May 05, 2018

Monthly Market Recap: Avoiding Retirement Disaster

By United Capital

Photo credit: Getty Images
CloseApril ReturnYTD Return
S&P 500 Index2,648.05+0.27%-0.96%
Russell 2000 Index1,541.88+0.81%+0.53%
MSCI Europe, Australasia, and Far East (EAFE) Index2,043.66+1.89%-0.07%
MSCI Emerging Markets Index1,164.43-0.55%+0.99%
Bloomberg BarclaysU.S. Aggregate Bond Index2,001.48-0.74%-2.20%
Bloomberg Barclays Municipal Bond Index1,150.42-0.36%-1.47%
Gold (spot)$1,315.35-0.73%+1.01%

Source: Bloomberg. Equity indexes are price-only and do not include the impact of dividends. Bond indexes are total return. It is not possible to invest directly into an index.


After the disasters of Enron in 2001, as well as, numerous prominent financial companies such as Lehman Brothers and Bear Stearns in 2008, it’s a shame that so many people still leave themselves vulnerable to the terrible consequences of a severe decline in a concentrated stock holding. Yes, there are often certain vesting requirements that necessarily lock up an investor for a period for a time, however, too many people make the decision to keep an oversized portion of their wealth in an employer’s stock rather than take the prudent step of selling and diversifying into a broader array of investments.

Ideally, an individual should not keep more than 10% of his wealth in one employer’s stock.

On April 22, the Wall Street Journal published a story that starkly reminds us of the dangers of holding too much of a single employer’s stock. The article details the plight of several General Electric (GE) retirees who have had their retirement plans turned upside down due to the collapse of the company’s stock price over the past year -- which has been more than cut in half. Founded in 1892 by Thomas Edison, GE is one of the original twelve members of the Dow Jones Industrial Average (DJIA). The company has weathered depressions, recessions, wars, and painful restructuring over the years. So, it is not surprising that many retirees believed it unnecessary to sell shares of what is easily an icon of American industry.

Over the last several years, GE has suffered from poor earnings and cash flow, as well as, a deeply underfunded pension fund. To add insult to injury, GE slashed its quarterly cash dividend in half last September, cutting into the cash flow that retirees once enjoyed. Unless GE is able to turn things around, the dividend could be at risk for further reduction.

Many GE retirees accumulated large amounts of company shares over the years by taking advantage of a stock ownership plan that provided a generous company match totaling 50% of the worker’s contribution. Combined with a traditional defined-benefit pension plan provided by the company, retirees made a huge bet on the future success and financial strength of the company.

There are numerous reasons to help explain why investors in this type of situation fail to diversify:

Familiarity – Working at a company and being a part of its past success can lull one into assuming the business will enjoy a similar level of success into the future.Loyalty – Employees who have spent most, or the bulk, of a career at one employer are vulnerable to an emotional attachment to company stock, making it appear to them an act of betrayal to sell it.Endowment effect – Individuals often place a higher value on something already in their possession.Tax implications – Accumulating shares over a number of years can result in a big tax bill upon sale.

Some GE workers are now in the unfortunate position of having to contemplate a return to the workforce to fortify their finances after once assuming they had more than sufficient resources for a long and comfortable retirement. For many, finding work won’t be easy. For others, it is simply not an option due to advanced age or poor health.

In today’s dynamic, globalized economy, no business is immune from competitive disruption, strategic errors, poor management decisions, and regulatory/legal actions and, in the example of Enron, outright fraud. These are factors that can decimate a company’s stock price in no time at all.

Avoiding disaster is preventable. If you participate in an employer’s stock purchase plan, be mindful of vesting rules and look to take advantage of reducing exposure. This is especially crucial as one approaches retirement.

A trusted adviser may be an invaluable resource by helping the investor put a financial plan in place that addresses concentration risk to build a more diversified portfolio.


The streak has ended! OK, it wasn’t much of a losing streak but after such a long run of stock gains month after month in 2017, it certainly didn’t feel very good.

After falling over the past two months, the S&P 500 Index eked out a small gain of 0.3% in April. At month- end, the index remained almost 8% off the high reached back on January 26, but is only off by about 1% year-to-date. Six out of the eleven sectors recorded gains, led by Energy as the price of crude oil (West Texas Intermediate) rose 5.7% during the month. Consumer Staples was the laggard, down 4%.

Equity volatility (as measured by the CBOE SPX Volatility Index, aka, the “VIX” or the “fear index”) fell 20% in April and is well off the peak reached in February during the period when stocks dropped in excess of 10%.

