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CLS: Weekly Market Review


Week in Review
After five consecutive weeks of positive returns for stocks globally, last week marked a return in volatility. Bonds were the only asset class with a positive return as equities and commodities ended the week down. The U.S. stock market outperformed international markets. Within the U.S., large-cap stocks outperformed small-caps. Finally, emerging markets outperformed developed international markets, which were down the most.

During the week, economic data was mixed. The third revision of U.S. GDP in the fourth quarter came out at 1.4%, versus the prior estimate of 1.0%. The housing sector saw a pickup in new home sales but a decline in existing home sales. Labor market data remained strong with initial jobless claims and continuing claims falling week-over-week. Finally, composite Purchasing Managers’ Index (PMI) data printed with a small month-over-month increase.

The Proposed DOL Rule is a Game Changer
The new fiduciary rule proposed by the U.S. Department of Labor (DOL) has been a hot topic in the industry, as well as at CLS and among our advisors. Most advisors understand the rule can mean big changes to how they conduct their businesses, and these changes may mean additional liability.

CLS’s Chief Compliance Officer, Mike Forker, recently authored a white paper discussing the current fiduciary landscape and how it will change if the rule is passed as proposed. He highlights restrictions on sales commissions as one of the most impactful components. In the current environment, the Employment Retirement Income Security Act of 1974 (ERISA), states that if an advisor is a fiduciary, he or she is restricted from receiving compensation from the recommended investments. Additionally, compensation from a client cannot vary based on which investment is recommended. These types of transactions are referred to as “self-dealing” or “indirect compensation,” and are prohibited. An exemption currently exists that allows advisors to bypass some of these restrictions, but under the new rule, a new exemption is needed to receive indirect compensation: the Best Interest Contract Exemption (BICE). It will be difficult, if not impossible, to comply with BICE as the rule is currently written.

Clearly this rule change is altering the playing field, so what can an advisor do to stay in the game? Since the most impactful component of the rule relates to commissions, an extremely effective adaptation would be a switch to a fee-based model. We have written several articles on this topic, including:

Potential Advantages of the Fee-Based Model
Making the Switch: The Benefits of Moving to a Fee-Based Model

CLS recognized the need to switch to the fee-based model at its inception nearly 30 years ago. Our outcome-based strategies focus on accumulation, income, protection, and tax management and offer substitutes for commission-based investments. This includes anything from providing overlay management on a portfolio of American Funds to mirroring the benefits of variable annuities, such as living-benefit or guaranteed-income riders with our protection and income-oriented strategies.

Advisors can learn more about the DOL’s proposed fiduciary rule and receive updates on this topic, please subscribe to our email series*.

Fed Alters Its Rate Hike Forecast
Last week, the Federal Reserve (Fed) released its monetary policy projection, commonly referred to as the “dot plot.” As expected, the median estimate for the federal funds rate decreased since the last iteration was released following the December 2015 meeting. The current median estimate suggests the benchmark interest rate will be between 0.75% – 1.00% by the end of 2016. This implies two 0.25% rate hikes will occur during the remainder of 2016. The median estimates released in December had implied four 0.25% hikes. Despite the material downward revision, the market anticipates the pace of rate hikes to be slower than the Fed expects. At the time of this writing, Fed funds futures imply the expectation of just one 0.25% hike in 2016.

The important question here is: How does this development alter how you should allocate your portfolio? The answer is simple. It doesn’t. Here are a couple reasons why:

  1. At CLS, we believe global, balanced, risk-budgeted ETF portfolios help investors succeed over time. Being balanced means keeping the proper allocation between assets based on a portfolio’s mandate. To strike and maintain this balance, it is vital that risk not be evaluated within one asset class independent of the rest of the portfolio. For example, while the risk of loss for bonds may increase if rates are hiked, a rate increase may be a sign that the economy continues to strengthen. This is a positive for stocks. Investors who focused only on interest rate risk and shunned bonds ahead of the recent rate hike in December found themselves out of balance when volatility picked up in January and February. This imbalance can lead to tremendous discomfort for most investors, which leads to emotional decisions and inferior outcomes.
  2. Economists and other market participants demonstrate time and again that they are awful forecasters. Look no further than the dot plot referenced previously. Three months into a 12-month forecast, the Fed had to cut its prediction in half. Is there reason to believe this new attempt will prove more accurate? I suspect not. Let’s say for the sake of argument that you know with absolute certainty what the pace of hikes will look like this year. Could you profit off this information? It would be far from a guarantee. How many of those that correctly predicted the December rate hike also predicted domestic bonds would outperform the S&P 500 handily over the next three months?

