How To Avoid A 401(k) Meltdown If The Trump Rally Fizzles

Millions of Americans are asking the wrong questions when it comes to their retirement plans. It’s not “how much should I invest now?” or “is the market safe?” You should invest as much as you can in every kind of market.

So forget about the question of whether the “Trump rally” is over, or taking a pause. If that’s your concern, you’re focused on the wrong thing.

Despite this reality, far too many investors are trying to find the right fund manager who can somehow predict and navigate the rocky seas the market will toss up. In rare cases, some managers get lucky and get in and out at the right time. But most don’t have this ability.

Most of us want to believe that professional money managers know just when to get in and out of stocks. We put a lot of faith in them — and mis-spend some $2 trillion in fees hoping that they’ll be right and protect our money.

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The numbers don’t lie, however. Most managers can’t do better than passive market averages and rarely outperform after you subtract their fees. So if you’re placing your trust in active management, you’re headed for a meltdown sooner or later.

A recent study by Jeff Ptak at Morningstar shows the folly of active management for most investors.

Ptak looked a the relationship between what actively managed funds return to the fees they charge for management. In most cases, expenses will cancel out most significant gains.

“Fees haven’t fallen that steeply, and, as a result more than two-thirds of U.S. stock funds levy annual expenses that would wipe out their estimated future pre-fee excess returns.”

What this means is that active managers who time the market aren’t likely to outperform passive baskets of stocks. When you subtract their fees, you’re not coming out ahead.

Fees take an even bigger bite when overall market returns are lower. If stocks return less than double digits, you’re going to feel the pain even more.

Ptak is blunt in his conclusion: “Many active stock funds are too expensive to succeed. The exceptions are small-cap funds, where it appears fees are still below estimated pre-fee excess returns.”

What can you do to avoid the meltdown of overpriced, actively managed funds? It’s a pretty simple process.

1) Find the lowest-cost index funds to cover U.S. and global stocks and bonds. Expense ratios shouldn’t be more than 0.20% annually (as opposed to 1% or more for active funds).

2) If you still want active funds in your portfolio, they should be highly-rated managers who invest in smaller companies.

3) Make sure that the “active” part of your portfolio is no more than 30% of your total holdings. While this is an arbitrary percentage, it will provide some buffer against market timing decisions.

You should also avoid the error of picking funds based on their past performance, which can never be guaranteed. So, instead of asking how they performed, you should ask “how many securities can they hold for the lowest-possible cost.”

 

Market Update: April 3, 2017

MarketUpdate_header

  • Stocks search for direction to begin Q2. After closing out a solid first quarter amidst Brexit and Trump-trade uncertainties, equities are modestly lower in early trading. Friday’s session saw the S&P 500 (-0.2%) and the Dow (-0.3%) finish in the red, ending the quarter without enthusiasm despite an overall increase of 5.5% for the S&P. Rate-sensitive real estate (+0.5%)  and utilities (+0.3%) won the sector battle for the day as a number of Federal Reserve (Fed) presidents expressed interest in potentially reducing the Fed’s balance sheet; financials (-0.7%) was the worst performer. Overseas, the Hang Seng (+0.6%) and Nikkei (+0.4%) gained ground on strong regional Purchasing Managers’ Index (PMI) data; China’s Shanghai Composite was closed for a holiday. In Europe, the STOXX 600 Index (-0.2%) and most markets are lower. Meanwhile, WTI crude oil ($50.46/barrel) is down slightly, COMEX gold ($1253/oz.) is near flat, and the yield on the 10-year Treasury is down to 2.36%.

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  • Checking in on so-called Trump trades. Recent underperformance of small caps, financials, and industrials likely reflects some loss of confidence in the Trump agenda, although we believe small caps and financials may have enough going for them that the recent weakness may be a buying opportunity, even with a scaled-back policy path. Industrials, on the other hand, may need more help from the macroeconomic environment should policy disappoint.
  • Just missed five in a row. The S&P 500 lost 0.04% last month, after a late-day drop on Friday. This was the first monthly decline since October, just missing the first five month win streak since March-July 2016. It was still a great first quarter as the S&P 500 jumped 5.5%; the best return since Q4 2015 and the best Q1 since 2013. For the quarter, technology and consumer discretionary led, while telecom and energy lagged.
  • April is usually strong. Over the past 20 years, no month sports a higher monthly S&P 500 average than April at 2.0%. Going back to 1950[1], the average monthly return is 1.5%, with only the historically strong months of November and December better. Post-election years are also strong, up 1.6% on average. Lastly, after a big first quarter gain of 5% or more (like 2017), April actually does better at up 2.0% on average.
  • April is a big month. There are multiple potential market-moving events in April: the start of Q1 earnings season, elections in France, and a potential government shutdown head the list of things we are watching closely. To get ready for the big month, we will examine these events more closely.

MonitoringWeek_header

Monday

  • ISM (Mar)
  • Eurozone: Markit Mfg. PMI (Mar)
  • Eurozone: Eurostat PPI Industry Ex-Construction (Fed)

Tuesday

  • Eurozone: Eurostat Retail Sales Volume (Feb)

Wednesday

  • ISM Non-Mfg. (Mar)
  • Eurozone: Markit Services & Composite PMI

Thursday

  • Initial Jobless Claims (Apr)
  • Eurozone: Market Retail PMI (Mar)

Friday

  • Change in Nonfarm, Private & Mfg. Payrolls (Mar)
  • Unemployment Rate (Mar)
  • Average Hourly Earnings (March)

 

 

 

 

[1] Please note: The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of predecessor index, the S&P 90.

