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Third Quarter Commentary: US Tech and Consumer Lead the Way with Trade Wars Remaining a Serious Threat

Topics Covered:

  • US Growth Strengthens and Impending Trade Wars
  • Recap of Second Quarter: Strong Dollar, Global Growth Slow Down, Emerging Market Weakness
  • Portfolio Positioning for Latter Half of 2018
  • Firm Updates

US Growth Strengthens and Trade Wars:

By virtually all estimates the U.S. economy just completed an outstanding second quarter with robust growth. Bank of America Merrill Lynch officially revised its Q2 GDP forecast to 4.0%, and expects the US economy to grow by 3.0% in 2018. Looking ahead they expect some of the momentum and better productivity growth in the economy to carry over into 2019 in the form of better spending and investment, with expectations of next year’s annual growth number to 2.6%. 

American factory activity accelerated for the second straight month in June, signaling momentum in the U.S. manufacturing sector. We’re seeing the small business confidence index continue to hold at the highs (107.8 in May). And why does this matter? Conditions for small businesses can be taken as a quasi-proxy for emerging/prevailing “main street” conditions. Recall, small businesses represent over 99% of total U.S. Employer firms and >60% of net private sector hiring on a monthly basis. So, collective sentiment matters in handicapping the prospects for labor and wage trends.

Yet despite surging corporate profits, robust growth, record low unemployment and strong consumer spending, stocks have largely moved sideways this year on talks of trade tariffs and the growing risk of an outright trade war breaking out between the US and its trading counterparts. Ironically, US GDP growth is more vulnerable to trade tariffs than that of its trading partners.

Consider the following narrative below:

What matters to GDP growth is not the dollar amount of targeted products, but their share of GDP. When the US goes to “war” with many of its trading partners, they can collectively impose a much bigger percentage point shock on US GDP than the US can impose on ROW (rest of world) GDP. Recall that in 2016 ROW GDP was almost $57tn, or three times as much as US GDP (almost $19tn). Hence if the US puts tariffs on all of its imports it only impacts about 4% of ROW GDP. By contrast, if ROW puts tariffs on all US exports it impacts 8% of US GDP. Therefore a 25% tariff on all US exports and imports is equivalent to a 2% of GDP tax on Americans, but only a 1% of GDP tax on the rest of the world.

A full-blown trade war, on which the US puts 10-25% tariffs on most imports and trade partners put tariffs on most US exports, may very well lead to a significant reduction in growth, decline in confidence and supply chain disruptions which could amplify the trade shock, triggering a global recession. For now, the probability of a full-blown trade war is relatively muted, but the risks are certainly rising which has put the US equity market rally on hold, for now.

Highlights from Second Quarter:

Strong $US Dollar

The U.S. Dollar Index, +7% off its YTD lows, has already inflicted some major pain in consensus macro views that were positive on investments like commodities and emerging market financial assets heading into Q2.

40% of S&P 500 earnings are international and impacted by a strong dollar. As Keith McCullough the CEO of Hedgeye put it, “The S&P 500 has international baggage, emerging market baggage, china slowing baggage, and European and Polish Baggage.” For more pure US investment exposure, consider investing in indexes like the Russell 2000 which are less impacted by a strong dollar.

Global Growth Slowing Down

Growth and economic data in Europe has been weaker than expected over the last several months. Analysts have cut Euro area growth to 2.1% in 2018, and 1.7% in 2019 from 2.4% and 1.9% previously. The global wave, one of Bank of America Merrill Lynch’s most widely recognized proprietary indicators which combines seven key macro indicators, has peaked for only the 10th time in 25 years! Following previous peaks, the MSCI All Country World Index averaged -3.4% in the next 12 months, and the US tends to be a more defensive region on average.

In looking at world equity performance from the 2018 market peak on 1/29/18, we’re now down -10% from $87 trillion in total market capitalization to $78.6 trillion.

