways – sometimes the wife calls all the financial shots. Other times, that’s the role assumed by the husband.

If your marriage works like that, do you want your wife’s first year of widowhood to also be her rookie year as the financial manager of the family wealth?

These are only possible scenarios to spark your thinking. I am not an attorney and this column does not contain legal advice. You need to talk to an experienced, qualified attorney concerning all of these matters.

An attorney may suggest the use of certain types of trusts, ownership arrangements or management agreements made ahead of time to address the specifics of your situation. You won’t know any of that until you speak with an attorney.

Your good intentions are a wonderful motivator and a great place to start. Just don’t stop there. Make sure there are structures in place to carry out once you are gone what you so nobly intend while you are alive.

Otherwise, your good intentions might die when you do.

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Investment Insights

Sequence Risk May Be The Biggest Problem For Retirees
by Mike Jones

Over the next several years professionals in the financial services industry are going to be called upon to solve an extremely difficult problem: providing income to millions of retirees who have placed the majority of their life savings into publicly traded securities.With interest rates still hovering around historical lows and stock market prices setting record after record, it is correct to ask, “Where do we go from here?” and “How in the world do we attempt to sustain a fixed or inflation adjusted standard of income from a portfolio of volatile assets?”

The problem is one of simple math. As stated above, millions of investors are depending on investment returns from volatile assets to deliver income from the time they retire until their death. Using averages for investment returns or simulations that work 85% of the time provides no comfort to such investors. It is the sequence of returns that matters most.

What good is it to a retiree to make 50% on your life savings if you have lost 50% the prior year? That would mean your $1,000,000 fund is worth $650,000 after just two years (assuming a 4% distribution rate). Keep that up and you will be broke before you know it. Avoiding a large negative return in the early years of one’s retirement is CRITICAL to making the money last.

Dr. Wade D. Pfau, CFA®, is a Professor of Retirement Income in the PhD in Financial and Retirement Planning program at The American College of Financial Services. He is also a contributor to the College’s Retirement Income Certified Professional® (RICP®) designation program curriculum.

Dr. Pfau graciously shared information from his forthcoming book, How Much Can I Spend in Retirement, to subscribers of the FA (Financial Advisors) website. In the article “Managing Sequence Risk for Retirees,” Dr. Pfau suggests four techniques retirees may employ to mitigate the threat of running out of money in retirement:

1.Spend Conservatively. This techniques advises investors to keep reducing the amount they distribute from a portfolio the more aggressive they make that portfolio. At least at first. This allows the more aggressive investment strategy time to succeed thus enabling the investor a chance to harvest bigger sums down the road. While this is mathematically feasible, it is highly impractical for most retires.

2.Maintain spending flexibility. This approach only works for those retirees who have other sources of income. It espouses a fluctuation in income that is mirrored to the fluctuation in return.  If you have a meager year in performance you take out a meager distribution.  If you have a robust year, it’s party time. This greatly reduces sequence risk but is an option only to a small percentage of investors.

3.Reduce Volatility (when it matters most). I actually like this one and subscribe to it in many cases. A portfolio of reduced volatility risk is a portfolio of reduced sequence of return risk. This concept can be applied two ways. The first is to greatly reduce the risk factors during the early years of retirement. Since it is the investment returns during the first 5 to 10 years of retirement that reek the most havoc on the eventual outcome, then why not just lower the risk? One can also reduce volatility after a period of economic growth and market expansion, i.e. dynamic asset allocation. Not losing money when others are can certainly benefit a retirement portfolio as money will be available to make investments when they become attractive again. Please don’t try this one on your own. It must be applied with discipline.

4.Buffer Assets. This final technique encourages investors in the securities markets to buffer against down markets by setting aside money that can be a resource when markets turn down. The return on these assets cannot be correlated to the securities market as they would not provide a buffer if that were the case. In other words, diversify. But diversify intelligently. Many investors forget that last admonition.

The road ahead for retirees and their investment professionals is going to be a tricky one. We know that. Fortunately, many brilliant minds are thinking ahead to ways to avoid the worst of those potential problems.

