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Monthly Market Brief- October 2016

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 2016 for the October 2016 update.

Here are some key highlights:

Americans continue to clean up household balance sheets by significantly lowering average mortgage payments to 11.7% of income, down from approximately 19.5% at the peak of the Great Recession and average over the last 40 years
oVehicle sales rose to an annualized 17.8 million units in September, up a surprising 4.7% from August
oWhile non-farm payroll growth was relatively soft compared to the last three months, 156,000 jobs were added in September
oBoth the ISM manufacturing and non-manufacturing indices rebounded in September, suggesting that the significant decline both experienced in August was an anomaly

oThe labor force participation rate remains at a low of 62.8% since the peak of the Great Recession, and while a good portion can be explained by those choosing to retire, the aging effect and cyclicality do not tell the whole story
oAs of September 30, 2016, the real yield on a 10-year treasury was -0.70%; thus, savers are not being compensated adequately for inflation and are in essence paying to save
oSoft consumer spending and capital goods shipments will likely weigh on third quarter GDP growth; thus, market expectations for a November interest rate hike have cooled


Making Sense of Conflicting Signals: Where is the Economy Taking Us?

by Jim McElroy,
We are living in unusual times. The U.S. economy is now in its eighth year following the “great recession”. Under normal circumstances, we would expect that a recovery lasting eight years might be a little long in the tooth: the average since 1950 has been just over five years. But this has been no ordinary recovery: it’s been the weakest since the end of WWII. Not once in the twenty-nine quarters of this post-recession expansion has GDP grown at an annualized rate in excess of 5% and only twice has it grown in excess of 4%. The average number of greater than 5% quarters for the preceding ten post-war expansions has been seven. During those ten earlier expansions, the average annual GDP growth rate was 4.85% per quarter; the current average through June has been 2.08%. Is slower better and does incremental growth last longer? Or, does the tepid nature of the current expansion serve as a warning that the economy is vulnerable to an unexpected shock? The question we’re asking — the question we’re always asking — is where are we in the economic cycle: are we closer to the beginning, middle or end of an expansion? The answer to that question is obviously critical to the timeliness of investment decisions.

Investment markets are supposed to be semi-reliable predictors of the economy. The stock market, reputed to be the best market harbinger of economic growth or decline, has been in a bull market for over eight years and is near all time highs. On the other hand, fixed income markets, sporting absurdly low yields — below 2% for ten-year U.S. Treasuries and negative for many international debts — suggest anemic prospects for the economy. So, which market are we to believe? And, to further cloud the picture, this is a presidential election year. That and the fact that the two major candidates have distinguished themselves by their unpopularity create a situation fraught with uncertainty.

The continuing strength of equity performance is noteworthy in that earnings for major U.S. corporations (i.e. the S&P 500) have been declining for the last five quarters and are expected by analysts to have declined even further for third quarter, which ended September 30th. Though much of the index’s earnings decline over the past five quarters came from the energy sector and, according to FactSet, earnings would have been mostly positive without its negative impact, this does not, on its own, justify record high prices or an almost 20 multiple on trailing earnings. Either the stock market is extremely forgiving of lackluster earnings — not its reputation — or factors other than earnings are driving stock prices. We need look no further than the fixed income markets and the level of interest rates for at least one explanation of equity strength.

There are at least two ways through which interest rates influence stock prices: through their impact on overall economic activity and through competition. High interest rates obviously discourage borrowing and encourage savings, results that reduce economic activity and limit equity earnings. In addition, high interest rates raise the bar for stock returns, causing investors to require either higher earnings and/or dividends (difficult in a period of reduced economic activity) or lower stock prices. Low interest rates, or in the current case, ludicrously low interest rates, normally produce the mirror image of the above: aggressive borrowing and depletion of savings by investors and consumers and a lowered bar for equity returns. As it happens, the current environment of near zero interest rates has had only a limited impact on economic activity: the consumer is spending more and low mortgage rates are encouraging him to invest in more home ownership, but corporations to date have been unwilling to borrow funds or employ cash savings to invest in new plant and equipment. Consequently, the effect of low interest rates on economic activity has been limited and has had very little impact on stock prices. However, the impact of low interest rates on the competition for returns on risky investments, such as stocks, has been enormous. When cash management funds are yielding less than .25% and ten year Treasuries are yielding below 1.6%, a dividend yield of 2.06% (S&P 500) or higher, with the potential for growth, looks very attractive indeed. It looks so attractive, on a risk return basis, that corporations have been employing excess cash reserves to buy their own stock rather than investing in plant and equipment. Little wonder that all time highs in the stock market are coinciding with all time lows for interest rates. All this begs the question of what happens to the stock market when central banks like the Federal Reserve begin to raise interest rates.