Emerging Market Weakness

Emerging markets are struggling with a sharp and abrupt reversal in the dollar, rising rates, and concerns about global growth and idiosyncratic issues surrounding particular markets such as Turkey and Brazil. Below are the 10 worst performing emerging market countries since the 1/29/18 market peak:

1. Venezuelan: -77%

2. Luxemburg: -54%

3. Argentina: -44%

4. Turkey: -32%

5. Brazil: -28%

6. Kazakhstan: -25%

7. Poland: -25%

8. Hungary: -24%

9. South Africa: -23%

10. China: -21%

Portfolio Positioning for Latter Half of 2018:

Positive on US Large Cap Energy

We remain bullish on energy because inflation has been heading higher.

Positive on Real Estate Investment Trusts (REITs)

Increases in interest rates often are driven by economic growth that may support the growth of REIT earnings and dividends in the future. Research shows that REITs have often outperformed during periods of rising rates.

Neutral on US Consumer Discretionary and Technology

We remain cautiously optimistic on the Consumer Discretionary and Tech sectors because these are the sectors most tethered to the U.S. consumer and an acceleration in the U.S. economy. We recognize that after eight consecutive quarters of growth acceleration, the prudent move is to book some gains in cyclically sensitive sectors.

Negative on Emerging Market Stocks

Strategists on Wall Street continue to advocate for buying emerging markets claiming they are “cheap.” Based on price-to-book ratios, the MSCI Emerging Index is indeed trading at a 30% discount to MSCI World Index of developed markets. But with the headwind of a stronger dollar, emerging markets can continue to get cheaper in the latter half of 2018, which makes us near/intermediate term bearish. We’d like to wait for a more attractive entry point in adding more exposure to emerging markets in client portfolios that may be the only area of the market where we’ll see positive real returns after adjusting for inflation.

Firm Updates:

As I reflect on 2018 thus far, there are a number of updates I’d like to share with you, my valued clients. You may recall back in January of 2017, that I took a leap of faith in leaving Merrill Lynch to start my independent wealth management practice, Rapport Financial. Since then, each and every morning I wake up with one primary goal in mind – to provide you with the best possible client experience. For this, I feel a great responsibility to continuously improve upon my practice by seeking out the best suite of solutions in the marketplace. A few of these recent additions are listed below:

  • Docusign. Electronic Document Signing
  • Hedgeye. Independent Research Firm (responsible for the images you see in this commentary!)
  • Right Capital. Financial Planning Software

There are other solutions being evaluated that I’m confident will improve upon the financial planning and risk management portion of my service offering and I cannot wait to implement these for you.

My job, as a client recently put it best, is to work with you to identify and implement the most appropriate strategies and solutions to meet your financial goals. To adjust your portfolios for the underlying conditions of growth and inflation that are directly impacting the value of your hard-earned assets. To provide advice that affords you a level of financial stability that promotes a healthy, wholesome personal and professional life free from financial stress.

This past month I was honored to be named an Investopedia Top 100 Financial Advisor. This list consists of advisors around the country who have contributed significantly to conversations about financial literacy, investing strategies, life-stage planning and wealth management.

Know that as your fiduciary advisor, I will (and am legally required to) always make suggestions that are in your best interest. But my commitment goes beyond that. Over the years I’ve continued my education in the field, from attaining securities licenses, to the life and health insurance license, and becoming an Accredited Investment Fiduciary where I took the fiduciary oath. I’m currently studying at the College for Financial Planning where I have taken classes on insurance, annuities, investments, taxes, and estate planning. The final step will be to sit for the rigorous CFP examination in November.

While the recommendations made in this commentary are backed by macro research and quantitative data, it’s important to remember that all investments are made within the framework of our long-held belief that diversification continues to be the foundation of each portfolio.

Warm Regards,

Aaron L. Hattenbach, AIF®
[email protected]

The opinions expressed herein are those of Rapport Financial, LLC (RF) and are subject to change without notice. Past performance is not a guarantee or indicator of future results. Consider the investment objectives, risks and expenses before investing. You should not consider the information in this letter as a recommendation to buy or sell any particular security and should not be considered as investment advice of any kind. You should not assume that any of the securities discussed in this report are or will be profitable, or that recommendations we make in the future will be profitable or equal the performance of the securities listed in this newsletter. These securities may not be in an account’s portfolio by the time this report is received, or may have been repurchased for an account’s portfolio. These securities do not represent an entire account’s portfolio and may represent only a small percentage of the account’s portfolio. partners, employees or their family members may have a position in securities mentioned herein. Rapport Financial was established in 2017 and is registered under the Investment Advisors Act of 1940. Additional information about RF can be found in our Form ADV.


