Estate Planning Just Got Real

Estate Planning Just Got Real

by Grant Sims, CFP®

This last year has brought many changes in my life. My wife and I had our first child, we purchased our first house, my role has introduced me to many new clients, and my wife transitioned to staying at home with our baby. These changes have been extremely exciting and have required a lot of adjusting and although these changes have been challenging, they have certainly made life better.

Since adding to my family and owning my own home, my perspective about life has been somewhat altered.  I have asked myself, “If something terrible happened to me, how would that affect my wife and child?”, “What if my wife and I weren’t here, who would raise our baby?” My first response to those questions may be like yours:

1. These questions feel awfully gloomy and I wish I didn’t have to think about them.

     AND

1. What are the odds of any of those things really happening to me?  

These recent changes in my own life have made the importance of estate planning way more personal than ever before. I am also blessed to hear the experiences of my clients and advise them through their estate planning issues, which has helped me see firsthand the future impact that good planning can have on my own loved ones.

Whether you added a family member, moved to a new state, received an inheritance, or are facing health issues, major changes in life are a great prompt to meet with an estate planning attorney. Its highly beneficial to review your circumstances and determine if you need to create or update your estate plan. Some clients explain that when they created their plan years ago, their circumstances were the same. Whether or not things have changed, it is still a good idea to have your plan reviewed every five to seven years, as state or federal laws can change. Also, some documents can become less effective, if they get too old, or you may have forgotten details of your plan that no longer apply to your situation.

Estate planning is not just for when you die, many don’t realize that it can protect you and your assets in the event you are incapacitated or can’t make decisions yourself. If this happens to you, who will take care of paying your bills or managing your healthcare? Designating financial and health care POA’s (Power of Attorney) can save your family a lot of time and money and make sure everything is handled according to your wishes. Having a living will, your clearly stated desires for end of life care, can also save your family from the burden of heart-breaking decisions that no one should have to face.

Another primary goal of estate planning is reducing taxes and fees. The price you pay for a good estate planning attorney to draft your plan and review it over the years could save your family tens of thousands of dollars. Working with your financial advisor to coordinate your assets, according to your plan, is equally important – a plan without proper execution can be costly.  Recently, a client unfortunately had to pay $50,000 in taxes she could have otherwise kept if her parent’s plan had simply been updated. Proper planning can also help your estate avoid probate or legal issues where court and legal fees can eat away at your family’s inheritance.

With the start of my own family, planning for their provision and protection is the greatest motivation to have an estate plan in order. This can take shape in so many ways, starting with young families that can protect their children by assigning guardians and caretakers that will best raise their children in their absence.  Others have adult children and grandchildren that may have different needs regarding money or asset protection (due to their profession or family circumstances). Still more, an heir may require a professional trustee to help guide or administer their inheritance in the event they cannot be trusted or properly care for themselves. I encourage my clients to recognize that providing for their children equally doesn’t mean they provide for them the exact same. 

Finally, your estate plan can help you support your favorite causes. Yes, you can leave a generous donation to your favorite charities when you pass away, but you can also have a huge impact, while you are still alive. Exploring options like charitable gift annuities or remainder trusts can provide tax benefits while living. Additionally, it can be hugely beneficial to plan for which assets would be best to designate to charities – i.e. appreciated assets or retirement accounts. Some clients have even started their own charitable fund through a community foundation.

I always like to remind clients that an estate plan is more about others than about yourself. If you haven’t completed your estate plan or need to review it, don’t wait. There are too many benefits that come with being prepared.

Reviewing the Major Macro Variables

Reviewing the Major Macro Variables

By Paul Hoffmeister, Chief Economist

·      Here, in our latest monthly letter, we discuss US-China Trade, Fed and ECB policy, Brexit, the Hong Kong protests, and the 2020 elections. Given the increasingly weak global economy, the possibility grows that each could make or break the next year.

·      We believe President Trump’s negotiating strategy is becoming increasingly clear, and there are more levers he can pull to pressure China to concede to US demands. Given how much further Trump can go as well as the weak Chinese economy today, the odds are rising in our view that Chinese officials will compromise on at least some major demands in the coming year. A comprehensive deal, however, is a long shot – as that arguably would entail a wholesale reformation of the Chinese economic system.

·      Furthermore, we expect the Federal Reserve and European Central Bank to continue moving dovishly, and if conditions deteriorate further, they will need to do so in a big way – such as a 50 basis point cut at an upcoming FOMC meeting.

·      Prime Minister Boris Johnson shocked the world with his political maneuverings recently, and the probability of Brexit by the end of October has jumped significantly.

