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Salal Investment Services Newsletter, Third Quarter 2018

photo of Adrian Hedwig

Adrian A. Hedwig

Financial Advisor, CUSO Financial Services, L.P.*
Available at all Salal Credit Union branches
P: 206.607.3481
F. 206.299.9530
adrianh.cfsinvest@salalcu.org

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The Markets (as of market close June 29, 2018)

The second quarter of the year can be called a lot of things, but boring isn’t one of them. The potential for a trade war between the United States and China heated up in April as China responded to the threat of U.S. tariffs on Chinese imports by warning of the same magnitude of tariffs on American exports. Favorable corporate earnings reports helped calm some of the global economic angst investors may have felt. The indexes listed here ended the month ahead of their March closing values — but only barely. The Global Dow (1.16%) and the Russell 2000 (0.81%) posted the largest monthly gains, followed by marginal upticks in the S&P 500 (0.27%), the Dow (0.25%), and the Nasdaq (0.04%).

Despite expanding trade tensions between the United States, China, Canada, Mexico, and the European Union, equities enjoyed a better month in May, riding surging energy stocks. For most of the month, oil prices hit multi-year highs before falling at the end of May. Robust first-quarter earnings reports also helped push stock markets higher. In fact, each of the indexes listed here posted strong end-of-month gains. The small caps of the Russell 2000 (5.95%) and the tech-heavy Nasdaq (5.32%) enjoyed the largest gains, followed by the S&P 500 (2.16%) and the Dow (1.05%). Of the indexes in this report, only the Global Dow lost value, falling 1.95% by the end of May.

A strong jobs report kicked off the month of June on a mostly positive note. Stocks closed the first full week of June higher, led by the large caps of the S&P 500 and the Dow. However, by the middle of the month, investors were hit with China’s threat of increased tariffs on U.S. exports, while Canada pledged to impose retaliatory penalties as well. By the end of the month, the Dow and Global Dow lost some value, while the remaining indexes listed here posted marginal gains.

Overall, the second quarter saw the tech-heavy Nasdaq gain over 6.0%, only to be bested by small caps of the Russell 2000, which grew by almost 7.5%. The S&P 500 also closed the quarter ahead of its first-quarter closing values. The Dow didn’t fare as well, finishing the quarter up by less than 1.0%. Prices for 10-year Treasuries rose by the end of the quarter, pulling yields down by 13 basis points. Crude oil prices closed the quarter at about $74.25 per barrel by the end of June, almost $10 per barrel higher than prices at the close of the first quarter. Gold closed the quarter at roughly $1,254.20, noticeably lower than its $1,329.60 price at the end of March. Regular gasoline, which was $2.648 per gallon on March 26, climbed to $2.833 on the 25th of June.

Market/Index2017 CloseAs of June 29Month ChangeQuarter ChangeYTD Change
DJIA24719.2224271.41-0.59%0.70%-1.81%
NASDAQ6903.397510.300.92%6.33%8.79%
S&P 5002673.612718.370.48%2.93%1.67%
Russell 20001535.511643.070.58%7.43%7.00%
Global Dow3085.412979.52-0.75%-1.56%-3.43%
Fed. Funds1.25%-1.50%1.75%-2.00%25 bps25 bps50 bps
10-year Treasuries2.41%2.86%0 bps13 bps45 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Month’s Economic News

