Q4 2017 Market Commentary:

Confluence of Market-Friendly Variables

PKH Headshot - Sep 2015.jpg

By Paul Hoffmeister,            

Chief Economist

On January 16, the Dow broke through another record. The headline at CNN read, “Dow 26,000: The Stock Market Is a Runaway Freight Train”. 

Journalists and market pundits seem to be stepping over each other to herald the nearly 40% rally in the Dow since late 2016, as well as the speed of its ascent. As CNN reported, it took 14 years for the Dow to climb from 10,000 to 15,000; three and a half years to reach 20,000; and less than 12 months to rally from 20,000 to 25,000. Given these statistics, “melt-up” and “euphoria” are some popular terms being used today to describe the market. 

In our Q3 market commentary in November, we highlighted the strong equity market performance and narrow credit spreads at the time, and suggested that the primary factors behind the sanguine environment were the prospects of tax reform and a Fed policy approach that had been looking to “do no harm”. 

Considering whether the environment (or “enthusiasm”) was sustainable, our conclusion was: 

       …[d]uring the near-term, the passage of tax reform and the continuation of moderate Fed                policy could easily extend the strong market trend of the last year. If fiscal and monetary policy          (the “twin pillars of productivity”) remain supportive, then the future remains bright. 

We believe this has been the case, as we look back at the last two months. The major macroeconomic variables are evolving positively, and igniting investors’ animal spirits. 

Of course, on December 22nd, President Trump signed the largest tax cuts in American history, including a reduction in the statutory corporate tax rate from 35% to 21%. For companies previously paying a 35% tax rate, the new 21% rate will enable them to increase corporate earnings by 21.5%, thanks simply to this change in the tax rules. For example, a company that previously paid $35 in taxes on $100 in earnings can now keep $79, a 21.5% earnings increase. 

2nd Quarter Market Commentary 2017


Caution is Warranted


For those who are parents, you know the feeling when you realize the house is quiet.  Too quiet.  You have been enjoying the peace and calm, but realize something is not right.  You want to believe it is because your children are angels and are playing nicely in their rooms, but your gut tells you that is not the case.  You go to explore and find your children have gotten into your lipstick and drawn all over the walls, or tried to baptize the cat in the toilet, or found your chocolate stash and decided to save you from all those unnecessary calories.  We have all heard of other cases where the result is more sinister, resulting in harm to the children. 

As a nearly 20 year investing veteran, I am having one of those moments now.  It is more than just a gut feeling – there are many indicators we follow that lend support to the notion that something is not right in the markets.  Things are calm and appear to be well, but under the surface, trouble may be brewing.  I believe the risk in the market at this point is quite elevated and any further gains experienced in the short term will likely be reversed when the market experiences some volatility. 

Is this a certainty?  Absolutely not – it is possible the market could keep chugging higher for quite some time.  However, I believe that is a low probability scenario.  I believe a more likely scenario is that we experience a 5-10% pullback in the market before the end of the year, wiping out about half of the gains since the election.  I don’t believe this is a “Johnny cut off his hand” scenario.  It is more like a “Johnny decided it would be fun to jump off the garage and broke his leg” scenario.  It will cause some pain in the short term, but will not cause permanent damage to a well-designed investment plan.

In reality, I believe it will create some great investing opportunities for us – we just have to be patient and disciplined to capitalize on them.  We have continued to raise or accumulate cash in many of our strategies so we have dry powder to take advantage of these opportunities for our clients.   

The second quarter was essentially a continuation of what we observed in the first quarter: market gains driven by a small number of stocks, unexciting economic growth, no progress on tax reform or health care reform, and the Federal Reserve raised interest rates another .25% in June.  

Geopolitical concerns continue to fester, but have not rattled the market.  Corporate profits showed strong growth in the 1st quarter (as expected) but likely grew at a slower pace in the 2nd quarter. 

As previously mentioned, last quarter the gains in the market were largely being driven by a small number of stock.  For example, from March 1, 2017 to July 31, 2017, one stock (Boeing) accounted for about half of the gain on the Dow Jones Industrial Average.  If you throw in one more stock (McDonalds), together they account for nearly 75% of the gains, meaning the other 28 stocks in the index only accounted for 25% of the gains. (Morningstar)


  • Employment continued to be steady with the unemployment rate at 4.4% in June. (U.S. DOL)

  • Low oil & gas prices continue to save money for consumers, but the savings have been shrinking.

  • We believe energy markets have stabilized and are near equilibrium.  We expect oil to stay in the $40-$60 range for the foreseeable future.

