Perspectives from Above the Noise – Week of January 27, 2014

3 Stories in the global economy that should not go un-noticed

Weighed down by mixed earnings results, profit-taking and extreme volatility in many emerging markets, U.S. stocks capped off their worst week since 2012. Consumer discretionary stocks were among the hardest hit after disappointing earnings reports from several retailers. The S&P 500, now down more than 3% year-to-date, fell below its 50-day moving average on Friday for the first time since October.

The Federal Reserve is holding its two-day meeting on Tuesday and Wednesday of this week. It will mark Chairman Bernanke’s last meeting before handing over the reigns to new Fed chief Janet Yellen on Feb. 1. Despite last month’s weak jobs report, most economists expect the Fed to continue the tapering process set into motion at the December meeting, thereby reducing the Fed’s monthly asset purchases by an additional $10 billion a month (from $75 to $65 billion).

For the week, the S&P 500 lost 2.63%, the Dow fell 3.52%, and the MSCI EAFE (developed international) dropped 1.99%.

Here are the 3 stories this week that rose above the noise:

China Loses its Allure

The Economist has an interesting look at how the business environment in China is getting much more challenging for multinational firms. After decades as an easy driver of growth, foreign companies operating in China now face the headwinds of slowing growth, rapidly rising wages, and even greater government scrutiny including a sweeping consumer-protection law that is coming in March. These challenges are likely to make achieving profitable growth out of business operations in China much more difficult in the coming years than it has been over the past decade.

Emerging Market Currencies: A Well-thought-out Crisis

A recent CNBC article examines the slide in emerging-market currencies, arguing that the trend is not new, as foreign-exchange markets have been pricing in the Fed tapering of its bond-buying program since May 2013. Interestingly, the declines have been quite orderly, as the currencies that have depreciated the most have generally been those with the worst fundamentals based on current account situations. Given the sharp drop, some contrarian investors think that buying opportunities may now exist, with Indonesia and Korea being two countries specifically mentioned.

New U.S. Home Sales Drop 7%, Miss Estimates

New home sales dropped 7% in December to an annualized rate of 414,000 units, below the consensus estimate of 455,000 and the second consecutive month of declining sales. Severe weather in many parts of the country was largely to blame for the significant drop in new home sales. Despite the weak finish for the year, 2013 was the strongest year for new home sales since 2008. Additionally, December’s new home sales were 4.4% higher than one year ago and the average price of a new home increased 8.4% in 2013 to $265,800, the largest increase since 2005.

Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.

8 Wealth Issues: Retirement Planning

Social Security in 2014

As 2014 kicks off, we are adding our 2^nd regular column, which will be a monthly piece on one of the 8 Wealth Issues we address within our financial planning framework.  These are:  Fiscal Fitness; Retirement Planning; Investment Strategies; Tax Efficiency; Insurance; Executive Compensation; Business & Succession Planning; & Estate.

This month we focus on Retirement Planning, with a specific focus on the sub-issue of Social Security.  This also is in line with our upcoming workshop on Social Security, Medicare, & Retirement Income Planning, scheduled for January 25^th at Mira Vista Country Club.

Here are six things you need to know about Social Security for 2014.
For clarity’s sake, here is a rundown of what is changing this year, and what isn’t.

Social Security recipients are getting a raise – but not much of one. Next year, the average monthly Social Security payment will increase by $19 due to a 1.5% cost-of-living adjustment, one of the smallest annual COLAs in the program’s history. Since 1975, only seven COLAs have been less than 2%. Four of these seven COLAs have occurred in the past five years, however. The 2013 COLA was 1.7%.^1,2

How does Social Security measure COLAs? It refers to the federal government’s Consumer Price Index, specifically the CPI-W, which tracks how inflation affects urban wage earners and clerical workers. Social Security looks at the CPI-W from July to September of the present year to figure the Social Security COLA for next year, so the 2014 COLA reflects the very tame inflation measured in summer 2013.^1,2,3

Does the CPI-W accurately measure the inflation pressures that seniors face? Some senior advocacy groups say it doesn’t. The Senior Citizens League, a non-profit that lobbies for elders and retired veterans, contends that Social Security recipients have lost 34% of their purchasing power since 2000 because the CPI-W doesn’t track rising health care expenses correctly.³

