Mid Year Review - Slow but Steady?

In our December 2016 year end review we wrote, "No forecast now, no forecast until April.  We can't recall another time in the last 30 years that we were so uncertain about what to expect from the US government, and how that would affect the key drivers of stock market returns - revenues, earnings and interest rates.

Other analysts put out price targets for the S&P 500 of 2300-2450, which would imply gains of 3-9.5% from the current level of the S&P 500 at 2239.  The consensus for 2017 is that:

  • Inflation will rise from the current 2% annualized
  • Interest rates will continue to rise, with the Fed raising rates perhaps 3 times this year
  • The dollar will remain strong, depressing the value of overseas earnings and promoting imports over exports
  • A combination of deficit spending and new spending on infrastructure COULD enable the US economy to grow faster than the 2% annually of the last 8 years.
  • Wages will rise as labor markets tighten
  • Earnings in general will rise, particularly if corporate taxes are lowered

From year end through July 14th, the S&P 500 made 24 record highs and currently gains 9.85% YTD, so already above the most optimistic forecast at the start of the year.  

Read the full commentary here.

Implications of the Trump Presidency for US Stocks

After 107 days of the Trump Presidency, we believe that this administration is determined to be the wildest reality TV show of all time.  People say, "War is God's way of teaching us geography."  Perhaps Donald Trump is God's way of teaching us about the Federal Government?

The purpose of this commentary is explain the challenges of making radical decisions about the US tax code and economy without creating counter-productive secondary effects.  We will also project how these decisions affect specific sectors and industry groups.  We'll do our best to write about Trump while leaving partisan feelings to the side.

As we often tell our clients, emotions and news nuggets dominate day by day fluctuations in the US stock market.  Over longer time frames - quarters, years, decades - only revenues, earnings and interest rates matter.  Ultimately, we invest in the cash flow generated by US corporations, discounted by expectations of current and future interest rates.  Rising revenues and expanding earnings support the market; rising interest rates harm the market.  With this framework in mind, let's review everything we know about the Trump presidency so far.

Healthcare

Spending on healthcare represents 17.1% of the US economy, yet our health outcomes (obesity, child mortality, addiction rates and chronic disease) trail "socialist" countries that spend much less including Sweden (11.9%), France (11.5%), Canada, (10.4%) and Japan (10.2%).  These countries regarding health care spending as an investment in productive workers the way a manufacturer regards maintenance dollars spent on factory robots as an investment.

Americans don't regards healthcare spending as an investment, but as a cost.  Uniquely among major industrialized nations, the provision of healthcare in the US is attached to employment, which left 50 million Americans uninsured prior to the passage of the Affordable Care Act in 2010.  The ACA, with all its flaws, enabled 22 million to receive insurance, whether through purchasing policies through the exchanges, Medicaid expansion, or as young adults staying on their parents plan.  We have HNW clients who are enrolled in Obamacare because it's the most affordable option in their communities.

Conservatives hate the cost of the Affordable Care Act that is covered by a 0.9% increase in Medicare Tax for earned income in excess of $250K for a couple, $200K for an individual and a 3.8% surtax on the unearned income (interest, dividends, passive business income).  These taxes apply primarily to the top 2% of US earners and generate about $30 billion annually in tax revenues.

Given that Congress voted over 60 times to repeal the ACA between 2011-2016, observers assumed that repealing Obamacare would be the first act of the new administration.  Indeed the S&P 500 Health Care index, sold off through the summer of 2016, rallied just before the election anticipating a Clinton win, sank in the days after the election.

Read the full commentary here

The 2016 Year in Review

In January 2016, we projected that the S&P 500 would gain 5% for the year, but we noted we would revisit that estimate in July.  In July, noting that an earnings recession among US corporations was coming to an end, we elevated our forecast to 10%.  For the full year, the S&P 500 rose 12.0%, so close enough.  Full details of US and world Indexes are here:

 Within the major categories, Energy stocks rallied 27.4%, as oil rose from a mid January low of $26/barrel to a year end high of $54.  On January 23rd, we wrote:

We would like to think that financial markets are "rational" but every once in a while, markets fixate on ONE particular indicator. In the last three weeks, price direction in stocks became entirely correlated with the price direction in oil.  Nothing else - earnings, interest rates, labor markets, industrial production, housing markets - seemed to matter.  Last August, investors fixated on the Chinese markets, which dragged down US stocks 11% in a month.  When the fixation dissipated, US stocks gained back the entire loss in 2 ½ months.  We expect the same will happen over the next few months, so starting Monday we are putting all our spare cash to work.

