You may have seen recent headlines calling for the possibility of a recession by the second half of 2017… With Buttonwood Financial Group’s proactive approach to investment management we have processes designed position investments appropriately for each stage of the economic cycle.
Above is the current view from Moody’s Analytics of the Global Business Cycle Map. This map is designed to provide a snapshot of where various countries are in the economic cycle. At Buttonwood, the economic cycles drive our investment positioning and are ALWAYS on our radar. You may remember the 15% decline in the major stock markets from May 2015 to February 2016 – then again you may not – as our more defensive positioning helped to buffer the decline.
The objective of the Investment Policy Committee at Buttonwood is to produce a more consistent rate of return through economic cycles. Proactively positioning assets to both defend against, and to take advantage of opportunities in future economic cycle stages, is key to realizing that objective. Recently we have seen an increase in later stage economic cycle indicators, and as such we have continued to reduce risk – position investment assets more conservatively.
We use the following logic when positioning investment assets:
- Our baseline allocation is determined by stock and bond world index allocations. We adjust the baseline annually.
- We then make specific allocation changes based on our perceived changes over both U.S. and foreign economic cycles. We review economic cycles at least quarterly.
- Once allocation targets are defined by the economic cycle stage, we then determine specific investments that align with these targets.
- Once investments are made, we implement a rigorous process to track and monitor each investment.
- Beyond tactical economic cycle allocation, we also overlay shorter term technical market indicators to determine ‘cash’ strategy (invest cash OR hold cash).
In action: We began to decrease overall investment risk in 2015 based around signs of later stage economic cycles (#2 above). As we moved into 2016, we have, and will likely continued this trend. From a shorter term cash perspective (#3 above); in September 2016 we began to let cash build. And with the final two months of 2016 yet to unfold, we may once again end the year overweight cash.
Our proactive, logic based, investment approach provides us a much greater probability of success. At the same time, our strategy presents Buttonwood clients the ability to sleep well at night – even when the future of the markets looks uncertain.
As early as the mid 1700’s, our nation’s financial traders could be found in action on the streets of lower Manhattan. It was during these years brokers, merchants and auctioneers bought and sold to one another in offices, coffee houses, and marketplaces all over town. In the 1790’s, speculative excess, combined with the lack of a formal trading structure, left the future of our nation’s markets in question.
On May 17, 1792, a group of two dozen traders gathered at their daily meeting place, a Buttonwood tree at 68 Wall Street. Facing chaotic markets, they made the decision to organize their trading. “The Buttonwood Agreement“, as this arrangement would later come to be known, helped to create liquidity and give birth to The New York Stock Exchange.
Today, Buttonwood Financial Group, also founded on the basis of creating conservative order, brings to their clientele financial organization with a personalized focus. Through the combination of the development of conservative growth portfolios based upon asset allocation theory, as well as specialization in fixed income investments, from retirement to estate planning, the lessons taught by our forefathers come to light every day.
Higher education is a commitment—not just of time but money. And increasingly, universities are demanding a larger financial commitment. According to the College Board, the average tuition for a public four-year college is $9,139 for in-state students and $22,958 for out-of-state students. For private colleges, the average is $31,231. That’s per year.
Financial aid is available, but many wealthy families can’t count on qualifying for need-based aid. So what do you do to make higher education more affordable for you and your child? Here are some ideas:
Start Saving Early
Ideally, you should start saving while your child’s age is still in the single digits. Open a 529 college savings plan, and let the magic of compounding work on your kid’s behalf. The earnings on these investment accounts are tax-deferred—and they’re tax-free when withdrawals are made for qualified education expenses, such as tuition, fees and books. Plus, depending on the state, contributions to the plan may be tax deductible.
Like your retirement accounts, investing early in a 529 plan helps your earnings grow. You can choose plans that start with aggressive allocations while your child is young, then get more conservative as your child approaches college age.
There are more advantages to a 529 plan. First, if your child doesn’t end up going to college, you can give the funds to another student—or even use the money as part of your retirement planning (talk to your financial advisor how to do that). Plus, the plan will be in your name rather than your child’s, which will help in the calculations that the government uses to determine need-based financial aid. That’s because a student’s assets play a larger part in those calculations than a parent’s assets.
