With July in full swing, we figured it was time to give an in-depth mid-year update on the markets. We dive into several topics ranging from investments to the political climate and what this could mean for your money in the second half of 2017.
“2017 Mid Year Update” Transcript[00:00:00] Welcome to gimme some truth I’m Kevin Castro your podcast producer and your co-hosts are Clint Walkner and Nate Condon the co owners and financial advisors at Walker and financial advisors in Madison Wisconsin. This is a podcast series dedicated to eliminate some of the darkness around fees. Conflicts of interest and the motivation behind recommendations in the financial planning industry. Here are your hosts.
[00:00:38] (intro music).
[00:00:49] Welcome to gimme some truth so we’re going to talk about the first half of 2017.
[00:00:55] What happened both in the economic markets as well as politically and what might happen in the second half of the year. So let’s start with the economic side of the equation.
[00:01:07] Tell us a little bit about what happened the first half of 2017 first half of 2017 if you were an equity investor you’re pretty happy because you know the S&P went up you know about just shy of 9 percent. We’re looking at as of date of about 7 6 2017. We’re happy to put this online for you to check it out.
[00:01:27] But right now S&P is doing well. So when we talk about S&P we’re talking about really the 500 largest U.S. companies by market capitalization. So if you’re bigger you have a higher weight into the index. So for example you know General Electric is a really big percentage of the index as is Exxon-Mobil’s So you recognize a lot of the names at the top there. If you are in international stocks you did well emerging markets are up over 16 percent. European stocks are up over 13 percent so it’s been a very good time to be an equity investor particularly if you’re investing on a large company side. If you’re looking more at small companies those actually didn’t do as well. The rate of return is much lower it’s around 4 percent for the year. For small company investors so smallcaps have struggled a bit relative to the large caps and we can get into why that is in this part of the cycle. And then large value companies and particularly dividend payers energy companies have struggled a bit to date only up you know just shy of 3 percent. And if we look more at energy companies specifically those were down almost 15 percent for the year. So energy companies while they performed fairly well last year this year have really struggled. So you know it just goes to show that you know being a diversified investor helps you out times because if you’re trying to not pick sectors and you pick kind of more broad asset classes you can average those out.
[00:02:58] And if you’re more of a stock picker type of person hopefully you’re focused more on the technology sector. Healthcare for at least the first half of this year because those perform very well around 16 percent rate of return for both technology and healthcare this year. And those have been really strong performers so energy communications services US real estate hasn’t performed quite as well you know anywhere from that negative 15 percent in the energy to just around even for communications and real estate up just over 2 percent so some of those categories have struggled a bit but overall very strong equity performance for the first half of the year.
[00:03:36] Yeah the sector markets are interesting because when we look at healthcare for example I think most people with a political debate that’s going on right now in the health care industry would assume that health care for the year would be either flat or maybe even down. Health is performed very well this year. So that’s a curious one. The energy market being down is a little bit easier to figure out because oil right now is kind of struggling to figure out what direction it’s going to go. There are a lot of people out there that think that a barrel of oil should cost $75 knows a lot of people out there that think it should cost $25. Right now it’s depending on the day in the middle 40s. So it’s a little easier to figure out.
[00:04:15] Plus there’s pressure on the oil industry from more of the alternative energy is really starting to take a stake and grow it’s not as governmentally supported as it once was it’s now standing on its own two feet in battery power and solar power is really starting to become kind of the leaders in the alternative energy space.
[00:04:43] Real estate is also an interesting one if we look at local real estate markets. Most people are aware of the fact that the Matteson market is incredibly hot for selling homes. Now a lot of inventory in a really strong market. But when you look at the real estate sector as far as an investing standpoint it hasn’t done as well. A lot of people would wonder why that is our take on it is that it’s not just housing numbers that move that. We also have things like addressed industrial real estate. We have hotels we have commercial buildings we have apartment buildings that are all factored into that number cell sector players this year in and investing had a harder time kind of picking up figuring out the ones and figuring out the winners and the losers. Easy for me to say. Whereas a more broad diversified investor has seen a nice solid year.