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The Pros and Cons of Robo Advisors

Topics Covered:

  • Rapport Financial is now offering Fixed Fee Financial Planning Packages. Don’t have 250k to invest? Not to worry, we can still work together.  Contact me to learn more.
  • Are you using Betterment, Wealthfront, or another Robo Advisory service?  Do you fully understand how these strategies work?  The pros and cons?  I’ll fill you in on something they don’t want you to know.

One of my mentors once told me something that has stuck throughout my career:

“Price is only a major factor in the absence of value.” 

I begin with this quote for a reason.  Over the past few years, Robo Advisors have grown in popularity.  I often come across them when advising my peers and providing holistic financial planning services.

In order to better understand the appeal of Robo Advisors, I began asking my peers why they went with a Robo Advisor instead of a DIY solution, or a human advisor.  Overwhelmingly the response was “low fees.”  But as I prodded further it became evident that the majority couldn’t explain why beyond this low fee benefit.

So allow me to share the pros and cons of a Robo Advisor as objectively as I possibly can, because as a consumer you should have an understanding of the services that manage your hard-earned money.


  • Low Fees and Minimums.
  • User-Friendly Experience.
  • Automated Asset Management and Rebalancing.  This is the most valuable ongoing feature a Robo Advisory service provides.  The algorithm is designed to bring your portfolio back to its original allocation (plan) so you’re not taking on more risk than you can handle.  And you get an efficient portfolio built for you without having to concern yourself with choosing the investments.
  • Tax Loss Harvesting.  This is actually both a pro and a con.  The pro is that they can proactively take losses to offset gains in your taxable account.  However, this is where things get interesting.  This automated tax loss harvesting feature possess risks and may not be as valuable as they claim.  The drawback here is that the automated tax loss harvesting exposes you to  wash sales that wipe away the benefits of tax loss harvesting.


Finally, if you happen to use Wealthfront or Betterment, remember that they fill one gap: asset management via an automated service. Which has worked during a bull market like the one we’ve been in for nearly 10 years. But Robo Advisors emerged after the financial crisis and had yet to experience significant corrections and market volatility until this year.

What happened to the Robo Advisors when volatility finally returned?  Crashing websites.  Customers unable to log in to their accounts.

For more information on my services, and to book a 15 minute free consultation visit my calendar.

Warm Regards,

Aaron L. Hattenbach, AIF®
[email protected]


The opinions expressed herein are those of Rapport Financial, LLC (RF) and are subject to change without notice. Past performance is not a guarantee or indicator of future results. Consider the investment objectives, risks and expenses before investing.  You should not consider the information in this letter as a recommendation to buy or sell any particular security and should not be considered as investment advice of any kind. You should not assume that any of the securities discussed in this report are or will be profitable, or that recommendations we make in the future will be profitable or equal the performance of the securities listed in this newsletter. These securities may not be in an account’s portfolio by the time this report is received, or may have been repurchased for an account’s portfolio. These securities do not represent an entire account’s portfolio and may represent only a small percentage of the account’s portfolio. partners, employees or their family members may have a position in securities mentioned herein.  Rapport Financial was established in 2017 and is registered under the Investment Advisors Act of 1940. Additional information about RF can be found in our Form ADV.

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February Market Insights

Topics Covered:

Market Update

There are a number of positives contributing to this robust bull market entering its 9th year. Consumer sentiment is at a 17 year high, while unemployment is at a 17 year low. Wage growth picked up to 2.9% in January, its strongest pace since the recession.  We also had the best January since 1997, with the S&P 500 finishing the month up 5.7%. The story–global synchronized growth.  US corporate and personal tax reform, the first we’ve had since 1986.

