Celebrating our 30th Year

1988-2018

LW Client Newsletter 5 11 2018 Image.jpg

Stock Market Volatility Returns

Mid-Year Update 2018

The Economy & Global Markets

In the first quarter of 2018, three of the largest economies, U.S., China, and Europe experienced growth in employment, manufacturing, and business investment; U.S. gross domestic product hit an all‐time high with corporate profits accelerating to record heights and Europe exceeded the U.S. in 2017[I]. The U.S. economy grew near 3% in the prior twelve months as of 3/31/2018[ii], while U.S. corporate earnings are projected to increase by 18% in 2018 and Europe expects 11% earnings growth this year[iii].

The International Monetary Fund (IMF) in April released its forecast for global economic growth; world‐wide real GDP at 3.9% versus 3.8% in 2017, with the Euro‐Zone real GDP rising from 2.3% in 2017 to 2.4% in 2018[iv]. Even Great Britain, despite voting to leave the European Union in June 2016, had a strong 2017 with record highs in new orders for manufacturing and citizens working, and income inequality reaching a 30 year low despite predictions of economic collapse after the Brexit vote[v].

In the U.S. retail sales are up a robust 4.5% from a year ago[vi], housing starts (multi‐family and single‐family homes) are up 10.9% from a year ago[vii] and new single‐family home sales are up 8.8% form a year ago[viii].  Existing home sales are down slightly from the prior year though mostly from tight inventories of available homes as demand remains strong with the average home selling in about 3 ½ months, well below historical averages[ix]. Durable goods orders have increased by a healthy 9.5% over the prior 12 months[x]. The first quarter real GDP report revealed that for the second quarter in a row, every major component of business investment was positive: equipment, commercial construction, and intellectual property[xi].

Despite an apparent positive economic outlook, after hitting an all‐time high on January 26th of this year, the Dow Jones Industrial Average tumbled more than 10% into correction territory and has been in a tight trading range ever since, currently down 1.8% for the year and 8.8% from the all‐time highs[xii]. Sentiment changed quickly, although economic fundamentals appear to still be in place[xiii]. The S&P500 index had 23days with swings of 1% or more in the first quarter verses just 8 days with swings of 1% or more in all 2017[xiv]. In 2017, the S&P500 did not register a single down month of total return, while in the prior nine years we had no less than two months each year of negative total return and as many as eight[xv].

Political uncertainty over the Mueller investigation and mid‐term elections, inflation, higher interest rates, potential trade tariffs and speculation that the current global expansion may lose momentum are all factors that may have contributed to the current lull. Additionally, Congress increased discretionary, non-entitlement spending by $300 billion over the next two years, and now federal spending is set to rise 10% per year which could negate some of the benefits of tax cuts and deregulation[xvi]. Keep in mind, every dollar of government spending needs to be taxed or borrowed from the private sector, thus crowding out potential growth[xvii].

Jobs

The U.S. jobless rate fell in April to 3.9%, hitting a low not seen in seventeen years; further, the economy has added jobs in every month since October 2010 while the U.S. economic expansion has now continued for 107 consecutive months, ranking it 2nd all‐time[xviii]. Industrial production in the U.S. has increased 4.4% during the past year, the most since 2011[xix]. Most notable though is that all eighteen service sector industries reported growth in April, highlighting continued expansion[xx]. Private sector wages, growing at an annual rate 4.3% during the past 6 months, should help to boost consumer purchasing power; consumer spending is up 4.4% during the prior 12 months[xxi]. There are roughly as many job openings as there are unemployed workers (6.5 million) in the U.S. presently[xxii].

Foreign Policy

Geopolitical risks with ISIS and North Korea appear to be diminishing; Arab and Kurdish militias backed by U.S. Special Forces crushed ISIS in their capital city of Raqqa in Syria, effectively destroying the terrorist group. President Donald Trump and North Korea’s Kim Jong‐Un are expected to meet on June 12th to work out a peaceful agreement for the Korean Peninsula[xxiii]. However, Iran may fill the wildcard geopolitical risk going forward as tensions between the U.S. and Tehran have increased[xxiv].

Taxes & Stock Buybacks

The Tax Cuts & Jobs Act of 12/22/2017 lowered the federal corporate tax rate from 35% to 21% beginning in 2018. Further, it created special tax rates for foreign earnings repatriated to the U.S. and coupled with the historic cash levels held at most U.S. corporations, it is expected to substantially increase stock buybacks[xxv]. It is notable that U.S. corporate stock repurchases have been $158 billion in the first quarter of this year, marking this the biggest quarter since buyback records started being recorded in 1998[xxvi]. As an example, Apple Inc. has announced repatriation of more than $250 billion in cash overseas due to the new tax law[xxvii] and highlighted a $100 billion share buy‐back program when it announced earnings this quarter[xxviii].

Stock buybacks lower the number of shares outstanding and consequently increase earnings per share for shareholders[xxix]. Proponents argue that stock buybacks display management confidence in the value of their own stock, while opponents argue corporate funds could be better spent employee wage increases, acquisitions, equipment, and research & development[xxx]. Goldman Sachs estimates that share repurchases of S&P500 companies could reach $650 billion in 2018; at that rate of repurchase, Andrew Bary in a recent Barron’s article estimates a three percent increase in S&P 500 return calculated by dividing the buyback dollars by the cumulative market value of the S&P500 index[xxxi]

Infrastructure

“The U.S. economy is hitting on all cylinders with robust government expenditures, consumer spending and business investment”, stated Mohamed El‐Erian recently on Fox Business’s Mornings with Maria, “but to get to the next leg up we need to begin the long‐awaited government infrastructure program”[xxxii]. Infrastructure is the underlying structure of a country and its economy needed to function efficiently infrastructure includes roads, bridges, dams, water and sewer systems, railways and subways, airports, natural gas and oil pipelines, electricity transmission lines, and harbors. The proposed Trump Administration Plan is targeted to create public and private partnerships to fund infrastructure, drawing heavily on private capital investment, with the additional objective to create quality jobs.

Oil

The price of oil, and subsequent increase in gas prices, are attributed to increased worldwide demand for oil after a long period of over‐supply, OPEC production cuts, the Venezuelan economic crisis and Middle‐East geopolitical risks including the tension between the U.S. and Iran[xxxiii]. Consequently, with the price of oil has advanced 12% this year[xxxiv] and has been good for U.S. oil producers[xxxv]. The price of oil (West Texas Intermediate) closed at $68.57 on 4/30/2018 and is now on par with the average price during the period of 2002‐201[7xxxvi]. U.S. crude oil production has increased 25% to 10.54 million barrels per day since 2016 and is expected to expand further to meet worldwide demand[xxxvii].

Interest Rates

The Federal Open Market Committee (FOMC) voted to maintain the federal funds target rate at between 1.50% and 1.75% at their May meeting which reinforces a gradual approach to increasing interest rates. Further, the FOMC stated job gains have been strong on average in recent months, inflation for items other than food an energy has moved close to their 2% target, and risks to economic outlook appear to be balanced[xxxviii]. Most economists believe based on this most recent economic backdrop that the FOMC will raise rates two more times this year and three more times next year[xxxix].

The FOMC has the power to move markets by their action, or in some cases their failure to act. Warren Buffett has famously stated “Everything in valuation gets back to interest rates”. In a study highlighted in a book “Invest with the Fed”, for the period 1966‐2016, the S&P500 returned 15.2% annually when rates were trending down and 5.8% when rates were trending up[xl]. Interest rates affect companies in two ways; first, rising rates increase borrowing costs and second, higher rates decrease demand for discretionary products[xli]. Bonds with higher interest rates affect the stock of companies in yet another way by offering a more competitive investment alternative with less risk[xlii] than stocks.

Inflation & Budget Deficits

The case for higher expected inflation, greater than the FOMC’s target of 2%, is based on several factors including an increase in the producer price index of more than 3% over the past year[xliii]. Plus, oil and gasoline prices have risen significantly this year. Additionally, although wages have risen modestly during the past year, the quest for quality workers in the current tight labor market may begin to inflate wages more rapidly. Lastly, the U.S. government deficit is expected to grow and, coupled with an increased consumer debt load, may act as a catalyst to push interest rates higher[xliv].

Low unemployment, as we now have, caused double‐digit inflation during 1970s and 1980s but FOMC member, Charles Evans of the Federal Reserve Bank of Chicago, cautioned that because of structural changes in the economy today we may not necessarily experience the same result, and as such, the FOMC may be more patient to make monetary policy adjustments. Further, the Trump Administration argues that deregulation and tax cuts should increase business investment and increase productivity providing growth, thus keeping inflation low[xlv].

Debt

The U.S. National Debt stands at $21.144 trillion dollars, or $64,526 for each of our 327 million citizens; plus, the States have another $1.177 trillion of debt outstanding[xlvi]. The U.S. government is projected to run a $12.4 trillion budget deficit over the next ten years as forecasted by the Congressional Budget Office on 4/9/2018. The service of the U.S. national debt is approximately 8% of the budget, but with rising interest rates and the projected debt growth, the percentage of the national budget allocated to debt service could more than double in just the next ten years to more than 18% of the national budget, thus crowding out other important priorities for the country[xlvii]. At the individual level, credit card debt has crept back to all-time highs as of February of this year totaling $1.03 trillion[xlviii]. In addition, 70% of students utilize student loans to fund all or part of their education, as total student loan debt in the U.S. has bloated to $1.4 trillion, or $27,975 per student on average[xlix].

Politics & the Mid‐Term Elections

In U.S. elections, stocks generally do better six months after a mid‐term election than they do six months before due to the uncertainty surrounding the outcome beforehand verses the certainty afterward, no matter the actual outcome[l]. It has been argued in a recent article by Marshall Shield, citing academic research spanning 100 years, that a correction during a mid‐term election year, in a non‐recessionary economic environment, may wind up being a favorable buying opportunity[li]. Bottom line forget the political drama and focus on the economic fundamentals.

Trade

U.S. Treasury Secretary Steven Mnuchin traveled to China last week opening talks to iron out a new trade agreement between two of the world’s largest economies. No formal agreement was reached, but all sides acknowledged reaching agreement on some issues, while significant differences still exist, and the parties established a working mechanism for further communication[lii]. Running a trade deficit means the U.S. buys more than it produces. Consequently, investors around the world place their savings in U.S. bonds resulting in a net cash inflow that offsets our trade deficit. In general, trade tariffs or tariffs on specific goods (steel and aluminum) are not good for the economy; they act as taxes and often are counter‐productive[liii]. Furthermore, free trade enhances our standard of living even if other countries don’t practice free trade. Tariffs act to raise prices with no benefit to producers or consumers, plus these recently proposed tariffs may act to negatively offset some of the recently passed tax benefits[liv]. In 2017, China exported $506 billion to the U.S., while we exported only $130 billion to China[lv].

With that said, China has married access to its markets with rules enabling the Chinese government to essentially steal trade secrets and intellectual property for its own state‐run companies. Additionally, a case for national security can be made, especially for steel and aluminum imports, because China is a potential military rival[lvi] and we need to be able to produce those metals domestically. President Trump’s proposed trade tariffs on steel and aluminum, as well as protection of intellectual property rights proposed against China hopefully will be used to negotiate better trade terms and not become permanent trade policy. The U.S. and China could both risk giving up standard of living by limiting trade between these two leading economies.

Viewpoint

Our outlook for 2018 remains unchanged; U.S. corporate earnings have increased over the past year in anticipation of the new tax cuts, with the implied tax cut of deregulation, a relatively low inflationary and low interest rate environment. Although we expect that should continue to fuel profit growth for U.S. corporations, we are also looking abroad to the European, Asian and emerging markets for additional growth opportunities after a period of under‐performance. Major economies in the Euro‐zone, Japan, China, and Germany are experiencing early to mid‐cycle characteristics including accommodative central bank policy, housing increases, and economic expansion[lvii]. Emerging markets, such as India, China, Taiwan and Brazil are becoming more stable, are developing a sizeable middle class, and are less dependent on natural resources, making these opportunities more attractive[lviii].

Individual tax cuts, coupled with increased wage earnings, are expected to keep consumer spending at a healthy pace. Further, we expect the economy to experience some headwinds from political uncertainty, the increased price of oil, higher interest rates, increased inflation, potential trade tariffs and higher wage pressure. The energy and financial sectors, which have been slow to recover from 2007 levels, may offer potential for growth throughout the remainder of the year[lix].

What we are seeing is a domestic and global economy that is expanding, not contracting, with the main fear recently of inflation and higher interest rates due to that acceleration. At this point, faster growth and inflation are pushing interest rates up which we feel is a good sign[lx], but needs to be continually monitored. The bond market has not been rewarding investors for being savers for some time; the FOMC has artificially held short‐term rates low for too long, well below historical inflation rates, so higher interest rates are long over‐due and potentially good for savers[lxi]. Although a little inflation and a gradual rise in interest rates over time is deemed to be good for the economy, too much is cautionary—no one knows at this point how that will play out, and as such, short‐term caution has developed. Additionally, tariffs, otherwise known as trade taxes, can be counterproductive to capitalism creating uncertainty and volatility in the markets.

Our LW Portfolio Models deploy two investment methodologies at all times so we do not have to be predictors of market corrections, which is impossible to foresee precisely. First, we have a portion of the portfolio that is flexible and tactical to potentially take advantage of a momentum opportunity that is present, including safety if a defensive posture is justified. Second, we overweight each core position in the model with a value position (ex/ mid‐cap core coupled with mid‐cap value); the theory is that growth is overpriced and naturally over‐weights all core positions with growth and thus more expected volatility. By coupling a value position with the core holding, we believe this not only increases the dividend income coming into the portfolio, but also may help reduce overall volatility (risk). No strategy can eliminate all types of risk, but both strategies have academic research supporting the respective theory over long periods of time.

Timeless Investment Principles

Market declines are inevitable and do not last forever. We expect higher long‐term returns on stocks than we do from cash and bonds, and for that, we also expect greater volatility based on historical data. Over the past 116 years, market declines of 10% occur about once every 115 days[lxii]. The last time we experienced a pullback in the U.S. stock market of this magnitude (10% or greater), prior to February 2018, was in August 2015, and before that in October 2011[lxiii]. The average length of a 10% correction is about four months[lxiv] before prices begin to return to previous levels. Market declines of 15‐20% had occurred on average every 2‐4 years[lxv] during the prior 116 years. Declines can sometimes cause imprudent behavior by filling and consuming investors with dread and panic. History has shown that stock market declines are a normal part of the investment cycle. Market declines have varied in intensity and frequency, but the market has always recovered from declines. Although past results don’t guarantee future results, remembering that downturns have been temporary in the past may help quell fears[lxvi].

Short‐term market timing does not work. Short term market timing is the elusive “holy grail” or “fountain of youth” of investing—something you want very much, but that is very hard or impossible to get or achieve. If anyone could do it consistently—ell right before something goes down and buy right back before it goes back up—the rewards would be great, but typically investors end up with sub‐par performance due to the extreme difficulty with getting the short‐term timing (day trading) wrong[lxvii]. Dr. Horstmeyer, an assistant professor of finance at George Mason University, believes investors on average lose between one and two percentage points annually from market timing verses the average stated return of the investment on an annual basis[lxviii]. Although the Holy Grail or Fountain of Youth most likely does not exist, the benefits of a long‐term disciplined investment plan are compelling, but the generally higher returns associated with investing in stocks over the long‐term is dependent on sticking with your investment plan through both good and bad times in the markets. As a hypothetical example, if you stayed invested in the S&P500 index during the 20‐year period 1/1/1997 to 12/31/2016 you earned 7.68% annually assuming reinvestment of dividends; however, if you missed just the 10 best days in the market during that 20‐year period hoping to ride out some of the volatility, your annual return would have been reduced almost in half to 4.01%. If you missed just the 30 best days over that 20‐year period, your return was negative[lxix]. Obviously, past performance is not a guarantee of future results but numerous similar examples over different long‐term periods (20 years of more) reveal the same lesson that market timing could adversely affect your long‐term goals[lxx].

