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Market Minutes with KC Mathews

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Chief Investment Officer KC Mathews recently completed a two-day media briefing in New York City, where he shared his thoughts on current market conditions as well as information on his 2017 forecast with CNBC, CNN Money, and Bloomberg Radio. Listen to the brief podcast and read the articles below to learn more about what KC is expecting to see over the course of the year.

Also, read KC’s recent economic articles, which give more detailed information on where we’ve been and where we’re headed.

Follow UMB and KC Mathews on LinkedIn to stay informed of the latest economic trends.

Interested in learning more about our Private Wealth Management division? See what we mean when we say, “Your story is our focus.

When you click links marked with the “‡” symbol, you will leave UMB’s website and go to websites that are not controlled by or affiliated with UMB. We have provided these links for your convenience. However, we do not endorse or guarantee any products or services you may view on other sites. Other websites may not follow the same privacy policies and security procedures that UMB does, so please review their policies and procedures carefully.

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UMB Financial Corporation (Nasdaq: UMBF) is a diversified financial holding company headquartered in Kansas City, Mo., offering complete banking services, payment solutions, asset servicing and institutional investment management to customers. UMB operates banking and wealth management centers throughout Missouri, Illinois, Colorado, Kansas, Oklahoma, Nebraska, Arizona and Texas, as well as two national specialty-lending businesses. Subsidiaries of the holding company include companies that offer services to mutual funds and alternative-investment entities and registered investment advisors that offer equity and fixed income strategies to institutions and individual investors.



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UMB Insights: How Will Senior Housing Look in 2037?

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Millennials may be all the rage these days, but Baby Boomers are still making an enormous impact on the U.S. economy, particularly in the senior housing market. By 2050, the population of individuals aged 65 or older will grow from 40 to 89 million, an increase of 120 percent.

And as Americans age, where and how they will live becomes a more pressing issue – an issue that will have a significant impact on the economy, construction industry and banking sector over the next 20 years.

Where will Boomers live?

Although staying in their homes is almost universally preferred among Baby Boomers, many aging Americans will transition to multi-housing developments that provide some assistance and allow them to live as independently as possible. Others, especially those with medical disabilities, will seek housing in environments that provide more intensive nursing support and other assistance.

The average age of a resident in a senior housing facility is in the ’80s. With the leading edge of Baby Boomers just now turning 70, the need for additional senior housing units is expected to accelerate over the next few decades. In fact, between 2015 and 2020, all 50 states forecast growth in the number of 75-year-old+ households. The increase in senior housing will come from sectors such as Alzheimer’s and Memory Care facilities, independent living centers, assisted living facilities, skilled nursing facilities, continuing care retirement communities, home health care and hospice care.

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What will their housing look like?

It is a common rule of thumb in the industry that Baby Boomers will typically choose a newer, more modern and home-like facility versus an older institutional facility. Therefore, the industry has moved from an institutional feel to a more home-like atmosphere, including eliminating long hallways and nursing stations and replacing them with single rooms, private baths, large rehab spaces, smaller cafeterias, snack bars, beauty salons, theater rooms and much more. As a result, when new competition hits the market and consumers choose with their feet, it becomes much harder for older facilities to maintain the occupancy levels needed to ensure financial success.

How will their preferences affect the economy?

So, what does this mean for the general economy? It means that there are significant opportunities for contractors, developers and lenders that are experienced in senior housing to help owners modernize existing facilities or build new housing options for seniors. Construction for many new facilities is already underway or in the approval phases and financing continues to be readily available for developers and operators in this sector.

What are the risks?

On the flip side of this successful outlook, there are concerns and challenges that need to be monitored and addressed. Even though the senior housing industry is one of the fastest growing segments in the U.S. economy and there are many desirable lending and development opportunities, builders, developers and lenders must effectively mitigate the risks inherent in the industry.

Characteristics of the long-term care business require that successful participants maintain industry-specific knowledge and utilize best practices for each project. For the benefit of all parties involved, it is important that everyone tied to senior housing projects remain prudent and evaluate all risk related to each project. Doing so will mean a stronger economy with more housing options available for Baby Boomers of all ages.


Richard Ziegner is executive vice president and director of healthcare banking at UMB Bank where he is responsible for leading the bank’s efforts in the healthcare sector and providing capital and financial solutions to healthcare providers. He graduated from the University of Arizona in Tucson, Ariz. with a Bachelor of Science degree in finance and earned his Master of Business Administration degree from Northern Arizona University in Flagstaff, Ariz.



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How to Prepare for Ag Challenges in 2017

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For those in the ag business, it’s no secret that 2015 and 2016 were challenging years. And 2017 is looking like it might follow suit. In an industry known for its optimism, you could be hard-pressed to find anyone overly positive about what lies ahead this year.

Producers, in particular, are going to face more challenges in 2017 given the current commodity prices and over supply of crops. In light of those challenges, here are a few steps they can take to prepare for 2017 and beyond.

1. Know Your Numbers: As lenders work with you to project what the next year will look like, it will help to be prepared with key data points, including:

  • Planting intentions – Know your acres, crop type and fertilizer application plans
  • Working capital needs – Know what is changing and ways to improve working capital
  • Break-even analysis – Know your input costs, conservative bushel projections and sales triggers
  • Expense management – Know what specific changes are being made in your operation to endure lower prices and what further trimming can be done
  • Balance sheet basics – Have a good understanding of your current amount of working capital, overall debt-to-equity ratio and value of unencumbered real estate
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2. Be a Tough Negotiator: With the significant price changes in the grain complex, those who sell to farmers are having a harder time making the next sale. This means you have an opportunity to attain better prices when you spend money.

