Adam Zuercher

CPA, Certified Financial Planner, and Wealth Management Advisor based in Findlay, Ohio

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Rebecca Patterson's Economic & Investment Outlook

January 23, 2014 by Adam Zuercher

This post is one of a series of notes on the sessions I attended at the AICPA’s 2014 Advanced Personal Financial Planning Conference. You can find links to all my notes from the conference here.

This past Monday (1.20.2014)  Rebecca Patterson, Managing Director and Chief Investment Officer at Bessemer Trust, presented her investment outlook to the attendees at the AICPA conference.

Rebecca opened her talk by asking us if we were anxious about 2014. About 1/2 the audience raised there hands (which means the other 1/2 are optimistic about 2014:-))

Risks, Worries & Concerns…

There are some good reasons for 1/2 of the advisors in the room to be nervous:

The Fed

Patterson believes that the Fed is the most important factor to watch in 2014 as it will likely be the primary driver of the markets. The Fed’s “QE” has been fueling higher stock prices. Last week the Fed balance sheet hit a new milestone…$4 Trillion. She thinks it’s likely that we will see the Fed continue to taper by reducing bond purchases at rate of $10 Billion per month. Will the end of easy money mean the end of rising stock prices?

It is important to remember that tapering isn’t tightening. Monetary policy is still easy and tapering remains a dovish stance.

However, there will be ripple effects from the Fed taper including:

  • higher longer-dated US Treasury yields
  • a stronger US Dollar
  • pressure on commodity prices
  • pressure on emerging markets

Washington

The US remains politically challenged.

  • Congress approval rating went from 9% to 12% in the last year…not very impressive! (the long-term average is 33%)
  • 2014 mid-term elections (House & Senate) may add to stock market volatility

Jobs

For the average American who loses their job today it takes 9 months to find a new job.

Government Debt

Governments don’t have much room for further fiscal stimulus.

Government Debt to GDP:

  • Japan >200%
  • Italy & portugal ~125%
  • US ~100%
  • France, Spain & Germany ~75%

Emerging Markets

Last week Brazil raised short-term interest rates (Fed’s equivalent) to 10.5%.

Emerging markets are unlikely to sustain a rally in the short-term. Valuations are attractive, but there are too many headwinds including the ripple effects of the Fed tapering.

The worst case for emerging markets: Yellen and the Fed turn out to be more hawkish than expected, and we see a repeat of last May and June where yields spike and the emerging markets come under pressure.

Watch the “Fragile Five” currencies that are under the most pressure against the US Dollar:

  1. The Brazilian real
  2. South Africa’s rand
  3. The Indian rupee
  4. Turkish Lira
  5. Indonesian rupiah

But, It’s Not All Bad…

Patterson’s most out of consensus view is that the US economy will surprise to the upside, despite all of her concerns.

The US economy is still recovering slowly, but it is moving in the right direction. Here are some things that lead Patterson to this optimistic outlook:

Exports

The US economy is currently at record exports. Why? Because the US Dollar is weak and demand from Europe and Japan is increasing.

Energy Independence

In 2008 the US produced 78% of the energy it consumed. Today, we produce 90% of the energy we consume.

Global Liquidity

…will continue to be very supportive for financial markets.

Inflation

Over the next five years we will see relatively higher inflation, but inflation is not a concern for 2014.

Europe & Japan

…are showing relative economic improvement.

China

…looks stable in the near-term, but longer-term challenges remain. China’s investment is nearly 50% of GDP, and household consumption is around 34% of GDP. China is faced with the challenge of rebalancing to a consumer based economy.

Valuations

Valuations
Presentation Slide from Rebecca Patterson, Managing Director and Chief Investment Officer at Bessemer Trust

US equity valuations are not at highs.

  • The 12-month Forward P/E of the S&P 500 is 15.4…a tiny bit above the long-term average, but not an egregious valuation.
  • This valuation is similar to the 2007 peak, but nowhere near the 200 peak of 25.2.

The market is fully priced, but Patterson wouldn’t sell stocks solely on this measure.

Market Positioning

From 1.1.2007 to 11.30.2013 cumulative net fund flows into bond funds have been $1.3 Trillion. Flows into equity funds have been $496 Billion. There was a reversal in 2013 as we started to see investors pull money out of bond funds and add to their stock funds. With interest rates as low as they are and the possibility of rising rates, this trend is expected to continue. Fund flows into equities are also likely to continue given the good year for stocks in 2013.

Profit Margins

In the near term, corporate profit margins are sustainable. Historically profit margins peak when wage growth hits 3.5%. We’re not there yet. We are a long way from meaningful wage inflation.

Conclusion & Portfolio Positioning

Patterson identified four reasons the market can go up despite valuations:

  1. Capital Flows
  2. Share Buybacks
  3. Higher Corporate Revenues
  4. Supportive Central Banks

So, what’s the bottom-line? Going into 2014 Patterson is positioning portfolios according to the following outlook:

  • Traditional Government Bonds: Down/Underweight
  • Credit: Sideways/Neutral
  • Commodities: Sideways/Neutral
  • Developed Market Equities: Up/Overweight
  • Emerging Market Equities and Debt: Sideways/Neutral
  • US Dollar: Up/Overweight
  • The firm currently has its largest overweight to equities in years.
  • “We have one of our biggest overweights in our portfolio to healthcare.”

Question: What’s your economic or investment outlook? Share your thoughts in the comments.