Important Disclosures: Past performance is no guarantee of future results. The economic forecasts set forth in the presentation may not develop as predicted. The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Stock investing involves risk including loss of principal. Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, political risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks. Treasury Inflation-Protected Securities (TIPS) are subject to interest rate risk and opportunity risk. If interest rates rise, the value of your bond on the secondary market will likely fall. In periods of no or low inflation, other investments, including other Treasury bonds, may perform better. Bank loans are loans issued by below investment-grade companies for short-term funding purposes with higher yield than short-term debt and involve risk. Because of its narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies. Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, disease, and regulatory developments. Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate. Investing in foreign and emerging markets debt securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical and regulatory risk, and risk associated with varying settlement standards. High-yield/junk bonds are not investment-grade securities, involve substantial risks, and generally should be part of the diversified portfolio of sophisticated investors. Municipal bonds are subject to availability, price, and to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rate rise. Interest income may be subject to the alternative minimum tax. Federally tax-free but other state and local taxes may apply. Investing in real estate/REITs involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained. Currency risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged. This research material has been prepared by LPL Financial LLC.

Market Update: March 6, 2017

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  • Equities move lower to begin week. U.S. stocks are moving lower in early trading, following their European counterparts on little news. The major averages all managed to squeak out slight gains on Friday; the S&P 500’s 0.1% gain was led by financials and healthcare, which both closed up 0.4%. Overnight in Asia, stocks finished mostly higher with the exception of Japan’s Nikkei (-0.5%) as the yen strengthened; the STOXX Europe 600 is lower by 0.5% in afternoon trading. Meanwhile, the yield on the 10-year Treasury is near flat at 2.48% as market-implied expectations of a Fed rate hike in March are near 86%, WTI crude oil ($53.25/barrel) is slightly lower, and COMEX gold ($1231/oz.) is climbing 0.4%.

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  • Brexit, EU summit, China forecasts, Fed “quiet period”, and February jobs report highlight week ahead. Other than the February employment report (due out this Friday, March 10)  it’s a relatively quiet week for U.S. economic data. It’s also the unofficial quiet period for the Federal Reserve ahead of the March 14-15 FOMC meeting. The overseas calendar is chock full of potentially market-moving events, including the EU leaders summit, a potential House of Lords vote on Brexit, the European Central Bank meeting, and a few key reports on China’s economy in February.
  • Beige Book. This week, we’ll examine the Fed’s latest Beige Book, looking for signs of any impact from the new Trump administration, an overheating labor market, rising wages, and inflation ahead of next week’s FOMC meeting.
  • Corporate sentiment improved again in our latest Corporate Beige Book. Sentiment improved among corporate executives based on our analysis of fourth quarter earnings conference call transcripts. Not surprisingly, policy was a popular topic, as corporate tax reform, infrastructure and regulation saw big jumps in the number of mentions. Currency and China also continued to garner a lot of attention, while energy and Brexit faded. The solid fourth quarter results coupled with improved sentiment from corporate executives support our expectation of mid-to-high single digit earnings growth for the S&P 500 in 2017.
  • The Chinese National People’s Congress began its annual meeting on Sunday. Nothing shocking has come out of the meeting so far, though little was expected. Official economic growth forecasts have been cut to 6.5%. The focus of the meeting has been on economic stability, including a reduction in monetary growth targets and efforts to reduce China’s bad debt problem. The most notable change in language related to calls for further currency liberalization. A more market-oriented currency policy suggests potential weakening of the yuan, which would run counter to China’s long-term political goals, as well as increase the likelihood of China being labeled a “currency manipulator” by the Trump administration.
  • Make that six in a row. The S&P 500 was up 0.7% for the second consecutive week, and managed to close at a new weekly all-time high. In the process, it closed higher for the sixth consecutive week for the first time since a six-week win streak off of the February 2016 lows. The last time it was up seven weeks in a row was late 2014. Here’s the catch, the S&P 500 was up only 4.9% the past six weeks – making this one of the weakest six-week win streaks ever. Given the historically small daily trading ranges recently, this shouldn’t come as a big surprise. You have to go back to late 2013 for the last time there was a smaller return during a six-week win streak.

MonitoringWeek_header

Monday

  • Kashkari (Dove)

 Tuesday

  • China: Imports and Exports (Feb)
  • Japan: Economy Watchers Survey

 Wednesday

  • ADP Employment (Feb)
  • China: CPI (Feb)

Thursday

  • Initial Claims (3/5)
  • Challenger Job Cut Announcements (Feb)
  • Household Net Worth and Flow of Funds (Q4)
  • European Union leaders Summit in Brussels Begins
  • Eurozone: European Central Bank Meeting (No Change Expected)

Friday

  • Employment Report (Feb)
  • European Union leaders Summit in Brussels Continues

 

 

 

 

 

Important Disclosures: Past performance is no guarantee of future results. The economic forecasts set forth in the presentation may not develop as predicted. The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Stock investing involves risk including loss of principal. Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, political risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks. Treasury Inflation-Protected Securities (TIPS) are subject to interest rate risk and opportunity risk. If interest rates rise, the value of your bond on the secondary market will likely fall. In periods of no or low inflation, other investments, including other Treasury bonds, may perform better. Bank loans are loans issued by below investment-grade companies for short-term funding purposes with higher yield than short-term debt and involve risk. Because of its narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies. Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, disease, and regulatory developments. Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate. Investing in foreign and emerging markets debt securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical and regulatory risk, and risk associated with varying settlement standards. High-yield/junk bonds are not investment-grade securities, involve substantial risks, and generally should be part of the diversified portfolio of sophisticated investors. Municipal bonds are subject to availability, price, and to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rate rise. Interest income may be subject to the alternative minimum tax. Federally tax-free but other state and local taxes may apply. Investing in real estate/REITs involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained. Currency risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged. This research material has been prepared by LPL Financial LLC.

