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STA Weekly Report – What Does Dow 22,000 Mean Anyway?

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What Does Dow 22,000 Mean Anyway?
Chart of the Week: Will Retail Woes Provide Opportunities in Retail Real Estate Stocks?
“Serving the Entire Family is Where FAs Have Robos Beat”

Weekly Technical Comment:

Dow Outperformance May Not Be a Sign of Market Strength
Dow Leadership Has Usually Accompanied Market Weakness
Dow Transports Are Weakening
Stocks Have Entered a Weak Seasonal Period
401k Plan Manager

Stocks were a mixed bag this week. The large-cap S&P 500 managed to advance nearly 0.25% while smaller stocks such as those in the Russell 2000 fell over 1.1%. Leading the charge were Financial and Utility stocks (both of which gained 1.5% or more). Energy stocks were among the laggards and lost 1%.

Today the Dow was on track for its 11th straight daily rise, as well as its 10th straight record close. Those are the longest streaks since February.

While recent market action has had a modest upside bias, the moves have been muted; by one metric, this is the quietest market since 1965. Trading volumes have fallen close to their lows of the year, while the S&P 500 has failed to post a 1% daily move in either direction since the middle of May, an abnormally long time.  The CBOE Volatility Index is trading near its all-time lows.

The Dow Jones Industrial Average has been shattering records lately. Six months after it crossed the 20,000 mark, the Dow hit 22,000 on Wednesday morning, before pulling back. It’s another milestone that might not mean much for your portfolio, but it is symbolic of the enormous bull run the market has enjoyed since 2009.

What is the Dow Jones Industrial Average anyway? 

The Dow is the oldest and most-widely followed U.S. stock market index, composed of 30 large public companies. Meant to represent a broad cross section of the market, the index is composed of a diverse group of blue chip companies such as PfizerBoeingCoca-ColaGoldman SachsWalmart, and Disney.

Why did the Dow just smash through another record?

  • Promise of regulatory and tax reform: President Trump and the Republican party have campaigned on business-friendly policies such as a lower corporate tax rate and softer regulations. If successfully implemented, investors believe that corporate earnings will increase.
  • Decent economic fundamentals: Low unemployment, slow but steady GDP growth.
  • Low interest rates: The Federal Reserve has increased interest rates three times since December, another reason to be optimistic about the economy. Nevertheless, rates are still near historical lows, meaning that investors looking to earn a reasonable return have few options besides the stock market, driving share prices higher.
  • Improved corporate earnings: Companies have been earning higher profits and expect to earn more in the future as the economy improves and business and consumer spending increase.
  • Weakening dollar: Many of the Dow’s components have large international operations. The U.S. dollar has fallen 10% since the start of the year relative to other currencies, meaning that foreign profits are worth more in dollars and making U.S.-produced goods cheaper and more competitive abroad.
  • A big factor behind the outperformance of foreign-exposed companies is the improved backdrop overseas. Buoyed by strength in Europe and many emerging-market countries, global economic growth outside of the U.S. is has shown the best pace in four years.

What does Dow 22k mean?

On the surface, not much. The number 22,000 itself is a relatively meaningless milestone and isn’t technically any different than the DJIA hitting 21,756 or 22,011. What’s relevant is the trend, and this year it’s been practically nothing but up. 

Why Dow 22,000 is not good news for most Americans

Who owns the stock market? About half of all equity is owned by the richest 1 million or so families, and another 41% is owned by the rest of the top 10%. The bottom 90% of families own about 9% of outstanding shares.

With stock markets at record levels in nominal terms, and with price-to-earnings ratios through the roof, there’s not much upside left. Returns over the next decade or two or four probably won’t match the 11% compounded annual returns I’ve received since 1977.

On the economic front, many were enthused by the employment report. Job growth topped 200,000 and was well above Wall Street expectations. Unfortunately, it was not all smooth sailing as the headline number suggested. We have previously noted how full-time jobs often go hand-in-hand with the entrepreneur class. More entrepreneurs usually lead to more full-time positions.  Unfortunately, last month our country lost 278,000 entrepreneurs. Thus it should not be surprising to note the economy gained 300,000 part-time jobs while losing over 50,000 full-time jobs. This also helps explain the disturbing lack of growth in personal income even though a gain of 0.4% had been predicted by pundits.

