1Q 2019 Newsletter
Market Update
(all values as of 08.31.2020)

Stock Indices:

Dow Jones 28,430
S&P 500 3,500
Nasdaq 11,775

Bond Sector Yields:

2 Yr Treasury 0.14%
10 Yr Treasury 0.72%
10 Yr Municipal 0.81%
High Yield 5.38%

YTD Market Returns:

Dow Jones -0.38%
S&P 500 8.34%
Nasdaq 31.24%
MSCI-EAFE -6.23%
MSCI-Europe -7.39%
MSCI-Pacific -4.42%
MSCI-Emg Mkt -1.18%
 
US Agg Bond 6.85%
US Corp Bond 6.94%
US Gov’t Bond 8.09%

Commodity Prices:

Gold 1,973
Silver 28.43
Oil (WTI) 42.82

Currencies:

Dollar / Euro 1.19
Dollar / Pound 1.33
Yen / Dollar 105.37
Dollar / Canadian 0.76
 

Macro Overview
Weariness among investors escalated towards the end of 2018 as uncertainty surrounding trade, the Federal Reserve, a government shutdown, and global economic growth lingered into the new year.

Even during the turbulent year of 2018, the U.S. economy continues its resilience into 2019, with unemployment at its lowest level in 49 years, wage growth reaching levels not seen since 2009 and consumer spending and industrial production remaining strong. A tight labor market along with moderate inflation has maintained an accommodating environment for consumers.

The year-end climate heading into 2019 became more challenging as equity markets reacted negatively to another rate hike in December along with two more expected hikes in 2019. Ironically, the market views the Fed hikes as a validation by the Fed that U.S. economic activity is healthy enough to endure further rate increases.

Global equity markets ended 2018 in negative territory with nearly every major index in both developed and emerging markets falling. China’s stock market was among the worst performer internationally as trade tensions took a toll on Chinese manufacturers and exporters. U.S. stock markets experienced volatility that had not occurred in several years resulting in a pullback for all major domestic equity indices in 2018.

Ongoing trade disputes and the imposition of new tariffs negatively influenced the markets and economic projections throughout year. Relations with China were forefront as the administration negotiated trade terms intended to better protect U.S. intellectual property and disparate tariffs. Growing U.S. oil production and an increase in supplies led to a drop of U.S. oil prices by 25% in 2018. The benchmark for U.S. oil, West Texas Intermediate (WTI), fell from $60 per barrel in the beginning of the year to $45 per barrel by year-end, simultaneously reducing the price of gasoline nationwide. According to the Federal Reserve Bank of New York, the likelihood of a recession remains relatively low with less than a 15% probability one will occur in the next year. The Fed has historically seen greater than 30% probabilities before each of the last seven recessions since 1970. (Sources: Federal Reserve Bank of New York, Treasury, Labor Dept., Bloomberg)

 
THE FED RAISED RATES FOUR TIMES IN 2018

Global Equity Markets Decline In 2018 – Equity Review
Volatility throughout the trading year kept stock valuations tough to determine. A popular process that analysts use to value stocks is based on Price Earnings (PE) ratios, calculated by dividing the current market price of a stock by its earnings per share. PE ratios for stocks began the year above 20 for all three major equity indices and finished the year near 15. The lower the PE the less expensive stocks are relative to their earnings so a drop in PEs has made stocks more appealing to value seeking investors.

Global equity markets experienced widespread negative returns for 2018 with both developed and emerging market indices falling. Domestic equities faired records according to data compiled by better than international stocks for the year as earnings optimism and a strong dollar helped stabilized U.S. markets.

An increase in the use of options as a hedge against market volatility increased to roughly 20 million option contracts a day being traded, surpassing previous records according to data compiled by Options Clearing Corporation. Creative option strategies have evolved as increased stock volume accompanied by consistent volatility has become the norm. Computer as well as human initiated trades have also leant to staggering trading days resulting in wild market swings as traders cover open option contracts. (Sources: Options Clearing Corp., Bloomberg, Federal Reserve; https://fred.stlouisfed.org/series)

Short Term Bond Rates Rise – Fixed Income Review
Shorter term bond yields rose closer to longer term bond yields, thus further flattening the Treasury bond yield curve, an economic gauge closely followed by market analysts. The benchmark 10-year Treasury Bond ended the year at 2.69%, down from a mid-year high of 3.24% it reached in November.

The Fed indicated that it would continue to shrink its balance sheet by $50 billion a month, a reversal from balance sheet expansion following the 2008-2009 financial crisis. What this means is that rather than buying government bonds in the marketplace and placing them on the Fed balance sheet, the Fed will instead forego holding additional bonds and allow bonds to mature without replacing them. This is a form of quantitative tightening as is raising short-term rates.