Market Update: January 30, 2017

Provided by thetaxhaven/Flickr

MarketUpdate_header

  • Markets sell off ahead of Fed meeting, corporate earnings. Stocks are down across the globe as investors await key central bank meetings this week and another string of high profile corporate earnings. The S&P 500 drifted 0.1% lower in an unremarkable session Friday; gains in healthcare (+0.8%) and telecom (+0.7%) were offset by losses in energy (-0.9%) and real estate (-0.9%). Many markets were closed Monday in Asia to mark the Lunar New Year, although Japan’s Nikkei Composite slid 0.5% as investors sought safety in the yen following President Trump’s executive order on immigration. In Europe, both bonds and stocks are lower in afternoon trading following German inflation data, which came in at the highest level in more than three years. Meanwhile, WTI crude oil ($52.76/barrel) is lower, COMEX gold ($1192/oz.) is up modestly, and the yield on the 10-year Treasury is down a basis point to 2.48%.

 

MacroView_header

  • Little upside in Q4 numbers but there are bright spots. With 169 S&P 500 companies (about 34% of the index) having reported results for the fourth quarter of 2016, year-over-year earnings growth is tracking to a 6.8% increase. Although that pace is better than the 4.3% pace in the prior quarter, the modest upside to prior (January 1, 2017) estimates is disappointing. Financials and technology results are among the bright spots, while we are encouraged by the increase–albeit modest–in overall S&P 500 estimates for the second half of 2017 that at least partly reflect policy upside and the oil rebound. This week is one of the biggest of the season with 109 S&P 500 companies slated to report fourth quarter results.

013017_earningsdashboard-01

  • Still value in value? Despite its strong 2016, there may still be some value in value. While value (based on the Russell 1000 Value Index) has lagged its growth counterpart so far in 2017, we see several reasons to like value stocks, including accelerating economic and profit growth and the better outlook for financials. But we believe the growth side has enough going for it, including a positive outlook for the technology sector and attractive relative valuations, that we suggest investors generally maintain balance across the styles.
  • Very busy week ahead. Several times a year, the global economic and event calendar jams up with a dozen or so high-profile events, and this is one of those weeks. The Federal Reserve Bank, the Bank of Japan, and the Bank of England all meet, and while none is expected to change policy, it’s the first meeting of the year for each. On the political front, the U.K. Parliament will vote on whether to authorize Prime Minister Theresa May to move forward with Brexit, and later in the week, the leaders of the European Union will meet to discuss what’s next. India will release its budget for 2017-2018, and China’s markets are closed for the Lunar New Year. This week is an extremely busy week for data with January data on Institute for Supply Management (ISM), vehicle sales, and the January employment report. Overseas data include GDP reports in the Eurozone, India, Mexico, and Indonesia.
  • More small ranges. We’ve been talking about the slow action lately and last week was no different. In fact, the daily range for the S&P 500 on Friday was only 0.32%–which is in the bottom 1% of all daily ranges since 1970. Incredibly, Thursday was actually a smaller range. Even though the S&P 500 was down the last two days of the week, it was one of the 18 smallest two-day losing streaks (down 0.16%) since 2000. Lastly, the S&P 500 has now gone 29 consecutive days without a 1% intraday move, the longest such streak since late 1995.
  • Dow 30,000? Barron’s had a cover over the weekend titled “Next Stop Dow 30,000” and as you might expect, it caused quite a stir. Many noted this cover could be a  bearish signal, as the well-known ‘magazine cover indicator’ is used as a contrarian indicator. Once something is so universally agreed upon and it makes the cover of a magazine, the trend very well could be closer to the end than the beginning. The classic example of this is the “Death of Equities” BusinessWeek cover that came out near the 1982 low in equities. Turning to the Barron’s article, what is important to note is the forecast of 30,000 by 2025 – which comes out to about a 5% annual gain, well in line with the long-term average for the Dow. So maybe this cover isn’t quite as outlandish as it might appear at first blush.

MonitoringWeek_header

Sunday

  • Chinese Lunar New Year; Chinese Markets Closed All Week

Monday

  • Germany: CPI (Jan)

Tuesday

  • Employment Cost Index (Q4)
  • Chicago Area PMI (Jan)
  • Eurozone: GDP (Q4)
  • Eurozone: CPI (Jan)
  • Germany: Unemployment Change (Jan)
  • UK Parliament Begins Debate on Article 50 (Brexit)
  • Japan: Bank of Japan Meeting (No Change Expected)
  • China: Official Mfg. PMI (Jan)
  • China: Official Non-Mfg. PMI (Jan)
  • India: GDP (2016)

Wednesday

  • ADP Employment (Jan)
  • ISM Mfg. (Jan)
  • Vehicle Sales (Jan)
  • FOMC Statement
  • UK Parliament Expected to Vote on Authorizing Article 50 (Brexit)
  • India: 2017-18 Budget Speech

Thursday

  • UK: Bank of England Meeting (No Change Expected)
  • China: Caixin Mfg. PMI (Jan)

Friday

  • Employment Report (Jan)
  • ISM Non-Mfg. (Jan)
  • Evans* (Dove)
  • EU Leaders Meet in Malta

 

 

 

 

 

 

 