Indeed, we nailed the low for 2016.

Full commentary here:

Presidential Election Recap, and What Comes Next

Our job is to make good decisions in an environment of permanent uncertainty.  To succeed at this task, we must revisit our past research, ESPECIALLY when we are wrong.  What went wrong with our analysis of the election?

First let's consider what we got right:

  • Clinton was the ultimate Democratic nominee
  • The Republicans did indeed organize a circular firing squad, producing a nominee NO ONE expected (not even Trump.)
  • We noted that if Clinton couldn't put away Sanders, the email server or the Clinton Foundation issues she would struggle.
  • In particular, we identified the division of the country into "haves" and "have-nots."  In principal the combination of

low unemployment
low inflation
low gas and fuel prices
record GDP
record number of workers employed
stock market at record highs
real-estate prices approaching record highs

should have ensured a slam dunk for the party in power.  However, the gains unevenly favored "coastal elites" over the "Rust Belt" working class.

  • These factors created an opportunity for Trump to win, even if we regarded that outcome as low probability.
  • Ultimately, electoral college math would prevail

Here's what we got wrong:

  • The final electoral college count!

Read complete commentary:

Hey "Millennial," Give Yourself a Break, You Were Dealt a Tricky Hand

The media does not generally portray millennials in a positive light. This holds true for perceptions of the savings habits of millennials. Millennials are still seen as the generation living in mom's basement. Whether they are doing so because they are, in fact, diligently saving, or because they are "failure to launch” kids is not usually specified. The other point that often goes unmentioned is that millennials will need to save more than previous generations, as well as work harder in order to save more. Interest rates are low and investment savings are not returning the high yields seen by previous generations. Between the major limitations of low interest rates and crippling student loan debt, most millennials are struggling to save. 

When it comes to accruing savings, millennials are swimming against the current, but they are swimming very, very hard. They are not getting into credit card debt at the rate of previous generations, which shows a wariness and sophistication with which millennials are not credited enough in mainstream media. The money they put away is not going to work as hard for them as the money put away by their parents and grandparents. As a result, millennials are being called on to put away more and more towards retirement than any previous generation. Not only are the low interest rates holding them back, but there is a very real threat that social security will run out long before full retirement age, leaving millennials to fund 100% of their own retirement.

Read the entire article on LinkedIn

Confounding All Expectations, Donald J. Trump Elected US President

As of Monday evening, one day before the election, all 15 major political forecasters tagged Clinton for the win. FiveThirtyEight.com was the most conservative, forecasting an electoral split of 272-268 in favor of Clinton with a 66% probability of success. The mood among Republican operatives, even the candidate himself, was despondent. No candidate in modern electoral history who polled so badly post Labor Day had ever won.

And yet, by 10PM last night, Trump won the three major states (Ohio, Florida and North Carolina) he had to win to stay competitive, plus enough of 6 more states to exceed 270 electoral votes by 2:30 AM. Clinton holds a 100K lead in the popular vote, which may flip in favor of Trump as states finalize vote tallies. The final electoral count will be 320 Trump to 218 Clinton. Republicans retain control of the US Senate and House of Representatives, plus choose the next Supreme Court Justice.

Clinton was the policy wonk to the end, but could not overcome three instances of bad judgement:

  1. Using a private email server for State Department business
  2. Allowing the Clinton Foundation to solicit gifts from foreign governments while Secretary of State
  3. Accepting 6 figure speaking fees from Wall Street banks

The optics were horrible, shifting 1-2% of voters in critical states and delivering Florida, Pennsylvania, Wisconsin, Michigan and New Hampshire to Trump at the buzzer.

Read the full commentary here:

Trump's Victory Polarizes Investors as Financial Advisers' Clients Adjust

If the 2016 U.S. presidential race was a tale of two countries, its aftermath has become a tale of two investors.

Financial advisers and investment houses across the country have been besieged Wednesday by investors looking for reassurance, guidance on whether to sell or stay put and advice on how to play Republican  Donald Trump's upset win over Democrat  Hillary Clinton.

