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It's a difficult topic to think about, but 1 in 3 seniors may experience some type of dementia. Melissa Acayan, compliance counsel for Senior & At-Risk Clients discusses how to plan for wealth and well-being in the event of a loss of capacity. For more information view the link below:
https://go.rjf.com/2GSPiHM .
Medicare open enrollment begins in October. This time presents the opportunity to make sure you are getting the most from Medicare. Here are some things to consider when reviewing your plan: https://go.rjf.com/2YMsqA7 .
Click to read the latest Investment Strategy Commentary from Raymond James Chief Investment Officer Larry Adam. https://go.rjf.com/2GXuSOa .
August 9, 2019
Next week, the economic calendar picks up again. The Consumer Price Index is expected to get a small boost from higher gasoline prices, which normally fall in July. Ex-food and energy, inflation should remain moderate (note that year-over-year inflation in the core CPI is trending about 0.4 percentage points higher than the PCE Price Index, which is the Fed’s chief inflation gauge). Retail sales are likely to be mixed in July, following strong results in recent months. Industrial production is expected to remain weak. Lower mortgage rates have failed to fuel a significant pickup in residential construction activity.
For more information view the link below:
https://www.raymondjames.com/newsletters/weekly_market_snapshot/nocontact.asp?id=f0000
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 7/31/2019
The Fed cut short-term interest rates by 25 basis points today, moving the range for the federal funds rate down to 2.00 - 2.25%. It also announced it will stop reducing its balance sheet in August, two months earlier than previously planned.
It made these moves despite better-than-expected economic data since the last meeting in June, as well as Chairman Powell's assessment at the press conference that our economic performance is "reasonably good" and the outlook is "good," as well. The Federal Reserve still claims it's "data dependent," but no one should believe it.
We don't think today's rate cut was needed, and would prefer that they continue to shrink the balance sheet. Nominal GDP is up 4.0% in the past year, and is up at a 5.0% annual rate in the past two years. Both figures stand well above the Federal Reserve's target for short-term rates. On policy, we agree with Esther George and Eric Rosengren, bank presidents for Kansas City and Boston, respectively, who dissented stating they preferred no change in rates at today's meeting.
We think cutting rates by 25 basis points was the worst possible policy outcome. If the Fed was determined to cut rates, it should have committed further – by 50 basis points or more – to tell businesses and consumers considering big-ticket purchases the Fed is planning for one-and-done. By cutting rates only 25 basis points and leaving alive expectations of further gradual cuts at coming meetings – drip, drip, drip – the Fed has created an incentive to postpone economic activity. Powell said the Fed wasn't committed to a series of rate cuts, but didn't give markets a reason to believe it. After all, at the June meeting the median interest rate projection from the Fed was for rates to remain unchanged through year-end.
The Fed's statement justified the rate cut based on "global developments" and "muted inflation." At the press conference, Powell referred to the European Union and China as points of global concern. But US monetary policy is not the tool to address these problems. Powell also suggested the Fed is concerned with a "downward slide" into lower inflation expectations. It is true that the Fed's favorite inflation measure, the PCE deflator, is up only 1.4% from a year ago. However, it's up at a 2.2% annual rate in the past three months. This is not an environment where deflation seems like much of a risk.
Putting aside whether the Fed is doing the right thing, we think the Fed is likely to reduce rates by another 25 basis points in September. In for a penny, in for a pound. The current environment remains bullish for equities, which were cheap even without rate cuts. In the meantime, holders of long-term bonds will eventually come to regret policies that mean a faster pace of inflation over the long run.
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 7/29/2019
A cottage industry has sprung up in the past decade with the sole focus of discrediting any good news on the economy. When President Obama was in office, the attacks mostly came from the right. With President Trump in Office, the attacks mostly come from the left. Since March 2009, regardless of who was in office, we have stridently argued that this recovery has legs. The result? We have been attacked from both sides of the political aisle.
The latest debate is over real (inflation-adjusted) GDP, which grew at a better than expected 2.1% annual rate in Q2. Some say it showed soft spots from the trade war and weak business investment.
It's true that net exports (exports minus imports) trimmed the Q2 real GDP growth rate by 0.65 percentage points. But that follows the Q1 boost to growth of 0.73 points. In the past year, trade has subtracted an average of 0.58 points each quarter. For comparison, we saw larger drags from net exports in 2010, 2014, and 2015, all years without "trade wars." Our conclusion: this is statistical noise.
That leaves real business fixed investment, which declined at a 0.6% annual rate in Q2, the first drop since 2016. Many have taken this as proof that tax cuts and deregulation didn't work.
But the Q2 decline was almost entirely due to a drop in brick and mortar investment (what economists call "structures"). In the age of the Internet, software and computers are replacing brick and mortar. We buy airline tickets online, not in an office. Blockbuster was replaced by Netflix. You don't need to leave the comfort of your home, the stores come to you. As a result, investment in structures has slowed in recent years while investments in technology and equipment have continued to rise. Strip out structures, and real fixed investment rose at a 1.9% annual rate in Q2 2019.
More importantly, business investment ex-structures has clearly picked up under the Trump Administration compared to Obama's second term.
Why only use the final four years of the Obama Presidency? Because the first four years were driven by a V-shaped recovery from the Panic of 2008. His second term illustrates the impact of tax hikes and more business regulation.
Real business investment, excluding structures, grew at a 3.8% annualized rate between Q4 2012 and Q4 2016, but accelerated to a 5.9% annualized rate since Trump took office. Real Investment in software and R&D grew at a 5.5% annualized rate in the final four years of the Obama Administration versus 7.5% since the start of 2017. Tax cuts and deregulation have indeed boosted "animal spirits."
In addition, Core GDP – combining personal consumption, business investment, and home building – grew at a very solid 3.2% annual rate in Q2. Meanwhile, profit reports are widely beating expectations. The economy is much stronger than conventional wisdom thinks and has been since 2009.
