your financial future
YOUR FINANCIAL FUTURE Your Guide to Life Planning November 2016
In This Issue
Bond Market Perspectives | Week of November 7, 2016 Municipal performance has been weak in recent months, with rising rates and record supply taking their toll on the sector.
Independent Investor | November 2016
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
A will is a legal document that directs the disposition of your assets upon your death--both tangible assets, such as your home or car, and intangible assets, such as bank accounts and mutual fund shares. Another critical function of a will: to name a legal guardian for minor children.
Weekly Market Commentary | Week of November 7, 2016 This week we share our thoughts on the end of the earnings recession and discuss prospects for earnings acceleration in the coming quarters.
Weekly Economic Commentary | Week of November 7, 2016 The structural and demographic problems that will drive the deficit over the next several decades remain in place.
Hucksters and Hype: Signs of a Stock Scam If an investment opportunity sounds too good to be true, it probably is. Here are a few tips to help you determine if a stock is worth taking a chance on -- or best avoided.
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Your Guide to Life Planning
Bond Market Perspectives | Week of November 7, 2016
Highlights
October was the worst month for municipal bonds since August 2013 as record supply and rising rates took their toll on the sector. Supply hit monthly records in August and September, and an all-time record in October, as municipalities tried to get issues to the market prior to any potential election- or Fed-driven volatility. A combination of slowing supply and improving valuations may point toward a turning point for municipal performance, though rising rates remain a risk to total returns and slowing investor demand remains a question.
Turning Point for Munis? Municipal performance has been weak in recent months, with rising rates and record supply taking their toll on the sector. Monthly returns (as measured by the Barclays Municipal Bond Index) turned negative in September 2016 for the first time since June 2015, and October's loss of 1.05% was the sector's worst monthly performance since August 2013. Rising rates were a major culprit in the recent decline, with the 10-year Treasury yield moving from 1.57% at the beginning of September to 1.82% as of October 31. However, supply has also been a headwind all year, with 2016 poised to eclipse 2010's previous issuance record. Municipal bonds normally outperform Treasuries in rising rate environments, but the addition of elevated supply actually led munis to underperform Treasuries as rates rose, leading to better relative valuations. 10- and 30-year AAA Municipal to Treasury ratios are now at 97% and 100% respectively, toward the cheaper end of their recent range, though just approaching the middle of their 5-year range[Figure 1].
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SUPPLY HEADWIND FADING? Total municipal bond issuance of $392 billion year to date is second only to 2010's record $433 billion, and with two months left it is looking very possible that 2016 could end up being a record year, though this year has seen heavier amounts of refinancing than 2010. Issuance has picked up even more in recent months, with August and September hitting monthly records, while October's $53 billion in issuance ranked as the largest month since recordkeeping began in 1980, as low yields and the spectre of volatility from upcoming events such as the election and a likely Fed rate hike in December have led issuers to push offerings to the market. A few larger issues, including $1-billion-plus offerings from NJ Transportation and Illinois General Obligation (GO) Refunding, have made up a large portion of recent issuance. The drive to get these issues out ahead of any potential election-related volatility has led to less new issuance in the pipeline, as evidenced by a significant drop in The Bond Buyer 30-Day Visible Supply over the past few weeks. Estimated upcoming issuance by this measure hit a 2-year high in October, but has since fallen back below its longer-term average [Figure 2]. Based on this, it appears that a lot of the issuance that may normally take place in November was likely pushed back to October, meaning supply for the rest of the year may be lower and less of a headwind for the municipal market moving forward. Click here Figure 2: Visible Supply for Municipal Bonds Has Fallen Significantly in Recent Weeks
THE QUESTION OF DEMAND Demand has also been elevated this year, and has helped the market weather the headwind of increased supply. The continued reach for yield is helping fuel municipal bond demand from retail investors (including year-to-date inflows of nearly $53 billion into municipal bond mutual funds according to Investment Company Institute [ICI] data), and is even reportedly bringing in demand from foreign buyers, which is relatively uncommon for municipals, given that foreign owners generally don't receive any tax benefit for holding U.S. municipal bonds.
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Your Guide to Life Planning In recent weeks ICI's reported inflows have slowed, and Lipper (another source of fund flows data) has reported two weekly outflows (following a previous streak of uninterrupted weekly inflows that lasted more than a year), showing that demand is likely slowing. The municipal bond market is largely made up of retail investors, meaning demand can fade (or return) quickly, but a continued reach for yield in a low-yield environment, coupled with more attractive valuations versus Treasuries, may continue to benefit demand in the near term. To this point, taxable equivalent yields remain attractive for investors across a range of tax rates [Figure 3].
CONCLUSION A drop in visible supply, improving valuations, and a low yield environment may act as tailwinds for municipal bonds in the near term, potentially helping the sector to turn the corner away from recent weakness. We continue to believe that interest rates will remain rangebound for the remainder of the year, though events such as the election and a potential Fed rate hike in December could add additional volatility. Such volatility may benefit high-quality sectors of the bond market such as municipal bonds, though the potential for rising rates presents a risk, leaving us neutral on the asset class overall.
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 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. 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 Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate, and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features. Municipal bonds are subject to availability, price, and to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise. Interest income may be subject to the alternative minimum tax. Federally tax free but other state and local taxes may apply. Yield spread is the difference between yields on differing debt instruments, calculated by deducting the yield of one instrument from another. The higher the yield spread, the greater the difference between the yields offered by each instrument. The spread can be measured between debt instruments of differing maturities, credit ratings, and risk. General obligation (GO) bonds are municipal bonds backed by the credit and “taxing power” of the issuing jurisdiction rather than the revenue from a given project.
INDEX DESCRIPTIONS The Barclays Municipal Bond Index is a market capitalization-weighted index of investment-grade municipal bonds with maturities of at least one year. It is an unmanaged index and cannot be invested into directly. RES 5681 1116 | Tracking #1-553451 (Exp. 11/17)
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Your Guide to Life Planning
Independent Investor | November 2016
Everything You Need to Know About a Will, but Haven't Thought to Ask Everyone knows the importance of preparing and maintaining a will, yet many people have never written one. To those who haven't, take note: If you die intestate (without a will), the intestacy laws of the state where you reside will determine how your assets will be distributed. And if minor children are involved, a judge may decide with whom they will live. On the other hand, if you take the time to prepare a will, you'll be the one who determines how your property is distributed and who will care for your minor children when you're gone. Simply put, a will is one way that provides peace of mind and the immense satisfaction of knowing that you have taken the necessary steps to pass on the fruits of your life's labor to your loved ones.
