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June 2019 Commentary

June 2019
Stock Market Outlook
and Economic Update

The stock market once again is responding to uncertainty relating to trade tensions with China, and most recently, with Mexico. I believe the Mexican tariff threat will be resolved shortly. Mexican President Obrador stated on June 1, 2019 a desire to resolve this issue and is sending a delegation to the U.S. to resolve the U.S. – Mexican border dispute and thus the threat of tariffs.

The U.S. stock market, as measured by the S&P 500 Index (S&P), declined 7% in May 2019.  However, the index remains up 10% on a year-to-date basis through May 31, 2019.


Note: S&P 500 is an index of 500 large capitalization companies; the Russell 2000 is an index of small-capitalization companies
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The recent stock market sell-off is normal for the stock market as periodic concerns develop prompting investors to sell. We advise clients to establish a long-term investment strategy which includes an appropriate amount of risk assets (stocks and real estate), and funds for cash needs and emergencies (money markets and bonds) for the next 1-4 years.

Corporate earnings are expected to be up a mere 3% in 2019, after a robust 22% growth in 2018. The consensus estimate for corporate earnings growth for 2020 is 12%. If our economy remains in a growth phase, and corporate earnings rise by 10%+ in 2020, the U.S. stock could rise by 10-15%, in my opinion. An important caveat: if the trade dispute between the U.S. and China does not dissipate, consumer and business confidence could easily deteriorate and thus cause a weakening economy and possibly a recession. A bear market (-20% or more) would likely ensue.

The U.S. economy continues to expand but its growth rate is decelerating. The U.S. economy remains on a solid growth trajectory, although its growth rate has slowed in 2019. Gross Domestic Product (GDP) is the primary measure of economic growth and is expected to be up by 2.7% in 2019, down slightly from 2.9% in 2018. World GDP is expected to be up by approximately 3.5% in 2019 and 2020, down from 3.8% in 2018.

On the job front, companies continue to hire new workers at a health pace with 260,000 new jobs being added to the U.S. economy in April 2019, and 8170,000 so far in 2019. Wages are rising 3.2% on average for production/non-supervisory workers with higher gains among the lower wage jobs. This is certainly welcome news because wage growth has been lackluster for several years.

Consumers are spending cautiously, but still “feeling” well. Personal income rose 5.1% in the March 2019 quarter on a year-over-year basis, while spending was up 3.6%, exhibiting consumers caution. The personal savings rate is 7%, approximately twice the rate prior to the financial crisis of 2008.

Consumer and business sentiment, while currently healthy, could deteriorate easily if trade tensions do not show signs of abating ……

Small business optimism on a slight upturn after deteriorating at the end of 2018 and into 2019…….


Stock Market Outlook: a possible 10-15% upside in the next 18 months?

The stock market’s valuation (price-to-earnings ratio) is back to its historical average and is currently (5/31/2019) 15.7x. As we look to 2020 earnings estimates, the P/E ratio drops to 14.7x, based on the current price of the S&P and its 2020 earnings estimate. Herein lies the catalyst of the potential for the market to rise by 15% in the next 12 to 18 months! This potential is based on our economy not experiencing a recession and continues its modest GDP growth rate of 2.5%+.


Is a recession on the horizon? We continue to see the media bring forward articles and opinions that a recession is coming every time the market declines. We heard this cry in the third quarter of 2018 when the S&P declined 20%. Then, in the first quarter of 2019 the S&P rebounded 22% and the economy expanded by 3.1%. It is unclear what the outcome will be with trade negotiations, especially with China. These negotiations will likely have a direct impact on business sentiment and investment. If business uncertainty leads to business investment declining, an economic downturn could easily follow. If global economic growth rates continue to decline and trade tensions remain heightened, the stock market could easily enter a true bear market (down 20%+).

Portfolio Investment Strategy
• Maintain an appropriate allocation to cash and bonds for cash needs for the next 1-4 years.
• Equity/stock investments should have a time horizon of at least three years.
• Equity/stock allocation: increase small-cap exposure. Small cap stocks are now selling at a discount to large capitalization stocks and have a higher  
    earnings growth rate. Small cap stocks typically sell at a P/E ratio premium to large cap stocks.
• Market timing is fruitless. While it is tempting to sell stocks when the markets are declining, we believe prudence is on the side of maintaining a long-
    term strategy and/or adding to stock investments when the stock market is declining.

