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The First Quarter & The Market Outlook

Is the bull market over? In the first quarter of this year, the U.S. investment markets have experienced the first correction (a decline of 10% or more) in three years. The VIX index (known as Wall Street's "fear index") had its biggest quarterly jump since 2011, rising 81%.

The downturn hit most parts of the market, both domestically and globally --

  • The Wilshire Total Market Index finished the quarter down 0.76%.¹
  • The Russell 1000 Large-Cap Index fell 0.69%.²
  • The Russell Midcap Index dropped 0.46%.²
  • The Wilshire U.S. Small-Cap Index lost 0.73%¹
  • The EAFE (Europe/Australasia/Far East) Index went down 2.37%.³
  • The Wilshire U.S. REIT (Real Estate Investment Trust) Index fell 7.42%¹

The reasons are varied. Some are due to Trump's self-inflicted wounds --

  • The White House is in chaos. Thirty-seven staff have been fired by President Trump, or have left on their own since the inauguration, eleven just since January.
  • Trump is at risk for impeachment for one or more violations -- collusion with Russia, obstruction of justice, and/or illegal campaign financing.
  • Trade tariffs on steel and aluminum and on Chinese products announced by Trump have created uncertainty. Even if these tariffs are quietly walked back and amount to little in the end, they have caused a temporary roiling of the markets.

Some of the volatility has resulted from a strong economy --

  • The unemployment rate is near record lows.
  • Salaries have risen 3%, and 18 states have increased their minimum wages.
  • Companies in the Standard and Poors 500 index of the largest U.S. firms are enjoying a 7.1% boost in earnings in the first quarter of this year, the quickest rise since 1996.⁴

Because of the robust economy, Jerome Powell, the chairman of the Federal Reserve Bank, has announced that he will likely increase interest rates at a faster pace than he did in 2017. This is a reasonable and prudent move. The Fed would like to see controlled growth, as opposed to runaway growth that could spark inflation. However, his announcement was one of the causes of the current volatility.

One of the keys to understanding the current market is not to panic, and to view current events from a long-term perspective --

  • The VIX "fear index" although higher than last year, is now near its historical average. In other words, the current volatility is "normal" compared to the steady, uninterrupted growth we had last year.
  • A big concern last year was that stocks were overvalued. That is, the Price Over Earnings (P/E) ratio was inflated at 18.6. That means that the price of one share of stock was 18.6 times projected annual earnings. After the correction in the last quarter, the P/E ratio is at a more reasonable 16.1. Because of this, we might be able to avoid a more severe bear market later on.⁵
  • Corporations profited from a huge tax cut, from 35% down to 21% in the new Tax Law. The benefits of the tax cut are going to be felt later in the year. Consequently, the strong earnings by corporations in the first quarter can only get better.

Most investors are trying to accomplish long-term goals, intending for the growth of their investments to fund college for their children, a home purchase, or retirement. Because of a better diet, more exercise, and improved medical care, many couples spend 25 to 30 years in retirement. Over a long period of time, the ups and downs of the market even themselves out, and the potential for a good return becomes more predictable.

The increased volatility in the first quarter is just a reminder that the market never goes up in straight line. The bull market that we had last year was only temporary. If we enter a bear market, when stocks go down, that will end too. In the context of long-term goals, the performance of the market during a quarter or even a year shouldn't scare you from sticking to your plans.

¹ Wilshire index data: http://www.wilshire.com/Indexes/calculator/

² Russell index data: http://www.ftse.com/products/indices/russell-us

³ International indices: https://www.msci.com/end-of-day-data-search

⁴ S&P index data: http://www.standardandpoors.com/indices/sp-500/en/us/?indexId=spusa-500-usduf–p-us-l–

http://money.cnn.com/2018/04/01/investing/stocks-week-ahead-valuation/index.html

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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Trade Tariffs and Your Investments

Earlier this month, President Trump roiled the stock market by announcing that he would impose a 25% trade tariff on steel imports coming into the U.S. from foreign countries, and a 10% tariff on aluminum imports. The Dow Jones Industrial Average stock market index immediately dropped 2%.

