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 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)

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.)

What Could Cost More In Retirement – Retirement Planning

As retirement nears for millions of aging baby boomers, the realization of how to pay for retirement becomes a challenge for many.

Expenses that one was accustomed to while still working and raising a family changes dramatically once retirement arrives. The biggest challenge for many is how to maintain the same lifestyle in retirement as during working years.

Unfortunately, many have realized that Social Security and menial retirement savings just aren’t enough to make up for lost wages. This either forces many retirees to seek part-time employment or merely live a less desirable lifestyle in order to minimize expenses.

Unforeseen expenses such as an illness not covered by Medicare or health insurance, home repairs, and emergency cash outlays may deplete valuable cash savings and derail what was thought to be a well executed financial plan. Retirees have found that liquidity during retirement is critical, thus avoiding the necessity to sell investments at gains or losses and even reducing income derived from them.

The biggest surprise that retirees are having is the increasing costs of drugs and healthcare. The Employment Benefit Research Institute has identified a number of expenses not necessarily planned for that are common among retirees: Special diets with foods and ingredients that may be more expensive than average, medical & toiletry items such as supplements and diapers, special transportation, medicare part A & B items not covered. (Sources: Employment Benefit Research, Social Security Adm;, Medicare.gov)