Every investors situation is unique and requires a customized strategy to implement.

Rich Lawrence, CFA June 4, 2019

Plan for the Long Term
Prepare for the Short Term

DISCLOSURE
This market update includes data we believe to be accurate. However, Lawrence Wealth Management (LWM) does not warrant or guarantee its accuracy. Opinions about the future are not predictions, guarantees or forecasts. Investing in stock and bond markets have risk that could lead to investors losing money.

Dow Jones Industrial Average Sold off 833 Points or 3% on 10/10/2018 Adjusting to Rising Interest Rates

The market decline in perspective:The stock markets’ 3% decline yesterday puts the DOW back to where it was in August 2018 and is up 4% on a year-to-date basis through this morning (10/11/2018). Earlier in the year we were expecting a 6-10% gain for the U.S. stock market for 2018 which we continue to maintain based on corporate earnings growth in 2018 and 2019.  We keep in mind 2018 is following two very strong years for the stock market with gains of 14% and 20% for 2016 and 2017, respectively, as corporate earnings grew significantly.

The all-important 10-Year Treasury yield is now 3.2%, up from 2.5% at the beginning of 2018.  Economists and money managers alike have been expecting interest rates to rise for the past couple of years. Well, a rising interest rate environment is finally here.  Stock markets sell off during the early stages of rising interest rates because investors become concerned that higher rates will lead to slower economic and corporate earnings growth. Stock markets typically regain upward momentum as long as corporate earnings continue to expand.

The economy continues to be strong and is why the Federal Reserve Board (FED) believes the economy can withstand higher interest rates. The economy is expanding strongly at the 4.0% GDP level well above the 1.5-2.5% level at which the economy expanded during most of the last 10-years.  The FED’S objective with increasing interest rates is to “normalize” interest rates and not to curtail inflation at the current time. A 4.0% GDP economy and a 3.7% multi-year low unemployment rate could set the stage for inflation above the 2% FED target in the future.  And if inflation shows evidence of moving up to the 2.5-3.0% range, we expect the FED will in fact raise interest rates faster than currently expected to temper the economy’s growth and thus inflation.  This would likely put significant downward pressure on the stock market.

Rich Lawrence 10/11/2018

Plan for the Long Term

  Prepare for the Short Term

DISCLOSURE:
This market update includes data we believe to be accurate. However, Lawrence Wealth Management (LWM) does not warrant or guarantee its accuracy. Opinions about the future are not predictions, guarantees or forecasts. Investing in stock and bond markets have risk that could lead to investors losing money.

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Fundraiser for Storm Victims

A Fund Raiser for Storm Victims

I believe the time is now to chip in whatever we can to help so many storm victims.  All donations will help greatly from $5, $25, $50, $100, and up!

Lawrence Wealth Management (LWM) will match dollar-for-dollar up to $500.   If clients and friends’ total contributions reach $5,000 we will raise our donation to $750. This offer expires September 25, 2017 at 11:59 p.m. Hurricane Harvey that hit Texas is over, but the devastation is not.  And now Irma, another category 4-5 storm, is headed right to Florida.

Donate directly to the charity of your choice and email or call me AFTER you have donated and let me know the amount and name of charity.  I will tally all donations on Tuesday September 26th, and will make my own donation in accordance with this challenge.

When the goodness of people surfaces during times of natural disasters, so do   scoundrels looking to gain financially from charitable people.  BE THOUGHTFUL WITH YOUR GIVING.  There is a great site to conduct due diligence of a charity: “Charity Watch” website: www.charitywatch.org.   Charity Watch provides a list of charities for Texas and/or Florida.  The various humane societies are in full engagement to rescue pets and livestock and are great recipients of donations as well..  https://www.charitywatch.org/charitywatch-hot-topics You will see a list of charities that are general in nature, or specific as to location or need.  I will be giving to the St Bernard Project www.sbpusa.org, and was informed about this charity from a thoughtful client.

Please note: Fraudsters sometimes replicate a legitimate charity online.  Carefully read the url address: the www….  Most charities have urls that end with .org and not .com.  A fraudster could develop a website with the exact web address with.com or one different character. 

