The first quarter of 2016 has come to a close, and now is a good time to discuss with you, our valued clients and prospects, the recent performance of HWG, our thoughts on current market conditions, our approach for the near future and news of our office expansions and growing staff.

First Quarter Strategy and Review

In January equity markets took a beating; in fact, it was the worst January in history for equity markets.  During this time, HWG portfolios did not go down as much as the overall market.  We started the year with a 40% cash position, and then converted to a 70% cash position by mid January.  The correction for the major indices ranged from -9% to -12% from 12/31/15 through 1/20/16.  By comparison, the HWG Composite fell only -4.4%.  This is a great example of our FAR Investing strategy.  Our clients do not want to go down with the market. When the market enters into a correction, there is no way to determine how far it will fall.  Valuation is of little use because cheap stocks simply get cheaper. During the first quarter we locked in gains and minimized losses to preserve client wealth, then slowly re-entered the market.

Since late January, equity markets slowly climbed a “Wall of Worry”, providing Haven the opportunity to redeploy cash.   Our purchases included high yield bonds and a concentration of income producing stocks.  In large portfolios, we took advantage of a lack of liquidity in the high yield bond market by purchasing bonds with maturities ranging from 1 to 1 ½ years.  Yields on these bonds ranged from 8% to 21%. We also invested in dividend paying stocks and preferred stocks, which offer annual yields ranging from 3% to 7% and are paid quarterly.

During the first quarter the HWG Composite declined -2.1%, compared to the S&P500 equity index gain of +1.3%.  Conservative portfolios under management gained +2.3%, while aggressive portfolios lost -3.4%.  The conservative portfolios outperformed as a result of a higher concentration in dividend paying stocks. Below are summary returns for HWG Composites.

Composite Equities Bonds Total
HWG Composite -1.4% +5.6% -2.3%
HWG Aggressive Composite -4.2% +5.8% -3.4%
HWG Conservative Composite +5.1% +4.9% +2.3%


Strategy for the Remainder of 2016

This brings us to our strategy for the remainder of 2016.  This year has a number of economic headwinds which foreshadow the possibility of continued volatility in financial markets.  These headwinds include rising interest rates, a fully valued equity market, continued pressure on energy prices, and a presidential election cycle.

The Federal Reserve initiated a tightening cycle in December.  In March, the Fed provided updated guidance.  The Fed anticipates raising interest rates twice in 2016.  This guidance was revised downward from previous plans to hike rates 4 times this year, or an increase of 1.0%.  The Fed justified their revisions based on slow growth in China and Europe and the desire to curb recent strength in the US Dollar.  With a low inflation rate and a strong job market, the Fed now believes they can raise rates gradually, over a longer period of time.

The S&P500 is currently fully valued, based on Wall Street earnings estimates.  Current estimates imply 26% growth in earnings for S&P500 companies.  This is concerning, as earnings estimates continue to decline, due in large part to a slower than expected recovery in the Energy Sector.  While oil prices recently climbed above $40/barrel, earnings growth from energy companies is likely to remain sluggish, implying present earnings estimates for 2016 may still be too high.

Finally, the first year of a presidential election cycle increases uncertainty in financial markets.  Historically, when a presidential race is too close to call, US equity markets experience increased volatility up until Election Day.

The headwinds detailed above suggest two possibilities for equity markets for the remainder of 2016: stocks may remain range bound or stocks could correct sharply, testing or taking out recent lows.

Haven’s strategy for the remainder of 2016 is to remain defensive and respond to opportunities the market provides.  We will continue to implement our FAR Investing approach, protecting client principal by increasing cash if downside volatility returns.  Further, we plan to methodically lock in gains and minimize losses.  We will maintain a concentration in dividend paying stocks, and continue to monitor short term bonds for high yield opportunities.

One exception to the overall strategy, where we believe potential rewards outweigh risk, is in the biotechnology industry group. Many biotech stocks are currently undervalued and may have finally bottomed. For this reason, we have added positions in this industry group and we are closely monitoring performance.

Office and staff expansions

In January, HWG opened its second office in Atlanta, Georgia.  We hired an experienced sales person, Steve Fine, who spent the last 14 years with Ned Davis Research, a globally renowned investment research firm.

We also expanded our existing office space in Houston. When you visit us now, you may enter through the large wooden double doors in the elevator lobby.

To improve our overall efficiency and continue our current level of customer service, we have added Marshall Gregory, a full time dedicated trader.

In closing, please be assured that we are closely monitoring the markets and actively looking for investments that should both preserve your capital and improve your returns in this difficult market.  We will continue to provide updates throughout the year.    As always, please contact our office if you have any questions.

The Haven Wealth Group Team


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