Plan Sponsor Newsletter May 2016

Domestic & International Oil Prices Divert – Commodities Update

The price of oil declined 1.5% during August to $95.87 (WTI) and the more widely used global oil benchmark, Brent crude, declined 3.2% to $103.07.

WTI represents the price that U.S. oil producers receive and Brent represents the prices received internationally. The two prices have been diverting due to a recent surge in production in the United States that has caused a buildup of crude oil inventories at Cushing, Oklahoma, where WTI is stored and priced. Before this increase in U.S. oil production, the two crudes had historically traded in line with each other.

oil pricesRealization of a short-term oversupply issue has put pressure on oil prices in recent months. Recently, crude oil production in the U.S. has surged because of the technology behind horizontal drilling and hydraulic fracturing, primarily in the states of North DakotOil-Prices-Down-600x350a and Texas. Fracking makes it possible to extract oil and natural gas in places where conventional technologies are not effective. Fracking involves the use of high water pressure combined with sand and chemicals to create cracks in rock that allow the oil and natural gas it contains to escape and flow out of a well.

Fears of a slowdown in demand also occurred in August as Chinese manufacturing activity weakened to a 3-month low, with the preliminary HSBC China Manufacturing Purchasing Managers Index slipping to 50.3 compared with 51.7 for July.

Oil prices declined despite the ongoing geopolitical tensions in many parts of the oil producing world. The Russian-Ukraine situation, the Israel-Gaza conflict, and the rise of ISIS in Iraq and Syria all remained unresolved as of the end of the month but material disruptions in supply have not occurred, at least at levels high enough to offset the reduction in demand due to slowing global economic growth.

Another constant pressure on oil prices from the demand side is the great changes we have seen in automotive technology. Rapid advances in engine and vehicle design are creating more fuel efficient cars and the materials used to make cars are getting lighter and stronger. Electric and hybrid cars, as well as those powered by natural gas will also have an effect on demand for oil. Analysts have calculated that if the fuel efficiency of cars and trucks improves by an average of 2.5% a year, it will be enough to measurably constrain oil demand. The U.S. government continues to push for higher Corporate Average Fuel Economy (CAFE) standards through comprehensive regulations on the auto industry. Proposals today developed by the EPA and NHTSA impose fleetwide standards which would raise averOil-Prices-2016age fuel efficiency requirements to 54.5 miles per gallon by 2025. The program is projected to save more than $1.7 trillion in fuel costs and reduce America’s dependence on oil by more than 2 million barrels per day in 2025.

Sources: U.S. Energy Information Administration

Equity Update

Major domestic stock indices were essentially flat for the month of April after U.S. equities reached record levels not hit since July 2015, sending the Dow Jones Industrial Average to the 18,000 level.

Defensive stocks pulled back in April, a signal that buyers are less risk averse and leaning towards more aggressive growth company stocks. Other optimistic sector trends evolved in April as small caps, cyclicals, and multi-nationals outperformed more conservative large cap and defensive equities.  Some investors celebrated the seventh year of the bull market that began in March 2009. Even with the volatility and pullbacks over the 7-year period, it is still considered the second longest bull market in the market’s history.

Sources: Dow Jones, S&P, Bloomberg

The Japanese Yen Has Risen Over 10% Versus the U.S. Dollar This Year


International Review

China released economic data that showed exports were growing and that its GDP was heading higher. International analysts and economists tend to play down economic data released by the Chinese government due to perceived inaccuracies of what it releases.

Economic growth in the eurozone surpassed growth in the Unites States for the first quarter, a sign that central bank stimulus in Europe may be making some progress. The dollar’s recent slide against the euro was also an indicator that U.S. growth was stagnating relative to international markets.

Many economists believe that the central banks in Europe and Japan have held back on further stimulus efforts until financial conditions stabilize and their currencies regain some strength.

Sources: Eurostat, Bloomberg, Reuters


Japanese Yen Surges – Currency Update

The yen has risen over 10 percent against the dollar so far this year, with any additional gains intensifying speculation that the Bank of Japan would intervene sooner rather than later, as Japanese politicians have raised concerns about the yen’s run-up. Japan’s rising currency is making Japanese exports form cars to pens more expensive worldwide, stifling any stimulus efforts that had originally been enacted.