[00:05:35] Know retailers and a big piece of that real estate number. Those have really struggled this year. That sector has struggled as well if you’re looking at just purely vesting in that space as you can see a lot of our malls are losing a lot of their tenants.
[00:05:48] And Amazon has really been a big player there in having you know their biggest news arguably of the first quarter was the Amazon whole foods merger that looks like it’s going to take place.
[00:05:59] So that’s just an incredible game changer as far as that goes. It looks like they’re going to get strong into the grocery space where they were kind of dabbling in it and now Amazon is really you know they’re continuing their takeover of the whole world. So you know they’re pretty incredible as a business. So you know we’re seeing some some really important things there. If we look at other rates of return in the market the bond market interest rates have been going up a bit particularly on the short term side as an impact throughout the bond market both on short intermediate and long term bonds. So right now the U.S. Aggregate Bond Index which contains a sizable amount of U.S. government bonds and some corporate bonds up about 2 percent year to date on a total return basis so not a great rate of return there but not bad. You know it’s just one of those situations where you’re probably not going to get a lot of red of return out of your bonds over the next few years as interest rates slowly start to rise. And the Fed has indicated that they’re going to continue to push up those interest rates as they see economic conditions strengthen. And so right now we’ve seen reasonably good economic conditions I wouldn’t say that we’re in some sort of crazy good recovery ever since 2008 but it’s been pretty slow and steady. The Fed has had a big hand in that in kind of helping with that. Some might call it manipulation and some might call that help in the low interest rate policies that they’ve they’ve had.
[00:07:24] And so they’re going to stop buying some bonds that will have an impact on the interest rate environment. Also on the bond market when they start divesting themselves of their bond portfolio and they’ve since ceased purchasing bonds. So you know we’re seeing the Fed kind of be less interventionist here and that will have a definite impact on things. We’re also seeing that high yield bonds you know up almost 5 percent for the year which isn’t a tremendously good rate of return but you know for a half a year in a bond investment that’s pretty reasonably good. So you know we’re starting to see the bond markets struggle a bit more under some of these interest rate increases and I would anticipate that the second half might not be quite as good as the first half in the bond market.
[00:08:09] Yeah I go back to the retail sector for just a second because I think that’s a really interesting kind of visual for people a lot of things that happened in the markets aren’t as tangible as people would like them to be it’s harder to kind of see what’s going on. The retail sector gives us a really interesting view as to how the overall stock market is kind of a changing and how it kind of evolves over time. So if you go to a mall and you start to see what’s happening within malls nowadays tells you a lot about what’s happening within retail and how that all plays out within the markets. Kevin our fearless producer is here with us today. Kevin one last time you bought something at a mall.
[00:08:54] Amazon is an accountant.
[00:08:55] No I haven’t. That does not counted at all. That’s right. It is.
[00:09:00] I’m saying Amazon is not in law I’d say about 80 percent of my retail purchases are through Amazon. So I really couldn’t tell you less than my shop that I’m all right.
[00:09:09] And so that’s an interesting kind of kind of sea change if you will within the within the retail space that that malls may start to become almost I hate to say a thing of the past which is so tangible for people to be able to see. And you’re seeing why that has the effect on on stock portfolios.
[00:09:30] But you’re definitely seeing a reconfiguration of malls too.
[00:09:32] You know it just locally looking at how malls are now designed you know used to have these huge anchor tenants that were these huge department stores and I just don’t think you’re going to see that now you’re seeing more of these boat Teac stores that are put together that have a smaller footprint with the square footage and so expensive you know because if you think about these traditional stores like the Macy’s and Boston stores and even Nordstrom’s I mean they require tens of thousands of square footage. I mean it’s so expensive to keep up. And if you can’t move that inventory that’s just that’s just expense at your expense. That’s on top of that so yeah we’re seeing the retail sector just evolve tremendously.
