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Midterm Madness and the Markets

The highly debated midterm elections have come and gone. After the dust settled, Congress is split as the Democrats secured enough seats to flip the majority and retake the House while the Republicans added seats to their majority in the Senate. Let’s take a look under the hood, courtesy of our friends at CFRA Research, and see what history tells us about post-elections, political gridlock and market returns.

This was the 19th midterm election since 1946. 

Did you know? 

  • From election day to the end of the year, the S&P 500 has averaged a 3.3% gain and it has advanced 67% of the time.
  • Looking at the six months after the election, the S&P 500 has advanced 13.8% on average and did so 94% of the time.
  • Going out a year after the election, the average price gain in the S&P 500 was 14.5% and it advanced 100% of the time.


History is only a guide, not a guarantee, but what stands out most to us is the 100% advance rate in the 365 days after the election in comparison to only 2/3rds of the time in the short timeframe up to year’s end.  Clearly, investors become more and more bullish once the midterm elections pass.  A large part of that bullishness can be credited to the fact that the uncertainty leading up to the election is now minimized, if not gone entirely.  Will it happen again after this midterm election, in this environment?  That is the million-dollar question, as the saying goes.  The actual legislative environment does matter so let’s dig even deeper and see what history tells us about political gridlock.

  • Since WWII, the best market returns as measured by the S&P 500 occurred when the Government was unified. In other words, the President and controlling majority in Congress were from the same party.
  • The second-best scenario for the S&P 500 occurred when Congress was unified but the President was from the other party.
  • The third-best scenario overall for the S&P 500 occurred with a split Congress.


The Unified Government scenario is by far the best and it makes clear sense because there is little need for compromise to get legislation and policies approved.  The 80% frequency of advance is the telling number in that scenario.  Under a Unified Congress, there is still room to approve stimulus and policy, albeit with a bit of compromise.  The least favorable set-up is a Split Congress because both sides typically dig their heels in and all but refuse to compromise.  We believe volatility and returns will be influenced by how Congress decides to govern.  The President will likely focus in on key areas where his executive powers can be maximized such as tariffs.  Other legislative items such as immigration, further tax overhauls and healthcare reform will likely face stiff headwinds.

It is important to remember that markets are a reflection of several variables, domestic politics being just one of those inputs.  We believe a couple of the challenges facing this market are very real but controllable, namely tariffs and Fed monetary policy.  A healthy skepticism is welcomed as we progress forward under a split Congress, in this global economic environment at this stage of the corporate earnings cycle.  However, on balance we believe history has written a strong case for continued market gains post midterms.  We take a wide-angle view and understand this is not the first-time investors have differed on politics or faced trade wars, inflation or rising interest rates.  The short-term view isn’t always the clearest one so we must continue to invest with the long-term in mind.

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Why we use individual bonds vs bond mutual funds

One important note to distinguish us at Ables, Iannone, Moore & Associates from other firms is we use individual stocks and bonds.  This helps us manage portfolios with tremendous flexibility, control and transparency.  It also allows us to reduce costs.  We believe this makes it easier to align our management to the goals of the client vs a one size fits all feel that is associated with model portfolios and financial products.

The other week I wrote a post about some of the opportunities we are seeing in the fixed income space in current market conditions.  I won’t rehash that discussion but it largely centered on individual bond structures we like in a rising rate environment.

What you may have noticed is it did not include bond mutual funds or ETF’s for that matter.  Here are 3 reasons why:

  1. The mechanics of a traditional bond mutual fund make it impossible to guarantee your return of principal because you don’t own the actual bonds in the fund, you own proportional shares of the mutual fund’s net asset value (NAV). More importantly, there is no maturity date established in a traditional bond fund.  This is because they are pooled investment vehicles in which thousands of investors aggregate their money together with a manager who is charged with following the investment goals of the fund in perpetuity as outlined in the prospectus.  Therefore, when an investor wants to redeem their money they do so at the NAV of the fund at the end of that given day.  In response to this, fund sponsors developed mutual funds and ETFs that have a defined maturity (DMF).  These products do offer a close approximation to a return of principal in the form of a final investment value but may still fall short of actual principal return due to costs and other factors in running the fund.  Further research shows that DMFs can produce more volatility than traditional funds due to their structure and carry higher costs which can drag on overall performance.  Contrast this with owning bonds outright.  Minus an issuer default or another agreed upon structure to the bond, the investor gets their principal back at maturity regardless of the fluctuating value of the bond during the holding period.
  1. It’s hard to actually get fixed income out of them because of the numerous variables in determining the yield of the fund. It is beyond the scope of this post to dive into all the factors that determine bond fund yields but suffice it to say, it can get complicated.  However, it is important to understand that distribution yields are calculated on a per-share basis, typically dividing the most recent per-share distribution by the current per-share net-asset value (think share price of the fund).  That means if either of these inputs change it will result in a fluctuating distribution yield (think payout to you as shareholder).  And it will change because new bonds are constantly being added, cash is constantly moving in and out of the fund, prices of existing bonds will change and the manager is under pressure to maintain a competitive yield in order to attract new investors.  Is your head spinning yet?  You’re not alone.  Years ago, the Securities and Exchange Commission stepped in to mandate a standardized yield calculation, called the 30-day SEC yield, largely in response to the fact managers were manipulating their fund’s stated yield to appear more attractive than it actually paid out.
  1. They seem expensive when factoring in all the fees and expenses. Many investors miss or don’t understand the true cost of ownership which may include commissions, 12b-1 fees, soft dollar arrangements, transaction and brokerage costs, tax implications and annual expense ratios.  Depending on the fund, these costs can range between 2% - 4% per year.  This would be in addition to whatever you may be paying your finanical advisor.

