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Klingman Insights Archive

   Trump Wins Election

November 9th, 2016

Good morning. Undoubtedly, most of you, like us, had a long night following the election results. Much will be written today and in the coming weeks regarding what the results mean for our country and our position in the world, and much of that analysis will be thoughtful and accurate. In our opinion, many will read more into this election than is actually there. The reality is both parties nominated candidates that were very unpopular with the majority of people in this country and that made the outcome of the election that much more unpredictable.

As we expected and as we discussed in our call a few weeks ago, markets are reacting negatively in the short term to a Trump victory because of the uncertainty of some of his stated policy objectives. We expect to see considerable volatility today and over the coming weeks as the markets try to sort out how much of some of Trump’s more extreme positions on trade and immigration can work their way into actual policy.

The question for the markets, and our country, is whether Donald Trump the President actually governs as the extremist populist campaigner or the pragmatic businessman that wants to change Washington. We will watch closely to see the people that he surrounds himself with and potential future cabinet members as an indication of which direction he intends to lead.

With Republicans appearing to be in control of the Presidency, the Senate and the House of Representatives, we believe there will be significant changes in tax policies and regulation. Clearly Trump is not the typical Republican and it is still uncertain how closely the executive branch and Congress will work together, but there are some significant opportunities for legislation that would be viewed positively by the financial markets.

We will continue to watch developments closely over the coming months and communicate our views. If you have any specific questions, don’t hesitate take to reach out to us or anybody on our team.

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 opinions are those of Gerald Klingman and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

   "Brexit" Vote to Leave

June 24th, 2016

In a close ballot, Britain voted to leave the European Union. So what does it mean? As various published studies have shown, the departure will likely be negative for the UK economy and increases the chance of a recession. We would agree, and thus expect today's vote to be very disruptive to financial markets in the short-term. Britain never adopted the Euro as its currency, and there will likely be a significant fall in value of the British Pound. However, we do not think it necessarily spells the end of the Eurozone, nor the world, and, depending how this plays out, we believe it may present attractive opportunities in global asset prices.

The overall impact of the Brexit is hard to quantify as there are many economic and political uncertainties that will remain. There are going to be unanswered questions around the timing and length of trade negotiations, impact on the UK government and the relationship a departing UK will want with the EU. However, we believe the biggest long-term risk may be around political contagion. If Britain establishes a clear exit path out of the EU, it's possible that Britain may not be the last member state to depart from the EU. At the same time, it is possible that the remaining 27 countries bind together and unite politically to strengthen the union. This outcome would become more likely if Britain struggles throughout their "break-up" with the EU. Only time will tell.

We are disappointed in the outcome today, and believe it was a short-sighted decision on behalf of the UK. However, Britain has prospered on its own for centuries and we do not see any fundamental reason why that will change going forward. For that reason, we believe a significant market sell-off could create long-term opportunities in many global assets classes, particularly non-US stocks. We are prepared to take advantage if this occurs with the built up cash allocation in our models. As we have preached time and time again, markets often overreact in the short-term assuming the worst case scenario. Investors who remain calm and focus on the longer term horizon can possibly benefit from such volatility.

   "Brexit"

June 15th, 2016

On June 23rd British citizens will vote to determine if their country will stay or leave the European Union. This process has often been referred to as "Brexit". Before diving headfirst into the "Brexit" vote and its potential implications, recall that the European Union (EU) is an economic and political union of 28 European states. The EU upholds common policies across the states on social and economic programs such as trade and immigration. Britain is a member of the EU, despite maintaining its own currency.

Economists, central banks and politicians around the world (including the Bank of England, the UK Treasury, and Britain's Prime Minister David Cameron) have warned Britain that they could be worse off economically outside the EU. However, it has become clear that the vote is much less about economics. Rather, people's voting interest seems to be more about sovereignty of the British citizens – specifically around control of their immigration and trade policies. We believe it is in Britain's best interest to stay in the EU, and we believe that is the probable outcome. However, recent polls indicate the vote could come right down to the wire. The Financial Times most recent poll on June 10th suggests 45% vote stay, 43% leave, and 12% remain undecided. The big swing factor will likely be the British youth, who generally support staying in the EU, but are less likely to actually vote. All of this uncertainty around the outcome has led to a significant increase in market volatility, and we expect more to come as we approach the vote. We saw somewhat of a similar situation last year when Scotland voted whether to break from the United Kingdom. Polls indicated a close vote, but the Scots comfortably voted to stay in the UK.

If the outcome of the vote is to stay in the EU, it will be business as usual and we would expect a relief rally in global asset prices, particularly in Europe. If the outcome is to leave the EU, Britain will embark on a two-year negotiation period with the EU about the terms of their divorce. The departure would increase the chances of a recession in both the UK and the EU in the coming years. It would also increase the chances that the remaining 27 states in the EU do not stay intact. Both most likely would be negative for markets in the short term. Stay tuned.