  • Cash rents – In general, landowners will need to make some concessions on cash rents. Be willing to negotiate but not afraid to walk away if the math doesn’t work for you at renewal time.
  • Equipment – There are definitely deals to be had on used iron, but only do what makes sense for your operation. Also, aggressive lease terms are being offered and in many cases may lower cost, or improve cash flow, throughout your operation.
  • Basic purchases – Those who sell you crop insurance, seed, fertilizer, chemical, parts, equipment and more will need to know that farmers are carefully weighing each purchase. Loyalty to such suppliers is wonderful but it is also okay to encourage competition for your spending dollars.

3. Sell Items that Aren’t Contributing: The truth is there are some things that just need to go. Whether it is a poor piece of land that isn’t producing, a tractor that might not be essential or a trailer that is collecting dust, take stock of what you have and determine what needs to go.

During this period in which some producers will have limited working capital and struggle to service debt, it is imperative to critically examine your assets. Working capital and liquidity have become – and will continue to be – critically important in the coming years. Any asset sale that bolsters your liquidity position will improve your ability to endure the current commodity prices and thriving as we look forward to better days.


Lance Albin is vice president, agribusiness commercial lending officer at UMB Bank and has more than nine years of experience in agriculture financing. He has a master’s degree in business administration from Fort Hays State University. UMB Bank is one of the Top 25 Farm Lenders in the United States serving farmers/ranchers, producers, processors, manufacturers and dealers throughout the Midwest and Mississippi Delta regions.



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St. Louis Snapshot: Q&A with Peter Blumeyer

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In the early months of the year, bankers are looking ahead and considering challenges the industry might face as well as where the industry could be going. The Risk Management Association recently hosted a Bank Presidents’ Fireside Chat to gain insight and industry perspectives for 2017. Following are a few of the comments shared by UMB Bank St. Louis President Peter Blumeyer, who served as one of the panelists.

What is your outlook for the year?

As we begin 2017, the banking industry is very competitive. We believe C&I, manufacturing and distribution will be the most competitive industries for lending this year. We have set high goals and will work very hard to compete in this market. We will also keep a keen eye on the talent in the market. We want to ensure we hire people who can compete in this industry while providing them a fruitful career.

How has UMB Bank dealt with the extended period of extremely low interest rates?

We continue to operate in a sustained low interest rate environment that has impacted our net interest margin and continues to challenge our industry. However, we have actively positioned UMB to benefit as rates begin to rise. As a result, whenever the Federal Reserve does drive the short end of the rate curve higher, the nimble position of our earning assets is expected to produce a lift in interest income. We have a solid balance sheet and take pride in our extraordinary credit quality and are well positioned for when interest rates begin to move up.

Are there any new trends developing, positive or negative, in lending?

One negative trend we are experiencing is aggression. As mentioned above, the market is very competitive as every bank looks for new deals and areas to grow. We are seeing customers hone in on the aggressive competitive nature. They might ask for more money with a lower rate or try and compare different term sheets. This can work in their favor as they search for the best rate, but it’s also a risky situation. If a customer tries to piecemeal a deal, it might not be very attainable for the banker to create.

A positive trend is the market is healing. We are slowly coming back from the recession, which is very exciting. Companies have access to the money they need to grow their business and perform their capital expenditures. This is even better for our economy as more growth is added to St. Louis. It is encouraging to see, and at UMB, we are excited to support this growth.

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UMB Financial Corporation (Nasdaq: UMBF) is a diversified financial holding company headquartered in Kansas City, Mo., offering complete banking services, payment solutions, asset servicing and institutional investment management to customers. UMB operates banking and wealth management centers throughout Missouri, Illinois, Colorado, Kansas, Oklahoma, Nebraska, Arizona and Texas, as well as two national specialty-lending businesses. Subsidiaries of the holding company include companies that offer services to mutual funds and alternative-investment entities and registered investment advisors that offer equity and fixed income strategies to institutions and individual investors.



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Will the Rational Bubble Become Irrational?

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In my last article, “Riding the Rational Bubble,” I shared that given the economic conditions we have experienced over the last six years, financial bubbles could be developing. Alan Greenspan said, “Long-term economic stability with low inflation will result in a bubble.” If he is right, get ready for a financial bubble, because that is exactly what we have seen over the past seven years. Since 2010, the U.S. economy has been stable, with real GDP growing at an annual 2.2 percent average. Inflation during that period has been low, with the consumer price index growing at
1.7 percent on average over that same period.

However, bubbles alone aren’t necessarily damaging to an economy. Take the stock market debacle of 1987—late in the year the market tumbled 24 percent in one day, but fundamentally the economy didn’t change. Bubbles with leverage, on the other hand, can be dangerous.

Since the Great Recession, the U.S. economy has been stimulated by aggressive monetary policy, with little impact on growing the economy, yet perhaps with significant impact on stabilizing the economy. With the new administration, we will experience a paradigm shift moving from aggressive monetary policy and weak fiscal policy to the opposite—aggressive fiscal policy and diminishing monetary policy stimulus. Could this exacerbate financial bubbles and change rational bubbles to irrational ones?

At present, we see three potential bubbles worth watching: 1) sovereign debt, 2) the stock market, and 3) interest rates. At this time we think interest rates could be the first irrational bubble, with sovereign debt following suit if not dealt with over the longer-term.

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Sovereign Debt

The U.S. national debt is $19.8 trillion or 105 percent of our GDP. On the surface that looks like a bubble that will end badly. However, $5.4 trillion, or 27 percent, of that debt is intragovernmental holdings. Therefore, if evaluating debt held by the public, debt to GDP is only 75 percent.

This model has been the recent strategy to combat slowing economic growth around the world. Japan’s debt to GDP stands at 229 percent. Again, on the surface it seems like a bubble, yet 40 percent of their debt is held by the Bank of Japan. What matters is who owns the debt.