The Fed raised rates four times in 2018 and has risen rates nine times since it began tightening rates from near-zero three years ago. The Fed signaled that it expects to raise rates at least twice in 2019. Some analysts believe that the Fed has raised rates in order to be able to lower them as a form of stimulus should economic conditions deteriorate. (Sources: Treasury Dept., Federal Reserve)

 
OVER 270 MILLION CELL PHONE USERS MAY BENEFIT FROM NEW CREDIT SCORES

The Common Occurrence Of Federal Government Shutdowns – Fiscal Policy
Government shutdowns have been a common occurrence over the years under most every president. The
length of the shutdowns have varied from 2 days in 1981 under President Reagan to 21 days in 1996 under
President Clinton. A shutdown occurs when Congress fails to pass or the President refuses to sign
legislation funding federal government operations and agencies.

Estimated costs of the most recent government shutdown are still unknown, with lost wages, exports, and government services essential to the operation of private sector businesses being affected. How much the shutdown may have weighed on the economy may not be known until later in the year.

Government shutdowns entail partial closure of certain agencies and departments, not complete closures. Departments affected during the most recent shut down include Homeland Security, Housing & Urban Development, Commerce, FCC, Coast Guard, FEMA, Interior, Transportation, and the Executive Office of the President.

Federal employees deemed as “essential” among the various departments are required to work without pay until a funding bill is passed by Congress. The closures affect numerous private businesses that rely and adhere to regulatory rules imposed by the Federal government, such as mortgage loans and Housing & Urban Development. (Sources: Congressional Records, https://www.congress.gov/congressional-record/2018/12/22)

Credit Score Calculations Will Change In 2019 – Financial Planning
In response to pressure from regulators and the banking industry, credit reporting firms will offer modified credit scores starting in 2019. The modifications include the calculation of utility and cellphone bills that millions of Americans pay every month. Banks have argued that a large group of consumers nationwide just don’t have sufficient credit history to generate a viable credit score for a bank loan. However, the inclusion of utility and cellphone payments will help identify credit worthy consumers for bank loans.

The challenge lies with consumers that hold little if any loan balances, thus not generating a track record of payments. The modification is expected to increase loan issuance by banks as millions of consumers become qualified for loans. An overall drop in credit scores following the financial crisis of 2008-2009 made it difficult for consumers to obtain loans. (Sources: Fair Issac Corp., Office of the Comptroller of the Currency, Treasury Dept.)

 
FOR 2019, INCOME BRACKETS WIDENED BY ROUGHLY 2% ACROSS ALL INCOME LEVELS

U.S. Became Net Oil Exporter In 2018 – Oil Industry Overview
December marked the first time ever that the U.S. exported more crude oil and fuel than it imported, a result of ambitious U.S. production and the lifting of a decades old ban on U.S. oil exports in December 2015. With the U.S. now able to export its own oil production, both as refined and crude, it has increased stockpiling capabilities. Partially because of over supply, Congress agreed to remove the 40-year old ban on oil exports, thus allowing the U.S. to export some of its excess supplies. The onslaught of fracking and technological advances in drilling has led to increased U.S. production and supply growth. Saudi Arabia’s attempts to destabilize U.S. drillers with increased production and lower oil prices has essentially backfired. (Sources:IEA, U.S. Dept. of Energy, EIA.gov)

Tax Rule Changes For 2019 – Tax Planning
Various changes are effective for the 2019 tax year beginning January 1, 2019. The changes affect most every tax payer both as an employee and self employed business owners. Indexing will affect 2019 Tax Brackets & Rates, which is essentially an inflation adjusted modification to account for rising inflation trends. For 2019, income brackets increased by roughly 2% across all income levels.

With personal exemptions eliminated under the new tax law, a larger single standard deduction was devised in order to streamline returns for taxpayers. Standard deduction amounts increased slightly for 2019. Other changes for 2019 include: Estate Tax Exemption increases from $11.18 million to $11.40 million in 2019; Elimination of the ACA penalty for not having health insurance becomes effective; Unreimbursed medical expenses must exceed 10% of AGI in order to deduct; Alimony is no longer deductible for the payor and no longer taxable for the recipient for divorce decrees issued after December 31, 2018.

 
CALIFORNIA HAD OVER $58 BILLION IN INSURANCE LOSSES IN 2017

Insurance Losses By State Are Adding Up – Insurance Sector Review

As natural disasters mount from wild fires in California to hurricanes and flooding in Texas, Florida and the East coast, insurance claims are in the billions of dollars and growing. Most major insurance companies offer and issue various types of insurance, including liability, fire, flood, earthquake and homeowners. As
claims increase with one or two of the coverage segments, coverage costs may increase with the others as well.

