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Market Commentary 06/30/2016

Fiduciary Responsibility in a World of Uncertainty

Uncertainty may be an understatement in today’s environment. Political and societal turmoil, terror threats and a pervasive sense of anxiety have become the mainstays of our media’s reporting. Events such as Brexit highlight the discontent many feel the world over. The long-term implications of Britain’s vote to leave the European Union may not be known for years, but when the results were tallied, global markets reeled. Only days later, though, much, if not all, of the market loss had been recouped. The market gyrations were a reaction that lasted mere days, leaving investors to wonder what they’d just experienced.

Why markets react the way they do has long been a subject of study for financial advisors. One theory states that as soon as information relevant to a stock is made public, the stock’s price will immediately and accurately adjust to reflect this new data. But even this past quarter, the market’s efficiency, or the degree to which stock prices reflect all available information, has been hotly debated. A newer field of study called behavioral finance argues instead that investors don’t always make decisions that are well thought out or rational. Decisions can be irrational or based on emotion, leading to prices that deviate from the market’s actual value. We believe that there is truth in both ideas. Experience has shown us that short term market movement can be erratic and volatile, but markets over longer time periods are generally efficient.

Already this year, we’ve had significant volatility with steep market declines followed by strong rallies. Fear during these market drops has driven investors to stockpile record levels of cash, in sums now topping $12 trillion. Cash sitting in money market funds and bank accounts is earning a fraction of a percent, far below even the level of inflation. This reveals that while cash may seem like a safe haven, it’s not a long term investment strategy. The surprise of the quarter may be how well equities and fixed income performed given the up and down environment. On June 23, the day we got Britain’s vote results, the S&P 500 lost a whopping 3.6% but in a fashion similar to the first quarter’s reversal, losses were brought positive by quarter end to post 2.5%. For the year, the S&P 500 is up 3.8% with the turnaround in energy being a big contributor. The energy sector lead the quarter with an 11.6% return. While cash paid virtually nothing, longer term fixed income remained safe ground for investors and provided a nice return. High quality corporate bonds returned 7.7% for the year and US Treasuries were up 5.4%. International markets continued to struggle with sluggish growth, fluctuating currencies and political uncertainties. Overall, developed overseas markets saw a negative 1.46% for the quarter and a loss of 4.42% year to date.

As advisors, we watch markets and report returns, but our primary responsibility is to help our clients reach their goals without letting emotion interfere with results. This quarter the US Department of Labor addressed this responsibility by finalizing the definition of “investment advice fiduciary.” At the most basic level, this regulation simply requires that financial advisors manage assets in ways that demonstrably put clients first. At Legacy Financial Advisors, we have long operated under this standard and have always believed in offering objective guidance. We know, too, that this high level of care is even more important during uncertain and volatile times when emotions can prevail. Compliance with the DOL’s regulation may mean some modest changes in forms and reporting that Legacy provides, but you can be assured we will continue to work in your interests toward your financial goals.

As we look toward the second half of 2016 we see some bright spots as well as challenges. We appreciate the trust you have placed in us and welcome your questions and concerns as we navigate the times ahead.

Thomas L. Menzel, CFP®                                             Shawn J. Jacobson, CFP®, ChFC, MBA
Asset Manager                                                            Asset Manager

JP Morgan 3Q 2016 Guide to the Markets; Forester Value Fund Quarterly Update, July 2016; Schwab 2016 Midyear Market Outlook, July 2016; Lazard Asset Management, July 2016; The Finance Professional’s Post “Whither Efficient Market? Efficient Market Theory and Behavioral Finance”, May 19, 2010; Investment News, “Figuring Out Fiduciary: Now Comes the Hard Part”, May 9, 2016; Morningstar.com, Fund Category Returns.


IMPORTANT DISCLOSURES: The opinions presented in this communication are subject to change without notice and no representation is made concerning actual future performance of the markets or economy. Information obtained from sources is considered reliable but is not verified. The research and other information provided herein speak only as of it date. We have not undertaken, and will not undertake any duty to update the research or information or otherwise advise you of changes in the research or information. Performance information presented is not an indication of future results and index data is provided for market reference purposes only. This is not an offer to buy or sell or the solicitation of an offer to buy or sell any security/instrument or to participate in any particular trading strategy. This document is the property of Legacy Financial Advisors and is intended solely for the use of the Legacy client, individual, or entity to which is addressed. This document may not be reproduced in any manner or re-distributed by any means to any person without the express consent of Legacy. This material is for educational purposes only. Mis-transmission is not intended to waive confidentiality or privilege.