By Gerald H. “Chip” Carnes Jr., CPA, MBA, Registered Investment Adviser

Charles Dickens begins his famous novel, A Tale of Two Cities, “It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness.” The story takes place during the French Revolution in 1789. When you consider the current political, social, and economic turmoil in the United States, it is a fitting way to describe 2016. In other words, there are often conflicting and confusing messages delivered by various investment industry leaders. It is our job to reconcile them.

Core Market Controversies

It has been seven years since the S&P 500 Index ended its downward plunge and bottomed on March 9, 2009, at 676.53. There was “blood in the streets,” as Wall Street journalists like to write. Many investors believed the U.S. system of capitalism was coming to an end. Looking at my own investment portfolio at the time, I was not sure I would ever recover my losses. As in A Tale of Two Cities, despair was everywhere. However, the U.S. economy, the S&P 500 Index, and my portfolio all managed to recover. Politicians, investment pundits, and investors cannot agree as to whether it was a good recovery or a bad recovery (assuming there is such a thing as a bad recovery).

Today, the stock market seems to have stalled. The S&P 500 Index peaked on May 18, 2015, at 2129.20, and more than a year later the index is still below its prior peak. So, the U.S. large cap market has experienced a full year of negative stock market value growth. This single fact seems sufficient to convince some critics that the market recovery was a failure, the recovery is over, and the next step is recession.

You are probably asking yourself, or have clients asking you, “Where is the stock market going next? Is the market recovery really over? Is a recession coming?” The cold, hard facts are the 500 largest U.S. companies have been in an earnings recession for the last six quarters and the S&P 500 has experienced six consecutive quarters of declining Composite Average EPS.

Given the significant reduction in corporate earnings it is remarkable the market index has held up as well as it has. I have to acknowledge it is somewhat overvalued, but just how overvalued depends on what happens to corporate earnings next.

Another core market controversy, which evolved in 2015, focuses on the actions of the Federal Reserve Bank and the interest rate policy as set by its Federal Open Market Committee (FOMC). After seven years of following a zero interest rate policy, the FOMC raised interest rates in December 2015, stimulating debate over what interest rate policy should be in 2016. The FOMC has two choices: continue to raise rates in 2016 or cease increases for an undetermined period of time.

This choice will have an impact on the stock and bond markets in 2016-2017. Raising interest rates will certainly lower bond prices, and, in theory, reduce stock market prices. And yet, many market forecasters believe it is the Fed’s duty to normalize, or raise, interest rates as soon as possible. Keep in mind that raising interest rates is by the nature of economics designed to slow both economic growth and stock market growth, although it does not always create the desired effect.

Recent Techniques

To best serve your clients, you need to understand the fundamentals of stock and bond analysis, as well as pressing market matters and new techniques, including robo-investing or robo-advising.

Each advisory firm or brokerage firm has its own version of how to apply its methodology of robo-investing or robo-advising. The terms generally encompass a series of investment selection algorithms combined with defined polices regarding automatically rebalancing investor asset allocation after establishing their initial asset allocation. As investment technology matures and grows, investors must be cautious to ensure they apply the correct balance between selecting investments and using contemporary technology to answer these questions:

• What is right for you (or your clients?)
• Is it worth it?

Learn More

Annual Investment Update Series by Chip Carnes

Investing for Retirement
Oct. 13 | Harrisburg
Oct. 14 | Malvern
Oct. 28 | Cranberry

Annual Investment Update
Dec. 2 | Cranberry
Dec. 21 | Harrisburg
Dec. 22 | Malvern

For more information and to register, go to www.picpa.org/coursesearch.