We believe we are in a transitory environment that will be increasingly challenging for bonds. With potential rate hikes in the future, it is important to have realistic expectations about bond returns as they are likely to be low in 2022. The image below illustrates the inverse relationship between bond prices and bond yields. Although the bond market is less volatile than the stock market, bonds also fluctuate in terms of price. You can see we have been in a 36-year bull bond market that has brought yields to record lows.

Although bonds typically provide portfolios with a safe haven from market volatility due to their low correlation to stocks, they don’t provide much protection against inflation. In fact, inflation is a major driver of volatility within the bond markets. With the Federal Reserve likely to raise interest rates multiple times in 2022 to combat inflation, investors have been concerned about a potential decline in bond performance. In fact, the Barclay’s Intermediate US Aggregate Bond Index was down -1.54% last year...

We are frequently asked for our opinion on international investing. Recent articles suggest an overweight allocation to international stocks, more specifically in European stocks, because of their attractive valuation relative to US domiciled stocks. While we agree the valuations may favor Europe over US in the short run, our concern is the risk/reward trade off in doing so. To summarize some of those risks:

• Transparency: Companies abroad follow different financial reporting standards and abide by different regulatory bodies so comparing apples to apples may be difficult. Less transparency can mean more volatility because audited financial information may not be provided on a regular basis and the local markets may be less liquid.

• Layers of complexity: There are a couple of ways to invest internationally: direct investment, depository receipts, or through a fund structure. In any structure, diligence is required to account for different settlement instructions, clearing instructions, regulations of the market, differences in accounting standards, foreign exchange rate fluctuations, counterparty risk, and many other aspects. These layers of complexity also mean higher fees.  
   
• Currency Risk: When you invest outside the US, you are exposed to currency risk. Currency risk is the risk that unfavorable currency depreciation will negatively impact the value of your investments.

Source: Yahoo! Finance

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As of 5/31/16, 97% of S&P 500 companies have reported their earnings for the first quarter of 2016. According to S&P Dow Jones Indices, of those that have reported we have operating earnings per share of $24.09 which is a decline of -6.7% from one year ago. The 12 month operating earnings per share is $98.73 for the index, a decline of -11.45% from one year ago and a decline of -1.71% from the previous quarter. This marks the fourth consecutive quarter of declining year-over-year earnings and the fifth consecutive quarter of year-over-year revenue declines.

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 Charles Schwab Investment Outlook 2016

Columbus, Ohio: February 11^th, 2016

Patrick Wallace and Cindy Jones had the opportunity to attend the annual Charles Schwab Investment Outlook held each year in Columbus, Ohio. This one day conference brings together experts in their respective fields to give their insights on the markets, economy, politics, and investment strategies. This year we were excited to see Chief Political Strategist for Horizon Investments, Greg Valliere and Chief Investment Strategist for Charles Schwab & Co., Inc., Liz Ann Sonders in addition to several new speakers. Below are some highlights from each session:..

Covington had the pleasure of attending the Charles Schwab Impact Conference held in Boston, MA this year. This marks the 25^th year of the conference with around 1,800 advisors from all over the country in attendance. Each year Schwab strives to provide best in class speakers from various backgrounds who offer their unique perspectives on their field of expertise. This year’s keynote speakers ranged from cellist Yo-Yo Ma to Alan Mulally, former CEO of Ford Motor Company.

In addition to the in-depth educational sessions we attended, highlights of the general sessions were the following:

• Bernie Clark – Executive Vice President of Charles Schwab & Co., Inc. and head of Schwab Advisor Services:

• Over the past 10 years, the Registered Investment Adviser (RIA) industry has grown from $1.6 trillion to $4 trillion.
• There are over 14,000 RIA firms today.
• RIA’s employ over 32,000 people.
• There’s $23 trillion in untapped opportunities for Advisors.

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The Need for an Independent Federal Reserve Bank

(Or a Perfect Federal Reserve Bank Cannot Be Taylor Made)..

Welcome and Happy New Year!

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