CAS News
Brexit is Beginning
If you have a good long memory, you may recall that last summer, the U.K. panicked the investment markets by voting, in a nation-wide referendum, to exit the European Union. There were, of course, dire predictions about the impact on the U.K. economy, which never materialized, in large part because the U.K. had not yet formally opted out of its Eurozone agreements.
At the end of March, the U.K. finally pulled the trigger and made the departure from the European Union official. The Queen of England delivered her royal assent, and the U.K.’s envoy to the European Union hand-delivered a letter to the office of the European Council president in Brussels invoking Article 50 of the EU treaty. This delivered formal notification of the Brexit decision, the first time this has happened in the EU’s history.
So that means those dire predictions will finally come true. Right?
As it happens, Article 50 was intended to prevent any rash or immediate consequences of an exit from EU membership, and it seems to have accomplished that goal. Under the bylaws, the divorce will be negotiated, item by item, over the next two years, meaning that any change in economic circumstances will be gradual and perhaps accommodated as they happen. How gradual? Over the next several weeks, the EU’s remaining 27 members will discuss their priorities in advance of the negotiations, and then hold a summit on April 29. Only then will the European Commission have a mandate to negotiate with representatives from London.
What will the negotiations cover? First up will be Britain’s obligations to the EU for its participation thus far—a bill that could total up to roughly $65 billion. Also: what will be the rights of 3 million EU citizens living in the U.K., and the rights of more than 1 million Britons living and working in the Eurozone?
After that, it is speculated that the British government will seek to negotiate a broad free-trade agreement which will effectively replicate the provisions of its former membership in the European Union, as a way to protect its commercial ties with the Continent. This is where negotiations will get sticky, since France and Germany will almost certainly oppose a no-consequences exit, and they will want to protect their own economies’ free-trade access to Eurozone markets. On the EU side, a simple majority of countries will decide what proposals are accepted and which are sent back to the negotiating table—with one notable exception: any free trade agreement between the two sides much win unanimous approval.
This latter issue is problematic for the U.K., because it exposes each country to yet another referendum on the conditions of EU membership; the citizens of France, Germany, Luxembourg, Ireland, Holland and, well, all the other nations would want to be involved in the final decision, which would give them yet another opportunity to voice displeasure with the EU and stir up nationalistic parties and sentiments.
Also still to be determined are budgetary considerations. The U.K.’s contribution to the governing infrastructure of the EU will have to be made up by the remaining members, whose citizens are not eager to contribute more to the increasingly unpopular entity. The British government, meanwhile, will have to create an expensive governance infrastructure to replace the EU bureaucracy in Brussels, and Parliament will have to formally repeal the European Communities Act of 1972, making EU law U.K. law. Then, parallel with the EU negotiations, Parliament will debate every aspect of the EU law and decide which to keep long-term and which to drop. That, too, will take years.
The bottom line is that nothing dramatic is likely to happen, economically and in the investment markets, for years. Throughout the two years of negotiations, the U.K. will remain a full EU member, albeit without a chance to participate in EU decision-making. Some are predicting that the discussions will last for several additional years, with extensions on the status quo until issues can be ironed out. Unpicking 43 years of treaties and agreements covering thousands of different subjects will not be an easy task.
Those investors who overreacted to the initial (and shocking) Brexit vote sold their stocks into a market rally, and there is no reason to think that those who might panic now that the trigger is finally pulled will fare any differently. Both sides in this negotiation have a stake in not having anything dramatic—particularly dramatically damaging—from happening, and they will probably succeed in making Brexit a boring exercise in bureaucratic handover.
Sources:
Special thanks to Bob Veres for his commentary.
https://www.stratfor.com/geopolitical-diary/brexit-has-begun-now-what?utm_source=Twitter&utm_medium=social&utm_campaign=article
https://www.theatlantic.com/news/archive/2017/03/brexit-faq/521175/?utm_source=atltw
Fed Announces Rate Hike
As the U.S. economy and the stock market continue to see sustained growth, the Federal Reserve has elected to increase the interest rates once again. Just as in December, the latest Fed rate hike is quite conservative: an increase of 0.25%, to a range of 0.75% to 1%. As indicated in the chart, the rates remain historically low.