PLEASE GIVE…get me to donate my $750.

Rich Lawrence, CFA
Managing Director
215-540-0896

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July 2017 Commentary

The stock market continues to climb the proverbial “Wall-Of-Worry” – with the Dow Jones Industrial Average (DOW) up 8% through June 30, 2017.  Standard and Poor’s 500 corporate earnings grew by 10% in the March quarter with a solid 7% revenue gain.  Consensus earnings growth of large companies for 2017 and 2018 are 10% and 12%, respectively. The earrings rebound is clearly pleasing investors after a period in 2015 when the S&P 500 experienced an “earnings recession” that lasted through mid-2016. Once earnings growth commenced in mid-2016, the stock market responded swiftly on the upside with only minor pull backs. 

The stock market is trading at 17.5 times earnings, higher than the 15.9x P/E average during the past 25 years.  Low bond yields and inflation and the prospect of tax and regulatory reform are giving investors optimism about future earnings growth and they are willing to pay a premium for this potential. 

We observe optimism and complacency in the market, which can be the perfect recipe for a short-term correction when negative news develops. The stock market declines or “corrects” by 5-8% in a typical year.  Therefore, we will not be surprised if the DOW pulls back by 1,000 to 1,500 points before the end of 2017.  Possible catalysts: 1) an unforeseen geopolitical event; 2) a reduction of earnings estimates for 2018; and/or 3) the Federal Reserve Board increasing interest rates faster than is currently expected. We are cautiously optimistic about the stock market but are being realistic about the near-term outlook and normal stock market behavior.  

Economically, the US is experiencing steady growth.  Job growth remains intact although it has been trending a bit lower with monthly non-farm job growth of 200,000. The US Bureau of Labor Statistics announced that 222,000 non-farm jobs were added to the economy in June 2017, much higher than the 179,000 estimate.   Small business and consumer confidence edged lower last month, but still remain high.  In May 2017 consumer spending rose 0.1% and disposable income increased 0.5%, underscoring consumers’ caution while building future purchasing capacity. 

Portfolio additions:  Small cap stocks and long-short equity funds.  Small company earnings are expected to grow by 20% in 2018, in contrast to 12% for large companies, and they are selling at a modest valuation premium to large caps.  These small cap stocks started 2017 by underperforming large stocks, but recently have rebounded, exhibiting strong relative strength to the broad stock market.  We are also discussing with clients the inclusion of two “long-short’ funds for their portfolios.  These funds have approximately half the volatility, as measured by standard deviation, of the stock market, yet participate with much of the market’s upside.  

Rich Lawrence, CFA
Managing Director
July 12, 2017

 

 

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Our Federal Budget

The much dreaded April tax season is over bringing to question - where do our federal tax dollars go? And why is the Federal Government spending more than it takes in?

This chart illustrates clearly how our federal budget is allocated among the various functions.  After quick inspection you will see that 65% of the federal budget is allocated among national defense, social security and various healthcare support programs.  The Federal Government is operating with a $500-600 billion annual deficit, 13% of federal outlays or 3% of gross domestic product (GDP).

The cause:  federal outlays have been growing 4% annually during the past 10 years, substantially faster than our economy’s 3% annual growth over the same time period.  Our deficit is structural and not cyclical because of demographics, health care inflation and expanding life expectancy.

61% of the federal budget is considered “mandated” and includes Medicaid state block grants, Medicare, and Social Security.  These programs expenses have been growing annually by 5-7%, twice the growth rate of our economy.

The Solution: The only way to solve our federal budget deficit is to reduce spending growth, particularly entitlement programs, to a level slightly below the growth rate of our overall economy. While entitlements are considered “mandated or non-discretionary”, these programs need to be reformed and benefits reduced, if our fiscal budget deficit is to materially decline. 

Raising taxes could solve the deficit in the short term, but as long as our economy’s growth rate is below the growth rate of federal spending, the deficit will reappear and our debt will continue to grow. Congress and the president of the United States, of both political parties, have been reluctant to touch these programs in fear of being voted out of office. 

Rich Lawrence May 3, 2017
Managing Director

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Is Economic Growth On The Verge of Rising?

