[fname], I want to share with you (below) our 2016 stock market Mid-Year Update and Outlook from our Financial Services Division here at Sullivan & Company CPAs.  In case you didn't know, I am an IAR or Independent Advisor Representative and the RIA or Registered Investment Advisor we work through is the Archer Investment Corporation, who generated the Mid-Year Update and Outlook for us.

 

Now if you are not already an investment client with us, you may wonder why your accounting firm wants you to invest with them.  Well years ago, CPAs were not allowed to venture into the investment world, but it always bothered me to see how poorly our clients were treated at their broker. It is not that the broker was not nice or attentive; it was the quality of the investments and, oftentimes, the lack of understanding for how the investments were going to affect the client in the future.

The amount of commissions and fees were oftentimes much larger than the client realized. Principles taught in universities were ignored by greedy advisors. Some forward thinking CPAs worked hard to get the accounting industry to see that we could, at the least, counsel our clients so that their investing experience was successful.

Our function is to work with you in all areas of your financial life. We prepare your tax returns and financial statements, of course, but there's a lot more decisions you make that we should be involved in. These include: succession planning for business owners such as HOW TO:

1) Sell your business
2) Retire comfortably
3) Handle your finances now that you are divorced or widowed
4) Provide for loved ones if you die
5) Pay for the education of your children
6) Determine if a trust is right for you
7) Minimize estate taxes

Worse than hearing that the IRS is going to audit is the call from a client who has plunged into an investment, whether stocks, bonds or another home without consulting us first.

Sometimes these decisions have unfortunate results and are difficult or impossible to undo. So, in response to this need, your CPA firm has well trained accountants and financial services professionals to help you navigate the financial world..

For a free review of your investments, give me a call at 301 657-8080 X 102.  

 

Thanks, Paul

 

 

 

 

 

 

9000 Keystone Crossing # 630
Indianapolis, IN 46240
www.thearcherfunds.com


click here to download this report in a PDF format

 

Archer 2016 Mid-Year Update and Outlook:

 

Where are the earnings driving this market higher? This is the question we pose for investors as we look out into the rest of 2016 and early 2017. So far in 2016, we have seen the market show some gains just after the BREXIT vote. The markets were scared to death of the unraveling of the European Union, now it seems as if it really does not matter. Trade will continue, companies will forge new ventures, etc.

The bears may have sharpened their claws, but they have still yet to use them. Even in the face of political uncertainty in the U.S., so many commentators on the idiot box have declared ruin to the stock markets. In spite of this and BREXIT, the market as of this writing has moved to new highs. Some of this can be traced to the seasonality of the stock market. In fact the chart below shows the month of July has increased 70% of the time over the last 10 years on average of 1.9%. However, August is followed up by an average drop of -1.1% and drops nearly half the time. This year may be no different. We will examine some additional charts later in this Update to show the valuations of the markets are fairly valued by all accounts but one or two. We will discuss those in more detail a bit later.

  

If you have sat on the sidelines like Carl Icahn and George Soros who have both shorted the market and bet against stocks, you may be licking your wounds here a bit. However, a 5% move in the market higher does not create a trend up. In fact, there is still plenty to be worried about, and only earnings will ultimately drive the market higher. In light of these anticipated earnings it is worth noting the market breadth of stocks advancing vs. declining suggests markets have plenty of momentum to move higher. However, we believe only earnings will accelerate the next leg of the bull market. Look at the next chart and you can see earnings have severely stalled and are indicating a slowdown in the market. Many will say this is just Energy related, however, the S&P 500 through the second quarter earnings releases have shown an overall -.8% decline in sales.

  

  

With the Year over Year earnings looking dismal, how can the market possibly move higher? Great question. If you look at the chart below we can see the market is overvalued by most accounts. Even Utilities which have been on a tear and ran up wildly are now trading at a trailing P/E of 22.3x vs a Median of 14.7 back to 1990. I highly doubt Utilities are growing at a 15-20% clip to keep these valuations for the near term. So why are utilities trading at a P/E high? Simple, interest rates are low, extremely low.

