2017: 12 Things to Do Before the Ball Drops

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Post-Election Market Outlook: Cautious Optimism, Measured Approach

The most divisive and chaotic Presidential election campaign in recent memory is now over.  Donald Trump emerged as the victor and now the markets must digest the news. Here are my impressions and analysis of what investors could expect moving forward.

Conventional wisdom was that Hillary Clinton would be the 45th President and that at least one house in the Congress would remain in Republican hands. Many investors have felt comfortable with a divided government.

It was predicted that if Donald Trump won the election, the stock markets would move violently lower. On the night of the election, as the results poured in and it looked more likely that Donald Trump had a chance of winning, the stock market futures sold off in excess of 850 points! As this possibility became a reality, the markets started to determine winners and losers of a Trump presidency.

Cause for Optimism?

There was already some optimism built into the stock market outlook for 2017. The Standard & Poor’s 500 Index (S&P 500 Index) has had declining earnings for the past five quarters in a row. The Earnings Per Share growth (loss) for 2016 is estimated to be -0.2%, which is disappointing, but reflects the nagging drag energy has had. Upcoming 2017 is anticipated to be a different story. The consensus view points to a recovery of 6.1% in earnings with robust revenue growth because of higher wages, low gas prices and personal wealth gains (largely from the stock and housing markets).  (Zacks Investment Management Newsletter, November 9, 2016)

However, there seems to be more optimism about the potential for even faster growth in the economy. This perception results from the view that there will be greater spending on infrastructure, lower tax rates, less regulation and, in general, a more business-friendly climate. That can be offset, in part, by the fear of a disruption in foreign trade resulting from challenging established trade agreements and a tougher stance on immigration.

Market-By-Market Analysis

The following is a list of sectors that can be affected by a Trump Presidency and a Republican Congress.

Energy – Expect fewer regulations for big oil companies and reduced subsidies for alternative energy. I expect more permits for development on federal lands, more drilling, more pipelines, and more coal, which could also benefit some railroad companies. However, some of the energy stocks may not perform as well because the potential additional supply could cause the price of oil to go down and stay down for an extended period of time.

Financials – There has been a very strong rally in this sector as soon as it was announced that Trump won the presidential election. He has promised to freeze new financial regulations and roll back some of the older ones including the controversial Dodd-Frank Act. This would likely favor smaller banks, which would benefit more from reduced regulatory costs. In addition, if interest rates move higher (see below), banks will enjoy higher net margin interest, which is crucial to their profitability.

Manufacturing – This will be an interesting sector to watch. On the one hand, manufacturing could be hurt with Trump’s tough talk on trade, including tariffs (particularly on imports from China) and tearing up NAFTA. It could be just tough talk and the start of a negotiation. On the other hand, lower energy prices could help manufacturing companies reduce costs.

Infrastructure – Most people agree that America needs to revitalize its ailing infrastructure. I expect big spending in this area. This would probably lead to more jobs, faster economic growth and a higher deficit, which could lead to higher interest rates. Trump has mentioned that he would have companies invest their own money to fund some of these projects, which would lead these companies to charge the users (i.e., toll roads) so the projects wouldn’t be all funded by the government.

Health Care – Trump wants to repeal the Affordable Care Act and allow individuals to buy policies directly from insurers that would likely be cheaper, but may not provide equally complete coverage. A centerpiece of his plan is allowing insurers to sell policies across state lines to promote competition. Fewer restrictions may bode well for health care and pharmaceutical companies.

Technology – These are worldwide companies. Since the election this sector has sold off for three reasons:

  • Technology companies use all of the tools available, such as using lower-tax countries (i.e., Ireland) to claim their income, thereby paying a lower tax rate than they would if they claimed the income in the U.S. With corporate tax reform, this tool may be removed and these companies may have to pay tax at a higher rate.
  • Many of these companies depend on foreign workers and any reform or restriction to immigration may negatively affect these companies.
  • The stocks have done very well during the last year and it is possible some money managers are locking in profits in this sector and reallocating some money to other sectors, such as financials and infrastructure plays.

