Category: Individual Investor News

2018 May Broad Market Commentary

The volatile 1st quarter of 2018 is in the books, and half way through the 2nd quarter of the year the theme of volatility followed by brief periods of calm continues in the global financial markets. At this point, we continue to believe the up and down markets will continue through the summer, and likely through the end of the year.

Over the past two months we have seen the U.S. administration take on trade deals, the tech sector, North Korea and even Amazon specifically. While the developments with North Korea seem to be trending positive, trade negotiations with Canada, China and other countries have created uncertainty, and we see that reflected in performance of the US Industrial and US Basic Materials sectors. At the market close on May 16th, U.S Industrials were down -0.19% year to date and US Basic Materials were down -0.63% for the year. U.S Utilities have also suffered with the sector down -4.60% percent for the year. After numerous positive sessions over the past two weeks the S&P500 has moved into positive territory and is now up 2% year to date. The NASDAQ is up +7.17% year to date reflecting the continued strength of the technology sector. The Russell 2000 has been at, or near, record levels with the index up +5.71% year to date.

The bond market, as generally defined by the U.S Aggregate Bond Index is down -3% year to date. The bond market is under duress across the yield curve and will continue to face headwinds as the federal reserve continues to raise interest rates in 2018 and 2019.

As we have mentioned in prior updates, we believe this year’s market volatility is the result of three main underlying issues that are large in nature and will take time for the economy, markets and investors to work through over the coming year. These three issues are:

Federal Reserve Balance sheet

-Scott Fox

The Federal Reserve took drastic actions during the recession and financial crisis of 2008 and 2009. These actions included large asset purchases and multiple rounds of quantitative easing in an effort to spur economic growth. The actions were mostly effective, and helped asset prices around the world stabilize and then surge. Since these actions can’t last forever, the Federal Reserve is beginning to unwind its balance sheet as U.S economic conditions have improved. This re-positioning and selling of assets by the Fed increases the supply of bonds, and other securities, which impacts both the fixed income and cash liquidity markets (known as the money markets). Many will refer to the Fed’s balance sheet reduction campaign as quantitative tightening. We’ll call it an increase in supply, which is challenging for the markets to absorb, thereby causing prices to decrease. Of course, a decrease in the price of individual bonds causes underperformance in the asset class.

Interest Rates

-Scott Fox

With continued global economic improvement, and new Federal Reserve Chairman Jerome Powell now at the helm, the markets have become concerned that the Federal Reserve will raise interest rates at a faster pace than anticipated a year or so ago. While the expected rate increases are a normal part of an economic recovery, the fixed income markets are going through a period of repricing and adjustment following 10 years of unprecedented low rates. This adjustment period in the bond market will have an impact on bond prices, equity markets and commodities over the coming months and possibly years. It’s important to remember that it is normal for interest rates to rise and fall, but rates near zero for almost a decade was unprecedented. With continued low unemployment numbers, and rising inflation numbers, we expect the Fed to tighten rates by 25 basis points two more times in 2018. As always we continue to keep a close eye on the 10 year US Treasury bond, which is a benchmark for the yield curve. The 10-year treasury bond yield has finally risen above 3% and is now trading at a yield of 3.09%.

Inflation

-Bob Brown

Along with the low interest rates mentioned above, the U.S. economy has experienced very low inflation since the market downturn of 2007 and 2008. We have recently seen a slight uptick in inflation, and some projections that inflation could continue to increase. Inflation talk always scares the bond market because as inflation increases, higher rates typically follow. When interest rates go up, bond prices go down. Long story short, higher inflation causes fixed income portfolio managers and bond traders to re-balance their portfolios very quickly, which can cause pricing uncertainty and bond market volatility. You may recall that our belief at Copper River over the past 18 months was that inflation and interest rates would rise more slowly than many expected. This prediction was accurate, but we are now drifting closer to the consensus belief that inflation numbers and interest rates should continue a slow and steady upward movement through the summer. We are beginning to see pricing power increases in very specific sectors, but we don’t see massive broad- based inflation over the near or mid-term.

Strategy Going Forward

The normalization of the Fed balance sheet combined with expectation of higher rates and an increase in inflation will have an impact on the markets for at least the next several quarters. We will be watching these changes closely, and will strive to preserve principle and generate returns when opportunities arise. We continue to maintain our cautiously positive view of the equity markets mid-way through the 3rd quarter. We have been able to capitalize on a number of buying opportunities and will continue to deploy cash into sectors and single stocks when we feel they are “on sale”. One of the advantages of volatility is that large downswings can provide opportunities to invest at oversold levels. As we go through these transitions some of our basic strategies will be as follows:

Addressing rising rates and Fed balance sheet unwinding:

• Reduce exposure to interest rates by investing in shorter term bond holdings while continually monitoring the credit quality of issuers.