Diversification is important. After studying the most brilliant and successful minds in the investment field over the past 30 years—both past and present—the one vital and common lesson learned is that diversification through asset allocation works to mitigate volatility over the long‐term by diversifying into separate asset classes with varying correlation to one another. We were taught as youngsters by our parents and grandparents “don’t put all your eggs in one basket” which is a straight forward translation to allocate your investment capital into different asset classes within your portfolio. The idea is that they all don’t go up or down at the same time—nd this could not ring louder at this time. While this may not be the case on a day‐to‐day basis, a mix of different types of assets provides a smoother and more stable ride for your portfolio over the long‐term[lxxi]. However, investment disciplines do not work all the time in every economic environment. In fact, in a recent Bloomberg News article, it was argued that asset allocation in 2015 had one of the worst results in nearly 80 years with most major asset classes finishing the year with tepid results, with no asset class offering superior relative returns to lift the overall diversified asset allocation portfolio return[lxxii] so patience is essential with any investment discipline.

Our Gameplan

Our LW Portfolio Models are not immune to declines in global markets as we experienced in the 2008 financial crisis, or on “Brexit Friday” in June 2016, or even the most recent downturn in February of this year. We do not have a crystal ball nor do any of the market analysts and forecasters. Our belief is that our LW Portfolio Model construction has positioned us for potential resilience in this environment and has also positioned us to possibly take advantage of market mispricing. We see no need to change course, as the ancient buddish proverb states “If we are facing in the right direction, all we have to do is keep on walking”. We do not modify overall asset class allocation due to market corrections unless a fundamental change in the underlying outlook for the domestic or global economy has diminished or brightened verses our expectations. Stocks have increased since the election in 2016 without any noticeable volatility, so a pullback or correction is healthy and necessary for markets to advance. Pullbacks can be expected to last for a few months, and not weeks, as the greed present turns to fear and shakes out those investors who are not fundamentally based in their convictions.

Our Leshnak Wealth Portfolio Models are globally diversified and strategically constructed, with a tactical component and a bias for value which prescribes a requirement for dividend yield from our investment positions. In simple terms, we have investment positions in eight asset classes: domestic equities, foreign developed stocks, foreign emerging market equities, domestic bonds, foreign bonds, cash equivalents, commodities, and real estate. How much of each asset class (if any) we hold in the aforementioned asset classes is based on your unique risk tolerance, financial resources and personal goals and objectives. Moreover, we have a portion of each portfolio that is tactical and flexible. This allows the manager to move assets into the sector(s) that best fit current market conditions based on their investment methodology. Our portfolio construction has two other vital components—we want dividends from each position so no matter what markets are doing day to day, we still have dividend coming into the portfolio for income or to reinvest. Lastly, we add value positions in our allocation by coupling a value position to each core position which we believe puts us in the position of the “turtle”, in the proverbial tortoise verses the hare scenario, over the long‐term with equities.

As your financial fiduciary, the Leshnak Wealth team cares deeply about your financial well‐being, and will monitor for rebalancing opportunities that may add value to your portfolio, or to be defensive as conditions might warrant. As always, please call with questions or if you wish to discuss your specific portfolio in greater detail.

–Bob Leshnak, May 11, 2018

The investment decisions are those of Robert M. Leshnak, Jr., CLU, ChFC, CFP®, MS, EA as of 5/11/2018 and are subject to change. The information contained herein is only intended for Leshnak Wealth clients invested in the Leshnak Wealth Portfolio Models. No forecasts or recommendations are guaranteed. The technical data utilized as part of the investment decisions does not guarantee future positive results. Performance, especially for short periods of time, should not be the sole factor in making investment decisions. The information contained herein does not constitute client specific investment advice or take into account a specific client’s particular investment objectives, strategies, tax status, resources, or investment time horizon. No investment strategy such as asset allocation, diversification, tactically overweighting sectors, or utilizing fundamental and technical analysis can always assure a profit, nor always protect against a loss. The information presented is not intended to be a substitute for specific individualized tax, legal, or financial planning advice. The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time. Investing involves risks in regards to all of the investment products mentioned in this commentary, including the potential loss of principal. International investing involves additional risks including risks associated to foreign currency, limited liquidity, government regulation, and the possibility of substantial volatility due to adverse political, economic, and other developments. The two main risks associated with fixed income investing are interest rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the insurer of the bond will not be able to make principal and interest payments. Investments in commodities may entail significant risks and can be significantly affected by events such as variations in the commodities markets, weather, disease, embargoes, international, political, and economic developments, the success of exploration projects, tax and other government regulations, as well as other factors. Indexes are unmanaged and investors are not able to invest directly into any index. Past performance is no guarantee of future results. Please note that individual situations can vary. Therefore, the information presented here should only be relied upon when coordinated with individual professional advice.

i Cote, Douglas and Cananaugh, Karyn, “The Economy and markets Unleashed in 2018”; Voya Global Perspectives Market Outlook 2Q18.

ii Wesbury, Brian S. and Stein, Robert, “The First Estimate for Q1 Real GDP Growth is 2.3% at an Annual Rate”; First Trust Advisors-Data Watch, 4/27/2018.

iii Cote, Douglas and Cananaugh, Karyn, “The Economy and markets Unleashed in 2018”; Voya Global Perspectives Market Outlook 2Q18.

iv “A Snapshot of European Equities”; First Trust, 4/19/2018.

v Nelson, Fraser, “The U.K. Is Doing Just Fine, Thanks”; The Wall Street Journal, March 24-25, 2018.

vi Wesbury, Brian S. and Stein, Robert, “Retail Sales Rose 0.6% in March”; First Trust Advisors-Data Watch, 4/16/2018.

vii Wesbury, Brian S. and Stein, Robert, “Housing Starts Increased 1.9% in March”; First Trust Advisors-Data Watch, 4/27/2018.

viii Wesbury, Brian S. and Stein, Robert, “New Single Family Home Sales Increased 4% in March”; First Trust Advisors-Data Watch, 4/24/2018.

ix Wesbury, Brian S. and Stein, Robert, “Existing Home Sales Increased 1.1% in March”; First Trust Advisors-Data Watch, 4/23/2018.

x Wesbury, Brian S. and Stein, Robert, “New Orders for Durable Goods Rose 2.6% in March”; First Trust Advisors-Data Watch, 4/26/2018.

xi Wesbury, Brian S. and Stein, Robert, “The First Estimate for Q1 Real GDP Growth is 2.3% at an Annual Rate”; First Trust Advisors-Data Watch, 4/27/2018.

xii Otani, Akane and Wursthorn, Michael, “Markets Run Fast Only to Stay in Place”; The Wall Street Journal, May 7, 2018.

xiii Wesbury, Brian S. and Stein, Robert, “This is Just a Correction”; First Trust Advisors 2/9/2018.

xiv “2Q18: Volatility Makes a Comeback”; Hartford Funds. The 5-Minute Forecast 5/3/2018.

xv “Every Year Looks Volatile Compared to 2017”; First Trust 4/26/2018.

xvi Wesbury, Brian S. and Stein, Robert, “Snatching Slow Growth from the Jaws of Fast Growth”; First Trust Advisors- Monday Morning Outlook, 2/12/2018.

xvii Wesbury, Brian S. and Stein, Robert, “Snatching Slow Growth from the Jaws of Fast Growth”; First Trust Advisors- Monday Morning Outlook, 2/12/2018.

xviiixviii Mitchell, Josh, “Jovless Rate at 17-Year Low”; WSJ Weekend, May 5-6, 2018.

xix Wesbury, Brian S. and Stein, Robert, “Industrial Production Rose 0.5% in March”; First Trust Advisors-Data Watch, 4/17/2018.

xx Wesbury, Brian S. and Stein, Robert, “The ISM Non-Manufacturing Index Declined to 56.8 in April”; First Trust Advisors-Data Watch, 5/3/2018.

xxi Wesbury, Brian S. and Stein, Robert, “Personal Income Rose 0.3% in March”; First Trust Advisors-Data Watch, 4/30/2018.

xxii Morath, Eric, “For Unemployed, Now Is a Good Time to Get Hired”; The Wall Street Journal, May 9, 2018.

xxiii Cote, Douglas and Cananaugh, Karyn, “The Economy and markets Unleashed in 2018”; Voya Global Perspectives Market Outlook 2Q18.

xxivxxiv Bender, Michael and Gordon, Michael, and Ballhaus, “Trump Pulls U.S. Out of Iran Deal”; The Wall Street Journal, May 9, 2018.

xxvxxv “Stock buybacks are expected to rise markedly thanks to tax reform”; First Trust 4/17/2018.

xxvi Eisen, Ben and Otani, Akane, “Buybacks Surge, Steadying Market”; The Wall Street Journal, May 11, 2018.

xxvii Wakabayashi, Daisuke and Chen, Brian X., “Apple, Capitalizing on New Tax Law, Plans to Bring Billions in Cash Back to U.S.”; NY Times, 1/17/2018.

xxviii Apple’s Q2 2018 earnings call, 5/1/2018.

xxixxxix Eisen, Ben and Otani, Akane, “Buybacks Surge, Steadying Market”; The Wall Street Journal, May 11, 2018.

xxx Eisen, Ben and Otani, Akane, “Buybacks Surge, Steadying Market”; The Wall Street Journal, May 11, 2018.

xxxi Bary, Andrew, “The Buyback Boom”; Barron’s, May 14, 2018 (received on 5/11/2018).

xxxii El-Erian, Mohamed A. “Live Interview on Mornings with Maria”; Fox Business Chanel, 5/9/2018.

xxxiii Turnill, Richard, “How to Play the Oil Rally”; Blackrock Advisors Global Weekly Commentary, May 7, 2018

xxxiv Sider, Alison and Kantchev, Georgi, “Forecaster Fail: Missing Oil’s Rise”; The Wall Street Journal, May 7, 2018.

xxxv “China Trade: Short Visit, Long-Distance”; Legg Mason Global Asset Management, May 4, 2018.

xxxvi “The Price of Crude Oil has Risen to an Interesting Level”; First Trust 5/1/2018.

xxxvii “The Price of Crude Oil has Risen to an Interesting Level”; First Trust 5/1/2018.

xxxviii “As expected, rates left unchanged as inflation moves closer to a “Symmetric” target”; Pacific Asset Management, 5/3/18.

xxxix Tankersley, Jim, “Fed Officials Worry the Economy Is Too Good. Workers Still Feel Left Behind”; NY Times, April 26, 2018.

xl Johnson, Robert and Jensen, Gerald and Garcia-Feijoo, Luis, “Invest with the Fed-Maximize Portfolio Performance by following Federal Reserve Policy”; McGraw-Hill, 2/20/2015.

xli Johnson, Robert and Jensen, Gerald and Garcia-Feijoo, Luis, “Invest with the Fed-Maximize Portfolio Performance by following Federal Reserve Policy”; McGraw-Hill, 2/20/2015.

xliixlii Turnill, Richard, “The 3% yield that really matters”; Blackrock Advisors Global Weekly Commentary, 4/30/2018.

xliii Wesbury, Brian S. and Stein, Robert, “The Producer Price Index Increased 0.3% in March”; First Trust Advisors-Data Watch, 4/10/2018.

xliv Derrick, James R., Jr., “Inflation Shock May Be Next”; SFS Portfolios April 2018 MarketPoint Commentary, 4/13/2018.

xlv Tankersley, Jim, “Fed Officials Worry the Economy Is Too Good. Workers Still Feel Left Behind”; NY Times, April 26, 2018.

xlvi USDebtClock.org

xlviixlvii Hooper, Kristina, “Assesing the road ahead after a turbulent first quarter”; Q2 Market Outlook: Five Things to Watch in April, Invesco Advisor Perspectives, 4/4/2018.

xlviii By the Numbers; April 16, 2018.

xlixxlix “Student Land Debt Statistics 2018”; The Student Loan Report; 3/2/2018. https://studentloans.net

l Hulbert, Mark, “Why Stocks Can’t Wait for the Midterms to be Over”; The Wall Street Journal, May 7, 2018.

li Shield, Marshall, “Use the Correction as a Buying Opportunity: 40% upside?”; Proactive Advisor Magazine 4/18/2018.

lii “China Trade: Short Visit, Long-Distance”; Legg Mason Global Asset Management, May 4, 2018.

liii Wesbury, Brian S. and Stein, Robert, “Thoughts on Trade”; First Trust Advisors-Monday Morning Outlook, 4/16/2018.

liv Wesbury, Brian S. and Stein, Robert, “Harleys, Bourbon & Denim”; First Trust Advisors-Monday Morning Outlook, 3/5/2018.

lv Wesbury, Brian S. and Stein, Robert, “Thoughts on Trade”; First Trust Advisors-Monday Morning Outlook, 4/16/2018.

lvi Wesbury, Brian S. and Stein, Robert, “Thoughts on Trade”; First Trust Advisors-Monday Morning Outlook, 4/16/2018.

lvii “But US assets have gotten expensive”; Capital Group Outlook-Time for Balance and Flexibility, January 2018.

lviii “But US assets have gotten expensive”; Capital Group Outlook-Time for Balance and Flexibility, January 2018.

lix “But US assets have gotten expensive”; Capital Group Outlook-Time for Balance and Flexibility, January 2018.

lx Wesbury, Brian S. and Stein, Robert, “3%-Why it Doesn’t Matter”; First Trust Advisors-Monday Morning Outlook, 4/30/2018.

lxi Wesbury, Brian S. and Stein, Robert, “A Generation of Interest Rate Illiterates”; First Trust Advisors-Monday Morning Outlook, 4/9/2018.

lxii “Keys to Prevailing Through Stock Market Declines”; American Funds Investor Resource: A Guide to Market Fluctuations; Aug. 2015; americanfunds.com

lxiii “Keys to Prevailing Through Stock Market Declines”; American Funds Investor Resource: A Guide to Market Fluctuations; Aug. 2015; americanfunds.com

lxiv “Keys to Prevailing Through Stock Market Declines”; American Funds Investor Resource: A Guide to Market Fluctuations; Aug. 2015; americanfunds.com

lxv “Declines Have Become Common and Temporary Occurrences”; American Funds Client Conversations; Jan. 2016

lxvi “Keys to Prevailing Through Stock Market Declines”; American Funds Investor Resource: A Guide to Market Fluctuations; Aug. 2015; americanfunds.com

lxvii Vanguard Principles for Investing Success; 2014, pages 29-32; vanguard.com

lxviii Horstmeyer, Derek, “Caught in the Return Gap”; The Wall Street Journal, May 7, 2018.

lxixlxix “Five Things You Need ot Know to Ride Out a Volatile Sock Market”; Franklin Templeton Investments, Sept 2017.

lxx “Market Volatility-Managing the Ups and Downs”; Fidelity Investments, March 2017.

lxxi Vanguard Principles for Investing Success; 2014, pages 8-16; vanguard.com

lxxii “The Year that Stocks, Bonds and Cash Failed to Thrive”, Investment News, January 4, 2016.

2017 Year End Tax Update

I trust this letter finds you enjoying the holiday season!  Congress has enacted what is being described as the biggest tax reform law in thirty years[i].  As I review the new legislation, I believe it will fundamentally change the way you, your family, and your business prepare your federal income tax return, and ultimately the amount of tax you will pay. Most of the changes will go into effect in 2018; however, there may be time before year end to take advantage of certain items in 2017 to best position yourself or your business as we will outline below.   

