Highlights of this Month’s Review and Update:
- Call today to schedule your personal review and financial planning update and take advantage of new services offered to you today!
- Social Security rules were changed behind the scenes in the new budget deal passed by Congress and signed by the President. Call us to review how they might affect your claiming strategies.
- Stocks move sharply higher in October, notching the best monthly gains in four years.
- We see continued stock gains possible in the coming months.
- FED rate watch with possible small interest rate increase in December or the first quarter of 2016.
- S. economy continues to move forward, albeit slowly, with manufacturing lagging.
- S. corporate earnings slower than a year ago due to decline in energy.
READ ON FOR FURTHER DETAILS……………………………………………….
Schedule Your Year-End Review Now:
If you have not yet done so, now is the time to call and schedule your personal year-end review and financial planning update, either in person or by phone. With our new MyWealth planning system, and the new Riskaylze portfolio analysis we added this past month that can define your personal portfolio’s specific risk, an update and review of your long term goals/plans will allow us to serve you better and add a great deal of value to the services we provide. Call us today-405-844-9826 or 1-800-736-3642!
Congress Sneaks in Changes to Social Security Claiming Strategies:
We have been holding several Social Security workshops over the past few months, covering current benefits and discussing when and how to claim based on individual situations. Americans planning to select a claiming strategy to maximize their Social Security benefits and secure their retirement were shocked to learn that most of those options have been virtually eliminated by a stealth act of Congress.
It’s not just that file and suspend strategy and the option to restrict Social Security claims to spousal benefits have been eliminated for all but a small group of people who happened to be born at the right time. It’s the fact that there was no advance warning.
The Social Security rule changes were slipped into a backroom budget compromise designed to keep the country from running out of money. There were no public hearings on the subject. No legislation was introduced. Word leaked out last week just before the House approved the budget deal by a 222-167 margin on Wednesday. The Senate followed with a 64-35 approval in the dark of the night at 3 a.m. Friday. President Barack Obama signed the law into effect today, Monday, just in time to avert a Government shutdown by Tuesday’s debt ceiling deadline.
There are certain exemptions for those already full retirement age and also anyone turning 62 before December 31, 2015. It is now more important than ever to review the current options under this change for your own Social Security claiming strategies. The rules have changed, and many previous options you had prior to this law are now gone. We will be continuing to conduct workshops in the future to provide you with the new options, and in the meantime, if you have questions or are coming up to your own decision as to how to claim benefits, call us and let’s schedule a personal review to discuss what best fits your goals and needs.
October was a strong month for stocks, nearly erasing the losses incurred in August and September. By month’s end, the Dow Jones Industrials recorded a gain of 8.47% and the S&P 500 Index rose 8.30% (MarketWatch data). In both cases, these were the best monthly gains in four years (St. Louis Federal Reserve data). See the above chart for the S&P 500 rise in October. It should be noted how quickly the current upturn came after the major stock market indices just posted their worst monthly decline since May 2012. Market volatility was a main theme, especially in late August and early September, and has already been suppressed during the month of October. Our portfolios remain invested looking forward, expecting reasonable equity gains in the months ahead. We would also expect reduced volatility over the coming months with the possibility of rising stock prices.
During the month of October we also saw interest rates rise, with the yield for the 10 year U.S. Treasury increasing by .10%, ending at 2.16%. (U.S. Treasury) The national average rate for a 20 year fixed mortgage closed out October at 3.78%, with the 15 year fixed rate at 2.84%. (Bankrate.com)
The price of oil climbed .55 per barrel, finishing out the month at $46.39 for West Texas Intermediate Crude, and gold rose $28.35 per ounce, closing out October at $1,142.35. (CNBC)
We would expect the Fed to eventually raise rates in the near term, which has to come soon if not only to save face. If the Fed hikes in December, it could potentially come as a surprise, as many market participants have started to change their tune with the release of the last FED meeting’s notes; however, the first quarter of next year seems to be a much more likely candidate. The Fed has turned its attention abroad, which could be the beginning of an endless rabbit hole of excuses. Consequently, they should eventually be forced to test the waters and begin with a small rate hike. This would lead us to expect a 0.25% change in rates to be followed by a several months of waiting as the ripples calm. The Fed will closely be watching the response of the markets and we feel a rate hike could be welcomed as it may be signaling an improvement in the U.S. economy. We may initially see more volatility and currencies could see some wide swings, but, it should all eventually be washed out as rates normalize and investors realize the world once survived without a zero interest rate policy.