I am not ready to call the bull market over, but I will remind investors that excitement is highest as the roller coaster goes over the top.  Investors are emotional beings, and the recent past of the 2008-9 financial crisis plays a huge role in our attitudes. NOW is the time to engage in honest soul-searching about your tolerance for risk and your investment discipline.

Will Retail Woes Provide Opportunities in Retail Real Estate Stocks?

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After peaking in mid-2016, the rate at which U.S. corporations are filing for bankruptcy has steadily declined. However, woes for traditional retailers continue. In fact, companies in the consumer discretionary sector have accounted for 32% of bankruptcy filings this year through July 26. Specialty apparel stores, including well-known retail chains like Gymboree Corp. and Payless ShoeSource, inc., have been especially hard hit and make up nearly 8% of bankruptcy filings this year. With the challenging environment for brick & mortar stores, we have also seen U.S. store closures increase to levels that outstrip store closures during the 2008 recession.
So why is this happening at a time when the economy is still growing, albeit slowly, unemployment rates are near multiyear lows, and interest rates remain low?

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One of the culprits is ecommerce. As E-commerce has grown, so too have the challenges for traditional retail trying to compete on both cost and convenience. Our chart of the week illustrates just how steadily ecommerce is eating away at brick & mortar’s share of retail sales.

Source: U.S. Census Bureau

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Amazon alone makes up a large percentage of the U.S. retail sales done online. To illustrate how dominant Amazon has become in several retail categories, we can look at US sales of apparel and accessories. As Amazon’s market share has grown, other major retailers including Macy’s, Walmart, and Nordstrom have seen sales flatline, a trend that is expected to continue, thanks in large part to millennial shopping habits.

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To drum up more sales, traditional retail is increasingly trying to grow their online sales presence but unfortunately for many, the transition has proven difficult. As you may imagine, this seismic shift has started to have an impact on retail real estate companies and their stocks.

As the chart above shows, since July 2016, the S&P 500 Retail REIT Index has declined nearly 30%. As we currently see it, the pain experienced in retail real estate stocks since mid-2016 very well could continue, maybe for quite a while longer, but sharp declines often bring us attractive opportunities to put capital to work. While we are not saying that time is now, we are saying that it is a sector worth keeping an eye on for opportunities.

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The most compelling retail real estate companies to eventually invest in may include those that specialize in owning and leasing real estate used by service-based businesses that provide an experience. The tenants in this sector of real estate would include restaurants and movie theaters. We would favor these areas of real estate as spending at eating and drinking establishments has steadily increased since 1992 and despite the proliferation of streaming services like Netflix, box office admissions have also remained relatively consistent over the last 10 years.

Warren Buffett, for one, appears to have been watching the indiscriminate selling in retail REIT’s for quite a while and recently bought a 9.8% stake in Store Capital, a net-lease REIT that focuses on the service focused real estate segment. In fact, Store Capital has about 2/3 of its real estate portfolio occupied by service-based businesses.

However, Buffett has been wrong many times before. So before putting money to work in this bombed-out sector, it is important to realize that there are many different flavors of retail real estate. Investing in the stocks of companies that own real estate primed to benefit from macroeconomic tailwinds when they display constructive technicals and favorable valuations will help preserve capital and increase the probability that the investment will produce an acceptable rate of return.