Tax Cuts and Jobs Act of 2017

The Tax Cuts and Jobs Act of 2017 (TCJA) is now law in the United States.  This newsletter provides a brief description of some of the major provisions and how they may impact you, your families, your business, and your employer.  The goal of the Trump Administration and Congressional Republicans is to stimulate the economy after a long slow expansion following the 2008 great recession.  In theory, reducing the corporate and pass-through business tax rates should induce hiring and capital spending.  New provisions for repatriating international corporate profits for U.S. based companies has the objective to bring those funds to the U.S. for investment in personnel, plant and equipment.  Lower individual rates are designed to provide Americans more money to spend or save as they see fit.[i]  Fewer tax breaks are designed to make the IRS code simpler, although the limitation of state, local and real estate tax deductibility may actually preclude some upper middle class taxpayers, especially those taxpayers of higher taxed states such as New York, New Jersey, and California from realizing a lower overall tax bill.[ii] The Democrats’ argument to this tax legislation is that corporate tax breaks do not lead to job creation.  The bill does not contain enough tax breaks for the middle class but allows most of the individual tax breaks for the wealthy.[iii] Time will certainly be the arbitor of this new tax legislation and the theories both for and against it. 

Game Plan

The overall game plan would be to take advantage of lower tax rates next year by deferring income until 2018.  Additionally, itemized deductions such as real estate taxes could be paid in 2017, as the deductibility may be limited in 2018.

Tax Items of Interest[i]

  • The new standard deduction is $24,000 for married individuals filing a joint return, $18,000 for head of household and $12,000 for all other taxpayers, adjusted for inflation in tax years beginning after 2018.  No changes are made to the current law for additional standard deductions for the elderly and the blind.  Because of the increase in the standard deduction and the changes to the rules for itemized deductions many taxpayers may now find themselves taking the standard deduction versus itemized deductions.[i] 

  • Individuals will only be able to claim an itemized deduction up to $10,000 ($5,000 for a married taxpayer filing a separate return) for the total of (1) state and local property taxes; and (2) state and local income taxes. To avoid this limitation, pay the last installment of estimated state and local taxes for 2017 no later than Dec. 31, 2017, rather than on the 2018 due date. But don't prepay in 2017 a state income tax bill that will be imposed next year – Congress says such a prepayment won't be deductible in 2017.  In many cases, it may be beneficial to prepay your 2018 real estate taxes before year end. 

  • The home mortgage interest deduction has been modified beginning in 2018.  Interest on a home equity loan is no longer deductible.  Interest on a new home mortgage is limited to interest paid on a maximum of $750,000 ($375,000 if MFS) of a mortgage taken out after December 14, 2017.  Taxpayers with a mortgage taken out before December 15, 2017 can continue to claim home mortgage interest on up to $1 million ($500,000 if MFS) going forward; the $1 million ($500,000 if MFS) limit continues to apply to a refinanced mortgage incurred before December 15, 2017.

  • The itemized deduction for charitable contributions remains intact. But because most other itemized deductions will be eliminated in exchange for a larger standard deduction (e.g., $24,000 for joint filers), charitable contributions after 2017 may not yield a tax benefit for many because they won't be able to itemize deductions.  If you believe you will be taking the standard deduction next year, you may consider accelerating some charitable giving in 2017.

     

  • The new law temporarily increases itemized deductions for medical expenses. For 2017 and 2018 these expenses can be claimed as itemized deductions to the extent they exceed a floor equal to 7.5% of your adjusted gross income (AGI). But keep in mind that next year many individuals will have to claim the standard deduction because many itemized deductions have been eliminated. If you anticipate not being able to itemize deductions after this year, but will be able to do so this year, consider accelerating medical expenses, such as dental work or new glasses, into this year.

  • The new law substantially increases the alternative minimum tax (AMT) exemption amount, beginning next year. There may be steps you can take now to take advantage of that increase. For example, the exercise of an incentive stock option (ISO) can result in AMT complications. So, if you hold any ISOs, it may be wise to postpone exercising them until next year.

  • Like-kind exchanges are a popular way to avoid current tax on the appreciation of an asset, but after Dec. 31, 2017, such swaps will be possible only if they involve real estate that isn't held primarily for sale.

  • Although businesses have been able to deduct 50% of the cost of entertainment directly related to or associated with the active conduct of a business, this deduction is disallowed after 2017.  The cost of business meals remains a 50% deduction.

  • Under current rules, alimony payments generally are an above-the line deduction for the payor and included in the income of the payee. Under the new law, alimony payments aren't deductible by the payor or includable in the income of the payee, generally effective for any divorce decree or separation agreement executed after 2017.

  • The new law suspends the deduction for moving expenses after 2017 (except for certain members of the Armed Forces), and also suspends the tax-free reimbursement of employment-related moving expenses.

  • 529 plans currently provide tax deferred growth and tax free withdrawals when used to pay for college.  Under the new tax law, families will be able to withdraw up to $10,000 tax free per year for elementary or high school. [ii]

  • If you are about to convert a regular IRA to a Roth IRA, postpone your move until next year.  That way you’ll defer income from the conversion until next year and have it taxed at lower rates.

  • Earlier this year, you may have already converted a regular IRA to a ROTH IRA but now you question the wisdom of that move, as the tax on conversion will be subject to a lower tax rate next year.  You can unwind the conversion to the Roth IRA by doing a recharacterization – making a trustee-to-trustee transfer from the Roth to a regular IRA.  This way, the original conversion to a Roth IRA will be cancelled out.  But you must complete the recharacterization before year-end.  Starting next year, you won’t be able to use a recharacterization to unwind a regular IRA to ROTH IRA conversion.

  • Under current law, various employee business expenses, e.g., employee home office expenses, are deductible as itemized deductions if those expenses plus certain other expenses exceed 2% of adjusted gross income. The new law suspends the deduction for employee business expenses paid after 2017. The deduction for tax preparation fees and investment interest expenses as miscellaneous itemized deductions subject to the 2% floor has fully been eliminated beginning in 2018.  Personal casualty and theft losses, except for certain losses in federally declared disaster areas, have been fully eliminated beginning in 2018.

  • In 2017, taxpayers claimed a personal exemption for themselves, their spouse (if married filing jointly) and each qualifying child or qualifying relative.  Each exemption reduced taxable income by over $4000 in 2017.  Under the TCJA, personal and dependent exemptions are eliminated in 2018.

  • Through 2025, the TCJA increases the maximum child tax credit from $1,000 to $2,000 per qualifying child.  The refundable portion of the credit increases from $1,000 to $1,400.  That means taxpayers who don’t owe tax can still claim a credit of up to $1,400.  The higher child tax credit will be available for qualifying children under age 17, as under current law.  Also, the child tax credit begins to phase out for taxpayers with modified adjusted gross income (MAGI) of over $200,000 or $400,000 (MFJ).  This phaseout more than doubles the phaseout range under current law.  Taxpayers can’t claim a child tax credit for a child who does not have a Social Security Number (SSM) by the due date of the return.  The TCJA allows a new $500 nonrefundable credit for dependents who do not qualify for the child tax credit.

  • There is a significant new tax deduction taking effect in 2018 that should provide a substantial tax benefit to individuals with qualified business income from a partnership, S corporation, LLC or sole proprietorship[iii].  This income is sometimes referred to as “pass-throughincome. The deduction is 20% of your qualified business income defined as the net amount of items of income, gain, deduction, and loss with respect to your trade or business.  Certain specified service trades in the fields of health, law, consulting, athletics, financial or brokerage services or where the principal asset is the reputation or skill of one or more employees or owners, have exclusions and limitations.

  • If you run a business that renders services and operates on the cash basis, the income you earn isn't taxed until your clients or patients pay. So if you hold off on billings until next year—or until so late in the year that no payment will likely be received this year—you will likely succeed in deferring income until next year.

  • If your business is on the accrual basis, deferral of income until next year is difficult but not impossible. For example, you might, with due regard to business considerations, be able to postpone completion of a last-minute job until 2018, or defer deliveries of merchandise until next year (if doing so won't upset your customers). Taking one or more of these steps would postpone your right to payment, and the income from the job or the merchandise, until next year.

Our LW Gameplan

As your financial fiduciary, the Leshnak Wealth Team cares deeply about your financial well-being.  As always, please call with questions or if you wish to discuss your specific issues in greater detail.

–Bob Leshnak, December 21, 2017

New Tax Rates

FOR MARRIED INDIVIDUALS FILING JOINT RETURNS AND SURVIVING SPOUSES:

If taxable income is:                 The tax is:

--------------------                          -----------

Not over $19,050                      10% of taxable income

Over $19,050 but not                  $1,905 plus 12% of the

  over $77,400                          excess over $19,050

Over $77,400 but not                  $8,907 plus 22% of the

  over $165,000                         excess over $77,400

Over $165,000 but not                 $28,179 plus 24% of the

  over $315,000                         excess over $165,000

Over $315,000 but not                 $64,179 plus 32% of the

  over $400,000                         excess over $315,000

Over $400,000 but not                 $91,379 plus 35% of the

  over $600,000                       excess over $400,000

Over $600,000                       $161,379 plus 37% of the

                                        excess over $600,00

 

FOR SINGLE INDIVIDUALS (OTHER THAN HEADS OF HOUSEHOLDS AND SURVIVING SPOUSES):

If taxable income is:                 The tax is:

--------------------                         ----------

Not over $9,525                       10% of taxable income

Over $9,525 but not                   $952.50 plus 12% of the

  over $38,700                           excess over $9,525

Over $38,700 but not                  $4,453.50 plus 22% of the

  over $82,500                           excess over $38,700

Over $82,500 but not                  $14,089.50 plus 24% of the

  over $157,500                          excess over $82,500

Over $157,500 but not                 $32,089.50 plus 32% of the

  over $200,000                          excess over $157,000

Over $200,000 but not                 $45,689.50 plus 35% of the

  over $500,000                          excess over $200,000

Over $500,000                         $150,689.50 plus 37% of the

                                         excess over $500,000

 

FOR HEADS OF HOUSEHOLDS:

If taxable income is:                 The tax is:

--------------------                         -----------

Not over $13,600                      10% of taxable income

Over $13,600 but not                  $1,360 plus 12% of the

  over $51,800                           excess over $13,600

Over $51,800 but not                  $5,944 plus 22% of the

  over $82,500                          excess over $51,800

Over $82,500 but not                  $12,698 plus 24% of the

  over $157,500                          excess over $82,500

Over $157,500 but not                 $30,698 plus 32% of the

  over $200,000                          excess over $157,500

Over $200,000 but not                 $44,298 plus 35% of the

  over $500,000                          excess over $200,000

Over $500,000                         $149,298 plus 37% of the

                                         excess over $500,000

  

FOR MARRIEDS FILING SEPARATELY:

If taxable income is:                 The tax is:

--------------------                  ----------

Not over $9,525                       10% of taxable income

Over $9,525 but not                   $952.50 plus 12% of the

  over $38,700                           excess over $9,525

Over $38,700 but not                  $4,453.50 plus 22% of the

  over $82,500                           excess over $38,700

Over $82,500 but not                  $14,089.50 plus 24% of the

  over $157,500                          excess over $82,500

Over $157,500 but not                 $32,089.50 plus 32% of the

  over $200,000                          excess over $157,500

Over $200,000 but not                 $45,689.50 plus 35% of the

  over $300,000                          excess over $200,000

Over $300,000                         $80,689.50 plus 37% of the

                                         excess over $300,000

 

FOR ESTATES AND TRUSTS:

If taxable income is:                 The tax is:

---------------------                        -----------

Not over $2,550                       10% of taxable income

Over $2,550 but not                   $255 plus 24% of the

  over $9,150                            excess over $2,550

Over $9,150 but not                   $1,839 plus 35% of the

  over $12,500                            excess over $9,150

Over $12,500                          $3,011.50 plus 37% of the

                                         excess over $12,500

The investment decisions are those of Robert M. Leshnak, Jr., CLU, ChFC, CFP®, MS, EA as of 12/21/2017 and are subject to change.  The information contained herein is only intended for Leshnak Wealth clients invested in the Leshnak Wealth Portfolio Models.  No forecasts or recommendations are guaranteed.  The technical data utilized as part of the investment decisions does not guarantee future positive results. Performance, especially for short periods of time, should not be the sole factor in making investment decisions.  The information contained herein does not constitute client specific investment advice or take into account a specific client’s particular investment objectives, strategies, tax status, resources, or investment time horizon. No investment strategy such as asset allocation, diversification, tactically overweighting sectors, or utilizing fundamental and technical analysis can always assure a profit, nor always protect against a loss.  The information presented is not intended to be a substitute for specific individualized tax, legal, or financial planning advice.  The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time.  Investing involves risks in regards to all of the investment products mentioned in this commentary, including the potential loss of principal.  International investing involves additional risks including risks associated to foreign currency, limited liquidity, government regulation, and the possibility of substantial volatility due to adverse political, economic, and other developments.  The two main risks associated with fixed income investing are interest rate and credit risk.  Typically, when interest rates rise, there is a corresponding decline in the market value of bonds.  Credit risk refers to the possibility that the insurer of the bond will not be able to make principal and interest payments.  Investments in commodities may entail significant risks and can be significantly affected by events such as variations in the commodities markets, weather, disease, embargoes, international, political, and economic developments, the success of exploration projects, tax and other government regulations, as well as other factors.  Indexes are unmanaged and investors are not able to invest directly into any index.  Past performance is no guarantee of future results.  Please note that individual situations can vary.  Therefore, the information presented here should only be relied upon when coordinated with individual professional advice.

[i] Pickering, Kathy. “How the Tax Cuts and Jobs Act Impacts US Tax Returns; HR Block.com December 20, 2017

[ii] Pickering, Kathy. “How the Tax Cuts and Jobs Act Impacts US Tax Returns; HR Block.com December 20, 2017

[iii] Rapoport, Michael.  “Pass-Through Rules Remain Complex”; The Wall Street Journal December 20, 2017

 

[i] “2017 Tax Reform: Checkpoint Special Study on Individual Tax Changes in the “Tax Cuts and Jobs Act””: Thompson Reuter Accounting News, December 20, 2018

 

[i] Timiraos, Nick and Davidson, Katie.  “Plan to Test GOP’s Economic Pledge”; The Wall Street Journal December 20, 2017

[ii] Pickering, Kathy. “How the Tax Cuts and Jobs Act Impacts US Tax Returns; HR Block.com December 20, 2017

[iii] Bender, Michael & Hook, Janet & Reuben, Richard.  “Tax Vote Seals Victory for Trump”; The Wall Street Journal December 21, 2017

 

 

[i] Bender, Michael & Hook, Janet & Reuben, Richard.  “Tax Vote Seals Victory for Trump”; The Wall Street Journal December 21, 20

Newsletter September 2017

Equifax Data Breach

 With assessment and cleanup underway from Hurricane Irma and the cleanup from Hurricane Harvey continuing, we want to send our best wishes and prayers to our friends and clients affected by these storms. 

This past weekend, amongst the hurricane coverage, you may have heard about the massive data breach at Equifax Inc., which is one of the three main credit reporting companies.  The breach exposed Social Security numbers, birth dates, addresses, driver’s license information and other important data affecting roughly 143 million people in the United States, as well as some people in Canada and the United Kingdom[i].  Identity thieves utilize the stolen data to open credit accounts, file tax returns, buy property and cars, and possibly access investment and bank accounts[ii].

