Weekly Commentary horterinvestment.com January 29, 2018

Goldman Warns on “Extreme” Optimism

Goldman Sachs is going on the record warning of “extreme” optimism in markets after stocks’ torrid start to the year. The bank says its cross-asset measure of risk appetite is the highest it has been since 1991 (!). The bank says the risk of losses is higher now, but that in their experience, signals from the macro economy tend to trump signals from risk appetite. Therefore, given that the world’s economy is moving nicely, the market may have more room to run. That said, Gold-man is nervous about markets, saying “Risk appetite is now at its highest level on record, which leads to the question of what future returns can be”.

Why the Next Recession Will Be Very Painful

While everyone expects that we will have a recession at some point, and likely a significant correc-tion, one of the big questions regards the depth. The Wall StreetJournal has something to say about this issue, as the paper is arguing that the next recession is going to be brutal. The reason why is that the government won’t have as much firepower to stimulate the economy in coming years. That is because the newest tax package will send the deficit surging, and there will not be further room to cut once the recession takes hold, eliminating one of the government’s main weapons in com-bating recessions.

B-Ds Next to Fall Under Fiduciary Rule

InvestmentNews has run a very ominous article. The piece cites recent evidence published by the Wall Street Journal showing that large discount broker-dealers often mislead clients by saying they do not have incentive fees when they do. Firms like Charles Schwab and TD Ameritrade often brand themselves in a very positive light, saying things like being “champions of investors” and putting clients first etc. However, such misleading behavior may lead to the current or future fiduciary rules being extended to cover broker-dealers entirely, not just regarding disclosing conflicts of interest.

Taking a comprehensive look at the overall current stock market, you can see the chart below representing eight major indices and their returns through the week ending January 26, 2018. In a truly diversified portfolio, the portfolio’s total return is determined by the performance of all of the individual positions in combination – not individually.

So, understanding the combined overall performance of the indices below, simply average the 7 indices to get a better overall picture of the market. The combined average of all 7 indices is 3.28 % year to date.

Data Source: Investors FastTrack, Yahoo Finance

Past performance is not a guarantee of future results. This Update is limited to the dissemination of general information pertaining to its investment advisory services and is not suitable for everyone. The information contained herein should not be construed as personalized investment advice. There is no guarantee that the views and opinions expressed in this newsletter will come to pass. Investing in the stock and bond markets involves gains and losses and may not be suitable for all investors. Information pre-sented herein is subject to change without notice. Horter has experienced periods of underperformance in the past and may also in the future. The returns represented herein are total return inclusive of reinvesting all interest and dividends.

The above equity, bond and cash weightings are targets and may not be the exact current weightings in any particular client account. Specifically, there may be cases where accounts hold higher cash levels than stated in these target weightings. This is usually to accommodate account level activity. Furthermore, some variable annuity and varia-ble universal life accounts may not be able to purchase the exact weightings that we are indicating above due to specific product restrictions, limitations, riders, etc. Please refer to your client accounts for more specifics or call your Horter Investment Management, LLC at (513) 984-9933.

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WEEKLY MARKET SUMMARY

Global Equities: As earnings season ramps up, US stocks continue to soar, with the Dow Jones Industrial Average, S&P 500, and the NASDAQ all hitting new record highs. Among US equity sectors, HealthCare posted the largest weekly gain, with Consumer Discre-tionary trailing close behind. Developed international and Emerg-ing markets rose as they posted their seventh and eighth consecu-tive weekly gains, respectively.

Fixed Income: The benchmark 10-Year US Treasury Note yield was relatively flat for the week caused by conflicting remarks about the dollar from President Trump and Treasury Secretary Mnuchin. High yield spreads tightened to around 3.28% over Treasures, a level that has not been seen since 2007. High yield bond funds experienced back to back weekly outflows as an additional $1.13 billion was pulled from mutual funds and ETFs during the week ended January 24th, according to Lipper data.

Commodities: US benchmark West Texas Intermediate (WTI) was on fire last week, gaining about 4.3% and trading above $66 as of Friday afternoon. A weakening US dollar caused a spike in demand for dollar-denominated commodities. WTI is now trading near its 52-week high and at levels that haven’t been seen since 2014. Brent Crude finished the week just under $71 a barrel.

WEEKLY ECONOMIC SUMMARY

GDP comes in just shy of expectations: Fourth-Quarter GDP rose 2.6%, falling short of consensus estimates of 3.0%. Consumer spending rose 3.8% while business investment was up a strong 6.8%. Housing investment was up 11.6%, a very encouraging rate after 2 consecutive negative quarters.

ECB stays the course: The European Central Bank left its interest rates and policy stance unchanged. The bank’s governing council did not change its stance that its $30 billion Euros in monthly bond purchases will run at least until September and longer if necessary. President Draghi made it clear that he does not expect the bank to change interest rates in 2018.

Davos agenda: Speaking at the World Economic Forum in Davos, Switzerland on Friday, President Trump said that there has never been a better time to invest in America’s future, pointing to tax cuts, regulatory reform, and new energy sources as some of the main reasons for optimism. Trump also said he would consider re-entering the Trans-Pacific Partnership trade pact if the US got a “substantially better” deal.

4th QUARTER 2017 EARNINGS SUMMARY

Earning season heats up: Shares of Netflix (NFLX) soared to all-time highs on blowout subscriber growth and a bullish outlook, ending the week at $274.60 for a weekly gain of 24.56%. Dow con-stituents Caterpillar (CAT), 3M (MMM), Procter & Gamble (PG), and Travelers (TRV) all reported strong earnings as well. General Electric on the other hand was not so lucky. Missing on earnings and disclosing an SEC probe caused additional pain to the strug-gling company, GE is down -45.01% over the last year. This week we have even more to look forward to with Apple (AAPL), Mi-crosoft (MSFT), Facebook (FB), AT&T (T), Amazon (AMZN), and Google (GOOG) set to report, just to name a few.

Dow Jones – Week Ending

Current Model Allocations

Last Week’s Manager Moves

HIM #22—Bought 100% Fund on 1/24

In utilizing an approach that seeks to limit volatility, it is important to keep perspective of the activity in multiple asset classes. We seek to achieve superior risk-adjusted returns over a full market cycle to a traditional 60% equities / 40% bonds asset allocation. We do this by implementing global mandates of several tactical manag-ers within different risk buckets.

For those investors who are unwilling to stomach anything more than minimal downside risk, our goal is to provide a satisfying return over a full market cycle compared to the Barclays Aggregate Bond Index. At Horter Investment Management we realize how confusing the financial markets can be. It is important to keep our clients up-to-date on what it all means, especially with how it relates to our private wealth managers and their models.

We are now in year nine of the most recent bull market, one of the longest bull markets in U.S. history. At this late stage of the market cycle, it is extremely common for hedged managers to underper-form, as they are seeking to limit risk. While none of us know when a market correction will come, even though the movement and vol-atility sure are starting to act like a correction, our managers have been hired based on our belief that they can accomplish a satisfying return over a full market cycle, — while limiting risk in comparison to a traditional asset allocation approach.

At Horter we continue to monitor all of the markets and how our managers are actively managing their portfolios. We remind you there are opportunities to consider with all of our managers. Hope-fully this recent market commentary is helpful and thanks for your continued trust and loyalty.