What’s new at J.P. King Advisors, Inc.?
Our firm continues to grow—we are pleased to welcome eight new clients this quarter, which makes 25 this year. Thank you to everyone who continues to recommend our services to friends and family.
It is bittersweet that we announce the retirement of Olivia Moore-Jones. Olivia joined the firm 3 ½ years ago with the intention of eventually retiring. The time has gone by too quickly! It has been a tremendous joy having her on the team and we will miss her dearly.
We have a new person joining the firm, Terri Coney. She will be working as our front office receptionist—welcome Terri!
We would normally be announcing our next client event for early in the year. Unfortunately though, our usual venue Round Hill Country Club is undergoing a major renovation and will be unavailable until at least May. We hope to secure another venue in February. We’ll let you know well in advance if we do.
2017 was a year for the record books. We experienced record low volatility across all asset classes and superb returns to boot. An example of the low volatility is the fact that the S&P 500 stock index did not experience a single negative month during the year. This so called “perfect” calendar year is a first in market history dating to 1928!
These past few years are a great reminder of how stock returns are not smooth each and every year; instead they are “lumpy”. Consider that U.S. Stocks returned 1% in 2015, a year we referred to as “the year that nothing worked”. Then 2016 was “the comeback story” with a 12% return. And now 2017 surpassed all expectations, returning 21.8%. Maybe an apt description for 2017 is “a shockingly good year”. When you average the past three years the return is a little over 10%, or about the long term average of the stock market. But if you contrast 2015 with 2017, 1% vs. 21.8%, you see a massive variation in returns. This reminds us of the old saying “it’s not tim-ing the market—it’s time in the market that counts”.
After lagging six out of the past seven years, international stocks finally outpaced U.S. Stocks. Performance leadership between international and U.S. tends to be cyclical. For example, international stocks beat U.S. stocks by a wide margin between 2003 and 2009. Since then, U.S. stocks have outperformed international stocks—in one of the longest streaks since 1979. Could the pendulum be swinging back the other way for a period of time—it’s very possible.
The bond market had another modest year with the U.S. Aggregate index rising 3.5%. This is not surprising given the low interest rate environment we find ourselves in. The Fed did hike rates again this quarter, marking the third increase of the federal funds rate target in 2017 and the fifth rate rise of this hiking cycle. Janet Yellen’s replacement as Fed chair will be Jerome Powell. As the new Fed chair we expect more of what we have seen before, the Fed moving rates up very cautiously. The last thing Powell wants is to spook the stock market by moving too quickly. And, with continued lower than target inflation, they’ll face pressure to keep rates low rather than normalize too fast. Look for two or three rate hikes in 2018.
Among our bond investments, our core position (DoubleLine Core Fixed Income) outperformed the index, returning 4.6%. This marks the seventh year in a row it has outperformed its benchmark index. This is why with bonds, unlike with stocks, we favor active management instead of “indexing”. Another bright spot in our fixed income portfolio was the Osterweis Strategic Income fund, returning 6%.
Last quarter we mentioned one of the newer investments we have been especially pleased with, the AQR Style Premia fund. This fund, in the “alternatives” asset class, was added to most portfolios in May of 2016. We highlighted that the objective was to achieve a return of 7% over cash, with low correlation to stocks and bonds. For 2017 the fund returned 12% with virtually no correlation to stocks or bonds. In fact, it is actually the least correlated of any position in most portfolios. From a risk management perspective, this is the ideal—investments with very low correlations to other holdings, yet capable of generating high single digit annual returns.
In fact, all of the alternative investments we own had solid 2017 returns. Two of the best were Gold, up 12.9%, and AQR Long Short Equity, up 15.7%.
The “average” J.P. King Advisors portfolio had a gain of 13% for the year, (net of all fees). This is just the average; the most conservative portfolios (Income and Preservation) were up around 6% while the most aggressive (Maximum Growth) were up around 18%. Of course past performance is no guarantee of future returns.
The biggest event, and one that will have reverberating effects for some time, will be the implementation of the new tax bill. This is the largest change to the tax code in decades. The change which will likely have the leading effect on the stock market is the lowering of the corporate tax rate from 35% to 21%.
When it comes to investing it is sage advice to keep emotions tempered. When results are weak, as in 2015, you do not want to get too discouraged. And when results are really strong, like last year, you do not want to get too excited. Emotional investing usually leads to ill-timed decisions. Markets move in cycles, it’s the natural order of things. Right now times are good, but concerns and unpredictability always remain.
With the stock markets at all-time highs, coupled with record low volatility, it’s easy to get lulled into a sense of complacency. Unfortunately, another 20%-plus return for U.S. stocks seems unlikely. (Recall that calendar year returns are “lumpy” year to year). A reasonable outlook for 2018 and beyond is one of higher risks and lower returns. Elevated valuations, low volatility, and low bond yields are unlikely to be allies for robust financial market returns over the next five years. So, as we have been counseling clients, now is probably not a good time to increase one’s risk level.
Our outlook underscores the need for investors to remain disciplined and globally diversified, armed with realistic return expectations and low-cost strategies—hallmarks of our investment philosophy. We wish you and your family a happy, healthy, and prosperous 2018!
Scott Horton, CFP® Justin Dodson Jim King, CFP® Olivia Moore-Jones Jessica Schafer, CFP®
The preceding Commentary and the following Report were prepared with data from sources believed to be reliable but no representation is made as to accuracy or completeness. Performance figures in the Commentary are gross of Investment Advisory fees. Performance figures in the Report are net of Investment Advisory fees. Past performance is not a guarantee of future results. Total return and principal value will vary. This data is for informational purposes only and not intended to replace the statements, confirms, or tax forms issued by the custodian of your assets.