We wanted to alert you to this in case you hadn’t heard and provide advice on how to respond.  Identity theft and credit fraud can be an eye-opening, time consuming, scary topic, but an informed consumer armed with the most effective prevention measures will be the best way to make sure it does not happen to you.   

Here are a few options on what you can do now to prevent someone from using your data:

  • View your credit reports for free at www.AnnualCreditReport.com.  You’re entitled to get a free copy of your credit report from each of the three big agencies once every 12 months.  Review it closely for unauthorized accounts or any mistakes.

  • Place a 90-day security fraud alert on your credit report.  Fraud alerts are warning flags on your credit report notifying the creditors that they should contact you before issuing new credit[iii].  However, creditors are permitted to and can issue credit anyway—so it’s not foolproof. 

  • Place a credit freeze on your credit report so that the creditor cannot review your credit history and thus may not issue new credit.  This option, however, comes with some downsides.  While the freeze stops thieves from opening new credit cards or loans in your name, it also prevents you from opening new accounts.  Each time you apply for a credit card, mortgage or loan, you will need to lift the freeze from each credit agency a few days beforehand.  A credit freeze can be done online at the websites of the three credit reporting agencies -- Equifax , Experian and TransUnion . You'll need to freeze all three reports for the best protection. Each company will give you a code that you'll need again in order to lift the freeze, so keep it in a safe place.

  • Consider a credit monitoring service which will alert you as often as daily to changes in your credit report, usually for a monthly fee[iv]Equifax is offering free credit monitoring for a year. The company says the service will search suspicious sites for your Social Security number, give you access to your Equifax report and other offerings. You can sign up at equifaxsecurity2017.com and click on ENROLL at the bottom of the screen[v].  The deadline to do so is November 21, 2017.  A popular comprehensive credit monitoring service, https://www.LifeLock.com (1-800-LifeLock), is a fee service that helps to prevent, protect and defend against fraud, theft, and identify theft.

  • Other useful measures to prevent against Identify theft[vi]:

    • Monitor bank and credit card accounts regularly.

    • Request electronic delivery of your credit, bank, and brokerage account statements—thus reducing the amount of sensitive information in your mailbox for thieves to steal.

    • Shred all documents that contain personal information before placing in the trash.

    • Do not carry in your wallet or purse as many credit cards and other documents, like your social security card, that are not used as often.

    • Photocopy or take a picture with your iPhone the front and back of EVERYTHING in your wallet or purse so you can immediately know what you had and who to contact if your wallet or purse is stolen.

    • Secure online accounts with difficult passwords that include not only upper and lower case letters, but also numbers, and special characters.  You can also create a phrase such as “Igotothestoreandpaywith$”.  Remember to change passwords often, and keep a password list in a secure place.

    • Update anti-virus, firewall and spyware software regularly.

    • Never give out personal information over email.

    • Substitute your driver’s license number for your Social Security number whenever possible.

    • Only work with reputable on-line companies. 

    • Do not give out your child’s Social Security number unless required. 

    • Password-protect your computer in case it is stolen, especially laptop computers.  Encrypt all hard drive data and emails that you send.

    • Back-up all personal data on your computer in case it is stolen, lost, or the hard drive becomes damaged.  www.Carbonite.com is an online back-up service to protect your electronic documents, videos, and photos.

  • Resources that may be of assistance in the future:

    • Federal Trade Commission www.consumer.gov/idtheft

    • Identify Theft Resource Center www.idtheftcenter.org

    • www.Experian.com

    • www.TransUnion.com

    • www.Equifax.com

 We hope you find this information helpful.  As your financial fiduciary, the Leshnak Wealth Team cares deeply about your financial well-being, including offering reliable advice or direction on all financial matters.  As always, we will monitor for rebalancing opportunities that may add value to your portfolio, or to be defensive as conditions might warrant.  Please call with questions on the Equifax Data Breach, or if you wish to discuss your specific portfolio in greater detail.

–Bob Leshnak, September 12, 2017

“The referral from a client is a tremendous compliment and a huge responsibility that can never be taken lightly.”  –Anonymous

 

The investment decisions are those of Robert M. Leshnak, Jr., CLU, ChFC, CFP®, MS, EA as of 9/12/2017 and are subject to change.  The information contained herein is only intended for Leshnak Wealth clients invested in the Leshnak Wealth Portfolio Models.  No forecasts or recommendations are guaranteed.  The technical data utilized as part of the investment decisions does not guarantee future positive results. Performance, especially for short periods of time, should not be the sole factor in making investment decisions.  The information contained herein does not constitute client specific investment advice or take into account a specific client’s particular investment objectives, strategies, tax status, resources, or investment time horizon. No investment strategy such as asset allocation, diversification, tactically overweighting sectors, or utilizing fundamental and technical analysis can always assure a profit, nor always protect against a loss.  The information presented is not intended to be a substitute for specific individualized tax, legal, or financial planning advice.  The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time.  Investing involves risks in regard to all of the investment products mentioned in this commentary, including the potential loss of principal.  International investing involves additional risks including risks associated to foreign currency, limited liquidity, government regulation, and the possibility of substantial volatility due to adverse political, economic, and other developments.  The two main risks associated with fixed income investing are interest rate and credit risk.  Typically, when interest rates rise, there is a corresponding decline in the market value of bonds.  Credit risk refers to the possibility that the insurer of the bond will not be able to make principal and interest payments.  Investments in commodities may entail significant risks and can be significantly affected by events such as variations in the commodities markets, weather, diseases, embargoes, international, political, and economic developments, the success of exploration projects, tax and other government regulations as well as other factors.  Indexes are unmanaged and investors are not able to invest directly into any index.  Past performance is no guarantee of future results.  Please not that individual situations can vary.  Therefore, the information presented here should only be relied upon when coordinated with individual professional advice.

 


[i]  Andriotis, AnnaMaria, “Equifax Complaints Keep Growing”; The Wall Street Journal, Monday, September 11th, 2017.

[ii] https://www.Lifelock.com and www.consumer.gov/idtheft.

[iii] Dalton, Richard J., Jr. Consumer Watch: Putting a freeze on your credit report A new weapon to fight identify theft isn’t foolproof, but it could help.  Newsday. All Editions; July 22, 2007, pg.1.

[iv] www.fightidentifytheft.com

[v] Equifax.com

[vi] https://us.Norton.com/internetsecurity-emerging-threats-143-million-people-exposed-in-Equifax-data-breach

Newsletter: Summer 2017

2017 Mid-Year Update

I trust this letter finds you enjoying the beautiful summer!  It is also a wonderful time to provide some economic context as we complete the first half of 2017 and look ahead to the rest of the year and beyond. 

      Global Markets

The U.S. experienced stock market gains during the first half of 2017 with the technology heavy NASDAQ Composite up 14%, the small stock barometer Russell 2000 index up 4%[i], the Dow Jones Industrial Average and the S&P500 both up 8% in the last six months[ii].  Globally, twenty-six of the top thirty foreign stock markets by market cap have had positive gains during the first half of 2017[iii]. In  European countries, such as France and Germany which account for half of the Euro GDP, earnings surprises have been the trend the past tweleve months and valuations are attractive compared to historical price to earnings multiples[iv].  Emerging market stocks, the darling of the early 2000s then trailed developed countries after the financial crisis of 2009 with slower growth prospects, heightened currency volatility and declining commodity prices, have begun to show life in 2017 outpacing developed counties the past 18 months[v].   

Meanwhile the VIX Index is at its lowest level in 20 years and on pace to set its lowest annual average on record[vi].  Sometimes refered to as the “fear guage,” the VIX measures the implied volatility of at-the -money, 30-day options on the S&P500 Index; the higher the number, the higher the implied risk of imminant stock market decline.  Keep in mind, this is what investors think might happen based on their buying of options to protect gains or take advantage of declines.  Keep in mind, implied volitility as measured by the VIX is not the same as actual volitility, or standard deviation, which is measured by the market’s daily movement.  Although implied volitility is usually a little higher than actual volitiility, the two are closely correlated over time[vii].   

 The U.S. dollar has declined 5.6% in 2017 as economies around the world begin to accelerate; however, the U.S. dollar reached a 14 year high in late 2016 as investors anticipated tax cuts and infrastructure spending that may accelerate U.S. GDP growth[viii].  A pullback from the recent six year bull market in the U.S. dollar generally helps U.S. multinationals and exporters to be more competitive overseas[ix]

The Wall Street Journal reports “In the past 20 years, only four first-half ralies have been as widespread or better than the current global surge.  Two of them preceeded sharp stock market crashes and two others came at the start of long bull markets”[x].  This  fact? prompts the real question we all want to know—will this be the beginning of another leg of the current bull market[xi], or will we see stocks and subsequently the economy begin to recede?  The current bull market in U.S. stocks began in March 2009 right after the panic lows of the 2008 housing crisis.  Corrections in the market can occur at any time, but corrections are natural and they will come and go.  Fundamentally, what drives stocks and markets are earnings and the expectations for continued growth[xii].

 Economic Highlights

 The Federal Reserve raised interest rates by another ¼ point in June as part of the Fed’s statement to remove excess reserves and begin reducing its balance sheet as the economy begins to gain traction[xiii].  This is the fourth rate hike of ¼ point since December 2015 in a process that may take a few years to complete[xiv].  Compared to last quarter’s projections, the Fed now is expecting slightly more growth, less unemployment and less inflation[xv].  Personal income and spending moved higher in May; income has increased 3.5% during the past year with consumer spending slightly higher[xvi].  Consumer debts are at a record high in dollar terms, but so are assets, and if we look at the two on a personal balance sheet, debts to assets are the lowest since 2000.  Furthermore, the financial obligations ratio, comparing debt and other recurring payments to income, is close to the lowest level in 30 years[xvii].  Consumer prices fell slightly in May, but are up 1.9% over the prior year, verses 1% the prior year ending in May 2016 and remain in a rising trend[xviii].  Retail sales declined in May by 0.3% mainly due to the drop in gasoline prices and are up 3.8% from a year ago.  Usual drivers of increased consumer spending are job and wage growth as well as low levels of debt[xix]

Real Gross Domestic Product (GDP) growth was revised up on the final revision to 1.4% for the first quarter with the largest contributors coming from consumer spending, business investment and home building[xx].  Manufacturing as measured by the ISM Manufacturing Index rose in June to the fastest pace in three years and highest level since 2011.  Manufacturing growth continues to remain broad based across the most sectors and continues the trend higher since November 2016[xxi].  Although the Producer Price Index (PPI) was unchanged in May due mainly to the drop in oil and gas, the core PPI, excluding food and energy increased and is up more than 2.1% in the last tweleve months, the first move above 2% since 2014[xxii]

Existing home sales increased in May and are up 2.7% over the past year; supplies are tight and the median price has been rising for 63 consecutive months reaching a new high in May[xxiii].  New home sales moved up in May by just under 3% and are up almost 9% in a year[xxiv].  The national Case-Shiller home price index is up 5.5% in the past year ending April 30, 2017; home prices increased 5.1% the prior year ending April 30, 2016[xxv].  New home sales may fare better as mortgage credit standards are relaxed and current renters begin to chip away at our historically low homeownership rate[xxvi]. Housing starts declined 5.5% in May which was lower than expected, but digging into the numbers may provide context.  Both single-family and multi-family units are responsible for the drop in May’s number, however single-family home starts are up 8.5% in the last year while multi-family units are down 23% which is generally a good sign for the economy.  Single-family homes contribute approximately twice as much to our gross national product as multi-family units[xxvii].

I read an interesting article positing the thesis that the Fed’s Quanitative Easing (QE) didn’t work as some economists have proclaimed. Economists had asserted that QE boosted money supply and boosted stock and bond prices thus lifting an ailing economy after the financial crisis of 2008.  As a quick primer, with QE, the Fed created 3.5 trillion in new money and bought U.S. Bonds with that newly printed currency;  however in hindsight, we now know most of it remained as excess reserves in the banks they bought them from and did not circulate[xxviii].  The U.S. M2 money supply, the short-term deposits and money in circulation, never accelerated as the Fed continued to buy bonds, and GDP growth, although stabilized, remained below historical averages.  After the Fed stopped QE the stock market continued higher and interest rates have remained stable[xxix].  This could also be why we did not see inflation rear its head in the face of the amount of new money printed—most of it never got into circulation.

Politically Speaking

Will Congress repeal, repeal & replace, keep or just modify the current Affordable Health Care Act (AHA), and will it ultimately be good policy for Americans and our national fiscal house?  I believe it all boils down to Medicaid spending.  Medicaid is a jointly funded federal and state health insurance program for the poor, elderly and disabled, providing coverage for nursing homes for the elderly and long-term care for the disabled once poverty-stricken.  Medicaid currently covers 20% of Americans, or roughly 70 million people, provides the payment for half of all babies born and is the largest payer for substance abuse treatment in the United States[xxx].  In Ohio, the largest state expenditure is on Medicaid at more than 37% of the state’s budget and that does not count the Children’s Health Insurance Program (CHIP), institutional and community care for the mentally ill and developmentally disabled, or public health programs.  By contrast, the state spends 20% on K-12 and higher education[xxxi].

In 1987, federal Medicaid spending was 3% of all federal expenditures, today it stands at 10% due in part to our rising health care costs, but due in larger part to the raised income eligibility under the expansion provision of the AHA which allowed more than 11 million more Americans to have health insurance through Medicaid[xxxii].  The debate in Congress and among Americans goes something like this: pro-Medicaid expansionists believe Medicaid is less expensive per person than Medicare or private insurance and provides a cost effective solution for our less fortunate populations, the elderly and the disabled[xxxiii].  Anti-Medicaid expansionists believe federal spending is unsustainable and since Medicaid is one of the fasterst growing programs within the federal budget, its growth needs to be controlled[xxxiv].  Current Republican Proposals on Medicaid funding involve capping the amount each state receives per year as a block grant and allowing each state more flexibility with their Medicaid program, as opposed to the open-checkbook method now employed.  Although proposed funding amounts would be at or near the current levels, pro-Medicaid expansionists argue that this may put added pressure on states in the future to pick-up any shortfall when federal payments may not adequately reflect the actual growth of the program and actual costs in each state.  Anti-Medicaid expansionist believe the capping of benefits in the form of a block grant and providing more flexibility for each state would enable individual states to create programs that are more cost effective and work more efficiently for their citizens within their states[xxxv].  The debate goes on…       

Health Care Reform is important to complete so that Americans can afford and have access to quality healthcare.  It is also vital so that a realistic budget can be formulated based on that legislation.  A good fiscal house is vital to every American.  No matter what path Congress takes with healthcare or any other legislation, we must be able to pay for the changes so we don’t kick the can down the road for the next generation.  A great midwestern state, Illinois, has not had a budget in more than two years, has not had a balanced budget in 15 years and is now $15 billion in debt[xxxvi].  Illinois is now confronted with raising taxes and reducing state expenditures for it’s current citizens based on past political decisions that were kicked down the road.  Congress also has other policy proposals from the Trump Administration—deregulation, reduced individual and corporate tax rates, infrastructure spending, Dodd-Frank financial improvement and immigration reform—that need to be debated, and if appropriate, enacted for the American people.

Artificial Intelligence

 You just used your Uber app for a ride—and a driverless car shows up.   The age of artificial intelligence (AI) is upon us ushering in the sixth technological revolution since the 1700s—following the industrial revolution, the age of steam & railways, the age of steel, electricity & heavy engineering, the age of oil, the automaobile and mass production, the age of information and telecommunications[xxxvii].  AI refers to technology that enables computers to simulate portions of human thinking without being programmed with every detail of contingency.  Machines can teach themselves by analyzing data from the web and internet connected devices, including your smartphone.   The explosion of AI has been linked to increased processing power, the smartphone and advent of cloud computing[xxxviii].