  • Housing has continued moderate--but choppy--growth.  Low interest rates have helped keep prices affordable.  (Barron’s)

  • Economic growth continued in the first quarter, but was very weak at 1.2%.    Initial readings for the 2nd quarter suggest a much better growth of 2.6%, following a similar patter we have seen over the last few years.

Challenges & Risks

  • Economic growth will likely trend in the 2% range in our opinion.

  •  Interest rates – the Federal Reserve raised interest rates again in June and expects at least one more increase this year.  In addition, they intend to start shrinking their balance sheet.  This is something that has never happened before and is a major factor in our concerns about the markets.

  • Government regulation is a potential huge drag.  Health care costs are continuing to rise significantly & government interference in several areas (finance, education, energy) continue to limit economic growth.  Will this improve in 2017? 

  • China, Europe, North Korea, & Russia – They have certainly been capturing headlines as expected, with more to come. 

Despite the concerns heighted above, we believe there is still a high likelihood of decent investment returns in the coming years.  We simply wanted to highlight some likely short-term concerns which explains why we have built larger than normal cash positions in some strategies. 

We will continue to monitor these developments closely and seek to use them to your advantage.  This is our mission!  Have a great summer!


1)      Bloomberg

2)      Barron’s


Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that the future performance of any specific investment, investment strategy (including the investments and/or investment strategies recommended by the adviser), will be profitable or equal to past performance levels.  This material is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept for any particular advisor or client.  These materials are not intended as any form of substitute for individualized investment advice.  The discussion is general in nature, and therefore not intended to recommend or endorse any asset class, security, or technical aspect of any security for the purpose of allowing a reader to use the approach on their own.  Before participating in any investment program or making any investment, clients as well as all other readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisors.  Camelot Portfolios LLC can assist in determining a suitable investment approach for a given individual, which may or may not closely resemble the strategies outlined herein. A486

Protecting Your Most Valuable Asset


What happens when you Google “Protecting Your Most Valuable Asset”? You get 1,720,000 results for topics that range from spirituality, to privacy, to tangible assets such as your home, to your digital picture files, to fingerprint ID kits for your children. In the context of your financial plan, I believe your most valuable asset is your ability to earn a living. In our work as financial planners, protecting that asset requires three separate approaches:

1. Personal Development

2. Short Term Contingencies

3. Long Term Income Replacement

Personal Development

Employers today require a combination of hard skills, the technical ability to do the job, and the soft skills of communication and critical thinking. According to a recent survey by employment company Adecco, 92% of employers feel that employees are not as skilled as they need to be. Our education system is playing catchup to these demands from the business community.

To protect your ability to earn a living and increase your income over time, it is now your responsibility to create a personal development plan. Budgeting both time and money for certificates and advanced learning that apply to your job and your future career requirements has been the traditional development plan. Attending free webinars from universities or online learning communities like the Khan Academy and TedX can help with the technical knowledge. In either case, you should be ready to demonstrate to an employer how you have taken that information and applied it to your work with the resulting impact on your business results.

Short Term Contingencies

You see the headlines over the weekend that your employer is shutting down your facility. Or they are merging with a mega-company and eliminating your department. Or they are outsourcing your job to a contractor. Maybe you want to explore new career opportunities and need time away from the daily demands of your current job to sort through your options. Having a well-funded short term contingency fund will allow you to take the time to find the best employment situation for your next career move, no matter what the reason is for the temporary reduction of income.

How much should you have in a short term contingency fund? The rule of thumb is at least three months of spending set aside if you have a two income household, six months if you are on your own. From both my own personal experience and working with clients who have undergone significant job changes, those numbers are not enough. Unfortunately, there is no magic formula for the right amount. One significant variable to consider is your overall debt load. If you have not paid off your mortgage, student loans, car loan and credit cards, a better target is probably double those amounts.

Long Term Income Replacement

Warning, I am about to talk about insurance. Having worked as an agent for two of the largest insurance companies in the world, I am familiar with the resistance most of us have about discussing what happens at our own death or disability. Combine that with a culture of ‘salesy’ insurance consulting and it is natural to avoid diving into this subject. The reality is that properly insuring against a potential loss of income is, in my opinion, the second most important financial planning activity behind budgeting. After you figure out how to spend less than you earn, buying enough life and disability insurance ensures that the rest of your long term plans will be fulfilled. Yes, this is more important than starting contributions to your retirement accounts. It is more important than your asset allocation, funding your college savings account and paying off your debt, in my belief. None of those objectives will be met if you cannot go to work tomorrow.

