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Where's the Market?

Ladenburg Thalmann Market Commentary

Q2 2019

  

Introduction

After an impressive first quarter, both stocks and bonds experienced more volatility during the second quarter but still ended up positive. Overall, the economic data in the U.S. has moderated from peak levels in 2018 but remains positive in many regards. The labor market has been a bright spot for the economy with the unemployment rate falling to 3.6% as of May. GDP growth is up 3.1% however is anticipated lower for the remaining quarters this year. Lastly, inflation has been somewhat muted with CPI up 1.8% year over year as of May. The Federal Reserve has recently mentioned the possibility of cutting short term interest rates to support this expansion in light of economic risks that exist such as the threat of further tariffs and data on slowing global growth. With equity markets continuing to move higher, we are taking a more conservative posture and reviewing the data to confirm where the economy is headed. As there is uncertainty as to whether the Fed will cut rates and to what magnitude, headlines such as tariffs, and geopolitical tensions between the U.S. and Iran are impacting market sentiment in addition to the economic data coming in softer. 

 Domestic Equities

Although U.S. stocks generated a positive return of 4.30% for the second quarter of 2019, this 3-month performance hides the volatility which took place intra-quarter. In fact, the S&P 500 returned 4.05% in April but significantly sold off in May falling -6.35% only to rebound and return 7.05% in June. The selloff in May can be predominantly explained by a heightening of trade tensions between the U.S. and its trading partners and fear of slowing global growth. Although tariffs would likely hurt foreign countries like China and Mexico more than it would hurt the U.S. due to a higher dependency on exports, U.S. companies would still feel some pain as a result of higher prices due to tariffs. After the selloff in May, investors found optimism in anticipation of a potential Fed rate cut which could occur in the back half of the year, hope for improved negotiations with China and the possibility that the Mexican situation is resolved for now. With earnings growth projected to be negative for Q2 2019, stock valuations more expensive, and a softer economic backdrop than what was experienced last year we recommend a neutral stance on equities. 

 International Equities 

International developed equities and emerging market equities returned 3.68% and 0.61% for the second quarter, respectively, both lagging the S&P 500. Despite prolonged uncertainty in Europe after the United Kingdom failed to reach an agreement on Brexit in late March, GDP growth in the euro-area exceeded expectations as low inflation supported stronger household spending. Germany, the economic powerhouse in the Euro Zone, may have avoided a recession as manufacturing production stabilized and output accelerated, though the potential of auto tariffs from the U.S. remains a risk to their economy. Though growth was stronger than expected in Europe, weak productivity, high unemployment, and an aging population are likely to drag on growth over the longer term. The ECB President Mario Draghi has indicated a possibility of cutting interest rates to help support an already tepid economy. 

Within emerging markets, trade tension continues to weigh on major emerging market economies such as China and other developing countries that are dependent on the Chinese economy. The U.S. raised tariffs in May on $200 billion in imports from China from 10% to 25% bringing the total amount to $250 billion. China’s economy has continued to slow, with its manufacturing PMI falling into contraction territory in May to 49.4. Although Chinese economic data is moderating, the Chinese government has historically provided stimulus to the economy during bouts of weakness. Overall there are many uncertainties in international and emerging markets, but due to inexpensive valuations and the potential resolutions to the pending conflicts, there may be buying opportunities in the future. Despite mild economic data, both international and emerging market equities have performed well this year up 14.03% and 10.58%, however, still lag the S&P 500. 

 Fixed Income

Fixed income continued its strong run in 2019 to post positive returns in the second quarter of 3.08% as measured by the Bloomberg Barclays US Aggregate Bond index. Lower quality corporate bonds benefited from investors’ continued appetite for risk while longer maturity bonds were supported by falling long term interest rates. The Federal Reserve adopted a more dovish tone, removing the word “patient” from their most recent commentary as well as introducing the possibility of rate cuts in 2019. As a result of the market’s downward projections for interest rates, demand for longer duration securities increased and pushed yields down, with the 10-year U.S. Treasury yield ending the quarter at 2.00%, a drop of -0.40% from the beginning of the quarter. During the past two expansions, the Fed hiked rates by 3.5% and 4.25%, respectively; Since the Fed only raised rates to 2.50% during this cycle, we believe the projected path for interest rates will remain stationary in the near term, as the Federal Reserve has less room to cut rates than it did in the past and while economic data has slowed, it remains positive. Moving forward, we believe fixed income securities will provide significant diversification benefits to equities as economic and corporate growth slows. 

 Alternatives 

Risk-reducing alternatives took a backseat to traditional return enhancing alternatives during the second quarter. Oil prices experienced increased volatility amid fears of oversupply and worries that slowing global growth coupled with rising crude inventories could potentially cause a supply glut. Specifically, the trade dispute between the U.S. and China clouded the outlook for oil demand. On the other hand, escalated tensions between the U.S. and Iran and the potential for further supply cuts from OPEC has bolstered oil prices. Overall, U.S. crude only fell -2.78% over the course of the second quarter to $58.47 per barrel. The Morningstar Diversified Alternative index returned 0.83% for the second quarter underperforming the S&P 500 but with significantly less volatility (as measured by standard deviation). 

 Real Estate

The housing sector is on uneven footing as housing starts, a gauge of home construction, fell -0.9% in May from the prior month and new home sales fell -7.8%. The NAHB index, an index that tracks homebuilder optimism and a leading indicator for the housing market, fell to 64 this month from an unrevised level of 66 in May, as builders continue to report rising development and construction costs due to tariffs. However, building permits edged up 0.3% compared to April suggesting the housing market may be benefitting from the continued decline in mortgage rates. The average rate on the 30-year fixed mortgage ended the second quarter at 4.06% down almost -1% from its peak of 5.17% in November of 2018. Even with low borrowing costs, the demand for housing has decreased due to the changing demographics of the U.S. 

 Conclusion

The market managed to generate positive returns for Q2 despite multiple headlines impacting investor sentiment. With markets recently moving higher in anticipation of consecutive Fed rate cuts through the end of the year it will be interesting to see if the Fed acts accordingly. The market needs a catalyst to grind higher other than the actions of the Fed and equity valuations are already high. Also, the bond market is signaling a slowdown as rates are lowered. Similar to the Fed, we are data dependent to determine where the markets go from here and take a wait and see approach as we maintain a neutral stance in our portfolios 

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 American: LTS.


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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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

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

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

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


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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So many things—other than your investments—effect your finances. Discover some useful information here.

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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.


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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Carlin Cares

Carlin Cares Helps the Homeless

Carlin Financial fills gallon-sized bags full of goodies for the homeless, and we make these bags available to clients who want to help the homeless but have qualms about handing them cash. These bags are full of snacks and small items that a homeless person might find useful. A new batch of bags is now available to pick up and stash in your back seat so it’s handy when you pass one of these unfortunates. 

We are always accepting donated items for the next batch of bags. Good sources for items include the free samples provided by hotels, dental care kits your dentist gives you, and travel-sized BOGO items.

We accept: 

  • Hygiene items — shampoo, soap, toothpaste, lotion, sunscreen, etc.
  • Grooming items — toothbrushes, combs, washcloths, etc.
  • Non-perishable snacks — granola bars, nuts, hard candies, chips, crackers, etc.
  • Small drink bottles — water, Gatorade, etc.

We all have so very much.  Let’s put a little food in someone’s belly and a smile on their newly scrubbed face!

Chris


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.

Carlin Cares

We’re committed to lending a hand to those less fortunate. Maybe you’d care to help us.