Broker Check

October 22, 2018

| October 29, 2018
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The world remains full of opportunities and challenges. Although we’ve seen global markets moving in tandem in recent years, Sara Potter of FactSet pointed out, “…we’re starting to see the end of the synchronized global growth that has prevailed over the last two years. While the U.S. economy remains strong, growth in Europe and Japan is moderating, and emerging markets are under increasing economic and financial market pressure.”

Strong economic growth and robust earnings helped U.S. stocks significantly outperform other regions of the world during the third quarter of 2018. In addition, the resolution of some trade tensions, namely the signing of a United States-Korea trade deal and the renegotiation of NAFTA (North American Free Trade Agreement), helped soothe investor concerns, reported Jeffrey Kleintop of Schwab.

The trade relationship between the United States and China, however, remains an issue marring the outlook for economic growth in both countries. The Economist Intelligence Unit reported:

“Since the start of 2018 trade policy has become the biggest risk to The Economist Intelligence Unit's central forecast for global economic growth. We now expect this risk to materialize in the form of a bilateral trade war between the United States and China, with negative consequences for global growth…The trade war comes at a challenging time for the Chinese economy…The trade war will also affect the U.S. economy…the escalating trade dispute with China will start to weigh on growth later in 2018 and into 2019 – we now expect growth to slow in 2019 to 2.2 percent (2.5 percent previously). The U.S. manufacturing and agricultural sectors, in particular, will be hit by the trade dispute, and rising interest rates will cause private consumption to slow.”

China’s economic growth slowed during the third quarter. The nation experienced its slowest growth since 2009, reported Reuters. One of our top risks is China’s growing debt burden. China’s third quarter GDP (Gross Domestic Product) report showed the country’s year-over-year GDP growth slowed to 6.5 percent, the lowest rate since the 2008 financial crisis. While slow for China, 6.5 percent is still incredible. The United States is expected to grow around 3.3 percent in the third quarter. For the United States, 3.3 percent is rapid growth.

Still, the growth number missed expectations of 6.6 percent. This can be attributed to declining growth in industrial output over the last quarter. Export data was very strong and led investors to conclude the United States-China trade dispute is having little impact. Our view is the opposite. Concerns over future tariffs caused some transactions to be moved forward, pushing exports higher. Businesses also seem to be scaling back expansion plans because of uncertainty regarding trade, which lowers current growth.

Many Chinese officials restored some market confidence by claiming the recent market performance doesn’t reflect the overall economic health of China. The government is clearly concerned with how the market is performing. Look for fiscal policy to play a key role in counteracting the recent downward trend in China’s market.

Chinese stock markets generally lost value. However, some Chinese indices performed better than others, depending on the type of stocks included in the index. For example, the MSCI China Index, which measures large- and mid-cap stocks of various share types that trade on the mainland and in Hong Kong, was down 8.45 percent during the third quarter.

In contrast, the MSCI Red Chip Index, which is comprised of stocks that are incorporated outside of China, trade on the Hong Kong exchange, and are usually controlled by the state or a province or municipality, was up 3.25 percent for the third quarter and flat year-to-date.

Emerging markets were weak performers overall during the third quarter, but there were bright spots. Schroders explained, “Turkey was the weakest index market amid a sharp sell-off in the lira…By contrast, Thailand recorded a strong gain and was the best performing index, with energy stocks among the strongest names. Mexico outperformed as the market rallied following general elections and an agreement with the United States on NAFTA renegotiation. Taiwan, where semiconductor stocks supported performance, also outperformed. Despite ongoing risk of new U.S. sanctions, Russian equities also finished ahead of the benchmark, benefiting from crude oil price strength.”

Political strife continued to hamper the European Union and the United Kingdom during the third quarter. Overall company profits weren’t particularly impressive in the region and neither was economic growth, reported BlackRock.

As the third quarter came to a close, Barron’s conducted its Fall Big Money Poll. Vito Racanelli reported almost two-thirds of professional money managers from across the country said the U.S. stock market was fairly valued – and that was before the market slid lower this month. While the money managers’ assessment doesn’t mean all U.S. stocks are fairly valued, there may be opportunities to invest in sound companies at attractive prices.

Trade tensions, inflation trends, economic growth, corporate earnings and central bank monetary policy are likely to affect the performance of markets during the remainder of 2018 and into next year.

Key points for the week

⦁ The S&P 500 was positive last week but by a miniscule amount.
⦁ Corporate earnings are supporting the market.
⦁ Chinese economic growth slowed last quarter and missed expectations.