What Is a Will? A will is a legal declaration that enables you to direct the disposition of your assets upon your death. You can divide your assets any way you want, as long as guidelines are presented clearly in writing. While wills generally address the bulk of your assets, there are a variety of items that are not covered by the instructions in a will. These items include community property, proceeds from life insurance policy payouts, retirement assets, assets owned as joint tenants with rights of survivorship, and investment accounts that are designated as "transfer on death."1
Types of Wills Following are some of the more common types of wills and their intended uses. A simple will provides for the outright distribution of assets to beneficiaries. This type of will is best for individuals with small, uncomplicated estates. A pour-over will passes assets into an existing trust or trusts. A living will expresses an individual's last wishes regarding whether and how the person wishes his or her life to be sustained under specific circumstances.
Drafting a Will Ideally your will should be drawn up by a lawyer, and you (and your heirs, if possible) should be familiar with its general form and contents. Although it's your legal right to do so, it's usually not a good idea to draft your own will. You may not be aware of the statutory requirements that exist in your particular state for establishing a valid will. State requirements vary and some states may have different standards for witnessing a will, or require specific language that must be included for the will to be considered valid. Having your will at least reviewed by a lawyer can safeguard against potential problems down the road. When meeting with a lawyer to draft your will, bring the proper information. Such a list typically includes proof of your real property, such as your home, along with documentation that shows how much you paid for it. Also bring a list of intangible property such as your bank and investment accounts along with your latest statements for each; a copy of any life insurance policies; and a list of your debts. One item that individuals often overlook when drafting their will is a list of professionals they want contacted, such as a financial advisor, insurance agent, banker, or lawyer. Also bring the names of any executor or guardian named for your children.
Key Decision Points Husbands and wives can write their wills jointly or separately, although most legal professionals recommend the latter. One reason is that joint wills generally bind the surviving spouse to dispose of property per the will's terms despite future changes in circumstances (including tax law changes.) Also, if you have young children, an important provision is the selection of a guardian who would raise your children in the event of your death and the death of your spouse. If you die without a will and have minor children, a judge may appoint a guardian for them, and there is no guarantee that the court's appointment will coincide with your own wishes.
The Post-Will Process Once your will is completed, keep an original copy on hand, although it's perfectly fine to make photocopies for family members and friends. Keep the original in a secure place, such as a home or business fireproof safe. If
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Your Guide to Life Planning that can't be arranged, keep it in your lawyer's office or with the clerk at your local probate court, who will hold it for safekeeping in a sealed envelope. Wherever you decide to keep your will, make sure that its location is known by family members or close friends. It's also a good idea to review your will every five years. Your family circumstances or financial fortunes may change, as may federal and state laws. When things do change, periodically reviewing your will with your lawyer (and revising it if necessary) will help to ensure that its contents conform to current laws and regulations and that it reflects your current status and desires.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. This article was prepared by DST Systems Inc. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. We suggest that you discuss your specific situation with a qualified tax or legal advisor. Please consult me if you have any questions. LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial. Because of the possibility of human or mechanical error by DST Systems Inc. or its sources, neither Wealth Management Systems Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall DST Systems Inc. be liable for any indirect, special or consequential damages in connection with subscribers' or others' use of the content.
#1-549702 (Exp. 11/18)
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Your Guide to Life Planning
Weekly Market Commentary | Week of November 7, 2016
HIGHLIGHTS The earnings recession was not quite as long as the Cubs' World Series drought, but we--like Cubs fans--are glad the drought is over. Corporate America ended its earnings drought in style, with S&P 500 earnings tracking to a 4% year-over-year increase for Q3 2016, well above prior estimates. Perhaps even more important than the solid results relative to expectations in Q3 is that the prospects for a continued rebound in the fourth quarter and into 2017 remain intact.
EARNINGS UPDATE: END OF A LONG DROUGHT Third quarter earnings results mark the end of a long earnings drought. It was not quite as long as the Cubs' World Series drought (107 years), but we--like Cubs fans--are glad it's over. Like the Cubs, corporate America has ended its drought in style. In the third quarter of 2016, S&P 500 earnings are tracking to a 4% year-over-year increase, well above prior estimates and marking the end of the year-long earnings recession. This week we share our thoughts on the end of the earnings recession and discuss prospects for earnings acceleration in the coming quarters. For those of you looking for election-related content, we would refer you to our October 24, 2016 Weekly Market Commentary, "Election Playbook." Also, look for an election recap from us here next week when, hopefully, we will know all of the results.
THE WAIT IS OVER After four quarters of year-over-year earnings declines (or five, depending on the data source) from early-to-mid 2015 through mid 2016, the wait for earnings growth is over [Figure 1]. The third quarter also marked the return of revenue growth, which had been absent since the fourth quarter of 2014. There has been a lot to like in the results, in addition to the return of earnings gains: Trough is in. The results further confirm that Q1 2016 represented a trough in earnings, and the Q4 2015 was the trough for revenue. Strong upside. The S&P 500, with roughly 5% upside, is on track to potentially produce the biggest upside surprise in any quarter in more than five years (Q1 2011). Robust profit margins. S&P 500 profit margins are near record highs, and would eclipse record high levels if the energy sector is excluded. Stable pre-announcements. Pre-announcements have been less negative than the historical average. The ratio of negative-to-positive pre-announcements for Q4 2016, at 2.1, is better than the long-term average (2.7), Q3 2016 (2.3), and the year-ago quarter (2.5). Resilient earnings estimates. Revisions to earnings estimates for Q4 2016 are down by the smallest margin (1.2%) during any earnings season since Q2 2014. Strong results for financials. The financial sector produced a stellar 6.9% upside surprise, while estimates for Q4 2016 have increased by 1.7% since earnings season began [Figures 2, 3]. Higher interest rates and healthy capital markets activity have been supportive. Strong results for technology. The technology sector produced a solid 6% upside surprise, and estimates for Q4 2016 have increased by 0.9% since earnings season began [Figures 2, 3]. The sector benefited from strength in internet advertising, cloud computing, and semiconductors. At the same time, there have also been some disappointments: Industrials estimate reductions. Since earnings season began, the industrials sector has seen a nearly 5% reduction in Q4 2016 estimates [Figure 3] as oil sensitivity and still lackluster global growth remain headwinds. Commodity headwinds still weighing on materials. Ongoing challenges in the commodity markets are evident in the 14% reduction in earnings estimates for the materials sector (again since the start of the Q3 2016 earnings season, Figure 3). Drug pricing controversy hurts healthcare. Healthcare, embroiled in the drug pricing controversy, has
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Your Guide to Life Planning seen far less upside than in prior quarters. The sector has uncharacteristically seen its Q4 2016 estimates reduced by more than the S&P 500 (-1.9% vs. -1.7%) as the pricing environment has tightened. Slowdown in consumer discretionary earnings. Consumer discretionary earnings growth has slowed significantly over the past several quarters, while the sector has produced less upside than the S&P 500 [Figure 2] with a bigger-than-average downward revision to Q4 2016 estimates since earnings season began [Figure 3]. We see more positives than negatives and characterize this earnings season as a success overall.