As your child ages and college approaches, here are some other strategies to make higher education more affordable:
Reduce Your Income
In the calendar year before your child applies for aid, defer income, spend down assets that would be counted in aid calculations or shift those assets to accounts that wouldn’t be counted—for example, move cash from your savings (which is used in financial aid calculations) into your IRA (which isn’t used in calculations). This approach can be helpful for students who will be eligible for need-based aid, but if your income is simply too high, this strategy isn’t likely to help.
As part of this approach, talk with family members and friends who would like to help your child with college costs. Their gifts could count against your child in financial aid calculations. Instead, the gifts can be given to you and you can apply them toward tuition, or the gifts can be deferred until your child’s senior year, when applying for financial aid will be a moot point.
Similarly, strive to reduce your child’s assets, or move them into a more aid-favorable account, like a 529 plan. Bear in mind that the sale of assets such as stocks could trigger capital gains for your child.
Negotiate with Colleges for Tuition Discounts
Yes, many universities do offer tuition discounts when they’re especially interested in a student, such as an academic standout. If a second-choice university offered your kid better tuition, go to the first choice and see if it’ll offer a discount.
Seek Merit-Based Aid
If your child excelled in academics, the college may provide financial assistance based on merit rather than need. Call the admissions office and talk about the school’s policies on merit-based aid. In addition, there is a universe of financial aid available from organizations, charities, businesses and others that isn’t based on need. Fastweb and BigFuture by The College Board are resources for researching possibilities.
Paying for a child’s university education can be costly. There is no need to make it unduly so. Start planning early, and consider all funding possibilities. An ongoing conversation with your child is essential, and we are happy to coordinate family meetings. That way, there’ll be no surprises about who is expected to pay what and how much. Talk with us—we know your situation and can advise you on the strategies that are likely to work for you.
BigFuture by The College Board, “College Costs: FAQs,” bigfuture.collegeboard.org/pay-for-college/college-costs/college-costs-faqs.
FinAid, “State Tax Deductions for 529 Contributions,” www.finaid.org/savings/state529deductions.phtml.
Liz Skinner, “Even Affluent Parents Can Tap into Financial Aid to Lower the Cost of Their Children’s College,” Crain’s Wealth, September 4, 2015, www.crainswealth.com/article/20150904/WEALTH/150909948/even-affluent-parents-can-tap-into-financial-aid-to-lower-the-cost.
William Baldwin, “12 Insider Tricks to Pay for College,” Forbes, January 2, 2013, www.forbes.com/sites/baldwin/2013/01/02/12-insider-tricks-to-pay-for-college/#15063b2e3ce5.
U.S. stock markets finished last week in heady territory.
The Dow Jones Industrial Average closed at 18,003. Its all-time closing high is 18,312. The Standard & Poor’s 500 Index was less than 1 percent below its intraday trading record, which was set last year.
Despite strong stock market performance, optimism was in short supply.
The latest Barron’s Big Money poll showed money managers are less bullish than they were last fall. Just 38 percent were bullish or very bullish about the prospects for stocks in coming months, 46 percent were neutral and 16 percent were bearish. Their outlook varied by market. Overall, they were most enthusiastic about U.S., European and emerging markets:
- U.S. stocks: 72 percent bullish, 28 percent bearish
- European stocks: 66 percent bullish, 34 percent bearish
- Emerging market stocks: 53 percent bullish, 47 percent bearish
- Japanese stocks: 30 percent bullish, 70 percent bearish
- Chinese stocks: 29 percent bullish, 71 percent bearish
The American Association of Individual Investors’ survey of investor sentiment reported, when compared with money managers, investors are less neutral (43 percent) and more bearish (24 percent) about what may happen during the next six months.
Current levels of pessimism might have inspired Sir John Templeton, a renowned contrarian investor. He once said, “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.”
|Data as of 4/22/16||1-Week||Y-T-D||1-Year||3-Year||5-Year||10-Year|
|Standard & Poor’s 500 (Domestic Stocks)||0.5%||2.3%||-0.8%||10.2%||9.4%||4.8%|
|Dow Jones Global ex-U.S.||1.0||1.7||-11.8||-0.3||-1.8||-0.5|
|10-year Treasury Note (Yield Only)||1.9||NA||2.0||1.7||3.4||5.0|
|Gold (per ounce)||1.3||17.0||4.5||-4.4||-3.7||7.2|
|Bloomberg Commodity Index||3.3||5.7||-17.5||-14.1||-13.8||-7.3|
|DJ Equity All REIT Total Return Index||-1.7||4.2||5.1||7.8||10.6||6.7|
Want Health? Get Outdoors
On average, Americans spend 91 percent of their time indoors or in a vehicle. Just 7 to 8 percent of their time is spent outside. These were the findings of the National Human Activity Pattern Survey (NHAPS), which measures variation in human exposure to pollutants.