Then last week, Trump proclaimed additional tariffs on $60 billion of imported goods from China, sending the market tumbling further.

The worst-case scenario would have been a global trade war, in which countries engage in a tit-for-tat retaliation against each other. The European Union, for example, would impose tariffs on U.S. motorcycles, bourbon, peanut butter and orange juice.

Trump used national security as a justification for imposing these tariffs. He would have had difficulty getting approval from the World Trade Organization. Many of the countries he targeted, like Canada, Japan and the European Union, already have mutual defense treaties with the U.S. A tariff on aluminum would have no impact on national security. The manufacturing process for aluminum requires bauxite, and the last U.S. bauxite plant closed 30 years ago.¹

Even from the point of view of protecting jobs in the U.S., the tariffs make no sense. Steel tariffs, for example, might have benefited 140,000 American steel workers, but it would have endangered the jobs of 6 1/2 million workers in construction, auto manufacturing, oil and gas pipelines, beer cans, agriculture and food processing.²

Already, Trump has granted exemptions to the foreign metal tariffs to Canada, Mexico, the European Union, Australia, Argentina, Brazil and South Korea. These exempted countries account for more than half of the $29 billion in steel sold to the U.S. in 2017. He also left the door open to other allies, like Japan, that did not get an initial exemption. Instead of tariffs, Trump is now talking about quotas. Quotas, compared to tariffs, might be welcomed by foreign exporters, since they would benefit from higher prices. With tariffs, the U.S. government collects the higher duties.³

It may be that Trump had no intention of actually imposing broad tariffs, but wanted to use the threat of tariffs as a bargaining chip to wrest concessions from other countries. The U.S., Canada and Mexico are in the midst of renegotiating the North American Free Trade Agreement (NAFTA). South Korea is also renegotiating its own free-trade agreement with the U.S.

One of Trump's main beefs with China was its requirement for U.S. companies manufacturing or trading in China to have a Chinese corporate partner, who would own 51% of the joint venture, and would have access to the American company's trade secrets and intellectual property. Even before the tariffs were announced, the Chinese government had agreed to lift the majority stake rule for U.S. securities firms and insurance companies. After three years, all caps would be removed. It will be the largest liberalization of China's financial services industry in eleven years.⁴

Global currency markets are very sensitive to trade flow because currency pricing is dependent on the stability or disruption of trade. However, the South Korean won, the Taiwanese dollar and Singapore dollar are all trading near their strongest levels in three years. World trade overall is expanding at the fastest rate in six years. China has responded with their own tariffs against U.S. products, but in a very muted way -- $3 billion in tariffs against U.S. products, versus $60 billion in tariffs against Chinese products.⁵ 

Since the initial panic, investor sentiment has warmed, and the market has already made back half of its initial losses. It seems as though the President is pursuing his common pattern of tapping out a dramatic tweet, followed by quietly walking back from his initial pronouncements. In the end, the "tariff turmoil" may turn out to be much ado about nothing.

¹ Wall Street Journal 3/9/2018

² Marketwatch 3/5/2018

³ New York Times 3/22/2018

⁴ South China Morning Post 11/10/2017

⁵ www.bobveres.com 3/1/2018

 

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

 

 

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Medicare Under Attack

In our last article, we talked about a cynical aspect of the Social Security "Cost of Living Adjustment." The 2% increase is actually fully offset by a simultaneous increase in Medicare premiums. We have seen other "give with one hand, take with the other" strategies in the new tax law. For example, the increase in the Standard Deduction is cancelled out by the repeal of the Personal Exemption. 

