Market Update 7/31/2017

Financial Market Update

—July 31, 2017

The summary below is provided for educational purposes only. If you have any thoughts or would like to discuss any other matters, please feel free to contact me.

New Highs and Favorable Fundamentals

 On July 11, 2016, the S&P 500 Index posted its first all-time closing high in almost 14 months (St. Louis Federal Reserve). Since then, the broad-based index of 500 large U.S. companies has recorded 48 new highs, including two last week (LPL, St. Louis Federal Reserve).

The most reasonable explanation for the latest run is primarily found in the fundamentals – earnings driven by economic growth, both at home and overseas.

Q2 profit season is off to a very good start. With 58% of S&P 500 firms having reported, earnings are forecast to rise 10.8% versus a year ago (Thomson Reuters), up from an estimate of 8.0% made on July 1.

The chart below illustrates the sharp improvement in earnings, with profits expected to rise at a double-digit rate for two consecutive quarters. Notably, it also highlights the impact from the collapse in energy earnings, and the subsequent but modest recovery in energy earnings (all tied to oil prices).

Currently, 73% of S&P 500 firms have posted profits ahead of Wall Street forecasts. That’s above the historical average of 64% (Thomson Reuters).

But it’s not just firms keeping a close eye on expenses. Modest growth at home is being amplified by an acceleration in economic growth around the globe.

You see, S&P Dow Jones Indices recently reported that sales overseas account for 43% of total sales of S&P 500 firms. It is just an estimate, as not all firms breakout sales by geography. Still, it highlights that the global economy does have an impact on corporate profits.

That said, revenue growth is beginning to accelerate and top expectations, which is adding to the upbeat mood. Currently 71% of firms are beating sales estimates, which is well above the long-term average of 59%.

We see it anecdotally in remarks made in various press releases.

“While the activity outlook in North America for the second half of the year remains robust, we are now also seeing more positive signs in the international markets…”

—Large oil service provider

“Mining and oil-related activities have come off recent lows, and we are seeing improving demand for construction in most regions….…we are confident in raising our full-year 2017 outlook.”

—Large construction equipment maker

Results “were powered by economic tailwinds in the U.S. and globally.”

—Major transaction provider

Sources: Investor Relations, respective firms

Add still-low interest rates and a slow-to-tighten Fed to the mix, and investors have driven stocks to new highs this year.

Kyle Hurt CFP

 

It is important that you do not use this information to request or authorize the purchase or sale of any security or commodity, or to request any other transactions. Any such request, orders or instructions will not be accepted and will not be processed.

 All items discussed in this report are for informational purposes only, are not advice of any kind, and are not intended as a solicitation to buy, hold, or sell any securities. Nothing contained herein constitutes tax, legal, insurance, or investment advice.

 Stocks and bonds and commodities are not FDIC insured and can fall in value, and any investment information, securities and commodities mentioned in this report may not be suitable for everyone.

 U.S. Treasury bonds and Treasury bills are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. U.S. government bonds are issued and guaranteed as to the timely payment of principal and interest by the federal government. Treasury bills are certificates reflecting short-term (less than one year) obligations of the U.S. government.

 Past performance is not a guarantee of future performance. Different investments involve different degrees of risk, and there can be no assurance that the future performance of any investment, security, commodity or investment strategy that is referenced will be profitable or be suitable for your portfolio.  

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. 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. 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.

 Before making any investments or making any type of investment decision, please consult with your financial advisor and determine how a security may fit into your investment portfolio, how a decision may affect your financial position and how it may impact your financial goals.

 All opinions are subject to change without notice in response to changing market and/or economic conditions.

 1 The Dow Jones Industrials Average is an unmanaged index of 30 major companies which cannot be invested into directly.  Past performance does not guarantee future results.

2 The NASDAQ Composite is an unmanaged index of companies which cannot be invested into directly.  Past performance does not guarantee future results.

3 The S&P 500 Index is an unmanaged index of 500 larger companies which cannot be invested into directly.  Past performance does not guarantee future results.

4 The FTSE Developed ex North America Index is an unmanaged index of large and mid-cap stocks providing coverage of developed markets, excluding the US and Canada. It cannot be invested into directly. Past performance does not guarantee future results.

5 New York Mercantile Exchange front-month contract; Prices can and do vary; past performance does not guarantee future results.