The Federal Reserve raised short term interest rates .25% last December and said that it expected to raise rates four times in 2016. Because of a variety of weak economic news during the first three quarters of 2016, the Fed balked and did nothing. It now is signaling that it will likely raise rates by .25% this December. We believe the Fed will raise rates in December, but will continue their message of caution and patience in bringing interest rates to levels consistent with sustainable growth. As long as the Fed succeeds in conveying this message of patience, there should be no December collapse in asset prices.

It is becoming clear, even to many central bankers, that a low to negative interest rate will not in and of itself create economic growth or inflation. Those effects, like almost everything else in economic and market activity, are driven by the collective psychology of humans behaving as humans or, as John Maynard Keynes called it, “animal spirits”. Among investors it’s called fear and greed. Without the presence of optimism among economic participants, reducing interest rates to extremely low levels in order to produce growth is only so much pushing on a string. And, as many have seen over the last few years, it can also be counterproductive: desperately low rates can produce a degree of pessimism that may discourage investment and the assumption of risk. On the other hand, lifting interest rates from very low levels may not discourage investing and risk taking when in the context of growing consumer and investor optimism. And, at least domestically, consumers and investors appear to be demonstrating an incipient degree of optimism: U.S. consumer confidence has been climbing since May — the latest reading places it at its highest level in nine years (since just before the last recession); and the stock market is hovering within 2% of its all time high, which was set during the current/third quarter.

We’ve already mentioned that the absence of competition from bonds has provided a support to the equity markets. With rates set to increase, this support could slowly disappear, a future well appreciated by stock investors. Since the stock market has the reputation of discounting practically everything, we may assume that the market at current levels is not overly concerned with a .25% increase in overnight rates. However, in order for the stock market to grow from current levels, investors will have to believe that earnings growth will make a long awaited appearance sometime in 2017. In order for that to happen, there needs to be a lift in GDP well above the “muddling through” pace to which we’ve grown accustomed.

It seems to us unlikely that a 2% GDP growth rate will last indefinitely: it will either accelerate or the economy will slip back into a recession. In addition to the increases in consumer confidence mentioned above, there are signs that the U.S. economy is improving: the unemployment rate has declined to 4.8% and payroll employment is holding steady; perhaps more importantly, the labor participation rate, after having declined for most of the last nine years, appears to have bottomed (at 62.8%) and begun to rise; the housing market is steadily improving and new home prices are closing in on levels not seen since before the last recession; and the Federal Reserve, after having modestly lifted short rates from zero last December, now finally sees enough strength in the economy to consider another increase. As long as the Fed raises rates gradually — and they say that they will — then we see no reason why the domestic economy won’t benefit from higher rates. Perversely, there may be nothing like higher capital costs to quicken the animal spirits of corporations and investors. If this is correct, then this long recovery may last even longer and we might actually see significant growth and returns on invested capital.

For more information about the commentary found in this newsletter, please contact a member of the investment committee.

Heritage Institutional-October Retirement Report

Each month, our Heritage Institutional team publishes the Retirement Report, which provides timely news and updates for plan sponsors and fiduciaries of defined contribution plans.  This month’s topics include:

  • “Conflict of Interest” or “Fiduciary” Rule: A Plan Sponsor’s Q & A – Part II
  • ERISA Update
  • Establishing Your Retirement Plan Committee Charter
  • Summary Plan Description Reminder

To read the full report, click here.

Heritage Institutional — September Retirement Report

Each month, our Heritage Institutional team publishes the Retirement Report, which provides timely news and updates for plan sponsors and fiduciaries of defined contribution plans.  This month’s topics include:

Q & A – Department of Labor defined “fiduciary” and helps you understand the regulations and how they pertain to you, your plan and participants.

Participant Behaviors — OneAmerica® providing insights in order to improve financial wellness.

Organizing Your Fiduciary File — Prepare your file in four key sections to keep everything organized.