I ask if economic growth is on the verge of rising for a very specific reason. The stock market in 2016 is up 10% as measured by the S&P 500 Index, led by materials, industrials, financial and telecommunications stocks; and with health care and consumer staple stocks being the two worst performing sectors. In addition, gold and bond prices are on the decline. Please note: when bond prices decline interest rates are rising. This market behavior is classically associated with rising economic activity and certainly not indicative of the latter stage of an economic cycle.

1-2% Real GDP Growth

This market behavior may cause confusion to many, especially after nine years of economic expansion. Although the U.S. economy has been expanding, it has done so anemically with 1-2% real GDP growth. This compares to 6-8% annual GDP growth immediately after the deep recession of 1981 when the unemployment rate hit almost 10%. Then in the 1980s and 1990s GDP growth was 2-5% annually.

After eight years of so-so economic growth, corporate and consumer balance sheets are in good shape and not overextended as is usually the case when the economic cycle is nearing a peak. The U.S. government however continues to run deficits, and its share of GDP has expanded from 19 to 21%. Obviously our government has not had the will to curtail expenses, and its balance sheet poses risk to our economy and taxpayers.

A Republican President and a Republican Congress

What should we expect with a Republican President and a Republican Congress? The Trump campaign and policy initiatives were straight forward: reduce regulations; cut corporate taxes; increase infrastructure spending; renegotiate trade agreements, rebuild the military; and border control. These initiatives are pro-economic growth and the markets responded swiftly.
Some observers (pre-election) opined that the federal deficit would expand regardless of the election outcome. However Mitch McConnell (Senate Majority leader) stated last week that any corporate tax reduction must be matched with budget cuts to fully offset the revenue decline. So let the bargaining begin!

Higher Economic Activity

The stock market is an excellent economic predictor for six months, but that is about all. The market is expecting solid low-teen earnings growth in 2017, along with rising inflation and interest rates. If our government enacts policies of lower taxes and regulation the “animal spirits” of our country may finally be ignited resulting with capital investment and business formation. The result: higher economic activity.

Primary Market Risks

I envision two primary market risks as 2017 unfolds: saber rattling as we attempt to slow the transfer of U.S. wealth to China, and to a lesser extent a strengthening dollar.

As we all know we are in a $400 billion trade deficit annually with China. Why does this matter? Let’s “follow the money”. We sell China plenty of products, especially high technology and complex industrial products. China sells us a wide variety of products from low to high tech, most of which have a high labor content. There is a well know economic theory called comparative advantage that supports free trade. Essentially, comparative advantage stipulates that trading partners all win when each country produces that which they can produce most efficiently. And if trade balances are equal both trading partners win through sharing higher productivity.

Wealth Transfer to China

Our trading situation with China is far different. The regulatory environment of the U.S. and China could not be more different in term of labor laws, environment and market access. Our trade deficit with China has been running between $300 and $400 billion annually for the past few years, and is literally a wealth transfer to China. These deficits provide China with $300 to $400 billion of U.S. dollar currency which can be used to buy U.S. Treasury bonds, businesses or real estate around the globe including back here in the U.S. If this trade imbalance goes unchecked, we will see a slow but continued wealth transfer to China.

President-Elect Trump brought this issue to the fore and it is at the cornerstone of Trumps economic policy. I expect both countries will be pushing back against each other providing uncertainty and potentially stock market corrections. The good news is that both countries are economically dependent upon one another, so both economies will benefit greatly if trading activity remains brisk but moving back into balance.

Is economic growth on the verge of rising? Most indicators suggest our economy is gaining momentum. If you have questions about economic growth, financial planning, or would like to learn more about investment management advice offered on a fee-only basis, contact me Richard Lawrence at Lawrence Wealth Management LLC, a small, private investment firm. Phone 215-540-0896; email rich@lawrencewealthmanagement.com.

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What You Need to Know About a Health Savings Account Before January 1

Are health insurance premiums taking too big of a bite out of your budget? Do you wish you had better control over how you spend your health-care dollars? If so, you may be interested in an alternative to traditional health insurance called a Health Savings Account (HSA).

Most HSAs allow you to contribute through automatic transfers from a bank account or, if
You are employed, through an automatic payroll deduction plan.