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 7/22/2019
This Friday, the government will release its initial estimate of real GDP growth in the second quarter, and the headline is likely to look soft. At present, we're projecting an initial report of growth at a 1.8% annual rate.
If our projection holds true, we're sure pessimistic analysts and investors will latch onto the slowdown from the 3.1% growth rate for the first quarter, implying that we're back to slower Plow Horse growth for good. They will argue nothing has substantially changed since Trump took office, despite tax cuts and deregulation.
It's true that an annualized growth rate of 1.8% would be the slowest pace since the first quarter of 2017. But, as we will explain below, growth in the second quarter was likely held down temporarily by businesses returning to a more sustainable pace of inventory accumulation following the rapid pace of inventory building in the second half of 2018 and first quarter of this year. Excluding inventories – focusing on what economists call final sales – we estimate that real GDP grew at a 3.1% annual rate in Q2.
We also like to follow what we call "core GDP," which is real growth in personal consumption, business investment, and home building, combined. Core GDP looks like it grew at a 4.1% annual rate in the second quarter, the fastest pace in a year. In other words, while the economy may not be booming like the mid-1980s or late-1990s, the underlying trend remains quite healthy, and certainly much better than the Plow Horse period from mid-2009 through early 2017.
Here's how we get to our 1.8% real growth forecast for Q2:
Consumption: Automakers say car and light truck sales grew at a 2.8% annual rate in Q2 while "real" (inflation-adjusted) retail sales outside the auto sector grew at a 3.9% rate. Combined with some less up-to-date figures on consumer spending on services, real personal consumption (goods and services combined) looks to have grown at a 4.0% annual rate, contributing 2.7 points to the real GDP growth rate (4.0 times the consumption share of GDP, which is 68%, equals 2.7).
Business Investment: Reports on durable goods shipments and construction suggest all three components of business investment – equipment, commercial construction, and intellectual property – rose in the first quarter. A combined growth rate of 5.1% adds 0.7 points to real GDP growth. (5.1 times the 14% business investment share of GDP equals 0.7).
Home Building: After five straight quarters of contraction, it looks like home building – a combination of new housing as well as improvements – increased at a 2.6% annual rate in Q2. Expect more gains in the quarters ahead as home builders are still constructing too few homes given population growth and the scrappage of older homes. In the meantime, a 2.6% pace translates into a boost of 0.1 point to real GDP growth. (2.6 times the 4% residential construction share of GDP equals 0.1).
Government: Looks like a relatively large 2.3% increase in real public-sector purchases in Q2, which would add 0.4 points to the real GDP growth rate. (2.3 times the government purchase share of GDP, which is 17%, equals 0.4).
Trade: Net exports' effect on GDP has been very volatile in the past year, probably because of companies front-running - and then living with - tariffs and (hopefully) temporary trade barriers. Net exports added 0.9 points to the GDP growth rate in Q1, but should subtract an almost equal 0.8 points in Q2.
Inventories: Inventories are a potential wild-card, because we are still waiting on data on what businesses did with their shelves and showrooms in June. We get a report on inventories on Thursday, the day before the GDP report arrives, which may change our final GDP forecast. In the meantime, it looks like the pace of inventory accumulation got back to more normal levels in Q2, which should temporarily subtract 1.3 points from real GDP growth.
Add it all up, and we get 1.8% annualized real GDP growth. Don't let this tepid headline number spoil your day; the trend remains strong where it matters most, and prospects are bright for the US economy.
June 27, 2019
The beaches are filling up and the days are getting longer, giving you space to take a breath, reflect on your progress and set new goals. You’ll also want to take stock of any recent life changes that may affect your estate plan, benefits and insurance and adjust as needed.
Thursday, July 4: Independence Day
Monday, September 2: Labor Day
Friday, August 2: Observe Information Security Day – update your passwords for all online accounts to keep your personal information secure.
Conduct a midyear checkup: Look back on your to-do list progress, make sure your retirement plan is on track, determine if your emergency fund is adequate, and establish a regular savings plan you can stick to each month.
Register with SSA.gov: Check your earnings history for accuracy and review your expected benefits. If you’re close to retirement age, discuss with your advisor when and how you should file to maximize your benefits.
Update your estate plan: Check the beneficiaries of your IRAs, insurance policies, trusts and any other accounts, and update information that is no longer relevant. Ensure your plan protects you and your family in the case of an unexpected event.
Assess insurance needs: Periodically review and update coverage to help ensure proper protection.
Adjust as life changes: Speak with your advisor about major life changes you’ve experienced and how your financial plan could be affected. These changes include marriages, births, deaths, divorces, a sudden windfall and more.
Plan a family meeting: Use the opportunity to talk about “big” things, like your philanthropic legacy, as well as simpler things – like the menu for the next holiday dinner.
Never stop learning: Websites like EdX and Coursera offer free online classes in a range of topics.
Talk with your advisor to help ensure you don't miss any important financial planning dates this summer.
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Estate planning is more than just sharing wealth – it also includes the passing down of your family’s values and history to the next generation. And while selecting the right financial strategies is crucial to ensure your family’s long-term well-being, it’s just as important to prepare your loved ones for the responsibilities of managing the wealth they’re set to inherit.
One of the best ways to start this preparation is by hosting a family meeting to have an open conversation about your family’s unique situation, needs and goals. Here’s a guide to get you started
Read moreThe narrative that the U.S. economy is in trouble – some say teetering on the edge of recession - has become so powerful and persuasive that few investors give it a second thought. So of course, they believe, the Fed should cut interest rates. We haven’t seen anything like it since the Fed was hiking rates in the deflationary late- ‘90s. Those rate hikes, which were totally unwarranted, ended up causing a recession.
