After a volatile first quarter of 2016, markets managed to end positive for the first half of 2016. Common market barometers such as S&P 500 and Dow Jones Industrial Average gained 2.7% and 2.9% respectively, the NASDAQ Composite ended with a decline of -3%. It is important to remember that these “all stock” indices do not necessarily represent your portfolio, but they do provide interesting headlines and a glimpse of the overall health of the U.S. economy.

We’ve always recommended a balanced approach to investing, combining a mix of stocks, bonds, real estate and other investment elements to globally diversify and create a portfolio that corresponds to your risk tolerance. Now more than ever, it is important to manage portfolio risk in accordance with your overall Life Planning goals.

Where do we go from here?

World markets again experienced a short term setback toward the end of the 2nd quarter, shocked by Brexit, the U K’s referendum to exit the European Union. Global markets declined abruptly upwards of 8% over a matter of days. Thankfully the volatility was short lived, as calm settled in the markets, and the July rebound started.

During most of the past quarter, market results were muted, overtaken by fears of continued global terrorism and the U.S. Presidential election.

Not until June did U.S. stocks benefit from rising oil prices that cleared the way for energy stocks to become the best performing sector for the 2nd quarter. Investments in real estate, utilities and technology all benefited your portfolios, while investments in healthcare continued to lag the first half of 2016. The U.S. dollar remained prominent among global currencies with the British pound, Euro and Canadian dollar all falling on the news of the Brexit referendum.

Historically, a rising dollar may suggest an upcoming recession but the most recent economic evidence points to the contrary. U.S. manufacturing is clearly signaling economic expansion and the U.S. services sector grew during the 2nd quarter for a 77th consecutive month. Further, the most recent employment report was surprisingly strong, with positive job creation and unemployment stability.

Where do we go from here? So far, the 3rd quarter is showing excellent signs of investment appreciation. Markets continue to receive a perceived boost from low interest rates and energy costs. Our experts predict the cost of energy will remain low into 2017, which will benefit many areas of the economy, particularly the housing market. Home prices remain high and sales just as strong, benefitting from 70+ year lows in traditional mortgage rates. Although we remain very cautious, we are optimistic on the short term health of U.S. economy and markets.

Dividend Income an Important Factor

Traditionally, we witness investment growth in stocks focusing on technology and smaller areas of the global markets. Currently, investors seeking income are forced to either settle for “losing money in the safety of bonds” or climb the ladder of risk. In 2016, investments in dividend paying companies have outperformed those in non-dividend paying companies, hence the recent stock market rally. The yield on the U.S. 10-year Treasury recently reached a new, all-time low of 1.4% and the 30-year Treasury bond offers an unprecedented yield of 2.2%. Alternatively, the S&P 500 now has a yield of 2.1%, which is on par with 30-year bond. This is only the second time in U.S. history that this has occurred, and the first time since the Great Recession.

In an environment where there is such scarcity of relatively safe investments, it is not surprising that investors are flooding into U.S. Treasuries. It is surprising however, that a record volume (approximately 70 %) of U.S. Treasury debt went to non-U.S. investors (European and other investors seeking quality). We cannot recommend structuring a portfolio that provides 10-year dividend income at just 1.4% annually. As record sums have piled into bond investments in 2015, the latest news suggests a tremendous inflow into stock investments.

This likely explains the recent stock market appreciation, as investors are unsatisfied with low income and no growth. In such a world, we take great comfort knowing that our recommendation of stable high-quality dividend growth companies offers not only a higher dividend yield than that of the 30-year Treasury, but consistent growth of income and portfolio appreciation.

At Mason & Associates, we continue to believe in a balanced approach, recommending stock investments that pay above-average dividend income, but are in accordance with your personal risk profile. Investments that can offer reliable growth of income are scarce. Good income producing alternatives in real estate provide upside growth with superior dividend income compared to traditional bond investments.

We have recently steered away from high-cost REIT investments, focusing on ownership of actual real estate properties. These options in real estate provide actual ownership in a specific asset, possible tax advantages, diversification and good portfolio income. This is one of the many reasons we ended our relationship with Cambridge and became a “fee-only” Registered Investment Advisor. We are no longer forced to recommend investments that benefit a broker/dealer.

Is Now the Time to be Invested Internationally?

The recent Brexit vote reminded the world that there is great instability. Parts of Europe continue to struggle since the 2008 recession and global terrorism is never-ending. Events that once shocked the stock markets are being ignored; with the travesty in France and Turkey having little effect on investments. We continue to recommend some exposure to “global” investments – companies that not only have large exposure in the U. S., but to world economies as well.

Pure international investments stocks underperformed U.S. stocks during the first half of 2016. Investment spending and a potential recession caused by Brexit will have lasting effects in that region. The Japanese yen rose in value, but it hurt U.S. investors as exporters have benefited from previous weakness in the yen. Global Central Banks are challenged to find the right levers to pull, with few possibilities left as renewed concerns about the potential for competitive devaluations continue to percolate.

