|as of March 31, 2016|
|DJ Industrial Average||2.08%||2.20%||2.20%||7.22%|
|MSCI EAFE Index||-8.27%||-3.01%||-3.01%||6.51%|
|MSCI Emerging Markets||-12.03%||5.71%||5.71%||13.23%|
|Barclays US Aggregate||1.96%||3.03%||3.03%||0.92%|
|Barclays Intermediate US Gov/Credit||2.17%||2.58%||2.58%||0.75%|
Wendy Beaver is a financial advisor in our Southern Pines office. She got her start on Wall Street and we wanted to know what her experience was on the NYSE. Here is what she had to say:
As a former Head Equity Trader of NationsBank and a former Manager of Business Development of Prime Executions, a firm on the Floor of the New York Stock Exchange, I spent many years closely involved with the workings of the NYSE. It all started in the early 1980s, when I was a junior equity trader at InterFirst Bank in Dallas, Texas. For many years, The New York Stock Exchange held a program to introduce up and coming people in equity trading to the NYSE, called the FACTS Program. An invitation to attend this day long program was coveted among my peers. When I received my invitation, I was honored, and, I must admit, a little nervous at the thought of spending a whole day at the venerable New York Stock Exchange.
As it turned out, that day began a life long love and respect for the New York Stock Exchange, whose history began with the signing of the Buttonwood Agreement by 24 New York City stockbrokers and merchants on May 17, 1792, outside at 68 Wall Street under a Buttonwood tree. Twenty-five years later, on March 8, 1817, the organization officially became the New York Stock Exchange Board, later simplified to the New York Stock Exchange. The location changed several times over the years before settling into its present locational 11 Wall Street in 1865. The Neo-Classical building was registered as a Historic Landmark in 1978.
A few years after this important registration, I was there attending the FACTS Program. The day started with an introductory meeting outlining the days events, after which my fellow attendees from throughout the country and I were taken to the NYSE Trading Floor. My first stop was at the post of a Specialist firm. The Specialist was a member of the NYSE, whose role was to maintain a fair and orderly market in his inventory of stocks listed on the New York Stock Exchange. They had actual long and narrow books with lined pages where the existing buy and sell interest was written at particular prices. If there were no actual client interest, the Specialist firm had to use their own capital to facilitate the trade. It was fascinating to me to observe as the Floor Brokers approached the Specialist post, checked the book up and down and began negotiating their order.
The next stop was to be assigned to a Floor Broker, who could be employed by a member firm of the NYSE (Merrill Lynch, Paine Webber, etc.), or be an independent $2 Broker representing many member firms. Their role was to execute the orders from the clients of those firms. The Floor Broker picked up the order from his clerk in his firm’s booth around the perimeter of the Trading Floor. Buy orders were written on green tickets and sell orders were written on pink tickets. Then the Floor Broker walked very quickly(running was prohibited) to the Specialist post where that stock was traded. After negotiating with the Specialist and executing the order, the Floor Broker tore the ticket off the pad and threw it on the floor. At the end of the day, paper tickets were knee deep on the Trading Floor! The Floor of the New York Stock Exchange was the busiest and most exciting place I had ever been. Through human communication and interaction, a large majority of the equity trades that took place in this country were executed there.
The rest of the day was spent with lunch in the Stock Exchange Luncheon Club, a wood-paneled dining room that served members of the NYSE and other Wall Street professionals from 1898 until it closed in 2006, and a visit to the Boardroom of the NYSE, which held a rostrum from the original floor from the early 1800’s and the urn given as a gift to the New York Stock Exchange by Czar Nicholas II of Russia in 1904. ( I was fortunate enough to return to the Boardroom quarterly from 1994 to 1997, when I was asked to be a member of the Institutional Traders Advisory Committee to the Board of the New York Stock Exchange.) A closing reception was held for us in the Luncheon Club at the end of the day.
