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Investing at All-Time Highs

In the United States, the S&P 500 and the Dow Jones Industrial Average, the two most quoted equity indices, seemingly post new records daily. Driven by rallies in the financial services, industrial and technology sectors, U.S. equities are priced richly, both in comparison to historical averages and in terms of valuation multiples. Given these trends, where then do investors allocate capital? While conventional wisdom may lead investors to avoid equities, we believe there is still significant room for appreciation. Historically low retail investor participation means that a massive inflow of assets into equities may be coming. Slow rate increases mean that fixed income market returns will remain subdued in the intermediate term, making many bonds untenable for a large group of savers. Finally, macroeconomic and policy tailwinds should serve as a strong bedrock for future earnings growth.   As equity markets digest these factors, sectors that have not fully participated in the rally to date should benefit disproportionately. Health and biotech, negatively affected by rumors about drug price controls, should be able to manage any risks that arise from policy changes. The economically sensitive materials business will likely see share price increases as a result of economic growth and the prospect of higher infrastructure spending. Consumer staples, some of the highest dividend payers in the equity market, should remain attractive relative to still-low yields in sovereign and corporate bond markets.   Economic Outlook   Despite a weak economic outlook internationally, the United States economy continues to outperform. This is especially acute when weighed against weak growth expectations across other advanced economies in Europe and Asia that are mired in a sub-two percent growth range. With stronger consumer spending expectations, the comeback of some energy-related industrial production and a better demographic outlook, the U.S. economy should expand well above the two percent range in both 2017 and 2018. Additionally, while the Federal Reserve is expected to raise interest rates in congruence with the direction of the economy, these increases will likely be moderate in the short-term, reducing the risk of stunting growth.   Corporate Earnings Outlook   These macro trends are trickling down to U.S. corporations, which are projected to post the first consecutive quarterly revenue growth for the first time since the last quarter of 2014 and the first of 2015. This shows that companies are successfully monetizing higher incomes and capitalizing on new opportunities. Corporations are not just increasing sales without benefit to shareholders. Earnings per share (EPS) growth is expected to be above five percent, the highest since 2012, as businesses turn better sales into better profits. In past years, many companies have been unable to translate top line growth into earnings. Companies’ ability to transform revenue into profits is a reflection of improving productivity and cost restraint. Overall, the picture seems rosy for the U.S. economy and corporations alike.   Policy Outlook   In Washington, there is a significant expectation that the agenda of the White House and Congress will yield policies favorable to the equity market. First is the complex issue of tax reform, where Republicans want to reduce tax rates and incentivize companies to repatriate an estimated $2 trillion of overseas capital. This should provide tax relief to individuals, increasing their spending power and acting as a further benefit to an already growing economy. On the corporate side, the large pool of capital held overseas would presumably be used to finance more aggressive shareholder returns and/or capital investments. Both are beneficial to the broader equity market. While there is, of course, the chance that neither of these legislative proposals are enacted, the general environment in Washington seems more conducive to business growth and investor returns.   Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is no guarantee of future results. Investments are subject to risk, including the loss of principal. Because investment return and principal value fluctuate, shares may be worth more or less than their original value. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. Talk to your financial advisor before making any investing decisions. All indices are unmanaged and investors cannot actually invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses.
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Market Commentry: Snapchat Goes Public

  Snapchat made its highly anticipated publicly traded debut on March 2nd, under its parent company Snap Inc. (SNAP.) The initial public offering (IPO) of 200 million shares made noise from the investing world to teenagers all over the world. The listing on the New York Stock Exchange (NYSE) valued the social media company at more than $30 billion, making it the largest U.S-based technology offering since Facebook’s launch in 2012. This valuation was a very big contingency point for investors as it equates to a price-to-sales ratio of 80x, nearly 6x the valuation Facebook carries. It also became instantly more valuable than a handful of household companies such as: Snapchat   The valuation will be highly scrutinized and will only be able to play itself out over time, but some of the most interesting details have become public in their prospectus.   The Financials Snap currently has no earnings; in fact, it recorded a net loss of $514.6 million in 2016.   The revenue has increased from $58.7 million in 2015 to $404.6 million in 2016, but not enough to outpace its net revenue loss.   98% of Snap’s revenue is derived from advertising.   All shares listed on public exchange have zero voting rights; co-founders Evan Spiegel and Robert Murphy have an iron clad control of the company.   User Base The majority of its users fall into the 18-34 age category, a highly coveted advertising demographic.   These users visit the app more than 20x per day and spend more than 30 minutes’ total on the app.   With 158 million daily active users (DAU’s), an average of 2.5 billion snaps are sent every day.   The teen demographic is one of the least “brand loyal” bases and could shift attention to another platform.   Snap uses Alphabet Inc’s (GOOGL) Google Cloud for much of its computing storage, bandwidth and other needs. Snap said in its filing that if business would be “seriously harmed” if that relationship was disrupted.   About Midwest Wealth Management, Inc.   Midwest Wealth Management, Inc. was formed by Greg Shields, a 30-year financial services veteran committed to offering sophisticated investors an alternative when looking for a more strategic path for long-term investing. As a private investment group, Midwest Wealth Management, Inc. offers a proprietary trading platform, alternative investment offerings and dedicated advisory support for a select audience. For more information, please visit www.midwest-wealth.com.   Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict.   All indices are unmanaged and investors cannot actually invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses. Past performance does not guarantee future results. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks.   VIX: trademarked symbol for the Chicago Board Options Exchange Market Volatility Index. Often referred to as the fear index or the fear gauge, it represents one measure of the market's expectation of stock market volatility over the next 30 day period.   https://techcrunch.com/2017/03/02/snapchat-is-already-more-valuable-than-these-9-companies/   http://www.marketwatch.com/story/snap-ipo-six-things-we-now-know-about-snapchat-parent-company-2017-02-02
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Our Market Commentary-Global Developments

U.S. Interest Rates: Bond & Currency Moves The Federal Reserve has started to surprise many observers by the number of potential interest rate hikes in 2017. The initial thought of two rate hikes may turn out to be three or four. The decision to raise rates pushed short-term bonds lower. The yield of the two-year U.S. Treasury rose to the highest level in 7 years. Rising U.S. rates can cause disturbances for markets and other countries’ currencies moves all over the globe.

     

  • China’s Yuan tumbled to lowest level against the dollar in more than 8 years
  • U.S. dollar is moving closer to 1:1 parity with the Euro, its highest level in nearly 15 years.

 

Bitcoin on the Move The most popular crypto currency, Bitcoin, has risen to record highs above $1,250. The currency has increased an impressive 76% since the U.S. Presidential election and is now worth more than an ounce of gold.

 

Volatility (VIX) Touches Multi-Year Low Dropping 20% over 2016, the VIX, a measure of market volatility, hit levels only previously seen in early 2007 and in summer of 2014.  
  • Indicates a lot of complacency in the market and that investors perceive minimal risk in equities.
  • This can lead to a lot more upside pressure, as retail investors are owning historically low percentage of stocks.
  • Could leave stocks susceptible to large and quick corrections on any news of a negative event.
  About Midwest Wealth Management, Inc. Midwest Wealth Management, Inc. was formed by Greg Shields, a 30-year financial services veteran committed to offering sophisticated investors an alternative when looking for a more strategic path for long-term investing. As a private investment group, Midwest Wealth Management, Inc. offers a proprietary trading platform, alternative investment offerings and dedicated advisory support for a select audience. For more information, please visit www.midwest-wealth.com. Securities and Advisory Services offered through Commonwealth Financial Network®. Member FINRA/SIPC a Registered Investment Adviser.
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