Important Disclosures: Past performance is no guarantee of future results. The economic forecasts set forth in the presentation may not develop as predicted. The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Stock investing involves risk including loss of principal. A money market investment is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although money markets have traditionally sought to preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund. Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, political risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks. Treasury Inflation-Protected Securities (TIPS) are subject to interest rate risk and opportunity risk. If interest rates rise, the value of your bond on the secondary market will likely fall. In periods of no or low inflation, other investments, including other Treasury bonds, may perform better. Bank loans are loans issued by below investment-grade companies for short-term funding purposes with higher yield than short-term debt and involve risk. Because of its narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies. Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, disease, and regulatory developments. Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate. Investing in foreign and emerging markets debt securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical and regulatory risk, and risk associated with varying settlement standards. High-yield/junk bonds are not investment-grade securities, involve substantial risks, and generally should be part of the diversified portfolio of sophisticated investors. Municipal bonds are subject to availability, price, and to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rate rise. Interest income may be subject to the alternative minimum tax. Federally tax-free but other state and local taxes may apply. Investing in real estate/REITs involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained. Currency risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged. Technical Analysis is a methodology for evaluating securities based on statistics generated by market activity, such as past prices, volume and momentum, and is not intended to be used as the sole mechanism for trading decisions. Technical analysts do not attempt to measure a security’s intrinsic value, but instead use charts and other tools to identify patterns and trends. Technical analysis carries inherent risk, chief amongst which is that past performance is not indicative of future results. Technical Analysis should be used in conjunction with Fundamental Analysis within the decision making process and shall include but not be limited to the following considerations: investment thesis, suitability, expected time horizon, and operational factors, such as trading costs are examples. This research material has been prepared by LPL Financial LLC.

 

 

 

 

 

Why We Think Munis are Offering a Buying Opportunity Now

Municipal bond prices have taken a beating lately and I don’t believe that the downward move is justified. As Jon Rocafort of Eaton Vance points out in his blog post below, this might be a great buying opportunity!

 

Jon Rocafort, Co-Director of SMA Strategies at Eaton Vance

We think the extreme move in the municipal bond market after the U.S. election may offer an attractive entry point for investors.

Let’s start with some historical context on the recent spike in muni yields, which has sent bond prices lower. The BofA Merrill Lynch Municipal Master Index lost 3.7% in November, its largest one-month decline since 2008. Zooming out a bit, we have witnessed one of the largest five-month increases in yields on record.

Our view is that this historic move has created an emerging opportunity to lock in higher yields and potentially generate higher future returns. For investors lamenting the “sticker shock” of low muni yields recently, this could be their chance to enter the sector or add to existing holdings.

The chart below illustrates the resilience of the municipal market and demonstrates that sharp increases in municipal yields have created buying opportunities and rewarded investors with strong returns in subsequent months. Although as always, past performance is no guarantee of future results.

10-yr-muni-b

The noticeable yield upswings in 2008, 2010 and 2013 all offered investors the chance to buy munis at not only higher yields, but also at attractive valuations. For example, the 2010 scare was driven by analyst Meredith Whitney’s prediction of hundreds of billions of dollars of muni defaults – that never materialized. Also, during the 2013 “Taper Tantrum” both Treasury and municipal yields rose sharply after the Federal Reserve said it would start slowing its bond purchases.

We may be witnessing another overreaction in the bond market. Many of Donald Trump’s plans, including tax cuts and fiscal stimulus, would come with very high price tags and likely be challenged by fiscal hawks in Congress. At this point, it’s extremely difficult to predict what will actually be passed, in what form, and over what horizon. In our view, the “Trump rally” in stocks and the sell-off in bonds are based on very little detail on the President-elect’s policy initiatives, and seems driven more by speculation.

And even if the Trump administration succeeds in reducing personal income tax rates, muni yields still look attractive. First, the ratio of 10-year AAA muni yields versus 10-year U.S. Treasury yields has risen from 93% before the election to about 105% (higher ratios indicate cheaper muni valuations). Also, as we have discussed recently in a separate blog, historical changes in the highest marginal tax bracket have not had a material impact on the relative valuation of muni bonds over the medium to long term.

Bottom line: Treasury and municipal bond yields have seen an extreme short-term reaction after the U.S. election. It is surprising what has taken place without more actual detail. The move could be an overreaction that gives investors a chance to scale into munis at higher yields and cheaper valuations – an opportunity similar to what developed following 2008, 2010 and 2013.

 

 

 

 

 

An imbalance in supply and demand in the municipal market may result in valuation uncertainties and greater volatility, less liquidity, widening credit spreads and a lack of price transparency in the market. There generally is limited public information about municipal issuers. As interest rates rise, the value of certain income investments is likely to decline. Rising interest rates could reduce the value of the bonds in the portfolio, thus adversely affecting the value of the overall investment.

Source: Eaton Vance

Does a Trump Presidency Put Municipal Bond Tax Exemption At Risk?

President-elect Trump has called for increased spending to rebuild infrastructure. This, coupled with calls for tax reform, has municipal bondholders nervous that the federal government will limit or end the tax exemption on their bonds as a way to partially pay for this program. Although possible, we do not believe this is probable for the following reasons.

Municipal bonds have long been the primary financing vehicle for infrastructure spending in the United States. The federal government has stayed largely out of the process, allowing states to price their own deals. The belief has been that this lowers net interest cost as it is more efficient to finance on the local level. Although the federal government could use the revenue, we think that ending the municipal bond tax exemption could lead to court challenges. While tied up in court, new projects might be delayed or canceled, leading to pressure on politicians. This, coupled with the increased borrowing costs as investors demand more yield for the volatility, would diminish the benefit of new revenues collected from municipal bonds.