Read moreThere are moments in your clients’ lives when they realize money can indeed buy happiness. It’s the joy they feel when they get the unexpected bonus at work. Or the cash in their hands when they sell a car. Or the pleasure when a stock they took a risk on quickly doubles or triples in value. Money delivers a rush. The way they feel at those times is a physiological response to money. That’s because when they think about money, it can exert a neurological effect on their brains so seductive that it literally matches what happens to their bodies when they think about love or sex—some of their most primal of urges. It’s no wonder, then, that research from behavioral economists and neuroscientists confirms it can be difficult to remain rational when it comes to investing behavior. Clients are seeking that rush, time and time again.My field of study, physiology, sheds fascinating light on how the body deals with these seductive effects. Let’s investigate why evolution hard wires clients to react emotionally rather than rationally when it comes to money, and how they, as investors, can tame their inner beast and resist the allure of quick profits from the next cryptocurrency.
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When volatility hits, keep a cool head and consider taking advantage of potential opportunities.
May 30, 2019
Periods of market volatility can trigger emotional responses in investors. When the markets are as reactive as we’ve seen lately, it can be natural to feel some apprehension, but that’s why you and your advisor have spent time developing a tailored financial plan – so that these dips, dives, rallies and recoveries can be accounted for, all while still making strides toward your long-term financial goals.
In times of uncertainty, the key is to remain focused on those goals. Certainly, how you feel about a hypothetical 10% drop could change if that drop becomes a reality. But as you prepare for market volatility or correction, trust in the planning process and review your priorities and portfolio with your advisor.
Part of the strategy, although it may seem counterintuitive, is to pay less attention to the markets and more to yourself and your financial goals. If we’re honest, we know that it’s our emotional reactions to what the markets are doing that often cause us the most trouble. For example, stock investors who simply stayed invested between 2007 and 2013 almost certainly did better than those who tried to time a very volatile market. While it’s difficult in an ultra-connected age, your investment decisions should be based on your long-term goals, not what’s happening in the markets this week or next.
Now is a good time to review your individual holdings – stocks, bonds, mutual funds, ETFs – to determine if they’re still right for you. Discuss with your advisor why you bought each security in the first place and if that reason still applies. Evaluate your portfolio as a whole to determine if you are sufficiently diversified – not just in terms of stocks versus bonds but also in terms of large- versus small-cap stocks, long- versus short-term bonds, and domestic versus overseas holdings. With your advisor, consider the current environment, where volatility is likely to continue and interest rates are likely to rise over the next few years. Think about your overall time horizon, and what you expect to happen in your personal life in the near term.
A key part of paying attention to your goals also means understanding your comfort level with movements in the market. Knowing your risk tolerance – your long-term tolerance, not how you feel when the market is soaring or skidding – can provide important perspective for creating an individual asset allocation model that’s designed to help see you through the markets’ inevitable ups and downs.
Your asset allocation model – the mix of stocks, bonds and cash designed to help you achieve your financial goals – isn’t something you set and forget. It needs to be monitored regularly to be sure it’s reflecting changes in market conditions, as well as in your personal life. You also need to stress test your model periodically to assess the likelihood that it will achieve the objectives you’ve set forth. If things are on track, fine. If they’re not, you and your advisor may have to make some adjustments – either to your goals or the model itself.
While market declines are fairly common, historically, gains have tended to follow. But you have to participate, not withdraw, to benefit from those potential gains. Investors who chose to pull their money out of equities during those down periods may have missed some of the market’s biggest gains because some of the best days came right after periods of steep decline. Also, remember that a decline can present opportunities to buy quality investments while they’re potentially undervalued. This may enable you to invest in high-quality companies at lower prices and capture additional value.
Remember:
Selling during downturns may lock in the loss
Pullbacks and corrections can present buying opportunities
Fundamentally sound investments may be discounted
The stock market is cyclical, and you likely will encounter numerous pullbacks and/or corrections as a long-term investor. In the long run, upturns have always been stronger than downturns.
By looking at the market over a sufficiently long period of time, we’re provided with a true testament of resiliency. When we track the overall growth the market has achieved, we learn a lesson in persistence, patience and commitment.
There is no assurance any investment strategy will be successful. Investing involves risk including the possible loss of capital. Past performance may not be indicative of future results. 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 and are not suitable for all investors. Asset allocation and diversification do not guarantee a profit nor protect against a loss.
Give your family the best shot at preserving wealth from one generation to the next.
May 14, 2019
As more baby boomers approach retirement, they’ll start thinking about transferring wealth. Many plan to leave generous inheritances, but that’s not always as easy as it sounds. In fact, approximately 70% of family wealth disappears when distributed across multiple generations.
A common reason is many families lack the ability to make joint decisions or can’t implement a system that works with multiple stakeholders. To increase your odds, bring everyone together and create the strongest family unit possible. The goal is for each succeeding generation to preserve wealth for the good of the family and the world around them. The question is how to achieve it.
Talk with your children and grandchildren as soon as possible and make sure they understand their responsibilities when it comes to being good stewards of wealth.
At the right time, share your wishes for the future in detail. Introduce your kids to your professional advisors, who can help answer any questions.
The promise of sudden wealth may inspire your children to rest on your laurels, so to speak. Encourage them to make a financial life of their own.
Share how your wealth was built in the first place and how you view money’s purpose. This will help heirs recognize the importance of diligence, delayed gratification and good stewardship.
While you may not always agree with your kids, give them a say in how the family wealth should be used. This strengthens the family bond and gives you a better chance of success.
The more children face and conquer obstacles on their own, the more tools and resilience they will develop for later.
Did you know conversations about money can also teach values? In fact, they can help kids become thrifty, modest, patient and generous – which helps when it comes to transferring wealth.
Something simple, like allowance, is a great place to start. Encourage young children to divide their allowances into three buckets:
Spending: For spending, of course.
