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Stock Market Corrections In Mid-Term Election Years

Mid-term election years tend to be volatile for the stock market, especially in the second-half of the year. The main reason, is simply the market doesn't like uncertainty and this year may create more uncertainty and and volatility than normal. The table below shows the biggest corrections that have occurred in each year
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Commodities Perform Best Late In The Cycle

Commodities tend to be one of the best performing asset classes late in the market cycle.  The chart below shows the historical performance of stocks, bonds and commodities from the time the yield curve inverts to a recession, and commodities have been the best performer by a wide margin.  At the current late stage of the market cycle and with unemployment so low we think having some commodity and real return exposure can improve returns both on an absolute and risk-adjusted basis.
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How To Stay Mentally Fit In Retirement

So what do we need to do to stay mentally fit and keep our minds nimble? The answer is to keep going. Research has shown people ages 50-70 are better off staying in work longer or taking up hobbies to keep them physically and mentally active in retirement. To stay mentally fit, we can’t rely too heavily on technology. Try not to be mentally lazy by relying on your smartphone to route you to your next location or to find your friends cell phone number. Training your brain by solving problem
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June 2018 Investment Commentary

Global stock market performance diverged last month as volatility persisted. Stocks in the U.S. rallied strongly as the macro backdrop of steady economic growth and improved corporate earnings continued. While foreign markets sold off as a result of heightened political risk, trade concerns and a higher U.S. dollar.
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About That Best Interest Rule

On April 18th, Under Regulation Best Interest was released by the SEC (U.S. Securities and Exchange Commission). This proposal requires broker-dealers to act in the best interest of their customers when making recommendations involving securities, without putting their own interests ahead of the customer. To act in like character with aims based on investment objectives, risk tolerance, financial circumstances, and needs of investor. This standard of conflict has been issued and widely known tha
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Are Corporate Profits Rising or Flattening Out?

It depends on the data you look at!  The chart below from Gavekal Research shows that before-tax corporate profits (blue line) are actually down by $32 billion from the peak in 2014.  However, after-tax profits are up about $130 billion from that same year.  Obviously the recent tax cuts are having a big impact on profits, the key question is whether this is a one-time boost to corporate profits or not.  We don't expect the data to diverge for too long.
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Secular Thinking

Many investors get tripped up by short-term thinking, which leads to overreacting to the latest headlines, and ultimately poor investment decisions.  One way to combat the hazard of ‘short-termism’ is to develp a long-term or secular view (3-5 years) of where the global economy and financial markets are headed.  PIMCO is one of the very best firms at developing a secular view of the world that guides their long-term investment decision making.  At their recent secular
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PIMCO

The investment team at PIMCO recently shared a chart and commentary that does a nice job of summarizing asset classes in a way that is consistent with our view of the investing landscape. On the surface the chart looks rather simplistic with the safest asset classes in the center and the riskiest on the outer circles. The safest securities start with Treasury bills and gradually move out the risk curve to equities and real estate. Suggesting the obvious conclusion that higher r
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TIMING A TURN IN THE MARKETS

As we write, the current rally which dates to November 20, 2012 has become the second longest in the past thirty years. For this purpose we define a rally as the number of weeks the S&P 500 stays above its 200 day moving average (DMA). By most measures the current rally seems a little "long in the tooth", but that in itself is not necessarily a r
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INCOME INVESTING

Thankfully we were early to recognize the secular theme of a rising demand for investment income in an era of low interest rates. Based on demographic trends, slower economic growth (New Normal), monetary policy and other factors we have tilted our portfolios towards higher income from multiple sources, which has resulted in improved returns with lower risk. In essence, we have been able to" have our cake and also eat it too." For many investors, there is an intuitive appeal to owning
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YIELDS AND VALUATION

We are starting to see some interesting divergences in the 10 year yield and valuations. The chart below from GaveKal (www.gavekal.com) illustrates that the forward p/e on the S&P 500 has continued to drift higher while yields have pulled back.  Note that bond yields are at an interesting technical level that could add to the divergence; we will continue to monitor these relationships closely.
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THE NEXT BLACK SWAN