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EARNINGS REBOUND INTACT Perhaps even more important than the solid results relative to expectations in the third quarter of 2016 is that the prospects for a continued rebound in the fourth quarter and into 2017 remain intact. The resilience of forward estimates--the next three quarters have fallen by a relatively modest 1.7%, 1.2%, and 1.1%, respectively during earnings season--is one indication that earnings are poised to ramp up, although most analysts and strategists, ourselves included, think that consensus estimates calling for double-digit earnings increases in the first half of 2017 are still too high. A stable and better-than-average series of pre-announcements is also positive. Some other encouraging signs: Better U.S. economic growth. In the third quarter of 2016 the economy experienced a pickup in gross domestic product (GDP), the best quarterly growth in two years, an improvement in the Institute for Supply Management's (ISM) manufacturing survey, and accelerating industrial production. We believe these data points indicate economic momentum is starting to pick up and bode well for earnings prospects over the next several quarters. Oil has stabilized. Despite oil's recent return to the mid-40s on skepticism surrounding OPEC's ability to agree to production quotas, the market has continued to progress toward balancing supply and demand. Given that energy continues to drag on earnings, continued improvement in the sector will be a key component of a sustained earnings rebound. Cost efficiency. Companies continue to do an excellent job controlling costs, which played a key role in driving earnings growth ahead of revenue growth during the third quarter. Earnings growth in the quarter could end up outpacing revenue growth by close to 2% after all results are in, a reversal of expectations when earnings season began. Looking ahead, there are several risks to earnings, including, first and foremost, the election. The uncertainty has already started to impact confidence and spending among consumers and businesses. Potentially more protectionist trade policy could impair overseas earnings. High drug prices are a target for both candidates. But as we wrote in our "Election Playbook," corporate America has operated under many different political regimes and business cycles over many decades, and through it all, S&P 500 companies have grown profits by an average of 8% annually. Other risks to earnings include Brexit (the U.K. is positioned to begin the process of exiting the European Union this spring), a potential negative surprise out of China, and, although not our expectation, a surge in the U.S. dollar. CONCLUSION A long earnings growth drought appears to be coming to an end. Though well short of the Cubs 107-year championship drought, and perhaps lacking the excitement of a deciding seventh game in extra innings, the earnings recession ended in style--with a strong earnings surprise and generally positive outlooks from company managements. Softness in some key sectors bears watching, and the election certainly has the potential to throw a wrench into things, but we'll put the third quarter in the win column. For those who are wondering which sports franchise now has the longest championship drought, you just saw them play the Cubs. It's the now 68-year championship drought for the Cleveland Indians (the Detroit Lions are next at 58 years). So for those long-suffering fans, go get 'em next year!
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 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,
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Your Guide to Life Planning 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 USD Index measures the performance of the U.S. dollar against a basket of foreign currencies: EUR, JPY, GBP, CAD, CHF and SEK. The U.S. Dollar Index goes up when the dollar gains “strength” compared to other currencies. 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 #1-552937 (Exp. 11/17)
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Your Guide to Life Planning
Weekly Economic Commentary | Week of November 7, 2016
READY FOR THEIR CLOSE-UP? DEFICIT & DEBT KEY TAKEAWAYS The good news is that the deficit, debt, and pace of federal spending are not on the market's radar screen at this time. Currently, the only way to change the course of the deficit and debt over the medium and long term is to cut spending or raise taxes (or both) via meaningful programs, and in Washington today, neither seems very likely. The federal deficit and debt have not received much attention on the campaign trail this election cycle. Our August 22, 2016 Weekly Economic Commentary, "Fiscal Policy -- String Theory," provides some insight into the plans floated by both Hillary Clinton and Donald Trump to cut and/or reform taxes and make significant investments in the nation's infrastructure. The deficit and the debt did get a brief moment in the spotlight during the presidential debate season in September and October 2016, but have since faded into the background amid the general rancor of this year's campaign. Regardless of who wins the election this week, the new president and new Congress will face a rising deficit and many unanswered questions on the direction of the deficit and debt in the coming years and decades. In this week's commentary, we will answer several of the most frequently asked questions that come into the LPL Research Department on the deficit and debt. WHAT'S THE LATEST ON THE BUDGET DEFICIT? Later this week, on Thursday, November 10, 2016, the U.S. Treasury Department will release the budget data for the first month of Fiscal Year (FY) 2017, which began on October 1, 2016, and will end on September 30, 2017. As a reminder, the federal budget deficit in FY 2016, which ended on September 30, 2016, was $587 billion -- $148 billion higher than in FY 2015. Federal government receipts fell 2% to $3.3 trillion in FY 2016 while federal outlays, including interest on the public debt, rose 18% to $3.8 trillion. The $587 billion deficit in FY 2016 was equal to 3.2% of GDP, up from 2.5% of GDP in FY 2015. FY 2016 marked the first time since FY 2009 that the deficit increased from one year to the next. Looking ahead, the non-partisan Congressional Budget Office (CBO) expects the deficit in FY 2017 to widen out to $594 billion, but shrink as a share of gross domestic product (GDP) from the 3.2% reading in FY 2016 to 3.1% in FY 2017. Over the next 10 years, the CBO projects the deficit will hit $1.2 trillion or 4.6% of GDP. More disturbingly, under current law (absent any changes to laws governing taxes or spending) the CBO projects the deficit will hit 8.8% of GDP by mid-century. HOW ABOUT THE DEBT? As it stands today, financial markets are not overly concerned with budget deficits or the public debt (the total of the deficits and rare surpluses that have accumulated over the years). Financial market participants focus on the public debt-to-GDP figure, which stood at $14.2 trillion (or 77% of GDP) at the end of FY 2016, up from $13.1 trillion (74% of GDP) at the end of FY 2015. The CBO projects that over the next 10 years (absent any changes in the laws governing federal taxation or federal spending and assuming no recession in the United States), the debt-to-GDP ratio will move to 86% of GDP, an 80-year high. By 2046, again assuming no changes to current law, the CBO projects the debt-to-GDP ratio will rise to 141% of GDP. The main driver of the higher debt-to-GDP ratio in the next 10 years, and indeed over the next several decades, is spending on Social Security, Medicare, and Medicaid, which is in turn largely driven by demographics. Spending cuts and tax increases related to these programs are the only way to arrest rising debt levels in the next 10 years and beyond. WHAT ABOUT INTEREST ON THE DEBT? In FY 2016, the federal government paid net interest of $240 billion on the federal debt, up from $223 billion paid in FY 2015. While the dollar amount of interest paid in FY 2016 ($240 billion) was near the all-time high of $252 billion back in 2008, it represents just 1.3% of GDP. At 1.3% of GDP, the federal government's net interest payments on the debt are the lowest in 40 years, and well below the recent peak of 3.2% of GDP hit in the mid-1980s through the mid-1990s. Looking ahead, the CBO projects that net interest payments will rise to $712 billion by the end of FY 2026, doubling its size relative to GDP from 1.3% today to 2.6% by FY 2026. This projection assumes that the average interest rate paid on the federal debt moves from 2.0% today to 3.3% by 2026, as the yield on the 10-year Treasury note moves from 1.8% today to 3.6% by 2026, and the yield on the 3-month Treasury bill moves from around 0.35% today to 2.8% by 2026 [Figure 1]. As noted above, if the CBO's projections are correct, at 2.6%, the interest paid on the national debt in 2026 would still be below the recent peak of 3.2% of GDP hit in the mid-1980s through the mid-1990s under presidents Ronald Reagan and George H.W. Bush. By 2046, the CBO projects that the interest on the debt would rise to 5.8% of GDP.