How Does the HSA Option Work?

An HSA is a tax-advantaged account that’s paired with a high-deductible health plan (HDHP). Let’s look at how an HSA works with an HDHP to enable you to cover your current health-care costs and also save for your future needs. Before opening an HSA, you must first enroll in an HDHP, either on your own or through your employer. An HDHP is “catastrophic” health coverage that pays benefits only after you’ve satisfied a high annual deductible. (Some preventative care, such as routine physicals, may be covered without being subject to the deductible.) For 2016, the annual deductible for an HSA-qualified HDHP must be at least $1,300 for individual coverage and $2,600 for family coverage. However, your deductible may be higher, depending on the plan.

Once you’ve satisfied your deductible, the HDHP will provide comprehensive coverage for your medical expenses (though you may continue to owe co-payments or coinsurance costs until you reach your plan’s annual out-of-pocket limit). A qualifying HDHP must limit annual out-of-pocket expenses (including the deductible) to no more than $6,550 for individual coverage and $13,100 for family coverage for 2016. Once this limit is reached, the HDHP will cover 100% of your costs, as outlined in your policy.

Because you’re shouldering a greater portion of your health-care costs, you’ll usually pay a much lower premium for an HDHP than for traditional health insurance, allowing you to contribute the premium dollars you’re saving to your HSA. Your employer may also contribute to your HSA, or pay part of your HDHP premium. Then, when you need medical care, you can withdraw HSA funds to cover your expenses, or opt to pay your costs out-of-pocket if you want to save your account funds.

An HSA Can Be a Powerful Savings Tool.

Because there’s no “use it or lose it” provision, funds roll over from year to year. And the account is yours, so you can keep it even if you change employers or lose your job. If your health expenses are relatively low, you may be able to build up a significant balance in your HSA over time. You can even let your money grow until retirement, when your health expenses are likely to be substantial. However, HSAs aren’t foolproof. If you have relatively high health expenses (especially within the first year or two of opening your account, before you’ve built up a balance), you could deplete you could deplete your HSA or even face a shortfall.

How can an HSA help you save on taxes?

  • You may be able to make pretax contributions via payroll deduction through your employer, reducing your current income tax.
  • If you make contributions on your own using after-tax dollars, they’re deductible from your federal income tax (and perhaps from your state income tax) whether you itemize or not. You can also deduct contributions made on your behalf by family members.
  • Contributions to your HSA, and any interest or earnings, grow tax deferred.
  • Contributions and any earnings you withdraw will be tax free if they’re used to pay qualified medical expenses.
    Consult a tax professional if you have questions about the tax advantages offered by an HSA.

Can Anyone Open an HSA?

Any individual with qualifying HDHP coverage can open an HSA. However, you won’t be eligible to open an HSA if you’re already covered by another health plan (although some specialized health plans are exempt from this provision). You’re also out of luck if you’re 65 and enrolled in Medicare or if you can be claimed as a dependent on someone else’s tax return.

How Much Can You Contribute to an HSA?

For 2016, you can contribute up to $3,350 for individual coverage and $6,750 for family coverage. This annual limit applies to all contributions, whether they’re made by you, your employer, or your family members. You can make contributions up to April
15th of the following year (i.e., you can make 2016 contributions up to April 15, 2017). If you are 55 or older, you may also be eligible to make a $1,000 additional “catch-up” contribution to your HSA, but you cannot contribute anything once you reach age 65 and enroll in Medicare.

Note: You may be able to make a one-time tax-free rollover of funds to your HSA from a health flexible spending account (FSA), a health reimbursement arrangement (HRA), or a traditional IRA (certain limits apply).

Can You Invest Your HSA Funds?

HSAs typically offer several savings and investment options. These may include interest-earning savings, checking, and money market accounts, or investments such as stocks, bonds, and mutual funds that offer the potential to earn higher returns but carry more risk (including the risk of loss of principal). Make sure that you carefully consider the investment objectives, risks, charges, and expenses associated with each option before investing. A financial professional can help you decide which savings or investment options are appropriate.

How Can You Use Your HSA Funds?