 Machines thinking for themselves and conversing with humans is the stuff right out of the Terminator Movies, using reason, logic, experience and massive amounts of data to figure things out on their own.  AI is already transformative for many industries such as healthcare, transportation, and manufacturing, providing potential efficiency, productivity and profit potential.  AI has the potential to improve the standard of living of people while offering investors opportunities to review[xxxix].  AI is also a threat to jobs as robots and computers displace workers and impact income in industries that utilize (or will utilize) IA.  Facebook’s news feed uses machine learning to provide feed to each member.  Machine learning provides for Amazon’s recommendation algorithm.  Google and Apple are two companies that are advancing the

landscape with this technology.  Companies from many industries are exploring the possible applications for AI.  Automation with robots is not a new phenomenon, but between 2010 and 2015 sales of robots increased 16% per year with 254,000 industrial robots sold in 2015 worldwide as AI evolved[xl].       

Our LW Gameplan

Our Leshnak Wealth Portfolio Models are globally diversified and strategically constructed, with a tactical component.  We have a bias toward value which prescribes a requirement for dividend yield from our investment positions.  In simple terms, we have investment positions in eight asset classes: domestic equities, foreign developed stocks, foreign emerging market equities, domestic bonds, foreign bonds, cash equivalents, commodities, infrastructure, natural resources and real estate. 

How much of each asset class (if any) we hold in the aforementioned asset classes is based on your unique risk tolerance, financial resources and personal goals and objectives. Moreover, we have a portion of each portfolio that is tactical and flexible.  This allows the manager to move assets into the sectors that best fit current market conditions based on their methodology.  Our portfolio construction has two other vital components—we require dividends from each position so no matter what the market is doing day to day, we still have a dividend coming into the portfolio for income or to reinvest.  Lastly, we overweight value versus growth in our allocation models which we believe puts us in the position of the “turtle”, in the proverbial tortoise verses the hare scenario, over the long-term with equities.

As your financial fiduciary, the Leshnak Wealth Team cares deeply about your financial well-being, and will monitor for rebalancing opportunities that may add value to your portfolio, or to be defensive as conditions might warrant.  As always, please call with questions or if you wish to discuss your specific portfolio in greater detail.

–Bob Leshnak, July 4, 2017

The investment decisions are those of Robert M. Leshnak, Jr., CLU, ChFC, CFP®, MS, EA as of 7/4/2017 and are subject to change.  The information contained herein is only intended for Leshnak Wealth clients invested in the Leshnak Wealth Portfolio Models.  No forecasts or recommendations are guaranteed.  The technical data utilized as part of the investment decisions does not guarantee future positive results. Performance, especially for short periods of time, should not be the sole factor in making investment decisions.  The information contained herein does not constitute client specific investment advice or take into account a specific client’s particular investment objectives, strategies, tax status, resources, or investment time horizon. No investment strategy such as asset allocation, diversification, tactically overweighting sectors, or utilizing fundamental and technical analysis can always assure a profit, nor always protect against a loss.  The information presented is not intended to be a substitute for specific individualized tax, legal, or financial planning advice.  The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time.  Investing involves risks in regards to all of the investment products mentioned in this commentary, including the potential loss of principal.  International investing involves additional risks including risks associated to foreign currency, limited liquidity, government regulation, and the possibility of substantial volatility due to adverse political, economic, and other developments.  The two main risks associated with fixed income investing are interest rate and credit risk.  Typically, when interest rates rise, there is a corresponding decline in the market value of bonds.  Credit risk refers to the possibility that the insurer of the bond will not be able to make principal and interest payments.  Investments in commodities may entail significant risks and can be significantly affected by events such as variations in the commodities markets, weather, disease, embargoes, international, political, and economic developments, the success of exploration projects, tax and other government regulations, as well as other factors.  Indexes are unmanaged and investors are not able to invest directly into any index.  Past performance is no guarantee of future results.  Please note that individual situations can vary.  Therefore, the information presented here should only be relied upon when coordinated with individual professional advice.

Leshnak Wealth is a marketing designation. Securities and investment advisory services offered through FSC Securities Corporation, member FINRA/SIPC and a registered investment advisor.  Additional investment advisory services offered through Southland Equity Partners, LLC, a Registered Investment Advisor.  Insurance services offered through Leshnak Financial Group, LLC.  Tax Preparation offered through Leshnak Tax Preparation, LLC.  Listed entities are not affiliated with FSC Securities Corporation.

[i] Money.CNN.com 7/1/2017

[ii] Russolillo, Steven. “Global Stocks Cap Strong First Half”; The Wall Street Journal, July 1, 2017.

[iii] Russolillo, Steven. “Global Stocks Cap Strong First Half”; The Wall Street Journal, July 1, 2017.

[iv][iv] “Eurozone: Three Forces Driving the Rally”; iShares by Blackrock, June 2017.

[v] “Emerging Markets: A Tale of Improving Fundaments or Increased Risk”; T. Rowe Price, June 16, 2017.

[vi] Driebush, Corrie and Gold, Riva.  “Stocks Ring Up a Robust Start to Year”; The Wall Street Journal, July 1, 2017.

[vii] Hooper, Kristina. “Are investors becoming numb to risk? A low fear guage might not be a bad thing—as long as investors don’t ignor fundamentals”; Invesco Weekly Market Review, 6/29/2017.

[viii] Dulaney, Chelsey. “Dollar is Pressured from All Directions”; The Wall Street Journal, July 3, 2017.

[ix] Dulaney, Chelsey. “Dollar is Pressured from All Directions”; The Wall Street Journal, July 3, 2017.

[x] Russolillo, Steven. “Global Stocks Cap Strong First Half”; The Wall Street Journal, July 1, 2017.

[xi][xi] Wesbury, Brian and Stein, Robert. “The Bulls Keep Running”; First Trust Monday Morning Outlook, July 3, 2017.

[xii] Wesbury, Brian and Stein, Robert. “The Bulls Keep Running”; First Trust Monday Morning Outlook, July 3, 2017.

[xiii] Wesbury, Brian and Stein, Robert. “Less Loose”; First Trust Monday Morning Outlook, June 12, 2017.

[xiv] Wesbury, Brian and Stein, Robert. “QE Didn’t Work”; First Trust Data Watch, June 19, 2017.

[xv] Wesbury, Brian and Stein, Robert. “Fed Hikes Rates Again, Sets Plan to Re-Normalize Balance Sheet”; First Trust Research Reports, June 14, 2017.

[xvi] Wesbury, Brian and Stein, Robert. “Personal Income Increased 0.4% in May”; First Trust Data Watch, June 30, 2017.

[xvii] Wesbury, Brian and Stein, Robert. “Personal Income Increased 0.4% in May”; First Trust Data Watch, June 30, 2017.

[xviii] Wesbury, Brian and Stein, Robert. “The Consumer Price Index Declined 0.1% in May”; First Trust Data Watch, June 14, 2017.

[xix] Wesbury, Brian and Stein, Robert. “Retail Sales Declined 0.3% in May”; First Trust Data Watch, June 14, 2017.

[xx] Wesbury, Brian and Stein, Robert. “Real GDP Growth in Q1 was Revised up to a 1.4% Annual Rate”; First Trust Data Watch, June 29, 2017.

[xxi] Wesbury, Brian and Stein, Robert. “The ISM Manufacturing Index Rose to 57.8 in June”; First Trust Data Watch, July 3, 2017.

[xxii] Wesbury, Brian and Stein, Robert. “The Producer Price Index was Unchanged in May”; First Trust Data Watch, June 13, 2017.

[xxiii] Wesbury, Brian and Stein, Robert. “Existing Home Sales Increased in 1.1% in May”; First Trust Data Watch, June 21, 2017.

[xxiv] Wesbury, Brian and Stein, Robert. “New Single-Family Home Sales Rose 2.9% in May”; First Trust Data Watch, June 23, 2017.

[xxv] Wesbury, Brian and Stein, Robert. “Real GDP Growth in Q1 was Revised Up to a 1.4% Annual Rate”; First Trust Data Watch, June 29, 2017.

[xxvi] FRED Economic Data, Economic Research at the Federal Reserve Bank of St. Louis; 7/1/2017 https://fred.stlouisfed.org/series/RHORUSQ156N

[xxvii] Wesbury, Brian and Stein, Robert. “Housing Starts Declined 5.5% in May”; First Trust Data Watch, June 16, 2017.

[xxviii] Wesbury, Brian and Stein, Robert. “QE Didn’t Work”; First Trust Monday Morning Outlook, June 19, 2017.

[xxix] Wesbury, Brian and Stein, Robert. “QE Didn’t Work”; First Trust Monday Morning Outlook, June 19, 2017.

[xxx]TheHill.com, 6/22/2017.

[xxxi]“Ohio State Budget and Finances”; BallotPedia.org, July 3, 2017.

[xxxii] Kiefer, Francine. “Why Medicaid is central to healthcare debate”; The Christian Science Monitor, 6/22/2017.

[xxxiii] Kiefer, Francine. “Why Medicaid is central to healthcare debate”; The Christian Science Monitor, 6/22/2017.

[xxxiv] Kiefer, Francine. “Why Medicaid is central to healthcare debate”; The Christian Science Monitor, 6/22/2017.

[xxxv] Kiefer, Francine. “Why Medicaid is central to healthcare debate”; The Christian Science Monitor, 6/22/2017.

[xxxvi] Domonoske, Camila. “Illinois Governor Vetoes Budget Deal; Legislators Begin Override”; NRP.org, 7/4/2017.

[xxxvii] American Funds “Artificial Intelligence: It’s Not the Future, It’s Now”; The Long View-Investment Insights, April 2017.

[xxxviii] American Funds “Artificial Intelligence: It’s Not the Future, It’s Now”; The Long View-Investment Insights, April 2017.

[xxxix] American Funds “Artificial Intelligence: It’s Not the Future, It’s Now”; The Long View-Investment Insights, April 2017.

[xl] American Funds “Artificial Intelligence: It’s Not the Future, It’s Now”; The Long View-Investment Insights, April 2017.

Newsletter: Kickoff 2017

2017 Kickoff

 Happy New Year!  This year’s Collegiate Football National Championship on January 9th featured two of the best teams in the nation, the University of Alabama Crimson Tide and the Clemson University Tigers, matched up to decide which school could claim the coveted title.  After a hard-fought battle, we now know it was a great match-up, thrilling to the end.  What made it a good, competitive football game was the skill possessed by both teams to play a robust balanced offense.  What was also important was the ability to play solid defense against both the run and pass - efficiently, effectively, and consistently.  I use this analogy because it is my belief that a good football team resembles prudent portfolio management - the ability to play a balanced offense with diversification, with the objective to move the portfolio forward, and just as important, the proficiency to play solid defense during the inevitable market downward cycles, both with an investment methodology that is consistent, effective and efficient.

In this Kickoff Newsletter we will discuss the state of our global markets as we enter 2017, as well as, the perceived opportunities and potential areas of concern to investors.  We inaugurate our new President-Elect, Donald J. Trump, on January 2oth, and we will explore in some detail what this new administration might mean for investors.

 Global Markets

As we enter 2017, consumer confidence has hit a 15 year high[i].  We have witnessed higher equity prices, commodity prices moving higher[ii], rising interest rates and a stronger U.S. dollar.  Investors are cautiously optimistic for modest U.S. and international growth presumably based on a Republican Presidential Administration, coupled with a majority Republican House and Senate that may mean a roll back of regulation and fiscal expansion through spending and tax cuts[iii].  Prior to the election, U.S. growth was warming and showed improvement from the first part of 2016 as estimates for future growth had increased.  Since the election, equities have moved forward and yields have increased likely due to the pro-growth inflationary Trump policies that are being proposed[iv].   Apparently, instead of reacting slowly to the anticipated changes in fiscal policy that are expected by the new administration, U.S. equities have reacted as if the changes have already taken place, even though they face tough debate in Congress before they’ll be enacted[v].  The Federal Reserve has begun to raise rates and is expected to increase bond yields only gradually, while other major central banks around the world are continuing to ease rates in a pro-growth posture[vi].  The contrarian would point out that the political uncertainties surrounding a Trump Administration, as well as around the world, and the potential for increased inflation could cause volatility to spike[vii]

 Most investors have heard that when bond yields rise, prices decline, and conversely, when bond yields decline, prices increase.  We have certainly witnessed bond yields increase a bit since election day as evidenced by the rise in 30 year mortgages and the 10-year Treasury bond[viii].  In the past three decades, interest rates have declined due to many factors affecting inflationary pressures: aging demographics, global growth, technology, central bank policies promoting low rates, and the globalization of trade, labor and supply chains.  Now we see a reversal, or possibly a pause, of some of these factors that are forcing bond yields higher such as tighter labor markets, wage growth, higher commodity and oil prices, and the new administration’s proposed policies that may increase inflationary pressures[ix].  Keep in mind we have been in a period of low interest rates and below average inflation for many years due to the policy of our Federal Reserve to keep our economy moving.  This monetary intervention, which purported to keep us out of recession following the financial crisis of 2008, may also have contributed to falling commodity prices, low wage inflation and the slow economic growth, so some normalization and increase in inflation and interest rates may actually be healthy for our economy[x].  

 The bond market may be  pricing in a change in fiscal policy due to the anticipated increase in infrastructure spending and lower taxes that are supported by the incoming president-elect, which may increase the U.S. budget deficit in the short-term while attempting to boost U.S. gross domestic product.  Higher output and larger budget deficits are factors that could be a recipe for inflation to rise[xi].  Additionally, the bond market may be leery of protectionist policies that may arise from renegotiating the North American Free Trade Agreement or implementing tariffs, as these may move prices higher, and thus bond yields higher.    Trade deals traditionally take time and may not have an immediate impact on growth, but protectionist tariffs will impact prices on imported goods, which would have a negative impact on growth initially[xii].  On the monetary side, Janet Yellen’s term at the Federal Reserve, which has been characterized as a dovish policy stance, is set to expire in February 2018.  The bond market’s uncertainty with who the new President-Elect might choose to lead the Fed is an unknown at this point so the bond market may be pricing in a more hawkish Fed Chief with designs on raising interest rates[xiii].  However, fiscal expansion over time may replace monetary stimulus, as it is perceived now, as the primary driver of economic growth[xiv].

Although the new administration’s proposed policies of deregulation, lower corporate and individual taxes, and infraructure stimulus spending may be perceived as a positive boost for riskier assets like equities, bonds could continue to be vital for portfolios for a number of reasons that may not be fully priced-in at present[xv].  Possible risks to economic growth that could hurt equities and drive more money into bonds include the uncertainty that the new administration’s fiscal and monetary policy will not work as intended, or as quickly as expected.  Additionally, there is risk that a trade war may be triggered and thus could harm growth, or that the new administration’s immigration policy may be too restrictive and thus stimies growth.  Pension funds, endowments and insurance companies in the U.S. and throughout the world buy U.S. denominated bonds to fullfil their asset allocation and to support funding future obligations and this is likely to continue as in the past thus driving demand for bonds[xvi].  Geopolitical potential economic concerns, such as low or negative interest rates in Japan and the Europe or growing global debt levels, may cause increased demand for U.S. bonds[xvii], as could potential unforeseen events, such as acts of terriorism, natural disasters and major market declines, all which would more than likely serve to boost bond buying[xviii].     