Professors Carmen Reinhart and Kenneth Rogoff and economist Vincent Reinhart studied the debt- to-GDP ratios of advanced economies. Their conclusion was when countries have a debt to GDP ratio that exceeds 90 percent for at least five years, it has a negative effect on the economy. High levels of public debt are associated with lower growth. In total government debt, the U.S. passed the 90 percent debt- to-GDP ratio in 2010; but when we consider just the debt in the public’s hands, we still have a way to go.

The sovereign debt bubble has been developing over many years; I don’t think it will burst in the next few years, but do believe it will become more problematic. President Trump’s fiscal policy may deflate one bubble and exacerbate another. Lower taxes and regulation may jump-start corporate earnings and keep equity valuations in check. However, more than likely, it will increase the national debt. Sooner or later there may be a day of reckoning, but I have been in the investment business for 27 years, and over the years the common question has always been, “What about the debt?” In hindsight, perhaps the best response would have been, “So what about the debt?” The reality is that even though the economy grew and the debt levels increased, investors continued to make money.

The Stock Market

Since the beginning of 2009 to the end of 2016, the S&P 500 has moved up nicely—190 percent to be exact. But that alone doesn’t put it in bubble territory. When you analyze the valuation of the S&P 500, it is clearly not in bubble territory. In fact, I would argue that it is fairly valued. Today the market trades at 17.5 times forward earnings, far from the near 30 times earnings we saw in the tech bubble in the late 1990s.

Bubbles with debt are dangerous. Margin debt, or leverage in buying stocks, is now at previous peaks relative to GDP. If the market traded at a lofty valuation, along with this leverage, it would be a red flag, and an irrational bubble would be looming. That is not the case today as valuations remain rational.

Last year we were concerned with an earnings recession due to the contraction of oil prices and the U.S. dollar headwinds. In the first and second quarters of 2016, earnings contracted, putting the market’s valuation in question. However, earnings did rebound in the second half of the year, and we expect earnings growth for calendar year 2016 to be in the 2-4 percent range. This year, given the economy’s momentum, we anticipate corporate earnings to grow around 9 percent, not assuming any of President Trump’s growth initiatives. If President Trump is successful in implementing his proposed fiscal policy initiatives swiftly, the risk to our earnings forecast is to the upside. This should keep valuations in check and avoid an irrational bubble.

Interest Rates

The U.S. bond market has been in a bull market for more than 35 years. In 1981, the yield on the 10-year Treasury was 15.8 percent. Over the next 35 years, interest rates came down to virtually zero. In August of 2016, the yield on the 10-year Treasury fell to 1.3 percent, partly due to loose monetary policy and quantitative easing. This has become an irrational bubble. Why have Fed Funds been at virtually zero with a stable economy growing at 2 percent? This is not solely a U.S. problem—global growth has slowed and the central bankers in Europe and Japan have pushed interest rates down to zero in an attempt to stimulate their economies, putting additional downward pressure on interest rates in the United States.

President Trump has suggested the economy will grow faster than 3 percent. We think 2.5-3 percent is more realistic. If the president’s forecast comes to fruition, inflation expectations will move higher, ending the longest bull market I have seen in my career. As long as we don’t experience a surprise inflation spike or runaway inflation, the Federal Open Market Committee will be able to manage this bubble deflation by moving short-term interest rates higher on a moderate glide path.

Conclusion

As economies and markets ebb and flow, financial bubbles come and go; they’re just part of the cycle. Many times it is difficult to identify bubbles until they pop. As a friend once told me, “All peaks aren’t bubbles, yet all bubbles have peaks.”

Conditions are conducive for bubbles to develop; we have to be mindful of that. Risk-based assets may perform well this year, and we remain cautiously optimistic. Yet, as always, we never lose sight of the risk that is present.

 

UMB Investment Management is a division within UMB Bank, n.a. that manages active portfolios for employee benefit plans, endowments and foundations, fiduciary accounts and individuals. UMB Financial Services, Inc.* is a subsidiary of UMB Financial Corporation. UMB Financial Services, Inc is not a bank and is separate from UMB Bank, n.a.

This content is provided for informational purposes only and contains no investment advice or recommendations to buy or sell any specific securities. Statements in this report are based on the opinions of UMB Investment Management and the information available at the time this report was published.

All opinions represent our judgments as of the date of this report and are subject to change at any time without notice. You should not use this report as a substitute for your own judgment, and you should consult professional advisors before making any tax, legal, financial planning or investment decisions. This report contains no investment recommendations and you should not interpret the statements in this report as investment, tax, legal, or financial planning advice. UMB Investment Management obtained information used in this report from third-party sources it believes to be reliable, but this information is not necessarily comprehensive and UMB Investment Management does not guarantee that it is accurate.

All investments involve risk, including the possible loss of principal. Past performance is no guarantee of future results. Neither UMB Investment Management nor its affiliates, directors, officers, employees or agents accepts any liability for any loss or damage arising out of your use of all or any part of this report.

“UMB” – Reg. U.S. Pat. & Tm. Off. Copyright © 2017. UMB Financial Corporation. All Rights Reserved.

Securities offered through UMB Financial Services, Inc. Member FINRA, SIPC or the Investment Banking Division of UMB Bank, n.a.

*Insurance products offered through UMB Insurance Inc.

You may not have an account with all of these entities.

Contact your UMB Representative if you have any questions.

