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To: Clients and Friends March 31, 2015 From: Patrick L. McFawn, Registered Principal Dale L. White, Registered Principal Joseph G. De Steiger, Registered Representative “Market Overview” How low can it go?? That’s the question that comes to mind when I read a recent article in the Wall Street Journal. I bet you can’t guess the topic of the article. No, it wasn’t an article on the price of oil. Although we addressed the oil decline in last quarter’s newsletter and even though the price continued to fall in the first quarter of 2015, it has seemingly stabilized a bit, around $50/barrel. Nor was it an article on the Euro currency decline versus the U.S. dollar, although it dropped significantly from $1.38 about a year ago to approximately $1.07 at the end of March 2015. It was actually an article on Switzerland government debt yields. (See, I knew you couldn’t guess that.) The article discussed the declining interest rates in Switzerland and reported that the country had become the first ever to issue 10‐year debt that gives investors a yield below 0%.¹ This means that investors are now actually paying the Swiss government to hold their money for 10 years! So…how low can it go? Apparently, it can go below zero! The article stood out to me because it just fascinates me that investors and institutions are willing to pay for the ‘right’ to lend the government money for 10 years. Sometimes I have to remind myself that there may be additional factors pushing markets (further) in certain directions. In this case, some institutions and qualified retirement plans are required to hold a certain portion of their assets in governmental debt, and this may help to maintain demand, no matter what the interest rate (or negative interest rate). But overall, it’s amazing to see this level of interest yield on government debt, and many other countries in the Eurozone are almost as low. Here in the U.S., we are slightly higher, but still hovering around all‐time lows at around 2% on the 10 year Treasury. Of course, one of the drivers of these low rates has been the Quantitative Easing programs (“QE” hereafter) here in the U.S. and abroad. And while we recently concluded our program here in the U.S., additional easing is just getting started in the Eurozone. The European Central Bank (“ECB” hereafter) announced in January that they would begin to direct national central banks to purchase 60 billion Euro in sovereign assets each month beginning in March 2015 and continue to do so through September 2016, with the flexibility to keep the program intact if the ECB deems necessary. Similar in size and scope to the QE program just completed here in the United States, this move by the ECB has pushed rates lower in Europe and has had an ancillary effect of helping to keep rates low here in the U.S. So what are the implications of these extremely low interest rates? Well, it seems like we have been beating the proverbial ‘dead horse’ on the issue, but regardless of whether rates reverse direction and start heading higher anytime soon, at this point they simply cannot go much lower, and this makes bonds in general simply a less attractive asset class. This is because bond values rise when interest rates fall, and with interest rates already so low, there is (in theory) little room for rates to continue to decline. Also, with rates as low as they are, the yield in certain areas of the bond market is simply not very attractive. Another consequence of the Eurozone easing has been a weaker Euro and a stronger U.S. dollar. This is because the Eurozone easing increases liquidity in their financial system and is seen as devaluing their currency in comparison to that here in the U.S., especially as we have completed our QE program here at home. As mentioned, the Euro/U.S. dollar exchange rate has declined significantly in the last year and almost 50% of the decline occurred in the last quarter, as it fell from about $1.21 at the beginning of the year to approximately $1.07 at the end of the quarter. We are starting to see the effects of this change in exchange rates first hand. I recently had breakfast with some long‐time friends and they explained to me how they had initially planned to take a summer trip out East, but after sitting down a month ago to work out the details, they abruptly changed their plans and now have two plane tickets booked to Italy. The primary reason for the change – the significant decline in the value of the Euro against the U.S. dollar. When they did the math, a trip to Italy this year will cost them about 22% less when compared to the same trip if they had taken it last summer! 340 E. Big Beaver Rd., Ste. 140 Troy, MI 48083 Phone (248) 619‐0090 Fax (248) 619‐7068 www.mcfawnfinancial.com Securities Offered Through Raymond James Financial Services, Inc. Member FINRA/SIPC More broadly, the impact of a weakening Euro should eventually prove to be an economic benefit in Europe in general, as the products produced by companies domiciled in Europe will be cheaper, driving up exports, growth, and profitability. On the flip side, here in the United States, the stronger dollar will initially prove to be a headwind as a stronger dollar tends to hurt the profits of multinational companies domiciled here. These companies rely on exports for a percentage of their sales and the stronger dollar makes their products more expensive abroad. These currency effects along with the effects of the QE program began to show up in the results of the equity markets in first quarter of 2015. Unlike 2014 where the U.S. was the place to be, the developed international and emerging markets showed signs of life in the first quarter, while the U.S. markets ended relatively flat, albeit with increased volatility. For the record, the following is a summary of key stock indexes and percentage changes: Market Index² Dow Jones