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Your Guide to Life Planning WHAT ABOUT WASTE, FRAUD, AND ABUSE? The libertarian Cato Institute, a Washington, D.C.-based think tank, estimates waste, fraud, and abuse in the federal budget at between $100 billion and $125 billion per year. The Government Accountability Office (GAO) estimated that waste, fraud, and abuse in the federal budget in 2014 was $125 billion. On an absolute basis, this is an enormous amount of money, and taxpayers and the financial markets would welcome any and all steps to eliminate this from the budget. However, the annual outlays of the U.S. federal government in FY 2016 were $3.8 trillion. So even if the federal government were able to eliminate every dollar of waste, fraud, and abuse in the budget, federal outlays in FY 2016 would still have been well over $3.6 trillion, and the federal deficit in FY 2016 would have been $462 billion instead of $587 billion [Figure 2].
HOW ABOUT FOREIGN AID? Although not a single line item in the budget, foreign aid receives a great deal of attention in the media. A 2014 poll conducted by the Kaiser Family Foundation found that Americans thought that the United States spends 26% of its budget on foreign aid. At around $40-50 billion per year, foreign aid accounts for only about 1% of federal budget outlays, far less than the 26% public estimate. These outlays are found in the budgets of the U.S. Treasury, the Department of Agriculture, the State Department, and even the Department of Defense for items such as: • Embassy security • The Peace Corps • Disaster assistance • Peacekeeping • Direct economic support to foreign nations • The World Bank, IMF, and the United Nations • Global health initiatives SHORT-TERM GAIN, LONG-TERM PAIN
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Your Guide to Life Planning In the aftermath of this week's presidential election, many market participants will be looking for the new Congress and the new president to work together to pass a fiscal stimulus package in an effort to reinvigorate economic growth. Such a package may include repatriation of overseas profits, broad-based corporate tax reform, and spending on the nation's rapidly aging infrastructure. While we (and markets) would welcome these steps, in the longer run, the U.S. federal budget outlook remains relatively bleak, largely driven by demographics. As we wrote in our September 28, 2015 Weekly Economic Commentary, "Short-Term Gain, Long-Term Pain," the good news is that the deficit, debt, and pace of federal spending are not on the market's radar screen currently. The stable debt-to-GDP ratio over the remainder of the decade (as forecast by the CBO) also provides a window for Congress to address the underlying structural problems in the budget, which have been masked--and indeed overwhelmed--by the improving economy and the near-term spending constraints imposed by Congress on non-defense discretionary spending. Any action to address the underlying structural issues in the budget are unlikely until after the 2016 presidential and congressional elections, but recent history suggests that Congress may not act until a crisis is already underway. The biggest risk is that the recent improvement in the deficit (and relative stability in the debt-to-GDP ratio) allows complacency to set in among policymakers in Washington. CONCLUSION The structural and demographic problems that will drive the deficit over the next several decades remain in place, and the longer policymakers wait to address them, the more difficult they become-and the more painful the solution. As it stands today, the only way to change the course of the deficit and debt over the medium and long term is to cut spending or raise taxes (or both) on sizable portions of the budget such as Social Security, Medicare, and Medicaid; and in Washington today, neither seems very likely.
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 your clients. All performance referenced is historical and is no guarantee of future results. Any economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Gross domestic product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments, and exports less imports that occur within a defined territory.
This research material has been prepared by LPL Financial. 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- 553045 (Exp. 11/17)
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Your Guide to Life Planning
Hucksters and Hype: Signs of a Stock Scam You've probably received them -- e-mail or text messages touting a "hot" stock and directing you to a website for more information.1 Be cautious. You might be the target of a con in a "pump and dump" scheme. By creating demand for the stock of a small, thinly traded company, hucksters pump up the price, sell their shares, and leave investors holding worthless stock. Consider the "why." Why would a complete stranger give you a tip about a lucrative investment opportunity? The answer: The opportunity probably doesn't exist.
How can you avoid being taken in by investment scams? These tips can help. Consider the "why." Why would a complete stranger give you a tip about a lucrative investment opportunity? The answer: The opportunity probably doesn't exist. Consider the "who." Be skeptical when a flurry of promotions and press releases make exaggerated claims about a company's revenue, profits, and future stock prices, particularly if there's no mention of the investment's risk. Research the company. Search the Internet for information on the company, its corporate officials, and major stakeholders. Changes to the company's name or business focus, indictments or convictions of officers, or investigative articles should make you wary. Read the SEC filing. The SEC's EDGAR database may have helpful information about the company. Keep in mind, though, that filing with the SEC doesn't make the company a good investment or ensure that financial information has been independently reviewed. Find out where it trades. Stocks quoted in the over-the-counter (OTC) market instead of on a major exchange may trade infrequently and be extremely volatile. And companies typically don't have to meet any minimum standards for their securities to be quoted in the OTC market. Talk to your financial professional. Your advisor can help you determine if the investment represents a legitimate opportunity.
1Investing in stocks involves risks, including loss of principal.
© 2016 Wealth Management Systems Inc. All rights reserved. 1-486471
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
Bond Market Perspectives | Week of November 7, 2016 Municipal performance has been weak in recent months, with rising rates and record supply taking their toll on the sector.
Independent Investor | November 2016
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
A will is a legal document that directs the disposition of your assets upon your death--both tangible assets, such as your home or car, and intangible assets, such as bank accounts and mutual fund shares. Another critical function of a will: to name a legal guardian for minor children.
Weekly Market Commentary | Week of November 7, 2016 This week we share our thoughts on the end of the earnings recession and discuss prospects for earnings acceleration in the coming quarters.
Weekly Economic Commentary | Week of November 7, 2016 The structural and demographic problems that will drive the deficit over the next several decades remain in place.
Hucksters and Hype: Signs of a Stock Scam If an investment opportunity sounds too good to be true, it probably is. Here are a few tips to help you determine if a stock is worth taking a chance on -- or best avoided.
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Your Guide to Life Planning
Bond Market Perspectives | Week of November 7, 2016
Highlights
October was the worst month for municipal bonds since August 2013 as record supply and rising rates took their toll on the sector. Supply hit monthly records in August and September, and an all-time record in October, as municipalities tried to get issues to the market prior to any potential election- or Fed-driven volatility. A combination of slowing supply and improving valuations may point toward a turning point for municipal performance, though rising rates remain a risk to total returns and slowing investor demand remains a question.
Turning Point for Munis? Municipal performance has been weak in recent months, with rising rates and record supply taking their toll on the sector. Monthly returns (as measured by the Barclays Municipal Bond Index) turned negative in September 2016 for the first time since June 2015, and October's loss of 1.05% was the sector's worst monthly performance since August 2013. Rising rates were a major culprit in the recent decline, with the 10-year Treasury yield moving from 1.57% at the beginning of September to 1.82% as of October 31. However, supply has also been a headwind all year, with 2016 poised to eclipse 2010's previous issuance record. Municipal bonds normally outperform Treasuries in rising rate environments, but the addition of elevated supply actually led munis to underperform Treasuries as rates rose, leading to better relative valuations. 10- and 30-year AAA Municipal to Treasury ratios are now at 97% and 100% respectively, toward the cheaper end of their recent range, though just approaching the middle of their 5-year range[Figure 1].
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SUPPLY HEADWIND FADING? Total municipal bond issuance of $392 billion year to date is second only to 2010's record $433 billion, and with two months left it is looking very possible that 2016 could end up being a record year, though this year has seen heavier amounts of refinancing than 2010. Issuance has picked up even more in recent months, with August and September hitting monthly records, while October's $53 billion in issuance ranked as the largest month since recordkeeping began in 1980, as low yields and the spectre of volatility from upcoming events such as the election and a likely Fed rate hike in December have led issuers to push offerings to the market. A few larger issues, including $1-billion-plus offerings from NJ Transportation and Illinois General Obligation (GO) Refunding, have made up a large portion of recent issuance. The drive to get these issues out ahead of any potential election-related volatility has led to less new issuance in the pipeline, as evidenced by a significant drop in The Bond Buyer 30-Day Visible Supply over the past few weeks. Estimated upcoming issuance by this measure hit a 2-year high in October, but has since fallen back below its longer-term average [Figure 2]. Based on this, it appears that a lot of the issuance that may normally take place in November was likely pushed back to October, meaning supply for the rest of the year may be lower and less of a headwind for the municipal market moving forward. Click here Figure 2: Visible Supply for Municipal Bonds Has Fallen Significantly in Recent Weeks
THE QUESTION OF DEMAND Demand has also been elevated this year, and has helped the market weather the headwind of increased supply. The continued reach for yield is helping fuel municipal bond demand from retail investors (including year-to-date inflows of nearly $53 billion into municipal bond mutual funds according to Investment Company Institute [ICI] data), and is even reportedly bringing in demand from foreign buyers, which is relatively uncommon for municipals, given that foreign owners generally don't receive any tax benefit for holding U.S. municipal bonds.
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Your Guide to Life Planning In recent weeks ICI's reported inflows have slowed, and Lipper (another source of fund flows data) has reported two weekly outflows (following a previous streak of uninterrupted weekly inflows that lasted more than a year), showing that demand is likely slowing. The municipal bond market is largely made up of retail investors, meaning demand can fade (or return) quickly, but a continued reach for yield in a low-yield environment, coupled with more attractive valuations versus Treasuries, may continue to benefit demand in the near term. To this point, taxable equivalent yields remain attractive for investors across a range of tax rates [Figure 3].
CONCLUSION A drop in visible supply, improving valuations, and a low yield environment may act as tailwinds for municipal bonds in the near term, potentially helping the sector to turn the corner away from recent weakness. We continue to believe that interest rates will remain rangebound for the remainder of the year, though events such as the election and a potential Fed rate hike in December could add additional volatility. Such volatility may benefit high-quality sectors of the bond market such as municipal bonds, though the potential for rising rates presents a risk, leaving us neutral on the asset class overall.
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 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. 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 Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate, and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features. Municipal bonds are subject to availability, price, and to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise. Interest income may be subject to the alternative minimum tax. Federally tax free but other state and local taxes may apply. Yield spread is the difference between yields on differing debt instruments, calculated by deducting the yield of one instrument from another. The higher the yield spread, the greater the difference between the yields offered by each instrument. The spread can be measured between debt instruments of differing maturities, credit ratings, and risk. General obligation (GO) bonds are municipal bonds backed by the credit and “taxing power” of the issuing jurisdiction rather than the revenue from a given project.
INDEX DESCRIPTIONS The Barclays Municipal Bond Index is a market capitalization-weighted index of investment-grade municipal bonds with maturities of at least one year. It is an unmanaged index and cannot be invested into directly. RES 5681 1116 | Tracking #1-553451 (Exp. 11/17)
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Independent Investor | November 2016
Everything You Need to Know About a Will, but Haven't Thought to Ask Everyone knows the importance of preparing and maintaining a will, yet many people have never written one. To those who haven't, take note: If you die intestate (without a will), the intestacy laws of the state where you reside will determine how your assets will be distributed. And if minor children are involved, a judge may decide with whom they will live. On the other hand, if you take the time to prepare a will, you'll be the one who determines how your property is distributed and who will care for your minor children when you're gone. Simply put, a will is one way that provides peace of mind and the immense satisfaction of knowing that you have taken the necessary steps to pass on the fruits of your life's labor to your loved ones.