*Securities and Insurance products are:

Not FDIC Insured * No Bank Guarantee * Not a Deposit * Not Insured by any Government Agency * May Lose Value


K.C. Mathews joined UMB in 2002. As executive vice president and chief investment officer, Mr. Mathews is responsible for the development, execution and oversight of UMB’s investment strategy. He is chairman of the Trust Investment, Asset Allocation and Trust Policy Committees. Mr. Mathews has more than 20 years of diverse experience in the investment industry. Prior to joining UMB, he served as vice president and manager of the portfolio management group at Bank of Oklahoma for nine years. Mr. Mathews earned a bachelor’s degree from the University of Minnesota and a master’s degree in business administration from the University of Notre Dame. Mr. Mathews attended the ABA National Trust School at Northwestern University and is a Chartered Financial Analyst and member of the CFA Institute. He is past president of the Kansas City CFA Society and a past president of the Oklahoma Society of Financial Analysts.



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Focus Items for Small Business Owners

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In December, the NFIB Small Business Optimism Index‡ had its highest reading in 12 years. In the report seven of the 10 index components rose, including small business owners expecting better business conditions and higher sales.

Optimism is currently at a high point allowing for owners to focus on their next big idea, their bottom line and how they can make things better for their employees. Their bankers should be thinking about those things, too.

If you’re a small business owner, make sure you’re talking with your financial partner about these business-critical items as you venture into 2017 and beyond.

Top Talent Identification and Retention
Companies requiring vocational talent can face challenges finding the right type of employee. As businesses look to expand, growth can be difficult without a sound workforce and could potentially force companies to outsource to other cities or move operations entirely.

As part of their talent acquisition and retention efforts, small businesses should ensure they are offering solid compensation and benefits to build and retain a strong workforce.

Business Growth
With an ultimate goal of growing their company, small businesses need to evaluate what other potential clients exist and if there are new segments where they can introduce their product or service.

Companies that did not survive the 2008 economic downturn left behind certain voids that need to be filled. Existing companies should evaluate this as an opportunity to expand to a new business target.

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Employee compensation and benefits
Currently, there are two big issues that could pose a threat to small businesses: the minimum wage discussion and health care. If minimum wage increases, many businesses will face challenges with revenue and cash flow, particularly if they employ lower-wage workers. With no offsetting revenue increase, this would affect a company’s cash flow and could create unprecedented challenges within the business.

The other topic of note for business owners is healthcare. The rules and regulations of the Affordable Care Act may change with the current administration discussing extensive healthcare reform. This could mean an extra expense without incurring any additional revenue for small businesses.

Fraud and Protection
Fraud continues to be a top concern among business owners, and the latest statistics prove it is a legitimate fear. In the 2016 Association for Financial Professionals Payments Fraud and Control survey, 62 percent of companies were subject to fraud during the survey period, and wire fraud has nearly doubled from 14 percent to 27 percent.

The truth is, businesses can plug one gap and another one opens up somewhere else. The key is to stay vigilant with your employees, train them and understand the latest tactics that are being used to commit fraud.

 

When you click links marked with the “‡” symbol, you will leave UMB’s website and go to websites that are not controlled by or affiliated with UMB. We have provided these links for your convenience. However, we do not endorse or guarantee any products or services you may view on other sites. Other websites may not follow the same privacy policies and security procedures that UMB does, so please review their policies and procedures carefully.


Dominic is a executive vice president for the Business Banking division at UMB. He joined UMB in 2013 and has more than 20 years of experience in the financial services industry.



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VTO takes Anthony Rutledge back in time

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For one associate, UMB’s volunteer time off (VTO) program* recently reconnected him to his past.

Twenty years ago, UMB associate Anthony Rutledge was a third grade student at Meadow Lane Elementary School. His class participated in the School of Economics, which provides students with a hands-on experience focused on implementing real economic principles. Students create their own business—from determining operating expenses to selling goods and managing money.

As a student, Anthony spent weeks preparing for School of Economics and when the big day came, he worked as an accountant. Through helping “business owners” track money, pay off loan debt and pay rent, Anthony was hooked.

Fast forward to the present, and Anthony, a customer relationship manager for UMB, found himself back at School of Economics—this time, as a volunteer.

THEN                                                         NOW

Anthony Rutledge as a student attending the School of EconomicsAnthony Rutledge volunteering in 2016

 

 

 

 

 

 

 

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“I wanted to give back to something that I enjoyed as a student. Most kids do not understand why they have to do something, and showing how what they’ve learned translates into how I, and the other UMB volunteers, make our living is very rewarding,” Anthony explains.

The VTO program empowers many to give back to organizations that have helped shape them. According to Anthony, “most of us would not have the opportunities we’ve had, or be where we are today, if someone hadn’t volunteered to help us in one way or another.”

*All full-time UMB associates (and part-time associates who work at least 20-hours per week) receive two paid days each year to volunteer at qualifying organizations of his or her choice. Learn more about our community involvement and associate benefits.

 

When you click links marked with the “‡” symbol, you will leave UMB’s website and go to websites that are not controlled by or affiliated with UMB. We have provided these links for your convenience. However, we do not endorse or guarantee any products or services you may view on other sites. Other websites may not follow the same privacy policies and security procedures that UMB does, so please review their policies and procedures carefully.


Jen Houston joined UMB in 2015 as community relations manager. In her role, she works to create volunteer opportunities and to be a resource for associates looking to get involved in their communities. Jen holds a Bachelor of Journalism degree and a Bachelor of Arts degree in Spanish from the University of Missouri – Columbia. She also holds a Master of Business Administration degree, with an emphasis in leading and managing people, from the University of Missouri – Kansas City, in addition to completing the Multimedia Studies Certificate Program at the Kansas City Art Institute.



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Riding the rational bubble

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Don Ho’s famous song “Tiny Bubbles” went something like this:

Tiny bubbles, in the wine

Make me happy, make me feel fine.

Tiny bubbles make we warm all over

With a feeling that I’m gonna love you till the end of time.