6 London Bullion Market Association; gold fixing pricing at 3 p.m. London time; Prices can and do vary; past performance does not guarantee future results.

 

Copyright © 2017 Financial Jumble, LLC All rights reserved.

Is There a Role for Growth in Your Portfolio Strategy?

Market returns in recent years have highlighted the cyclical nature of equity investing styles. Regardless of the latest trends, however, many investors continue to ask themselves, “What is the role of growth in my portfolio?”

Shades of Growth

When deciding how much of a portfolio to allocate to growth or value stocks, it’s important to understand how they differ. Generally speaking, growth stocks have often produced higher earnings and have prices that have typically risen faster than the overall market.

Depending on their objectives, growth-oriented investors may take different approaches to security selection. Aggressive growth investors, aiming to maximize capital gains, may invest in companies with the potential for especially rapid earnings growth, which could include corporations in developing industries or small but fast-moving companies. Because these stocks may be volatile in the short term, they may be appropriate for investors with a longer-term time horizon. More traditional growth funds also strive for capital appreciation, but attempt to temper short-term ups and downs by focusing on established companies. Some growth managers, proponents of a strategy called growth at a reasonable price (GARP), try to blend strong earnings and good value.

Value stocks, in contrast, typically sell for prices that are lower than comparable securities, often because the issuing companies have experienced an earnings disappointment or other setback or simply haven’t been widely followed by the market. In other words, value stocks are those judged by investors to be bargains with unrealized potential. Value stocks may be more likely to pay dividends.

A Long-Term View

Growth and value stocks historically have taken turns outperforming one another, partly because they react differently to economic and market developments. And the conventional wisdom about when each outperforms doesn’t always hold up. Because no one knows for sure what will happen next, many financial advisors recommend owning both growth and value funds.

The growth/value decision does not have to be either/or. Your financial advisor can help you decide on an allocation that balances the two styles and suits your risk tolerance and time horizon.

Kyle Hurt MBA, CFP

Lifetime Capital Management, Inc.

Because of the possibility of human or mechanical error by S&P Capital IQ Financial Communications or its sources, neither S&P Capital IQ Financial Communications 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 S&P Capital IQ Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.  © 2013 S&P Capital IQ Financial Communications. All rights reserved.

Creating a Plan for Effective Wealth Transfer

Investors often concentrate on accumulating assets, but how much time and energy is spent on preserving those hard-earned assets for future generations? Not nearly enough. Have you considered any of the following strategies to help pass along more of your estate to your heirs?

Nuts and Bolts of Estate Planning

Many people don’t begin thinking about transferring their assets until retirement. In reality, effective estate planning is an ongoing process — often best begun at a much younger age. At the very least, you should have a will to ensure that your final wishes are known. If you have dependent children, also consider naming a suitable guardian for them. After determining the value of real estate, cash-value life insurance policies, and assets held in retirement and investment accounts, a more encompassing plan may also be necessary.

Giving Less to the Tax Man

What can you do to avoid drastically reducing your estate to meet tax obligations? Life insurance may be a tax-efficient way of transferring accumulated wealth. Some types of policies offer current tax benefits and also reduce or eliminate taxes for beneficiaries. And life insurance may also increase the amount passed on to your heirs. Plus, it may also help owners of highly appreciated property or small businesses retain their assets, rather than be forced to sell those assets to pay Uncle Sam. 

Trusts may also be appropriate, and there are many types from which to choose. A grantor retained annuity trust (GRAT), for example, allows you to transfer assets to an irrevocable trust and then receive a yearly annuity for a specific number of years. Once the GRAT is dissolved, the remaining assets pass to the beneficiaries, usually free of estate and gift taxes. Charitable remainder trusts are also popular. They can be arranged so that you — and, if you desire, a named beneficiary — receive tax benefits and, in some cases, income during life. What’s more, the trust also benefits a charity of your choice. If appropriate, trusts are a key part of the estate planning process.

This article just scratches the surface of effective wealth transfer. Contact your financial advisor or lawyer about these and other suggestions to make the most of your assets — for both you and your heirs.

Kyle Hurt CFP, MBA

Lifetime Capital Management, Inc.

 

Because of the possibility of human or mechanical error by S&P Capital IQ Financial Communications or its sources, neither S&P Capital IQ Financial Communications 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 S&P Capital IQ Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.  © 2013 S&P Capital IQ Financial Communications. All rights reserved.