Another reason we do not see this as probable is the negative impact on the largest buyer, the retail investor. According to the Securities Industry and Financial Markets Association (SIFMA), more than 40% of municipal bonds, totaling more than $1.6 trillion, are held by individuals. This number increases to 70%, or more than $2.6 trillion, when mutual fund holders (including money market mutual funds) are included. Many holders are elderly and rely on tax-exempt income for retirement. They constitute an active voting group that would be very unhappy with changes to its fixed income payments. In addition, they could seek legal recourse because bond deals were marketed and sold to them as tax-free.

muni-bond-holders

In conclusion, the increased costs associated with restructuring the bonds would likely be prohibitive. And even if a change occurred, the process would take years and the bonds that have already been issued would more than likely be grandfathered. In other words, all bonds issued before the tax changes would likely remain tax exempt, increasing the value of existing municipal portfolios. We will continue to watch this issue as more certainty around the incoming Trump administration’s plan of action emerges.

 

 

 

 

IMPORTANT DISCLOSURES

Past performance is no guarantee of future results. The economic forecasts set forth in the presentation may not develop as predicted. The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond and bond mutual fund values and yields will decline as interest rates rise and bonds are subject to availability and change in price. Municipal bonds are subject to availability, price, and to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rate rise. Interest income may be subject to the alternative minimum tax. Federally tax-free but other state and local taxes may apply. Indices are unmanaged index and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. This research material has been prepared by LPL Financial LLC.

Market Impact of a Trump Presidency

Donald Trump emerged as the winner last night of a hotly contested presidential campaign and will be inaugurated as the 45th president of the United States on Friday, January 20, 2017. The transition to a Republican presidency and Trump’s rejection of politics as usual, which drew so many voters, naturally lead to questions about his impact on the economy and markets. Today on our blog we provide a high level overview of our thoughts of the significance of a Trump presidency.

ECONOMY

Does Trump’s win change LPL’s view on the economy over the remainder of 2016 and into 2017?

The election results have not changed our long-term outlook for the U.S. economy. We will continue to monitor many important economic indicators, including the Five Forecasters, the Current Conditions Index, and the Recession Watch Dashboard, and will keep you updated in the event of any changes to our views.

Will the election results cause a recession?

Elections do not in and of themselves cause recessions. Policies can, however, and we need to wait to see which policies Trump moves forward with and the details of those policies.

Our Recession Watch Dashboard continues to point to an overall low risk of recession within the next year.

What impact might the election have on overseas economies and markets?

Trade has been a major theme in this election, yet a president’s ability to impact trade directly and immediately is somewhat limited. Trump has been outspoken in favor renegotiating NAFTA terms and has been opposed to the TransPacific Partnership (TPP), which has little chance of passing. The Trump victory raises some concern across foreign markets about U.S. trade.

FED

Will the election results impact Fed monetary policy later this year and in 2017?

We do not believe the election results have changed the Fed’s outlook. Furthermore, we believe the Fed is much less sensitive to financial markets than most people think. As it stands, we believe the Fed is on course to increase rates at its December meeting, with another 2-3 increases in 2017. It would take a major market disruption or a change in the economic fundamentals for the Fed to alter this course.

EQUITIES & FIXED INCOME

Will the election result cause a bear market in equities?

Just as an election does not cause a recession, it does not cause a bear (or bull) market. Government policies alone do not change the market’s long-term trend, although they are a factor.

Shorter term, elections are rarely a harbinger for a sell-off, and when they have been, the election has not been the primary cause. In election years since 1952, the S&P 500 has returned an average of 2.5% in November and December and has been higher 75% of the time. From Election Day until Inauguration Day, the S&P 500 has averaged a gain of 1.0% and has been higher 69% of the time. The median return jumps to 3.0% because of a nearly 20% drop in 2008 that skews the average return, but 2008 returns were fundamentally driven by the recession, not Obama’s election. The bottom line is some near-term volatility is likely, but a massive sell-off absent an economic recession has never happened in the period between the election and inauguration.

Are the near-term results impacted by the party of the President?

There doesn’t appear to be much of a difference in equity performance over the short term. Since the election in 1952, the final two months of the year have returned 2.6% when a Republican wins and 2.4% when a Democrat wins. Looking at the largest drops the final two months of an election year in 2000 (Republican victory) and 2008 (Democrat victory) stand out, as the S&P 500 dropped 7.6% and 6.8%, respectively. Both times the economy was either in a recession (2008) or about to fall into a recession (2000) – which greatly contributed to the equity weakness. With the end of the earnings recession, improving consumer confidence, and the best quarterly GDP print in two years – we presently have an improving economic backdrop, which should help contain any large downside moves in equities the rest of 2016.

Which sectors would likely benefit under Trump?

Biotech and Pharmaceuticals: Although Trump has stated his desire to repeal the ACA and has favored drug re-importation from other countries, controlling drug prices is unlikely to be as high of a priority for him as it would have been for Clinton. As a result, biotech and pharmaceutical companies may get a bump. We believe the market may have overreacted to perceived policy risk and we continue to favor the healthcare sector, which has historically performed well after elections.

Energy: Trump is likely to be positive for fossil fuels. He has promised less regulation on drilling, along with expansion of drilling areas. The segment of the industrials sector that services the energy sector may also benefit.

