Monthly Archives: March 2018

Who needs a financial advisor?

Investment Approach

Not everyone needs a financial advisor. But if you are not sure about how your financial assets should be invested, if you make major errors when you invest, you are a candidate for getting professional financial advice.

Fees are the main barrier that keeps people from getting the kind of advice that would improve their financial lives.

But just as doctors get paid for keeping us healthy and lawyers for protecting our interests, getting good financial guidance is worth every penny. Solving our financial problems has a huge impact on our lives. Making sure we don’t run out of money during retirement that can last decades is often people’s biggest fear in life.

People who are in good shape financially may not need assistance. But too many times people need guidance but are reluctant to pay for what they need. Instead, they search the internet, or ask friends or family who are often not knowledgeable. And even if they get good advice, friends and family are not going to create a plan and make sure that the plan is followed. That’s not their job.

That’s were a professional investment advisor comes in. He’s paid to create a plan, to design a portfolio for you, manage that portfolio and alert you in case the plan needs adjusting. Like a physician conducting a periodic physical, a financial professional keeps track of your progress and fixes it when things go wrong.

If you think you may need help, find an advisor in whom you have confidence, pay him a fair fee for his services and you’ll have the peace of mind knowing that your financial future is in good hands.

 

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Does Volatility Make You Nervous?

One of our favorite economists, Brian Wesbury, has some comments on recent volatility and the economy.

When Volatility is Just Volatility

Stock market volatility scares people. But, volatility itself isn’t necessarily bad. Only if there are fundamental economic problems, something that could cause a recession, would we think volatility itself is a warning sign.

So, we watch the Four Pillars. These Pillars – monetary policy, tax policy, spending & regulatory policy, and trade policy – are the real threats to prosperity. Right now, these Pillars suggest that economic fundamentals remain sound.

Monetary Policy: We’re astounded some analysts interpreted last Wednesday’s pronouncements from the Federal Reserve as dovish. The Fed upgraded its forecasts for economic growth, projected a lower unemployment rate through 2020 and also expects inflation to temporarily exceed its long-term inflation target of 2.0% in 2020.

As recently as December, only four of sixteen Fed policymakers projected four or more rate hikes this year; now, seven of fifteen are in the more aggressive camp. Some analysts dwell on the fact that the “median” policymaker still expects only three hikes in 2018, ignoring the trend toward a more aggressive Fed.

But all of this misses the real point. Monetary policy will still be loose at the end of 2018, whether the Fed raises rates three or four times this year. The federal funds rate is about 120 basis points below the yield on the 10-year Treasury (which will rise as the Fed hikes), and is also well below the trend in nominal GDP growth. Meanwhile, the banking system still holds about $2 trillion in excess reserves. Monetary policy is a tailwind for growth, not a headwind.

Taxes: The tax cut passed last year is the most pro-growth tax cut since the early 1980s, particularly on the corporate side. Some analysts argue that the money is just going to be used for share buybacks, but we find that hard to believe. A lower tax rate means companies have more of an incentive to pursue business ideas that they were on the fence about.

And there is a big difference between who cuts a check to the government and who truly bears the burden of a tax, what economists call the “incidence of a tax.”

Cutting the tax rate on Corporate America will lift the demand for labor, meaning workers and managers share the benefits with shareholders. Yes, some of the tax cut will be used for share buybacks, but that’s OK with us; it means shareholders get money to reinvest in other companies. Buybacks also move capital away from corporate managers who might otherwise squander the money on “empire building,” pursuing acquisitions for the sake of growth, when returning it to shareholders is more efficient.

Spending & Regulation: This pillar is a little shaky. On regulation, Washington has moved aggressively to reduce red tape rather than expand it. That’s good. But, Congress can’t keep a lid on spending. That’s bad.

Back in June, the Congressional Budget Office was projecting that discretionary spending in Fiscal Year 2018 would be $1.222 trillion. (Discretionary spending doesn’t include entitlements like Social Security, Medicare, or Medicaid, or net interest on the federal debt.) Now, the CBO says that’ll reach $1.309 trillion, a gain of 7.1% in just nine months.

Assuming the CBO got it right back in June on entitlements and interest, that would put this year’s federal spending at 20.9% of GDP, a tick higher than last year at 20.8% – despite faster economic growth. This extra spending represents a shift in resources from the private sector to the government. The more the government spends, the slower the economy grows.

Trade: Trade wars are not good for growth. And the US move to put tariffs in place creates the potential for a trade war. We aren’t dismissing this threat, but a “full blown” trade war remains a low probability event.

The bottom line: taxes, regulation and monetary policy are a plus for growth, spending and new tariffs are threats. Things aren’t perfect, but, in no way do the fundamentals signal major economic problems ahead. The current volatility in markets is not a warning, it’s just volatility.

 

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Tax Cuts and Jobs Act Highlights

Significant reforms of personal income tax

  • Most taxpayers pay less at all levels
  • Marriage penalty reduced.

Increase in Standard Deduction

  • $12,000 for individuals
  • $24,000 for married couples

No change in Capital Gains Rates

  • 0% up to $77,200 for married couple
  • 15% from $77,200 to $479,000 for married couple
  • 20% over $479,000 for  married couple

Significant reforms of Corporate Tax

  • Chapter C Corporations pay flat 21%.