The next Black Swan may come from "geopolitical tapering" not the tapering of the Federal Reserve's bond purchases according to Harvard historian, Niall Ferguson. In a recent speech, Niall provided an interesting perspective on the scaling back of the U.S. military presence around the world, at the same time that we are seeing China, Japan, Russia and others start to assert themselves globally. Black Swans by definition are low probability events, however this is an area that inves
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WORKING WITH A FINANCIAL PLANNER

When starting a relationship with an advisor, we believe it is important to ask the right questions. The Certified Financial Planner Board, which is regarded as the standard for practitioners, list 10 Questions to Ask a Financial Planner. Two questions that stood out to us were, What are your qualifications?" and "Could anyone besides me benefit from your recommendations? Our team is highly credentialed and experienced to address the complex needs of our client
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BILL GROSS AND THE "NEW NUETRAL"

In his most recent investment outlook Bill Gross discussed the concept of a New Neutral, and its importance to the pricing of financial assets. Historically the real (after inflation) fed funds rate has followed a long trend from 4% in the 70's to 2% before the financial crisis. This is important because the fed funds rate is central to the pricing of most financial assets, including stocks and bonds. Gross' thesis is that the long-term real fed funds rate is moving towards z
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COSTS MATTER

A recent study from Morningstar confirms what we intuitively already know, mutual fund performance is closely linked with expenses. The chart below summarizes the performance and fees of the leading mutual fund families; with the lower left representing weaker risk-adjusted returns and higher costs and the upper right being higher returns and lower costs. Some of the fund families that stand out for good performance and low fees are no surprise: Vanguard, Dodge & Cox, T. Rowe Price and PIMCO
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REITS VS COMMERCIAL REAL ESTATE

How do Real Estate Investment Trusts (REITs) compare to direct exposure in Commercial Real Estate (CRE)? There are many pro's and con's when investing in REITs vs. CRE. The pro's are: easy diversification; decent yields; and no fixed real real estate costs. The con's include: higher volatility, lower yields than direct CRE and less diversification benefits. As investment managers we like the greater volatility of REITs because we believe it creates opportunities for patient inve
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INVESTORS ARE STRETCHING TOO FAR FOR YIELD

The table below shows the effective yield, option adjusted spread and expected nominal returns for different categories of corporate bonds. It's clear from the table that buyers of lower quality bonds are not being adequately compensated for taking on the added risk of owning low quality bonds. Default rates are currently low, however this will change when we enter the next recession. In our opinion, it's not always worth stopping to pick up the extra pennies, especially if the steam
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AN INSIDE LOOK AT THE S&P 500 P/E BY MARKET CAP

The S&P 500 is a market weighted index, meaning that companies with the largest market capitalizations have the biggest impact on the overall performance and valuation of the index. The table below, provided by GaveKal, shows the forward P/E valuation for the S&P 500 broken into three market cap categories: top 10, top 50 and bottom 450. The table clearly shows that the largest companies (top 10 and top 50) are trading at significantly lower valuation multiples than the smallest companie
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BEHAVIORAL ECONOMICS: A FUNNY ILLUSTRATION OF THE "HERDING" EFFECT...

"Lone Gazelle"
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WHY ECONOMIC MOATS MATTER

The term "economic moat" is widely credited to Warren Buffett, and simply means that a firm possesses a sustainable competitive advantage over its competition.  Allowing them to fend off their competitors and earn high rates of return on their capital.  Identifying moats is a key part of our investment strategy and the reason is clearly illustrated below.  Firms that have sustainable competitive advantages (economic moats) will earn a higher return on
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THE MIDDLE OF THE YIELD CURVE IS ACTING LIKE THE FED JUST COMPLETED A TIGHTENING

While yields at the long end of the US Treasury market have been heading lower all year (the 30-year has fallen from 3.93% to 3.32% and the 10-year has fallen from 2.94% to 2.56%) the middle of the yield curve has been acting entirely differently. The 7-year yield has fallen only slightly by about 20bps to 2.23%, while the 5-year yield is actually 1bps higher at 1.75%. Moreover, since the middle of 2012 5-year yields have risen by 216% and 7-year yields have risen by 146% (chart 1 below).
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A CASE OF DISAPPEARING FUNDS

Dimensional Fund Advisors (DFA) recently published a study of mutual fund performance that had some eye-popping statistics. The chart below shows the number of equity mutual funds that outperformed their respective benchmarks over multiple time-frames and the number of funds that survived over those same time-frames. The number of funds that outperformed their benchmarks over the different time-frames is astoundingly low, and progressively got worse the longer the time period.
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INVESTMENT HUMOR