Saving: To teach the virtues of building a cushion for the “what ifs” that may come their way, as well as the benefits of perseverance and patience in allowing the balance to grow.
Giving: To promote the value of generosity and giving to those less fortunate. You might be amazed at the results!
While these guidelines might not fit every family, they should provide a great starting point as you plan your legacy and family’s future.
Raymond James and its advisors do not offer legal advice. You should discuss any legal matters with the appropriate professional.
Sources: kitces.com; Raymond James research; James Hughes, author of “Family Wealth: Keeping it in the Family”
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By Rocky Mengle, Tax Editor
May 9, 2019
My son recently sent me a text asking, "Is it better to claim 1 or 0 allowances?" He was starting a new job that day, so I instantly knew he needed guidance on how to fill out a W-4 form. That's the IRS form you use to let your boss know how much federal income tax to withhold from your paycheck.
But don't worry…we've got your back! We provide the basics you need to know when it's time to fill out your next W-4, and we also have an easy-to-use withholding calculator to help you figure out how many allowances are right for you. Hopefully, the information below and our handy tool will help reduce some of the angst and uncertainty often associated with the W-4 form.
First of all, you're exempt from federal income tax withholding altogether if you had no federal income tax liability last year and you also expect to have no tax liability this year. That'll save you the hassle of having to file a return next year just to get a refund of any income tax withheld from your pay. You still have to give your employer a W-4 form to claim the exemption, but you don't have to worry about the nuts and bolts of claiming allowances on the form.
An exemption is good for only one year, though. So you have to give your employer a new W-4 form by February 15 each year to extend your exemption.
If, like most of us, you're not exempt from withholding, the allowances you claim on your W-4 control how much federal income tax is withheld from your paycheck. If you claim more allowances, less tax is withheld (so you get a bigger paycheck). If you claim fewer allowances, more tax is withheld (so your paycheck shrinks). However, you can't claim fewer than zero allowances.
Since allowances impact withholding, they also affect the amount you have to pay the IRS or the size of your refund when your file your next federal tax return. That's because the total amount of federal income tax withheld from your wages during the year is subtracted from the overall tax liability shown on your return. The more tax withheld, the less you'll have to pay to the IRS or the larger your refund will be on your next return. Conversely, if less tax is withheld, you'll have to pay more or you'll get a smaller refund.
More AllowancesFewer AllowancesLess Tax WithheldMore Tax WithheldLarger PaycheckSmaller PaycheckSmaller RefundLarger RefundLarger Tax PaymentSmaller Tax Payment
Playing it out one more step to connect allowances to refunds or the amount of tax owed next April 15: More allowances will reduce your refund or increase the amount you owe, while fewer allowances will increase your refund or lower the amount you owe. Got it?
The W-4 instructions have three worksheets to help you determine how many withholding allowances you can claim. (Don't give the worksheets to your employer.) The goal is to select the number of allowances that will result in total withholding for the year being as close as possible to your tax liability for the year. So, if you follow the worksheets, the refund or the amount you owe on your next tax return should be relatively close to zero.
Everyone should complete the Personal Allowances Worksheet first. If your tax situation is fairly simple, that's all you'll need to do to figure the total number of allowances to claim. This worksheet calculates allowances based on your filing status and number of jobs. It also converts tax credits to withholding allowances.
If you expect your next tax return to be more complicated, then you might want to complete the Deductions, Adjustments, and Additional Income Worksheet, too. Use this worksheet to increase allowances/reduce withholding if you plan to itemize deductions or claim certain income adjustments, the qualified business income deduction or additional standard deductions for age or blindness on your next tax return. You can also use this worksheet to decrease allowances/increase withholding from your paycheck if you have a large amount of nonwage income, such as interest, dividends, rental income, unemployment compensation, gambling winnings, prizes and awards, hobby income, capital gains, royalties or partnership income.
If you (1) have more than one job at a time or (2) file a joint return and both spouses work, you can also complete the Two-Earners/Multiple Jobs Worksheet to refine your withholding. However, only use this worksheet for 2019 withholding if the combined earnings from all jobs are more than $53,000 ($24,450 for joint filers).
There are also a few other worksheets in IRS Publication 505 to help certain employees calculate allowances, but most people won't need to use them. You can also use the IRS's withholding calculator or an alternative method to determine the number of withholding allowances to claim. However, if you don't use the W-4 worksheets to calculate allowances, you still need to give your employer a W-4 form to actually claim them.
Tip for Married Couples: If both you and your spouse are employed and expect to file a joint return, figure your withholding allowances using your combined income, adjustments, deductions and credits. Use only one set of worksheets. You can divide your total allowances any way, but you can't claim an allowance that your spouse also claims. If you and your spouse expect to file separate returns, figure your allowances using separate worksheets based on your own individual income, adjustments, deductions and credits.
Tip if You Have Multiple Jobs: If you have income from more than one job at the same time, complete only one set of worksheets. Then split your allowances between the W-4s for each job. You can't claim the same allowances with more than one employer at the same time. However, you can claim all your allowances with one employer and none with the other(s), or divide them any other way that accomplishes your withholding goals.
If you're already at zero allowances but still want to increase the amount of tax withheld on your paycheck – to account for nonwage income not subject to withholding, for example – you can request an additional amount to be withheld from each paycheck on line 6 of your W-4 form. Use Worksheets 1-3 and 1-5 in Publication 505 to see if this is a good idea for you.
No, you aren't required by law to fill out a W-4 form. However, if you don't, your boss is automatically going to withhold tax from your paycheck as if you're single and claiming no withholding allowances, which is the highest withholding rate.
You can claim fewer withholding allowances than you're entitled to, but you can't claim more. The IRS can hit you with a $500 civil penalty if you claim allowances with no reasonable basis to reduce the amount of tax withheld. You could also face criminal charges for supplying false or fraudulent information on your Form W-4. If convicted, you could be fined as much as $1,000 and/or thrown in jail for up to a year.
