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Markets in Minutes March 4 2018

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Markets in Minutes: March 4, 2018

S&P 500    10 Year Treasury    Gold    World Ex-US    US Dollar    Commodities   US Economy   Stock Market Valuation

Markets in Minutes is intended to give our client partners and subscribers a quick and easy understanding of current market conditions. This update covers December 1 – December 30, 2017

Investor Learning: Given recent volatility I thought rather than sharing a quote I’d share what drives bull markets. It’s simple if you take time to break it down. Bull markets are driven by:
1. Low to moderate inflation
2. Low to moderate interest rates
3. Rising earnings
4. Economic expansion
Inflation and interest rates are both slowly rising but are low overall. Earnings are growing. Economies both here and abroad are growing. Under these conditions, bull markets continue. That makes periods of volatility buying opportunities for smart investors.

 

Economy: Consumer prices rose 0.3% ex-energy in January. This inflation rate is still below the Fed mandate which will help keep interest rate rises gradual, which is supportive to expansion.

Industrial production rose by 1.7% and is solidly in expansion mode. The Non-Manufacturing Index saw a strong rebound from December’s numbers and is also in expansion mode. The official unemployment rate for February won’t be released until March 9, but anecdotal accounts suggests employment held steady at 4.1%. Wages ticked up 0.1% in the period, with wage inflation still below target. The US continues to be a sort of Goldilocks situation: moderate inflation, rising employment, low interest rates, rising GDP and corporate earnings.

 

Markets

S&P 500: (-3.7%), 0.0% for 2018. The S&P enjoyed its first correction in about 2 years in February, and volatility remains relatively high. Earnings season is wrapping up, and in many sectors of the S&P, stronger than expected. Both the primary and intermediate up-trends are intact.

Bonds: Yields on the 10 year Treasury rose +3.6% in February, +16.2% for 2018. Bond risk remains elevated, and rising yields even during a stock correction reinforces the idea that bonds may be nearing the end of a decades long bull run. Long duration bonds (more than 5 years) should be examined carefully to make sure they are in your portfolio for a specific reason.

Gold: (-1.7%) for the period, +0.3% for the year. Gold followed the expected behavior for February, falling from January’s high and finding support in the $12.50/$12.60 area, with some gymnastics in between. It will be interesting to see if it can continue to hold above $12.60 once we work through the stock correction. As before, a fall below $12.50 on volume could see Gold fall back into the 2017 range ($11.65 – $12.60). I use IAU as a proxy for Gold and the above is based on the ETF.

World Ex-US: (-5.2%), (-0.9%) YTD 2018. February was not a great month for the rest of the world, but it held up better than I expected vs. American markets. Interest rates are low elsewhere and economies are growing globally, which is supportive of positive market outcomes. However, nothing has changed about my view of US markets vs. the world. I was wrong in 2016/2017. We’ll see where 2018 takes us. I continue to view risk in markets outside the US as higher than perceived.

US Dollar: +1.8%, +2% for 2018. The dollar hit a new 2 year low in February but has managed a mild rally towards $90 against a basket of currencies. I think the Buck will have a tough time rising about $92. I would not be surprised to see it move between $86 and $92 over the next several months. This would be a positive for earnings.

Commodities: Oil (-5%) for month, +2.4% for the year. Global growth expectations continue to support oil in the face of growing American supply (US added 30 rotary rigs in February, active rig count up +15% since last February). I expect increased American production to drive barrel prices into the $50’s by the 2nd half of the year if not sooner.

Copper futures lost -2.3% for the month, falling aggressively mid-month before recovering. Copper still looks appears to be in a consolidation phase that seems unlikely to resolve itself in either direction until the fate of the President’s infrastructure initiative becomes clear. If the project gets off the ground, it is likely to push copper to multi-year highs, if not it may fall back to mid-2017 levels.

 

Earnings: Earnings season is wrapping and it’s been stronger than many anticipated. We’ll know by the next Markets-in-Minutes if we got the record quarterly earnings I expected.

Market Valuation: February helped bleed off some of the market’s excess valuations, with the broad market falling a bit over 11% from January’s high to the February 9th low. It recovered fairly quickly before seeing some sellers in the market again this past week. The market is now in an area where it is fully valued, but not overly so. If interest rates and inflation remain muted, earnings growth still looks solid enough to offset a gradual pace of rising rates. That makes it likely this correction will look like a reasonable entry point come year end.

Recession Probability Indicator: The most recent reading on the RPI is 17, up from last’s months reading of 12. The RPI is still indicating we are not currently in recession and the investment environment is stable. CLICK HERE to learn more about the RPI.

S&P Technical Picture: The S&P found support in the zone highlighted in the last edition of Markets in Minutes and institutional buyers appeared to step into the market at both the areas expected.  The rally off the $2500/$2600 zone keeps both the intermediate and primary up-trends intact.   The intermediate term and primary trends are identified by the red arrows below, Fair Value by the thick blue line. Any of these points can present reasonable entry points for index investing from a technical, if not a purely fundamental, standpoint.

SPY Chart (S&P 500 Proxy)

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Invest Smarter. Live Better. Expect a Difference.

Dak Hartsock
Market Strategist
ACI Wealth Advisors, LLC
Process Portfolios, LLC

Here’s How to Get Better Investment Returns

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Here’s How to Get Better Investment Returns  April 02, 2017

“Greedy, short-term orientated investors may lose sight of a sound mathematical reason for avoiding loss; the effects of compounding on even moderate returns over years are compelling, if not downright mind boggling.” Seth Klarman (17% annualized returns over more than 30 years)

Today I thought I’d take a break from Markets-in-Minutes and talk a little about loss management. There’s an old phrase that a bull market makes everyone a genius. And to some extent it’s true. It seems almost hard to lose money in a bull market, which is why so many investors get hurt so badly when the bear drives the bull out.

As a professional manager, I’ve been fired a couple times for not keeping up with the market in a given year. Investors that chase the market, and there are many of them, are failing to confront the mathematical reality of investing – it’s more important to protect capital than it is to maximize returns.

Here is a simple illustration.

The chart below tracks 2 investors in the S&P 500 since January 2000.

The red line is the result of an investor buying the S&P 500 and doing nothing but hold it through December 2016. In between were 2 gut wrenching recessionary bear markets, and years and years spent waiting for the account to make it back to break even. “Red” believes if you want ride the rallies you gotta endure the valleys. It’s a neat phrase he heard from his financial advisor.

The green line is an investor that buys the S&P 500, but whenever there is a recession this investor takes the simple precaution of reducing risk by 50%. When the recession goes away, the investor simply takes the cash set aside and buys back into the market. He’s isn’t worried about the gains – his eye is on the losses.

This investor misses the top and the bottom, but his initial investment isn’t any different than Red’s, nor are his initial gains. But in investing, as in football, it’s defense that wins championships.
Let’s compare the two:

RED
Dotcom Crash Loss (initial investment to valley): -41.5%
Time to get back to initial investment: 5 years.
Time account stayed positive between recovery and next crash: 14 months.
Great Recession Loss (initial investment to valley): -47.3%
Time to get back to initial Jan 2000 investment 5 years.
Total gain after 1st 12 years (Aug 2012): 0.9%
Total gain for 16 years (Dec 2016): +60.6%

GREEN
Dotcom Crash Loss (initial investment to valley): -23.8%
Time to get back to initial investment: 23 months
Time account stayed positive prior to next crash: 5 years
Great Recession Loss (initial investment to valley): -6.4%
Time to get back to initial Jan 2000 investment: 5 months
Total gain for 1st 12 years (Aug 2012): 44%
Total gain for 1st 16 years (Dec 2016): +229.2%
 
Wow, right?

What happens if you play defense every month instead of just when a recession hits?

Below is the BXM Index (Green) vs. the S&P 500 Index (Blue) since 1989. The BXM is always partially hedged, meaning that it trades part of the potential upside gain each month to get some downside protection.