On its website, the Bureau of Labor Statistics admits that the CPI “differs in important ways from a complete cost-of-living measure.” The CPI measures increases or decreases in rents, transportation costs, tuition, food, clothing, prescription drug and medical care costs, and the prices of consumer discretionary goods and services – 200 item categories in all. Still, some prices in the CPI rise faster than others; medical costs increased 2.4% from September 2012 to September 2013, and housing costs rose 2.3%.^2,3,4    

Chained CPI is not yet being used to determine COLAs. Some analysts and legislators would like Social Security COLAs to be based on chained CPI, a formula which assumes some consumers are buying cheaper/alternative products and services as prices rise. Supporters think that pegging Social Security COLAs to chained CPI could reduce the program’s daunting shortfall by as much as 20% in the long term.^5,6

The CPI-W is still the CPI of record, so to speak. That’s good for retirees, as the Congressional Budget Office says that COLAs would be about 0.3% smaller if they were based on chained CPI. Perhaps this sounds bearable for one year, but according to AARP, a 62-year-old who retired and claimed Social Security in 2013 would be losing the equivalent of an entire month of income per year by age 92 if chained CPI were used to figure benefit increases.^5,6

Groups like TSCL and AARP wouldn’t mind basing the COLAs on the CPI-E, an alternative CPI that the BLS maintains to track prices most affecting consumers aged 62 and up. From 1982-2011, the CPI-E showed yearly inflation averaging 3.1% compared to 2.9% for the CPI-W.^4,5,6

Social Security’s maximum monthly benefit is increasing. In 2013, a Social Security recipient who had reached full retirement age could claim a maximum monthly benefit of $2,533. Next year, the limit will be $2,642.¹

So is Social Security’s annual earnings limit. This limit is only faced by Social Security recipients who have yet to reach the month in which they turn 66. In 2013, retirees younger than 66 were able to earn up to $15,120 before having $1 in retirement benefits temporarily withheld for every $2 above that level. In 2014, the annual earnings limit rises to $15,480. Social Security recipients who will turn 66 next year can earn up to $41,400 in 2014; if their earnings break through that ceiling, they will have $1 of their benefits temporarily withheld for every $2 above that level. Once you get to the month in which you celebrate your 66th birthday, you can earn any amount of income thereafter without a withholding penalty.¹

On the job, the wage base for Social Security taxes is rising. American workers will pay a 6.2% payroll tax on the initial $114,000 of their incomes in 2014. The 2013 payroll tax cap was set at $113,700. About 6% of working Americans will pay more in Social Security tax next year as a consequence of this seemingly insignificant adjustment.^1,6

      

There are significant considerations to your retirement income claiming for Social Security.  An area of financial planning that is often overlooked is the optimization of these benefits.  We can help you choose a strategy for this optimization.

 

     

Citations.

1 - money.usnews.com/money/blogs/planning-to-retire/2013/10/30/how-social-security-will-change-in-2014 [10/30/13]

2 - blogs.marketwatch.com/encore/2013/10/30/social-securitys-2014-raise-a-modest-1-5/ [10/30/13]

3 - seniorsleague.org/agenda/ [11/7/13]

4 - stats.bls.gov/cpi/cpifaq.htm#Question_4 [10/24/13]

5 - baltimoresun.com/news/opinion/bs-md-federal-chained-cpi-20131106,0,7051573,full.story [11/7/13]

6 - aarp.org/politics-society/advocacy/info-02-2013/the-chained-consumer-price-index-explained.html [2/13]

Perspectives from Above the Noise – Week of January 20, 2014

3 Stories in the global economy that should not go un-noticed

In keeping with the start to 2014, stocks were volatile on the week as investors struggled to make sense of conflicting economic data and Federal Reserve intentions. U.S. equities registered their largest one-day decline in two months on Monday, feeling the hangover effect from the previous Friday’s surprisingly lackluster jobs report.

Meanwhile, historically dovish Atlanta Fed President Dennis Lockhart further roiled markets by seeming to support more tapering of the Fed’s monthly bond-buying stimulus. Even though incoming Fed chairwoman Janet Yellen has long espoused a philosophy of accommodation, the uncertainty surrounding the Fed’s exit strategy and upcoming leadership transition has contributed to this year’s volatile beginning on the market .

For the week, the S&P 500 lost 0.2%, the Dow gained 0.13%, and the MSCI EAFE (developed international) rose 0.14%.