What are we reading
Below are some articles we paid particularly close attention to this week. We encourage our readers to follow the links.

This expense has reached $100,000 annually in retirement.
While overall inflation has remained close to the Federal Reserve’s 2% target, the inflation rate of long-term care grew at an annual rate of 6.67% over the past year. On average, American’s will not spend at least $100,000 per year when long-term care is needed. The national median amount spent on a private room in a nursing home hit $100,375 in 2018.

Tax Benefits of ‘Opportunity Zones’ under the 2017 Tax Cuts and Jobs Act.
As part of last year’s tax reform, Congress created a new type of tax favored investment called ‘opportunity zone’ investments. The purpose of these new opportunity zones is to attract capital to depressed areas around the country to help boost economic output and investment. Last week, the US Treasury released proposed rules that lay out the time investors must hold on to their ‘opportunity zone’ investments to receive the tax benefits. The Treasury predicts up to $100 billion could be invested in these new ‘opportunity zones’.

Rankings of last and most tax-friendly states.

Oblivious man had $1M lottery ticket for four months
A man in Connecticut cleaning out his wallet recently realized he owned a Powerball ticket worth $1 million. Apparently, he bought it on a whim after stopping for ice cream and then forgot about it. Some prudent investors may know the feeling. Being fully invested during the 10-year bull market could be the equivalent to discovering a $1 million Powerball ticket in your pocket. Except, if you checked it later, it may be worth $10 million.

Should Parents Pay for College Tuition?

It’s a pricey question.

College Board estimated the average cost for full-time, in-state students who live on campus at four-year public colleges or universities during the 2017-18 school year is $25,290.

Out-of-state students can expect to pay $40,940. Students who choose four-year, private, non-profit colleges and universities will spend about $50,900 a year.

If pricing increases continue to follow the trend of the last five years, tuition and fees may increase by 3.2 percent a year without factoring in inflation.

The return on investment can be attractive
While the price tags attached are considerable, there is an argument to be made that the price of a college education is worth it.

Consider unemployment rates. The average unemployment rate in the United States in March 2018 was 3.6 percent, while the average unemployment rate for a person with a bachelor’s degree was 2.5 percent, reported the Bureau of Labor Statistics.

A bachelor’s degree provides an income advantage, too.

The median (which is the mid-point, not the average) income for workers in the United States in March 2018 was $907 per week. The median income for Americans with high school diplomas was $712 per week. For people with bachelor’s degrees, median earnings were $1,173 per week, and for people with professional degrees, it was $1,836 per week.

In other words, the $100,000 to $200,000 price tag attached to a bachelor’s degree could provide a lifetime income advantage of $1 million or more. (*Assumes full time work, 52 weeks a year, from age 25 to age 67. Or, 2,184 weeks of full-time work in a lifetime.)

There are alternatives to a four-year college
Of course, there is no guarantee a child will realize unemployment or income advantages, and college isn’t for everyone. When a child is not a passionate student, has little interest in additional schooling, or does not succeed in college, then skilled trades may be an option.

As the Baby Boom generation retires, a shortage of skilled workers has emerged, and it’s costing American businesses billions of dollars. Generally, skilled trades require fewer years of college or trade school and education alternatives – union and non-union apprenticeships, mentorships, or manufacturing-company training programs – may be available.

Typically, skilled trade jobs pay well. Just think about the last time you wrote a check for plumbing, construction, or electrical work around your home. NPR reported, “In all, some 30 million jobs in the United States that pay an average of $55,000 per year don't require bachelor's degrees, according to the Georgetown Center on Education and the Workforce.”

Sometimes, students with a passion for learning choose to pursue a dream rather than go to college. A variety of organizations, including the Thiel Foundation, provide support for select individuals. Thiel offers a two-year, $100,000 fellowship for students, ages 23 and younger, who forgo college and “build new things instead of sitting in a classroom.”

Who should pay the bill?
This is a difficult question. The typical American family pays for college by combining scholarships and grants, personal income, savings, and loans, according to Sallie Mae’s 2017 How America Pays for College report. Income was derived from:

⦁ Scholarships and grants 35 percent
⦁ Parents’ income and savings 23 percent
⦁ Students’ loans 19 percent
⦁ Students’ income and savings 11 percent
⦁ Parents’ loans 8 percent
⦁ Friends and relatives 4 percent

Not every family follows this formula. Often, the solution a particular family adopts is determined by its financial circumstances, values, and philosophy about raising children. Here are broad descriptions of three basic options for parents:

Parents pay all college costs. If you want to pay for college, you’ll need to start saving early and save for other financial goals at the same time. Sometimes, parents skimp on retirement savings to put more toward college. Many financial planners disagree with this choice because, as recently wrote, “…you and your child can borrow for college, while nobody lends for retirement.”