  • Employment: Total employment rose by 223,000 in May after adding 164,000 new jobs in April. The average monthly gain over the prior 12 months is 191,000. Notable employment gains occurred in professional and technical services (23,000), retail trade (31,000), and health care (29,000). The unemployment rate slipped to 3.8%. The number of unemployed persons declined to 6.1 million. Over the year, the unemployment rate was down by 0.5 percentage point, and the number of unemployed persons declined by 772,000. The labor participation rate was little changed at 62.7% (62.9% in April). The employment-population ratio held at 60.4%. The average workweek was unchanged at 34.5 hours for the month. Average hourly earnings increased by $0.08 to $26.92. Over the last 12 months, average hourly earnings have risen $0.71, or 2.7%.
  • FOMC/interest rates: The Federal Open Market Committee raised the federal funds target range rate for the second time this year, bumping the range up by 25 basis points following the Committee’s June meeting. The target range now sits at 1.75%-2.00%. The Committee cited continued strengthening in the labor market and increased household spending as justifications for the rate hike. Also of note, the Committee forecasts the median funds rate at 2.4% by year’s end instead of 2.1% as forecasted in March. This means two more rate hikes could be in the offing before the end of the year.
  • GDP/budget: The third and final estimate of the first-quarter gross domestic product showed the economy expanded at an annual rate of 2.0%, according to the Bureau of Economic Analysis. The fourth-quarter GDP grew at an annualized rate of 2.9%. According to the report, consumer spending was rather subdued, expanding at a rate of only 0.9%. Corporate profits increased $39.5 billion in the first quarter, in contrast to a decrease of $1.1 billion in the fourth quarter. Fewer exports and more imports during the quarter contributed to slower economic growth. Spending on durable goods, which had increased 13.7% in the fourth quarter, dropped 2.1% in the first quarter. Gross domestic income rose 3.6% in the first quarter — far surpassing the 1.0% growth rate in the fourth quarter. The government budget deficit was $146.8 billion in May following a surplus of $214.3 billion in April. For fiscal 2018 through May, the federal deficit sits at $532.2 billion — up by $99.4 billion, or about 23%, from the deficit over the same period last year.
  • Inflation/consumer spending: Consumer spending, as measured by personal consumption expenditures, jumped 0.2% in May, after increasing 0.5% in April. Core consumer spending (excluding food and energy) also rose 0.2% in May. Core consumer prices, a tracker of inflationary trends, increased 0.2% in May. But of more importance, core prices have increased 2.0% over the last 12 months — an annual rate that could prompt more interest rate increases during the remainder of 2018.
  • The Consumer Price Index rose 0.2% in May, the same increase as in April. Over the last 12 months ended in May, consumer prices are up 2.8%. Core prices, which exclude food and energy, also climbed 0.2% for the month, and are up 2.2% for the year.
  • Prices at the wholesale level expanded noticeably in May. The Producer Price Index showed the prices companies receive for goods and services jumped 0.5% after climbing 0.1% in April. Year-over-year, producer prices have increased 3.1%. Prices less food and energy increased 0.3% for May and are up 2.4% over the last 12 months.
  • Housing: Sales of existing homes continued to slow in May. Total existing-home sales fell 0.4% for May following a 2.5% drop in April. Year-over-year, existing home sales are down 3.0%. The May median price for existing homes was $264,800, which is 4.9% higher than the May 2017 price of $252,500. While inventory for all types of existing homes for sale rose 2.8% in May, it is 6.1% lower than a year ago. New home sales, on the other hand, climbed 6.7% in May after falling 1.5% in April. Falling home prices surely led to the spike in new home sales. The median sales price of new houses sold in May was $313,000 ($318,500 in April). The average sales price was $368,500 ($394,600 in April). Inventory fell slightly to 5.2 months, down from the 5.5-month supply in April.
  • Manufacturing: Industrial production edged down 0.1% in May after increasing 0.9% in April. Nevertheless, total industrial production is 3.5% higher in May than it was a year earlier. Manufacturing production fell 0.7% in May, largely because truck assemblies were disrupted by a major fire at a parts supplier. Excluding motor vehicles and parts, factory output moved down 0.2%. The index for mining rose 1.8%, its fourth consecutive month of growth; the output of utilities moved up 1.1%. New orders for manufactured durable goods climbed 0.6% in May following two consecutive monthly decreases.
  • Imports and exports: The advance report on international trade in goods revealed that the trade gap decreased by $2.5 billion in May from April. The deficit for May was $64.8 billion (the April deficit was $67.3 billion). May exports of goods jumped 2.1%, while imports increased 0.2%. On a seasonally adjusted basis, May’s total imports ($208,405 billion) far exceeded exports ($143,560 billion). Both import and export prices are starting to move higher. Import and export prices are starting to move higher; both increased 0.6% in May after climbing 0.3% and 0.6%, respectively, in April. Over the last 12 months, import prices have increased 4.3% and export prices are up 4.9%.
  • International markets: Investors, both at home and abroad, may be concerned that the escalating trade dispute between the United States and several other important trade partners may stunt global economic growth. Despite the negative trade rhetoric, China’s economy expanded at a rate of 6.8% in the first quarter, much to the surprise of some investors and economic analysts. On the other hand, potential trade tariffs may have impacted Europe’s largest economy. Germany’s gross domestic product stalled in the first quarter, growing at a subdued rate of 1.2% after expanding 2.5% in the fourth quarter. Overall, the eurozone GDP also decelerated to a growth rate of 1.7% in the first quarter, down from the 2.7% rate of growth in the fourth quarter.
  • Consumer confidence: Consumer confidence, as measured by The Conference Board Consumer Confidence Index®, dipped 2.4% in June following an increase in May. According to the report, consumers’ confidence in the present economic conditions remained relatively the same as in May, but expectations for future growth were tempered. This reading may be reflective of the imposition of tariffs and the ongoing trade war.

