US Dollar

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

Markets in Minutes November 2017

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Markets in Minutes: December 2, 2017

S&P 500    Tax Cuts     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 November 1 – November 30, 2017

I’m also going to discuss the potential impact of the tax bill on corporate earnings and therefore the stock market in this update.

Investor Learning: “Risk never looks like risk when it’s generating a high return” Howard Marks

“Paradoxically, it is exactly then, when investors don’t see any risk in a market that it becomes the riskiest. But this is usually realized later.” Francois Rochon

 

S&P 500: +3.1% since October 30, +17.8%% year-to-date. The S&P 500 posted a solid November on the back of continued earnings growth for the quarter (approximately +5% vs. 2nd quarter), a raft of positive economic data, retail strength which seems to have somehow surprised most market watchers, and a mostly positive outlook on tax reform. Both the primary and intermediate uptrends are intact.

 

Tax Cuts: With tax cuts approved by both the House and Senate as of this morning, the bill now heads to chamber for reconciliation before being sent to the President. There will be tweaks, but the corporate tax break is going to come through. This is a major positive for stocks. 

Some quick, back-of-the-napkin math to illustrate:

In the last 12 months, the S&P proxy SPY has delivered approximately $18.75 in equal weighted earnings (“EWE”). The average 10-year price-to-earnings ratio on an EWE basis is 11.3x. So, using one measure of fair value, the S&P should be at about $2119 (It closed at $2642.22 yesterday). So, prior to tax reform, the S&P is about 25% over-valued.

This is a simplified illustration, BUT with a 15% tax cut to corporate taxes, companies will now theoretically see after tax earnings rise to reflect those extra dollars now available for earnings.

CURRENT: $18.75 EWE (earnings) x 1.35% (current corp. tax rate) = $25.31 Pre-tax EWE (earnings).

IN CHAMBER: $25.31 EWE (earnings) x 20% (new corp. tax rate) = $5.06 per share tax = $20.25 EWE (earnings) .

$20.25 EWE x 11.3x (Avg. EWE Price-to-earnings ratio) = $2288 fair value for S&P. So, the market is now only about 15.5% over-valued. That’s a LOT better than 25% over.

Earnings are still growing; interest rates are still low. In short, the tax cuts are inarguably a good thing for a stock market that was starting to push valuations to uncomfortable heights.

Again, this is back-of-the-napkin stuff and there are other factors involved, but it makes the point.

 

Bonds: The 10-year treasury yield rose 1.7% for the 2nd month in a row. In between it fell to 2.32%. The 10-Year is up 2.1% Year-to-Date. I sound like a broken record, but yields are currently low enough that long duration bonds (more than 5 years) should be examined to make sure they are in your portfolio for a specific reason. It is still a good time to compare corporate bonds with highly rated municipal bonds in both the taxable and exempt spaces.

 

Gold: Basically unchanged at +0.3% for the month and in a technical consolidation following the failed breakout in September. Gold appears to have moved out of the counter trend rally it’s been in for a couple years and looks a lot like a range trade is setting up between $11.47 and $12.60. As before, if a spike occurs, $12.60 still looks like a good place to reduce bets on higher gold prices. If gold falls below $11.38 it’s likely the larger down trend will re-assume control of price.

Again the broken record, but a sudden large scale geopolitical event is likely to cause a rapid spike in price. In my view, that spike is likely to be temporary and a selling opportunity. For those interested, I use IAU as a proxy for Gold and the above is based on the ETF.

 

World Ex-US: +0.8% for the month, +21.9% year-to-date. It will be interesting to see if US tax cuts and the resulting reduction in US market valuations pull money from a less stable, less growth oriented Europe. I am not long term bullish on European/Asian/Emerging market stocks/economies due to the social/structural risks I see vs. the US. I may be wrong about this.  I may wind up with egg on my face with this view, but I just don’t think any other market in the world compares with the risk/reward trade-off in US markets.

 

US Dollar: The Buck fell 2% in November (down -10% year-to-date). Continued dollar weakness into the quarter end would be another positive for stocks in that they support the earnings of large US based multi-nationals. From a near term technical perspective, it looks like the dollar is about equally likely to test the September low of $91.33 as take another run at $95. With tax cuts, we may see another run at $95 first.

 

Commodities: Oil was up +5.1% in November on the heels of a multi-month rally that tested $60 a barrel last week. Talks of production cuts by both OPEC producers and Russia as well as dollar weakness continue to support the rally, as does a still growing global economy. My range expectations for oil in 2017 are still intact ($40 – $60/$65) and while I think 2018 will see oil prices average higher than 2017, I don’t think oil will sustain prices above $55 until late spring, particularly given that US producers are increasing well counts again.

Copper futures fell by -1.4% in November in what appears to be a consolidation of the recent run. The economy is still moving forward, and the tax cuts are likely to give the economy a little more steam, adding to the argument that industrial expansion will continue to support copper prices.

