Could The Market’s Worries Be Wrong?

March 2019 Trust and Investments Market Review

Inflation and geopolitics could be viewed as the market’s biggest risks. Current worries about inflation harken back to the so-called “wage-push” inflation of the 1970s, while geopolitical risks are ever present in the markets. Brexit seems a manageable near-term concern, but the risk from a growing rivalry between the U.S. and China, both industrially and diplomatically, loom larger these days. Could the markets be wrong to worry about inflation and China? This Market Brief argues these fears might be overstated.

WAGE-PUSH INFLATION

The worry the market has over the current historically low level of unemployment is driven by a fear the pool of job candidates has become so small that the primary way to acquire the next new employee is to hire one from another firm – and the main inducement is to offer a higher wage. This competition for workers eventually becomes so fierce that businesses are forced to raise prices to cover higher wages of new hires. Hence the name “wage-push” inflation can be understood as rising wages push inflation higher.

To assess whether or not the dynamics of the current labor market are conducive for wage-push inflation, other labor metrics are more illustrative than the unemployment rate. Rather than focus on the number of unemployed, this analysis instead focuses on the number of people employed. The Employment and Wage Inflation chart at the top left of page three depicts the Labor Force Participation Rate (LFPR) and the Employment to Population Ratio (EPR) beginning in 1948 through the present and compares them to the annual percentage change of Unit Labor Costs (ULC).

The LFPR measures the proportion of people who are working out of all those who are employed or seeking employment. If you are unemployed and not looking for work, you are not counted in the LFPR. The EPR is the number of employed adults in proportion to the entire adult population, whether or not they are seeking employment.

It can be seen on the Employment and Wage Inflation chart on page three that LFPR and EPR were fairly stable until the mid-1970s, and ULC rose and fell in line with EPR. The impact of women and younger baby boomers entering the workforce can be seen in both the LFPR and EPR rising during the 1970s and 1980s. This rising supply of workers may have offset growing labor demand and staved off wage inflation. Since the early 1980s, ULC has been more stable outside of recessions.

Also displayed on the chart is the impact of the recessions following the early 2000s “tech wreck” and 2008s sub-prime mortgage crisis. As the EPR fell during recent recessions, ULC also fell, but failed to accelerate as rapidly post-recession as it did in the past. A potential reason wages did not climb rapidly could be the greater supply of workers (LFPR) is higher today compared to the 1950s, 1960s, and most of the 1970s.

Read full March Market Review.

RCB Bank Trust offers free portfolio reviews at no cost, no obligation. We’d be happy to take a look at your current portfolio and offer a second opinion to ensure you’re getting the most out of your investments.

Connect with an RCB Bank Trust Wealth Advisor in your area.

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40-Year Old’s Guide to Catching Up Retirement Savings

Chairs on a beach.

Many Americans do not have adequate savings to cover them through their retirement years.

Federal Reserve 2017 Report on the Economic Well-Being of U.S. Households

You’ve heard the advice to start saving for retirement in your 20s to reap the most benefits. That’s all well and good if you’re 20. What about if you’re 40? Can you catch up?

With 20 years ahead of you before retirement, yes, time is still on your side to build up your savings.
It’s crucial to plan a retirement income savings strategy that will provide adequate funds to cover you throughout your retirement years. You need to consider:

  • Age you plan to retire
  • Retirement goals
  • Living expenses
  • Expected life span

Talk to a financial professional you trust. They can walk you through realistic expectations, taking your savings time horizon, risk tolerance and retirement goals into consideration.

Crank up the Savings

Good news is you’re likely making more money than before. It is time to put away as much as you can into your retirement savings accounts.

  • Increase 401(k) contributions to 10-15%.
  • Max out Roth IRA contributions.
  • Cut expenses where you can to save more.

Balance your debt.

Bad news is you are likely facing more debt than before with a mortgage, multiple car payments, student loans (for you or your kids) and possibly your parent’s care. The trick during your prime accumulation years is to save as much as you can while not taking on too much debt.