Heron Financial Group received emails from distraught clients Tuesday night as the election unfolded and called them back as quickly as possible Wednesday. The New York advisory firm said it had received more calls than usual Wednesday morning-even more than after the U.K.'s June vote to exit from the European Union-from its clients, who are overwhelmingly Hillary Clinton supporters.

David Edwards, the firm's president, found himself consoling a tearful female client Wednesday morning.

"It certainly was a shock to the system," he says.

A few clients have asked Mr. Edwards to sell everything. For one client, he is raising $100,000 "just so he can sleep at night," Mr. Edwards said.

However, he has been able to discourage most others from selling. "You want to sell now and buy when things are better?" he's telling clients seeking to sell. "You want to sell low and buy high?  My job is to prevent you from doing that!"

Read the entire commentary here:

4 Trading Days Till US Presidential Election: We Are NOT Invoking Our Doomsday Plan

At this point, everything that can possibly be said about this election has been said. Whether you dislike Trump more than Clinton, or dislike Clinton more than Trump, the horrible, miserable conclusion is just days away.

Investors clearly prefer a Clinton win over Trump. A Clinton Presidency would do little to rock the status-quo, since it’s unlikely that a Republican controlled House of Representatives would allow the passage of ANY substantial legislation. 

Markets have been unsettled for 7 straight trading days as Clinton’s early October polling advantage shrank, particularly after FBI Director James Comey’s oddly timed announcement regarding emails of Huma Abedin on the laptop of estranged husband Anthony Weiner. After selling off 3% in the last three days, US stocks are now 4.1% below the July high, though up 5.2% on the year. Our forecast for all of 2016 remains at 10%.

We reassured many concerned clients that if Trump appeared likely to win, four days in advance of the election we would sell all the stocks and equity mutual funds in their retirement accounts in anticipation of a 10% correction in stocks. We wouldn’t sell equity exposure in taxable accounts because the capital gains taxes would generally exceed 10% of the value of the positions.

Read the full commentary here:

Fee-Only Wealth Advisor Doubles Managed Assets in Less Than Three Years

NEW YORK (October 15th, 2016) - David Edwards, founder,  Heron Financial Group | Wealth Advisors, a New York-based Registered Investment Advisor, continues to educate current clients and prospects on how to plan, grow and keep more of their financial assets. A slate of activity at industry and business events shows the dedication that Edwards and his team demonstrate in their quest to promote the "Joyful Planning" concept. Edwards took on leadership roles in the financial services industry, accepting advisory positions and speaking engagements with key industry associations. Edwards brings that exposure back to the firm to provide better service for Heron clients.

"As a fiduciary to our clients, we always act in their best interests. We remain committed to leading our profession in best practices and technology. This combination of good advice and good service resulted in exceptional growth within our firm," said Edwards. Heron Wealth grew from $122 million in assets as of January 2013 to $260 million through September 2016. "We plan to double assets over the next three years, double again within seven years to $1 billion. We will continue to deliver the high touch experience our clients expect, but also derive the revenues necessary to support our continued investment in human capital, technology, cybersecurity, compliance and operations," added Edwards.

Recap of recent leadership events:

Heron Wealth Founder David Edwards Promotes "Joyful Planning"

NEW YORK (October 3rd, 2016) - David Edwards, founder,   Heron Financial Group | Wealth Advisors, a New York-based Registered Investment Advisor, continues to educate current clients and prospects on how to plan, grow and keep more of their financial assets.  A slate of activity at industry and business events shows the dedication that Edwards and his team demonstrate in their quest to promote the "Joyful Planning" concept.  Edwards took on leadership roles in the financial services industry, accepting advisory positions and speaking engagements with key industry associations.  Edwards brings that exposure back to the firm to provide better service for Heron clients.

"As a fiduciary to our clients, we always act in their best interests.  We remain committed to leading our profession in best practices and technology.  This combination of good advice and good service resulted in exceptional growth within our firm," said Edwards.  Heron Wealth grew from $122 million in assets as of January 2013 to $260 million through September 2016. "We plan to double assets over the next three years, double again within seven years to $1 billion.  We will continue to deliver the high touch experience our clients expect, but also derive the revenues necessary to support our continued investment in human capital, technology, cybersecurity, compliance and operations," added Edwards.

