…And, they’re off! Bullish sentiment helped world equity markets get off to a fast start last week. Just name a country or region – developed markets, emerging markets, the United States, Latin America, Asia, Europe, the United Kingdom – and it’s likely the area’s benchmark index may have been up for the week. Not everyone was in the bullish camp, though. Barron’s reported:

The market optimism is understandable. After a long spell of zero interest rates, a baton transfer from monetary manipulation to fiscal stimulus and pro-growth chutzpah can be an exciting regime change…But investors’ hopes could be misplaced. It would be one thing if there were shovel-ready infrastructure projects or proposed tax cuts on the table that could quickly boost spending. Instead, Republicans propose, for example, changing the basis for corporate tax from location of operations to location of sales. The aim is to encourage domestic production and exports, but the plan could hurt companies that import materials or goods. Will big importers like [big box stores] pass the tax hit onto consumers by raising prices?

For contrarians, record highs for U.S. stock markets (both the Standard & Poor’s 500 Index and NASDAQ closed at new highs last week) and strong bullish sentiment (Barron’s reported, “The Investors Intelligence survey of newsletter writers showed the bullish herd swelling above 60 percent…”) are red flags, signaling an inflection point may be near. No matter which camp you fall into, there is a lot of uncertainty. Which policies will the new administration pursue? Will China’s growth slow more quickly than expected? How quickly will the Federal Reserve raise rates? Will interest rates continue to move higher? Will a stronger dollar negatively affect emerging markets? In the face of so much uncertainty, it’s important to be diversified.

S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods. Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.  

Are you thinking about starting a business?

Small businesses in the United States employed 56.8 million people or 48 percent of the private workforce in 2013 (the latest numbers available), according to the U.S. Small Business Administration. That’s pretty remarkable when you realize that 34 percent of small businesses employ fewer than 100 people. If you’re thinking of starting a business, the AARP suggests you carefully consider legal and tax issues, including:

• Business structure. Will you be a sole proprietor? Or will you establish a corporation, limited liability company, or partnership? The structure of your business will affect taxes, liability, and other matters.
• Many cities and states require a new business to register, apply for a business license, and pay an annual fee to do business.
• Tax payments. Talk with a tax professional to determine whether you need to make quarterly tax payments. Also, be aware that people who work for themselves pay both the employer and employee portions of Social Security and Medicare taxes. You’ll want to factor that in when deciding pricing for products or services.
• In many cases, your business will need its own bank account and credit cards. You’ll also need a system for tracking business receipts and expenditures. Investing in business accounting software can make recordkeeping a lot easier.
• Contracts specify deadlines, terms of payment, and other particulars, ensuring everyone shares the same understanding and expectations. If your client asks you to sign a contract or asks you to provide a contract, consult with your attorney.
• Liability insurance. Professional liability insurance protects you if you’re ever sued, and some clients may require you to have coverage. Talk with your financial or insurance professional to determine what type of coverage you may need.

Of course, when you work for yourself, it’s critical to set money aside for retirement. Contact your financial and/or tax professional to discuss options that might work for you.   Weekly Focus – Think About It

We have neglected the truth that a good farmer is a craftsman of the highest order, a kind of artist. –Wendell Berry, American novelist and poet

Sources:

