The Brave Report: Market Commentary for March 2017

View the PDF version of this report here: The Brave Report-March 2017

The market continues to shrug. Even with a major presidential speech, numerous policy meetings, a rate increase and geopolitical news coming out of Europe, the market seems uninterested.  President Trump gave his first speech in front of congress on February 28th.  While we did see an initial market jump, it slowly returned to the flat line.  We saw similar reactions after the FOMC raised rates last week. The market just seems to be in a wait and see mode again; waiting for a real catalyst to add some directionality to the markets.

Market Overview

Over the last month, the markets have been pretty range bound again. This feels a little like the end of December and early January with the S&P 500 trading in a tight range and just scraping out small gains. The S&P is up by around a half a percent over the last month.  There was a small 1.4% jump following Trump’s speech to congress but this jump was short lived and the market gave all the gains back within a week. The NASDAQ had the biggest month of the three major indices but still only gained approximately 0.8% leaving it hovering around all-time highs. Continuing an interesting trend that I discussed in January, the S&P still hasn’t had greater than a 1% single day loss since October 11th.  The longest such streak we have seen since the current bull market started. Even with these small monthly gains, the markets have had a pretty good start to the year, with the S&P logging more than a 6% gain YTD.

The fixed income space also hasn’t seen much movement over the last month.  Even though the Fed raised rates at its meeting last week we saw very little movement in government bonds meaning the rate hike was largely expected and already priced in.  The yield on the 10-yr bond has actually dropped since the Fed statement.

Interest Rates: As was widely expected the Fed raised interest rates again at their meeting last week bringing the overnight lending rate to a target range of 0.75-1%. Even further, the statement from the Fed eased fears that they would take a more hawkish stance and indicate a faster pace of hikes. Additionally, little changed in terms of other expectations with other economic indicators including GDP and inflation. Based on the Feds projections from December and this meeting the market is largely expecting two more rate hikes this year but the Fed reiterated that future hikes would be data dependent. The reaction in the fixed income markets has been a slight drop in government yields.

In terms of how this spills over to everyday consumers, there won’t be a noticeable short term impact.  With future hikes on the horizon, we will probably see any floating rate debt adjust slightly higher. While mortgage rates are not directly tied to the fed funds rate, the impact will eventually trickle through to mortgages but the rate increase shouldn’t be that noticeable at this point.

In general, the rate hike should be viewed as a positive sign for the economy.  It reflects the view by the Fed that the economy is growing and job growth is stable.  It also shows that they are trying to reduce their role as an economy stimulator. This stimulation was needed during the financial crisis, but the hope is that this role will be given back to congress and the new administration as is traditionally the case.

Protectionism:  This was one of the cornerstone themes of Trump’s campaign and while very few details have emerged about any proposed import taxes, globally we are seeing this theme continuing to emerge.  In England, the march toward Brexit continues.  The government announced that they would formally inform the EU on March 29th of their intention to leave the bloc. This puts the timing of an actual exit at early 2019.

In last week’s Dutch election we saw the emergence of a far-right populist candidate. While he lost the election, it showed that this populist sentiment exists. A similar story is being written in France as well.  It doesn’t look like the populist candidate will win but again it shows that some of these populist, protectionist policies are resonating with large groups throughout the continent.

The G-20 also met over the weekend and for the first time in over 10-years they failed to reach an agreement to endorse free trade and reject protectionism.  This is a stark shift and one that is being championed by the Trump administration.  While the administration continues to maintain that they are not looking to get into a trade war, we will hopefully see some details emerge over the next few months about how they plan to renegotiate their trade relationships.

Trump Policy: President Trump spoke to a joint session of congress on February 28th. The speech was viewed by most as the most presidential he has looked since taking office. However, he still offered very little in terms of policy specifics.  This still leaves us in the dark on the specifics of many of his campaign promises but did reiterate to us that many of these promises are still a priority.

Trump did release a partial outline of his 2018 budget showing his proposals for discretionary spending.  In it, he proposed some significant increases in defense and security spending, including a 10% increase for Defense, a 7% increase for Homeland Security and a 6% increase for Veterans Affairs. To pay for these increases he has proposed some pretty widespread cuts across almost all other government agencies, including more than a 30% cut in funding for the EPA. All in, the result is a 1.2% decrease in discretionary spending. The proposal was obviously met with a partisan divide.  It is important to note that this is just an initial proposal and the final budget will be drafted and debated in congress.  This proposal continues to show us Trump’s consistency with his campaign promises. Whether they all come to fruition is another story.

