August 2016

Here are selected year to date return numbers through the end of July.

(As of 7/31/16)*

Dow Jones Industrials+5.80%

S&P 500 Index+6.30%

NASDAQ Composite+3.10%

Dow Jones World Index (ex. U.S.)+2.30%

(As of 7/31/16)*

Russell 2000+8.32%

Russell Value Index+9.38%

Russell Growth Index+6.15%

Major Bond Indexes (As of 7/31/16)*

U. S. Treasury – Intermediate +7.90%

Barclays Cap. Aggregate Bond Composite Index +5.98 %

Mutual Funds (As of 7/31/16)*

Lipper Large-Cap Growth Index+1.59%

Lipper Large-Cap Value Index+7.68%

Lipper Small-Cap Growth Index+5.14%

(Source: The Wall Street Journal, Russell Investments & Barclays websites)

*Inclusion of these indexes is for illustrative purposes only. Keep in mind that individuals cannot

invest directly in any index, and index performance does not include transaction costs or other fees,

which will affect actual investment performance. Individual investor’s results will vary. Past

performance does not guarantee future results.

FINANCIAL AND INVESTMENT PLANNING

Recently a caller on Money Talk asked me why anyone would purchase a bond with a negative yield. I think this is a good question for at least two reasons. Common sense would seem to suggest this is a dumb idea. Secondly, I believe the phenomenon of negative yields can help explain global financial market behavior.

The caller was referring to some maturities of sovereign debt in Germany, Switzerland, Japan and other northern European countries.

I answered the question in this manner. Some investors have specific future liabilities, perhaps a balloon payment on a real estate transaction or some other contractual obligation. Defined benefit pension plans might want to be sure they have a certain amount at a known future date to pay retiree beneficiaries. These hypothetical buyers want the certainty and safety of highly rated government debt.

Also, if an investor was convinced that the country was going to experience a period of deflation, the future value of a maturing bond would be greater than the purchase price.

Most investors and radiobroadcast callers with whom I speak are more concerned about future inflation, and how it would affect their retirement savings, investments and income.

One way I think about the behavior of global financial markets is what I call the search for return. Whether an investor is a person, or an endowment, foundation, pension plan or sovereign wealth fund, capital is invested to help meet goals and future liabilities.

In the U.S. it has been common for these types of entities to own bonds as part of a balanced portfolio strategy. Investors obtain current income, repayment of principal and a negative correlation to stocks and real estate. While bonds fluctuate in value, and can be subject to repayment or credit risk, investment grade fixed income was historically less volatile than stocks and real estate.

As a result of the 2008 financial crisis, central banks have sharply reduced short term interest rates. And when they have engaged in quantitative easing, buying government, mortgage backed, and in some cases corporate bonds, they have accomplished their stated objective of lowering long term interest rates.

Based upon my reading and thinking, the lower bond market yields moved, the more incentive investors had to look elsewhere for return. This search for return led to higher prices for equities and commercial real estate. I recently had a conversation with an Australian acquaintance who owns a commercial construction business. He told me that Chinese investors had recently purchased commercial property in Melbourne for a 3% return.

This low interest rate phenomenon puts individual investors in a dilemma. If you are saving for retirement or to fund a college education, to accomplish your goal you have to save and invest more, or allocate larger amounts to risk assets.

I believe this is a global phenomenon, and I do not currently understand how it will be resolved.

As I write this letter the Dow Industrials, S&P 500 and NASDAQ have hit new highs. They did so on the same day, August 11, 2016. The last time this happened was December 31, 1999. Source: Barron’s

While this is good news, at least as regards the Dow, there may be less here than meets the eye. As of August 11th, just three names, 3M, IBM and United Health Group accounted for almost 50% of the indexes 2016 gain. If you add Johnson and Johnson and the four stocks are responsible for nearly 60% of the rally. Source: Barron’s

I would call this narrow market leadership. I would prefer to see more of the Dow 30 stocks participating.

Because the Dow is a price weighted index, it would be a good sign to see significant advances from laggards with high weightings. Examples would include Goldman Sachs, Walt Disney, Boeing and Apple. Source: Barron’s

Warm regards,

Carl W. Stuart

Financial Advisor

CWS/lah

  • Past performance is not indicative of future results.
  • The information contained in this report does not purport to be a complete description of the securities, markets, or development referred to in this material. Any opinions are those of Carl W. Stuart and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject

to change without notice. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein.

  • The S&P 500 is an unmanaged index of 500 widely held stocks that’s generally considered representative

of the U.S. stock market.

  • The NASDAQ composite is an unmanaged index of securities traded on the NASDAQ system.
  • The Dow Jones Industrials is an index of 30 stocks that is considered representative of the overall market.
  • The Russell 1000 index contains the largest 1000 companies in the Russell 3000 index. The Russell 1000 is highly correlated with the S&P 500 and is reconstituted annually on May 31.
  • The Russell 2000 index is an unmanaged index of small cap securities which generally involve greater risks.
  • Inclusion of these indexes is for illustrative purposes only. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary.
  • 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.