May Thoughts 5.17.2016

Legacies Delivered Don Milich, Cody Hilbun, Max Dean, Senior Vice President, Wealth Advisor Financial Planner Address: Investments

Should We Sell in May and Go Away? Written by: Don Milich I first heard it said in the late 1980’s by a wise veteran at Kidder Peabody. He said, “Son, the market will do whatever it takes to prove as many people wrong as possible.” I remember I had to think for a bit to understand what he said and I brushed it off as yet another sarcastic statement from a grizzled veteran. I N S I D E T H I S I SSUE Well today I am that grizzled veteran as I firmly believe in the statement, having seen it’s truth on countless occasions. I give it almost as much credence as what I believe to be an irrefutable law of the 1 Should We Sell in May universe: “you reap what you sow, and in greater proportion.” and Go Away? So what am I talking about? Every year we hear “Sell in May and Go Away.” The belief being the market 2 Financial Repression does not do anything between May and November, so why bother? Well this year the crescendo is deafening and it made me think of that old market saw. Right now the consensus view is we are Updates from the Team 3 back to the top end of the trading range and the economy is going nowhere fast, and oh; we have a crazy election season and who knows how it will turn out. Sounds to me like everyone is lined up on one side of the market and we are ripe for a surprise.

We wanted to highlight the facts and those who have done serious research. Below are the relevant facts one needs to understand:

 According to Mark Hulbert, a famous financial journalist, “Over the past 50 years, the Dow has an average return of 7.5% from November through April [winter] versus an average loss of 0.1% from May through October [summer].”  Further investigation shows this data is skewed by a few outliers. Citing fell 37% in the summer of 2008, by 20% in 1974 and 15% in 1987, to highlight the biggest examples.  Recalling your education in statistics, using median values, winter's return is 5% versus 4% in summer. That's a very small difference. The returns in summer are typically positive, meaning you might very well sell in May and buy back higher in November.  Overall, 76% of winters since 1970 have been positive; while 67% summers are positive.

So while the -term trends may give small credibility to the concept, if we examine the last few years of 2012, 2013, and 2014, the strategy to sell in May would have severely hindered portfolio returns, as the second half of these calendar years presented very positive growth.

One doesn’t have to look far back in history to find examples when the broad market consensus was completely wrong. First, in 2013 the Fed released a statement saying they would taper the amount of their of bond purchases in the open market. In essence, starting to slow the process of QE. As usual, the bond market reacted spasmodically and within 90 days the ten year treasury went from 1.6% to 2.9%. As we entered 2014, nearly every bond manager and equity strategist was positioned for the rates to rise further. How did it turn out? 2014 was a year where interest rates fell and the on the ten year went from 3% to 2%.

The second example also had its genesis around the same time frame. As we entered 2013, sentiment was bearish with everyone expecting no compromises in Washington and it ultimately lead to a Government shutdown in October – caused by the ‘fiscal cliff’. The economy was growing but slowly. Certainly there was no reason to be invested and sentiment among the “smart money” was decidedly bearish. Well how did it turn out? The S&P had a total return of 31% in 2013. The economy accelerated, unemployment dropped, and from S&P 500 companies rose by ~11%.

Page 2 May Thoughts

Financial Repression

The financial crisis of 2008 and 2009 was a by-product of excessive levels of debt owned by consumers and industry. The non-conventional monetary policies we embarked upon transferred the debt from the balance sheets of industry and the consumer to the balance sheet of the Federal government. We now stand with debt equal to the value of GDP. There is one other time in modern American history where this has happened. After the Great Depression and World War II, US national debt stood at over 100% of GDP.

A highly relevant historical time period is between 1947 and the early 1970s. This is when the federal debt (measured as a percent of the economy) fell from over 100% down to about 30%. Post 2008, our government pursued similar policies whereby they drove down interest rates and devalued the dollar. As in post WWII America, this kept interest expenses on the national debt low and allowed the economy to grow its way out of its debt problem. However, the missing link this time is fiscal policy stimulus. Our recovery thus far has been solely driven by the Fed’s monetary policy. We’ll have to wait and see if that changes with the Presidential election.