Allowable Plan Expenses: Can the Plan Pay? — The payment of expenses by an ERISA plan (401K) defined benefit plan, money purchases plan, etc.) out of plan assets is subject to ERISA”s fiduciary rule.

To read the full report, click here.


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 2016 for the September 2016 update.

Here are some key highlights:

o While non-farm payrolls added a softer 151,000 jobs to the market in August, the 3-
month average of 232,000 job additions remains above the recovery average of 200,000
o Consumer confidence remains high which should bode well for near-term U.S.
economic growth
o According to Baker-Hughes, the North American rig count is down 50 rigs compared to last year
o With S&P 500 companies posting negative earnings growth for six consecutive
quarters, corporations are beginning to reduce share back buybacks and slow dividend
o The economy-weighted manufacturing plus non-manufacturing composite index fell
from 55.1 to 51.2 in August, the lowest reading since January 2010
o While a 12% year-over-year decline in farm prices may bode well for consumers, costs
likely outweigh the benefits as already tight producer margins become tighter and
impact agricultural related companies through lower producer spending
o A labor shortage of nearly 200,000 unfilled construction positions is resulting in higher
builder costs and leaving entry-level homes in tight supply as builders are building more
expensive homes to try and maintain margins


Heritage August Book Pick: Better Than Before

We all have habits that are good for us and not so good for us. We’d 51RivppusfL._SX322_BO1,204,203,200_probably all agree that saving money is a good habit and impulsive spending would be a bad one. But how can we change? Author Gretchen Rubin has spent years researching habits (and happiness) and provides some interesting self-assessment exercises that can help us recognize habits that need changing and tips on how to create healthy ones in the NYT bestseller Better Than Before.

From the publisher:

The author of the blockbuster New York Times bestsellers, The Happiness Project and Happier at Home, tackles the critical question: How do we change? 


Better than Before answers that question. It presents a practical, concrete framework to allow readers to understand their habits—and to change them for good. Infused with Rubin’s compelling voice, rigorous research, and easy humor, and packed with vivid stories of lives transformed, Better than Before explains the (sometimes counter-intuitive) core principles of habit formation.

Along the way, Rubin uses herself as guinea pig, tests her theories on family and friends, and answers readers’ most pressing questions—oddly, questions that other writers and researchers tend to ignore:

• Why do I find it tough to create a habit for something I love to do?
• Sometimes I can change a habit overnight, and sometimes I can’t change a habit, no matter how hard I try. Why?
• How quickly can I change a habit?
• What can I do to make sure I stick to a new habit?
• How can I help someone else change a habit?
• Why can I keep habits that benefit others, but can’t make habits that are just for me?

Whether readers want to get more sleep, stop checking their devices, maintain a healthy weight, or finish an important project, habits make change possible. Reading just a few chapters of Better Than Before will make readers eager to start work on their own habits—even before they’ve finished the book.

Read more about the book here. 

What Planking Can Teach You About Wealth

by Kenny Brown, Heritage Trust

Recently I joined a boot camp. I have friends and neighbors who rave about Kenny Brownthem, and I thought if it’s working for them then it should work for me, right? After my first class, I thought I was going to need someone to drive me to the emergency room. My body ached all over. I was told it is a sign of getting in shape. I do not understand why being out of shape has to feel so good. I stuck with it, and I was so glad I did. I feel better. I look better…I realize this is subjective. One of the exercises we do in our boot camp is known as the plank. Basically, it is when you hold your body off the ground similar to a push-up position and hold it in a straight line.  I have learned there is a right and wrong way to do them. The plank is one of the best exercises to strengthen your core, which I learned is more than just your muscles in your stomach. It is also includes the lower back, hips and buttocks.



Being the financial nerd that I am, I realized the plank exercise could be a great way to explain how to sustain and preserve long-term wealth. For example, no matter the fitness level during the plank exercise you will begin to shake, sweat and experience pain throughout your body. I know it sounds fun… like being electrocuted. Anyway, the point is the more planking one does the easier it gets.  The reason…a stronger core.  Similar to preserving and growing wealth over time you must have a strong core also known as a well thought out asset allocation.  Just like the pain (volatility) experienced in the capital markets, relying on a well diversified asset allocation and sticking with it over time (discipline) ensures success as things go up and go down you can rebalance and take advantages of those opportunities to buy low, sell high.