• Reduce exposure to high yield fixed income and look to reallocate more to investment grade fixed income and municipal bond portfolios. We will also consider variable rate preferred equity for those seeking dividends and interest.
• Increase exposure to floating rate debt and well managed bank loan portfolios.

Addressing the potential of increased volatility in the equity markets in 2018:

• Increase cash positioning in client portfolios to around 10% (client specific) to take advantage of the volatility and opportunities to buy equities at reduced prices. The focus will be on core equity positions and fundamental sectors. With our view that the recent volatility is market driven, we expect to see buying opportunities in key long term holdings at attractive prices.

• Reduce exposure to U.S price sensitive investments and increase exposure to U.S value related investments with a focus on solid dividend and solid revenue producers with strong balance sheets and limited debt or leverage exposure.

The principals at Copper River each have approximately 20 years of experience working in numerous market areas. Our backgrounds include: Institutional Portfolio Management, Credit, Capital Markets, Investment Banking, Institutional Investment Advisory and Proprietary Fixed Income Trading. These experiences provide us with a unique market view which helps us manage risk appropriately for each individual investor.

As always, the primary goal at Copper River is to appropriately manage your holdings per your individual risk tolerance given the current market conditions. Preserving capital, creating returns without taking excess risk and deploying capital at the right time will help accomplish long term growth and income in our portfolios. Please feel free to call us with questions, or if you would like additional information on any of the topics that covered here.

2017 Q4 Broad Market Commentary

-Dave Falicia

This was an impressive year for investors. During 2017, we witnessed consistently strong returns in nearly all markets, with relatively low volatility. There was broad based growth amongst the 10 largest world economies. China and India lead the way with Q3 expansion of 6.9% and 6.3% respectively, which is not uncommon for emerging markets. The US economy was up 3.3%, followed by Japan and Canada. Economic growth continued to be realized across all sectors and regions. The stock and bond markets reflected this.

There were several drivers of this growth. Developed regions such as the US, Europe and Japan have engaged in a great deal of economic stimulus since the recession. Emerging markets are currently being led by market and trade friendly administrations.

Going forward, we do see growth continuing broadly. We expect to see flatter returns from large US companies, as the current rate of US GDP growth seems unsustainable. The Federal Reserve will need to continue to normalize rates in order to maintain its full employment/low inflation objectives (see Scott’s piece below for more on that). We do expect strong opportunities to present themselves in small cap US equities, which will benefit from the new tax laws. Additionally, we see outpaced growth in developed and emerging foreign markets, which are behind the US in their respective economic recoveries. We remain diligent in looking for any headlines, events, or changes in global conditions that could affect our clients’ portfolios.

Sector Watch

-Dave Falicia

In terms of investment sectors over the the next 12 to 18 months, our views and beliefs are as follows:

Areas we like:
-Technology – We continue to like next generation technology which will create a positive disruption in how we live our lives. We are monitoring artificial intelligence, blockchain, robotics and battery technology (that will drive electric vehicles) and believe these areas will drive growth and expansion in the global economy. (Note Bob’s commentary below for more on AI)
-US infrastructure, Aerospace/Defense, and Financials – We see these sectors benefitting from current US policy. An increase in U.S. infrastructure spending is expected to be on the administration’s agenda in 2018 and will likely receive bipartisan support.
-Oil and Gas – We feel that there are select opportunities in the oil and gas industry, which has been underperforming over the past few years.

Areas we don’t like:
-United Kingdom – We feel that Brexit issues will decrease the UK’s influence on the European Union’s economy and will reduce its competitiveness within the region.
-US Agriculture – US agriculture should remain soft as a result of increased competition from foreign markets like Brazil and Mexico.
-Retail and Related Real Estate – Retailers and holders of related commercial properties that have not learned how to effectively compete with online retailers such as Amazon and Walmart are expected to continue their struggles in the coming years.
-Crypto Currencies – This sector will have extreme volatility until the market fully shakes out and matures. There are a lot of potential byproducts of this space that keep our analytical attention, one of which is blockchain technology. We are paying very close attention to blockchain as it will have a major impact on financial services and banking.