From 1989 to 2016 the BXM Index returned +1058.7% vs. the S&P 500 Index at 731.9%, and held gains far better during crashes.

Again, clearly its defense that wins championships.

What if you combined a BXM derived strategy with a recession risk reduction strategy?

If you are a current ACI investor, you are in luck. This is exactly what ACI’s Market Income portfolio does.

If you are not a current ACI investor and would like to learn more about how a solid defense might help you do better with your investments, you are also in luck. Just send an email to updates@aciwealth.com that includes your first and last name, the city and state you live in, and “subscribe” in the subject line. Include your questions.

We’ll add you to the weekly updates newsletter, reserve 2 slots for you our online educational event “Winning on Wall Street in the New NOT Normal,” and answer whatever questions you have.

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To Smarter Investing,

Dak Hartsock
Market Strategist
ACI Wealth Advisors, LLC.
Process Portfolios, LLC.

And now for our bonus disclosures. Everyone thank the lawyers in DC. Neither the S&P 500 Index nor the BXM Index can be invested in directly. Past performance does not guarantee future results. The illustration assumes that the portfolio moved to 50% cash when the US moved into recession in 2000 and 2008. This assumption is based on hindsight and assumes that the investment manager both reduced investment as a result of the US entering recession and that the data used to determine the state of the US economy accurately signaled that the US had entered recession. The indicator used to determine the signal in the illustration is the Recession Probability Indicator developed by Stock Market Strategist Dak Hartsock. For additional information on the Recession Probability Indicator please visit: http://www.dakhartsock.com/monthly-features/recession-probability-indicator/
While the RPI has proved to be very accurate in the past, there is no guarantee it will prove to be correct in identifying recession in the future. There are inherent limitations in hypothetical or model results as the securities are not actually purchased or sold. They may not reflect the impact, if any, of material market conditions which could have has an impact on the manager’s decision making if the hypothetical portfolios were real. Historical performance does not take into account either transaction or management fees and is shown for illustrative purposes only – no illustrations contained in this article should be interpreted as an indication of performance of any ACI portfolio.The Chicago Board of Exchange S&P 500 Buy/Write Index or “BXM” has historically displayed less volatility than the S&P 500 and Market Income. There are no guarantees it will continue to do so in the future.

Trump Wins – What’s Next for the Market?

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    Trump Wins – What’s Next for the Market? From the 11/13/2016 Client Letter

    Wow. What an interesting week for the markets.

    A quick recap, and then a brief summary of how I see events impacting markets over the next quarters:

    Early Wednesday morning, market futures began selling off as a Trump victory began to look possible. As those odds increased, the futures markets began to sell off in earnest. At one point Dow futures were down more than 800 points. Other exchanges such as the NASDAQ saw circuit breakers triggered to slow the downward cascade. Overseas markets, which had gone negative as the electoral votes piled up in Trump’s column, also sold off more deeply.

    For those that don’t know, when this happens the market usually opens where the after-hours trade left off. So it was looking like the markets were going to experience a very bad day.

    Then something changed. Futures began to make up lost ground, overseas markets began to rise. Often, following a large directional move, the markets will retrace part of that move prior to reversing again to continue in the same direction as before. In this case, down.

    But that’s not what happened Wednesday morning.

    Markets opened slightly down from Tuesday’s regular session and then proceeded to rally the rest of the day. The Dow’s move from down over 800 points after hours to rally nearly 6% from the futures low and reach an all-time high the day after the election results may be as unprecedented as Trump’s come from behind victory in election.

    Many of Trump’s campaign promises were slim on details and big on promise, as is often the case with politicians seeking election. But Trump had more unknowns than most and the markets dislike uncertainty.

    This uncertainty helped drive the futures selloff. But what changed in the early hours of Wednesday morning?

    Markets globally began to rally when it became clear that in addition to the Presidency, Republicans would also take the House and the Senate. Instead of a gridlocked DC with Democrats holding the Senate or Congress, real change suddenly became possible.

    It didn’t mean that everything would change, but that some items of Trump’s agenda were suddenly probable, and without a term long fight with the opposition.

    As a family member of mine expressed it, the Republican sweep is perceived as The Free Market Revived.

    What exactly does this mean, and how might it impact markets in the near term?

    First off, lower taxes. America has one of the highest corporate tax rates in the world. Lowering corporate taxes makes America more competitive as a home market for both our corporations and multi-nationals located in higher tax rate jurisdictions. Think of the tax inversions we’ve seen in the last couple years, when large US companies make an acquisition to get their corporate taxation domiciled in Ireland or elsewhere. It’s reasonable to expect multi-nationals elsewhere to start attempting American tax inversion if Trump gets his 15% corporate tax rate. More jobs.

    Lowering the corporate tax rate also leaves more $ in private sector hands, which is traditionally much more efficient with capital than government. This could translate to more jobs, bigger dividends, continued stock buybacks, and accelerated M & A activity driven by tax savings.

    He also aims to simplify individual taxes and lower rates across the board. In the near term, tax cuts are more effective than stimulus spending. Tax cuts hit the economy quickly.

    He’s proposed a tax holiday for US corporations. Depending on what study you read, there are between $1.2 trillion and $2.8 trillion dollars being held by US companies overseas. At a 20% tax holiday or less, most if not all of those dollars will come home. Trump is proposing 10%. That is a potential steroid for US corporations.

    Regulations will be rolled back. Many have been overly burdensome for several industries. This removes a major obstacle US companies of all sizes have been forced to deal with over the last decade. They can now look forward to an easing of regulations rather than more unknown regulations coming down the pipe. This allows management teams to become more effective in strategic planning and capital expenditures. These are probable positives for jobs and earnings.

    Banking in particular will almost certainly see wide spread reduction in regulations. Dodd-Frank will be heavily streamlined if not gutted entirely. These are positives for bank earnings.

    If Trump’s promises are to be believed, he will try to break up the big banks. I see this as an additional significant positive if it happens. It could pave the way for increased earnings sector wide while reducing systemic risk.

    Interest rates are likely to rise. Also good for banks.

    The energy industry is facing renewal, with administrative policies that favor American producers over global producers. This will begin to impact energy sector earnings within a few quarters, subject to what kind of protections actually come through and whether OPEC can get agreement at cutting production.

    The Affordable Care Act will also be streamlined or perhaps completely restructured. Given the precipitous rise in cost to patients, providers, insurers, and tax payers that has occurred as a result of the program, it’s hard to think whatever changes come will not be financial positives in some significant way. This will take longer than the other initiatives, but reforming the ACA is on the agenda.

    These are factors the market began to price in when it became clear Republicans were going to sweep the election.

    It’s interesting to note these are the sort of structural fiscal reforms the US Central Bank has been calling on elected officials to implement for years in order to reduce the economy’s dependence on monetary policies (which are increasingly ineffective.)

    Despite the sweep, many if not most of Trump’s ideas will be obstructed by opponents on both sides of aisle – he is an outsider and will likely remain so. But it’s clear the market is cheering lower taxes, lower regulation, and the probability of a renewed American energy sector.

    How long will the honeymoon last? That’s impossible to say definitively, but the above gives the market something to think about, particularly if earnings continue to strengthen. There are no guarantees, but lower taxes + lower regulation + rising earnings + no recession should translate into positives for equity market prices in the near term.

    There are downsides to many Trump proposals, including deficits risks and trade wars, and bonds seem likely to suffer, but for now the markets like what they think they see. Barring a change in recession status or a major disruptive event here or abroad, markets seem primed to hold their ground and perhaps even advance moving into year end and the first half of next year.

    As always, reach out with your questions. Please share this information with one friend that can benefit from it. Share buttons below.

    To smarter investing,

    Dak Hartsock
    Market Strategist
    ACI Wealth Advisors, LLC.
    Process Portfolios, LLC.