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Filed Under: Economy, Investing Tagged With: Bessemer Trust, economy, investing, Portfolio positioning, Rebecca Patterson

2014 AICPA Advanced Personal Financial Planning Conference

January 22, 2014 by Adam Zuercher

This week I attended the AICPA’s annual Advanced Personal Financial Planning Conference (#AICPAPFP). The conference is in Las Vegas, but I attended virtually. A huge “thank you” to the AICPA for offering the virtual option. I would love to see more conferences offer an online option (i.e. Morningstar’s annual Investment Conference).

This conference was, by far, the best I’ve attended in quite some time. Michael Kitces promotes it as one of the 8 best conferences for financial advisors, and the best conference for technical content. I couldn’t agree more. If you want to learn and improve your skills as an advisor, you will want to put this on the calendar for next year.

Save the date: January 19-21, 2015 at the Bellagio in Las Vegas.

Over the next few weeks I will be blogging my notes from the sessions I attended. Stay tuned to this page for link’s to all my notes.

Sessions I Attended Live

  • The Weight of the World Economy: Investment Outlook – Rebecca Patterson
  • Leaders Eat Last: Why Some Teams Come Together and Others Don’t – Simon Sinek
  • Manager Selection and Due Diligence – Stephen Horan
  • Social Media – Amy McIlwain
  • Breaking Barriers to Increase Business – Bill Grimes
  • Conversations on the Edge of Retirement – James Shambo & Bob Veres
  • Fixing Your Investment Committee – Tom Brakke
  • Opportunities of the Present, Crises of the Future – Peter Zeihan
  • The Effect of Attention, Emotions and Biases on Investment Decisions – Terrence Odean
  • Global Stock Market Valuation – Mebane Faber
  • Retirement Income Strategies – David Blanchett
  • The Six Dimensions of Excellent Client Service – Julie Littlechild
  • Best Planning Ideas Panel – Lyle Benson, Stephen Akers, Robert Keebler & Michael Kitces
  • Data Gathering: An Inside-Out Approach – Michael Kay
  • Political Update: View on Washington – Greg Valliere
  • Update 2014: Advanced Income and Estate Tax Strategies for the Mass Affluent – Michael Kitces
  • Think, Act and Invest Like Warren Buffett – Larry Swedroe

Question: What conferences do you attend? Please leave your favorites in the comments.

Filed Under: Investing

Book Review: The Principle of the Path by Andy Stanley

June 18, 2009 by Adam Zuercher

Andy Stanley is one of the best communicators I know of.  He is thought-provoking, inspirational, and memorable.  Best of all, he is a great story teller that knows how to keep my attention!  I just finished his latest book, The Principle of the Path.  The book revolves around a very simple principle:  Direction—not intention—determines our destination.

This principle seems obvious, but as we travel on the journey of life we don’t really think about it.  Or, when we do think about it it’s because we realize we’ve chosen the wrong path.

Everyone has dreams and desires for their future.  Most of us have great intentions. But our intentions alone aren’t enough to get us to our desired destination.  We must be making choices and decisions that keep us moving in the right direction.  Life is connected.  Yesterday affects today, and today will affect tomorrow. The things you do and the decisions you make today will affect tomorrow’s experiences.

Some other helpful takeaways from Andy are:

  • The best question ever: “In light of my past experience, and my future hopes and dreams, what’s the wise thing to do?”
  • Our quest for happiness often trumps our appreciation and pursuit for truth.
  • There is a relationship between submission to God and our ability to pick the best path.
  • “You will never reach your full potential without tapping into the wisdom of others.”
  • “Your life would be better, richer, and more enjoyable if less of your attention had been hijacked from the things you should have been focusing on.”
  • “The things you give your attention to will influence the direction and destination of everyone in your circle of influence.”
  • Disappointment creates powerful emotions.  Emotions fueled by disappointment can drive people to behaviors that put their dreams (and the dreams of others) out of reach.

I highly recommend this book to everyone, but I think it is especially helpful for young people.  The sooner you understand and live by this principle, the greater your chance of avoiding future regrets.

Get more information or buy the book from Thomas Nelson or Amazon.

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Filed Under: Books, Intentional Living

10 Questions To Put Your Dream To The Test

June 18, 2009 by Adam Zuercher

We all have dreams.  Some of them are worth pursuing.  However, there are some things to consider before jumping in with both feet.  So what does it take to achieve a dream?  What things need to be considered before pursuing your dream?  How do you know if a dream is worth pursuing?

I recently came across John Maxwell’s new book, Put Your Dream to the Test.  In this book, Dr. Maxwell presents ten questions that every dreamer needs to ask to put a dream to the test:

  1. The Ownership Question: Is my dream really my dream?
  2. The Clarity Question: Do I clearly see my dream?
  3. The Reality Question: Am I depending on factors within my control to achieve my dream?
  4. The Passion Question: Does my dream compel me to follow it?
  5. The Pathway Question: Do I have a strategy to reach my dream?
  6. The People Question: Have I included the people I need to realize my dream?
  7. The Cost Question: Am I willing to pay the price for my dream?
  8. The Tenacity Question: Am I moving closer to my dream?
  9. The Fulfillment Question: Does working toward my dream bring satisfaction?
  10. The Significance Question: Does my dream benefit others?

If you can answer yes to all of these questions, then the odds of achieving your dream are pretty good.  Dream BIG and go for it!

Filed Under: Books, Intentional Living

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