Industrial Average (DJIA) S & P 500 Index NASDAQ Index MSCI EAFE Index (International) MSCI Emerging Markets Index 3/31/15 12/31/14 1st Qtr YTD Index Value Index Value Change Change 17,776.12 17,823.07 ‐0.26 % ‐0.26% 2,067.89 2,058.90 0.44 % 0.44% 4,900.88 4,736.05 3.48 % 3.48% 1,849.34 1,774.91 4.19 % 4.19% 974.57 956.28 1.91 % 1.91% In addition to the effects from QE and the weakening Euro, international equities benefited from the perception that geopolitical risks are slowly decreasing. The Russian occupation of parts of Ukraine has moved off the headlines, while Iran and the U.S. are reportedly close to a deal to resolve concerns about Iran’s nuclear program. Also, Greece appears to be on its way to at least a temporary resolution, with the new government entering contentious, but so far productive, negotiations with the rest of the Eurozone. And the Chinese government has been slowly implementing various stimulus programs in response to weaker than expected growth. Here in the U.S., volatility re‐emerged with the S&P 500 down ‐3.10%, up 5.49%, and down ‐1.74% for the first 3 months of the quarter, respectively.² Looking at the Dow’s performance, it actually had triple‐digit changes in more than 60% of the trading days during the quarter.³ One cause of concern for the markets was a series of poor economic reports for the quarter. Personal spending dropped, driven by declines in vehicle and retail sales. Business investment also dropped, with spending on durable goods down and manufacturing surveys indicating lower confidence. Also, the March employment report showed job growth below expectations and included downward revisions for January and February. But the weak data notwithstanding, the underlying trends continued positive. The employment market still remains strong, with jobless claims at all‐time low levels, a 5.5% unemployment rate, and job growth over the past full year above the highest level of the mid‐2000s. This job growth has also led to strong growth in personal incomes, up a healthy 0.4 percent at the end of March.⁴ And despite a gap between income growth and spending, as the savings rate rises, the sustainability of the recovery actually becomes stronger. Housing also showed improvement during the quarter, despite the snow and cold weather in the Northeast. Sales volume and prices continued to increase for new and existing homes, suggesting demand is still strong. And consumer confidence also increased from a February decline, remaining close to a six‐year high at the end of March, and suggesting improved demand over the next several months.⁴ With everything that goes on in the markets today, as an investor, it can sometimes seem overwhelming to try making sense of it all. All‐time low interest rates, effects of currency exchange rates, quantitative easing programs – all of these items can move the markets. On top of it, the market itself is not always clear on determining what is “good” news and what is “bad” news at times. However, given that it appears equity valuations are still at approximate historical averages (and potentially undervalued for international equities) and given the low/minimal interest rates for cash holdings and certain areas of fixed income, we believe it is still a time of opportunity in these markets. While volatility is likely to increase and remain at more normal levels than we have seen in the last couple of years, we may be entering a period where stock selection and active management plays a more significant role. This perspective along with maintaining a long‐term focus and an overall balanced/diversified portfolio is a great approach in achieving your goals and objectives as an investor. As always, we appreciate you as clients and friends and don’t hesitate to contact us if you have any questions or concerns on anything financial related. And if you have considered or are considering an international trip, now may be the time!! The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. Any opinions are those of financial advisors Patrick McFawn, Dale White, and Joe De Steiger and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. Investments mentioned may not be suitable for all investors. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Past performance may not be indicative of future results. ¹ Wall Street Journal, Swiss, Mexican Bond Deals Represent Milestones for Debt, April 8, 2015 ² Wall Street Journal ³ Raymond James, Jeffrey Saut, Morning Tack, April 9, 2015 ⁴ Commonwealth, March 31, 2015 Market Update There is no assurance the trends mentioned will continue in the future. Investing involves risk and investors may incur a profit or loss, including a loss of all principal. Diversification and asset allocation do not ensure a profit or guarantee against a loss. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Please note that international investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. Investing in emerging markets can be riskier than investing in well‐
established foreign markets. Please keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual Investor’s results will vary. Index Disclosures  The Dow Jones Industrial Average (DJIA), commonly known as “The Dow”, is an index representing 30 stock of companies maintained and reviewed by the editors of the Wall Street Journal.  The S&P 500 is an unmanaged index of 500 widely held stocks that’s generally considered representative of the U.S. stock market.  The NASDAQ composite is an unmanaged index of securities traded on the NASDAQ system.  The MSCI EAFE Index is a float‐adjusted market capitalization index designed to measure developed market equity performance, excluding U.S. & Canada.  The MSCI Emerging Markets Index is a market capitalization‐weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. It excludes closed markets and those shares in otherwise free markets that are not purchasable by foreigners.