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SmartRFA™ Investment Strategies

January 12, 2017

Investment Strategies Update

2017 Game Plan: Change is Blowing in the Wind

Happy New Year!

Each December, Retirement Funding Advisors (RFA) evaluates the global economic environment and relative investment opportunities to create the basis for our investment strategy for the upcoming year. The purpose of this letter is to update you on the results of the 2016 strategy and to outline our strategy for 2017.

2016 Game Plan: A Global Quest for Growth

Our Game Plan 2016 has been updated to reference the actual results for the year.

When developing the Game Plan for 2016, we believed that global economic growth would be moderate, with the U.S. leading developed nations. We expected growth in emerging markets to outpace developed economies but remain below historic averages due in part to a continued slowdown in China. We believed the Federal Reserve would gradually raise short term interest rates in 2016, but that foreign central banks would continue on the path of monetary easing.

We liked stocks over bonds and U.S. stocks over foreign. In the U.S. we thought small and mid-cap stocks held the advantage over large-cap due to the impact of the strong U.S. dollar on corporate earnings.

In 2016 the global economic expansion was steady, but growth rates trended lower. As expected, developed nations continued to lag emerging economies. Unemployment in the U.S. continued downward below 5%. Europe saw a similar trend and unemployment stood at 9.8% at the end of October. The Federal Reserve declined to raise short-term interest rates until December, despite a strengthening job market, citing concerns about the strength of the global economic recovery.

The bulk of U.S. market gains came in the second half of the year. A rebound in corporate earnings, accelerating U.S. economic growth, and the stabilization of energy prices all helped reignite investor enthusiasm for stocks. The rally gained further momentum after the election of Donald Trump on November 8th, as investors bet that the new administration would be able to successfully implement business-friendly policies like tax cuts, less regulation, and fiscal stimulus.

S&P 500 Index

Barclays U.S. Aggregate Bond Index

Barclays Global Aggregate Bond Index

MSCI EAFE (Developed Foreign Country) Index

MSCI Emerging Markets Index

MSCI All Country World Stock Index

Q4 2016 Returns







YTD Returns







Overall, 2016 was a positive year for diversified investors as illustrated by the Morningstar allocation portfolio returns below:

Allocation 30%-50% Equity

Allocation 50%-70% Equity

Allocation 70%-85% Equity

Q4 2016 Returns





YTD Returns




Please find attached a Position Performance Summary that represents the performance of your portfolio in 2016.

2017 Game Plan: Change is Blowing in the Wind

Our outlook for 2017 is outlined in the following link: 2017 Game Plan


Entering 2017 the most significant risk we see facing the global economic recovery is the uncertainty caused by incoming Trump administration. There is a risk that Trump’s policy initiatives will fall short of market expectations, or have unintended consequences. For example, excessive fiscal stimulus could risk overheating the economy and force the Federal Reserve to raise rates more quickly than currently planned. Also, Trump was highly critical of existing trade agreements (most notably NAFTA) and it is not clear the exact policies that will be pursued and what the impact of those policies will be. Protectionist trade policies could lift consumer prices by raising the cost of imports, or potentially trigger a trade war that would threaten the global economic recovery. On the positive side, if Trump’s growth agenda is successful, the impact on the economy will be favorable.

The Federal Reserve raised interest rates in December against the backdrop of continued strength in the U.S. economy. This strength was underlined by further declines in the unemployment rate, which dipped to 4.6% by November. Meanwhile, GDP grew 3.5% year-on-year in the third quarter, a pronounced pick-up in activity from the first half of 2016.

Global Equities

Global equities are generally at or near historic valuations as measured by the price to earnings ratio. We believe opportunities still exist for active managers despite stretched valuations. For example, rising interest rates and quickening economic growth will favor cyclical sectors such as financials and technology, while defensive sectors could struggle.

U.S. equities performed well as the S&P 500 advanced 3.82% in the fourth quarter to finish the year up 11.96%. U.S. corporate earnings are growing after several quarters of declines.

International developed equities were up 7.07% in local currencies terms for the fourth quarter and 5.34% for 2016. However, the U.S. dollar continued to rally during the year and the MSCI EAFE Index returned a modest 1.00% over the year in U.S. dollar terms.

Investment prospects outside the U.S. appear favorable in the coming year as valuations are more reasonable and central bank policy is likely to remain very accommodating. While Europe is not without its political risks with elections in Germany, the Netherlands, France, and potentially Italy in 2017, it is still likely to benefit from stronger profits, a weak euro, and supportive monetary policy. Further gains in the U.S. dollar will boost corporate profits for non-U.S. firms, but negatively impact equity returns for U.S. investors. Japan continues to strive to push up inflation by keeping interest rates and the yen low.

The outlook for emerging markets is more uncertain. Rising U.S. interest rates and a stronger dollar provides headwinds, but a number of emerging economies are benefiting from stronger exports, lower inflation, and central bank support. China’s leading indicators are starting to pick up for the first time in nearly 4 years. But trade tensions with the new U.S. administration could put that in jeopardy.

Interest Rates

After holding off raising rates for most of the year, the Fed finally acted in December and increased rates by 0.25%. The Fed also signaled more increases are on the way given its optimism about the U.S. economy. We expect future rate increases will be small, measured, and limited in number. Another key consideration for the Fed is given that other central banks are not raising rates, this global divergence amplifies the impact of any U.S. tightening measures.

Summary and Recommendations

The Trump administration policies are generally pro-growth and pro-inflation, but it will take time to evaluate the scope and effectiveness of any changes. “Trumponomics” has the potential to nudge inflation higher and support a return to more normal interest rate levels, but too much fiscal stimulus may hasten the end of an already mature economic cycle. The U.S. economy is now operating at close to full capacity.

We expect rates to rise as the Fed tightens, and therefore continue to recommend a defensive underweight to duration. The prospect of higher inflation is an additional headwind for bonds.

In the global equity markets valuations favor foreign stocks over U.S., however, we expect the U.S. dollar to remain strong, which will hurt returns on foreign investments. Europe and the U.K. face political uncertainty with elections looming and Brexit, which dampens expectations for strong gains. Emerging markets face risks from rising interest rates, a strong U.S. dollar, and trending anti-trade sentiment. Therefore, we recommend maintaining an overweight position in U.S equities and an underweight positions in emerging market equities.

In the U.S. we recommend maintaining a modest overweight to small and mid-cap equities as we believe they are less vulnerable to global market disruptions, and stand to benefit from increased infrastructure spending.

Attached is your Composite Position Performance Summary showing the one year returns for the period ending December 31st, 2016. As always, I will continue to recognize your individual circumstances in recommendations designed for your portfolio.

I look forward to working with you in the New Year. Please feel free to call me with any questions that you may have.


Donald I. Gregg