is the stock market headed for a train wreck?€¦ · is the stock market headed for a train wreck?...

IS THE STOCK

MARKET

HEADED FOR A

TRAIN WRECK?

Presented by:

Louis P. Stanasolovich CFP®

, CEO

Legend Financial Advisors, Inc.®

And

EmergingWealth Investment Management Inc.

LOU STANASOLOVICH, CFP®, CCO, CEO

Lou is founder, CCO, CEO and President of Legend Financial Advisors, Inc.®

and EmergingWealth Investment Management, Inc.

Legend’s founder, Lou was selected by Financial Planning magazine as part of

their inaugural Influencer Awards for the Wealth Creator Award recognizing the

advisor who has made the most significant contributions to best practices for

portfolio management.

He is one of only four advisors nationwide to be selected 12 consecutive

times by Worth magazine as one of “The Top 100 Wealth Advisors”

in the country.

Lou has also been selected 11 times by Medical Economics magazine as one of

“The 150 Best Financial Advisors for Doctors in America”

Lou has been selected four times by Dental Products Report as one of “The Best Financial Advisors for Dentists in America.”

He has twice been named one of “The 100 Great Financial Planners in America” by Mutual Funds magazine.

Lou has been named three times to Investment Advisor magazine’s “IA 25” list, ranking the 25 most influential people in and around the financial advisory profession.

Lou was profiled in Financial Planning magazine as one of the country’s “Movers & Shakers” recognizing the top individuals who have done the most to advance the financial advisory profession.

Lou has also been selected three times by Pittsburgh Magazine as one of the Pittsburgh area’s FIVE STAR Wealth Managers, a list that represents the most elite financial advisors in Pittsburgh.

With over 30 years advising clients, he has shared his financial planning and investment management expertise through dozens of speeches, radio and television broadcasts, webcasts, and hundreds of times as an interviewee, writer and publisher.

CONCERNED ABOUT THE DOWNTURN?

RETURNS NEEDED TO REACH BREAK-EVEN POINTS AFTER LOSSESPERCENTAGE RETURN NEEDED

PERCENTAGE LOSS TO REACH BREAK-EVEN

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

45.00%

50.00%

55.00%

60.00%

65.00%

70.00%

75.00%

80.00%

85.00%

90.00%

95.00%

5.26%

11.11%

17.65%

25.00%

33.33%

42.86%

53.85%

66.67%

81.82%

100.00%

122.22%

150.00%

185.71%

233.33%

300.00%

400.00%

566.67%

900.00%

1900.00%

Source: Legend Financial Advisors, Inc.® COPYRIGHT 2015 LEGEND FINANCIAL ADVISORS, INC.®

REPRINTED WITH PERMISSION OF LEGEND FINANCIAL ADVISORS, INC.®

With People Living Longer,We’ll Have to Work Longer

Source: U.S. Global Investors, Advisor Alert, August 28, 2015, www.usfunds.com, Legend Financial Advisors, Inc.®

REPRINTED WITH PERMISSION FROM U.S. GLOBAL INVESTORS

As of: August 28, 2015

THE RUNDOWN OF LAST WEEK(Beginning August 24, 2015)

Market volatility spiked dramatically early last week as fears about the depth of China’s economic

downturn escalated. Asian markets were hit the hardest while European shares were also unstable,

and Japan’s Nikkei 225 and U.S. stock indices had six-day stretches of losses before rallying as strong

U.S. economic data countered worries about China’s weakness.

1. The VIX index, which measures U.S. stock market volatility, hit 53 intraday on Monday, then

dropped back below 27 on Friday.

2. The Yield on the 10-year U.S. Treasury note touched 1.9% Monday, August 24, 2015, the lowest

since April, then rebounded to settle at 2.18% on Friday.

3. U.S. West Texas Intermediate crude oil prices recovered from Monday lows near $38.00 per barrel,

ending the week close to $45.00 per barrel.

4. Second-quarter Real (After Inflation) Gross Domestic Product (GDP) growth was revised up to 3.7%

quarter-over-quarter seasonally adjusted annual rate (QoQ saar) from 2.3% QoQ saar in the initial

release. This was above the expected revision to 3.2% QoQ saar and shows above trend growth in

the U.S.

5. U.S. new home sales rose 5.4% in July to a seasonally adjusted annual rate of 507,000 units. Sales

were 25.8% above on a year-over-year basis. The S&P/Chase Schiller composite index of 20

metropolitan areas increased 5.0% in June from a year earlier. The Pending Home Sales Index

increased 0.5% to 110.9%, suggesting further housing market improvements.