·      Hong Kong protests are a serious danger to the legitimacy of the Chinese government and the confidence in Hong Kong as an international financial center – if not during the near-term, then during the long-term.

·      Elizabeth Warren is arguably the front-runner for the Democratic nomination. Managed health care stocks have been notably weak during the last month.

 US-China Trade: In our view, negative news on the US-China trade front has sparked the two meaningful sell-offs of 2019. Of course, on Sunday May 5, President Trump accused Chinese officials over Twitter of renegotiating the terms of what appeared to be a tentative agreement, and so he promised tariff increases by the end of that week.[i] Then on August 1, Trump announced, again via Twitter, additional 10% tariffs on $300 billion of Chinese imports.[ii] In each instance, the new information seemed to indicate that US-China trade negotiations were devolving substantially.

This is reportedly supported by recent comments from top officials in both camps. In an interview on CNN last weekend, National Economic Council Director Larry Kudlow said he couldn’t promise a finalized trade deal with China by the November 2020 election.[iii] And according to Bloomberg this week, Chinese officials have said only a few negotiators see a deal as actually possible before then, “in part because it’s dangerous for any official to advise President Xi Jinping to sign a deal that Trump may eventually break”.[iv]

In sum, the outlook for a resolution to the US-China trade dispute is very cloudy, and a slew of tit-for-tat tariffs have already been applied by both countries, and there are many more scheduled by year-end.

President Trump continues down two parallel paths, as we see it. The first path is the effort to reach a comprehensive agreement that addresses American grievances related to forced technology transfers, IP theft, fair market access, and Chinese state subsidies to domestic businesses. Assumedly, a partial deal would be met with the removal of some, but not all tariffs. The second path is the formation of a US trading sphere so as to create two international trading spheres with the US and China at the center of each.

Today, the prospects for a comprehensive trade deal with China are poor, while two distinct international trading spheres appear to be forming.

The Trump Administration has agreed to a revised US-Korea free trade agreement (September 2018) and the new US-Mexico-Canada Agreement or “USMCA” (June 2019), which replaced NAFTA. Furthermore, the White House is working on new trade agreements with Japan, the European Union, and the United Kingdom.

It appears that a deal with Japan is getting closer to being sealed as President Trump and Prime Minister Shinzo Abe agreed to “core principles” at the recent G7 meeting. It’s possible that the deal will be finalized within the next 1-2 months. At the same time, Trump and Prime Minister Boris Johnson have spoken positively about a major US-UK deal if Brexit happens. As for a US-EU deal, Trump struck an upbeat tone at the G7 meeting, saying “We’re very close to maybe making a deal with the EU because they don’t want tariffs.”[v] With this new US-centric trading sphere taking shape, it may explain why Trump seemed so upbeat about the G7 meeting.

Given the current circumstance, we expect President Trump to keep up the significant pressure on China to force into a more reciprocal trading relationship, and the path is unlikely to be smooth.

First, Trump could still apply more economic pressure possibly by raising tariffs even higher, utilizing the Emergency Economic Powers Act of 1977 to force US companies to divest from China, or even sanctioning Chinese companies or officials suspected of human rights violations.

Secondly, as the complex negotiations continue, it’s likely we’ll hear more mixed signals from President Trump. Asked by reporters at the G7 summit about his seemingly back-and-forth and changing statements on subjects such as President Xi and Iran, the President said, “Sorry, it’s the way I negotiate… It’s done very well for me over the years, and it’s doing even better for the country.”[vi]

Bottom Line: We believe President Trump’s negotiating strategy is becoming increasingly clear, and there are more levers he can pull to pressure China to concede to US demands. Given how much further Trump can go as well as the weak Chinese economy today, the odds are rising in our view that Chinese officials will compromise on at least some major demands in the coming year. A comprehensive deal, however, is still a long shot – as that arguably would entail a wholesale reformation of the Chinese economic system.

 Fed Policy: There are three more FOMC meetings before year-end, with the next one scheduled for September 17-18. At that meeting, federal funds futures are currently implying a nearly 96% probability of a 25 basis point rate cut, and 4% probability of a 50 basis point cut -- according to the CME Fedwatch Tool.

Arguably, the Fed must cut interest rates aggressively, and soon. The Fed is hostage to the market, trade negotiations, and other major macro uncertainties in the world today that are inhibiting risk-taking and production and thus slowing global economic activity. The inverted Treasury curve is another indication of the significant pressure on the Fed to cut interest rates. For example, the 3-month/2-year Treasury spread is approximately -47 basis points today, according to the St. Louis Federal Reserve. From our perspective, this implies that the market believes the funds rate is at least 50 basis points too high at the moment.