If you are nearing retirement and haven’t done so already, talk with your financial advisor about his or her recommendations on how you should approach tapping into your retirement savings to best avoid sequence risk.


Market Brief-October 2017

Each month, our Heritage Investment team publishes a market brief to provide an overview of the major factors influencing the US economy, including a summary of key sectors and the current positives & challenges.

Click Market Brief October 2017 for updates.

Here are some key highlights


  • Although, the income and spending trend has been downward over the past 3 years,consumer spending and personal income are still growing and inflation is low, which makes our dollar go further.
  • The PMI Manufacturing report (reflective of activity in private sector economy) continues to report moderate growth. September figure of 53.1 compared to 53.0 in August, shows little change. Hurricane effects can be seen in delivery delays which has slowed the most since Feb 2016.
  • ISM Manufacturing index has strengthened to an index of 60.8 in September, which is a 13-year best, signifying that there has been growth in the manufacturing sector. Hurricanes increased input prices but did not slow down production.
  • European equities (except for Spain, due to the Catalan referendum) have been up in the last week of September, partially due to weakening of the EURO. Gains ranged from 0.2% to 1.9%.


  • September payrolls are likely to slow down. Forecasters predict only a 95,000 rise for September non farm payrolls (compared to 156,000 increase in Aug). The risk is that Harvey and Irma could further impact the results.
  • Jobless claims in Texas rose early in September, while claims in Florida began to rise mid September. We are yet to see the effects on Puerto Rico.
  •  House sales in the south

Investment Outlook -September 2017

“It’s the Economy, Stupid”
by Jim McElroy,

A quote from a past presidential campaign provides an answer to bull market deniers who question the validity of the current market’s optimism. That’s not to say that the skeptics don’t have their point: this past quarter has provided enough troubling news to satisfy the most pessimistic doomsday prophets. The litany of ills reads like a biblical description of the end of days: hurricanes, floods, rolling balls of fire ants, violent mobs attacking statues and each other, governments too dysfunctional to confront looming crises and world rulers threatening nuclear Armageddon. Nevertheless, the world economy and its markets have chosen to ignore these troubling signs — some might say bury their heads — and to focus instead on the positive signs appearing in financial statistics. History is full of prophesies of doom that never materialize and economic booms that thrive against backdrops of fear and existential angst: the era of the Cold War, which from 1950 to 1989 held the world in constant fear of nuclear annihilation, was witness to unprecedented economic growth and multiple bull markets. Although the first correct prophecy of the end of the world will have a profound effect on the economy and markets, until that happens or until the financial news turns negative, we can expect a continued disconnect between what is reported on the front page and what is reported in the financial section.

And the reports from the financial pages remain significantly promising. U.S. GDP for the second quarter of 2017 registered 3.1%, the highest rate since the first quarter of 2015. Although GDP has probably taken a hit in the third quarter due to disruptions from hurricanes in Houston and Florida, these negatives will likely reverse in the fourth quarter as infrastructure and home rebuilding moves into full swing. And although it’s not included directly in the calculation of U.S. GDP, the hurricane that devastated Puerto Rico will generate similar negative and then positive results. It is, after all, an ill wind that blows no good. The unemployment rate has likely hit bottom at near 4% — probably a full employment level — while gains in employment continue at a strong or at least moderate pace of between 150,000 to 200,000 a month. Consumer confidence remains robust due to low unemployment and increasing home and stock prices. Corporate profit growth, which finally began appearing after the third quarter of 2016, continues to show progress. As a result of improving profitability, capital expenditures (key to productivity growth, low inflation and increasing real standards of living) have also returned to an upward slope after a slowdown in the 2014-2016 periods. All in all, the economic data describes an economy that is somewhere near the halfway point in its cycle. And the element of the economy, which for the last fifty years has marked the beginning of the end of almost every economic cycle, inflation, is virtually nonexistent.

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Monthly Market Brief-September

Each month, our Heritage Investment team publishes a market brief to provide an overview of the major factors influencing the US economy, including a summary of key sectors and the current positives & challenges.

Click Market Brief September 2017 for updates.