The findings do not bode well for Americans’ health because levels of pollution indoors are a lot higher than those outside and can cause serious health issues. They also are notable because researchers believe being outside has positive health effects:
“Research published in the Journal of Aging Health shows that getting outside on a daily basis may help older people stay healthy and functioning longer. Participants in the study who spent time outdoors every day at age 70 showed fewer complaints of aching bones or sleep problems, among other health-related problems, at age 77 than those who did not head outside each day.”
Being outside is thought to have benefits for people of all ages. These may include:
- Greater optimism
- Enhanced mental health
- Improved attention spans
- Stronger immune systems
Rearranging time budgets to include more outdoor activities could improve financial outcomes, too, since health care costs are a concern for many families, and these costs often increase as people age. The Bureau of Labor Statistics reported, on average, Americans spent about $53,500 in 2014. Almost $4,300—about 8 percent—was spent on health care.
Weekly Fun—Think About It
“Everybody needs beauty as well as bread, places to play in and pray in, where nature may heal and give strength to body and soul.”
—John Muir, American environmentalist and author
Isn’t it remarkable that China’s growth is so consistent?
A columnist from The Washington Post once opined that China “produces an astonishing number of astonishing numbers.” Last week’s announcement on gross domestic product, which helped push markets higher, may fall into that category.
China’s official statistics agency reported the country’s GDP grew by 6.7 percent during the first quarter of 2016. That didn’t come as a big surprise because it’s smack dab in the middle of the official Chinese government target of 6.5 to 7.0 percent GDP growth. The target was set last year when the government adopted its most recent five-year plan.
Not everyone thinks China’s official statistics are on the money. The Conference Board (TCB), an independent global research association, has found:
“… an upward bias in the previously published GDP growth series of, on average, 2.6 percentage points per year since the start of Deng Xiaoping’s so-called ‘reform era’ that began in 1978, this percentage has not been constant over time. In fact, our alternative series indicates much larger volatility in the year-on-year estimates (sometimes even showing faster growth rates than the official estimates), suggesting that the impacts of external and internal shocks on the Chinese economy are much more pronounced than the official statistics convey.”
In other words, China’s growth may not be as steadfast and unwavering as the country’s government would have us believe.
TCB estimated China’s GDP grew by 3.7 percent during 2015, which was significantly lower than the Chinese government’s 6.9 percent growth estimate. In fact, TCB expects the Chinese economy to grow by 3.7 percent in 2016, too. It’s not 6.5 percent, but it’s solid growth.
|Data as of 4/15/16||1-Week||Y-T-D||1-Year||3-Year||5-Year||10-Year|
|Standard & Poor’s 500 (Domestic Stocks)||1.6%||1.8%||-1.2%||10.3%||9.5%||4.9%|
|Dow Jones Global ex-U.S.||3.3||0.7||-13.0||-0.6||-1.6||-0.3|
|10-year Treasury Note (Yield Only)||1.8||NA||1.9||1.7||3.4||5.0|
|Gold (per ounce)||-1.0||15.5||2.9||-4.2||-3.6||7.2|
|Bloomberg Commodity Index||1.7||2.3||-20.8||-14.8||-14.0||-7.4|
|DJ Equity All REIT Total Return Index||0.2||6.0||7.2||9.1||11.4||7.2|
What Do Economists Think?
As they’ve traveled across the country, U.S. presidential candidates have made a variety of economic proposals and promises. National Public Radio’s Planet Money asked 22 economists from across the political spectrum for their two cents on the matter. Survey participants were given three options: good, debatable or bad. Here are their opinions:
- End the “carried interest” tax break, which benefits hedge fund managers and private equity executives.
- Good: 20
- Debatable: 2
- Bad: 0
- Lower the corporate tax rate to 25 percent.
- Good: 10
- Debatable: 10
- Bad: 2
- Create a “National Infrastructure Bank” seeded with public money to help finance infrastructure projects.
- Good: 10
- Debatable: 8
- Bad: 4
- Make tuition free at public colleges and universities.
- Good: 1
- Debatable: 1
- Bad: 20
- Make tuition free at community colleges for students who contribute earnings from working 10 hours a week.
