Eclectic Associates Q3 Client Letter

Below is a copy of our Q3 client letter. As always, thank you for entrusting us with your financial lives. We take this responsibility very seriously and we consider it a privilege to serve you. If you have any questions, please feel free to give us a call.

Enclosed are your investment reports for the third quarter of 2016. As we look back on the last three months, what stands out is how quiet financial markets were during the summer. Yet, as September rolled around and market fluctuations picked up, it paid to be diversified. We are pleased with year-to-date results, especially considering the negative way 2016 began.

Broad financial market returns have been positive. Large-cap U.S. stocks were up nearly 4% for the quarter and close to 8% year-to-date. Small-cap U.S. stocks, emerging market stocks, and European stocks performed better than large-cap U.S. stocks. Regarding fixed-income, high-yield bonds and foreign bonds have continued to perform better than core investment-grade bonds. This has been a welcome reversal of the trend over the past couple of years when diversification had hurt investment returns.

This year’s presidential race has generated more interest and questions from clients than any we can remember. Some want to know how the election impacts our investment views and how we might adjust our positioning in anticipation of the results.

Along with sudden shocks (e.g., terrorist strikes), unexpected developments (such as the Brexit vote results), and lately, central bank actions, presidential elections can drive short-term market swings. But the longer-term impact is a different story. According to Ned Davis Research, data on election cycles from 1900 through 2012 show that during presidential election years, financial market swings have tended to be magnified in the final weeks of the campaign. This has been particularly true in years when the incumbent party lost. Once voting was over, markets have rallied going into year-end.  We are not predicting how the markets will react this year, but it is interesting to note the historical trend.

We believe long-term returns are driven by fundamentals, not short-term trading or political rhetoric. While the U.S. economy isn’t as strong as it could be, growth is positive, unemployment is down, and wages are up. Also, consumer spending is increasing, and confidence recently hit a 12-month high.

Although the next president will likely influence long-term fiscal policy, this isn’t likely to change overnight. Presidents don’t get to make decisions in a vacuum. Without knowing which policy proposals will eventually be enacted, making preemptive changes to portfolios is more likely to hurt than help.

On a personal note, our financial advisor, Travis McShane, passed the Chartered Financial Analyst (CFA®) level 2 exam in June and is already studying for the level 3 exam next year.  Jennifer Murdock, a newer member of our back office team, began taking financial planning courses this summer at U.C. Irvine, working toward the education requirement of the Certified Financial Planner (CFP®) certification. We support and encourage the continuing education of our employees.

We urge you to compare our report with the account statement you receive from your custodian. If you are not receiving statements from your custodian, please contact us.

Thank you for entrusting us with your financial lives. We take this responsibility very seriously and we consider it a privilege to serve you. If you have any questions, please feel free to give us a call.

Eclectic Investment Committee