The bull markets of the 1980s and 1990s shattered all trading records. In fact, volume topped 2 billion shares a day in 2001. Although the NYSE upgraded its technology constantly over the years to meet the increasing volume, this amount of volume presaged changes to come. In 2005, the New York Stock Exchange merged with Archipelago, the first all-electronic exchange in the United States. In 2006 the NYSE ArcaEx merger created NYSE Arca and formed the publicly owned and traded for profit NYSE Group, Inc. In turn, NYSE Group merged with Euronext, creating the first trans Atlantic stock exchange group. In 2008, Specialist firms became Designated Market Makers. Finally, on December 20, 2012, Intercontinental Exchange, an American Futures Exchange, bought NYSE Euronext.
In October 2014, my Parsec colleague Greg James and I visited the NYSE Floor. It is a much quieter place now, with Floor Brokers working from trading desks with Designated Market Makers, often using hand held computers. Today more than half of all NYSE trades are conducted electronically, and Floor Traders are used to set prices and deal in high volume institutional trading. It is considered the largest equities-based exchange in the world based on total market capitalization of its listed securities. That being said, I still got that same awe-inspiring feeling walking onto the Trading Floor with Greg that I got many years ago walking onto the Trading Floor as a junior trader at the New York Stock Exchange for the first time.
Wendy S. Beaver, AAMS®
Each year we co-sponsor the Annual Economic Crystal Ball with UNC Asheville. This is a great opportunity to hear Parsec’s Chief Economist, Dr. James F. Smith, and Nationwide’s VP and Chief Economist, Dr. David W. Berson, discuss the economic and financial outlook through 2017. To register please email Kimberly Moore at firstname.lastname@example.org or call at 828-251-6550. A copy of the brochure can be found here.
- Location: Lipinsky Hall Auditorium (Next to Ramsey Library) UNC Asheville Campus
- Date: Thursday, April 28, 2016
- Reception: 6:15 p.m.
- Economic Outlook: 7:00 p.m.
- Financial Outlook: 7:30 p.m.
- Q & A: 8:00 p.m.
The Economic Outlook will focus on inflation, employment, interest rates, the strength of the dollar and the housing market. The Financial Outlook will explore the implications of Federal Reserve policy for the financial markets. Various investments will be addressed, with an emphasis on interest rates and the bond market.
About our Speakers
David W. Berson, Ph.D Dr. Berson is Senior Vice President and Chief Economist at Nationwide Insurance, where his responsibilities involve leading a team of economist that act as internal consultants to the company’s business units. His numerous professional experiences include Vice President and Chief Economist at Fannie Mae from 1989-2007, past president of the National Association of Business Economists, and senior management position with Wharton Econometrics Forecasting.
James F. Smith, Ph.D. Dr. Smith is the chief economist at Parsec Financial. He has more than 30 years of experience as an economic forecaster. Dr. Smith’s career spans private industry, government and academic institutions, and includes tenures with Wharton Econometrics, Union Carbide, the Federal Reserve and the President’s Council of Economic Advisers.
For about a year now, the industry has witnessed much conjecture and debate about the proposed Department of Labor’s Conflict of Interest rule, also known as the “Fiduciary Rule.” The rule attempts to broadly categorize anyone offering investment advice to retirement plans or IRAs as a fiduciary. It is in the final stages of review with the Office of Management and Budget and is expected to pass.
The mechanics of how this works are seemingly straightforward. An advisor recommending a rollover of retirement assets into an IRA or similar account would be considered a fiduciary. That matters because a fiduciary cannot make a recommendation that would cause his or her income to increase. The rule indicates a five-prong test to determine if a person is advising retirement assets. If any of the following apply, you are now considered a fiduciary:
- If you advise on the purchase or sale of securities or property in a retirement account;
- advise taking a distribution from a plan or IRA;
- manage securities or property including rollovers from a plan or IRA
- appraise or offer a fairness opinion of the value of securities or property if connected with a specific transaction by a plan or IRA; or
- recommend a person who is going to provide investment advice for a fee or other compensation.
Retirement plan sponsors should take note because if you read the rules correctly, it suggests anyone (including laymen) offering advice to a plan participant or an owner of an IRA would likely be considered a fiduciary and could be held personally liable for their recommendations or advice.
