Dear Clients and Friends,
Welcome to Chatham Wealth Management's Year End Newsletter. Each January, we like to review the big-picture events and scenarios of the past 12 months that influenced our investment strategies and ultimately impacted the value of your portfolio.
As we focus on achieving short-term and long-term financial goals in an ever-changing environment, we continue to view our relationship with you as a partnership. Many of you have been with us for over 35 years! We sincerely thank you for the trust you have placed in us.
2016 marked a milestone as our founder passed away in October. John Raab built a culture that he took from his experience at U.S. Trust. He believed in being a fiduciary for his clients. He believed high quality stocks were the foundation of investment portfolios, that bonds should be owned for safety and income, and if patient you could take advantage of inefficiencies in the market that present themselves because of short term issues. John was retired for the past 14 years and left CWM in good hands. Ownership is still retained by the same family and all key employees remain.
2016 What Happened?
Equities and bonds encountered quite a bit of volatility during the year. The year began with the market reacting to the first Fed interest rate increase since the financial crisis and expectations of four additional rate hikes throughout the year. This coupled with a continuation of a commodity selloff that began in late 2015 precipitated a selloff off of more than -10% in stocks (worst start to a calendar year in history). Oil traded below $30 a barrel after trading above $90 as recently as 2014. The markets recovered and turned positive in mid-February as the Fed tempered rate hike expectations. As the year moved along decent economic and corporate earnings reports carried stocks higher and bonds lower.
The surprise results of the presidential election created even more optimism for the business community. President Elect Trump’s ideas of less regulation, lower taxes, and a large infrastructure stimulus package are all very appealing to Wall Street as the common thinking is that these will lead to stronger growth for the economy.
What worked and what didn’t work in 2016? Sector performance of stocks was almost the complete opposite of 2015. The hot area to be in was growth and specifically, FANG (Facebook, Amazon, Netflix and Google) stocks. In 2016 these names performed poorly and were a drag on portfolios as institutional investors rotated out of growth and into companies that pay a dividend and can grow their dividend. Specifically, financials and energy stocks were big winners (after being big losers in 2015). This rotation is also a good reminder not to buy investments based on recent performance (rear view mirror investing).
On the bond side, shorter duration bonds, and floating rate bonds drastically outperformed traditional longer duration fixed rate bonds. As many of you know, we have been predicting the end of the thirty-five-year bull market in binds and discussing the dangers of buying longer term fixed rate debt if bonds trend back towards a normalization in rates.
What to expect in 2017
- US economic growth to plug along somewhere between +1.75% and +2.0%. This backdrop should continue to lead to continued job growth and wage increases that we experienced in 2016.
- Stocks still have better prospects than long dated fixed rate bonds.
- Corporate earnings are projected to grow in excess of +10% this year.
- Global economic growth to pick up to +3.5% from +3.0%. Emerging market commodity based economies should outperform.
- Reflation trade to march on – Bond yields will be choppy but most likely will move higher. Companies that have growth and strong balance sheets that can buy back stock and increase dividend payouts should flourish. Companies that do not have the ability to grow dividends much like fixed rate bonds will be less attractive.
- Real Estate – We are turning neutral on real estate as rates rise. The financial crash and extremely low interest rates have brought large amounts of institutional money into the residential market. They have made their money and are now starting to sell. Both of these factors will reduce demand
Cyber security –It seems that about once a month we read about a major credit breach by a large retailer or the government. I’m sure many of you saw the 60 Minutes piece last year on the criminals that file fake returns on unknowing citizens. It is a very difficult and time consuming process to rectify. We have been researching this issue and expect to issue an actionable report for our clients before the end of the first quarter.
We would like to thank all of those clients who have referred new business to us during the past year. If you have a friend or colleague who may benefit from our services, we will gladly send you a marketing package that you can provide to them. Of course, you can always have them call us directly.
Each year the SEC requires us to offer you a copy of its Securities and Exchange Commission Form ADV, Part II. This form documents standard information on our partnership. If you would like a copy, please let us know.
2016 Tax Documents – Please hold the 1099’s you receive in the mail. We will be sending realized gain and loss schedules that should match with the proceeds on your 1099 tax forms. Your tax preparer will need both to properly prepare your tax return
As a reminder, never hesitate to reach out to us with any questions you may have. We are here to help answer any financial planning issues. Whether it’s a question about a loan, mortgage, insurance, or retirement planning we are here to help.
If you have administrative issues, you can direct them to Kori Willis and Christine Hoehn. The two of them serve as the backbone to CWM’s operations. Both can be reached using our toll free phone number at (800) 472-8086
We wish all our clients and friends a happy, healthy, and prosperous 2017. We want you to know that we value and appreciate your business, and we thank you for trusting us to manage your financial well-being.
Daniel H. Moskowitz | John Lui | Gregory Shaw