1. http://www.barrons.com/articles/cheering-and-fearing-the-post-trump-rally-1483767229?mod=BOL_hp_we_columns (or go to https://s3-us-west-2.amazonaws.com/peakcontent/+Peak+Commentary/01-09-17_Barrons-Cheering_and_Fearing_the_Post-Trump_Rally-Footnote_1.pdf)
2. http://www.barrons.com/mdc/public/page/9_3063-economicCalendar.html?mod=BOL_Nav_MAR_hps (Click on U.S. & Intl Recaps, then on “Equities rise to the occasion”) (or go to https://s3-us-west-2.amazonaws.com/peakcontent/+Peak+Commentary/01-09-17_Barrons-Global_Stock_Market_Recap-Footnote_2.pdf)
3. http://www.reuters.com/article/emerging-markets-latam-idUSL1N1EW1QN
4. http://www.barrons.com/articles/no-cigar-yet-dow-stops-short-of-20-000-1483767234 (or go to https://s3-us-west-2.amazonaws.com/peakcontent/+Peak+Commentary/01-09-17_Barrons-No_Cigar_Yet-Dow_Stops_Short_of_20000-Footnote_4.pdf)
5. https://www.sba.gov/sites/default/files/advocacy/all_profiles_10_18_16.pdf
6. http://www.aarp.org/money/taxes/info-2016/tax-issues-for-independent-workers.html?intcmp=AE-MON-MAIN-TAXS-SPOT2
7. http://cdn.modernfarmer.com/wp-content/uploads/2016/02/berry2.jpg

The Markets

What a difference a year makes! At the start of 2016, investors were rather pessimistic and risk averse, preferring bonds to stocks. By the end of the year, they were quite optimistic and preferred stocks to bonds. In between, markets traveled a bumpy road.

During January of last year, few investors imagined we would be where we are today. Markets started 2016 in a tailspin with investors worried about slower growth in China, U.S. economic strength, oil price declines, and the possibility of a global recession.

During the first 10 trading days of 2016, U.S. stock markets got off to their worst start for any year on record, reported Financial Times. The Standard & Poor’s 500 (S&P 500) Index lost about $1.4 trillion in value and every major sector in the index was in the red, except for utilities.

The sharp drop stunned investors and many shifted assets from global stocks into bonds. In late January 2016, CNN Money reported:

Investors yanked $2.9 billion from U.S. stocks last week, marking the seventh week of outflows out of the past eight, according to Bank of America Merrill Lynch. Emerging markets, which have been in turmoil for months, experienced a 13th straight week of outflows of $1.2 billion. Money is fleeing to safe-haven government bonds.**

Investor sentiment was near its all-time low. On January 14, 2016, just 17.9 percent of participants in the American Association of Individual Investors (AAII) Investor Sentiment Survey said they were bullish. The all-time low is 12 percent and the long-term average for bullishness is 38.39 percent. Clearly, investors were not feeling optimistic about stock markets.

A specialist cited by Time.com discussed market performance and investor sentiment in the context of the AAII Survey:

Historically…the S&P 500 has advanced 7.7 percent in the six months after reaching this level of bearishness. By contrast, stocks have historically gained only 2.7 percent in the six months following the most bullish readings among individual investors.

As it turned out, the S&P 500 Index may have pushed the historic average higher during 2016. Barron’s reported the Index finished the year up 9.5 percent and returned 12 percent when dividends were included.

Investors didn’t enjoy a smooth ride last year, though. Late in June, the United Kingdom shocked the world when it voted to leave the European Union. Financial Times reported global markets lost $3 trillion during two days of brutal trading, including “…a nearly $1tn loss for the S&P 500, or the third worst two-day drop ever in value terms.”

Markets recovered relatively quickly after the Brexit drop. However, it looked like another rout was in the works in November as the U.S. presidential election votes rolled in. The initial reaction of global markets to Donald Trump’s election was panic; however, optimism soon prevailed and U.S. markets rallied on hopes the President-elect’s yet-to-be-defined policies would bolster growth and positively affect the global economy.

The expectation of stronger growth, along with an anticipated December rate hike by the Federal Reserve, pushed bond yields higher and investors moved assets out of bonds and into stocks. Barron’s reported:

The 30-year bond climbed 0.3 percentage point to 2.94 percent, resulting in a 6.3 percent decline in price. (Bond prices move inversely to yields.)…It wasn’t just Treasuries. Municipal bonds, corporate bonds, and preferred securities all fell. Bloomberg estimates $1 trillion in the value of bonds evaporated last week after the election.

