“There is nothing wrong with change, if it is headed in the right direction.”
– Winston Churchill
One year ago, the financial markets were experiencing an almost overwhelming amount of change. A dramatic sell-off in stock prices beginning in 2008, continued into 2009, with the S&P dropping another 22% in the opening few months of the year. By March 9th, uncertainty about our economic future had reached what we now believe was a generational high point. These extreme levels of investor fear were reflected in an asset allocation survey conducted by the American Association of Individual Investors (AAII) showing record low allocations to equities (41%) and record high allocations to cash (45%) by the average investor at that time.
Last April, our newsletter warned clients that we expected unemployment to rise toward 10%, that consumer and business spending would continue to be anemic, and that signs of an improving economy would not likely be visible until mid-year. However, we also informed clients that our experience with past recessions indicated that the markets would recover ahead of the economy. We outlined our intention to increase the allocation toward equities, stating that “We are confident that a low point has been achieved and that America is entering the early stages of a new bull market. Stocks offer very good long-term return potential at these price levels.”
We can look back today and see that our fortitude and optimism have been substantially rewarded. Over the past four quarters, the S&P 500 index gained 46% and is now up more than 60% from the March 9th low. The powerful rebound lifted all stock sectors, but smaller and lower-quality stocks significantly outpaced the high-quality and larger-sized blue chip companies. During January and February of this year, sovereign debt problems in Greece and other European economies, along with some belt-tightening in China, temporarily halted the rally. By March, however, equities were back on the rise, with the S&P 500 delivering a generous 5.7% gain for the first quarter.
Looking ahead, we expect the stock market to continue moving higher during the second quarter. The path is likely to be volatile, and normal corrections can be expected to occur at any time. However, it is our intention to retain your current portfolio allocation toward stocks. Many of the powerful trends that lifted the markets during this past year are still powerfully in place. For example, cutbacks in spending during the credit crisis have resulted in stronger corporate cash flows that can now be redeployed into technology purchases, inventory replenishment, new hires, stock repurchases and dividend increases. The emergence of a new middle class in China has not abated and should continue to drive revenue growth for companies that produce consumer-oriented products and services which can be sold into this region. Finally, the aging demographic trend for Europe and the United States is only just beginning to assert itself. In addition to the recently passed health care reform, these changing age demographics should also create many new opportunities for the pharmaceutical, biotechnology and life science industries.
Economic data released during the first quarter supplied fresh evidence of improvements in consumer spending, manufacturing and job growth. American consumers are no longer restricting their budget to basic necessities like food and medicine. Spending in March increased for clothes, cosmetics, jewelry and even cars again. In an effort to rebuild inventories, manufacturing levels expanded at their fastest pace since 2004. Businesses responded to increased sales by hiring more workers. Our nation added 162,000 new jobs in March, posting the best monthly gain in employment since 2007. We believe these positive economic news reports mark the beginning of another gradual growth cycle: more people with jobs, spending more money, producing more sales, leading to a pick up in manufacturing and the hiring of even more workers.
While we are pleased to finally see these improvements, the U.S. is still a long way off from becoming a “goldilocks economy”. Many questions remain about the sustainability of this recovery: Will the recent growth trends be self-sustaining when fiscal and monetary stimulus is slowly removed? Will consumers continue to spend once their pent-up demands have been satisfied? Will higher prices and higher interest rates eventually cause another decline in our economy?
At this point, our top down view can best be described as cautiously optimistic. We do not believe the economy will fall back into a double dip recession. We also do not expect a quick recovery in housing, but we do believe real estate prices will be slightly higher by 2011. Unemployment rates should continue to decline toward 9% at year-end, but the overall pace of job growth will be frustratingly slow. Most company leaders would rather increase productivity, or add hours worked by existing employees, before they decide to hire new staff. Overall, mild growth improvements should continue during the quarter but the recovery process will be quite choppy.
