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Sather Financial Group

120 E Constitution St
Victoria, TX 77901

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Second Quarter Commentary 2016

Negative Rates, The Brexit, Sluggish Growth & Debt…The World We Live In

To look at the performance of the financial markets, one would have thought the Brexit was the beginning of World War 3. The day after the surprising results the stock markets fell by 3.6% followed by a 2% drop the next day.

The media ate it up. Comments from the Wall Street Journal stated, The Dow Jones Industrial Average and the S&P 500 have erased more than three months of gains in the past two sessions and are on track for their worst month since January. The trillions of dollars lost amounted to the worst two days ever for the S&P Global Broad Market Index, a collection of stock markets world-wide, according to S&P Dow Jones Indices.”

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And yet, if you were the Rip Van Winkle investor who slept through the quarter, you awoke seeing the market finished pretty much where it began with no need to worry. ;

Although much of the second quarter was dominated by Brexit noise, the process by which we invest over long (10+ Year) time frames has not changed. Investing in the stock market remains a bumpy and volatile process, but one that has usually delivered respectable results.;

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The 10 Year US Treasury yield sits near record lows at less than 1.5%.

Despite this, US interest rates remain significantly above the rest of the developed world as many of those nations have negative rates.

In fact, there are more than $10.4 Trillion worth of government issued bonds from around the world that have NEGATIVE interest rates. This is about 2/3rds of bonds issued in the developed market. Essentially, this guarantees an investor will lose money.;

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With interest rates so low, investors continue to face quite the dilemma—take the guaranteed yield of a Ten Year US Treasury (1.46%)—or get 50% more income by investing in stocks (S&P 500 Dividend Yield: 2.17%)?

It is worth pointing out that if you buy a Ten Year Treasury, your rate is fixed for the term of that bond. In contrast, good quality stocks have a good habit of increasing their dividend over long periods of time.

Although this is not a guarantee, it appears to be a better way of increasing cash flow and offering a legitimate attempt at maintaining purchasing power—if you have the appropriate time frame and tolerance for volatility.;

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Adding further frustration to fixed income investors, GDP continues to be weak. As such, we see little indication that the Federal Reserve will increase rates any time soon.;

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Growth in the economy and employment traditionally go hand-in-hand. Unfortunately, this is not the case today. Hiring is at its weakest pace since 2010—however, there are 5.8 million job openings currently.

Although the “official” unemployment number is below 5%, this number excludes reality. Once you factor in the number of people who are marginally employed, have quit looking or whose unemployment benefits have expired, the true figure of unemployment is much closer to 10%.

As we have discussed previously, the Labor Participation Rate is more meaningful. This figure measures the number of people in our country, age 16 and older, who are working. Currently, this figure is at 62.6%--the lowest level in more than 35 years.;

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A bright spot for us in Texas has been the rebound in the price of oil. At approximately $50 per barrel, life in the oil patch has a heartbeat again. Although we see some activity, it remains cautious and metered.

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For decades we have been told that the path to a better life is through education. It is hard to argue with the statistics.

According to the Bureau of Labor Statistics and the NY Federal Reserve, a person with a Bachelor’s degree will make 50% more than someone with a high school diploma and have about half the unemployment rate. While this is generally understood, what is less well known is the cost to obtain this education and the hangover associated with this education.;

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At the same time that more and more consumers are falling behind on their student loan debts, they are borrowing more and more for car purchases and on credit cards.

This is putting the average consumer further behind in terms of saving for their retirement or the future in general.

Additionally, allocating capital to depreciating assets like a car, or a credit card, has to erode long-term purchasing power.

At the end of the day, you can’t spend more than you make and you have to continuously save for a rainy day. Sometimes that rainy day is an obvious deluge. However, most times the rain water slowly accumulates over time until it is overwhelming.;

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Lastly, today we celebrate our nation’s independence.

In doing so, we were given the opportunity to get up and go to work, to freely worship and to speak our minds.

Have a safe and happy 4th of July!

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