2nd Quarter 2017 Market Commentary

Stocks around the world edged higher during the second quarter. International and emerging market stocks continued to outperform U.S. stocks, while growth stocks outperformed value stocks. In the U.S., large cap stocks performed better the small cap stocks, but the reverse was true in international developed markets. Domestic bonds had small positive returns year to date, as short term interest rates ticked higher. International bonds, particularly in emerging markets, performed better than domestic bonds as the dollar experienced some weakness against global currencies. Volatility remained conspicuously absent, with the VIX index (a key measure of near-term volatility conveyed by S&P 500 stock index option prices) trading near all-time lows. Oil pulled back into the mid $40s as the OPEC production cuts encouraged a boost in U.S. shale production.

US Stocks are represented by the S&P500 Index. International Stocks are represented by the MSCI EAFE NR Index. Emerging Markets are represented by the MSCI Emerging Markets Index.

Interest Rate Movements

On June 14th, the Federal Reserve increased interest rates for the second time this year. Now the Fed Funds rate stands at 1.00% – 1.25%. While short term interest rates have risen, longer-term rates declined year to date. This caused a flattening of the yield curve. Historically, a yield curve inversion (which occurs when short-term rates are higher than long-term rates) has been associated with economic recession. Investors should keep a close eye on the interest rate curve. The good news for bond investors, however, is that the reduction in long-term rates caused bond prices to rise, while the increase in short-term rates provides better yield opportunities for reinvestment. The Bloomberg Barclays US Aggregate Bond Index is up 2.27% year to date.

There’s a misperception that stock prices always fall when interest rates rise. After all, the purpose of tightening monetary policy is the slow economic activity, right? A look at historic data shows no correlation between changes in the Federal Funds rate and stock returns. Below is a graph of the historic data. If there were a correlation between Fed Fund changes and US stock returns, we would see the dots form an upward sloping line to the left. Instead, we see no pattern.


Source: Dimensional Fund Advisors Q2 Quarterly Market Review; Second Quarter 2017

Federal Reserve Balance Sheet

While the Federal Funds rate receives all the media attention, the upcoming reduction in the Fed’s balance sheet will be a pivotal moment for financial markets. In the minutes from their most recent meeting, the Open Markets Committee outlined their plan to begin reducing the size of their balance sheet in a methodical way; starting with $10 Billion per month and increasing to $50 Billion per month over 12 months. [i]

After the 2008-2009 financial crisis, the Fed embarked on three rounds of bond purchases called Quantitative Easing (QE 1, 2, and 3).  These purchases increased the Fed’s balance sheet from about $1.5 Trillion to $4.5 Trillion. In 2014, the Fed began “tapering” bond purchases but continued to reinvest interest and maturing bonds, keeping the balance sheet level around $4.5 Trillion. This fall (consensus expectation is September) the Fed will stop reinvesting all proceeds and will allow balance sheet assets to roll off, starting at $10 Billion per month.

This will be a crucial time for financial markets because other buyers will need to purchase bonds in place of the central bank. The most likely outcome will be a rise in long-term interest rates. The central banks of Japan and Europe will watch closely, as they embarked on similar quantitative easing policies years after the Fed. After all the criticism thrown at the Fed’s unprecedented policies after 2008-2009, we may be about to find out if the exit will be successful.

ESG, Not the Old SRI

In late June, I participated in a panel at the IMN Global Indexing and ETF Conference in Dana Point, CA. The panel topic was ESG (Environmental, Social, and Governmental) investing. The other panelists and the moderator all represented institutional investors, and it occurred to me that individual investors are behind the curve in this topic area. Fifteen years ago, this type of investing was called Socially Responsible Investing (SRI). It consisted of negative screens for the so-called “sin” stocks and bad apples; think tobacco, firearms, and fossil fuels. SRI investors were willing to sacrifice return in order to align their investments with their values. ESG investing is different. ESG focuses on risk management and potential alpha from investing in companies who are leaders in a variety of Environmental, Social, and Governance factors. Environmental is not a blanket rejection of oil producers but a screen to identify those with the best practices for sustainability. Social includes screens for proper use of human capital such as fair compensation, sick leave, paid family leave, and the avoidance of child labor in emerging markets. Governance refers to board structure, composition, and independence. There’s a growing body of research that suggests ESG factors might even be sources of outperformance for investors and at least are not performance detractors. I think investors will see a lot more attention paid to this topic over the next decade, and I am excited to see new developments in the ESG space.

