Email Based Fraud Prevention

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There has been a global increase in the number of individuals who fall victim to email based fraud.  While email based fraud can take many forms, it often occurs when an unauthorized individual gains access to another individual’s email account, steals personal information, and then fabricates communications for the unauthorized individual’s financial gain. 

Fraud prevention is everyone’s responsibility.  The best defense is to be aware, use good judgment, and educate yourself regarding the general warning signs.  In that regard, be wary of: 

• Emails with odd wording or spacing.  Many fraudulent requests are poorly written with misspellings and incorrect grammar.  Other, more sophisticated fraudulent requests may closely mimic legitimate email requests, but upon close examination, contain incorrect punctuation or use odd spacing or capitalization.
• Emails sent from a suspicious address, email addresses with a misleading domain name, or emails containing mismatched URLs.  In many cases, emails are spoofed by making subtle changes so it is difficult to distinguish a fake address from a legitimate one.
• Emails marked urgent or that make unrealistic threats.  Fraudulent requests often insist that a funds transfer must happen quickly due to an emergency.
• Emails sent from a government agency.  It is unlikely that a government agency would initiate contact with you through email.  Contact the agency directly to verify whether the message is legitimate.  

Photo by filipefrazao/iStock / Getty Images

The following measures can help protect you and your family from becoming victims of email based scams:

• Always confirm that any request to initiate a transaction is from a legitimate source.  If the request cannot be confirmed at the source, it probably is not legitimate.
• Double and triple check email addresses.
• Slow down so as to avoid pressure to take action quickly before you have time to think it through.
• Never open attachments, click on links, or respond to emails from suspicious or unknown sources.
• Protect your account numbers, personal identification numbers, and passwords.  Never save this information on your computer.
• Use strong passwords and do not use the same passwords all of the time. Passwords should be at least eight characters and contain upper/lower case letters, numbers, and special characters. Do not authorize websites to remember your user name or password.
• Keep your computer and mobile devices up to date.
• Ask yourself if you are sharing too much information on social media websites.  Check your social media privacy settings.

If you have questions or concerns about fraud prevention, please contact Steven Plummer at 419.865.1098. 

Investment Insights Q3 2016

Equity Update - Mark Evans, CFA

Despite weak corporate earnings, the equity markets continued to advance in the third quarter. The S&P 500 gained 3.9% while small-cap stocks performed even better as the Russell 2000 advanced 9%. Technology stocks led the market climbing 12.9% for the quarter while Utilities and Telecom, which performed very well in the first half of the year, fell -5.6% and -5.9% respectively.

While this bull market is relatively old, there are no immediate signs that it is over yet as we continue to see signs of a classic wall of worry. Stocks have advanced 218% off the March 2009 low and have gone 88 months without a 20% pullback yet this is the most distrusted bull market in history. We continue to see net redemptions in equity mutual funds and ETFs, modest merger and acquisitions, and almost non-existent IPO activity. The market sentiment is being driven by fear and skepticism rather than greed. Given that real interest rates are extremely low and corporate credit spreads are well behaved, these are highly unlikely conditions for a bear market phase to begin. Additionally, the earnings outlook for 2017 looks to be much brighter as the earnings recession from energy companies will be behind us.

While we are entering the seasonally strong fourth quarter we are also entering a critical period in a Presidential election year. Typically, the fourth quarter is the best performing quarter for the stock market averaging almost 3% since 1928. Since 2009, the seasonal tail wind has been even more pronounced with an average gain of over 6%. However, countering this positive influence is a contentious open election. Open elections have on balance not produced such favorable returns. We are currently within a critical period when stocks focus on the election. In the three months ahead of the elections, the S&P 500 has predicted 19 of the past 22 elections. If stocks were higher in this three-month window, the incumbent party wins while the opposition party typically wins if stocks are lower. As of 9/30, the S&P 500 is slightly down at -.24% (since 8/8). October will be a critical test period. Further, the one-month performance of the market after the first debate is even more pronounced in open election years. This trend is evident from the chart below: a negative market favors the opposition party while a positive market favors the incumbent. Lastly, a relief rally typically occurs in the stock market after a presidential election regardless of the outcome.

