My F&M

Market Commentary 1st Quarter 2017

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After a solid 2016, most markets started this year on an even stronger note, with stocks advancing more than bonds or diversifiers.
Within stocks, the strongest performer was emerging markets, and the weakest was small cap U.S. stocks. The tech-heavy NASDAQ was the strongest domestic index in the first quarter as growth stocks outperformed value, which is not unusual in such a strong market.

Valuation Risks
In an era of such widely polarized political views, markets seem to have an undivided preference for the prospect of lower corporate tax rates and reduced regulatory costs. The economy continues to expand, but earnings have languished.  The longer stocks rise faster than underlying earnings, the more overvalued stocks become. We know that must ultimately be resolved, but whether by stock prices coming down or by earnings “catching up,” we can’t discern. We know this sounds like a broken record, but given the high (and rising) valuation risk, we can only lean against the wind by holding stocks with better valuations than the overall market, rebalancing when stock allocations become overweight relative to account targets, and embracing uncorrelated assets.

Lower Costs
Something that helps regardless of the environment, however, is lower fees for investments. In that regard, we are pleased to report recent reductions in costs for six mutual funds widely held in client accounts, and in Schwab commissions for stocks and ETFs:

Fund Annual Expense Reduction
Direxion Indexed Commodity Strategy Fund 31%
Oakmark International Fund     19%
Pioneer ILS Interval Fund 5%
Schwab Fundamental Emerging Mkt ETF 15%
Schwab US TIPs ETF 29%
Vanguard Tax Exempt Bond ETF 25%

Some of these funds already had very low expenses, but all the changes are meaningful.  And these cost reductions come in addition to a very recent 29% reduction in Schwab’s commission rate for stock and ETF trades (from $6.95/trade to $4.95/trade). You may also recall that in the latter half of last year, we negotiated a reduction in Schwab’s charge to clients for mutual fund trades.

Note that some of these mutual fund expense reductions came about as a result of a new share class (or in one case, a new ETF) offered with lower fees, and getting that better rate required a fund exchange (or in the case of the new ETF, a mutual fund sale and an ETF purchase).  So some recent trades may have looked like the sale and buy of the same fund!  They weren’t. The costs of each swap were carefully studied and many smaller holdings were excluded from these swaps when the trading cost was high relative to the ongoing cost savings.

We often talk about markets and about what we do to mitigate market risks. This time, we wanted to highlight cost reductions since there has been a concentration of these cuts of late and you might not otherwise know about them. Some happened automatically, and some were the result of work on our part. But all will incrementally help regardless of the path of the market.