Win by Not Losing

Jason Zweig, author and personal finance columnist for the Wall Street Journal, famously said; “My job is to write the exact same thing between 50 and 100 times a year in such a way that neither my editors nor my readers will ever think I am repeating myself.” This is how I feel about the conclusion of each quarterly letter. I try to end each letter with common sense investing principles explained in a new way.

Now that I’ve given away some of my secret sauce, on to this quarter’s conclusion …

We spend a lot of time talking about risk with clients. There are many ways to define risk in investing. One technical term is volatility, or standard deviation. I think that max drawdown, or downside risk, is a more applicable definition of risk for investors. The reason downside risk is important is the lopsided nature of the return required to recover from large losses. For example, you need an 11% gain to recover from a 10% loss, but you need a 43% gain to recover from a 30% loss. The math goes off the charts with a 50% drop, which requires a 100% return to recover to breakeven. This is the reason we spend so much time thinking about risk in addition to returns. Our goal is to create a smoother “rollercoaster ride” for client portfolios by limiting downside risk. In real life; however, I enjoy the rollercoasters with the biggest drops.



Blair duQuesnay, CFA, CFP®

July 2017





•    All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. It should not be regarded as a complete analysis of the subjects discussed.

  •  Information presented does not involve the rendering of personalized investment advice and should not be construed as an offer to buy or sell, or a solicitation of any offer to buy or sell the securities mentioned herein. Tax information is general in nature and should not be viewed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
  •  Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client’s portfolio. All investment strategies have the potential for profit or loss. There are no guarantees that an investor’s portfolio will match or outperform any particular benchmark. Index returns do not represent the performance of ThirtyNorth Investments, LLC, or its advisory clients.
  •  ThirtyNorth Investments, LLC, is registered as an investment advisor with the SEC and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the advisor has attained a particular level of skill or ability.

[i] Minutes of the Federal Reserve Open Market Committee; June 13-14, page 3.

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Blair duQuesnay’s Interview at the CFA Annual Conference

At the CFA Annual Conference in May, Blair duQuesnay spoke to Lauren Foster about her experiences in the wealth management industry. She discusses everything from working with women clients to social media and her thoughts on how financial advice will change in the next 10 years.

To watch the interview on the CFA Institute’s website click here. You will need to provide an email address to watch the 10 minute video.


Blair duQuesnay speaks at CFA Institute’s 70th Annual Conference

Blair duQuesnay participated in a panel on building a client oriented culture at the CFA Annual Conference in Philadelphia in late May. Joined by fellow advisors and CFA charterholders John T. Elmes II and Isaac Presley, the group discussed ways that advisors must differentiate themselves today.

“We always have asked for feedback,” said duQuesnay. The clients can tell you if you’re succeeding, that you set appropriate expectations up front, and will clue you in on where you are falling short.

“Everything we do,” duQuesnay said, “is about money and meaning.”

Reading more about the panel on the CFA Institute’s website by clicking here.

Mark-up Disclosure for Bonds: It’s About Time

I’ve spent the better part of a decade trying to explain to investors that bond purchases are not free. But that’s a difficult task when the costs are hidden from investors. This will change in May 2018, when the SEC’s new bond mark-up disclosure requirement takes effect.

What is a Mark-up?

Unlike stocks, where investors receive a confirmation that explicitly lists the transaction fee or sales commission, bonds are offered to investors out of a broker-dealer’s inventory. The broker-dealer firm buys the bond at one price, then “marks up” the bond and sells it at a higher price to its customers. There’s nothing wrong with the broker-dealer receiving compensation for functioning as a liquidity provider between buyers and sellers. The problem is that mark-ups have never been disclosed to investors. As a result, investors do not have an opportunity to compare costs and create a market price for these transaction costs. While the costs to trade stocks, ETFs, and mutual funds have come down dramatically, bond transaction costs remain a mystery.

Here’s an example of a mark-up in action:

Source: https://emma.msrb.org/

This is real trade data from May 31, 2017 for a municipal bond from Illinois.

At 3:10pm a broker-dealer purchased 50,000 bonds for $100.9 for a total purchase of $50,450.

At 3:33pm the broker sold pieces of this bond to two customers for $102.679. One customer bought 10,000 bonds and paid a mark-up of $177.90, and the other bought 20,000 bonds and paid a mark-up of $355.80.

At 3:45pm the broker sells the final 20,000 bonds to a customer who pays a mark-up of $355.80. Total mark-up earned by the broker-dealer and paid by the customers = $889.50 or 1.76%.

For perspective, a commission rate of 1.76% to purchase 100 shares of Apple stock would be $269.60. Online brokers charge between $10 – $25 for this type of trade.