Fixed Income Update – Rick Sasala, Ph.D., CFA

The Barclays US Aggregate posted a gain of 0.46% in Q3 which brings the YTD return to 5.80%.  The Intermediate Aggregate index gained 0.31% in Q3 and 4.10% YTD.   The Q3 gains were primarily from coupon payments as well as some narrowing of spreads, as rates overall were much more stable than the beginning of the year when yields fell significantly and produced most of the YTD returns.

The table below summarizes the quarterly yield moves for various treasury bonds as well as the yield change on an YTD basis.  Both the Y/Y and YTD numbers show a flattening of the curve since the longer maturity bonds have decreased and the shorter bonds have either remained the same or increased. Typically, long-term treasury yields are reflective of a combination of long-term growth and inflation expectations. Both of these are expected to be in the range of 2%, which indicates that there are other influencing forces which continue to put downward pressure on rates.  

While there continues to be much conversation and speculation about if, when and how the Fed will increase rates next, it is the international market over which the Fed has no direct control that has been a significant driver of the fixed-income markets this year.  This correlation can be seen in the following chart showing the spread change between the 2 yr and the 10 yr government bonds in the US, Germany and Japan.  One bright spot from the chart is that after 8 months of decreases, all three countries showed a notable tick in September which may indicate some stabilization.

The Fed and Three Big Questions

The Fed is wrestling with three big, intertwined questions today:

1.   How many people want jobs? - Seven years into the recovery, the unemployment rate has fallen to a low 4.9% but the picture doesn’t look quite right, since those actively seeking work is lower than normal. By keeping rates low, more people could be drawn back into the work force.

2.   How low are interest rates? - The Fed cut its benchmark by 5% in response to the great recession, expecting 5 points of stimulus.  Now the Fed is increasingly convinced that it has become more like 3% of stimulus.  Global rates are in a swoon from a glut of money or the absence of attractive investment opportunities.

3.   What damage is done by doing nothing? - The Fed usually increases rates because it fears inflation but inflation remains sluggish. But they are also worried about creating future financial crises since low rates are intended to encourage financial speculation. 

Household Income Gain The Largest in 50 Years

The Census Bureau's announcement that median household rose 5.2% marked the biggest annual gain on record. Income inequality eased as income grow fastest for lower-income households and the middle class grew more than the rich.

This shift could have hugely important implications for U.S. consumer spending, which accounts for a full 70% of GDP, and for retailers and other consumer-facing businesses.

The income gains for less affluent households probably continued in 2016. And, those paychecks tend to get spent. For most of these people additional income translates into additional spending.

Gains for middle and lower-income households look likely to continue, even if hiring moderates in the year ahead as the economy gets closer to full employment - wage growth ought to pick up steam.

GOOD NEWS FOR CONSUMERS; GOOD NEWS FOR THE COUNTRY

Brexit Brief (Part Two)

We urge perspective. The UK is not leaving Europe. That would be geographically impossible and economically disagreeable.  Rather, British voters are walking back from the EU. The great continent and durable culture of Europe is thousands of years old.  It continues. The EU and its flag, distinct from the earlier European Economic Community, is simply a struggling political superstructure that has been in existence for a mere 23 years.

If diplomacy’s sensible, through wit and wisdom, commerce will continue over automobiles, wine, vacations, films and financial services.  Indeed, Norway already offers a template for European trade and integration without EU membership.

Still, in the immediate fright, the pieces of the EU were no more highlighted than in the change of 10-year government bond yields on June 24th, as strong countries stood apart from weak and investors flew to safety:

To be sure, the 52% to 48% Brexit referendum causes an immediate political fallout.  Already, David Cameron announced his resignation as prime minister and Conservative party leader.  And, Britain’s exit will cost the EU one of its biggest military powers and one of its wealthiest members.