 

Economy: Consumer prices rose 0.2% in October as housing costs rose. Prices excluding food and energy up about 1.8% in the last 12 months. This inflation rate is in-line with the Fed mandate and should help keep rate raises gradual. Industrial production fell slightly but is still solidly in growth mode with backlogs increasing.

Anecdotal commentary by CEO’s suggest that the typical 4th quarter slowdown isn’t as strong as normal. This supports my idea (below) that we may be heading for a record 4th quarter. The Non-Manufacturing Index hit a 2-year high, suggesting that 70% or so of the economy is clicking along nicely. The official unemployment rate fell again to 4.1% in September. Despite that, wage inflation remains below target at 2.5% at the last report.

The US continues to be a mostly sweet spot: moderate inflation, rising employment, low interest rates, rising GDP and corporate earnings.

 

Earnings: Q3 earnings are wrapping up and overall it looks like the S&P saw EWE earnings rise about 5%. The earnings expansion is still underway with the tax cuts likely to add some momentum coming into what may be a record 4th quarter in earnings.

 

Market Valuation: Valuations are less stretched than last week and value in both sectors and individual companies will get a reset in the wake of the tax cuts. Despite that, things were stretched enough that near term value will still be a difficult find. We are likely to see an interest rate raise in December, but rates are still very low. With lowered valuations, earnings holding up their end, and continued supportive interest rates, near term pullbacks and especially corrections are buying opportunities.

 

Recession Probability Indicator: The most recent reading on the RPI is 12, indicating we are not currently in recession and the investment environment is stable.  The indicator will be updated for October somewhere between Nov. 5 and Nov. 10.  If there is a meaningful change, I will update subscribers.  CLICK HERE to learn more about the RPI.

 

S&P Technical Picture: The S&P is more overbought on weekly basis than we’ve seen in 10 years. This continues to suggest a near term top from a technical perspective, but corporate tax cuts combined with other positive economic data seem likely to overwhelm short term technical. In English, things seem like they might keep getting better (prices rise) before they get worse (prices fall). Overbought situations almost always result in either pullbacks or consolidations, but following tax cuts and a reset of stock valuations, we may see the technical aspects of what is happening overrun by the fundamentals.

Given all that is happening, I can’t help but consider the Rochon quote at the start of this update.

Fair Value has risen to $229.00 or so on the S&P proxy SPY, but I would not look for the index to fall that far should a correction ensue. Barring some truly nasty surprise, pullbacks more than 5% are probably buy opportunities, even in the face of geopolitical events. The intermediate term and primary trends are identified by the red arrows below, Fair Value by the thick blue line.

If you compare fair value with last month’s update, you can get a good idea of how much earnings and tax cuts are helping the market. 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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Dak Hartsock

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ACI Wealth Advisors, LLC
Process Portfolios, LLC

Markets in Minutes October 2017

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Markets in Minutes: October 30, 2017

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 October 1 – October 30, 2017

Investor Learning: “Over the last few decades, investors’ timeframes have shrunk. They’ve become obsessed with quarterly returns. In fact, technology now enables them to become distracted by returns on a daily basis, and even minute-by-minute. Thus, one way to gain an advantage is by ignoring the “noise” created by the manic swings of others and focusing on the things that matter in the long term” Howard Marks, Oaktree Capital

S&P 500: +2.1% since September 30, +16.9% year-to-date. The S&P 500 continued its strong run on the back of earnings expectations and news of tax reform. Earnings have continued to be positive across most S&P sectors with the market shrugging off the impact of a string of natural disasters. Economic data remains positive, with the 3rd quarter Gross Domestic Product (“GDP”) printing at 3%. The prospect of tax cuts and continuing efforts to reduce regulation are supporting the markets despite what appears to be a worsening geopolitical situation abroad and continued partisanship at home. Both the primary and intermediate uptrends are intact.

Bonds: The 10 year treasury yield rose slightly to 2.37%, up +1.7% for the month, with some interesting gymnastics in between. In the last week of the month, yield rose as high as 2.46% as investors demanded more premium to buy treasuries given the appearance of a strengthening economy and the prospect of slightly higher rates by year end. Yields are currently low enough that long duration bonds (more than 5 years) should be examined to make sure they are in your portfolio for a specific reason. It is still a good time to compare corporate bonds with highly rated municipal bonds in both the taxable and exempt spaces.

Gold: Down -0.7% for the period after a failed breakout above $1260. Gold peaked in early September on North Korea nuclear fears and a falling dollar. Gold may have moved out of counter trend rally mode to enter a range trade as gold bugs wait for stronger inflation numbers or the next geopolitical crisis. If a spike occurs, $1260 still looks like a good place to reduce bets on higher gold prices. If gold falls below $1138 it’s likely the larger down trend will reassume control of price. As before, a sudden large scale geopolitical event is likely to cause a rapid spike in price. In my view, that spike is likely to be temporary and be a selling opportunity.