Eye on the Month Ahead

Moving to the second half of the year, the economy in general and the market in particular will likely react based on the ongoing global economic trade wars. Fewer imports could lead to more domestic sales, which could add to job growth. However, prices could also increase at a rate ahead of wage growth.

Data sources: Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Department of Commerce (GDP, corporate profits, retail sales, housing); S&P/Case-Shiller 20-City Composite Index (home prices); Institute for Supply Management (manufacturing/services). Performance: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.
The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. The U.S. Dollar Index is a geometrically weighted index of the value of the U.S. dollar relative to six foreign currencies. Market indices listed are unmanaged and are not available for direct investment.

 


Building Confidence in Your Strategy for Retirement

Each year, the Employee Benefit Research Institute (EBRI) conducts its Retirement Confidence Survey to assess both worker and retiree confidence in financial aspects of retirement. In 2018, as in years past, retirees expressed a higher level of confidence than today’s workers (perhaps because “retirement” is less of an abstract concept to those actually living it). However, worker confidence seems to be on the rise, while retiree confidence is on the decline. A deeper dive into the research reveals lessons and tips that can help you build your own retirement planning confidence.

Create a foundation of predictable sources of income

Workers surveyed expect to rely less on traditional sources of guaranteed income — a defined benefit pension plan and Social Security — than today’s retirees. More than 40% of retirees say that a traditional pension plan provides them with a major source of income, and 66% say that Social Security is a primary source. Yet just one-third of today’s workers expect either a pension or Social Security to play a big role.

Understand how Social Security works. Although nearly half of today’s workers say they have considered how their Social Security claiming age could affect their benefit amount, the median age at which they plan to claim benefits is 65. Moreover, less than a quarter of respondents say they determined their future claiming age with benefit maximization in mind. Why does this matter? It’s because the vast majority of today’s workers won’t be able to collect their full Social Security retirement benefit until sometime between age 66 and 67, depending on their year of birth. Claiming earlier than that results in a permanently reduced benefit amount. To help ensure you make the most of your Social Security benefits, take the time to understand the ramifications of different claiming ages and strategies before making any final decisions.

Consider creating your own “pension” income. Eight in 10 workers in the EBRI survey hope to use their defined contribution plan assets [e.g., 401(k) or 403(b)] to purchase a product that will provide a guaranteed stream of income during retirement. Depending on individual circumstances, this could be a wise move. To help provide yourself with a steady stream of income, you might consider annuitizing a portion of your retirement plan assets or purchasing an immediate annuity, a contract that promises to pay you a steady stream of income for a fixed period of time or for life in exchange for a lump-sum payment.1

When combined with your Social Security benefits, the payments received from an immediate annuity can help ensure that your everyday “fixed” expenses are covered. Any additional assets can then be earmarked for future growth potental and “extras,” such as travel and entertainment.

Pay attention to your health — and health-care costs

Health. The EBRI survey revealed a correlation between health and retirement planning confidence. For example, 60% of today’s workers who are confident in their retirement prospects also report being in good or excellent health, while only a little more than a quarter of those who are not confident report similar levels of health. Moreover, 46% of retirees who say they are confident also say they are in good health, compared with just 14% of those who are not confident.

The lesson here is pretty straightforward: Healthy habits may pay off in healthy levels of confidence. Eat plenty of fruits and vegetables, exercise, get enough sleep, and take steps to minimize stress. And don’t skip important preventive checkups and lab tests. Keep in mind that even the most diligent savings strategies can be thrown off track by unexpected medical costs.