    Recession Odds Dip – Consumers Spending More

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    Recession Odds Dip – Consumer Spending Still Rising 9/7/2016

    Before we get going, I was recently asked what the point is of understanding whether or not we are entering a recession. This person had been told by their broker that to “ride the rallies you have to ride out the valleys.” Catchy, right?

    The reason to understand when the economy is falling into recession is because around 80% of the time the stock market sells off hard when it does. The market usually takes a few months after the recession actually starts to figure it out, but once it starts selling most of the time it keeps going far longer than anyone other than a billionaire likes to see. The other reason- when the market itself starts into recessionary selling, 70% or more stocks follow the market down.

    Think of it this way. If you were getting into your car this morning and you received a credible message that there was nearly an 80% chance you would get in a car accident today, and that about 70% of the cars on the road were also going to be involved in a crash today, would you crank it up and head for the freeway or would you decide to preserve your car (and maybe more than that) and stay at home?

    Now that doesn’t mean that you should stay at home at all costs, but if those were my odds for the day, I’d sure like to know about them before I decided to take a drive.

    So, my firm and I use what’s called the Recession Probability Indicator (“RPI”) to identify whether or not we are in (or entering) a recession. Think of it as a lookout in the crow’s nest of an old school sailing ship – he’s keeping an eye out for storms or rocks so the ship gets where it’s heading safely.

    My firm and I use the RPI for the same reasons – to help steer client accounts away from storms and rocks so they can live their lives focused on what’s important to them rather than worrying about the next market crash. We aren’t going to see every single rock or approaching storm, but if we weren’t looking we wouldn’t see any of them. I think of it as Wealth Preservation 101. It’s basic.

    Absent a recession, it’s best to stay invested. If you’d like more information on this idea, follow this link —> CLICK HERE.

    So, if recession is what we need to pay attention to, are we in one yet?

    Nope.

    Consumer activity drives about 70% of the American economy and spending is still rising at +4.2% vs. last quarter. As a result, we are seeing a slightly reduced probability of recession vs. earlier in the year. This is subject to change, but for now the investment climate is stable and likely to stay that way for a while longer.

    If you don’t know how the Recession Probability Indicator works, CLICK HERE. Make sure to scroll down to take a look at the tables below the description.

    Below is an updated graph of the RPI. It runs on a 2 – 3 month lag.

    If you’d like to take a look at the American Institute of Economic Research business conditions update CLICK HERE.

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    To Smarter Investing,

    Dak Hartsock
    Chief Market Strategist
    ACI Wealth Advisors, LLC.
    Process Portfolios, LLC.

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    Q1 2016 Quarterly Update and Market Outlook

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    Q1 2016 Year-to-Date and Market Outlook Update

    The video below reviews performance for all 6 Process Portfolios year-to-date through April 15, 2016 and also includes an updated Market Outlook near the end.

    2016 saw the worst January in at least a generation and a return to higher levels of volatility thanks to central bank actions that seem to be increasingly opaque to many market watchers. I’ve been fortunate in that the Fed hasn’t done anything far distant from my expectations, at least so far. We’ve also seen the financial media predictably stoking fear and the usual parade of media guests short on data but long on opinion.

    Regardless, careful students of the markets have seen a number of signs that suggest we may see smoother waters later in the year, as long as the economy does not move onto a recessionary footing.

    Overall, reasonable performance with 4 of 6 portfolios beating the benchmarks, and 3 of 6 outpacing the broad market. Most portfolios have managed to do so with less risk than investing in an index fund. It’s fair to say it’s been a very good quarter for the 3 portfolios that clocked a 4%+ return, 2 with substantially less risk than buying an S&P 500 index fund. That’s a nice result for such a tumultuous period.

    The video below features the executive brief and results updates in the first 4 slides. Feel free to use the video player’s tools to skip ahead to what you are interested in. Thereafter there is a little more “color” on each portfolio followed by an updated Market Outlook. Rounding out the periphery of the presentation are descriptions of each ACI Process Portfolio, including risk management.

    This video concludes with the always exciting regulatory disclosures, which seem to get longer by the day. We can thank the admirable solidarity law school graduates in government demonstrate with their private sector compatriots, constantly striving to make sure their fellows on the other side of the fence have plenty of work.

    As I know everyone loves to read the disclosures, I’ve had our theme music looped at the end to give you an even better reading experience.

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    Warm Regards,

    Dak Hartsock
    Chief Market Strategist
    ACI Wealth Advisors, LLC.
    Process Portfolios, LLC.

    What’s Up With The Economy? Recession Probability and Business Conditions Update

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    There has been a lot of economic doom and gloom talk over the last couple months, with media “expert” after media “expert” saying the US economy is about to fall into a recession. It comes with the predictable warnings about a bad bear market. The vast majority of these talking heads are just voicing opinions based on their own views and often get emotional when voicing their perspective. The problem with these “experts” is there very little in the way of factual economic data to support any of their positions.

    Understand that investing is not an activity that benefits from either uninformed opinion or emotions. In fact, the opposite is true – uniformed opinions and emotional decision making often cause grief to investors.

    Success in the investment game is primarily about WHAT IS, not WHAT IF. What IF is the progenitor of fear and greed, arguably the cause of more financial grief than Alan Greenspan (that was a market nerd joke). What IS, by definition, restricts consideration and decision to the facts at hand.

    I’m sure you’ve gone to a doctor at some point in your life because you had a cold – runny nose, sore throat, a bit of fever, maybe some aches and pains. Has the doctor ever said, “What if this isn’t a cold? What if this is pneumonia? What if one of your lungs is collapsing? Could it be that you have cancer? Maybe you are sniffling because you are about to fall victim to a hemorrhagic fever and the bleeding has started in your sinuses? Maybe you are achy because you are going to come down with Dengue Fever? Is it possible this is Malaria?

    Do you believe the doctor could effectively manage your condition if the diagnostic conversation was about What IF rather than What IS?

    Investing is no different. Any effective conversation or action has to be about What IS. What IF is basically irrelevant.

    So, let’s look at What IS.

    At the most recent reading, the Recession Probability Indicator is cruising along at a steady 12, meaning the overall investment environment continues to be stable. That is subject to change, but for right now there is no recession on the horizon and in fact several key areas of the economy strengthened in the most recent month. If you aren’t familiar with the RPI, CLICK HERE to see how well it works.

    RPI Graphic March 2016 update

    Manufacturing, responsible for about 30% of our economy, moved back into expansion mode last month for the first time since last fall and the non-manufacturing sector of the US economy also strengthened a bit, which is good news for the other 70% of our economy.

    A reminder – just because there is no recession doesn’t mean the market can’t go up and down, but that history vastly favors those who stay invested despite volatility, as long as there is no recession imminent.

    If you’d like some evidence, take a look at the facts– Why Recessions Kill Investment Portfolios.

    Fear helps the media sell advertising and brokers increase commissions, but it doesn’t help your investment portfolio get you to retirement with the assets you need to live the way you want to.

    The point? Don’t let short term noise get in the way of a solid investment plan. Only impending recessions should do that, and if you have a real investment plan, you already know what you are going to do when the next recession comes.

    Don’t have a retirement income and investment plan? Newsflash – one of the key differences between the wealthiest investors and the average person is that they know what they have to invest and save and when they need to do it.

    We can help. Use the contact page or email and we’ll have a no pressure, get to know chat to see my firm and I can add value to your life.

    For those interested, here is a link to the most recent Business Conditions Report by the American Institute of Economic Research–CLICK HERE

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    To Smarter Investing,

    Dak Hartsock
    Chief Market Strategist
    ACI Wealth Advisors, LLC.
    Process Portfolios, LLC.

    Recession Watch

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    Is 2016 the Year of Recession? This question seems to be on everyone’s mind and even the media talking heads have jumped on it to grab readers & viewers.