Financials: The Trump administration is likely to be easier on financial regulation than Clinton would have been. Trump has indicated he would like to roll back financial regulations, including the Dodd-Frank legislation enacted as a result of the financial crisis. Trump has also suggested bringing back Glass-Steagall, which would separate traditional banking from investment banking, a move we see as very unlikely.

How will the election impact the dollar and bonds?

Dollar: Trump’s policies are likely to be relatively negative for the U.S. dollar. His comments on renegotiating U.S. debt held by foreigners may limit the attractiveness of bonds to foreign investors.

Bonds: We saw an initial Treasury rally as stocks sold off overnight, but yields have since moved higher. We expect there may continue to be additional volatility as markets digest the news, but we broadly believe markets may be pricing in a rise in deficit spending, which is pushing yields higher; though continuation of low rates overseas is an offsetting factor, potentially keeping rates somewhat range bound over the near-term.

Will Trump’s policies lead to a debt downgrade?

Trump had mentioned last spring the possibility of renegotiating our debt and paying back less than the full amount if the economy were to falter. This idea, if implemented, would almost certainly lead to a debt downgrade. However, he backed away from this idea a few days after he floated it.

More realistically, Trump has signaled higher deficit spending. While deficit spending was a contributing factor to the U.S. debt downgrade by S&P in August of 2011, it wasn’t the only reason. The main driver of the downgrade was the debt ceiling crisis, as Republicans demanded a deficit reduction package before they were willing to join Democrats in raising the debt ceiling. Divided government and partisan politics led to months of debate and an eleventh hour deal that avoided a default. With Republicans keeping control of the Senate and the House, a fight over the debt ceiling fight that could threaten the U.S. credit rating is unlikely.

COMMODITIES

What is the election impact on gold?

Gold can thrive in chaotic environments and the uncertainty surrounding Trump’s policies could offer some support to the commodity.

What is election impact on oil?

When discussing oil, it is important to remember that oil stocks and crude oil can have very different performance, even though investors often expect similar returns.

Trump’s victory is likely a positive for oil stocks, especially in the short run. He has promised reduced regulations on oil and gas production, which would improve profitability of existing projects and may result in a very marginal increase in U.S. production. Note, this may be a negative for energy prices.

VOLATILITY

Will volatility increase due to the election outcome?

We expect that market volatility will likely increase. Equity markets have experienced abnormally low volatility recently, in part because of central bank intervention. As those interventions decrease, volatility should increase. However, we view that increase as a healthy aspect of equity markets. The degree to which the election results impact volatility will depend a great deal on which policies are actually enacted as a result of the changes in Washington.

 

 

 

 

IMPORTANT DISCLOSURES

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market. Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks. Currency risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged. Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, geopolitical events, and regulatory developments. Because of its narrow focus, investing in a single sector, such as energy or manufacturing, will be subject to greater volatility than investing more broadly across many sectors and companies. The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. This research material has been prepared by LPL Financial LLC.

5 Places to Move to if Trump Becomes President

Every election cycle, we hear about U.S. citizens who say that they will leave the country if a particular candidate becomes president. Their reasons and status may vary widely from election to election.

“In 2004 people moved to Boquete (Panama) because they disliked George Bush and had money, while in 2008 people moved to Boquete because they disliked Barack Obama and had no money,” said Phil McGuigan, who moved from the U.S. to Boquete, a popular expat community, albeit for non-political reasons.

It’s difficult to know which candidate would cause the largest overseas migration, although we can get some idea via a Google search of “Move abroad if [fill in the blank] is elected.” Here are the hits Google generated for each candidate:

  • Donald Trump: 316,000
  • Hilary Clinton: 292,000
  • Bernie Sanders: 241,000
  • Ted Cruz: 233,000

While the volatile Trump and controversial Clinton stir the strongest response, Bernie Sanders and Ted Cruz are not that far behind.

While there is no credible data on how many Americans move overseas primarily for political reasons, the evidence suggests that an increasing number are moving abroad. Their motives probably differ.

According to the United Nations Secretariat, as of 1999, about 4.3 million U.S. citizens lived outside the U.S., while according to a more recent brochure published by the U.S. State Department, in May 2015, that number was 8.7 million.

Which location would be best for you if you didn’t like an electoral outcome? Here’s are five countries that offer a great quality of life at reasonable prices.

Panama

 
Susan Leggett/Alamy

Panama has several established, large expat communities, such as Boquete, with its famous springlike temperatures year-round, and beach town Coronado, which is about 90 minutes from Panama City.

Panama has experienced solid economic growth for more than a decade, and in many areas is not a third world country. It has a stable democracy, it’s easy to start a business in Panama, the U.S. dollar is the legal currency, and Panama City has emerged as a sophisticated, international trading hub that many compare to Miami. It also has world-class health care at generally less than half the cost of the US.

Panama has an attractive visa and discount program for retirees, for which it is easy to qualify. The country is welcoming.

Although Spanish is the official language of Panama, if you don’t speak Spanish, you can get by with English in daily life in many of the better-known areas. Also, Panama is close to the U.S., just 2 ½ hours from Miami and five hours from New York by plane. So if you want to visit friends and relatives, you can get to the U.S. quickly.

Belize

Belize City, Belize:  
Kevin Schafer/Corbis

If you want to move to a beautiful, laid-back, English-speaking country with British Common Law and a Caribbean vibe, Belize may be a good choice.

The best-known expat locations are San Pedro on Ambergris Caye, a world-famous tourist destination where the inhabitants drive around on golf carts; Placencia, an up-and-coming town with beautiful beaches; and the Cayo District, with it’s jungles, famous open-air market and lower cost of living.

Belize also has an attractive retirement program under which you can import household goods without paying an import fee.

