June 21, 2016 Letter to Clients

Regarding: Market Sentiment and Volatility

I hope this letter finds you and your family doing well. With the anticipation of summer upon us you are most likely thinking ahead to your plans, be it traveling far or staying closer to home. Recently in conversation, I was commenting on what a mild winter we had and how it was followed by quite a volatile spring. This got me thinking about how the weather has been very similar to the market with the need to stay the course during the bleaker days in order to reap the rewards to come. Interestingly, it has been suggested that there is a direct correlation between the weather and stock market performance and how decisions made based on mood or emotion can drive market pricing. This brings me into what I wish to discuss in this latest letter.

Markets Go Up....and Markets Go Down

I would like to discuss entry points in the market as they have a heavy influence perspective in the investing world. An individual who invests in equities at a market bottom will see very different returns compared to the investor who enters in a late-stage bull market, or in other words, a positive market. For example, the investor who entered the stock market soon after the March 2009 low benefited from cheap valuations and went on to realize outsized equity returns. Meanwhile, those who entered two years ago have experienced more subdued returns amid much higher stock market volatility.

An old, but true, adage asserts that markets exist in one of 3 states: they go up, they go down, or they bore you to death being sideways. Unfortunately over the past 2 years we have been stuck in a sideways market.

Lessons for the Class

Some investors may think that their investment portfolios aren’t “making the grade” because they started investing at a point in the market cycle that has resulted in meager gains or even short-term losses in certain months. In volatile environments a certain discipline is required to stick to an investment plan and avoid the temptation to exit the market. It can be difficult to resist the flight instinct in the midst of negative headlines that surround us and geopolitical uncertainty. However, staying disciplined positions investors to capture the next market upswing.

At the current moment cash produces near-zero returns and with inflation those returns could actually turn negative. Both of which delay a portfolio in achieving return objectives. Instead, it is more prudent to take advantage of volatility by strategically deploying cash, particularly when the economic and fundamental backdrop is supportive of a bullish outlook on equities as we see in today’s market environment. It is important to our clients with retirement accounts through their employer to not lose focus or discipline, because as you know employer plans are an integral piece of your overall financial plan and future. I highly recommend giving your employer sponsored plan a “check-up” from time to time. This means not only checking the performance and allocation but seeing if there have been any changes, such as fund discontinuations or additional selections offered. Also, by investing a fixed amount on a regular basis, such as contributing to your retirement plan, investors purchase more of a security, or index, when prices are low and less when prices are high. This process is known as dollar-cost averaging as it takes advantage of market weakness while reducing the risk associated with market timing. At LePage Financial we employ these very same standards to prevent clients’ accounts from purchasing shares at the height of the market.

“A” is for Asset Allocation 

“Don’t put all your eggs in one basket” is a phrase often referenced in investing. While the market has historically rewarded investors a premium for owning stocks over cash and bonds, it comes with a price tag- volatility. However, spreading risk across a number of different investments can help offset losses in any one investment and smooth out returns over time. The right mix of asset classes will depend on both your wealth goals and an informed view of the current and expected market environment.

Sunny Skies, with a Chance for Clouds

The U.S. stock market hit its highest level in 10 months this month with the S&P 500 Index closing at 2119 on June 8th. Recent gains were driven largely by investors’ optimism over Federal Reserve Board Chairman Janet Yellen’s remarks that the U.S. economy is making progress, and by indications that Fed policy makers may not rush to raise interest rates. Indeed, some investors now see December as the first month with at least even odds of a rate increase.

That said, the positive investor sentiment fueling stocks’ recent run-up may have peaked for the moment. We did see stock prices fall as investors paused to consider the economic growth outlook ahead of a series of events that could set the tone for the next few months-including policy meetings by the Fed and the Bank of Japan, Britain’s vote to leave the European Union (“Brexit”), and the U.S. political conventions.

The Forecast on Equities

I continue to favor and remain positive on equities over bonds and commodities for 2016. However, I expect lower returns and higher volatility than in the past five years. While I prefer developed over emerging markets, I think higher starting valuations and gradually rising interest rates in the U.S. could weigh on returns from equities and bonds. Within bonds, it’ll pay to be discerning in the credit space and a good active manager with a history of prudent risk management and superior security selection will matter.

Another reason to remain positive on U.S. equities in 2016 is based on improving global growth and corporate earnings, a slow Fed hiking cycle, and corporate profit margins that should remain historically high. Rising volatility should favor higher quality companies with strong balance sheets and growing cash flows and dividends.

Fixed Income Outlook and a Look at Alternative Investments

I view bonds as essential for diversification and income purposes, with high-quality issues comprising the core of a fixed-income portfolio. A “low and slow” pace to higher rates in 2016 should not pose risks to diversified bond portfolios. I think the current level of bond spreads will resist gradually rising rates. A firm U.S. dollar and subdued global growth will continue to put downward pressure on commodity prices. Oversupply in the energy markets is also likely to persist in 2016, however I expect demand to improve slightly. Given our expectations of greater volatility and market uncertainty, we continue to support alternative investments that provide portfolio diversification, such as global macro and managed futures strategies.

In Conclusion

Based on our research and many conversations with leading economists and top rated money managers, we anticipate global growth inching higher in 2017. This growth will be driven by developed markets. Inflation, though rising slightly, should remain muted and allow interest rates to remain lower longer. In addition, central bank policy divergence should bring about greater volatility and a firmer U.S. dollar. We expect equities to outperform bonds, but acknowledge that returns going forward are likely to be lower than in the past five years.

Gratitude & Service

I want to take this time to extend my appreciation on behalf of all of us at LePage Financial for the continued trust you place in our firm. It is something we never take lightly and are continuously striving to exceed your expectations. To further enhance our commitment to offering superb service, we recently welcomed an additional staff member, Christina Laneiro, to our firm as an executive assistant. Christina has enjoyed getting to know many of you already and welcomes the opportunity to be of service. We also invite you to visit our newly designed website, www.lepagefinancial.com. We think you’ll be pleased to see that you can access your accounts online using the Client Portal and also access letters from our office to read at your leisure.

We wish you a very enjoyable and relaxing summer. As always, please feel free to contact us with any questions or concerns you may have.


Steven LePage

These are the opinions of Steven LePage and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Diversification and asset allocation strategies do not assure profit or protect against loss. Investing regular amounts steadily over time (dollar-cost averaging) may lower your average per-share cost.