  • Always pay yourself first.
  • Pay down your debt second.
  • Sparingly splurge last (minimize debt).

Create a plan.

People live longer. You need a savings strategy that focuses on sustainable income – continued growth – so you do not outlive your money.

  • Select a diversified portfolio of stocks & bonds.
  • Focus on growth that will outpace inflation.
  • Plan realistic expectations for retirement.

We offer free portfolio reviews at no cost, no obligation. We’d be happy to take a look at your current portfolio and offer a second opinion to ensure you’re getting the most out of your investments.

Connect with an RCB Bank Trust Wealth Advisor in your area.

Invest in your retirement.
RCBbank.com/GetFit

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Are We There Yet?

February 2019 Trust and Investments Market Review

Many parents can appreciate the all-too-familiar question “Are we there yet?” We can all picture the children packed in the back seat of the family minivan, anxious to arrive at their destination. Parents, despite their best efforts to placate children with promises of sweets and presents, often fail to stop the barrage of questions. Perhaps this vignette illustrates attitudes of modern day investors. “Are we there yet?” is similar to the way in which some investors question when the markets will return to “normal.” This phrase can describe the sentiment of investors looking for a reason to change their goal, measure their success, or just simply time the markets. This Market Brief doesn’t exactly answer the question, but instead seeks to reframe it more constructively.

EQUITY MARKETS

When the stock market declines 15% to 20% over a short period of time, worried investors may lament “When will things get back to normal?” just as the child asks “Are we there yet?” Very concerned investors might even sell stocks if they can’t stomach this risk. Historical average annualized U.S. equity market returns are between 10% to 12%. The typical range of returns around this average is about 15% on either side as measured by the variance of annual returns. With return expectations of between 10% to 12% in line with historical data, a typical investor might not worry when markets are down 10%, but become very worried when the decline approaches 20%.

Investors might acknowledge that losses of 15% to 20% are possible, but it’s different when they actually see it on monthly statements. To us, this thought exercise might help contextualize investors’ yearning for markets to get “back to normal.” The top left chart on page three shows the path of the S&P
500 since January 1, 2018. The pullback in late January and early February was so short lived that some investors may not have had time to react. In fact, their absence of worry was rewarded by new all-time highs achieved from August through October. However, as the drawdown from the October highs through year end approached 20%, investor reaction was meaningfully negative as measured by data
including net equity fund outflows. Though the rally off the December lows has cut the loss in half, investor sentiment may remain poor until stocks recover and then surpass the October all-time highs.

Read full February Market Review.

RCB Bank Trust offers free portfolio reviews at no cost, no obligation. We’d be happy to take a look at your current portfolio and offer a second opinion to ensure you’re getting the most out of your investments.

Connect with an RCB Bank Trust Wealth Advisor in your area.

Investment products are Not insured by the FDIC or any government agency, Not a deposit, Not a bank guarantee, subject to risks and may lose value. Market Review is published by MainStreet Advisors of Chicago, an investment sub-advisor partner.
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Crude Oil Prices: Down the Well

January 2019 Trust and Investments Market Review

Pipeline for crude oil leading to refinery

The attention of investors was squarely focused on the steep declines in U.S. stocks from late September through year end. Yet, one of the most unexpected stories of the fourth quarter was the nearly 40% plunge suffered by global crude oil prices in the final three months of 2018.

The collapse caught many market participants on their back feet in part due to the growing chorus of
commentators in the late summer calling for $100 per barrel oil. Those predictions were largely driven by expectations of steady global demand and sanctions on Iranian oil exports scheduled for early November. During one historic stretch ending in mid-November, U.S. West Texas Intermediate (WTI) crude oil prices declined for a record twelve consecutive days. Lower oil prices have historically been a positive for U.S. consumer spending given their transmission to lower gasoline prices. In the corporate sector, lower crude oil prices often result in reduced input costs for large domestic industries including airlines and chemical producers. On the other side of the ledger, lower oil prices present challenges for
companies engaged in the exploration for and production of oil as well as regional economies with significant exposure to energy sector industries.