INVESTMENT HUMOR
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A PENNY SAVED IS A PENNY EARNED

Money continues to gravitate towards Vanguard and Blackrock. What do they have in common? Mostly, low costs and market leading ETFs... we are glad to see that investors are waking up to the notion that costs matter!
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THE GREYING OF AMERICA

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MID-TERM ELECTIONS

Markets have been extremely volatile of late, however history suggests they could improve post the mid-term elections. The resolution of election uncertainty, and the negative rhetoric that comes along with campaigning, has historically been a positive for the stock market. The chart below shows that 6 to 12 months after the mid-term elections stocks have tended to show significant gains. If history holds we think the correction in October may be setting up for a pretty good buying opportunity.
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TAX CHANGES FOR ESTATE PLANNING

The Internal Revenue Service announced Thursday that in 2015 the estate-tax exemption will rise to $5.43 million per individual ($10.86 million for married couples) from $5.34 million this year. The top estate and gift-tax rate remains at 39.6% for 2015. The increase in federal estate tax exemptions and portability has left many people less concerned with updating their estate plans. However, there are many reasons other than taxes to keep your estate plan current, including protecting your
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INTERNATIONAL MARKETS LOOKING MORE ATTRACTIVE

International developed and developing markets have lagged the U.S. markets for several years, mainly a result of slower economic growth and declining currencies. We believe valuations in those markets are becoming more attractive on a relative basis, and would consider further underperformance as an opportunity to increase positions. Below is a snapshot of normalized P/E valuations from the Leuthold Group, indicating the better relative valuations in foreign developed and developing markets.
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CHARITABLE GIVING

The last few months of the year make up what is commonly called the Giving Season for the nonprofit community. Include charitable giving in your financial plan and support the causes that mean the most to you.
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LONG END OF THE US YIELD CURVE FLATTEST SINCE JAN 2009

The spread between 30-year treasury yields and 10-year treasury yields fell to 65 basis points yesterday which is the lowest spread since January 21st, 2009. Since April 2013, the spread has narrowed by 59 basis points.
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WINNERS AND LOSERS OF THE OIL PRICE PLUNGE

With oil prices dropping close to 50% the past six months, it's important to think about who wins and who losses. The chart below shows a summary of the countries that are the biggest oil importers and exporters, with importers being the obvious winners. Here's a quick run-down of some of the winners and losers from the recent oil price decline: Winners: • Countries and regions that are big importers of oil (i.e. Japan and China) • Global consumers will have extra
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THE FUTURE OF RETAIL BANKER

Online banks continue to take market share from traditional banks, according to a recent article from Morningstar. The combination of a low-cost position due to a lack of physical branches, shifting customer preferences, and superior customer service is strengthening the competitive advantages of the bank subsidiaries of companies like Discover Financial Services and Charles Schwab. We believe this trend will continue to favor online banks, pressuring traditional banks, especially smaller banks
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SINCE 1871, US EQUITIES HAVE NEVER RISEN 7 CONSECUTIVE YEARS IN A ROW

Will 2015 be different? Trends are made to be broken and each market cycle is unique. We would never recommend relying on one data point as an indicator of future trendes, however, we are watching a number of key variable, including the US dollar, US bond yields, commodity prices, actions of foreign central banks and global economic activity as part of our assessment.
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THE AVAILABILTY OF SOVEREIGN BONDS IN THE PRIVATE SECTOR IS SHRINKING

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THE LAW OF LARGE NUMBERS

One of our research providers, the Leuthold Group, recently published an interesting study of individual companies whose market value has grown large enough to comprise more than 4% of the S&P 500's market value. Something that has only happened 5 times, with Apple being the most recent addition to that club. The chart below shows how long the previous members of the "4% club" stayed at that level and how they performed afterwards. The Leuthold Group concludes tha
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EURO_DENOMINATED DEBT ISSUANCE IS GROWING

The widening gap between U.S. and Euro area corporate interest rates is driving U.S. companies to issue more euro-denominated. The first chart below shows the increasing divergence in the investment grade corporate bond yields that is now approaching 2%. The second chart shows the significant growth in euro-dominated corporate debt, which is back near the 2007 high. Given the divergence in monetary policy, the U.S. likely to raise rates while the euro area ramps up QE, the trend is likely to per
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IT HAS BEEN A WHILE SINCE WE'VE SEEN A CORRECTION