Strategy commentary

With little overall market movement over the last month, I have continued to maintain our allocations, making very few moves at all.

My bias still remains toward the US.  While I am watching some select international markets, specifically the rebound in emerging markets and developed Asia, I am still content to wait to make any major moves.  In times like this, it is important to not feel forced to make moves in an effort to chase potential returns.  A disciplined approach and patience are important now to ensure that we are well positioned, from a risk-reward standpoint, when the market does make a move in one direction.

I am maintaining my over-weights to financials, industrials, technology and small-cap. A lot has been discussed about financials and industrials since the election, however, technology has actually been the best performing sector over the last three months, with financials lagging over that time frame.  I am still bullish on financials and industrials under the new administration but also think tech can continue to be a surprise winner.

I am still negative on fixed income and will continue to maintain more cash as a replacement for these fixed income allocations.

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You Sold Your Company: Now What?

I’ll start by clarifying one thing, this post isn’t just for people that have sold a company. As much as we hear about company acquisitions in the financial news, selling a company is pretty rare. With all of the entrepreneurs and start-ups in the world, the actual number of companies that grow to a point of acquisition is tiny and most of the ones that do sell are not your Snapchats and Instagrams that reach rapid, almost overnight, success.  They are companies that grow gradually over time, maybe even being passed down through generations before being sold. With that said, the lessons from this post can also be applied to other transitions in life.  It could be a windfall from an inheritance, the realization of profit from stock options or even a simple transition to retirement.  In any case, the planning that you do leading up to, during, and after such an event can have a vast impact on the success of the transition and your future goals.  This applies not only to the financial side of things but also to the emotional transition people experience.

So, you sold your company. Congratulations. You worked your butt off and now you are about to reap the benefits. You can kick back, relax and spend the rest of your days lounging on the beach, sipping pina coladas. As idyllic as this may sound to some, this is not reality.  Yes, you have some new found wealth, more flexibility in your schedule, but you still have work to do.  Transitioning from building a company to life after the company isn’t like flicking a switch.  You need that new wealth to provide you with income. You need that new wealth to last for the rest of your life.  All this while adapting to a life where the main focus isn’t the company anymore.  Many people I work with struggle with this emotional part more than any other.

So how do you make this transition successful?


Just because your company is in the growth phase and hasn’t sold yet doesn’t mean there aren’t strategies that can be implemented to benefit you and your family in the long run.  During this time frame it is important that proper ownership of company stock is reviewed and that steps are taken to create a transition plan.  There should be a plan in place to make the transition from earning money to needing income.  This plan should be reviewed and discussed prior to any sale to ensure there is appropriate liquidity from the start and there isn’t a lag period.

There are also some wealth transfer strategies that lose their effectiveness the more mature the company gets.  The key to most wealth transfer and estate planning strategies is to control when and at what valuation something is included in your estate or gifted to a trust or other individual.  This discussion is much more complicated than can be covered in this blog post and will be the topic of a future post. However here are two basic strategies that could be appropriate.  As with all estate planning and tax related strategies, please speak with your tax or estate planning attorney to decide what strategies are appropriate for you.

  • Gifting: This is the simplest form of wealth transfer. You can simply gift shares of your company to a child or other individual.  The IRS sets forth lifetime gifting rules and restrictions so being able to gift an asset when its valuation is low can allow any future growth of an asset to avoid being included in your estate.  This is not always the best strategy from a control standpoint but could allow you to shelter significant growth from your estate.
  • GRAT: A Grantor Retained Annuity Trust also allows you to remove appreciation from your estate in return for a stream of income over the life of the trust. An asset (in this case, company stock) is placed in the trust for a set period of time. During that time the trust must pay out an annuity stream back to the grantor during the life of the trust.  With interest rates still at such low levels, this income requirement is quite low allowing more money to stay in the trust.  When the life of the trust expires the remainder passes along to the beneficiary of the trust. The beauty is that any asset growth during the life of the trust is not included in the gift amount. The gift amount is determined by valuation when the trust is established. If you expect your company stock to appreciate rapidly prior to an exit this can be a very efficient vehicle to keep that growth out of your estate and pass it on to your beneficiaries. (This is a very high-level description of a GRAT. There are many other caveats and details that should be considered and taken into account).

