The Intelligent Investor
A bi-weekly publication from Consultiva Internacional, Inc. (Registered Investment Adviser) January 5, 2017
Myrna Rivera, CIMA®
We are all familiar with the postmortem examination that follows a disaster, along with the accompanying blame game. Such “a posteriori” analysis inevitably suffers from hindsight bias; everyone suddenly thinks that the disaster was predictable and that different actions could have caused alternative outcomes. Richard H. Thaler, considered the father of behavioral economics, recently reminded us of an alternative approach; the ”The Premortem”. Thaler states that premortems help overcome natural organizational tendencies toward groupthink and overconfidence by introducing a devil’s advocate in the decision making process. This is the skeptic that pricks new projects or ventures to uncover unfounded assumptions or to dissect the specifics of processes and designs. While an unpopular function, the point of the exercise is thinking of reasons why a project could fail and guarding as much as possible against it. Thaler also suggests a subtler form of premortem that can help generate creativity and critical thinking. An example illustrates how this approach can work: Suppose a pension plan director communicates to her staff that she just learned that the plan will fail within 5 years. Why? Of course, some will think that contributions are too low or that the investment portfolio is not achieving the desired results. But real progress will be made by thinking of much more mundane explanations. Suppose someone suggests that the cause could be a lack of awareness among participants and lack of education about the importance of contributions. This type of thinking can tackle incorrect assumptions and processes that are thought to be working smoothly. In the end, it is an alternative path to increasing effectiveness and efficiency in our endeavors, something we should all be thinking about in what promises to be a challenging 2017.
Edmundo J. Garza
As incoming U.S. president Donald Trump names his cabinet members, makes speeches on his “thank you” tour, and continues to tweet his way to social media stardom, economic analysts are battling out a consensus on what the future will look like under “Trumponomics”. One issue does seem certain, even with one political party controlling both houses of Congress and the presidency, the new administration’s proposals will need to be presented, refined, detailed and debated before eventually being implemented. That means there’s time to prepare for the fiscal fallout and watch for economic “flags” we should not miss: 1) Mortgage rates are on the rise. According to Bankrate.com, they averaged 4.15% for a 30-year fixed rate loan during the week before the Federal Reserve Board’s December meeting, up from 3.73% just four weeks earlier. Some economists and bankers have expressed that this trend will continue because the Trump administration is pro-growth and that the GOP dominated Congress will give greater way to fiscal spending. Presumably, government spending would stimulate the economy and interest rates will continue to rise. 2) Inflation seems imminent. With an economy near full employment, trade restrictions driving up the price of import-competing goods, and central bank independence challenged, inflation could likely exceed 3% in the near future. Inflation eats away at real earnings and purchasing power, as the costs for products and services rise. This points to inflation protection alternatives in the investment portfolio, along with other rebalancing possibilities. 3) An economic recession could be in the making. While Trump has vowed to push for economic growth policies, the economic expansion that began in July 2009 has already lasted much longer than the 58-month average post-war expansion. Kenneth Rogoff, professor of economics and public policy at Harvard University, recently warned in a post on Project Syndicate that “if the new administration proves erratic and incompetent, dejection will quickly overwhelm confidence”. On the other hand, he cautioned readers to beware of “pundits who are certain that Trump will bring economic catastrophe”. Ahead of the possible turmoil, investors are advised to approach asset allocation and risk assessment prudently, and to base decisions on their future capital needs and responsibilities.
(As of December 13, 2016)
CPI: +1.7% Chg. from yr. ago
Unemployment Rate: 4.6%
GDP: 3.5% Comp. Annual rate of Chg. on 2016:Q3
Ind.Prod.Index: -0.4% change from previous month
Source: St. Louis Fed. Res.
CPI: 0.6% Chg. from yr. ago
Unemployment Rate: 9.8%
GDP: 0.3%, Comp. Annual rate of Chg. on 2016:Q3
Ind.Prod.Index: -0.1% change from previous month
Source: Moody’s Analytics
CPI: -0.4% Chg. from yr. ago
Unemployment Rate: 3.1%
GDP: 0.3%, Comp. Annual rate of Chg. on 2016:Q3
Ind.Prod.Index: 1.5% change from previous month
Source: Moody’s Analytics
CPI: 0.3% Chg. from yr. ago
Unemployment Rate: 11%
Payroll Employment: -0.7 Chg. from yr. ago
GDB Econ. Act. Index: -1.0% Chg. from yr. ago
Source: P.R. GDB
Evangeline Dávila, CIMA®
Stocks: U.S. stocks fell on the last trading day of 2016 following a 0.7% decline in the S&P 500 technology sector. Eight of the 11 major S&P 500 sectors were lower, with technology and consumer discretionary stocks taking the biggest hit. The Dow Jones, which came within 13 points of breaching 20,000 earlier in the month, ended more than 200 points away from the milestone.