- Good: 5
- Debatable: 9
- Bad: 8
- Impose a “spectator tax.” Stock trades will be taxed at 0.5 percent and bonds at 0.1 percent.
- Good: 4
- Debatable: 6
- Bad: 12
- Raise the federal minimum wage to $15 an hour.
- Good: 2
- Debatable: 4
- Bad: 16
- Remove single taxpayers who earn less than $25,000, and married taxpayers (and those filing jointly) who earn less than $50,000—approximately over 50 percent—from the tax rolls.
- Good: 2
- Debatable: 9
- Bad: 11
- Everyone pays the same 10 percent tax rate. It retains some version of the earned income tax credit and deductions for lower-income families.
- Good: 1
- Debatable: 0
- Bad: 21
- Expel immigrants who are in the United States illegally.
- Good: 0
- Debatable: 0
- Bad: 22
We’ll find out what the American people think later this year!
Weekly Fun—Think About It
“And along the way I discovered that a lot of great originals in history were procrastinators. Take Leonardo da Vinci. He toiled on and off for 16 years on the Mona Lisa. He felt like a failure. He wrote as much in his journal. But some of the diversions he took in optics transformed the way that he modeled light and made him into a much better painter.”
—Adam Grant, organizational psychologist
We all learned a thing or two about Panama last week.
The country is not the home of the Panama hat, which is made in Ecuador. However, it is the only place in the world where you can watch the sun rise on the Pacific Ocean and set on the Atlantic Ocean.
It’s also home to a lot of offshore companies, according to the millions of records leaked from the world’s fourth largest offshore law firm. The Guardian reported that 12 national leaders were among 143 politicians, athletes and wealthy individuals (including family members and associates) who were participating in offshore tax havens.
It’s not illegal to hold money in an offshore company, unless the company facilitates tax evasion or money laundering. Further investigation will be required to know whether that was the case. CNBC suggested financial markets could be affected if the findings lead to greater regulation of foreign banks or prosecutorial action against them.
While the Panama scandal captured a lot of attention, it didn’t have much of an impact on markets. News that the U.S. Treasury was cracking down on corporate inversions (or mergers that give U.S. companies a foreign address and lower their tax rates), along with indications the U.S. Federal Reserve may raise rates twice during 2016, caused stocks to dip late in the week. Some major U.S. indexes finished the week lower.
We may be in for another round of market volatility. Corporate earnings season is here. That’s the period when publicly traded companies report how well they performed during the previous quarter. CNBC said, “Over the past 10 years, the emergence of first-quarter earnings reports has generally corresponded with a rise in volatility.”
|Data as of 4/8/16||1-Week||Y-T-D||1-Year||3-Year||5-Year||10-Year|
|Standard & Poor’s 500 (Domestic Stocks)||-1.2%||0.2%||-1.7%||9.4%||9.0%||4.7%|
|Dow Jones Global ex-U.S.||0.3||-2.5||-14.2||-1.5||-2.5||-0.7|
|10-year Treasury Note (Yield Only)||1.7||NA||1.9||1.7||3.6||5.0|
|Gold (per ounce)||2.1||16.7||2.7||-7.7||-3.4||7.6|
|Bloomberg Commodity Index||1.4||0.6||-20.4||-16.2||-14.6||-7.3|
|DJ Equity All REIT Total Return Index||-0.4||5.7||4.3||8.7||11.9||7.0|
Guessing at the Future
As Carly Simon used to sing, “We can never know about the days to come.” However, that doesn’t stop anyone from making educated guesses about the future of companies, financial markets and economies. As we enter the second quarter, investment and business professionals have been offering their insights:
- McKinsey & Company’s March Economic Conditions Snapshot indicated 80 percent of surveyed executives “expect demand for their companies’ products and services will grow or stay the same in the coming months, and a majority believe (as they have in every survey since 2011) their companies’ profits will increase.” However, they are not as optimistic about the global economy as they were in December. About one-half of executives in developed and emerging markets said economic conditions globally are worse than they were six months ago.
- The Wall Street Journal’s April 2016 Economic Forecasting Survey, which queries 60 economists, reported that three of four survey participants expect a Fed rate hike in June. Few expect a recession during the next 12 months, putting the odds at 19 percent. Almost one-half stated global risks were the greatest threat to the U.S. economy, followed by financial conditions, a slowdown in consumer spending, falling corporate profits, and U.S. politics.
