The headline risk may seem high currently for the stock and bond markets due to the upcoming election and the possibility of a Fed tightening during the coming months. This news, however, has been widely broadcast for months now, so a reaction could be muted. In his weekly “Kee Points,” Dr. Jim Key keeps us updated on current polling and shifts in voter sentiment. The third quarter webcast will provide some good historical perspective on election year outcomes and stock market reactions. The bottom line is: do not make big bets on the election outcome. Click here to view the 3rd Quarter 2016 webcast.
What we are watching closely are stated tax and spending policies for each candidate and how they are then followed through on by the winning candidate. Dividend tax policy and capital gains tax rate policy will be of great interest to the stock market. And of course, a divided Congress and President on proposed tax policy could likely delay or prevent any changes.
If the Fed should increase the Fed Funds rates at their upcoming meeting, it will most likely be a small increase reflected in short-term interest rates, since long-term global economic growth is still anticipated to be low. The Fed’s move could be preemptive in order to curb inflation expectations with the current economic environment moderately positive. Jobs and housing reports in the U.S. have been stable. However, higher U.S. interest rates would play into a stronger U.S. dollar, making us less competitive for exports. We have been predicting a continued strong dollar relative to other currencies since the June Brexit vote outcome (click here to view chart).
We still view the Brexit outcome as a cloud on short-term global growth due to the disruption of trade between important trading partners, but the stock markets quickly shrugged that off, running first to high yield stocks and defensive sectors, then shifting quickly in the third quarter to more aggressive and economically sensitive stocks and sectors like banks, cyclicals, and energy stocks.
Even European stocks were high performers in the third quarter relative to U.S. stocks. This was a real reversal of long-term trends and one to watch. Three of our top ten performers for this third quarter were non U.S. companies; Michelin, Volvo and Garmin (click here to view 3rd Quarter 2016 Top 10 Best and Worst Performing Stocks). Our positioning in the third quarter, and currently, is defensive. That means we are generally carrying some cash in the equity portion of accounts and our bond investments continue to be short in duration and high quality. We know that the broad stock market is still an enticing investment alternative for investors seeking yield and liquidity. Certainly three-year annualized returns on stocks through the third quarter are impressive, at 8.12% net for our equity composite and 5.85% for the MSCI Index comparable period.
An important positioning in our stock portfolios is very low exposure to banks. In fact, Bank of America and Bank of Montreal are our only discretionary names in that space. Banks generally are not fitting into our discipline of either value or growth. Fortunately, Bank of America was a strong performer in the third quarter. The private equity buyout of our recent Rackspace holding was nice as well as two new healthcare stocks, Varian Medical and Edwards Lifesciences Corp returning approximately twenty percent for full quarter holdings. Bristol-Myers, a strong long-term performer for us, sold off after news of disappointing clinical trials. We continue to be defensive on energy exposure. Though oil prices have lifted, we feel that global oil volumes are not contained due to a now fractured OPEC.
Now that the extended tax filing date of October 15 has passed, we will be sending out another tax questionnaire for our clients to update. The information we gather from this form is very beneficial to us to help better tax manage taxable accounts. Also noteworthy and mentioned on the tax questionnaire is that in December 2015, Congress made permanent the provision allowing IRA holders to donate all or part of their required minimum distribution (RMD) to qualified charities without incurring U.S. income tax on those distributions. If you are unfamiliar with this and would like more information, please let us or your tax advisor know.
At STMM, we are focused on making an impact in the communities in which we serve. This year, we are excited to partner with the regional AFP (Association of Fundraising Professionals) in each of our market places. Through sponsorship of the AFP Annual Philanthropy Days, we hope to inspire, educate, and support a wide array of non-profits in each of the communities in which we (and you) live.
Please take a moment to review the nonprofit client quarterly spotlight featuring, Haven for Hope (click here to view). We are pleased to feature this outstanding organization serving the homeless and are proud of the program they have built to break the cycle of homelessness.
Finally, if you are a Facebook user, please visit our page on Facebook. There you will find updates on our employees and events as well as some recent articles and accolades. You may find our Facebook page at https://www.facebook.com/stmmltd/.
Thank you for being our client.
Jeanie Wyatt, CFA®
Chief Executive Officer & Chief Investment Officer
This letter is not intended to constitute investment advice. Market and economic views are subject to change without notice and may be untimely when presented here. You are advised not to infer or assume that any securities, sectors, or markets described in this letter were or will be profitable. Securities identified in this letter do not represent all of the securities purchased, sold, or recommended for advisory clients, and you should not assume that the recommendations made in the future will be profitable or will equal the performance of the securities identified above. A complete list of all equity recommendations made by STMM during the past year is available upon request. Past performance is not indicative of future results. There is a risk of loss.
STMM Core Strategy Composite contains those accounts with an all-equity securities focus. The equity securities in these accounts are described as Core Equity or are comprised primarily of all-capitalization stocks combining both growth and value disciplines. This composite was created on 2/4/2011, and includes taxable and non-taxable accounts that have also been included in the STMM Equity Only Core Strategy Composite and/or the STMM Equity Only Tax Managed Composite. Prior to 12/31/2010, STMM primarily reported the performance results of its Equity Only Core Strategy Composite, which has an inception date of 1/31/2001. In order to capture the performance of accounts managed by STMM since 12/31/2000, STMM created this Core Strategy Composite. Taxable accounts included in this composite are managed in a tax-sensitive manner. The creation of this new composite does not indicate a change in STMM’s investment strategy. From 6/30/2008 – 6/30/2012, this composite contained only accounts having more than 90% in core holdings. Beginning 6/30/2012, accounts with less than 90%core holdings are allowed into the composite provided the noncore positions are not restricted.
Index and Other Information
The performance and other information contained herein is subject to change. Total return includes reinvestment of dividends and interest, as well as accrued income and capital gain or loss. There is a possibility of loss. Past performance is not indicative of future results.
Index information is included merely to show the general trend in the markets for the periods indicated and is not intended to imply that client accounts will be similar to the index either in composition or risk. Additionally, the index may vary from client accounts in various ways including volatility, types of securities, investment objective, and level of diversification.
The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets. It consists of the following 23 developed market country indices: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom, and the United States. As a net total return index, dividends are reinvested after the deduction of withholding taxes, using a tax rate applicable to non-resident institutional investors who do not benefit from double taxation treaties.
The Standard & Poor’s 500 Index (S&P 500®) is an unmanaged market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance.
The criteria for including a name in any index may be more restrictive or limiting than the criteria STMM uses in adding companies to its equity portfolios or bonds to its fixed income portfolios. For example, STMM equity portfolios may include international stocks as well as stocks of companies having a market capitalization below $3.5 billion, neither of which would be eligible for inclusion in the S&P 500 Index. Index information is included merely to show the general trend in the markets for the periods indicated and is not intended to imply that client accounts will be similar to the index either in composition or risk. Indices do not include cash balances.
Although the information contained in this report has been obtained from sources believed to be reliable, its accuracy and completeness cannot be guaranteed. Additional information regarding policies for calculating and reporting returns is available upon request. To receive a complete list and description of STMM’s composites and/or a presentation that adheres to the GIPS® standards, contact Jennifer Mendez, 210.824.8916, and/or email@example.com.
CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute. ©2016 South Texas Money Management, Ltd. All rights reserved.