Supreme Court Expands Access to Tax, Retirement, and Other Benefits for Same-Sex Couples

Same-sex couples celebrate, but many questions remain in the wake of the Supreme Court ruling.

The Supreme Court decision to strike down the Defense of Marriage Act (DOMA) — ruling key aspects of the law as unconstitutional — immediately opens the door to a raft of federal benefits that previously have been denied same-sex couples. In addition, by declining to rule on California’s Proposition 8, which bans same-sex marriage, the Court effectively cleared the way for California to join the other 12 states and the District of Columbia in recognizing same-sex marriage.

The historic decision will immediately extend many federal benefits to couples in those states where same-sex marriage is legal, and will strengthen the president’s ability to broaden other benefits through executive orders.1

Many questions remain unanswered, however. For instance, the ruling did not address how the government should treat civil unions between same-sex couples. Nor does the decision compel states that currently do not recognize same-sex marriage to do so. This could create issues (and diminished rights) for couples who are married in a state that permits same-sex marriage but move to one that does not.

While it will take time for the government’s various constituents (e.g., the Department of Labor, the Internal Revenue Service, Social Security, and Medicare) to issue concrete guidance on benefits and how they will be implemented, some areas that are sure to be affected include the following:

Big Picture Benefits

Income taxes: Same-sex married couples will now have the option of filing their federal tax returns jointly, which may mean lower tax bills. Married couples filing jointly can take better advantage of certain credits and deductions for children, mortgage payments, and other items that can generate significant tax savings. They can also share capital gains and losses, receive a larger exclusion if they sell a home (up to $500,000 for married couples, compared with $250,000 for an individual), among other tax breaks. In addition, couples who were forced to file separate federal tax forms in the past may be eligible to claim refunds on any amounts they overpaid by filing amended returns as a married couple.2 (Generally, the IRS allows up to three years for amended returns to be filed.)

Estate taxes/planning: Transferring wealth will now become greatly simplified for same-sex couples. Like traditional couples, same-sex couples will be able to pass assets directly to their spouses after death. Where trusts have been created, same-sex couples will want to review and/or update their arrangements with an estate planning attorney to ensure the surviving spouse has tax-free access to trust assets (income and principal) — a benefit that previously has only been available to traditional couples.

Health and retirement benefits: While more employers have been allowing same-sex partners to be added to an employee’s health plan in recent years, in many cases that has been treated as a taxable benefit. Now that taxes should no longer be an issue, couples may want to review their health insurance choices, evaluating the quality and affordability of each other’s options.

In addition, under the ruling, employees will have expanded access to the following employer-sponsored health and retirement benefits. Depending on plan design, this may include:3

  • Health savings and flexible spending accounts.
  • COBRA continuation coverage.
  • HIPAA special enrollment rights.
  • Ability to pay for health benefits with pre-tax dollars and receive an employer contribution toward a same-sex spouse’s coverage without being taxed on such coverage (also referred to as taxation on “imputed” income).
  • Mandatory 401(k) beneficiary status absent spousal consent.
  • The right to be covered by a joint and survivor annuity in defined benefit plans.

These are some of the very preliminary implications of the historic high court ruling. More details will be provided as the framework for the law takes shape.

Source/Disclaimer:

1Source: The New York Times, “Supreme Court Bolsters Gay Marriage With Two Major Rulings,” June 26, 2013.

2Source: MarketWatch.com, “Same-sex couples: Celebrate, then call a CPA,” June 26, 2013.

3Source: Aon Hewitt news release, June 26, 2013.

Required Attribution

Because of the possibility of human or mechanical error by S&P Capital IQ Financial Communications or its sources, neither S&P Capital IQ Financial Communications 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 S&P Capital IQ Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.  © 2013 S&P Capital IQ Financial Communications. All rights reserved.

Classifying Stocks

The Major Classification of Stocks

If you want to understand the stock market, you should understand the different ways in which people classify and identify stocks.1 Here is a summary of some different stock types.

Stock Sectors

A sector is a group of companies that loosely belong to the same industry and provide the same product or service. Examples of stock sectors include airlines, software, chemicals, oil, retail, automobiles, and pharmaceuticals, to name just a few. Understanding sectors is important if you want to make money in the stock market. The reason is simple: No matter how the market is doing and no matter what the condition of the economy, there are always sectors that are doing well and sectors that are struggling.