While the Fed’s decision to move forward with another modest rate hike was not surprising, the more consequential aspect of this story is their intention to gradually increase the rates over the next several years.
The below dot plot illustrates the interest rates that have been projected by each of the 17 Federal Reserve policy board members.
The majority of policy board members said they believe the interest rates should be increased to a range of 1.25-1.5% by the end of 2017 – indicating that we could see two or three more rate hikes before the end of the year. By the end of 2019, the Fed policy board anticipates an interest rate of about 3% – a considerable increase from the current rates, but a fairly moderate rate when compared to historical levels.
The latest interest rate projections are consistent with the Fed’s December projections, reflecting the Fed’s overarching goal of tying future rate increases to U.S. economic progress.
How Does the Rate Hike Affect You?
The rise in rates is good news for those who believe that the Fed has intruded on normal market forces by suppressing interest rates much longer than could be considered prudent, and even better news for people who are bullish about the U.S. economy.
However, bond investors might be less enthusiastic, as higher bond rates mean that existing bonds lose value. The recent rise in bond rates suggests that the bull market in fixed-rate securities may finally be waning.
The impact on stock investors is more complex. Bonds and other interest-bearing securities compete with stocks, in the sense that they offer stable returns on your investment. As interest rates rise, some stock investors could be inclined to move a portion of their investments into the bond market – reducing demand for stocks and potentially lowering future returns.
As the Fed contemplates more rate hikes in 2017 and 2018, our family team of advisors will continue to closely monitor the market and offer recommendations that reflect your current situation and future objectives.
Sources:
https://www.ft.com/content/76cffb46-6661-3424-ba07-0e11e3a58cbe
https://www.washingtonpost.com/news/wonk/wp/2017/03/15/fed-hikes-interest-rate-hits-brakes-on-growing-economy/?utm_term=.55ca0ba430c6
Graphs:
Federal Reserve/Washington Post
Federal Open Market Committee/Financial Times
What Will I Need to Do When My Spouse Passes?
Kim Ciccarelli Kantor | Naples Daily News | March 2017
In a perfect world, you would know exactly what to do and who to call when your spouse passes. You would have checklist of key estate planning considerations, which you had discussed with your advisors and your spouse before they passed. But for all the preparation in the world, it can be difficult to know where to start amidst the sorrow and grief of losing your spouse.
Of course, your first responsibility is family: handling all of the necessary arrangements for your spouse’s funeral and coordinating with your family members. Next, you need to notify your advisors – specifically, your attorney and your family financial advisor – and set up a meeting to gain a better understanding of your responsibilities as the surviving spouse.
Unfortunately, many people fail to adequately prepare for their spouse’s death. Of course, most people execute and sign their key estate planning documents in accordance with their wishes. They work with their financial advisor to name beneficiaries and properly title assets. They open a safe deposit box and make sure there are multiple signors. They secured their domicile and filed the necessary homestead papers. They prepare a balance sheet or a ledger of assets.
While all of these steps are necessary and valuable to the estate planning process, these actions will not sufficiently prepare you for the reality of losing your spouse.
By completing a thorough post-death dress rehearsal with your spouse and advisor team, you will effectively bridge any gaps in your plan that could undermine the proper execution of your estate. Create a comprehensive list of the most important priorities to contemplate at the time of your spouse’s death. As morbid as a post-death rehearsal may sound, a detailed rundown of your responsibilities will prepare you for the worst imaginable scenarios.
For instance, pre-death planning is especially imperative if both you and your spouse are deceased or incapacitated, and you need to defer to your Power of Attorney or successor trustee for oversight. Without a complete understanding of your responsibilities after your spouse’s death, that situation could be a total nightmare.
Your life plan hinges on how well you settle your affairs and the decisions you make. Prior to meeting with your advisors, claim nothing, make no decisions, and do not inform institutions of your spouse’s passing. Instead, gather information in preparation for this time together. Visit your safe deposit box, and bring your original estate documents and your spouse’s death certificate. Review your cash balances in accounts that are in your name – both individual and joint – to ensure that you have “operating” funds during the estate settlement process. Create a list of funeral expenses and medical bills – but wait to pay until you’ve met with your advisors.
