It is important to have and maintain the proper perspective and attitude in your financial journey. The lenses through which we view the world shapes both our market and political views. When your eyes become older, or shall we say more experienced, you realize two lenses may be required to see clearly. Bifocals perform a great service for those of us seeking clarity. As investors, we should use one set of lenses to assess the political landscape, and another set to analyze the markets. Separating your political views from your market assessment will provide a much sharper market focus. A key role of Nevada Retirement Planners is to help you navigate through all the noise and distraction, while getting your portfolio keenly focused on your financial goals.

Let’s focus on the markets. In February, the bull market in U.S. stocks continued its run to levels never before seen. Dow 20,000, once an unreachable peak is now 812 points in the rear view mirror and Dow 21,000 is knocking on the door. It was a remarkable month for stocks with only five down days and twelve consecutive record breaking closes for the Dow. Market leadership came from the consumer goods, healthcare, and financial sectors. Apple was the one thousand pound gorilla in the room, gaining an amazing 12.8% in the short month. Healthcare was led by Pfizer and Johnson and Johnson with returns just below 10%. Banks had a solid month across the board as the prospects of higher interest rates would improve net interest margins and the proposed peel back in regulation provided additional fuel for their rally. Basic materials took a breather led by declines in some of the major oil companies like Exxon which was down just over 4%. The U.S. stock market as measured by the S&P 500 gained 3.97% in February, outpacing the emerging markets and international markets which returned 3.06% and 1.43% respectively.

Interest rates, which have gone absolutely nowhere this year, should begin to drift higher as the economy continues to grow and Washington discovers fiscal policy once again. Fiscal policy is important to the Federal Reserve because it provides them more latitude to implement a more restrictive monetary policy. Chairwomen Janet Yellen made clear in testimony to Congress that rate hikes are “on the table” for their March meeting and I imagine each Fed meeting this year. The Fed needs to return to a normalized monetary policy before they can begin addressing their bloated $4.5 trillion balance sheet. The Fed has a long way to go and raising the Fed Funds rate is just the beginning.

Higher interest rates mean lower bond prices. Time also plays an important role in bond price action. We believe the rate rise this year will be gradual. This means the income earned from bonds over the course of the year will have the opportunity to cushion the price decline. This path is less painful than an immediate rise in interest rates which causes a sudden price decline. In this scenario, investors need twelve months of income to repair the effects of a sudden rate increase. It’s okay to own bonds for the basic reasons of income, principal preservation or volatility control, but temper your expectations from this asset class. Earning the coupon alone would make for a great year in bonds.

Whether your t-shirt reads, “Make America Great Again” or “Dump Trump”, please check it at the door and embrace the financial markets on their own merits. As explained in last month’s commentary, we are positive on the global stock markets in 2017 and cautious on the outlook for bonds. The path will not be a straight line higher, rather periods of strength followed by consolidations as news and revised expectations are priced into the markets. If watching cable news is now a hobby, either embrace the perceived chaos you hear every night or change channels if your market view is being swayed. Nothing trumps a solid financial plan. Stay on your path.

MARKETS BY THE NUMBERS:

To expand on these Market Commentaries or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222

Within Nevada Retirement Planners, we have two stock based strategies, the Gradient 50 (G50) and the recently introduced Gradient 40 International (G40i), that emphasize dividend income as part of their value proposition. In today’s market reflection, we are going to provide you with our thoughts as to why dividend based investing provides long-term portfolio value.

Reason #1: Dividends generate income in a low yield environment
The current yield on a 10-year U.S. treasury note is 2.38%. This is near a 30 year low. In other countries, 10-year yields are even lower. The data shown below illustrates the current yield and annual income generated from a $100,000 investment in each particular country’s debt. The data also reflect the current dividend yield and annual income generated from a $100,000 investment in the S&P 500, the Gradient 50 (U.S. stocks) and Gradient 40i (international stocks) portfolios. In this low yield environment, an allocation to select stocks that pay consistent dividends can generate additional income to supplement the payments received from fixed income investments.

Reason #2: Dividends have the ability to outpace inflation
With fixed income coupon payments, the amount of payment generally stays the same through maturity. Over time, prices of goods and services tend to rise (inflation), and the result of rising prices means the fixed coupon payments become less valuable – investors lose purchasing power. Dividends from stocks have the ability to outpace inflation as many companies can, and do, raise their dividends over time. As the chart below shows, the average dividend growth rate of stocks (represented by the S&P 500) has outpaced average inflation (represented by the Consumer Price Index) since 1990.