    Spoiler: As of today, there is no recession on the horizon. The Recession Probability Indicator (“RPI”) scored a 12 at the most recent reading, meaning the economic environment for investment is stable. That is subject to change but as with all things that have to do with investing, it’s better to take direction from facts and not fears. My personal opinion is that the odds of recession are higher in 2016 than they were in 2015, but the fact remains: no recession yet on the horizon.

    That doesn’t mean the market can’t go up and down (sometimes a lot), but that history vastly favors those who stay invested despite volatility, as long as there is no recession imminent. Don’t take my opinion, click the title at the right to see the facts– Why Recessions Kill Investment Portfolios.

    Here’s some simple and quick proof-in-the-pudding: Pretend you had $200,000 to invest in January 2000. The first block gets invested the way financial salespeople tell you to invest – it’s going to stay invested no matter what because you “have to be in it for the long term.”

    The second block of $100,000 is, to be simple, going to move to 100% cash as soon as it looks like there may be a recession coming. Call that the “RPI Guided” for Recession Probability Indicator.

    Where are these two investments at the end of December 2015?

    As you can see below, it pays to make rational decisions about investments rather than getting caught up in short term volatility or whatever the media clones are spouting off about.

    RPI Table Dec 2015

    As I observed in one of last month’s articles We May Have a Bump Coming in the Markets (click title to read) it wasn’t clear a Fed rate raise was going to be the positive short term catalyst many market observers & participants thought. It may be that much of what we are seeing as we start 2016 is the holiday-delayed reaction to the Fed raise, mixed in with a liberal dose of alarming headlines arising from a wide spectrum of topics, some of which have no real bearing on investing. Some (me) might say most of which have no real bearing on investing.

    Remember, fear helps the media sell advertising and stock brokers earn commissions, but it sure as heck doesn’t help investment portfolios do what they are supposed to do, which is be there for you when you retire, with the assets you need to live the way you want to.

    Don’t let short term noise get in the way of a solid plan. Only impending recessions should do that, and if you have a real investment plan, you already know what you are going to do when the next recession comes.

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    To Smarter Investing,

    Dak Hartsock
    Chief Market Strategist
    ACI Wealth Advisors, LLC.
    Process Portfolios, LLC.

    So, We May Have a Bump Coming in the Market

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    So, We May Have a Bump Coming in the Market

    For those that don’t know, the vast majority of analysts and institutional investment managers believe that the Federal Reserve will raise rates for the first time since the Great Recession December 16th. They also see this as an overall positive for the markets.

    So if almost everybody (79.1% of economists and institutional managers as of 12/4) thinks the rate raise is coming and is a positive, why this article?
    The equity and bond market reaction to the European Central Bank’s mildly disappointing stimulus package on December 3 seems to indicate investors are less prepared for a rate hike than the institutional consensus may think, whatever surveys indicate. In the last several days we’ve also seen markets selling off on any news that seems to support a decision to raise.

    As a result, a positive market reaction to a hike the 16th is far from certain despite the consensus belief of managers. They may be right, but it’s important to understand how to react if the consensus is wrong.

    Once the initial reaction is over, the market will likely turn its attention back to earnings, the broad economy, and stock market alternatives – -when that happens investors will realize they still have nowhere to go for yield and that US domestic stocks still represent the smallest risks out there as well as the best opportunities for risk adjusted returns. Markets will very likely stabilize and perhaps rise in the 5%-10% range in 2016, barring a new recession.

    Instead of just taking my opinion, let’s look at some data. Since 1950 we’ve seen 9 true bear markets. Only 2 were not accompanied by a recession, one in the late 60’s and again in 1987’s Black Monday crash. Both of those bear markets were short duration and shallow vs. the average bear, with negligible impact on the portfolios of more astute investors — 1987’s crash came near the middle of the greatest bull market we’ve ever seen. Investors that panicked and sold missed out on spectacular returns in the coming years.

    Why does this matter? Answer below the chart.

    Bear Mkts & Recessions

    We can see from the chart above that it isn’t bear markets or periods of choppiness that investors need to fear, it is bear markets that go hand-in-hand with recessions. These are the markets that cause massive damage to portfolios – everything else is pretty much just noise.

    Recall last week’s post on the why of the Recession Probability indicator, and the fact that it sounded warnings months ahead of most bear markets. It also clearly illustrated the benefit of staying invested absent a recession. For those that didn’t read it, here is a link – it is well worth your time if you are truly interested in long term investment success. CLICK HERE.

    While the overall market may have been disappointing in 2015 and headlines seem to get progressively more alarming, the reality is that investors that ignore short term market noise and only react when recessions loom are richly rewarded for their perspective – this understanding of the markets can result in additional tens of thousands, hundreds of thousands or even millions depending on the size of the account.

    To be clear – there does not appear to be an economic recession on the horizon at this point. There are some valuation issues in the markets, but that’s another conversation.

    In conclusion, while I expect some short term difficulty whatever announcement the Fed makes on the 16th (and perhaps even a return to the August lows if the message is not communicated well), without a recession to accompany it the odds are vastly in favor of being rewarded for staying invested at this point.

    Uncertainty is the friend of the intelligent investor and the bane of the emotional.

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    To Smarter Investing,

    Dak Hartsock
    Chief Market Strategist
    ACI Wealth Advisors, LLC
    Process Portfolios, LLC

    Why Recessions Kill Investment Portfolios (and Poorly Protected Retirements)

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    images source dreamstime
    images source dreamstime

    Why Recessions Kill Investment Portfolios (and Poorly Protected Retirements)

    We’ve all heard “You’ve got to be in it for the long term,” or “You can’t catch the rallies unless you are in the market” from brokers or financial salespeople (they prefer “financial advisor”) and as a result more than one investor has had night sweats or an obsessive compulsion to check portfolio balances several times a day when the market starts selling off hard.

    But that thinking is incredibly costly:

    As you can see from this 25 year market study from Hepburn Capital Management, catching the rallies isn’t nearly as important as missing the valleys.

    Best & Worst Mkt Days

    Click graphic to enlarge

    If you are like most people, the above makes it pretty clear that your broker or financial salesperson (ahem, “financial advisor”) isn’t giving you the facts.

    Bottom line: If you missed the best and the worst over the last 25 years, you are almost doubling your investment performance. Reasonable risk for reasonable return is good label and it’s how the most successful investors handle their accounts.

    What does this really tell us?

    The worst times for investing are prior to recessions. Put your money to work ahead of a recession and most likely you will have to live with years of losses before your account even makes it back to break even. Why is that?

    Gains and Losses

    Click graphic to enlarge

    The above shows you the gain required just to get back to break even. Following the DotCom crash, it took the market about seven years to get back to break even. Following the Great Recession, it took about five years and that was with massive, unprecedented government support in the form of trillions of quantitative easing.

    Still not buying it? Here’s an even simpler example; Pretend you had $200,000 to invest in January 2000. The first block gets invested the way financial salespeople tell you to invest – it’s going to stay invested no matter what because you “have a long term plan.”

    The second block of $100,000 is, for the sake of simplicity, going to be moved to 100% cash as soon as it looks like a recession may be coming – Call that “RPI” guided for Recession Probability Indicator. CLICK HERE to get the most recent recession probability reading.

    Total RPI Guided ROI

    Click graphic to enlarge. Both examples exclude dividends.

    Now, this is just an illustration, but it’s pretty clear that getting out before things get bad and getting in after things have already started to recover may be a very good thing. Consider that in this illustration, the RPI guided account would be 97% higher AND you didn’t have to lose sleep at night worrying if your portfolio was going to be ruined while you were “in it for the long term.“ Protecting the RPI guided account when investment conditions were not favorable made a huge difference between these two investment accounts. H-U-G-E.

    The fact is, both of these accounts are in it for the long term, but normal “buy and hold” was also in it for the best days at the cost of being in it for the worst days. As we’ve seen, this is too high a price to pay for most investors.