Don Ho’s lyrics perfectly capture the way we typically feel about asset bubbles. Asset bubbles are formed when assets become over-inflated and prices rise beyond any real sustainable value. As asset bubbles are developing and asset prices are increasing, we feel fine and warm all over, buoyed by hope the bubbles never end. Unfortunately, they are typically followed by a crash. They don’t last until the end of time. Many empirical examples exist going back to the 1600s when “tulip mania,” a speculative bubble in tulip bulbs in the Netherlands, resulted in a collapse. More recently, the Dot-com bubble of the late 1990s burst when shares of Internet-related companies soared to astronomically high prices.

I spoke to CNBC about my take on this recently:

I also sat down with Gregg Greenberg at The Street to discuss asset bubbles.

the-street

 

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How to spot an asset bubble

Identifying bubbles can be difficult. Bubbles have historically emerged in periods of productivity where structural change enhancements and/or a low interest rate environment were present. Examples include the railway boom, the electricity boom and the Internet boom. So the question of the day is: Are we experiencing an asset bubble? Clearly we are not experiencing a productivity boom similar to those that have promoted bubbles in the past. However, we are experiencing the other end of the equation—historically low interest rates. Quantitative easing (QE) has failed to promote economic activity as expected, but it has driven interest rates to virtually zero for six years. Given that backdrop, asset bubbles are to be expected.

So are we in an asset bubble or is a bubble developing? I believe that a bubble is developing, caused by aggressive monetary policy around the globe. Presently the valuation of the market is rational, with the current price earnings (PE) ratio 20 times the last 12 months earnings and the current yield on the 10-year Treasury at 1.5 percent. Looking back, we now know there was a bubble in the equity market in early 2000. At that time the PE ratio was 30 times trailing earnings and the yield on the 10-year Treasury was 6.8 percent. Keep in mind that low interest rates and low inflation should support a higher multiple, so today 20 times trailing earnings would be defined as rational.

Can we ride the bubble?

There is vast array of academic research that would suggest the answer is yes. As asset bubbles form, many attempt to profit from the irrational exuberance of others, in effect promoting further growth of the bubble. I labeled today’s bubble “rational” because we don’t know the counter-factual argument. What if Ben Bernanke didn’t execute on QE? Would we have fallen into a recession? I don’t know; no one does and more importantly, it never happened. It appears to be rational that The Federal Reserve (Fed) would lower interest rates and keep them low for quite some time. In addition, by analyzing the global economy, one could conclude that low interest rates are rational and the bubble will remain in place for some time

When does the rational bubble become irrational?

Again, history provides us some indication. For example, tulip mania manifested over four years and the “South Sea Bubble,” a British stock bubble centered on trading rights purchased by the South Sea Company in the year 1716, also lasted four years. Interestingly, Isaac Newton found himself caught up in this bubble and apparently lost money in the ensuing crash. His famous quote, “I can calculate the movement of stars, but not the madness of men,” sums up the irrational behavior in a bubble. Another famous example, Black Monday – or the stock market crash of 1987 – ended the bull market run that started in 1982. I always get a kick out of the November 1987 Time Magazine cover titled: “The Crash—After a wild week on Wall Street, the world is different.” I respectfully disagree. The world didn’t change because of a stock market debacle. Lastly, the Dot-com bubble I referenced earlier began in the late 1990s and developed over a five-year period. The bottom line is that history tells us most asset bubbles come and go within a three- to five-year period. Rational bubbles become irrational when valuations can’t be justified. I do not believe we are there yet.

Are we in an asset bubble?

Admittedly, the challenge in determining the duration of a bubble is defining the anchor points. When did the bubble actually begin and when did it end? Typically these anchor points are a bit fuzzy. Nevertheless, it appears that historically, bubbles have lasted three to five years.

I know what you’re thinking: interest rates have been low for six years and the stock market has gone up since mid-2009. Does this mean we are in a bubble and will it burst? As I mentioned, it is extremely difficult to determine when exactly a bubble begins to develop. One key indicator to consider is that bubbles typically begin when we see an economic recovery turn into an expansion phase.

After the Great Recession in 2008 to 2009, the Fed lowered interest rates to stabilize the economy and right the ship. However, GDP growth has looked tortoise-like from 2010 to 2013 rather than showing a more robust economic recovery that could then lead to the development of an asset bubble. I believe the rational bubble we are in today likely began around 2014 when GDP held steady at 2.4 percent, followed by 2.4 percent again in 2015.

Stock market valuations have increased but are nowhere near levels we have seen them prior to past crashes. Interest rates are low and are expected to remain low for quite some time, yet inflation remains in check. It all appears to be rational. This signals investors to stay invested, buy quality companies and monitor the situation carefully.

Will the bubble burst?

The previous examples I cited were situations where a bubble has become irrational and eventually burst, though not all asset bubbles end badly. We may experience the frequent development of asset bubbles over the years, but most remain rational and eventually dissipate as the markets correct. This may be precisely the situation we find ourselves in today.

 

When you click links marked with the “‡” symbol, you will leave UMB’s website and go to websites that are not controlled by or affiliated with UMB. We have provided these links for your convenience. However, we do not endorse or guarantee any products or services you may view on other sites. Other websites may not follow the same privacy policies and security procedures that UMB does, so please review their policies and procedures carefully.

UMB Investment Management is a division within UMB Bank, n.a. that manages active portfolios for employee benefit plans, endowments and foundations, fiduciary accounts and individuals. UMB Financial Services, Inc.* is a subsidiary of UMB Financial Corporation. UMB Financial Services, Inc is not a bank and is separate from UMB Bank, n.a.

This content is provided for informational purposes only and contains no investment advice or recommendations to buy or sell any specific securities. Statements in this report are based on the opinions of UMB Investment Management and the information available at the time this report was published.