Weekly Technical Comment

Dow Outperformance May Not Be a Sign of Market Strength

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It seems everyone in the media has been transfixed on the Dow Industrials hitting 22K. And they cite that as proof that the stock rally is alive and well. That recent Dow strength, however, is coming from a handful of high-priced stocks. Since the Dow is a price-weighted index, the highest priced stocks carry the most weight. The first is Boeing which has gained 20% over the last month; Verizon’s nearly 10% gain over the last week; and Apple’s recent gain. While that’s good for the Dow, history suggests it’s not necessarily good for the rest of the market. That’s because Dow leadership has usually been more a sign of caution than confidence. The Dow Jones Industrial Average is composed of thirty of the bluest of blue chip stocks. That’s where investors go when they’re looking for more safety. They buy lesser quality stocks when they’re more optimistic. Right now, they’re favoring the blue chips. The chart below shows that Dow leadership hasn’t been good for the rest of the market over the last decade.

Dow Leadership Has Usually Accompanied Market Weakness

The solid line in the chart above (chart 1) plots a “relative strength ratio” of the Dow Industrials divided by the S&P 500 over the last ten years. The solid gray area shows the trend of the S&P 500 by itself. Notice first the sharp jump in the ratio in 2008 during the financial crisis, as the Dow outperformed. The ratio peaked at the end of 2008 as that bear market neared completion and a new bull market started in the spring of 2009. The ratio fell for most of the time since then, as the Dow underperformed and the market rose. The next blip in the ratio took place during 2011 when the S&P 500 lost nearly 20% (first circle). There again, Dow leadership coincided with market weakness. The same thing happened during 2015 (second circle). Interestingly, the Dow/SPX ratio bottomed that August as the market weakened. After pulling back in early 2016 as the market turned up, the ratio turned higher later that year and is now at the highest level in three years. I take that as a possible sign of “late cycle” behavior as the aging bull market enters its ninth year. Chart 1 shows Dow leadership usually coinciding with periods of market weakness, not strength. The next chart (below) shows that Dow leadership sometimes precedes a market top.

A Two-Decade Look at Dow Leadership

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The chart below plots the same chart over the last two decades. But the message is the same. The Dow/SPX ratio surged during the bear market between 2000 and 2002. It peaked in 2003 as the market bottomed and continued to drop for the next three years. It started rising again in 2006 and rose throughout 2007, just prior to the financial crisis (and rose during 2008). Its next major peak took pace as the last bull market started in early 2009. The Dow/SPX ratio bottomed in the middle of 2015 (during a market downturn) and has been rising for the last two years. If the history of the past two decades is any guide, that’s not necessarily a positive sign for the market.

Dow Transports Are Weakening

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Here’s another potential problem for the Dow Industrials. While they’re hitting new highs, the Dow Transports are falling. Chart 3 shows the Dow Transports tumbling nearly -5% over the last month. In addition, the transports are threatening their 200-day average. They bounced off that major support line during May. Let’s hope they do so again. Dow Theorists like to compare the trend of the Dow Transports with the Industrials because the market is usually stronger when both are rising together. Right now, they’re not. The solid line on top of Chart 3 shows the transports underperforming the industrials by a wide margin this year. That relative strength line has reached an important testing point.

Stocks Have Entered a Weak Seasonal Period

After a normal July bounce, stocks have now entered the seasonally weak period between August and September. In fact, they’re usually the two weakest months of the year. Given some of the warning signals mentioned above, combined with short-term overbought readings, some profit-taking wouldn’t be surprising 

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Weekly Snapshot of Global Asset Class Performance

If you have any questions, please feel free to email me at


STA Investment Committee
Luke Patterson, CEO & Chief Investment Officer
Michael Smith, President
Andrei Costas, Senior Investment Analyst (Equity Strategies)
Nan Lu, Senior Investment Analyst (Fixed Income Strategies)

Financial Planning:
Serving the Entire Family is Where FAs Have Robos Beat

Wealth industry experts say a growing recognition of the value of rigorous tax efficiency across household accounts gives traditional financial advisors a potential advantage over no-frills rivals. This article, the second part of a two-part series, looks at ways advisors use off-the-shelf and purpose-built technology to provide comprehensive advice for entire families.

Household wealth management — householding for short — is the proverbial double-edged sword.

On one hand it promises clients cutting-edge efficiencies and a way for advisors to underline their lasting value. But it’s a multi-layered and difficult task, says Laura Varas of the Rye, N.Y.-based consultancy Hearts & Wallets.