    Now, your financial salesperson may have also told you that you can’t predict recessions. That is not true. The Federal Reserve, along with dozens of other in-the-know players like hedge fund and mutual fund managers, track certain sets of data to give them a heads up when a recession is coming. Nothing in life is absolutely guaranteed except death, taxes, and calls from telemarketers but these data sets – things like consumer price index, retail sales, leading indicators, purchasing managers index, etc. can be assembled to give a pretty good picture of when recessions are most likely. In the past, they have given a warning signal anywhere from three to nine months before the market realizes we’re in a recession and acts accordingly.

    RPI S&P Warning

    Click graphic to enlarge

    In the above illustration, the RPI gave a recession signal in January 2008 and confirmed it in March 2008, which would have spared many investors heartache (and dollars). Is it perfect? No. The market bottomed in March 2009 and the RPI didn’t give a reinvestment signal until October 2009, seven months later. But look at the table above the graph. Even missing that seven months, the RPI guided account still saw serious and sustained gains vs. the buy and hold.

    There are no guarantees the RPI will spot the next recession – in the last 30 years it’s accurately warned of a recessionary bear market a bit over 70% of time. Of course, there are no guarantees you will be robbed tonight – but I’ll bet your house is probably equipped with an alarm anyway.

    Whatever a thief would take from your house is worth substantially less than your investment account(s). The people my firm and I work with sleep better knowing that ACI is monitoring a pretty good alarm built to help protect their money.

    Is anyone monitoring an alarm to protect your money?

    Remember, successful investing isn’t about catching the rallies nearly as much as it is about missing the valleys.

    To get a monthly update on the likelihood of recession in the form of the Recession Probability Indicator (and other good stuff), sign up above on the right.

    Please Share with the buttons below.

    To Smarter Investing,

    Dak Hartsock
    Chief Market Strategist
    ACI Wealth Advisors, LLC.
    Process Portfolios, LLC.

    Is the S&P 500 Over Valued? Yes. What Should You Do? Market Valuation Update November 2015

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    iStock_000003205786Medium

    Is the S&P 500 Over Valued? Yes. What Should You Do?

    Market Valuation Update November 2015

    I’ve broken this update into 2 parts. The first will just give the big picture summary for my executive type clients & subscribers and the second, below the illustrations, is a discussion of the factors involved for those interested.

    The S&P 500 earnings in the last 4 quarters have fallen about 12% vs. the previous 4 quarters. Price is about the same. What does this mean for investors?

    Part 1 – Findings
    Buying the S&P 500 Index at current prices offers total expected returns in the 1% – 4% range over the near-to-intermediate term based on current earnings. The index does not represent a good opportunity to most investors at current valuation, which is about 20% higher than the 10 year average value of the S&P 500.

    There is about a -16% margin of safety associated with buying the S&P 500 at the current earnings level. In English, that means that buying the S&P index now could mean unrealized losses in the area of -16% for a few quarters IF earnings don’t recover. For the record, my current view is they will.

    Commentary: Earnings appear to be recovering in the index and many (but not all) of the factors driving recent earnings weakness may be transitory. The American Economy is expanding, albeit slowly, while consumer spending (70% of the economy) is still fairly strong and appears to be increasing. Both factors should give a lift to earnings over the next few quarters, and therefore the price of the S&P 500 Index.

    In the meantime, it’s probably best to seek investment opportunities away from the main stock indices, and in the US. There are solid earnings and reasonable value in several sectors including non-internet technology. Look to avoid or minimize excess exposure to assets threatened by dollar strength, Europe, South America and other less developed markets.

    If you are unsure what to do with your 401k choices moving into year end and next year, email me and we’ll see what can be done to put you on the best investment footing possible. —-> Contact Dak

    • SPY TTM EPS
    • SPY QTR EPS
    • SPY 10 Yr PE

    * Negative price-to-earnings ratios during the Great Recession have been set to “0” for the graphic above to make the chart more readable, and extremely high one-time p/e’s have been capped at 25 for the same reason. Double click the graphics to make them larger.

    Part 2 – Discussion (optional reading)
    The problem with this is not so much the reduced earnings so far in 2015 (which would be scarier if the economy was heading into recession but it isn’t), but whether historical valuations for the S&P 500 support higher prices based on current earnings. The answer to that is probably not. Earnings need to recover in order to drive the S&P meaningfully higher.

    Before you panic and hit the sell button, understand that while the S&P 500 itself may not be a good investment at the moment, that doesn’t mean there aren’t good stock investments available. Most sophisticated managers look for investment opportunities beyond the S&P 500, I among them. There are solid investment opportunities out there, but right now buying the S&P 500 index probably isn’t one of them.

    Why?

    We saw the S&P 500 move up pretty aggressively in 2013 and 2014, but earnings began to fall as we entered 2015 due to a variety of factors I won’t get into here. The result? As earnings have fallen the valuation of the S&P 500 has risen, eroding the margin of safety in the index and also lowering expected future returns.

    Because price has not followed earnings down, the S&P is a bit rich right now (about 20% higher than the average 10 year valuation). This doesn’t mean it’s going to collapse, nor is the index in bubble territory. It does mean that investors are willing (so far) to pay more for less, unsurprising given alternatives in the fixed income world.

    Investors continue to accept lower returns in the S&P for the simple reason that interest rates are low and basically force investors to hold risk assets. The S&P 500 in the form of the ETF SPY is one of the best known and widely owned risk assets available, which makes it the purchase of least resistance for index investors of all sizes.

    To understand whether you should invest and where, it’s important to understand a few key concepts. Some of my clients and subscribers are already familiar with these concepts. Feel free to skip.

    How the Market is Priced.
    The stock market is driven by valuation, and valuation is driven by earnings. This is how the wealthiest investors think, and they use that thinking to help them manage their investment risk. The term is “margin of safety” and it’s an important concept. Successful investors are searching for that margin of safety, whether they are small investors with a million or two, or a mutual fund with hundreds of billions under management. Big or small, investment success demands the same discipline.

    Generally speaking, the higher the valuation versus the historical average valuation, the lower your margin of safety.

    There is another side to this coin –“expected return“–it’s the potential reward you may receive for buying at a certain valuation level. The lower the valuation versus earnings, the larger the margin of safety and the larger the expected return.

    Add expected return to the dividend payout and you get “total expected return” which is exactly what it sounds like.

    That’s it. Hope this update helps you sort through the useless noise in the financial news.

    If you have additional questions feel free to reach out, and please share using the buttons below.

    Warm Regards,

    Dak Hartsock
    Chief Market Strategist
    ACI Wealth Advisors, LLC
    Process Portfolios, LLC.

    Next week’s updates:
    * Process Portfolios Performance Update
    * Controlling Long Term Health Expenses

    © Copyright 2015
    Dak Hartsock

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    Investment Management

    For ACI, investment management begins with understanding and actively managing risk for our clients and partners.  We do this through smarter investments built on low cost, highly liquid and diversified investments rather than expensive financial products.

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    Understanding the needs of investors seeking stable results for portfolios greater than $500,000 is a core strength of ACI.  One of the most important things we do is help your investments to create stable income while generating sufficient growth to meet your future demands and the needs of those you care for. 

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    Market Income

    This portfolio invests in a basket of highly liquid Index or Sector securities and sells off atypical returns in exchange for a premium on a rolling basis. That’s a fancy way of saying we take the bird in hand and let someone else have the two in the bush.  We buy sectors that are undervalued relative to the rest of the market or vs. their historical value ranges which reduces downside risk vs. the broad market.  Typically out-performs in bear markets, neutral markets and mild bull markets.   while under-performs strong bull markets.

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    Core Equity

    Invests in diversified components of the financial markets and broad economy by targeting sectors which demonstrate the greatest potential for a consistent range of multi-year returns, while offering a risk adjusted investment profile equal to or lower than the broad markets.  Our research tells us which sectors demonstrate the greatest potential for consistent multi-year returns while offering greater risk efficiency than the broad markets.  We invest on an “Outcome Oriented” basis – meaning we have a good idea what the returns over time will be at a given purchase price.