Politically & Economically

Donald J. Trump will become the 45th President of the United States with a Republican administration that will initially have majorities in both the House and Senate that may aid in enacting his economic agenda.  He could enact his economic agenda through the budget reconciliation process, which requires only a majority approval in the Senate for tax and spending changes, not a 60 vote filibuster proof majority[xix].  Presidential inaugural years have historically had the highest frequency of negative returns in the stock market of presidents’ four-year terms since 1948; however, these returns are still positive more often than negative[xx].  We explored some of the potential areas of concern in the global markets section of this letter while discussing the economy and markets, so we will concentrate in this section on the potential positive aspects of the President-Elect’s proposed agenda.    

 An estimated $500 billion to $1 trillion in infrastructure spending has been proposed on roads, bridges, airports, tunnels, seaports, water treatment, sewer systems, electric grids and the “Wall,” which could provide stimulus and jobs for the economy[xxi]. The Trump Administration plans to triple Immigration and Customs Enforcement (ICE) agents, reform and enforce immigration laws, and end catch-and-release and funding for sanctuary cities in an effort to thwart illegal immigration and restore legal immigration as the main route to entry and participation into the United States.  Legal immigration is vital to our growing economy; in fact, the U.S. Census Bureau estimates that 65% of our population growth in future decades is projected to come from immigration.  Without immigration, the U.S. could experience population stagnation or decline as currently experienced in Japan and Europe[xxii].  Conceding the fact that illegal immigrants can increase economic growth by spending and producing as workers, illegal immigration can also be harmful to a society by increasing competition for low-skilled jobs and thus decreasing overall wages, as well as, adding to state and federal expenditures extended for social services, education, incarceration and health care by non-citizens/non-documented workers who often do not pay all the required taxes that citizens are required to pay[xxiii].

Proposed increases in defense spending by the new administration may be expected to aid manufacturing and technology companies in the defense and aerospace industry as the military re-tools its air, land and sea capabilities and readiness.  Excessive “red tape”, as identified by the new Trump administration, in the areas of energy, environment and financial regulations, may be removed from many industries with the expectation of reducing costs, boosting productivity and creating jobs.  Specifically, mentioned by Trump thus far has been a pull out of the Paris climate deal, reversing regulations that hurt fracking and coal mining, an overhaul of the Dodd-Frank financial regulations enacted in 2010[xxiv], and all illegal and overreaching executive orders[xxv].  Obviously, there will be pushback on many of these items, but the financial and energy sectors of our economy are expected to benefit[xxvi].

Lower tax rates for corporations of 15% could replace the 35% highest marginal rate currently levied on corporations.  The new proposed tax rates on businesses could extend to sole propriatorships, S-corporations, LLCs, and partnerships.  The incoming administration expects corporate tax cuts to be stimulative by allowing companies to hire more employees, expand operations, upgrade equiptment, increase research and development, and raise wages[xxvii].  Additionally, the proposed one-time tax of 10% for corporations to repatriate the estimated $2 plus trillion of U.S. corporate earnings trapped overseas is expected to seduce companies to bring cash back to the U.S.[xxviii].  Individual tax cuts would serve to put more money in consumers’ pockets, including the proposal to make child care expenses fully deductible, and is expected to strengthen economic growth[xxix].  The area of corporate and individual tax reform appears to be a bi-partisan issue - U.S. corporate tax rates are among the highest in the world and corporate and individual tax cuts are expected by many to be stimulative to the economy over the long-term. 

Trade is an area that Donald Trump campaigned on vigorously during the campaign, and a president has considerable power to renegotiate current trade deals, so we expect changes are forthcoming.  Specifically, the new administration has mentioned renegotiating NAFTA, nixing the Trans-Pacific Partnership (TPP), and negotiating fairer U.S. trade deals with Mexico and China in an effort to put American interests first, including jobs[xxx]

Lastly, but maybe the most important of all Trump campaign promises, is the pledge to repeal and replace the Affordable Care Act (ACA or ObamaCare).  Healthcare comprises 1/6 of the U.S. economy, so getting this reform right could be highly stimulative and beneficial for our country.  Since 20 plus million Americans have health care under the ACA, it is unlikely that these recipients will simply be cancelled.  More likely, new reforms will scale back regulation and reduce subsidies to insurance companies going forward while grandfathering current ACA beneficiairies with coverage[xxxi].  We may also see the private heath insurance market expand across state lines, as consumers demand more insurance company choices, affordable coverage, and an expanded network of providers.

 Timeless Investment Principles

Market declines are inevitable and do not last forever.  We expect higher long-term returns on stocks than we do from cash and bonds, and for that, we also expect greater volatility based on historical data.  Over the past 115 years, market declines of 10% occur about once every 115 days[xxxii].  The last time we experienced a pullback in the U.S. stock market of this magnitude (10% or greater) was in January 2016[xxxiii].  The average length of a 10% correction is about four months[xxxiv] before prices begin to return to previous levels.  Market declines of 15-20% occur on average every 2-4 years[xxxv] during the prior 115 years.  Declines can sometimes cause imprudent behavior by filling and consuming investors with dread and panic.  History has shown that stock market declines are a normal part of the investment cycle.  Market declines have varied in intensity and frequency, but the market has always recovered from declines.  Although past results don’t guarantee future results, remembering that downturns have been temporary in the past may help quell your fears[xxxvi].

Short-term market timing does not work.  Short term market timing is the elusive “holy grail” or “fountain of youth” of investing—something you want very much, but that is very hard or impossible to get or achieve.  If anyone could do it consistently—sell right before something goes down, and buy right back before it goes back up—the rewards would be great, but typically investors end up with sub-par performance due to the extreme difficulty with getting the short term timing (day trading) wrong[xxxvii].  Although the Holy Grail/Fountain of Youth most likely does not exist, the benefits of a long-term disciplined investment plan are compelling, but the generally higher returns associated with investing in stocks over the long-term is dependent on sticking with your investment plan through both good and bad times in the markets.

The importance of diversification. After studying the most brilliant and successful minds in the investment field over the past 28 years—both past and present—the one vital and common lesson learned is that diversification through asset allocation works to mitigate volatility over the long-term by diversifying into separate asset classes with varying correlation to one another.  We were taught as youngsters by our parents and grandparents “don’t put all your eggs in one basket” which is a straight forward translation to allocate your investment funds into different asset classes within your portfolio.  The idea is that they all don’t go up or down at the same time.  While this may not be the case on a day-to-day basis, a mix of different types of assets provides a smoother and more stable ride for your portfolio over the long-term[xxxviii].  Broad diversification requires patience based on three key attributes; a diversified portfolio won’t beat the large-cap equity market every year, it will contain investments that each perform differently each year and you cannot bail out of the positions that are temporarily down, and lastly, the value of a broad diversification is manifested over time frames of 15 to 20 years[xxxix].  Investment disciplines do not work all the time in every economic environment.  In fact, in a recent Bloomberg News article, it was argued that asset allocation in 2015 had one of the worst results in nearly 80 years with most major asset classes finishing the year with tepid results, with no asset class offering superior relative returns to lift the overall diversified asset allocation portfolio return[xl].

The key to a sustainable and inflation adjusted retirement income stream is managing the risk of outliving your assets (longevity risk) alongside of managing volatility (market risk). Equities have greater long-term total return than bonds but with greater volatility[xli].  An increase in the amount of equities within a portfolio can potentially decrease longevity risk, but at the same time increase volatility risk.  Volatility risk may also adversely affect the longevity of a portfolio during the distribution phase depending on the sequence of market returns and the percentage withdrawn each year[xlii].  Conversely, when we reduce volatility risk by reducing equity exposure, we are prone to increase the longevity risk of the portfolio, thereby increasing the likelihood of running out of money.  The balancing act between these two risks have been even tougher with the lower bond yields we have experienced for several years.  At Leshnak Wealth, we believe the selection of investment equity positions within a portfolio that may best mitigate volatility while potentially alleviating the longevity risk over the long-term can be characterized by the following five historical traits when comparing to peer investment alternatives[xliii]:

·         Lower expense ratio.

·         Lower downside capture of negative market moves.

·         Payment of consistent increasing dividends.

·         Higher risk-adjusted return.

·         Lower volatility as measured by standard deviation.    

Our LW Gameplan

Our LW Portfolio Models are not immune to declines in global markets as we experienced recently on Brexit Friday in June 2016 or in the oil price drop scare of January 2016; or from the larger market declines we experienced after the 2008 sub-prime mortgage crisis or after the terrorist attacks of 9/11.  We do not have a crystal ball nor do any of the market analysts and forecasters.  Our belief is that our LW Portfolio Model construction has positioned us for potential resilience in any environment and has also positioned us to possibly take advantage of market mispricing.  Although we constantly monitor our investment methodology we rarely see a need to change course after or during market declines.  However, we are constantly reviewing our individual investment positions, and asset allocation decisions for potential enhancement.

 

“If we are facing in the right direction, all we have to do is keep on walking”.  

–Ancient Buddish Proverb

 Our Leshnak Wealth Portfolio Models are globally diversified and strategically constructed, with a tactical component.  We have a bias toward value which prescribes a requirement for dividend yield from our investment positions.  In simple terms, we have investment positions in eight asset classes: domestic equities, foreign developed stocks, foreign emerging market equities, domestic bonds, foreign bonds, cash equivalents, alternatives (commodities, infrastructure & natural resources) and real estate. 

How much of each asset class (if any) we hold in the aforementioned asset classes is based on your unique risk tolerance, financial resources and personal goals and objectives. Moreover, we have a portion of each portfolio that is tactical and flexible.  This allows the manager to move assets into the sector(s) that best fit current market conditions based on their methodology.  Our portfolio construction has two other vital components—we want dividends from each position so no matter what the market is doing day to day, we still have a dividend coming into the portfolio for income or to reinvest.  Lastly, we overweight value versus growth in our allocation models which we believe puts us in the position of the “turtle”, in the proverbial tortoise verses the hare scenario, over the long-term with equities.

As your financial fiduciary, the Leshnak Wealth Team cares deeply about your financial well-being, and will monitor for rebalancing opportunities that may add value to your portfolio, or to be defensive as conditions might warrant.  As always, please call with questions or if you wish to discuss your specific portfolio in greater detail.

–Bob Leshnak, January 10, 2017

[i] “Key Points”; Blackrock Investment Institute Weekly Commentary, January 3, 2017.

[ii] “Key Points”; Blackrock Investment Institute Weekly Commentary, January 3, 2017.

[iii] Davidson, Kate. “Fed Minutes to Offer Insight on Central Bankers’ Outlook for 2017”; The Wall Street Journal, 1/6/2017.

[iv] “Making American Reflate Again”; PIMCO Global Update, December 2016.

[v] “What Could Go Right in 2017”; Legg Mason Annual Outlook, December 2016.

[vi] Maxey, Daisy. “The Outlook for the Markets and Economy in 2017”; The Wall Street Journal, 12/11/2016.

[vii] Maxey, Daisy. “The Outlook for the Markets and Economy in 2017”; The Wall Street Journal, 12/11/2016.

[viii] Federal Reserve, Thomson Reuters Datastream Dec 2016.

[ix] “Fidelity’s Persective on Rising Interest Rates”; Fidelity Leadership Series, December 2016.

[x] Kelly, David Dr. “The Investment Outlook for 2017 – Economic Warning and Political Warmings”; J.P. Morgan Market Insights, December 2016.

[xi] Spence, Darrell. “Trump’s Presidential Win May Not Be Bad for the Economy”; American Funds Investment Insights, November 2016.

[xii] Spence, Darrell. “Trump’s Presidential Win May Not Be Bad for the Economy”; American Funds Investment Insights, November 2016.

[xiii] “Reports of the Bond Market’s Death Have Been Greatly Exaggerated: Post-Post-Crisis Era to Continue”; American Funds Investment Insights, November 2016.

[xiv] “Global Investment Outlook 2017”; Blackrock Investment Institute, December 2016.

[xv] “Reports of the Bond Market’s Death Have Been Greatly Exaggerated: Post-Post-Crisis Era to Continue”; American Funds Investment Insights, November 2016.

[xvi] “Reports of the Bond Market’s Death Have Been Greatly Exaggerated: Post-Post-Crisis Era to Continue”; American Funds Investment Insights, November 2016.

[xvii] “2017: How Poilcy and Politics Shape the Global Outlook”; Lord Abbett Economic Insights, November 14, 2016.

[xviii] “Reports of the Bond Market’s Death Have Been Greatly Exaggerated: Post-Post-Crisis Era to Continue”; American Funds Investment Insights, November 2016.

[xix] Miller, Matt. “Five Ways President-Elect Trump Could Move Markets”; American Funds Capital Ideas, 11/9/2016.

[xx] “The Unabridged History of Postwar Elections and Stocks”; Fisher Investments Market Minder, 10/12/2016.

[xxi] Miller, Matt. “Five Ways President-Elect Trump Could Move Markets”; American Funds Capital Ideas, 11/9/2016.

[xxii] “Reports of the Bond Market’s Death Have Been Greatly Exaggerated: Post-Post-Crisis Era to Continue”; American Funds Investment Insights, November 2016.

[xxiii] Davis, Bob. “The Thorny Economics of Illegal Immigration”; Wall Street Journal, 2/9/2016.

[xxiv] Miller, Matt. “Five Ways President-Elect Trump Could Move Markets”; American Funds Capital Ideas, 11/9/2016.

[xxv] Green, Bryon. “Trump’s Campaign Promises: What are the Investment Implications?”; Green Investment Management Market Update, 12/14/2016.

[xxvi] [xxvi] Kelly, David Dr. “The Investment Outlook for 2017 – Economic Warning and Political Warmings”; J.P. Morgan Market Insights, December 2016.

[xxvii] Green, Bryon. “Trump’s Campaign Promises: What are the Investment Implications?”; Green Investment Management Market Update, 12/14/2016.

[xxviii] Miller, Matt. “Five Ways President-Elect Trump Could Move Markets”; American Funds Capital Ideas, 11/9/2016.

[xxix] Green, Bryon. “Trump’s Campaign Promises: What are the Investment Implications?”; Green Investment Management Market Update, 12/14/2016.

[xxx] Miller, Matt. “Five Ways President-Elect Trump Could Move Markets”; American Funds Capital Ideas, 11/9/2016.

[xxxi] Miller, Matt. “Five Ways President-Elect Trump Could Move Markets”; American Funds Capital Ideas, 11/9/2016.

 

 

[xxxii] “Keys to Prevailing Through Stock Market Declines”; American Funds Investor Resource: A Guide to Market Fluctuations; Aug. 2015; americanfunds.com

[xxxiii] “Keys to Prevailing Through Stock Market Declines”; American Funds Investor Resource: A Guide to Market Fluctuations; Aug. 2015; americanfunds.com

[xxxiv] “Keys to Prevailing Through Stock Market Declines”; American Funds Investor Resource: A Guide to Market Fluctuations; Aug. 2015; americanfunds.com

[xxxv] “Declines Have Become Common and Temporary Occurrences”; American Funds Client Conversations; Jan. 2016

[xxxvi] “Keys to Prevailing Through Stock Market Declines”; American Funds Investor Resource: A Guide to Market Fluctuations; Aug. 2015; americanfunds.com

[xxxvii] Vanguard Principles for Investing Success; 2014, pages 29-32; vanguard.com

[xxxviii] Vanguard Principles for Investing Success; 2014, pages 8-16; vanguard.com

[xxxix] Israel, Craig L. “The Secret to Portfolio Performance Consistency”; Financial Planning, 7/12/2016.

[xl] “The Year that Stocks, Bonds and Cash Failed to Thrive”, Investment News, January 4, 2016.

[xli] “Key Steps to Retirement Success: How to Seek Greater Wealth and Downside Resilience”; American Funds Select Active Advantage, July 2015.

[xlii] Zolt, David, M. “Retirement Planning by Targeting Safe Withdrawal Rates”; Journal of Financial Planning, October 2014.