To what can we reasonably attribute the nasty bear market in oil? Most commentators pointed to one or more of the following factors: concerns about weakening demand for oil caused by what many fear is a global economic slowdown, global oversupply driven by record U.S. oil production and the impact of temporary waivers on Iranian oil sanctions given to eight countries by the Trump administration. In our view, it seems like the latter two items best explain the lion’s share of the recent collapse in oil prices.

Read full January Market Review.

RCB Bank Trust offers free portfolio reviews at no cost, no obligation. We’d be happy to take a look at your current portfolio and offer a second opinion to ensure you’re getting the most out of your investments.

Connect with an RCB Bank Trust Wealth Advisor in your area.

Investment products are Not insured by the FDIC or any government agency, Not a deposit, Not a bank guarantee, subject to risks and may lose value. Market Review is published by MainStreet Advisors of Chicago, an investment sub-advisor partner.

 

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Are We In A Bear Market?

Bear and Bull Chess Pieces

Are we in a Bear Market?

The answer is “it depends.” While that may be the most succinct answer, it is hardly satisfying.

The classic definition of a bear market is when an investment has declined more than 20%.

For comparison, a correction is a drop of 10-20%. But, and here’s the critical part, the 20% decline needs to be measured from a specific point in time. A stock’s price could be down 20% from its price six months ago, but at the same time could be higher compared to 18 months ago. To some investors this hypothetical stock could be in a bear market (for those who invested near the top), while other investors could only be experiencing a minor pullback in a longer term bull market.

To dig a bit deeper, what does the answer to the bear market question depend on? Well, “it depends” on time — the length of the measurement period. This Market Brief reviews the year-to-date (YTD) performance of stocks and compares them with other investments over much longer periods of time to discover which investments may really be in a bear market.

Read full December Market Review.

RCB Bank Trust offers free portfolio reviews at no cost, no obligation. We’d be happy to take a look at your current portfolio and offer a second opinion to ensure you’re getting the most out of your investments.

Connect with an RCB Bank Trust Wealth Advisor in your area.

Investment products are Not insured by the FDIC or any government agency, Not a deposit, Not a bank guarantee, subject to risks and may lose value. Market Review is published by MainStreet Advisors of Chicago, an investment sub-advisor partner.
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Historical Perspectives for Mid-Terms and Markets

Touching stock market chart

During the months of September and October, some news media covering the financial markets attempted to explain performance of stock markets by asserting prices were reflecting a “typical election pattern: Though the exact phrasing may differ, one often cited explanation for near-term equity volatility by the media was that daily moves in stocks could be attributed to hope or anxiety over the results of the forthcoming election, especially if a presidential tweet recently occurred.

This Market Brief reviews activity of stock markets for the 17 mid-term election years since 1950 to see if just such an effect exists. Our analysis only focuses on this period to avoid any lingering impact from either World War II or the Great Depression that could overshadow these earlier years.

Truman was elected president in 1948, and his mid-term election occurred in 1950. Every four years after 1950 are mid-term election years. The presidents during those mid-term years are: Eisenhower (1954, 1958), Kennedy (1962), Johnson (1966), Nixon (1970, 1974). Carter (1978), Reagan (1982, 1986), Bush (1990), Clinton (1994, 1998), Bush (2002, 2006), Obama (2010, 2014) and Trump (2018). Our analysis begins by observing the path of stock prices for each of the 68 calendar years since 1950 and compares them to the 17 mid-term years to see if they are similar. Shorter time periods are also analyzed similarly.

Using charts to depict the pattern of stock prices over a year can provide high level observations. For consistency and comparability, each year is scaled to 100. We show the maximum, minimum and average to illustrate the range of performance outcomes.

