Quarterly Reflections - January 2018

“The future…something which everyone reaches at the rate of sixty minutes an hour, whatever he does, whoever he is.” ~ C.S. Lewis

Just like that, 2018 is upon us. Time does seem to speed up as we mature, as does the hectic pace of news that we are expected to know, synthesize and apply. To that end, this newsletter will be the “Skimm” or “Finimize” of what Serene Point has been reading and reflecting upon. Our online version will include links for more in-depth reading.

On the economy

Prosperity is in the air across our country and around the globe. Highways are busy, restaurants are full and airports crowded. Urban neighborhoods buzz with delivery trucks unloading our online purchases. Our GDP is trending up and complimented by historically low inflation and a modest dollar valuation that is consumer friendly.

For sure this has been a slow burn of a recovery but nonetheless it is real and strong by nearly every economic measure and indicator. To what do we owe this pleasant surprise? At last Europe’s economy has found its footing and #euroboom is now underway. This has helped synchronize global commerce and has swept up the U.S., extending our near record-long expansion.

What’s not so certain is where we are in the cycle of expansion. Thanks to subdued inflation and six years of ZIRP (zero interest rate policy), the recovery since June 2009 is approaching its 9th birthday. It has lasted nearly twice as long as the average U.S. expansionary period. We have a vintage model here and, really, how long can we expect it to keep running?

We need more certainty to know the answer to this question. Certainty allows better investment and personal financial decisions. It is the difference between selling a house now or not; between taking a new job now or staying put.

From our viewpoint, the near future is bright. Leading indicators, such as low unemployment, strong residential housing permit requests, solid consumer confidence and a flat bond yield curve, all indicate that recession is not imminent, and perhaps years away yet.

We will keep our eye on China, which is somewhat out of step with this growth scenario. China has been raising interest rates amidst slowing prosperity and job growth. For a debt-burdened country, in which you could say everyone owes everyone else money, we see a fragile financial situation that requires continued careful handling. The worst-case scenario would be a housing bubble bust, then a bank bust, then a trade slowdown and then consumers reeling in their wallets. That sum of events, in some varying order, would rattle our markets greatly.

On the markets

Looking back, 2017 exceeded most every prediction of what the markets would yield. On the one hand, there was plenty of reason to believe that stock prices started the year in overbought territory. But the global recovery and a stream of earnings surprises fueled the markets. Many words can be, and have been, written on the records smashed in 2017 prices.

This chart shows for the monthly S&P 500 returns going back through 1990. Notice how 2017 stands out?

What was most remarkable was how calmly this unfolded, against a backdrop of highly unusual politics, weather, and social upheavals. Volatility was so rare that traders who routinely put insurance on their investments by buying options stopped hedging in this way; the premium was turning out to be wasted money. Yet complacency is concerning - it is just when we think that we are such good drivers that we do not need insurance, that it is most needed. .

Do not expect such unwavering markets to continue; indeed we will see more volatility in the year to come. In fact, expect that it may be caused by the U.S., as the Federal Reserve continues cranking up interest rates. Too much and too fast this year could tip our economy into a deflationary recession.

On personal finance

Client discussions around events such as marriage, retirement, selling a business or the ultimate – winning the lottery – are exciting. But it is arguably more important and necessary to discuss how to handle the inevitable death of a loved one. We have a collection of sad stories shared with us over lack of planning ahead of a loved one’s decline and death. They include lapsed insurance policies, lost stock certificates, and IRAs inherited by former spouses because beneficiaries were not updated.

Serene Point has developed a Letter of Instruction that we are using with clients to help declare their intentions long before anything happens. Our letter is to be completed by you and saved in an accessible place for your family. Think of it as a love letter and an important item to put on your 2018 to-do list.

Open the letter via this link: Letter of Instruction or by going to our Forms section.

With that, we wish you a happy new year ahead filled with laughter and joy!

DISCLOSURE

Statements on financial markets and economics are based on current market conditions and subject to change without notice. Due to the rapidly changing nature of financial markets, all information, views, opinions and estimates may quickly become outdated and are subject to change or correction. We provide information from reliable sources but should not be assumed accurate or complete.

Information published herein is provided for informational purposes only, and does not constitute an offer, solicitation or recommendation to sell or to buy securities, investment products or investment advisory services. Nothing contained herein constitutes financial, legal, tax or other advice. The appropriateness of an investment or strategy may not be suitable for all investors and will depend on an investor’s circumstances and objectives. You may find links to websites that are not managed by Serene Point Advisors.

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