Quarterly Playbook 3 rd Quarter 2016

Transcription

1 Current Financial Planning and Investment Themes By Shon P. Anderson, M.B.A., CFP, CFA President & Chief Wealth Strategist The (Market) Force Awakens. There are times when news headlines outweigh market fundamentals, and times when the market forces are stronger than the media noise. It appears that we are in an environment of stronger market forces at present. Despite global turmoil surrounding the Brexit vote and various political fears, markets are tuning out the noise (for the most part) and focusing on economic and fundamental factors. These economic forces can be very powerful over the majority of distractions, and that bodes very well for portfolio strategy. US Economics The not-so-new normal. US economics continue to run on the slow side, with Federal Reserve economic growth projections falling again down to % real GDP growth from % in March. Yet, the labor market is continuing to grow stronger, albeit at a slow creep of a pace. In June, the U-3 (official) unemployment rate dropped to 4.9% from 5.0% in March while the U-6 (broader definition including part-time) rate pushed down as well to 9.6%. This is in light of the June Labor Participation rate coming in at 62.7%, which is back down from the tick up we had in March. Currently, although the economy is persistently slow, it doesn t appear to be brittle in my opinion. Market forces seem to be resilient, despite conditions being less than optimal. Consumer finances are still in amazing shape, thanks partially to a long period extremely low interests rates on debt coupled with broad asset growth. Additionally, household debt payments as a % of disposable income remain at record low levels. Corporate financials, on the other hand, are still solid but have given up some ground as of late. Among other thing, corporate debt levels have risen and profit margins have declined to some degree. All things considered, the US economy is still stuck in slow growth mode and not likely to change anytime soon. **Summary of Economic Projections to be released with the FOMC minutes June 15, 2016

2 Page 2 of 6 US Equity Markets US equity markets not only recovered during the second quarter, they pushed higher. There were still some anxiety factors that came into play around Brexit, however. Valuations continue to appear neutral overall, with Small Value and Large Growth having the most opportunity compared to their 15-year P/E averages. Furthermore, as have been mentioned previously, positive earnings surprises should become more abundant as we move along the year due to low year-over year comparisons caused by 2015 currency issues. However, we should expect the persistence of more frequent, but lower magnitude volatility episodes throughout the remainder of the year though. In my view, chances are that we will see high single digit US equity returns for US Fixed Income Whoa! How can it be? The bond market keeps rising and yields keep going lower. Did anyone see that coming? Well, yes, we did. While most other portfolio strategists have been advocating reducing or even eliminating bonds from a portfolio because the only place for yields to go is up and why buy bonds when the yield on the S&P 500 is higher than the 10-year treasury, we have maintained our strategic exposure and have captured rebalancing opportunities. As of the end of the 2 nd quarter, most fixed income asset classes have far outperformed their equity counterparts. High Yield bonds have lead the way and still remain attractive. Treasuries have exceeded expectations with the 10-year returning 7.95% YTD and the 30-year bond returning an astounding 16.82% YTD. This is all amongst a backdrop of global yields plummeting due to central bank policies with many carrying negative interest rates. This scenario makes US bonds very attractive relatively speaking. However, once the central bank policies come to an end, there very well could be a snap-back in fixed income pricing. In my opinion, regular rebalancing will help capture these fixed income asset dislocations and prevent major portfolio shocks. International Markets International Equites are still struggling as the Eurozone and Japan governments and Central banks are throwing everything including the kitchen sink at their economic problems. For a brief period, the Brexit vote cast volatility into the global equity markets but has since subsided, with the focus now on growth efforts. Many of these so called growth efforts are driven by pushing the extreme limits of monetary policy by driving down interest rates and bond yields to the point of being negative in many cases. For this reason, foreign bonds have had good performance so far this year. However, as we have mentioned, if Central Banks and institutions mandated to hold these assets stop doing so, then the prices may fall rather quickly.

3 Page 3 of 6 Real Estate In September, Real Estate will be given its own sector according to the widely used GICS system (Global Industry Classification Standard). This will make it the 11 th sector, and most likely provide heightened exposure and demand from investors on my opinion. Coupled with a solid fundamental backdrop, the real estate outlook is very positive. Fundamental contributors including modest supply and continued low financing costs provide opportunity for cash-flow growth in this space. Legislative Here we are, only one quarter away from the elections. Both candidates continue to be very controversial, however, there are some issues where they seem to converge such as re-negotiating trade policies and bringing a serious use of force to ISIS. However, they each have very different approaches to structuring our economy for growth. That said, the markets do not seem to be experiencing many election effects at this point, although evidence of cautiousness remains. In my opinion, it has been the majority of the countries view for some time now that the structure of government appears to only be able to improve from here as the current level of dysfunction is at alltime highs. Regardless of the election outcome though, we are likely to see a bump in the markets as some clarity to policy direction emerges. Interest Rates & the Fed Our base case from early on in the year still remains, that there will likely only be 1 rate hike that comes in the 4 th quarter. Weak inflation and economic growth data continue to plague the outlook, making the case for more caution. However, the relative yields of other foreign government bonds provide some cover for the Fed to raise another 25 basis points and yet have very little impact. The case for raising rates due to normalization and the need for room to operate if the economy slides back the opposite direction is paired with weak domestic and global growth and the desire to avoid further US dollar appreciation. It s my view that as long as these environments persist, we will see the Fed continue to talk a big game but is likely to only keep inching their way toward interest rate hikes.