Japanese Prime Minister Shinzo Abe is scheduled to visit Italy and Germany in May where it is believed he will try to set the stage for a possible intervention in currency markets as Japan prepares to host a G7 meeting later in the month.

Some currency analysts expect a possible resurgence in a currency war should the yen and other major currencies continue to rally versus the U.S. dollar.

Yen-1000Competitive devaluation of a nation’s currency, also known as a currency war, is a condition in international affairs where countries compete against each other to achieve a relatively low exchange rate for their own currency.

The benefits of a devaluing currency for a nation’s economy include an increase in exports, which may result in additional manufacturing and employment. A significant hindrance of a devaluing currency would be imports becoming more expensive, thus indirectly causing inflationary pressures within an economy.
Source: Federal Reserve Bank of New York


7 States Have No State Income Tax


Fixed Income Update – Global Bond Markets

The ECB disclosed additional details in April about its bond buying program, stating that it will purchase government and corporate debt with maturities of 6 months to 30 years. Effectively, this strategy will provide cheap loans to global corporations operating in Europe, leading to a possible surge in debt issuance as companies take advantage of the ECB’s plan.

So far this year, corporate bonds have outperformed most government bond sectors, including Treasuries and mortgage-backed debt. High-yield corporate debt has seen the most appreciation of all corporate debt. Historically, high-yield bonds tend to correlate with equity markets due to factors as improving earnings and credit ratings.

Some analysts believe that the Fed’s stance on keeping rates stable for now and the ECB’s stimulus program in Europe of buying corporate debt has prompted domestic bond values to rise.

Sources: ECB, Bloomberg, Federal Reserve


State Income Tax Rates – Tax Planning

State-Tax-Rates-1024x970Individual state income taxes are a major source of revenue for states, accounting for nearly 35% of state tax collections nationwide. Forty-three states currently impose a state income tax, in addition to a Federal income tax, with only seven states imposing no state tax at all.

As state and municipal finances have experienced unforeseen fiscal duress, many states have levied and plan to levy higher tax rates on their residents. The non-partisan, non-profit Tax Foundation founded in 1937 provides unbiased research and data on taxes imposed throughout the United States.

Individual state income tax rates not only affect individuals but also affect companies. As companies grow and hire staff for new locations, state tax rates can deter some companies from hiring in higher rate states. Some companies can pay less since an employee’s take-home pay might be higher should there be no state income tax.

Retirees also consider state tax rates when planning for retirement and reducing expenses. It’s no surprise that the seven states that have no state income tax are also popular living destinations for retirees.

Source: Tax Foundation





Wealthy Folks Tend To Be Healthier

Where Our Tax Dollars Go To – Fiscal Overview

Federal Spending 2015For fiscal 2015, the federal government took in over $3.2 trillion in tax payments, a record year compared to previous fiscal years. The federal budget for fiscal year 2015 ran from October 1, 2014, to September 30, 2015. The total figure amounts to approximately $21,833 for every person in the United States.

Taxpayers often wonder, where does all their tax money go. The Office of Management & Budget breaks down where tax payments go each year, allowing Americans to see what they’re getting.

Source: Office of Management & Budget



Rich Are Healthier – Health

Researchers at the Urban Institute and Virginia Commonwealth University released a report in April examining the links between health, wealth, and income..

Speeding running shoe icons in four color variations with a trainer, sneaker or sports shoe with speed and motion trails, vector silhouette on white

For years poverty has often been associated with poor health, while the wealthiest have been thought of having fewer illnesses..

To confirm these perceptions, the report analyzed various health prob
lems for which the Centers for Disease Control (CDC) has recorded prevalence by family income. In every case, the wealthy are better off. .

How health and money are related is complex. For both rich and poor, the two attributes likely reinforce one another. “Health and income affect each other in both directions: not only does higher income facilitate better health, but poor health and disabilities can make it harder for someone to succeed in school or to secure and retain a high-paying job,” the Urban authors write..

Living in poverty often means less access to nutritious food or neighborhoods safe for outdoor exercise. Low-income people are more likely to smoke or be obese. White-collar jobs are less physically demanding, and people who have them can afford to take a day off for a doctor’s visit or to get a gym membership. They’re also probably not working the night shift, which is linked to cancer and other health problems.

Sources: Centers for Disease Control, Urban Institute & Virginia Commonwealth University