You won't be penalized for a simple error or an honest mistake on your W-4, though. For example, don't worry if you try to figure the number of withholding allowances correctly but end up claiming six when you're actually only entitled to five.
Although it's not included on the W-4 form, there's a helpful withholding wrinkle for people who don't work all year (say, for example, you graduate from college in May and start your first job in July). It's called the part-year withholding method, and it allows less tax to be withheld from your paycheck than would be withheld if you worked all year. To be eligible, you can't expect to be employed for more than 245 days during the year, which is about eight months. (So you aren't eligible if you begin working before May 1 and expect to work for the rest of the year.) You also have to ask your employer to use the part-year method – and your boss can say no.
The W-4 isn't a one-and-done form. You'll certainly have to fill one out each time you get a new job. But you should also at least check your withholding annually to make sure you're where you need to be – especially if there are significant personal or financial changes in your life, such as getting married or divorced, having a baby, your spouse starting (or stopping) work, receiving a big raise and the like. If you need to make a change, simply give your employer a new W-4 claiming the revised number of withholding allowances. It's also easier to get the right amount of annual tax withheld if you do this earlier in the year.
You should also revisit your withholding if you owed a large amount or received a large refund on your last tax return. Ideally, you want your annual withholding and your tax liability for the year to be close, so that you don't owe a lot or get back a lot when you file your return. (Remember, a large refund just means you gave the IRS an interest-free loan.) But if that's not the case, there's an easy way to see how you can get back on track. Kiplinger has created an online tool that will quickly and easily show you how many more or fewer withholding allowances you need to achieve a better-balanced tax return next year. From that point, it's just a matter of filling out a new W-4 for your employer. It only takes a few seconds to use the tool – so check it out now!
Brian S. Wesbury – Chief Economist
Robert Stein, CFA – Dep. Chief Economist
Strider Elass – Senior Economist
Since hitting new all-time highs two weeks ago, the S&P 500 has fallen about 2.2% as trade negotiations with China hit a snag. Last week, the US announced new tariffs on Chinese imports. This morning, China announced new tariffs on some US goods. Many fear a widening trade war.
Don’t get us wrong. We want free trade, and we understand the dangers of trade wars and tariffs (which are just taxes on consumers). At the same time, we think trade deficits themselves are not a reason for trade wars. We all run personal trade deficits with the local grocery store and benefit from that. Even if the entire world went to zero tariffs, the US would almost certainly still run trade deficits, even with China.
But today, the trade deficit with China is partly due to the fact that China has higher tariffs on imports than the US does – working to eliminate these lopsided tariffs is worthwhile.
In 1980, China was an impoverished nation. Then it began adopting tools of capitalism – property rights, markets, free prices and wages. Chinese businesses started to import the West’s technology, and growth accelerated.
Initially, China didn’t have to worry about intellectual property. When you replace oxen with a tractor, all you have to do is buy the tractor, not reinvent the internal combustion engine. But China has now picked, and benefited from, the lowest hanging fruit. So, China decided to steal the R&D of firms located abroad. Some estimates of this collective theft run into the hundreds of billions of dollars.
That’s why normal free market and free trade principles don’t neatly apply to China.
Remember President Reagan’s old story supporting free trade? “We’re in the same boat with our trading partners,” Reagan said. “If one partner shoots a hole in the boat, does it make sense for the other one to shoot another hole in the boat?” The obvious answer is that it doesn’t, and so our own protectionism would hurt us.
But China hasn’t just shot a hole in the boat, they’ve become pirates. If Tony Soprano and his cronies robbed your house, would free market principles require you to trade with them to buy those items back? Of course not!
It’s true tariff increases will not help the US economy. But $100 billion of tariffs spread over $14 trillion of consumer spending is not a recession inducing drag. It’s true some business, like soybean farmers, are hurt. But the status quo means accepting hundreds of billions in theft from companies that are at the leading edge of future growth.
Either way, if tariffs nick our economy, China’s gets hammered. Last year we exported $180 billion in goods and services to China, which is 0.9% of our GDP. Meanwhile, China exported $559 billion to the US, which is 4.6% of their economy. We have enormous economic leverage that they simply can’t match.
An extended US-China trade battle means US companies will shift supply chains out of China and toward places like Singapore, Vietnam, Mexico, or “Made in the USA.” If that happens, the Chinese economy is hurt for decades.
Anyone can invent a scenario where some sort of SmootHawley-like global trade war happens. Realistically, though, that appears very unlikely. We’re not the only advanced country China’s piracy has victimized, and China may realize it’s more isolated than it thought. In the end, China wants to trade with the West, not North Korea, Russia, and Venezuela. China needs the West. And all these trade war hysterics just aren’t warranted.
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Published: May 9, 2019 2:58 p.m. ET
Success with money and investments requires humility, self-awareness, and a few good friends
By Vitaliy Katsenelson, Columnist
College graduation ceremonies this time of year remind me of my own graduation from the University of Colorado in 1997.
I felt completely lost, with no idea what to do next. Now, more than 20 years later, I can offer some experience-based advice about investing and how to go about it realistically. Here’s what I would tell my younger self and his generation:
1. Find yourself. Investing is like a piece of tight clothing: Just because it fits and looks good on someone else doesn’t mean it’s a good fit for you. Your investment strategy has to fit your personality; it has to wrap around your biases and life experiences. You’ll only discover your strategy, the one that fits your personality, when you start putting real money to work.
2. Just do it. The best way to learn about investing is by doing. Don’t create paper portfolios. Take as much money as you can afford to lose (because you may lose it), and invest it. The most difficult part of investing is staying rational when you get punched in the face by the markets. Understanding the emotions that losses and gains evoke in you and dealing with them is incredibly valuable.