Registered Investment Advisors may not see a significant change in business practice. We are already considered fiduciaries. However, broker/dealers (B/D) may not have it as easy. B/Ds are generally not considered fiduciaries to retirement plans or IRA assets, they are instead held to a less stringent “suitability” standard. In the light of the proposed rule, one of the chief issues B/Ds face is how to handle variable income and commissions. Changing their business model to accept level income would likely be an onerous undertaking. There is an unattractive alternative. Under the DOL’s Best Interest Contract (BIC) exemption, the broker/dealer may be exempt from the fiduciary rules if certain requirements are met. These include:
- obtaining a written contract prior to the offering of any advice,
- supplying the prospect information and costs for every investment they could own,
- providing performance information on each investment,
- fully disclosing compensation arrangements and
- maintainging this information for a period of six years.
In addition to this, the aforementioned information must be maintained a public website. Consider the amount of work and man-hours it would take to become compliant with the BIC exemption. Because of this, it is expected that smaller B/D’s will exit the industry or merge with larger providers.
One of the controversial rules surrounds the “seller’s carve out” and its impact on small business retirement plans (plans with either less than $100 million in assets or 100 participants). Under the rule as proposed, the advisor is not considered a fiduciary to the investments of these small business plans. I question why every plan, irrespective of size, wouldn’t be required to have a fiduciary. After all, under this specific rule, if the DOL is trying to protect consumers, why protect some of them and not all of them?
In closing, we at Parsec have been watching this unfold for months and are eager to see the final form of the rule. Perhaps an unintended consequence is that many customers and retirement plans may have to reconsider their advisory relationship. Regardless of the new rule, it is important to always put the best interest of your clients first. Parsec will be prepared for whatever the DOL comes up with.
Neal Nolan, CFP®, AIF®
Senior Financial Advisor
Director of ERISA Services
The most unpleasant part of investing in stocks is definitely the periodic pullbacks. Unfortunately, these are part of the price we pay for more money in the long run.
When the stock market is going up, everybody feels good about being a long-term investor. It is the downturns that test all of our nerves and our belief in long-term investing. As one pundit put it – we can then see who the long-term “owners” of stocks are as opposed to the shorter-term “renters.”
Currently the S & P 500 is around 1946, down about 8.6% from its peak in May of 2015. The low point of the current correction was on 2/11/16, when the S & P was down about 14% from its peak. As a refresher, a correction is defined as a -10% to -20% retracement from a previous peak, and a bear market refers to a decline of more than -20%. We are currently in the 35TH correction or bear market since 1945, and during this time these have occurred about every 2 years on average. Prior to the current correction we had gone almost 4 years without a 10% pullback, so our memories of this sort of negative volatility had begun to dim.
Considering market declines of between 10% and 20% since the end of World War II, the average percentage decline is -13.8%. The average time to recover back to the previous peak level was 3.6 months from the low point. The correction we are experiencing is currently about average in magnitude, and if it were to follow historical averages we would expect a recovery sometime in early summer. Nobody knows for sure whether things will get worse before they get better, but studying past market conditions gives us some context as to the range of potential outcomes.
What do we do in the meantime? If your asset allocation is 100% stocks, we recommend that you stay with it or, if you have the ability, take this opportunity to add to your portfolio with monthly deposits (such as to your 401k or Roth IRA), periodic bonuses or other savings. If your chosen asset allocation includes fixed income, then we periodically rebalance to your target mix and add money to stocks at temporarily depressed prices.
In our portfolios that contain individual stocks, our recipe is as follows: start by focusing on high quality companies with the potential for rising earnings and dividends. Combine 35-45 such companies into a well-diversified portfolio. Regardless of what happens in the stock market over the next year, your portfolio income should be higher each subsequent year. The management teams of high quality companies with long track records of dividend increases are very reluctant to cut their dividends. Even in a recessionary environment, more companies should increase their dividends than maintain or cut them. There are many well-known companies that have increased their dividends every year for 25, 35, 50 or even 60 consecutive years. You may already own some of these companies, especially if you are a Parsec client.
