When Volatility is Just Volatility

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Dep. Chief Economist

Strider Elass – Economist

     Stock market volatility scares people.  But, volatility itself isn’t necessarily bad.  Only if there are fundamental economic problems, something that could cause a recession, would we think volatility itself is a warning sign.

      So, we watch the Four Pillars.  These Pillars – monetary policy, tax policy, spending & regulatory policy, and trade policy – are the real threats to prosperity.  Right now, these Pillars suggest that economic fundamentals remain sound.

     Monetary Policy:  We’re astounded some analysts interpreted last Wednesday’s pronouncements from the Federal Reserve as dovish.  The Fed upgraded its forecasts for economic growth, projected a lower unemployment rate through 2020 and also expects inflation to temporarily exceed its long-term inflation target of 2.0% in 2020.

      As recently as December, only four of sixteen Fed policymakers projected four or more rate hikes this year; now, seven of fifteen are in the more aggressive camp.  Some analysts dwell on the fact that the “median” policymaker still expects only three hikes in 2018, ignoring the trend toward a more aggressive Fed.

     But all of this misses the real point.  Monetary policy will still be loose at the end of 2018, whether the Fed raises rates three or four times this year.  The federal funds rate is about 120 basis points below the yield on the 10-year Treasury (which will rise as the Fed hikes), and is also well below the trend in nominal GDP growth.  Meanwhile, the banking system still holds about $2 trillion in excess reserves.  Monetary policy is a tailwind for growth, not a headwind. 

     Taxes:  The tax cut passed last year is the most pro-growth tax cut since the early 1980s, particularly on the corporate side.  Some analysts argue that the money is just going to be used for share buybacks, but we find that hard to believe.  A lower tax rate means companies have more of an incentive to pursue business ideas that they were on the fence about.

     And there is a big difference between who cuts a check to the government and who truly bears the burden of a tax, what economists call the “incidence of a tax.”

      Cutting the tax rate on Corporate America will lift the demand for labor, meaning workers and managers share the benefits with shareholders.  Yes, some of the tax cut will be used for share buybacks, but that’s OK with us; it means shareholders get money to reinvest in other companies.  Buybacks also move capital away from corporate managers who might otherwise squander the money on “empire building,” pursuing acquisitions for the sake of growth, when returning it to shareholders is more efficient.

     Spending & Regulation:  This pillar is a little shaky.  On regulation, Washington has moved aggressively to reduce red tape rather than expand it.  That’s good.  But, Congress can’t keep a lid on spending.  That’s bad.

      Back in June, the Congressional Budget Office was projecting that discretionary spending in Fiscal Year 2018 would be $1.222 trillion.  (Discretionary spending doesn’t include entitlements like Social Security, Medicare, or Medicaid, or net interest on the federal debt.)  Now, the CBO says that’ll reach $1.309 trillion, a gain of 7.1% in just nine months.

      Assuming the CBO got it right back in June on entitlements and interest, that would put this year’s federal spending at 20.9% of GDP, a tick higher than last year at 20.8% - despite faster economic growth.  This extra spending represents a shift in resources from the private sector to the government.  The more the government spends, the slower the economy grows.

     Trade:  Trade wars are not good for growth.  And the US move to put tariffs in place creates the potential for a trade war.  We aren’t dismissing this threat, but a “full blown” trade war remains a low probability event.

     The bottom line:  taxes, regulation and monetary policy are a plus for growth, spending and new tariffs are threats.  Things aren’t perfect, but, in no way do the fundamentals signal major economic problems ahead.  The current volatility in markets is not a warning, it’s just volatility.  

"Please follow the link below for further information"

https://www.ftportfolios.com/Commentary/EconomicResearch/2018/3/26/when-volatility-is-just-volatility

Playing Parent to Your Parents

Should the time come, you may need to step in to help preserve your parents' lifestyle and legacy.

March 27, 2018

Unfortunately, increasing longevity and quality of life do not always work in tandem.

What do you do if – or when – your once-financially-astute parents no longer have the ability to handle their affairs? How can you prepare for a time when they are unable or unwilling to recognize that their mental acuity has declined?

Parental Financial Planning

Taking care of one or both of your parents may seem a noble, selfless goal. But it can seem a much loftier ambition when you dive into the reality of the situation. You’ll find yourself making sure that your parents won’t outlive their money while also trying to manage your own finances, all while maintaining control of your personal stress level.

If you undertake this task, keep in mind that managing someone else’s money can be challenging and sometimes thankless work. And if handled less than diplomatically, you may wind up being viewed as overly aggressive rather than appropriately concerned. If you don’t have the time, patience, willingness, expertise and confidence to provide the level and quality of oversight your parents require, you may want to turn over at least some of the responsibility to a financial advisor or other trusted professional.

Maximizing Benefits

Whatever route you and your parents – perhaps together with other family members – choose, you'll want to ensure that your parents are receiving all the benefits to which they are entitled, including those from Social Security and any pensions, retirement accounts, insurance contracts and annuities they may have. These benefits should be accounted for in a comprehensive retirement strategy designed to help make sure their lifestyle expectations are in line with their income.

To solidify that strategy, you and/or a financial advisor also need to assess your parents’ income, expenses and net worth – and perhaps bring in other professionals such as doctors or home healthcare specialists to help explore health, emotional and other relevant factors. If your parents are not likely to have enough resources to pay for their own care, then finding ways to supplement their income will become a priority.

Key Financial Questions

Essential issues to address include whether your parents have – and will continue to have – the income they need to meet routine living expenses, whether they have difficulties remembering to pay bills, whether they encounter trouble keeping their financial paperwork organized, and if they (or you) have concerns about whether their assets are sufficient to pay for their needs as long as they live.

In addition, someone will have to decide whether, and for how long, they can remain in their home, or if they need a greater level of care – the kind provided by assisted-living communities, nursing homes, or another housing option.

Don’t forget to look at the sources your parents are tapping for current income. For example, are they using the proceeds from income-generating investments to pay bills or are they accessing their principal to meet their daily expenses? If they are spending down their principal too quickly, the next issue becomes whether they can redeploy their assets to generate more income while still tightly controlling risk.

A Watchful Eye

If your parents have multiple accounts and struggle to keep track of them all, you might suggest that they consolidate those accounts into one or two streamlined accounts and set up automatic payment plans. And while you’re attending to all these matters, keep an eye out for signs of financial fraud. Red flags can include abrupt changes to wills, a sudden change in attorneys or financial advisors, and a tendency to commit funds to complex or obscure securities or ventures.

Make sure your parents also have key documents in order – wills, trusts, long-term care, medical and other insurance policies. Ideally, they should secure all financial documents in a safe place and give copies to trusted relatives or friends. Also, recommend that they designate an estate executor and keep a secure list of usernames and passwords for any online accounts.

If your parents remain in good health, asking for power of attorney may never become necessary – but it can be invaluable if a time comes when you need to make choices without their input.

Take Care of You, Too

No matter how compassionate you are, try to avoid tapping into your own assets to help out your parents. Spending funds you've already earmarked for yourself could make a bad situation worse, and it could inadvertently shift the burden for your own future care to other family members – in other words, reinforcing an increasingly difficult-to-break cycle of dependency.

The experience of caring for your aging parents will likely be challenging. But it may also serve as inspiration for you to revisit your own plans for the future. If you don’t have your own up-to-date comprehensive retirement and estate plan in place, there’s no better time to start than now. The following generation will thank you for it.

COMPARISON OF PRIOR TAX LAW WITH THE TAX CUTS AND JOBS ACT

After making its way through Congress and seeing numerous last-minute tweaks, the tax reform bill was approved by Congress and then signed by President Trump on December 22, 2017. The new tax rates and countless other provisions generally took effect on January 1, 2018. The charts beginning on the following page, aimed at individuals and businesses, provide insight into changes made and provisions left intact. They provide brief explanations of past tax law and the Tax Cuts and Jobs Act of 2017, as well as insight from Raymond James thought leaders.

"Click Charts to see the  following illustrate the difference in the 2018 income tax brackets for the various filing statuses under the new tax laws versus what it would have been without these tax law changes: "

Laying the Groundwork for Tax Season

Smart moves at the beginning of tax season can help get your financial house in order.

March 2, 2018

Contrary to popular belief, tax planning isn’t limited to the months between year-end and April 15. In fact, smart tax planning goes beyond deductions and credits and should be incorporated throughout the year. As Americans prepare to file their returns, let’s take a look at what we should be thinking about for tax season and beyond.

Get It Together, Now

The beginning of each new year is the time to get organized before filing your taxes. Make an appointment with your accountant and prepare by gathering all the relevant documentation.

Among other things, you’ll need:

• Year-end statements from financial accounts
• W-2s, 1098s and 1099s, K-1s (many can be found online)
• Last year’s tax returns
• Receipts for donations and business-related expenses
• Social Security numbers for your spouse and dependents
• Business identification number
• Tax ID number for daycares or schools, if filing for the carechild credit

Keep in mind that most 1099s should be mailed before the end of January, but they could be delayed or revised. You and your accountant will have to decide if you need to file an extension, a common occurrence these days.

Strategies for Any Season

If lowering your taxes is a priority, start a conversation with your financial and tax advisors about ways to save money come April 15. Consider these perennial options:

• Put pretax dollars to work. Flexible savings accounts – available during your employer’s open enrollment period – allow you to use pretax dollars to pay for qualified expenses. You can also use pretax retirement contributions to reduce your taxable income.
• Fill in the blanks. Work with your financial advisor to make sure all the cost-basis information is complete and accurate before calculating losses and gains for tax-loss harvesting purposes.
• Pursue tax-efficient investing. Investing should be focused on meeting your goals, not just on reducing taxes. But in some cases the two dovetail nicely. For example, interest* from municipal bonds is generally exempt from federal and state income tax (if you’re a resident of the state the bond is issued in). You could also sell underperforming stocks to offset realized gains.

For all taxpayers, it’s important to take a look at what tax strategies could benefit your specific situation without losing sight of your overall financial goals. Reviewing your investments in light of your goals, the tax environment, and the economic landscape can help you see where adjustments need to be made to position yourself for the upcoming year and beyond.

*Interest may be subject to the federal alternative minimum tax and state or local taxes.

Municipal bond investments may involve market risk if sold prior to maturity, credit risk and interest rate risk. There is no assurance that any investment strategy will be successful. Investing involves risk and investors may incur a profit or a loss. Please note, changes in tax laws or regulations may occur at any time and could substantially impact your situation. While familiar with the tax provisions of the issues presented herein, Raymond James Financial Advisors are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional.

Healthy Beginning to the Rebuilding Phase

Mike Gibbs, Managing Director of Equity Portfolio & Technical Strategy, discusses fourth quarter earnings and the early February pullback.

February 27, 2018

Over the past month, volatility returned to the equity markets. The S&P 500 experienced an 11.8% correction from its closing high on January 26 to its intraday low ten days later on February 9. This sharp pullback was the first one of its magnitude in roughly two years, making it feel much worse to investors that had grown accustomed to the exceptionally low volatility experienced throughout 2017. As a reminder, since 1980, the S&P 500 has experienced a pullback of -14.9% on average each year. Additionally, ~25% of days since 1980 have had an intraday move of at least 1% (in either direction). We believe that volatility is likely to return to more normal levels this year.