Don’t focus on building a properly diversified portfolio. Your initial focus should be stock analysis, not portfolio construction. You simply won’t have enough time to do the deep research necessary to build a diversified portfolio of 15 to 25 stocks. At this point in your career, depth is more important than breadth.
3. Invest, don’t gamble. Do the analysis with the diligence and care that you would bring to investing your parents’ retirement savings. Document your research. Imagine you are working as an analyst at a mutual fund and writing a pitch for a stock to a portfolio manager. You’ll learn a lot from documenting and writing up your research. This will keep you rational.
Browse investment writeups on ValueInvestorsClub.com. This website was started by Joel Greenblatt — a terrific investor who wrote “The Little Book That Beats the Market” and “You Can Be a Stock Market Genius” (both highly recommended). This is where you can learn what the depth and rigor of your research needs to be. Writeups here are posted by diehard value investors, not academics, who put their money where their mouths are.
4. Start with what you know. What stocks do you analyze first? Recently I was asked this question by a fellow who had undergraduate and graduate degrees in aerospace engineering. What do you think my answer was? I said “You probably know more than most people your age about the aerospace industry. Create a map of the industry and then learn about each company in the industry.” It is easier to start analyzing something you already understand.
5. Learn to say ‘I don’t know’. You cannot be expert in everything. Someone who has an answer for everything probably knows very little. Saying “I don’t know” requires honesty and self-confidence, and it opens doors for learning.
6. Make investment friends. My life over the last 20 years has been enriched by having great investment friends around me. Today my investment friends are really just my friends, with whom I share and debate stocks, though we also talk about family, kids, and such.
Investing doesn’t have to be a solitary, sterile journey; in fact it should not be one. Every investor, without exception, will go through a period where he or she feels like a complete idiot — the market will do this to you at times (trust me on this). Surround yourself with loyal, humble investment friends who can give you support, and who are smarter than you, so you’ll always be learning from them.
7. Read. These books have been helpful to me:
• “Fooled by Randomness”, by Nassim Taleb, which will make you deeply appreciate the role randomness plays in investing.
• “The Essays of Warren Buffett” — Buffett’s annual reports edited into a book by Lawrence Cunningham.
• “Poor Charlie’s Almanac”, to understand the second half of Berkshire Hathaway BRK.A, -2.26% BRK.B, +0.00% — Warren Buffett’s partner, Charlie Munger.
• “Basic Economics”, by Thomas Sowell, which has taught me more about economics than all my economics classes combined.
• “Margin of Safety”, by Seth Klarman — one of the most brilliant investors of our time. Though the book is out of print, you can find it online if you’re resourceful.
• “The Most Important Thing Illuminated”, by Howard Marks, which is filled with Klarman-like wisdom.
• The “Little Book” series: The process of writing one of these books made me appreciate the series even more that I did already. These books are typically written by investors who often have taken their “big” books (as I did) and simplified and condensed them into smaller, more accessible works. This process of simplification and condensation forces you to keep what matters the most. My two favorite books in is series are “The Little Book of Behavioral Investing”, by James Montier, and “The Little Book That Builds Wealth”, by Pat Dorsey.
• “Reminiscences of a Stock Operator”, written in 1923 by Edwin Lefevre, tells from a first-person perspective the fictionalized tale of the early years of the great trader Jesse Livermore. It is rumored that this book was actually written by Jesse Livermore and edited by Lefevre.
This book provides a great introspective look inside a trader’s mind and teaches many behavioral and common-sense lessons. My favorite edition is the one annotated by my friend Jon Markman. His annotations are like a book within a book; they take you behind the scenes of Lefevre’s story and give important insights into the key characters and the backdrop of that interesting time period.
I don’t want to end with empty platitudes, but I’d be remiss if I didn’t stress the importance of having an unstoppable, insatiable thirst for knowledge. Learning doesn’t cease when you graduate; it continues and never stops. As I look at my investment role models, all them, without exception, have that quality. If you don’t have that thirst, cut your losses and find another career or hobby. A value investor needs to have a growth mindset.
“We remain optimistic a deal will be struck,” says CIO Larry Adam.
May 9, 2019
While optimism had been growing that the U.S. and China were nearing the final stages of a trade deal, market uncertainty moved sharply higher following President Donald Trump’s Sunday tweet that threatened to raise tariffs from the existing 10% to 25% on $200 billion worth of Chinese goods and potentially add tariffs to an additional $325 billion dollars of Chinese imports at 25%. In total, that amounts to the potential of $575 billion in Chinese imports being taxed at 25% (~$144 billion or 0.7% of U.S. GDP). As a result, the potential parameters of what constitutes a “deal” have expanded, with increased downside risk.
A reduction of overall tariffs could lead to upside pressure in the equity market and an increase in tariffs could lead to further downside pressure. The timing and enforcement of these tariffs will similarly play a role in the market response.
We remain optimistic a deal will be struck. We disagree with many market pundits that believe better economic conditions in both the U.S. and China have emboldened each side to be more aggressive in negotiating. To the contrary, the current “indefinite” postponement of the tariffs and apparent progress in the trade discussions has helped sentiment and led to better economic and equity market performance. Increased tariffs and trade war rhetoric could cause that economic momentum to be short-lived, with both sides incurring at least short-term negative repercussions. Thus, a negative response to increased tariffs could force both sides back to the negotiating table.
With President Trump having such favorable polling on his handling of the U.S. economy (56% approval rate), it is unlikely that he would want to jeopardize the momentum of the economy and dampen his prospects for re-election. However, no one knows what the timing could be or what the framework of a deal would look like. Therein lies the “cliffhanger” for the market.
