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Financial Market Fear: 2016 Isn’t Off To As Rough A Start As You May Think

Financial Market Fear: 2016 Isn’t Off To As Rough A Start As You May Think

Just a week into 2016, and the market is off to a difficult start. If it feels like déjà vu, it is. Chinese market volatility has once again reared its ugly head and is causing anxiety in the U.S. markets. As of Thursday’s close, the S&P 500 is down 10% from its May highs. While we don’t want to dismiss the turmoil, it is worth noting not much has changed from August. Meaning the economy continues to chug along and stock valuations are fair.

What’s different this time? First, oil continues to make new lows. Second, the Federal Reserve raised rates 0.25% in December. Let’s address both.

Oil prices are still low. Lower oil prices provide a tailwind for consumer spending, which accounts for 70% of U.S. GDP, and very rarely (arguably never) lead to recessions. The other piece of good news is oil’s decline has stemmed from oversupply and not lack of demand. Lack of demand sends worrying economic signs, not too much supply.

The Fed’s rate hike. Federal Reserve inaction/action over the past few years has produced market volatility. We expect this to continue, unfortunately. On the plus side, we also expect the Fed to move very slowly compared to prior cycles. This means while rates could rise over the next 12-24 months, our base case calls for a slow ascent and that the overall environment will remain accommodative.  

What’s the same this time? The U.S. economy remains on solid footing. Though we readily admit it’s acting more like the tortoise than the hare. GDP is growing in the 2.0%-2.5% range and is likely to do so again in 2016, disposable income has accelerated to near 4%, unemployment remains low fueled by solid job growth and the housing market is improving. These factors all pointing in the right direction lead us to the same conclusion from last time: a recession looks unlikely over the next 12-18 months.

The start to 2016 is not a welcome one, to be sure, but we think it has more elements of fear than fundamental merits. As always, we believe strongly that a balanced portfolio is key and are here to help.


10 Key Themes That Will Impact Your Investments in 2015

If we look into our economic history books ten or twenty years from now, how might 2014 be remembered?  Maybe as, “the year that oil prices crashed, despite a strong US economy,” or perhaps, “the year when nearly every economist on Wall Street predicted a rise in interest rates that never came.” It could even be (my personal favorite), “the 2014 bull market that nobody loved.”

Whichever way it’s written, the point is that it’s now history. What I’m more interested in is what we can expect from 2015.

The Investment Committee at my company, Capital Investment Advisors, worked together to hone in on what we believe will be the 10 most impactful themes for investors over the next 12 months:

1. The US Economy – The US will slow from the torrid pace that closed out 2014, but not completely fall apart.  Most likely it will be sufficient to keep corporate earnings and profits growing and the unemployment rate headed to below 5.5 percent. However, with Japan in recession and the European Union on the verge of recession, the US can’t completely “decouple” forever.  Look for a solid 2015, but not a runaway train.

2. Stocks over Bonds (again) – The bull market in stocks is now more than five years old, but bull markets don’t end without a major economic event, i.e. a US recession.  Remember that a recession is negative growth for two full quarters. With the 5% surge we ended on in 2014 combined with low energy prices for consumers and companies alike, it’s likely we’ll see stocks continue to rise. On the other side of this coin, as interest rates make a push higher in 2015, bonds (in general) will be presented with a headwind – making a “flat” year for bonds likely.  As rates move higher throughout the year, bonds may look attractive again in late 2015 (with higher interest rates).

3. Interest rates finally climb – This is something that we have been expecting for more than a year now.  With the Federal Reserve’s “taper” over, and Janet Yellen and co. already forecasting a rate rise in mid-2015, it is likely that we will see interest rates in more “normal” territory.  This means rising to the 3.5 percent range for 10 year Treasury bonds.

4. Less Smooth Sailing – Yes, we almost saw a full 10 percent correction during the fall of 2014, but we spent much of the year with relatively low volatility.  As the economy adjusts to higher interest rates in 2015, stock market volatility will likely pick up.

5. Ultra-Low Inflation – With the precipitous drop in US oil prices towards the end of 2014, lower energy input prices will filter through the entire economy.  Manufacturing costs will decline, what consumers pay for gas at the pump will stay low, transportation, shipping, construction, and petroleum based products will all moderate driving the consumer price index closer to a very low historical rate of 1 percent.

6. Sectors to watch – Lower oil prices and a solid US economy should bode well for the consumer discretionary, financial, healthcare, and technology sectors.  These sectors have historically performed well (relative to other sectors) in the year following a large decline in oil/energy prices.

7. Housing stays steady – The Millennial generation is expected to spend $1.6 trillion over the next five years on home purchases. This will continue to support housing prices as Millennials move out of their parent’s basements and start owning homes of their own.