All opinions represent our judgments as of the date of this report and are subject to change at any time without notice. You should not use this report as a substitute for your own judgment, and you should consult professional advisors before making any tax, legal, financial planning or investment decisions. This report contains no investment recommendations and you should not interpret the statements in this report as investment, tax, legal, or financial planning advice. UMB Investment Management obtained information used in this report from third-party sources it believes to be reliable, but this information is not necessarily comprehensive and UMB Investment Management does not guarantee that it is accurate.

All investments involve risk, including the possible loss of principal. Past performance is no guarantee of future results. Neither UMB Investment Management nor its affiliates, directors, officers, employees or agents accepts any liability for any loss or damage arising out of your use of all or any part of this report.

“UMB” – Reg. U.S. Pat. & Tm. Off. Copyright © 2016. UMB Financial Corporation. All Rights Reserved.

Securities offered through UMB Financial Services, Inc. Member FINRA, SIPC or the Investment Banking Division of UMB Bank, n.a.

*Insurance products offered through UMB Insurance Inc.

You may not have an account with all of these entities.

Contact your UMB Representative if you have any questions.

*Securities and Insurance products are:

Not FDIC Insured  *  No Bank Guarantee  *  Not a Deposit  *  Not Insured by any Government Agency  *  May Lose Value

 


K.C. Mathews joined UMB in 2002. As executive vice president and chief investment officer, Mr. Mathews is responsible for the development, execution and oversight of UMB’s investment strategy. He is chairman of the Trust Investment, Asset Allocation and Trust Policy Committees. Mr. Mathews has more than 20 years of diverse experience in the investment industry. Prior to joining UMB, he served as vice president and manager of the portfolio management group at Bank of Oklahoma for nine years. Mr. Mathews earned a bachelor’s degree from the University of Minnesota and a master’s degree in business administration from the University of Notre Dame. Mr. Mathews attended the ABA National Trust School at Northwestern University and is a Chartered Financial Analyst and member of the CFA Institute. He is past president of the Kansas City CFA Society and a past president of the Oklahoma Society of Financial Analysts.



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How investors keep calm and carry on amidst turmoil

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It sounds so easy: buying low and selling high – yet in practice it is very difficult. Why? When stocks are low (attractively-valued), there is often something happening to shake our confidence in the markets and question if we should even consider owning such risk-based assets.

What shakes investor confidence?

  • economic recessions
  • military conflicts
  • terrorist attacks
  • health epidemics

Obviously with all of the unknown factors with these events, investors find themselves questioning how long they will last, how they could impact economic fundamentals and ultimately, how to respond when the stock market reacts.

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Military conflict

The difficulty in buying low always comes down to timing. World War II serves as a perfect example.

The United States entered World War II on December 7, 1941 when Japan bombed Pearl Harbor.  As expected, the stock market sold off.  One school of thought is to return to buying stocks when we receive the “all clear” signal, which perhaps would have been when Japan formally surrendered on August 2, 1945. But if we were looking to buy low, historical data indicates the time to buy would have actually been long before the war was over.

The bottom of the market actually occurred on April 27, 1942. At that time, the S&P 500 was at 7.61. When the war ended in 1945, the S&P 500 stood at 15.5. This means investors had an opportunity to more than double their money in the middle of a war. It seems buying stocks was not top of mind after the United States bombed Tokyo.

Now let’s take a look at a more recent situation: the Gulf War in 1991.

In August of 1990 Iraq invaded Kuwait. The U.S. got involved immediately by building up troops in a deployment called Operation Desert Shield. The combat phase, Desert Storm, began January 16, 1991 and the war ended shortly after that on April 6, 1991. In this conflict example, the S&P 500 bottomed in October 1990, again long before the conflict was resolved.  At that time the S&P 500 was at 295, and by the end of the war it was at 378, or up 28 percent in less than six months.

The time to buy is when uncertainty is peaking and emotions are running high. If you have found yourself fearful of the market reaction during military conflicts in the past, I suggest you look at historical data during times of military conflict as a starting point before making any dramatic investment decisions.

Terrorism 
Terrorism has plagued the globe for many decades. One might think that terrorism would have an impact on financial markets, but it actually does not. History tells this story as well.

One of the worst acts of terrorism on American soil occurred on September 11, 2001. In addition to the catastrophic loss of life, the twin towers of the World Trade Center, considered the most important financial hub in the United States, were destroyed. This caused the financial exchanges in New York to be closed for four trading days, the longest shutdown since 1933. On September 17, 2001, the first day of New York Stock Exchange trading since the attack, the S&P 500, expecting chaos, lost 684 points or 7.1 percent – the largest loss in history for one trading day. By the end of the week, the S&P 500 was down 11.6 percent.

Many expected the markets would be down for several months. However, it took only 30 days for the Dow Jones, the NASDAQ and the S&P 500 to regain their pre-9/11 price levels.

As I mentioned, some industries may sustain a more material impact. The airline industry suffered significant losses after 9/11 as the fear of additional hijacks escalated. The major airlines saw their stock prices tumble approximately 40 percent at the opening of the market on September 17. Steep declines also hit the travel, tourism, hospitality, entertainment and financial services industries.

But even as the number of terrorist attacks rise, it appears the markets have learned that they don’t change the fundamentals of the economy.

Unfortunately terrorism is now part of our lives.  My point is not to desensitize these issues, but to strictly investigate the economic data and market action around these events. It is clear that, at least historically, terrorism does not change the fundamentals of the economy. It may have a material impact on specific industries, but much of that has proven to be temporary.

Health crises

From time to time the human population becomes concerned with potential healthcare scares or epidemics. In 2013 an Ebola outbreak in Africa began. In September 2014 the CDC confirmed a case of Ebola in Dallas. Once again the markets sold off and recovered to pre-event levels less than 30 days later. I caution you to keep in mind when analyzing these events and market reactions that other variables will always concurrently impact markets. Market action is a function of the news of the day. The question is: what news is nothing but noise and what news changes the underlying fundamentals?