I know it sounds so simple, but it is so difficult to do. In fact, there is a big disconnect between what investors think they make and what they actually earn.

“Typically, the studies find that the returns investors have earned over time are much lower than the returns of the average investment.” – Carl Richards, The Behavior Gap.

The reason is simple. Investors are relying on everything else (CNBC, friends, neighbors and anyone willing to offer up advice) rather than an asset allocation plan that focuses on balancing the risk versus reward according to you as the investor’s individual risk tolerance, goals, and investment time frame.  Interesting fact: George Hood held the longest plank at five hours and fifteen minutes. We at Heritage are focused on the long-term, and while I don’t plan on planking for five hours, I hope this challenges you from an investment perspective to focus on the things that matter so you can stay up for the long haul.

Heritage Institutional — July Retirement Report

Each month, our Heritage Institutional team publishes the Retirement Report, which provides timely news and updates for plan sponsors and fiduciaries of defined contribution plans.  This month’s topics include:

On Stress and Financial Wellness, A Personal Perspective — Brad Knowles gives us his first-hand account of how focusing on his health improved his stress and well-being.

ERISA Fidelity Bond versus Fiduciary Liability Insurance — Plan sponsors often ask, “Is an ERISA fidelity bond the same thing as fiduciary liability insurance?” The answer is no, they are not the same. The two insure different people and have different requirements under the terms of ERISA.

I’m Too Young to Save for Retirement! — Too often, we hear the younger generation of workers tell us saving for retirement is not high on their priority list. It’s easy to understand why retirement may not be a main priority. However, what the younger generation needs to understand is that this may be the most crucial time to begin saving for retirement.

To read the full report, click here.

Heritage June Book Pick: Going Broke

Looking for an intellectually-stimulating beach read this summer? Nothing like a cold splash of the hard truth on a hot summer’s day. If you have read this book, we’d love to hear your thoughts in comments!

Going Broke: Why Americans Can’t Hold On To Their Money by Stuart Vyse

About the book (from the publisher):

51MRdAGQRQL._SX326_BO1,204,203,200_Over the last three decades, debt, bankruptcy, and home foreclosures have risen to epidemic levels. To make matters worse, the personal savings rate is at its lowest point since the Great Depression. Why, in the richest nation on earth, can’t Americans hold on to our money?

Winner of the prestigious William James Book Award for Believing in Magic and an authority on irrational behavior, Stuart Vyse offers a unique psychological perspective on the financial behavior of the many Americans today who find they cannot make ends meet, illuminating the causes of our wildly self-destructive spending habits. But unlike other authors, he doesn’t entirely blame the victim. Bringing together fascinating studies of consumer behavior, he argues that the mountain of debt burying so many of us is the inevitable byproduct of America’s turbo-charged economy and, in particular, of social and technological trends that undermine our self-control. Going Broke illuminates everything from the rise of the credit card, to the increase in state lotteries and casino gambling, to the expansion of new shopping opportunities provided by toll-free numbers, home shopping networks, big-box stores, and the Internet, revealing how vast changes in American society over the last 30 years have greatly complicated our relationship with money. Vyse concludes both with personal advice for the individual who wants to achieve greater financial stability and with pointed recommendations for economic and social change that will help promote the financial health of all Americans.
Engagingly written, with startling insights into modern consumerism and with poignant human-interest stories of people facing financial failure, Going Broke offers a provocative new perspective on American economic behavior that is likely to stir controversy and serious debate.

June Retirement Report

Solutions for a Stressed-out Nation — Mature couple discussing financial matter with advisorHow stressed are we? In May of 2014 New York Life Retirement Plan Services sponsored a research study which shed light on individual stress levels, its causes, and how best to combat it.

Fiduciary Seminar Alert — Plan fiduciaries have a primary responsibilities to understand and prudently discharge their duties in accordance with ERISA and their plan document. This section provides content and extra fiduciary training for plan fiduciaries.

How to Encourage Positive Retirement Outcomes in Tax Exempt Plans — Tax exempt organizations seem to have a different attitude towards the implementation of these strategies. Find out what they are in this section.

When “Float” is a Bad Thing — Float refers to the earnings or “compensation” accruing to a service provider while a plan’s contribution remittance (or other assets held in suspense) is awaiting deposit or distribution. Find out how to keep compliant.

To read these and other featured stories, visit Heritage Institutional or click to view the latest Retirement Report.