[00:10:15] You have the telecommunications sector is maybe a good one to try to parallel even if we have to reach back a little bit into the 70s and 80s. But a lot of the big telecommunication companies back then don’t exist anymore and they don’t exist anymore because cellular phones started to take over and now we’re at a point now where a huge population within the United States doesn’t even have a home phone. Clint’s going through that.
[00:10:44] Battle right now in his own house it will change just like announce that they’re not going to do landlines at all anymore or something like that. I didn’t because it was new news at all yesterday or something.
[00:10:53] But are you going to bail on your home phone. No you never had a home plan and no phone. Are you going to. Are you going the other way now because you don’t get that one out because my wife worked out Google Voice which is a great way for her to do it.
[00:11:06] Yeah there’s there’s no reason I’m always the one saying there’s no reason to have a home phone. You still have a landline still in line.
[00:11:13] Yeah. I don’t know why. But there’s no real reason I can’t handle it. Or is your antiquated cable bundle. Right.
[00:11:20] It’s a better deal because I have a bundle Apparently it is cheaper with a lot of those like you bundled phone and internet and TV it’s cheaper than just buying the internet and TV individually or whatever so that we actually have that. That’s that’s what we have to do that because it’s cheaper and I don’t even use the landline. So we have a landline but we don’t use it.
[00:11:39] Oh OK. So you actually do have a law you don’t have that. Oh that’s interesting. Yeah. We don’t have a phone to plug in because I want allow out there just like I want a filing cabinet in this office. That’s No.
[00:11:50] So you can see how these revolutions happen and how interesting it is to be able to look at something we’ve we’ve come so accustomed to thinking we had figured out like a mall that hadn’t changed in 20 or 30 years and now it’s potentially starting to almost phase itself.
[00:12:10] So that’s an interesting sector but it’s creative destruction but it’s it’s birthing out of that is almost always something better. So you know you look at all this we’re going to see so much change in the energy energy industry and you know Volvo announced this week that they’re going to basically go full bore into electric cars. I think you’re going to start to see a lot of the other automotive carriers do the same thing. Obviously Tesla is starting to ramp up production of their vehicle. You know they’re a mass market vehicle starting later this year so it’s really incredible about what’s going on. That’s going to change the entire infrastructure of how we consume energy if everyone starts plugging in their car what we’re going to have to find places where you can plug your car in or we have battery packs at home or you know something like that so you know all of this is going to generate a lot of returns for people and I think this is why a lot of people don’t trade individual stocks anymore. I think that a lot of people are doing more index based investing because they don’t want to try to pick winners and losers they just want to say OK well I want to own this whole sector I want to own all the large companies in the U.S. and I’m not going to pick the winners and losers and that’s why indexing has become so popular. I think for most people it’s probably a better way to invest.
[00:13:26] They’re doing it on their own rather than saying OK I’m just going to blindly buy Facebook and Apple and Google and a few things that I know and and have a non diversified kind of put it all on red type of portfolio. And I think that you know indexing you know if you’re not going to go spend all the time to research all these companies it’s probably the better way to go.
[00:13:45] Yeah we kind of draw a distinction between are you investing or are you gambling and you know for people that own individual stocks and there’s nothing wrong with that you just have to understand kind of the sandbox in which you’re playing. I mean it’s it’s just a different world and you have to handle it a different way. So our view as the as the year kind of plays out here again in the second half of 2017 is the stock market in our opinion is going to take its lead from Washington D.C. And what happens inside the beltway the kind of politically charged atmosphere that we have right now along with the legislation that’s being discussed I think is going to have a big impact on how the remainder of 2017 plays out. So let’s take one of those topics take healthcare for example and talk just a little bit about kind of where we’re at within that debate. So our thoughts on health care are pretty simple if they get something passed and it’s something that’s digestible by companies and it’s something that companies have some certainty on. We could see some positivity coming is that a word positivity towards me. I made it up in fits and positivity in the markets. If we’re left with a bunch of uncertainty for the next six months the markets could start to take back some of the gains they’ve had so far this year.