Fortunately, Varas stresses, the help traditional FAs need to compete as tax-efficient household wealth managers is in view.

Varas means LifeYield. The Boston-based software maker has been kicking around for nearly a decade, first as a tax-optimizer, now also as an aid to household wealth management.

“As far as I know, they’re the only ones doing it comprehensively,” says Varas, referring to the technological underpinnings of household wealth management.

Atlanta-based SunTrust’s wealth management unit was an early adopter of LifeYield tax-optimization tools. Franklin Templeton advisors have access to LifeYield as well. And, more intriguingly, in January Morgan Stanley mentioned LifeYield among other vendors fueling the wirehouse’s efforts to modernize its service platform.

Morgan Stanley has declined to elaborate on LifeYield’s new or impending contributions to its advisor tool set. LifeYield also demurred ahead of an official roll-out of its collaboration with the Wall Street giant.

The impending deal with Morgan Stanley may mark a turning point for LifeYield, but Mark Hoffman, the tech company’s co-founder and CEO, admits uptake has been slow to date.

The reason? “The whole industry thinks in terms of single accounts,” says Hoffman.

But — as competition from lower-priced online investment and rudimentary advice offerings intensifies — advisors who grapple with tax, drawdowns, fees and other household efficiencies can save their clients “several hundred basis points a year,” Hoffman claims.

And they can distinguish themselves from rivals in the process.

This is especially pertinent to older clients, adds Hoffman, who mentions tax as potentially the greatest fixed expense new retirees who’ve set aside at least $500,000 face in the run of a year.

LifeYield user Tom Brandon of American Retirement Advisors in Atlanta specializes in retirement income strategies. He says the software lets him “show a client how we can add a significant income boost during retirement and in many cases a meaningful reduction in taxes.”

Adds Brandon: “The coordination of all accounts within a household for maximum income and minimum taxes down to the specific tax lot” is more than most families — even those that are extremely financially sophisticated — could ever handle. But using LifeYield means “we can provide this service and show that the right household decision does make a difference.”

This granular and hyper-watchful approach to his clients’ money also helps him “differentiate the value we bring” to each relationship, says Brandon, who, having recently sold about half his book, now manages nearly $90 million.

But some advisors just as committed to householding — and to making themselves stand out — are content with the technology at hand.

Scott Bishop is head of financial planning at Houston-based STA Wealth Management, which manages about $760 million. Using a suite of technologies that includes Fidelity’s eMoney Advisor, he and his colleagues use a proprietary (and trademarked) process called Planning for Retirement the RITE Way — with RITE standing for “retirement income taxed efficiently.”

Capitol Financial Consultants in McLean, Va., uses Naviplan’s cash-flow-based financial planning software to achieve household management.

“We look at all avenues for building wealth,” says Joshua Stillman, Capitol Financial Consultants president. In practice, he says this means looking for tax-planning opportunities and hurdles — “which may present themselves at any time” — while weighing things like Social Security strategies, approaches to estate planning, philanthropy and a whole litany of other factors touching on asset location, liquidity and drawdowns.

Capitol Financial Consultants, which managed $96 million at the end of 2016 and charges clients on a retainer basis, uses Naviplan “to incorporate all these various factors into one model,” says Stillman. “We then test which combination of factors results in maximizing wealth in the long-term.”

Written by: Thomas Coyle
Financial Advisor IQ

Investopedia Announcement

Scott Bishop, our head of Financial Planning at STA Wealth, was recently invited to join Investopedia’s group of expert advisors that fields questions from users of their website.  If you would like to follow Scott’s weekly thoughts on financial planning topics, check out his Investopedia webpage at the link below.

Scott Bishop, Investopedia

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Disclaimer: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by STA Wealth Management, LLC), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from STA Wealth Management, LLC. Please remember to contact STA Wealth Management, LLC, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. STA Wealth Management, LLC is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of the STA Wealth Management, LLC’s current written disclosure statement discussing our advisory services and fees continues to remain available upon request.

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