- PIMCO’s Cyclical Outlook predicts China’s growth in gross domestic product (GDP) may be in the 5.5 to 6.5 percent range. The target is 6.5 percent. In addition, a gradual devaluation of the yuan is possible, although China’s currency policy often produces unexpected twists and turns.
- BlackRock Investment Institute’s second-quarter outlook centered on three themes. First, returns are likely to remain muted in the future. Second, monetary policies appear to be less divergent, which could be a positive for some markets. Third, volatility may persist as the Federal Reserve normalizes monetary policy. Diversity and careful asset selection are likely to be critical in this environment.
While it’s interesting to read experts’ predictions and expectations for coming months and years, it’s important to remember that forecasts are not always accurate. An organization that tracked forecasting results through 2012 found that forecasts were correct about 47 percent of the time.
Weekly Fun—Think About It
“Do the right thing. It will gratify some people and astonish the rest.”
—Mark Twain, American author
It’s like déjà vu all over again!
It wasn’t the first quarter, or even the first year, that bond markets have not performed in the way Wall Street strategists have expected.
During 2014, bond yields were expected to rise. They did not.
During 2015, bonds were predicted to finish the year yielding about 2.8 percent to 3.3 percent. On December 31, they were about 2.3 percent.
During the first quarter of 2016, despite persistent predictions that yields would move higher after the Federal Reserve’s rate hike, yields fell and bond values increased. Government bonds delivered the strongest returns, gaining 3.7 percent for the quarter, according to Bloomberg.
There is an inverse relationship between interest rates and bond prices. When rates move higher, bond prices move lower, and the value of investors’ holdings may fall. When rates move lower, bond prices move higher, and the value of investors’ holdings may increase.
The current bull market in bonds started in 1982. During January of that year, the 10-year U.S. Treasury yield was about 14.6 percent. Since then, rates on Treasuries have declined and investors have reaped the rewards of steadily rising bond values.
The Federal Reserve began tightening monetary policy in December 2015 by raising the fed funds rate. Late in the month, the rate on benchmark 10-year Treasury bonds reached about 2.3 percent. However, after central banks in Europe and Japan loosened their monetary policies, yields on Treasuries moved lower. By the end of the first quarter of 2016, they were at about 1.8 percent.
Overseas, the picture was a bit more complicated. An expert cited by Bloomberg explained, “Of the five countries that performed best—Germany, Belgium, Denmark, Japan and the United Kingdom—the two-year debt of all but the United Kingdom has negative yields.”
When bonds have negative yields, investors are paying to lend their money. Why would anyone do that? The Economist reported there are three types of investors who buy bonds when yields are negative: (1) central banks and other entities that must own government bonds, (2) investors who expect to make money when a country’s currency gains value, and (3) investors who would rather suffer a small loss in government bonds than risk a bigger loss investing in something else.
That something else might have been a stock market during the first month or so of the quarter. Globally, stocks underperformed bonds, returning 0.4 percent for the first quarter of 2016. However, the end-of-quarter return doesn’t really tell the whole story. Fears of global recession, among other things, produced a wild ride for stock market investors during the first months of the year. Worldwide, stocks were down about 11.3 percent through mid-February, according to Barron’s, and then gained 13.2 percent to end the quarter slightly higher, overall.
The United States delivered strong returns for the period. Barron’s reported:
“Still, the United States fared a good deal better than other developed markets, with Europe down 2.4 percent, the United Kingdom off 2.3 percent, and Japan worse by 6.4 percent—a surprise because overseas markets were touted as the places to be. That is, except for emerging markets; but their results also confounded the seers, as they returned a robust 5.8 percent for the quarter.”
At the end of last week, the Bureau of Labor Statistics’ monthly jobs report showed more people were looking for jobs, increases in employment exceeded analysts’ expectations and average hourly earnings had moved higher. These were positive signs for the U.S. economy.
|Data as of 4/1/16||1-Week||Y-T-D||1-Year||3-Year||5-Year||10-Year|
|Standard & Poor’s 500 (Domestic Stocks)||1.8%||1.4%||0.6%||9.9%||9.2%||4.8%|
|Dow Jones Global ex-U.S.||0.3||-2.8||-12.5||-1.8||-2.2||-0.6|
|10-year Treasury Note (Yield Only)||1.8||NA||1.9||1.8||3.5||4.9|
|Gold (per ounce)||-0.6||14.3||1.4||-8.5||-3.1||7.5|
|Bloomberg Commodity Index||-1.7||-0.8||-22.0||-17.0||-14.4||-7.3|
|DJ Equity All REIT Total Return Index||3.3||6.1||5.0||9.9||11.5||6.7|
How Do Investors Feel About Stock Markets?
The American Association of Individual Investors (AAII) surveys investors weekly about whether they are bullish, bearish or neutral on stock markets for the next six months. Last week, the majority of participants indicated they were neutral. There was less bullish sentiment than the previous week, but bulls maintained a slight edge over bears:
- Bullish: 27.2 percent
- Neutral: 47.1 percent
- Bearish: 25.8 percent
The AAII also asked whether participants were better off, worse off or as well off as they had been eight years ago (early in the Great Recession). More than one-half (54 percent) said they were better off. The remainder was almost evenly split. Twenty-four percent indicated they were not better off, and 23 percent said they were as well off.
Weekly Fun—Think About It
“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way.”
—Charles Dickens, A Tale of Two Cities
Risk is inevitable in any business. But a foundation of general coverage combined with policies specific to your company helps protect against losses that may disrupt or bankrupt even the most cautious business owners. The right mix of insurance can make your personal wealth less vulnerable—yet adequate and appropriate protection is often overlooked until it’s too late.
Selecting the right mix requires a strategic approach that accounts for the many exceptions and exclusions found in typical coverage. Regular reassessment of your policies is important to eliminate gaps and redundancies, which helps protect and grow your business investment. While it’s important to balance between protection and cost, the following 10 types of insurance are established ways to manage risk in an extremely litigious society:
General Liability Insurance
Considered the baseline of business insurance, general liability provides for defense and damages in claims of bodily harm, property damage or personal injury. If accidents land your business in court, this insurance covers losses related to legal, medical and other related payments, such as settlements for libel and slander.
Errors and Omissions (E&O) Insurance
Also known as professional liability insurance, this coverage protects business owners who provide a professional service rather than a product. E&O insurance goes beyond general liability to protect your business against claims of negligence—alleged or actual. It covers harm that results from inadequate work, including incorrect advice.
In selecting coverage for your commercial property, consider the particulars of your business space, including the equipment, inventory and tools needed to maintain your operations. Generic all-risk policies generally cover damage from such perils as vandalism and fire, but they often do not cover damage incurred in a natural disaster such as a flood or earthquake. Make sure you understand your exclusions, and if you want a specific type of natural disaster to be covered, ask for an insurance rider.
Business Interruption Insurance
Many businesses that close due to natural disaster never recover, but this policy, also known as business income insurance, can cover lost income from forced closings and during rebuilding. Adding this coverage to your property insurance can mitigate the unforeseen and unintended consequences of a disaster by recouping lost income, minus the expenses your business would have incurred under normal conditions.
Directors and Officers Insurance
Civil and criminal actions can be brought against a company’s directors and officers as well as the business itself. This policy covers reimbursement when alleged wrongful acts have adverse financial consequences for the business, and it often contains “shrinking limits” provisions for defense costs that reduce the policy’s limits. It does not protect against intentional illegal acts.
Workers’ Compensation Insurance
State laws vary, but workers’ compensation insurance is required for all employees. It provides for wage replacement, as well as medical, disability and death benefits, in the event an employee is injured or becomes ill. In exchange, employees give up the right to sue the business for injuries, which protects the company against costly claims from occupational hazards.
Employee Theft Insurance
Fraud comes in many forms, and employee dishonesty is far more common than external theft, so exposure to incidents of intentional misconduct by employees cannot be underestimated. Also known as fidelity insurance, employee theft insurance covers potentially crippling damages from internal risk, such as embezzlement, regardless of whether the crimes were perpetrated by employees acting alone or in collusion.
Employment Practices Liability Insurance (EPLI)
Small businesses are not immune from lawsuits claiming a violation of employees’ rights. This policy protects against wrongful acts arising from the employment process, such as discrimination, invasion of privacy, wrongful termination or sexual harassment. It covers legal costs, whether your company wins or loses the lawsuit, though it does not typically pay for punitive damages, including civil fines related to bodily injury, nor criminal fines related to dishonesty.
Product Liability Insurance
This policy covers against claims of defective manufacture, design and warnings, with options to customize based on specific types of products. It provides protection against bodily injury and property damage losses arising from defects in products your business sells or distributes. It can cover liability incurred by a contractor after a job is completed, known as completed operations coverage.