[00:15:06] I think part of the gains that we’ve seen over the last 365 days have been attributed to the fact that we thought some legislation was going to be passed and it was seen as being economically positive. We’re not really taking a stance on it. I think we’re just kind of looking at it as far as how Wall Street sees all of this. And so there was some expectation that we’re going to see health care reform. There is going to be an expectation we’re going to see some tax reform and potentially some infrastructure.
[00:15:32] And we were going to see it already in July.
[00:15:34] A lot of it we were we were supposed to have already seen and we haven’t seen any of it yet so we’ve seen a bill get passed in the house. The Senate is going to be a tough bill to pass because the moderates and the more conservative wing of the party are not necessarily getting along and seeing how they’re all going to get this done together and there is a very unlikely scenario where the Democrats enter the fray and come in and actually vote for anything related to any of these bills so you know I think the general consensus that people had was all the Republicans have everything. So therefore they can push through legislation. But I think people forget about the actual legislative process. You know in many cases if you’re going to avoid a filibuster you have to have 60 votes. And if you don’t have 60 votes then you have to do some certain things to avoid the filibuster. And one of these items is going through the budget reconciliation process which is what the Republicans are likely going to use to get both health care and tax reform passed. They only have to have 51 votes. And if they do that they have to markedly change how what the strategy is is they can’t just ram everything through.
[00:16:46] It’s not that easy. So you know we did a blog video on this earlier this year and I said that it was most likely that nothing got done and then it looked like I was going to be wrong and health care was going to get done and I don’t know I don’t know.
[00:16:59] It feeling pretty good about that but now I don’t know I feel like it. Yeah. Because you know they did pass it in the house and you know there’s a possibility Republicans could get it passed in the Senate to coalesce around one solution. But it mean the numbers out of the CBO. I don’t think we’re as positive as they wanted to see it and they did want to see a bunch much people get they didn’t want to have the headline be that however many it was what was it 40 million are going to lose coverage or 25 193. So it’s a lot of people are going to lose coverage if they amend the bill any further and strip out some of the provisions. I think you’re going to see even less people have coverage and I don’t know if that’s a real politically popular stance to take right now. So I don’t know if it gets passed.
[00:17:43] Yeah let’s talk about some dates here just so everybody kind of has a feel for what the landscape is going to look like so July 10th is Senate back in session. But they’re only back in session until July 28. So there’s only 18 calendar days when they’re actually back in session. Then the House and the Senate take an entire month off from July 28 and don’t come back until September 5th. At that point the government is funded until September the end of September they say I’m not sure they have figured out the exact date yet but that’s another political hot button issue that a lot of people have forgotten about is the government runs out of funding the end of September. So really in our in our view how this all plays out.
[00:18:29] Is they have until July 28 to try to get health care bill passed.
[00:18:35] If they can’t and they have to come back after the beginning of September and they don’t have health care bill passed. It’s Arvi that they’ve got to put them on the backburner and get a budget deal figured out because the government runs out of funding the end of September.
[00:18:49] You know those are big moments in the market and I think that as we see uncertainty creep in you’ll see the markets react and usually when uncertainty creeps in that’s almost always negative. So we could see a bit of a pullback there. We’ll see if a lot of hard liners on the right end up stalling out the government and they perhaps move towards me they’re never going to default. But I mean it could put defaults end quote If they want to put the government aside and stop the government for a while. That’s feasible. I think that that’s much greater than a zero percent chance happening. So we’ll see if that does occur. I think you’ll see the market react negatively to that.
[00:19:28] It’s been an interesting kind of first half second half we draw to do a football analogy here. You know the first half of the year first half of a game you know you can almost call it kind of at halftime between that July 20th and September 5th period time when Congress is in recess the first half of the year just like the first football game a lot can happen. But it does not determine the outcome because we saw the second half to play. Well we get past September 5th we’re definitely in the second half and we’re going to definitely see what happens because there’s not a third half to go. This is going to happen between you know July 28 September 5th and then the end of the year and it’s going to be very telling in the markets in our opinion are going to react strongly one way or the other. So we could definitely see some increased volatility in comparison to what we’ve seen previously. And another thing to keep in mind is that with the market where it’s at now over 20000 points a 1 percent move on a given day and the market is will test Kevin on this math quiz this morning. See if you do that a 1 percent move. Kevin let’s go 1 percent down in a 20000 point market means the market fell how much that day 200 points 200 points is correct.