At the end of 2016, investor sentiment had risen well above the long-term average. More than 45.5 percent of participants in the AAII Investor Sentiment Survey were feeling bullish. Investors weren’t the only ones feeling optimistic. The Investors Intelligence survey of investment advisors found the bulls (59.8) outnumbered the bears (19.6) quite significantly in late December. The Bull/Bear Ratio was at 3.05, according to Yardeni Research.

The ratio is considered by many to be a contrarian indicator. When the Bull/Bear Ratio is at 1.0 or lower, and when it is at 3.0 or higher, we may be near a turning point for stock markets, according to Investing Answers and The New York Times.

S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods. Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

*The year-to-date and one-year returns are different. The year-to-date return reflects performance from 12/30/2015 to 12/30/2016. The one-year return reflects performance from 12/31/2015 to 12/30/2016.

** US Treasuries may be considered “safe haven” investments but do carry some degree of risk including interest rate, credit, and market risk.  They are guaranteed by the US 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.

How Important Is A College Degree?

At the University of Baltimore 2016 Midyear Commencement, Federal Reserve Chair Janet Yellen shared her thoughts about the importance of college:

Economists are not certain about many things. But we are quite certain that a college diploma or an advanced degree is a key to economic success. Those with a college degree are more likely to find a job, keep a job, have higher job satisfaction, and earn a higher salary. The advantage in earnings is large. College grads’ annual earnings last year were, on average, 70 percent higher than those with only a high school diploma. Back in 1980, the difference was only 20 percent. The gap in earnings is significant only a few years after graduation – almost $18,000 a year, according to some recent data. Beyond these advantages, research also shows that a college or graduate degree typically leads to a happier, healthier, and longer life.

There appears to be significant benefits to attending college. However, Aon Hewitt recently suggested there also may be some drawbacks, especially for students who borrow to pay for their degrees. Aon’s survey of 2,000 U.S. workers found 44 percent of Millennials, 26 percent of Gen X, and 13 percent of Baby Boomers are repaying student loans which, “…can have a long-term impact on workers’ financial future.”

The survey found just 71 percent of workers with student loans were participating in employer-provided retirement plans as compared to 77 percent of workers without student loans.

Weekly Focus – Think About It

In other words, I claim, if we really want to improve our judgment as individuals and as societies, what we need most is not more instruction in logic or rhetoric or probability or economics, even though those things are quite valuable…We need to learn how to feel intrigued instead of defensive when we encounter some information that contradicts our beliefs. –Julia Galef, Co-founder of the Center for Applied Rationality

Sources:

1. http://money.cnn.com/2016/02/01/investing/stocks-markets-january-93-percent-lost/
2. http://time.com/money/4182371/stock-market-dow-crash-reasons/
3. https://www.ft.com/content/9e642f0a-bdc4-11e5-9fdb-87b8d15baec2
4. http://www.aaii.com/sentimentsurvey/sent_results
5. http://www.barrons.com/articles/stocks-off-1-for-week-up-10-for-2016-1483167529?mod=BOL_hp_we_columns
6. https://www.ft.com/content/91dd01b6-3caf-11e6-8716-a4a71e8140b0
7. https://www.ft.com/content/a606181e-a7fb-11e6-8b69-02899e8bd9d1
8. http://www.barrons.com/articles/moves-to-make-as-the-bond-market-sinks-1478931249
9. https://www.yardeni.com/pub/peacockbullbear.pdf (Page 5 of report) 
10. http://www.investinganswers.com/financial-dictionary/stock-market/bullbear-ratio-1775
11. http://www.nytimes.com/2013/11/03/your-money/the-dangers-of-a-stock-market-melt-up.html?_r=0
12. https://www.federalreserve.gov/newsevents/speech/yellen20161219a.htm
13. http://ir.aon.com/about-aon/investor-relations/investor-news/news-release-details/2016/Student-Loans-Hurting-Workers-Ability-to-Save-for-Retirement/default.aspx
14. https://www.ted.com/talks/julia_galef_why_you_think_you_re_right_even_if_you_re_wrong/transcript?language=en