Roswell Asset Advisors, LLC

RAA Monthly

                                                                                           December 5, 2018

Market Update

We would be remiss if we first did not take a moment to honor the memory of our 41st President, George Herbert Walker Bush, on this very special day of remembrance.

God Bless America !

At RAA, we pride ourselves on providing timely information and education. 

This month's newsletter should prove to be a doozy!  Class is about to begin...

It has been another crazy month in the financial markets.

Our good friend, Mr. Market, is up to no good again.

Last weekend brought some exuberance back into the market on Monday that was quickly washed away.  On Sunday, the message from the G-20 meeting in Buenos Aires was taken as a positive step to a fair resolution of the trade war with China.  However, once some further detail of the Trump/Xi meeting surfaced on Monday, the water got clouded again and the rally quickly fizzled.  To make things much worse, a couple of key technical indicators sounded an alarm yesterday.

Please refer to the charts above.  The first is a daily chart of the S&P 500 over the past year.  The major point to highlight on the chart is that the level of the S&P 500 has crossed below it's 200 day moving average (red line) once again.  The 200 day moving average is widely followed and provides a level that should and often does act as support (where a decline will slow down or stop like it did in April and May) or resistance (where a rally will stall).  In this case, the level of the S&P did not slow or stop; it dropped firmly through the red line for the third time since October.  This is thought to be a potential bearish (market will go down) indicator.  

Another way moving averages are used is to gain a sense of the health of the market by measuring the slope of the line.  The slope of the line can indicate if the direction of the market is likely to continue or reverse course.  Generally speaking, when the slope is upward and to the right, it is considered to be supportive to a rising market.  You will notice that the line was sloping upward and to the right from February all the way to mid October when the market hit it's recent peak.  Since that peak, you will notice that the line has become very flat (circled in black).  This indicates a potential change in direction for the S&P.  I hope that makes sense so far.  Now we know that the S&P 500 is trading under it's 200 day moving average.  So, what now?  Often times what happens next depends on whether another supporting technical indicator triggers to support and strengthen the warning indicted by the original indicator.  Looking at the chart again, you will see a blue (maybe purple) line. That is the 50 day moving average.  The first thing I will point out is the slope.  The fact that it is sloping down means that the health of the direction of the market may not be good.  More important to note is the fact that the 50 day line (blue/purple) looks to be on a crash course to cross the 200 day line (red).  That is typically not a good thing.  So not good that the two lines crossing has been given a pretty easy to understand nickname...The dreaded "Death Cross".  A death cross is a chart pattern indicating the potential for a major selloff.  We will be watching the action over the next few weeks to see what happens.

The second chart is the price of the 10 year US Treasury bond.  The first thing to mention is that as prices of bonds go up, yields go down.  Also, we need to remember that US treasury bonds are seen as a safe haven when uncertainty is in the air.  Lastly, as you may have learned in Economics 101, supply and demand determine price.

Interest rates have been in rally mode (prices down, demand down) until that quickly reversed in the past week or so.  Suddenly, the price of 10 year treasuries popped (yields down, demand up).  Let's go back to what we just learned about the 200 day moving average.  If you look at the red line on the chart, you will notice that the price rose above the 200 day moving average...seen as a potential positive for a price rally (yields dropping).  The major difference here as opposed to the S&P 500 is that both the red line (200 day) and blue line (50 day) are still sloping down and to the right indicating this may only be a correction and we will continue in the same direction.  You will also notice that the 50 day (blue line) is nowhere near the red line (200 day).  Therefore, the 2 lines are not likely to cross giving support to the current indicator.

In summary, we are cautious.  We see the potential for more downside risk in the stock market in the near term and we are not overly concerned about a continued rally in bonds sending interest rates lower.  

OK, one last thing to discuss that happened yesterday that sent the markets into a spiral...