Bonds – Interest rates have risen fairly dramatically since the election. One could say it was a knee-jerk reaction to an unexpected result. The bond market has quickly re-priced bonds to reflect a new reality. It appears that the new President and Congress will agree to new fiscal measures that will complement monetary policy and fuel more growth in the economy. The consensus view is that this will in turn fuel inflation and, hence, higher interest rates. This is bad for bonds that are interest rate sensitive, such as longer-dated Treasuries or high-quality corporate bonds (although in time this will be better for savers).

Measured Approach

The level of optimism in the markets is surprising given the derision Trump faced from Wall Street and the U.S. Chamber of Commerce during the election. While markets have initially rallied, we will be measured in our approach and take our time to review potential opportunities as well as areas to avoid. When we make recommendations to adjust, where appropriate, they will be based not on knee-jerk reactions but on the expected fundamentals going forward.

Dow Jones Industrial Average is an unmanaged index of 30 widely held stocks. The S&P 500 is an unmanaged index of 500 widely held stocks. Investors cannot invest directly in an index. The S&P 500 is an unmanaged index of 500 widely held stocks.

Past performance does not guarantee future results. Individual investor’s result will vary.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of David A. Urovsky, President, and are not necessarily those of Lincoln Financial Advisors Corp. Expressions of opinion are as of this date and are subject to change without notice. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein.   Investments mentioned may not be suitable for all investors. The content of this newsletter is for informational purposes. We encourage you to seek the advice of a professional prior to making investment and/or insurance decisions.

Investing involves risk, and investors may incur a profit or loss. Past performance is not an indication of future results. Diversification may help reduce, but cannot eliminate, risk of investment losses.  

This Report is not a replacement for the client account statements from Lincoln Financial Advisors, Inc. or other custodians. Investors are reminded to compare the findings in this report to their quarterly account statements.

David Urovsky is a registered representative of Lincoln Financial Advisors Corp. Securities and investment advisory services offered through Lincoln Financial Advisors Corp., a broker/dealer (member SIPC) and registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies. Wealth Advisors Group is not an affiliate of Lincoln Financial Advisors Corp.  CRN-1658535-120716

Keys to Risk-Adjusted Portfolio Management

Keys to Risk-Adjusted Portfolio Management

By David Urovsky

Not every investor has the same tolerance for risk, which is why risk-adjusted portfolio management is so essential in today’s volatile market.

The risk-adjusted investment approach starts with a clear understanding of the client’s risk tolerance and investment goals. Investment recommendations are initially constructed to match the client’s unique risk level and then carefully monitored to help keep the portfolio on track toward meeting the client’s goals.

Monitoring portfolio risk level

Risk tolerance is often directly related to a person’s experience with investments. For example, somebody who experienced the tech crash of 2000 – 2002 or the financial crisis of 2008 – 2009 is going to have a different perspective on investments than somebody who is coming into the market for the first time or who only has a couple of years of experience.

Time horizon is also a factor in a client’s risk tolerance. For example, a 40-year-old saving for retirement can be more growth-oriented than somebody who is nearing retirement and is going to need their portfolio to provide income.

Takeaway: At the most fundamental level, risk-adjusted portfolio management requires continuous monitoring of the portfolio’s risk level in light of market conditions. In 2016, I don’t expect great growth in the economy. I will be looking for investments that pay dividends.

There are times to take risks and times to wait for better opportunities

Looking back to 2015, with savings accounts or money markets paying less than 1 percent, many investors reached for higher yielding investment vehicles such as high-yield bonds, master limited partnerships (MLPs) and real estate trusts (REITs). Unfortunately, these investors ended up losing a fair amount of principal. As a result, in this uncertain economic and growth environment, you have to be careful not to try to force getting higher rates of return. You have to almost take what the market is giving you. There are times to take risks, and there are times to keep the powder dry, so to speak, and wait for better opportunities.