Following the correction, the S&P 500 has been able to rally back to its 50 Displaced Moving Average (up 7.6% from the low and back to positive territory on the year). We view this as a healthy beginning to the rebuilding phase. It is very common following sharp selloffs for the market to be choppy in the short term, as technical resistance and support levels are tested (and retested), and consolidation occurs to build a base for renewed upside.

The volatility was sparked by a couple of economic reports showing “hotter” than expected wage growth and inflationary pressures. The U.S. 10-year Treasury yield rose to a high of 2.94% (2.88% currently) from 2.43% at the end of 2017, and investors became concerned over the potential pace of wage growth, its impact on inflation and interest rates, and in turn its influence on future monetary policy. The concern is that rising inflationary pressures could cause the Federal Reserve to tighten too quickly, and potentially upset economic conditions. Inflation and interest rates remain low, but as they rear their head up over the course of the year, volatility could ensue. However, given the strong economic and earnings backdrop, pullbacks should be normal in nature and viewed opportunistically.

According to FactSet, 4Q17 earnings season was very strong (90% of S&P 500 companies have reported thus far) as earnings grew 14.9% on sales growth of 8.2%. This takes full year 2017 earnings growth up to 10.8% on sales growth of 6.3% – the strongest levels since 2011. Additionally, estimates have been revised sharply higher for 2018. Earnings for the first, second, third and fourth quarters and for 2018 as a whole now reflect estimated growth of 17.4%, 19.2%, 21.1%, 16.1%, and 18.2% respectively. Full year 2018 earnings growth has been upwardly revised by 7.9% since the start of the year, with the strongest upward revisions coming from Energy, Telecom, Financials, Industrials, and Consumer Discretionary. Furthermore, the strongest earnings growth is expected from Energy, Financials, Materials, Industrials and Technology.

Through the volatility, Technology outperformed, Financials and Consumer Discretionary held up very well, and the interest-rate sensitive sectors (Utilities, Telecom, Real Estate, and Consumer Staples) continued their poor relative strength trends. Energy also continued to be the worst-performing cyclical sector and broke to new relative strength lows despite crude oil prices back to $63/barrel currently.

Sources: FactSet, Raymond James Equity Portfolio & Technical Strategy

The S&P 500 is an unmanaged index of 500 widely held stocks. It is not possible to invest directly in an index. All expressions of opinion reflect the judgment of the Research Department of Raymond James & Associates, Inc. and are subject to change. There is no assurance any of the trends mentioned will continue or that any of the forecasts mentioned will occur. Economic and market conditions are subject to change. Past performance may not be indicative of future results. Displaced Moving Average (DMA) is a moving average that has been adjusted forward or back in time to forecast trends. U.S. Treasury securities are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The forgoing is not a recommendation to buy or sell any individual security or any combination of securities.

Strategies for Paying an Unexpected Tax Bill

If you're surprised by a tax bill, consider ways to pay without interrupting your financial plan.

March 2, 2018

Many working Americans expect a refund come tax day, but this year, some of us may get an unexpected bill instead. So what happens if you fall into that camp?

First, stay calm. Secondly, think strategically about how to pay what you owe, particularly if your money is invested, earmarked for retirement or stashed away in an emergency fund. Lastly, put plans in place to include more tax-mitigating strategies into your financial plan. Doing so can help avoid this situation next year.

If you do find yourself obliged to pay, perhaps you can rely on one of these options to help you settle up with the IRS and keep your financial plan undisturbed and on track.

Actions to Take

Make sure it’s not a mistake. Review your return with your accountant to make sure you’ve included every exemption and credit for which you qualify.

Consider taking out a low-interest rate loan. If you really do owe Uncle Sam a large chunk of change, a securities-based line of credit or a home equity loan may be a more cost-effective way to pay instead of selling securities that are part of your long-term investment plan. These types of loans can offer quick liquidity and flexibility to help you meet your tax obligation, at competitive interest rates. And you may be able to avoid capital gains taxes that could result from selling appreciated investments.

Carefully select investments that could be sold for additional liquidity. In some cases, selling securities to capture capital losses or rebalance a portfolio is a good idea. Talk to your advisor about securities that could be harvested for capital losses or ones that you can sell to help bring your portfolio back into alignment with your long-term goals. Another possible benefit? Unused realized capital losses may be available to offset future tax bills. Please remember that the process of rebalancing may result in tax consequences.

If Possible, Avoid …

An unfavorable offer in compromise. The IRS may negotiate an offer in compromise (OIC) to help you settle your bill for less than you owe. However, be aware that there are associated costs, including a filing fee.

Paying with a high-interest-rate credit card. This kind of debt can negatively impact your credit score and quickly rack up fees, making it harder to pay down the principal. Even though the IRS also charges interest (federal short-term rate plus 3%), it’s far lower than most credit card companies.

Taking money from your retirement accounts. It’s not a great idea to undermine a long-term plan by withdrawing funds early. You’ll be faced with penalties, as well as additional taxes on the amount you take out, which could mean you won’t have as much to pay your tax bill as you thought. And you’ll have even less for retirement.

Plan Ahead

If you do end up owing taxes, talk to your tax and financial advisors about other ways you can pay the bill without disrupting your investment plan or depleting savings. If you anticipate owing taxes again, you may also want to discuss investment and tax-saving strategies to reduce your liability next year and beyond.

A Securities Based Line of Credit (SBLC) may not be suitable for all clients. The proceeds from an SBLC cannot be used to purchase or carry margin securities. Raymond James Bank does not accept RJF stock as pledged securities towards an SBLC. Borrowing on securities based lending products and using securities as collateral may involve a high degree of risk including unintended tax consequences and the possible need to sell your holdings, which may lead to a significant impact on long-term investment goals. Market conditions can magnify any potential for loss. If the market turns against the client, he or she may be required to quickly deposit additional securities and/or cash in the account(s) or pay down the loan to avoid liquidation. The securities in the Pledged Account(s) may be sold to meet the Collateral Call, and the firm can sell the client’s securities without contacting them. A client is not entitled to choose which securities or other assets in his or her account are liquidated or sold to meet a Collateral Call. The firm can increase its maintenance requirements at any time and is not required to provide a client advance written notice. A client is not entitled to an extension of time on a Collateral Call. Increased interest rates could also affect LIBOR rates that apply to your SBLC, causing the cost of the credit line to increase significantly. The interest rates charged are determined by the market value of pledged assets and the net value of the client’s Capital Access account.

Securities Based Line of Credit provided by Raymond James Bank. Raymond James & Associates, Inc. and Raymond James Financial Services, Inc. are affiliated with Raymond James Bank.

Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, Raymond James Financial Advisors are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.

February’s wild ride

March 2,2018

After a year or so of upward price momentum, exceptionally low volatility and record highs, the domestic stock market slipped in and out of correction territory at the beginning of the month and continued to zig and zag until the last minute of trading. At the same time, the 10-year Treasury yield rose to a high of 2.94%, and investors became concerned over the potential pace of wage growth, its impact on inflation and interest rates, and in turn its influence on future monetary policy. The concern was that rising inflationary pressures could cause the Federal Reserve to tighten too quickly, and potentially upset economic conditions. Some of this concern should be alleviated by the strong fourth quarter earnings we’ve seen. The Tax Cut and Jobs Act, a strong global economy, and a weaker U.S. dollar are additional tailwinds for equities, according to Raymond James Chief Investment Strategist Jeff Saut.

The pullback was the first real test of investors’ resolve in recent memory. Long-term investors have seen this happen time and again. In fact, the broad market S&P 500 Index has experienced a pullback of 15% on average each year since 1980, according to Senior Equity Portfolio Analyst Joey Madere. Volatility is likely to return to more normal levels this year, he added.

“One would expect either some kind of pause, or even better, some kind of pullback to rebuild the stock market’s internal energy,” Saut explained. “Plainly, the fundamentals remain excellent with earnings estimates continuing to ratchet up, revenues trending higher and a stronger economy… . And while interest rates have increased, they have done so in a very orderly fashion.”

The major indices, namely S&P 500, NASDAQ and the Dow Jones Industrial Average, slipped in the last few days of the month, although they remain in positive territory year to date.

                                                 12/29/17 Close     2/28/18 Close     Change YTD     % Gain/Loss YTD

DJIA                                                  24,719.22            25,029.20            +309.98                      +1.25%

NASDAQ                                           6,903.39               7,273.01             +369.62                     +5.35%

S&P 500                                             2,673.61                2,713.83              +40.22                      +1.50%

MSCI EAFE                                        2,050.79              2,070.37               +19.58                     +0.95%

Russell 2000                                       1,535.51                1,512.45                -23.06                     -1.50%

Bloomberg Barclays U.S.

Aggregate Bond Index                     2,046.37               1,999.70               -46.67                      -2.28%

Performance reflects price returns as of 4:30 EDT on Feb. 28, 2018. The EAFE reflects the previous day's close.

Here is a look at what’s happening in the economy and capital markets, as well as key factors we are watching:

Economy

• The Bureau of Labor Statistics January Employment Report showed nonfarm payrolls increased by 200,000, while the unemployment rate held steady at 4.1%.
• There was a smooth transition as Jerome Powell took the helm of the Federal Reserve from Janet Yellen. Fed decisions remain data dependent, a familiar refrain from the central bankers, explains Chief Economist Scott Brown.
• The labor market and inflation continue to be areas of focus as the Fed mulls monetary policy decisions.

Equities

• World stock markets began the month in turmoil, and the resultant correction gave investors their first real bout of downside volatility in over a year, explains Senior Research Associate Andrew Adams.
• The weakness was more of an overdue trading event, in Adams’ view, rather than concern about the health of the secular bull market, so his team remains constructive on U.S. stocks even with heightened volatility.
• Through the volatility, technology outperformed; financials and consumer discretionary held up very well; and the interest-rate sensitive sectors (e.g., utilities, telecom, real estate and consumer staples) showed weaker trends. Energy was the worst-performing cyclical sector despite crude oil prices sitting above $60 a barrel.
• Recent years have seen water scarcity issues in South Africa; California; Flint, Michigan; and Gujarat, India. There is a need to boost investment in water infrastructure – a theme that long-term investors may want to consider, suggests Energy Analyst Pavel Molchanov.

International

• International equity markets also were volatile in February but most markets were off their 2018 lows by the end of the month, assisted by a generally solid corporate earnings season, according to European Strategist Chris Bailey.
• In Europe, political discussions remain at the fore with important updates on the status of the proposed German grand coalition and the results of the Italian general election slated for early March.
• Meanwhile, the Brexit debate continues in the U.K.
• In Asia, there were lowered geopolitical risks due to Olympics-related diplomacy supplemented by generally positive economic data out of influential countries, such as China and Japan.

