Broker Check

January 8, 2018

| January 18, 2018
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The S&P 500 is up nearly 9 percent since the beginning of the fourth quarter in 2017. Three quick thoughts to keep in mind:

  • A full year’s price appreciation occurred in just over three months.
  • Based on interest rates and valuations, we expect long-term rates of return to be slightly lower than average.
  • Statistically, the stock market produces very strong results more often than expected.

2018 could easily be another great year, but the risks are higher than they were at the start of 2017.

2018 is off to an impressive start, but let’s pause for a moment and take a look back at 2017. It was a memorable year for global markets, but there are other reasons it was interesting, too. Here are the highlights of a few of The Economist’s most popular articles during the year:

  • The world’s most valuable resource is no longer oil, but data (May 6). One-half of the most valuable companies in the world are American technology firms. Some, including The Economist, are concerned about tech companies’ market power and dominance of consumer data.

  • The world’s most dangerous cities (March 31). Despite a declining murder rate, San Salvador remained the world’s most dangerous city, as measured by homicides per 100,000 during 2016 (the latest figure available). Acapulco ranked second. Several cities in the United States made the list including St. Louis, Baltimore, Detroit, and New Orleans

  • Governments may be big backers of the blockchain (June 1). Blockchain may seem complicated and difficult to understand, but it may become a part of everyday life. “…a blockchain expert at the Massachusetts Institute of Technology argues that governments will drive its adoption – an ironic twist for something that began as a libertarian counter model to centralized authority. Backers say it can be used for land registries, identity-management systems, health-care records, and even elections.”
  • The death of the internal combustion engine (August 12). Rapidly changing battery technology and electric motors, in tandem with self-driving systems and ride sharing, may mark the beginning of the end for the internal combustion engine. It’s a change that is likely to disrupt markets and industries. The silver lining may prove to be less traffic and improved air quality.
  • How to keep cool without costing the earth (February 11). Scientists at the University of Colorado in Boulder have “…invented a film that can cool buildings without the use of refrigerants and, remarkably, without drawing any power to do so. Better yet, this film can be made using standard roll-to-roll manufacturing methods at a cost of around 50 cents a square meter.”

There is a theme that appears to run through many of these articles. They explore new ways of doing things, such as cooling buildings and transporting people. The articles discuss the growing value of consumer data, which many people provide to companies for free, as well as technologies that may allow people to protect and monetize their data in the future (blockchain).

These new developments may be part of a process called creative destruction, which is a process of innovation that includes the introduction of new products and services that may eclipse existing ones. You don’t have to look far to find examples. Just think about the evolution of movie rentals, photography, or phones during the past couple decades.

Creative destruction was introduced in 1942 in Joseph Schumpeter’s book, Capitalism, Socialism and Democracy. He believed it was the essential fact about capitalism. More recently, MIT Professor Ricardo Caballero wrote, “Over the long run, the process of creative destruction accounts for over 50 percent of productivity growth.”

It seems, as Schumpeter suggested, we live in a gale of creative destruction.

Key points for the week

  • The U.S. added fewer jobs than expected in December
  • Record-setting low temperatures this winter are giving the energy sector a boost.
  • Sears and other large retailers are closing multiple locations as executives rethink their business strategies.

We will be hosting several upcoming Town Hall presentations to review the Tax Cuts and Jobs Act of 2017 in detail. The first will be held on January 18th @ 7PM located at Flemings Steakhouse in Tysons Corner and the second will be held on January 31st @ 7PM located at Ruth Chris in Gaithersburg. Please call our office and ask for Kayla Walter to RSVP for either Town Hall.

We also plan to hold additional Town Hall presentations and will send additional details once the dates and locations have been finalized.

Cryptocurrency May be Expensive in Unexpected Ways.

If you’re like many investors, you have probably spent some time thinking about the latest innovation in money: cryptocurrency. Cryptocurrencies, or digital tokens, are ‘mined’ using computer networks to solve complex puzzles. The Economist provided an example:

“A huge aircraft hangar in Boden, in northern Sweden, big enough to hold a dozen helicopters, is now packed with computers – 45,000 of them, each with a whirring fan to stop it overheating. The machines work ceaselessly, trying to solve fiendishly difficult mathematical puzzles. The solutions are, in themselves, unimportant. Yet by solving the puzzles, the computers earn their owners a reward in bitcoin, a digital ‘crypto-currency.’”

A hangar of computers is a lot of overhead expense, and it’s not all that’s needed to mine digital tokens, either. Experts in the field told The Washington Post mining a popular cryptocurrency, “…probably uses as much as 1 to 4 gigawatts, or billion watts, of electricity, roughly the output of one to three nuclear reactors.”

What are we reading?

Below are some areas articles we paid particularly close attention to this week. We encourage our readers to follow the links.

U.S. Added Fewer Jobs Than Expected in December
The United States added fewer jobs than expected in December, but a positive outlook on the economy remains. This decrease is to be expected as the United States is near full employment. Wages increased a healthy 0.3 percent, and the jobless rate is at 4.1 percent, its lowest point since 2000. The wage gain metric will be a point of focus as we gauge the impact of the tax overhaul.