The chart below from Ned Davis Research shows the number of days since we have seen a correction of 5, 10 or 20%. The length of time since the last significant correction is near record levels, suggesting that complacency on the part of investors is increasing. The chart doesn't suggest that a correction is imminent, but it does suggest a corrections is overdue and likely to occur this year. The longer it takes for a correction to occur, the greater the magnitude of the decline is likely to
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STOCK MARKETS ARE NARROWING IN 2015

According to a recent study by Ned Davis 11 stocks in the NASDAQ 100 account for 100% of the returns thru 7/31 of this year, while only 3 stocks (AAPL, Amazon and Google) account for 50% of the gains. It is not unusual for the breadth in the market to narrow, particularly during the later stages of a market rally. It is also a good illustration of why it is so hard for active managers to keep up with the passive indices, if a manager doesn't own the few stocks that are leading
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G7 Deflationary Forces Remain Intact

The chart below, from ECRI, shows that inflation remains well contained in the G7 countries, with core inflation staying close to 1.5% and headline inflation near zero. The shaded areas are recessionary periods and illustrate how inflation drops when a business cycle recession occurs. With inflation so low, and weak economic growth in China and around the world, it seems clear why the major central banks have not been in a hurry to raise rates.
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Five Questions and Answers about New Social Security Claiming Rules

When Congress unexpectedly eliminated two Social Security claiming strategies as part of the Bipartisan Budget Act of 2015, retirement planning got a little more complicated for people who expected to use those strategies to boost their retirement income. Here are some questions and answers that could help if you are wondering how the new rules might affect you.
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The employment numbers are not as healthy as they appear

The sustained decline in the official jobless rate - now near the Fed's estimate of "full employment" is a misleading indicator of labor market health. Indeed, the stagnation in nominal wage growth is consistent with the weakness in the employment/population (E/P) ratio. After dropping to three-decade lows in the wake of the Great Recession, the E/P ratio has barely improved since the fall of 2013, reversing only a quarter of its decline from its pre-recession highs.
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Reasonable values are returning to the markets

One of the valuation metrics we like to follow is the Morningstar Fair Value indicator. The indicator takes all of the stocks rated by the Morningstar analysts to arrive at a composite value for the market.The recent correction is starting to create some reasonable valuations in the market… making it a good time for investors to get their watch-lists ready!
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The Trend in Nominal GDP Growth is Declining

We have talked about the "New Normal" for many years and how it is translating into slower economic growth in the U.S. The charts below from ECRI show that a similar trend is happening around the world. The charts below show the trend in nominal GDP growth for five of the largest developed economies and how it has trending down for many years. The only exception is Japan the past couple of years, however that is mainly because their economy has been trending in and out of r
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Value is Starting to Outperform

in the battle of growth vs. value, growth stocks have been winning handily for several years. However, over the past couple of months we have seen value stocks start to take the performance lead. Now is a good time for investors to review their portfolios and make sure they haven't become too complacent in letting their growth or "FANG" & stocks become too large of an allocation in their portfolios. We don't know if the outperformance of value stocks will continue in
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Historical Volatility to Start 2016

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The Predictive Power of Fees

A fund's expense ratio is one of the best predictors of future success, it's not the only criteria to look at but it's a great place to start!  The below chart from Morningstar sorts funds from the cheapest quintile to the most expensive and shows the success ratio for each.  The results clearly show that cheaper funds produce better success ratios than the second-cheapest and so on, demonstrating how important costs are to successful investing.  FYI- the success ratio
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Where Are We In The Credit Cycle?

When we think about the credit cycle, we divide it into three broad stages: the recovery, the expansion, and the downturn. Based on qualitative and quantitative factors, we believe we are in the later innings of the expansion phase. While there are still a number of positives, some metrics we monitor are starting to show signs of fatigue. To be clear, these are cracks as opposed to outright erosion, and it's quite possible this cycle will persist longer than prior cycles. Also, it's impo
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The Coppock Curve Turns Positive

In the midst of a lot of negative headlines, there are positive signs for the bull market to continue.  According to Leuthold , the Coppock Curve recently turned positive.  This indicated has a decent long-term track record.  The charts below show the history of the indicator.  It doesn't always mean it will be right, but thought it was worth sharing in the face of all the pessimism. 
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New Highs.........