Insurance companies are intertwined and coverage costs are related. Some insurance companies spread their costs across all policyholders nationwide as opposed to centralizing higher premiums to one geographic region. Homeowners in coastal states from Texas and Florida to North Carolina are seeing rates rise faster than in other parts of the country, as the threat of future storms and flooding remains relatively high. In California, some insurance companies have designated several additional regions as high risk areas to insure. (Sources: NAIC, Insurance Information Institute)

 
 
The Social Security Administration announced a 2.8% increase in benefit payments

Social Security Payments Increasing By 2.8% – Retirement Planning

Social Security recipients are due to receive the largest increase in benefits in seven years. But for many recipients, the increase in payments will go towards higher Medicare costs. As of September 2018, over 67.6 million Americans currently receive Social Security benefit payments, with 46.3 million aged 65 or older.

The Social Security Administration announced a 2.8% increase in benefit payments effective in late December 2018 for disability beneficiaries and in January 2019 for retired beneficiaries. The 2.8% increase is the largest increase since a 3.6% increase in 2012.

Many are concerned that the 2.8% increase may not cover expenses that are rising at a faster rate, including other essential items such as food and housing. The latest increase also affects the premiums for Medicare Part B, which covers doctor visits and outpatient care. Medicare premiums are expected to increase at the beginning of the year, minimizing net increases in Social Security payments.

The establishment of Social Security occurred on August 14, 1935, when President Roosevelt signed the Social Security Act into law. Since then, Social Security has provided millions of Americans with benefit payments. The payments are subject to automatic increases based on inflation, also known as cost-of-living adjustments or COLAs which have been in effect since 1975. Over the years, recipients have received varying increases depending on the inflation rate. With low current inflation levels, increases in benefit payments have been subdued relative to years with higher inflation. The COLA adjustment for 2019 is 2.8%, a steep increase from the 2017 adjustment of only 0.3%.

Over the decades, Americans have become increasingly dependent on Social Security payments, however, for some Americans it may not be enough to rely on Social Security alone. Unfortunately, Social Security is a major source of income for many of the elderly, where nine out of ten retirees 65 years of age and older receive benefit payments representing an average of 41% of their income. Over the years, Social Security benefits have come under more pressure due to the fact that retirees are living longer. In 1940, the life expectancy of a 65-year old was 14 years, today it’s about 20 years. By 2036, there will be almost twice as many older Americans eligible for benefits as today, from 41.9 million to 78.1 million.  There are currently 2.9 workers for each Social Security beneficiary, by 2036 there will be 2.1 workers for every beneficiary. Source: Social Security Administration

 
34.2 MILLION ADULTS PROVIDE SOME SORT OF UNPAID CARE FOR ELDERS

Tax Breaks For Family Caregivers – Tax Planning
As the number of elderly has grown nationwide, so has the need for caregivers. The baby boom generation, the largest demographical segment of the U.S. population at 74 million, are now entering their late 60s and early 70s. Many are still very capable of caring for themselves, but others are in need of assistance as they progress into their senior years.

Unfortunately for many, the costs associated with an assisted living facility are not feasible and in other cases, not an option just yet. So instead, a growing
number of elderly are staying in their homes or living with their families. Many times, a son or daughter will move in with mom or dad and essentially become their part-time or full-time caregiver. Some elderly end up moving in with family members where they actually become part of the household. The challenge for family members that act as caregivers is the financial burden that may be imposed. An estimated 34.2 million adults provide some sort of unpaid care for elders aged 50 and older in 2015. Over 85% of these caregivers provide assistance directly for relatives. The average caregiver commits over 24 hours per week in providing care for elders. Even though there is no actual pay for family member caregivers, there is a tax break when done properly. Under the new tax rules, taking a personal exemption for a qualified friend or family member has been replaced by the larger standard deduction. However, the rules still allow caregivers to claim those receiving care as dependents as long as the following criteria are met for the person being cared for:

The person cared for is a relative as defined by the IRS or a non-resident that has lived with the caretaker for at least six months; Earns less than $4,050 (2017) per year, not including Social Security or disability benefits; Is unable to pay over 50% of personal living expenses; Can’t be claimed as a dependent by anyone else.

In addition to federal tax considerations, some states also allow for special tax credits meant solely for caregivers. Taxpayers should verify with their state of residency to confirm any additional tax credits.
(Sources: U.S. Census Bureau, IRS.gov)