What Is a Will? A will is a legal declaration that enables you to direct the disposition of your assets upon your death. You can divide your assets any way you want, as long as guidelines are presented clearly in writing. While wills generally address the bulk of your assets, there are a variety of items that are not covered by the instructions in a will. These items include community property, proceeds from life insurance policy payouts, retirement assets, assets owned as joint tenants with rights of survivorship, and investment accounts that are designated as "transfer on death."1
Types of Wills Following are some of the more common types of wills and their intended uses. A simple will provides for the outright distribution of assets to beneficiaries. This type of will is best for individuals with small, uncomplicated estates. A pour-over will passes assets into an existing trust or trusts. A living will expresses an individual's last wishes regarding whether and how the person wishes his or her life to be sustained under specific circumstances.
Drafting a Will Ideally your will should be drawn up by a lawyer, and you (and your heirs, if possible) should be familiar with its general form and contents. Although it's your legal right to do so, it's usually not a good idea to draft your own will. You may not be aware of the statutory requirements that exist in your particular state for establishing a valid will. State requirements vary and some states may have different standards for witnessing a will, or require specific language that must be included for the will to be considered valid. Having your will at least reviewed by a lawyer can safeguard against potential problems down the road. When meeting with a lawyer to draft your will, bring the proper information. Such a list typically includes proof of your real property, such as your home, along with documentation that shows how much you paid for it. Also bring a list of intangible property such as your bank and investment accounts along with your latest statements for each; a copy of any life insurance policies; and a list of your debts. One item that individuals often overlook when drafting their will is a list of professionals they want contacted, such as a financial advisor, insurance agent, banker, or lawyer. Also bring the names of any executor or guardian named for your children.
Key Decision Points Husbands and wives can write their wills jointly or separately, although most legal professionals recommend the latter. One reason is that joint wills generally bind the surviving spouse to dispose of property per the will's terms despite future changes in circumstances (including tax law changes.) Also, if you have young children, an important provision is the selection of a guardian who would raise your children in the event of your death and the death of your spouse. If you die without a will and have minor children, a judge may appoint a guardian for them, and there is no guarantee that the court's appointment will coincide with your own wishes.
The Post-Will Process Once your will is completed, keep an original copy on hand, although it's perfectly fine to make photocopies for family members and friends. Keep the original in a secure place, such as a home or business fireproof safe. If
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Your Guide to Life Planning that can't be arranged, keep it in your lawyer's office or with the clerk at your local probate court, who will hold it for safekeeping in a sealed envelope. Wherever you decide to keep your will, make sure that its location is known by family members or close friends. It's also a good idea to review your will every five years. Your family circumstances or financial fortunes may change, as may federal and state laws. When things do change, periodically reviewing your will with your lawyer (and revising it if necessary) will help to ensure that its contents conform to current laws and regulations and that it reflects your current status and desires.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. This article was prepared by DST Systems Inc. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. We suggest that you discuss your specific situation with a qualified tax or legal advisor. Please consult me if you have any questions. LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial. Because of the possibility of human or mechanical error by DST Systems Inc. or its sources, neither Wealth Management Systems Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall DST Systems Inc. be liable for any indirect, special or consequential damages in connection with subscribers' or others' use of the content.
#1-549702 (Exp. 11/18)
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Your Guide to Life Planning
Weekly Market Commentary | Week of November 7, 2016
HIGHLIGHTS The earnings recession was not quite as long as the Cubs' World Series drought, but we--like Cubs fans--are glad the drought is over. Corporate America ended its earnings drought in style, with S&P 500 earnings tracking to a 4% year-over-year increase for Q3 2016, well above prior estimates. Perhaps even more important than the solid results relative to expectations in Q3 is that the prospects for a continued rebound in the fourth quarter and into 2017 remain intact.
EARNINGS UPDATE: END OF A LONG DROUGHT Third quarter earnings results mark the end of a long earnings drought. It was not quite as long as the Cubs' World Series drought (107 years), but we--like Cubs fans--are glad it's over. Like the Cubs, corporate America has ended its drought in style. In the third quarter of 2016, S&P 500 earnings are tracking to a 4% year-over-year increase, well above prior estimates and marking the end of the year-long earnings recession. This week we share our thoughts on the end of the earnings recession and discuss prospects for earnings acceleration in the coming quarters. For those of you looking for election-related content, we would refer you to our October 24, 2016 Weekly Market Commentary, "Election Playbook." Also, look for an election recap from us here next week when, hopefully, we will know all of the results.
THE WAIT IS OVER After four quarters of year-over-year earnings declines (or five, depending on the data source) from early-to-mid 2015 through mid 2016, the wait for earnings growth is over [Figure 1]. The third quarter also marked the return of revenue growth, which had been absent since the fourth quarter of 2014. There has been a lot to like in the results, in addition to the return of earnings gains: Trough is in. The results further confirm that Q1 2016 represented a trough in earnings, and the Q4 2015 was the trough for revenue. Strong upside. The S&P 500, with roughly 5% upside, is on track to potentially produce the biggest upside surprise in any quarter in more than five years (Q1 2011). Robust profit margins. S&P 500 profit margins are near record highs, and would eclipse record high levels if the energy sector is excluded. Stable pre-announcements. Pre-announcements have been less negative than the historical average. The ratio of negative-to-positive pre-announcements for Q4 2016, at 2.1, is better than the long-term average (2.7), Q3 2016 (2.3), and the year-ago quarter (2.5). Resilient earnings estimates. Revisions to earnings estimates for Q4 2016 are down by the smallest margin (1.2%) during any earnings season since Q2 2014. Strong results for financials. The financial sector produced a stellar 6.9% upside surprise, while estimates for Q4 2016 have increased by 1.7% since earnings season began [Figures 2, 3]. Higher interest rates and healthy capital markets activity have been supportive. Strong results for technology. The technology sector produced a solid 6% upside surprise, and estimates for Q4 2016 have increased by 0.9% since earnings season began [Figures 2, 3]. The sector benefited from strength in internet advertising, cloud computing, and semiconductors. At the same time, there have also been some disappointments: Industrials estimate reductions. Since earnings season began, the industrials sector has seen a nearly 5% reduction in Q4 2016 estimates [Figure 3] as oil sensitivity and still lackluster global growth remain headwinds. Commodity headwinds still weighing on materials. Ongoing challenges in the commodity markets are evident in the 14% reduction in earnings estimates for the materials sector (again since the start of the Q3 2016 earnings season, Figure 3). Drug pricing controversy hurts healthcare. Healthcare, embroiled in the drug pricing controversy, has
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Your Guide to Life Planning seen far less upside than in prior quarters. The sector has uncharacteristically seen its Q4 2016 estimates reduced by more than the S&P 500 (-1.9% vs. -1.7%) as the pricing environment has tightened. Slowdown in consumer discretionary earnings. Consumer discretionary earnings growth has slowed significantly over the past several quarters, while the sector has produced less upside than the S&P 500 [Figure 2] with a bigger-than-average downward revision to Q4 2016 estimates since earnings season began [Figure 3]. We see more positives than negatives and characterize this earnings season as a success overall.