529 College Savings Plans offer tax-advantages to parents and grandparents who are tucking money away for a child’s college costs.

Parents pay a portion of college costs. College cost sharing can be structured in a variety of ways. The variation chosen should suit the family. For instance, some parents may agree to pay tuition while children pay living expenses. Alternatively, parents may pay what they can afford from income and savings (without borrowing) and students are responsible for the remainder of the costs, even if students are required to borrow.

Another way to divide expenses is for parents to pay for undergraduate degrees, while children are responsible for graduate degrees. There are myriad variations on this theme.

Children pay all college costs. Some parents do not have the means to pay for college. Others believe in tough love or expect their children to ‘pull themselves up by their bootstraps.’

No matter the reason, the student may benefit by declaring themselves financially independent from their parents, which may help them qualify for additional aid.

Sometimes, parents who require children to fund college pay off student loans as a graduation gift. As long as the amount is lower than the annual exclusion amount, gift taxes should not be triggered. Check with your tax advisor before taking any action.

If you would like to discuss saving and paying for college or trade school, give us a call.

New Trend: Pets and financial planning.

Animals have played important roles in human lives for centuries. They provide companionship, comic relief, work assistance, transportation, reassurance, protection, and food.

Today, emotional-support and service animals may be found in workplaces, beauty salons, cafes, theatres, airplanes, and many other places where our parents or grandparents would have been surprised to find them. Landlords charge pet rent, and some service animals qualify as a medical expense under Internal Revenue Service rules.

It is also becoming more and more common for pet owners to include pets in their financial planning goals. While you cannot leave your pet property, you can make arrangements to have your pet cared for after you are gone.

Last week, The Economist reported, “Two-thirds of all horse owners in America have made some provision in their wills for their pets, according to a survey by the American Pet Products Association. Over a third of American pet owners say they would pay for animal-related expenses by putting less into their retirement accounts. And, three-quarters of those buying a home said they would turn down an otherwise ideal property if it did not meet their animal’s needs.” In addition, pets can become beneficiaries of trusts.

Whether you think the idea of providing financial support for pets is silly or you wholeheartedly embrace it, the role of animals in the lives of many Americans is changing.

Weekly Focus

“Animals are such agreeable friends - they ask no questions; they pass no criticisms.”

~ George Eliot (a.k.a. Mary Anne Evans), English Novelist

"Plenty of people miss their share of happiness, not because they never found it, but because they didn't stop to enjoy it."

~ William Feather, Writer

"I know for sure that what we dwell on is who we become... Become the change you want to see - those are words I live by."

~ Oprah Winfrey

"Perseverance is a great element of success. If you only knock long enough and loud enough at the gate, you are sure to wake somebody."

~ Henry Wadsworth Longfellow, Poet

Links & Disclaimers
RJFS and SPC do not offer or provide legal or tax advice. Tax services and analysis are provided by the related firm, S&M through a separate engagement letter with clients. Portions of this newsletter were prepared by Carson Group Coaching. Carson Group Coaching is not affiliated with RJFS, SPC or S&M.  The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material.  The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  This information is not intended as a solicitation of an offer to buy, hold or sell any security referred to herein.  There is no assurance any of the trends mentioned will continue in the future.  Any opinions are those of the author and not necessarily those of RJFS.  Any expression of opinion is as of this date and is subject to change without notice.

Opinions expressed are not intended as investment advice or to predict future performance.  Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.  Past performance does not guarantee future results.  Investing involves risk, including loss of principal.  Consult your financial professional before making any investment decision.  Stock investing involves risk including loss of principal. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stock companies maintained and reviewed by the editors of the Wall Street Journal. Please note direct investment in any index is not possible.

The MSCI Emerging Markets is designed to measure equity market performance in 25 emerging market indices. The index's three largest industries are materials, energy, and banks. Investing in emerging markets can be riskier than investing in well-established foreign markets.

International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. Investing in emerging markets can be riskier than investing in well-established foreign markets. Sector investments are companies engaged in business related to a specific sector. They are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification.

Links are being provided for information purposes only.  RJFS, SPC and S&M are not affiliated with and do not endorse, authorize or sponsor any of the listed websites or their respective sponsors, and they are not responsible for the content of any website, or the collection or use of information regarding any website's users and/or members. (Page 1) (Page 1) (Pages 3, 10)\ (Pages 8, 11, 17)

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