Total return is comprised of two components: income and price appreciation. Over long time periods, the income component of total return has represented just under half of the overall return of the stock market. However, the variability of the income return has been much lower than that of the appreciation component. By focusing on those companies that we believe are likely to have consistent dividend growth over time, particularly for those of our clients who are retired and spending from their portfolios, we are setting up a condition where there is less uncertainty about a significant component of their overall return. For our clients with large cap mutual funds instead of individual stocks, the same general premise applies.
The equity portion of our client portfolios also includes small-cap, mid-cap and international companies, which we invest in primarily through pooled vehicles such as mutual funds and exchange-traded funds (“ETFs”). The fixed income portion is also well diversified, with a focus on short-to intermediate term, high quality instruments along with some high yield and international bonds for diversification and yield improvement.
We encourage our clients to focus on this concept of rising portfolio income to meet their investment goals and provide peace of mind during the inevitable corrections and bear markets that we will all experience at some point.
William S. Hansen, CFA
Chief Investment Officer
In October, President Obama and the US Congress passed the Bipartisan Budget Act of 2015. Included in that act was a clause that eliminated two popular Social Security claiming strategies: File-and-Suspend and Restricted Application.
File-and-Suspend: A strategy where a person, who is at least full retirement age, files for social security benefits, but then immediately requests to suspend those benefits. This allows his/her spouse to take a spousal benefit on the filer’s record, while the filer’s benefits are delayed and continue to grow.
Restricted Application: A strategy where a person, who is at least full retirement age, files for spousal social security benefits and delays his/her own benefit so it continues to grow. This allows the filer to receive some benefit now (the spousal benefit), and a larger benefit later.
Delaying your benefit pays off big. When you delay your benefit you earn delayed retirement credits, which equate to an annual 8% increase in benefits.
Those born before April 30, 1950 were grandfathered in to the old rules and may continue to use File and Suspend and Restricted Application strategies while delaying their credits. Please note, if you were born before April 30, 1950 and you wish to implement the File and Suspend Strategy, you must submit your application before April 29, 2016.
Those born after April 30, 1950 or on or before January 1, 1954 (age 62 in 2015) may only use the Restricted Application strategy. If your spouse is receiving benefits and you have reached full retirement age, you may apply for a spousal benefit, while allowing your own benefit to accrue Delayed Retirement Credits.
For those born after January 1, 1954, neither strategy is available. However, you may still choose to delay taking your benefits until age 70. By doing so, you stand to increase your future benefits by 32%.
Please note that if you are already drawing Social Security, or if you have already set up File and Suspend, the new laws do not affect you.
Summary of Available Strategies
|Age||Can Participate||Cannot Participate|
|66 by 04/30/2016||File & Suspend /Restricted Application|
|62 by January 1, 2016||Restricted Application||File & Suspend|
|62 by January 2, 2016||File & Suspend /Restricted Application|
There are many factors to consider when determining when to start taking Social Security. We recommend that you meet with your financial advisor for guidance to help you with that decision. And if you were born before April 30, 1950, please remember the April 29, 2016 deadline.
Tracy Allen, CFP®
The popular press is generating a lot of recession-related articles lately and with stocks starting the New Year on a weak note, it’s no wonder investors feel a little nervous. Year-to-date, U.S. large cap stocks are down about 10% while most international markets are down even more. Commodities continue to slide and global economic growth has been revised lower. This is certainly not a confidence-inspiring picture, but here’s why keeping calm and carrying on is the best course of action.
First, I want to illustrate why stocks and stress don’t mix. Let’s say that stocks are down 10% year-to-date, the global growth outlook is muddy at best, and you’re seeing a lot of articles suggesting that the US is headed for a recession. Assuming the above facts and a meaningfully-sized investment portfolio, most humans are likely to feel anxiety, stress, and maybe some fear. Is the market going to fall further? Are we heading for a recession?
Having read enough about neuroscience to be dangerous, I know that when we’re feeling anxiety, stress, and fear, the more evolved part of our brain – our neocortex – is usually off-line and the more primitive part of our brain – our limbic system or brain stem (a.k.a. lizard brain) – is typically running the show. When our lizard brain is calling the shots we often make poor, fear-based decisions because we can’t see the big picture. Our brain shuts down and we become reactive instead of proactive. In these instances our capacity to think higher-level thoughts is greatly reduced.