World Ex-US: +2% for the month, +20.8% year-to-date and continuing to show strength. The theme driving this is a combination of Europe recovery thanks to very low interest rate policies and lower than US valuations which analysts think leave room for what’s called PE expansion – meaning European equities can go up farther than US equities can before entering bubble territory. My view on European/Asian/Emerging market stocks/economies remains negative, perhaps incorrectly. I’m bullish on the US, and don’t like risks in emerging economies. I do not have a favorable long term view of Europe’s ability to generate real growth.

US Dollar: USD +1.6% for the period (down -7.7% year-to-date). The Buck hit the low for the year on 9/7 but began to gain strength as rumors of the Administration’s push for tax reform before year end began to circulate. When rumors were confirmed and the Legislature seemed to clear a path towards tax reform before year end, the dollar managed to break through $94, potentially setting up a run at $97. From the standpoint of earnings, it would be better for the dollar to weaken further, and unless it’s able to sustain a move above $97/$98, it’s likely we’ll see the dollar revisit the September lows and possibly fall farther down the road. The bottom line is dollar weakness has been a positive for US multi-nationals for the most of the year and we may see that continue over the next couple quarters.

Commodities: Oil was up +5.8% for the month, continuing a run to the top of the range from the $42.05 low we saw in late June. My expectation is for this rally to run out of steam soon. So far, oil has been holding solidly in the range expected for 2017 ($40 – $60/$65). I think oil will have a hard time staying above $55 a barrel before spring. The rise in oil has been a help to energy producers, but the price is still favorable to US consumers and therefore the US economy. Copper futures rose by +5.6% as the economy continued to chug along, suggesting the notion of industrial expansion is still solid.

EconomyConsumer prices rose 0.5% in September mostly on rising gas prices, with prices excluding food and energy food up about 1.7% in the last 12 months. This inflation rate is about in-line with the Fed mandate and should help keep rate raises gradual. Industrial production rose incrementally in the September reporting period and the two core components of the economy, manufacturing and services, both remain solidly in expansion mode.  The official unemployment rate fell -0.1% to hit 4.1% in October. Despite that, wage inflation has remained moderate at +2.9% vs. a year earlier. This has put the US in a sort of sweet spot—moderate inflation, rising employment, low interest rates, rising GDP and corporate earnings.

Earnings: Q3 earnings season is in full swing and most companies are hitting expectations so far. The earnings expansion that began last year looks likely to endure at least through year end. This is a positive, although valuation is now a concern.

Market Valuation: Valuations are more than stretched in many sectors, and near term value is very difficult to find. Interest rates are still near historic lows and the Fed Chair, at least this one, seems to understand the risks aggressively raising rates poses to the economy. Valuations are a rising risk but with earnings still strengthening and a strong possibility of tax cuts before year end, valuations are not likely to cause a serious (or enduring) sell off. However, the market remains in a price zone that requires measurable earnings acceleration and tax cuts to sustain prices. So far at least, earnings appear to be holding up their end. If earnings stumble, the market will take notice.

Recession Probability Indicator: The most recent reading on the RPI is 12 and indicates 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 is once again overbought on weekly basis for the 3rd time this year (Feb, June and now October). As before, this suggests a potential near term top. Previously overbought situations resulted in mild pullbacks that represented buying opportunities. The underlying uptrend is intact and continues to be supported by both rising earnings and low interest rates, and so any decent pullback is still a buy opportunity.

Fair Value has risen to $213.75 or so on the S&P proxy SPY, but I would not look for the index to fall that far should a correction ensue. As before, barring a nasty fiscal/policy surprise, the weight of data suggests that pullbacks more than 5% are likely buying opportunities, even in the face of geopolitical events. 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 fundamental, standpoint.

SPY Chart (S&P 500 Proxy)

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To Smarter Investing,

Dak Hartsock

Market Strategist

ACI Wealth Advisors, LLC

Process Portfolios, LLC

 

2nd Half 2017 Market Outlook & 1st Half Results

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ACI 2nd Half 2017 Market Outlook & 1st Half Results

It’s been an interesting and largely rewarding year in the markets so far as many ACI expectations have come to pass. While ACI is not in the forecasting game, it is nice when general expectations are mostly born out.

 

Expectations coming into 2017:

• Earnings would continue to rise – check.
• Interest rates would stay low – check.
• Oil would be mostly stable in the $40 -$60 range – check.
• The US dollar seemed likely to fall – check.
• The Core Equity Portfolio would return to its past form once election rhetoric passed – check.
• The Market Income Portfolio would continue to generate income numbers – check.
• We’d experience a market correction by summer – big fat X

2nd Half Outlook: Rather than a lengthy essay, here is a bullet point summary of current ACI expectations for the 2nd half. The future is inherently unknowable, especially in the very short term – therefore these expectations are also inherently limited and subject to change as a result of shifts in data trends.

