September 2016

Macro Overview

Markets have become data sensitive as varying economic news moved equities and bonds in anticipation of a looming Fed rate hike. Some members of the Federal Reserve are leaning towards a rate increase before the end of the year rather than waiting until next year.

Growth estimates for the economy were revised down again in August with GDP growth revised to a 1.1% annual growth rate. Even though economic data has been mixed, the Fed may consider some of the data strong enough to raise rates sooner. Some Federal Reserve watchers believe that comments made by Fed members in August were meant to shore up rates a bit without the Fed actually raising rates, a tactic used before.

The S&P 500 index will have a new sector added in September with Real Estate Investment Trusts (REITs) comprising the 11th sector of the index. REITs have been part of the financial sector for years and have now earned their own designated category with an expected 3% allocation.

Internationally, worries still abound regarding the uncertainty of the EU’s future without Britain. Of concern is the lack of new capital investments by companies as a result of new rules that will take up to two years to formalize. Some see possible correlations between the EU vote in Europe and the U.S. presidential election in November, as polls failed to capture the voting intentions of marginalized and antiestablishment voters during the Brexit vote in Great Britain.

Volatility with oil prices continued producing reactions to headlines surrounding inventories, production, and OPEC policies. Domestic oil drillers and energy companies have been quick to acclimate to lower oil prices by retooling and curtailing production and costs. Decisions to increase production is seen as a validation that debt levels are under control and companies are positioned to expand, as long as oil prices stay around $50 per barrel.

Back to School Knowledge Studying Education Concept

Back to school sales rank as the second biggest shopping season for retailers, after the winter holiday season. According to the National Retail Federation (NRF), back to school shopping generates over $27 billion in retail sales every season.

Sources: FDIC, Federal Reserve, S&P, Reuters, Eurostat, NRF

REITs Will Earn Their Own Category Within The S&P 500 Index This Month

New Sector Joining S&P 500 Index – Equity Markets Update

Domestic stock market indices closed at new highs in August as earnings and economic data helped propel equity prices. Even with recent new highs, volume remains relatively low. Some market analysts believe that the increased regulation of banks and brokerage firms has taken a toll on trading. The use of various derivatives have been discouraged by regulators, which have in the past added activity and volume to equity markets.

The positive performance of the high-yield bond sector so far this year is indicative of improving credit characteristics for smaller company stocks. Since most smaller companies tend to rely more on debt for cash flow, a continued low rate environment has been beneficial for earnings and growth.

The S&P 500 index is adding a new sector to its mix. REITs will become part of the S&P 500 compilation on September 16th, making it the 11th sector. The growth and capital representation of REITs in the markets will now formally allow REITs to sit along side the other 10 sectors as a standalone class. REITs have been part of the financial sector for years, but now have earned their own designated category.

REITs have become increasingly popular with investors as their management teams have become more professional and the companies have become larger. There are two main types of REITs, equity REITs and mortgage REITs. The newly added sector will only include equity REITs that own physical property such as apartments, office buildings, industrial buildings, malls, hotels, cellular towers, data storS&P 500 Indexage facilities, self-storage facilities, movie theaters, timber and even prisons.

REITs currently constitute about 3% of the S&P 500, so it is estimated that the newly created 11th sector will make up about 3% of the total index.

Sector weightings comprising the S&P 500 vary as the economy shifts and industries evolve. Technology currently encompasses the largest portion of the S&P 500 at 21%, yet made up as much as 35% in 2000 during the height of the technology boom. (Sources: S&P, Bloomberg, Global Industry Classification Standard (GICS))

Continued Low Rates – Global Fixed Income Update

Short-term U.S. bonds have been rising slowly as long-term bond yields have been dropping, leading to a “flattening of the yield curve.” Such a dynamic helps bond analysts and economists to determine if there’s an economic slowdown or even inflation on the horizon.