Reason #3: Dividends can provide defense in turbulent markets
The majority of dividend paying companies tend to be large, relatively stable companies within defensive industries like Consumer Staples, Telecommunications, and Utilities. Over an extended period, these companies tend to exhibit less volatility compared to the broad market. This can be shown by looking at comparable standard deviation over time. Standard deviation tends to be the preferred method to measure market risk, where higher standard deviation represents higher risk. The below chart reflects the standard deviation of a dividend paying portfolio (the S&P Aristocrats Index) versus the broad market (S&P 500). Over the last 10 years, the data shows that the S&P 500 Dividend Aristocrats have had consistently less average risk compared to the broad market.

Reason #4: Dividend paying companies provide income and price appreciation potential
When an investor purchases a bond, the expectation is to receive coupon payments during the time of holding and receive a return of principal at maturity. When an investor purchases a dividend paying stock, there is an opportunity to benefit from price appreciation of the underlying during the holding period. Investing in stocks does involve increased risk, but over extended periods the stock market tends to appreciate. As a result, investors can be rewarded with both dividend income and a return on their initial principal investment.

Risks to dividend stock investing
While we at Nevada Retirement Plannners believe in the long-term benefits of dividend stock investing, we would be remiss not to point out some of the risks. Unlike fixed income coupon payments, dividends are voluntary payments from companies and can be reduced or eliminated in times of stress. Second, with fixed income instruments, there is an implied return of principal at maturity unless the entity is subject to default. When investing in stocks, the principal amount may increase or decrease, and invested assets typically display higher volatility (or increased risk) compared to fixed income investments. These risks should be factored into the overall asset allocation strategy that is based on an individual’s return needs, risk tolerance, and investable time horizon.

In summary, an allocation to dividend paying stocks is a proven investment strategy that can provide growth and income for investors over time. An allocation to dividend paying stocks, both U.S. and international, can provide supplementary income to meet investor needs as well as the opportunity to grow assets over time. While not without risk, we believe dividends are a valuable source of portfolio returns, and we continue to recommend dividend paying stocks as part of our investment allocation strategy.

To expand on these Market Reflections or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222

January brings a New Year with new political leadership and a new set of economic and political uncertainties. This is both normal and healthy. Learn to embrace change and volatility as it often creates long-term investment opportunities. Since we do not have a crystal ball, we evaluate the road ahead by actively monitoring key fundamental factors. Let’s walk the road as we see it unfolding this year.

Yes, the stock market continues to trade near all-time highs and a temporary early year price consolidation would not be a surprise. Equally possible is the scenario where the train continues to pull away from the station as new pro-growth policies and potentially lower corporate taxes benefit stock prices. The fundamental facts as we see them show stable to expanding core economic growth through 2018. Future growth in the 2-3% range will push the stock market higher. At the heart of the fundamental story is an acceleration of corporate earnings. The stock market navigated the deceleration of earnings growth and now we enter a more positive earnings phase. Remember, its earnings and valuation that drive stock prices. Positive earnings will be a positive force.

We see the U.S. stock market generating positive returns in the 5-10% range for the calendar year. Experience tells us the path to high single digit returns is not a gentle sloping line, rather a series of rallies and subsequent pullbacks. This year may in fact look like last year’s price action with new reasons for periods of price consolidations. Below is the 2016 path traveled.

If stocks are up 5-10%, what happens to bonds? The bond market is entering a new phase as the Federal Reserve’s seven year zero interest rate policy is coming to a close. Interest rates will begin an orderly move higher lead by the short end of the yield curve. The Federal Reserve now has room to begin the process of normalizing monetary policy. While the Fed has threatened for two years to embark on a systematic plan to hike the fed funds rate, we believe this is the year where it really begins. Three or four quarter point rate hikes will leave the fed funds rate near 1.50% by the end of the year.

The journey to higher interest rates will cause bond prices to decline and returns to be skimpy in 2017. Flat is our call, but plus or minus a few percentage points can easily occur. Investors should still own bonds for reasons of principal preservation, income generation or for overall portfolio volatility control, but realize this is not an asset class to make you rich this year. After higher interest rates are achieved, bonds will offer a more compelling future value. Bottom line in 2017 is, “don’t expect much offense from your bond portfolio”.

Every time period deals with market volatility and uncertainty. The markets have survived two World Wars, the great depression, stagflation, an oil crisis, the internet bubble and a financial crisis. This time is no different as the weight of the world can cause rational investors to second guess their investment decisions. This a dangerous trap to fall into, so be strong and avoid the temptation to eliminate risk. Risk makes you wealthy. Traveling through your investment horizon with confidence, conviction and patience is hard work, but the rewards are great. Five years from now, it will not matter if the market is up or down 5% in the next few months. Stay long and strong for the long haul.

MARKETS BY THE NUMBERS:

To expand on these Market Commentaries or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222