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EARNINGS REBOUND INTACT Perhaps even more important than the solid results relative to expectations in the third quarter of 2016 is that the prospects for a continued rebound in the fourth quarter and into 2017 remain intact. The resilience of forward estimates--the next three quarters have fallen by a relatively modest 1.7%, 1.2%, and 1.1%, respectively during earnings season--is one indication that earnings are poised to ramp up, although most analysts and strategists, ourselves included, think that consensus estimates calling for double-digit earnings increases in the first half of 2017 are still too high. A stable and better-than-average series of pre-announcements is also positive. Some other encouraging signs: Better U.S. economic growth. In the third quarter of 2016 the economy experienced a pickup in gross domestic product (GDP), the best quarterly growth in two years, an improvement in the Institute for Supply Management's (ISM) manufacturing survey, and accelerating industrial production. We believe these data points indicate economic momentum is starting to pick up and bode well for earnings prospects over the next several quarters. Oil has stabilized. Despite oil's recent return to the mid-40s on skepticism surrounding OPEC's ability to agree to production quotas, the market has continued to progress toward balancing supply and demand. Given that energy continues to drag on earnings, continued improvement in the sector will be a key component of a sustained earnings rebound. Cost efficiency. Companies continue to do an excellent job controlling costs, which played a key role in driving earnings growth ahead of revenue growth during the third quarter. Earnings growth in the quarter could end up outpacing revenue growth by close to 2% after all results are in, a reversal of expectations when earnings season began. Looking ahead, there are several risks to earnings, including, first and foremost, the election. The uncertainty has already started to impact confidence and spending among consumers and businesses. Potentially more protectionist trade policy could impair overseas earnings. High drug prices are a target for both candidates. But as we wrote in our "Election Playbook," corporate America has operated under many different political regimes and business cycles over many decades, and through it all, S&P 500 companies have grown profits by an average of 8% annually. Other risks to earnings include Brexit (the U.K. is positioned to begin the process of exiting the European Union this spring), a potential negative surprise out of China, and, although not our expectation, a surge in the U.S. dollar. CONCLUSION A long earnings growth drought appears to be coming to an end. Though well short of the Cubs 107-year championship drought, and perhaps lacking the excitement of a deciding seventh game in extra innings, the earnings recession ended in style--with a strong earnings surprise and generally positive outlooks from company managements. Softness in some key sectors bears watching, and the election certainly has the potential to throw a wrench into things, but we'll put the third quarter in the win column. For those who are wondering which sports franchise now has the longest championship drought, you just saw them play the Cubs. It's the now 68-year championship drought for the Cleveland Indians (the Detroit Lions are next at 58 years). So for those long-suffering fans, go get 'em next year!
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 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,
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Your Guide to Life Planning 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 USD Index measures the performance of the U.S. dollar against a basket of foreign currencies: EUR, JPY, GBP, CAD, CHF and SEK. The U.S. Dollar Index goes up when the dollar gains “strength” compared to other currencies. 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 #1-552937 (Exp. 11/17)
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Your Guide to Life Planning
Weekly Economic Commentary | Week of November 7, 2016
READY FOR THEIR CLOSE-UP? DEFICIT & DEBT KEY TAKEAWAYS The good news is that the deficit, debt, and pace of federal spending are not on the market's radar screen at this time. Currently, the only way to change the course of the deficit and debt over the medium and long term is to cut spending or raise taxes (or both) via meaningful programs, and in Washington today, neither seems very likely. The federal deficit and debt have not received much attention on the campaign trail this election cycle. Our August 22, 2016 Weekly Economic Commentary, "Fiscal Policy -- String Theory," provides some insight into the plans floated by both Hillary Clinton and Donald Trump to cut and/or reform taxes and make significant investments in the nation's infrastructure. The deficit and the debt did get a brief moment in the spotlight during the presidential debate season in September and October 2016, but have since faded into the background amid the general rancor of this year's campaign. Regardless of who wins the election this week, the new president and new Congress will face a rising deficit and many unanswered questions on the direction of the deficit and debt in the coming years and decades. In this week's commentary, we will answer several of the most frequently asked questions that come into the LPL Research Department on the deficit and debt. WHAT'S THE LATEST ON THE BUDGET DEFICIT? Later this week, on Thursday, November 10, 2016, the U.S. Treasury Department will release the budget data for the first month of Fiscal Year (FY) 2017, which began on October 1, 2016, and will end on September 30, 2017. As a reminder, the federal budget deficit in FY 2016, which ended on September 30, 2016, was $587 billion -- $148 billion higher than in FY 2015. Federal government receipts fell 2% to $3.3 trillion in FY 2016 while federal outlays, including interest on the public debt, rose 18% to $3.8 trillion. The $587 billion deficit in FY 2016 was equal to 3.2% of GDP, up from 2.5% of GDP in FY 2015. FY 2016 marked the first time since FY 2009 that the deficit increased from one year to the next. Looking ahead, the non-partisan Congressional Budget Office (CBO) expects the deficit in FY 2017 to widen out to $594 billion, but shrink as a share of gross domestic product (GDP) from the 3.2% reading in FY 2016 to 3.1% in FY 2017. Over the next 10 years, the CBO projects the deficit will hit $1.2 trillion or 4.6% of GDP. More disturbingly, under current law (absent any changes to laws governing taxes or spending) the CBO projects the deficit will hit 8.8% of GDP by mid-century. HOW ABOUT THE DEBT? As it stands today, financial markets are not overly concerned with budget deficits or the public debt (the total of the deficits and rare surpluses that have accumulated over the years). Financial market participants focus on the public debt-to-GDP figure, which stood at $14.2 trillion (or 77% of GDP) at the end of FY 2016, up from $13.1 trillion (74% of GDP) at the end of FY 2015. The CBO projects that over the next 10 years (absent any changes in the laws governing federal taxation or federal spending and assuming no recession in the United States), the debt-to-GDP ratio will move to 86% of GDP, an 80-year high. By 2046, again assuming no changes to current law, the CBO projects the debt-to-GDP ratio will rise to 141% of GDP. The main driver of the higher debt-to-GDP ratio in the next 10 years, and indeed over the next several decades, is spending on Social Security, Medicare, and Medicaid, which is in turn largely driven by demographics. Spending cuts and tax increases related to these programs are the only way to arrest rising debt levels in the next 10 years and beyond. WHAT ABOUT INTEREST ON THE DEBT? In FY 2016, the federal government paid net interest of $240 billion on the federal debt, up from $223 billion paid in FY 2015. While the dollar amount of interest paid in FY 2016 ($240 billion) was near the all-time high of $252 billion back in 2008, it represents just 1.3% of GDP. At 1.3% of GDP, the federal government's net interest payments on the debt are the lowest in 40 years, and well below the recent peak of 3.2% of GDP hit in the mid-1980s through the mid-1990s. Looking ahead, the CBO projects that net interest payments will rise to $712 billion by the end of FY 2026, doubling its size relative to GDP from 1.3% today to 2.6% by FY 2026. This projection assumes that the average interest rate paid on the federal debt moves from 2.0% today to 3.3% by 2026, as the yield on the 10-year Treasury note moves from 1.8% today to 3.6% by 2026, and the yield on the 3-month Treasury bill moves from around 0.35% today to 2.8% by 2026 [Figure 1]. As noted above, if the CBO's projections are correct, at 2.6%, the interest paid on the national debt in 2026 would still be below the recent peak of 3.2% of GDP hit in the mid-1980s through the mid-1990s under presidents Ronald Reagan and George H.W. Bush. By 2046, the CBO projects that the interest on the debt would rise to 5.8% of GDP.