However, these shell games pale in comparison to the overall impact of the new tax law. The main beneficiaries of the tax law are mega-corporations. Not only did they receive a "tax holiday" on $620 billion of tax-free profits sheltered overseas, but they were granted a massive tax cut from 35% down to 21%. Unfortunately, only 6% of this windfall has gone towards employee raises and bonuses.¹

Back in 2008, the government bailed out banks with taxpayer money during the recession. In a similar way, the new tax law gifts mega-corporations but leaves taxpayers to pay for the resulting $1.5 trillion federal budget deficit. Lawmakers have been somewhat vague about what they will do to reduce the federal debt, but deficits have consequences, and what they have already said is telling --

House Speaker Paul Ryan said, "We're going to get back to entitlement reform, which is how you tackle the debt and the deficit."²  Senator Marco Rubio (R-Fla), after voting to create the gigantic deficit, announced, "The driver of our debt is Social Security and Medicare."² It seems likely that Congress will use the pretext of higher deficits to attack Medicaid (Medi-Cal in California), Medicare, Social Security and anti-hunger programs.

Medicare began in 1965 when seniors were unable to go out and buy health insurance on their own. Insurance companies did not want to sell affordable policies to older people because they were more expensive to insure. We have now come full circle -- Republicans are proposing that seniors get a voucher in place of Medicare. The voucher would defray some of the cost of buying a health insurance plan, but once again, elderly Americans would be on their own to try to get coverage.³

Before he resigned last September, Secretary of Health and Human Services, Tom Price, wanted to replace the Federal Medical Assistance Percentage, which is the federal government's commitment to fund Medicaid. Instead, he proposed block grants given to states. Block grants are typically small and fixed, and shift the healthcare burden to states. In the event of an economic downturn or emergency health crisis, states would find it difficult to fund necessary services. Price is gone, but Congress continues to promote his policies.

The existing cost of Medicare is already a significant burden to many people. The National Committee to Preserve Social Security and Medicare reports that, "45% of retirees spend more than 1/3 of their Social Security benefits on health care, from co-pays, to premiums, deductibles, and out-of-pocket fees for services -- such as going to the eye doctor, dentist or audiologist -- that are not provided."³

Indicative of things to come, Trump signed into law a dismantling of Medicare's Independent Payment Advisory Board. This board was authorized to serve as a check to prevent higher Medicare premiums.

It's fairly certain that cuts to Medicare and Social Security will be the next target for Trump and the Republican leadership. It's only a question of when. It will be difficult for Republicans to press for these cutbacks ahead of the 2018 midterm elections. There is an anti-Trump wave building in many of the swing states and districts that Republicans want to hold onto, and there is a growing contingent of well-funded Democratic challengers, many of them women. Republicans recognize that Medicare is a very popular program to the very people that voted for Trump. After the midterm elections, however, GOP representatives won't have to worry about retribution from angry voters and can proceed with, "entitlement reform."

If the 2018 midterms result in a Democratic surge, the soon-to-be replaced Republican majorities may try to push through cuts to Medicare and Social Security during a lame duck session after the November elections, but before the next Congress is sworn in in January 2019. 

[1] http://money.cnn.com/2018/03/05/investing/stock-buybacks-inequality-tax-law/index.html

² https://www.washingtonpost.com/news/wonk/wp/2017/12/01/gop-eyes-post-tax-cut-changes-to-welfare-medicare-and-social-security/?utm_term=.754575565af9

³ http://www.truth-out.org/news/item/39715-you-re-on-your-own-republicans-plan-attack-on-medicaid-medicare-and-social-security

https://www.washingtonpost.com/news/monkey-cage/wp/2017/01/18/republicans-want-to-fund-medicaid-through-block-grants-thats-a-problem/?utm_term=.ca16b768bde8

 

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

 

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2018 SOCIAL SECURITY & MEDICARE: Give with one hand, take with the other

In October 2017, the Social Security Administration (SSA) announced that it would be increasing the social security benefit payments in 2018 by 2% for a Cost of Living Adjustment (COLA)[i].  In dollars, that means the average retirement benefit will increase by $27 to $1,404 per month and the average retired couple will receive a $46 raise to $2,340 per month[ii].  