Stock gains were assisted by favorable corporate earnings reports. According to FactSet, over half of the companies in the S&P 500 have reported results for Q1 thus far. On an earnings basis, more companies are reporting actual earnings per share (EPS) above estimates (79%) compared to the five-year average. If 79% is the final percentage for the quarter, it will mark the highest percentage of S&P 500 companies reporting actual EPS above estimates since FactSet began tracking this metric in Q3:2008. In aggregate, companies are reporting earnings that are 9.1% above the estimates, which is also above the five-year average.

Analysts currently project quarterly earnings growth to continue at double-digit levels through 2018.

In terms of valuation, the forward 12-month price-to-earnings (P/E) ratio is 16.3, which is above both the 5- year average and the 10-year average. From my perspective, stocks valuations appear modestly expensive but not unreasonable given the relatively favorable earnings, macroeconomic, and interest rate/inflation outlook.

The Russell 2000 Index of U.S. small company stocks had a respectable rise of 0.8% in April and is now in the black on a year-to-date basis.

Publicly-traded real estate, as measured by the MSCI US REIT Index, gained about 1.3% in April but remains lower by 7.8% year-to-date on fears of the impact from higher interest rates.

Developed international equity markets, measured using the MSCI EAFE Index, snapped back by 1.9% last month after falling by almost 7% over the previous two months. The MSCI Emerging Markets Index fell 0.5% due to headwinds including higher interest rates and a stronger U.S. dollar.

The yield on the benchmark 10-year U.S. Treasury note climbed 21 basis points (0.21%) to end the month at 2.95%. On April 25 the yield hit 3.03%, exceeding the 3% threshold for the first time since late 2013.

Although the rate reached 3%, it is important to keep in mind that this is not necessarily a signal that rates will continue to rise from here.

Fixed-income markets were mixed overall in April. The Bloomberg Barclays U.S. Aggregate Index - a broad- based benchmark of the U.S. taxable, investment-grade bond market - fell 0.74% as rates rose and credit spreads widened. The high-yield bond market, as measured by the Bloomberg Barclays U.S. Corporate High-Yield Bond Index, gained 0.65%. Municipal bonds, as measured by the Bloomberg Barclays Municipal Bond Index, slipped 0.4%.

A broad reading of economic indicators continues to show that recession risk in the U.S. is low. Much discussion of late has been focused on the message a flatter U.S. Treasury yield curve is sending (which I discussed in last month’s commentary.)

US GDP growth eased in the first quarter to a 2.3% annualized rate, the weakest gain in a year. This was due mainly to softer consumer spending.

Despite the weaker GDP growth in Q1, the year-over-year change continued to accelerate, albeit modestly. For the seventh quarter in a row, the annual rate of economic output in real terms picked up speed, climbing up to 2.9% — the fastest increase in nearly three years. Nominal GDP growth also picked up in Q1, advancing 4.8% vs. last year – the strongest annual gain since Q1:15.

Investors continue to grapple with several concerns, including the future path of interest rates, trade negotiations with China, and geopolitics (e.g. North Korea, Syria). It appears these and other factors should serve to keep market volatility elevated relative to levels enjoyed last year.

Disclosure: United Capital Financial Advisers, LLC (“United Capital”) and its regional offices provide advice and make recommendations based on the specific needs and circumstances of each of its client. For clients with managed accounts, United Capital has discretionary authority over investment decisions. United Capital provides sub-manager services to non-affiliated investment advisers, to help service their clients’ investment management needs. When managing assets as a sub-manager, United Capital relies solely on the client’s adviser to determine what the specific needs and circumstances of each client are and to choose the investment options that are appropriate to help meet each client’s needs. United Capital solely relies on information provided by the client’s adviser and does not independently verify any information provided.

Investing involves risks and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make an investment decision. The information, data, analyses and opinions contained herein includes confidential and proprietary portfolio information of United Capital, may not be copied or redistributed for noncommercial or personal purpose without United Capital’s expressed permission. The information contained herein is not represented or warranted to be accurate, correct, complete, or timely. United Capital and your adviser shall not be responsible for investment decisions, damages, or other losses resulting from use of the information.

Except as otherwise required by law, United Capital and your adviser shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, this information, data, analyses or opinions or their use.

The information contained herein is intended for information only, is not a recommendation to buy or sell any securities, and should not be considered investment advice. Please contact your financial adviser with questions about your specific needs and circumstances.

Equity investing involves market risk, including possible loss of principal. All indices are unmanaged and an individual cannot invest directly in an index. Index returns do not include fees or expenses and is calculated on a total return basis with dividends reinvested. Past performance doesn’t guarantee future results. Diversification doesn’t ensure a profit or protect against loss. There are no investment strategies that guarantee a profit or protect against a loss.

The information and opinions expressed herein are obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.

Certain statements contained within are forward-looking statements including, but not limited to, predictions or indications of future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties. Opinions expressed are current as of the date of this publication and are subject to change.

United Capital

United Capital

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