Market Digest          
1.31.18          
OBSERVATIONS
Keys to Investment Success
For good reason, there has been a lot of talk recently about how the US stock market is overpriced.  Consider that the historical price-to-earnings (P/E) ratio for the S&P 500 over the past 146 years is 15.6. Hovering around 25, the current earnings multiple represents a value 63% higher than the historical average. Even using forward earnings, the S&P 500 is valued higher  than it has been in the last 13 years. Although the economy shows no signs of slowing down, sooner or later there will be a reversion to the mean. So, what's an investor to do?

Last week, famed economist and author, Burton Malkiel outlined some ideas in an article for the Wall Street Journal. Malkiel, most famous for his classic finance book,  A Random Walk Down Wall Street, touted the same, proven investment strategies that we promote to our clients.

Market Timing
First, no valuation metric can accurately predict the future, and relatedly, no investor can consistently time the market. The cycle-adjusted price/earnings ratio, or CAPE ratio was close to 30 at the start of last year. This led many observers to sound the alarm over high valuations. Then the S&P 500 returned 19% in 2017. Had investors heeded warnings about expensive stocks they would have missed out on that outstanding return.

Diversification
Okay, so we can't predict what will happen, but we can take steps to lessen the impact of a downturn. Rightly known as "the only free lunch" in investing, diversification is step number one to mitigating risk. Investors need to diversify across market caps (large, blue chips to small businesses) across regions (US, developed international and emerging markets equities) and across asset classes (equities, fixed income, real estate). Well over half the world's economic activity takes place outside of the US and non-US equities are particularly attractive now because their valuations are low relative to the US.

Comparative PE Ratios US vs Non US
US Equities are Twice as Expensive as the Rest of the World
Source: Cliffwater LLC Asset Allocation Report


At New Market Wealth Management, we take diversification a step further by incorporating non-traditional asset classes like MLP's, BDC's and private investments. The primary benefit to diversifying your portfolio lies in correlation. By investing in assets that are uncorrelated, it's likely that if one asset class goes down, another could be going up, thereby reducing volatility and stabilizing returns.

Rebalancing
The next risk control strategy Malkiel offers is rebalancing. Periodically examining your portfolio to ensure you're still on track with your desired asset allocation strategy is a prudent practice. If the strong US stock-market performance over the past year lifted the proportion of domestic stocks in your portfolio to a level that is riskier than you want, now would be an appropriate time to rebalance. Of course tax considerations are key here, but if you haven't already diversified into less traditional, less-correlated asset classes, this may be a good time to shift your allocation in that direction as well.

Cost Control
A piece of advice offered by Malkiel, and one we consistently find ourselves discussing with investors, is cost. As he says, "minimizing costs is a winning strategy" and this will be even more important when the stock market turns south. Hidden fees, transaction costs, mutual fund loads, bond mark-ups and administrative fees can all eat away at returns. Truly understanding what you're paying your advisor can be eye-opening.

No one knows what will happen in 2018 and beyond, but implementing these key investment strategies now could set you up for a much easier ride when the downturn comes.
MARKET UPDATE
Led by large cap stocks, all the major equity indexes continued their winning streak. Earnings reports were generally positive, but the rally began early in the week after Congress passed a stop gap spending bill and ended (temporarily) the government shutdown.  Notably, merger and acquisition activity has already been strong this year and that too contributed to the gains.
Equity Index Returns through January 26_ 2018
Source: Yahoo Finance
ECONOMIC NEWS
> GDP: The first estimate of GDP growth in the fourth quarter of 2017 was 2.6%, announced last Friday. Consumer spending rose a very strong 3.8% and residential investment rose at an impressive 11.6% annualized rate. Business spending and government purchases also added to GDP in the quarter.

What pulled down fourth-quarter GDP were net exports, at an annualized deficit of $652.6 billion, and inventories which rose at a slower rate than the third quarter. 
4Q18 GDP

> FOMC:   This week's Federal Open Market Committee Meeting marks the last meeting that Janet Yellen will chair. As expected, the Fed did not take any rate action, though the market has been primed for a March hike, followed by two more later in the year.

Yellen leaves the Federal Reserve after four years as chair, and in that time she began the slow process toward normalizing interest rates and shrinking the Fed's balance sheet. Viewed through most of her tenure as a dove, Yellen began the process of reversing extreme crisis-level policy. She had previously served as vice chair to her predecessor, Ben Bernanke, and was president of the San Francisco Fed prior to that.   
 
Federal Funds Rate Jan 2018


> The Superbowl:  Maybe you watch because you're a die-hard Eagles or Patriots fan, or you watch to root against either team. Or, perhaps you tune in for the halftime entertainment, this year featuring Justin Timberlake, or you watch to judge how companies spend their $5 million for 30 seconds of air time. Regardless of the reason, over 110 million of us will be watching...and talking about it at work on Monday.

Superbowl Logo

THE WATERCOOLER
Bobsled Brownie
Baskin Robbins Celebrate 31
Yes, it's the middle of winter and yes, parts of the country are in a deep freeze. But today is one of just 7 times a year you can get a great deal on ice cream at Baskin- Robbins!

On the 31st of each month, Baskin-Robbins  sells regular and kids' scoops for just  $1.50 nationwide . The "Celebrate 31" special is to commemorate the brand's iconic 31 flavors - one for each day of the month.

January's flavor of the month is Bobsled Brownie, "a fudge crackle ribbon that rockets past blonde brownie pieces, and mountains of milk-chocolate-mousse-flavored and butter-caramel-flavored ice creams!"

Regardless of the flavor you choose, BR has some thoughts on you based on how you take their ice cream:
  • Those who chose a Sugar Cone are considered the life of the party and are funny, edgy and performers.
  • Those who favor a Waffle Cone tend to be the host of the party, more traditional and nurturing caregivers.
  • Those who would rather enjoy ice cream in a bowl or cup are analytical types who are rational thinkers. They are responsible, dutiful, family-oriented and hard working. 
NEW MARKETS. NEW ADVICE.
New Market Wealth Management offers modern investment solutions backed by extensive research and experience serving the needs of wealthy families. Through our strategic partnership with Cliffwater LLC , we have access to institutional-quality research, investment due diligence and asset allocation tools. We believe this level of experience and unique access to in-depth, sophisticated research are essential for success in today's complex world markets.

New Market Wealth Management
(657) 900-1899