Is the inverted yield curve a signal of a looming recession? We believe that it’s an ominous signal, given its track record for preceding many recessions, and an indication of central bank error. But recession isn’t guaranteed. It’s still possible that aggressive rate cuts by the Fed and more clarity and resolution to many other macro uncertainty could re-ignite animal spirits and keep the United States from recession.

Notably, former New York Federal Reserve President William Dudley penned a highly controversial Bloomberg oped on August 27, in which he expressed a desire for the Fed to withhold interest rate reductions in order to not “bail out an administration that keeps making bad choices on trade policy”.[vii] It also appeared that Dudley went even further to suggest that the Fed pursue monetary policy into the November 2020 elections in a manner that prevented President Trump’s reelection.

But Dudley’s oped may backfire. It seems that the popular response to his oped has been critical, and ironically, may in fact turn the tables and force the Fed to prove that it isn’t acting in an “anti-Trump” manner by withholding rate cuts, but is purely economically motivated and therefore will reduce interest rates aggressively during the coming months. 

ECB Policy: At its next monetary policy meeting on September 12, it looks like the ECB will be meaningfully dovish, at least according to Olli Rehn, a member of the ECB’s rate-setting committee and governor of Finland’s central bank.

On Thursday, August 15, Rehn said, “When you’re working with financial markets, it’s often better to overshoot than undershoot, and better to have a very strong package of policy measures than to tinker.”[viii]

We believe the ECB will lower its benchmark overnight rate by 10-20 basis points from negative 0.40% currently; announce new bond purchases (“quantitative easing”); and favorably adjust loan terms for EU banks.

As we indicated last month, the sharpest slowdown in growth globally may be occurring in Europe. It looks like the ECB is preparing to pull out the figurative monetary bazooka in a few weeks.

Bottom Line: We expect the Federal Reserve and European Central Bank to continue moving dovishly, and if conditions deteriorate further, they will need to do so in a big way – such as a 50 basis point cut at an upcoming FOMC meeting.

 Brexit: Prime Minister Boris Johnson has famously said that he’ll achieve Brexit by the October 31 deadline “do or die”. To that end, he shocked the world on August 28 by announcing that his Parliament will be suspended sometime between September 9-12, thanks to Queen Elizabeth II’s approval. Parliament will recommence after the Queen’s speech on October 14.[ix] This will give anti-Brexiters in the legislature little time to stop a no-deal Brexit by its lawfully mandated deadline.

Interestingly, the EU Council Meeting is scheduled to take place October 17-18. It appears that there are two possible scenarios emerging here: 1) if Johnson returns with a new Brexit deal, then he’ll hope to ram it through Parliament with less than two weeks to the deadline; or 2) if Johnson does not return with a new deal, then a no-deal Brexit may automatically occur by the deadline.

In sum, the probability of Brexit has increased substantially thanks to Johnson’s crafty political maneuvering. On August 28, the Predicit market for Brexit occurring by November 1 was 58 cents on the dollar; whereas the day before, the contract traded at 48 cents.[x]

Importantly, to mitigate market volatility and economic uncertainty that could erupt with the UK’s exit from the European Union, Johnson should figure out how to quickly pass pro-growth policies, including business-friendly tax cuts and a new trade deal with the United States – both of which he has previously endorsed.

According to the Financial Times, Finance Minister Sajid Javid said two weeks ago, in his first interview since assuming his new role[xi], that he wanted to see lower taxes, but he did not commit to delivering the Johnson government’s budget proposal before Brexit day (October 31). Arguably, the Johnson government should be more aggressive here. One idea that’s been floated is lowering the UK’s corporate tax rate to as low as Ireland’s. This could be highly beneficial for the economy and markets. But, unfortunately, we haven’t heard much about it during the last month.

As for a US-UK trade agreement, at the recent G7 meeting, President Trump reiterated his desire and plan for a deal, saying “We’re going to do a very big trade deal – bigger than we’ve ever had with the UK.”[xii]

Bottom Line: Brexit by the end of October 31 is now our base case scenario, given Boris Johnson’s latest parliamentary maneuverings. We want to see a pro-growth plan, such as tax cuts and big trade agreements, implemented at the same time as Brexit transpires.

 Hong Kong Protests: The protests in Hong Kong since early June continue. And, in the latest turn of events, the Xinhua news agency reported yesterday that the People’s Liberation Army (PLA) had sent a new batch of troops and equipment -- including personnel carriers, trucks and a small naval vessel – into Hong Kong.[xiii] Although this rotation of troops has been reported to be routine, the potential of a government crackdown is seemingly growing, raising the risks of unintended consequences for the Asian financial hub and the region at large.