CHARACTERISTICS OF CYCLICAL AND SECULAR STOCK MARKETS

Source: Legend Financial Advisors, Inc.®

COPYRIGHT 2015 LEGEND FINANCIAL ADVISORS, INC.® REPRINTED WITH PERMISSION OF LEGEND FINANCIAL ADVISORS, INC.®

Source: The Leuthold Group, LLC,

REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC


S&P COMPOSITE INDEX, PRICE RETURN

(SINCE 1900)

Source: Robert Shiller FactSet, J.P. Morgan Asset Management

COPYRIGHT 2015 J.P. MORGAN ASSET MANAGEMENT

REPRINTED WITH PERMISSION OF J.P. MORGAN ASSET MANAGEMENT

As of: March 31, 2015

Note: Data shown in log scale to best illustrate long-term index patterns.

24.42

Note: Created by Robert J. Shiller, Professor at Yale University, this Price Earnings Ratio is based on

average inflation-adjusted earnings from the previous 10 years (Each year of earnings is inflated

and quoted in current dollars), known as the Cyclically Adjusted P/E Ratio, also known as the

Shiller PE Ratio, or PE 10 Ratio. Because this factors in earnings from the previous ten years, it is

less prone to wild swings in any one year. The bad news: Because of the current high P/E valuation

of 24.42 returns on the S&P 500 are likely to be in the very low single digits over the next ten years.

SHILLER PRICE/EARNINGS RATIOSLong-Term Stock Market P/E Valuations Continue To Climb Which Means Lower 10-Year Returns

As of: September 1, 2015

REPRINTED WITH PERMISSION OF LEGEND FINANCIAL ADVISORS, INC.®Source: www.multpl.com

COPYRIGHT 2015 LEGEND FINANCIAL ADVISORS, INC.®

45

40

35

30

25

20

15

10

5

0

Black Tuesday

Black Monday

1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

1881-01-01 2015-08-18

P/E

U.S. STARTING VALUATIONS HAVE DEMONSTRATED A STRONG

IMPACT ON FUTURE RETUNS

Subsequent nominal returns (annualized)*

As of: September 2013 Source: Robert Shiller Online Data; Via PIMCO

* Median of the annualized subsequent returns calculated at each month end, using Shiller P/E and S&P 500 monthly

returns from December 31, 1927 to November 21, 2014

Current level: 24.42

Source: Bloomberg via U.S. Global Investors, Advisor Alert,

August 28, 2015, www.usfunds.com

REPRINTED WITH PERMISSION FROM U.S. GLOBAL INVESTORS


COPYRIGHT 2015 U.S. GLOBAL INVESTORS

Stock Selloffs

Volatility Extreme

(VIX Value)

Peak-To-Trough

Drawdown, by Percent

Length

(Months)

China – 2015 58 -43% 2

Dow Jones Industrial Average 1929 75 -89% 32

Japan – 1990 50 -36% 32

Thailand – 1997 72 -85% 31

Russia – 1998 155 -84% 12

NASDAQ – 2000 69 -78% 31

S&P 500 Index – 2008 75 -57% 17

CHINA’S CRASH IS BIG, BUT NOT THE BIGGEST

Note: Volatility is 60-day historical.

ARE THERE MORE STORM CLOUDS AHEAD?

MARKET FLUCTUATIONS

What Past Market Declines Can Teach Us

A History Of Declines (1900-December 2014)

Type of

Decline

Percentage

Decline

Number of

Declines

Average

Frequency

Average

Length

Dip -5.0% to -10.0% 388 About 3 times a

year

46 days

Correction -10.0% to -15.0% 123 About once a

year

115 days

Severe

Correction

-15.0% to -20.0% Included in

corrections

total

About once

every 2 years

216 days

Bear Market* -20.0% to -30.0% 17 About once

every 6.25 years

11 months

Severe Bear

Market*

-30.0% or more 14 About once

every 8.25 years

22.8

months

Source: American Funds Distributors, Inc., Bloomberg, Dow Jones, Legend Financial Advisors, Inc.® Ned Davis Research, Edward Jones, The Leuthold Group, LLC

* Bear Markets and Severe Bear Markets occur approximately every 3.7 years.