Bonds: Treasury yields have been edging higher as expectations for an aggressive pickup in consumer prices weighed on fixed-income markets. The yield on the 10-year Treasury note gained 1.8 basis points, and rose 0.8 basis points on the two-year note (remember that bond yields move inversely to prices). The dramatic postelection selloff in Treasury notes appears to be slowing as investors internalize that the incoming administration’s policy proposals, which spurred much of the rally, will take time to enact.
Alternatives:In 2016 commodities scored their strongest yearly gain since 2010, a complete turnaround from last year’s poor performance. Iron ore, zinc and natural gas were the year’s top performers. The Bloomberg Commodity Index (see the chart below) tallied its first yearly percentage gain in six years—a significant turnaround from the end of 2015, when it posted its worst annual percentage loss since 2008. Oil posted a 45% rise in 2016, the biggest annual gain in 7 years.
Bloomberg Commodity Index - 5 year chart
David L. Alvarez
A new year is a great time to evaluate where you stand in regards to your long-term goals. This is true for your portfolio also. Do you know how hard your money worked for you in 2016? If not, you can contact your investment advisor to conduct a quick check-up: 1) Evaluate portfolio performance. If your funds are invested in large-company stocks, you might want to compare your performance with the S&P 500. If your equity investments also include stocks in smaller companies, you can look at the Russell 2000. If your portfolio is well diversified, your advisor can show you comparable composite benchmarks which include index results in proportions that correspond to the weights given to different asset classes. The performance of investments in mutual funds and other pooled vehicles should also be compared to similar vehicles offered by well established companies. 2) Review fees. After evaluating performance, check-out how much it cost you to achieve it. If you are invested in mutual funds, fees will show up as the expense ratio. Obviously, lower fees are better, but sometimes paying a slightly higher fee for a fund could get you better diversification and a better match to your personal values. 3) Rebalance your portfolio. Over time, as certain funds underperform or outperform, your asset allocation may become skewed. If a couple of your investments did great while everything else declined, you may be weighted too heavily in a particular area. Ideally, you should have a balance of stocks, bonds and other investments that are based upon your individual goals and risk tolerance, and these tend to change over time.
Overall, U.S. equities continued their postelection surge in December, albeit a weak finish to the year. Investors continue to anticipate pro-business policies, and were spurred by the Federal Reserve’s decision to increase interest rates; a “tip of the hat” to an economy that seems to continue to strengthen. Multinationals, however, are concerned with protectionist policies and undesired interventions in the markets. The pressure recently exerted by the incoming President on Ford and Carrier are examples of that. Amid an uncertain scenariowe continue to recommend prudent asset allocation and risk assessment, based on future capital needs, for plan sponsors, institutions and individual investors. Due diligence reviews and an adherence to a well-developed investment policy remain the most prudent course for long-term investors. Continued fiduciary education is paramount.
Consultiva is a Registered Investment Adviser. The registration with the Securities and Exchange Commission does not imply a certain level of skill or training. Consultiva has compiled the information for this report from sources Consultiva believes to be reliable. Sources include: investment manager(s); mutual fund(s); exchange traded fund(s); third party data vendors and other outside sources. Consultiva assumes no responsibility for the accuracy, reliability, completeness or timeliness of the information provided, or methodologies employed, by any information providers external to Consultiva. Conclusions reflect the judgement of Consultiva Investment Strategy Committee at this time and is subject to change without prior notice. There also can be no guarantee that using this information will lead to any particular result. Past performance results are not necessarily indicative of future performance. Diversification does not guarantee a profit or protection against loss. This document is for informational purposes only and is not intended to be an offer, solicitation, recommendation with respect to the purchase or sale of any financial investment/ security or a recommendation of the services supplied by any money management organization neither an investment advice or legal opinion. Investment advice can be provided only after the delivery of Consultiva’s Brochure and Brochure Supplement (ADV Part 2A and 2B) once a properly executed investment advisory agreement has been entered into by a client and Consultiva. This is not a solicitation to become a client of Consultiva. There are risks involved with investing including the possible loss of principal. All investments are subject to risk. Investors should make investment decisions based on their specific investment objectives, risk tolerance and financial circumstances. Global and international investments may carry additional risks that are generally not associated with U.S. investments, such as currency fluctuations, political instability, economic conditions and varying accounting standards. Annual, cumulative, and annualized total returns are calculated assuming reinvestment of dividends and income plus capital appreciation.