Bottom Line: The unrest in Hong Kong is a major risk to the Communist Party’s grip on power and the region’s economies – if not during the near-term, then during the long-term.

 2020 Elections: Elizabeth Warren’s prospects for becoming the Democratic presidential nominee seem to be growing. In fact, she could be considered the front-runner today.

On Predictit, the contract for her to be the nominee has risen to 34 cents on the dollar, compared to 22 cents on July 30. Bernie Sanders has risen to 16 cents from 13 during that time; while Kamala Harris has fallen to 10 from 24. The contract for former Vice President Joe Biden is trading roughly flat, around 26-27 cents.[xiv]

Given these betting market indications, it seems that with Warren and Sanders, the progressive wing of the Democratic Party is ascendant. And notably, with Medicare for All being a hot topic in the Democratic primaries, managed health care stocks have been especially weak during the last month. According to CNBC, the S&P 500 Managed Health Care Index fell 11.1% between July 31 and its low on August 27.

This sector may be a clear way to play bets on whether a Republican or Democrat wins the White House in 2020. We still believe, as we explained in April, that changes in American health care policy are likely in coming years, but a lot more needs to happen politically before a wholesale restructuring of the system occurs.

Bottom Line: Elizabeth Warren is arguably the front-runner to compete against President Trump for the White House in 2020. Her recent strength, as well as Bernie Sanders’s, may have spooked managed health care stocks in August.

Paul Hoffmeister is chief economist and portfolio manager at Camelot Portfolios, managing partner of Camelot Event-Driven Advisors, and co-portfolio manager of Camelot Event-Driven Fund (tickers: EVDIX, EVDAX).

 *******

Disclosures:

•       Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that the future performance of any specific investment, investment strategy (including the investments and/or investment strategies recommended by the adviser), will be profitable or equal to past performance levels.

•       This material is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept for any particular advisor or client.  These materials are not intended as any form of substitute for individualized investment advice.  The discussion is general in nature, and therefore not intended to recommend or endorse any asset class, security, or technical aspect of any security for the purpose of allowing a reader to use the approach on their own.  Before participating in any investment program or making any investment, clients as well as all other readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisors.  Camelot Portfolios LLC can assist in determining a suitable investment approach for a given individual, which may or may not closely resemble the strategies outlined herein.

•       Any charts, graphs, or visual aids presented herein are intended to demonstrate concepts more fully discussed in the text of this brochure, and which cannot be fully explained without the assistance of a professional from Camelot Portfolios LLC.  Readers should not in any way interpret these visual aids as a device with which to ascertain investment decisions or an investment approach.  Only your professional adviser should interpret this information.

•       Some information in this presentation is gleaned from third party sources, and while believed to be reliable, is not independently verified.

A901

[i] “Trump Says He Will Increase Tariffs on Chinese Goods on Friday as He Complains about Pace of Trade Talks”, by David Lynch, Damian Paletta and Robert Costa, May 5, 2019, Washington Post.

[ii][ii] “Trump Says US Will Impose Additional 10% Tariffs on Another $300 Billion of Chinese Goods Starting Sept. 1”, by Yun Li, August 1, 2019, CNBC.

[iii] “Kudlow Can’t Promise China Trade Deal by November 2020, But Says Big Announcement Coming”, by Nick Givas, August 25, 2019, Fox News.

[iv] “China Prepares for the Worst on Trade War After Trump’s Flip-Flops”, by Peter Martin, Kevin Hamlin, Miao Han, Dandan Li, Steven Yang and Ying Tian, August 27, 2019, Bloomberg News.

[v] “Trump Sees Possible US-EU Trade Deal That Would Avert Car Tariffs”, by Jeff Masonl and Paul Carrel, August 26, 2019, Reuters.

[vi] “’Sorry, it’s the way I negotiate’: Trump Confounds the World at Wild G-7”, by Gabby Orr, August 26, 2019, Politico.

[vii] “The Fed Shouldn’t Enable Donald Trump”, by William Dudley, August 27, 2019, Bloomberg.

[viii] “ECB Has Big Bazooka Primed for September, Top Official Says”, by Tom Fairless, August 15, 2019, Wall Street Journal.

[ix] “Boris Johnson Just Took a Huge Step to Ensure Brexit Happens on October 31”, by Matt Wells, August 28, 2019, CNN.

[x] Source: Predictit.org

[xi] Sajid Javid Promises a Simpler Tax Regime”, by Sebastian Payne, August 17, 2019, Financial Times.

[xii] “After Brexit, a U.S. Trade Deal”, Wall Street Journal Editorial, August 28, 2019, Wall Street Journal.