Let’s recap.  There is no guarantee made as to the return of principal.  It’s hard to nail down the cash flow that will be generated from owning shares of the fund.  And they are expensive.  So why use them?  First and foremost they are easy to own.  It makes getting diversified exposure to fixed income really simple.  Also, there are times in which no alternative exists such as inside a company 401k or other retirement plan.  On the more nefarious side, advisors can be incentivited for selling or using the funds in client portfolios.  We see this quite a bit with the big name places – looking through a statement and seeing the firm’s own funds conveniently being used.  I digress. 

Our goal isn’t to rail against bond mutual funds or ETFs and it’s not to suggest you are going to investment hell for using them.  Rather, it is to highlight the alternative of using individual bonds to customize specific fixed income solutions.  Instead of pooling that money with thousands of other investors under one goal of a fund manager, we find it is superior using individual bonds to manage various risks such as duration, reinvestment, interest rate, principal and credit for our clients.  It provides flexibility and clarity on what you own, how much cash flow will be generated and an end date for when we can expect a return of principal.


Ables, Iannone, Moore & Associates, Inc. is a fee-only, SEC  registered investment advisory firm providing asset-management to clients in over 20 U.S. states, Europe, Asia and South Africa.  We have over 50 years of combined experience in the financial services industry.

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How can I put money to work in these market conditions?

This is literally a question we get asked all the time, regardless of the market environment.  It is understandable – not all portfolios are created equal regarding entry price and allocation – and people come to us at differing times with new money or cash positions asking what is the best route to take?  How can we help get their money working harder?  Of course the answer to those questions are very specific to each client but we thought it would be helpful to show an example of an opportunty we are seeing right now in the markets.  Something you could possibly adapt to your own personal situation.

Let’s start in the stock market, fresh off its all-time highs.  We do see some attractive names, but in general stocks seem fairly priced.  In other words there aren’t a lot of great deals to be had.  Some?  Yes, but not a lot.  It rarely does us any good to chase prices.  Instead, taking some profits where appropriate, waiting for better pricing on entry and slowly building positions has been our recent approach with equities.  That said, we also aren’t feeling any dramatic recession is upon us.  How about elevated volatility?  Sure, but nothing more than the healthy garden variety type.

Now let’s look at the fixed income side of things.  We know bond yields are gradually rising.  Remember, when interest rates rise, the price on existing bonds fall.  With the FED continuing to increase short-term rates, we know market forces will also gradually increase the yield on the bonds available.  This is largely due to supply and demand.  Foreign yields are a drag on this at the moment, but eventually longer-term bond yields should rise back toward normal levels.  This can cause a decline in the value of your portfolio of existing bonds and leave you with a multi-year underperforming asset.  Many investors see this backdrop as a catch-22.  But there are creative ways to invest in this environment and we have been successfully using a hybrid approach to boost yields during this time.

Specifically, we see a ton of opportunity in short-term corporate bonds linked to underlying stocks.  Because of the structure of the bond this has produced attractive yields with short maturities.  Another area is in longer-term bonds that have adjustable rates tied to economic measures such as the consumer price index (inflation) or the difference between say the 30-year treasury rate and the 2-year rate.  Take the 30/2 example for instance, since there is virtually no difference currently in the spread, these bonds are being sold at a deep discount.  However, if you believe as we do that the yield curve will eventually return to a more normalized level, you could see bonds such as these appreciate in price and produce rising coupons simultaneously.  That is a good thing.