For the first time in a very long time we saw "yield curve inversion".  Truthfully, we think this was way overblown.  A true inversion of the yield curve is when long term rates are lower than short rates.  Historically, economists measure the yield of 2 year treasury notes versus 10 year treasury bonds.  Current yields are 2.83% and 2.98% respectively and NOT inverted.  What occurred yesterday was a slight inversion between 2 year and 5 year treasury notes.  They both ended the trading day at a 2.83% yield.  The importance of the inversion of the yield curve is that it typically indicates that we are headed for a recession.  It has been a reliable indicator.  The inversion did lead to recession shortly after occurring in 1981, 1991 and 2000.  However, the inversion that occurred in late 2005 was a bit early.  It was over 2 years before the economy slipped into recession following the financial crisis in 2008.  Fear of the potential unknown consequences is adding more fuel to the fire and creating more concern about uncertainty.

So here we are now...We quickly went from some level of certainty to another case of the Uncertainty flu.  We can't say it enough...Mr. Market does not like uncertainty!

Generally speaking, we still believe strongly that stocks offer the best potential for growth over the long-term.  However, we still plan to maintain our more conservative stance and the use of lower volatility investment vehicles. We are more concerned about avoiding the large losses than chasing the big gains.  We will not always get it right and there will always be winners and losers.  I think Peter Lynch taught us well back in the days at Fidelity.  Here are a few of my favorite Peter Lynch quotes:

"You should invest in several stocks because out of every five you pick, one will be very great, one will be really bad, and three will be OK."

“Know what you own, and know why you own it” 

"A sure cure for taking a stock for granted is a big drop in the price"

A few last notes on our client portfolios:  We are glad that we exited our positions in energy focused investments in mid-October when our Spidey senses were tingling telling us something was up.  That turned out to be a good move as we recently saw oil trade down to below $50 from above $70.  

We also exited most of our direct exposure to banks.  Banks were supposed to be a no-brainer as interest rates were to continue rising.  That did not turn out to be the case at all.  We saw regional banks like SunTrust and Regions hit 52 week lows yesterday.  Lastly, we avoided much of the wash out in the NASDAQ and technology stocks in general. 

We continuously follow market research and are always looking for new ideas.  We plan to continue to take a global approach with a positive view of emerging markets.

 

If you have any questions, please call or email us.

 

Let's Talk About Risk

We have had several clients come to us this year asking for ways to avoid market risk in their portfolio.  This has spearheaded a yearlong venture in which we committed to finding resources and solutions to utilize to help better identify and isolate risk in our client's overall financial plans.  There are several risks involved in the financial planning process;  loss of life, investment risk, longevity, sequence of returns risk and the increasing cost of health care to name a few.  For now we are going to focus on investment risk.

Here is what we came up with...

First of all, too many investors are enamored with advice from Clark Howard, Suzy Orman and others to just buy low cost index funds or ETFs and grin and bear it.  Although a fantastic strategy for the younger investor in their prime retirement savings years, this is not as compelling for those unwilling to stomach large losses.  This is particularly important for near retirees and retirees.  That being said, we’d like to pose a question to everyone reading this newsletter...Please send us your answers. We would love to collect the data. Ok, ready?

Multiple choice question:

Which investment strategy would you prefer?

A. 50% of the upside and 0% of the downside of the S&P 500. for example, if the S&P is up 10% you get 5%. If the S&P is down 10% you get 0%

B. 100% of both the upside and downside of the S&P 500. for example, if the S&P is up 10% you get 10%. If the S&P is down 10% you lose 10%.

Thank you in advance for your responses.

 

To address and improve our ability to assess risk and better understand the appropriate amount of risk to employ in your portfolio, we have recently purchased groundbreaking new software from Riskalyze.  Riskalyze invented the Risk Number®, an alignment tool for financial advisors to quantitatively measure investor risk tolerance, risk capacity, and portfolio risk on a scale from 1 to 99.

Below is a snippet from a sample Risk Number report.  For reference, the Risk Number for the S&P 500 is a 73.  The portfolio in the below example is less risky than the S&P 500 and has a 95% probability of a return between -9.732% and +16.02%.  In other words, the portfolio could potential lose ~10% or gain ~16% in the next 6 months.  The Riskalyze GPA is 4.0.  This is an measure of efficiency.  The GPA scale is 1.0 to 4.3; 4.3 being the most efficient.  The expected average annual return of the portfolio based on current economic conditions is 6.30%.  The annualized dividend income is 2.06%.  The annual expense of the portfolio (not including advisory fees) is 0.44%.