Read the entire commentary here.

US Markets Paralyzed, Await Outcome of US Presidential Election

Trump Clnton socks!

We last wrote a market commentary July 11th. Since then, we've had nothing to say as investors focus on the last stage of the US presidential election, excluding any other data points including the US employment situation, US corporate earnings, and US Fed Policy. Through September 30th, US stocks as defined by the S&P 500 are up 7.85% on the year, up 0.013% for the month of September and up 3.31% in the third quarter. 

Our forecast remains 10% gains by year end, contingent on Clinton winning the election. If Trump wins, we expect a Brexit like reaction where stocks sell off 7-10% in three days. Unlike the Brexit scenario, which primarily harmed British investors, we expect US stocks would not recover quickly. A number of our clients are so anxious about a Trump win that we have told them we will sell all the stocks in their retirement (IRA, 401K) accounts 4 days before the election IF there is a chance Trump can pull out of the death spiral of his campaign.

Plan | Grow | Keep! How our wealth advice can solve your problems

Heron Wealth provides our clients with an increasingly broad range of financial advice.  To make sure that you understand everything we can do for you, watch this short video to see how our wealth advice can help solve your problems. We help clients Plan for the future, Grow their wealth and Keep more for their families. 

Plan - Financial Planning & Budgeting

Budget Creation & ManagementEducation Funding
Business SuccessionFinancial Planning
Cash Flow ManagementHealth Care Expense Management
Charitable GivingHome Purchase
College Tuition SavingsRisk Tolerance Assessment
Disability InsuranceSOS - Second Opinion Service
Divorce PlanningTax Optimization

Grow - Investment Management

401K Advice for IndividualsIncome Management
401K Advice for BusinessesInvestment Performance Analysis
Annuities - Term and VariableIRA's: Roth, Rollover & Traditional
Asset Allocation & Portfolio MgmtSingle Stock Diversification
Bond & Fixed Income InvestmentsStock & Stock Fund Investments
Hedging Strategies & AlternativesStock Option Planning
Education Events & Webinars

Keep - Estate Planning & Insurance

EldercareRMD Calculations for IRA's
Estate PlanningRetirement Income Needs
Life Insurance StrategiesRetirement Income Distribution
Long-term Care AnalysisRisk Management & Asset Protection
Medicare & Medicaid PlanningSocial Security Benefit Options
Memorable Family Experiences

Read the entire commentary here.

The Challenges Millennials Face in Saving for Retirement

Forget about everything the media is saying about Millennials. The group born between the late 1970s and 1990s is anything but lazy - yes, I am referring to the young people who in many cases are still living at home with mom and dad.

Unlike prior generations, Millennials live in a time of unprecedented student debt, and have already lived through multiple economic downturns. They are financially savvy like their depression-era grandparents, and they work hard for their money. 

Watch this quick piece from InvestmentNews where I discuss some of the challenges millennials face in saving for retirement.

Read the entire commentary here:

Recapping the August Correction

Between May 21st and August 25th, US stocks as defined by the S&P 500 slid by 12.4%, leaving the index down 5.4% on the year and down 2.3% over the last year..  A correction is defined as a slide of 10% or more, while a bear market is a decline of 20% or more.  The S&P500 is currently down 10.0% from the May 21st record.   The Chinese stock market is off 38.8% from its June 12th high, down 0.9% on the year and still up 38.1% over the last year.  US stocks are on the low side of fair value.  Chinese stocks could fall another 50%, yet still be overvalued.

We were pleased that a number of our clients added cash to the accounts in the last two weeks.  We happily invested those additional funds in stocks, though it will be a few months before US stock market resumes its upward trajectory.  When the stock market has a "heart attack" as we saw in the last three weeks, it takes time before the market "gets back to the gym."  Investors remain skittish and race to sell any rally.  Earlier in the year January through June, retail investors purchased $83 billion in equity mutual funds as the S&P made multiple record highs.  In July and August, investors sold $56 billion - a classic example of buying high and selling low.  We still believe our year-end forecast of 6% gains of 2015 in the S&P 500 is reasonable, which would be 13.5% higher than Friday's close.