During the meeting, talk earnestly with your advisors, who are well-versed on your personal circumstances as well as the planning and distribution options under your plan. Have your advisors review a flow chart of how your affairs should be handled, as well as a checklist of items you will be required to complete in accord with your attorney. Determine who will handle your required income tax return filings, and be sure that creditors are notified if a formal process needs to be followed.
If you need more clarity about your immediate duties after your spouse’s death, run through the process before they pass away. Evaluate your list of executor activities, and seek out estate planning opportunities that allow you and your family with the flexibility you need.
Most importantly, address the question: “What are my most timely priorities?” Then, begin to move forward.
The First Wealth is Health
Jill Ciccarelli Rapps | Life in Naples Magazine | March 2017
Financial planning involves more than just discussing investments. In fact, our greatest asset is not a stock or a bond; it is our health.
An unhealthy lifestyle places a major strain on your finances, while embracing wellness can reduce your long-term financial burden. With the cost of health care rising exponentially, it is more important than ever to take care of yourself. By keeping your body and mind in top condition, you will find it easier to enjoy all aspects of your life.
Bad Habits Are Expensive
Unhealthy habits like smoking tobacco, drinking too much alcohol, eating junk food or buying sugary coffee drinks all come with huge price tags. Eliminating or reducing these bad habits will enrich your health, lower your chances of developing a costly long-term health condition, and save you hundreds of dollars every month. The money you save by kicking these habits can go towards preserving your family’s financial future.
Being Healthy Increases Your Earning Potential
Being in good health can increase your earning potential. The healthier you are, the more equipped you are to work longer hours and thrive in high-paying positions that have more demanding schedules and responsibilities. Being healthy also reduces the number of sick days you need to take, as well as the number of doctor’s visits you need to make. Lastly, healthy people can keep working and generating steady income well into their golden years.
Healthy Habits Save Money
Making small adjustments to your lifestyle can save a substantial amount of money over time. Biking and walking cost less than driving a car. Packing a healthy lunch rather than eating out is good for your waistline and your wallet. Unlike drinking sodas and other sugary drinks, water is usually free. Maintaining a healthy weight can reduce the number of clothes you have to buy. All of these healthy habits can help you cut on daily expenses that detract from your savings goals and retirement plans.
In addition to daily savings, being healthy can have long-term financial benefits for your entire family. The combination of increased earning potential and increased savings on daily expenses will enable you to contribute more to the household budget. Secondly, healthy habits set a positive lifestyle example for your children, which will encourage them to be healthier throughout their lifetime. Finally, a wellness-focused lifestyle will reduce the need for expensive and time-intensive health care procedures later in life.
Here are some resources that will help you to jumpstart your healthy lifestyle!
• Discover tips for staying healthy and wellness-related guidance at Blue Zones of Southwest Florida
• Check out the upcoming SpelLIFE Women’s Wellness Summit in Naples on April 1 at www.AEuphoricLivingFoundation.org
A Strong Mind Manages Finances Better
One of the most critical aspects of healthy living is ensuring that your mind stays sharp well into your golden years. As your mental capabilities decline, managing your personal finances becomes more difficult. Between the calculations required for your monthly budget to determining the best investment strategies, you need your mind to be functioning at peak efficiency; otherwise, you could end up making very costly errors. The best way to promote mental wellness and alertness is to maintain an active, healthy lifestyle.
A Healthy Lifestyle Reduces Healthcare Costs
Finally, and most importantly, the biggest benefit to living a healthy lifestyle is reduced healthcare costs. Medical care in the United States is the most expensive in the world. The average American spends hundreds of thousands of dollars on healthcare during their lifetime.
Your life insurance and health insurance premiums are based on your current state of health. If you are in poor health, or engage in habits that deteriorate your health over time, you will pay more for monthly insurance coverage. Insurance premiums grow quickly over time, and could ultimately become one of your biggest expenses.
Being healthy also correlates to lower insurance premiums, fewer doctor’s visits and a major decrease of spending on pharmaceuticals. In addition, healthy people are more apt to seek out preventative care, which is less costly than the high fees associated with chronic illness. Simply put, the healthier you are, the less money you have to spend on medical care.