[xliii] “Key Steps to Retirement Success: How to Seek Greater Wealth and Downside Resilience”; American Funds Select Active Advantage, July 2015. 

The investment decisions are those of Robert M. Leshnak, Jr., CLU, ChFC, CFP®, MS, EA as of 1/10/2017 and are subject to change.  The information contained herein is only intended for Leshnak Wealth clients invested in the Leshnak Wealth Portfolio Models.  No forecasts or recommendations are guaranteed.  The technical data utilized as part of the investment decisions does not guarantee future positive results. Performance, especially for short periods of time, should not be the sole factor in making investment decisions.  The information contained herein does not constitute client specific investment advice or take into account a specific client’s particular investment objectives, strategies, tax status, resources, or investment time horizon. No investment strategy such as asset allocation, diversification, tactically overweighting sectors, or utilizing fundamental and technical analysis can always assure a profit, nor always protect against a loss.  The information presented is not intended to be a substitute for specific individualized tax, legal, or financial planning advice.  The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time.  Investing involves risks in regards to all of the investment products mentioned in this commentary, including the potential loss of principal.  International investing involves additional risks including risks associated to foreign currency, limited liquidity, government regulation, and the possibility of substantial volatility due to adverse political, economic, and other developments.  The two main risks associated with fixed income investing are interest rate and credit risk.  Typically, when interest rates rise, there is a corresponding decline in the market value of bonds.  Credit risk refers to the possibility that the insurer of the bond will not be able to make principal and interest payments.  Investments in commodities may entail significant risks and can be significantly affected by events such as variations in the commodities markets, weather, disease, embargoes, international, political, and economic developments, the success of exploration projects, tax and other government regulations, as well as other factors.  Indexes are unmanaged and investors are not able to invest directly into any index.  Past performance is no guarantee of future results.  Please note that individual situations can vary.  Therefore, the information presented here should only be relied upon when coordinated with individual professional advice.

Newsletter: Brexit

GLOBAL MARKETS

Last Friday, a much anticipated United Kingdom (UK) referendum voted to discontinue membership in the European Union (EU) after 43 years(i), by a 52-48% margin with over 70% of eligible voters casting ballots(ii). The EU as a trading block is larger than the US(iii), comprises 28 European countries and the UK would be the first to leave the EU(iv). The UK is the second largest member of the EU by both population and gross domestic product(v). The announcement to move out of the EU by the (UK) has ignited volatility in markets around the world that will likely continue in the short-term until its impact is fully assessed by other global markets. The vote surprised many with markets advancing during the prior week as polls in the U.K. showed that a majority of voters favored staying part of the EU.    

All major global markets and currencies, except the US Dollar, fell on the news(vi). The Prime Minister and leading advocate of the UK remaining in the EU, David Cameron, has announced he will resign in the next few months so that new leadership can be chosen by the citizens of the UK to direct the country into this new era(vii).  Some economists and financial analysts believe it could be two years or more for the UK to formally leave the 28-nation bloc.  It remains unclear how the country’s relationship with the EU and each of its member nations, as well as with other major global trade partners, will change during that period(viii)

POLITICALLY & ECONOMICALLY

Great Britain became part of the European Union in 1973 before the name was formally adopted and its regulatory powers expanded(ix). Ever since then, many within the UK complained that being a part of the EU seeded too much sovereignty to Europe; years later when the euro as a currency was implemented, the UK opted to stay with the British Pound instead of the new common Euro currency(x).  Exit polls reveal that UK voters were most worried about a loss of national identity as a result of the amount of immigration that has hit their country(xi).  Immigration and what welfare benefits they receive should be sovereign decisions as voiced by UK voters in favor of leaving the UE(xii). 

The UK voters went against all five major political parties, more than 1,200 FTSE 100 corporate CEOs, major banks in the UK including the Bank of England, as well as various heads of states and UK academic institutions who all favored remaining part of the EUxiii.  President Barak Obama stated in April when visiting London to pledge his support for the UK remaining in the EU, that you (UK) “would go to the back of the queue” in future trade negotiations with the U.S.(xiv).  Economists are mixed.  Currently, 50% of Great Britain’s total trade is within the European Union and that will be affected, as will London’s role as a major world financial center.  However, there are two schools of thought how this might play out. Proponents who wanted the UK to leave the EU had contended that the U.K. would benefit by the elimination of costly EU regulations and by controlling immigration into their country(xv), thus enabling the world’s fifth largest economy to sign new trade agreements with its trading partners(xvi).  The vital task of the new independent UK will be to focus on gaining access through new negotiation to the single EU market, as this currently represents almost half of UK exports(xvii).  Opponents of the UK exit from the EU cautioned that leaving the EU would irreparably harm the U.K. economy by abandoning long-held trade, financial, legal, and immigration agreements that provide for the free movement of people and capital within the EU(xviii).  

Additionally, the other unknown at this point is whether other countries may also want to leave the EU(xix).  The UK as a single event is relatively small in a global context; therefore, the question of contagion is actually more important(xx).  The European and other global central banks have indicated their willingness to provide liquidity if needed(xxi).  The prospect of a U.S. rate hike has diminished for the remainder of this year, further providing liquidity to markets(xxii).

Many economists describe Friday’s market sell reaction as more of a surprised environment than a truly distressed one(xxiii) and may in the end be advantageous for the US.  The UK may emerge as a stronger ally for the United States as we can negotiate a new stronger trade and financial agreements.  The US may be able to align more closely with our ally in challenging world aggression and global terrorism(xxiv).           

TIMELESS INVESTMENT PRINCIPLES

Market declines are inevitable and do not last forever.  We expect higher long-term returns on stocks than we do from cash and bonds, and for that, we also expect greater volatility based on historical data.  Over the past 114 years, market declines of 10% occur about once every 115 daysxxv.  The last time we experienced a pullback in the U.S. stock market of this magnitude (10% or greater), prior to August 2015, was in October 2011(xxvi).  The average length of a 10% correction is about four months(xxvii) before prices begin to return to previous levels.  Market declines of 15-20% occur on average every 2-4 years(xxviii) during the prior 115 years.  Declines can sometimes cause imprudent behavior by filling and consuming investors with dread and panic.  History has shown that stock market declines are a normal part of the investment cycle.  Market declines have varied in intensity and frequency, but the market has always recovered from declines.  Although past results don’t guarantee future results, remembering that downturns have been temporary in the past may help quell your fears(xxix).

Short-term market timing does not work.  Short term market timing is the elusive “holy grail” or “fountain of youth” of investing—something you want very much, but that is very hard or impossible to get or achieve.  If anyone could do it consistently—sell right before something goes down, and buy right back before it goes back up—the rewards would be great, but typically investors end up with sub-par performance due to the extreme difficulty with getting the short term timing (day trading) wrong(xxx).  Although the Holy Grail/Fountain of Youth most likely does not exist, the benefits of a long-term disciplined investment plan are compelling, but the generally higher returns associated with investing in stocks over the long-term is dependent on sticking with your investment plan through both good and bad times in the markets.

The importance of diversification. After studying the most brilliant and successful minds in the investment field over the past 28 years—both past and present—the one vital and common lesson learned is that diversification through asset allocation works to mitigate volatility over the long-term by diversifying into separate asset classes with varying correlation to one another.  We were taught as youngsters by our parents and grandparents “don’t put all your eggs in one basket” which is a straight forward translation to allocate your investment funds into different asset classes within your portfolio.  The idea is that they all don’t go up or down at the same time—and this could not ring louder at this time.  While this may not be the case on a day-to-day basis, a mix of different types of assets provides asmoother and more stable ride for your portfolio over the long-term(xxxi).  However, investment disciplines do not work all the time in every economic environment.  In fact, in a recent Bloomberg News article, it was argued that asset allocation in 2015 had one of the worst results in nearly 80 years with most major asset classes finishing the year with tepid results, with no asset class offering superior relative returns to lift the overall diversified asset allocation portfolio return(xxxii).

OUR GAMEPLAN

Our LW Portfolio Models are not immune to declines in global markets as we experienced on “Brexit Friday”.  We do not have a crystal ball nor do any of the market analysts and forecasters.  Our belief is that our LW Portfolio Model construction has positioned us for potential resilience in this environment and has also positioned us to possibly take advantage of market mispricing.  We see no need to change course, as the ancient buddish proverb states “If we are facing in the right direction, all we have to do is keep on walking”.  

Our Leshnak Wealth Portfolio Models are globally diversified and strategically constructed, with a tactical component.  We have a bias toward value which prescribes a requirement for dividend yield from our investment positions.  In simple terms, we have investment positions in eight asset classes: domestic equities, foreign developed stocks, foreign emerging market equities, domestic bonds, foreign bonds, cash equivalents, commodities, and real estate.  How much of each asset class (if any) we hold in the aforementioned asset classes is based on your unique risk tolerance, financial resources and personal goals and objectives. Moreover, we have a portion of each portfolio that is tactical and flexible.  This allows the manager to move assets into the sector(s) that best fit current market conditions based on their methodology.  Our portfolio construction has two other vital components—we want dividends from each position so no matter what the market is doing day to day, we still have a dividend coming into the portfolio for income or to reinvest.  Lastly, we overweight value versus growth in our allocation models which we believe puts us in the position of the “turtle”, in the proverbial tortoise verses the hare scenario, over the long-term with equities.

As your financial fiduciary, the Leshnak Wealth team cares deeply about your financial well-being, and will monitor for rebalancing opportunities that may add value to your portfolio, or to be defensive as conditions might warrant.  As always, please call with questions or if you wish to discuss your specific portfolio in greater detail.

–Bob Leshnak, June 27, 2016

The investment decisions are those of Robert M. Leshnak, Jr., CLU, ChFC, CFP®, MS, EA as of 6/27/2016 and are subject to change.  The information contained herein is only intended for Leshnak Wealth clients invested in the Leshnak Wealth Portfolio Models.  No forecasts or recommendations are guaranteed.  The technical data utilized as part of the investment decisions does not guarantee future positive results. Performance, especially for short periods of time, should not be the sole factor in making investment decisions.  The information contained herein does not constitute client specific investment advice or take into account a specific client’s particular investment objectives, strategies, tax status, resources, or investment time horizon. No investment strategy such as asset allocation, diversification, tactically overweighting sectors, or utilizing fundamental and technical analysis can always assure a profit, nor always protect against a loss.  The information presented is not intended to be a substitute for specific individualized tax, legal, or financial planning advice.  The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time.  Investing involves risks in regards to all of the investment products mentioned in this commentary, including the potential loss of principal.  International investing involves additional risks including risks associated to foreign currency, limited liquidity, government regulation, and the possibility of substantial volatility due to adverse political, economic, and other developments.  The two main risks associated with fixed income investing are interest rate and credit risk. 

Typically, when interest rates rise, there is a corresponding decline in the market value of bonds.  Credit risk refers to the   possibility that the insurer of the bond will not be able to make principal and interest payments.  Investments in commodities may entail significant risks and can be significantly affected by events such as variations in the commodities markets, weather, disease, embargoes, international, political, and economic developments, the success of exploration projects, tax and other government regulations, as well as other factors.  Indexes are unmanaged and investors are not able to invest directly into any index.  Past performance is no guarantee of future results.  Please note that individual situations can vary.  Therefore, the information presented here should only be relied upon when coordinated with individual professional advice.                                             

i AllianzGI Perspective: UK Votes Leave, “With the UK electorate voting to leave the EU, investors will need to brace themselves for the political, economic and market impact of this watershed moment.”, June 24, 2016. ii Gross, Jenny. “U.K. Rejects European Union”: The Wall Street Journal, June 24, 2016. iii Green, Byron.“Will it be Brexit, or another dodged bullet?”; Green Investment Management Market Commentary, June 20, 2016. iv Fidler, Stephen, Pop, Valentina and Gross, Jenny. “World Leaders Grapple with Impact of an EU Exit by Britain; Cameron Steps Aside”: The Wall Street Journal Weekend, Sat/Sun June 25-26, 2016. v Green, Byron.“Will it be Brexit, or another dodged bullet?”; Green Investment Management Market Commentary, June 20, 2016.

vi Gold, Riva, Bird, Mike and Otani, Otani. “U.K Vote Sets Off Shockwaves: Stocks, Currencies Take Hard Fall”: The Wall Street Journal Weekend, Sat/Sun June 25-26, 2016. vii Fidler, Stephen, Pop, Valentina and Gross, Jenny. “World Leaders Grapple with Impact of an EU Exit by Britian; Cameron Steps Aside”: The Wall Street Journal Weekend, Sat/Sun June 25-26, 2016. viii “U.K. Vote to Leave European Union Roils Financial Markets, But Process Will Be Lengthy and Outcome Likely Not as Bad as Markets Fear”; American Funds Market Commentary June 24, 2016.

  1. “U.K. Vote to Leave European Union Roils Financial Markets, But Process Will Be Lengthy and Outcome Likely Not as Bad as Markets Fear”; American Funds Market Commentary June 24, 2016.

  2. “U.K. Vote to Leave European Union Roils Financial Markets, But Process Will Be Lengthy and Outcome Likely Not as Bad as Markets Fear”; American Funds Market Commentary June 24, 2016. xi Baker, Gerald. “Britain Fires a Shot Heard Round the World”: The Wall Street Journal Weekend, Sat/Sun June 25-26, 2016. xii Wesbury, Brian S., Stein, Robert and Elass, Strider, “Brexit is Freedom”; First Trust Monday Morning Outlook, June 6, 2016 xiii Baker, Gerald. “Britain Fires a Shot Heard Round the World”: The Wall Street Journal Weekend, Sat/Sun June 25-26, 2016. xiv “U.K. Vote to Leave European Union Roils Financial Markets, But Process Will Be Lengthy and Outcome Likely Not as Bad as Markets Fear”; American Funds Market Commentary June 24, 2016. xv “U.K. Vote to Leave European Union Roils Financial Markets, But Process Will Be Lengthy and Outcome Likely Not as Bad as Markets Fear”; American Funds Market Commentary June 24, 2016. xvi Gardiner, Nile. “Why Americans Should Celebrate the Brexit Vote”; The Daily Signal-Heritage Foundation: June 24, 2016.

    xvii First Eagle Insights; “After Brexit”; First Eagle Investment Management Market Commentary, 6/24/2016. xviii “U.K. Vote to Leave European Union Roils Financial Markets, But Process Will Be Lengthy and Outcome Likely Not as Bad as Markets Fear”; American Funds Market Commentary June 24, 2016.

    xix Hasenstab, Michael, Templeton Global Macro Portfolio Update in light of the UK vote to leave the EU; 6/24/2016. xx First Eagle Insights; “After Brexit”; First Eagle Investment Management Market Commentary, 6/24/2016. xxi First Eagle Insights; “After Brexit”; First Eagle Investment Management Market Commentary, 6/24/2016. xxii Hilsenrath, Jon, and Douglas, Jason, “Prospects for early Fed Rate Increase Recede”; The Wall Street Journal; June 25-26, 2016.

    xxiii First Eagle Insights; “After Brexit”; First Eagle Investment Management Market Commentary, 6/24/2016. xxiv Gardiner, Nile. “Why Americans Should Celebrate the Brexit Vote”; The Daily Signal-Heritage Foundation: June 24, 2016. xxv “Keys to Prevailing Through Stock Market Declines”; American Funds Investor Resource: A Guide to Market Fluctuations; Aug. 2015; americanfunds.comxxvi “Keys to Prevailing Through Stock Market Declines”; American Funds Investor Resource: A Guide to Market Fluctuations; Aug. 2015; americanfunds.comxxvii “Keys to Prevailing Through Stock Market Declines”; American Funds Investor Resource: A Guide to Market Fluctuations; Aug. 2015; americanfunds.comxxviii “Declines Have Become Common and Temporary Occurrences”; American Funds Client Conversations; Jan.