Overall though, we believe that the direct economic impact of Britain exiting the EU is likely not material to the global macro-economy.  In our view, the greater risk comes from the potential tightening of financial conditions should more countries decide to exit the trading block.

In the near term, market volatility will most likely remain elevated and central banks will be accommodative.  Such conditions may present unique buying opportunities over the next several months as equity valuations contract and the pursuit for yield continues in an ever low and diminishing interest rate environment.

Over the longer term, investment reward accumulates within a diversified portfolio that is disciplined and devoted to a risk/reward plan.

It is vital that all parties concerned, from central banks to policymakers in the major capitals, take the necessary steps to avoid a repeat of the Lehman collapse which triggered the 2008 global financial crisis.  And the UK needs to remain engaged, open and, in the best spirit, pro-European. That way lies the future.

Brexit Brief

British voters today surprised the world with their decision to change how they cooperate and share resources with their neighbors in the European Union.

While market reaction is eye-popping, it is likely that Britain will continue to coordinate its sourcing and using of resources with countries across the channel.  It is also probable that future British trade and regulation will be conducted under a familiar philosophical framework. 

To quote Walter Bagehot: “One of the greatest pains to human nature is the pain of a new idea.” Today we see that this can be true even when the new idea – that of a Britain independent of its neighbors in the European Union – is quite an old one.

While many say that change is the only constant, we believe human adaptation to change is a remarkably consistent phenomenon.  We see that repeatedly in the financial markets.  Market calm will return.

Investment Insights Q1 2016

Equity Update

On March 9th, the bull market turned seven but there was little celebration as 2016 was shaping up to be one of the worst starts to a year, ever. Broad macro concerns resurfaced to start the year with large cap stocks down -10.3% at the February low before rebounding sharply and finishing the quarter at +1.3%. Volatility has been largely driven by oil price movements as well as concerns of a China hard landing, yuan devaluation, and other geopolitical concerns such as the sustainability of the European Union. International developed equities were not as fortunate with the MSCI EAFE finishing the quarter down -2.9% among negative interest rate policy (NIRP) in Europe and Japan intended to stimulate economic activity. The MSCI Emerging Markets index bounced back off of lows finishing the quarter at +5.7% aided by stronger commodity prices, a drop in the U.S. dollar, and lower expectations for future U.S. rate hikes.

From the chart below we can see that the market has been trading in lockstep with the price of oil over the short-term. We view a stabilization of the price of oil in the $40-$50 range as still beneficial to the consumer while easing pressure on the energy companies which make up a considerable portion of the market.
 

Overall, the U.S. economy appears to be in good shape and is arguably the healthiest economy in the world right now. Job growth has been solid, auto sales and housing have been strong, and 2016 government stimulus should add .6% to GDP. While this seven year bull market has been tested recently, investors are left with same dilemma - lack of viable alternatives to achieve investment return.

From a historical perspective, this bull market is the third longest in duration as can be seen from the chart below. Based on current economic factors, we feel that the cycle still has room for growth. Typically, bull markets are killed off by rising real interest rates, inflation, excessive speculation or black swan events. While black swan events are difficult to forecast, the other three factors are still a tail wind for stocks.
 

Source: Strategas

We believe the chance of a recession over the next year is low but recommend a diversified portfolio as the best way to weather market volatility and achieve long-term investment goals. 

Fixed Income Update
 
The Barclays US Aggregate posted a gain of 3.03% in Q1 and the Intermediate index gained 2.31%. The gains were a result of falling rates due to concerns of slowing global growth, overall financial stability of world markets and negative interest rates in overseas bond markets.