2011 DEBT LIMIT NEGOTIATIONS AND U.S. CREDIT RATING DOWNGRADE

S&P 500 TOTAL RETURN

APRIL 29, 2011 – OCTOBER 3, 2011

As of: January 18, 2013 Source: Bloomberg via Legend Financial Advisors, Inc.®



100 YEARS OF BEAR MARKET RECOVERIES

(DJIA: 1900-1926; S&P 500 1926 to Present)


REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLCAs of September 30, 2009

As of September 30, 2009

BEAR MARKET DECLINES OF 45% OR MORE

100 YEARS OF BEAR MARKET RECOVERIES

(DIJA: 1900-1926; S&P 500 TO PRESENT)

Stock Market Down In Third Year



DOW JONES INDUSTRIAL AVERAGE SEPTEMBER 03, 1929 – JULY 8, 1932

Note: Price change -89.2%

SOURCE: BLOOMBERG INVESTMENT SERVICE


DOW JONES INDUSTRIAL AVERAGE JULY 8, 1932 – MARCH 10, 1937

Note: Price change + 371.62%



DOW JONES INDUSTRIAL AVERAGE March 10, 1937 – April 28, 1942




DOW JONES INDUSTRIAL AVERAGE APRIL 28, 1942 – , MAY 29, 1946

Note: Price change +128.7%



DOW JONES INDUSTRIAL AVERAGE MAY 29, 1946 – JUNE 13, 1949




ECONOMIC CONTRACTION DEFINITIONS

Two or more consecutive quarters of contracting real GDP.

A recession where real GDP contracts between 5% and 10%.

A recession with peak-to-trough contraction in real GDP that exceeds 10%.

A depression with peak-to-trough contraction in real GDP that exceeds 25%.

Recession:

Depression:

Great

Depression:

Severe or Deep Recession:




As of August 28, 2015

YIELD CURVE: ALL ISSUERS



Source: The Leuthold Group, LLC, Perception Express, August 7, 2015, http://leuth.us/bond-market



COPYRIGHT 2015 THE LEUTHOLD GROUP, LLC

Note: The Risk Aversion Index combines ten market-based measures including various credit and

swap spreads, implied volatility, currency movements, commodity prices and relative returns

among various high- and low-risk assets.

RISK INCREASED SLIGHTLYMONTHLY RISK AVERSION INDEX (RAI)