It’s a lot harder to pick successful sectors than many people think. Nevertheless, it’s worth taking the time to understand and identify the various sectors and to be aware of which sectors are strong and which are weak. This could give you a clue as to where the economy is headed.

Income Stocks

Income stocks include shares of corporations that give money back to shareholders in the form of dividends. Some investors, usually older individuals who are near retirement, are attracted to income stocks because they live off the income in the form of dividends and interest on the stocks and bonds they own. In addition, stocks that pay a regular dividend are less volatile. They may not rise or fall as quickly as other stocks, which is fine with the conservative investors who tend to buy income stocks. Another advantage of stocks that pay dividends is that the dividends reduce the loss if the stock price goes down.

There are also a number of disadvantages of buying income stocks. If the company doesn’t raise its dividend each year — and many don’t — inflation can cut into your profits. Finally, income stocks can fall just as quickly as other stocks. Just because you own stock in a so-called conservative company doesn’t mean you will be protected if the stock market falls.

Value Stocks

Value stocks are stocks of profitable companies that are selling at a reasonable price compared with their true worth, or value. The trick, of course, is determining what a company is really worth — what investors call its intrinsic value. Some low-priced stocks that seem like bargains are low-priced for a reason.

Value stocks are often those of old-fashioned companies, such as insurance companies and banks, that are likely to increase in price in the future, even if not as quickly as other stocks. It takes a lot of research to find a company whose price is a bargain compared with its value. Investors who are attracted to value stocks have a number of fundamental tools that they use to find these bargain stocks.

 

Growth Stocks

Growth stocks are the stocks of companies that are expected to grow faster than the competition. The price of growth stocks can be very high even if the company’s earnings aren’t spectacular. This is because growth investors believe that the corporation will earn money in the future and are willing to take the risk.

Most of the time, growth stocks won’t pay a dividend, as the corporation wants to use every cent it earns to improve or grow the business. Because growth stocks are so volatile, they can make sudden price moves in either direction. This is attractive to short-term traders, but may be unnerving for many investors. 

Source/Disclaimer:

1Investing in stocks involves risk, including loss of principal.

Required Attribution

Because of the possibility of human or mechanical error by S&P Capital IQ Financial Communications or its sources, neither S&P Capital IQ Financial Communications 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 S&P Capital IQ Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.  © 2013 S&P Capital IQ Financial Communications. All rights reserved.

Understanding Correlation

investments to help reduce risk.But less discussed is an equally important measurement: correlation, which is a way to measure how closely related two types of investments are. In theory, you could be invested in multiple securities of differing types and classes, but if they are all closely correlated, your portfolio may not be as diverse as you think — and could open you up to more risk than you intended.

Correlation is expressed as a number between 1.00 and -1.00.

  • A “1.00” indicates an absolute positive correlation (that is, the assets under comparison always move together in the same direction).
  • A “0” correlation indicates there is no relationship between the assets. 
  • A “-1.00” indicates an absolute negative correlation (the assets always move together in opposite directions of each other).

Very few assets have a pure 1.00 to 1.00 or -1.00 to -1.00 relationship. Generally, most experts consider a correlation value between 0 and 0.50 as a weak correlation, while a value of 0.50 and higher is progressively stronger. The farther from a 1.00 correlation two investments are, the more diversification you may realize. 

If you’d like to determine the correlation of your portfolio, the easiest way may be to contact your financial professional. You can also search the Web for an investment correlation calculator — a number of brokerage firms and other financial sites have tools, but few are free to use.

The Markets March in Unison

One important consideration for investors to keep in mind is that the financial markets are increasingly marching in unison, making correlating your investments increasingly difficult. A variety of factors are causing this trend, including:

  • Globalized economies: The growth of global trade and the proliferation of worldwide investment firms mean that the fortunes of both large corporations and the investors who own their stock are tied together as never before.
  • Reliance on U.S. dollars: Many foreign governments and global financial institutions rely on U.S. dollars as a reserve currency to pay debts or to influence exchange rates. Given this situation, the health of the U.S. economy and the actions of the Federal Reserve reverberate globally, as do events in Europe and beyond. 