Health-care costs. The percentage of retirees who are at least somewhat confident that they will have enough money to cover medical expenses in retirement has dropped from 77% in 2017 to 70% in 2018. And four out of 10 retirees say that health-care expenses are at least somewhat higher than they expected. However, retirees who have estimated their health-care costs (39% of respondents) are more likely to say their expenses are about what they expected them to be. On the other hand, just 19% of workers have calculated how much they will need to cover their health expenses in retirement.

If you have not yet thought about how much of your retirement income may be consumed by health-care costs, now may be the time to start doing so. Having at least a general idea of what your medical expenses might be will help you more accurately project your overall retirement savings goal.

 


Managing Money When You Marry: Financial Tips for Newlyweds

Getting married is an exciting time for a couple. However, along with this excitement come many challenges. One such challenge is how to manage your finances together. The key to success is to communicate with your partner and come up with a financial plan that you both agree on, since the financial decisions you make now can have a lasting impact on your finances in the future.

Map out your financial future together

Your first step should be to discuss your common financial goals. Where do you see yourself next year? What about five years from now? Together, make a list of your short- and long-term financial goals. Short-term goals are ones that can be achieved in less than five years (e.g., saving for a down payment on a home or new car). Long-term goals usually take more than five years to achieve (e.g., paying off college loans, saving for retirement). Next, determine which financial goals are most important to both of you so together you can focus your energy on them.

Prepare a budget

A budget is an important part of managing your finances. Knowing exactly how you are spending your money each month can set you on a more clear path to pursue your financial goals. Start by listing your current monthly income. In addition to your regular salary and wages, be sure to include other types of income, such as dividends and interest. Next, add up all of your expenses. It helps to divide expenses into two categories: fixed (e.g., housing, food, transportation, student loan payments) and discretionary (e.g., entertainment, vacations). Ideally, you should be spending less than you earn. If not, you need to review your expenses and look for ways to cut down on your spending.

Consider combining bank accounts

You’ll also need to decide whether you and your spouse should combine bank accounts or keep them separate. While maintaining a joint account does have its advantages (e.g., easier record keeping and lower maintenance fees), it is sometimes difficult to keep track of the flow of money when two individuals have access to a single account. Fortunately, online banking makes it easier to know exactly what is in your account at all times. If you choose to keep separate accounts, you might consider opening a joint checking account to pay for common household expenses.

Resolve outstanding credit/debt issues

Having good credit is an important part of any sound financial plan, so this would be a good time to identify any potential credit or debt problems you or your spouse may have and try to resolve them now rather than later. Order copies of your credit reports and review them together. You are entitled to a free copy of your credit report from each of the three major credit reporting agencies once every 12 months (visit annualcreditreport.com for more information). For the most part, you are not responsible for your spouse’s past credit problems, but they can prevent you from getting credit together as a married couple. Even if you’ve always had good credit, you may be turned down for credit cards or loans that you apply for together if your spouse has a bad credit history. As a result, if one of you had credit issues, you might consider keeping your credit separate until your credit situation improves.

Evaluate your employee and retirement benefits

If you and your spouse have separate health insurance coverage through an employer, you’ll want to do a cost-benefit analysis of each plan to determine whether you should keep your health coverage separate. Compare each plan’s deductible, copayment, and benefits as well as the premium for one family plan against the cost of two single plans. In addition, if you and your spouse participate in an employer-sponsored retirement plan, you should be aware of each plan’s investment options, matching contributions, and loan provisions. Review each plan carefully and determine which one provides the better benefits. If you can afford to, contribute the maximum amount possible to your respective plans.

Assess your life and disability insurance needs

While the need for life and disability insurance may not have seemed necessary when you were both single, as a married couple you may find that you are financially dependent on each other. Having life and disability plans in place will help ensure that your financial needs will be taken care of if either of you dies or becomes disabled. If you already have insurance, you should reevaluate the adequacy of your coverage and update your beneficiary designations.

1 “Stress in America,” American Psychological Association, 2017

IMPORTANT DISCLOSURES:
*Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (member FINRA / SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. The credit union has contracted with CFS to make non-deposit investment products and services available to credit union members.
Prepared for Salal Investment Services by Broadridge Investor Communication Solutions, Inc. Copyright 2018.
Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual’s personal circumstances.
To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice. This communication is strictly intended for individuals residing in the state(s) of WA, OR, OH, IA and CA. No offers may be made or accepted from any resident outside the specific states referenced.