Here’s the point of all this.  Instead of sitting around fearful of the next bear or trying to perfectly time the markets, there are ways to take advantage of opportunities as they are presented.  Currently, it happens to be with some creativity and a hybrid approach to fixed income while maintaining discipline within the equity market.


Ables, Iannone, Moore & Associates, Inc. is a fee-only, SEC  registered investment advisory firm providing asset-management to clients in over 20 U.S. states, Europe, Asia and South Africa.  We have over 50 years of combined experience in the financial services industry.

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Why is the rapid decline in oil prices causing market volatility?

Over the past several weeks the price of a barrel of oil has dropped from approximately $100 per barrel to closer to $50 per barrel. On the surface this seems like a tremendous economic benefit. Gas prices have been cut significantly from $3.50 or so to around $1.90 per gallon. Less money spent on gas means more money to spend elsewhere. Restaurants, retailers and so forth should be thrilled. So why aren’t the markets feeling the joy?

Deflation concerns are the answer. What is deflation and why is it bad for investments? First, let me say that it is a complex issue, but I am going to try and take a surface level approach here. Naturally, there are numerous factors in a worldwide economy that can occur that would have an impact. It is impossible to address all of those possibilities. In short, however, deflation indicates a significant change in economic conditions and if it persists can spiral out of control and have long-lasting repercussions.

Deflation is a decrease in the general price level of goods and services and it occurs when the inflation rate falls below 0% (a negative inflation rate). The fall in oil prices is a good example. Although we may like it when we are standing at the pump, the reason oil prices have fallen can be of concern. First let me say that oil and food prices are volatile. That is why they are excluded from government inflation measurements (CPI). That being said, in this case there is an increasing glut of oil and subsequently oil reserves have increased. The cause of this lies predominantly with the US drilling and fracking techniques that have allowed more domestic production. This has reduced our dependency on OPEC nations as we now consume a greater amount of our own oil; rather than from foreign sources. China is another major oil consumer. Though their economy continues to expand at about 7% per year, it is far below the double digit growth rates of the recent past. The slower growth combined with lingering poor economic conditions across the European Union and sanction based slowness in Russia we have seen an economic slowdown that has caused a shift in the demand curve. Producers of oil need to sell their products and to do so with current inventory levels prices must fall.

The simple answer seems to be to stop producing as much product. Although reducing supply would gradually have the desired impact of increasing demand, it is getting to that point that is an issue. OPEC has chosen to try and smoke out the US fracking companies. By maintaining production levels and driving prices down many of these new US companies find it unprofitable to drill. Their cost structure is high as they are highly levered and payments on equipment and manpower start to strain these startup companies cash flow. OPEC’s hope is that eventually these companies will go bankrupt and the production declines will be from fewer non-OPEC participants. Think of it in this way, OPEC has long enjoyed the swimming pool greatly to itself. Over time, however, more and more people have been jumping in and now the space is overcrowded. The pool may be uncomfortable right now, but the members of OPEC want to return to the days where they were the primary users of the pool. Rather than to climb out themselves or come to the pool less frequently they have decided to jump in and stay. Over time they want to drive the new members out.

Deflation can impact several areas of the economy. Initially, the prices of goods and services in other areas may start to fall. Lower prices in oil mean cheaper manufacturing costs, lower delivery costs and so forth. This can further reduce prices at the grocery store or retail outlets as oil based products such as plastics cost less to make. Near term this can be good for companies and profitability. Lower costs and firm retail pricing seems like an option. But gradually everyone wants price adjustments. The retailer knows the manufacturer is making a greater profit so they want to share in the bounty. Demanding lower costs they purchase the products for less. The manufacturers typically will do that particularly if the retailer buys at higher volumes. The retailer is willing to do so because they know that they can lower their prices to move the merchandise since they paid less initially. However, competitors follow suit and the price decline spreads across the economy. Now margins start to get squeezed and profits actually decline. When profits decline companies look for more efficiencies and start reducing labor forces. Reduced labor or higher unemployment means less demand for goods and services. Less demand in a higher inventory environment means even lower prices and lower profits, more layoffs and the spiral continues.

Now, this scenario is not playing out as we sit here today, but it is the reason that investors are a bit nervous. The FED has a long history of monetary intervention to try and stem inflation and control interest rates. Deflation although it rarely happens is also a major concern and would be fought vigorously by the FED. To do so there are two primary tools. The first is lower interest rates. This generally spurs economic activity. However, worldwide interest rates are already so low that there is little room here at this time. More likely, the contraction of the monetary supply or some level of stimulus such as tax relief would need to be used to increase demand.

