Market Commentary – A Strong Start to the Year, but Risks Remain

After suffering their worst December since the Great Depression, stocks had their best first quarter in ten years primarily due to the Federal Reserve halting interest rate increases and improving U.S-China trade relations. Perhaps the most impactful event of Q1 was the Fed meeting that took place on January 29th and 30th when the Federal Open Market Committee opted to hold interest rates steady, but also stated that it would be “patient” regarding further rate increases. This shift, which according to the Fed was in response to global economic uncertainty, helped extend the markets’ gains from early January. The expected “pause” in rate hikes was later confirmed by the Fed at the March meeting as official projections for interest rates (known as the “dot plot”) showed no more rate hikes are expected in 2019. The Fed keeping interest rates steady should relieve pressure on the economy, and we have already seen some positive effects of that move via a decline in mortgage rates and a rebound in housing sales in the first quarter. Regarding the U.S.-China trade negotiations, significant progress was made toward a new deal over the past three months, highlighted by the removal of the March 1st trade deal deadline imposed by the administration back in late November. Most of that progress occurred in January and that was one of the initial catalysts for the first quarter rally in stocks.

While the macro events of accommodative central banks and a potential trade deal with China certainly provided a tailwind for stocks in Q1, it would be a mistake to think that the economic “coast is clear.” Many economic data points in the first quarter disappointed and continued to show a loss of momentum, not just in the Unites States, but globally. The current estimates for first quarter GDP (both here and abroad) have continually declined over the past three months as many companies in various industries have cut their Q1 profit estimates. Internationally, European and Chinese manufacturing data showed outright contraction, while continued Brexit uncertainty is acting as a headwind on the British economy. Italy is already in a recession, while Germany’s export driven economy is being hampered by a slowing China. As a result, interest rates around the globe fell during the quarter resulting in approximately $9 trillion of global debt having negative yields at quarter’s end. Finally, many parts of the yield curve have inverted, meaning Treasury yields are higher on short term debt compared to longer-dated maturities. In the past, that dynamic has sometimes preceded slower economic growth and lower inflation, neither of which are positive for stocks.

Bottom Line:  While nothing in the bond market is screaming recession yet, it is certainly starting to whisper it. The retreat in interest rates should serve as a warning about slowing global economic growth.

Stocks vs Bonds

If this was a pay-per-view fight, I doubt it would have many takers, although the money “wagered” would be much greater. Over the last six months, both markets have rallied sending conflicting signals to the market; since rallies in both asset classes often indicate two quite different scenarios.

For stocks, the recent rally is indicating investors’ confidence in the economy and corporate profits moving forward.  Investors are basically betting that the Fed will successfully navigate the current soft patch allowing profit growth to accelerate in the second half of the year, thereby averting a recession. In other words, as in years past, it will be the Fed to the rescue!

For the bond market, the recent strong rally (bonds increase in value because interest rates are falling) is reflecting much slower growth where the Fed will have to cut rates sooner rather than later in order to stimulate the economy and keep the yield curve from inverting further. Last week, the three-month Treasury bill was paying a higher rate of interest than the 10-year Treasury bond. This is the opposite of what one might expect, and it often indicates that a recession is looming.

For now, which market is correct is anyone’s guess, including the Federal Reserve’s.  But it’s a situation that bears (no pun intended) close monitoring.

Wealth Management – Turning 66 This Year? Last Chance Social Security Opportunity Still Exists

Looking for a little extra income for four years? Born on or before Jan 1, 1954? Then you may be in luck.

Background: Those who reach their full retirement age of 66 in 2019 are the last group of Americans eligible to file a restricted claim for spousal benefits, which allows their own retirement benefit to continue to grow by 8% per year up to age 70, while receiving 50% of their spouse’s benefit (assuming your spouse is already receiving social security).

Example: Jack, age 66 this year, is married to Jill, who is already receiving social security of $1,500 per month. If Jack starts collecting his social security this year, he would be eligible for $2,200 per month. However, Jack can delay receiving his benefit and file a restricted application to claim a $750 monthly spousal benefit (50% of Jill’s $1,500 benefit) bringing their combined monthly benefit up to $2,250. While Jack’s benefit is delayed, it continues to grow at 8%, increasing to approximately $2,900 at age 70. At that point, the combined social security is increased to $4,400 per month. And it gets better! Jack’s increased benefit is one that Jill can keep should Jack predecease her, increasing her monthly benefit at Jack’s death by $1,400 ($2900 - $1500 she was receiving).

Key Points:

• As stated above, in order to take advantage of this strategy, your spouse must already be claiming his or her benefit. So if your spouse is 60, you would have to wait at least two years before you could use this strategy.
• The strategy works best if the lower earner claims first and the higher earner files a restricted claim allowing their benefit to continue to grow.
• Divorced? You are still entitled to this strategy as long as you were married for at least ten years, divorced for at least two years, and currently single. Even better… your ex-spouse does not have to be receiving social security to qualify.
• Eligible individuals do not have to use this strategy in 2019. (You must just be age-eligible this year.) You can use this strategy anytime between ages 66 and 70.

Bottom Line:  If you reach age 66 this year, you may want to consider this valuable claiming strategy. As always, if you’re not sure what to do, we can certainly assist you with crunching the numbers. Please give us a call.

Quarterly Thought – Expectations

“Believe it! High expectations are the key to everything.” …Sam Walton

This especially holds true when evaluating your Adviser... NEVER SETTLE.

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_{This article was written by Advicent Solutions, an entity unrelated to Pinnacle Wealth Management Group, Inc.. The information contained in this article is not intended to be tax, investment, or legal advice, and it may not be relied on for the purpose of avoiding any tax penalties. © 2013-2015 Advicent Solutions. All rights reserved.}