[xiii] “China Sends Fresh Troops into Hong Kong as Military Pledges to Protect ‘National Sovereignty’”, Weizhen Tan, August 29, 2019, CNBC.

[xiv] Source: Predictit.org

Market Commentary

June: A Confluence of Positives

By Paul Hoffmeister, Chief Economist

During the last month, we’ve seen a confluence of positives in some of the major macro variables: Fed policy, trade and Brexit.

To us, the latest macro developments are very encouraging. But the equity market outlook remains tricky, and we do not believe it’s a one-way ticket up in equities for the third and fourth quarters.

My biggest concern at the moment is the slowing global economy, which is permeating into the United States.

During the last month, we’ve seen a confluence of positives in some of the major macro variables. Most notably, Chairman Powell said on June 4th that the FOMC was prepared to act in response to the economic outlook, including the trade disputes with China and Mexico.[i] His comments suggested that interest rate cuts were on the horizon, sparking a 2.1% rally in the S&P 500 for the day.[ii] The rally marked the beginning of the recent turnaround in equities after the weakness we saw in May. 

Arguably, the Fed outlook has been the most important macro variable of the last year. From our perspective, Powell’s comments on October 3rd that the fed funds rate was a long way from neutral catalyzed the beginning of the multi-month selloff in equities, and his pledge on January 4th that the Fed would be patient with any further rate increases laid the foundation for this year’s rally. [iii][iv] And now more recently, we have Powell seemingly coming to the stock market’s rescue.

During the last month, we’ve also seen positive developments on trade and Brexit.

Of course, Presidents Trump and Xi agreed to restart trade talks during the G20 meeting at the end of June. Trump promised to hold off on putting a 25% tariff on nearly $300 billion of Chinese imports, and he lifted some restrictions on Huawei. Meanwhile, Xi reportedly promised to start large scale purchases of American food and agricultural products.[v]

In addition to renewed hopes for a US-China trade deal, American and Mexican negotiators reached a deal on June 7th in which the Mexican government agreed to take new measures to curb the influx of Central American migrants into the United States. This averted new tariffs on Mexican imports.[vi]

There was also some good news on the Brexit issue. While Brexit still appears to be on track to occur by October 31st, Boris Johnson -- the frontrunner to become the UK’s next prime minister – has promised to cut personal income and corporate taxes. This follows Jeremy Hunt, another contender for Prime Minster May’s job, who wants to reduce the UK’s corporate tax rate from 19% to 12.5%.[vii]

As we’ve stated in the past, news during the last year of a Brexit divorce not occurring seems to have been received positively by financial markets. Nonetheless, we’ve believed that Brexit could happen without being disruptive to markets if it was combined with new, pro-growth policy measures. Major tax cuts (such as lowering the UK’s corporate tax in line with Ireland’s 12.5% rate) and new trade deals (Trump keeps dangling a major post-Brexit, US-UK trade deal) could be exactly the pro-growth package that turns Brexit from a market negative into a market positive.

The confluence of positives related to interest rates, trade and Brexit appear to have been the predominant catalysts behind the strong equity market performance in June. This begs the question, do we have clear skies for the remainder of the year? After all, it appears that we have a Fed that won’t be raising rates, the US and China will continue to negotiate their differences, and Brexit could go through more smoothly than expected.

To us, the latest macro developments are very encouraging. But the equity market outlook remains tricky, and we do not believe it’s a one-way ticket up in equities for the third and fourth quarters.

My biggest concern at the moment is the slowing global economy, which is permeating into the United States.

As we’ve shown in recent months, GDP for the major foreign economies (China, Japan, Germany and UK) has been slowing, while US GDP has been accelerating. But economic data at the margin suggests that the strength in the US could fade.

According to the Institute for Supply Management, the US Manufacturing PMI Index peaked at 60.9 last August, and June’s reading was 51.7 – down from 52.1 in May and 52.8 in April. [ix] Note, readings below 50 signal contraction in the manufacturing sector. We have warned that should this reading fall to 50 or less, the US economy will be at a heightened risk of entering recession.

It’s economic deterioration such as this that likely underpins the Fed’s motivation to reduce interest rates, despite the fact that the S&P 500 is trading near all-time highs. 

As we see it, the good news is that June brought positive macro event catalysts, and holding all variables constant, one or two quarter-point rate cuts by the Fed could get the Treasury curve out of inversion. But the current inversion in the Treasury curve should be respected, and it will be important to see global economic growth stabilize after almost a year of deceleration.