Classified Information Breach Insurance
As businesses grow ever more dependent on technology, they also become more susceptible to hacking attacks and privacy violations. Insurance that covers against theft of intellectual property can be overwhelming, as it often bundles several types of policies. However, coverage against compromised user data—from employees and customers alike—guards against potentially devastating costs to both your business and reputation.
Peace of Mind Is an Invaluable Asset
The range of insurance options available can seem alarmist or excessive, but not when considered against the current and future value of your business. Buttonwood Financial Group works with you to simplify the complexity that comes from wealth while acknowledging that there is no “one size fits all” approach to coverage. If you are interested in seeing how you can minimize your risk, call us at 816.285.9000.
Are corporations in the United States struggling?
In its cover article last week, The Economist (a British publication) suggested there is not enough competition among American companies. It pointed out:
“Aggregate domestic profits are at near-record levels relative to GDP… High profits might be a sign of brilliant innovations or wise long-term investments were it not for the fact that they are also suspiciously persistent. A very profitable American firm has an 80 percent chance of being that way 10 years later. In the 1990s the odds were only about 50 percent.”
At the end of last week, U.S. headlines indicated concern about declining corporate profits:
- “Consumers Prop Up U.S. Economy, but Profits Under Pressure”
- “U.S. Fourth-Quarter GDP Revised Up to 1.4% Growth but Corporate Profits Fall”
- “Corporate Profits Fall in 2015 for First Time Since Great Recession”
- “U.S. Corporate Profits Fall 8.1% in 4th Quarter”
So, are U.S. companies experiencing record profits or are they in trouble?
Last week’s press release from the Bureau of Economic Analysis indicated corporate profits (after inventory valuation and capital consumption adjustments) declined from the third quarter of 2015 to the fourth quarter of 2015—hence the headlines.
However, a one-quarter decline doesn’t provide a complete picture of the health of corporate America. As CFO.com pointed out, over the full year, corporate profits were up 3.3 percent year to year.
The Trading Economics website offered additional context. From 1950 through 2015, U.S. corporate profits averaged about $395 billion annually. Profits hit a record low for that period, $14 billion, during the first quarter of 1951. Profits rose to an all-time high of about $1.64 trillion during the third quarter of 2014.
Fourth quarter’s profits of $1.38 trillion remain well above that average.
|Data as of 3/24/16||1-Week||Y-T-D||1-Year||3-Year||5-Year||10-Year|
|Standard & Poor’s 500 (Domestic Stocks)||-0.7%||-0.4%||-2.7%||9.5%||9.2%||4.7%|
|Dow Jones Global ex-U.S.||-2.1||-3.1||-14.1||-2.0||-2.0||-0.5|
|10-year Treasury Note (Yield Only)||1.9||NA||1.9||1.9||3.4||4.7|
|Gold (per ounce)||-2.5||14.9||2.5||-8.6||-3.3||8.2|
|Bloomberg Commodity Index||-1.9||0.9||-20.8||-16.8||-14.0||-7.0|
|DJ Equity All REIT Total Return Index||-1.2||2.7||-0.2||9.3||11.6||6.3|
If You Could Live Anywhere, Where Would You Live?
If cities are your cup of tea, then here is some good news. The 2016 Worldwide Cost of Living Report compares the prices of 160 products and services—from food and drink to domestic care and private schools—in cities around the world. It found the cost of living in many cities fell during 2015 thanks to lower commodity prices, weakening currencies and geopolitical unrest.
Be warned: A lower cost of living doesn’t mean a city offers good value. Take Zurich, for instance. Remember the uproar when the Swiss unpegged their currency early in 2015? The Swiss franc realized double-digit gains, the Swiss stock market swooned, and the Swiss people went shopping in neighboring countries. Well, the cost of living in Zurich fell from September 2014 to September 2015, but the decline wasn’t proportionate to declines elsewhere in Europe, and Zurich currently reigns as Europe’s most expensive city.
In September 2015, the most and least expensive cities in the world were:
- Republic of Singapore
- Zurich, Switzerland
- Hong Kong, China
- Geneva, Switzerland
- Paris, France
- Chennai, India
- Karachi, Pakistan
- Mumbai, India
- Bangalore, India
- Lusaka, Gambia
Cities in the United States didn’t fare well, either. A strong U.S. dollar helped push all 16 of the U.S. cities that were in the survey up at least 15 places. New York and Los Angeles both rank among the 10 most expensive cities in the world.