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    Durable Opportunities

    This portfolio invests in companies possessing a Durable Competitive Advantage.  Such companies are likely to be around for decades, easing the concern of principal return.  DCA companies often suffer less in bear markets and usually lead recoveries.  These companies allow ACI to build portfolios with minimum expected returns that can be in the mid-single digit range over any 3-5 year period which can provide long term stability partnered with long term growth in equity.

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    Full Cycle

    This portfolio is derived from the ground breaking work in ‘risk parity’ by Ray Dalio, arguably one of the top 10 money managers in history and founder of Bridgewater Associates.  The Full Cycle portfolio is built on the allocation models Ray designed to provide the highest potential risk adjusted returns possible through all phases of the economic cycle.  Bridgewater’s “All Weather” fund was designed for pension funds and other large institutional investors that needed to earn stable returns with stable risk, and has been closed to new investors for years.  At the time the fund closed, the All Weather Portfolio had a minimum required investment of $100 million.

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    Equity Builder

    This is a risk management overlay which helps build and protect accounts by collecting small premiums against held positions on an opportunistic basis during correcting markets.  EQB seeks to collect an extra 2% – 5% per year against the cost of underlying investments.  While primarily targeted at increasing account equity, EQB gives an extra layer of protection to capital during periods of higher volatility.

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    Fixed Income

    Diversified, broad exposure to fixed income ETFs and best of breed no load funds including core fixed income components such as Government, Corporate or MBS, municipals, and unconstrained “Go Anywhere” funds.

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    ACI Investment Team

     

    Dak Hartsock; Investment manager with over 15 years of experience with securities & securities options. Dak has worked full time in the financial markets since 2007. He has more than a decade of operating experience as a business owner & developer, with substantially all personal net worth invested in ACI. He is a graduate of the University of Virginia.

    Robert Hartsock; MBA. Bob has over 30 years of senior management experience in diverse markets, products and businesses. He brings an exceptional record that includes management roles in two Fortune 500 companies and leadership of 7,500+ employees. Bob’s career features a specialization in identifying and fixing management and operational problems for multiple companies including leading over a dozen acquisitions, private placements and a public offering. He is uniquely positioned to provide ACI with highly relevant C-Level management perspective. Bob provides operational & macro perspective on investments ACI undertakes for client portfolios. Bob holds degrees from University of Illinois and University of Washington.

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    This web site reflects the opinions of Dak Hartsock and is not intended to offer personalized investment advice. Information regarding investment products, strategies, and services is provided solely for educational and informational purposes. Other information provided on the site, including updates on the Recession Probability Indicator (“RPI”) are presented for educational purposes and are not recommendations to buy or sell securities or solicitation for investment services.

    Dak Hartsock does not provide personalized investment advice over the internet, nor should any information or materials presented here be construed as personalized investment or financial advice to any viewer. Mr. Hartsock is not a tax advisor and investors should obtain independent tax advice regarding investments. Neither Dak Hartsock, ACI Wealth Advisors, nor any affiliated persons or companies accept any liability in connection with your use of the information and materials provided on this site.

    Dak Hartsock is a Series 65 licensed and registered Independent Advisor Representative with ACI Wealth Advisors, LLC (“ACI”). ACI is a Registered Investment Advisor (“RIA”), registered in the State of Florida and the State of California. ACI provides asset management and related services for clients in states where it is registered, or where it is exempt from registration through statute, exception, or exclusion from registration requirements. ACI is in no way responsible for the content of DakHartsock.com nor does ACI accept any responsibility for materials, articles, or links found on this site. A copy of ACI’s Form ADV Part 2 is available upon request.

    Market data, articles, blogs and other content on this web site are based on generally-available information and are believed to be reliable. Dak Hartsock does not guarantee the accuracy of the information contained in this web site, nor is Mr. Hartsock under any obligation to update any information on the site. Information presented may not be current. Any information presented on this site should not be construed as investment advice or a solicitation to buy and sell securities under any circumstances.

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    Disclosures Regarding Investment Performance Reporting in compliance with Rule 206(4)-1(a)(5).

    Visit http://www.dakhartsock.com/process-portfolios-historical-performance/ for historical performance of ACI’s Process Portfolios.

    Market Income Portfolio
    1. The performance of the broad market over the same time periods is included for both model and live portfolio to help investors understand market conditions present during the period examined by the model and during live investment.
    2. Listed Index models and graphs do NOT include transaction, fund or Advisor Management fees as the index model is not available for investment. Live portfolio results include all fees, including Advisor Management fees.
    3. Model results do NOT reflect reinvestment of dividends or other earnings. Actual results reflect limited reinvestment of dividends and other earnings, but do not reflect the impact of any applicable taxes which vary by investor and account type (deferred account vs. taxable, etc.).
    4. Investing involves risk, including risk of loss and/or principle. While the Index model has historically shown reasonable performance versus the S&P 500 on a risk adjusted basis, there is no guarantee that will continue into the future. Market Income is designed to provide reasonable returns for less risk than the broad market on a risk adjusted basis, and while the firm believes model portfolios are capable of continued outperformance on this basis, there is no guarantee they will do so. Comparisons with the S&P 500 are included to help the average investor understand how an investment in Market Income may differ from investment in an index fund such as an S&P 500 index fund.
    5. The model for Market Income is the Chicago Board of Exchange S&P 500 Buy/Write Index or “BXM.” BXM has historically displayed less volatility than the S&P 500 and Market Income. BXM cannot be directly invested in. Market Income does not exactly follow the BXM index model – the mechanics of closing and opening positions differ – BXM opens, closes or rolls positions on the same day every month regardless of the profit or loss in a position – Market Income generally, but not always, waits until after expiration before transacting. Market Income will also close or roll ahead of expiration if the position has a high percentage of profit present in order to capture that gain. Options are generally sold again within a week of the closure of the prior position, but not always, and often new position may be opened the same day the prior position is closed.
    Benchmark and index comparisons are made on a best available basis – meaning that both the index model and live performance are believed to be compared with market and the closest possible benchmark for simplicity of comparison. However, there is no guarantee future volatility will be either less than, equal to, or greater than the volatility experienced in the model or the S&P 500 although the firm invests with an eye on reduced volatility vs. the S&P 500.
    6. The model portfolio (BXM) utilizes the S&P 500 as its basis. Market Income differs from BXM in that the underlying securities are primarily selected on the basis of “relative” value. This simply means that sectors are compared with one another and Market Income generally invests in the sector or sector(s) trading at the greatest discount or the smallest premium relative to its historical average valuation. Other factors are also considered including sector earnings growth and expected return versus other available sector instruments. Advisor believes this gives Market Income a higher margin of safety than repeatedly investing in the S&P 500 on a rolling basis without regard to value or prevailing economic conditions, while preserving liquidity.
    7. The BXM model on which Market Income is based is a non-traded index. As such, results do not represent actual trading or investment and do not reflect any impact that material economic or market factors may have had on the advisors decision making if advisor had been managing live money during the period the model covers, including transaction, fund, or management fees.
    8. Market Income also differs from the BXM model in that Market Income seeks to reduce investment during recessionary economic periods while BXM stays invested regardless of economic or market conditions. Advisor believes this will better protect capital vs. BXM model but is materially different than staying invested in all market conditions. This action may cause Market Income to have reduced participation in markets that continue to move up despite Advisors reduction in investment.
    9. Advisor clients have experienced results that exceed the performance of the model to date. There is no guarantee Market Income will continue to outperform BXM in the future regardless of Advisor efforts to do so.