    2016

    xxix “Keys to Prevailing Through Stock Market Declines”; American Funds Investor Resource: A Guide to Market Fluctuations; Aug. 2015; americanfunds.comxxx Vanguard Principles for Investing Success; 2014, pages 29-32; vanguard.com xxxi Vanguard Principles for Investing Success; 2014, pages 8-16; vanguard.com xxxii “The Year that Stocks, Bonds and Cash Failed to Thrive”, Investment News, January 4, 2016.

Newsletter: Summer 2016

Global Markets

Although 2016 began wildly in the global equity markets, including a historically weak start for the U.S. stock marketi, most developed markets around the world have actually posted small gains so far this year. As of Friday May 27th, the

Dow Jones Industrial Average, the S&P 500, and the MSCI-EAFE (international) indexes have each advanced roughly 2%, while the Russell 2000 (small stocks) and the NASDAQ indexes have each progressed more than 3%ii year to date.

Overall global growth has been rather benign during the last five years, with U.S. equities showing the only oasis during that time. However, during the past two years even the U.S. equities have gone flat while volatility has increasediii. Europe and Japan have begun a period of quantitative easing, similar to the plan the U.S. government deployed here in recent years, which should help to support these economies although at the expense of lower global bond yieldsiv. China continues to deal with a growth slowdown in that country and is using debt to bridge their budget deficit. We continue to see political uncertainty in countries such as Brazil, recession in countries such as Greece and terrorist activity throughout world that could impede global growth. However, estimates for 2016 World GDP growth are in the 2.5 to 3.0% range despite the present challengesv.

 

Index 1 year return* 2 year avg return* 5 year avg return*
S&P 500 -0.40% 4.66% 12.29%
S&P Mid Cap -2.14% 4.04% 11.04%
Russell 2000 (small cap) -7.71% 0.49% 8.47%
MSCI EAFA (international) -11.97% -7.52% -0.75%
MSCI Emergin Markets -19.55% -11.66% -6.18%
Barclays Aggregate Bond 0.42% 0.46% 0.62%
Barclays High Yield Bond -10.53% -7.52% -2.39%

*arithmetic avg. price only divs not included
*source: yahoo.com as of 5/27/2016

 

Gross domestic product (GDP) is one of the primary indicators used to evaluate the financial health of a country's economy. The United States GDP is the total dollar value of all private and public consumption, government outlays, investments, and exports minus imports that occur within our countryvi. U.S. GDP is estimated on an annualized basis, at the end of each quarter, then revised up or down as the data becomes more reliable. GDP, which is commonly referred to as the size of the nation’s economyvii, is utilized by economists, businesses, government organizations, and investors to compare and analyze the health and strength of the economy based on GDP figures from other periods.

"An investment in knowledge pays the best interest." - Benjamin Franklin

Gross domestic product in the U.S. for the first quarter of 2016 was a very minimal .8% and that, coupled with the past two years (2014 & 2015) of 2.4% GDP growth seems to indicate that the U.S. economy is moving forward, albeit not particularly at a robust rateviii. In fact, we have now experienced ten years in a row of less than 3% real GDP growth in the U.S. for the first time in our historyix. The longest previous run of consecutive sub 3% real GDP growth was only four years, and that was during the Great Depression (1930-1933)x. By comparison, the average real GDP growth rate in the U.S. from 1947 to 2016 was 3.23%xi. Now, if you’re an optimist on the economy there are a number of signs that show we can move more energetically upward from here. Conversely, if you’re negative on our economy there are some signs that we could slip back into recession. So, as we head into the summer mid-point of the year, signals are mixed.

Opposing Perspectives

An Optimistic View. Europe and Japan are in the early stages of their quantitative easing programs with the objective to backstop their economy and pre-empt recession. Stronger European and Asian developed markets should benefit emerging markets; plus, higher oil prices for many of the emerging economies that export oil should generate needed growth in those countriesxii. U.S. GDP growth is expected from 1.7 to 2.0% in 2016xiii. In the U.S., retail sales and housing starts are up 3% year over yearxiv. Sales of existing homes are up 6% from a year ago with the average selling price increasing 4%xv. The non-manufacturing purchasing managers index (PMI), which is considered a forward indicator of future GDP levels, revealed an expanding economyxvi in April. The purchasing managers index surveys businesses each month to inquire about business activity, new orders, employment, order backlog, inventories, supply fulfillment, imports, export orders and pricesxvii.

Oil prices have moved from $26 a barrel in January 2016, back to near $50 per barrel in May. The collapse in oil prices depressed business spending, especially in the energy sector which spilled over into the U.S. economy in general. The U.S. dollar’s strength, which had increased more than 25% during the previous five yearsxviii, has begun to decrease thereby boosting exporters and multinational corporationsxix. Unemployment is below the historical median currently at 5% and the U.S. has created roughly nine million new jobs since President Barak Obama took office in 2009xx. Additionally, U.S. wages have increased more than 2% in each of the last two yearsxxi and roughly 3% per year during the last 8 yearsxxii creating a tighter labor market. Consumer spending has increased, but at a slower pace than wage increases, due at least in part, to more restrained use of mortgage and credit card debtxxiii, thereby placing consumers in a better personal financial position. The inflationary environment remains below historical averages with the 12 months ending in April up just 1.13%xxiv which may seem somewhat low due to the drop in energy prices. Commodity prices, which had been on a five-year retreat after a period of over productionxxv seeing many basic resources and energy prices cut in half, have now begun to rebound amid a weaker U.S. dollar and increased demand.

“Great opportunities may come once in a lifetime, but small opportunities surround us every day.” –Rick Warren, Pastor & Author of “The Purpose Driven Life”

The Pessimistic Perspective. It could be argued that much of the moderate recovery we have experienced since 2009 has been driven by government monetary policy and historic infusions of capital in the form of quantitative easing. If so, great, that is what it was designed to do, but now we have begun to back away from that monetary stance by reducing stimulus and increasing interest rates, so that the economy must run on its own fundamentals to create growth. Some economists believe that we will not be able to sustain meaningful growth in the absence of government stimulusxxvi.

"In investing, what is comfortable is rarely profitable." –Robert Arnott

The sovereign debt crisis in Europe, in countries such as Portugal, Ireland, Italy, Greece and Spain, has affected the European economy by reducing overall demand, especially in the aforementioned countries that are saddled with high debt levelsxxvii. The United Kingdom has a referendum in June to discuss continued membership in the European Union (EU). A move out of the EU by the United Kingdom may ignite volatility until its impact is assessed by other global economiesxxviii.

The Chinese economy has grown exponentially during the past 30 years, now second in the world, and so has the wealth of its middle class population. The Chinese government wields financial controls and restrictions on its citizens, allowing them very few options for investment except for Chinese real estate and stocks that have appreciated significantly during the past decade. The risk is of a serious correction in China that could spill over into recession in that country thereby affecting the rest of the world economiesxxix.

In the U.S., student debt has now topped more than 1.3 trillion in 2016xxx, and this impacts the economy in two ways; first, most student loans are backed by the U.S. government and the loan default rate on these loans is 11.6% thereby putting the tab on taxpayersxxxi. Second, more than 43 million Americans have student debt possibly delaying or impeding them from buying a first home or making other consumer purchases that would normally boost the economyxxxii. Although the U.S. unemployment rate is currently at 5%, it may not tell the whole story. Many workers are underemployed with temporary or part-time work, and still others are out of the workforce and off the government’s unemployment rate radar due to long-term unemployment. The labor force participation rate, which measures how many people in the potential workforce are actually working, has declined to levels not seen since in 40 yearsxxxiii at roughly 62%. This may indicate a higher actual unemployment picture than is depicted.

"When everything seems to be going against you, remember that the airplane takes off against the wind, not with it." –Henry Ford

Many U.S. States and territories have budget deficits that are expanding due to increased spending on legacy items such as pensions and benefits, healthcare (especially with the expansion of Medicaid), and infrastructure, with aging roads and bridges in many states. Medicaid spending increased 15 percent and added 6.3 million people in 2015, which now supports 15.3 million with healthcare, or about one in 20 Americansxxxiv. Medicaid accounted for a mammoth 27.4 percent of total state spending in 2015xxxv. Lastly, recent economic data during the last few quarters show corporate profits, real GDP growth, retail sales, wholesale sales and U.S. exports have been slowing, which may or may not develop into a longer-term trend at this point.

Our Outlook & Gameplan

Although I am an optimist at heart, our investment approach is neutral as we strive to take advantage of the opportunities presented and play defense as conditions warrant. Right now we are cautionary but optimistic as we look to the remainder of 2016 and into 2017. The contrarian portion of our Leshnak Wealth Portfolio Model favors international developed and emerging markets equities, commodities, natural resources, and high yield bonds. These are the areas that have fared the worse the past five years. Conversely, the momentum or tactical portion of our portfolio is mixed allocating to such sectors as energy, technology, consumer discretionary, healthcare, financials, and real estate, as well as, defensive cash positions and consumer staples.

Our Leshnak Wealth Portfolio Models are globally diversified and strategically constructed, with a tactical component. We have a bias toward value which prescribes a requirement for dividend yield from our investment positions. In simple terms, we have investment positions in eight asset classes: domestic equities, foreign developed stocks, foreign emerging market equities, domestic bonds, foreign bonds, cash equivalents, commodities, and real estate. How much of each asset class (if any) we hold in the aforementioned asset classes is based on your unique risk tolerance, financial resources and personal goals and objectives. Moreover, we have a portion of each portfolio that is tactical and flexible. This allows the manager to move assets into the sector(s) that best fit current market conditions based

on their methodology. Our portfolio construction has two other vital components—we want dividends from each position so no matter what the market is doing day to day, we still have a dividend coming into the portfolio for income or to reinvest. Lastly, we overweight value versus growth in our allocation models which we believe puts us in the position of the “turtle”, in the proverbial tortoise verses the hare scenario, over the long-term with equities.

As your financial fiduciary, the Leshnak Wealth team cares deeply about your financial well-being, and will monitor for rebalancing opportunities that may add value to your portfolio, or to be defensive as conditions might warrant. As always, please call with questions or if you wish to discuss your specific portfolio in greater detail.

FSC Securities Corporation

AIG Advisor Group, the parent company of our broker-dealer FSC Securities Corporation, has been sold to a holding company formed by a private equity firm and other investment groups. This change in ownership should be seamless and has no impact on you or our relationship with our transfer agent, or with our firm, Leshnak Wealth. A change in a broker-dealer ownership requires that regulatory notifications be made directly to you from FSC. You will receive this notification over the next few weeks, and there is NO ACTION required on your part. Leshnak Wealth became affiliated with FSC Securities in 1997, and since that time FSC had been bought twice before; SunAmerica Life, and then again by AIG.

–Bob Leshnak, June 1, 2016

We wish you and your family a safe and enjoyable summer.

Cordially Yours,

Bob

Robert M. Leshnak, Jr., CLU, ChFC, CFP®, MS, EA
Registered Principal, FSC Securities Corporation
Managing Partner, Leshnak Financial Group, LLC

 

The investment decisions are those of Robert M. Leshnak, Jr., CLU, ChFC, CFP®, MS, EA as of6/1/2016 and are subject to change. The information contained herein is only intended for Leshnak Wealth clients invested in the Leshnak Wealth

Portfolio Models. No forecasts or recommendations are guaranteed. The technical data utilized as part of the investment decisions does not guarantee future positive results. Performance, especially for short periods of time, should not be the sole factor in making investment decisions. The information contained herein does not constitute client specific investment advice or take into account a specific client’s particular investment objectives, strategies, tax status, resources, or investment time horizon. No investment strategy such as asset allocation, diversification, tactically overweighting sectors, or utilizing fundamental and technical analysis can always assure a profit, nor always protect against a loss. The information presented is not intended to be a substitute for specific individualized tax, legal, or financial planning advice.

 

The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time.

 

i Driebusch, Corrie, “Bad Week for Stocks Dims Outlook”; Wall Street Journal 1-9-2016

ii Mench Financial, Inc. Memorial Day Newsletter; major indexes quoted as of 5/27/2016.

iii Green, Byron, “Ongoing challenges, leavened with encouraging signs”; May 18th, 2016, Green Investment Management, Inc. Market

Commentary.

iv Green, Byron, “Ongoing challenges, leavened with encouraging signs”; May 18th, 2016, Green Investment Management, Inc. Market

Commentary.

v “System says slow”; Economist.com 4/16/2016 and “2016’s global wealth forecast”; 12/31/2015 Economist.com

vi Investopedia.com

vii “What is GDP and why is it so important?”; Investopedia http://www.investopedia.com

viii Gillespie, Patrick, “U.S. economy grinds to near halt at end of 2015”; CNNMoney.com January 29, 2016

ix Woodhill, Louis; “Barack Obama’s Sad Record on Economic Data”; realclearmarkets.com; 2/1/2016.

x Woodhill, Louis; “Barack Obama’s Sad Record on Economic Data”; realclearmarkets.com; 2/1/2016.

xi “US GDP Growth Rate 1947-2016”; TradingEconomics.com

xii Green, Byron, “Ongoing challenges, leavened with encouraging signs”; May 18th, 2016, Green Investment Management, Inc. Market Commentary.

xiii TheConferenceBoard.com; May 2016 and “Economic Forecasting Survey”; May 2016 TheWallStreetJournal.com

xiv US Census Bureau; May 2016

xv Tradingeconomics.com; May 2016

xvi Institute for Supply Management; May 2016

xvii Investopedia.com

xviii CNBC.com, US Currency Index 5/30/2016.

xix “Ongoing Challenges, Leavened with Encouraging Sings”; Green Investment Management Market Commentary 5/18/2016.

xx “Obama’s Numbers” Factcheck.org; January 2016

xxi US Bureau of Labor Statistics; 4/29/2016.

xxii “Obama’s Numbers” Factcheck.org; January 2016

xxiii Green, Byron, “Ongoing challenges, leavened with encouraging signs”; May 18th, 2016, Green Investment Management, Inc. Market

Commentary.

xxiv Inflationdata.com May 2016

xxv Kymar, Kalyan; “Commodities on Comeback Trail, Says Analyst: Right Time To Invest”; FXNewsCall.com 6/3/16 and

Bloomberg.com/energy 6/3/2016

Kalyan Kumar on Jun 3, 2016

xxvi Hayes, Adam CFA,“6 Factors That Point to Global Recession in 2016”; Investopedia, 3/8/2016.

xxvii Hayes, Adam CFA,“6 Factors That Point to Global Recession in 2016”; Investopedia, 3/8/2016.

http://www.investopedia.com/articles/investing/071515/6-factors-point-global-recession-2016.asp#ixzz4AMZsZKSS

xxviii Green, Byron, “Ongoing challenges, leavened with encouraging signs”; May 18th, 2016, Green Investment Management, Inc. Market

Commentary.

xxix Bureau of Labor Statistics

xxx Studentloanhero.com and NewYorkFed.org

xxxi Studentloanhero.com and NewYorkFed.org

xxxii Studentloanhero.com

xxxiii Cannon, Lou, “Economic, Political Uncertainty the 2016 Outlook for States”; State Net Capitol Journal, 12/20/2015

xxxiv Cannon, Lou, “Economic, Political Uncertainty the 2016 Outlook for States”; State Net Capitol Journal, 12/20/2015

xxxv Cannon, Lou, “Economic, Political Uncertainty the 2016 Outlook for States”; State Net Capitol Journal, 12/20/201