· During the Great Recession, America laid off two million factory workers and factory output fell 20%. Before the Great Recession, of course, manufacturing jobs were headed overseas. As we have slowly emerged from the Great Recession, it’s a little surprising to some that manufacturing has led the way, outpacing overall GDP growth. This year it looks like manufacturing could add 3.5% in growth. Is this just a replacement of jobs that were lost during the Great Recession?
Certainly that’s a portion of the explanation. However, the fact is that jobs in the manufacturing sector have grown for seven straight months, and there’s nothing really standing in their way. The good news is that manufacturing cuts across the entire country and over many different industries. There is, however, a need for more skilled workers than in the past. But these skilled workers have higher productivity and receive higher pay; in some cases dramatically higher.
What is bringing these jobs back to America? Companies that require significant amounts of energy are able to take advantage of the natural gas that has been developed over the past few years, and thus energy costs are down. No longer do goods have to be shipped across the seas from low cost countries, but simply across the country, and in some cases, simply across the state. On top of that, as low labor cost countries developed their own middle class, there was a demand by workers for higher wages, and thus, the differential in labor costs isn’t as great as it once was. As an example, in China, labor costs have gone up about 50% in the past 10 years while labor costs in the US have declined about 10%. (Source: Kiplinger Letter)
· We all know what a great year the equity markets had in 2013 and, of course, many people were/are concerned that the markets are getting a little frothy. If you fall into that camp, then your concerns might be justified by the fact that the average first day IPO return in 2013 was a positive 17.3%. This is the highest since the late 90s during the dot com boom. There is a major difference, however. Many of the IPOs today are from companies with real revenues and real opportunities for growth, not the hopes and dreams of the 90s. (Source: Bloomberg Businessweek)
· Buried in the 2015 fiscal year budget that President Obama recently sent to Congress is an attempt to make some changes to Social Security; but only the claiming strategies that he believes are unfair and are taken advantage of by those who potentially have some flexibility. Specifically, his budget reads “In addition, the budget proposes to eliminate aggressive Social Security – claiming strategies, which allow upper-income beneficiaries to manipulate the timing of collection of Social Security benefits in order to maximize delayed retirement credits.” While this sentence is in the budget, there are those who think Social Security could eliminate some of these claiming strategies without Congressional action. Of course, if that happens, you can expect Congress to raise a stink. Don’t be surprised to see the Republicans pick up on this and use it against the Democrats in the fall.
Specifically, a common strategy is for one of the spouses who has attained age 66 to file for Social Security and then immediately suspend the benefits. Let’s look at an example – once Jim has reached age 66, he files and suspends allowing his benefit to grow. Then after age 66, Susan can claim a spousal benefit delaying her own benefits until age 70. Susan can also file and suspend and Jim can claim a spousal benefit off of Susan’s Social Security. Every year from age 66 to age 70, the Social Security benefit increases by 8%. In today’s low interest rate environment, many financial planners (including ProVise advisors in the right circumstances) are recommending this strategy to clients. When each spouse gets to age 70 and can have the maximum benefit, they then claim and take their own Social Security. It’s a bit frustrating for us as financial planners working with our clients – we didn’t make the rules, we just try to understand them and apply them in the right situations – to then have someone want to come along and change the rules. We’re in full favor of reform of Social Security, but this approach, in our opinion, is not the way to do it.
· Looking back over the last 25 years ending February 28th of this year, the S&P 500 has been up 65% of those 300 months and down the other 35%. In other words, it’s up about two months for every one month that it goes down. This time period includes the bear market of 2000 through 2002 which was down 49% and 2007 through 2009 bear market which was down 57%. Had you invested $10,000 at the beginning of that time period, it would have grown to $97,126 with dividends reinvested, which represents an average annualized return of 9.52%. (Source: BTN Research: Standard & Poors)
· In what was one of the worst kept secrets in Washington, the Federal Reserve reduced its Bond Purchase Program by another $10 billion at its meeting earlier this month. New Fed Chair, Janet Yellen, went on to say, “We know we’re not close to full employment, not close to an employment level consistent with our mandate… unless inflation was a significant concern, we wouldn’t dream of raising the federal funds rate target.” Off of that remark, she backed off of the Fed’s target of 6.5% unemployment and indicated that while unemployment would continue to be a data point, it would not be the only data point and that, “there’s a great deal of slack in the labor market still that we need to work to eliminate.”
What shocked the markets was her statement that interest rates could begin rising six to 12 months after the tapering ends. That means it’s possible that interest rates could rise beginning in July 2015 assuming that tapering ends in December this year. This sent the markets into a tizzy, the Dow Jones Industrial Average saw its gains that day quickly evaporate and it eventually closed 100 points down. Interest rates, however, are not going to stay virtually zero forever. In fact, there is a good case to be made that interest rates at this level are unhealthy for the economy, as savers have less money to spend. Low interest rates can also lead those in certain segments of the economy to want to speculate using the interest rate arbitrage that could be available. On top of that, higher interest rates would generally be a result of an improving economy. Thus, on a long term basis, we found her remarks encouraging, not discouraging.
Although we hate to measure markets by looking from one day to the next, we can’t help but comment that the day following the Fed meeting, the paranoid market closed up over 100 points making up almost all that was lost from the day before. With the first quarter behind us and markets having only moved a little bit from beginning to end, based on information available today, we remain comfortable with our forecast of 8-10% by the end of the year. Yes, we’re a broken record when we tell you that patience is going to be needed this year. Just look at all that’s happened in the last 90 days. While the Dow Jones Industrial Average did retreat almost 6% earlier in the quarter, almost all of that was recovered by the end of the quarter.
· Growth can often be measured by the rate of inflation, which the Federal Reserve would like to have at about 2.5%. During the first two months of the year, however, inflation was up only 0.1%. Over the last 12 months, consumer prices have risen only 1.1%, which is below the previous 12 months ending in January at 1.6%. Food prices began to rise during February due to the drought in the West and Southwest and are expected to continue to rise during March. Nonetheless, these price increases were offset by lower energy costs. As long as inflation continues to run at these levels, it is unlikely that the Federal Reserve will begin raising interest rates.
· We all know what happened to real estate during the Great Recession. Real estate prices peaked as a part of America’s net worth in December 2007 at $10.3 trillion. At the depth of the housing crisis which was December 2011, the equity in homes fell to $6.3 trillion. By the end of December last year, it had finally climbed back to $10 trillion. Interest rates always play an important part in real estate and mortgages. From 1979 until 1990, a 30-year fixed rate mortgage was pegged at around 10% for 12 consecutive years. The average rate today is 4.32%. (Source: Federal Reserve: Freddie Mac)
· ProVise is pleased to announce that Paul Auslander, CFP®, GFS® has joined our family of financial advisors. Paul was the co-founder and CEO of America Financial Advisors, Inc. in Orlando. He is the immediate past Chairman of the Board of the Financial Planning Association, the membership home for Certified Financial Planners and all others that advocate for personal financial planning. He is currently President of the FPA of Florida. We look forward to Paul’s contribution as he is the Director of Financial Planning.
As always, we encourage you to give us a call if you would like to discuss anything further. We will visit again soon. Proudly and successfully serving our clients for over 27 years.
RAY, KIM, ERIC, BRUCE, LOU, NANCY, TINA, JON, STEVE and DOROTHY
© 3/31/14 ProVise Management Group, LLC
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