What Investors Can Do

If climbing correlations concern you, consider the strategies that may help you balance risk and return, including:

  • Combining stocks with other types of assets. Adding exposure to bonds, real estate, and commodities may help you to balance returns over the long term.2

Kyle Hurt MBA, CFP

Lifetime Capital Management

 

 

Source/Disclaimer:

1Asset allocation does not ensure a profit or protect against a loss in a declining market.

2Investing in stocks involves risk, including loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and are subject to availability and change in price. Exposure to the commodities market may subject investors to greater volatility as commodity-linked investments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates, or factors affecting a particular industry or commodity.

Required Attribution:  Because of the possibility of human or mechanical error by S&P Capital IQ Financial Communications or its sources, neither S&P Capital IQ Financial Communications 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 S&P Capital IQ Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.

© 2013 S&P Capital IQ Financial Communications. All rights reserved.

High-Yield Bonds: Income Potential at a Price

High-yield bonds have long been a popular source of diversification for long-term investors who seek to maximize yield and/or total return potential outside of stocks.1High-yield issues often move independently from more conservative U.S. government bonds as well as the stock market.

These bonds — often referred to as “junk” bonds — are a class of corporate debt instruments that are considered below investment grade, due to their issuers’ questionable financial situations. These situations can vary widely — from financially distressed firms to highly leveraged new companies simply aiming to pay off debts.

As the name “high yield” suggests, the competitive yields of these issues have helped attract assets. With yields significantly higher than elsewhere in the bond market, many investors have turned to high-yield bonds for both performance and diversification against stock market risks.

These are valid reasons for investing in high-yield bonds, especially long term. But as you read about what these issues could offer your portfolio, it’s also wise to consider how these bonds earned their nicknames.

The Risk-Return Equation

In exchange for their performance potential, high-yield bonds are very sensitive to all the risk factors affecting the general bond market. Here’s a summary of some of the most common risks.

  • Credit risk: A high-yield bond’s above-average credit risk is reflected in its low credit ratings. This risk — that the bond’s issuer will default on its financial obligations to investors — means you may lose some or all of the principal amount invested, as well as any outstanding income due.
  • Interest rate risk: High-yield bonds often react more dramatically than other types of debt securities to interest rate risk, or the risk that a bond’s price will drop when general interest rates rise, and vice versa.
  • Liquidity risk: This is the risk that buyers will be few if and when a bond must be sold. This type of risk is exceptionally strong in the high-yield market. There’s usually a narrow market for these issues, partly because some institutional investors (such as big pension funds and life insurance companies) normally can’t place more than 5% of their assets in bonds that are below investment grade.
  • Economic risk: High-yield bonds tend to react strongly to changes in the economy. In a recession, bond defaults often rise and credit quality drops, pushing down total returns on high-yield bonds. This economic sensitivity, combined with other risk factors, can trigger dramatic market upsets. For example, in 2008, the well-publicized downfall of Lehman Brothers squeezed the high-yield market’s tight liquidity even more, driving prices down and yields up.

The risk factors associated with high-yield investing make it imperative to carefully research potential purchases. Be sure to talk to your financial professional before adding them to your portfolio.

Kyle Hurt MBA, CFP

Lifetime Capital Management

 

 

Source/Disclaimer: 1Diversification does not ensure a profit or protect against a loss in a declining market.

Required Attribution: Because of the possibility of human or mechanical error by S&P Capital IQ Financial Communications or its sources, neither S&P Capital IQ Financial Communications 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 S&P Capital IQ Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.

© 2013 S&P Capital IQ Financial Communications. All rights reserved.

 

Spring Cleaning: Put Your Financial House In Order

As you file away your forms and schedules at the end of the tax season, it’s a good time to take a closer look at the big picture of your financial structure and tidy up where needed. Here’s a checklist of key considerations to help you get started.

Lay a Balanced Investment Groundwork

Does your current asset allocation — the mix of securities in your investment portfolio — still match your risk tolerance and time horizon? Stock market performance over the past few years may have altered the value of your stock holdings above or below the level you had originally intended. If so, consider rebalancing, either by selling some of your stock or bond investments or by purchasing more stock, bond or cash investments.

Create a Nest for the Future

Rather than just hoping you’ll have enough for a comfortable retirement, take some time to calculate how much you’ll need — and how much you’ll need to save. Your financial professional can help you establish a realistic accumulation goal and ensure that you’re on course to reach it.

