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Market Commentary 09/30/2016

USA! USA! USA!

Earlier this month, those were the patriotic chants heard around Hazeltine, the Chaska MN golf course that hosted the 41st Ryder Cup. The premier golf tournament, which pits Team USA against Team Europe, saw veteran captains Davis Love III and Darren Clark select their dream teams of a dozen of the world’s best players from each country or continent. On American soil with galleries nearing 50,000 fans, the US team reclaimed the cup for the first time since 2008 with a decisive 17-11 win.

Investors may also be chanting USA! as they review their portfolio statements. After disappointing returns in 2015, US stocks provided a nice win for both the quarter and 2016 to date. Small and medium-sized companies showed double digit year-to-date returns of 11.5% and 10.3% respectively while large US companies produced 7.8%. By contrast, the European and other developed international stocks did little to help overall performance as they only eked out 2.2% over the same time period.

Just as not all of the US team members won their rounds, not all of the S&P 500 sectors positively contributed to the quarter’s return. A number of the more defensive sectors that had strong growth in the first half of the year saw a retracement of their earlier gains. Consumer staples and real estate had losses of -2.6% and -2.1% for the quarter but still maintained solid year-to-date returns. The telecom and utility sectors each had even greater quarterly losses of -5.6% and -5.9% but still managed double-digit year-to-date returns. The greatest contributor to US stock quarterly performance was the technology sector up 12.9% helped by a successful Apple product launch. Overall the S&P 500 gained 3.9% for the quarter and a respectable 7.8% for the year.

The strength in the bond market also came as a surprise to many as our Federal Reserve again declined to raise rates. Central banks around the world maintained low or even negative interest rate policies which in turn drove prices even higher in many areas of the bond market. Thanks to these policies, the “safe” part of investor portfolios scored again. It’s difficult to know how long this trend will continue, but this fall marks the 35th anniversary of a bull market in US treasuries. It’s been a good run, giving bond investors very healthy returns over the years.

Navigating the course through the rest of the year will not be without challenges. The uncertainty of the approaching presidential election is weighing on many, as is the direction and timing of Fed policy. Globally there is an overall sense of geopolitical instability and ongoing challenges to economic growth. After all, while the Ryder Cup brought the British and their European brethren together for a harmonious weekend, we still have to consider the long-term impact of Brexit. The rapid decline and volatility of the British Pound Sterling is reflecting this uncertainty.

It was 8 years ago that Warren Buffet wrote his “Buy American, I Am” op-ed article in the New York Times. Buffett encouraged investors to be “be fearful when others are greedy and be greedy when others are fearful.”  This letter was released less than 5 months before the US stock market bottomed on March 9, 2009, ending a 57% decline of the S&P 500. Since that time, US markets have seen a more than 200% increase, with passive indices producing very solid results. But we believe we have entered a new phase of the market cycle that will require more care in selecting investments here and across the globe. Valuations are not cheap overall, but there is more fear in the market than there is greed and our belief is that opportunities remain. However, just as the Ryder captains were able to select their best players to compete, we believe that the challenges ahead warrant active managers who can select the best investments to carry the distance and navigate the hazards inherent to securing your financial future.

We appreciate the trust you have placed in us.

Thomas L. Menzel, CFP®                                             Shawn J. Jacobson, CFP®, ChFC, MBA
Asset Manager                                                            Asset Manager
 
 
 
JP Morgan 4Q 2016 Guide to the Markets; Forester Value Fund Quarterly Update, October 2016; Schwab “With a Whimper Instead of A Bang: Is the Great Bond Bull Market Over?” September 2016; Goldman Sachs Asset Management “Market Know How- Insights and Implementation Q4 2016”; MFS “By the Numbers,” October 2016.


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.