February Sell-Off

But February is off to a rocky start with a sizable sell off having wiped out all 2018 gains in the markets.  We’ve finally broken the streak of 81 straight weeks without a correction of more than 5%.  Commentators are reminiscing about Black Monday, August 24, 2015 when the Dow fell over 1,000 points only to recover some of its losses and finish the day down 588 points.  At the time, America hadn’t had a point drop of that magnitude since October 2008, when the financial crisis was in full effect and people were gravely concerned that more banks like Lehman Brothers would also collapse.  The following day, August 25, 2015 markets continued their downward plunge with the Dow dropping another 215 points.

It’s important to take note of what happened in the days ensuing.  August 26th and 27th of 2015 saw massive rallies of 609 points and 370 points respectively for the Dow, recovering all losses from the days prior!

We’re actually seeing the same pattern take place in February 2018. In just two days of trading in February (2nd and 5th) the Dow retreated -541 points (-2.07%) and -1,175 points (-4.6%), respectively, catching many investors off guard and left to wonder, is this the beginning of the next major financial crisis?  Only to rebound the very next day, February 6th when the Dow gained 567 points (+2.33%) erasing some of the losses from Monday’s rout.  This should remind investors that trying to time the market is a losing proposition.  If you cannot tolerate or afford these day-to-day whipsaws and market volatility, you probably shouldn’t be invested in the markets in the first place!

Drops of this severity are becoming commonplace as quantitative investment and growth of passive investing strategies continue to grow in popularity at the expense of fundamental stock selection.

According to a Wall Street Journal feature back in May 2017 called, “The Quants,” Quantitative investment strategies are now responsible for 27% of all U.S. stock trades by investors, up from 14% in 2013.  Furthermore, passive and quantitative investing account for about 60% of trading, more than double the share a decade ago.  Just 10% of daily trading volume can be attributed to stock pickers–individuals and professional fund managers.

But in the high frequency, computer driven trading world we live in, and with passive investment strategies continuing to garner the lions share of investor assets, such wild market swings have been, and will become more and more commonplace.

At this point, you may be asking yourself, what can I do to protect my portfolio should we go through a 10-20% correction? Well, for starters, don’t rely on a Robo Advisor strategy to protect your portfolio as they consistent entirely of passive investment strategies designed to track the markets.

Robo Advisors: Limited Downside Protection

In a blog post back in July of 2017 I warned readers that a bubble is forming in passive investing and may have serious consequences for investors.  I feel that this is an opportune time to remind you that a portfolio of passive exchange traded funds (ETFs) offered by the likes of Betterment and Wealthfront offer little to no downside protection from a major market downturn.  Such Robo Advisor strategies are not nimble, as they are designed precisely to attain market-like returns by using low-cost index funds.  Sure, they offer different mixes of passive investment strategies based on the answers provided from a cookie cutter questionnaire, but many were created after the great recession of 2008-09 and have yet to experience a major market downturn.

From personal experience, I can tell you how important it is to be selective with what you buy this late in the bull market and especially with valuations where they are.  Owning the markets since 2009 has worked out quite well for investors.  Get this–the S&P 500 hasn’t had a negative year since 2008, when Taylor Swift was only 19 years old.  Wow!

Past 5 Major Crises

For my clients, I’m going back to the drawing board, and using a proprietary portfolio analytics software (see image below) to stress test portfolios so we can better understand how they performed during the last 5 major crises:

      1. Asian Crisis of 1997
      2. Russia/Long Term Capital Management fiasco of 1998
      3. Tech Bubble of 2000-01
      4. World Trade Center Attack of 2001
      5. Subprime Crisis of 2008-09.












If you’d like to have your portfolio analyzed so you can better understand the risk you’re currently taking, schedule time on my calendar.

Bear Market Checklist/Recession Indicators

While we’re on the topic of risk, allow me to share a checklist I periodically review to make sure I’m not caught off guard by the next recession.