Many retirees were thrilled at the news, as this was the most generous COLA increase in 6 years.  In 2010 and 2011, the COLA was 0%, making the average increase in the last 9 years a whopping average of 1.2% per year.  During the same period, however, the cost of food, energy, gas, entertainment, and medical coverage seemed to tick up faster.  In 2018, it is estimated that Medicare expenses will go up by 2.8%[iii] meaning that for a retiree, any increase in Social Security Income will be spent in full to try to cover increasing Medicare premium costs.  That just doesn’t make sense, now does it?

Medicare Premium Surcharges

Since 2006, Medicare Part B premiums, the medical insurance portion of your care (i.e.: for doctor’s visits) have been subject to a tiered premium schedule where higher earners pay higher premiums.  In 2018, the surcharge starts at an extra $53.50/month (on top of the baseline payment of $134/month) and can rise as high as an extra $294.60/month for those whose Modified Adjusted Gross Income (MAGI) exceeds $85,000 for individuals, or above $170,000 for married couples.[iv]  As a part of the Bipartisan Budget Act of 2018, in 2019, a 5th level will be added, bringing the premium surcharge to as high as 85%, or $321.40/month on top of the base of $134/month for a total monthly premium of $455.40/month.  

What does that mean for me?

For some unfortunate retirees, even if your income didn’t change much year over year, due to the new tax tables, your Medicare Part B premium might have.  This year’s premiums are based on last year’s taxes, but the new tables will take effect shortly, so it would be prudent to discuss what the future might hold when you sit down with your CPA to file your 2017 tax return.  

The consistently rapid and rising costs of medical care certainly exceed the average return on money market accounts at the bank, but also the COLA used for Social Security benefits and pension payments.  The average annual US inflation rate since 1914 has been approximately 3.24%[v], but the US Department of Labor tracks medical care costs to have increased at a higher rate of approximately 5% per year[vi] during roughly the same period.  This makes the case that in order to keep up with inflation, retirees need to find investments vehicles that allow them to protect their standard of living in retirement with returns that meet or exceed average inflation.  One of the safest ways to achieve this historically, has been a portfolio of diversified investments that captures both domestic and international equity market returns, but also offers protection from fixed income on the downside.  Your Certified Financial Planner™ can help construct a customized portfolio that suits your investment risk tolerance and retirement goals.

One of our clients said she was happy to hear that her Social Security Income was going to increase in 2018, only to find out her Medicare Premiums did too.  She estimates netting an $8 gain at year’s end.  Come to find out, she might have been one of the lucky ones!

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.



[i] https://www.ssa.gov/news/cola/

[ii] http://www.investmentnews.com/gallery/20180102/FREE/102009999/PH/2018-social-security-and-medicare-changes&Params=Itemnr=2

[iii] https://www.kiplinger.com/article/business/T019-C000-S010-inflation-rate-forecast.html

[iv] https://www.kitces.com/blog/bipartisan-budget-act-2018-irmaa-medicare-premium-surcharges-tuition-and-fees-deduction/

[v] http://www.usinflationcalculator.com/inflation/historical-inflation-rates/

[vi] https://data.bls.gov/pdq/SurveyOutputServlet

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Don't Forget About Inflation Risk

At a time when we're experiencing renewed volatility in the stock market, it's easy to be influenced by fear. When you turn on the news, the media tends to focus on just one risk -- stock market risk. They rarely mention a risk that may be even greater -- inflation risk.

The annual rate of inflation averages out historically to 4 – 4 ½% per year. It doesn't sound like much. However, over the course of 25 to 30 years of retirement, it can become a big deal. When the market is in the midst of a correction, it's tempting to move retirement assets to the low, but guaranteed, interest offered by banks, or the somewhat higher income presented by fixed annuities.

Returns from the stock market are not guaranteed. That's why your investment prospectus tells you, "Past performance is no guarantee of future results." However, it is this risk that forces the stock market to give the potential to receive much higher returns than guaranteed, fixed investments. When there is a growing gap between rich and poor, and the middle class is paying for big tax breaks to corporations, the stock market may be one of the few ways for average people to participate in the growth of the economy.