Significant reforms of Estate Tax

  • No Estate tax below $11.2 million per person

Questions?  Ask us.

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Ten for 2018

1. It’s going to get complicated. The global economy is strengthening but there are crosscurrent including rising interest rates and changes on the way trade issues are addressed.
2. Central banks are winding down unprecedented levels of monetary stimulus. At the same time government policy and spending are stimulative.
3. The geopolitical climate remains unsettled. Elections are being held throughout the world and the electorate is looking at new faces.
4. China has confirmed that leader Xi will be in office as long as he wishes. His rule will impact China’s economic development and foreign policy.
5. The search for income will continue as the Federal Reserve has far to go before fixed income investment becomes appealing for the retail investor.
6. Current low default rates may change as public pension plans come under increased pressure as the elderly begin to outnumber the young.
7. Two-way markets return following the post-election bounce that saw a smoothly rising market with no meaningful interruptions.
8. Active management set to recover its value as some of the components of popular indexes become significantly overpriced.
9. Finding opportunities and avoiding “torpedo stocks” becomes a challenge for individual investors and fund managers.
10. Planning becomes critical as an aging population will be spending decades in retirement even as pensions and social security come under pressure.

If these issues trouble you, getting professional assistance and creating a financial plan may help you navigate the uncertainty of 2018.

 

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A different tax saving strategy

Tax loss harvesting allows people to reduce their taxable income by selling securities that have gone down in value. Capital losses can be used to offset ordinary income or to offset realized capital gains.

But if an individual dies with a capital loss that they have not used, the person who inherits these securities may not be able to use these losses.  There is a way to use these capital losses if it’s done right.

For example, If Joe buys a stock for $200 and it declines to $100 and then gives it to daughter Sue, her cost basis is $100 (the value when he gifts the stock). If she then sells it for $100 she cannot claim a loss.

However, if Joe gave the stock to wife Mary who then sells it for $100 she can claim a loss of $100 (the original cost $200 – $100 = $100 loss).

This is a quirk written into the tax code -Section 1015(e) – specifically designed for gifting of depreciated assets to a spouse.

This example only works if the assets are gifted before death. If Fred dies with the depreciated stock the tax cost basis is its value as of the date of death.

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Stay Invested: Economy Looks Good

One of our favorite economists, Brian Wesbury, Chief Economist of First Trust, offers this advice:

The current recovery started in June 2009, 105 months ago, making it the third longest recovery in U.S. history.

The longest – a 120-month recovery in the 1990s – saw real GDP expand an annual average of 3.6%. The current recovery has experienced just a 2.2% average annual growth rate – what we have referred to as “plow horse” economic growth.

That’s changing. In particular, the labor market is gathering strength. In February, nonfarm payrolls rose 313,000, while civilian employment, an alternative measure of jobs that includes small-business start-ups, rose 785,000.

Hourly wages rose a tepid 0.1% in February, but in the past six months, average hourly earnings are up at a 2.7% annual rate while the total number of hours worked is up at a 2.6% annual rate. Total earnings are up at 5.4% annual rate in the past six months, which is faster than the trend in nominal GDP growth the past few years.

New orders for “core” capital goods, which are capital goods excluding defense and aircraft, were up 6.3% in the year ending in January, while shipments of these capital goods were up 8.7%. Sales of heavy trucks – trucks that are more than seven tons – are up 17.4% from a year ago.

The pace of home building is set to grow in the year ahead, in spite of higher interest rates or the new tax law limiting mortgage and property tax deductions. In the fourth quarter of 2017, there were 1.306 million new housing permits issued, the highest quarterly total since 2007.

A better economy also means higher interest rates, but this doesn’t spell doom. Housing has been strong despite rising mortgage rates many times in history. In fact, both new and existing home sales were higher in 2017 than they were in 2016 in spite of higher mortgage rates.

Yes, the new tax law will be a headwind for homebuyers and builders in high-tax states, but it’s going to be a tailwind for construction in low tax states like Texas, Florida, and Nevada. Housing starts have increased eight years in a row. Look for 2018 to be the ninth.

In the past two months, both ISM surveys – for Manufacturing and Services – have beaten consensus expectations. The US economy is not going to grow at a 3.0% pace every quarter, but all this data suggests that our forecast for an average pace of 3% growth this year is on steady ground.

The bottom line is that the U.S. economy is accelerating, not decelerating, and the potential for any near-term recession is basically zero. Corporate earnings growth, and forecasts of future earnings, have accelerated, and our 2018 year-end forecast for Dow 28,500 and S&P 500 3,100 remain intact. Even with higher interest rates! Stay invested.

Have questions? Contact us.

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Planning Makes a Difference

Five reasons why you should work with us to create a retirement plan.

  1. Helps you focus on your goals.
  2. Address your concerns.
  3. Identify threats to your retirement plans.
  4. Feel more confident about your future.
  5. Provides a roadmap to your retirement.

Click on the link for more: Planning Makes a Difference

 

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