The Bank of England launched its biggest stimulus package since the financial crisis with its first rate cut in more than seven years and a new £70 billion bond-buying program. The Bank of England is forecasting that unemployment will rise, housing prices will fall and inflation will go up. The Bank of England is joining central banks in Japan and the eurozone in buying large amounts of sovereign bonds, as global benchmark yields continue to descend to new lows, exacerbating the matching of future long-term liabilities for pension plans and insurance companies. The amount of global negative yielding debt has now risen to $12.64 trillion, and is dominated by European and Japanese bonds. The Fed continues to be at odds with other central banks worldwide, as lower rates and stimulus efforts are underway in Europe and Japan, while the Fed prepares to tighten in the United States. (Sources: Bank of England, Eurostat, U.S. Treasury)

A Gold Olympic Medal Is Worth About $564

What An Olympic Gold Medal Is Actually Worth – Market Fact

Of the 78 countries that won medals in Rio, the U.S. won more Olympic medals than any other country that participated with a total of 121 medals. Of those, 46 were gold, 37 silver, and 38 bronze.Olympic-Medals

Surprisingly enough, U.S. Olympic athletes receive no formal financial support from the U.S. government. Instead, financial assistance is provided by the U.S. Olympic Committee, which is a federally chartered nonprofit entity receiving no federal funding whatsoever. Conversely, almost every other country that participated in the Rio Olympics offered government sponsored financial support. Countries such as Canada, China and the U.K. have appointed sports ministers that have dedicated resources available for Olympic athletes. Uniquely, Team USA athletes rely on the generosity of the American people to achieve their Olympic dreams. In addition to receiving a medal, the U.S. Olympic Committee also awards a cash prize along with each metal. Athletes are awarded $25,000 for gold metals, $15,000 for silver, and $10,000 for bronze. What’s interesting is that the cash prizes are worth much more than the medals themselves. Based on recent commodity prices, the value of a gold medal is about $564, silver is roughly $305, and bronze is barely worth anything. (Sources: U.S. Olympic Committee)

Credit Card Debt On The Rise – Consumer Finance

U.S. banks have ramped up lending to consumers through credit cards at the fastest pace since 2007. The industry has accumulated an additional $18 billion of credit card loans and other types of revolving credit in the past three months.

Data released by the Federal Reserve shows that the U.S. banking industry has seen credit card and other revolving loans rise at a annual rate of 7.6% in the second quarter of 2016, to $685 billion. The credit card business remains among the most profitable in banking as banks can charge much higher interest rates than other loan types, with average credit card rates between 12% and 14%.

Yet as credit card debt levels have risen, so have reserves for losses as banks anticipate delinquencies to rise. Within the past year U.S. banks have piled on about $54 billion worth of loans to consumers through credit cards, according to Federal Reserve data. Financially savvy consumers that pay their balances down each month avoid hefty interest charges, but those that don’t, known as “revolvers,” pay average rates of between 12% to 14% and significantly more if they are considered higher risk. Seven years since the recession ended, consumers who were hit hard during the financiTotal Credit Card Debtal crisis have found their credit scores improving. Bankers attribute a rise in credit card issuance to rising home prices and low unemployment. Banks are also lending more since one of the most important drivers of their profits are net interest margins, the difference between returns on assets and the cost of funds, which remain near their lowest levels in decades. The average credit limit per card for a subprime borrower is about $2,300, compared with about $11,500 for the safest customers.

Source: Federal Reserve


Kathryn's Update

Fall is in the air and schools are back in session!  Fall is my favorite time of year, soon the leaves will be changing color and cooler weather is on the horizon.  Fall is also the calm before all the hustle and bustle of the holiday season.  Our third quarter is coming to a close and I will be reaching out to all of our clients to schedule quarterly reviews.  Mikus looks forward to joining us by video conference.  We have already had the opportunity to test out video conferencing with a few clients and it feels like he is right here with us!

We feel so very blessed to have the opportunity to have our own practice.  A small firm allows us more time to dedicate to managing our clients’ portfolios and truly customizing each financial plan.  Our goal is to be more than financial advisors, but to be financial advocates for our clients.  The flexibility of your own practice allows us the opportunity to be involved in our community.  I enjoy volunteering with my church’s endowment fund, as well as volunteering as PE docent at my children’s school.  Without parent volunteers, many of the beloved programs that we grew up with such as music, art, and PE would not happen.  I also get the pleasure of coaching both of my daughter’s soccer teams this year.

We want to send out a special thank you to many of our clients that have referred their friends and family to us.  Your referrals are the biggest compliment we can receive and we appreciate it so very much.

We look forward to seeing all of you in October!  Below are a few pictures of my soccer teams and the first day of school.



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