September Market Review from Sumner Wealth Management

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- September 2016 -


 In This Edition:

  • Market Review 
  • US Economy
  • Feds Stay the Course
  • What is Fee Base?
  • About SWM



Market Performance

Stock Market



YTD 2016

 Total U.S. Market1 +0.10% +7.84%


   Domestic Large Cap Equity2 0.00% +7.67%  +14.27% 
   Domestic Small Cap Equity3 +1.59%  +10.04%  +11.04% 
 International Equity4 +1.65%  +5.59%  +6.40% 
   Developed International Equity5 +1.05%  +1.47%  +2.68% 
   Emerging Market Equity6 +3.35%  +15.52%  +17.29% 

Fixed Income



YTD 2016

 U.S. Bonds7 -0.43% +5.52% +5.60%
Cash Equivalent8 +0.02% +0.16%  +0.17%
1Russell 3000 2S&P 500 Index 3Russell 2000 Index 4MSCI ACWI ex-U.S. Index 5MSCI EAFE Index 6iShares MSCI Emerging Markets Index 7Barclays Capital U.S. Aggregate Bond Index 8Barclays Capital 1-3 Month U.S. Treasury Bill Index   

Dear Visitor,

Managing the late innings of a baseball game is tricky. On a good day, your starting pitcher gets you to the sixth or seventh inning. However, once you go to the bullpen, it gets more difficult, as you rotate through multiple pitchers on your way to a closer. Sometimes you put a pitcher in just to get one batter out and then replace them. Similarly, asset allocation in the late innings of an economic expansion is more complicated. The early years are simple enough. If stocks are cheap and the expansion looks healthy, you stick with a stock overweight.

However, as the expansion ages you have to consider how it could end. An economy that overheats before it slumps suggests an overweight to stocks and commodities over bonds and cash, at least initially. An economy that gradually slides into recession suggests an overweight to fixed income. And overlaid on top of this are valuations. How cheap or expensive are various assets as you head into the late innings? Good financial advice is always important – but it is particularly important in the late innings of an economic expansion. Having said this, the good news is that the current expansion, already in its eighth year, looks like it is headed to extra innings. Over the past year, economic growth has decelerated while labor force growth has quickened, resulting in a much slower reduction in labor market slack than in the early years of the expansion.

August Market Review

The U.S. market was fairly calm in August. Price volatility and trading volume were both light, which is often the case in the holiday-laden month. Through the end of August 26, the overall market (Russell 3000) was essentially unchanged for the month, as was the large-cap index (S&P 500). Smaller companies, however, (Russell 2000) were up by about 2%. International stocks, were also higher by almost 2%, with developed markets (MSCI EAFE Index) up 1% and emerging market stocks (MSCI Emerging Markets) up over 3%. The bond market, meanwhile, was down slightly, as the 10-year Treasury yield moved higher to 1.62%. Commodities were also up 1%.


The August employment report provided the clearest evidence of this. The report was straight down the middle – a 151,000 gain in payrolls but with only a moderate 0.2% rise in the average hourly earnings of production workers. Moreover, the most important aspect of the report was the unemployment rate, which did not fall but rather stayed at 4.9%, unchanged from July and, actually, unchanged from January.  

Part of the reason for this is a slowdown in the pace of real GDP growth, which amounted to just 1.2% in the year ended in the second quarter, compared to a 2.1% expansion average. This has somewhat constrained the growth in labor demand.

A second reason has been a revival in labor supply. Over the past year, while the population aged 16 to 64 grew by just 0.6%, the labor force grew by 1.5%. This may be partly due to a decline in the number of people claiming disability benefits, which fell by 70,000 in the year ended in July instead of rising by 100,000 which would have kept pace with the growth in the over 16 population. The last two years have seen a crackdown on people claiming disability without good cause, after explosive growth in the prior decade, and this may have pushed many adults back into the labor market.

In addition, according to the Conference Board, perceptions about the job market have improved over the past year and real wages have increased - both factors that may have boosted labor supply. Whatever the reason, the net result is that the unemployment rate fell by just 0.2% over the past year.

In the first six years of this expansion, economic growth averaged 2.2%, household employment grew by 1.0% per year and the labor force grew by just 0.3% per year. If these trends had continued, the unemployment rate would have been 4.7% in the second quarter of this year, 4.1% in the second quarter of next year and 3.7% by the fourth quarter of next year.