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Your Guide to Life Planning WHAT ABOUT WASTE, FRAUD, AND ABUSE? The libertarian Cato Institute, a Washington, D.C.-based think tank, estimates waste, fraud, and abuse in the federal budget at between $100 billion and $125 billion per year. The Government Accountability Office (GAO) estimated that waste, fraud, and abuse in the federal budget in 2014 was $125 billion. On an absolute basis, this is an enormous amount of money, and taxpayers and the financial markets would welcome any and all steps to eliminate this from the budget. However, the annual outlays of the U.S. federal government in FY 2016 were $3.8 trillion. So even if the federal government were able to eliminate every dollar of waste, fraud, and abuse in the budget, federal outlays in FY 2016 would still have been well over $3.6 trillion, and the federal deficit in FY 2016 would have been $462 billion instead of $587 billion [Figure 2].
HOW ABOUT FOREIGN AID? Although not a single line item in the budget, foreign aid receives a great deal of attention in the media. A 2014 poll conducted by the Kaiser Family Foundation found that Americans thought that the United States spends 26% of its budget on foreign aid. At around $40-50 billion per year, foreign aid accounts for only about 1% of federal budget outlays, far less than the 26% public estimate. These outlays are found in the budgets of the U.S. Treasury, the Department of Agriculture, the State Department, and even the Department of Defense for items such as: • Embassy security • The Peace Corps • Disaster assistance • Peacekeeping • Direct economic support to foreign nations • The World Bank, IMF, and the United Nations • Global health initiatives SHORT-TERM GAIN, LONG-TERM PAIN
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Your Guide to Life Planning In the aftermath of this week's presidential election, many market participants will be looking for the new Congress and the new president to work together to pass a fiscal stimulus package in an effort to reinvigorate economic growth. Such a package may include repatriation of overseas profits, broad-based corporate tax reform, and spending on the nation's rapidly aging infrastructure. While we (and markets) would welcome these steps, in the longer run, the U.S. federal budget outlook remains relatively bleak, largely driven by demographics. As we wrote in our September 28, 2015 Weekly Economic Commentary, "Short-Term Gain, Long-Term Pain," the good news is that the deficit, debt, and pace of federal spending are not on the market's radar screen currently. The stable debt-to-GDP ratio over the remainder of the decade (as forecast by the CBO) also provides a window for Congress to address the underlying structural problems in the budget, which have been masked--and indeed overwhelmed--by the improving economy and the near-term spending constraints imposed by Congress on non-defense discretionary spending. Any action to address the underlying structural issues in the budget are unlikely until after the 2016 presidential and congressional elections, but recent history suggests that Congress may not act until a crisis is already underway. The biggest risk is that the recent improvement in the deficit (and relative stability in the debt-to-GDP ratio) allows complacency to set in among policymakers in Washington. CONCLUSION The structural and demographic problems that will drive the deficit over the next several decades remain in place, and the longer policymakers wait to address them, the more difficult they become-and the more painful the solution. As it stands today, the only way to change the course of the deficit and debt over the medium and long term is to cut spending or raise taxes (or both) on sizable portions of the budget such as Social Security, Medicare, and Medicaid; and in Washington today, neither seems very likely.
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 your clients. All performance referenced is historical and is no guarantee of future results. Any economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Gross domestic product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments, and exports less imports that occur within a defined territory.
This research material has been prepared by LPL Financial. 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- 553045 (Exp. 11/17)
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Your Guide to Life Planning
Hucksters and Hype: Signs of a Stock Scam You've probably received them -- e-mail or text messages touting a "hot" stock and directing you to a website for more information.1 Be cautious. You might be the target of a con in a "pump and dump" scheme. By creating demand for the stock of a small, thinly traded company, hucksters pump up the price, sell their shares, and leave investors holding worthless stock. Consider the "why." Why would a complete stranger give you a tip about a lucrative investment opportunity? The answer: The opportunity probably doesn't exist.
How can you avoid being taken in by investment scams? These tips can help. Consider the "why." Why would a complete stranger give you a tip about a lucrative investment opportunity? The answer: The opportunity probably doesn't exist. Consider the "who." Be skeptical when a flurry of promotions and press releases make exaggerated claims about a company's revenue, profits, and future stock prices, particularly if there's no mention of the investment's risk. Research the company. Search the Internet for information on the company, its corporate officials, and major stakeholders. Changes to the company's name or business focus, indictments or convictions of officers, or investigative articles should make you wary. Read the SEC filing. The SEC's EDGAR database may have helpful information about the company. Keep in mind, though, that filing with the SEC doesn't make the company a good investment or ensure that financial information has been independently reviewed. Find out where it trades. Stocks quoted in the over-the-counter (OTC) market instead of on a major exchange may trade infrequently and be extremely volatile. And companies typically don't have to meet any minimum standards for their securities to be quoted in the OTC market. Talk to your financial professional. Your advisor can help you determine if the investment represents a legitimate opportunity.
1Investing in stocks involves risks, including loss of principal.
© 2016 Wealth Management Systems Inc. All rights reserved. 1-486471
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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