Check Your Family’s Security System

Insurance can help protect you and your loved ones from the costs of accidents, illness, disability, and death. It’s an important part of any sound financial plan. However, your individual need for coverage will depend on your personal circumstances, including your age, family, and financial situation. A young, single person, for example, may not need much life insurance. A person with a growing family, on the other hand, may need to ensure adequate financial protection for loved ones.

Preserve the Assets You’ve Accumulated

You may not enjoy thinking about what will happen after you’re gone, but failing to plan could cost your family and loved ones. A sound estate plan can help preserve your assets and keep them from being unnecessarily reduced by taxes. In 2013, taxpayers can exclude up to $5.25 million of an estate’s assets from federal estate taxes. While that may sound like a limit you’ll never approach, if you tally the appreciated value of your retirement assets, your home, and your other holdings, you may find otherwise. Your estate plan should include an up-to-date will and may make use of tools for charitable giving and joint ownership of property.

Debt Can Threaten the Foundation

While you’re putting the rest of your financial plan in order, don’t neglect credit card balances or other outstanding debt. Consider ways to either reduce your debt or manage it better. For example, you might be able to save on interest charges by consolidating and transferring your credit card balance or by refinancing your mortgage.

Your financial house is a complex structure that needs regular upkeep. By staying on top of things and keeping you financial house in order, you’ll be well on your way to reaching your goals.

Kyle Hurt CFP, MBA

Partner-Financial Advisor

Lifetime Capital Management

 

 

Because of the possibility of human or mechanical error by S&P Capital IQ Financial Communications or its sources, neither S&P Capital IQ Financial Communications 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 S&P Capital IQ Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.

© 2013 S&P Capital IQ Financial Communications. All rights reserved.

 

Is Inflation On The Horizon?

Economists and market watchers have been warning investors about the prospect of increased inflation since the housing bubble burst in 2007.

Worries about inflation have been cropping up more frequently lately, largely due to escalating commodity prices, which are pushing up consumer prices, both in the United States and abroad. With an improving economy and soaring federal deficits, many experts feel that prices in the United States will inevitably pick up their pace.

Inflation Rates Around the World (as of November 30, 2012)2

Country

Rate

Brazil

5.78%

Canada

0.8%

China

2.0%

France

1.4%

Germany

2.1%

Greece

1.0%

India

7.2%

Italy

2.5%

Japan

-0.2%

Mexico

4.2%

Russia

6.5%

United Kingdom

2.7%

United States

1.8%

Venezuela

18.0%

 

Staying Ahead

For investors, staying ahead of inflation means choosing investments that are most likely to provide returns that outpace it. Here’s a look at how a climbing inflation rate could impact various investment types and asset classes.

  • Domestic Stocks — Although past performance is no guarantee of future returns, historically, stocks have provided the best potential for long-term returns that exceed inflation. An analysis of holding periods between 1926 and December 31, 2011, found that the annualized return for a portfolio composed exclusively of stocks in Standard & Poor’s Composite Index of 500 Stocks was 9.83% — well above the average inflation rate of 2.99% for the same period. However, over shorter time periods the results are not as appealing. For the 10 years ended December 31, 2011, the S&P 500 returned an average of only 2.92%, compared with an average inflation rate of 2.50%.3
  • International Stocks — During the same 10-year span that ended December 31, 2011, the Morgan Stanley Capital International (MSCI) EAFE, which is composed of established economies such as Germany and Japan, outpaced U.S. inflation with an average return of 5.12%. The MSCI Emerging Markets index, which tracks developing world economies such as Brazil and China, was even more stellar, returning an average of 14.2%.4
  • Bonds — Historically, investors have turned to shorter-term corporate and high-yield bonds for protection in rising-rate environments.There are two types of bonds that receive a lot of investor interest when inflation starts to rise: Treasury Inflation-Protected Securities (TIPS) and I Savings Bonds. Both TIPS and I bonds are types of fixed-interest rate bonds whose value rises as inflation rates rise.
  • CDs and Other Cash Instruments — The Federal Reserve is still keeping a tight lid on interest rates, forcing investors who hope to keep pace with inflation by investing in cash instruments facing a harsh reality. The rates on a one-year CD are averaging under 1%, while a five-year CD is yielding an average of under 2%, according to Bankrate.com. Money market and other bank savings accounts are also averaging well under 1%.6

 

Although many economists project overall U.S. inflation to remain modest in the near future, most see an uptick down the road. For investors, a well-rounded portfolio may be your best weapon. The key is to consider your time frame, your anticipated income needs, and how much volatility you are willing to accept, and then construct a portfolio with the mix investments with which you are comfortable. Consult your financial professional to discuss your specific needs and options.