The two most accurate predictors of a recession being:

      1. Inverted Yield Curve. This occurs when the 10 year treasury and 2 year treasury note invert.  It’s more of a yellow flag, as historically it takes 18 months after an inverted yield curve to see a recession occur.  Historically after the yield curve inverts, there’s another 18 months with average returns of 40%.  So moving to cash would be a mistake.
      2. 10 Conference Board Leading Indicators begin to show signs of slowing down.

Other important indicators include:

      • Elevated Valuations
      • Extreme reading in consumer bullish sentiment/investor optimism
      • M&A/IPO Market Boom
      • Steep declines in: ISM Manufacturing, Service PMI dips below 50
      • Credit Spreads widening. Yield spread between high yield bonds and treasuries
      • Defensive Stocks/Sectors outperforming
      • Strong inflows into equity funds
      • Inverted Yield Curve. When short-term rates rise above long-term levels
      • Uptick in initial unemployment claims

So far, we can only check the boxes for Elevated Valuations and Strong Inflows into equity funds.  In my opinion, not enough to trigger a recession.

10 Stocks that Delivered Positive Returns in 2008

Finally, as promised, I’ve compiled a portfolio of 10 stocks that provided positive performance (and lower volatility) in 2008, while the markets proceeded to drop 37%.  And if you actually look over a 20 year period, this portfolio of 1o defensive stocks has provided annual returns of 14.89% while the S&P 500 has returned 6.96% annualized.

This is not meant to serve as a recommendation to buy the 10 companies listed, nor to suggest that these 10 particular stocks are entirely recession (fail) proof when we do indeed experience the next recession.  But these companies share a few commonalities that historically made them relatively stable holdings when seemingly everything collapsed.  They provide products (consumables) many would consider as necessities, preventing them from being dependent on a healthy economy.  Think of things you can eat, drink or smoke.














Remember, if you’re invested in the markets, it’s about the long game.  Ignore the short-term noise.  Don’t let this recent correction get in the way of sticking to a sensible investment plan.  And certainly don’t allow yourself to get whipsawed by these drastic day-to-day fluctuations!

Aaron L. Hattenbach, AIF®
Managing Member
Rapport Financial


The opinions expressed herein are those of Rapport Financial, LLC (RF) and are subject to change without notice. Past performance is not a guarantee or indicator of future results. Consider the investment objectives, risks and expenses before investing.

You should not consider the information in this letter as a recommendation to buy or sell any particular security and should not be considered as investment advice of any kind. You should not assume that any of the securities discussed in this report are or will be profitable, or that recommendations we make in the future will be profitable or equal the performance of the securities listed in this newsletter. These securities may not be in an account’s portfolio by the time this report is received, or may have been repurchased for an account’s portfolio. These securities do not represent an entire account’s portfolio and may represent only a small percentage of the account’s portfolio. partners, employees or their family members may have a position in securities mentioned herein.

Rapport Financial was established in 2017 and is registered under the Investment Advisors Act of 1940. Additional information about RF can be found in our Form ADV Part 2a.

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Market Insights Second Quarter 2017

Strong Economic Data—However Brace for a Pullback in the Second Half of 2017

I’m beginning this economic commentary with the chart below from JP Morgan Private Bank’s Q2 insights presentation. The upper half of the chart identifies pullbacks during the current market cycle from 2010-present.


  • The last time we had a peak (top) to trough (bottom) correction in the S&P 500 greater than 10% was nearly 18 months ago driven by fears of a slowdown in China and weaker oil prices.
  • In every calendar year since the great recession of 2008-09 (2010-2016) there’s been a healthy pullback in the markets greater than 5%. 2017 is the lone exception.
  • 4 of 7 corrections were greater than 10%.

The markets have been remarkably resilient and immune to bad news. Each 1-2% correction has been met with opportunistic investors eager to “buy the dip” and put money to work at lower prices.


If you look a little deeper we see the following:

  • The U.S. has added jobs every month since October 2010, a record 81 month stretch that has resulted in roughly 16 million jobs and slowly repaired much of the damage inflicted from the 2008-09 recession.
  • Employers added 222k jobs in June and the unemployment rate ticked up to 4.4% with more people joining the labor force.
  • US Purchasing Managers Index (PMI) reading for June came in at 57.8, its highest level since August 2014. A number above 50 indicates an expansion in manufacturing activity.