How much insurance should you buy and what type of policy makes sense for your situation? This is a very individual answer. A great place to start is your employer benefit plan. You probably have the ability to add supplemental amounts of life insurance to the company provided benefit. You might also have the ability to buy long term disability income insurance to supplement the short term plan provided by your employer. When you are in the midst of funding multiple goals, buying as much insurance as you can for the lowest cost usually leads to buying term life insurance that only covers your life for a certain period of time. Start with an amount at least equal to all of your debt plus 10 times your income, with a goal of eventually having coverage of 20 times your income.

For example, if you are making $40,000 per year, have a mortgage of $90,000, student loans totaling $30,000, credit card debt of $10,000 and a car loan of $5,000, you can look at coverage for $500,000 that would pay off all of the debt ($135k) and leave $365,000 to partially replace your income.

If you are working in a highly specialized industry, buying your own disability policy becomes more favorable as you can customize when and how much that policy will pay in benefits. An important concept in disability insurance planning is what type of work you can do following an illness or accident. The insurance industry terms are “own occ” or “any occ”. Most group plans and many individual policies pay claims only if you cannot work in any occupation (any occ). The more narrow the specialization of your work, you would want to explore a policy that pays benefits when you cannot work in your own occupation (own occ), as it might be hard to replace your income working a different job even in a similar industry.

When it comes to preserving your assets, you should think short and think long. Invest time to continue developing the skills that meet the demands of a dynamic job market. Fund a short term contingency account and buy enough insurance to make sure there is enough money to pay for your long term goals. Then get to work saving and investing for college and for retirement and all of the ways you live a life of significance.


Josh Mudse is licensed to sell insurance in Ohio and Michigan.

This material is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept for any particular advisor or client. These materials are not intended as any form of substitute for individualized investment advice. The discussion is general in nature, and therefore not intended to recommend or endorse any asset class, security, or technical aspect of any security for the purpose of allowing a reader to use the approach on their own. Before participating in any investment program or making any investment, clients as well as all other readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisors. Camelot Portfolios LLC can assist in determining a suitable investment approach for a given individual, which may or may not closely resemble the strategies outlined herein.

These materials contain references to hypothetical case studies. These are presented for the purpose of demonstrating a concept or idea, and not intended to be interpreted as representing any specific person. Such representations are not intended to substitute for individual investment advice, even if the case study appears to have similar characteristics. A447



Why Do I Get Different Answers From Different Estate Planning Attorneys? It Depends...

By Laura Noble Walker, JD

I recently asked an advisor, “What is the one question you have right now as it relates to estate planning for your clients?”  His answer was, “Why do I get different answers from different attorneys?”  My initial response, one that is common when he comes to me for consultation on a particular client matter and a response that is not uncommon from an attorney…”It depends!”

The advisor went on to give me examples of his experiences.   “One attorney recommended a Testamentary Trust; another recommended a Revocable Living Trust.”  “The attorney advised the client to place their personal residence into their Trust, another attorney advised the client to use a Transfer on Death Affidavit (Ohio).” Or, “The client has a Traditional IRA, one attorney recommended their Revocable Trust as a contingent beneficiary, and the other attorney advised against it and recommended the client’s adult children be contingent beneficiaries.”  The advisor is a Certified Financial Planner and appreciates the importance of good discovery and understanding a client’s desired outcomes to implement a plan that provides tools and solutions for a particular client’s unique situation.  Not unlike a Certified Financial Planner, the same can be said for a similarly skilled estate planning attorney and there may be more than one tool or solution, and the attorney may know something about the client’s particular desired outcomes and circumstances that lead him or her to make a particular recommendation.  Sometimes an estate planning attorney simply has a preferred tool or solution that they use; to quote Abraham Maslow, “I suppose it is tempting, if the only tool you have is a hammer, to treat everything as if it were a nail.” 

Let’s take a look at the particular examples the advisor gave me.  Testamentary Trust or Revocable Living Trust?  To recap, a Testamentary Trust is established through a Last Will and Testament and therefore requires Probate to come into existence as well as to be administered.  I often surprise advisors and clients when I say “Probate is not necessarily a bad thing.”  Probate is the court administration and supervision of an estate or trust.  It is orderly and provides certainty that an individual’s intentions will be carried out as there is an extensive amount of accountability by the Trustee to the Court.  An estate planning attorney who spends a significant amount of time in Probate may be more than comfortable with this arrangement.  However, I also share the following perspective with advisors and clients regarding Probate, it is often public record and clients may prefer to protect their privacy and Probate can cause delays.  Also, it is true that the Probate process involves court costs that a Revocable Living Trust will likely not.  In both cases, the Trustee will likely need the advice and counsel of a competent estate planning attorney so attorney fees are not necessarily eliminated with a Revocable Living Trust.  A Trustee is also accountable under a Revocable Living Trust, but the burden of that accountability is upon the Trust beneficiaries.