Mid-terms versus all other years

In the chart labeled “S&P 500 Annual Growth of $100,” note the wide dispersion of calendar year stock returns. A conclusion that can be drawn is that there is a wide range of outcomes over the last 68 years. Let’s add a little math and statistics for further understanding. The average annual price change is 9.1%, with a standard deviation of 16.4%. Excluding dividends, 95% of the time the annual stock performance has been between approximately 41.8% and -23.6%.

The 2018 time period stands out as one of those rare years that stocks are little changed through October. Only seven of the 68 full calendar years since 1950 have experienced stocks changing between -2.5% and +2.5%, indicating that roughly one out of every ten years is flat.

Read full November Market Review.

RCB Bank Trust offers free portfolio reviews at no cost, no obligation. We’d be happy to take a look at your current portfolio and offer a second opinion to ensure you’re getting the most out of your investments.

Connect with an RCB Bank Trust Wealth Advisor in your area.

Investment products are Not insured by the FDIC or any government agency, Not a deposit, Not a bank guarantee, subject to risks and may lose value. Market Review is published by MainStreet Advisors of Chicago, an investment sub-advisor partner.
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Artificial Intelligence: A Brave New World

October 2018 Market Review

Artificial Intelligence

Many of the highest profile companies with the best performing stocks over the past two years including NVIDIA, Amazon.com and Microsoft have been world leaders in the research and development of artificial intelligence (Al). From speech recognition software, like Amazon’s Alexa, to Intel’s summer 2017 $15 billion purchase of Mobileye, an Israeli manufacturer of vision sensors for autonomous vehicles, Al-related products and concepts have begun to infuse consumer and business environments.

Al is an area of computer science that focuses on the creation of machines that can think and learn like humans. These machines can understand and speak language, recognize patterns and solve problems. Al machines create phenomenal new applications but also can cause significant disruption as they evolve. Al is based on three main components: machine learning, deep learning and neural networks. Machine learning is usually based on “trial learning” wherein machines are given large data sets and asked to repeat a task in order to achieve an objective. For example, a machine may be fed millions of images to analyze. After going through endless repetitions, the machine acquires the ability to recognize a pattern, shape or human face.

Deep learning involves machines training or learning from their mistakes. The process involves feeding a computer program massive data sets and asking it to make decisions about other data. The learning can be supervised, semi-supervised or unsupervised. Deep learning models are based on information processing or biological functioning, like human brains. Generally, some form of a neural network is developed to conduct the learning and training. A neural network is organized as a layer made up of interconnected nodes or decision points. The system learns from the output of each layer. The “deep” refers to the number of layers through which the data is transformed. Similar to a young child learning to speak, the neural net is supposed to learn how to process information via practice, trial and error.

Consumers engage with Al every day at home, at work and at play including Apple’s Sid and Amazon’s Alexa. While vehicles may not be fully autonomous yet semi-autonomous driving fleets are on the roads. Manufacturers like Tesla have connected all their vehicles with knowledge learned by one car shared across all models. Shared experiences provide a critical feedback loop in the machine learning process.

Within social media, Al works through users’ past web searches and interactions, to deliver a customized experience. Music and media streaming services like Spotify, Netflix and YouTube deliver introductions or recommended lists of new or related content based on current or previous selections. Gamers, whether on PUBG or Fortnite often play against Al powered “bots” while in some games such as Middle Earth, the Al enemies evolve based on their interaction with users. Online advertising networks and navigation and travel applications such as Google Maps or Uber were early adopters of Al technologies. Now the banking and finance industries are heavy Al users in areas of customer service and fraud protection with AI-driven emails alerting users when an unusual transaction occurs.

Looking forward, Al will likely incentivize firms to rethink their enterprise structures for sales, cyber-security, procurement, logistics and human resources. While the advancement of Al seems certain, predictions relating to workers, jobs and training are far less certain. While AI-driven technology may displace or eliminate jobs, it should not eliminate work In the near term, machine learning is most adept at replacing individual tasks. The authors of a recent paper in the American Economic Association state “full automation will be less significant than the reengineering of processes and the reorganization of tasks” leaving workers with more time for higher level tasks. While workers will need to adapt and mid-career training will become more important, difficulty in retraining may grow as the skills gap continues to widen. For many workers, more specific and advanced education may be required as roles and responsibilities evolve alongside smart machines.

