Worcester Business Journal

www.wbjournal.com • Worcester Business Journal • 2 018 Economic Forecast 29 S P O N S O R E D B Y T he 2017 "just right" Goldilocks market acted as if risk no longer existed. This sweet fairy tale will likely continue unless we see a Black Swan appear in 2018. Statistically, a correction of 5% to 15% is highly likely and should be anticipated sometime in 2018. The mastery comes when one knows how and when to turn volatility into opportunity.. CASH "Cash is king." U.S. stock markets are slightly over valued and economic conditions have many investors nervous. Tactical investing is key to turn cash from perceived "safe haven" to opportunity play. Over the past 25 years I have heard many prophesize a "doomsday scenario," although 2008 was the scariest market by far since the Great Depression of the 1930's, it is unlikely to occur given the resilient US economy. →Consider slightly increasing your cash position to be positioned appropriately if the market corrects 10% to 15% like it did in 2015 and 2016. Seizing this opportunity may be wise giving we have not had a correction of 5% or more since 2/11/16. You should note that cash alternatives do still carry various risks, such as market or credit risk, and may lose value. BONDS High quality bonds are poised to earn meager returns in 2018. Eighty seven percent (87%) of a bonds performance is attributable to its coupon and today the AGG is yielding 2.55%. Source - Bloomberg Barclays U.S. Aggregate Bond Index (AGG) of 9/30/17. Short- term U.S. interest rates are likely to continue to march higher but without signs of major inflation, any increases will be modest. The stated Fed goal will be 3% by the end of 2019. Demand for mortgaged back securities may deteriorate based on fed future actions. In the global landscape of fixed income options, U.S. investment grade corporates offer a compelling mix of yield and diversification potential. Emerging market debt now appears to offer better relative value than U.S. high yield bonds. →Consider underweighting fixed income. Government bonds not likely to outpace inflation so look to corporate bonds. Consider reducing U.S. high yield debt and increasing emerging market debt. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values vary, and will decline as interest rates rise. Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. High yield/junk bonds (grade BB or below) are not investment grade securities, and have higher risk than those graded BBB and above. International debt securities involves special additional risks, such as currency risk, geopolitical and regulatory risk, and risk associated with varying settlement standards. These risks are often heightened for investments in emerging markets. US STOCKS Valuations are expensive, but it does not mean that stocks cannot continue to climb the wall of worry. Former Federal Reserve Chairman Alan Greenspan, in December of 1996 made his first infamous comment, about "irrational exuberance" and yet markets doubled in the next three years. A pullback of 5% to 15% would be statistically probable but may not occur. If it does and earnings continue at their current clip a reentry of cash into stocks would be prudent for long-term investors. Twenty percent (20%) plus corrections typically only occurs when we are in a recessionary environment, which is just not the case today. (Reference Leading Economic Indicator Index). We are witnessing stronger global growth and the U.S. expansion continues to mature. Comparisons to the late 1990 bubble should be viewed with open eyes. Future looking Price/ Earnings (P/E) ratios as of 6/30/17 are 23.30 vs a P/E of 30.06 in January of 20001. That is a huge difference, never mind how much lower inflation is today compared to then. Corporate earnings have accelerated across the economy in the past year and a half. →Consider favoring sectors with a combination of growth and reasonable valuations like Financials, information Technology, Consumer Discretionary, and Health Care. As with all investing, stocks investing has risk including loss of principal, and the prices of small cap stocks are generally more volatile than large cap stocks. Because of their narrow focus, investing in specialized sectors maybe subject to greater volatility and special risks than investing more broadly across many sectors and companies. INTERNATIONAL STOCKS Valuations are much cheaper than U.S. and we are experiencing improving corporate earnings overseas. If you are absolutely busting to stay fully invested in equities, 2018 may present the second year international stocks outperform U.S. stocks. The risk is theoretically less from a valuation methodology. For those looking for maximum return willing to take on risk, you should consider emerging markets. Additionally strengthening foreign currencies are providing a tail wind and populist politics are less threatening in Europe. Historically, periods of underperformance by international equities have been followed by periods of outperformance. As forecasted last year in our forecast this may continue. It is certainly validated statistically. Concerns like anything would be black swan events. →Consider increasing international equities within a global portfolio. Consider strategies that pursue opportunities in emerging markets. When investing internationally, it's important to remember there are special risks such as currency fluctuation and political instability, which may not be suitable for all investors. These risks are often heightened for investments markets. ALTERNATIVE INVESTMENTS Generally defined as any investment that is not a stock or bond. This consists of investment like Real Estate, Commodities and Currencies, etc. We believe this asset class is important going forward. Some investments are designed for income and others growth. Research should be conducted to discover which is appropriate for you. Some investments may not be suitable. Make sure you work with an investment fiduciary to try to uncover any potentially hidden gems. →Consider a shift of some of your portfolio from stocks to alternative investments to potentially lower stock market risk while increasing return opportunities. You will also want to consider special risks and alternative investments, such as leveraging the investment, potential adverse market forces, regularly changes, potentially illiquidity, and that strategies could accelerate the velocity of potential losses. The Bottom Line: Use Stocks, Bonds and Alternative Investments for True Diversification Most investors are some combination of stocks, bonds and cash. The global economy and other factors have changed and the traditional approach of a portfolio of 60/40 stock to bonds ratio, in place since the inception of the Modern Portfolio Theory of 1952 is outdated for some. This leaves many scratching their heads and wondering why what's worked before may not hold true in 2018. Alternative Investments have been used successfully by endowments for years2, they are less correlated with traditional investments. This means they may perform differently from each other under the same market conditions and provide further diversification, lower portfolio volatility, and potentially increase returns. Lowering risk is a more critical factor in 2018, having to fight your way back from losses can be a real portfolio killer. Work with an advisor with cutting edge analytical tools to turn volatility into opportunity, a critical move in 2018, impacting your portfolio for the short and long term. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. No strategy assures success or protests against loss. n Economic Forecast For Investing Factors and moves to consider: Roadmap to Investing in 2018 1Source: Macrotrends.net 2Source: From 6/30/2005-6/30/2015, an equal weighted average of 812 University Endowments returned 6.3% compared to the S&P 500® Index average return of 5.53%. 2015 NACUBO Endowment Study, Annual Report of the National Association of College and University Business Officers Endowment Performance and Management in Higher Education, 2015. e S&P 500 Index is unmanaged and available for direct investment. Past performance is no guarantee of future results. Allocations for endowment funds may not be suitable for the average retail investor considering various factors, such as volume of invested funds and respective risk tolerances. Additionally, the performance shown may not be indicative of any results of a retail investor. Correlation is a statistical measure of how closely two securities move in relation to each other. A high (positive) correlation implies the securities generally move in a similar direction, whereas a low (negative) correlation implies the securities generally move in opposite directions. Securities offered through LPL Financial, Member FINRA/SIPC. Investment Advice offered through Provo Wealth Management Group, a Registered Investment Advisor. Provo Financial Services, Inc. and Provo Wealth Management Group are separate entities from LPL Financial. E D U C AT I O N

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