Category Archives: Investment

Reasons for optimism and risks to be aware of in the second half of 2017

So far in 2017, solid equity market returns, low unemployment, a growing economy, and low inflation point toward financial and economic health and offer reasons for optimism. Other indicators, however, sit near the high or low end of their longer-term ranges. Reversion to their respective means would have significant implications for investors. In this article, Milliman’s Joe Becker offers some perspective.

Inflation considerations for the post-recession market

Unanticipated inflation can adversely affect capital gains and fixed incomes. It is important for banks and other financial institutions to evaluate the prospect for future changes in price levels. In the United States, low inflation levels have created uncertainty surrounding the top-down policy measures that directly affect prices.

This Milliman Insight paper by Patrick Humes examines recent monetary policies that were employed to create inflation. It offers perspective on why these measures were not effective. Additionally, the paper outlines the proposed fiscal policies of the new administration and its prospect for increasing prices.

How did financial markets respond to Brexit?

Throughout the month of June leading up to the Brexit vote, the markets appeared to have trouble deciding which way the vote would go. Equity markets began to sell off during the second week of June as Brexit appeared to be increasingly likely. On June 14, as sentiment changed and the likelihood of Brexit seemed to be waning, equity markets started to climb back to early June levels. Markets were firmly higher on the day of the vote, exhibiting confidence that Britons would choose to stay in the European Union. As vote counts came in, currency and futures markets grew increasingly volatile with the rising prospect that Brexit would prevail. The next morning, equity markets opened sharply lower, displaying the characteristics of a classic gap event. Milliman consultants Adam Schenck,  Jeff Greco, and Joe Becker provide more perspective in this article.

Managed risk equities can reduce retiree loss aversion

Many individuals entering or nearing retirement encounter the risk tolerance paradox. They seek asset growth with an aversion to losses. This conflicting mindset prompts some investors to acquire low-risk assets when markets become volatile, essentially locking in losses while trading market risk for longevity risk.

According to Milliman’s Wade Matterson, “introducing managed risk equities into the portfolio of clients close to (or in) retirement can provide exposure to higher returns while managing the inherent higher risk.” He provides perspective on what investors should consider when using managed risk equities in his article “Solving the risk tolerance paradox for retirees.”

Money market amendment considerations

A U.S. Securities and Exchange Commission (SEC) amendment, which will take effect on October 14, 2016, has important financial implications for retirement plan participants and individual investors that own nongovernment money market funds. The amendment made to the Investment Advisors Act of 1940 (IA 1940) replaces the stable net asset value (NAV) for money market funds with a “floating” NAV.

In this article, Milliman consultant Jeff Marzinsky explains the SEC’s reasons for amending IA 1940. He also discusses how the amendment affects investors and retirement plan sponsors and provides steps people should consider to prepare for the new regulation.

Rocky start to 2016: A look at some historical market patterns

Marzinsky-JeffRecent market declines appear to be driven by a few primary factors: the purported North Korean hydrogen bomb test, tensions between Iran and Saudi Arabia, an oil glut causing the lowest price per barrel in a number of years, along with continuing concerns about growth in China, have all contributed to global market instability in recent days. Not to mention, we are entering into a presidential election year in the United States. While we have no way to predict the outcomes of these economic and geopolitical issues, we do view them with some historical perspective and insight.

We are seeing some positive aspects in domestic economics with the U.S. Labor Department indicating better job growth during the last three months and hourly pay rising 2.5%. The U.S. unemployment rate remains steady at 5% and is the lowest it’s been since 2008.

Since the end of December, the Dow Jones Industrial Average has dropped nearly 1,000 points and the S&P 500 has fallen nearly 121 points, amounting to percentage declines of around 6% in the first week of 2016. If you look back to January 2015 and January 2014, we began both years with declines in the U.S. equity markets early in the month, continuing into negative territory to finish off January. In both of those years, the market rebounded during February and ended the quarter with better results than January might have predicted.

Source: Morningstar Direct
Source: Morningstar Direct

This is not to say that we are expecting or predicting the same type of rebound during February 2016, but it shows that, from a historical perspective, the January effect doesn’t provide the full story. As you can see, rocky starts were followed by healthy rebounds as we moved into the mid part of the first quarter in each year.

More currently, during August 2015, the markets experienced a sharp correction of more than 11% over a period of six trading days from August 18 through August 25. During that period, market volatility rose significantly, as noted in the VIX Index (see chart below). The VIX, a market volatility indicator, jumped significantly during this time from the 10-to-15 level prior to the correction to over 40 during the first couple days of the decline, and remained moderately high through September.

During this time, we saw the market attempt a rebound on a couple of occasions, but ultimately it dipped again in the last week of September. The return of the market to pre-correction levels took the entire month of October, finally ending the first day of November with the S&P 500 hitting 2,100.

Source: Morningstar Direct
Source: Morningstar Direct

At this point, as an investor, you are most likely asking yourself what, if anything, should be done. Looking at historical market patterns and movements, there is a tendency for investors to be cautious when the market ventures into near-correction territory. Concerns associated with market declines often lead to unwarranted or ill-timed actions. Remember to look at the long-term aspects of your investment strategy. Market setbacks and corrections are always a part of long-term investing. Keep in mind your risk tolerance while thinking twice before making any significant portfolio adjustments.