• Expect earnings to continue to rise.
• Oil to generally move with a range of $40 and $60.
• The dollar to stabilize a bit lower than it is currently.
• Interest rates to continue to stay low, with a max of 25- 50 additional basis points added to the Fed rate by year end.
• Inflation to remain muted.
• US consumer to continue to strengthen.
• Manufacturing to maintain stability.
• Wages to rise incrementally.
• Unemployment to fall incrementally (even as measured by U6).
• A market correction which will likely be an entry point.
• Stocks to broadly hold most gains and potentially rise into year end.
• Tax reform.

If tax cuts are taken off the table, that seems the most likely spark for an overdue pullback in the broader market, short of a nasty geopolitical surprise.

Barring recession, pullbacks in equities are still opportunities.

Corrections should also be viewed as an opportunity to evaluate longer duration bonds.

 
Portfolio Performance Table

Results are reported at an aggregate, portfolio level. Individual account results within each portfolio may differ due to several variables.

If you have questions about individual results, please get in touch.
 

Portfolio Commentary:

ACI Core Equity: + 10.6% Year-to-date. Core Equity returned to its historical form for the 1st half of the year, leading the S&P 500 despite being nearly 20% cash across all accounts. The US Dollar has lost about 8% year-to-date against a basket of global currencies, and this hurt performance in the portfolio. With valuations high, free dollars are being dollar cost averaged in, with a target 10% cash buffer held against correction. While prudent, this has certainly negatively impacted performance.

ACI Market Income: +3.4% Year-to-date. Market Income has an inherently defensive stance, and seeks to invest in sectors or indices that are trading at or below historical fair value, or that represent better relative value (and higher margin of safety) than the broad market. This led to an investment in the retail sector during the fall of 2016. Fears of Amazon have since crushed the retail sector, driving it down over -15% from the 2016 high. This has negatively impacted the overall performance YTD for Market Income. The expectation for the 2nd half of the year is for a retail recovery. We will see if reality bears this out. Income Year-to-date from the portfolio has been nearly on target, and has more than offset the unrealized, and likely short term, losses in the underlying sector equities.

ACI Full Cycle Portfolio: +4.3% Year-to-date. This portfolio is doing well for the year, and slightly ahead of targets on the strength of emerging markets, high yield corporates, and the relentless climb of most sector stocks. The portfolio risk profile continues to be approximately on par with investment grade bonds, while benefiting from sufficient stock exposure to give potential for some growth.

Durable Opportunities Portfolio: (0.9%) Year-to-date. This portfolio has a very heavy cash position because of high valuations and therefore slim purchase opportunities. Dollar losses have worked to drag down performance. The portfolio also took on a position in Ross Stores which has since been punished along with the rest of the retail sector, including another portfolio holding, TJ Maxx. In these two cases, it appears the baby has been thrown out with the bathwater. Both companies operate in a space that is Amazon resistant if not Amazon proof – curated, low cost items bought at discount and then resold at price points where shipping costs make competition from Amazon problematic. Many items are also “high touch,” meaning people want to see and hold them prior to purchase. These stores almost operate as brick and mortar Amazons – they buy in bulk at discount which insulates margin, have an ever-changing inventory which lends itself to the customer experience, and run relatively lean in terms of operating costs. They were eating the lunch of other retailers for years, and there is no indication that Amazon’s growth into the apparel or home goods space is going to change that.

Universal Insurance Holding’s strong performance in 2016 has retraced about half of the 2016 gains.

These factors have all damaged short term performance. The expectation is to see this mitigate over the 2nd half as earnings continue to gain ground at all three companies despite Amazon fears. The market is currently in love with the idea that retail has become a zero-sum game with Amazon the only winner. While it is a power in the space, online purchase accounts for less than 14% of retail purchase activity. Amazon’s market share in retail spending, while immense, is still less than 5%. The death of retail is mostly exaggerated. CLICK HERE to read a recent article on Amazon and the retail sector. 

Market Momentum Portfolio: +4.3% Year-to-date. This portfolio has been in cash since March. The expectation is for another opportunity to deploy that cash before year end.

Multi-Manager Income: +2.6% year-to-date. The portfolio is performing slightly ahead of expectations YTD in a challenging environment for fixed income.

As always, please reach out with questions or comments. Please share with one friend that can benefit from this information. Share buttons below for your convenience.

To Smarter Investing,

Dak

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

Markets in Minutes June 30, 2017

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Markets in Minutes June 30, 2017

S&P 500   10 Year Treasury   Gold   World Ex-US   US Dollar   Commodities

Markets in Minutes is intended to give our client partners and subscribers a quick and easy understanding of current market conditions.  This update covers April 15 – June 30, 2017.