4

3

2

1

0

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

4

3

2

1

0

http://leuth.us/stock-market

FINANCIAL CONDITIONS INDEXES



European Financial Conditions -0.335

U.S. Financial Conditions -0.354

S&P 500 Index 1972.18


FIVE-YEAR CREDIT DEFAULT SWAP RATES FOR DEVELOPED COUNTRIES

DECEMBER 31, 2007 THROUGH AUGUST 28, 2015

Australia 26.075

France 33.758

Germany 13.815

Norway 14.365

Switzerland 18.300

Japan 38.506

United Kingdom 18.998

United States 15.765

S&P 500 1988.87

U.S. Dollar 96.106



FIVE-YEAR CREDIT DEFAULT SWAP RATES FOR LATIN AMERICA


Brazil 332.000

Mexico 137.000

Chile 105.936

S&P 500 2077.57

U.S. Dollar 97.563



FIVE-YEAR CREDIT DEFAULT SWAP RATES FOR ASIAN TIGERS


Hong Kong 45.840

South Korea 65.583

Thailand 141.498

Malaysia 169.933

China 111.666

Indonesia 228.188

S&P 500 1988.87

U.S. Dollar 96.106



FIVE-YEAR CREDIT DEFAULT SWAP RATES FOR THE HUNGARY PIIGS/POLAND


Portugal 173.742

Ireland 50.367

Italy 115.134

Greece 1439.655

Spain 100.877

Poland 72.000

Hungary 152.500

S&P 500 1988.87

U.S. Dollar 96.106

Greece

1439.655



FIVE-YEAR CREDIT DEFAULT SWAP RATES FOR THE HUNGARY PIIGS/POLAND

WITHOUT GREECE


Portugal 173.742

Ireland 50.367

Italy 115.134

Spain 100.877

Poland 72.000

Hungary 152.500

S&P 500 1988.87

U.S. Dollar 96.106



FIVE-YEAR CREDIT DEFAULT SWAP RATES FOR HIGH DEBT COUNTRIES


Iceland 135.000

Russia 377.000

Dubai 195.158

S&P 500 1988.87

U.S. Dollar 96.106



FIVE-YEAR CREDIT DEFAULT SWAP RATES

FOR MAJOR U.S. FINANCIAL INSTITUTIONS

DECEMBER 31, 2007 THROUGH AUGUST 28, 2015Citigroup 90.729

Bank of America 80.105

Goldman Sachs 99.320

Wells Fargo 59.293

J.P. Morgan 80.500

S&P 500 1988.87

U.S. Dollar 96.106



FIVE-YEAR CREDIT DEFAULT SWAP RATES

FOR EUROPEAN FINANCIAL INSTITUTIONS

DECEMBER 31, 2007 AUGUST 28, 2015

Credit Suisse 74.249

UBS 67.446

BNP Paribas 72.810

HSBC 78.591

Deutsche Bank 93.774

Societe Generale 84.995

U.S. Dollar 96.106



Banco Santander 112.310

Barclay’s 70.501

S&P 500 1988.87


S&P 500

GOLDEN/DEATH CROSS STRATEGY ANALYSIS

DECEMBER 31, 1999 TO AUGUST 28, 2015

S&P 500 Index

S&P 500 50 Day Moving Average

S&P 500 200 Day Moving Average

-3.9% +15.8%+11.5%+19.2% +16.7% +1.3%

+63.4%



GOLD VERSUS U.S. DOLLAR VERSUS S&P 500

DECEMBER 31, 1969 THROUGH DECEMBER 31, 1979

August 31, 2015



S&P 500

Gold Bullion

U.S. Dollar



August 31, 2015



S&P 500

Gold Bullion

U.S. Dollar

Source: Barclays Capital, JP Morgan, BofA Merrill Lynch and Standard & Poor’s via

Eaton Vance Monthly Market Monitor, August, 2015, www.eatonvance.com

FIXED INCOME CHARACTERISTICS AND PERFORMANCE ANALYSIS

As of: July 31, 2015

Averages

REPRINTED WITH PERMISSION OF EATON VANCE DISTRIBUTORS, INC.

1.44

1.35

2.68

1.47

2.44

3.36

6.87

5.32

6.23

5.34

6.72

PRICE IMPACT OF A 1% RISE/FALL IN INTEREST RATES*

Source: U.S. Treasury, Barclays Capital, FactSet, J.P. Morgan Asset Management

COPYRIGHT 2015 J.P. MORGAN ASSET MANAGEMENT

REPRINTED WITH PERMISSION OF J.P. MORGAN ASSET MANAGEMENT

As of: June 30, 2015

Source: The Leuthold Group, LLC, www.leutholdgroup.com

COPYRIGHT 2012 THE LEUTHOLD GROUP, LLC


As of: December 31, 2012

AVOID PITFALLS

POTENTIAL PROBLEMS AHEAD

I. Oil Drops Quickly Or Increases Too Fast In Price

A. Oil Drops Problems

1. Problems For The Oil Drilling, Refining And Transportation Industries

2. Oil Producing Nations Have Financial Problems

a. Subsidies For Food And Other Necessities Will Not Be Available

B. Oil Increases Problems

1. U.S. Citizens Pay More At The Pump

2. Transportation Industry, Including Trucking, Railroads, Airline Costs

Rise

3. Most Costly Manufacturing

4. Cheap Foreign Goods Become More Expensive

5. Heating And Electricity Costs Rise

II. The Federal Reserve Raises Interest Rates Too Fast Or Too Much

III. Chinese Economic Problems

IV. Chinese Currency Devaluation

V. European Economic Problems

VI. Mid-East Political Conflict

POTENTIAL PROBLEMS AHEAD (cont’d)

IS CHINA GOING TO DEVALUE THE YUAN AGAIN

1. First Devaluation – August 11, 2015 – By Approximately 1.9% Versus U.S. Dollar

2. Effect: Worldwide Stocks, Commodities, Other Asian Currencies Were Negatively

Affected.

3. Why Devalue? – To Boost China’s Exports And Economy. Devaluation Makes

Exported Goods Cheaper.

4. Will Devaluation Succeed And/Or Increase Inflation In China? – Probably Not

5. If Exports Don’t Increase – Will China Devalue Again? – Probably

6. If China Devalues Again, They Will Do So Cautiously.

7. Other Effects Of Chinese Devaluation

a. Japanese Corporate Earnings To Suffer Causing Japanese Economic Problems

b. Probably Will Delay U.S. Interest Rate Hikes




ARE YOU CONFUSED ABOUT WHICH DIRECTION TO TAKE?

DEFENSIVE ACTIONS TO TAKE

1. Moving Certain Assets To Cash

2. Buying Asset Classes That Will Appreciate Such As U.S.

Government-Related Securities

3. Shorting Equities By Using Inverse Exchange-traded

Funds And Utilizing Dedicated Short Open-end Mutual

Funds

4. Buying Equity Investments Opportunistically When Such

Situations Present Themselves




THIS IS NO TIME TO HIDE

Questions and Answers

Legend Financial Advisors, Inc.®

5700 Corporate Drive, Suite 350

Pittsburgh, PA 15237-5829

Phone: (412) 635-9210

E-mail: [email protected]

www.legend-financial.com

CONTACT INFORMATION

EmergingWealth Investment

Management, Inc.

5700 Corporate Drive, Suite 360

Pittsburgh, PA 15237-5829

Phone: (412) 548-1386

http://www.legend-financial.com/

http://www.legend-financial.com/

is the stock market headed for a train wreck?€¦ · is the stock market headed for a train wreck?...

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