You may have news of a terrorist attack and favorable earnings reports on the same day. And while the market will react to uncertainty in the short-run, only a change in the fundamentals will cause a long-term market reaction.

Buying low can be difficult, but selling low becomes easy when investors erroneously react to events without knowing what truly impacts markets and companies’ fundamentals. Perhaps the most profitable strategy is to invest in great companies and continue to deploy capital into the markets when there is a high level of uncertainty. As Warren Buffet who once said, “The best time to buy a farm is in a drought.”

When you click links marked with the “‡” symbol, you will leave UMB’s website and go to websites that are not controlled by or affiliated with UMB. We have provided these links for your convenience. However, we do not endorse or guarantee any products or services you may view on other sites. Other websites may not follow the same privacy policies and security procedures that UMB does, so please review their policies and procedures carefully.

UMB Investment Management is a division within UMB Bank, n.a. that manages active portfolios for employee benefit plans, endowments and foundations, fiduciary accounts and individuals. UMB Financial Services, Inc.* is a subsidiary of UMB Financial Corporation. UMB Financial Services, Inc is not a bank and is separate from UMB Bank, n.a.

This content is provided for informational purposes only and contains no investment advice or recommendations to buy or sell any specific securities. Statements in this report are based on the opinions of UMB Investment Management and the information available at the time this report was published.

All opinions represent our judgments as of the date of this report and are subject to change at any time without notice. You should not use this report as a substitute for your own judgment, and you should consult professional advisors before making any tax, legal, financial planning or investment decisions. This report contains no investment recommendations and you should not interpret the statements in this report as investment, tax, legal, or financial planning advice. UMB Investment Management obtained information used in this report from third-party sources it believes to be reliable, but this information is not necessarily comprehensive and UMB Investment Management does not guarantee that it is accurate.

All investments involve risk, including the possible loss of principal. Past performance is no guarantee of future results. Neither UMB Investment Management nor its affiliates, directors, officers, employees or agents accepts any liability for any loss or damage arising out of your use of all or any part of this report.

“UMB” – Reg. U.S. Pat. & Tm. Off. Copyright © 2016. UMB Financial Corporation. All Rights Reserved.

Securities offered through UMB Financial Services, Inc. Member FINRA, SIPC or the Investment Banking Division of UMB Bank, n.a.

*Insurance products offered through UMB Insurance Inc.

You may not have an account with all of these entities.

Contact your UMB Representative if you have any questions.

*Securities and Insurance products are:

Not FDIC Insured  *  No Bank Guarantee  *  Not a Deposit  *  Not Insured by any Government Agency  *  May Lose Value


K.C. Mathews joined UMB in 2002. As executive vice president and chief investment officer, Mr. Mathews is responsible for the development, execution and oversight of UMB’s investment strategy. He is chairman of the Trust Investment, Asset Allocation and Trust Policy Committees. Mr. Mathews has more than 20 years of diverse experience in the investment industry. Prior to joining UMB, he served as vice president and manager of the portfolio management group at Bank of Oklahoma for nine years. Mr. Mathews earned a bachelor’s degree from the University of Minnesota and a master’s degree in business administration from the University of Notre Dame. Mr. Mathews attended the ABA National Trust School at Northwestern University and is a Chartered Financial Analyst and member of the CFA Institute. He is past president of the Kansas City CFA Society and a past president of the Oklahoma Society of Financial Analysts.



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The presidential election and the stock market

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Stocks always react differently during an election cycle. A piece of advice we give clients is to look for election-neutral stocks. Hear some of my thoughts on how stocks are performing this year from a recent visit to CNBC studios and read more below.

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Elections matter, but do they predetermine a bear‡ or bull market on Wall Street?

If history teaches us anything, there is one thing investors can count on during an election year, and that’s an upcoming period of uncertainty in the markets. The year promises to be interesting on multiple fronts—and while the candidates are busy making the case for why they should be elected, we wanted to get to the bottom of one question: How does a presidential election affect returns in the stock market?

Market Returns and the Four-Year Presidential Cycle

We all know the market dislikes uncertainty and it doesn’t matter what causes the uncertainty. Political uncertainty is no exception. Going back to 1900, we categorized each calendar year of market returns into one of four categories: the election year, the first year, the second year and the third year of the presidency. We discovered the third year in office was the best performing and the election year had the most uncertainty.

Stocks have struggled in the first half of historic election years, no doubt due to the uncertainty of the election and what a new president may mean to the economy and the markets. Typically, the market struggles early in the year when the political theater is at its highest, with numerous candidates still in the running. Consequently, the bottom of the market is linked to the timing associated with determining a clear winner. A few examples make the point: In 1996, President Clinton’s second term was not in question and the market only suffered a minor correction of 5 percent. In 2004, there was more uncertainty. Incumbent George W. Bush, running for a second term, was in a tight race with John Kerry. That year the market established a bottom in August. This graph illustrates the two races.

S&P 500 1996 vs. 2004

The bottom line: Expect volatility whenever you see uncertainty, but as this pertains to election cycles, it usually clears up quickly.

Political Rhetoric

As politicians campaign, they need to gain the voters’ attention. When the discussion turns to sectors and industries, markets react—sometimes temporarily or sometimes longer-term. In any case, the impact is seldom as bad as the language being used.

