your financial future
YOUR FINANCIAL FUTURE Your Guide to Life Planning August 2016
In This Issue
Weekly Economic Commentary | Week of August 8, 2016 Monetary policy in Europe has just begun to increase bank lending, which historically has resulted in higher stock prices for banks, though the full impact of negative interest rates is difficult to determine.
Bond Market Perspectives | Week of August 9, 2016 A stronger than expected July jobs report caused Treasury yields to jump higher, but investors looking for the long-awaited rise in yields may have to wait longer. Mark Dutram, CFP First City Bank of Florida Vice President 135 Perry Ave. SE Fort Walton Beach, FL 32548 850-244-5151 ext. 1125 Fax: 850-244-1417 [email protected] www.LPLFCB.com
Weekly Market Commentary | Week of August 8, 2016 This week we provide an overview of earnings season and discuss prospects for a second half earnings rebound.
Independent Investor | August 2016 College planning is a major life event for parents. But what about the kids? Getting them involved in the process can provide lessons that go well beyond the cost of tuition.
Midyear Outlook 2016 | July 2016 The recently released LPL Research Midyear Outlook 2016: A Vote of Confidence publication contains the guidance and investment insights to support you throughout the rest of this year.
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Weekly Economic Commentary | Week of August 8, 2016
Highlights
Banks everywhere are under pressure from the low interest rate environment. Corporate financing in Europe goes through banks, not the capital markets, making banks more important to the system. Monetary policy in Europe has just begun to increase bank lending, which historically has resulted in higher stock prices for banks, though the full impact of negative interest rates is difficult to determine.
European Banks: Neither a Borrower Nor Lender Be European banks are vital to economic recovery in Europe; low and negative interest policies in Europe not only hurt banks, but may be counterproductive to boosting the economy. Banks in Europe are more structurally important to the economy for a number of historical and structural reasons. The European Central Bank's (ECB) expansion of money supply and low to negative interest rate policy were designed to aid the economy. But the negative impact on banks has limited lending, therefore countering this state policy. Banks have belatedly begun to increase lending. Stock prices for European banks tend to rise with increases of lending, though historically it takes some time (approximately a year) for stock prices to begin to follow actual loans.
WHY DO RATES MATTER? We have taken our title from Shakespeare's Hamlet, in which Polonius, a pompous and self-serving advisor to the king, provides a series of life lessons to his son. "Neither a borrower nor lender be" is one of the most famous. Of course, Polonius is informing his son that borrowing and lending put the parties at odds with each other, working against both parties intentions. The ECB appears to have failed to heed this lesson. It has engaged in a number of measures to spur the economy by encouraging borrowing and spending. In particular, interest rates have been reduced to zero, and in an increasing number of cases have been negative. The ECB has also been purchasing bonds from banks at a record rate through its quantitative easing (QE) program. The idea behind these policies is that by reducing interest rates, corporations will increase their borrowing for investment and consumers will use low rates to borrow and spend. However, the low rates have failed to do much to stimulate the economy, and may even be worsening the malaise. One reason may be the negative impact these policies have on banks. Low interest rates dampen bank profits; the bank simply doesn't make much money on the loans. This can result in a tightening of lending standards, as banks do not feel they can be adequately rewarded for taking on additional risk. Low interest rates also may lead savers to not use banks; they may withdraw their principal from the banks, as they don't earn enough on their savings to meet their spending needs. Low rates encourage savers to look elsewhere, maybe even out of the country, seeking higher rates. By depriving banks of this source of funds, the ECB is partially negating its own policy. In today's environment, Polonius's words can be seen as a warning to the financial industry. Go ahead, try to borrow and lend, but you aren't going to make any money at it. But it's also a warning to the ECB: be careful of the unintended consequences of your actions.
WHY DO BANKS MATTER? Banks and bank lending are much more important to the European economy than they are in the U.S. In Europe, approximately 80% of all corporate debt is in the form of a bank loan, with only 20% structured as a bond. In the U.S., those figures are approximately reversed. The differences in the regions are even more striking when looking at sources of credit as a percentage of gross domestic product (GDP) [Figure 1]. The U.S., the Eurozone, and the U.K. all have very similar private sector debt-to-GDP ratios. However, the European nations, including the U.K., which is counted differently as it does not use the euro, are more reliant on banks to fund the economy. This tendency is somewhat surprising for the U.K., which typically follows the more dynamic Anglo-Saxon model of capitalism, relying on the capital markets-the issuance of stocks and bonds, and the trading of loans through the securitization of debt-to finance corporate activity.
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When we look down to the capital structure, to high-yield bond issuance, levered loans, and securitization of debt, the difference between Europe and the U.S. grows even starker. By some estimates, European issuance of high-yield debt is only 35% of that of the U.S. when adjusted for GDP. The securitization market is only 17% of that of the U.S., adjusted the same way. Relative to the U.S., not only do European banks create a disproportionate amount of the credit, they tend to keep the loans on their books. This does not allow banks to diversify these risks. It also may mean that if a bank is overleveraged, or has too much bad debt, it may reduce lending to good creditors, which hinders economic growth. Both the causes and effects of the dominance of traditional banking, rather than use of the capital markets, are impacting the health of European banks. There are many reasons why Europe is so dependent on banks. Among them is the fact that, outside of the largest of banks, transnational banking is itself a relatively new concept, boosted by the EU and its common currency. Even banks based in countries that do not use the euro, such as the U.K. and Switzerland, benefit from the fact that so many other countries are using the euro, as it reduces the number of currencies used. European banking evolved in an era where each country had one or two "national champion" banks and a few smaller banks that typically operated in just one region or province. Further explaining the importance of banks to Europe are the higher savings rates relative to the U.S. [Figure 2]. Different countries have different savings rates, even within Europe. Polonius also warns that "borrowing dulls the edge of husbandry"-the management of resources, primarily land and livestock in Shakespeare's day. Judging from the economic health of many of the highly indebted countries, maybe they should have heeded the warning. Click here for Figure 2, Savings Rates Across the Region
IMPACT OF POLICY People tend to believe that central banks worked in a coordinated way after the financial crisis of 2008 to support global growth. In fact, the ECB was late to the party. Though it kept rates low, European money supply was stagnant in 2010 and rose slowly after that. It has only been since 2014 that the ECB has aggressively expanded the money supply [Figure 3]. Bank lending actually declined in 2009, and after a brief increase, was negative on an annualized basis for almost three years. It has only been recently, since the beginning of this year, that bank lending began to increase. This increase, should it continue, will be evidence that European economic recovery is truly underway. Given the reliance on banks for financing, bank credit is an even more important indicator of the economy.