Here are the 3 stories this week that rose above the noise:

World in 2014 Is Better…But Not Good Enough

PIMCO Co-CIO Mohammad El-Erian is more optimistic about the global economy in 2014, citing improving economic growth in developed economies, lowering global unemployment rates and strengthened financial regulation.

Despite many signs that global economic growth is strengthening, El-Erian lists several risks that the global economy faces in 2014, including transitioning U.S. Federal Reserve policy, political dysfunction in Washington, sluggish growth accompanied by elevated unemployment in Europe, and global economic growth unable to reach “escape velocity” five years after the financial crisis.

OECD Leading Indicators Point to Pick Up in Global Growth

Growth is set to pick up in most large economies during the first half of 2014, with the exception of India, which is set for a slowdown, according to leading indicators published last Monday by the Organization for Economic Cooperation and Development.

The Paris-based research body's leading indicators suggest that the outlook for many parts of the global economy improved as 2013 drew to a close. The leading indicators for Brazil and China also rose, indicating both will experience an increase in growth over coming months.

U.S. Small Business Confidence Rises; Firms Expect More Sales

U.S. small business confidence rose in December, driven by increased optimism about revenues and an improving outlook for business conditions over the next six months. The Small Business Optimism Index is still below pre-recession levels, but has trended higher over the last year.

Overall, the report was encouraging. The outlook for small business spending is also improving according to National Federation of Independent Business economist William Dunkelberg. “Reports of capital spending did rise significantly in December...and plans to make expenditures did rise a bit.”

Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.

Perspectives from Above the Noise – Week of January 13, 2014

3 Stories in the global economy that should not go un-noticed

Last week began with several pieces of economic data pointing to signs of solid improvement. First came news that that the United States trade deficit had fallen to its lowest level in four years as strong domestic production reduced demand for energy imports. On Wednesday, payroll processor ADP reported that the private sector had added 238,000 jobs, topping the 200,000 forecast. This was the largest monthly increase in the ADP report since November 2012, however, Friday’s December nonfarm payrolls report reframed the unemployment numbers as the U.S. economy added only 74,000 jobs.

For the week, the S&P 500 gained 0.6%, the Dow fell 0.2%, and the MSCI EAFE (developed international) gained 0.63%.

Here are the 3 stories this week that rose above the noise:

Services in U.S. Expand at Slower Pace than Forecast

U.S. service activity fell to its lowest rate of growth in six months during December. The ISM Non-Manufacturing Index dropped to 53.0 from 53.9 in November (above 50 signals expansion). However, the decline in growth was likely weather-related and service activity continues to expand at a healthy pace. Solid gains occurred in construction and retail, while hotels and restaurants experienced a slowdown. European service activity also expanded in December, albeit at a slower pace than in the United States and below the level of growth that occurred in November.

Trade Gap Shrinks to Four-Year Low as U.S. Oil Imports Drop

The trade deficit in the United States declined 12.9 percent to $34.3 billion in November, smaller than the $40 billion Bloomberg consensus and represented the lowest monthly gap since October 2009. Exports increased 0.9 percent to $194.9 billion, reflecting significant gains in civilian aircraft and chemical sales which are being driven by improving economies in Europe and Asia.

Imports dropped 1.4 percent to $229.1 billion in November, as purchases of crude oil dropped to the lowest level in three years, reflecting both lower prices and volume. The figures used to calculate gross domestic product, which eliminate the influence of prices, showed the trade deficit narrowed to $44.6 billion in November, a five-month low. The fourth-quarter average so far is smaller than in the previous three months, indicating trade boosted gross domestic product.

Disruptive Technologies: Advances that Will Transform Life, Business, and the Global Economy

The relentless parade of new technologies is unfolding on many fronts. Almost every advance is billed as a breakthrough, and the list of “next big things” grows ever longer. Not every emerging technology will alter the business or social landscape, but some truly do have the potential to disrupt the status quo, alter the way people live and work, and rearrange value pools. This article from the McKinsey Global Institute cuts through the noise and identifies 12 technologies that could drive truly massive economic transformations and disruptions in the coming years.

3 examples include: 1) Advanced robotics—that is, increasingly capable robots or robotic tools, with enhanced “senses,” dexterity, and intelligence. 2) Next-generation genomics marries the science used for imaging nucleotide base pairs (the units that make up DNA) with rapidly advancing computational and analytic capabilities. As our understanding of the genomic makeup of humans increases, so does the ability to manipulate genes and improve health diagnostics and treatments. 3) And Energy-storage devices or physical systems store energy for later use. These technologies, such as lithium-ion batteries and fuel cells, already power electric and hybrid vehicles, along with billions of portable consumer electronics.

Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.

RETRO-Spectives from Above the Noise – 2013

The 3 Major Stories in the Global Economy for the Year

Now that 2013 is behind us, let's take a look at the events that shaped markets last year. 2013 was the year that investors finally became confident in the economic recovery and poured their enthusiasm into equities.

Despite significant continued volatility, stocks soared to new heights, giving the S&P 500 its best year since 1997. For the year, the S&P rose 29.6%, the Dow gained 26.5%, and the MSCI EAFE (developed international) advanced 19.4%.

Here are the 3 major stories from 2013 we believe will continue to impact 2014:

When Diversification “Fails”…but why it still works

Devin Cassels from SEI Investments recent published a commentary discussing the over exuberance in the use of the S&P 500 as a yard stick. A unique aspect of the S&P 500 Index is that many investors consider it to be a barometer of financial market performance. This trend has emerged for two main reasons: (1) the ease of focusing on a single number, and (2) the media’s tendency to publicize the S&P 500 as a proxy for overall financial market performance. While these forces make this trend understandable, they can also create confusion for investors when portfolio returns deviate from those of U.S. large-cap stocks. In environments like 2013, a natural question tends to arise—if investors understand the S&P 500 Index and often compare their portfolios to that proxy, why don’t investment professionals simply provide their clients with portfolios that contain large allocations to U.S. stocks and track very closely to the well-known index?

The simple answer is that, while U.S. large-cap stocks do act as an important allocation, they are also subject to fluctuations in performance just like other asset classes. For this reason, it is important that portfolios contain other exposures that can moderate the investment experience—with an aim on consistency, rather than out-performance.

US Government Shutdown & Continued Divided Government

Political gridlock in Washington was another source of market volatility in 2013. After resolving the Fiscal Cliff on New Year’s Day, legislators were still unable to agree on a deficit-reduction plan. This forced the federal government to the “sequestration” budget cuts designed to significantly reduce the budget over the next 10 years.

This was followed much later in the year with a disagreement over the federal budget which ultimately caused a 16-day shutdown. Generally, investors stayed calm and markets rose sharply in the period immediately following the budget deal. Some estimates put the cost of the shutdown at $2 billion in lost productivity plus the cost of ripple effects across the economy.

Fortunately, a bipartisan budget deal reached in December promises to alleviate a new round of sequestration cuts and stabilizing government funding through late 2015.

The Economist published a recent article commenting that “insurgent” political parties are on the rise in Europe—in addition to the “tea party” in the US—noting that they could carry more power than “at any time since the second world war.” Though US politicians will still have to tackle raising the Treasury debt ceiling in early 2014, we expect to avoid another showdown. Political division could be seen and heard in other parts of the world—with the effects felt in the global economy.

The Federal Reserve: Inflation, Taper, & Interest Rates

The Bureau of Labor Statistics published their calculation of consumer price index (seen by many as a general measure of inflation) through the end of November at 1.2% for the previous 12 months. This is much lower than historical inflation numbers—and it has been for about the last year. One of the main concerns over the Federal Reserve’s bond buying program (termed quantitative easing or QE) was that it could trigger higher inflation over time due to more currency being put into circulation. As the Fed begins to gradually wind down QE, the big questions is how will inflation react?

In balance with QE taper is the question of how the Fed will adjust interest rates going forward. With interest rates still at near 30-year lows, bond values could suffer as rates head upward.

Current Fed chairman Ben Bernanke will be stepping down at the end of January and the Senate has confirmed Janet Yellen, the current vice chair, as his successor. It is expected that she will continue many of his policies. A recent contribution in Forbes magazine comments however that Yellen believes in “printing money to drive down unemployment.” If this continues as the main economic ammo for the Fed, we may in fact see higher inflation on the horizon—which could also in turn influence how quickly interest rates rise.



Looking ahead, we're optimistic about 2014. Even if stocks slow their pace of growth, we think there's still upside potential if the U.S. economy continues to gain steam and Q4 corporate earnings reports are positive. While a pullback is always possible as investors consolidate their positions, long term economic trends are still heading in the right direction. Although it's impossible to predict market trajectories with accuracy, we're always on the lookout for both dangers and opportunities for our clients, and we look forward to supporting you in the year ahead!