Our instincts tell us that a deal will ultimately be reached. The new threat of an additional $325 billion dollars is unlikely. It would be difficult to implement as that would essentially include all Chinese imports, with no exceptions. If the current rate on the $200 billion goes to 25% (from 10%), it will likely be for a limited amount of time as both sides continue to talk. In the end, it is our belief that President Trump wants to engineer a deal that ultimately lowers tariffs from current levels to show he has effectively made a deal. Not all tariffs will be removed as the President needs an enforcement mechanism in place and is likely to use them as a tool to reference in his re-election bid. A deal should provide a catalyst to push global equities higher, especially emerging markets (EM) equities, and would be supportive of more cyclical and internationally-exposed sectors such as industrials and info tech.
If both sides walk away from the table and the 25% tariff (from 10%) goes into effect, it will likely lead to further downside for global equities, with emerging market equities, especially China, getting hurt the most. However, while we see a modest pullback, we do not expect a redux of the ~20% decline experienced in late 2018 for U.S. equities, as a number of key risks have been removed from the market since then. First, interest rates (10-year Treasury yield) have declined significantly and are down ~75 basis points from the September high. Second, the Fed has moved to the sideline as the market is now pricing in a 66% chance of a rate cut in 2019 relative to the expected one to two 2019 interest rate hikes expected last September. Lastly, U.S. recessionary concerns have abated as fundamentals (employment, retail sales, earnings growth) remain solid and have arguably improved over recent months.
All expressions of opinion reflect the judgment of Raymond James & Associates, Inc. and are subject to change. Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed. Past performance is not indicative of future results. No investment strategy can guarantee success. 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. Investing involves risks including the possible loss of capital. Technical Analysis is a method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security’s intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity. Further information regarding these investments is available from your financial advisor. Material is provided for informational purposes only and does not constitute a recommendation. Sector investments are companies engaged in business related to a specific sector. They 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. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. Investing in emerging markets can be riskier than investing in well-established foreign markets. Investing involves risk and investors may incur a profit or a loss. 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.
While it’s never easy to watch stocks fall, CIO Larry Adam sees any current weakness in the market as a potential buying opportunity.
May 7, 2019
Click HERE to watch video
In the video above, Chief Investment Officer Larry Adam discusses five factors pointing to continued stock market growth:
The economy is accelerating.
The Fed has put interest rate increases on hold.
Earnings are better than expected, and estimates for future quarters are being revised higher.
Dividends have remained healthy and have reached a record high.
The U.S. market continues to de-equitize, meaning fewer companies are trading publicly.
Recorded April 25, 2019 with Larry Adam, CFA, CFP®, CIMA®.
Brian S. Wesbury – Chief Economist
Robert Stein, CFA – Dep. Chief Economist
Strider Elass – Senior Economist
you take a long hike up a mountain, there’s plenty to appreciate along the way. But, sometimes, you just have to stop and enjoy the view. With that in mind, let’s forget about the April employment report – which saw a combination of very fast payroll growth and moderate wage growth – and think about where the labor market stands in general.
Nonfarm payrolls have grown by 2.6 million in the past year, well ahead of the roughly 2.0 million jobs the consensus was forecasting a year ago.
Due to the rapid job creation, the unemployment rate has dropped to 3.6%, the lowest level since 1969. Some analysts claim the jobless rate is being artificially suppressed by lower labor force participation, but participation is higher now than it was in the late 1960s, when 3.6% was considered full employment.
Regardless, the labor force is up 1.4 million from a year ago, and the labor force participation rate has been essentially flat since late 2013. And that’s in spite of an aging population.
The unemployment rate for those with less than a high school degree has averaged 5.6% in the past twelve months, the lowest on record, and well below the previous cycle low of 6.3% reached during the internet boom two decades ago
The Hispanic unemployment rate has averaged 4.6% in the past year, while the Black unemployment rate has averaged 6.4%, both also record lows.
Meanwhile, wage growth has accelerated. Average hourly earnings are up 3.2% from a year ago, versus the gain of 2.8% in the year ending in April 2018, and 2.5% in the year ending in April 2017. And the gains in wages are not just tilted toward the rich. Among full-time workers age 25+, usual weekly earnings are up 3.5% for those in the middle of the income spectrum. But wages are up 4.9% for workers at the bottom 10% of earners, while up 1.7% for those at the top 10% of income earners. A rising tide is lifting all boats.
Some observers are claiming we should discount strong job creation because workers are taking multiple jobs. But, in the past year, multiple job holders have been just 5.0% of the total number of employed workers; that’s lower than at any point during the 2001-07 expansion, or during the previous longest recovery on record during the 1990s. Meanwhile, part-time jobs are down since the expansion started, meaning, on net, full-time jobs account for all the job creation during the expansion.
What’s interesting is that President Trump, Vice President Pence and NEC Chief Larry Kudlow all think things could be even better if the Fed hadn’t raised interest rates. President Trump, in fact, is calling for a 1% interest rate cut. This puts the Administration at odds with Fed Chair Jerome Powell, who thinks interest rates are at appropriate levels.
We don’t disagree with the theory behind the thinking of Trump, Pence and Kudlow who say faster economic growth, by itself, doesn’t have to cause higher inflation. A "permanent" supply-side boost to "real" growth from deregulation and marginal tax rate cuts is not inflationary. In fact, as we’ve previously written, the growth potential of the US economy has accelerated. Productivity (output per hour) is up 2.4% in the past year, deep into this recovery, when normally productivity growth should slow.
But "nominal" GDP (real growth plus inflation) is still up 4.8% at an annual rate in the past two years, and is set to equal, or exceed, that in the year ahead. If we think of nominal GDP as the average growth rate of all businesses in the economy, then a federal funds rate of 2.375% is not holding anyone back. Even projects with a below-average return could justify borrowing, which is a recipe for disaster – what Ludwig von Mises called "mal-investment" – when people push investment into areas that are unsustainable at normal interest rates. Remember the housing bubble?