Arguably bonds do not trade on exchanges and require broker-dealers to take risk by holding them on their balance sheet as inventory, if only for a few minutes. This requires broker-dealers to employ more traders to handle bond transactions. I’m not implying the bond trades should cost the same as stock trades, but what I do know is that consumers have no idea what they’ve been paying to buy bonds. That will change next year.

Disclosure Requirements

Beginning in May 2018, mark-ups must be disclosed to investors on trade confirmations. Specifically, the broker-dealer must disclose a mark-up if it sells a bond to you out of its inventory, which is also known as a principal transaction. Additionally, the trade confirmations must include a hyperlink to a website containing publicly available data for the specific security traded. This will allow investors to see exactly what time (to the second) the broker-dealer purchased the bonds it sold to them at a what price.

Sunlight is the best disinfectant. Mark-up disclosure is long overdue. It will give investors a chance to compare prices and will create competition among broker-dealers. This is good for investors. Broker-dealers and their sales representatives will have to make adjustments to their business models. I suspect that long gone are the days of charging customers “2 points in and 1 point out.”




1) Based on closing price of $153.18 per share on June 1, 2017.

2) A common mark-up charged by brokers to retail customers is 2 points (2%) to buy and 1 point (1%) to sell a bond.

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Blair duQuesnay One of FA Magazine’s 10 Young Advisors to Watch

ThirtyNorth CIO Blair duQuesnay was recently named one of FA Magazine’s 10 Young Advisors to Watch. The article states:

“Still in her 30s, Blair DuQuesnay has carved out a role as thought leader in her CIO and partner role at New Orleans’ ThirtyNorth Investments, a firm with $135 million in assets. She’s written papers on everything, questioning how cheap ETFs really are to showing the stock performance risks companies take when they have no females on their boards.”

Read the rest of her profile on the FA Magazine website by clicking here.



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1st Quarter 2017 Market Commentary

Financial markets saw healthy gains during the first quarter of 2017. In the US, the Dow Jones Industrial Average reached 20,000 for the first time on January 25. 20,000 is a symbolic number that perhaps eases investor fear lingering from the 2008-2009 financial crisis. Growth stocks outperformed value stocks, and large caps fared better than small caps in the first quarter. International and emerging market stocks performed better than US stocks. Interest rates remained steady, allowing for modest, but positive, returns for bonds. The only negative performers were international bonds and commodities.

New Administration

In the US, stocks continued their post-election climb dubbed the “Trump rally”. Investors expect a positive environment for businesses from a Republican-controlled White House and Congress. Consumer confidence rose in March to a level not seen since December 2000.[1] Late in the quarter, markets cooled as key healthcare legislation failed to achieve enough support to pass the House. President Trump previously stated that healthcare must come before tax reform.

Delivering on his campaign promise of less regulation, President Trump ordered a review of the Dodd-Frank financial regulation and the DOL Fiduciary Rule on February 3. The Fiduciary Rule required that financial advice given to investors with 401(k) or IRA retirement accounts be in their best interest. Currently, the DOL rule is under a 60-day delay. Regardless of the outcome, the DOL Fiduciary Rule has let the “cat out of the bag” with regards to the best interest standard for retirement advice. Many of the largest financial services firms have already made changes to reflect the intent of this rule. Read more

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It’s Smart to Use Common Sense

Just as you wonder when the bad news cycle or political campaign season will ever end, something is announced which encourages you to think positively about the future.

Recent business news included the release of Commonsense Principles of Corporate Governance, www.governanceprinciples.org . Before you quickly conclude that I need a real vacation (yes, it’s scheduled), let me explain why the contents of this release are important to all of us as investors.

Everyone invested in the stock market, through individual stock holdings, mutual funds or ETFs, relies on the quality and competency of the leadership of the corporations in which they invest. This leadership comes from both boards and management, but the focus of these principles is with board leadership.

The Commonsense Principles of Corporate Governance were offered by a group of corporate leaders and institutional investors, including Warren Buffett of Berkshire Hathaway, Jeff Immelt of GE, Larry Fink of Blackrock and Bill McNabb of Vanguard to name a few. The hope of the authors is that “our effort will be the beginning of a continuing dialogue that will benefit millions of Americans by promoting trust in our nation’s public companies. “

When something goes terribly wrong at a publicly held company, how often do you hear the question “Where was the board?”   Too often there is concern (sometimes justified, oftentimes not) that boards are just cronies of top management, unwilling to ask the challenging questions or overlooking their responsibilities as fiduciaries of shareholders. This sort of thinking erodes trust in the very corporations that provide economic growth and employment in our country.