Our health is our greatest asset. Taking care of your health can save you a lot of money – from small saving on daily expenses to larger savings on insurance rates and healthcare spending. By making a continual commitment to healthy living, you lay the groundwork for a successful financial future.
FSC Securities Corporation and Ciccarelli Advisory Services, Inc., are not affiliated, endorsed nor employed by the companies listed here which includes but is not limited to at Blue Zones of Southwest Florida and A Euphoric Living Foundation.
Longer Lives: At Home and Abroad
For years, life expectancy in the U.S. has been among the longest in the world – a natural byproduct of the fact that the U.S. is wealthier than most other nations. Indeed, a recent report from the medical journal The Lancet projects that by 2030, women in the U.S. will live an average of 83.3 years (up from 81.2 today), and men will live an average of 79.5 years (up from 76.5 today).
The report analyzed data on mortality and longevity patterns from 35 industrialized nations (both high-income and emerging nations). The projected increases in American longevity are definitely encouraging; however, perhaps the most interesting aspect of this study is seeing how the rest of the world is catching and even surpassing American seniors in terms of life expectancy.
South Korean women are projected to live to an average age of 90 years in 2030, and women in Spain, Portugal, Slovenia and Switzerland will see average lifespans above 87. South Korea, the Netherlands, Australia, Denmark and Switzerland will all see their male citizens survive for more than 80 years on average. In Mexico and the Czech Republic, the lifespans of both men and women will be at levels comparable to the U.S. by 2030.
Why is the U.S. not progressing as fast as other countries? The researchers who generated this report have pointed to the high obesity rates in the U.S. The average American consumes a diet that is less healthy than people from the countries that top the list of global life expectancy.
The U.S. healthcare system also plays a role in longevity outcomes. Although the U.S. spends more of its total GDP on healthcare than any other nation, the quality of care received tends to be top-heavy – meaning that richer Americans can afford much better care than their less-wealthy counterparts.
Sources:
https://www.washingtonpost.com/news/to-your-health/wp/2017/02/21/us-life-expectancy-will-soon-be-on-par-with-mexicos-and-croatias/?tid=sm_tw&utm_term=.cb737a6fb684
http://www.cnn.com/2017/02/21/health/life-expectancy-increase-globally-by-2030/index.html
The Good and Bad of Millennial Financial Habits
Millennial Americans – people born between 1982 and 1999 – now represent a larger portion of the U.S. population than Baby Boomers (those born from 1946 to 1964). New research from the Transamerica Center for Retirement Studies demonstrates that Millennials are saving their money at a higher rate than their Baby Boomer counterparts.
Nearly 75% of Millennials are saving for retirement at an earlier age than any previous generation. Half of their generation is putting away 6% of their income or more – a statistic that makes Millennials the best cohort of savers since the Great Depression – despite carrying unprecedented levels of student loan debt. Those who participate in their workplace retirement plans are saving even more (7% per year on average).
That being said, Millennials are not doing an equally good job of investing. The research suggests that many younger Americans are skeptical of or confused by the topic of investing, and tend to keep their savings in cash. That is problematic, since low interest rates essentially drop their return on investment to 0 percent.
In the Transamerica survey, 25% of Millennial respondents said they weren’t sure how their retirement savings were invested. When they were prompted to check, they were more likely to report higher allocations to bonds, money market funds and other low-return investments than their Baby Boomer or Generation X counterparts.
There are a variety of prescriptions for the problem of being under-invested, which is much more easily corrected than bad savings habits. Millennials need to be educated about investing – a subject that is rarely taught in high school or college. The key to guiding Millennials towards financial independence is helping them to become more comfortable with risk.
While everyone knows that the markets will go down from time to time, young people will be more likely to invest if they understand that the markets have always recovered and beaten their previous highs.
Sources:
http://www.forbes.com/sites/arielleoshea/2017/02/21/5-essential-investing-moves-for-millennials/?ss=personalfinance#743c36582ab5
http://www.csmonitor.com/Business/Saving-Money/2017/0221/Why-Millennials-are-better-with-their-money-than-their-parents
Your Guide to Financial Spring Cleaning
Spring is just around the corner! Now is the perfect time to start sorting through your official documents and reduce the clutter after tax season.