Kyle Hurt CFP, MBA

Partner-Financial Advisor

Lifetime Capital Management Inc.

 

Source/Disclaimer:

1Source: U.S. Bureau of Labor Statistics, January 2012.

2Sources: TradingEconomics.com; U.S. Bureau of Labor Statistics, January 2013.

3Sources: Standard & Poor’s; U.S. Bureau of Labor Statistics. The S&P 500 is a unmanaged index. It is not possible to invest directly in an index. Past performance is no guarantee of future results.

4Source: Morgan Stanley. The MSCI EAFE and MSCI EM are unmanaged indexes. It is not possible to invest directly in an index. Past performance is no guarantee of future results.

5Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and are subject to availability and change in price.

6Source: Bankrate.com, January 20, 2012.

 

Because of the possibility of human or mechanical error by S&P Capital IQ Financial Communications or its sources, neither S&P Capital IQ Financial Communications 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 S&P Capital IQ Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.

© 2013 S&P Capital IQ Financial Communications. All rights reserved.

Year End Financial Planning Checklist

 Year End Checklist

As the end of the year is fast approaching, it is important to get any loose ends tied up well in advance of the last week of the year as some things may take more time to complete than just a day or two will allow.  For example, contributing stocks to your favorite charity usually requires some amount of lead time (up to 3+ weeks) for your custodian to send shares electronically and make the year-end deadline.  Here are a few items to be thinking about: 

  • Insurance Coverage. The end of the year is a good time to review your current coverage and possible insurance needs.  Setting a certain time period each year to review your coverage allows you to make sure you are not over paying and under covered.  
  • Roth conversion. With possible tax changes coming for higher incomes (and possibly all taxpayers), now may be the time to convert to a Roth IRA from a traditional IRA. Both accounts offer tax benefits, but a Roth gives you the potential to earn tax-free growth (not just deferred tax-free growth) and allows for tax-free federal withdrawals if certain requirements or met. 
  • Tax loss deadline. You have until December 31, 2012 to “harvest” any tax losses and/or offset any capital gains. But be careful. There are distinctions between short- and long-term capital gains, and you must be aware of wash-sale rules. 

-Taxes are scheduled to rise for all taxpayers next year, including taxes on capital gains. Even if a deal is reached that averts a tax increase on most Americans, any agreement could include a larger tax bite on capital gains for the wealthiest taxpayers.

Now may be the time to look at some of your winners and consider ways to mitigate any upcoming changes in the tax laws that benefit Uncle Sam at your expense. 

  • Philanthropy. Whether it is cash, stocks or bonds, you can donate to your favorite charity before December 31, potentially offsetting any income. Or you may want to consider a donor-advised fund.  

-With a donor-advised fund, an account is operated by a community foundation or nonprofit affiliate of an investment firm, and sponsors have legal control of the assets. The donor makes recommendations on how the money should be distributed (Investment News).

 

  • RMD or required minimum distribution. Once you’ve hit the age of 70 ½, the IRS requires that you begin taking money out of your traditional IRA, SEP, SIMPLE, Rollover IRA, and other tax-deferred retirement plans (IRS.gov)

And if you miss the deadline, you could be subject to steep penalties. If an account owner fails to withdraw a RMD, fails to withdraw the full amount of the RMD, or fails to withdraw the RMD by the applicable deadline, the amount not withdrawn is taxed at 50% (IRS.gov). 

  • Estate Plan Review-Protect your estate from the fiscal cliff. Mix our tax code with estate planning and you’ve created a complex recipe that many would rather avoid. But eschew planning today and you may unwittingly create pitfalls for yourself and your heirs.

While this list is certainly not all encompassing list, this is a good start and should be tailored to your specific situation.  It is in our human nature to delay things that cause us pain or discomfort but these are a few of the “chores” that need to be dealt with at some point.  Why not make this the year that you are able to get in front of these things and relax as the end of the year draws near. 

Kyle Hurt CFP®, MBA

Partner-Financial Advisor

Lifetime Capital Management

 

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss.