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Where's the Market?

Market Commentary: July 2018

  

Market Commentary from Ladenburg Thalmann Financial Services

Second Quarter 2018

Introduction

Market volatility has spilled over into the second quarter of 2018. Investors have been surprised to the downside, with U.S. equities only modestly higher, foreign equities in negative territory and fixed income on track to posting its first negative calendar year return since 2013. Despite this relatively unpredictable market compared to 2017, the U.S. continues with strong economic data. The labor market continued to strengthen with the unemployment rate falling to 3.8% in May, an eighteen-year low, first quarter GDP increasing at a moderate 2.0% annual rate and expected to strengthen in the second quarter, and inflation ticking up with CPI up 2.8% year over year. The Fed raised the federal funds rate by 0.25% in their June meeting to keep the economy from overheating and is expected to raise rates two more times this year. Although there are risks, as evidenced by geopolitical headlines regarding trade and election cycles and concerns surrounding the length of the current bull market, we still find equities attractive due to a solid economic backdrop and pro-growth policies, like tax cuts, taking effect. However, we do not dismiss the threats currently looming over the market and instead stand ready to alter our portfolios to a more defensive posture in the face of uncertainty. 

Domestic Equities 

U.S. stocks continued to be relatively volatile, but still showed signs of resilience with positive performance on the year. This is despite a heightening trade war between the U.S. and its four largest trading partners. In total, the S&P 500 is up 2.65% year to date, and 3.43% for the past three months. Second quarter earnings and sales are expected to come in strong. The full extent of the most recent tax cuts is expected be realized in the upcoming quarters, which should result in continued positive results for the remainder of the year and into 2019. Due to this and a healthy economic environment, we believe U.S. equities should continue to grind higher, albeit with some short-term resistance due to geopolitical uncertainty related to tariffs. These geopolitical uncertainties coupled with significant currency movements make smaller sized stocks an attractive opportunity as they tend to be more isolated than larger sized stocks from these global risks because of their more U.S focused business models. With all this in mind, we remain modestly overweight domestic equities. 

International Equities 

The global markets have seen a recent slowdown in growth, with the MSCI EAFE, returning -2.75% year to date and -1.24% quarter to date. The European Central Bank (ECB) has declared it will stop buying bonds in December and will start raising interest rates no earlier than the summer of 2019. The ECB plans to raise their rates gradually in response to a weakening Euro, but there is concern that the Eurozone will continue to miss its GDP annualized goal of 2% growth by raising rates too soon. Unlike in the U.S. and Europe, the Bank of Japan plans on keeping rates steady due to a downgraded view on inflation, which is moving at around 1%. The negative returns in international equities can be attributed to political risks from Europe, trade tensions, as well as a rising dollar due to Fed rate hikes and solid U.S. economic data. The MSCI Emerging Markets index (EM), with a return of -6.66% year to date and -7.96% quarter to date, has underperformed both the S&P 500 and the MSCI EAFE in 2018, with most of its decline occurring in the last month due to a few reasons. First, many of the countries face political uncertainty, which has negatively impacted their local currencies. In addition, as the dollar strengthens, it becomes more difficult for EM countries to pay off their dollar denominated debt. The hit from a stronger dollar can be magnified for commodity-oriented EM economies since the demand for commodities should decrease as their prices increase in line with the increasing dollar. Finally, poor trade relations between China and the U.S. have caused global concerns as the two represent the world’s two largest economies. Escalated trade tensions may also impact consumer sentiment and the global supply chain, the consequence of which could be difficult to estimate. International equities have taken a sizable hit recently, but due to a world economy that is still showing signs of strength, oil production set to increase, and President Trump starting to ease up on Chinese-U.S. investment relations, international as well as emerging market equities should bounce back. 

Fixed Income 

Through the first half of 2018, the fixed income market is showing negative returns. The 10-year Treasury yield has steadied around 2.9% whereas the 2-year Treasury yield has climbed to 2.5%. If the two-year yield surpasses the 10-year yield, it has historically been an indicator of a fast approaching recession, but we are not there yet. Federal Reserve Chair Jerome Powell continues to take a hawkish outlook on interest rates moving into 2019. With the second interest rate hike of the year up another 25 basis points, the Fed maintained their forecast of two additional rate hikes in 2018. The Fed anticipates 2.7% growth in GDP this year, up from 2.5%, noting that their economic outlook has strengthened. Fixed income securities will continue to face headwinds with rising interest rates, but a diversified fixed income bucket should be resilient on its own and help diversify the overall portfolio as the equity markets experience increased volatility. 

Alternatives 

Oil prices have picked up since their February low. Brent crude, the global benchmark is up 13% in the second quarter after major crude producers agreed to a slight increase in output – 600,000 barrels per day – which in turn calmed investor fears of an oversaturated market. The U.S. continues to increase production and be a large contributor of oil, with plans to produce 11 million barrels a day by October. However, the broad commodities space, as measured by the Bloomberg Commodity Index, was relatively flat this quarter as the stronger dollar continues to be a headwind. 

Real Estate 

Real estate has begun to slow down, with growth on both the commercial and residential side lagging in comparison to 2017. Leading the housing market are first time home buyers, who make up 34% of the population purchasing homes. There are many difficulties that are pressing this year, but some of the largest are the supply of homes on the market as well as rising mortgage rates. The US Home Mortgage 30-year fixed rate posted by bankrate.com is up 0.13% on the quarter and nearly 0.55% from the same time last year. With rates continuing to rise and supply at historically low levels, we believe there is a chance for moderate growth, but there is limited opportunity in the sector at this stage of the business cycle. 

Conclusion 

Stocks and bonds have been positive in the last 4 calendar years, however, this year has not followed trend, as U.S. stocks are modestly up and bonds are down. Overall, we expect the market to grind higher but do not expect to see performance like 2017, as geopolitical issues such as tariffs, a flattening yield curve, and questions surrounding the effectiveness of the fiscal stimulus so late into a market bull run remain on the forefront of investors’ minds. Although limited, 2018 should be a positive year, as the economy remains on solid footing with a constructive outlook into 2019. As a result, we are cautiously optimistic that global markets will continue to rise. 

Although this market outlook has been prepared from public and private sources and data that LTAM believes to be reliable, LTAM makes no representation as to its accuracy or completeness. Any securities, indices, and other financial benchmarks shown are provided for illustrative purposes only, and reflect reinvestment of income, dividends, and other earnings. They do not reflect the deduction of advisory fees. Indexes are unmanaged and investors cannot invest directly in an index. Investors should bear in mind that past performance is no guarantee of future results and there can be no assurance that the Program will achieve comparable results. Investment products are subject to investment risk, including possible loss of the principle amount invested and should review the prospectus before investing. The information and views expressed are given as at the date of the writing and are subject to change. This information is not to be used or considered as an offer or the solicitation of an offer to sell or buy any securities mentioned herein. Ladenburg Thalmann Asset Management Inc. is a registered investment advisor and subsidiary of Ladenburg Thalmann Financial Services Inc. which is traded on the NYSE_MKT: LTS. 

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This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.

Newsletter

Have You Heard?

Arizona Tax Credits for 2017

The state of Arizona offers its taxpayers the opportunity to make contributions to schools and non-profit organizations that reduce the amount of tax owed to the state or increase the amount of the taxpayer’s refund, dollar-for-dollar. There are three main communities tax credit donations serve, and donors can contribute to any or all of them. To learn more about each, read on.  This summation is for informational purposes only.  Be sure to check with your tax professional to verify whether any of these strategies are beneficial in your particular situation.

Qualifying Charitable Organizations

This individual income tax credit is available for contributions to Qualifying Charitable Organizations that provide assistance to residents of Arizona who either receive Temporary Assistance of Needy Families (TANF) benefits, are low-income residents of Arizona or are chronically ill or physically disabled children residing in Arizona.

Starting with the 2013 tax year, taxpayers no longer have to itemize deductions to claim a credit for contributions to a Qualifying Charitable Organization or Qualifying Foster Care Charitable Organization.

Maximum Credit for Any Tax Year

Single or head of household: 
$400 (Qualifying Charitable Organization)
+ $500 (Qualifying Foster Care Organization)
= $900 Total

Married filing jointly: 
$800 (Qualifying Charitable Organization) 
+ $1,000 (Qualifying Foster Care Organization) 
= $1,800 Total

Beginning in 2016, the qualifying charitable organization and qualifying foster care organization donations are no longer linked, so you can take both credits for a new maximum of $900 ($1,800 for married filing jointly).

Donation Deadline
April 17, 2018 (for 2017)

Credit/Deduction Distinctions
Any charitable contribution that is included in itemized deductions on your federal return must be removed from your Arizona itemized deductions if the contributions were claimed as an Arizona credit. Donations made to organizations not listed on the department’s published website are typically allowable as deductions. You cannot claim both a deduction and a credit for the same charitable contribution on your Arizona return.

NOTE TO DONOR: Many charities indicate on their websites if they are qualified for this credit. Annual reports are often available online as well so that you can see how the organization spends its money. If a charity’s website does not provide this information, you can call and ask for copy of its certification letter from the ADOR.