8. Drama in the Middle East and Russia – Dramatically lower oil prices will continue to take a toll on oil reliant economies. Saudi Arabia will continue to produce oil regardless of how low prices go but can only fully fund its suite of rich social programs with oil at $87/barrel.  Likewise the Russian economy needs oil above $100/barrel for a balanced budget.  This means, most likely, both regions will see unrest as their citizens adjust to more economic strife and their government’s increasingly limited ability to “contribute” to keeping the peace.

9. European Recession – With aging demographics and restrictive labor laws continuing to plague many EU nations, a full blown recession overseas is not unlikely in the coming year.

10. Tech like it’s 1999 – Unlike the late 90s, startup tech companies are now actually expected to generate revenue and have the true potential for profit before garnering a sky high valuation. However, with the (still private) ride sharing service Uber boasting a $41 billion valuation, the price tag for other companies like Instacart are beginning to seem astronomical.  Instacart is a wonderful idea and service (which I’ve written about before), but it’s still relatively small footprint seems hardly supportive of a now $2 billion valuation. This tells us that startup-chasing VC firms are beginning to create an environment reminiscent of the late 1990s.  Look for the tech “startup bubble” to continue to inflate in 2015.


Bottom Line 

As always, I’ll continue to keep an eye on the markets for you as we go into 2015, and update you here on any trends we see that spring up. I hope you have a wonderful and profitable 2015!


Disclosure:  This information is provided to you as a resource for informational purposes only.  It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors.  Past performance is not indicative of future results.  Investing involves risk including the possible loss of principal.  This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.


Read the original article here.


3 Ways To Avoid Being Part Of The Upcoming Retirement Crisis

I ran across an interesting article this week from the Boston Globe with another dire warning about retirement in America. It profiles the work of Alicia Munnell, a former top economist at the Federal Reserve Bank of Boston who is now the head of Boston College’s Center for Retirement Research. At the age of 71, she has just released a new book (adding to her impressive collection) which focuses on my favorite subject, retirement. The title of her book is, “Falling Short: The Coming Retirement Crisis and What To Do About It.” In it, she is pushing the idea that it’s just not realistic anymore for people to plan on being able to retire at age 62, and start walking on the beach while holding hands.

Munnell’s argues that most Americans should push the retirement age to 70, so that retirees can fully “max out” what their social security payments will be. She is assuming that due to a lack of savings in America, most Americans are going to have to rely on Social Security – hence the importance of maximizing the amount (with the caveat of working longer).

What’s the unsettling reality of the Social Security system? Without any changes to the current system, the social security trust fund surplus will run to zero, and the government will likely have to reduce payments either across the board or for certain groups.

On top of social security’s issues, Munnell’s other factor leading to the retirement crisis is the slow death of the pension. In 1983 almost two-thirds of workers had some kind of traditional pension plan with a lifetime of income guaranteed. In 2013, though, less than one in four people now have pension plans. Hence, those relying only on 401k savings have increased from 12% to 71% since 1983.

While a pension plan guaranteed retirees a set monthly income based on a percentage of their previous income from the company, now, according to Munnell, the typical household approaching retirement only has around $111,000 in retirement savings which translates into about $400 a month.

I love parsing these statistics – even though some of them might be dire. This might come across as depressing news, but I believe they’re important for all of us to understand so that we can learn how to identify the warning signs and avoid ending up being a statistic.

With all that said, I also believe part of the problem people have with saving for retirement today is that Americans are hearing seemingly impossible and ultimately unattainable retirement benchmarks from Wall Street and the media.

A message of “never enough,” and “work forever” are counterproductive in my opinion for the problem we all face with retirement. That’s why I like to focus on the bare minimum financial benchmarks that everyone can target without feeling like they’ve lost before they’ve even started.

In Munnell’s book, she outlines four main strategies for people to not run out of money in retirement:
1. Work until age 70
2. Save more
3. Pass on less to your heirs

These three strategies are good “common sense” approaches, but let’s look at some of the realities behind them.

If you have zero savings for retirement, then of course you’ll have to work as long as humanly possible and at least until age 70. Based on my personal experience, though, 75% of the people I have worked with over the years are in no way interested in working full time until the age of 70.

Rather than taking Munnell’s approach, I would suggest you aim for the ability to stop working full time at age 62. Then, if you are able, work just enough part time so that you don’t have to tap into your savings. This will allow your savings to continue to grow until age 65 or 66. At that time you can also being taking your social security payments which will also have had time to grow.

For Munnell’s second point on saving more, I think that’s a no brainer. However, I think it’s important that you have a reasonable and attainable goal on the horizon. That way you at least start and stay on your savings journey. Just saying “save more” is too ambiguous of a strategy. In the research for my book I found that happy retirees typically have at least $500,000 saved for retirement. If that’s not realistic for you, though, remember that you should have $240,000 saved to pull $1,000 per month from your portfolio.

As far as leaving less money to heirs, I actually agree. With so many people having virtually zero savings, leaving millions to your kids is a rare luxury. I believe that not being a burden to your children is gift enough.

Bottom line
Here is my update to Munnell’s list:
1. Understand what you need for your monthly budget in retirement above what social security is going to provide; and map out other income streams to “fill the gap”
2. Hit $500,000 in savings for retirement
3. Have a plan to eliminate your mortgage by the time you’re ready to retire

The retirement crisis might be coming, but by reaching the above goals, you won’t be a statistic.

Read the original article here.


The Week After

Last week, many stayed up till the wee hours of the morning watching the U.S. map fill in with red or blue.

For me, my eyes couldn’t stay open long enough. But there was enough press coverage the following day. So, it was easy to get the low down… quickly.

A good amount of issues remained in the balance based on these results, even though it was just a mid-term election.


The results

The major question heading into the mid-terms this time around was whether the Republicans could take a majority in the Senate.

And they did. By a larger-than-anticipated margin.

What is funny about politics (but I guess makes sense since everything runs in cycles) is that two years ago everyone was talking about how the Republican Party was in shambles. But now this. 

I digress.

In the House, the Republicans maintained their majority. They actually gained a larger majority than they previously had. They now have the largest majority since 1945.

One of the main takeaways from the election has to be the general public’s negative view of the president. It seems (and many more versed pundits felt as well) that many voters were putting the president and any Democrat candidate on the same pedestal. And they didn’t like that pedestal. 

But now we are left with a Republican Congress and a Democratic president. That seems like a bit of gridlock is ahead for us. But markets had a good week after the election… and possibly even further out.


What’s to come

Gridlock in Washington tends to be music to investors’ ears. Gridlock tends to mean not much is done in Washington and for investors that means less opportunity for harm to corporate sector. So, history shows that gridlock tends to be good for equity markets.

Yes, many huge bills are not likely to make their way through, but some items will likely still get passed.

One thing to be aware of is that the president may pass some bills without putting them on Congress’s table. This will likely provide headlines and some anger to some in Washington.

But given how the election turned out, Republicans will likely be able to push some of their desired initiatives through in the gridlocked state. And given a desire to not ruin the party’s image heading into a presidential election, the president may be forced to concede on some issues.

First, Republicans will likely work hard to alter some of Obamacare. Some of the areas that they may look to target first will be in regards to the medical device tax.  And they may even try to repeal the employer mandate.

Secondly, they will likely look to take some actions that may positively impact the energy sector. Given the one-sided Congress, much action will likely surround trying to expedite pipeline approvals.  This could bode well for the energy sector. But it would also bode well for the U.S. desire to become even more energy independent.

Finally, it wouldn’t be surprising to see some work done in Congress to try and alter Dodd-Frank.


Heading forward

Now that the mid-terms are finished, some of the political headlines will likely be focused on the what the lame duck Congress takes care of in December.

And then headlines will quickly turn towards who will run in the 2016 presidential election. These headlines may cause some volatility as the uncertainty to what will happen in 2016 will continue to build.

But for the time being, investors are pretty happy that deadlock has occurred in Washington. And investors will surely relish that for a little while.



Ebola and the Economy

Just last week I did a quick 24-hour round trip from Atlanta to New York City. Thursday was the first day that a case of Ebola was reported in New York.  Friday morning I tweeted a selfie “warm NY welcome photo” of me holding a copy of the New York Post with the headline “Ebola Here!”

Nerves will certainly continue about Ebola’s potential impact but so far here are the real effects that I’ve been able to measure:

So far, no impact on economic activity. Last week in New York my hotel was completely booked, both of my Delta flights were completely full, and New York City despite the past several weeks of Ebola news including Thursday’s reported case was as bustling as I’ve ever seen it. According to NYC & Co. (NY’s official tourism group) occupancy at hotels is still close to 90 percent. Those numbers were as low at 65 percent following the 9-11 terrorist attacks. Restaurants are still packed, flights still seem full, and the economy appears to be completely resilient to the threat.

However, the stock market has proven to be much more sensitive. Despite a strong week last week in the market, from mid-September to mid-October travel and hospitality related stocks suffered tremendously, even compared to the overall stock market decline we saw. From mid-September until mid-October the broad S&P 500 dropped about 9 percent at its worst measurement. However, travel and hospitality stocks fared far worse. Delta at one point was down nearly 25 percent, Southwest nearly 18 percent, Intercontinental Hotels 15 percent, and Royal Caribbean cruises down nearly 20 percent.