Organizing and preserving your official documents will save you time and effort in the long run, simplifying the financial planning process. While keeping detailed records is crucial for the well-being of your financial plan, it is equally important to discard your outdated records on a regular basis.
Given the wide variety of documents you have in your archives, you may find it difficult to determine which records you need to keep and how long you should maintain them. Here are some useful guidelines for maintaining your official documents.
Records to Keep for a Lifetime
There are numerous records that you should keep throughout your entire lifetime. In order to avoid damaging or misplacing these records, you should store these files in a locked safety deposit box or fireproof safe. You may also elect to store them electronically in a password-protected online vault.
Regardless of your method, make sure to preserve the following documents in a secure location that your loved ones will be able to access:
•Retirement plan and IRA adoption agreements
•Complicated tax returns (discuss with your financial advisor to determine which annual returns, if any, should be preserved)
•Social security cards and passports
•Birth certificates, marriage certificates, and death certificates
•Divorce papers or settlements
•Adoption papers
•School transcripts and diplomas
•Immunization records and records of any hospital stays and surgeries
•Military discharge papers
•Estate documents including wills, trusts, prenuptial agreements, advanced medical directives, do not resuscitate orders and other instructions
How Long to Keep Other Important Documents
While all of the above documents should be kept indefinitely, there are different retention guidelines to observe for your other documents. See the following list of suggested timelines for maintaining the rest of your key documents. Of course, you should check with your advisor to confirm that these guidelines are appropriate for your financial situation.
•Tax records including annual tax returns, W-2s, 1099s, cancelled checks, receipts, and the first two pages of Form 1040: Seven years.
Note: Tax returns can generally be audited for any reason for up to three years after filing; or up to six years if the IRS suspects underreported income. For this reason, it is wise to preserve all of your returns for at least seven years (and even longer if a specific return is complicated or unusual – discuss with your advisor for more details).
•Property records including deeds, titles, and loan and lease agreements: The entire duration of ownership plus seven years.
•Home improvement records including receipts, contracts, and records of cost: Until you sell the property and tax liability is settled.
•Insurance policies including coverages, policy numbers, and contracts: Life of the policy plus four years.
•Bank statements and deposit slips: Seven years.
•Charitable contribution documentation: Seven years.
•Investment records including investment purchase receipts, dividend reinvestment records, mutual fund annual statements and year-end brokerage account statements: The entire duration of ownership plus seven years.
Note: Most custodians will keep your cost-basis records for you.
•Savings bonds and accounts and support documents such as certificate of deposit, bank holdings, account numbers, and banker and branch information: The entire duration of ownership plus seven years.
•Credit card records: Keep statements for seven year; maintain receipts for one year after purchase.
In addition to observing these guidelines for record retention, you can further simplify your financial life by creating a master checklist of all your assets and liabilities. By doing so, you can ensure that you have all the official documentation to prove your portfolio holdings – and easily identify any information that is missing in your records.
Also, as mentioned earlier, you should always store your records in a secure location that is easily accessible for your family members and loved ones.
As a result of keeping your financial and legal records for an appropriate length of time, you will prevent many of the complications that can arise when managing your finances. Use this handy guide to make sure you are maintaining everything you need!
CAS Profiles – Logan Curti (Florida)
Logan joined our CAS family in March 2016 as our New Business Development Coordinator at the Naples office.
Logan facilitates all of our CAS marketing communications, including the website, blog, weekly email blasts and social media pages. He is also in charge of coordinating client events, writing press releases and articles on various financial topics, and generating public relations and community outreach opportunities for our firm.
“CAS is truly a fantastic place to work – a friendly, hardworking culture filled with incredible people,” he said. “I find it very gratifying to know that my contributions play a key role in fulfilling our firm’s greater mission: guiding every client family towards 
the realization of their vision for the future.”
Logan was born and raised in the Minneapolis-St. Paul area, and earned his Bachelor’s degree in Public Relations and Advertising from North Dakota State University in Fargo, ND. After graduation, he briefly worked in Fargo as a promotional products sales consultant; then, in February 2016, he decided to ditch the tundra and move to the tropics!