Fixed Income

• There are several factors simultaneously pushing and pulling on interest rates, potentially offsetting a significant directional move. The Tax Cuts and Jobs Act looks to free capital for corporations, lower price-to-earnings ratios and potentially increase revenues, all with the potential to promote future economic growth. Global central banks continue to purchase bonds in the open market, yet proclaim a soon-to-be reduction. At the same time the Fed is reducing its balance sheet and positioning to raise domestic rates at least a couple of more times this year. If these events continue to clash, interest rate movement may be dulled.
• The municipal curve value points have increased in the intermediate area. In the past month, Treasuries have outperformed high-quality municipal bonds, resulting in a widening of municipal to Treasury spreads in the 5- and 10-year points, notes Doug Drabik, Senior Vice President, Fixed Income Services Group.
• Global bond yields are following U.S. yields higher and this reinforces the need to understand the components of your portfolio and how they fit into your long-term financial plan.

Bottom Line

• Inflation and interest rates remain low from a historical standpoint, but are likely to move higher over the course of the year, potentially causing additional bouts of volatility.
• Given the strong economic and earnings backdrop, pullbacks should be normal in nature and viewed opportunistically.
• In the meantime, a well-diversified portfolio geared toward achieving your long-term goals should allow you to participate in upside potential as well as serve as a ballast for any short-term volatility that may arise in the coming months.

Your advisor will continue to watch for legislative updates as well as economic developments. In the meantime, please reach out to him or her if you have any questions.

Investing involves risk, and investors may incur a profit or a loss. All expressions of opinion reflect the judgment of the Research Department of Raymond James & Associates, Inc., and are subject to change. Past performance is not an indication of future results and there is no assurance that any of the forecasts mentioned will occur. Economic and market conditions are subject to change. The Dow Jones Industrial Average is an unmanaged index of 30 widely held stocks. The NASDAQ Composite Index is an unmanaged index of all common stocks listed on the NASDAQ National Stock Market. The S&P 500 is an unmanaged index of 500 widely held stocks. The MSCI EAFE (Europe, Australia, Far East) index is an unmanaged index that is generally considered representative of the international stock market. The Russell 2000 is an unmanaged index of small cap securities. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. An investment cannot be made in these indexes. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets. Small and mid-cap securities generally involve greater risks. Companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification. The performance noted does not include fees or charges, which would reduce an investor's returns. Asset allocation and diversification do not guarantee a profit nor protect against a loss. Debt securities are subject to credit risk. A downgrade in an issuer’s credit rating or other adverse news about an issuer can reduce the market value of that issuer’s securities. When interest rates rise, the market value of these bonds will decline, and vice versa. Price/Earnings Ratio is the price of a stock divided by its earnings. It gives investors an idea of how much they are paying for a company’s earning power. While interest on municipal bonds is generally exempt from federal income tax, it may be subject to the federal alternative minimum tax, state or local taxes. U.S. Treasury securities are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. Chris Bailey is with Raymond James Euro Equities, an affiliate of Raymond James & Associates, and Raymond James Financial Services. Not approved for rollover solicitations.

Blueprints for Your Financial Future

Investment policy statements can serve as a guide for you and your advisor.

February 23, 2018

Entrepreneurs don’t start a business without a plan and contractors don’t start a house without blueprints. Given the important role your wealth plays in your life, as an investor, you require your own strategy or blueprints to guide your way forward. An investment policy statement may fit the bill.

Typically a tool used by institutions managing significant assets, an investment policy statement (IPS) provides an opportunity to proactively define and document your investment goals and tolerance for risk with the completion of a risk assessment or questionnaire. They can help guide your relationship with your financial advisor, acting as a foundation and benchmark for you both as you work together to manage your wealth and pursue your financial objectives.

Finding Clarity

We often think of our financial goals as relatively straightforward. But in reality, once we consider market turbulence or our environment of increasingly complex investments, it’s rarely a simple matter.

Going through the exercise of a risk assessment – part and parcel with an IPS – prompts you to provide a detailed look at both your comfort with risk as well as your portfolio’s ability to weather that risk. For example, the idea of a 10% drop in the market may sound manageable to you, but if that means your $250,000 portfolio drops by $25,000, will you still be comfortable? In such an event, would you be tempted to make impulse decisions or would you trust in the long-term plan you’d previously laid out? These are the moments in which an up-to-date IPS can serve as a valuable guidepost for you and your financial advisor.

Further, the discussions you’ll have when you develop your IPS can help you to clarify not just your financial objectives but also reveal the personal motivations behind them, including the aspirations you have for your family, career or enduring legacy. Defining those, in turn, makes it easier for your financial advisor to ensure your portfolio continues to support your long-term vision for the future.

Your Financial Touchstone

Wealth is a highly personal matter, touching each facet of our lives. It’s only natural that temporary volatility that may seem to threaten your financial well-being and the wealth you’ve worked hard to amass could spark some emotion or stress. In periods of market turmoil, seeing the immediate decline in your assets will undoubtedly be more distressing in the moment than when imagining the mere possibility of such an event while in the comfort of your financial advisor’s office.

If and when the market takes a downturn, an IPS can serve as a grounding tool – which is exactly how they’re used by institutions tasked with the management of significant assets. An IPS helps to keep them from straying from their mandate, while pursuing their objectives, and it’s this disciplined, steadfast approach that allows institutions to outperform individual investors time and again. In a 2015 report from Dalbar, the average institutional investor outperformed the average diversified individual investor over the previous 20 years, by a factor of three (7.31% vs. 2.11%). The pattern repeats itself over shorter time periods, too. Adhering to a long-term investment plan may account for some of the differences among average investors, although there are disciplined individuals who remain focused on their long-term financial plan and achieve better results over time.

Going through the measured and thoughtful practice of creating an IPS can help you stay confident and focused on your long-term goals, and avoid making emotional decisions in the moment.

Common Ground for You and Your Advisor

Your relationship with your advisor will be a long one – one that has seen you through many milestones, but also one that will see your children do the same. And as your life evolves, an IPS will serve as a benchmark for both you and your advisor, ensuring neither of you loses sight of the future you’ve long been working for. You could be a testament to the power of steadfast, long-term planning guided by an IPS, your advisor and yourself.

In addition to your risk tolerance and financial objectives, an IPS will give you an opportunity to define the roles and responsibilities you and your financial advisor each hold within your partnership, as well as the roles of other professionals such as accountants and portfolio managers. If you and your financial advisor do part ways, say after a move or retirement, having this document will make a potential transition that much easier since your goals and expectations have been laid out.  

A Living Document

Think of your IPS as something that will evolve as your life does, likely needing adjustment as you reach milestones or life events including an expanding business, a growing family, the purchase of property or retirement. Consider even using your IPS, or a summary of it, as a guide and reference point for your quarterly review. Year-end may also be a good time to schedule your annual review of the document itself to ensure it continues to reflect your needs and wishes, and support your long-term financial health.

The Architecture of an IPS

Make sure to cover these key elements when drafting your IPS.

Investment Objectives and Constraints

What is it that you’re hoping to accomplish by investing? What is your risk tolerance? This section also will detail your time horizon, contribution and withdrawal needs, tax considerations, as well as target return goals.

You’ll also share your personal motivations behind your financial objectives. Do you have strong preferences for sustainable companies or companies whose values mirror your own?

Outline what you want your wealth to do – fund an active retirement; help you pursue a philanthropic legacy; or further education for your loved ones – and who you want to benefit as your money grows. Be sure to update this section as your goals change or evolve.

Portfolio Allocation

Based on your risk tolerance and return objectives as well as any constraints you’ve established, your advisor will help you determine the appropriate mix of assets that align with your overall investment philosophy. Here, you’ll lay out your portfolio preferences including how and where you’d like your assets allocated among various investments with different risk/reward profiles. These details should change as your tolerance for risk does, particularly when nearing or entering retirement.

Roles and Responsibilities

How hands-on would you like to be? Clarify what you and your family are responsible for, and what your financial advisor is responsible for. By taking the time to define your roles and having it in writing, you can both better manage expectations, as well as your relationship, moving forward. Be sure to update this section as your priorities change.

Rules for Rebalancing

Together with your advisor, determine how often you’d like to review your portfolio and rebalance or reset it in an effort to stay close to your ideal asset allocation model. This will include whether you’d like your dividends reinvested or disbursed to you as cash. Some leave this for their annual review, while others prefer to rebalance or reset more frequently to stick closer to their ideal allocation, which can drift over time. As you make updates to your asset allocation goals, make sure to review and update your rebalancing preferences, as well.

And Now, the Don'ts

We’ve covered the do’s. When it comes to your IPS, make sure you don’t:

• Underestimate time horizons. For investments, these can extend much longer than most might think, even past your retirement or passing.
• Generalize your goals. Get specific. Are you hoping to buy a cabin in Colorado with room for grandkids, or spend a certain amount each year on travel?
• Use jargon or vague language. Avoid wording that is either too restrictive or too broad and could get misinterpreted down the road.
• Abandon an IPS that needs fixing. It’s normal if your first stab at an investment policy isn’t quite right. Don’t scrap it altogether but instead work with your advisor to determine where adjustments make sense.
• Set it and forget it. Your IPS should be a flexible, living document. When your life changes significantly, talk to your advisor to see if updates to your IPS might be needed, too.

Given its role in your life, your wealth is far too important to gloss over. Going through the practice of creating and updating an IPS will ensure you’ve considered each element of your investment strategy – all while helping your financial advisor to maintain a thorough understanding of your priorities and goals.

Investing involves risk, and you may incur a profit or loss regardless of strategy selected. Past performance may not be indicative of future results. The performance noted does not include fees or charges, which would reduce an investor's returns. Diversification and asset allocation do not ensure a profit or protect against a loss. The process of rebalancing your portfolio may result in tax consequences.

Sources: The Globe and Mail; Investopedia; USA Today; Wilshire Advisor Solutions; Dalbar

A Vital Role

It’s time to take charge of your relationship with your healthcare provider.

February 22, 2018

When faced with a health issue, we turn to our doctor and other healthcare specialists for information, support and a positive resolution. But when you head to an appointment, do you go armed with research gleaned from reputable sources? Are you prepared to ask questions and voice your concerns if something doesn’t seem right? Many aren’t. In a recent Medscape poll, a majority of physicians and nurses surveyed said they would describe less than a quarter of their patients as empowered advocates for their health.

It’s time to take charge of your relationship with your healthcare provider in a way that places you squarely on the same team, rather than on the sidelines.

Take Control, Stat

Your doctor is an expert, but why not take some time to do your own research about a medical issue you’re experiencing before heading to an appointment? Your access to reputable websites, like those maintained by the Centers for Disease Control and Prevention or the Mayo Clinic, can provide you with invaluable information and help you know what to ask your doctor, as well as better understand what he or she recommends. Just be sure to avoid misinformation; rely instead on websites run by reputable, major hospitals, healthcare organizations and government agencies. Afterward, research any recommended procedures and prescriptions, as well as costs through your state’s department of insurance and your insurance company’s website.

