G. EARL MOWREY & CO., L. L. C.

Fee Only Certified Financial Planner ™, Registered Investment Advisor

4964 Belmont Avenue, Suite A, Youngstown, Ohio 44505

Phone/Fax (330) 759-3444

QUARTERLY NEWSLETTER SPRING 2017

1st Quarter Review

Dow up 4.6%

S&P 500 up 5.5%

NASDAQ up 10 %

We are beginning 2017 on a strong note but things may be getting ahead of fundamentals. The global and domestic economies are slowly moving forward. This is actually better than growing rapidly. Interest rates are expected to rise slowly on a path back to normal… the market likes gradual moves. As corporate earnings come out over the next several weeks, we will get a better picture of how companies are doing.

It is true that change is taking place in the retail industry. When money was cheap as in much of the past decade, some companies took on debt and expanded their presence with more retail stores in mall, etc. Too many store locations and a rise in internet sales is taking a toll on them. Survivors will be stronger and retail stores will continue to exist but in lower numbers.

There was a lot of money flowing into stocks both domestic and overseas in the first quarter. ETF’s (exchange traded funds) had their biggest quarter ever with over $135 billon in inflows. Consumer confidence is high and the largest part of the money went into S&P 500 index funds. In looking at valuations into MSCI USA sector indices at the end of 2016, they ranged from one at 25% below average (energy) to one about double its average (financials). Two of them seemed normal and the rest 10% to 20% above normal.

Averages can be misleading though because a lot of individual entities make up an average. As I was writing this, I came across what I believe may be a good example to illustrate the extremes that you may find in averages:

….A headline stated that Tesla (the electric car company) had just surpassed Ford in the value of the companies. Fast forward a couple of days and Tesla is valued greater than GM! …..By Morningstar’s analysis both Ford and GM are somewhat under valued whereas Tesla is valued below $200 but selling for over $310. My point is simply that while averages seem high, some companies may be bargains and that, over time, the market resolves inbalances.

The DOL Fiduciary Rule

The Department of Labor’s (DOL) fiduciary rule was proposed back in 2015 and finalized in 2016. It was set to be implemented slowly so the financial services industry would have time to adjust to the changes.

The fiduciary rule would force all financial professionals who work with retirement accounts or provide retirement planning advice to act as fiduciaries. Most investors do not know that there are two standards of care in the financial services industry. Furthermore, they do not understand the differences between the two.

There is a fiduciary standard and a suitability standard. With the fiduciary standard, the professional must act in the client’s best interest ahead of their own. Registered investment advisors (both Earl and Chris) are fiduciaries. Under the suitability standard, professionals are obligated to recommend products that are ‘suitable’ for the client but may not be in the client’s best interest. Financial salespersons, brokers, and insurance agents are held to a suitability standard.

This new rule is facing resistance from the brokerages and insurance industries. These industries will be forced to act in the client’s best interest and reconfigure their commission-based models. They will no longer be able to recommend a product that will earn them a large commission even though a more appropriate product exists that would not give them as lucrative a commission. The new rule will not outlaw commission-based models. However, the costliness to comply with it may give the incentive to only charge a fee for advisory services. According to Morningstar, the added expense of compliance will cost the financial services industry roughly $19 billion in revenue. If a commision-based model becomes unprofitable, young and small-time investors who do not have a lot of assets to invest could be priced out.

Trump vs. Congress

The success of Donald Trump will hinge on his ability to get legislation through Congress. During his campaign, he made numerous promises that would make America ‘great’ again. These promises along with his pro-business stance caused the stock market to rally and confidence about the economy to climb after the election. The hope is that things will get done since there is a Republican president and the House and Senate are controlled by Republicans. Trump has the potential to make a big impact through tax reform, deregulation, infrastructure spending, and healthcare. The millon dollar question is will he be able to work with Congress and his colleagues to come up with plans that are ‘great’enough to get through the gridlock of Congresss?

Healthcare reform was #1 on the agenda for the Trump admistration. The Republicans have been trying to ‘Repeal and Replace’ Obamacare ever since it became law… while the Democrats feel it only needs minor adjustments. The first attempt to replace Obamacare failed. This is a very complicated issue and it will take some work to come up with a good fix.

The next issue on Trump’s agenda is tax reform. It seems that both political parties agree that tax reform is necessary. The tax code is overly complex and overdue for an overhaul. The last time major tax reform took place was in 1986. While both parties agree that it needs changed and simplified, they disagree on how it should be done. Realistically tax reform will likely be a 2018 event.

Another issue is fixing our infrastructure. It is known that our bridges and roads have not been maintained and updated regularly over the years. Trump said he would spend a masssive amount of money on infrastructure while cutting taxes across the board and not touching entitlement programs. Where will the money come from? The controversial border adjustment tax could be a source of revenue. It is a tax on imports. If this part of the tax does not get passed, the proposed massive spending on infrastructure and the military may be smaller than originally envisioned. Trump should be able to get support from both parties on this issue but will he be able to get the money to do it? In reality, taxes may need to go up.

Things are looking up but be prepared for bumps along the way. Remember that market downturns are common but, if your investments are not in overpriced areas, you experience a tempory inconvenience as opposed to a permanent loss.

The articles and information provided in this quarterly newsletter are solely to aid in your understanding of certain financial planning and investment issues. This newsletter is provided to you with the understanding that I am not engaged in rendering accounting and/or legal advice. An accountant or attorney should be contacted regarding any tax or legal matters. All indices are unmanaged and cannot be directly invested into. A copy of my Form ADV Part IIA and IIB Firm Brochure, which is on file with the Ohio Division of Securities, and were most recently updated on March 31, 2017 will be made available upon written request.