Machine learning and automation will probably have lesser impacts on jobs that involve managing people, creative and design functions, technology professionals and occupations involving human or social interactions such as veterinarian, lawyer, pharmacist, nurse, school teacher, surgeon childcare and eldercare. Jobs conducted in unstructured environments such as gardeners or plumbers may also be minimally impacted. Globally, Al and machine learning may have drastically different impacts. Advanced economies may be more affected than developing ones, driven in part by differing wage levels, demand growth, industry mixes and demographics.

Predicting the long-term scope of economic change is notoriously difficult, especially given today’s rapid pace of technological change, enormous sums of capital investing in research and the speed with which new products penetrate markets. Throughout history, automation has consistently driven productivity higher, in turn driving profits and incomes higher. Higher incomes lead to greater demand for goods and services which then create newer or different jobs. This cycle continues today, only at a much faster pace and simultaneously across multiple industries and global regions. While the potential for short-term disruption from Al may be greater, the probability of unheralded innovation and growth is staggeringly higher.

Read the full October Market Review.

RCB Bank Trust offers free portfolio reviews at no cost, no obligation. We’d be happy to take a look at your current portfolio and offer a second opinion to ensure you’re getting the most out of your investments.

Connect with an RCB Bank Trust Wealth Advisor in your area.

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Listen Up! Bonds have something important to say

Market Review September 2018

SIGNALS FROM THE BOND MARKET

As summer comes to its eventual end, the parade of strong economic data continues and major domestic
stock indexes are back to, or even above, their all-time highs set back in January. With all the focus on the good news in both stocks and the economy, it is important to remember that the bond market can offer insights as well. There are some who consider the signals from the bond market to be just as important, or even more so, than those from stocks. It behooves us to pay attention as well. This Market Brief interprets the latest signals from the bond market by considering real, or inflation-adjusted, yields and the slope of the yield curve. Let’s listen.

NOMINAL VS. REAL YIELDS

Many a bond buyer has been heard wishing for the “good ol’ days” of the late 1970s and early 1980s. Back then, yields on 10-year U.S. Treasury Notes (US10) ranged mostly between 10-12%, but did get as high as 15%. Yields that high are practically unheard of in today’s domestic markets, even in high yield bonds. However, it has also been said that “it’s not what you make, but what you keep” and for bond investors what you “keep” is your yield, less inflation. The chart on the top of page three (left) shows US10 yields, inflation and a real yield equal to the US10 yield less inflation. During that same period mentioned above, real yields were as low as -4% and as high as 8%. Beginning in the mid 1980s and continuing to the present, real yields have fallen from about 9% to nearly zero today, with periods of negative yields emerging briefly in 2008, 2011, and 2012. Many investors consider the last 40 years of data and broadly infer that real yields on US10s range from 2-4%. Despite that generalization, bonds have more to say.

Why would real bond yields vary so greatly over time? And why would they ever be negative? Economic growth and inflation are the answer. If bond investors are indeed a cautious bunch, they would own fewer bonds when inflation expectations are rising (their selling pushes rates higher) because future coupon payments will be worth less after inflation. Conversely, they would own more when inflation expectations are falling (their buying pushes rates down). Since bond prices and yields adjust at differing speeds compared to growth and inflation expectations, real yields in the lower end, or below the inferred 2-4% range, could indicate bondholders believe growth and/or inflation rates may be low or decline in the future. When yields are at the high end or above this range, bondholders likely believe growth and inflation may remain elevated or accelerate. The message from today’s near-zero real bond yields could be that economic growth and inflation might not have much room to expand further.

Read the full September Market Review.

RCB Bank Trust offers free portfolio reviews at no cost, no obligation. We’d be happy to take a look at your current portfolio and offer a second opinion to ensure you’re getting the most out of your investments.

Connect with an RCB Bank Trust Wealth Advisor in your area.