Loud and Clear

When you visit the doctor, go prepared with a list of specific questions informed by your online research. Do your best to avoid what are commonly called “doorknob complaints,” things you suddenly remember – or simply gain the courage to express – as you walk out the door. Voice those concerns early on in the appointment, while your doctor has time to discuss the possibilities and your options.

Once you’ve received a clear explanation of your condition and proposed treatment, results and any possible side effects, write the information down for future reference while you’re still in the office. If there’s something you don’t understand, ask for further clarification. In a situation that’s emotionally stressful, it’s best not to rely on memory alone. Even routine doctor’s visits can be overwhelming, so think about taking someone you trust with you. At the very least, they’ll provide support during and after your appointment. They could also be another set of eyes and ears to record the details you may learn, which, in turn, will make coordinating care among providers easier.

Remember that you’re the boss. You have the right to respectful and considerate treatment, just as you have the right to ask questions and receive meaningful responses. You have the right to a healthcare professional who will listen to you and take time to understand what’s going on. And you also have the right to ask for a second medical opinion and, if necessary, to change physicians to ensure you’re receiving the care you need.

Keep Your Records Straight

If you’ve ever switched doctors or seen a specialist, you know that transferring your records can be a hassle. But, with electronic health records becoming the norm, it’s easier than ever to both obtain and then digitally maintain your own copies. By creating a personal healthcare file that tracks your medical history, you can advocate for yourself without worry of forgetting anything – an important consideration if you’re nervous and distracted during an appointment, or are not able to tell your medical provider yourself. Documents to include (and update regularly) in your personal healthcare file include:

• Notes from previous appointments
• Medications with dosages
• Medical providers and their contact information
• Important treatment records (e.g., hospital summaries, surgeries, lab reports)
• Allergies
• Emergency contacts
• Your preferred pharmacy
• Family medical history
• Implanted devices you have
• Immunization records
• Alternative treatments you’ve undergone and supplements you take
• Healthcare proxy or durable power of attorney, indicating who makes medical decisions for you if you’re not capable of doing so

Once you’ve created your personal healthcare file, share its location with your loved ones – particularly those who have been granted HIPAA authorization – and any individuals who will be called on to support you during a health issue. This summary of your medical history can be indispensable in the event of an emergency, as it ensures hospital staff and other parties involved can be brought up to speed quickly.

Learning how to advocate for your own health is vital when forming a partnership with your healthcare providers to better participate in your own care, rather than simply receive care passively. You are the only one who knows what it’s like to live in your body, so now is the time to begin to feel empowered, to voice your opinion, to ask questions, and to truly take control of your health.

Sources: medscape.com; webmd.com; urmc.rochester.edu; health.usnews.com; futureofhealthcarenews.com

Deficits, the Fed, and Rates

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Dep. Chief Economist

Strider Elass – Economist

   Forgive us our incredulity.  The bond vigilantes were certain that as the Federal Reserve hiked short-term rates, longterm interest rates would barely budge, the yield curve would invert, and the economy would fall into recession.

   That theory has been blown to smithereens, so now we hear that it’s rising long-term rates that will cause a recession.

    According to the vigilantes, which ascribe deep meaning to every move in long-term interest rates, the U.S. has gone from secular stagnation and permanent low rates, to huge (impossible to fund) deficits and rising rates – overnight.

    No wonder the average investor is completely confused.

    So, let’s start at the beginning.

   Yes, the Fed drove short-term interest rates to zero and held them there for seven years.  And, yes, the Fed bought $3.5 trillion in bonds during Quantitative Easing.  And, yes, the Fed is reversing course.  It’s lifted the federal funds rate five times since 2015, and it’s slowly allowing its bond portfolio to shrink.

   The federal government enacted tax cuts and spending increases, and the budget deficit ($665 billion in 2017) is now expected to approach $1 trillion or more in 2018 and beyond.

   So, how much impact does each of these things have on interest rates?

    Here’s our list:

    1) If the budget deficit were no higher in 2018, than it was in 2017, long-term bond yields would still be higher today.

   2) If the Fed had just lifted short-term interest rates, but had not started unwinding QE, longer-term bond yields would still be higher today.

   3) When the Fed promises to hold short-term interest rates down, they pull longer-term rates down as well.  Long-term rates (say a 5-year bond) are just a series of short-term rates (five 1-year bonds).  So, rising 1year yields mean rising 5-year yields.

    When tax cuts and regulatory reform lead to stronger economic growth, a pick up in the velocity of money, and rising inflationary pressures, the bond market begins to realize that short-term interest rates need to rise – across the yield curve.  Rising interest rates have everything to do with better economic data and nothing to do with QE and deficits.

   Every dollar the government spends has to be paid for with either tax revenue or borrowing from bondholders.  Either way, the money is “crowded-out.”  If you pay higher taxes, but need to buy a machine, you have to borrow; if the government borrows the money first and doesn’t tax you, you still need to buy the machine.  Either way, debt is created.  But, it’s not the debt itself that drives interest rates up or down.

   So, what about the QE-unwind? At this point, the Fed is only reducing its holdings of Treasury debt by $12 billion per month, versus a total pool of publicly-held Treasury debt of $14.8 trillion.  A drop in the bucket.

   Interest rates are determined by fundamental factors, not who owns what, or how many, bonds.  Right now, fundamental factors in the US – faster growth, rising inflation and a tightening Fed – are pushing yields up….not deficits.  In other words, the Vigilantes may think they have us on the run, but they’re not close to being dangerous.  

"To read more please follow the link"

https://www.ftportfolios.com/Commentary/EconomicResearch/2018/2/26/deficits,-the-fed,-and-rates

QE and Its Apologists

Brian S. Wesbury – Chief Economist

Robert Stein,CFA – Dep. Chief Economist

Strider Elass – Economist

On March 9, 2018, the bull market in U.S. stocks will celebrate its ninth anniversary.  And, what we find most amazing is how few people truly understand it.  To this day, in spite of massive increases in corporate earnings, many still think the market is one big “sugar high” – a bubble built on a sea of Quantitative Easing and government spending.

While passing mention is given to earnings (because they are impossible to ignore), conventional wisdom has clung to the mistaken story that QE, TARP, and government spending saved the economy from the abyss back in 2008-09.

A review of the facts shows the narrative that “Wall Street” – meaning capitalism and free markets – failed and government came to the rescue is simply not true.

   Wall Street was not the driving force behind subprime mortgages.  In his fabulous book, Hidden in Plain Sight, Peter Wallison showed that by 2008 Fannie Mae, Freddie Mac and other government programs had sponsored 76% of all subprime debt – not “Wall Street.”  Everyone was playing with rattlesnakes and government was telling them it was OK to do so.  But, when the snakes started biting, government blamed the private sector, capitalism and free markets. 

  At the same time, Wall Street did not cause the market and economy to collapse; it was overly strict mark-to-market accounting.  Yes, leverage in the financial system was high, but mark-to-market accounting forced banks to write down many performing assets to illiquid market prices that had zero relationship to true value.  Mark-to-market destroyed capital.

   QE started in September 2008, TARP in October 2008, but the market didn’t bottom until March 9, 2009, five months later.  On that day in March, former U.S. Representative Barney Frank, of all people, promised to hold a hearing with the accounting board and SEC to force a change to the ill-advised accounting rule.  The rule was changed and the stock market reversed course, with a return to economic growth not far behind.

  Yes, the Fed did QE and, yes, the stock market went up while bond yields fell, but correlation is not causation.  Stock markets fell after QE started, and rose after QE ended.  Bond yields often rose during QE, fell when the Fed wasn’t buying, and have increased since the Fed tapered and ended QE.

   A preponderance of QE ended up as “excess reserves” in the banking system, which means it never turned into real money growth.  That’s why inflation never took off.  Long-term
bond yields fell, but this wasn’t because the Fed was buying.  Bond yields fell because the Fed promised to hold short-term rates down for a very long time.  And as long-term rates are just a series of short-term rates, long term rates were pushed lower as well.

   We know this is a very short explanation of what happened, but we bring it up because there are many who are now trying to use the stock market “correction” to revisit the wrongly-held narrative that the economy is one big QE-driven bubble.  Or, they use the correction to cover their past support of QE and TARP.  If the unwinding of QE actually hurts, then they can argue that QE helped in the first place.

   So, they argue that rising bond yields are due to the Fed now selling bonds.  But the Fed began its QE-unwind strategy months ago, and sticking to its plans hasn’t changed a thing.

   The key inflection point for bond yields wasn’t when the Fed announced the unwinding of QE; it was Election Day 2016, when the 10-year yield ended the day at 1.9% while assuming the status quo, which meant more years of Plow Horse growth ahead.  Since then, we’ve seen a series of policy changes, including tax cuts and deregulation, which have raised expectations for economic growth and inflation.  As a result, yields have moved up.

  Corporate earnings are rising rapidly, too, and the S&P 500 is now trading at roughly 17.5 times 2018 expected earnings.  This is not a bubble, not even close.  Earnings are up because technology is booming in a more politically-friendly environment for capitalism.  And while it is hard to see productivity rising in the overall macro data, it is clear that profits and margins are up because productivity is rising rapidly in the private sector.

   The sad thing about the story that QE saved the economy is that it undermines faith in free markets.  Those who argue that unwinding QE is hurting the economy are, in unwitting fashion, supporting the view that capitalism is fragile, prone to bubbles and mistakes, and in need of government’s guiding hand.  This argument is now being made by both those who believe in big government and those who supposedly believe in free markets.  No wonder investors are confused and fearful.

  The good news is that QE did not lift the economy.  Markets, technology and innovation did.  And this realization is the key to understanding why unwinding QE is not a threat to the bull market.  

"Please follow the link below for more information"

https://www.ftportfolios.com/Commentary/EconomicResearch/2018/2/20/qe-and-its-apologists

Consensus forecasts come from Bloomberg.  This report was prepared by First Trust Advisors L. P., and reflects the current opinion of the authors.  It is based upon sources and data believed to be accurate and reliable.  Opinions and forward looking statements expressed are subject to change without notice.  This information does not constitute a solicitation or an offer to buy or sell any security.

This is Just a Correction…

Brian S. Wesbury – Chief Economist

 Robert Stein, CFA – Dep. Chief Economist

Strider Elass – Economist

Last year US stock markets experienced the least volatile year on record, hitting new highs seemingly every day.  Then came the tax reform bill to end 2017, and a huge January with the S&P 500 rising 5.6%.  Investors, especially individuals who finally became convinced that the rally would go on, piled in.  It wasn’t massive 1999style euphoria, but many investors finally succumbed to the fear of missing out. 

And as if on cue, sentiment (but not fundamentals) shifted, and stock markets gave up their 2018 gains.  The S&P 500 - as of the close on February 8th - was down 10.2% from its all-time closing high set on January 26th.  

Everyone wants to find a “reason” for a correction, to explain what happened, especially when it takes them by surprise.  And these days the prime culprit, according to the financial press, is interest rates heading higher.  Some attribute this increase to rising wage pressures and inflation, some blame ballooning budget deficits.  But beneath it all is a widely-held belief that stock market gains have been propped up by easy money and low interest rates – a sugar high. 