We addressed concerns about China in our August 22nd commentary.  The main thing we're tracking now is "how will the Chinese government switch from a 'command and control' economy to an economy flexible enough to provide for China's 1.36 billion in population?"  Governments are commonly at greatest risk from the frustration of "rising expectations."  China is the second largest economy after the US, but 89th in per capital income (out of 187 nations - US is 15th.)  We won't know the answer to that question for years.

Read the entire commentary here.

When to Have the 'Money Talk'

There has been a lot of chatter about an article that made the rounds last week on a woman who requests to see a man’s credit score by the fourth date, and a couple who met on a dating site that matches singles based on their credit history. Most of the reactions I have heard to this article seem to be of surprise, disgust, or incredulity. I have seen a lot more criticism than acceptance of the idea that a potential romantic partner’s credit score should be of any importance, after all where is the romance in FICO?

Let’s discuss this idea. Imagine if you have worked your entire adult life to save money, build credit through responsible credit card usage and diversified manageable debt. You have always paid all of your bills on time, and you never spend more than you can afford. Then you meet someone who you hit it off with. Maybe they are as responsible with their finances as you are, maybe they have had a financial hardship, or maybe they are hundreds of thousands of dollars in debt. When do you talk about your finances with this person? On the third date? When you move in together? Three years into marriage?

Personally, I think finances are a little too personal to discuss on the third date, but you should never move in with someone before you have had this talk, let alone marry someone whose financial history you have no knowledge of. I am not saying you need to run a credit report on someone, nor am I suggesting that people need to match financially in order to have a successful, loving relationship, however you should know how much debt your partner has, how they plan to repay it, what their savings look like, and how much they earn.

Read the entire article on LinkedIn.

Mid-year Review: Brexit, US Jobs, US election, S&P 500 Makes Record High

January 18th we wrote:

"The US economy should grow at the middling rate of 2.5% in 2016, with unemployment hovering around 5% as more Americans rejoin the work force, and with inflation in the 0.5-1% range.  In this context, the US Federal Reserve can move slowly to raise rates, or not at all.  Corporate earnings should grow at a modest rate, reversing the negative trend of the last two years caused by declines in the energy sector.  Bottom line, our forecast of gains in US stocks for 2016 remains intact at 5%, 13% higher than Friday's close.  Stocks may sell off a little more in the next few weeks, possible testing the lows of last August, then resume the long term upward trend." 

At the end of last December we wrote:

"The world economy is going through a slow patch right now, depressing revenues and earnings for US companies (60% derived from international operations.)  Economists often refer to the US as the "locomotive of global growth."  With an improving labor market, firming wage growth, low inflation and still-low interest rates, sustained consumer spending will keep the US economy growing at least 2.5%/year, and in so doing bring along the rest of the planet.  US stocks are just 4.25% off the record set in May 2015.  We have no doubt new records will be set this year." 

So far, the major trends remain intact.  Jobs growth in the US was a robust 287K in June, with an unemployment rate of 4.9% and a modest year over year increase of 2.6% in wages.  Annualized, jobs growth so far this year is about a 2 million annual rate, versus 3 million last year.  Inflation in general rose only 1.0% over the last year, held down by a 10% decline in energy costs.  The Fed may raise rates once, twice, or not at all for the rest of the year.  Q2 earnings for the S&P 500 are estimated to decline 5.6%, the 5th straight quarterly, decline, but projected to gain slightly for Q3 and Q4.  With no earnings growth in over a year, it's no surprise that US stocks remain stuck in a trading range.  Yet, despite MUCH bad news this year, US stocks closed today at a record high, eclipsing the previous high set May 21, 2015, up 6.1% YTD through July 9th.  Stocks are slightly overvalued right now, but may move higher in anticipation of a return to earnings growth in 2017.  

We increase our 2016 forecast on the S&P 500 from 5% to 10%.

Read the rest of the commentary here

Mid-year Review: Brexit, US Jobs, US election, S&P 500 Makes Record High

January 18th we wrote:

"The US economy should grow at the middling rate of 2.5% in 2016, with unemployment hovering around 5% as more Americans rejoin the work force, and with inflation in the 0.5-1% range.  In this context, the US Federal Reserve can move slowly to raise rates, or not at all.  Corporate earnings should grow at a modest rate, reversing the negative trend of the last two years caused by declines in the energy sector.  Bottom line, our forecast of gains in US stocks for 2016 remains intact at 5%, 13% higher than Friday's close.  Stocks may sell off a little more in the next few weeks, possible testing the lows of last August, then resume the long term upward trend."