Resources

• 2017 Qualifying Charitable Organizations – can be contacted to make a donation
• 2017 Qualifying Foster Care Charitable Organizations – can be contacted to make a donation

School Tax Credits 

There are three school tax credits available for individual taxpayers: one for contributions to public schools and two for contributions to Private School Tuition Organizations.

Public Schools

An individual may claim a credit for making contributions or paying fees to a public school for support of extracurricular activities or character education programs. These are school-sponsored activities that require enrolled students to pay a fee in order to participate. You are allowed to specify which programs you would like your contribution to support when making a donation.

Maximum Credit for Any Tax Year

Single or head of household: $200
Married filing jointly: $400

Donation Deadline
April 17, 2018 (for 2017)

Resources

• Generate a Department-of-Education-sponsored listing of the public & charter schools within Arizona. You can make your donation directly to the institution you choose to support.
• ADOR Publication (with FAQ)

Private School Tuition Organizations

The Original Individual Tax Credit Program allows Arizona taxpayers to make a contribution to a School Tuition Organization that will help to fund private school students’ tuition.

In 2012, the Overflow/PLUS/”Switcher” Individual Tax Credit Program was signed into law, allowing donors to claim an additional tax credit OVER AND ABOVE the Original. Donors must first meet the Original Program maximum in order to claim the Overflow tax credit. Overflow Tax Credit donation revenues may only be allocated to students that meet certain criteria as determined by Arizona state law.

Maximum Credit by Tax Year

Original Program
Single or head of household 2017: $546
Married filing jointly 2017: $1,092

Overflow/Plus/ Swicher Program
Single or head of household 2017: $543
Married filing jointly 2017: $1,085

Donation Deadline
April 17, 2018 (for 2017)

Information for Donors

What is a School Tuition Organization (STO)?
A school tuition organization is one that is tax exempt under Section 501(c)(3) of the Internal Revenue Code, allocates at least 90 percent of its annual contributions to scholarships or grants and makes its scholarships/grants available to students of more than one qualified school.

What is a qualified school?
A qualified school is a non-governmental preschool for disabled students, or a non-governmental primary or secondary school located in Arizona. The school cannot discriminate on the basis of race, color, disability, familial status or national origin. The primary school begins with kindergarten, and the secondary school ends with grade 12. Qualified schools must also require all teaching staff and personnel that have unsupervised contact with the students to be fingerprinted.

Resources

• Certified STOs
• ADOR Publication (with FAQ)
• Arizona Private Education Scholarship Fund | Donate

Military Family Relief Fund

This individual income tax credit is available for contributions to the Arizona Military Relief Fund, which was established by the Arizona Legislature in 2007 (Arizona statute 41-608.04) and is administered by the Arizona Department of Veterans’ Services (ADVS). The fund provides financial assistance to the families of currently deployed Service Members and post-9/11 Military and Veteran Families for hardships caused by the Service Member’s deployment to a combat zone.

Maximum Credit for Any Tax Year

Single or head of household: $200
Married filing jointly: $400

*Donations to the fund will only qualify for the credit if the total amount donated to the fund during the calendar year has not exceeded one million dollars. Donations made to the fund once the total donations for the calendar year reach one million dollars will not qualify for the credit. The determination of whether a donation will qualify for the credit is made on a first come, first served basis. The ADVS will provide you with a receipt that will let you know if your donation qualifies for the credit. The ADVS will also send a copy of that receipt to the Arizona Department of Revenue.

Donation Deadline
December 31

Additional Notes to Donors

There is no carry forward for this credit. You must claim and use this credit on the tax return filed for the taxable year for which you made your donation. This credit is available only to individuals and cannot be claimed as both a tax credit and an itemized deduction in the same taxable year. Before you claim this credit, you must have received a receipt from the ADVS showing all of the following:

• Your full name and address
• The last four digits of your social security number
• The amount you donated
• That your donation qualifies for the credit

Resources

• ADVS Military Family Relief Fund Page
• 2017 MFRF Donation Form
• How to Request Assistance from the Fund

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This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.

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Something to Think About

Digital Estate Planning

Have you made plans or considered making plans for your electronic information and online accounts after you die? The term for this is “digital estate planning,” and for anyone who spends time online, it’s something that deserves serious thought. 

If you handle your household utility payments online, for example, how easy would it be for your family to figure out when the bills are due in the weeks after your death? If all notices for those accounts are sent to you via email, it’s something they may not consider right away and late fees--or even shut offs for non-payment--might occur. If you belong to an online community or have friends online, would anyone know to inform them of your death? Do you have any prepaid accounts or frequent flyer miles that will need to be transferred to someone else upon your death? Do you store photos and videos online and want your family to receive copies after you are gone?