Meanwhile, the European Central Bank (ECB) said it is open to further monetary stimulus (ECB website, Wall Street Journal), and China’s central bank cut its key lending rate late in the month (Wall Street Journal). It’s the sixth time in 12 months that China’s central bank has eased, though it’s no guarantee the latest rate reduction will cure what ails the world’s second-largest economy. The same holds true for Europe.
The U.S. Economy Moves Forward
Just prior to the end of October, the U.S. Bureau of Economic Analysis reported that Gross Domestic Product (GDP), which is the largest measure of goods and services in the economy, slowed from an annual pace of 3.9% in the second quarter to 1.5% in the third quarter.
On the surface, it’s unimpressive. But a quick look behind the numbers is more reassuring. Consumer spending, which accounts for almost 70% of GDP, expanded at a respectable 3.2%. It was a contraction in business inventories that knocked nearly 1.5 percentage points off GDP. In other words, GDP would have grown by nearly 3% if businesses had just maintained Q2’s level of goods on hand. That bodes well for Q4.
It’s not that the expansion has been robust. It hasn’t, as GDP has averaged a 2.1% year-over-year rate since the first quarter of 2010. Moreover, we have failed to achieve growth rates of prior expansions – see Figure 1.
However, the fact that businesses throttled back on production highlights the problems facing the manufacturing sector.
Industrial production in the U.S. has slowed significantly over the last 12 months – see Figure 2 – according to Federal Reserve data, with year-over-year growth at its slowest pace since January 2010. Since the beginning of the year, production is actually down 0.5%, which would signal that manufacturing has slipped into a mild recession.
Blame the sluggish global economy, which has hurt exports (U.S. Census Bureau), the stronger dollar, which reduces the competitiveness of U.S. exports, and the bust in the oil patch, which has forced significant cutbacks in capital spending among energy firms.
However, manufacturing is a small segment of the overall economy, and modest weakness among the industrial firms is unlikely to cause a full-blown recession in the U.S. Additionally, U.S. exports account for 13% of GDP (U.S. BEA). It’s not insignificant, but the relatively small share helps to insulate the U.S. economy from global turbulence.
Long-term, corporate profit growth is probably the single biggest variable that supports stocks. The most recent dip in profits can be traced back to the sharp drop in oil prices and its punishing effect on energy earnings. In Q2, profits at energy firms in the S&P 500 plunged 56% from the prior year, weighing on profits in the overall index (Thomson Reuters).
With 68% of S&P 500 companies having already reported third quarter earnings through October 30th (Thomson Reuters), profits are forecast to drop by 0.9% from a year ago. Again, blame an expected 59% decline in the energy sector. Exclude energy and estimated Q3 profits would improve by about seven percentage points (FactSet).
While Thomson Reuters is forecasting a slight decline in Q4 profits, earnings are expected to turn higher in 2016. Any profit forecasts going out more than one quarter are dicey at best, but the general consensus that modest economic growth will fuel the bottom line has been supportive.
We appreciate the privilege to be of service to each and every one of you, and please don’t hesitate to call if you ever have any questions or concerns, or if we can be of further service in any way.
Your TEAM at F.I.G. Financial Advisory Services, Inc.
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1 The Dow Jones Industrials Average is an unmanaged index of 30 major companies which cannot be invested into directly. Past performance does not guarantee future results.
3 The S&P 500 Index is an unmanaged index of 500 larger companies which cannot be invested into directly. Past performance does not guarantee future results.
5 New York Mercantile Exchange front-month contract; Prices can and do vary; past performance does not guarantee future results.
6 London Bullion Market Association; gold fixing pricing at 3 p.m. London time; Prices can and do vary; past performance does not guarantee future results.