    Core Equity Portfolio
    1. The performance of the broad market over the same time periods is included for both model and live portfolio to help investors understand market conditions present during the period examined by the model and during live investment.
    2. Model is a historical back test and includes brokerage and fund fees but does NOT include Advisor Management fees which vary by account size, but in general reduce annual performance by approximately 1.5%. Live portfolio results include all fees, including Advisor Management fees.
    Historical back-test means the model portfolio has been tracked on a backwards looking basis prior to the beginning of live investments in order to establish historical risks and results for investment in this portfolio. Back testing has certain inherent limitations as detailed in item #7 below.
    3. Model results reflect regular investment of dividends or other earnings. Actual results reflect limited reinvestment of dividends and other earnings.
    4. Investing involves risk, including risk of loss and/or principle. While the back tested Core Equity model has historically shown desirable performance versus the S&P 500 on a risk adjusted basis, there is no guarantee that will continue into the future. Core Equity is designed to provide reasonable returns for the same or less risk than the broad market on a risk adjusted basis, and while the firm believes model portfolios are capable of continued outperformance on this basis, there is no guarantee they will do so. Comparisons with the S&P 500 are included to help the average investor understand how an investment in Core Equity may differ from investment in an index fund such as an S&P 500 index fund.
    5. The model for Core Equity is built of highly diversified, highly liquid sector and index securities, most frequently low cost ETFs. Core Equity live portfolios do not exactly follow the Core Equity model – variances in investor contributions, withdrawals, and risk tolerances result in measurable drift from the model. Over time, client accounts come closer in line with the Core Equity model.
    Core Equity live portfolios may differ from the Core Equity model in an additional material way; when valuations on certain sectors become overly stretched versus their historical average valuations, the Advisor may reduce exposure to those sectors in favor of a sector position which is priced in a more reasonable range in comparison to it’s typical historical valuation. Periodically, Core Equity may allocate a small but measurable percent of assets (up to 5%) in volatility linked instruments in an effort to better manage the portfolio.
    These factors may result in greater or less than model performance over time.
    Benchmark and index comparisons are made on a best available basis – meaning that both the index model and live performance are compared with market and other benchmarks the
    Advisors believe to be suitable for simplicity of comparison. However, there is no guarantee future volatility or performance will be either less than, equal to, or greater than the volatility or performance experienced in the model or the S&P 500 although the firm invests with an eye on reduced volatility vs. the S&P 500.
    6. Core Equity invests in diversified components of the financial markets and broad economy by targeting sectors or indices which demonstrate potential for a consistent range of multi-year returns, while seeking a risk adjusted investment profile equal to or lower than the broad markets. These sectors contain a range of equity stocks with an equally broad range of characteristics – some sectors are present in the Core Equity portfolio due to their historically defensive nature, some are present due to their historical growth characteristics, some are a blend of the spectrum between. The intent is to provide a balanced equity portfolio suitable for most investors as an S&P 500 index fund replacement but which seeks lower risk while experiencing, on average, a greater return than an S&P 500 index investment.
    7. The Core Equity model results do not represent actual trading or investment and do not reflect any impact that material economic or market factors may have had on the advisors decision making if advisor had been managing live money during the period the model covers, including transaction, fund, or management fees as detailed above in item #2.
    8. Core Equity live portfolios also differ from the Core Equity model in that Core Equity seeks to reduce investment during recessionary economic periods while the Core Equity historical model stays invested regardless of economic or market conditions. Advisor believes this will better protect capital vs. model but is materially different than staying invested in all market conditions. This action may cause Core Equity live portfolios to have reduced participation in markets that continue to move up despite Advisors reduction in investment.
    9. Advisor clients have experienced results that slightly lag the performance of the model to date. This lag is due to a number of factors, primarily the fact that different clients allocate different dollar amounts to Core Equity at different times. In general, the longer a client has been fully allocated to the Core Equity portfolio, the closer it is to model performance.
    The benchmark for Core Equity (The S&P 500) has historically displayed greater volatility (risk) than the Core Equity model or live Core Equity portfolios. This may or may not be the case in the future.

    Market Momentum Portfolio
    1. The performance of the broad market over the same time periods is included to help investors understand market conditions present during the period covered by live investment.
    2. Listed comparison Index graphs and statistics do NOT include transaction, fund or Advisor Management fees. Live portfolio results include all fees, including Advisor Management fees.
    3. Actual results reflect limited reinvestment of dividends and other earnings, but do not reflect the impact of any applicable taxes which vary by investor and account type (deferred account vs. taxable, etc.).
    4. Investing involves risk, including risk of loss and/or principle. While the closest benchmark for Market Momentum has historically shown reasonable performance versus the S&P 500 on a risk adjusted basis, there is no guarantee that Market Momentum that will continue such performance into the future. Market Momentum is designed to provide reasonable returns for less risk than the broad market on a risk adjusted basis, and while the firm believes the portfolio is capable of outperformance on this basis, there is no guarantee it will do so. Comparisons with the S&P 500 are included to help the average investor understand how an investment in Market Momentum may differ from investment in an index fund such as an S&P 500 index fund.
    5. The closest benchmark for Market Momentum is the Chicago Board of Exchange S&P 500 Buy/Write Index or “BXM.” BXM has historically displayed less volatility than the S&P 500 and Market Income. BXM cannot be directly invested in. Market Momentum differs in key ways from BXM – the mechanics of closing and opening positions differ – BXM opens, closes or rolls positions on the same day every month regardless of the profit or loss in a position – Market Momentum targets closing or rolling positions based on technical factors including trend support and resistance. Market Momemtum will also close or roll ahead of expiration if the position has a high percentage of profit present in order to capture that gain. Options are generally not sold again until the underlying investment has moved into an area of resistance but not always; new position may be opened the same day the prior position is closed.
    Benchmark comparisons are made on a best available basis – meaning that live performance is believed to be compared with the closest possible benchmark for simplicity of comparison. However, there is no guarantee future volatility will be either less than, equal to, or greater than the volatility experienced in the model or the S&P 500 although the firm invests with an eye on reduced volatility vs. the S&P 500. Market Momentum , like BXM, is an options writing strategy seeking to reduce investment volatility and improve risk adjusted returns for investors.
    6. The model portfolio (BXM) utilizes the S&P 500 as its basis. Market Momentum differs from BXM in that the underlying securities are primarily selected on the basis of “relative” value. This simply means that sectors are compared with one another and Market Momentum generally invests in the sector or sector(s) trading at the greatest discount or the smallest premium relative to its historical average valuation. Other factors are also considered including sector earnings growth and expected return versus other available sector instruments. Advisor believes this gives Market Momentum a higher margin of safety than repeatedly investing in the S&P 500 on a rolling basis without regard to value or prevailing economic conditions, while preserving liquidity.
    7. The BXM model on which Market Momentum is compared is a non-traded index. As such, results do not represent actual trading or investment and do not reflect any impact that material economic or market factors may have had on the advisors decision making if advisor had been managing live money during the period the model covers, including transaction, fund, or management fees.
    8. Market Momentum also differs from the BXM model in that Market Momentum seeks to reduce investment during corrective or recessionary economic periods while BXM stays invested regardless of economic or market conditions. Advisor believes this will better protect capital in comparison to BXM but such action is materially different than staying invested in all market conditions. This action may cause Market Momentum to have reduced participation in markets that continue to move up despite Advisors reduction in investment.
    9. Advisor clients have experienced results that exceed the performance of the benchmark to date. There is no guarantee Market Momentum will continue to outperform BXM in the future regardless of Advisor efforts to do so.