One downside: If you’re looking for world-class shopping like there is in Panama, Belize is not for you. There’s not a single shopping mall in the country. Like Panama, Belize is very close to the U.S., a little more than two hours by plane to Miami.

Portugal

 
Rex Features  

If European charm with great weather and low prices is your style, you may want to consider the Algarve region, located on the southern edge of Portugal on the Atlantic Ocean.

While there are not yet a lot of Americans there, the Algarve has become a popular expat location for Brits, so you would have many English-speaking neighbors. The Algarve has charming, little villages, lots of golf courses, goodamenities and great food, particularly if you like fish, and wine.

Starting a business in Portugal or finding a job in Portugal would be difficult,although not impossible in certain circumstances. You are geographically close to Spain. Seville, is only 125 miles away, and you are little more than a two-hour flight from other European locations. According to Luis da Silva, in the Algarve, you can get by without speaking Portuguese. “I have English friends who have been in the Algarve for 22 years and don’t speak a word of Portuguese,” according to da Silva.

Nicaragua

 
Tan Yilmaz/Getty Images

While it doesn’t have a large expat population, Nicaragua is becoming an interesting choice for American and Canadian expats, and has a lot to offer at a low cost of living.

Although nominally a Socialist country, North American expats tell us that, by and large, the government stays out of their business, even to the extent that many expats reported that they had more daily freedom in Nicaragua than in the U.S. They also tell us that Nicaragua is safe. It has escaped its turbulent past when the country was a battleground between communist and pro-democracy forces.

Expat Mike Cobb said: “Reality is very different from the perception. Cobb said that “the United Nations Development Program in 2013 had rated Nicaragua as the second safest country in Latin America only after Chile.”

The better-known expat areas of Nicaragua include the colonial city of Granada, which was founded in 1524 on the shores of Lake Nicaragua, and the tourist, fishing and surfing town of San Juan del Sur on the Pacific Ocean. Nicaragua also has several large developments, including Gran Pacifica, which has over three miles of pristine private beachfront property, a nine-hole golf course, and the feel of small-town Americana in the 1950s.

Mexico

 
Stockcam/Getty Images

If not for concerns about crime, Mexico would be an obvious choice for many Americans because of its many advantages:

  • Geographically, it’s next door to the U.S.
  • The cost of living is substantially less than in the U.S.
  • U.S.-quality healthcare is available in the major metropolitan areas and inexpensive. Many expats said that the healthcare they received in Mexico was equal to, and in many cases, superior to the healthcare they received in the U.S., and at low prices.
  • You can choose your weather by elevation and geography. Temperatures are in the mid-70s to 80’s year-round in the towns of Lake Chapala/Ajijic and San Miguel de Allende. They are warmer in famous tourist and expat locations like Los Cabos, Puerto Vallarta and areas in the Yucatan Peninsula, including Cancun.

Expats advise taking some common-sense precautions to avoid crime. They say it’s best to stay out of remote and dangerous areas at night and to avoid any contact with drug-related activities.

Mexico is generally safe for American expats, with some areas much safer per capita than in the U.S. For example, the homicide rate in the state of Yucatan, which contains the colonial city of Merida, with over a million inhabitants, is about the same as Maine, half that of West Virginia, and only a quarter that of Washington, D.C. So, if Washington D.C. is driving you out of the U.S., you can live in Merida at a price that is substantially less.

You’ll also be safer and have access to better beaches.

Written by Chuck Bolotin of The Street

(Source: The Street)

How $1,000 Invested at Birth Could Change Everything

baby hand holding money
Getty Images

In the presidential debates, we’ve heard more about Donald Trump’s anatomythan what may be the most pressing financial issue directly in front of millions of boomers: Where will they find monthly retirement income that is guaranteed for life?

The retirement industry can talk about almost nothing else, which in hindsight seems a predictable turn. Did we really believe Americans would manage their 401(k) plans well enough to stash away 25 years of post-career financial security? We haven’t come close, and in this sense the 401(k) has been a colossalfailure. Now the first wave of pensionless retirees is about to land, and politicians have almost nothing to say on the subject.

One reason is that there are no quick fixes, which is why it may be time to dust off a long-term solution first floated in the 1990s and still championed by one of its architects, Bob Kerrey, the former democratic senator from Nebraska. He would like every child born in the U.S. to receive $1,000 in a “KidSave” account that would compound over 65 years before being tapped. “For most people it’s not income that matters,” says Kerry, now with investment firm Allen & Co. “It’s wealth accumulation.”

In other words, retirement security is less about what you earn and more about how much and how soon you save. Compound growth over seven decades can do a lot of heavy lifting.

Kerrey reiterated his support for what he calls “wealth accounts” last week during a discussion on the financial impact of longevity, hosted by Bank of America Merrill Lynch at the Museum of American Finance in New York. These wealth accounts would be funded at every child’s birth through a government loan, to be repaid when the child enters the workforce some 25 years later.

The initial $1,000 by itself wouldn’t make a huge difference: at 6% a year over 65 years it would produce just $44,145 in tax-deferred savings. But the existence of a wealth account from birth would encourage more saving, Kerrey believes. These accounts would be strictly off limits for 65 years and in his estimation could be enough to guarantee adequate income that will never run out later in life. If parents or grandparents, say, kicked in $20 a month for 20 years the nest egg would swell to more than $240,000 at the child’s retirement.