The current monetary policy comes with a huge cost to and retirees as it limits their return on savings and safer investments. For example, in 1987 it took about $1 million invested in a money market fund to earn $100,000 worth of income. Today, it takes $70 million to earn the same level of interest. That’s a staggering difference with broad implications especially for those who are retired. The last time the US employed Financial Repression as a policy tool, the experiment lasted 30 years. We’re not saying it will be a 30 year ride this time but growth is still anemic and we believe we have multiple years of low interest rates ahead of us. Consequently, investors have been forced out on the risk spectrum to find yield. CDs, treasuries, and agency paper simply do not offer enough return. We have seen massive flows into high yield bonds and mortgage paper. While these instruments have their place, their risk reward characteristics are very different and yield-oriented investors should be cognizant.

The risk / return profiles of paying stocks definitely look interesting in precisely this situation. They combine the benefits of currently high dividend yields with historically low share price , while at the same time protecting against inflation. Historically, the gap has rarely been so wide between dividend yields and the yields on government and corporate bonds. A look at the USA since 1950 shows that dividend strategies have outperformed the wider market in times of both rising inflation (up to 10 %) and deflation.

Over time, the difference this can make for investors is staggering. We have a long standing client who loves the approach to his portfolio. His portfolio is full of these examples but here are two which illustrate the principal. In 1997 we made the following purchases for his portfolio: Abbott Labs at 6.98 (now 38.10), and Caterpillar at 19.68 (now 72.51). These investments have currently returned him 445% and 268% respectively. Just as importantly, the companies has increased during this time frame so that the current on his investment is ~15%. This is precisely why we invest in dividend growing companies for the core of our portfolios. In a prolonged low and slow growth environment, dividends can be the difference between achieving your goals and limiting your legacy.

Raymond James & Associates, Inc., member New York , makes a market in this Abbott Labs (ABT) and Caterpillar (CAT). Additionally, ABT is followed by the Raymond James & Associates Equities Research Department. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. Past performance is not indicative of future results. Dividends must be authorized by the company's board of directors. Dividends are not guaranteed and will fluctuate.

May Thoughts Page 3

Cody: Updates from the Team It’s amazing to think my Daughter London Kate is two Don: years old as of May 1st and she already has me As a parent I have learned to use FB given it’s the wrapped around her little fingers. Adrianne and I best way to keep up with my college-aged enjoyed her Birthday at the beach which is among her children. One of my favorite features is how the favorite things to do next to watching Mickey Mouse system gives you pictures from prior special Clubhouse and drinking chocolate milk. I’ve enjoyed the event. Here’s a picture of Abbie and me the “learning process” of being a first time dad and summer prior to her freshman year at continue to enjoy the experience. Auburn. Wow how things have changed! This fall she will be a senior and I am so proud of her and her accomplishments. She is a psychology major with a near 3.90 average and is doing an internship this summer in Atlanta with troubled youth. Her first day of training included a lesson on how to get out of a choke hold. Pretty sobering stuff but I am immensely proud of her.

Max: The last twenty years have brought many incredible innovations including the internet, mobile phones, tablets...and selfie sticks! Had a great time this month celebrating a friend’s birthday and yes, I managed to snap the group picture.

Legacies Delivered

Address: Perimeter Location: Galleria Location: 1100 Abernathy Road 3625 Cumberland Boulevard SE Views expressed in this newsletter are the current opinion of the author, but not Building 500, Suite 1850 Suite 150 necessarily those of Raymond James & Associates. The author's opinions are subject to Atlanta, GA 30328 Atlanta, GA 30339 change without notice. Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed. Past performance is not Phone: indicative of future results. There is no assurance these trends will continue or that Don: 770-850-4785; [email protected] forecasts mentioned will occur. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success. The S&P 500 is an unmanaged Cody: 770-673-2163; [email protected] index of 500 widely held stocks. It is not possible to invest directly in an index. Max: 770-673-2154; [email protected] Companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence. Website: www.bespokewealthmanagement.com There are additional risks associated with investing in an individual sector, including limited diversification. Investments in the energy sector are not suitable for all investors. Further information regarding these investments is available from your financial advisor. Gross Domestic Product (GDP) is the annual market value of all goods and services produced domestically by the US. Raymond James & Associates, Inc., Member New York Stock Exchange/SIPC.