Inflation is not currently at the top of our worry list, but it is likely to be a major concern one year from now. Because markets are forward-looking, we are preparing Money Masters Investment Portfolios for inflation right now, before it actually sets in. Money Masters portfolios currently hold an overweight allocation toward consumer staples, telecommunication, technology and health care stocks that pay consistent dividends and have historically been recognized for their potential as a hedge against inflation. Accounts also include an allocation of natural resource stocks with oil, food and water companies that benefit from the price increases of their underlying commodities. These stocks have proved to be a good source of value during inflationary times. When inflation starts to rise, our expectation is that your Money Masters Investment Portfolio will already be prepared for that type of environment.
Money Masters actively managed investment strategy generated positive net returns that were ahead of the blended industry benchmarks during the last 12 month period:
The Money Masters Bond Composite achieved a net gain of 23.5% for the period 03-31-09 to 03-31-10, compared to the 7.6% gain achieved by the Barclay’s Aggregate bond index during the same time period.
The Money Masters Stock Composite achieved a net gain of 46.0% for the period 03-31-09 to 03-31-10, compared to the S&P 500 stock index which returned 46.5% (price change) during the same period.
The specific net performance results for your Money Masters Investment Portfolio account are included in the First Quarter 2010 Performance Report which is posted on the website at www.MoneyMasters.com.
Consistently outperforming these industry benchmarks is just one of our major objectives. We also manage the specific level of risk (volatility) absorbed by each client portfolio. This measurement is best accomplished using analytical software called Risk Metrics. Portfolios with a high risk-metric score have the potential to perform better during market upswings, but also tend to perform worse during market declines.
Although most of our Money Masters clients are still working, they typically prefer a portfolio that experiences substantially less volatility with a lower risk metric score. Our portfolio management team has been quite busy lately placing trades inside your account in order to successfully accomplish this objective. At the beginning of April, the Risk Metric Score for the Money Masters Bond Composite indicated that it was 13% less volatile than the Barclay’s Aggregate bond index. The Risk Metric Score for the Money Masters Stock Composite indicated that it was 11% less volatile than the S&P 500 stock index.
Our objective at Money Masters is to produce returns that are ahead of the market indices, while taking a level of risk that is below the market indices. We believe this goal best measures our success in helping you accomplish the objective of limiting downside risk while at the same time being in a position to benefit from any further uptick in asset prices. As always, we will closely monitor the fiscal, monetary, and political changes taking place. We remain committed to keeping your portfolio headed, as Winston Churchill noted, in the “right” direction.
Although the recent bear market was difficult for many advisors, Money Masters’ performance results and business momentum have been accelerating. As the registered investment advisor managing assets on behalf of Money Masters, The Retirement Corporation of America was recently selected to Barron’s Magazine 2010 listing of “America’s Top Advisors”. While we are proud to be recognized by Barron’s as one of America’s best advisors, this type of industry award reinforces our long standing commitment to the core values that have grounded us through the years: integrity, honesty, independence and fulfilling our fiduciary duty to always act in our client’s best interest.
Because we have added staff and new technology, we now find ourselves in a position where Money Masters has the capacity to add more client families and still serve everyone effectively. With capacity for growth, our strong preference is to establish these additional relationships with the friends and colleagues of our existing client families. The reason for this is very simple. We enjoy working with you, and we are pretty sure we would enjoy working with the people you also like and admire.
We do not expect (or believe we deserve) an introduction to your friends and family unless you are happy and satisfied with the advisory services we have provided. However, if we have served you successfully in the manner that you hoped for, we would sincerely appreciate an introduction to someone you know who might also enjoy being similarly served. Please send me an email (dan.kiley@moneymasters.com) with their name and phone number and I will be happy to provide your friends and family with a complimentary initial consultation.
Thank you for giving our growth opportunity some of your valuable time and attention. We look forward to continuing to help you achieve your financial goals.
Sincerely,
Daniel C. Kiley, CFP®
Chief Executive Officer
Important Notice – Money Masters Newsletter Disclaimer - To the extent that a reader has any questions regarding the applicability of any specific issue discussed within the preceding newsletter to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or investment strategy will be suitable or otherwise appropriate for an individual's investment portfolio. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for personalized investment advice from The Retirement Corporation of America, or from any other investment professional