Greetings from the crew at Eagle Financial Strategies. We hope this finds you all well.
Following please find our commentary on the markets in general as we go into the second half of the year. But first, some issue specific news concerning those of you who hold American Finance Trust.
American Finance Trust, as of their director’s meeting on June 9th (we were notified on 6/27) has suspended their redemption program for now (with the exception of death or disability of the shareholder), including the redemption we were supposed to have in July. Their rationale for this is that the constant redemptions were hurting their ability to use their cash to make further investments for the Trust to strengthen the underlying portfolio. The company reiterated that these are intended to be long term investments, generally using a 3 to 5 year time frame. American Finance Trust is currently in its third year of operation. They did not indicate when the next round of redemptions would be.
While this means that it will take a while longer to fully exit this position, there is a positive takeaway. At their current dividend of $1.30 per share per year, the annual yield on the positions held in your portfolios that have this issue is slightly above 6%.
Now on to the markets in general. The “Trump Rally” continues to produce decent returns in almost all market segments. Although the markets seem to be rangebound over the last few weeks, year to date (through 6/30/2017) performance for the major indices is as follows (Source: Morningstar):
Dow Jones Industrial Average + 9.35%
Standard & Poors 500 Index + 9.34%
Russell 2000 + 4.99%
MSCI Europe Asia Far East +13.81%
MSCI Emerging Markets +17.22%
As you can see, in general, it has been a good year so far. Even in a rising interest rate environment in which fixed income investments normally do poorly, the Barclay’s US Aggregate Bond Index is up 2.27%.
This, however, causes us pause. We believe that, going forward, we need to be very cautious and prepare ourselves for increased market volatility. We base this cautionary stance on the following factors:
1. Since spring of 2009, with the exception of a small pullback in 2015, the markets, as a whole, have been going up.
2. We believe in “reversion to the mean”, in which the markets need to adjust back to their traditional, historical rates of return.
3. We see investors getting extremely comfortable with the relatively low levels of market volatility. This comfort level often leads to unrealistic expectations that the markets will continue their upward trend indefinitely.
So, how do we prepare for what we believe is a return of volatility and perhaps a broad market pullback? We offer the following suggestions.
First, realize that, for the most part, your portfolios are built for the long haul. Increased volatility allows us to create buying and selling opportunities, while market pullbacks allow us to buy your investments and reinvest your dividends at better prices.
Second, understand that making knee-jerk reactions to short term market movements can derail your long term investment program. Sometimes doing nothing is better than doing something. Portfolio activity does not always translate to positive, long term outcomes.
Finally, if and when market volatility returns and/or we begin to experience a market pullback, talk to us if the market action is causing you stress. There are many steps we can take to help you through the market declines including investment education and re-evaluation of your risk tolerance, among others.
In other developments, we are continuing to refine our portfolio modeling program. Most of you will see some additional trading activity in your accounts as we continue this process.
In closing, we want to reiterate how much we appreciate the trust you place in us to handle your financial affairs. In terms of personnel, we have been going through some growing pains over the last few months. Thank you all for your patience. We will be announcing a new hire soon.
As always, please contact us with any questions or concerns. On behalf of all of us at Eagle Financial Strategies, we hope you have a great Summer.