   
Our answer to this: No!  The stock market has been driven higher by earnings growth.  In fact, given the recent downdraft in stock prices and the simultaneous increase in earnings estimates, the S&P 500 is now trading at roughly 16.7 times 2018 earnings estimates.  That’s not high by historical standards. In fact, that is lower than the 30 year average of 19.4. 

More importantly, we have been expecting interest rates to go higher and have urged the Fed to raise rates more quickly.  Given the pace of economic growth, the Fed is a long way from being tight.  At the same time, economic data has been strengthening and earnings are booming.  With 337 S&P 500 companies having reported Q4 earnings as of the 8th of February, 76.9% have beaten estimates, and earnings are up 17.0% from a year ago. This double-digit earnings growth is forecast to continue through 2018, even with higher interest rates. Corporate balance sheets are stronger than they have been in decades, spending is accelerating and the recent tax cut is an unambiguous positive. 

Corrections scare the snot out of people.  For many, who thought markets only go up, they feel like the end of the world.  This is especially true when pundits start trying to explain the drop in stock prices by arguing that there are fundamental problems with the economy.  This time is no different.  But, in our opinion, this is an emotional correction, not a fundamental one.  The US is not entering a recession, and higher interest rates over the next few years do not spell doom for the economy or markets.  

In fact, because of better policy, economic growth this year looks set to accelerate to 3%+ (we are forecasting 4% real GDP growth in Q1). That is why interest rates are rising, because of better than expected economic growth.  This is a good thing!  Not a reason to sell stocks.  In this case higher interest rates are a byproduct of a stronger economy, not the unwinding of QE or higher deficits. 

Retail sales rose 0.4% in December, are up 9.0% annualized over the past six months and are up 5.5% year over year.  January’s ISM Manufacturing and Nonmanufacturing indexes just hit the highest readings for a January in seven and 14 years respectively.  In January, hourly earnings were up 2.9% from a year ago, the best reading since 2009. At the same time, initial claims have been below 300,000 for 153 consecutive weeks.  Private payrolls were up 196,000 in January, and the unemployment rate is down to 4.1% and headed lower.  And no, this is not a “part-time” recovery.  In the past twelve months, full-time employment has grown by 2.39 million jobs while part-time employment is down 92,000!  With 5.8 million unfilled jobs and quit rates at the highest levels of the recovery, there should be little question why the Fed continues to hike rates. 

We use a Capitalized Profits Model (the government’s measure of profits from the GDP reports divided by interest rates) to measure fair value for stocks. Our traditional measure, using a current 10-year Treasury yield of 2.85% suggests the S&P 500 is still massively undervalued. The model needs a 10-year yield of 3.9% today to conclude that the S&P 500 is already at fair value with current profits.  Fair value, not over-valued.  

What we focus on are the Four Pillars of Prosperity: Monetary Policy, Tax Policy, Trade Policy, and Spending & Regulation. So, let’s see where those stand: 

1. Monetary Policy – The Fed is still easy and will be for the foreseeable future. Remember, there are still over $2 trillion in excess reserves! 

2. Tax Policy – Tax policy has improved dramatically on the margin, a tailwind for growth and earnings. 

3. Trade Policy - The protectionist talk coming from Washington is worrisome, but, so far, there has been much more hot air than substance. In fact, total trade (exports + imports) sits at record highs.  

4. Spending & Regulation – This is a mixed, but still positive, bag.  On the regulation front, 2017 saw the biggest decline in regulation, at least since the Reagan-era, and possibly in history.  That’s great news for growth.  The spending side is still a concern.  The recent budget deal reached in the U.S. Senate boosts spending at least as fast as GDP growth over the next couple of years.  That’s not a recipe for long-term economic acceleration, but also not an immediate threat to growth. 

The bottom line shows that the fundamentals of the economy are strengthening.  Higher interest rates are a byproduct of a stronger economy. And, out of the four potential threats to the economy, only one is moderately negative. 

It's not often you get a substantial pullback in the market when both economic and earnings growth are strengthening.  Stay calm. Stay invested in equities.  Don't fight the fundamentals.  

This information was developed by first trust, an independent third party. The opinions of Brian S. Wesbury, Robert Stein and Stider Elass are independent from and not necessarily those of RJFS or Raymond James.

"Pullbacks, Indicators, Barometers, and Fear"

Jeffrey D. Saut, Chief Investment Strategist

So most know we took one of our South Florida speaking tours last week.  Such tours consist of meeting with portfolio managers, presentations to clients of Raymond James, branch visits with our financial advisors, doing the media thing, well you get the idea.  To all of those emailers/callers we were unable to respond to – apologies – but, the fact of the matter is we were doing five or six events a day, interspersed with a massive amount of phone calls, and then drive to the next event.  While there were many questions about the bond/stock/commodity markets, the economy, earnings, etc., by far the most questions were about the December Low Indicator, because we broke below the December low last week.  Recall, we brought this indicator to the attention of Jeff and Yale Hirsch decades ago and they have published it in The Stock Trader’s Almanac ever since.  Since then it has been quoted by many Wall Street pundits, yet Lucien Hooper’s December Low Indicator would likely have been lost if not scribed by us a long, long time ago.  We like this story:
It was back in the early 1970s, when I was working on Wall Street that I encountered Lucien.  At that time Lucien, then in his 70s, was considered one of the savviest “players” in this business.  While known for many market axioms and insights, the one that stuck with me was Lucien’s “December Low Indicator.”  It seems like only yesterday we were sitting at Harry’s at the Amex Bar & Grill having lunch when he explained it.  “Jeff,” he began, “Forget all the noise you hear about the January barometer; pay much more attention to the December low.  That would be the lowest closing price for the Dow Jones during the month of December.  If that low is violated during the first quarter of the New Year, watch out!”
Now the track record of Lucien’s indicator over the past 50 years is pretty good, especially when taken in concert with the January Barometer (“So goes the month of January so goes the year”).  In the more recent history, however, Andrew Adam’s comments of last Friday are worth repeating.  To wit:
One potential red flag, however, is that that the Dow Jones Industrial Average did close below its December closing low of 24410 to give us violation of the "December Low Indicator" we referenced last month.  . . . The last time it happened was only two years ago back in 2016, though the situation was very different considering January 2016 began almost right where the December 2015 low sat, and the Dow ended up closing beneath it on the third trading day of the year.  That, of course, culminated in the January/February correction that ended on February 11 and saw the Dow ultimately fall about 14% from its previous trading high of early November 2015.  After that, though, the market went almost straight up to finish the year comfortably higher.  Overall, the December Low Indicator has a rather mixed history going back to 2000.  It is actually not uncommon at all to get a violation, with 12 occurrences since 2000, and the forward returns have been surprisingly encouraging.  From the point of the December low being broken, the Dow was up after three months 8 out of 12 times, up after six months 7 out of 12 times, and up after 12 months 9 out of 12 times.  So, while it does bear watching, we don't think the indicator, by itself, is enough to be overly concerned about, especially with stocks already near downside extremes.
Speaking to “downside extremes,” the envisioned February Flop came three sessions before our February 1 target, but it was within the +/- three-session window our models allow.  Subsequently, we got the anticipated selling climax last Tuesday, as related on CNBC that day.  Then, as is the typical pattern, the indices experienced a sharp throwback rally that we chatted about on that same CNBC appearance and said that it should fail, with the indices sliding to lower lows.  “The textbook chart pattern,” we said, “would be for an undercut low of Tuesday’s selling climax low.”  Well, that’s pretty much what has happened. What we find interesting is that pundits that NEVER saw this decline coming have been rushing out over the past few weeks touting various support levels; you pick the index, as well as their various stock buy ideas, all of which are pretty worthless until the equity markets exhaust themselves on the downside.  Ladies and gentlemen, when the stock market gets into one of the selling stampedes, all such comments are pretty useless!  So what now?
Well, while normally our mantra of “never on a Friday” should have applied to last Friday’s Flop, meaning stocks in a selling skein rarely bottom on a Friday, that mantra probably doesn’t play this time.  Indeed, the bottoming process we laid out weeks ago was almost textbook, punctuated by last Friday’s undercut low.  As written:

What should happen here is a selling climax low today followed by a throwback rally that fails, leading to a retest of the recent intraday lows.  The perfect chart pattern would be for a marginal undercut low downside test of this early week's trading lows, which would turn EVERYBODY bearish looking for another huge leg to the downside, yet we would BUY it, believing the worst has been seen in a continuing secular bull market.
And then there was this over the weekend from Canada’s savviest oracle ever, our pal Leon Tuey:
What a tumultuous week!  Don’t sweat and be happy as the correction is over and the great bull market has resumed.  On Tuesday, what investors saw was a classic selling climax, which comes at the end of a selling squall.  A selling climax is an emotional catharsis when investors “throw the baby out with the bathwater.”  Besieged by fear, investors are willing to sell at any price.  They fear that their holdings will go to zero.  Consequently, stocks move from weak hands into strong hands.  How fearful?  On Monday, my phone rang off the hook and it didn’t stop ringing until 9:30 p.m.  Most of the callers were  practitioners in the business, retired or active, and they came from Europe, Asia, and local.  That was the most phone calls that I’ve fielded in one day for more than 35 years!  They were all very calm and collected.  I am flattered that they called, but the calls were instructive.  Globally, investors panicked, which is very bullish.  Remember what Warren Buffett advised: “Be fearful when others are greedy and be greedy when others are fearful!” 
The call for this week: Well, it’s Saturday and we are still on the road.  Since we are writing this from Orlando, a fitting title for the last few weeks would be “Mr. Toad’s Wild Ride” (Toad); but we digress.  Speaking to yet another ubiquitous question from last week was, “Did we get a Dow Theory sell signal?”  The answer, at least by our interpretation of Dow Theory, is a resounding NO!  So, as stated, the bottoming process was picture perfect.  We called the downturn, last Tuesday’s selling climax, the subsequent failed throwback rally, and Friday’s undercut low (the print low below last Tuesday’s selling climax low).  Indeed, “picture perfect!”  Our energy models are calling for an upside energy whoosh this week, so we think the selling stampede is over!  

To see graph and read more please follow the link below:

https://raymondjames.bluematrix.com/sellside/EmailDocViewer?encrypt=f44853a4-3c56-4acf-a917-93aef2edefea&mime=pdf&co=RaymondJames&id=Matt.Goodrich@RaymondJames.com&source=mail

The Impact of the Tax Act on You

Greetings,

Here is an article with some important information we’d like to share with you regarding tax cuts and jobs and how it may impact you in 2018.

On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act, a sweeping $1.5 trillion tax-cut package that fundamentally changes the individual and business tax landscape. While many of the provisions in the new legislation are permanent, others (including most of the tax cuts that apply to individuals) will expire in eight years. Some of the major changes included in the legislation that affect individuals are summarized below; unless otherwise noted, the provisions are effective for tax years 2018 through 2025.