In addition to writing and marketing, Logan is passionate about politics and news, and enjoys all forms of comedy. During his free time, Logan enjoys golfing, going for walks, playing tennis, spending time with family, and soaking up that Florida sun!
Logan, sister Alicia, parents Paul & Nancy
Logan Curti is not registered with FSC Securities Corporation or Ciccarelli Advisory Services, Inc.
Organizing Your Finances When Your Spouse Has Died
Losing a spouse is a stressful and emotionally draining experience. Even if you’ve done all the preparation in the world, you may find it difficult to know where to start amidst the sorrow and grief of losing your loved one.
Fortunately, you can follow these time-tested steps for simplifying your financial affairs in a way that is both efficient and less stressful.
Notify Others
When your spouse dies, your first step should be to contact anyone who is close to you and your spouse, and anyone who may help you with funeral preparations. Next, you should contact your attorney and other financial professionals. You’ll also want to contact life insurance companies, government agencies, and your spouse’s employer for information on how you can file for benefits.
Get Advice
Getting expert advice when you need it is essential. An attorney can help you go over your spouse’s will and start estate settlement procedures. Your funeral director can also be an excellent source of information and may help you obtain copies of the death certificate and applications for Social Security and veterans benefits. Your financial advisor or insurance agent can assist you with the claims process, or you can contact the company’s policyholder service department directly. You may also wish to consult with a financial professional, accountant, or tax advisor to help you organize your finances.
Locate Important Documents and Financial Records
Before you can begin to settle your spouse’s estate or apply for insurance proceeds or government benefits, you’ll need to locate important documents and financial records (e.g., birth certificates, marriage certificates, life insurance policies). Keep in mind that you may need to obtain certified copies of certain documents.
For example, you’ll need a certified copy of your spouse’s death certificate to apply for life insurance proceeds. And to apply for Social Security benefits, you’ll need to provide birth, marriage, and death certificates.
Set Up a Filing System
If you’ve ever felt frustrated because you couldn’t find an important document, you already know the importance of setting up a filing system. Start by reviewing all important documents and organizing them by topic area. Next, set up a file for each topic area. For example, you may want to set up separate files for estate records, insurance, government benefits, tax information, and so on.
Finally, be sure to store your files in a safe but readily accessible place. That way, you’ll be able to locate the information when you need it.
Set Up a Phone and Mail System
During this stressful time, you probably have a lot on your mind. To help you keep track of certain tasks and details, set up a phone and mail system to record incoming and outgoing calls and mail. For phone calls, keep a sheet of paper or notebook by the phone and write down the date of the call, the caller’s name, and a description of what you talked about. For mail, write down whom the mail came from, the date you received it, and, if you sent a response, the date it was sent.
Also, if you don’t already have one, make a list of the names and phone numbers of organizations and people you might need to contact, and post it near your phone. For example, the list may include the phone numbers of your attorney, insurance agent, financial professionals, and friends – all of whom you can contact for advice.
Evaluate Short-term Income and Expenses
When your spouse dies, you may have some immediate expenses to take care of, such as funeral costs and any outstanding debts that your spouse may have incurred (credit cards, car loan, etc.). Even if you are expecting money from an insurance or estate settlement, you may lack the funds to pay for those expenses right away.
If that is the case, don’t panic – you have several options. If your spouse had a life insurance policy that named you as the beneficiary, you may be able to get the life insurance proceeds within a few days after you file. And you can always ask the insurance company if they’ll give you an advance. In the meantime, you can use credit cards for certain expenses. Or, if you need the cash, you can take out a cash advance against a credit card. Also, you can try to negotiate with creditors to allow you to postpone payment of certain debts for 30 days or more, if necessary.
Avoid Hasty Decisions
- Don’t think about moving from your current home until you can make a decision based on reason rather than emotion.
- Don’t spend money impulsively. When you’re grieving, you may be especially vulnerable to pressure from salespeople.
- Don’t cave in to pressure to sell or give away your spouse’s possessions. Wait until you can make clear-headed decisions.