Stay tuned as we begin to integrate this new software into our process in 2019.  

In addition to allowing us to better assess your Risk Number, the software will allow us to send you periodic "Check-Ins" via email to assess your feelings about the market and your financial future.  Lastly, the software has state-of-the-art screens sharing capabilities that will allow us to work with over the internet.  

To better position ourselves to address concerns about market  risk and loss aversion, we have spent the year building a strong insurance offering.  We have done countless hours of research, attended several training sessions and workshops and built a solid infrastructure to allow us to offer a full menu of fixed annuity and insurance products.  We have maintained our independence and are not affiliated with any one company; allowing us to shop for products and solutions that are in our clients' best interests.  We are excited to talk to more about our new offerings in our upcoming meetings.

Financial Planning Tip of the Month

Life Insurance in Retirement

September was life insurance awareness month.  We had some great conversations and were able to provide solutions to clients that helped address several concerns.

We would like to share three cases with you.

Before we do, we want to mention that we believe that for most people with an insurable need for life insurance, term insurance is still the best choice.  However, there a many cases in which permanent, cash value life insurance can provide additional features and benefits.

First, by being independent, we were able to shop for a better policy for a client that recently left her job.  She had a Group Life policy that did not have a fixed premium.  In other words, the policy could get more expensive over time.  Not only did we find a policy with a lower premium, the policy premium will be fixed for the 20 year term and included an accelerated death benefit endorsement (ADBE) that could be used in the event that she is deemed to have a chronic, critical or terminal illness.

Second, we worked with a client that was in the peak earning years of his career, pulling in a six-figure income and looking for places to stash cash for retirement.  He is contributing the maximum to his 401(k), is participating in his employee stock ownership plan, and now is no longer able to contribute to a Roth IRA because his income is in excess of the maximum allowed.  After a few meetings and several discussions, we presented the idea of using a Fixed Index Universal Life insurance policy as a tax efficient retirement savings vehicle for both him and his wife.  We would redirect the amount they had typically contributed to Roth IRAs to this new policy.  This policy provided a solution for an additional way to save for retirement through its potential to build cash value that can be accessed in retirement (potentially tax free) as an additional income source.  In addition, the policy included a strong ADBE for chronic illness.  We uncovered in our early discussions that he feared that dementia and Alzheimer's disease run in his family.

Lastly, and most recently, we are working on a proposal for a client that is looking to replace her traditional long term care insurance (LTCi).  She is sour over the fact that her deceased husband paid for a LTCi policy for many, many years and was never eligible for benefits.  Although he lived for years later in his life with several ailments and physical challenges, he did not qualify and thus, never benefited from the policy.  In addition, he died with very little life insurance.  She does not currently have life insurance.  We spent several weeks researching a solid solution.  What we found falls into a category called Hybrid Life or Linked Benefit (Hybrid) Insurance.  With this policy, she will not only have coverage for potential LTC expenses, she will have a death benefit for her heirs if she does not have a qualifying LTC claim.  It is important to note that the amount of LTC coverage in this policy may not be as great as with a traditional LTCi policy.  However, the combination of the LTC living benefit coupled with the death benefit make it a compelling option.  Several carriers that offer Hybrid/Linked Benefit policies can circumvent the tradtional underwriting process and use a more streamlined phone interview process.

If this may be of interest to you, please contact us to arrange a meeting to review further.

 

To our clients, thank you for a terrific year.  Your loyalty, friendship and referrals are greatly appreciated.

To those reading that are not clients, we would love to see you in the new year to explore ways we may be able to help you.

 

We wish you all a very Merry Christmas.  

Have fun, travel safe and have a happy New Year

 

 

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3380 Trickum Rd, 1400-200 Woodstock, GA 30188
770.545.8801

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