All of these opinions are integrated into our client portfolios on a case by case basis. If you would like more insight into our views on the markets, feel free to contact us.

Bond Market Commentary and Flattening Yield Curve

-Scott Fox

As investors know by now, President Trump has nominated Jerome Powell to succeed Janet Yellen as the Chair of the Federal Reserve. Powell is currently serving as a Federal Reserve Governor, which has led the majority of market participants to believe the Fed will continue its strategy of slow and predictable tightening of monetary policy. At this month’s meeting the Fed raised rates by 0.25%, which was expected and further validates the market’s expectation of future Fed activity.

When looking at the Treasury yield curve, it is interesting that the curve continues to flatten. A flattening curve means short term interest rates have risen, while rates farther out the curve (longer term) have fallen. The spread between 2-year and 10-year Treasury yields touched 58 basis points in November and is currently holding near that spread level. By historical standards, this is a very narrow range between the 2 and 10-year Treasury bonds. For the majority of high net worth investors, the flattening yield curve should not bring immediate concern within an overall portfolio. The question is what might the flattening yield curve mean over a longer period of time?

Many economists and fixed income experts have pointed out that a flattening yield curve could imply a pending economic slowdown as well as decreased inflation expectations. Most concerning to a high net worth investor would be the continuation of this pattern to the point that the yield curve becomes inverted. An inverted yield curve happens when short term rates are higher than long term rates. While we at Copper River don’t see this happening in the immediate future, it is something we will be monitoring closely. An inversion of the yield curve has happened in all seven of the last seven recessions in the United States.

Artificial Intelligence

-Bob Brown

Artificial Intelligence (AI) refers to the theory and development of computer systems able to perform tasks that normally require human intelligence. Technologies can be combined in different ways to:

Sense – Computer vision and audio processing. The use of facial recognition at border control kiosks is a practical example of how AI can assist with security and improve productivity.

Comprehend – Natural language processing and inference engines can enable AI systems to analyze and understand information collected. The technology is used to power the language translation feature of search engine results (i.e. Google Translate).

Act – An AI system can take action through technologies such as expert systems and inference engines or undertake actions in the physical world. Auto-pilot features and assisted braking capabilities in cars are examples of this.

All three capabilities are underpinned by the ability to learn from experience and adapt over time.The growing use of AI is enabling computers to essentially think, learn and reason more like humans and perform increasingly more sophisticated tasks.

The Google Brain division of Alphabet employed an artificial “neural network” which improved software language translation capabilities by an order of magnitude. The new wave of artificial intelligence enhanced assistants – Apple’s Siri, Facebook’s M, Amazon’s Echo – are all creatures of machine learning, built with similar intentions (NYT Magazine: The Great AI Awakening 12/04/2016) link

How can AI drive growth?

1. Intelligent automation
2. Labor and capital augmentation
3. Innovation diffusion

The global management consulting firm, Accenture analyzed 12 developed economies and found that AI has the potential to double their annual economic growth rates by 2035 by boosting labor productivity. The rise in labor productivity will not be driven by longer hours but by innovative technologies enabling people to make more efficient use of their time.

In absolute terms, advances in AI are projected to add $15.7 trillion to global GDP by the year 2030. This is an increase of 14% over baseline projections, according to PwC, a leading international accounting and consulting firm. Of the $15.7 trillion in AI-driven global GDP increase forecasted for 2030, PwC projects that about $10.7 trillion (68% of the total) will be in North America and China combined.

Risk Management

-Jim Etten

The equity markets having been on a multi-year run with the DJIA advancing from 12,938 in December of 2012 to 24,746 as of December 27, 2017. Considering this historical growth, we now need to keep the concept of risk in mind for our portfolios. Risk is defined by the potential for the change in value or circumstance. Risk can be personal (relationships), physical (walking down the street, skydiving) or in this context, financial. Risk is not a bad thing, but it needs to be recognized and properly managed. Throughout the history of human advancement risk has always been present. Without risk being taken, one can not make significant advancements. Without a certain degree of risk, portfolio returns cannot materialize.Understanding the portfolio management risk concepts of beta, risk adjusted return (Sharpe Ratio), volatility, and correlation is extremely important for investors. We will discuss some of the tools that we use for risk evaluation and risk management in future newsletters.

In Closing- 2017

As 2017 comes to a close we want to thank all our HNW clients as well as the institutional clients that have entrusted us with managing their portfolios and turned to us for investment advice.