The letter from the authors of the principles states “truly independent corporate boards are vital to effective governance”. The principles cover best practices in a wide variety of areas from board composition to responsibilities to the public.  It’s a virtual handbook of good governance, and much of it is applicable to private, governmental and non-profit entities as well as public companies. It even addresses diversity on boards, stating that “diverse boards make better decisions, so every board should have members with complementary and diverse skills, backgrounds and experiences”.

As an investor, I find the work of this group encouraging and applaud the leaders who participated. With the adoption of these guiding principles, we should all feel more confident of the actions of our corporate boards. How commonsense is that!


Would It Help?

If you are a movie enthusiast, you may have enjoyed 2015’s Bridge of Spies, a Spielberg/Hanks historical drama set in 1957. Hanks plays Ray Donovan, a New York insurance lawyer asked by the government to provide a pro bono defense for Rudolf Abel. Abel is accused and convicted of spying for Russia in the midst of the Cold War. (Spoiler alert – if you intend to see the movie, you may want to skip the first two paragraphs). Donovan’s argument before the Supreme Court saves the spy from the death penalty. The CIA then becomes involved and Donovan finds himself in a tense negotiation in East Berlin with the Soviets for a prisoner swap. (A bit more exciting than his normal insurance practice!).

The Russian spy was especially calm throughout his capture, trial, and subsequent exchange into the hands of the Russians who were none too pleased that he was caught. I cannot imagine what awaited him in Russia. When asked on several occasions if he was alarmed, or if he ever worried, his response was a consistent, “Would it help?”, a simple but powerful response.

I think about this as it relates to the ups and downs of the market. We all occasionally suffer from strong reactions to market downturns. Some of us cope better than others, but it does not feel good to see the value of your account drop. After all, the timing of a bounce back is unpredictable. Frustration and genuine fear are common and painful reactions.

Would it help to listen more to the financial news when the market begins a downturn? Would that help us figure out what to do? Knowledge is power, right?   Unfortunately, much of what you hear is a dramatic sound bite or personal opinions regarding an uncertain future. Add the presidential election rhetoric and the drop in price of oil, and you can quickly become pretty depressed about the state of economic affairs in our country and around the world. This commentary is rarely useful for long-term investors or anyone with a well-diversified strategy. Bottom line – the noise doesn’t help.

Would it help to take action – believing that action is always better than staying still? Makes you feel more in control? Change up your investments so it doesn’t happen again? For instance, would it help to move to cash, recognizing that timing when to get back in to the market is a losing game? It is a likely prediction that the market will rebound before you are back in.

If your risk tolerance has changed due to your age or financial circumstances, then this should be fully considered. Otherwise, making a change in a downturn is rarely a smart move.

Staying the course is not indicative of not knowing what to do. Staying the course is a deliberate choice, which has proven to be successful when you have a well-developed long-term strategy.  Despite that, staying the course is oftentimes the hardest choice of all.

As I write this, the market has rallied and erased the losses from the first two months of the year. Now the commentary suggests that it won’t last. We should brace ourselves for a very volatile year. Nothing is right in the world. but then again it never is.

As for me, I am prepared to stay the course, focus on the long-term strategy, and put the ups and downs into a balanced perspective. And that, my friends, is what I believe will help.

Suzanne T. Mestayer


Financial Advice – It’s Not Only Cost, but Quality


There have been countless articles written on the cost of financial advice in recent years.  Every time I pick up a Wall Street Journal or a popular personal finance column there’s a story about fees. They are right to criticize.  Financial services costs remain high even though advances in technology have reduced costs dramatically.

This laser-like media attention on costs has sparked a revolution in financial services. Investors are flocking to low cost ETFs, whose AUM surpassed that of hedge funds in 2015. For Do-It-Yourself investors, online, automated investment services called robo-advisors provide basic asset allocations for one-third the traditional costs of similar advice.

These reductions in costs are good for investors. After all, the less you pay to invest, the more returns you get to keep. I would like to see the media turn its attention now, to the quality of financial advice, not just the cost.

Providing financial advice does not have a uniform education requirement, licensure, continuing education, or self-regulatory institution like many other established professions. Anyone who can pass a low level test has the right to call him or herself a “financial advisor.” Financial planners do not need credentials to enter the field.  The disparity in the quality of financial advice investors receive can be enormous. Some financial advisors have zero educational background or training in investing. Other advisors have PhDs and many professional designations. Might a difference in the price of these two individuals make sense?

Read more