[00:20:47] You know there’s no price or anything else. Belly will do. Well the old golf club there you go Kevin. I’ll check that out. So.
[00:21:01] So a lot of people are looking at 100 point moves in the market and thinking wow that was a volatile day. Well the market has grown so big now that a 100 point move only means a half a percent one way or the other. That’s a pretty benign day in the market. So when we’re started to see 100 150 to 300 point moves that that’s not even necessarily a big move percentage wise within the market.
[00:21:24] I think people have somewhat lost kind of lost context for what that means.
[00:21:28] Well that’s exactly right. And one of the things I find funny is that everyone has to write a headline at the end of every day about why the market did something. I went up while I went down and when you’re talking about like eight point five percent move or less. Like no one knows. No one knows why the market went up 100 points in a day it’s you know it’s it’s like a half a percent of the doubt. Come on. I mean that’s you can sneeze and the market can do that for no reason the market can go up that amount. And for no reason that market that can go down. Now if you’re talking about like four or five hundred point swing then usually you have some news that that generates that because the expected rates of return for companies can be impacted. And that’s really how the market is determined every single day. We all think the market companies will continue to exist and we’re buying their future earnings. So that’s why we invest in companies that we know that they’re going to be a going concern. We know that they’re going to continue to generate revenue and we expect that the revenue will grow over time. That’s why we invest we never invest in dying companies.
[00:22:31] You know that’s what well some people do. We would hope that she wouldn’t do that. So if you’re an investor or Sears I’m not saying you shouldn’t buy Sears. I’m just saying I don’t know if the best course of action for you to hold Sears long term is high risk It is high risk high risk. That’s yeah. Or RadioShack RadioShack for that matter. I don’t know how I would go there. So think about it like this. I want to get hate mail from radio. Yeah right well that’s going to happen now. Bob where are you going to buy your cables now. Well Amazon. I don’t know. How does RadioShack stay in business. No I mean what do you call these things down phone me.
[00:23:05] I’ll do a Seinfeld call and say as Kramer said Why does radio shack ask for your zip code when you buy batteries. Who knows why they do that why do they do anything. That’s how they exist they sell you listen to me everybody. So think of it this way it brings up a great point.
[00:23:18] They have to put a headline on what happened in the market every day and it’s and it’s it’s not just newspapers it’s you know CNBC and CNN Money and all these other plays.
[00:23:29] What I’d like. So think about it like that.
[00:23:32] And they’re required to do that. So if a meteorologist predicts in the morning that the higher for the day is going to be 75 and at the end of the day I ended up being 77. This would be akin to the meteorologist having to explain why the high was actually 77 and not 75. It’s ridiculous right. Well it’s 70s because it’s slightly hotter than what I predicted it would be but they have to put a deadline on. Now if the high end of it being 85 instead of 75 meteorologists would probably go OK well maybe we got a storm from blueing or something. We weren’t expecting. So they are just out to explain the big moves they have to explain every move in the market. And so we get these these over analytics of why the market moved 30 points one way or the other. There’s no possible way in our opinion determine why the market moved less than a half percent in one day and be accurate in predicting why that happened it’s ridiculous. The level of of of over analytics that we’ve gotten to this point.
[00:24:26] That’s right. And that’s why I know and I try to reject kind of forecasting where the market’s going to go in this second half. I mean it’s not to say we don’t know where the market’s going but you know we look at certain things and we look at OK you know how likely is it that we’re going to go through a recession in the next 12 months. And the answer to that is not very likely but it doesn’t necessarily mean that just because we’re not going to recession that we won’t see negative rates of return. The stock market is a forecaster. So the stock market’s almost always ahead of economic news and data because they’re trying to predict where the market’s going to go. They’re trying to predict where the economy is going to go. So it’s based on future earnings. And when those future earnings prospects you’ll see the market correct itself backwards. So you know I don’t know when the next recession is going to start. If anybody listen to his podcast notes please send us an email and we’ll keep track of that. But you know what we do try to follow is you know when does the economic data kind of slide backwards when things look like they’re going to get a little tougher in the future and you know we will say this we are in you know the longer stretches in this bull market run it is one of the longer bull market runs ever. It’s not a total robust recovery but we’ve seen a pretty nice bull run at some point and we’ll come to and usually there’s an event that stokes it.