Individual income tax rates
The legislation replaces most of the seven current marginal income tax brackets (10%, 15%, 25%, 28%, 33%, 35%, and 39.6%) with corresponding lower rates: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The legislation also establishes new marginal income tax brackets for estates and trusts, and replaces existing "kiddie tax" provisions (under which a child's unearned income is taxed at his or her parents' tax rate) by effectively taxing a child's unearned income using the estate and trust rates.

Single

If taxable income is:                                               Then income tax equals:

Not over $9,525                                                                                                    10% of the taxable income

Over $9,525 but not over $38,700                                      $952.50 plus 12% of the excess over $9,525

Over $38,700 but not over $82,500                                   $4,453.50 plus 22% of the excess over $38,700

Over $82,500 but not over $157,500                                 $14,089.50 plus 24% of the excess over $82,500

Over $157,500 but not Over $200,000                              $32,089.50 plus 32% of the excess over $157,500

Over $200,000 but not over $500,000                             $45,689.50 plus 35% of the excess over $200,000

Over $500,000                                                                    $150,689.50 plus 37% of the excess over $500,000

Head of Household

If taxable income is:                                               Then income tax equals:

Not over $13,600                                                                     10% of the taxable income

Over $13,600 but not over $51,800                                      $1,360 plus 12% of the excess over $13,600

Over $51,800 but not over $82,500                                   $5,944 plus 22% of the excess over $51,800

Over $82,500 but not over $157,500                                 $12,698 plus 24% of the excess over 82,500

Over $157,500 but not over $200,000                              $30,698 plus 32% of the excess over 157,500

Over $200,00  but not over $500,000                              $44,298 plus 35% of the excess over 200,000

Over $500,000                                                                    $149,298 plus 37% of the excess over $500,000

Married Individuals Filing Joint Returns

If taxable income is:                                                              Then income tax equals:

Not over $19,050                                                                                     10% of the taxable income

Over $19,050 but not over $77,400                                                       $1,905 plus 12% of the excess over $19,050

Over $77,400 but not over $165,000                                                     $8,907 plus 22% of the excess over $77,400

Over $165,000 but not over $315,000                                                   $28,179 plus 24% of the excess over $165,000  

Over $315,000 but not over $400,000                                                 $64,179 plus 32% of the excess over $315,000

 Over $400,000 but not over $600,000                                               $91,379 plus 35% of the excess over $400,000

Over $600,000                                                                                       $161,379 plus 37% of the excess over $600,000

Married Individuals Filing Separate Returns

 If taxable income is:                                              Then income tax equals:

Not over $9,525                                                                     10% of the taxable income

Over $9,525 but not over $38,700                                    $952.50 plus 12% of the excess over $9,525

Over $38,700 but not over $82,500                                $4,453.50 plus 22% of the excess over $38,700

Over $82,500 but not over $157,500                              $14,089.50 plus 24% of the excess over $82,500

Over $157,500 but not over $200,000                           $32,089.50 plus 32% of the excess over $157,500

Over $200,000 but not over $300,00                            $45,689.50 plus 35% of the excess over 200,000

Over $300,000                                                                 $80,689.50 plus 37% of the excess over $300,000

Standard deduction and personal exemptions
The legislation roughly doubles existing standard deduction amounts, but repeals the deduction for personal exemptions. Additional standard deduction amounts allowed for the elderly and the blind are not affected by the legislation and will remain available for those who qualify. Higher standard deduction amounts will generally mean that fewer taxpayers will itemize deductions going forward.

2018 Standard Deduction Amounts
Filing Status                                              Before Tax Cuts and Jobs Act                                             After Tax Cuts and Jobs Act

Single or Married Filing Separately                         $65,000                                                                                       $12,000

Head of Household                                                   $9,550                                                                                         $18,000

Married Filing Jointly                                                $13,000                                                                                         $24,000

Itemized deductions
The overall limit on itemized deductions that applied to higher-income taxpayers (commonly known as the "Pease limitation") is repealed, and the following changes are made to individual deductions:

 • State and local taxes — Individuals are only able to claim an itemized deduction of up to $10,000 ($5,000 if married filing a separate return) for state and local property taxes and state and local income taxes (or sales taxes in lieu of income).

• Home mortgage interest deduction — Individuals can deduct mortgage interest on no more than $750,000 ($375,000 for married individuals filing separately) of qualifying mortgage debt. For mortgage debt incurred prior to December 16, 2017, the prior $1 million limit will continue to apply. No deduction is allowed for interest on home equity indebtedness.

• Medical expenses — The adjusted gross income (AGI) threshold for deducting unreimbursed medical expenses is retroactively reduced from 10% to 7.5% for tax years 2017 and 2018, after which it returns to 10%. The 7.5% AGI threshold applies for purposes of calculating the alternative minimum tax (AMT) for the two years as well.

 • Charitable contributions — The top adjusted gross income (AGI) limitation percentage that applies to deducting certain cash gifts is increased from 50% to 60%.

• Casualty and theft losses — The deduction for personal casualty and theft losses is eliminated, except for casualty losses suffered in a federal disaster area.

• Miscellaneous itemized deductions — Miscellaneous itemized deductions that would be subject to the 2% AGI threshold, including tax-preparation expenses and unreimbursed employee business expenses, are no longer deductible.

Child tax credit
The child tax credit is doubled from $1,000 to $2,000 for each qualifying child under the age of 17. The maximum amount of the credit that may be refunded is $1,400 per qualifying child, and the earned income threshold for refundability falls from $3,000 to $2,500 (allowing those with lower earned incomes to receive more of the refundable credit). The income level at which the credit begins to phase out is significantly increased to $400,000 for married couples filing jointly and $200,000 for all other filers. The credit will not be allowed unless a Social Security number is provided for each qualifying child.

 A new $500 nonrefundable credit is available for qualifying dependents who are not qualifying children under age 17.

Alternative minimum tax (AMT)
The AMT is essentially a separate, parallel federal income tax system with its own rates and rules — for example, the AMT effectively disallows a number of itemized deductions, as well as the standard deduction. The legislation significantly narrows the application of the AMT by increasing AMT exemption amounts and dramatically increasing the income threshold at which the exemptions begin to phase out.

2018 AMT Exemption Amounts
Filing Status                                             Before Tax Cuts and Jobs Act                                           After Tax Cuts and Jobs Act

Single or Head of Household                                 $55,400                                                                                  $70,300                     

Married Filing Jointly                                               $86,200                                                                                 $109,400

Married Filing Separately                                       $43,100                                                                                    $54,700

2018 AMT Exemption Phaseout Thresholds
Filing Status                                             Before Tax Cuts and Jobs Act                                            After Tax Cuts and Jobs Act

Single or Head of Household                                $123,100                                                                                  $500,000

 Married Filing Jointly                                            $164,100                                                                                  $1,000,000

 Married Filing Separately                                      $82,050                                                                                 $500,000

Other noteworthy changes

• The Affordable Care Act individual responsibility payment (the penalty for failing to have adequate health insurance coverage) is permanently repealed starting in 2019 

. • Application of the federal estate and gift tax is narrowed by doubling the estate and gift tax exemption amount to about $11.2 million in 2018, with inflation adjustments in following years.  

• In a permanent change that starts in 2018, Roth conversions cannot be reversed by

recharacterizing the conversion as a traditional IRA contribution by the return due date. 

• For divorce or separation agreements executed after December 31, 2018 (or modified after that date to specifically apply this provision), alimony and separate maintenance payments are not deductible by the paying spouse, and are not included in the income of the recipient. This is also a permanent change.

This information was developed by Broadridge, an independent third party. It is general in nature, is not a complete statement of all information necessary for making an investment decision, and is not a recommendation or a solicitation to buy or sell any security. Investments and strategies mentioned may not be suitable for all investors. Past performance may not be indicative of future results. Raymond James & Associates, Inc. member New York Stock Exchange/SIPC does not provide advice on tax, legal or mortgage issues. These matters should be discussed with an appropriate professional.

Done Deal: Tax Bill Takes Effect

Ed Mills, Washington Policy Analyst, breaks down the major components of the new tax legislation.

January 11, 2018

The tax bill lowering the corporate tax rate and making a number of adjustments to the individual tax code was signed into law on December 22, 2017. The final tax bill sets a corporate tax rate of 21% starting January 1, 2018, and makes a number of changes to individual tax rates (including lowering the top individual to 37%). Key changes on the individual side include doubling the standard deduction ($12,000 for individuals and $24,000 for joint filers) but the bill reduces and/or removes many existing deductions. On the corporate side of the bill, businesses will have the benefit of 100% depreciation of qualified capital expenditures for the next five years, repeal of the corporate AMT, and a shift towards a territorial tax system (from a worldwide tax system). The bill also repeals the individual mandate of the Affordable Care Act (ACA). In this report, we review the changes to the corporate and individual tax code and cover next steps on tax legislation in 2018.

Individual Changes

Seven tax brackets are retained, but the bill provides tax relief by changing the income thresholds and tax rate for most taxpayers. The bill also lowers the top rate to 37% (starting at $600,000 for joint filers). The standard deduction is doubled to $12,000 for individuals and $24,000 for joint filers. Personal exemptions are eliminated, and SALT deductions are capped at $10,000. Mortgage interest deductions are capped interest on loans below $750,000, but grandfathers existing loans at $1 million. The individual AMT is retained, but narrowed with a raised phase-out threshold at $1 million.

Corporate Changes

Lowering the corporate tax rate to 21% and moving to territorial taxation are the key parts of the corporate tax changes. The corporate alternative minimum tax (AMT) is eliminated. Repatriated earnings will be subject to a 15.5% tax on liquid assets and 8% on other earnings and profits with an eight-year repayment window. Net interest deduction is limited to 30% of adjusted taxable income, and net operating loss deductions are capped at 80% of taxable income. Capital expenditures see full depreciation and are 100% deductible for five years. For small businesses, the capital investment deduction limit under Section 179 is increased from $500,000 to $1 million.

Next Steps

Guidance and interpretations are expected from the IRS over the course of the year. House Ways and Means Committee Chairman Kevin Brady (R-TX) anticipates work will continue on tax legislation with corrections to streamline and clarify provisions in the final bill expected this year. Congressional Republicans may attempt to work with Democrats on fixes that require 60 votes to pass the Senate, but have also signaled that the budget reconciliation measure used to pass tax reform with a 51 majority vote may be used again on issues where bipartisan compromise cannot be reached. This will usher in a new round of debates about which provisions could see further revision (including a potential SALT fix).

See below the changes to the corporate and individual tax code in the final tax bill.

Raymond James financial advisors do not render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional.

Themes to Watch in 2018

Review key themes that are likely to occupy headlines and conversations in the coming year.

January 3, 2018

The following key themes are likely to occupy headlines and conversations in the coming year.

International Investing

Change always matters in financial markets, and the simple question for international investors in 2018 is, "How much faith do you have in countries and companies outside the U.S.?" The good news is that valuations are generally lower and, in many cases, corporate earnings levels are growing more quickly than in the U.S. The missing ingredient is a belief that Brexit compromises between the U.K. and the European Union can be reached, and reform initiatives to boost economies in Asia and Europe have credibility, political drive and support.