- Don’t give or loan money to others without reviewing your finances first, taking into account your present and future needs and obligations.
The Ciccarelli Advisory Services family team is always here to guide and support you during this difficult transitional period.
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.
START – A Guide to the U.S. Economy
By Logan Curti, Lynn A. Ferraina and Jasen Gilbert, CFP®
Based on the January 29 presentation by Garrett D’Alessandro, CEO of City National Rochdale
In the midst of a major transition within our government – the inauguration of President Trump and initiation of a Republican-controlled Congress – many people have expressed uncertainty about the economic conditions that face our nation.
START is an acronym that serves as a useful tool for predicting U.S. economic performance as it relates to our government. Stimulus, Taxes, Attitude, Regulation and Trade are directly impacted by congressional legislation and executive action.
By understanding the interplay between public policy and economic factors, we are able to make informed predictions about the outcomes for investors. We have compiled this article to guide you through the economic landscape over the upcoming years.
Stimulus
Perhaps the most effective way to stimulate the U.S. economy is through increased spending by the government, consumers and corporations.
In terms of public-sector spending, defense and infrastructure spending serve as the foundation for stimulus efforts. As part of our nation’s $18 trillion annual GDP in 2016, about $450 billion was spent on infrastructure projects, whereas more than $600 billion was spent on national defense1.
Infrastructure spending creates well-paying middle-class jobs, and our country has a pressing need for modernization. However, infrastructure projects have a gradual effect on our economy; building a new bridge or upgrading a water system can take several years, and we do not feel the full impact of the stimulus until the project is completed. On the other hand, increased defense spending serves as a means for immediately stimulating the U.S. economy.
The U.S. economy is currently entering its 92nd consecutive month of economic expansion – the longest streak of growth since the 1990s. During the past eight years of expansion, we have experienced a modest but steady rate of GDP growth (between 2-2.25% in annually)2.
Based on the campaign platform of President Trump and the GOP, the U.S. may increase defense and infrastructure spending. This suggests that there may be a low likelihood of recession during the next 18 months.
While the government plays a less direct role in determining consumer spending, about 65-75% of our economy is driven by consumers3 – buying groceries, automobiles, clothing, housing, etc. Healthy consumer fundamentals will help to boost economic growth. Given that the U.S. has a low unemployment rate (4.8%)4 and the lowest level of consumer debt since the early 1980s5, consumer spending may also be on the rise during 2017.
Another critical component of our economy is corporate spending. As a result of business-friendly reforms on taxes and regulations (discussed in the following section), corporations may have more buying power under President Trump.
Taxes
When Congress and the President discuss tax reform, there are two distinct areas of conversation: the tax rates and the tax code. The two parties have different priorities in regards to tax reform, with Trump emphasizing tax cuts more heavily and Congress more focused on simplifying the tax code.
Given that our tax code is more than 10,000 pages long and is full of pork for corporate interests, reform will be a slow, arduous process. Regardless of Congress’ intentions, we likely won’t see any materials changes to the tax code during the next year, or even during the tenure of President Trump.
However, City National Rochdale feels that corporations, wealthy individuals and upper-middle class people may receive substantial tax relief in the form of lower marginal tax rates. Corporations will likely experience the greatest amount of tax reduction. The top federal marginal corporate tax rate is currently 35%; the GOP is proposing a top marginal rate of 20%, and Trump is supporting a 15% top marginal rate6.
For individuals, President Trump is proposing a top marginal tax rate of 33%, while congressional Republicans typically favor a top rate of 35% (the current rate is 39.6%)7. In regards to the capital gains tax and the estate tax, both Trump and the Republicans have advocated for the absolute repeal of these measures. Upper- and upper-middle class individuals will find these tax cuts to be advantageous to their bottom line.
With significantly lower tax rates, the national deficit could rise substantially over the next several years. However, if these tax breaks serve as a catalyst for companies and individuals to start spending more, the economy could boom – which could result in a long-term reduction in the deficit.
Attitude
The attitudes of consumers also play a vital role in shaping the economy. When consumers feel confident about their financial situation, they are inclined to spend more and invest more.