While friends, family and clients would generally describe me as an optimist— the optimist in me is growing concerned with complacency forming in the markets. The current bull market that began in 2009 is now the second longest in history and 24 months away from being the longest ever! Valuations are high, balance sheets are levered, and the Federal Reserve is raising rates. I’d say given this mix of factors, you’d be wise to temper your expectations and not expect the double-digit annualized returns we’ve experienced since the financial crisis.

Central bank easy monetary policies have had arguably the greatest impact on this bull market in stocks globally. As you can see from the chart below courtesy of Bank of America Merrill Lynch, the S&P 500 has risen roughly in tandem with increases in central bank balance sheets during the past 9 years. With the Fed signaling it will begin to reduce its balance sheet, and the European Central Bank likely to end its quantitative easing program by the end of 2018, growth in central bank assets is likely to decelerate next year and turn negative in 2019. This could also weigh on future returns in developed market stocks.

There are several risks with the greatest potential to derail the 8 year bull market run:

1. Subprime Auto Loans-38% of new car loans have negative equity rolled into the loans. And lenders like Banco Santander aren’t verifying income or job histories. Sound eerily familiar? Auto financing is a $1.2 trillion market. I’d track down a list of the largest auto lenders and identify the lenders issuing the highest volume of subprime loans, that is, to borrowers with lower than average credit scores.

2. S&P 500 valuation getting extended. The Shiller P/E ratio is currently at 30.12, which puts the figure at its 2nd highest level in history! Stock market capitalizations as a percent of the US Gross Domestic Product (GDP) stands at 130%, close to peak levels.

3. Low volatility encouraging excessive risk taking through the use of leverage. Historically, during periods of extended low volatility, investors increase leverage by effectively borrowing to increase the size of their bets.

4. Exponential growth in popularity of passive market cap weighted index fund investment strategies. The proliferation of passive index investing has rewarded investors over this 8 year bull market expansion with double-digit annualized market returns and low fees. However, investors need to understand that these are bull market strategies that offer no downside protection.

THE #1 RISK TO INVESTORS: Formation of a Bubble in Passive Investing

Whether you invest through a registered investment advisor, robo advisor, company 401k plan, or happen to be a “do it yourself investor,” it is likely that you have a portion of your assets in what are called “passive investment strategies” designed to track an index like the S&P 500. These passive investment strategies, taking the form of a mutual fund or exchange traded fund (ETF) are now the most popular form of investing for both small and large investors.

“Through the first five months of this year, investors put $338 billion into passive mutual funds and ETFs—that’s on top of last year’s record inflows of $506 billion, according to Morningstar. If this pace keeps up, passive funds could take in more than $800 billion in 2017, a 60% jump from 2016’s record and nearly double the assets from 2015!”

Record inflows into passive investment strategies are also happening as investors abandon actively managed strategies that have failed to outperform their indexes and come with higher fees. In fact, new data confirms passive investment strategies are actually beating 82% of all active funds after fees.

As a result, once industry powerhouses known for their actively managed mutual funds, T. Rowe Price and Franklin Templeton have been replaced by the new 800lb gorillas in asset management and early adopters of passive ETF investing: Blackrock and Vanguard, the two largest asset managers in the world according to the Top 400 Asset Managers of 2017.  See the chart below which shows this trend taking place over the past decade.

I am admittedly a strong proponent of the low-cost and market exposure offered by passively managed index tracking strategies. The ability to hold an investment that gives you exposure to 500 of the largest companies in the United States for a fee as low as 0.04%–that’s right, 40 cents on every $1,000 invested is absolutely brilliant and arguably the greatest invention in modern finance. But in an aging bull market, it is important you recognize that these funds are designed precisely to match the return of the index and therefore offer no downside protection. Furthermore, when you buy a market cap weighted index fund like the Vanguard S&P 500 Index Mutual Fund, you’re effectively buying all the stocks in the index—whether they’re cheap or expensive. So, as more money pours into a passive fund like the one above designed to track the S&P 500 index, it must buy stocks in the same proportion as the index it tracks—with no regard for stock price or fundamentals. The effect is that the largest companies become larger, riskier, and more important in determining the overall direction and performance of the index.