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Sustainable. Responsible. Investing.

Get$Fit: Invest in the future you want.

Hand holds sustainable world
By Grant J. Goering, AIF,® AVP, Portfolio Manager, RCB Bank

 

There is a growing trend in investing — sustainable, responsible and impact investing (SRI)— that blends personal values and principles with investment choices.

Aligning investments with values.

Sustainable investors consciously choose to invest in companies that contribute to advancements in environmental, social and corporate governance (ESG) practices, e.g., clean tech, labor and human rights, anti-corruption policies.

Sustainable investing has grown 33 percent in the U.S. since 2014. That equates to $8.72 trillion. SRI now accounts for more than one out of every five dollars under professional management, according to the latest SRI trends report, published by The Forum for Sustainable and Responsible Investment Foundation (US SIF).

Sustainable investing performs in line with traditional investing.

Research also reveals a positive correlation between SRI strategies and corporate financial performance. A 2017 study conducted by Nuveen TIAA Investments found that investing in SRI strategies did not lead to a decrease in performance or an increase in risk.

The MSCI KLD 400 Social Index, one of the first socially responsible investing indexes, has performed right in line with the S&P 500.

In fact, during the February 2018 market downturn, SRI funds actually outperformed the broad market, according to Morningstar investment research company.

Wondering what impact your investments are making?

Ask your financial advisor for a portfolio review to see if your current investments include SRI companies.

Learn more about SRI at ussif.org, or speak with a financial advisor.

We offer free portfolio reviews at no cost, no obligation. We’d be happy to take a look at your current portfolio and offer a second opinion to ensure you’re getting the most out of your investments.

Connect with an RCB Bank Trust Wealth Advisor in your area.

Invest in your values. RCBbank.com/GetFit

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Bucket Approach to Investing

Bucket with money in it

Investing is a tool for building wealth.

Legendary investor Warren Buffett defines investing as “… the process of laying out money now to receive more money in the future.”

The key to successful investing is setting clear-cut goals. Know what you want, the cost to get it and how long you have to save.

We all have different comfort levels when it comes to investing our money. We call this risk tolerance. The concept of risk tolerance refers not only to your level of comfort in taking a risk, but also your financial ability to endure the consequences of loss.

Therefore, when it comes to investing, there is no one- size-fits-all strategy.  When I talk about investing with my clients, I like to use a bucket visualization. Imagine investing as three buckets.

Everyone needs to begin with a foundation – bucket one. This is your readily available cash, including your savings, emergency fund and short-term investments.

Once you have bucket one filled, you are ready to toss money into buckets two and three, your mid-term and long-term goals. The amount you invest in each bucket varies by your time horizon and risk tolerance. Bucket two consists of low-risk investments while bucket three is long-term, higher growth risk investments.

As with any plan, it is important to monitor your portfolio to ensure you stay on track with your goals.

If you plan to work with a financial advisor, make sure they are working for you with your best interest in mind. It’s important that you have an open line of communication with your advisor.

I am here to help answer questions you may have about investing even if you are not an RCB Bank customer. Feel free to call me at 918.342.7100 or email mwood@bankrcb.net.

At RCB Bank Trust, we offer professional recommendations at no cost, no obligation.

We provide a conservative approach to growing and preserving wealth tailored to your individual financial needs. Call one of our wealth advisors today and request your free review.

We offer free portfolio reviews at no cost, no obligation. We’d be happy to take a look at your current portfolio and offer a second opinion to ensure you’re getting the most out of your investments. Connect with a wealth advisor in your area.

The bucket concept was originally created by planning guru Harold Evensky. It is one of many approaches to investing.
Investment products are not a deposit. Not insured by the FDIC or any federal government agency. Not guaranteed by the Bank. Subject to risk and may go down in value.
Opinions expressed above are the personal opinions of the author and meant for generic illustration purposes only. This information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investments mentioned may not be suitable for all investors. The material is general in nature. Past performance may not be indicative of future results.
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