Going into 2018 we rebranded our website to better serve our client base. Please take a look when you can and let us know what you think. We wish everyone a happy new year and all the best in 2018.

With warm regards- Jim, Dave, Scott and Bob.

“Institutional investors are reportedly turning toward ETFs, particularly ultra-short-term bond funds, as their choice du jour to equitize massive amounts of cash. Think funds like the $7.3 billion PIMCO Enhanced Short Maturity Active ETF (MINT), the$2.6 billion iShares Short Maturity Bond ETF (NEAR) and the newcomer Arrow Reserve Capital Management ETF (ARCM), with $50 million in assets. Together they have attracted more than $2 billion in combined new assets in 2017. Meanwhile, money market mutual funds have faced net redemptions this year. Joe Barrato, CEO of Arrow Funds, talks about the space and why these ETFs are winning the race.” 

—Read the full article here

Economics and Market Commentary

Sector Watch

Sector Rotation (In)

-Scott Fox

We feel that select emerging markets, namely India, should provide an investor with tremendous growth potential over the next few years.

As we look at this emerging market we see that the current Indian government is extremely pro-business and this is reflected in an economic growth cycle nearing 20% for 2016 and 2017. So far this year, the Indian stock market is up + 25%, but given the strong underlying fundamentals the outlook continues to look

extremely positive for long term and patient investors.

Below are a few key facts on the market as compiled by Forbes.

• India is world’s fastest growing economy.
• India is benefiting from the demographic dividend.
• India’s business–friendly government reforms have started.
• Households are increasingly saving money and investing in equities.
• India’s stock market may be undervalued when analyzed on its P/E ratio

https://www.forbes.com/sites/trangho/2017/04/17/the-5-biggest-reasons-to-invest-in-india-now/#22ee96f91f33

Artificial Intelligence

Rising inflation could lead to higher rates than the market is currently expecting, potentially resulting in investors moving out of the “yield-chasing” trade that has helped to bolster the sector over the past few years.

REIT’s

Over the past decade yield starved investors have flocked to the REIT sector seeking an income alternative to bonds. These investors have been rewarded, with the REIT index returning nearly 400% since 2009 and outpacing the S&P500’s total return of roughly 300% over the same time period.

That said, the chart below clearly shows how REIT’s have underperformed since the Federal Reserve resumed raising interest rates. With interest rates expected to continue to increase, and continued pressure being put on retail space from internet sales this sector should continue to be challenged over next few years.

The Amazon Effect

-Jim Etten

In our next newsletter we plan on covering in detail one of the largest seismic shifts that’s been taking place in our economy over the past few years. This shift has been taking place in the retail sector, which supports 42 million jobs, provides $2 trillion in labor income and contributes $2.6 trillion annually to U.S GDP. While the internet is the main culprit for a shift to online retail sales, one company stands out for its dominance in accelerating this shift and its continued potential to massively disrupt everywhere it decides to operate.

https://seekingalpha.com/article/4037080-amazon-effect-store-closures-everywhere

The benchmark MSCI emerging markets index advanced more than 11% last year, and this year to date gained another 14%.

https://www.onwallstreet.com/news/turnaround-for-emerging-market-dividend-etfs

Copper River Advisors- Even though we continue to see a fairly broad market rally, it is important to keep in check various risks as well as continue to deploy positions and holdings tactically in a portfolio.

The attached link provides some good insight, and a short video clip from BlackRock (world’s largest asset manager) that adequately spotlights some of the current market themes.

https://www.blackrock.com/investing/insights/multi-asset-income-monthly

2017 Q1 Market Commentary
-Dave Falicia

Since the New Year we have adjusted our client portfolios to take advantage of opportunities associated with the new political environment, as well as the shift in FOMC policy leading to a more normalized rate environment.

As a whole, the economy continues on track to recovery and expansion. Inflation remains in check, employment reports are consistently promising, as well as housing and GDP. Although we feel that they could have moved much sooner, the Federal Reserve finally started raising interest rates in order to ensure that the economic recovery is sustainable. With this in mind, we have pared a number of interest rate sensitive holdings and sectors as well as repositioned various holdings to take advantage of the Fed’s deliberate, incremental tightening pace.

We continue to monitor the market rally that has run since the election and are constantly evaluating how to best position the portfolios based on each client’s risk tolerance. Cracks in the equity rally have begun to show, as a number of the Republican agenda items have struggled to move quickly through congress. We do believe that these setbacks in the markets will continue to be minor, as the real driver of market growth has been the underlying economic growth and expansion.

