Stocks Rebound In June – Equity Overview

Stocks and bonds registered the first half of the year with formidable gains propelled by an expected rate cut by the Fed later in the year. It was the best first half of the year since 1997 for equities, with the Dow Jones Industrial Index, S&P 500 Index, and the Nasdaq nearing new highs.

Equities were also driven higher in June by a relief in trade tensions between the U.S. and China as the expectation that the Fed will eventually cut rates sometime this year. Historically, a low-rate environment is favorable for equities in the form of inexpensive capital for expansion and loans.

The rebound in stock prices in the first half of 2019 from the turmoil that hindered markets in December 2018 has been one of the strongest rebounds in decades.

The Federal Reserve gave large U.S. banks the approval to repurchase their own shares and lift dividends, part of the Comprehensive Capital Analysis and Review process set in place by the Fed. Large money center banks as well as smaller regional banks were restricted from buying back their own shares as well as increasing dividends in order to fortify bank balance sheets following the financial crisis. (Sources: Federal Reserve, Dow Jones, S&P, Bloomberg, Reuters)

Yields Drop Further In June – Fixed Income Update

The 10-year Treasury bond yield dropped below 2% for the first time since November 2016. The 10-year Treasury continues to trade at a lower yield than the 3-month Treasury bill, signaling an inversion, which is when shorter term maturity bonds yield more than longer term bonds.

Rates also concurrently dropped in Europe, India and Australia as central banks maintained stimulus efforts with a continued low interest rate environment.

The Federal Reserve communicated its confidence with the labor market and rising wages for lower paid workers as positive for the U.S. economy, but noted that inflation is still mundane and below expectations. Its concern is slowing global growth with anemic economic expansion in other parts of the world. Such concerns may lead to dismal expansion with the need to eventually reduce rates to help prop up economic growth. (Sources: U.S. Treasury, Federal Reserve)

Worldwide Debt On The Rise – International Finance

Corporate debt worldwide has become a growing concern among central bankers and international finance managers. The extended period of ultra low interest rates following the monetary stimulus programs of central banks worldwide allowed companies from all over the globe to issue debt very inexpensively. Now with monetary policy on reversal from a decade of stimulus, the cost of debt will begin to increase.

Of the more than $164 trillion of debt worldwide, nearly three quarters of it is held by advanced economies such as the U.S., Britain, and Germany. A smaller proportion is maintained by emerging market economies, yet are seeing rapid growth in debt accumulation. The Bank for International Settlements identified three economies with the highest risk of a bank crisis, China, Canada, and Hong Kong, primarily due to excessive outstanding debt. Additionally, expansion of debt in the U.S. has slowed while it continues to expand in China. (Sources: https://www.bis.org/statistics/secstats.htm;summary of debt securities outstanding)

Social Security Falls Short On Projections – Retirement Planning

A U.S. Government report compiled and released by the Government Accountability Office (GAO) found that 48 percent of individuals 55 and older had no retirement savings whatsoever. Statistics like this are where the concept of Social Security originated from.

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. Over the decades, Americans have become increasingly more dependent on Social Security payments; however, for some Americans it may not be enough to rely on Social Security alone.

As of April 2019, over 63 million Americans received Social Security benefit payments, with over 40 million age 65 or older. The Social Security Administration estimates that Americans received over $989 billion in Social Security benefit payments in 2018.

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.

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.

Social Security costs will exceed its income in 2020 for the first time since 1982, forcing the program to dip into it’s trust fund, which is currently just under $3 trillion. Social Security is funded by two trust funds, one for retiree benefits and another for disability benefits. Disability applications have actually been declining since 2010, with a decreasing number of workers receiving disability benefits since 2014.

The latest annual report issued by the trustees of Social Security and Medicare revealed that by 2034, the program’s trust fund will be depleted. Depletion means that Social Security recipients will no longer be receiving full scheduled benefits. Recipients would receive about three-quarters of their scheduled benefits after 2034. Congress can eventually act to fortify the program’s finances, but it may be years before it actually takes effect and funds.

Social Security’s largest costs are attributable to Medicare, which represents over 76% of Social Security benefits. The report also mentioned that Medicare’s hospital insurance fund would be depleted in 2026. The trustees noted that the aging population of the country has placed additional pressure on both the Social Security and Medicare programs. A decade ago, roughly 12% of Americans were age 65 or older, today 16% of Americans have already surpassed 65, the eligibility age for Medicare.

The Social Security Administration considers various factors in projecting its estimates, including fertility, immigration, wages, health, and economic growth. A recent drop in U.S. birthrates along with stagnant wages has placed additional burden on the viability of future benefit payments.

Sources: https://www.ssa.gov/oact/TR/2019/index.html