Stocks to Watch as a Major Snowstorm Hits the East Coast
This frigid winter showed it is far from over as a winter storm reached the East Coast last week. There are clear beneficiaries of the icy weather that will continue to prosper through the storm. Natural gas investors have seen major returns as futures contracts appreciated 2 percent. This has helped make energy a leading sector in early 2018 after lagging in 2017.

Sears is closing over 100 more stores
Sears is closing more than 100 Kmart and Sears stores in January. Macy’s announced last year it would close nearly 100 locations, and it expects to close 11 more in 2018. These closings are due to changing strategies as brick-and-mortar retail loses market share each year. Sears has begun listing its brands on Amazon, and Macy’s is focusing on its prime locations and selling online from its own platform.

Story of the week

Fattening Up Your 401(k) Will Be Easier Than Losing Weight in 2018
New Year’s resolutions historically have miserable success rates. But a goal-setting website called StickK has developed a platform geared to help people succeed. From data it has collected, StickK has found when using a “referee,” a person who verifies progress, participants had a 61 percent success rate in their finance goals and a 47 percent success rate in their fitness goals. In today’s economic environment, it may be easier to fatten up your finances than yourself.

Weekly Focus – Think About It

“I offered a definition of bubble that I thought represents the term’s best use: A situation in which news of price increases spurs investor enthusiasm which spreads by psychological contagion from person to person, in the process amplifying stories that might justify the price increase and bringing in a larger and larger class of investors, who, despite doubts about the real value of the investment, are drawn to it partly through envy of others’ successes and partly through a gambler’s excitement.”

                                                          ~ Robert Shiller, American Nobel Laureate and Professor of Economics

Links & Disclaimers

RJFS and SPC do not offer or provide legal or tax advice. Tax services and analysis are provided by the related firm, S&M through a separate engagement letter with clients. Portions of this newsletter were prepared by Carson Group Coaching. Carson Group Coaching is not affiliated with RJFS, SPC or S&M. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. This information is not intended as a solicitation of an offer to buy, hold or sell any security referred to herein. There is no assurance any of the trends mentioned will continue in the future. Any opinions are those of the author and not necessarily those of RJFS. Any expression of opinion is as of this date and are subject to change without notice.
Opinions expressed are not intended as investment advice or to predict future performance. Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Past performance does not guarantee future results. Investing involves risk, including loss of principal. Consult your financial professional before making any investment decision. Stock investing involves risk including loss of principal. Sector investments or companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification. Investing in the energy sector involves special risks, including the potential adverse effects of state and federal regulation and may not be suitable for all investors. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Please note direct investment in any index is not possible. Securities that have been classified as Bitcoin-related cannot be purchased or deposited in Raymond James client accounts.
Links are being provided for information purposes only. RJFS, SPC and S&M are not affiliated with and do not endorse, authorize or sponsor any of the listed websites or their respective sponsors, and they are not responsible for the content of any website, or the collection or use of information regarding any website's users and/or members.

https://www.barrons.com/articles/dow-25-000-how-high-can-it-go-1515213968
https://www.economist.com/news/top-ten-articles-2017
https://www.economist.com/news/business/21722869-anti-establishment-technology-faces-ironic-turn-fortune-governments-may-be-big-backers
https://www.economist.com/news/science-and-technology/21716599-film-worth-watching-how-keep-cool-without-costing-earth
https://www.forbes.com/sites/joshlinkner/2012/11/16/palm-kodak-blockbuster-sears-rim-borders-circuit-city-compaq-and-the-only-thing-you-can-do-to-avoid-being-next/
https://books.google.com/books?id=ytrqJswoRCoC&printsec=frontcover&dq=schumpeter+creative+destruction&hl=en&sa=X&ved=0ahUKEwjI3vzTj8TYAhXn34MKHflSA6MQ6AEINjAD#v=onepage&q=essential%20fact&f=false
https://economics.mit.edu/files/1785
https://books.google.com/books?id=ytrqJswoRCoC&printsec=frontcover&dq=schumpeter+creative+destruction&hl=en&sa=X&ved=0ahUKEwjI3vzTj8TYAhXn34MKHflSA6MQ6AEINjAD#v=onepage&q=gale&f=false
https://www.economist.com/news/business/21638124-minting-digital-currency-has-become-big-ruthlessly-competitive-business-magic
https://www.washingtonpost.com/news/energy-environment/wp/2017/12/19/why-the-bitcoin-craze-is-using-up-so-much-energy/?utm_term=.c9d35abe5a84
https://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2013/shiller-lecture.pdf
https://www.bloomberg.com/news/articles/2018-01-05/u-s-adds-148-000-jobs-wages-rise-in-signs-of-full-employment
https://www.bloomberg.com/news/articles/2018-01-03/snow-bomb-cyclone-nears-with-energy-retail-sectors-exposed
https://www.cnbc.com/2018/01/04/sears-is-closing-more-than-100-more-stores.html
https://www.bloomberg.com/news/articles/2018-01-05/fattening-up-your-401-k-will-be-easier-than-losing-weight-in-2018


RJ Approval # C18-002400

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