That’s why we want Powell and the Fed to resist calls to cut rates. The Fed is not tight. Interest rates are not discouraging investment. If anything, the Trump administration should work to cut government spending, which has grown so large it’s crowding out private sector growth.
https://www.ftportfolios.com/Commentary/EconomicResearch/2019/5/6/the-big-picture-and-the-fed
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.
The S&P 500 has had its best start to a year since 1975 and its second best over the last 75 years.
April 30, 2019
On the back of solid first-quarter earnings results and healthy economic data releases, the S&P 500 continued its remarkable move higher and closed at a record high for the first time since September 2018, shares Chief Investment Officer Larry Adam. To put the strength of the rally into perspective, the S&P 500 is now up 17.5% year-to-date through April 30 which marks the best start to a year since 1975 and the second best over the last 75 years, he said.
While Gross Domestic Product (GDP) rose at a 3.2% annual rate in the advance estimate for the first quarter of 2019, the details of the report were a mixed bag, explains Chief Economist Scott Brown. Growth was stronger than expected; however, it was boosted by faster inventory growth and a narrower trade deficit – both of which he believes are likely to reverse in the second quarter.
The Federal Reserve (Fed) is expected to keep short-term interest rates steady for the foreseeable future. Fed officials are reviewing monetary policy strategies, tools and communications policies this year, but changes aren’t expected until 2020, Brown added. All of this, combined with positive first-quarter earnings (78% of companies saw an average earnings surprise of 6.33%, adds Senior Portfolio Strategist Joey Madere) and a steepening yield curve, has made this year a good one for diversified portfolios up to this point, says Chief Portfolio Strategist Nick Lacy.
The month ended positively for the Dow Jones Industrial Average, NASDAQ, S&P 500 and the Russell 2000 Index.
12/31/18 Close 4/30/19 Close Change YTD % Gain/Loss YTD
DJIA 23,327.46 26,592.91 +3,265.45 +14.00%
NASDAQ 6,635.28 8,095.39 +1,460.11 +22.01%
S&P 500 2,506.85 2,945.83 +438.98 +17.51%
MSCI EAFE 1,719.94 1,916.38 +196.44 +11.42%
Russell 2000 1,348.56 1,591.21 +242.65 +17.99%
Bloomberg Barclays U.S. Aggregate Bond Index
2,046.60 2,104.12 +57.52 +2.81%
Performance reflects price returns as of 4:30 ET on April 30, 2019. 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:
First-quarter softness in underlying domestic demand may have reflected an impact from the partial government shutdown, explains Brown. Key components of the economy are expected to rebound in the second quarter.
Growth is expected to be moderate in 2019; however, the risks are weighted to the downside.
Consumer spending and business fixed investment slowed, while residential fixed investment fell for the fifth consecutive quarter, he adds.
Inflation has remained below the 2% target. The Fed could cut interest rates in the months ahead if the labor market begins to weaken; however, no changes are expected until 2020.
After rising approximately 10% year-over-year in 2018, dividends are expected to grow an additional 7% in 2019 to another record high, explains Adam. As the current S&P 500 dividend yield (+1.9%) remains elevated relative to short-term Treasury yields, U.S. equities remain an attractive investment in his view.
First-quarter earnings have been well-received, with notable strength from the technology-oriented areas, explains Madere.
Seven of the 11 S&P sectors have risen above their September highs. The largest percentage of Q1 earnings beats have come from the Technology, Consumer Discretionary, Communication Services, and Consumer Staples sectors so far. Communication Services has stood out in terms of average price reaction to earnings results.
Another sign of economic strength, in Madere’s view, is that 73% of S&P 500 stocks are above their 200-day moving average. Readings above 80% have often coincided with short-term pauses or peaks, so there is still room for upside in the short term. Additionally, we believe potential pullbacks should be normal in nature.
The world’s central banks have all remained constant in their current monetary policies. And it appears the Fed isn’t expected to make policy changes either, according to Doug Drabik, senior fixed income strategist.
The bond market sold off at the beginning of the month, pushing yields 5 basis points higher in the intermediate part of the curve and approximately 12 basis points out on the longer end of the curve.
The municipal and corporate curves maintained a positive slope. The small narrowing in product spreads for the month was offset by the Treasury curve sell-off (yield increases).
The “sweet” spot of the municipal curve has drifted to the 11- to 18-year maturity range, where 75% to 90% of the entire curve’s yield can be captured, according to Drabik. The same opportunity for yield can be found among corporate bonds in the 5- to 12-year maturity range.
While some investors are lamenting low rates, according to managing director Ted Ruddock, they may be missing opportunities in the municipal market that is rewarding investors for extending maturities but managing duration risk with embedded call options.
Global equity markets continued to make progress in April, shares European Strategist Chris Bailey, distancing themselves from December 2018 lows despite a rising dollar and a lack of overt progress in key geopolitical debates, including the U.S./China trade discussions and Brexit.
April saw some downbeat comments from the European Central Bank about the Euro zone’s economic progress and continuing difficult manufacturing output and sentiment data in Asia, he adds.
April also saw heightened volatility in Turkey and Argentina, while both Brazil and China made positive progress on legislation to help boost economic dynamism, Bailey explains. Toward the end of the month, the global corporate earnings season started solidly in both Europe and Asia.
Adam and the Investment Strategy team remain constructive on the equity market long-term and would use any near-term weakness as a buying opportunity.
Drabik feels that Treasuries remain a viable option for short-term planning, especially in high-income states, since they are federally taxable but exempt from state income taxes.
According to Madere, the S&P 500 holding its new high (without a quick rollover) is a good marker for continued momentum, which is what he and his team will be monitoring next.
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. The process of rebalancing may result in tax consequences. 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. High yield securities involve additional risks and are not appropriate for all investors. 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. The yield curve is a graphic depiction of the relationship between the yield on bonds of the same credit quality but different maturities. Chris Bailey is with Raymond James Investment Services. Material prepared by Raymond James for use by its advisors.