Investor Learning: “Holding cash is uncomfortable, but not as uncomfortable as doing something stupid” — Warren Buffett

“It takes character to sit there with all that cash and do nothing. I didn’t get to where I am by going after mediocre opportunities.” — Charlie Munger

Markets:

S&P 500:  +4% since April 13, +6.8% year-to-date.  The S&P managed to continue to creep upward since the last update, establishing a new incremental high June 9 before pulling back slightly.  Earnings have continued to be positive across most S&P sectors and economic data remains positive.  The prospect of tax cuts and deregulation continue to support the market despite continuing global and domestic political uncertainties.  The primary up trend remains intact, with the intermediate uptrend still intact. 

Bonds: The 10 year treasury yield is down 0.02%for the period, with bond principal holding steady.  The Federal Reserve raised rates again June 14 but interestingly the 10 year basically didn’t react.  Yields finally began to creep higher the 26th after the Treasury cleared some major banks to raise buyouts and dividends, incidentally sparking a mild rally in financials.  Yields are currently low enough that long duration (more than 5 years) should be examined to make sure they are in your portfolio for a specific reason.  It is still a good time to compare corporate bonds with highly rated municipal bonds in both the taxable and exempt spaces. 

Gold:  Down 3.7% for the period after a failed run at overhead resistance at $1260.  Gold has fallen despite a weakening dollar.  Gold still appears to be in a counter trend rally and may take another run at $1260 if it can stay above $1158.  If gold falls below $1138 it’s likely the larger down trend will re-assume control of price.  As before, a sudden large scale geopolitical event is likely to cause a rapid spike in price.  In my view, that spike is likely to be temporary.

World Ex-US: Down +5.9% for the period, +12.9%year-to-date and continuing to show speculative strength.  As before, my view on European/Asian/Emerging market stocks remains negative, perhaps incorrectly.  Time will tell. 

US Dollar: USD fell -4.9% for the period (down -6.6% year-to-date).  The Buck re-visited the lower end of its range in late April and early May before staging a failed rally to $100.  It broke down in mid-May and is entering another zone of support between $94 and $95.   We’ll see what happens next, but whatever else a falling dollar helps corporate earnings. 

Commodities:  Oil fell -12.4% since the last update, drifting into the bottom end of the projected range identified in January ($40 – $60/$65).  While this makes life harder on energy producers, it’s a positive for just about everyone else.  Falling oil prices drive costs down for many manufacturing companies and free up consumer dollars to be spent or invested, net positives for the economy.  As previously discussed, OPEC has had difficulty constraining pumping among members, and a leaner American fracking industry can pump profitably at $40 a barrel and falling.  Copper futures rose by 5.3%, supporting the notion of a stable economy and maintaining most of the post-election gains. 

Economy:  Consumer prices continued to weaken incrementally, again benefiting from falling oil.  This is a positive for consumer spending.  Industrial production fell very slightly since the last reporting period, with official unemployment rate falling 0.1% to 4.3%.  Demand for qualified workers continues to rise, helping push salaries higher &supporting consumer spending along with low inflation and rising employment. 

Earnings:  Q1 earnings are in and by and large were pretty positive with only pockets of weakness (energy/retail).  This suggests that the earnings expansion that began last year may be sustainable. 

Market Valuation:  Valuations are more than stretched in many sectors, and near term value is difficult to come by.  However, with interest rates still in a range of historic lows, rising earnings, and the possibility of tax cuts before year end its unlikely valuations will drive a meaningful (or enduring) sell off.  The market remains in a price zone that requires measurable earnings acceleration and tax cuts to sustain prices.  So far at least, earnings appear to be holding up their end.

Recession Probability Indicator:  The most recent reading on the RPI is 12 and indicates 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 managed to grind almost 2% higher since February’s $240.32 high and moved briefly into another overbought scenario in early June.  It’s possible this is again signaling a near term top.  Regardless, the underlying uptrend is intact and is supported by both rising earnings and low interest rates.

Fair Value is approximately $1850 – $1900, but I would not look for the index to fall that far should a correction ensue.  As before, barring a nasty fiscal/policy surprise, the weight of data suggests that pullbacks more than 5% are likely buying opportunities, even in the face of geopolitical events.  The intermediate term and primary trends are identified by the red arrows below.  These can be reasonable entry points for index investing from a technical, if not fundamental, standpoint.   

SPY Chart (S&P 500 Proxy)

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ACI Wealth Advisors, LLC
Process Portfolios, LLC

Markets in Minutes April 30, 2017

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Markets in Minutes April 30, 2017

S&P 500   10 Year Treasury   Gold   World Ex-US   US Dollar   Commodities

Markets in Minutes is intended to give our client partners and subscribers a quick and easy understanding of current market conditions. This update covers April 17 – April 28, 2017.