[00:25:49] And usually it’s an event that we cannot predict. So you know if the market goes down in the second half of the year it could be that one of these things happen like we see protracted fight in the government. And you know that kind of falls apart or we don’t see any of these legislative things get done. And all of a sudden people start to lose confidence in the economy and consumer confidence is relatively fickle so we also have some geopolitical things going on too. You know North Korea and Russia and we’ve got all kinds of things. There’s always things going on in the world. But you know that ramping up of North Korea and some of the concerning things going out of there could definitely impact you know the markets in general there. And then when we look back at the legislative things and touch on that for a second to get tax reform done we really need something to be done from the healthcare side because in order to do tax reform under budget reconciliation it has to basically be a revenue neutral item. So if the Republicans are not going to go and gather the 60 votes and avoid the filibuster they’re going to need money to be able to make any sort of tax reform done. Some of the savings from the health care bill was going to be applied to the tax reform bill and that’s how they were going to get a more robust tax reform package passed. So you know the tax reforms looking at cost money and will not make up for the revenue that is lost so they have to find revenue.
[00:27:16] So you know if we don’t see health care get done then the tax reform bill will be much more pared back and it might not have any meaningful impact on the economy. So these are things to watch because the two while completely separate legislative items have a lot to do together.
[00:27:35] Yes it’s going to allude to or not in the business of predicting the future because that’s a heck of a lot smarter people than us have failed and failed miserably in trying to do that. So that’s not something that we’re going to do but we will say is second half of the year in our opinion is going to be pushed forward by a strong jobs environment. We’ve got a great jobs number come out recently strong housing market and a strong ish consumer sentiment. You know that the average American is feeling OK right now if not pretty good about where things stand in terms of their pocketbook. And you know where they’re at from a savings standpoint. So those are all positives. So if those continue if those persist they’re at the end of the year we think we’re going to have a strong end of the year. If those start to fade or if the geopolitical issues get hit on or the more domestic political issues start to drag on the market the market could easily give back the gains that it picked up first half of the year. So it’s wait and see at this point because there’s a lot of unanswered questions. But we will see how it plays out. So we look forward to speaking to you in the future. And thanks so much for listening.
[00:28:59] (Outro Music).
[00:29:19] Advisory services are offered through Walkner Condon financial advisors LLC a registered investment advisor in the states of Wisconsin and Texas Clint Walkner and Nate Condon are investment advisor representatives of Walkner Condon and Kevin Castro’s an office manager and marketing communications specialist for Walkner Condon financial advisors. He’s not registered and his participation in this podcast is limited to unregister activities and will not be providing any advice investment related nor should any comments he makes be construed as giving investment advice insurance products and services are offered through WC Insurance Services LLC Walkner Condon financial advisers LLC and WC insurance services O are affiliated companies. Content should not be viewed as an offer to buy or sell any of the securities mentioned or as legal or tax advice you should always consult an attorney or tax professional regarding your specific legal or tax situation. Walkner Condon financial advisers LLC is not engaged in the practice of law. Whenever you invest you are at risk of loss of principle as the market does fluctuate. Past performance is not indicative of future results. Purchases are subject to suitability. This requires a review of an investor’s objective risk tolerance and time horizons. Investing always involves risk and possible loss of capital. Long term care estate planning insurance products and tax advice are not offered through Walkner Condon financial advisors LLC Walkner Condon works on a best efforts basis and does not promise or guarantee any results. Past performance does not represent future results. Please see Walkner Condon Dot com for additional disclosures.