Heritage Market Brief – May 2016

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 here for the May 2016 update.

Here are some key highlights:


o With a recent increase in fuel consumption, a series of supply disruptions, and production outages, global supply has somewhat rebalanced and driven crude oil prices to new 2016 highs

o The nation’s trade deficit narrowed more than expected to $37.4 billion and should positively impact second quarter 2016 GDP

o While consumer confidence remains somewhat mixed, future income expectations ticked up along with an increase in consumers expecting to buy a car or home within the next 6 months

o Labor markets continue to show strength as highlighted by a 7,500 decline in the four- week moving average of jobless claims to 269,500


o The World Bank once again lowered its global growth estimate by 0.5% to 2.4% citing a weaker outlook for commodity exporters and a challenging external environment with soft investment amid weaker growth prospects and elevated policy uncertainty

o The service sector, which is driven by the strength of the domestic consumer, is turning noticeably lower as indicated by a decline of 2.8 points in the ISM non-manufacturing index to 52.9 as well as a decline of 1.5 points in the services PMI to 51.3

o As wages continue to lag, inflation remains flat with the PCE Core Index struggling to meet the Fed’s 2% target

o The nation’s oil patch still remains in extended contractionary territory despite WTI surging 60% since February; as long as oil prices remain stable to increasing, these territories should start to benefit

Legacy and the Aubrey Echo

by Bond Payne, Chairman/CEO Heritage Wealth Management Company

Bond Payne

Bond Payne

How can a legacy be measured?  Do you measure it in dollars, the number of friends or grandchildren you have, or maybe the edifices that bear your name?  Many of our clients have achieved financial security for themselves and their families, but as they begin to come to grips with their own mortality, they begin to think in terms of what they are leaving behind and how to best care for those they love.

When I moved back to Oklahoma City in 1993, I was looking for a job in the oil and gas industry. The economy was very slow in Oklahoma City and not much had changed since I had gone away to college.  Most of my high school friends had gone away to college and never returned due to the lack of job opportunities in Oklahoma.  However, I was fortunate enough to connect with a number of oil and gas producers who had been through the hard times and, through grit and good fortune, were still hanging on.  I would typically meet them for lunch at the Petroleum Club for a long lunch and listen to their stories about the poor condition of the industry.  Then I was introduced to Aubrey McClendon.

I met Aubrey at his office at 63rd and Western.  At the time, Chesapeake was operating out of a few small office condominiums that have now been replaced by a sprawling campus. Aubrey came out of his office, introduced himself, and we pressed on to Flip’s for lunch.  For the next thirty minutes, he peppered me with questions and talked about Chesapeake while we ate. Then we hustled back to his office and, by the time the interview was over, the whole process had taken only 45 minutes.  It was apparent to me that this guy was different.

While I did not get the job, I continued to follow Aubrey as he built Chesapeake and began to transform our community.  His employment practices and charitable giving raised the bar on every single company in town.  The community projects he funded became the cornerstones of a higher quality of life that was attractive to young workers and benefitted everyone.  He challenged us to think big, be more and do more.  His vision, leadership and irrepressible energy was inspiring to me as we grew Heritage from a small, independent trust company to become the pioneering, sustainable wealth management company in the Southern U.S with more than $12 billion under administration.

Recently, in conjunction with our redevelopment of the historic Journal Record Building, we commissioned a study of the Oklahoma City multi-family housing market.  One of the findings of the report was that Oklahoma City has one of the highest populations of millennials in the U.S.  And I’m sure you have read that millennials are believed to be a key driver of future economic growth, just as the baby boomers were in the post-war era.  It occurred to me that the reason all of the millennials are in Oklahoma City is largely because of Aubrey McClendon and his visionary transformation of the energy industry and Oklahoma City.  Without Aubrey’s vision for creating a corporate campus and community that was appealing to bright young workers, and without him raising the bar for all of us in the business community, I believe none of this would have happened.

Many of the brightest young people I encounter around town are here for two reasons:  1) they were born here and stayed here for because they got a high paying job at a dynamic company, or 2) they came here because Aubrey McClendon brought them here to work.  I have dubbed this group the “Aubrey Echo”, because I believe they will have an impact on our community that will make the unbelievable work that Aubrey did during his all-too-short life look small in comparison.  His greatest legacy will not be what he did while he was here, but the impact that he will have for generations to come.