A very real impact for stocks, while the actually economic activity is seeming unscathed. Remember, fear of what could happen is usually much scarier than what will happen.  I want to remind you of this as you will continue to hear more about Ebola, and see continued sensationalism around the topic.

I personally sometimes get challenged for my lack of sensationalism and pessimism. When I talked about the Perfection Misconception a few weeks ago and the fact that we are not in a recession anymore and have not been since 2009 (which 72 percent of people in the US apparently didn’t even realize), I actually received emails, phone calls and online comments saying that I was crazy to say the economy is in good shape. Here’s the thing, though; I’m looking at facts. After looking at economic data points day after day, year after year and watching the stock market rise nearly 200 percent over the last five and a half years it’s difficult for me not to be optimistic about the economic repair we have experienced since 2009.

I think it’s time that we look at those cold hard facts, and take a step away from the pessimism of the media to really evaluate the risk of Ebola in the US. I’m clearly not a doctor, but from everything that I have read and researched, Ebola is only transferable through blood or bodily fluid and is not the kind of disease that would spread rapidly in the US.   However, almost every article you read about Ebola seems to include a small,almost innocent side note that goes something like, “Ebola is a tragedy and terrible and scary but it really shouldn’t be a problem for us here in the US…unless it becomes airborne and spreads.”

When a reporter or an economist gives their “disclaimer” about how bad things could get if Ebola becomes “airborne” they make you pause and question just how likely that is to happen. Could Ebola suddenly mutate and spread through the air like in the Dustin Hoffman and Rene Russo movie Outbreak? Does the author of the article know something that we don’t know?

The answer is no.  The reporter very likely doesn’t have some super secret knowledge on this disease that has not already been shared with us. It’s similar to the reporter saying, “You’re safe to sleep in your own home and your own bed tonight…unless you get swallowed by a sink hole that’s possibly lurking under your house.” Wait a minute; does the reporter know something that I don’t know?  When you hear this disclaimer, you might get scared into thinking, “Should I be worried about a sinkhole under my house?” Sound familiar when reading articles and disclaimers about Ebola “going airborne”?

An American man was killed a few weeks ago by a camel on a beach in Mexico. When you hear about Mexico now, you probably aren’t hearing a warning to stay away from camels. That’s because even though a guy was killed by one there recently, it’s still so unlikely that people aren’t disclaiming a spread of kicking camels in Mexico.

It’s important to remember that anything could happen, whether it’s the stock market crashing, a sink hole appearing under your house, a camel killing you on a Mexican beach, or Ebola even becoming airborne. Just because it could happen doesn’t mean it will, so don’t let media disclaimers, pessimism, or sensationalism scare you into quarantining yourself from the world.   It’s better for your mental health and your wallet in all these situations to remember the Perfection Misconception, and not let these possibilities dominate your life.


Read the original article here.


CIA Success Story

In today’s CIA Success Story, we share a story about a recently retired airline employee who wanted to figure out how he could continue to afford his current lifestyle throughout retirement. He had a specific interest in working with us to come up with a strategy that would allow him to generate multiple streams of income during retirement. His goal was to use his investments as a source of additional income as he prepared for life after retirement.


The Question

How can I generate multiple streams of income from my investments?


The Scenario

The recently retired airline employee decided to roll his 401(k) over to his IRA. From there, he needed help in evaluating what more he could do with his investments to supplement his current lifestyle in retirement. He came to us wanting to figure out how to create multiple streams of income. 


How We Helped

After numerous personalized meetings and working together, we were able to show this retiree how to generate a specific income off of his investments and feel confident in knowing that the income would supplement his lifestyle throughout retirement. The option recommended for this retiree was to look at an income investing strategy. After determining the amount of cash he needed to cover emergency expenses, short-term cash funding needs and SWAN (Sleep Well at Night) cash; we evaluated his portfolio to determine if his investments would be in a “Growth” or “Income” bucket, and we assessed the level of risk.


If you currently find yourself in a similar scenario, here are a few questions to ask an advisor:

1. When is the best time to roll over my 401(k) to a IRA?

2. How much money do I need to live off of for a happy retirement?

3. How can I develop a personalized income investment strategy?


Preparation for Retirement

Never feel that you are alone going through this transition to retirement. If you are anxious and need a secure income investment strategy, we are trained and committed to guide you step-by-step through the process. If you aren’t ready to meet with an advisor, you can do your own research but make sure you get information from reputable sources.


The Takeaway

This retiree trusted the knowledge of our team, and now feels confident with generating multiple streams of income while fully retired. Over the past year, he learned how to supplement his income and live comfortably. 


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