The signs heading into 2018 on this front are positive, building on progress made in 2017. Such progress includes the well-received National People’s Congress in China as well as Macron’s election victory and actions thus far in France. Still, much work needs to be done. If further progress is made, a likely impact would be a stronger British pound, euro and Japanese yen relative to the U.S. dollar, enhancing the potential diversification benefits for U.S. investors.

Economic Growth

There has been much hand-wringing about the moderate pace of U.S. economic growth in recent years. However, we’ve seen a similar moderation in global economic growth, driven largely by the same factors as in the U.S. – that is, demographic constraints on labor force growth and a lackluster pace of productivity growth, likely related in part to slower capital investment. The demographic constraints are still there, but productivity growth appears to be picking up around the world. Brexit will be messy, Chinese debt levels are a concern and geopolitical tensions could be a problem, but the global economic outlook for 2018 is brighter. How central banks respond will dictate what happens in 2019 and beyond.

Geopolitics

It’s hard not to conclude that the key geopolitical relationship is between the United States and China ("G2"). The latter continues to spread its wings. This is best shown by its expansive "Belt and Road" initiative, which aims to link Europe and China in a giant economic region, as well as a continuation of its large trade surplus with the United States. The ‘free versus fair trade’ debate continues to rumble on, but, given the proclivity of both Chinese and Japanese investors to buy Treasury bonds, pushing too hard may have more significant consequences. A plausible compromise may be found via a lower dollar, which would take the competitive edge off of the surplus countries and reduce the need to aggressively renegotiate other trade deals (such as NAFTA), potentially benefiting global economic and market confidence. With Europe looking inward and the Middle East/Russia more focused on keeping oil prices firm, North Korea becomes the remaining significant geopolitical issue for 2018. Considerable Chinese economic influence on the ‘Hermit Kingdom’ adds another dimension to G2 interactions.

Central Bank Policy

Current Federal Reserve Governor Jerome "Jay" Powell is set to be sworn in as Fed chair on February 3, and President Trump is expected to fill a number of vacancies on the Fed’s Board of Governors. The change in leadership is expected to be smooth. The focus for monetary policy should not change. The unwinding of the Fed’s balance sheet has been mapped out, and officials will stick to that plan.

However, the outlook for short-term interest rates gets cloudier beyond the middle of 2018. How will officials respond to a tighter labor market and a strong economy? The Fed’s monetary policy has long been the focus for financial market participants, but regulatory policy will be placed front and center. Outside of the U.S., global investors will look to central banks to tighten policy at some point, which ought to have some impact on the dollar and on long-term interest rates here and abroad.

The Modern Investor

The investment industry is constantly evolving as technological advancements create potentially faster, cheaper and more accessible methods to participate in the global financial markets. The near instantaneous transmission of information has created new trading patterns. Packaged products for individual investors have proliferated in a market that was previously dominated by institutions that traded far fewer investments. Handwritten stock orders have been replaced with high-frequency trading programs, and intricate retirement income solutions have largely supplanted individual bonds. These advancements have infused additional complexity into today’s markets. The modern investor is faced with more choices and information than ever before. Fortunately, financial planning applications have been developed to navigate this intricate investing environment and enhance professional advisement, enabling investors to more easily work toward their long-term financial objectives.

The Secular Bull Market

U.S. stocks remain in a multiyear, broad-based bull market that shares more similarities to the 20-year post-World War II and 1982 - 2000 periods than the lost decades of the 1970s or 2000s. Secular bull markets have, on average, lasted about 14 years and enjoyed annualized returns of around 16%. Moreover, just like no one begins to measure the 1982 - 2000 bull market from the absolute price low in the S&P 500 set in 1974, we believe this secular bull market began not at the low of March 2009, but when it broke out above the prior-2007 peak in 2013, meaning it remains relatively early in its cycle. Stocks will fall at times during secular bull markets but, historically, these have offered more favorable opportunities to buy rather than reasons to worry. The S&P 500 is up about 285% (on a cumulative basis) since the March 2009 bottom, but this pales in comparison to the 1400% gained during the 1982 - 2000 period.

To read more from Raymond James Quarterly strategy, please click on the link below:

https://www.raymondjames.com/branches/library/features/investment_strategy/investment_strategy.pdf

All expressions of opinion reflect the judgment of the Research Department of Raymond James & Associates, Inc. and are subject to change. Past performance is not an indication of future results and there is no assurance that any of the forecasts mentioned will occur. There is no assurance any investment strategy will be successful. Investing involves risk including the possible loss of capital. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets. The S&P 500 is an unmanaged index of 500 widely held stocks. Investors cannot invest in it directly. The performance noted does not include fees or charges, which would reduce an investor's returns.

Start the New Year with an Organized Outlook

Consider getting organized this winter season by decluttering and updating your financial plan.

December 26, 2017

Still trying to think of a New Year’s resolution? Consider organizing, decluttering and updating your financial plan. To start, going paperless, embracing online file sharing and organizing your tax documents from the beginning can help you avoid frantic filing. Review these market closure dates and timely tips to start the new year off on an organized note.

Winter 2017–2018 Market Closures

Monday, January 1: New Year’s Day
Monday, January 15: Martin Luther King Jr. Day
Monday, February 19: Presidents Day
Friday, March 30: Good Friday

Planning To-Do's

Get organized: Sign up to view your accounts online and go paperless to reduce clutter. Additionally, consider organizing your personal and financial documents by uploading them to a file sharing or content management platform.

Rev up your retirement: Confirm that employer retirement plan contributions take advantage of any available employer match. Maximize IRA contributions early in the year so they will have more time to generate tax-deferred gains; you have until mid-April to do so for the previous year. If you are 50 or older, ask your advisor about catch-up contributions.

Optimize health spending: If you participate in a flexible spending account (FSA) or health savings account (HSA), review your contribution levels to take full advantage based on your family’s needs – without exceeding applicable limits. If you have an FSA, utilize available funds before your plan’s use-it-or-lose-it deadline.

Face the future: Have major new expenses that must be planned for in advance? Conduct a cash flow and liquidity analysis for the coming year to garner essential information. Additionally, prioritize how you’ll apply available savings, perhaps by paying down high-interest debt, building or maintaining an emergency fund, or increasing retirement savings.

Bolster benefits: Research your company's open enrollment schedule and decide whether you need to make changes to your benefits.

Avoid frenzied filing: Keep your tax documents organized as they arrive so you’re prepared when it’s time to file. Talk to your advisor about coordinating with your tax professional to ensure everything is in order.

Download the complete checklist below and talk to your advisor to make sure you don't miss any important financial planning dates this winter season.

http://www.raymondjames.com/pointofview/resources/articles/a-plan-for-all-seasons-winter.pdf

The Capitals Long January To-Do List

According to Ed Mills, Washington Policy Analyst, this month boasts one of the longest lists of “must-pass” items on the congressional agenda in memory.

January 2, 2018

We enter January with one of the longest lists of “must-pass” items on the congressional agenda in memory. Government funding faces a January 19 deadline and the U.S. Treasury is using extraordinary measures while waiting for Congress to lift the debt ceiling. A disaster aid bill, potential fixes to the Affordable Care Act (ACA), a long-term solution to the Deferred Action for Childhood Arrivals (DACA) program, an extension for the Children’s Health Insurance Program (CHIP), an extension of a variety of expiring tax provisions, and a Senate vote on a bill to alter the Dodd-Frank Wall Street Reform Act are all up for debate in January.

Longer-term, President Trump and congressional Republicans would like to debate an infrastructure bill and entitlement reform in 2018. Funding the government and dealing with the debt limit both require a 60-vote threshold in the Senate, which will require votes from Senate Democrats. While congressional Democrats were willing to support a temporary government funding bill in December, they have signaled that they will not vote for another funding bill unless it includes a solution to a number of the agenda items listed above. Ultimately, we believe a deal is within reach, but do caution that this month is set to produce a series of negative macro headlines coming out of DC and a return of brinkmanship.

Government Funding

Government funding expires on January 19 and this is the debate to track. A funding bill will likely serve as the legislative vehicle for compromises reached on other agenda items. President Trump and congressional leaders are set to meet this week to start negotiations, but we expect a fight up to the deadline. All government funding bills require a simple majority vote in the House of Representatives, but face a 60-vote (out of 100) threshold in the Senate. Congress passed a series of short-term extensions at the end of the year to avoid some of the more politically difficult issues now facing congress out of concern it could have jeopardized the tax bill, and Democrats did not want to shut down the government right before Christmas. With the tax bill signed, this gives Congressional Republicans greater ability to cut a deal with Democrats. A final deal will likely see some of the more conservative House and Senate Republicans voting against the final bill, but the bill passing with the support of congressional Democrats. The most likely provisions to be attached to a final bill (in order of likelihood) include: the debt limit, CHIP, disaster relief, tax extenders, a DACA fix, and a potential ACA fix.

Debt Ceiling

Congress had previously waived the debt limit through December 8, 2017 and the Secretary of Treasury is now using extraordinary measures to prevent breaching the debt limit. These extraordinary measures have become more commonplace in recent years. Treasury has warned that these measures can be maintained until some point this month, but no hard deadline has yet been set. When congress voted on the debt limit in 2017, there was an agreement between President Trump and the leadership of Congressional Democrats to come up with a solution that would prevent the need for future increases in the debt limit. Raising the debt limit is also subject to the 60-vote threshold in the Senate and we fully believe a compromise will be reached to deal with the debt limit, but this represents a significant point of leverage congressional Democrats have in negotiations on other agenda items.

CHIP

The Children’s Healthcare Insurance Program (CHIP) has been funded through a series of short-term funding bills following the end of its full funding at the end of FY17. Providing longer-term funding for CHIP is a main priority for congressional Democrats in government funding negotiations. Funding for this program remains likely in any government funding bill.

Disaster Relief

Funding for rebuilding efforts in California, Florida, Texas, and Puerto Rico following a variety of natural disasters in 2017 remains a top congressional priority, but the final amount and details of the relief remain in flux. In late December, the House voted for an $81 billion disaster relief bill, but the Senate has yet to unveil its bill. The $81 billion House bill would set a record for a disaster relief bill in U.S. history, but the affected communities have raised concerns that the bill may not be enough to meet their rebuilding needs. A disaster relief bill could be voted on as a standalone bill, but in the interest of time it is a top contender to be added to the final government funding/debt ceiling bill as a way to garner votes from members representing disaster impacted areas. We will also be monitoring the bill for potential relief for Puerto Rico, especially if it is used to fix some of the concerns raised by the island in the recently passed tax bill.

Tax Extenders

Despite the passage of the tax bill, there is a list of tax provisions that have expired and that Chairman of the Senate Finance Committee, Orrin Hatch (R-UT), is seeking to extend. Senator Hatch released a tax extender bill in late December and among the provisions he is seeking to extend is the ability to deduct mortgage insurance, a variety of energy provisions, and several tax provisions important to Puerto Rico. House Ways and Means Committee Chairman, Kevin Brady (R-TX) has indicated he generally opposes the continuation of the tradition of a tax extenders package, but expect this to emerge as a bargaining chip in other negotiations.