Little movement in asset classes in 2015

Another key factor in risk-adjusted portfolio management is understanding the correlation between investment/asset classes. Every portfolio must include different asset classes so that they don’t all move up or down at the same time. For example, Treasury bonds have a low correlation with the stock market. At the same time, correlation of high yield bonds with the S&P 500 and other stock indexes is much closer.

As it turned out, 2015 was an unusual year in that asset allocation didn’t help very much. Asset allocation is a strategy focused on how to invest among broad asset classes. The purpose of asset allocation is to control risk by reducing volatility or relative fluctuations in a portfolio thereby optimizing total return (investment returns, dividends and income). Asset allocation won’t guarantee a profit or ensure that you won’t have a loss, but may help reduce volatility in your portfolio. At the same time, diversification cannot eliminate the risk of an investment loss.

In 2015, most asset classes lost value or gained very little. Does that mean asset allocation no longer works? Of course not. Asset allocation is geared to long term success, and just because it didn’t work last year is no reason to discard it altogether. Asset allocation succeeds when it is part of a consistent investment approach over a long term, as opposed to chasing what’s hot today.

Takeaway: What is the key takeaway when it comes to risk-adjusted portfolio management? There are many different types of risks that an advisor reviews when putting together an asset allocation and selecting investments for the client. After all, we are trying to make money for the client. In order to do that on a consistent basis, each portfolio must be customized to reflect the balance between risk and return that the client will accept.

An advisor’s definition of success

Ultimately, our goal is to get better rates of return than the level of risk we have taken. From an advisor’s standpoint, that is our definition of success. When it comes to the client, success is invariably defined by the degree to which their portfolio meets their financial goals.

Questions or comments? Send us an email at David.Urovsky@lfg.com.

David Urovsky is registered representative of Lincoln Financial Advisors Corp. Securities and investment advisory services offered through Lincoln Financial Advisors Corp., a broker/dealer, Member (SIPC) and registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies. It is not our position to offer legal or tax advice. Wealth Advisors Group is not an affiliate of Lincoln Financial Advisors Corp.
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How Is Your Financial Fitness? Find Out With This 8-Point Checkup

By David Urovsky

Helping people achieve their financial goals starts with realistic and manageable planning.

In order to develop a sound financial plan, the financial advisor must determine not only the amount of wealth required to achieve your desired lifestyle but also study your entire financial situation. This includes an examination of the present or potential need for such financial tools as budgeting, tax reduction strategies, retirement planning, insurance, estate planning to avoid long-term tax issues and more. It is important to account for every aspect of your financial well-being.

A great way to start the planning process is with an 8-Point Financial Fitness Checkup, through which you and your financial advisor will come up with answers to the following key questions:

• Do you have a written, detailed and realistic monthly budget?

• How are you funding your emergency fund? How long will these funds last if you needed them to cover monthly expenses?

• How are you planning to guard against income losses from illness, disability or death?

• What tax saving strategies did you employ during the last year?

• How are you funding your retirement plan and when do you plan to retire?

• What are your goals for retirement (i.e., travel, major purchases, lifestyle changes, and so on).

• When did you last review the beneficiaries on your retirement accounts and insurance policies?

• When did you last update your will?

Following these conversations, your advisor can develop a customized plan that responds to your individual goals and gets you strategically positioned for financial health. Quarterly or semi-annual reviews in person and phone calls throughout the year will allow your advisor to respond to changes occurring in your life as well as changing market conditions.

It’s never too late to improve your financial fitness, so why not get started on your checkup today?

Coming next:  How children of baby boomers are playing an increasingly important role in financial planning for their aging parents.

David Urovsky is a registered representative of Lincoln Financial Advisors Corp. Securities and investment advisory services offered through Lincoln Financial Advisors Corp., a broker/dealer (member SIPC) and registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies. Wealth Advisors Group is not an affiliate of Lincoln Financial Advisors Group. CRN-1358518-112015