I don’t think we have reached this point yet. In fact, I believe the FED will increase rates starting this year and will try to do so at a steady measured pace. This may cause some slow down economically, but likely it would be offset by the increased consumer discretionary money. It may also stem production expansion. Finally, if rates are increased and at some point rates need to be decreased to offset deflation the FED would have room to do so.

In the end, the effects of the financial meltdown in 2008 are still having an impact. The FED artificially stimulated the economy with lower interest rates and government spending. Now they are trying to maintain the balance of avoiding runaway inflation while not sending the economy into deflation. I expect periods of volatility to arise periodically in our long trek back toward normal rates and economic conditions. Central bank intervention between the US and European countries should allow us to avoid any major long-lasting or catastrophic occurrences. We continue to monitor conditions and act accordingly. One final comment is that any economy is like a large ship. It doesn’t turn quickly rather it is gradual and adjustments take time. Choppy waters and storms arise, but a steady course and investing strategy allows for growth in various stages of the economic cycle.
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Five Ways to Maximize College Financial Aid

I hope everyone had a Happy Thanksgiving. I found the following article that I thought may help those of you looking at college for either children or grandchildren.

Some parents assume that if they position their assets creatively, they can strengthen their child’s chances of receiving financial aid. But in most cases, this isn’t financially smart or necessary. Some assets will matter, but not as much as you might assume; schools ignore qualified retirement accounts, and most institutions don’t even ask about home equity. Maximizing eligibility for aid can often only be tweaked at the margins. Here are five suggestions:

·         1. Check the EFC

Many affluent parents worry unnecessarily about how their investments will hurt their chances for financial aid. They should use an Expected Family Contribution calculator to generate a rough idea of what they would be expected to pay for one year of college. If their EFC, expressed as a dollar figure, is fairly close to a school’s price tag, they won’t qualify for need-based aid. In this scenario, parents should look for schools that provide merit scholarships to high-income students, and the vast majority of colleges and universities offer these awards.

Whether a child will receive the maximum financial aid award for which he or she is eligible is heavily dependent on the child’s college list. Parents may position their income and assets in an effort to obtain more aid, but if the schools that their children apply to are stingy, a larger financial aid package could simply include more loans. In contrast, if you are wealthy and seeking merit scholarships to help defray college costs, applying to many of the most elite institutions—such as the Ivy Leagues—would be unwise because these schools only give need-based awards.

Parents shouldn’t expect schools to alert them about their financial-aid deadlines, because these institutions can potentially save money if a student doesn’t seek financial aid. Many parents also overlook filing a second aid document called the CSS/Financial Aid PROFILE, which about 260 schools—nearly all of them private—also require.

To see how many FAFSA applications are submitted at individual high schools in a particular area, go to

·         4. Move Money Out of a Child’s Name

Parents should consider moving money out of a Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) account that is treated as a child’s asset, and into a custodial 529 account, which enjoys more favorable treatment. The FAFSA assesses children’s assets at 20 percent, and the PROFILE assesses them at 25 percent. In contrast, the aid formulas assess parent assets at much lower rates —a maximum of 5.64 percent for FAFSA and 5 percent for PROFILE.

Here’s an example of how a $50,000 account would impact financial aid if it was treated as the student’s versus the parent’s. This is how the PROFILE would calculate aid eligibility:

$50,000 (child asset) X 25 percent = $12,500

Financial aid eligibility would drop by $12,500.

$50,000 (parent asset) X 5 percent = $2,500

Aid eligibility would decline by $2,500.

Parents can shut down a custodial account, pay any applicable taxes on the withdrawal and then move the money into a custodial 529 savings account to obtain the more favorable aid treatment.

Schools don’t look at qualified retirement assets when calculating the financial need of a family. The FAFSA also ignores nonqualified annuities, while the PROFILE does count them.

But the FAFSA instructions are not clear about what assets parents need to include on the aid application. The FAFSA, for instance, asks, “As of today, what is the net worth of your (and your spouse’s) investments, including real estate (not your home)?” Unfortunately, the aid form does not specifically tell parents to exclude retirement assets on the form.

In addition, the form does not make clear that retirement money shouldn’t be included when it asks about the value of the parents’ cash, savings and checking accounts.

Remember, each family’s circumstances are different and what works for one family may not be right for another. It’s the same with investing, tax planning and insurance for example. The key is to find a trusted advisor in each of these areas that can help you make the correct decision for you and your family’s particular situation.

If you need any assistance in the area of college planning or any other financial guidance please don’t hesitate to contact us. Though we handle investments we have a solid network of qualified individuals that can help you in other areas such as this.

Lynn O’Shaughnessy is a nationally recognized higher-ed speaker, journalist and author of The College Solution. She writes about college for CBS MoneyWatch and her own blog,
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