Here are some key highlights








  • Q2 GDP revised 4 tenths higher to hit the 3% annualized rate for the first time in two years.
  • Consumer spending rose at an inflation adjusted rate of 3.3%, best since Q2 of last year
  • Oil prices have strengthened in response to Hurricane Harvey & a strengthening Hurricane Irma.
  • Although factory orders for July declined to -3.3%, reflecting a slowing in strong prior gains for aircraft orders, there is 6 tenths upward revision to core capital goods orders up to a 1% gain and 2 tenths upward revision to core shipments, now at 1.2%. These numbers point to accelerating strength for third quarter business investment.


  • Unemployment rates rose to 4.4% in August, up from 4.3% in July.
  • Trade surplus widened slightly in July to $43.7 Billion in July from $43.5 Billion in June, primarily due to fall in exports of 0.3%.
  • Trade gap with China widened by $1 Billion to $33.6 Billion, and widened with EU by$0.9 Billion to $13.5 Billion.

Monthly Market Brief-August

Each month, our Heritage Investment team publishes a market brief to provide an overview of the major factors influencing the US economy, including a summary of key sectors and the current positives & challenges.

Click Market Brief August 2017 for updates.

Here are some key highlights:


  • Non-farm payrolls added 209,000 jobs in July, bringing this year’s monthly average additions to 170,000 which is well above the minimum 100,000 needed to absorb new entrants
  • Second quarter GDP came in at an annualized growth of 2.6% for one of the best postings in 2 years
  • Business investment posted a strong increase of 5.2% in 2Q17, driven by a sharp increase in equipment investment of 8.2%
  • Factory payrolls have come alive with unfilled orders jumping to a two-year high, increased shipments rising to a five-year high, and new orders standing at a three-year high


  • With unemployment at 4.3%, average hourly earnings should theoretically be trending higher rather than remaining at a flat 2.5%
  • Given the relatively flat wage trend, consumer spending has been trending lower over the last three months with an average growth of 0.16%, near a cycle low

Monthly Market Brief-July 2017

Each month, our Heritage Investment team publishes a market brief to provide an overview of the major factors influencing the US economy, including a summary of key sectors and the current positives & challenges.

Click Market Brief July 2017 for updates.

Here are some key highlights:


  • Non-farm payrolls beat consensus expectations, adding 222,000 jobs in June
  • The ISM Manufacturing Index surged nearly 3 percentage points in June to 57.8, driven by strong new orders, production, and backlog
  • Consumer confidence came in at a strong 118.9, the highest posting in 16 years


  • Consumer inflation remains weak which does not support the Federal Reserve’s plan to increase interest rates and reduce their bond buying
  • Consumer spending will likely remain relatively weak if income continues to slip
  • Housing remains soft as indicated by relatively weak pending home sales and building permits

Investment Outlook-June 2017

What Would Goldilocks Do?
by Jim McElroy,

So far this year, the S&P 500 has broken its previous record high six times and has appreciated about 8% since the end of 2016. The run actually began in the last two months of 2016, after the election, when optimism surged over the new administration’s market friendly plans. The prospect of less onerous financial regulations, tax reform with tax cuts, billions in repatriated overseas corporate profits and much needed infrastructure construction trumped the previously held conviction that the world was coming to an end. Lately, however, the euphoria has waned: Congress has not been cooperative, the president’s style has so far been counter-productive and now there’s a special prosecutor on the hunt for impeachable offenses or crippling legal processes. So, since the thrill of political new hope and new change that drove the market to new highs is largely gone, why isn’t the market reversing course?

Forgive our skepticism, but we’ve never had much faith in the ability of politics to single handedly alter the course of economic cycles; from our perspective, the effects seem to flow in the opposite direction. The market, for now, is paying more attention to economic possibilities than to political dysfunction. And although the recent reports of economic strength don’t suggest acceleration, they also don’t suggest weakness; not too fast and not too slow is, of course, the Goldilocks scenario. As long as the market foresees a steady and gradual improvement in future economic conditions, and as long as the preponderance of actual data reinforces this forecast, equity prices should continue their upward trajectory. So far, nothing definitively predicts an overheated boom or a collapsing bust — the porridge is neither too hot nor too cold — but the statistics deserve close monitoring.

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