At the end of last December we wrote:

"The world economy is going through a slow patch right now, depressing revenues and earnings for US companies (60% derived from international operations.)  Economists often refer to the US as the "locomotive of global growth."  With an improving labor market, firming wage growth, low inflation and still-low interest rates, sustained consumer spending will keep the US economy growing at least 2.5%/year, and in so doing bring along the rest of the planet.  US stocks are just 4.25% off the record set in May 2015.  We have no doubt new records will be set this year."

So far, the major trends remain intact.  Jobs growth in the US was a robust 287K in June, with an unemployment rate of 4.9% and a modest year over year increase of 2.6% in wages.  Annualized, jobs growth so far this year is about a 2 million annual rate, versus 3 million last year.  Inflation in general rose only 1.0% over the last year, held down by a 10% decline in energy costs.  The Fed may raise rates once, twice, or not at all for the rest of the year.  Q2 earnings for the S&P 500 are estimated to decline 5.6%, the 5th straight quarterly, decline, but projected to gain slightly for Q3 and Q4.  With no earnings growth in over a year, it's no surprise that US stocks remain stuck in a trading range.  Yet, despite MUCH bad news this year, US stocks closed today at a record high, eclipsing the previous high set May 21, 2015, up 6.1% YTD through July 9th.  Stocks are slightly overvalued right now, but may move higher in anticipation of a return to earnings growth in 2017.  

Read the entire commentary here:

 

Why Do You Need a Financial Plan?

Q: Who likes talking about money?

A: <ambient noise> <crickets>

Talking about money can be uncomfortable! 

A surprising number of people do not know how much they spend every month, do not know how many years it will take them to pay down their debt, and have no idea what their credit score is or what it means. What happens if you have more than one type of debt, which are you supposed to pay down first? Do you know what year you would like to retire? Whether you know or not, how will you fund your retirement?

People who are confused about the answers to these questions might think they are alone, but in reality a surprising majority of people do in fact need help figuring out their finances – you are not alone!

If you have questions about any aspect of your financial life, financial planners and wealth advisors are here for you. We will answer your questions with compassion and without judgement.

Read the entire article on Linked In.

Markets Brace for Rocky Friday After UK Votes to Exit EuroZone

Defying consensus forecasts, UK citizens voted 52% to "Leave" vs 48% to "Remain" with a margin of 1.3 million out of 33.5 million votes cast.  Urban voters favored "Remain" by 60/40, but rural voters voted substantially in the other direction.   White collar "info-workers" have generally benefited from UK integration into the European Union, while blue collar, less educated and older Britons generally faired worse.  Here is the distribution of votes across Great Britain, Scotland, Wales and Northern Ireland.  Labor party voters favored "Remain," Conservative party voters favored "Leave."

World markets trended higher over the last two months on the expectation that the UK would remain in the EU.  This morning, we're seeing a sharp, unpleasant reversal in markets overseas and in US stock market futures:

  • British pound down 7.9%
  • Euro down 2.9%
  • UK FTSE down 4.0%
  • French CAC 40 down 8.5%
  • German DAX down 7.0%
  • Japan Nikkei down 7.9%
  • US S&P 500 futures down 3.9%

David Cameron, prime minister of the UK, resigned, saying,

"I was absolutely clear about my belief that Britain is stronger, safer and better off inside the European Union, and I made clear the referendum was about this and this alone - not the future of any single politician, including myself.

Read the entire commentary here.

You Need a Will...NOW

What are you waiting for? You need a will. Yes, you!

It is a common misconception that only older people with a lot of money require a will, but this could not be further from the truth. Whether you are old or young, have material assets or not, it is very important to leave instructions so that your loved ones know what to do in case something happens to you and you are unable to communicate your wishes.

A will is not just a way to communicate where you want your money and tangible assets to go, but it can also assign beneficiaries to your electronic assets. An electronic asset can be anything from a website or blog that is either important to you or generates revenue, or can be your email and social media accounts. In this day and age, it is important to have a beneficiary for your online passwords. It is also important to express your wishes for what will happen with these accounts once you are gone. Do you want your Facebook account taken down when you are gone, or do you want it to remain as a memorial? These questions might seem silly, but they are necessary in today’s world.