Paul Hoffmeister is chief economist and portfolio manager at Camelot Portfolios, managing partner of Camelot Event-Driven Advisors, and co-portfolio manager of  Camelot Event-Driven Fund  (tickers: EVDIX, EVDAX).

*******

Disclosures:

•       Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that the future performance of any specific investment, investment strategy (including the investments and/or investment strategies recommended by the adviser), will be profitable or equal to past performance levels.

•       This material is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept for any particular advisor or client.  These materials are not intended as any form of substitute for individualized investment advice.  The discussion is general in nature, and therefore not intended to recommend or endorse any asset class, security, or technical aspect of any security for the purpose of allowing a reader to use the approach on their own.  Before participating in any investment program or making any investment, clients as well as all other readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisors.  Camelot Portfolios LLC can assist in determining a suitable investment approach for a given individual, which may or may not closely resemble the strategies outlined herein.

•       Any charts, graphs, or visual aids presented herein are intended to demonstrate concepts more fully discussed in the text of this brochure, and which cannot be fully explained without the assistance of a professional from Camelot Portfolios LLC.  Readers should not in any way interpret these visual aids as a device with which to ascertain investment decisions or an investment approach.  Only your professional adviser should interpret this information.

•       Some information in this presentation is gleaned from third party sources, and while believed to be reliable, is not independently verified.

[i] “Stocks Jump as Fed’s Powell Suggests Rates Could Come Down”, by Jeanna Smialek and Matt Phillips, June 4, 2019, New York Times.

[ii] Ibid.

[iii] “Powell Says We’re a Long Way from Neutral on Interest Rates, Indicating More Hikes Are Coming”, by Jeff Cox, October 3, 2018, CNBC.

[iv] “Powell Says Fed ‘Will be Patient’ with Monetary Policy as It Watches How Economy Performs”, by Jeff Cox, January 4, 2019, CNBC.

[v] “Trump and Xi Agree to Restart Trade Talks, Avoiding Escalation in Tariff War”, by Peter Baker and Keith Bradsher, June 29, 2019, New York Times.

[vi] “Trump Announces Migration Deal with Mexico, Averting Threatened Tariffs”, by David Nakamura, John Wagner and Nick Miroff, June 7, 2019, Washington Post.

[vii] “Boris Johnson Promises Tax Cut for 3m Higher Earners”, by Rowena Mason, The Guardian, June 10, 2019.

[viii] Squawk Box, June 27, 2019, CNBC.

[ix] “US Factory Gauge Drops Less Than Forecast But Orders Stall”, by Katia Dmitrieva, July 1, 2019, Bloomberg.

[x] “US Services Gauge Drops to Lowest Since 2017”, by Jeff Kearns, July 3, 2019, Bloomberg.

First Quarter Market Commentary

First Quarter Market Commentary

by David Munn

If you happen to be an investor who only checks your portfolio every 6 months--and your last check was at the end of September--you might think the markets have been serene and uneventful over that time period, having experienced very little change.  But alas, your conclusion would be wrong, though you would have enjoyed the tremendous benefit that comes from not following the day to day turmoil to which other investors willingly subject themselves.

Since reaching new highs in September of 2018, the market has taken stockholders on a roller coaster of prices and emotions.  A fourth quarter that at one point saw price declines around 20%, and included the worst December since the Great Depression (1931), the worst single month (December) since the Great Recession (Feb 2009), and the worst Christmas Eve plunge ever, was followed by a significant rebound in the first quarter, including price increases of 20% or more over the Christmas Eve lows for many parts of the market.

In other words, there has been a lot of movement to essentially go nowhere.

Meanwhile, the bond market and more conservative side of the investment spectrum, which had a rough ride for much of 2018 as interest rates rose precipitously, has also experienced a sharp recovery from fourth quarter lows. 

As we communicated in our previous commentary, we believe the Federal Reserve’s decision with regard to interest rates and global trade agreements were driving much of the Q4 volatility, and would be a primary factor in 2019. Both of these issues appear to be trending favorably in the eyes of investors, and are not commanding the headlines they were several months ago.

Instead, the focus appears to be shifting to the strength of the global economy, the timing and inevitability of the next US recession, and--heaven help us all--the politicking and posturing that is the 2020 Presidential election that is still 19 months away.