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Your Guide to Life Planning Click here for Figure 3, ECB Only Started Aggressively Increasing Money Supply in 2014 Bank stocks prices also tend to follow bank lending, though typically with a lag of approximately one year. This has not happened recently; banks stock prices have declined even as lending has started to increase. This is due to both low interest rates and concern about the credit worthiness of some of the major banks. The total amount of bank lending represents the "sales" for banks; interest rates represent the "price" of what they are selling. Total sales are starting to increase. But if rates stay low, or even decrease, it will be hard for European banks, and European stocks as a whole, to earn our vote for inclusion in portfolios.
CONCLUSION In our Midyear Outlook 2016: A Vote of Confidence publication, we expressed a generally cautious view on European equities; we're looking for improved earnings and an appropriate response to Brexit before we could "vote for" increasing our allocation to the asset class. European banks, both as investments themselves and through their importance to the economy, represent an important factor in this decision.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly. The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful. International investing and international debt securities involve special additional risks. These risks include, but are not limited to, currency risk, geopolitical and regulatory risk, and risk associated with varying settlement standards. These risks are often heightened for investments in emerging markets. Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal, and potential liquidity of the investment in a falling market. INDEX DESCRIPTIONS The Euro Stoxx Banks Index is a capitalization-weighted index of companies based in the European Union in the banking sector. There are 30 stocks in the index. RES 5605 0816 | Tracking #1-523843 (Exp. 08/17)
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Bond Market Perspectives | Week of August 9, 2016
KEY TAKEAWAYS A strong July employment report caused Treasury yields to spike higher, but the broader message from the bond market has not changed. Improvement in economic data will need to exhibit greater consistency to exert meaningful upside pressure to bond yields.
HAS ANYTHING CHANGED? A stronger than expected July jobs report caused Treasury yields to jump higher, but investors looking for the long-awaited rise in yields may have to wait longer. The bright spot provided by jobs offset otherwise bond-friendly developments, including a powerful policy move by the Bank of England (BOE) in response to Brexit risks and softer than expected U.S. economic data in the form of a below-expectation Institute for Supply Management (ISM) manufacturing reading and weaker economic growth, as measured by gross domestic product (GDP). Therefore, more proof is needed before yields may rise on a sustained basis, which would pose a more meaningful threat to bond prices. The 10-year Treasury yield rose to near 1.6% following the July jobs report, a level that brought about buying interest during July and helped support high-quality bonds [Figure 1]. Holding this technical level will help determine whether the current, sub-1.6% yield range holds, or whether the 10-year Treasury yield rises to the 1.7-2.0% yield range that characterized trading from late January to late June of this year. For most investors, such a nuanced yield environment does not materially alter the bigger picture even if further bond price gains have run their course.
The employment report did, however, challenge very benign Federal Reserve (Fed) rate hike expectations. The jobs report helped keep bond investors "honest" and remain respectful of a potential rate hike in either September or, more likely, December 2016. Fed rate hike expectations increased for the week ending August 5, 2016, according to fed fund futures [Figure 2]. The market-implied probability of one 0.25% rate hike by December 2016 increased to 50%.
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Bond investors still expect very little from the Fed over coming years. Figure 2 also illustrates that market-implied Fed rate hike expectations remain very mild with futures showing a long run rate of only 1.5%. The Fed has loosely described "long run" as a period of five years. This indicates that much of the good news for bonds is likely already priced in but shows that investors need more convincing. In short, futures still reflect expectations the Fed will raise interest rates very slowly given the sluggish global economic backdrop, and that more data will be required. ASSESSING THE YIELD CURVE The yield curve steepened modestly in response to the stronger jobs report, a shift that reflects better growth expectations. However, the yield curve remains flat when viewed over a longer-term perspective [Figure 3] and is below the 25-year average of 1.2%. The yield curve slope remains positive and a substantial distance away from turning negative or inverting, but still reflects a slow-growth environment.
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AUCTION ACTION & OVERSEAS INVESTORS In the typical post-employment report lull, economic data are limited over the next two weeks and the bond market may take its cues from auction demand. Foreign demand, in particular, will be scrutinized closely as overseas purchases have played a key role in Treasury strength in 2016. Overseas investors' cost to hedge U.S. dollar currency risk has increased over recent months and may impact demand. The Treasury will sell new 3-, 10-, and 30-year securities over consecutive days starting Tuesday, August 9, 2016, as this publication goes to print. Longer-term 10- and 30-year Treasuries will be a better test of investor demand. CONCLUSION On a longer-term basis, the pace of economic growth and Fed rate hike prospects will hold greater influence over the path of bond yields, but last week's overall mixed message did little to alter the current environment. Economic data have yet to indicate a substantial acceleration that might warrant higher yields. Until then, global central banks remain bond market friendly, as last week's aggressive action by the BOE illustrated. The BOE announced additional stimulus consisting of a rate cut, increased government bond purchases, the start of corporate bond purchases, and a bank lending program. The bold move helped boost long-term bond prices and reinforced the bond-friendly stance of global central banks. We continue to suggest a relatively neutral bond exposure, consisting primarily of high-quality intermediate bonds given the absence of notable value. Still, investors hoping for even better value and higher yields may have to wait longer. IMPORTANT DISCLOSURES The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly. The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values and yields will decline as interest rates rise, and bonds are subject to availability and change in price. Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.
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Your Guide to Life Planning International debt securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical and regulatory risk, and risk associated with varying settlement standards. These risks are often heightened for investments in emerging markets. This research material has been prepared by LPL Financial LLC. To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity. Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by Any Government Agency | Not a Bank/Credit Union Deposit Tracking #1-524219 (Exp. 08/17)
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Weekly Market Commentary | Week of August 8, 2016
KEY TAKEAWAYS We were hoping for more out of corporate America this earnings season. Although the numbers have not been great, there have been some encouraging signs. The tech sector has produced solid results and forward estimates have been resilient.
EARNINGS UPDATE: WE WERE HOPING FOR MORE Second quarter earnings season has been okay, but we were hoping for more. S&P 500 earnings are tracking to a 2.6% year-over-year decline in the second quarter of 2016, which means the earnings recession is poised to continue. The quarterly decline would make four in a row according to Thomson Reuters data (by FactSet's count, the streak is five). Although the numbers for the quarter were not great, there have been some encouraging signs. The technology sector has produced solid results, and forward estimates have been resilient overall. This week we provide an overview of earnings season and discuss prospects for a second half earnings rebound. Later this month we will update our Corporate Beige Book barometer, an analysis of the topics covered in companies' earnings conference calls.
SECOND QUARTER EARNINGS BY THE NUMBERS With 428 S&P 500 constituents having reported second quarter results, S&P 500 earnings are tracking toward a 2.6% year-over-year decline, just 1.2% better than expectations as of quarter end (June 30, 2016). The second quarter of 2016 will also mark the fourth straight quarterly decline in one of the longest earnings recessions outside of an economic recession ever (read more on the earnings recession in this Thought Leadership publication). But among those dreary headlines, there is some good news: The second quarter results help to solidify the first quarter of 2016 as a trough in earnings growth. S&P 500 profit margins are near record highs, excluding energy. The technology sector produced significant upside to prior second quarter forecasts, with positive revisions to third and fourth quarter estimates. S&P 500 revenue came within 0.5% of a year-over-year gain and is up 3% year-over-year, excluding energy. Pre-announcements have been less negative than the historical average. The ratio of negative-to-positive pre-announcements for the third quarter, at 2.4, is better than the long-term historical average (2.7). Forward four quarters earnings estimates have fallen by a below-average 0.8% since earnings season began. At the same time, there have been some disappointments: Backing out headwinds from oil prices and the dollar still get us to only about 2% year-over-year earnings growth, a weak pace for this stage of the business cycle; moreover, the U.S. dollar comparison versus the year ago quarter suggests less currency drag than we have seen. Despite easing drags from oil and the dollar, the S&P 500 may not be able to generate the average earnings upside to prior forecasts of about 3%. The bars for the energy and industrials sectors were not low enough. Energy has missed second quarter
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Your Guide to Life Planning estimates by more than 6%, while the industrials sector has fallen 1.6% short thus far. TECHNOLOGY WAS A STANDOUT PERFORMER The clear highlight of this earnings season has been the technology sector, which has produced the biggest upside surprise in the quarter of any sector, at more than 6% [Figure 1], and a positive revision to estimates for the second half of the year--the only sector besides utilities that can make that claim [Figure 2]. The sector has benefited from powerful shifts toward mobile and cloud computing, as well as the continued strong trends in ecommerce. With each passing day, these growth areas become a bigger share of sector revenue and, with their better profit margins, improve the profitability and growth profile of the technology sector. Technology remains one of our favorite sectors for the second half of the year based on the potential pickup in growth and attractive valuations.
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WHAT BREXIT? In our earnings preview commentary, we wrote that the United Kingdom's (U.K.) decision to leave the European Union (EU) would have a limited impact on S&P 500 earnings and that is indeed what we have seen. Most companies that have cited Brexit as a potential business risk have noted that it is too early for them to predict what the impact might eventually be. For those who have been affected, it has been through the currency (the British pound has fallen 13% versus the U.S. dollar since the late June vote). But just because the impact has been minimal thus far does not mean the topic has not been popular on earnings calls. According to Bespoke, 49% of companies' earnings calls for the one month ending July 28, 2016, included at least one Brexit mention. We will have more on Brexit in our Corporate Beige Book commentary coming up in the next couple of weeks (for reference, you may view the first quarter's Corporate Beige Book here). PROSPECTS FOR SECOND HALF REBOUND We continue to expect earnings to rebound in the second half of the year. The U.S. economy should help. The latest data have gross domestic product (GDP) for the third quarter tracking between 2.5% and 3.5%, and the fourth quarter could reach similar levels as the recent drawdown in inventories reverses. Recent readings on the Institute for Supply Management's (ISM) Manufacturing Index, one of our favorite earnings indicators, have been solidly in expansion territory (five straight months over 50), with particular strength in new orders and production. Other positive factors include: Companies continue to display great cost efficiency, keeping margins near record highs, excluding the energy sector. The U.S. dollar has stabilized in a lower range in recent months, despite the sharp drop in the British pound, and may have little or no impact on earnings over the next six months after being a significant drag over the past year. Estimates for the second half of 2016 and first half of 2017 have only come down 0.8% since earnings season began, better than average and a positive sign. Figure 3 shows forward estimates rising because July 2016 results have rolled off and have been replaced by higher estimates in July 2017. The ratio of negative-to-positive pre-announcements, at 2.4, is slightly better than the long-term average of 2.7, though a bit worse than last quarter's 2.1.
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Your Guide to Life Planning One potential fly in the ointment is oil. After oil prices roughly doubled from the February 2016 lows in the mid-$20s to over $51 in early June, the commodity has since entered a bear market with a 20% decline. After closing below $40 on August 2, oil has moved higher over the past three trading days to close at $41.80 on Friday. Should oil remain at current levels, or fall, energy sector estimates for the next two quarters may be difficult to achieve and the energy-oriented segments of the industrials sector may see some incremental weakness. Brexit also remains a risk and may have more impact on results once the U.K. begins the actual process of exiting the EU. All in all, we see the potential for a rebound to mid-single-digit earnings growth for the S&P 500 by year-end.* *As noted in our Midyear Outlook 2016 publication, we continue to expect mid-single-digit returns for the S&P 500 in 2016, consistent with historical mid-to-late economic cycle performance. We expect those gains to be derived from mid- to high-single-digit earnings growth over the second half of 2016, supported by steady U.S. economic growth and stability in oil prices and the U.S. dollar. A slight increase in price-to-earnings ratios (PE) above 16.6 is possible as market participants gain greater clarity on the U.S. election and the U.K.'s relationship with Europe.
CONCLUSION Second quarter earnings season has been better than some had feared, but we had hoped for more. Still, there have been encouraging signs. The technology sector has produced solid results and forward estimates have been resilient. We continue to expect a second half earnings rebound. Look for more on earnings from us in the weeks ahead with our Corporate Beige Book barometer, an analysis of the topics covered in companies' earnings conference calls. IMPORTANT DISCLOSURES The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for
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Your Guide to Life Planning you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal, and potential liquidity of the investment in a falling market. Because of its narrow focus, specialty sector investing, such as healthcare, financials, or energy, will be subject to greater volatility than investing more broadly across many sectors and companies. The fast price swings in commodities and currencies will result in significant volatility in an investor’s holdings. All investing involves risk including loss of principal. INDEX DESCRIPTIONS The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The U.S. Institute for Supply Management (ISM) Purchasing Managers’ Index (PMI) is an economic indicator derived from monthly surveys of private sector companies, and is intended to show the economic health of the U.S. manufacturing sector. A PMI of more than 50 indicates expansion in the manufacturing sector, a reading below 50 indicates contraction, and a reading of 50 indicates no change. This research material has been prepared by LPL Financial LLC. To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity. Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by Any Government Agency | Not a Bank/Credit Union Deposit8 Tracking #1-523740 (Exp. 08/17)
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Independent Investor | August 2016
Skin in the Game: Getting Kids Involved in College Planning Getting kids involved in college planning may be an excellent way to teach responsibility to young people -- a lesson that could reap benefits well beyond their college years. Children can earn money, learn about sources of financial aid, research potential colleges and take other steps that may relieve their parents of some of the responsibility of college planning.
Starting Early According to the U.S. Department of Education, the best time to introduce children to college planning is when they are in middle school, typically grades six through eight. You may want to initiate discussions about college, explaining the importance of developing good study habits and instilling the idea that your family supports higher education. You may also want to encourage your children to begin thinking about the career they would like to pursue, which is likely to influence their choice of college, as well as to establish a savings account that could be earmarked for education expenses. In addition, you can teach basic lessons about compounding, investing and other money management issues. When students are in the latter part of middle school, they can also start planning to make the most of high school experiences with an eye toward college. Remind your budding scholar that success in high school depends on skills and attitudes that are developed in middle school or earlier. You can help your child plan for college by assisting him or her with developing a realistic budget. The chart below gives a general idea of the average current annual cost of attending a four-year public versus four-year private college. Average Annual Costs 2015-2016 Private 4-Year
Public 4-Year (In-State)
Public 4-Year (Out-of-State)
$32,405
$9,410
$23,893
Room and Board $11,516
$10,138
$10,138
TOTAL
$19,548
$34,031
Tuition and Fees
$43,921
Source: The College Board, Trends in College Pricing 2015, Table 1A.
Match Involvement to Age, Grade Level Young people can assume varying levels of responsibility for college planning depending on their age and interests. Consider the following if you are looking to get a middle or high school student involved.
6th to 8th Grades Continue good study habits Enhance computer and Internet skills Participate in arts activities or sports Start saving money
9th to 10th Grades Enroll in college-preparatory classes Establish high academic standards
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Your Guide to Life Planning Research careers that match personal aptitudes Learn about college costs Identify prospective colleges Research financial aid and scholarships Set aside money from babysitting, yard work, or other odd jobs for college expenses
11th to 12th Grades Get a part-time job and continue saving for college Visit colleges of potential interest Take the Scholastic Aptitude Test and/or the ACT® assessment Enroll in advanced placement classes, if available Apply to colleges and for financial aid #1-521073
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Midyear Outlook 2016 | July 2016 Dear Valued Investor: The recently released LPL Research Midyear Outlook 2016: A Vote of Confidence publication contains the guidance and investment insights to support you throughout the rest of this year. As we embark on the second half of 2016, the headlines and much of our attention will be focused on the 2016 presidential election, which can distract us with the barrage of promises and heightened political drama. Against that backdrop, however, we must strive to remain focused on our long-term investment plans. LPL Research proposes a vote of confidence in the economy, the market, and most importantly, in our ability as investors to remain focused on our long-term goals. This is not always easy; but a vote of confidence means having the belief that someone or something has the ability to succeed. It is more than being positive or negative, a bull or a bear. It is about trusting our assessments of the opportunities--and risks--that may lie ahead, formulating a solid investment plan, and sticking with it through the ups and downs we may face in the coming months and beyond. Our emotions were tested at the start of 2016, and again in late June. The S&P 500 had its worst start to a year ever; then, after coming back to within 3% of a new all-time high, met new opposition from the unlikely candidate of Brexit, as the United Kingdom voted to leave the European Union. Yet, two weeks after the vote on June 23 and the consequent volatility in the markets, the S&P 500 was back in positive territory--up over 4% for the year. This resilience has kept this bull market going, and the S&P 500 is expected to potentially post gains by the end of the year. Looking ahead to the rest of 2016, LPL Research maintains confidence in its existing forecasts, with some minor adjustments. Periods of volatility are also anticipated throughout the rest of this year, but the expectation remains that we will not enter a bear market or economic recession. Here are some of the key influential factors to be watching for: Federal Reserve (Fed) rate hikes. The forecast for Fed rate hikes in 2016 has been reduced from two to one, with additional rate increases next year. International growth uncertainty. We are looking for clarity around future global growth, due to Brexit, the impact of the U.S. dollar, China's debt problem, and earnings growth in Europe and Japan. Corporate America investments. A pickup in economic growth and an energy sector turnaround may boost companies' investments in their future growth, an element that has been lacking recently. Second half turnarounds: oil, dollar, earnings. These three turnaround stories are key for the rest of 2016. Should the drags from oil prices and the U.S. dollar continue to ease, an earnings rebound may occur in the second half of the year. The LPL Research Midyear Outlook 2016 provides the "vote of confidence" that the current economic recovery and bull market may continue through 2016 and beyond, with the investment insights and market guidance for what may lie ahead for the rest of this year. As always, if you have any questions, I encourage you to contact me. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. Indexes are unmanaged and cannot be invested into directly. Economic forecasts set forth may not develop as predicted. Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond and bond mutual fund values and yields will decline as interest rates rise and bonds are subject to availability and change in price. The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. This research material has been prepared by LPL Financial LLC. Securities offered through LPL Financial LLC. Member FINRA/SIPC. Tracking # 1-515364 (Exp. 07/17)
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Mark Dutram, CFP is a Registered Representative with and Securities are offered through LPL Financial, member FINRA/SIPC. Insurance products offered through LPL Financial or its licensed affiliates. First City Bank of Florida is not a registered Broker/Dealer and is not affiliated with LPL Financial Not Bank/Credit Union Guaranteed Not Insured by any Federal Government Agency
Not FDIC/NCUA Insured
May Lose Value Not a Bank Deposit
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In This Issue
Weekly Economic Commentary | Week of August 8, 2016 Monetary policy in Europe has just begun to increase bank lending, which historically has resulted in higher stock prices for banks, though the full impact of negative interest rates is difficult to determine.
Bond Market Perspectives | Week of August 9, 2016 A stronger than expected July jobs report caused Treasury yields to jump higher, but investors looking for the long-awaited rise in yields may have to wait longer. Mark Dutram, CFP First City Bank of Florida Vice President 135 Perry Ave. SE Fort Walton Beach, FL 32548 850-244-5151 ext. 1125 Fax: 850-244-1417 [email protected] www.LPLFCB.com
Weekly Market Commentary | Week of August 8, 2016 This week we provide an overview of earnings season and discuss prospects for a second half earnings rebound.
Independent Investor | August 2016 College planning is a major life event for parents. But what about the kids? Getting them involved in the process can provide lessons that go well beyond the cost of tuition.
Midyear Outlook 2016 | July 2016 The recently released LPL Research Midyear Outlook 2016: A Vote of Confidence publication contains the guidance and investment insights to support you throughout the rest of this year.
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Your Guide to Life Planning
Weekly Economic Commentary | Week of August 8, 2016
Highlights
Banks everywhere are under pressure from the low interest rate environment. Corporate financing in Europe goes through banks, not the capital markets, making banks more important to the system. Monetary policy in Europe has just begun to increase bank lending, which historically has resulted in higher stock prices for banks, though the full impact of negative interest rates is difficult to determine.
European Banks: Neither a Borrower Nor Lender Be European banks are vital to economic recovery in Europe; low and negative interest policies in Europe not only hurt banks, but may be counterproductive to boosting the economy. Banks in Europe are more structurally important to the economy for a number of historical and structural reasons. The European Central Bank's (ECB) expansion of money supply and low to negative interest rate policy were designed to aid the economy. But the negative impact on banks has limited lending, therefore countering this state policy. Banks have belatedly begun to increase lending. Stock prices for European banks tend to rise with increases of lending, though historically it takes some time (approximately a year) for stock prices to begin to follow actual loans.
WHY DO RATES MATTER? We have taken our title from Shakespeare's Hamlet, in which Polonius, a pompous and self-serving advisor to the king, provides a series of life lessons to his son. "Neither a borrower nor lender be" is one of the most famous. Of course, Polonius is informing his son that borrowing and lending put the parties at odds with each other, working against both parties intentions. The ECB appears to have failed to heed this lesson. It has engaged in a number of measures to spur the economy by encouraging borrowing and spending. In particular, interest rates have been reduced to zero, and in an increasing number of cases have been negative. The ECB has also been purchasing bonds from banks at a record rate through its quantitative easing (QE) program. The idea behind these policies is that by reducing interest rates, corporations will increase their borrowing for investment and consumers will use low rates to borrow and spend. However, the low rates have failed to do much to stimulate the economy, and may even be worsening the malaise. One reason may be the negative impact these policies have on banks. Low interest rates dampen bank profits; the bank simply doesn't make much money on the loans. This can result in a tightening of lending standards, as banks do not feel they can be adequately rewarded for taking on additional risk. Low interest rates also may lead savers to not use banks; they may withdraw their principal from the banks, as they don't earn enough on their savings to meet their spending needs. Low rates encourage savers to look elsewhere, maybe even out of the country, seeking higher rates. By depriving banks of this source of funds, the ECB is partially negating its own policy. In today's environment, Polonius's words can be seen as a warning to the financial industry. Go ahead, try to borrow and lend, but you aren't going to make any money at it. But it's also a warning to the ECB: be careful of the unintended consequences of your actions.
WHY DO BANKS MATTER? Banks and bank lending are much more important to the European economy than they are in the U.S. In Europe, approximately 80% of all corporate debt is in the form of a bank loan, with only 20% structured as a bond. In the U.S., those figures are approximately reversed. The differences in the regions are even more striking when looking at sources of credit as a percentage of gross domestic product (GDP) [Figure 1]. The U.S., the Eurozone, and the U.K. all have very similar private sector debt-to-GDP ratios. However, the European nations, including the U.K., which is counted differently as it does not use the euro, are more reliant on banks to fund the economy. This tendency is somewhat surprising for the U.K., which typically follows the more dynamic Anglo-Saxon model of capitalism, relying on the capital markets-the issuance of stocks and bonds, and the trading of loans through the securitization of debt-to finance corporate activity.
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When we look down to the capital structure, to high-yield bond issuance, levered loans, and securitization of debt, the difference between Europe and the U.S. grows even starker. By some estimates, European issuance of high-yield debt is only 35% of that of the U.S. when adjusted for GDP. The securitization market is only 17% of that of the U.S., adjusted the same way. Relative to the U.S., not only do European banks create a disproportionate amount of the credit, they tend to keep the loans on their books. This does not allow banks to diversify these risks. It also may mean that if a bank is overleveraged, or has too much bad debt, it may reduce lending to good creditors, which hinders economic growth. Both the causes and effects of the dominance of traditional banking, rather than use of the capital markets, are impacting the health of European banks. There are many reasons why Europe is so dependent on banks. Among them is the fact that, outside of the largest of banks, transnational banking is itself a relatively new concept, boosted by the EU and its common currency. Even banks based in countries that do not use the euro, such as the U.K. and Switzerland, benefit from the fact that so many other countries are using the euro, as it reduces the number of currencies used. European banking evolved in an era where each country had one or two "national champion" banks and a few smaller banks that typically operated in just one region or province. Further explaining the importance of banks to Europe are the higher savings rates relative to the U.S. [Figure 2]. Different countries have different savings rates, even within Europe. Polonius also warns that "borrowing dulls the edge of husbandry"-the management of resources, primarily land and livestock in Shakespeare's day. Judging from the economic health of many of the highly indebted countries, maybe they should have heeded the warning. Click here for Figure 2, Savings Rates Across the Region
IMPACT OF POLICY People tend to believe that central banks worked in a coordinated way after the financial crisis of 2008 to support global growth. In fact, the ECB was late to the party. Though it kept rates low, European money supply was stagnant in 2010 and rose slowly after that. It has only been since 2014 that the ECB has aggressively expanded the money supply [Figure 3]. Bank lending actually declined in 2009, and after a brief increase, was negative on an annualized basis for almost three years. It has only been recently, since the beginning of this year, that bank lending began to increase. This increase, should it continue, will be evidence that European economic recovery is truly underway. Given the reliance on banks for financing, bank credit is an even more important indicator of the economy.
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Your Guide to Life Planning Click here for Figure 3, ECB Only Started Aggressively Increasing Money Supply in 2014 Bank stocks prices also tend to follow bank lending, though typically with a lag of approximately one year. This has not happened recently; banks stock prices have declined even as lending has started to increase. This is due to both low interest rates and concern about the credit worthiness of some of the major banks. The total amount of bank lending represents the "sales" for banks; interest rates represent the "price" of what they are selling. Total sales are starting to increase. But if rates stay low, or even decrease, it will be hard for European banks, and European stocks as a whole, to earn our vote for inclusion in portfolios.
CONCLUSION In our Midyear Outlook 2016: A Vote of Confidence publication, we expressed a generally cautious view on European equities; we're looking for improved earnings and an appropriate response to Brexit before we could "vote for" increasing our allocation to the asset class. European banks, both as investments themselves and through their importance to the economy, represent an important factor in this decision.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly. The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful. International investing and international debt securities involve special additional risks. These risks include, but are not limited to, currency risk, geopolitical and regulatory risk, and risk associated with varying settlement standards. These risks are often heightened for investments in emerging markets. Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal, and potential liquidity of the investment in a falling market. INDEX DESCRIPTIONS The Euro Stoxx Banks Index is a capitalization-weighted index of companies based in the European Union in the banking sector. There are 30 stocks in the index. RES 5605 0816 | Tracking #1-523843 (Exp. 08/17)
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Bond Market Perspectives | Week of August 9, 2016
KEY TAKEAWAYS A strong July employment report caused Treasury yields to spike higher, but the broader message from the bond market has not changed. Improvement in economic data will need to exhibit greater consistency to exert meaningful upside pressure to bond yields.
HAS ANYTHING CHANGED? A stronger than expected July jobs report caused Treasury yields to jump higher, but investors looking for the long-awaited rise in yields may have to wait longer. The bright spot provided by jobs offset otherwise bond-friendly developments, including a powerful policy move by the Bank of England (BOE) in response to Brexit risks and softer than expected U.S. economic data in the form of a below-expectation Institute for Supply Management (ISM) manufacturing reading and weaker economic growth, as measured by gross domestic product (GDP). Therefore, more proof is needed before yields may rise on a sustained basis, which would pose a more meaningful threat to bond prices. The 10-year Treasury yield rose to near 1.6% following the July jobs report, a level that brought about buying interest during July and helped support high-quality bonds [Figure 1]. Holding this technical level will help determine whether the current, sub-1.6% yield range holds, or whether the 10-year Treasury yield rises to the 1.7-2.0% yield range that characterized trading from late January to late June of this year. For most investors, such a nuanced yield environment does not materially alter the bigger picture even if further bond price gains have run their course.
The employment report did, however, challenge very benign Federal Reserve (Fed) rate hike expectations. The jobs report helped keep bond investors "honest" and remain respectful of a potential rate hike in either September or, more likely, December 2016. Fed rate hike expectations increased for the week ending August 5, 2016, according to fed fund futures [Figure 2]. The market-implied probability of one 0.25% rate hike by December 2016 increased to 50%.
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Bond investors still expect very little from the Fed over coming years. Figure 2 also illustrates that market-implied Fed rate hike expectations remain very mild with futures showing a long run rate of only 1.5%. The Fed has loosely described "long run" as a period of five years. This indicates that much of the good news for bonds is likely already priced in but shows that investors need more convincing. In short, futures still reflect expectations the Fed will raise interest rates very slowly given the sluggish global economic backdrop, and that more data will be required. ASSESSING THE YIELD CURVE The yield curve steepened modestly in response to the stronger jobs report, a shift that reflects better growth expectations. However, the yield curve remains flat when viewed over a longer-term perspective [Figure 3] and is below the 25-year average of 1.2%. The yield curve slope remains positive and a substantial distance away from turning negative or inverting, but still reflects a slow-growth environment.
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AUCTION ACTION & OVERSEAS INVESTORS In the typical post-employment report lull, economic data are limited over the next two weeks and the bond market may take its cues from auction demand. Foreign demand, in particular, will be scrutinized closely as overseas purchases have played a key role in Treasury strength in 2016. Overseas investors' cost to hedge U.S. dollar currency risk has increased over recent months and may impact demand. The Treasury will sell new 3-, 10-, and 30-year securities over consecutive days starting Tuesday, August 9, 2016, as this publication goes to print. Longer-term 10- and 30-year Treasuries will be a better test of investor demand. CONCLUSION On a longer-term basis, the pace of economic growth and Fed rate hike prospects will hold greater influence over the path of bond yields, but last week's overall mixed message did little to alter the current environment. Economic data have yet to indicate a substantial acceleration that might warrant higher yields. Until then, global central banks remain bond market friendly, as last week's aggressive action by the BOE illustrated. The BOE announced additional stimulus consisting of a rate cut, increased government bond purchases, the start of corporate bond purchases, and a bank lending program. The bold move helped boost long-term bond prices and reinforced the bond-friendly stance of global central banks. We continue to suggest a relatively neutral bond exposure, consisting primarily of high-quality intermediate bonds given the absence of notable value. Still, investors hoping for even better value and higher yields may have to wait longer. IMPORTANT DISCLOSURES The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly. The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values and yields will decline as interest rates rise, and bonds are subject to availability and change in price. Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.
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Your Guide to Life Planning International debt securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical and regulatory risk, and risk associated with varying settlement standards. These risks are often heightened for investments in emerging markets. This research material has been prepared by LPL Financial LLC. To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity. Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by Any Government Agency | Not a Bank/Credit Union Deposit Tracking #1-524219 (Exp. 08/17)
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Weekly Market Commentary | Week of August 8, 2016
KEY TAKEAWAYS We were hoping for more out of corporate America this earnings season. Although the numbers have not been great, there have been some encouraging signs. The tech sector has produced solid results and forward estimates have been resilient.
EARNINGS UPDATE: WE WERE HOPING FOR MORE Second quarter earnings season has been okay, but we were hoping for more. S&P 500 earnings are tracking to a 2.6% year-over-year decline in the second quarter of 2016, which means the earnings recession is poised to continue. The quarterly decline would make four in a row according to Thomson Reuters data (by FactSet's count, the streak is five). Although the numbers for the quarter were not great, there have been some encouraging signs. The technology sector has produced solid results, and forward estimates have been resilient overall. This week we provide an overview of earnings season and discuss prospects for a second half earnings rebound. Later this month we will update our Corporate Beige Book barometer, an analysis of the topics covered in companies' earnings conference calls.
SECOND QUARTER EARNINGS BY THE NUMBERS With 428 S&P 500 constituents having reported second quarter results, S&P 500 earnings are tracking toward a 2.6% year-over-year decline, just 1.2% better than expectations as of quarter end (June 30, 2016). The second quarter of 2016 will also mark the fourth straight quarterly decline in one of the longest earnings recessions outside of an economic recession ever (read more on the earnings recession in this Thought Leadership publication). But among those dreary headlines, there is some good news: The second quarter results help to solidify the first quarter of 2016 as a trough in earnings growth. S&P 500 profit margins are near record highs, excluding energy. The technology sector produced significant upside to prior second quarter forecasts, with positive revisions to third and fourth quarter estimates. S&P 500 revenue came within 0.5% of a year-over-year gain and is up 3% year-over-year, excluding energy. Pre-announcements have been less negative than the historical average. The ratio of negative-to-positive pre-announcements for the third quarter, at 2.4, is better than the long-term historical average (2.7). Forward four quarters earnings estimates have fallen by a below-average 0.8% since earnings season began. At the same time, there have been some disappointments: Backing out headwinds from oil prices and the dollar still get us to only about 2% year-over-year earnings growth, a weak pace for this stage of the business cycle; moreover, the U.S. dollar comparison versus the year ago quarter suggests less currency drag than we have seen. Despite easing drags from oil and the dollar, the S&P 500 may not be able to generate the average earnings upside to prior forecasts of about 3%. The bars for the energy and industrials sectors were not low enough. Energy has missed second quarter
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Your Guide to Life Planning estimates by more than 6%, while the industrials sector has fallen 1.6% short thus far. TECHNOLOGY WAS A STANDOUT PERFORMER The clear highlight of this earnings season has been the technology sector, which has produced the biggest upside surprise in the quarter of any sector, at more than 6% [Figure 1], and a positive revision to estimates for the second half of the year--the only sector besides utilities that can make that claim [Figure 2]. The sector has benefited from powerful shifts toward mobile and cloud computing, as well as the continued strong trends in ecommerce. With each passing day, these growth areas become a bigger share of sector revenue and, with their better profit margins, improve the profitability and growth profile of the technology sector. Technology remains one of our favorite sectors for the second half of the year based on the potential pickup in growth and attractive valuations.
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WHAT BREXIT? In our earnings preview commentary, we wrote that the United Kingdom's (U.K.) decision to leave the European Union (EU) would have a limited impact on S&P 500 earnings and that is indeed what we have seen. Most companies that have cited Brexit as a potential business risk have noted that it is too early for them to predict what the impact might eventually be. For those who have been affected, it has been through the currency (the British pound has fallen 13% versus the U.S. dollar since the late June vote). But just because the impact has been minimal thus far does not mean the topic has not been popular on earnings calls. According to Bespoke, 49% of companies' earnings calls for the one month ending July 28, 2016, included at least one Brexit mention. We will have more on Brexit in our Corporate Beige Book commentary coming up in the next couple of weeks (for reference, you may view the first quarter's Corporate Beige Book here). PROSPECTS FOR SECOND HALF REBOUND We continue to expect earnings to rebound in the second half of the year. The U.S. economy should help. The latest data have gross domestic product (GDP) for the third quarter tracking between 2.5% and 3.5%, and the fourth quarter could reach similar levels as the recent drawdown in inventories reverses. Recent readings on the Institute for Supply Management's (ISM) Manufacturing Index, one of our favorite earnings indicators, have been solidly in expansion territory (five straight months over 50), with particular strength in new orders and production. Other positive factors include: Companies continue to display great cost efficiency, keeping margins near record highs, excluding the energy sector. The U.S. dollar has stabilized in a lower range in recent months, despite the sharp drop in the British pound, and may have little or no impact on earnings over the next six months after being a significant drag over the past year. Estimates for the second half of 2016 and first half of 2017 have only come down 0.8% since earnings season began, better than average and a positive sign. Figure 3 shows forward estimates rising because July 2016 results have rolled off and have been replaced by higher estimates in July 2017. The ratio of negative-to-positive pre-announcements, at 2.4, is slightly better than the long-term average of 2.7, though a bit worse than last quarter's 2.1.
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Your Guide to Life Planning One potential fly in the ointment is oil. After oil prices roughly doubled from the February 2016 lows in the mid-$20s to over $51 in early June, the commodity has since entered a bear market with a 20% decline. After closing below $40 on August 2, oil has moved higher over the past three trading days to close at $41.80 on Friday. Should oil remain at current levels, or fall, energy sector estimates for the next two quarters may be difficult to achieve and the energy-oriented segments of the industrials sector may see some incremental weakness. Brexit also remains a risk and may have more impact on results once the U.K. begins the actual process of exiting the EU. All in all, we see the potential for a rebound to mid-single-digit earnings growth for the S&P 500 by year-end.* *As noted in our Midyear Outlook 2016 publication, we continue to expect mid-single-digit returns for the S&P 500 in 2016, consistent with historical mid-to-late economic cycle performance. We expect those gains to be derived from mid- to high-single-digit earnings growth over the second half of 2016, supported by steady U.S. economic growth and stability in oil prices and the U.S. dollar. A slight increase in price-to-earnings ratios (PE) above 16.6 is possible as market participants gain greater clarity on the U.S. election and the U.K.'s relationship with Europe.