Investor Learning: “We would rather underperform in a huge bull market than get clobbered in a really bad bear market” — Seth Klarman, Founder Baupost Group, 17% average annual return over 3 decades.

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Economy: The only new number of import since the last report is GDP, which came in slightly below expectations but still in growth mode. The economy continues to tick onwards and upwards, albeit slowly and below potential.

Earnings: Earnings so far have been mostly positive. The exception is a dozen or so beleaguered retail companies such as Bebe and Sears who are singularly ill-equipped to compete in the digital age. Amazon, among others, is eating their lunch (and dinner, snack, breakfast and dessert by the looks). So far my expectation of seeing earnings growth vs. same period last year holding true. This is a big positive for markets – bull markets don’t usually die from valuation issues, they die from earnings issues.

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Market Updates:

S&P 500: +2.3%since April 17, +5.5% year-to-date. The S&P has managed to hold most of the year’s gains to date as positive economic data and earnings, along with the prospect of corporate tax cuts, continue to support the market in the face of rising global and domestic political uncertainties. The primary up trend remains intact, with the intermediate uptrend still intact.

Bonds: The 10 year treasury yield closed up +1.8% for the period, reducing bond principal incrementally. Yields fell to as low as 2.18% ahead of Trump’s tax proposals, but rallied as the equity market applauded (at least initially) the proposals. I’m beginning to sound like a broken record, but keep an eye on yields when we finally see an equity correction, or if geopolitical uncertainty causes a flight to bonds (Open conflict with North Korea, a potential La Pen victory in the upcoming French elections in May). If yields drop to 2% or below, passive investments in bonds (especially those with durations more than 5 years) should be re-evaluated. As an aside, if yields fall into the 2% range, that’s a good time to think about locking in a great rate on a 30 year mortgage if you missed that opportunity last time.

Gold: Down -1.5% since the last report. From a technical perspective gold is showing some signs of strength given the geopolitical uncertainty around North Korea and now France. As before, however, buying interest is still not displaying exceptional strength and until that changes the durability of the rally should be questioned. Gold remains in a countertrend rally unless it sustains a move above $1260. If gold falls below $1180, it seems likely to keep falling for a while.

World Ex-US: Up 2.5% for the period, +9.7%year-to-date and continuing to show speculative strength. This may be a be a good year for world stocks. However, I don’t see this as sustainable. Therefore, my view on European/Asian/Emerging market stocks remains negative, perhaps incorrectly. Time will tell.

US Dollar: Fell 1.3% for the period to close at $99.04. From a technical standpoint, the USD looks to test last period’s low of $98.75. A falling dollar is good for earnings.

Commodities: Oil fell 7.9% despite incremental dollar weakness for the period but remains within the projected range. Rising supply is outstripping rising demand. As long as oil can hold above $40 per barrel on average, American producers will continue to pump oil, putting a cap on oil prices. This should hold oil in my projected range of $45 – $60/$65 a barrel for the intermediate term. Copper futures rose 1.6% for the period, maintaining a moderately tight range which is likely to hold until we get clarity on Trump’s infrastructure spending plan.

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Market Valuation: Valuations are high. But as above, valuation doesn’t end bull markets. Interest rates continue to hold in a range of historic lows, earnings appear to be gaining strength, and the possibility of tax cuts before year end seems a strong focus of the administration. These are all supportive of the market, and therefore it’s not likely that high valuations will drive a meaningful (or enduring) sell off. IF the tax cuts do not materialize, the market is not likely to appreciate it as a 10% reduction in the corporate tax rate is already priced in.

Recession Probability Indicator: The most recent reading on the RPI is 17 and indicates we are not currently in recession. The investment environment is currently stable.

S&P Technical Picture: The S&P setup continues to be suggestive of a near term top, but we’ve seen nearly two months in a relatively tight range of price movement. This “time” correction or “consolidation” period could allow earnings to push the market higher. Fair Value is approximately $1800 – $1875. The weight of data still suggests that pullbacks more than 5% are likely buying opportunities, even in the face of geopolitical risk, provided earnings strength continues. The intermediate term and primary trends are identified by the red arrows below. These can be reasonable entry points for index investing from a technical, if not fundamental, standpoint.

SPY Chart (S&P 500 Proxy)

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ACI Wealth Advisors, LLC
Process Portfolios, LLC

Markets in Minutes April 15, 2017

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Markets in Minutes April 15, 2017

S&P 500   10 Year Treasury   Gold   World Ex-US   US Dollar   Commodities

Markets in Minutes is intended to give our client partners and subscribers a quick and easy understanding of current market conditions. This update covers March 20 – April 14, 2017.

Investor Learning: “Good long-term performance results from beating the market in bad times. Caution should not be seasonal.” — Christopher Browne, co-founder, Tweedy Browne Value Fund.