Which brings me to the issue at hand: elevated valuations on the largest companies. If you rely exclusively on passive market cap weighted index investment strategies you could be paying prices for stocks that are at or near peak levels. And paying prices that are too high is the single greatest risk to an investor according to one of the greatest investors of all time, Howard Marks of Oaktree Capital.

The best illustration of this elevated price risk can be seen by looking at the 5 largest companies by market capitalization (still publicly traded) in the Nasdaq 100 index during the tech boom and subsequent bust of the late 1990s-early 2000s. 4 of the 5 companies listed below are still recovering losses in market capitalization from their peak in 2000. And if you had the great misfortune of purchasing the Nasdaq 100 index fund at the peak of the market in 2000, you had to wait until September 30, 2016 to get back to even! That’s an astounding 16+ years of no returns!

Source: Yahoo Finance

Again, I’m increasingly becoming concerned about the enormous amount of money flowing into passive market cap index funds which is making large companies even larger and no longer reasonable on a fundamental basis. Technology stocks now make up over 58.32% of the Nasdaq 100, not far from their high of 64.9% in 2000. By many measures technology stocks have gotten expensive. Apple, Microsoft, Amazon, Facebook and Alphabet (Google) make up over 42.28% of the Nasdaq 100 index. These same 5 companies now constitute 12.36% of the S&P 500 index, and were responsible for 58% of the index’s 2017 advance through late May! When volatility and fear re-emerge from a long slumber, investors will, like they have time and again during previous downturns, sell what they own in their investment accounts, which for many investors includes these passive market cap index ETFs and mutual funds. Top heavy indexes like the S&P 500 and Nasdaq 100 will get absolutely clobbered and companies with the largest weights will suffer sharp declines.

While I’m likely calling this bubble in passive market cap index investing a bit too early, I’d rather forgo a few percentage points of upside to be protected when markets inevitably do correct. The alternative isn’t necessarily using an expensive active manager, that often (but not always) statistically provides lackluster performance. Instead, there are strategies designed with factors not limiting them to the restrictions imposed by strict index funds. If you’d like to learn about some of these alternative investment strategies or are interested in scheduling a complimentary portfolio review, feel free to book time on my calendar:

I’ll conclude this commentary with a reminder to review your asset allocation—being the mix of stocks, bonds and cash held in your investment portfolio. Start by comparing your initial asset allocation from when you first put together your portfolio to how the allocation looks today. For my current clients, this is an exercise we conduct quarterly to ensure the portfolio is aligned with their risk tolerance, time horizon, and investment goals. It’s likely after this long bull market run that the percentage mix of assets in your portfolio is now different, and you may be taking on more risk than you can stomach when the next major correction hits.

I’ll sign off with my favorite quote and let you determine where you think we are in this market cycle:

“Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on Euphoria.”    –Sir John Templeton

My gut tells me we’re in the “mature on optimism” phase.


Aaron L. Hattenbach, AIF®
Managing Member
Rapport Financial
[email protected]

PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. This market commentary is a matter of opinion and is for informational purposes only. It is not intended as investment advice and does not address or account for individual investor circumstances. Investment decisions should always be made based on the client’s specific financial needs and objectives, goals, time horizon and risk tolerance. The statements contained herein are based solely upon the opinions of Rapport Financial. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice. Information was obtained from third-party sources, which we believe to be reliable, but not guaranteed.

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First Quarter 2017 Takeaway: Focus on Price and Be a Contrarian Investor

The first quarter of 2017 has officially come to an end—and it was a good one, especially if you owned a globally diversified portfolio of stocks. Recently economists put out a warning to investors–the US markets have gotten ahead of reality! So where should investors look for relative value? The answer is—outside the US.

Below is a 10-year chart courtesy of (March 30, 2007 through March 31, 2017) comparing the performance of the S&P 500 (Ticker: SPY) up 104.34% to the iShares MSCI EAFE Value ETF (Ticker: EFV) down -1.11% over the same period.

