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Market Update May 2018

May 21, 2018

Four months into 2018 and it’s starting out as a strange one. I don’t recall a four month period like this one where good quality companies with cash that pay a dividend and have earnings to justify a higher stock price are trading at 10, 20 and some even 30% off their 52 weeks highs. And companies with low amounts of cash that in most cases don’t pay a dividend are have increasing stock prices and don’t have the earnings to justify their current stock price. I would prefer to own companies for our clients that fit the characteristics of the former vs the latter. We all know that sometimes in the investment world the opposite of what makes sense, happens. It’s no different from the world at times. I am reminded of what I was told at one point regarding investing, “Investing is about taking advantage of other people’s mistakes.” I believe it’s a mistake to ignore good quality companies, with healthy cash on hand that pay a dividend. These are the type of companies we would prefer our clients to own.

As a result the recent pullback in the stock market, in my opinion, has put us in a position where the stock market appears to be trading at a fair valuation (See Chart A). The S&P 500 PE Ratio is at the median average. The lower the PE the better the valuation is for the stock market. In addition, corporate cash as a percentage of current assets is near all-time highs (See Chart B). Another great sign. And the biggest plus is that S&P earnings have increased tremendously and truly are at all-time highs (See Chart C). I believe these are all positive signs for the overall stock market.

Some would say we would prefer to just get out of the stock market for now. First, I would say investing in the stock market isn’t for everyone and we definitely need to talk thru the positives and negatives when investing. I would also say that I have learned that when investing in the stock market we have to be ready to sometimes do the opposite of what we feel. A lot of times when we feel like selling we should buy and when we feel like buying we should probably look to take some profits. I am reminded of Warren Buffets quote that I have referenced before “Be fearful when others are greedy. Be greedy when others are fearful.” Now I don’t think Mr. Buffett is calling on us to be greedy people however when it comes to investing sometimes that is exactly what we must look to do. Secondly, I want to remind our clients that when we make money in the stock market we attempt to make most of our return in the “BEST” days of the market (See Chart D). On the chart you will see that in the best 2-4 days of the year and 60% of the best days over a 20 year period occurred within 2 weeks of the worst days. What is the likelihood that when trying to time the market we would get out of the market and get back in and not miss the best days? I would say not likely. What we want to do is when the market is high make sure our goals are the same and also make sure our allocation between stocks, bonds and cash are still allocated properly and also look to harvest gains in certain areas when needed as well.

Other investors would say they just want to invest in the fixed income bond market. Historically this may have paid off especially when interest rates are decreasing and we do believe that a portion of our allocation in a lot of cases should be placed in the fixed income bond market. One caution I have regarding the bond market is that when interest rates go up the value of bonds go down (See Chart E). A 1% rise in interest rates on a 10 year Treasury Bond will result in a decrease of 8.1% in the bond’s price value. We are in a period where rates seem to be leaning towards up vs down so I just want to caution investors that what used to be conservative may not be as conservative as it was in the past.

I want to sincerely thank each one of you for entrusting your hard earned assets to Zichterman Investment Group of Raymond James. We sincerely appreciate each one of you and know that what we are managing for you is nothing short of hard earned assets. We will continue to monitor your current allocations, especially since the asset allocation decision factor historically has been just under 92% in affecting total portfolio volatility (See Chart F). Feel free to contact us regarding your current allocation whether it be pertaining to your Raymond James & Associates assets or elsewhere. It is that important to your success whether you are in the retirement or accumulation stage. Again, we appreciate you and please call us if you would like to get together.

All investing involves risk. There is no assurance that any investment strategy will be successful. Diversification and asset allocation do not ensure a profit or protect against a loss. Dividends are not guaranteed and must be authorized by the company's board of directors. Past performance is not a guarantee of future results. The S&P 500 is an unmanaged index of 500 widely held stocks that's generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Bryan Zichterman and not necessarily those of Raymond James.

Chart A
Chart A


Chart B
Chart B


Chart C
Chart C


Chart D
Chart D


Chart E
Chart E


Chart F
Chart F


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