You can use your HSA funds for many types of health-care expenses, including prescription drugs, eyeglasses, deductibles, and co-payments. Although you can’t use funds to pay regular health insurance premiums, you can withdraw money to pay for specialized types of insurance such as long-term care or disability insurance. IRS Publication 502 contains a list of allowable expenses.
There’s no rule against using your HSA funds for expenses that aren’t health-care related, but watch out–you’ll pay a 20% penalty if you withdraw money and use it for nonqualified expenses, and you’ll owe income taxes as well. Once you reach age 65, however, this penalty no longer applies, though you’ll owe income taxes on any money you withdraw that isn’t used for qualified medical expenses.

HSA Questions to Consider

  •  How much will you save on your health insurance premium by enrolling in an HDHP? If you’re currently paying a high premium for individual health insurance (perhaps because you’re self-employed), your savings will be greater than if you currently have group coverage and your employer is paying a substantial portion of the premium.
  • What will your annual out-of-pocket costs be under the HDHP you’re considering? Estimate these based on your current health expenses. The lower your costs, the easier it may be to accumulate HSA funds.
  • How much can you afford to contribute to your HSA every year? Contributing as much as you can on a regular basis is key to building up a cushion against future expenses.
  • Will your employer contribute to your HSA? Employer contributions can help offset the increased financial risk that you’re assuming by enrolling in an HDHP rather than traditional employer-sponsored health insurance.
  • Are you willing to take on more responsibility for your own health care? For example, to achieve the maximum cost savings, you may need to research costs and negotiate fees with health providers when paying out-of-pocket.
  • How does the coverage provided by the HDHP compare with your current health plan? Don’t sacrifice coverage to save money. Read all plan materials to make sure you understand benefits, exclusions, and all costs.
  • What tax savings might you expect? Tax savings will be greatest for individuals in higher income tax brackets. Ask your tax advisor or financial professional for help in determining how HSA contributions will impact your taxes.

If you need help with evaluating HSA options, financial planning, or investment management advice on a fee-only basis, contact me Richard Lawrence at Lawrence Wealth Management LLC, a small, private investment firm. Phone 215-540-0896; email rich@lawrencewealthmanagement.com.

Lawrence Wealth Mgmt is a Registered Investment Advisor (RIA) and provides financial planning and investment management services to our clients on a “fee-only” basis. We sell no investment products for compensation and are therefore “conflict-free.” Bond, stock and other capital market investments could lose value and are not guaranteed. Investors should consider investment risks before investing, and be aware that historical returns are not a guarantee of, or proxy for, future results. Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016

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Thoughts From a Money Manager on New Trump Policy Initiatives

The election cycle is over: FINALLY! The political rhetoric we all witnessed was divisive and very disruptive. Once a Trump victory was evident, global markets sold-off taking the Dow Jones Industrial Average (DOW) down by more than 700 points at 1a.m. Eastern standard time on election night; only to rebound swiftly with the DOW now up over 400 points (2%) since election day, prompting this post containing advice from a money manager.

We now have a Republican President and Congress, setting the stage for reducing Washington D.C. gridlock and enacting pro-economic growth legislation. The support Bernie Sanders, Gary Johnson, Jill Stein, and Donald Trump received indicate the country was ready for change, and change we received.

Policy Initiatives Impacting Financial Planning

There are three initiatives I will be monitoring as part of the financial planning I do for my clients:

  • Tax Reform: Corporate tax reduction to 15%? I don’t think so; although 20-25% may be realistic. This would put the US in a globally competitive position from a tax cost perspective. In addition, there are $2 trillion of corporate cash parked outside of the U.S. because of the 35% tax levy that would be applied, if repatriated back to the US. There has been discussion of a 10-15% one-time reprieve from corporate taxation if repatriated to the U.S. If funds are brought back to the U.S., I expect a significant portion would be invested here in the U.S, providing a welcome stimulus to our economy.
  • The Affordable Care Act of 2010 (ACA):  Will it be abolished? Although ACA’s policy goals of increasing insurance coverage and cost reduction were virtuous, its design and execution fell short. I am sure this public policy initiative will get immediate legislative attention, due to rising premiums and deductibles that are affecting so many people. U.S. healthcare expenses is the single largest financial liability we face and needs to be addressed quickly. Health care expenditures have risen from 13% of our economy in 2000 to the current 18%. If these health care expenses are not controlled, how will we ever rebuild our infrastructure and educate our children? Who knows if ACA will actually be “repealed”, but the act will be amended and reformed.
  • Regulatory Reform: Regulations are hard to define economically but businesses, especially small businesses, have held back hiring and investing due to the regulatory environment. Small companies have been the life blood of our economy’s growth, and will benefit if regulation is eased. President-elect Trump and Congress have stated clearly that the regulatory environment will be eased, and many regulations outright eliminated.