A perfect example of this is the Affordable Care Act. This legislation was signed into law on March 23, 2010. Initially, there was massive uncertainty as employers and investors analyzed and interpreted the new law. In 2010, the S&P Health Care Index was up a mere 0.7 percent, managed care increased 8.3 percent and the S&P 500 was up 12.8 percent. As I previously mentioned, this market reaction proved temporary as the positive financial impact of the Affordable Care Act began to assert itself on the companies’ bottom lines. So looking at the next 12 months, returns reversed. In 2011, the S&P Health Care Index was up a stellar 10 percent, managed care increased an impressive 32.9 percent and the S&P 500 was up only 2.1 percent.

Democrat or Republican?

In the long run, markets are driven by economic fundamentals that trickle down to corporate earnings. In the short run, noise can influence markets. The data suggests that elections would be classified as noise.

We went back to 1900 and analyzed which political party in the White House produced the best returns in the stock market. Over this long period of time, Democrats won this contest, producing an average return of 7.9 percent. Republicans produced a return of only 3.0 percent.

DEMOCRAT OR REPUBLICAN:
MARKET RETURNS
POLITICAL POWER GAIN/ANNUM % OF TIME
Democratic President 7.9 47.2
Republican President 3.0 52.8
Democratic President, Congress Split 10.1 3.3
Republican President, Congress Split -4.2 10.6

I concede that this is a naïve way to analyze the data; however, the answer to the question of which party is best for the markets is inconclusive. I presented this data to a group of investors and a Republican asked if the returns would be different if I lagged returns by a year. The question has merit and does change the results dramatically as the outcome would be completely opposite.

It becomes difficult to assign market returns to a specific president. For years, we have experienced mounting debt, an increase in terrorist threats and easy monetary policy. As these issues flare up, they either positively or negatively affect the market. So is it fair to say the current president is totally responsible?

Is This Time Different?

This election may be different. This year we have a candidate who represents the establishment and a candidate who represents the anti-establishment.  I’m fairly confident that not all of the actions and policies touted by the candidates would be a good thing for the markets. Keep in mind that what a candidate says they will do during a campaign is typically not what they will do once in the oval office. A candidate’s goal is to excite the voter base, increase voter turnout and gain a political advantage.

And, remember: the president must work with Congress to get things done. In 2017, the president will not have a free hand. If we have a Democrat in the White House, there is a good chance we will have a Republican Congress. If we have a Republican president, he will have to deal with two experienced and successful leaders, Mitch McConnell and Paul Ryan, individuals who will not subordinate their policy views.

The Long and Short of the Matter

 

Elections are important on many fronts, but as far as markets are concerned there is a short-term effect and a long-term effect.

The only thing we can say conclusively about the market data is that prior to an election, markets tend to trade flat with higher volatility. After the election, the market has consistently delivered stronger returns.

In the long-run, the market’s preference for one political party over another is unclear. The data is clunky and incredibly sensitive to modest adjustments.

I would caution against using every statement and policy suggestion made by the candidates as a tool for guiding investment decisions. Rather, understand what history has taught us and refrain from making long-term decisions based on short-term emotions.

 

When you click links marked with the “‡” symbol, you will leave UMB’s website and go to websites that are not controlled by or affiliated with UMB. We have provided these links for your convenience. However, we do not endorse or guarantee any products or services you may view on other sites. Other websites may not follow the same privacy policies and security procedures that UMB does, so please review their policies and procedures carefully.

 

UMB Investment Management is a division within UMB Bank, n.a. that manages active portfolios for employee benefit plans, endowments and foundations, fiduciary accounts and individuals. UMB Financial Services, Inc.*  is a subsidiary of UMB Financial Corporation. UMB Financial Services, Inc is not a bank and is separate from UMB Bank, n.a.

This content is provided for informational purposes only and contains no investment advice or recommendations to buy or sell any specific securities. Statements in this report are based on the opinions of UMB Investment Management and the information available at the time this report was published.

All opinions represent our judgments as of the date of this report and are subject to change at any time without notice. You should not use this report as a substitute for your own judgment, and you should consult professional advisors before making any tax, legal, financial planning or investment decisions. This report contains no investment recommendations and you should not interpret the statements in this report as investment, tax, legal, or financial planning advice. UMB Investment Management obtained information used in this report from third-party sources it believes to be reliable, but this information is not necessarily comprehensive and UMB Investment Management does not guarantee that it is accurate.

All investments involve risk, including the possible loss of principal. Past performance is no guarantee of future results. Neither UMB Investment Management nor its affiliates, directors, officers, employees or agents accepts any liability for any loss or damage arising out of your use of all or any part of this report.

“UMB” – Reg. U.S. Pat. & Tm. Off. Copyright © 2016. UMB Financial Corporation. All Rights Reserved.

Securities offered through UMB Financial Services, Inc. Member FINRA, SIPC or the Investment Banking Division of UMB Bank, n.a.

*Insurance products offered through UMB Insurance Inc.

You may not have an account with all of these entities.

Contact your UMB Representative if you have any questions.

* Securities and Insurance products are:

Not FDIC Insured  ▪  No Bank Guarantee  ▪  Not a Deposit  ▪  Not Insured by any Government Agency  ▪  May Lose Value

 


K.C. Mathews joined UMB in 2002. As executive vice president and chief investment officer, Mr. Mathews is responsible for the development, execution and oversight of UMB’s investment strategy. He is chairman of the Trust Investment, Asset Allocation and Trust Policy Committees. Mr. Mathews has more than 20 years of diverse experience in the investment industry. Prior to joining UMB, he served as vice president and manager of the portfolio management group at Bank of Oklahoma for nine years. Mr. Mathews earned a bachelor’s degree from the University of Minnesota and a master’s degree in business administration from the University of Notre Dame. Mr. Mathews attended the ABA National Trust School at Northwestern University and is a Chartered Financial Analyst and member of the CFA Institute. He is past president of the Kansas City CFA Society and a past president of the Oklahoma Society of Financial Analysts.



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