While rates increased in Q4 of 2015 leading up to the Fed's December meeting, the market view of the Fed's decision to raise short term rates by 0.25% in December 2015 was that it was premature. The bond markets took a short hiatus after the Fed December meeting but then as the New Year turned, yields sank again. The flight to safety from risk assets was fully in play and the spreads on high yield escalated in lockstep with the falling equity prices, especially in the energy market sector. The market reaction along with weakening data seems to have given the Fed some pause on the rate of increase as indicated in their rate forecast "Dot Plot", which now shows 2 increases in 2016 whereas the December version included 4 increases in 2016. However, the market is showing that even 2 increases in 2016 is too much as shown in the probability of increase for each Fed meeting throughout the balance of the year shown in the chart below.
 

In the credit markets, spreads in investment-grade and high-yield spreads moved higher and together throughout the quarter, as seen in the chart below, and like equities, showed increased market stress in the middle of the quarter only to return to the starting point by the end of the quarter. The wider spreads provided a short time window for buying and serve as a reminder of what happens in credit markets during times of stress and that higher quality issues provide the most stabilizing diversification in an overall portfolio context.

Source: Northern Trust Investment Strategy

Recent Market Turmoil

Photo by 400tmax/iStock / Getty Images

Equity Update
 

As expected, 2015 was a volatile year with considerable return dispersion among asset classes. Commodities and emerging market equities struggled with the rise in the U.S. dollar coupled with fears of a global slow down stemming from China. Large cap equities outperformed their small cap counterparts with a return of +1.4% in the S&P 500 versus -4.4% in the Russell 2000. Outside of the U.S., the strong dollar weighed on foreign returns for U.S. based investors, with international developed equities and the MSCI EAFE index down slightly for the year at -0.2%.
For the first time in 9 years, the Federal Reserve raised interest rates by .25%. This is a small move that we believe the U.S. economy can handle given healthy underlying fundamentals. Going forward the trajectory of future rate increases will be important. Global monetary policy will likely remain accommodative helping to stimulate economic activity.

Ultimately, we believe the consumer will continue driving the U.S. economy higher as consumption makes up roughly 70% of total output. Consumer confidence has remained in an uptrend, housing prices are back to pre-crisis levels, auto sales have been strong, job gains are positive, and interest rates remain low. The U.S. is still essentially a closed economy with exports comprising only 9.3% of total GDP in 2014 and exports to China making up less than 1%.

Despite a year filled with geopolitical concerns as can be seen from the chart above, the S&P 500 rallied 7% in the fourth quarter to eke out a small gain for the year. Part of the challenge for 2015 was the first significant slowdown in earnings growth since the financial crisis and was driven primarily by a slumping energy sector. Consensus estimates for 2016 are predicting mid-single digit earnings growth for the S&P 500. While last year's performance was largely driven by uncertainty and macro headwinds, it is important to stay invested for the long run and remember that a diversified portfolio is the best way to weather these storms. Asset allocation is key to volatility.

Fixed Income Update
 
The Barclays US Aggregate posted a loss of 0.55% in Q4 and the Intermediate index lost 0.51%. The losses were a result of short term rates rising in anticipation and confirmation of the December Federal Reserve rate increase. This pushed down the Aggregate to a 0.55% YTD gain and the Intermediate Aggregate to a 1.21% YTD gain.

The Fed's decision to raise short term rates by 0.25%, improvement in global growth expectations and strengthening in US wage rates all played a role in the overall increase in yields over the quarter as well as a flattening curve due to higher increases at the short end. This is all part of the normalization of monetary policy that we have been expecting to start for several years. It is a vote of confidence from the Fed that the economy is on the right track even if all of the numbers that they monitor are not quite at the desired targets.

There was bifurcation between investment-grade and high-yield spreads as the investment grade spreads softened and the high yield spreads widened. The degree of widening in the high yield was strongly dependent on the credit quality as the lower quality spreads widened considerably during Q4, especially in the energy sector.

The pace of Fed rate increases will be more important than the fact that rates have started to increase. Official Fed data shows rates will likely increase four times in 2016, while market futures suggest two increases as the most likely scenario. Slower rate changes result in better total returns as the price changes are more fully offset by the coupon payments.