As you can see from the chart above, international developed stocks haven’t participated nearly as much in the massive recovery that’s ensued following the 2008-09 global financial crisis.

The S&P 500 currently trades at 25x trailing 12 month earnings, while the iShares MSCI EAFE Value ETF trades at a considerable discount of 15x earnings.

The EFA Value ETF provides diversified exposure to a broad range of developed companies in Europe, Australia, Asia and the Far East with a tilt towards value stocks that are thought to be undervalued by the market.

I’ll leave you with a timely piece of advice from legendary investor Howard Marks of Oaktree Capital Management:

“The greatest risk doesn’t come from low quality or high volatility. It comes from paying prices that are too high. This isn’t a theoretical risk; it’s very real.”

Year to date performance of indexes through 3/31/17:

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5 Questions to Ask Your Financial Advisor

I was recently in a meeting with a new client where we went over the scope of my services, and what I charge for advising my wealth management clients. It’s always been my practice to provide a transparent and detailed description of my fee structure so clients know exactly what they are paying me to advise them and manage their assets. With that said, here are the first 5 questions you should be asking a financial advisor before signing any legal documents:

1. What are ALL the ways that you and your firm are compensated for your services, and are they fully disclosed?

How much you’re paying for the management of your assets shouldn’t be a mystery, but usually this is anything but an easy answer for most providers. I can’t tell you how many times I’ve asked prospective clients, “what do you pay your current advisor” and draw a blank stare. Would you ever purchase a product without first knowing its price?

If you’re speaking with an Independent Advisor ask for their Form ADV Part 2. You can access this directly on the SEC website:

Remember, if you don’t know exactly how much you’re paying, you’re almost certainly paying too much!

2. Does your compensation depend on the investment strategies that you recommend?

The fees paid for different investment products can vary significantly, ranging from very little (indexed ETFs), to modest (active mutual funds), to exorbitant and very often unnecessary (derivatives, structured notes, annuities, hedge funds). This can bias recommendations towards more expensive investment products.

Your advisor should have no economic interests in the investment strategies they recommend!

3. What conflicts of interest do you face in advising me?

The answer should be none. Most financial advisors are not fiduciaries. Instead, they are outside sales agents for banking institutions with sales quotas in an antiquated business model.

Consider hiring a Fee-Only Registered Investment Advisor. An advisor working in this model is required by law to act in a fiduciary capacity and put their clients’ financial best interests first. The Fee-Only advisory model aims to remove many of the conflicts of interest found within traditional brokerage firms, i.e. UBS, Merrill Lynch, Morgan Stanley, etc.

4. How will you evaluate the success or failure of my portfolio over time?

This shouldn’t be just a performance number relative to the stock market, but rather whether the portfolio has met your stated goals, income and liquidity needs, tax considerations, liabilities, risk tolerance and other factors or preferences specifically addressed in your Investment Policy Statement.

This is only possible if these matters have been formalized in an Investment Policy Statement that defines the purpose of the portfolio and how it will be organized, formalized, implemented and monitored. As a part of the Investment Policy Statement, specific indices and benchmarks (S&P 500, Barclays Aggregate Bond, etc.) should be defined for the evaluation of performance so that no ambiguity will exist. Risk management is both the most crucial part of portfolio construction and the only real aspect that can be controlled — get the downside risks covered appropriately and the upside will take care of itself.

As one of my mentors used to say, “Don’t confuse a good advisor with a bull market!”

5. What services does your firm provide besides investment advisory?

Wealth Management/Investment Advisory is a full-time job. Be highly skeptical of firms that offer a number of unrelated or tangentially related services such as insurance, estate planning, tax preparation, banking, credit, etc. It is difficult for any firm to have more than a single core competency, and efforts to do otherwise typically lead to sub-standard offerings. The consolidation of the financial services industry has profited service providers more than their customers as its goal is to create cross-selling opportunities rather than a quality and customized service offering.

Financial advisory services should be more than just the core competency of the firm you work with, it should be the ONLY competency.