Market Updates:
S&P 500: -1.9% since March 17, +3.2% year-to-date. The S&P has managed to hold most of the year’s gains to date as positive economic data and earnings, along with the prospect of corporate tax cuts, continue to support the market in the face of rising global and domestic political uncertainties. The primary up trend remains intact, with the intermediate uptrend still intact.

Bonds: The 10 year treasury yield closed down -1.2%% for the period, pushing bond principal up incrementally. The rate raise in March sparked a mild rally in bonds, probably supported by rising geopolitical tensions. If yields drop further due to a potential equity correction or in response to a geopolitical event, passive investments in bonds (especially those with durations more than 5 years) should be re-evaluated. As an aside, municipal bond yields are now approximately level with corporate bond yields in some classes. If you have significant corporate bond positions it might be a good time to compare with municipals.

Gold: Up +4.9% for the period, and still experiencing what appears to be a counter trend rally with a tailwind from a falling dollar this week and increasing geopolitical risks. Buying strengthened on nuclear rhetoric out of North Korea and may have positioned gold for a run to resistance at $1260. Buying interest is still not displaying exceptional strength and until that changes the durability of the rally should be questioned. Gold remains in a countertrend rally below unless it sustains a move above $1260, but a sudden rise in geopolitical uncertainties could cause an equally rapid spike in price.

World Ex-US: Down -0.5% for the period, +7.0% year-to-date and continuing to show speculative strength. My view on European/Asian/Emerging market stocks remains negative, perhaps incorrectly. Time will tell.

US Dollar: USD rose slightly for the period (+0.3%) but has shown a fair amount of volatility with moves in both directions. From a technical standpoint, the USD made a lower low at $98.86 but rallied off support, setting up a potential range between $98.75 and $102.25. Reminder – falling dollar is good for earnings.

Commodities: Oil rose about 7.4% since the last report but still within the range identified in the December 19, 2016 edition of MIM. Outages in North Sea production early in the month and increased military activity in the Middle East combined with a recent dollar weakness to support the move. As before, my view is that American producers will continue to produce supply above $40 a barrel, keeping oil within a projected range of $45 – $60/$65 a barrel for the intermediate term regardless of OPEC agreements on constraining production. Copper futures fell by 4.5% as uncertainty about the speed of the Trump infrastructure agenda surfaced in the markets, but continue to hold most of the post-election gains.

Economy: Consumer prices weakened somewhat unexpectedly in the period, mostly on the back of falling gas prices. This is a positive for consumer spending. Industrial production was unchanged since the last reporting period, while job gains slowed slightly but drove the unemployment rate down to 4.5%. Demand for qualified workers is rising, helping push salaries higher, also supporting consumer spending.

Earnings: We are on the cusp of 1st quarter earnings reporting, and should see growth vs. the same quarter in 2016. Expect earnings to fall from last quarter – the 1st quarter has been slower for years following a 4th quarter spending hangover in consumers.

Market Valuation: Valuations are still stretched, but with interest rates still in a range of historic lows, rising earnings, and the possibility of tax cuts before year end its unlikely valuations will drive a meaningful (or enduring) sell off. The market remains in a price zone that requires measurable earnings acceleration and tax cuts to sustain prices.

Recession Probability Indicator: The most recent reading on the RPI is 17 and indicates we are not currently in recession and the investment environment is stable.

S&P Technical Picture: The S&P has worked off the previous overbought condition by virtue of time passing. Conditions still support the idea of a near term top, but the underlying uptrend is not currently at risk. Fair Value is approximately $1800 – $1850, but I would not look for the index to fall that far should a correction ensue. Barring a nasty fiscal/policy surprise, the weight of data suggests that pullbacks more than 5% are likely buying opportunities, even in the face of geopolitical events. The intermediate term and primary trends are identified by the red arrows below. These can be reasonable entry points for index investing from a technical, if not fundamental, standpoint.
SPY Chart (S&P 500 Proxy)

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ACI Wealth Advisors, LLC
Process Portfolios, LLC

March 20 2017 Markets-in-Minutes

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Markets in Minutes  March 20, 2017

Markets in Minutes is intended to give our client partners and subscribers a quick and easy understanding of current market conditions.  This update covers March 1 – 17, 2017. 

In this update:  S&P 500, Bonds, Gold, World Stock Market, US Dollar, Commodities, the Economy, Recession Probability Indicator, & S&P 500 chart. 

Investor Learning:  “Your ultimate success or failure [in investing] will depend on your ability to ignore the worries of the world long enough to allow your investments to become successful.” – Peter Lynch. 

