May 2020 Newsletter to Clients

Enjoy this month’s edition that features a note to UK clients, a notice of fund changes and a report on investment performance.

UK Faculty, Staff and Physicians: As you know, the University recently announced a reduction in its retirement contribution match from 10% to 5% over the fiscal year starting in July in order to help fill an approximately $70 Million budget gap due to impacts from the coronavirus. We have been asked if it makes sense to increase your voluntary contribution 5% to make up the shortfall for the year. The answer is YES. Not everyone will be able to afford this, but if you can, increasing your voluntary contributions will help keep your financial plan on track.

Fund changes: We are in the process of switching two of our recommended mutual funds to two other, more suitable funds. T. Rowe Price Real Estate (TRREX) will be switched to Cohen & Steers Realty (CSRSX) and Oakmark Fund (OAKMX) will be switched to T. Rowe Price Blue Chip Growth (TRBCX). Each fund we recommend serves a specific purpose within our clients’, and our own, portfolios. We continually monitor each fund’s performance relative to its benchmark to make sure it continues to fill the role it needs to. These decisions are made after much research, discussion with the fund companies themselves and evaluation of performance over a long period of time. We believe these changes will serve us all well.

Investment Performance: Last month’s newsletter quoted Bob Bova’s newsletter from January, 2009 that in a crisis the stock market often moves ahead before the economy does. So far, at least, that seems to be the case this year too. The S&P 500 crashed to Bear market territory in record time by falling more than 35% from its high on February 19 to the low on March 23. Since then, however, the market has rebounded quite well as the large cap S&P 500 was down just 11.83% year-to-date through May 1. Furthermore, the index was down just 1.23% over the last 12 months. Small stocks haven’t fared quite as well – the S&P Small Cap 600 Growth Index is down 22.54% on the year and the S&P Small Cap 600 Value Index is down 31.98%.

So, with all this volatility, what happens next? The top U.S. stock strategist for Bank of America/Merrill Lynch recently said that stocks are currently relatively expensive. The S&P 500 is currently priced at 18 times last year’s earnings. She continued that, as 2020 earnings will be much lower than last year for most companies in the index, stocks are even pricier looking forward. She said that historical performance tells us that stock prices relative to company earnings has very little predictive ability over the short term, meaning 1-2 years. Over the long-term, such as a decade, current price per earnings explains 80% of stock returns. She predicted, based on current prices, that stocks will return about 6% per year on average. If she is correct, a big if, that average return would be less than most of us are used to.

While the stock market performance is always uncertain, we do know that U.S. stocks have outperformed other asset classes, such as bonds, real estate and international stocks, over the long term. And we expect them to in the future, as well. As always, we structure your specific investment strategy to meet your individual goals and our focus remains there.

Thank you for your continuing confidence.