CONCLUSION Second quarter earnings season has been better than some had feared, but we had hoped for more. Still, there have been encouraging signs. The technology sector has produced solid results and forward estimates have been resilient. We continue to expect a second half earnings rebound. Look for more on earnings from us in the weeks ahead with our Corporate Beige Book barometer, an analysis of the topics covered in companies' earnings conference calls. IMPORTANT DISCLOSURES The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for
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Your Guide to Life Planning you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal, and potential liquidity of the investment in a falling market. Because of its narrow focus, specialty sector investing, such as healthcare, financials, or energy, will be subject to greater volatility than investing more broadly across many sectors and companies. The fast price swings in commodities and currencies will result in significant volatility in an investor’s holdings. All investing involves risk including loss of principal. INDEX DESCRIPTIONS The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The U.S. Institute for Supply Management (ISM) Purchasing Managers’ Index (PMI) is an economic indicator derived from monthly surveys of private sector companies, and is intended to show the economic health of the U.S. manufacturing sector. A PMI of more than 50 indicates expansion in the manufacturing sector, a reading below 50 indicates contraction, and a reading of 50 indicates no change. This research material has been prepared by LPL Financial LLC. To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity. Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by Any Government Agency | Not a Bank/Credit Union Deposit8 Tracking #1-523740 (Exp. 08/17)
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Independent Investor | August 2016
Skin in the Game: Getting Kids Involved in College Planning Getting kids involved in college planning may be an excellent way to teach responsibility to young people -- a lesson that could reap benefits well beyond their college years. Children can earn money, learn about sources of financial aid, research potential colleges and take other steps that may relieve their parents of some of the responsibility of college planning.
Starting Early According to the U.S. Department of Education, the best time to introduce children to college planning is when they are in middle school, typically grades six through eight. You may want to initiate discussions about college, explaining the importance of developing good study habits and instilling the idea that your family supports higher education. You may also want to encourage your children to begin thinking about the career they would like to pursue, which is likely to influence their choice of college, as well as to establish a savings account that could be earmarked for education expenses. In addition, you can teach basic lessons about compounding, investing and other money management issues. When students are in the latter part of middle school, they can also start planning to make the most of high school experiences with an eye toward college. Remind your budding scholar that success in high school depends on skills and attitudes that are developed in middle school or earlier. You can help your child plan for college by assisting him or her with developing a realistic budget. The chart below gives a general idea of the average current annual cost of attending a four-year public versus four-year private college. Average Annual Costs 2015-2016 Private 4-Year
Public 4-Year (In-State)
Public 4-Year (Out-of-State)
$32,405
$9,410
$23,893
Room and Board $11,516
$10,138
$10,138
TOTAL
$19,548
$34,031
Tuition and Fees
$43,921
Source: The College Board, Trends in College Pricing 2015, Table 1A.
Match Involvement to Age, Grade Level Young people can assume varying levels of responsibility for college planning depending on their age and interests. Consider the following if you are looking to get a middle or high school student involved.
6th to 8th Grades Continue good study habits Enhance computer and Internet skills Participate in arts activities or sports Start saving money
9th to 10th Grades Enroll in college-preparatory classes Establish high academic standards
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Your Guide to Life Planning Research careers that match personal aptitudes Learn about college costs Identify prospective colleges Research financial aid and scholarships Set aside money from babysitting, yard work, or other odd jobs for college expenses
11th to 12th Grades Get a part-time job and continue saving for college Visit colleges of potential interest Take the Scholastic Aptitude Test and/or the ACT® assessment Enroll in advanced placement classes, if available Apply to colleges and for financial aid #1-521073
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Midyear Outlook 2016 | July 2016 Dear Valued Investor: The recently released LPL Research Midyear Outlook 2016: A Vote of Confidence publication contains the guidance and investment insights to support you throughout the rest of this year. As we embark on the second half of 2016, the headlines and much of our attention will be focused on the 2016 presidential election, which can distract us with the barrage of promises and heightened political drama. Against that backdrop, however, we must strive to remain focused on our long-term investment plans. LPL Research proposes a vote of confidence in the economy, the market, and most importantly, in our ability as investors to remain focused on our long-term goals. This is not always easy; but a vote of confidence means having the belief that someone or something has the ability to succeed. It is more than being positive or negative, a bull or a bear. It is about trusting our assessments of the opportunities--and risks--that may lie ahead, formulating a solid investment plan, and sticking with it through the ups and downs we may face in the coming months and beyond. Our emotions were tested at the start of 2016, and again in late June. The S&P 500 had its worst start to a year ever; then, after coming back to within 3% of a new all-time high, met new opposition from the unlikely candidate of Brexit, as the United Kingdom voted to leave the European Union. Yet, two weeks after the vote on June 23 and the consequent volatility in the markets, the S&P 500 was back in positive territory--up over 4% for the year. This resilience has kept this bull market going, and the S&P 500 is expected to potentially post gains by the end of the year. Looking ahead to the rest of 2016, LPL Research maintains confidence in its existing forecasts, with some minor adjustments. Periods of volatility are also anticipated throughout the rest of this year, but the expectation remains that we will not enter a bear market or economic recession. Here are some of the key influential factors to be watching for: Federal Reserve (Fed) rate hikes. The forecast for Fed rate hikes in 2016 has been reduced from two to one, with additional rate increases next year. International growth uncertainty. We are looking for clarity around future global growth, due to Brexit, the impact of the U.S. dollar, China's debt problem, and earnings growth in Europe and Japan. Corporate America investments. A pickup in economic growth and an energy sector turnaround may boost companies' investments in their future growth, an element that has been lacking recently. Second half turnarounds: oil, dollar, earnings. These three turnaround stories are key for the rest of 2016. Should the drags from oil prices and the U.S. dollar continue to ease, an earnings rebound may occur in the second half of the year. The LPL Research Midyear Outlook 2016 provides the "vote of confidence" that the current economic recovery and bull market may continue through 2016 and beyond, with the investment insights and market guidance for what may lie ahead for the rest of this year. As always, if you have any questions, I encourage you to contact me. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. Indexes are unmanaged and cannot be invested into directly. Economic forecasts set forth may not develop as predicted. Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond and bond mutual fund values and yields will decline as interest rates rise and bonds are subject to availability and change in price. The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. This research material has been prepared by LPL Financial LLC. Securities offered through LPL Financial LLC. Member FINRA/SIPC. Tracking # 1-515364 (Exp. 07/17)
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Mark Dutram, CFP is a Registered Representative with and Securities are offered through LPL Financial, member FINRA/SIPC. Insurance products offered through LPL Financial or its licensed affiliates. First City Bank of Florida is not a registered Broker/Dealer and is not affiliated with LPL Financial Not Bank/Credit Union Guaranteed Not Insured by any Federal Government Agency
Not FDIC/NCUA Insured
May Lose Value Not a Bank Deposit
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