  

Why would one metric be so high and yet another so low? EV (Enterprise Value) equals the level of debt a company holds + the Market Capitalization of a Company. EV has averaged roughly 50% higher than Market Cap over time. Today, stock prices have increased tremendously while the price of corporate debt has not risen nearly as fast. Further, this can be explained by the level of debt companies have taken on to their balance sheets (or the market value of that debt). Companies are cash rich and therefore have paid down debt, in turn making the company look much more enticing. In addition, as investors have been driven to purchase equities, especially those with some kind of dividend, the market values have grown of those companies and clearly the debt levels have not grown or kept up proportionately with the market capitalization of stocks.

Small Cap stocks look very similar, but the EV/Market Cap for small stocks is at an 83% rank which suggests they are overpriced historically. This is because Small Caps typically borrow more to keep up with their growth, however, they look a bit overpriced as well.

So as the very first chart showed as well as the following chart, earnings, which have stagnated, will be the next leg of this market if it is to move substantially higher. We need to see corporate profits grow. The main reason we have been so timid in our projections over the last couple of years is we have seen a vast slowing of profits and sales. Companies can only cut costs so much and then they need to drive an increase in sales to get more money to the bottom line. From this standpoint, we see the market finishing the year a few percent higher than it is currently somewhere in the 2200 area.



Looking Ahead:

With the second quarter behind us and having declines in earnings and sales year-over-year in the S&P 500, many analysts have driven down expectations to very low levels. Oftentimes the market reacts based on expectations. With expectations so low it may just be easy to beat these lower levels and thus drive the market higher. Any increase from here in earnings should translate to a proportional increase in the market if we lived in a "perfect market world." Since we do not, we should expect the market to rise another 3% from this level into year-end. However, we anticipate some turbulence along the way.

There is another way for the market to rise higher and by this standard, much higher. If central banks continue to "print money", it could cause inflation and in this market, a little inflation is not a bad thing. This could potentially move the market much higher than it is today as companies revenues and profits would accelerate. Not from the sale of additional goods and services, but merely due to higher prices. We will discuss this further next quarter if we see this coming to fruition.

Regards,

The Archer Team

Troy C. Patton, CPA/ABV
Steven C. Demas
John W. Rosebrough, CFA

The opinions contained herein are not intended to be investment advice or a solicitation to buy or sell any securities. Archer Investment Corporation manages The Archer Funds. You should carefully consider the investment objectives, potential risks, management fees, and charges and expenses of the Fund before investing. The Fundís prospectus contains this and other information about the Fund, and should be read carefully before investing. You may obtain a current copy of the Fundís prospectus by calling 800-800-1776 or visit www.thearcherfunds.com. Past performance is not a guarantee of future results. The investment return and principle value of an investment in the Fund will fluctuate so that an investorís shares, when redeemed, may be worth more or less than their original cost. Distributed by Arbor Court Capital, LLC, 2000 Auburn Drive, Suite 300, Beachwood, OH 44122 Member FINRA.
 


 

      Financial Services at Sullivan & Co. CPAs

Paul Sullivan leads our Financial Services Division and is here to help you navigate your financial future. As an Investment Advisor Representative, he is able to provide an independent opinion on the investments you already own or are considering buying.

 

We can structure a portfolio based on your risk tolerance or we can help you decide how to invest in your company 401(k) plan. We work with each client to identify their concerns and to provide solutions according to their situation.

Paul is also experienced in company retirement plans. If you own a business that does not have a plan; we can discuss your options and set up a plan that fits your company.

 

If your business already has a plan; we offer a free evaluation of the plan to ensure that it is up to date and working well for you and your employees.

Our goal is to provide personal, unbiased and independent advice to help you make well-informed decisions about your financial life and investments.

Contact Paul Sullivan or Jordana Para to set up a free initial consultation (301) 657-8080.

And as always if you have any questions about accounting or investments and how they effect you or your business, please give us a call. We can help guide you in the right direction.

 

 

Remember you can call our offices if you have any questions about these or any other accounting, tax, financial planning or insurance related issues, at 301-657-8080. 

 

Regards, Paul Sullivan, CPA

President, Sullivan & Company

 

 

 

 

Sullivan & Company, CPAs | 4709 Montgomery Lane | Bethesda, MD 20814 www.eSullivan.net | email: pSullivan@eSullivan.net | Connect With Me on Linkedin

Direct: 240-316-3531 | Main no.: 301-657-8080 Ext 102 | Fax: 301-657-9055