Today, consumer attitudes are positive as a result of various factors. First, the U.S. is the wealthiest country in the world, and we have never held as much wealth as we do today. American households have an estimated $91 trillion of wealth, up from the previous high of $81 trillion in 20078.
Secondly, wages and median household income are on the rise for the first time since 20079. Higher wages for lower- and middle-class consumers help to stimulate the economy. As businesses receive lower tax rates and have more money to spend, we could see this trend continue.
Thirdly, as mentioned earlier, low levels of unemployment and consumer debt also play an important role in shaping positive attitudes about economic performance.
Lastly, when consumers are anticipating lower tax rates, they will be apt to put their tax savings to work – either by spending or investing the surplus. Increased spending and investment both serve to stimulate the economy.
On the other hand, uncertainty about complex situations can reduce consumer confidence. Because of the uncertainty involved with a major governmental transition – particularly given Trump’s reputation of being unpredictable – some emotion-based investors will react too aggressively. This attitude of uncertainty may bring more volatility to the market, but may not affect the long-term trend of steady economic growth.
When taken as a whole, the current public opinion regarding the U.S. economy could spur increased spending from consumers. The increase in our collective purchasing power may stimulate economic growth in 2017.
Regulation
Regulations on the private sector are a balancing act. While too few regulations can lead to volatility, overbearing regulations can hinder investment in our economy. Congressional Republicans want to loosen regulations, whereas President Trump has voiced support for eliminating most regulations. Despite this fundamental difference in opinion, the end goal is consistent: reducing regulations on business owners and corporations.
In particular, banking regulations have created a bottleneck in our nation’s financial system since the recession of 2008. In fact, there is more than $3 trillion in corporate and personal assets that are “frozen” in money market funds under the current system10. By loosening regulations, consumers and companies alike may begin to spend and invest this frozen money.
Under the regulatory and tax environment that have existed since 2008, corporate earnings have increased by 4-5% annually11. The new administration’s proposals to deregulate private enterprise and reduce corporate taxes may have a drastically positive impact on corporate earnings.
Trade
On trade issues, President Trump breaks from the mainline Republicans in Congress. While most Republicans have supported free trade agreements and globalist policies, President Trump has been outspoken in supporting domestic manufacturing and economic protectionism.
Trump’s call for tariffs – or “border adjustment fees” – could lead to an increase in prices for consumers. Levying a 20% tax on all imports from Mexico and China may incentivize consumers to buy more American-made goods; however, the actual burden of the tariff falls on consumers, who would have to pay 20% more for some of the goods they need.
Also, other countries could retaliate if we begin to levy tariffs against their products – sparking a trade war. In the case of China, retaliation of tariffs could be dangerous for the U.S. economy. China owns a significant portion of our national debt and produces a substantial amount of our consumer goods. The risks associated with tariffs against China and Mexico far outweigh the potential benefits for U.S. manufacturing.
When considering trade, the 80/20 rule (otherwise known as the Pareto rule) can be instructive. While the 20% of Americans who are involved in manufacturing benefit from protectionist policies and a weak U.S. dollar, about 80% of our population benefits from free trade and a strong U.S. dollar. In short, free and fair trade policies that embrace globalization lead to a positive impact on our economy.
Conclusion
The first four factors of START – stimulus, taxes, attitude and regulation – are positive indicators for economic growth under the Trump administration. On the other hand, protectionist trade policies could be a wild card that lead to volatility in the market.
Overall, 2017 should be an interesting year for investors.
References
1) Congressional Budget Office 2016 Year-End Report
2) Word Bank Annual GDP Growth Rate by Country, 1961-2015
3) Bureau of Labor Statistics Consumer Spending Report, Year-End 2014
4) Bureau of Labor Statistics Jobs Report, Q4 2016
5) Federal Reserve Consumer Debt Report, Q3 2016
6-7) Congressional Budget Office & Tax Policy Institute, 2016
8) US Department of the Treasury: Financial Crisis Response Report, 2015
9) Bureau of Labor Statistics Jobs Report, Q4 2016
10) A Financial History of the United States: From the Enron-Era Scandals to the Great Recession (Markham, J.W.), 2015
11) U.S. Bureau of Economic Analysis: U.S. Corporate Profits, 1951-2016