Transition to income

Financially, this is the major shift that someone will go through.  Throughout the lifespan of the company, you were working all the time and probably drawing some sort of paycheck to cover your bills and live your life.  Once the company sells this income stream vanishes. This means you must recreate a monthly income stream while also making sure there is enough capital to provide this income stream for many years to come. Too often I find people focusing exclusively on the income side of things and not taking into account that your principle also needs to grow in order to last the rest of your life.  If you sell a company when you are 50 you may need your assets to last more than 40 years, and often times you want to make sure there is some sort of legacy left behind.  To put this in perspective, with historic inflation averaging just over 3%, the amount of income you will need to maintain the same lifestyle as today will double in just over 20 years.  You need to make sure your principle is keeping up with this, especially if you have any legacy ambitions.

  • Income: Income can be created using a number of different strategies. Most commonly we create a balance between fixed income instruments (often times utilizing municipal bonds for the tax advantages) and dividend paying stocks. The balance will be dependent on the interest rate environment and a few other factors.  We also have the option of selling off security positions that have appreciated.  While traditionally this hasn’t been the most advantageous option, with capital gains rates at such low levels it can be considered if managed properly.
  • Growth: With many people I talk to that are either selling a company or transitioning to retirement they only focus on the income side of things. They are under the mindset that they need to cut out as much risk as possible.  Yes, I think for any money that you may need to spend in the next few years you should reduce risk substantially but with a large portion of retirement or post exit dollars the time frame can be longer than you think and this money should be managed appropriately.  This growth side could look very similar to your pre-exit/ retirement portfolio as the time frame is also longer term.  A longer term portfolio has the ability to withstand larger fluctuations in order to achieve long-term growth.

This strategy may seem different than what most people hear while they are building their wealth. We are always told to have a growth mindset while we are accumulating our wealth and then we should cut our risk when we make the transition to the income stage of life.  What I hope is apparent is that is exactly what we are doing.  By adding in an income producing layer we are reducing the overall risk within your assets but are still providing some opportunity for growth.

Future ventures

All of this financial management sounds great, but is this how the real world works? With most entrepreneurs I speak with, they don’t look at an exit as the end.  They look at it as a stepping stone to the next venture.  This can sometimes be a dangerous mindset from a financial planning standpoint.

It’s not always as simple as selling a company and then using that money to create income for the rest of their life. Many entrepreneurs want to take this new found wealth and use it to create the next big thing.  As a financial planner, this can create some difficult conversations. It is my job to help clients reach their goals. However, it is also my job to communicate the risks and rewards of financial decisions.  These risks and rewards are not just limited to financial outcomes but stretch across all aspects of life; family, work, philanthropy, lifestyle, and legacy.  It is important to understand that by simply taking a windfall and investing in the next venture you are not just risking financial loss but you could be risking your family’s long-term financial security.

Entrepreneurs can sometimes be blinded by success, often feeling like if they hit it big with one company they can easily do it again. You got rich by taking risks, but taking risks is not how you maintain wealth. You maintain wealth by managing risk. As I mentioned earlier, the success rate of start-ups is quite low so more often than not the prudent course of action is to create a balance between maintaining long-term wealth and taking a risk on the next opportunity.  This balance is going to look different for everyone but this is a very important time to evaluate risk well beyond financial loss. The goal is not to prevent future risk-taking and potentially miss out on creating that next great company. The goal is to put yourself in a position where you can have both.

Emotional Transition

This can sometimes be the most difficult part of selling a company (or retiring).  Entrepreneurs can grow attached to their companies and to their work.  It gives them purpose and in some cases is almost like another family member.  When you sell the company you need to fill this void, both from a time and an emotional standpoint. As a financial advisor, this is not my area of expertise but I think it is important to mention because the impact of this emotional transition can affect your financial lives especially when it comes to decision making.

There is no one way to emotionally handle this transition. Some people do it by relaxing. Some people get active with philanthropy. While others simply jump back into the waters with another venture, consulting work or board member responsibilities.  Whatever path works for you, it is just important to be mindful of this void and its impact on the rest of your life.

So, congratulations. You sold your company. Just remember, the work isn’t over yet.