    Durable Opportunities Portfolio
    1. The performance of the broad market in the form of the Dow Jones Industrial Index over the same time periods is included for live portfolio comparison to help investors understand market conditions present during the period covered by live investment.
    2. The Index results do not include brokerage, transaction, or Advisor fees. Live portfolio results include all fees, including Advisor Management fees.
    3. Actual results reflect limited reinvestment of dividends and other earnings.
    4. Investing involves risk, including risk of loss and/or principle. Portfolios compromised of companies matching the profile of those selected for including in Durable Opportunities have historically displayed superior risk adjusted performance to the Index, but there is no guarantee that will continue into the future. Durable Opportunities is designed to provide investment in companies that firm believes meet a stringent set of criteria firm believes reduces the likelihood of permanent capital impairment while allowing investors to participate in investment in companies firm believes will stand the test of time and provide superior long term returns. While the firm believes the portfolio is capable of outperformance on this basis, there is no guarantee it will do so. Comparisons with the Dow Jones are included to help the average investor understand how an investment in Durable Opportunities may differ from investment in a concentrated index fund such as a Dow Jones Industrials index fund. Durable Opportunities is not restricted to investment in industrial companies or in companies with a specific level of capitalization, unlike the Dow Jones.
    5. Durable Opportunities is primarily a value driven strategy; when valuations in holdings become overly stretched versus their historical average valuations, the Advisor may reduce exposure to those holdings by either liquidation or hedging, and may re-allocate funds into a holding which is priced in a more reasonable range in comparison to it’s typical historical valuation. Periodically, Durable Opportunities may allocate a small but measurable percent of assets (up to 5%) in volatility linked instruments in an effort to better manage the portfolio.
    Benchmark comparisons are made on a best available basis – meaning that live performance is compared with the benchmarks the firm believe to be suitable for simplicity of comparison. However, there is no guarantee future volatility or performance will be either less than, equal to, or greater than the volatility or performance experienced in the Dow Jones Industrials although the firm invests with an eye on reduced volatility vs. the Dow Jones Industrials Index. 6. Durable Opportunties invests in companies firm believes to possess a Durable Competitive Advantage. Such companies are likely to be around for decades, easing the concern of principal return. DCA companies often suffer less in bear markets and usually lead recoveries. These companies allow ACI to build portfolios with minimum expected returns that may be in the mid-single digit range over any 3-5 year period which may provide long term stability partnered with long term growth in equity. There are no guarantees the strategy will be successful in this endeavor.
    6. The Durable Opportunities portfolios also differ from the benchmark comparison in that Durable Opportunities reduce investment by hedging or raising cash during recessionary economic periods while Dow Jones Industrial Index reflects 100% investment at all times regardless of economic or market conditions. Firm believes this will better protect capital vs. model but is materially different than staying invested in all market conditions. This action may cause the Durable Opportunities portfolio to experience reduced participation in markets that continue to move up despite Advisors reduction in investment.
    7. Advisor clients have experienced results that have lagged the performance of the benchmark to date. This lag is due to a number of factors, primarily the fact that the current high valuation investing environment has made it difficult to identify companies that fit the parameters of Durable Opportunities at a desirable valuation level. Different clients allocate different dollar amounts to Durable Opportunities at different times, which has also impacted the performance of the overall portfolio.

    Full Cycle Portfolio
    1. The performance of the broad market over the same time periods is included for both model and live portfolio to help investors understand market conditions present during the period examined by the model and during live investment.
    2. Model is a historical back test and includes brokerage and fund fees but does NOT include Advisor Management fees which vary by account size, but in general reduce annual performance by approximately 1.5%. Live portfolio results include all fees, including Advisor Management fees.
    Historical back-test means the model portfolio has been tracked on a backwards looking basis prior to the beginning of live investments in order to establish historical risks and results for investment in this portfolio. Back testing has certain inherent limitations as detailed in item #7 below.
    3. Model results reflect regular investment of dividends or other earnings. Actual results reflect limited reinvestment of dividends and other earnings.
    4. Investing involves risk, including risk of loss and/or principle. While the back tested Full Cycle Portfolio model has historically shown desirable performance versus the S&P 500 on a risk adjusted basis, there is no guarantee that will continue into the future. Full Cycle Portfolio is designed to provide reasonable returns for the same or less risk than the broad market on a risk adjusted basis in all phases of the economic cycle by holding risk weighted non-correlated assets, and while the firm believes model portfolios are capable of continued outperformance on this basis, there is no guarantee they will do so in the future. Comparisons with the S&P 500 are included to help the average investor understand how an investment in the Full Cycle Portfolio may differ from investment in an index fund such as an S&P 500 index fund.
    5. The model for the Full Cycle Portfolio is built of diversified, liquid sector and index securities, most frequently low cost ETFs and low cost funds. The live Full Cycle portfolio does not follow the Full Cycle model exactly – variances in investor contributions & withdrawals result in measurable drift from the model. Over time, client accounts come closer in line with the Full Cycle model.
    Full Cycle live portfolios may differ from the Full Cycle model in an additional material way; when valuations on certain sectors become overly stretched versus their historical average valuations, the Advisor may reduce exposure to those sectors in favor of a comparable position which is priced in a more reasonable range in comparison to it’s typical historical valuation.
    These factors may result in greater or less than model performance over time.
    Benchmark and index comparisons are made on a best available basis – meaning that both the index model and live performance are compared with market and other benchmarks the
    firm believes to be suitable for simplicity of comparison. However, there is no guarantee future volatility or performance will be either less than, equal to, or greater than the volatility or performance experienced in the model or the S&P 500 although the firm invests with an eye on reduced volatility vs. the S&P 500.
    6. Full Cycle invests in diversified components of the global financial markets and broad economy by balancing risks with non-correlating or reduced correlation assets in opposition to one another each of which is designed to prosper in some phase of the economic cycle and intended to offset reduced or poor performance in other portfolio holdings.
    7. The Full Cycle model results do not represent actual trading or investment and do not reflect any impact that material economic or market factors may have had on the advisors decision making if advisor had been managing live money during the period the model covers, including transaction, fund, or management fees as detailed above in item #2.
    8. Full Cycle live portfolios also differ from the Full Cycle model in that the live portfolio may be rebalanced more or less frequently depending on prevailing market conditions. While firm believes this difference positions portfolio for improved risk adjusted performance, it is not clear that this difference results in clear over or under performance versus the Full Cycle model.
    9. Advisor clients have experienced results that slightly outperform the performance of the model to date. This outperformance may or may not persist. In general, the longer a client has been fully allocated to the Full Cycle portfolio, the closer it is to model performance.

    Fixed Income Portfolio
    1. The performance of the broad bond markets over the same time periods is included to help investors understand market conditions present during the period covered by live investment.
    2. Listed comparison Index graphs and statistics do NOT include transaction, fund or Advisor Management fees. Live portfolio results include all fees, including Advisor Management fees.
    3. Actual results reflect limited reinvestment of dividends and other earnings, but do not reflect the impact of any applicable taxes which vary by investor and account type (deferred account vs. taxable, etc.).
    4. Investing involves risk, including risk of loss and/or principle. While the closest benchmark for Fixed Income has historically shown reduced volatility and reasonable performance versus many classes of fixed income investments, there is no guarantee that Fixed Income that will continue such performance into the future. Market Momentum is designed to provide reasonable returns for less risk than the broad market on a risk adjusted basis, and while the firm believes the portfolio is capable of outperformance on this basis, there is no guarantee it will do so. Comparisons with US Aggregate Bond Market and PIMCO Total Return are included to help the average investor understand how an investment in Fixed Income may differ from investment in an alternative index or fixed income fund.
    5. The closest benchmark for Fixed Income is the Pimco Total Return Fund. Fixed Income differs in key ways from BOND – including selection of underlying investments and reduced diversification. Benchmark comparisons are made on a best available basis – meaning that live performance is believed to be compared with the closest possible benchmark for simplicity of comparison. However, there is no guarantee future volatility and performance will be either less than, equal to, or greater than the volatility and performance experienced by the benchmark although the firm invests with an eye on out performance.
    6. The benchmark may include securities not contained in Fixed Income, and vice versa. Fixed Income currently holds significantly more cash than PIMCO Total Return Fund, a situation likely to continue in the near future. This action may cause Fixed Income to have reduced participation in markets that move up despite Advisors reduction in investment.
    7. Advisor clients have experienced results that lag the performance of the benchmarks to date. There is no guarantee Fixed Income will continue to outperform benchmarks in the future regardless of Advisor efforts to do so.

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