4 Page 4 of 6 Financial Planning Corner Understanding Medicare: Parts A, B, C, and D (Courtesy of the Financial Planning Association) Medicare contains many rules that beneficiaries and their caregivers are required to learn. Perhaps the best way to grasp the program's details is to review the major components of the Medicare program: Parts A, B, C, and D. Medicare Part A: Hospital Insurance This insurance is designed to help cover the following: Inpatient care in hospitals, including rehabilitation facilities Care provided in a skilled nursing facility or hospice for a limited period Home health care For inpatient hospital care, Medicare typically covers a semi-private room, meals, general nursing, drugs, and other hospital services and supplies. Medicare typically does not cover long-term care or custodial care in a skilled nursing facility, although under limited circumstances, it may cover a maximum of 100 days during a benefit period if a doctor certifies that a patient needs daily skilled care. Medicare Part B: Medical Insurance Part B helps to cover physician services, outpatient care, preventive services, durable medical equipment, and certain home health care. Although the scope of Part B is extensive, there are many services -- such as dental care, routine eye exams, hearing aids, and others -- that are not covered as part of this program.

5 Page 5 of 6 Medicare Part C: Offered by Private Insurers Also known as Medicare Advantage plans, Part C consists of insurance plans provided by private carriers. For beneficiaries with Part C, Medicare pays a fixed amount every month to a private insurer for their care. Many Medicare Advantage plans include Medicare drug coverage, and all cover emergency and urgent care. In addition, certain plans may cover services that are not covered by Medicare, which may result in lower out-of-pocket fees for beneficiaries. You can sign up for Medicare Part C when you first become eligible for Medicare. You can also sign up between January 1 and March 31 or between October 15 and December 7 each year. If you sign up at the beginning of the year, you can't join or switch to a plan with prescription drug coverage unless you already had Medicare Part D. If you sign up toward the end of the year, your coverage will begin January 1 of the following year. Medicare Part D: Prescription Drugs There are generally two ways to obtain Medicare prescription drug coverage. If you have Original Medicare (Part A plus Part B), you can add drug coverage by obtaining it from an insurer approved by Medicare through Part D. Or if you have a Medicare Advantage plan, find out whether your plan includes prescription coverage as part of its program. Even if you don't take many prescriptions, you may want to consider signing up for Part D as soon as you become eligible. If you wait and try to sign up during a subsequent enrollment period, you may be charged a late enrollment penalty and be forced to pay higher premiums. You can join Medicare Part D when you initially become eligible for Medicare or between October 15 and December 7 of each calendar year. Costs: Part A: No premium if you or your spouse paid Medicare taxes while you were working. For 2015, there is a deductible of $1,260 before coverage begins. You may expect to pay a portion of the cost for a hospital stay of more than 60 days during a benefit period. Part B: A deductible of $147 for 2015 plus 20% of Medicare-approved amounts for medical services. The amount of additional monthly premiums depends on whether you are enrolled in Original Medicare or in Part C. With Original Medicare, the standard 2015 premium is $ per month. Single beneficiaries with incomes above $85,000 and couples earning more than $170,000 pay higher premiums.

6 Page 6 of 6 Part C: Costs and levels of coverage vary according to the plan. Contact plans that interest you to learn the details and to compare the costs and levels of coverage with Medicare Part A and Part B. Part D: Pricing for prescription drug coverage is complex. For those who add Part D to Original Medicare, there is a monthly premium, an annual deductible, and copayments. There is a "coverage gap" that works as follows: After a beneficiary and the insurer pay $2,860 for prescription drugs during a benefit period, the beneficiary will pay 47.5% of the plan's covered brand-name prescription drugs until out-of-pocket expenses total $4,700, at which point catastrophic coverage takes effect. Effective the following calendar year, a new benefit period begins with applicable premiums, copayments, and other costs. Medicare's rules can be confusing for many people. The Medicare website can be a valuable resource. Every year, Medicare also mails Medicare & You to beneficiaries and makes this fact-filled publication available online. You may want to review it to make sure you have an accurate understanding of the Medicare program. Points to Remember 1. Medicare consists of four components: Parts A, B, C, and D. 2. Part A is hospital insurance designed to help cover care in a hospital or rehabilitation center. In addition, Part A may cover a limited amount of care in a skilled nursing facility or hospice. 3. Part B is medical insurance that helps to cover physician services, outpatient care, preventive services, durable medical equipment, and certain home health care. 4. Part C, also known as Medicare Advantage, consists of insurance plans provided by private carriers. For beneficiaries with Part C, Medicare pays a fixed amount every month to a private insurer for their care. 5. Part D, which is prescription drug coverage, may be available as part of a Medicare Advantage plan or may be purchased in addition to Part A and Part B (also known as "Original Medicare"). Required Attribution Because of the possibility of human or mechanical error by Wealth Management Systems Inc. or its sources, neither Wealth Management Systems Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall Wealth Management Systems Inc. be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content Wealth Management Systems Inc. All rights reserved.