All these factors point to continued choppiness in the markets, which we view as a long-term positive for investors, unless you watch your portfolio daily and have untreated high blood pressure.  For your sanity and health we would recommend you address both those issues.

https://www.cnbc.com/2018/12/31/stock-market-wall-street-stocks-eye-us-china-trade-talks.html

https://www.nbcnews.com/business/markets/dow-drops-653-points-worst-christmas-eve-trading-day-ever-n951661

The Seven Money Types

By David Munn

In 1995, author Gary Chapman released his book, The Five Love Languages: How to Express Heartfelt Commitment to Your Mate, which has gone on to be a long-term best seller. The premise is that there are 5 ways to express and experience love, called “love languages”, and we each respond differently to each one.  The five love languages are:

• Receiving gifts

• Quality time

• Words of affirmation

• Acts of service

• Physical touch

For couples who don’t share the same love languages--which describes most couples--this insight undoubtedly created many “aha” moments as to why they didn’t necessarily feel loved at times by their partner, or why their partner didn’t respond in an expected manner to an expression of love.
 
In a similar vein, author Tommy Brown recently released his book, “The Seven Money Types”, which seeks to identify the differences in how we are each wired to handle money.
 
We have all, at one time or another, observed and been perplexed by the seemingly irrational financial decision(s) made by someone else, whether a spouse, child, or acquaintance.  Though they may not have given the decision a second thought, your perspective was that it was wasteful, foolish, and possibly even irresponsible. 
 
While many of us tend to naturally identify as either a “spender” or “saver”, our decision making process in both spending and saving is more complex.  Brown makes the case that there are seven different money types, each of which is guided by a basic belief, a key characteristic, and a shadow side--or a potential flaw of our money type. Following is a summary of each:

Without even reading the book, most of us will naturally identify with one or more money types, and may also find an accurate description of a spouse, child or friend whose financial behaviour has been at times perplexing. 
 
One of my first thoughts when reading this for the first time was of a pastor who I had a close relationship with in college. He would spend a large portion of his day going from restaurant to coffee shop, meeting with college students whom he was mentoring.  I found this to be extremely wasteful and financially irresponsible for a poor pastor with a family to feed(I identify strongly with both the “Discipline” and “Endurance” types), but I now realize that based on his money type, “Connection”, he felt the best use of his limited resources was to buy food and coffee for poor college students, because that’s about the only way they would make time to meet!
 
While I would not make the same decisions if I was in his position, it was enlightening for me to recognize that his decisions were not necessarily wasteful or irresponsible; we are simply wired for different outcomes and different values.
 
If financial decisions have ever been a point of conflict in a relationship--particularly with a spouse or child--take some time to identify the money type of everyone involved, and consider how that impacts everyone's different perspectives on the situation.

Seeds for Sowing

by Grant Sims

As we look back on life there are memories of difficult times, chapters of progress, and defining moments that tell a story of how we became who we are. We recognize that skipping any hard part or successful achievement could have led us somewhere different. Knowing the journey was worth it, we reflect with a feeling of adventure, satisfaction, and joy for where it has brought us.

This is exactly where we find Mike and Cindy Stein. They are looking back over the years since they got married and are amazed at the journey that brought them to their present joy! Twenty-five years ago they had no emergency fund, no savings plan, and were not sure how they would ever retire.

It was their desire for Cindy to be a stay-at-home mom that drove them to live as frugally as possible. In order to live off just Mike’s salary, they reduced their expenses and eliminated their debt (other than house and car payments). Cindy said, “We were able to live, but there was nothing to save.” 

While living in Chicago, they attended a Crown Financial Study at their church and learned more about the importance of prioritizing savings and giving back to God first. This was the first time the order in which you give back really jumped out at Mike. Most people he knew made money and spent most, or all of it, before thinking about giving. In the meantime, Cindy already had a generous heart but she was waiting and praying for years that Mike would gain the same perspective in this area of their finances. Wishing they would have gone through a course like this long before, they felt a strong conviction to make serious changes to their finances.

First, they made the decision to move to a city with a lower cost of living, then started implementing the steps from their financial class by establishing an emergency fund and utilizing the retirement plan at Mike’s new job.

Not long after that Mike and Cindy attended an event for his work where the speaker, an extremely generous giver, shared his story of increasing his giving by 1% every year and the impact it had on his and his wife’s perspective on life and money. This story encouraged Mike and Cindy to take this same step of faith and start to increase their giving 1% each year going forward, starting at the 10% they were already committed to.

Years later, Mike and Cindy decided to pursue a business venture that would help supplement their income.  They like to joke that even though this particular business venture was Mike’s idea, Cindy was the one that ultimately ended up running it.

After years of managing the business and significantly increasing its value, Cindy was tired and ready to sell.

When they approached Munn Wealth about the tax ramifications of selling their business, knowing both their story and their hearts for generosity, it was clear they could benefit from utilizing a Donor Advised Fund (DAF).