The S&P 500 recently made a new 52 week and all-time high.  The index had gone 413 days without making a new one-year high, making it one of the longer streaks on record. In similar periods the median return for the S&P 500 one-year later tended to be up strongly.  The chart below from Ned Davis Research also looked at new all-time highs after bear markets and also suggests more gains are likely to follow.  However, given high valuations for stocks we would suggest temperi
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The vulnerability of China’s financial system is growing

The Bank for International Systems published a warning about China's banking system in late 2016 due to the increase massive increase in their credit/GDP gap ratio.  This indicator has a good history of predicting financial crisis when a countries credit/GDP ratio exceeds 10% and China's current reading is a troubling 30% (see the chart below).  China, however has a centrally managed economy and banking system with little foreign ownership, so they may be able to navigate way t
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Actively managed fund expenses are dropping as investors move towards passively

Investors have been moving their money away from actively managed investments into passive investment funds in search of lower fees and better performance.  The good news is the flow of money into passive funds is causing active fund managers to react by lowering their fees.  Although the cost gap is still fairly wide between active and passive funds, the trend is definitely headed in the right direction.  We are big believers that the odds of outperforming go up sharply as fees c
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March 2017 Investment Newsletter

Equity returns continued their positive momentum as investors bet that the Trump administration will create faster growth if he follows through on campaign promises. Conversely, core fixed income markets were up slightly for the month, as yields stayed in a trading range.   There are a number of key events in March we are watching closely, including several key elections, which may have a significant impact on global market on.  In addition, the actions and commentary from the Federal
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Wealth Management Table of Experts

Last month, Business First gathered financial experts from seven local wealth management firms, including Steve Giacobbe, to discuss their outlook on key issues impacting financial markets and investors.  Tom Monohan, former publisher for Business First, led a 60 minute dialogue on the following topics:   • What is your market outlook for 2017? • How to digest news that may negatively affect the market? • How to determine tolerance for risk? • Wh
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Demystifying the Fee Confusion

According to a recent survey by J.D. Power, most clients don't understand the fees they pay their advisor or broker.  We can help demystify the industries hidden secrets!    
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What to Expect Next

One of the most common (and costly) mistakes an investor can make is chasing great performance.  The cartoon below by Carl Richards is a great visual and reminder that we must always be looking forward.   When forecasting expected returns, we evaluate the research from several different firms we respect.  Below are the 10 year expected 'real returns' from Research Affiliates.
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FAANG Stocks Lead the Way

The following post is from the Yardeni.com blog:  FAANG-led melt-up. The market cap of the FAANGs is up 41.4% y/y to a record $2.49 trillion, while the market cap of the S&P 500 is up 14.3% to $20.95 trillion over the same period. The FAANGs account for 27.8% of the $2.6 trillion increase in the value of the S&P 500 over the past year. The FAANG stocks now account for 11.9% of the S&P 500's market capitalization, up from 5.8% on April 26, 2013.  Collectivel
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Fund Flows Dominated by Two Firms

Fund flows into mutual funds and ETFs continue to be dominated by two fund families: Vanguard and BlackRock.  Passive strategies continue to be the big winner when it comes to attracting new assets, while active managers struggle to attract assets.  It's now estimated that passive funds represent a little more than a third of all assets in the U.S. We would not be surprised if this trend continues and passive funds approach 50% of the market over the next few years.
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What Keeps You Up At Night?

The condition of our finances and health are the two biggest worries that keep people up at night.  Although, how much we worry about these two areas tends to vary with age.  Finances tends to be a consistent worry throughout most people's lifetime, however surprisingly worry about finances drops as we age.  Perhaps because our spending drops and there's not much that can be done to significantly change them once you reach your 60's, 70's and 80's.   Under
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Inflation Sighting

We continue to see early signals that inflation may be perking up.  The signals can be seen in the pick up in inflationary expectations and commodity/energy prices are turning higher.  With the U.S. economy near full employment, we are watching for signs of wage inflation that would signal a turn in inflation that would be for real this time.  For longer term investors, we think it is a good time to start preparing for somewhat higher inflation going forward and add some inflatio
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