KidSave accounts enjoyed bipartisan support years ago but stalled amid efforts to boost other types of savings accounts and shore up Social Security. As previously envisioned, the initial deposit might be $2,000, indexed annually for inflation. That alone might produce $250,000 at age 65, Heritage Foundation found in its assessment of the program nearly two decades ago. Another version of the program called for $1,000 at birth and five annual payments of $500, which could generate a nest egg of nearly $140,000.

Why dust off KidSave accounts now? They are a relatively painless way to address a retirement income shortfall in the, yes, distant future. But as the youngest boomers and then Gen Xers retire with virtually no guaranteed income other than Social Security, the shortfall will only grow. Everything is on the table now as policymakers try to fix the retirement income issue via things like expanded Social Security, guaranteed retirement accounts, 401(k) annuities, better home reverse mortgages, and breaking down legal barriers to working longer.

Kerrey noted that without change every American now under age 40 will receive a 25% cut in Social Security benefits at retirement. We need interim steps. But we also need a long-term plan. The candidates have touched on ways to fix Social Security and cut ballooning student debt. But for now they are far more fixated on Donald Trump’s, er, hands than the retirement income crisis descending on the nation.

Written by Dan Kadlec of Money

(Source: Time)

Which Presidential Tax Plan Comes Out on Top?

Provided by CNBC

With the field of six candidates, there’s a wide range of tax proposals, each of which have different effects on your wallet. For one, GOP front-runner Donald Trump’s plan would slash tax rates for everyone. The real estate mogul is seeking to eliminate the current top individual income tax rate of 39.6 percent and create three tax brackets: 10 percent, 20 percent and 25 percent.

That said, a few observers have their doubts.

“I don’t think it’s viable,” Tax Foundation President Scott Hodge told CNBC. “I think it’s a dramatic overreach and an over-promise.”

Established in 1937, The Tax Foundation is an independent, non-partisan tax policy research organization. For the current election cycle, the organization compared the economic effects of each of the candidates’ tax plans.

Studies from both the Tax Foundation and another group, the Tax Policy Center, estimate that Trump’s plan could cut tax revenues by more than $10 trillion dollars over the next 10 years, resulting in a large burgeoning of the national debt. Earlier this week, Trump responded by telling CNBC he could close that gap by cutting waste and fraud in government.

However, Hodge branded that as “unrealistic,” suggesting that Trump’s plan doesn’t have structural changes to the tax code that could improve the economy. “It’s really just a tax cut plan, it’s not a tax improvement plan.”

On the other side, Bernie Sanders is promising the opposite: Higher taxes for all. The Democratic candidate/senator from Vermont wants to raise all taxes by 2.2 percent and create four higher tax brackets for high earners. Sanders’ top bracket would tax income over $10 million at a 52 percent rate.

The Tax Foundation’s Hodge found that tax increase could raise $14 trillion but “would come at a dramatic cost to the economy overall.”

Hodge said Sanders’ plans “would reduce the size of the economy by almost 10 percent and eliminate almost five million jobs.”

Provided by CNBC

On Tuesday, primary votes in two battleground states, Ohio and Florida, will head to the polls. Gov. John Kasich and Sen. Marco Rubio are counting on victories in their home states to jump-start their campaigns.

Both candidates want to lower the top corporate tax rate to 25 percent, yet Kasich plans to change personal income tax rates to three brackets, with a top rate of 28 percent. Separately, Rubio wants a top bracket of 35 percent, and that top tax rate would apply to $150,000 in earnings for single filers, and $300,00 for joint filers.

The Tax Foundation found that Rubio’s plan would boost growth and wages by double digits over 10 years, but would cost more than $6 trillion in static revenue.

Hodge said Democratic front-runner Hillary Clinton is “living up to promises to tax high-income people making $250,000 or more.” Under Clinton’s plan, those with incomes above $1 million would pay at least 30 percent in taxes. And she’d add an additional 4 percent tax on income above $5 million.

But Hodge pointed to Clinton’s plan to change how profits on investments are taxed. According to the Tax Foundation, the plan has “increased incentives to delay capital gains realizations,” and would be a drag on growth and wages over a decade.

The former secretary of state “wants to control when people realize capital gains by taxing people at different rates when they actually realize those gains,” Hodge explained. “If you’re at a high income, your tax rate could be as high as 47 percent on your capital gains, and then it lowers to 27 percent over the next seven years.”

The foundation estimated that capital investment would fall by nearly 3 percent over a decade. “It could have a very chilling effect on the market and on investors overall,” Hodge added.

Hodge called Republican Texas Sen. Ted Cruz’s tax reform “a very interesting plan from a couple different perspectives.” Indeed, the organization gave Cruz’s plan high marks on growth, capital investment and jobs added and, of the major candidates’ plans, found it cost the least.

Cruz is calling for the Internal Revenue Service to be abolished, and wants to create a flat 10 percent income tax and add a consumption tax. Yet the left-leaning Citizens for Tax Justice recently branded both Cruz and Trump’s plans as bad for taxpayers.

Hodge said that the Texan “wants to eliminate the corporate income tax and replace payroll taxes with a ‘business activity tax’ … it’s really a Value-Added Tax, much like what they have in Europe.” Cruz wants the consumption tax to be 16 percent.

The VAT raises a lot of “revenue for the federal government, which allows (Cruz) to reduce individual income tax rates down to 10 percent, which is a dramatic cut for everyone,” Hodge added. However, he warned the consumption tax “adds to the price of goods by 16 percent.” He added the 10 percent income tax rate “offsets some of the burden that might come from higher prices.”

As with any legislative plan, Hodge cautioned it should be taken with a grain of salt. “You have to take them as guidelines rather than proposals,” he said.

Written by Trent Gillies of CNBC

(Source: MSN)