In simple terms, a DAF is a giving account that allows donors to make a charitable contribution, receive an immediate tax deduction and then recommend grants from the fund over time. A DAF can be funded with cash, securities, or other appreciated assets.  It is an easy sell when you have the opportunity to increase your giving by 15-25% or pay that percentage to Uncle Sam.

Upon hearing of this opportunity, Mike and Cindy were excited about the potential to save thousands of tax dollars on the sale of their business and designate additional money for future giving.

Remember that promise to increase giving by 1% each year? Well that was 15 years ago and they have been faithful to give 12 . . . 18 . . . 21 . . . and now 25% of their income. When it came time to decide how much they wanted to give, they did not base it off tax savings or how much they needed to keep so they could retire right away, they wanted to honor their promise and continue their current giving level – 25% of all their sale proceeds.

Most people would have a terribly hard time giving away 25% of their income or the proceeds of a business they worked so hard on, but as Mike and Cindy shared their story they could not have been more excited about the impact these dollars will have on the charities they support or the new ones they will now be able to help fund.

Mike and Cindy recognized their decision to grow in generosity had an amazing impact on their lives and wanted to share that in a special way with their children. What better way to teach generosity than to provide your children with the opportunity to be generous, especially if they don’t have the financial means to do so?

They called a family meeting. Their daughters were skeptical; “Are mom and dad moving to Mexico? Taking a trip around the world? What is going on?”  They shared their story of generosity and faithfulness, followed by telling their daughters that when they opened and funded their own DAF they decided to open and fund one for each of their daughter’s families too. It was a gift--not cash to be spent, but to be given away. Their desire was for each family to identify causes they were passionate about and find nonprofits to support that are focused on that specific cause.    

That night and the following days were full of conversations about how they wanted to use the money. One family feels very passionate about underprivileged kids and schooling, and the other about international missionary work. They are now in the exciting phase of selecting  which nonprofits will best use their money and how much to give each.

 “This whole thing was so fun,” Mike and Cindy agreed.

For their own DAF, which they named, “Seeds for Sowing”, Mike and Cindy have chosen to focus their giving on helping nonprofits improve their donor management and engagement, as this is closely tied to the work Mike does. They believe there is a great opportunity to impact organizations through the development of better systems and fundraising plans.

It’s a pleasure to be a part of Mike and Cindy’s story and observe their joy and gratitude for what has happened, and their enthusiasm and excitement for the impact their generosity will have.

Changes to Be Aware of For Your 2018 Tax Return

By Drew Steinman

The arrival of 2019 brings with it the 1099s, W-2s, and other important tax documents that grace us with their presence. These of course serve as friendly reminders that tax season is upon us and that April 15th is coming whether we like it or not. However, these taxes aren’t like taxes of the past. Those filing, both personal and business returns, will find many changes when preparing their 2018 taxes.

One of the largest, and most welcome, changes is that most taxpayers will find themselves in a lower tax bracket for their 2018 taxable income. The chart below demonstrates the tax bracket changes for Married Individuals Filing Joint Returns and Surviving Spouses from 2017, on the left-side of the chart, and 2018, the right side. Most of the 2018 taxable income amounts increase, while many of the tax bracket percentages decrease.

Despite this being very considerable change in the tax law, it is hardly the only change. Another alteration is that the standard deductions have increase significantly. The standard deductions for single taxpayers now stand at

$12,000, up from the previous total of $6,350; the deduction for married individuals filing jointly deductions have increased to $24,000 rather than the previous total of $12,700.

Although the standard deductions have increased, the itemized deductions for state and local taxes (including income, property, and sales tax) are now capped at a total of $10,000. Miscellaneous itemized deductions from tax preparation, work-related expenses, and investment fees have been eliminated. The changes in the itemized deductions, paired with the in-crease in standard deductions, means that most taxpayers will no longer itemize their tax returns.

More changes coming to your 2018 taxes include the elimination of personal exemptions. The $4,050 that could have been exempt previously, has been retired, however, the Child Tax Credit has increased from $1,000 to $2,000 per eligible child.

Finally, one modification that business owners (Sole Proprietorships, S-Corporations, and Partnerships) will find during their tax preparations is a 20% deduction on business income. This is a welcomed sight, but also based on eligibility and subject to certain limitations, including a phase-out for certain businesses with more than $315,000 in taxable income and more than $157,500 for single filers.

Keep in mind that this is certainly not a comprehensive list of all the changes regarding your 2018 taxes, but some important ones that will affect most people filing. Be sure to consult your tax preparer for more information when it comes to the full list of changes in the tax law.

Disclosures

Information presented herein is based upon facts derived from publicly available information, and is also based on certain assumptions, including that there are no additional changes to current tax law, and that demographic information regarding retirement plan contributions also remains unchanged.