With the Fed poised to raise rates, and the US markets now looking more towards economic results versus political results, we continue our emphasis on income investments that underweight interest rate sensitivity, core equity investments that help diversify risk-weighted returns, and various sector investments that take advantage of market opportunities.

Sector Investing and the Economy
-Bob Brown

Those who focus on traditional stock selection and style factors often overlook one of the most useful tools for generating outperformance: sector allocation and rotation.

Companies are grouped within sectors and companies within a given sector have similar fundamental outcomes. Corporations in different sectors will usually have differing fundamental outcomes for a given economic environment. These divergent outcomes contribute to divergent equity sector performance, and create the opportunity for generating excess return through proper sector allocation. The chart below gives a basic view how some of the major market sectors have performed in differing economic cycles.

Most investors, as well as advisors feel that economic growth is the key driver of market returns. That said, proper sector allocation as well as sector re-balancing should play a component in every investor’s portfolio.

 
Portfolio Re-Balancing. How important is it?
-Scott Fox

For many, it is counter-intuitive to sell investments that have been performing well and buy investments that have not. With respect to core holdings, historical data shows that portfolio re-balancing is extremely beneficial to an investor.

There have been many studies done on this subject, but we will use an example from the period 1977 to 2014, taking a basic portfolio that is 60% stocks and 40% bonds. Starting with $10,000 in 1977, and following two strategies – un-rebalanced and rebalanced – we can see the differences.

Over this span, the re-balanced portfolio grew to $204,000 versus $181,000 for the un-rebalanced. The un-rebalanced portfolio accumulated as much as 81% equities at one point – which would be a significant risk deviation from the original 60/40 allocation.

Additionally, over the same period, the re-balanced portfolio was actually 28% less volatile. Rebalancing ultimately helps reduce volatility while providing superior returns over long market cycles.

At Copper River, we use a disciplined approach to portfolio rebalancing. Paying close attention to our risk models, we regularly look for positions that may be over or under-weighted due to market movements, and re-evaluate those positions as they deviate.

Good article from Forbes; click here here to read.

 
Product Outlook
-Jim Etten

The most critical function an advisor performs for a client is the research and careful selection of the underlying holdings that comprise of a client’s portfolio. Given the vastness of the financial markets, as well as available products it’s easy to see why the investment selection process can seem like an overwhelming task. To give you an idea of the vastness of the markets and the products associated consider the following numbers below:

• Equities (4,000+) Listed in U.S and actively traded
• Fixed Income ( Bonds) – (30 Trillion in size) domestically with thousands of issuers
• Mutual Funds – (9,200) in U.S
• Alternative Funds and Hedge Funds – (10,000+)
• ETF’s and Index Funds – (4,800) globally

Despite the vastness in the current product selection it is also important to understand that over the past decade there have been a number of product developments that have significantly simplified the selection process for the individual investor, as well as advisors.

The most significant developments have come out of the ETF space. ETF’s have allowed an investor to hold a low cost, liquid, diversified and tax efficient fund. Over the past decade the growth of the investment vehicle has been stunning, and is a reflection of the applicability for both institutional and individual investors alike.

While markets are constantly shifting and products evolving, it is extremely important for an advisory firm to take advantage of these developments as they can provide a substantial benefit to overall return inside an investor’s portfolio.

“A total of $124 billion has poured into ETFs in the first two months of 2017, the most aggressive start to a year ever.” – Wall Street Journal

Read full report here

Firm Update
-Jim Etten

As we head into the final days of 2016, we hope everyone had a great year and reason to celebrate. For those that had a difficult 2016, we hope that 2017 brings better opportunities and a new outlook for the year ahead.

For our firm 2016 was a year of growth and a year to prepare for more changes to come. Starting in 2017 we have two advisors joining the firm, both whom bring considerable experience,knowledge as well as adding a diverse investor base to the firm. Please see “Welcome Scott and Bob below”. In addition to Bob and Scott joining in 2017, the firm will split into into two different entities to address its client base and growth.

Copper River Advisors (CRA) will remain as is and focused exclusively on exceptional portfolio construction for high net worth individuals and families.

Copper River Institutional ( CRI ) will become registered and fully operational the first quarter of 2017 and will be focused solely on advising large corporations and institional investors on investment solutions in the global fixed income markets. Given Dave’s, Scott’s as well as my own experience in the space we will pick up with our decades of institutional knowledge and we look forward to working with many of our former institutional clients.