 

Market Updates:

 S&P 500:  +0.2% for the period, +5.3% year-to-date.  The S&P made an incremental new high on the 1st on the back of the largest overbought condition for the year so far, but the only thing that has changed since the last update is the Fed Funds target rate has increased by 0.25%.  The market continues to be supported by the promise of tax cuts & deregulation and an improved earnings picture.  As I’ve said, the market appears to have priced in a corporate tax rate of 25% or perhaps even 20%.  Look for volatility if the promised tax cut is meaningfully smaller, doesn’t materialize or is overly delayed.   The markets are showing signs of a near term top again as we saw in mid-December.  This suggests another period of consolidation such as December 9 until February 13, or we will finally see a pullback.  I’m leaning near term pullback.  A correction of 5% or more is a buying opportunity under current conditions.  The primary up trend is remains in control above $182 on the SPY, $1820 on the S&P.

Bonds:  The 10 year treasury yield closed up 2.9% at 2.53% from the prior period, pushing bond principal down incrementally.  The 10 year hit a high of 2.62% before pulling back.  With the economy likely to tolerate the Fed’s planned 2 additional 2017 rate hikes, passive investments in bonds (especially those with durations in excess of 5 years) should be carefully considered.  If yields drop because of an equity correction, it may benefit investors to have a hard think about longer duration bonds.

Gold:  Down -1.83% for the period after hitting a low of $1153 on 3/10, but +6.7% year-to-date.  The most recent action suggests gold may be trying to find a near term range trade as it held above its January low.   Regardless, it will stay positioned within a larger counter trend rally structure unless it can sustain a move above $1260.  Buying interest still doesn’t show commitment.  This may become a problem for gold bulls at or above $1195 if it makes it that far.  As before, recent dollar weakness is providing some support for gold and other commodities. 

World Ex-US:  +2.64% for the period and 7.6% run year-to-date.  World Ex-US stocks offer the distinction of good historical value at current valuations with the caveat that there are more unknowns in investing outside the US and also several knowns that are probably negative.  Rising rates in the US are not great for the rest of the world, particularly emerging markets.  My view, which may or may not be accurate, is that the US markets, despite uncomfortable valuations in some areas, will continue to benefit from capital flight from less stable markets over time.  My negative view on European/Asian/Emerging market stocks is unchanged despite gains year-to-date.  Time will tell if this is the correct perspective.  

US Dollar: USD began to fall March 10, but is flat for the period.  A stable dollar is better than a rising dollar, and a falling dollar even better at least where earnings are concerned.  Interestingly, the dollar has fallen about -2% from its March 9 high in the wake of a less than aggressive Fed plan to raise rates.  From the market’s perspective, it would be nice to see the dollar continue to show some weakness, but given other factors the higher likelihood is the dollar holding most 2016 gains and perhaps even moving higher at some point.   

Commodities:  Oil fell -8.8% for the period despite a -2% fall in the dollar, but still within the expected range I’ve talked about in the past.  The reality is that oil producers outside the US are not going to be able to consistently hold down supply with agreements.  There will be cheaters, and when prices are high enough to show profit (about $40) American producers are going to pump.  This is a benefit to US consumers and companies that use petroleum products in their supply chain. Copper futures rebounded from the March 9 low to finish the period down slightly, but barring a shock of some kind seem likely to hold most of the post-election gains.    

 

Economy:  Recent Fed data continues to support the notion of a slowly expanding economy, with Real Retail and Food Services Spending pulling back slightly in February as the holiday credit card hangover does what it does, but still moving upwards.  The March US Manufacturing report (ISM) also showed its sixth consecutive month of gains.   

Market Valuation:  Valuations are stretched, but with interest rates still in a range of historic lows, rising earnings, and the possibility of tax cuts before year end its unlikely valuations will drive a scary (or enduring) sell off.  However, the market is moving into a price zone that requires measurable earnings acceleration and tax cuts to sustain prices.   

Recession Probability Indicator:  The most recent reading on the RPI is 12 and indicates we are not currently in recession and the investment environment is stable.

 

S&P Technical Picture:  The S&P remains overbought on the weekly timeframe (red arrow), which hasn’t occurred since June of 2014.  Historically, this is suggestive of a near term top, but does not put the underlying uptrend (green line) at risk.   Fair Value is approximately $1800 – $1850, if tax cuts materialize the number is $1900 – $1950 but I would not look for the index to fall that far should a correction ensue.  Barring a nasty political or policy surprise, the weight of data suggests that pullbacks of more than 5% are likely buying opportunities.   

SPY Chart (S&P 500 Proxy)

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Market Strategist

ACI Wealth Advisors, LLC

Process Portfolios, LLC

Markets in Minutes December 2016

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    Markets in Minutes December 19, 2016

    This short video offers a quick survey of the major markets that normally attract US investors and a summary of their current status.  Moving forward, this update will be split into 3 markets per update. Video below.
     

    • The US Stock Market in the form of the S&P 500 (including the financial sector) — 0:28
    • The 10 Year Treasury — 2:40
    • Commodities (omitted due to time constraints)
    • Gold — 4:11
    • World Stocks ex-US — 5:19
    • The US Dollar — 7:24

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

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    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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    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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