Some online accounts can simply be closed or allowed to lapse, but other accounts might be important and, in the event of your death, it’s possible that you will have electronic documents or other information that need to be disseminated, deleted, archived, memorialized or even destroyed. Digital estate planning gives you time to consider these things ahead of time and put instructions in place so that your family or executor will know how to access critical information in the event of your death and handle your information or other online assets appropriately.

Keep in mind that, for some accounts, the terms of service you agreed to when the account was created will determine what happens to your information when you die. Your email account, for example, will be handled very differently depending on which company you have the account with. Apple will close your account and won’t share the contents with anyone, regardless of your wishes. With a Google Gmail account, you can choose to designate another person to handle your account after a set period of inactivity. Outlook will share all your information with anyone who can provide them with appropriate documentation. 

If it matters to you what happens to a particular account--and the information in it--after you are gone, it’s a good idea to find out what the terms of service are for that account and, if they are not in line with your wishes, consider changing providers now. 

Tips for digital estate planning:

• First, make a list that includes each account, including login and password information. When making this list, don’t forget to include password protected files and documents. You will also want to list every device or computer that your information can be accessed from: phones, laptops, tablets, desktops, etc. Remember to include flash drives, compact discs, and other storage devices.

If you have a lot of online accounts and the idea of making a comprehensive list overwhelms you, just concentrate on the critical accounts--the utility payment accounts, the accounts with important documents, the paid subscriptions, and anything else that will require someone else’s attention. 

• Decide how the information in each account should be handled, and who, if anyone, should be given access to it. 
• Find a safe place to keep this information. You don’t want to make yourself vulnerable to identity theft or other types of cybercrime. 
• Choose someone you trust to act as “Digital Executor” upon your death, and make sure he or she knows where to find this information when you die, even if you don’t make the information readily available to that person now (and for security’s sake, you shouldn’t). 
• If you have any online assets with financial value, such as a monetized YouTube channel, an eBay store, or one of the myriad other income streams available on the internet, make sure to talk to your estate planning attorney to determine what, if anything, needs to be included in your will. 

Once you’ve made a digital estate plan, it’s a good idea to review it regularly--at least once a year--and make sure the information is current. You may also want to ensure that the terms of service haven’t changed in cases where it’s important to you how an account is handled after your death.

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This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.

Newsletter

Carlin Cares

Adopt-A-Family 2017

It has been my pleasure to be involved in some way with a mentoring program, Mentoring Tucson’s Kids, since arriving in Tucson. As a matter of fact, many of you have met my Partner, Meg, over the years (who by the way is now 36!!). Looking for a way to stay in the spirit of this magical season, I asked if there were a way that we could help them. Here is our opportunity.

A single mom has had her 4 sons involved with mentors since they were little. They are now all teens, doing well in school and college bound. In the past few months, their mom has developed a medical condition that has kept her out of work and there is no definite date as to when she’ll be able to return nor whether it will at her full capacity. So, the two older boys have taken over the management of the family. Jose has taken a leave from PCC and is working in a restaurant management program to support the family. Chris has postponed his entering PCC and is keeping the household going – cooking, cleaning, laundry and getting his younger brothers off to school and their activities. They are quite a tight family, and everyone is pitching in.

When I asked Chris to give me a list of what they need, his response brought tears to my eyes. After offering them anything – clothes, games, decorations, music, electronics, etc… - he said what they need most is food. After nudging a bit more, he agreed to ask his family what they might like, and he did let me know the items below.

For food –

Any dry goods or canned items
Fry’s gift cards
Cash (and I’ll buy gift cards)

Mom

Blankets

Anthony (age 14)

sweat pants (medium)
sweaters/sweatshirts (medium)

Aaron (age 15)

jeans (size 38)
Sweaters/sweatshirts (XL)

Jose (age 19)

Black jeans for work (size 38)

Chris (age 18)

“Nothing for me – I would just like the food!!” (direct quote - via text)

What I’d like to add is that I am sure they would love anything that you can give. Gift cards for other stores, gently used items and whatever you think teenage boys might like. As for mom, gifts to lift her spirits through this unexpected and challenging time.

Please open your hearts and help this family who are helping themselves as best they can. All gifts can be dropped off at my office. If it’s food, cash or Fry’s gift cards , I will be delivering them as I receive them.

Questions? Give me a call – 520-878-9262 (office)

Very heartfelt thanks,

Chris

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This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.