DACA

A March 5 deadline looms for the Deferred Action for Childhood Arrivals (DACA) program and congressional Democrats, especially members of the Congressional Hispanic Caucus, have made a legislative fix for DACA a priority before supporting another government funding bill. Senator Jeff Flake (R-AZ) was also promised a vote on DACA in exchange for his support for the tax bill. This will likely be the most contentious fight surrounding the government funding/debt limit debate. President Trump has signaled he supports working to find compromise, but funding for a border wall with Mexico must be included in any deal – something congressional Democrats have stated is a non-starter. We believe a permanent solution on DACA is possible, but far from certain. The debate over DACA and the border wall will likely push these funding/debt limit fights to the deadline.

ACA Fix

With the repeal of the individual mandate for health insurance in the final tax reform package, Senator Susan Collins (R-ME) was promised a vote on legislation that restores payments to health insurers intended to subsidize premiums in the individual market. Among the provisions possible are a bi-partisan deal worked out by Senators Lamar Alexander (R-TN) and Patty Murray (DWA) restoring these insurance subsidies, and a bill from Senators Collins (R-ME) and Bill Nelson (D-FL) compensating health insurers for high-cost patients. These provisions enjoy broad support in the Senate, but are opposed by a number of House Republicans. A number of House Republicans have stated that inclusion of these provisions in a government funding bill would cause them to vote against any government funding bill. Inclusion in any final deal is possible, but these provisions currently rank low in terms of likelihood in a final bill.

Dodd-Frank Repeal?

Among the few items on the list that could see bi-partisan support in January is a bill in the Senate to make changes to the Dodd-Frank Wall Street Reform Act. This is far from a repeal, but this bill would provide meaningful regulatory relief for a number of community and regional banks. We expect that this bill can clear the Senate in late January, with a possible compromise reached with the house by the end of 1Q18.

Infrastructure and Entitlement Reform?

Beyond the rush to complete the January agenda, President Trump and congressional Republicans have been discussing a potential infrastructure bill and a debate on entitlement reform. There is some belief that infrastructure might be one of the few bi-partisan efforts that could be accomplished in 2018 and Speaker Paul Ryan has long wanted to tackle entitlement reform. We remain skeptical at this point on these efforts for a variety of reasons, but will be looking for how this month’s negotiations play out and will be updating our thoughts as warranted.

Key Dates and Deadlines

• January 3: Senate reconvenes
• January 6-7: Camp David retreat with President Trump and Congressional leaders
• January 8: House reconvenes
• January 19: Deadline for government funding agreement
• January TBD: Deadline to raise debt ceiling
• March 5: Deferred Action for Childhood Arrivals (DACA) expires
• March 31: Funding for Children's Health Insurance Program (CHIP) expires

Note that legislative and regulatory agendas are subject to change at the discretion of leadership or as dictated by events.

Source: Raymond James Research

All expressions of opinion reflect the judgment of the Research Department of Raymond James & Associates, Inc. and are subject to change. There is no assurance any of the trends mentioned will continue or that any of the forecasts mentioned will occur. Economic and market conditions are subject to change

What can I do to crack down on robocalls?

You may not mind if a legitimate robocall provides a helpful announcement from your child's school or an appointment reminder from a doctor's office. But sadly, criminals often use robocalls to collect consumers' personal information and/or conduct various scams. Newer "spoofing" technology displays fake numbers to make it look as though calls are local, rather than coming from overseas, which could trick more people into answering the phone.

Robocalls have been illegal since 2009 (unless the telemarketer has the consumer's prior consent). In mid-2017, federal agencies announced they are ramping up enforcement by fining violators and encouraging blocking technologies. What should you do if you want to help put an end to this nuisance?

1. Don't answer calls when you don't recognize the phone number. If you pick up an unwanted robocall, just hang up. Don't answer "yes" or "no" questions, provide personal information, or press a number to "opt out." Responding to the call in any way verifies that it has reached a real number and could prompt additional calls.
2. Look into robocall blocking solutions that may be offered by your phone service provider. If they're available, you may need to follow specific instructions to "opt in." Otherwise, consider a mobile app or cloud-based service designed to block robocalls; some of them are free or cost just a few dollars.
3. Consider registering your phone number on the National Do Not Call Registry. While taking this step can help mitigate the amount of robocalls you receive, it's only a partial solution to the problem. The Federal Trade Commission advises consumers whose numbers are on the registry but still receive unwanted calls to report robocall violations at complaints.donotcall.gov. The phone numbers provided by consumers will be released each day to companies that are working on call-blocking technologies, which largely depend on "blacklists" with numbers associated with multiple complaints.

IMPORTANT DISCLOSURES

Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual's personal circumstances.

To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable--we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

Copyright 2018 by Broadridge Investor Communication Solutions Inc.
All Rights Reserved.

Bitcoin and Other Cryptocurrencies May Shake up Boring Markets

Clients and friends - in light of the current news about BitCoin, we thought that we would re-post this article from October - Matt & Larry

October 24, 2017

Even beyond the dog days of summer, global capital markets have become boring

Investor complacency appears to have won the day—at least for the moment. The poster child for this unusual sense of calm has been the CBOE Volatility Index (VIX). The VIX, dubbed the fear gauge, as it measures implied expectations of U.S. market movements by tracking option prices, seems anchored near its all-time low. The message from the options market is that investors are content and not at all interested in buying downside protection.

Market participants have been so quiescent that even the threat of nuclear war with a rogue nation such as North Korea caused only a day’s disruption in the steady march to higher equity prices. During the past quarter, certain global equity markets merrily registered record highs. Meanwhile, inflation remained low, as prices across a variety of goods and services barely had the strength to lift themselves any higher. While there’s been some activity among industrial metals, with price increases for copper, zinc, and certain steel products, this has been offset by decade lows for most agricultural commodities, including corn, wheat, soy, cattle, and hogs. No matter how you measure it, inflation hasn’t risen enough to meet the Fed’s 2% target.

If global capital markets can’t get riled up about rising prospects for nuclear war, then we’ve entered a new regime—boring your way to wealth. Could it be that all the attention being paid by investors to their own lack of anxiety is actually an advanced form of nervousness? If so, then perhaps it represents an adequate level of risk awareness. Regardless, we’re not sure what it’ll take to nudge abnormally low VIX readings higher.

Bitcoin price bubble could shake things up

Bitcoin’s collapse could do the trick. Along with other so-called cryptocurrencies, bitcoin has been bid up to ever-higher levels this year. Cryptocurrencies are finding an eager audience among those wishing to convert government-backed notes into an untraceable, non-U.S. dollar medium of exchange. Apparently, a portion of the financial world has some faith in such new synthetic instruments; some market participants even treat bitcoin as a bona fide asset class. We love diversification and often embrace novel investment ideas—but remain unconvinced here.

Turning to more conventional currency markets, the U.S. dollar, a top consensus trade as recently as the fall of 2016, has turned into a relative loser versus most of its major counterparts this year. Such is the fickle nature of foreign exchange. The good news is that a lower U.S. dollar aids American exports and provides a greater degree of monetary easing throughout the global financial system. The weaker U.S. dollar should boost corporate profits, particularly among megacap multinationals that derive a substantial proportion of their revenues from sales outside of America.

Prospects for U.S. equity and high-yield debt have waned

Market multiples make horrible timing signals, but we know that buying expensive assets leads to disappointment more often than not. While the VIX has been abnormally low, history suggests it's only bound to stay low until it doesn’t. Don’t be surprised by a sudden U.S. equity market correction. At this mature stage of the cycle, the risk of a short-term, garden-variety drawdown remains elevated.

While U.S. equity valuations are indeed high, they’re not necessarily unreasonable relative to bonds. Amid an environment of anemic yields, we’ve long been maintaining light exposure to interest-rate risk while leaning into corporate credit, including allocations to lower-rated issues. At last, after a decade of singing the praises of U.S. high-yield debt, we believe it’s time to begin the process of reducing exposure. In late 2008, junk bonds were uniformly being discarded regardless of their coupons or discounts to par. The asset class was then a value vulture’s dream. Today, with option-adjusted spreads paying only a few percentage points over U.S. Treasuries, and with historical default and recovery rates that might wipe out most of that differential, the risks of holding junk bonds are starting to offset the potential rewards. Staying with our low anxiety theme, we anticipate ample liquidity and low default rates for at least the next couple of years, giving investors plenty of time to trim exposure to this asset class.

International equities—especially in emerging markets—show the most promise

The shrinking value of the U.S. dollar has also boosted the returns of international equities for U.S.-based investors. International developed-market equities are up double digits year to date. We’ve maintained a strong and vocal commitment to the benefits of global diversification, and after an extended period of U.S. equity market leadership, the recent shift in momentum adds a measure of validation to our view. Right now, we’re inclined to allocate the marginal investment dollar to markets outside of the United States. Europe continues to follow the U.S. path with a three- or four-year lag, suggesting more favorable market action across the Atlantic is still to come.

Leading the performance parade in 2017, emerging-market equity continues to be among our favorites. Having underperformed U.S. equity for a decade, it has plenty of relative runway to catch up. Strong earnings momentum and more modest valuations also bode well for stocks in emerging economies, especially within Asia. We believe India deserves special attention, as the country’s market reforms have been nothing short of extraordinary. The Indian government’s commitment to strategically simplify the process for starting a new business, combined with the demonetization initiative and the implementation of a goods and services tax, presents a generational change for this country—akin to the opening of China. Results won’t materialize overnight, but the opportunity set in India is vast.

When it comes to markets, remember that boring can be beautiful. It’s easy to forget investing’s basic principles: Remain calm and let the magnificent power of compounding continue. Stay globally diversified, and use these quiet times to read, reflect, and resist the impulse to trade just for trading’s sake. 

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Disclosure:

Views are those of Robert M. Boyda, co-head of global asset allocation, John Hancock Asset Management, and are subject to change. No forecasts are guaranteed. This commentary is provided for informational purposes only and is not an endorsement of any security, mutual fund, sector, or index.

Past performance does not guarantee future results.

Diversification does not guarantee a profit or eliminate the risk of a loss.

Investing involves risks, including the potential loss of principal. The stock prices of midsize and small companies can change more frequently and dramatically than those of large companies. Growth stocks may be more susceptible to earnings disappointments, and value stocks may decline in price. Large company stocks could fall out of favor, and foreign investing, especially in emerging markets, has additional risks, such as currency and market volatility and political and social instability. Fixed-income investments are subject to interest-rate and credit risk; their value will normally decline as interest rates rise or if an issuer is unable or unwilling to make principal or interest payments. Investments in higher-yielding, lower-rated securities include a higher risk of default. Precious metal and commodity investments can be volatile and are affected by speculation, supply-and-demand dynamics, geopolitical stability, and other factors.

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