   Read our thoughts on the current Stock Market Volatility

February 11th, 2016

As we discussed in detail in our Q1 Capital Markets Outlook and our January 28 client conference call, there are a range of economic issues that are concerning investors today: the rapid decline in oil prices, economic slowdown in China, divergent central bank monetary policies, and the risk of a global recession. We do not believe any of these concerns rival the types of risks that we saw entering into the global financial crisis and Great Recession of 2008-09.

Also on our call, we tried to give some historical perspective on the market decline that we've experienced since May of last year. (Click here to access a recording of the call.) As the US equity market appears to be retesting the January lows again today, we thought it might be helpful to provide some additional information and historical perspective on previous stock market declines.

The chart below looks at stock market declines in the S&P 500 since 1945. There have been 75 different declines of 5 to 10% in the market, an average of more than one per year. The average decline was ~6%, lasted about a month, and took about a month to recover from. This is normal year-to-year market volatility.

There have been 26 "corrections" or market declines between 10 and 20%, about one every three years. The average of these declines has been ~ 13%, lasted about four months, and took, on average, three more months to recover to previous highs.

There have been 11 declines that can be categorized as "bear markets", or declines of more than 20%. The chart below further breaks those into more "normal" bear markets declines between 20 and 40%, and the extreme bear markets that we experienced in the mid-70s and 2007-2009, which saw declines of over 40%. A "normal" bear market lasts about 11 months, with an average decline of almost 30%. It has taken 14 months, on average, for the stock market to recover to its previous highs.

Let's try to frame the current decline in this historical perspective. The S&P 500 peaked on May 20, 2015. At today's levels the S&P is down about 15% from this high and is nine months into the decline. While no one has a crystal ball, and it's impossible to pick a bottom, we believe that we are much closer to the end, than to the beginning, of this decline. History does not exactly repeat, but it certainly rhymes.

Economic textbooks talk about the "equity risk premium" which essentially says that if you're willing and able to hold equities through short-term, scary periods of decline, you should be rewarded with higher long-term returns in your portfolio. It no doubt can be a very painful process to live through, particularly in an era where CNBC is blaring in the background and we have online access to all our financial information at all times. Discipline and patience are rewarded over time.

As always, if you have any specific questions related to your portfolio or plan, please don't hesitate to reach out to any of us.

   A Greek Tragedy

If you have turned on a television or picked up a newspaper in the last few days, you have likely come across the standoff between Greece and its "creditors", which include the European Union (EU), International Monetary Fund (IMF) and European Central Bank (ECB). While tensions between the parties mount and volatility intensifies across global markets, we believe it is important to put the events in perspective as we consider their potential effects on the global economy in the long-term.

To give some background on the developing story, the "creditors" have organized a series of bailouts (amounting to $217b) to the Greek government over the last several years. While the Greek government has taken many steps to improve their fiscal situation, it has become apparent that they do not have the ability to make the July and August payments. The creditors are demanding a series of additional policy changes including reducing pension payments, raising the retirement age sooner, and cutting back on early retirement immediately in return for additional debt relief. Over the weekend, the Greek Prime Minister Alexis Tsipras pulled out of negotiations with the creditors and called for the Greek people to vote on the demanded policy changes (scheduled for July 5th). Mr. Tsipras strongly urged voters to vote against the proposed austerity measures.

While we continue to follow the developing story and monitor new headlines as they flash on our screens, it is important to put this all into context. In economic terms, Greece is a tiny country. It’s GDP (total output of goods and services) is 6% of Germany’s, 0.4% of the World’s, and comparable to our beloved constitution state, Connecticut. While it is evident that Greece’s economic footprint is relatively small, the real concern lies around the contagion effect on peripheral European nations (namely Portugal, Spain and Italy). We believe that the chaotic events in Greece, if anything, has made it less likely that Italy or Spain would head down the path toward exiting the Euro.

If Greek voters vote "yes", agreeing to the additional austerity measures in return for an extension on the loans, Greece will likely fall into another recession. If the voters vote "no", rejecting austerity, it will present the creditors with a difficult choice to either force Greece out of the Eurozone or continue to help Greece ease out of the crisis. If Greece is indeed forced out of the Eurozone (the more likely of the two scenarios), we expect to see short-term volatility in European and broader global markets given panicking investors responding to the headlines and draconian news coverage. The ECB and European Union is much more prepared for this than is 2010 when the debt troubles first surfaced, and we expect this to be a somewhat isolated event: painful for the citizens of Greece, but relatively benign for global economies and markets in the long term.

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 opinions are those of Klingman & Associates, LLC and not of Raymond James.


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