The addition of this business will not take away from the high net worth side but will only enhance it. We will be diligently working in the bond space, identifying leading managers, product structures and best practices in an adjusting interest rate environment.

Both CRI and CRA will advise and operate in a fiduciary capacity, always ensuring that a clients needs always comes first.

Welcome Bob and Scott

Bob Brown

Brings more than twenty-five years of experience in fixed income, custody, credit and risk management working in the New York City offices of Swiss Bank Corporation, Credit Lyonnais, Security Pacific National Trust and Bank of America. Bob will be responsible for clients that reside on the East Coast and assist the firm’s presence in the Eastern region.

• B.S. in Business Administration/Finance at the University of Colorado, Boulder
• M.B.A. in Finance & International Business at the New York University Leonard Stern School of Business
• Uniform Investment Advisor Designation

Bob Resides in Manhattan and is an avid mountaineer and skier.

Scott Fox

Has 18 years of institutional market experience, having worked for Wall Street sell-side firms as well as buy-side money managers. Scott has over 10 years’ experience consulting Fortune 500 corporations, hedge funds and some of the world’s largest insurance companies on their investment portfolios. We are excited about the unique relationships Scott brings to the firm. Scott will be focused on building out the firm’s institutional product offerings and advising large global clients on their fixed income investments.

• B.S. in Business Administration from Auburn University

Scott resides in Steamboat Springs with his family. He is an avid mountain biker, snow boarder and kids coach.

Market Update
-Dave Falicia

We started 2016 with a fair amount of pessimism in the markets, but it is now ending with most of that pessimism a distant memory. Economic data now consistently depicts an economy that is on good footing, and the Federal Reserve in turn, has finally decided it is safe to begin normalizing interest rates. We leave 2016 with the stock market at record levels, and interest rates climbing back to historical norms.

Going forward, we don’t think the current bull run will be without a few setbacks. We expect the market euphoria associated with the incoming administration to wear off at some point after the inauguration, after which we will begin to see whether there is long term growth associated with it. Because of this, we expect to balance our overall opinion of domestic and global financial markets with the uncertainty the new administration brings. This will most certainly result in opportunities for our clients, of which we will look to take advantage. The first quarter of 2017 will have us focusing on those opportunities and aligning our strategy for the remaining three quarters of 2017.

Sector and Industry Update
-Jim Etten

This year brought investors a much needed boost after a somewhat sideways 2014 and 2015. Certainly, various sectors and industry groups performed well in those years, but 2016 was a bit different in that a rising tide lifted almost all boats.

The S&P 500 YTD stands at +9.0% in 2016. Of the 11 major sectors that comprise of the index all but two were positive for the year.Only Healthcare and Real Estate stood out as having negative returns. The Healthcare sector is troubled by uncertainty coming from policy decisions in Washington, and Real Estate or REIT sector plagued by a rising interest rate environment. That said, both sectors have extremely strong 3 year performance numbers and at some point will be attractive to overweight on value.

At CRA we look for value and trends when investing in sectors and certain industry groups. We execute holdings for our clients through ETF’s, which provide us with a low cost tactical tool to sector rotate and re-balance a portfolio. A few ETF’s that we are overweight going into 2017 are:

SDIV- High Dividend Tilt
IYJ- U.S Industrials
GUNR- Global Commodity

On a final note, I would be remiss without mentioning the largest market in the world, the global bond market. 2016 was a year to remember, as the Federal Reserve finally tightened, moving off their near zero policy and towards an outlook for 2-3 incremental .25 basis point tightening’s in 2017. We could cover a 100 pages on analysis of fixed income in 2016, and what lies ahead, but no one would want to read that. What’s important is yields are climbing higher, very attractive to most all investors as fixed income plays such a critical part of an overall portfolio.

That said, the steep move in the yield curve, specifically in the 10 year treasury bond over last 45 days, has sent bond prices falling. For example (TLT) or the 20 year U.S treasury bond ETF is down -13% in the last 3 months. In the second half of 2016 the year the bond market performed extremely poorly in almost all its categories.

In summary to keep this short, clients are wise to be short on duration and overweight in higher credit quality as we go thru this unprecedented transition. In the long run higher rates will bode well for almost all bond investor, but patience is needed as it will take some time for rates to reach their historical normal range. The good news is the transition has started.

Thanks for reading our quarterly newsletter, and we wish everyone a Happy New Year!

Jim, Dave, Bob, Scott