Speaking of the big picture, did you know that from 1926 – 2015, stocks have delivered average annualized returns of 10%? Notice that includes the two largest US market declines, the Great Depression, and the Great Recession. Not bad. When we get triggered by stress, facts like these can get overlooked and we could make decisions we’ll come to regret. Here’s a schematic of how that might look:
You can see how our thoughts and emotions affect our behavior which then reinforces the above pattern or one like it. Unfortunately, the outcome stinks and so I’d like to propose an alternative – – one that leads to a much happier, healthier outcome.
In the alternative pattern, the same triggering event happens, only this time you’re aware of the stress and anxiety it triggers. The fact that you’re aware of the stress and anxiety is huge! It means you’re not identifying with the emotions and thus your rational-thinking, neocortex brain is still online. You now have choices. Given the old pattern, one strategy would be to call your advisor and get some reassurance that the sky isn’t falling. Another option is to simply turn off the TV or the computer and take some deep breathes. Maybe take a walk around the block or engage in an activity you enjoy. The point is to interrupt the old pattern. The more you can do this, the more your awareness grows, and in turn, the more options you have.
Following through with this example you can see that giving yourself a break from the triggering event and getting some perspective allows you to stay calm, and thus make better decisions. Just like the first illustration, when repeated, this one will also reinforce itself. And the outcome is much better.
So now that you’re hopefully in a calm, peaceful state, we can talk about the current environment. Yes, stocks have gotten off to a shaky start but the US economy remains on stable footing. Jobs growth is strong, oil prices are low, consumer debt is in-check, and wage growth is finally starting to rise. It’s true that US manufacturing is contracting but it only accounts for about 12% of GDP. Meanwhile, US services sectors, which account for 88% of GDP, remain in expansion mode.
Stocks have been spooked by falling commodity prices, slowing growth in China, and fears of deflation. But most leading indicators remain strong and every recession since the 1970’s has been preceded by a spike in oil, not a decline. Finally, and speaking of perspective, there will always be some risk of recession simply because contractions are a natural and a healthy part of any business cycle. Without them we can spiral out-of-control into bubble-like environments. I for one intend to stay calm and carry on. Nothing else seems to help anyway.
Carrie A. Tallman, CFA
Director of Research
The deadline to make IRA contributions for tax year 2015 is April, 15 2016. The maximum contribution is $5,500 per individual ($6,500 if age 50 or over) or 100 percent of earned income, whichever is less.
There are income limits which determine whether you can deduct your Traditional IRA contribution or if you qualify to make a Roth contribution. The following table gives the phase-out range for the most common circumstances.
Do you qualify to deduct your Traditional IRA contribution?
If your income is less than the beginning of the phase-out range, you qualify. If your income is over the phase-out range, you do not. If your income falls inside the range, you partially qualify.
Modified Adjusted Gross Income Phase-Out Range
|Tax Filing Status||For 2015 Contributions||For 2016 Contributions|
|Single, participates in an employer-sponsored retirement plan:||$61,000 – $71,000||$61,000 – $71,000|
|Married filing jointly, participates in an employer-sponsored retirement plan:||$98,000 – $118,000||$98,000 – $118,000|
|Married filing jointly, your spouse participates in an employer-sponsored retirement plan, but you do not:||$183,000 – $193,000||$184,000 – $194,000|
Do you qualify to contribute to a Roth IRA for 2015?
Modified Adjusted Gross Income Phase-Out Range – Roth
|Tax Filing Status||For 2015 Contributions||For 2016 Contributions|
|Married, filing jointly:||$183,000-$193,000||$184,000-$194,000|
If your filing status differs from those listed above, please contact your advisor and he or she can help you determine whether you qualify.