Weekly Fun—Think About It
“The first step in the evolution of ethics is a sense of solidarity with other human beings.”
—Albert Schweitzer, Winner of the Nobel Peace Prize
There is ongoing debate about whether markets behave in rational ways.
The efficient market hypothesis suggests it’s impossible to outperform the stock market because current share prices reflect all relevant information. In other words, stocks should always trade at fair value and it should be impossible to invest in a stock that is overpriced or underpriced.
The Economist reported there are two issues that efficient market theorists have trouble explaining. The first is market bubbles, “where entire markets get out of whack with traditional valuation measures and then collapse.” The other is pricing anomalies. For instance, value stocks are inexpensive relative to their asset values and tend to outperform over the long term. In a perfect market, pricing anomalies shouldn’t occur.
During the past few weeks, U.S. stock markets have recovered from losses suffered earlier in the year and moved into positive territory for 2016. The shift into positive territory has some suggesting the market may not be correctly priced, but there is disagreement about whether it is overvalued or undervalued.
According to Barron’s, the recent strong performance of U.S. stock markets hasn’t been inspired by sound decisions and rational economic behavior. “The market’s valuation, at 17 times consensus analyst earnings-per-share estimates for 2016, looks stretched again, given that easy monetary policy and rising oil prices—not earnings growth—are responsible.”
Wharton Professor of Finance Jeremy Siegel disagreed. “On an absolute basis [the stock market is] slightly more highly valued than average but relative to interest rates, which are extremely low, it is actually undervalued in my opinion.”
Investors who believe markets perform well most of the time, but not all of the time, may want to take opportunities like these to look for companies whose shares may be mispriced as well.
|Data as of 3/18/16||1-Week||Y-T-D||1-Year||3-Year||5-Year||10-Year|
|Standard & Poor’s 500 (Domestic Stocks)||1.4%||0.3%||-2.4%||9.7%||9.9%||4.6%|
|Dow Jones Global ex-U.S.||1.6||-1.0||-11.0||-1.6||-0.9||-0.3|
|10-year Treasury Note (Yield Only)||1.9||NA||2.0||2.0||3.3||4.7|
|Gold (per ounce)||-1.0||17.9||9.1||-7.9||-2.5||8.5|
|Bloomberg Commodity Index||1.0||2.8||-17.8||-16.3||-13.3||-6.6|
|DJ Equity All REIT Total Return Index||2.2||4.0||2.4||9.8||11.8||6.3|
Here’s a Milestone You Don’t Reach Until Your 70s
The major milestones of older Americans are not attended with the same sense of wonder that accompanies the major milestones of younger Americans. Sure, registering for Social Security benefits and signing up for Medicare are rites of passage, but they don’t hold a candle to earning your driver’s license, receiving your first kiss, winning your first promotion or dancing at your wedding.
If you have retirement accounts when you become a septuagenarian, then you’ll encounter a milestone that the Internal Revenue Service strongly encourages you to remember. Beginning April 1 of the year following the year in which you reach age 70½, you must begin taking required minimum distributions (RMDs) from most of your retirement accounts. Forbes offered this list:
- Traditional IRAs
- Rollover IRAs
- Inherited IRAs
- SEP IRAs
- SIMPLE IRAs
- 401(k), 403(b) and 457(b) plan accounts
- Keogh plans
There currently are no RMDs for Roth IRAs, unless the accounts were inherited.
If you have more than one qualifying retirement account, then a separate RMD must be calculated for each account. If you want to withdraw a portion of each account, you can, but it may prove simpler to take the entire amount due from a single account. Once you start, you must take RMDs by December 31 every year. If you don’t, you’ll owe some hefty penalty taxes.
The IRS offers some instructions for calculating the RMD due: “The required minimum distribution for any year is the account balance as of the end of the immediately preceding calendar year divided by a distribution period from the IRS’ ‘Uniform Lifetime Table.’ A separate table is used if the sole beneficiary is the owner’s spouse who is ten or more years younger than the owner.”
If you would prefer to have some help figuring out the correct amount when RMDs are due, contact your financial professional.
Weekly Fun—Think About It
“It wasn’t by accident that the Gettysburg address was so short. The laws of prose writing are as immutable as those of flight, of mathematics, of physics.”
–Ernest Hemingway, American writer