Fixed Income Quarter in Review
It is likely no surprise that the bond market has done quite well this year given the volatility in equity markets. As we enter the last week of the quarter, the 10-year Treasury bond yield trading at 1.90% is roughly 37 bps lower than where it ended 2015. The decrease in yields year-to-date, which occurred at every maturity beyond one year, fueled positive performance. The Barclays Aggregate Bond Index, a popular proxy for the domestic bond market, has returned 2.39% so far this quarter. In comparison, the S&P 500 has returned only 0.14%.

Just about every fixed income segment was positive. Emerging market bonds, developed international bonds, longer-duration Treasuries, TIPS, and corporate bonds have been the top performers thus far. Agency mortgages, preferred stock, municipal bonds, and convertibles have all lagged. At -0.43%Convertible bonds were the only fixed income segment with a negative return.

It’s clear that investors who remained balanced were rewarded this quarter as positive performance from bond allocations helped offset volatility in equities. Another interesting factor was the large return dispersion across fixed income segments, with approximately 7.50% separating the best and worst performers. Large dispersion in returns allows active managers to add value for investors by emphasizing or deemphasizing different segments.


The S&P 500® Index is an unmanaged composite of 500-large capitalization companies.  This index is widely used by professional investors as a performance benchmark for large cap stocks.  The Russell 3000 Index is an unmanaged index considered representative of the U.S. stock market.  The index is composed of the 3,000 largest U.S. stocks. The Russell 2000® is an index comprised of the 2,000 smallest companies on the Russell 3000 list and offers investors access to small-cap companies. It is a widely recognized indicator of small capitalization company performance.  The MSCI EAFE International Index is a composite index which tracks performance of international equity securities in 21 developed countries in Europe, Australia, Asia, and the Far East. The MSCI All-Countries World Index, excluding U.S. (ACWI ex US) is an index considered representative of stock markets of developed and emerging markets, excluding those of the US. The Barclay’s Capital U.S. Aggregate Bond® Index measures the performance of the total United States investment-grade bond market. The Barclay’s Capital 1-3 Month U.S. Treasury Bill® Index includes all publicly issued zero-coupon U.S. Treasury Bills that have a remaining maturity of less than 3 months and more than 1 month, are rated investment grade, and have $250 million or more of outstanding face value. The Equity Baseline (EBP) is a blended index comprised of 60% domestic equity (represented by the Russell 3000 Index) and 40% international equity (represented by the MSCI ACWI ex US Index), rebalanced daily. An index is an unmanaged group of stocks considered to be representative of different segments of the stock market in general.  You cannot invest directly in an index.


The views expressed herein are exclusively those of CLS Investments, LLC (CLS), and are not meant as investment advice and are subject to change. CLS is not affiliated with any companies listed above.  No part of this report may be reproduced in any manner without the express written permission of CLS.  Information contained herein is derived from sources we believe to be reliable, however, we do not represent that this information is complete or accurate and it should not be relied upon as such.  All opinions expressed herein are subject to change without notice. This material does not constitute any representation as to the suitability or appropriateness of any security, financial product or instrument.  CLS is not making any comment as to the suitability of any funds mentioned, or any investment product for use in any portfolio. There is no guarantee that investment in any program or strategy discussed herein will be profitable or will not incur loss.  This information is prepared for general information only.  It does not have regard to the specific investment objectives, financial situation, and the particular needs of any specific person who may receive this report.  Investors should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed or recommended in this report and should understand that statements regarding future prospects may not be realized.  Investors should note that security values may fluctuate and that each security’s price or value may rise or fall.  Accordingly, investors may receive back less than originally invested.  Past performance is not a guide to future performance.  Individual client accounts may vary.  Investing in any security involves certain non-diversifiable risks including, but not limited to, market risk, interest-rate risk, inflation risk, and event risk.  These risks are in addition to any specific, or diversifiable, risks associated with particular investment styles or strategies. The graphs and charts contained in this work are for informational purposes only.  No graph or chart should be regarded as a guide to investing.




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