The stock market is anticipating corporate earnings to rebound in the current quarter, followed by double digit economic growth in 2017. If consensus earnings growth of 13% and 10% are achieved in 2017 and 2018, respectively, the market could advance 8-12% implying a 20,500 Dow! The DOW is currently at its all-time high, indicating confidence in our economy and earnings for the next six to 12 months. Gold prices are also affirming this sentiment as they are down 11% from the high in July 2016, and down 5% since the election. While we are cautiously optimistic about the stock market and our economy, we are also keenly aware of various headwinds, including rising interest rates and inflation, and the likelihood of the very normal periodic stock market declines (corrections) which are taken into consideration with any good wealth management strategy.

November 15, 2016
Rich Lawrence, CFA
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This market update includes data we believe to be accurate. However Lawrence Wealth Management (LWM) does not warrant or guarantee its accuracy. Opinions about the future are not predictions, guarantees or forecasts. Investing in stock and bond markets have risk that could lead to investors losing money.

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2016 October Newsletter

Politics: a bit of levity and a sense of balance to such a wild political season.

Politics Defined:

“Politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly, and applying the wrong remedies” Groucho Marx-the comedian.

What election outcome would be the most calming to the markets? A Clinton presidential victory and a Republican Congress would give markets a sigh of relief. This alignment would assure that no extreme anti-economic policy would get through Congress. Clinton would have to pivot to the center, and adopt pro-economic policies, or face a one term Presidency. Any other scenario may generate market anxiety with a short term market sell-off.

The Economy

The U.S. economy is growing at a stubbornly stagnant 2.0% rate. Although labor conditions show signs of tightening; job gains have been skewed to lower paying jobs; and higher paying/skilled jobs are not being filled. Regulation, immigration, tax, and education policies all have a hand in this situation. If our government finally and urgently addresses these policy imperatives, I believe the entrepreneurial “animal spirits’ will release and our economy will begin to grow more briskly, generating higher incomes, corporate profits and tax revenue.

Stock and Bond Markets

The past two years have been a very frustrating period for investors as the U.S. stock market has been essentially flat. The culprit is a decline in corporate earnings due primarily to the strong dollar relative to other currencies and the decline of oil prices. Oil prices have rebounded to $50/barrel from the low $20s in early 2016; and the dollar has stabilized since early 2015 after a significant rise. These trends should remain favorable for corporate earnings to grow in 2017, barring any unforeseen economic concern or crisis. Corporate earnings are expected to grow by 14% and 11% in 2017 and 2018, respectively, which should be the catalyst for a 6-10% rise in the stock market in the next year to 18 months. With a 10-Year Treasury bond yield of 1.8%, the trend is likely to be with higher rates, not lower. I continue to recommend to not own long maturity bonds as these bonds’ prices are the most vulnerable to rising interest rates.

Investment Portfolio Design

Depending upon client objectives, we have been increasing investments in small to mid-sized companies, which have greater exposure to the US economy. Additionally we are allocating money to funds (long/short funds) designed to mitigate markets’ downside risk while participating in their upside potential. While we are not predicting a market correction or bear market, they are normal periods of market cycles. Therefore, I believe prudence prevails when investors are positioned and prepared ahead of these occurrences, based on their particular risk tolerances and goals. Cash is always king; we advise clients to always have sufficient cash and short term bonds for peace-of-mind and cash needs for 1-3 years, depending upon your situation.

If you need help with investment portfolio design, financial planning, or investment management advice on a fee-only basis, contact me Richard Lawrence at Lawrence Wealth Management LLC, a small, private investment firm. Phone 215-540-0896; email rich@lawrencewealthmanagement.com.