Over the past 40 years, the low water mark for the unemployment rate was 3.8%, a level briefly touched in the early months of 2000. A year ago, it seemed probable that we would hit this mark by the end of next year and that we would, by now, be experiencing an acceleration in wage inflation. Now it seems we have a little more time.

However, the question still is: where do we go from here? On economic growth, a re-acceleration appears likely. Consumer spending appears to be growing at a 3%+ pace in the third quarter and recent data on investment spending looks more hopeful. Importantly, the major drags of the last year, falling investment spending on energy infrastructure and a slowdown in inventory growth, now appear to be behind us. Barring a shock, the economy could easily grow by between 2% and 3% over the next year.

On labor force, while a crackdown on dubious disability benefits and more optimistic perceptions of the labor market have helped over the past year, these should be temporary effects while the chronic slowdown in the growth of the 16-64 age cohort is a long-term one. The most likely path is one where the unemployment rate resumes its steady decline with consequent inflationary pressures reasserting themselves. This is one reason why the Federal Reserve would be well advised to restart its interest rate normalization path when it meets in two weeks. It is also a reason investors should continue to prepare for the potential for higher growth, higher inflation, higher interest rates, and, eventually, the next U.S. recession. 

Feds Stay the Course

Unlike its Japanese counterpart, the Fed stayed the course and opted to not raise short-term rates this week. That said, Fed Chairwoman Janet Yellen made it clear that it is not a matter of if the Fed will raise rates, but rather when. While the Fed believes that "near-term risks to the economic outlook appear to be balanced", Chairwoman Yellen also reiterated that "the case for an increase in the Fed funds rate has strengthened". Reflecting the recent and seemingly contradictory speeches by Fed officials, three voting members (Kansas City Fed bank President Esther George, Cleveland Fed bank President Loretta Mester and Boston Fed bank President Eric Rosengren) dissented, instead preferring to immediately raise short-term rates by a quarter percentage point.

The next Fed meeting is scheduled for November 1-2. While Chairwoman Yellen insisted that it was a "live" meeting, consensus is that the Fed will opt to not move until its December 13-14 meeting, if then. With next week being relatively light for economic releases, and earnings season not really starting until Alcoa releases its result on October 10, next week's headlines may be dominated by the first of four Presidential debates on Monday September 26, and Fed Chairwoman Janet Yellen's testimony before the House Committee on Financial Services on Wednesday September 28.

What is "Fee Base Investing"?

Fee base investing, money managers, wealth managers, are investment accounts in which the adviser's compensation is based on a set percentage of the client's assets instead of on commissions. Contrast this to commission-based investment, in which the adviser makes money based on the amount of trades made or the amount of assets sold to the client.  The fee can be by a scale of total assets or negotiated by both the advisor and client.

The benefit of this type of account is that the adviser's interests are considered to be more in line with those of the investor. For example, if a client has an account worth $500,000 and the advisor's fee is 2% of the assets, the advisor is initially set to receive $10,000 per year. But if the advisor were able to increase the value of the account to $600,000, he or she would then receive $12,000 - an increase of $2,000. On the other hand, if the account value falls, the advisor gets a lower commission payout. So, it is in the best interest for the advisor for the account to grow or stay steady over time, based up the clients risk factor.  Below are there different areas that we focus on for these types of clients/accounts.

1. Core market management/portfolio broad market exposure to allow investors to participate in the potential growth or domestic or global economy.

2. Active management is an approach that is not buy-and-hold. Active management means there will be portfolio changes in attempts to improve risk-adjusted performance, on a pre-tax           and/or after-tax basis.

3. Tactical management is supplemental investments that can help add to portfolio performance or protect from extreme losses.  This would be like hedging against specific markets or             sectors.                  

By having access to different strategic managers, we are able to construct a diversified portfolio based on the clients needs and risk, regardless if it is Stocks, ETF's, Mutual Funds or Bonds. 


About Sumner Wealth Management

Our firm assist individuals, families, and businesses in proactively preparing themselves for a broad range of financial decisions and life events by utilizing a team of specialized individuals to help our clients gain income protection, financial stability, and overall peace of mind for themselves and their loved ones.  We are an Integrated,  Wealth Manager Specialists. 

Mark Sumner
Financial Advisor

Sumner Wealth Management, Inc.                
517 Alcove Road, Suite 202                                            
Mooresville, NC  28117                      
(704) 660-5510  Ext. 401                                                                 

Investment Management
Retirement Planning

   Sumner Wealth Management | 704.660.5510 x 410 |

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