Let’s now look at Trust Funding, in particular, whether or not to title assets into the name of the Trust or to include the Trust as beneficiary.  Again, this will depend on each individual client(s) situation, the nature of the assets, the estate planning outcomes and the estate planning attorney’s preferences based upon his or her experience.  Should the personal residence be in the Trust or could an alternative such as a Transfer on Death Affidavit (Ohio) be utilized?  Does the client have a mortgage on the property and is it likely or even possible that they might refinance the property at some point?  If so, many lenders are reluctant if at all willing to finance a mortgage within a Revocable Trust; in fact, they will often require the borrower to retitle the property into their individual names and back into the Trust.  This request is often made just before closing, when everyone is anxious to lock in the rate; it requires the preparation of Deeds and therefore attorney fees and recording fees in the County where the property is located.  As an alternative, in Ohio, there is the “Transfer on Death Affidavit” which is a recorded document naming a beneficiary; in this case, the Trust could be named beneficiary upon the death of one or both owners (if owned Joint with Right of Survivorship).  Other states may have similar tools specific to their state law and requirements but with the same outcome.  With this in mind, why would an estate planning attorney recommend titling the real estate into the Trust?  One possible reason is that in the event the client and Grantor of the Trust becomes disabled or incapacitated, some lenders, title companies, and/or buyers are more willing to transact business regarding the real property with a Successor Trustee of a Trust rather than an Agent under a Durable Power of Attorney. Also, if property is owned jointly, upon the death of the first owner, the surviving owner, likely the spouse any time before his or her death could change the beneficiary.  With a Trust, it is possible to make the Trust, or portions of the Trust irrevocable upon the death of the first spouse thereby preserving the couple’s intended estate plan. 

Finally, let’s consider whether or not a Trust should be the beneficiary of a Traditional IRA.  Most financial advisors understand the potential risks in naming a Trust as beneficiary of a Traditional IRA.  Unfortunately, there are also many misperceptions about the use of a “qualified Trust” as beneficiary.  Once again, different attorneys and even the same attorney will make different recommendations for clients, possibly even the same client.  The first misperception is any absolute statement that a Trust cannot and should not be a beneficiary of a Traditional IRA because doing so prevents the opportunity to “stretch” the income tax-deferral upon the death of the IRA owner.  This will not be true if the Trust is properly drafted so as to be a “qualified beneficiary “for purposes of determining the life-expectancy of the oldest beneficiary under the Trust to set Required Minimum Distributions.  Now, I could author an entire article on the technical and practical aspects of Trusts as a “qualified beneficiary” but that is not the purpose of this article.  What I want you to appreciate is that there will be situations based upon the client’s desired outcomes, the estate planning attorney’s advice to the client and to you as their advisor assisting the client with preparing or updating beneficiary designation forms when it will be appropriate to include the Trust as a beneficiary and situations when it will not.  For example, because the option to “stretch” an IRA is an optional election for an individual beneficiary, a Trust may be the appropriate beneficiary if there is a second marriage, minor beneficiaries, beneficiaries who need asset protection from themselves, high-risk professions, divorce and other potential creditors.  If however, none of these scenarios are applicable, or there are significant age differences among the beneficiaries and the client doesn’t want the complexity and cost of individual, separate IRA Trusts, it may be appropriate to name individual beneficiaries. 

What does a financial advisor, in an effort to best serve his or her client, do when he or she gets a different answer from one or more attorneys on the same matter?   Start with client outcomes.  Good discovery questions and a thorough understanding of the client’s desired outcomes is the first step.  Don’t make assumptions based upon other client situations or even the particular client’s situation.  Don’t hesitate to inquire of the attorney, with statements such as, “Help me (as the advisor) and/or the client to understand…”  Do so professionally, respectfully and if appropriate, with the permission of the client, discuss one on one with the attorney so as to not put anyone in a defensive position in front of the client.     In a collaborative team environment, each participating advisor can offer a potentially unique perspective or experience, or tools to help the client achieve their desired outcomes.

DISCLOSURES: Please be aware that Camelot Portfolios, LLC is not authorized to practice law and the considerations provided herein are intended to be educational in nature and should not be relied upon as legal or tax advice.  A client should consult with their personal estate planning attorney and/or tax advisor(s) as to their particular situation and the implementation of any strategies. A437