In order to not lose ground financially, we have to find ways for our assets to grow at least as fast as inflation. To give you an idea of the impact of inflation over a long period of time (like your retirement), check out this free, online calculator at:

            https://www.calcxml.com/do/ret05

Input your current age, the income that you are receiving, and the year in which you think you might pass away. Don't be too conservative about your life expectancy. A study by the Society of Actuaries Committee on Post-Retirement Needs and Risks stated that, "For a couple 65 years old, there’s a 25% chance that the surviving spouse lives to 98!"¹ The calculator will tell you what your income will need to be at some point in the future in order to maintain your purchasing power, and maintain your current lifestyle.

For example, suppose that you are age 65 today, and you are receiving an income of $100,000 per year from an annuity, and that income stays the same over your lifetime. How much of your future lifestyle will that annuity sustain by the time you're 90? The calculator shows that when you assume an inflation rate of 3% per year, you would need $209,378 at age 90 to enjoy the same lifestyle you enjoy today. In other words, the annuity would provide less than half of what you need at age 90.

Remember that I said that average inflation is closer to 4 to 4 ½% per year. If we use a 4% inflation rate, the future income needed to match today's $100,000 rises to $266,584.

I'm not saying that all annuities are bad. There are good annuities and bad annuities (we'll get into that at another time).  A good annuity is appropriate in the right circumstances as part of an overall retirement strategy, especially for people who aren't so fortunate to retire with a pension. However, when you see the results of your own calculation, you can understand why it makes sense for many retirees to assume a moderate amount of risk in a broad, globally-diversified portfolio.

Investments that grow over time may make it possible for you to afford a comfortable future retirement. The safety of bank CDs and guaranteed fixed income from annuities can have a place in your retirement strategy, but if they are the only assets you have, you may be swapping a guarantee not to lose money for a guarantee that you will run out of money in retirement.

¹ USA Today, 10/5/2016

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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EDUCATIONAL WORKSHOPS


 

2018 SCHEDULE 

HELP AGING PARENTS WITH FINANCES

Saturday, May 5, 2018

9:00 a.m. - 11:00 a.m.

South Pasadena Library Community Room**

1115 El Centro Street

South Pasadena, CA  91030

**this activity not sponsored by the City of South Pasadena or the South Pasadena Public Library

 

HELP AGING PARENTS WITH FINANCES

Saturday, May 19, 2018

9:00 a.m. - 11:00 a.m.

Ken Nakaoka Center*

1670 W. 162nd St.,

Gardena, CA  90247

*not sponsored by the City of Gardena

 

YOUR RETIREMENT CHECKLIST AND LTC/LI HYBRIDS

Saturday, July 14, 2018

10:30 a.m. - 12:30 p.m.

La Canada Flintirdge Library

4545 N. Oakwood Ave.

La Canada Flintridge, CA 91011

 

YOUR RETIREMENT CHECKLIST AND LTC/LI HYBRIDS

Saturday, July 21, 2018

9:00 a.m. - 11:00 a.m.

Ken Nakaoka Center*

1670 W. 162nd St.,

Gardena, CA  90247

*not sponsored by the City of Gardena

 

INVESTING AFTER AGE 70.5 AND RMDS

Saturday, September 8, 2018

9:00 a.m. - 11:00 a.m.

South Pasadena Library Community Room**

1115 El Centro Street

South Pasadena, CA  91030

**this activity not sponsored by the City of South Pasadena or the South Pasadena Public Library

 

INVESTING AFTER AGE 70.5 AND RMDS

Saturday, September 22, 2018

9:00 a.m. - 11:00 a.m.

Ken Nakaoka Center*

1670 W. 162nd St.,

Gardena, CA  90247

*not sponsored by the City of Gardena

 


Contact Us

300 North Lake Avenue, Suite 920
Pasadena, California 91101
Phone: (626) 449-7783
Fax: (626) 449-7785
Email: info@kondowealthadvisors.com

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