Therefore, because of low currency values and interest rates, now is not the time to be invested in markets outside the United States. Continued turmoil overseas is likely to remain a key factor in keeping the Federal Reserve from raising rates in the near term. The U.S. jobs market is close to the FED’s measure of full employment and inflationary pressures are gaining steam, yet the Fed will likely be wary of letting the U.S. dollar get too strong, hence the case for increased long term rates. The proverbial increased interest rate train is coming, but most likely not until 2017.

We will continue to recommend a focus on global investments, particularly in real estate and dividend paying investments that tend to keep pace with inflation and population growth.

Planning for Household Income during a Presidential Race

The greatest risk to our economy is the “entitlement bomb” unfolding between U.S. Social Security and Medicare gap funding, now estimated at $43 trillion according to the Government Accountability Office (GAO). While the GOP is the only political party talking about reform, there are several challenges to this system that may prove to be an unavoidable issue for the next President, regardless of party.

If no change is enacted, a combination of lower benefits for future retirees, lower cost of living adjustments (COLA) for current retirees, and even the possibility of investing in riskier assets could help alleviate the problem. A simple solution, never welcomed by anyone, would be to increase income taxes. Although this is an easy point to suggest – it is very hard to implement, particularly with the discourse in Congress.

Keeping these hurdles in mind, for the rest of 2016 we will be working with you in evaluating your personal income Life Plan. As many portfolios generate income that is used to supplement expenses, it is very difficult to keep up with inflation. We are very mindful of risk and will not over-extend your stock exposure for short term gain. The continued rising cost of healthcare, housing and possible increased taxation will be part of our overall personal Life Planning.

The rest of the Year

In summary, the longer-term impact of the Brexit decision is yet to be known, but many market observers are expecting reverberations across the EU. Brexit is a complicated and uncertain event that has no real historical precedent, which, in itself, is a source of uncertainty and a cause for uncertainty. Most agree that Brexit will cause a long-term headache for Europe as a weaker currency may inspire inflation. Once the changes are implemented, the UK will continue to conduct business, and specific exporting functions will likely be absorbed by remaining members of the EU.

This presents some additional food for thought. What is the possibility of negative interest rates in the U.S. and how might this affect the U.S. economy and the outlook for corporate profits? If the U.S. economy experiences healthy job growth and rising inflation as well as rising commodity prices, the market expects that there will be no chance of an interest rate hike for the balance of the year – this is good for U.S. stock markets.

A lot can happen in a few months, particularly with the U.S. Presidential election; however, markets continue to stabilize and the job market remains relatively healthy. As U.S. stock markets continue to advance we feel short-term stocks will support current levels and continue on a higher trend. There will be short-term setbacks, particularly this year, but the current consensus among experts is that the markets, in general, will finish 2016 higher.

Personal Updates from Mason & Associates

On a personal note, Alexandra (6) and Zachary (4) just finished summer camp at Tom Sawyer near Pasadena, CA. They enjoyed the horseback riding, archery, fishing, hiking, and all other outdoor activities the camp offered. Their little sister, Samantha (2), is happy to have them back at the house for the remainder of summer as she sharpened her swimming skills and talking abilities.

Thomas and Jamie’s son, Ryan (4 months), is now sleeping through the night – giving his parents some much needed rest. He is growing more and more each and every day, and is now rolling over at every opportunity. We can all tell he is going to be a very active little boy!

Charlie and Chris are doing well. Charlie is still putting hours in at the office on a daily basis, but his golf game continues to improve with some additional time out on the course. Chris is back volunteering at Verdugo Hills/Keck hospital and they are both taking every opportunity to spend time with their four grandkids.

If you have any questions or concerns about the markets and how they will affect your future, get the conversation started with us at Mason & Associates. Your first meeting is always complimentary and commitment-free. Give our office a call at (323) 254-3072 or email us at This email address is being protected from spambots. You need JavaScript enabled to view it. .

Regards,

Brent M. Mason

About Brent

Brent M. Mason is the President of Mason & Associates, Inc. Brent began his career in 1999 with Putnam Investments, where he was a vice president and served as the marketing manager for Putnam’s Insurance Products Division, specializing in the development and sale of investment vehicles within insurance related products. Brent earned a Bachelor’s Degree in Business Administration from Southern Methodist University, in Dallas, Texas where he focused on marketing and finance. Brent is a licensed California insurance agent and can offer life, health, variable and long-term care insurance products. Currently, he is a member of the Board of Directors at Hillsides, an organization that specializes in meeting the needs of at-risk children in the greater Los Angeles area. Brent lives in Pasadena with his wife Leah and their three beautiful children. He enjoys golf, snow skiing and spending time with family and friends.