Harli Palme, CFA, CFP®
|DJ Industrial Average||0.21%||0.21%||7.70%||-1.52%|
|MSCI EAFE Index||-0.81%||-0.81%||4.71%||-1.35%|
|MSCI Emerging Markets||-14.92%||-14.92%||0.66%||-2.23%|
|Barclays US Aggregate||0.55%||0.55%||-0.57%||-0.32%|
|Barclays Intermediate US Gov/Credit||1.13%||1.13%||-0.73%||-0.35%|
|Current Level||Prior QTR Level||TTM High||
You may have read some scary headlines on high-yield bonds recently. We’d like to take a moment to update you on the situation and provide our perspective. First a little background. High-yield bonds are debt securities issued by companies with credit ratings below investment-grade. These bonds are commonly called “junk bonds” because of the weaker balance sheets and growth prospects of the companies that issue them. As a result of increased default risk, investors typically demand higher interest rates on these types of bonds to compensate for the additional risk they take on. When things are going well, high-yield or junk bonds can deliver above-average interest payments and price appreciation. When things are not going well, investors can experience sharp price declines and some companies may even default on bond payments. In a nut shell, higher reward comes with higher risk.
Many advisors, including Parsec, include a modest amount of high-yield bonds in client portfolios. Junk bonds are considered an asset class and can improve the diversification of a portfolio because they have lower correlations to regular bonds and even stocks. This means when regular bonds are flat or down, high-yield bonds could actually rise. The same goes for stocks – high-yield bonds and equities do not always move in the same direction, which confers some diversification benefits.
In addition to diversification benefits, junk bonds have historically delivered healthy returns. The group tends to do well in the early years of an economic expansion when tight credit starts to loosen and company balance sheets improve. On the flip side, high-yield bond performance becomes more volatile as an economic expansion starts to slow down and the spread between higher-quality bonds and junk bonds widen. This indicates investors once again require more return to hold these higher-risk assets.
Earlier this year, interest rate spreads – the difference between high quality bond interest rates and low quality or “junk” interest rates – started to widen as energy company profits came under pressure and debt default rates ticked higher. Since May 2015 through mid-December, high-yield bond prices have fallen over 12%*. However, on a total return basis, the group is down about 8% as higher coupon payments were a partial offset. While debt default rates on speculative-grade companies are below the 20-year average of 4.3%, at around 2.8%, they’ve jumped from 1.4% a year ago due to falling commodity prices that negatively affect profits**.
As high-yield returns tumbled over the summer, many investors ran for the exits. Unfortunately, diminished bond liquidity following the 2008-2009 financial crisis made redeeming shares difficult for some. Regulations that strengthened the banking and financial systems via higher capital requirements and reduced leverage have had the unintended side-effects of raising costs for banks and primary dealers to hold fixed income inventory. With lower inventory levels, these critical market makers are less able to provide liquidity in the debt markets. This was highlighted recently when investment firm Third Avenue froze investor redemptions in its high-yield fund (which is not a Parsec holding) due to liquidity constraints. The Third Avenue fund was heavily invested in some of the lowest-ranked credit bonds, which exacerbated the management team’s ability to find willing buyers. In the end, Third Avenue chose to freeze investor redemptions for one month.
The Third Avenue situation is unusual, but does it reflect deeper issues for the high yield space? Our view is that current U.S. economic expansion is maturing, which suggests higher credit spreads and potentially more volatility (including downside risk) for the group. At the same time, falling commodity prices and a strong dollar are headwinds for high-yield. That said, U.S. jobs growth remains robust, the housing market continues to advance, and consumers are the healthiest they’ve been since before the Great Recession. The recent Federal Reserve interest rate hike echoes our sentiments that the U.S. economy is on healthy footing.
While high-yield may see more downside, we believe investors are becoming more discerning after years of indiscriminate investing across high and low-risk asset classes alike. This is a good thing. It means that fundamentals, and not accommodative monetary policy, will once again drive asset returns. Although high-yield bonds may face more headwinds in the near-term, our focus on higher-quality, higher-liquidity, high-yield debt should help us better weather a difficult environment.
Despite potential high-yield headwinds, we continue to recommend that clients remain fully invested. This is based on our experience that market timing is a losing game, as asset class leadership can change sharply, and often without warning. The historical record has shown that through various market cycles, both stocks and bonds have out-paced inflation over the long-term. As a result, we recommend investors stick with their high-yield holdings.
*The BofA Merrill Lynch US High Yield Index
**S&P 500 data
Carrie A. Tallman, CFA
Director of Research