ProVise Bullets

· Okay, so where did the last six months go? Hard to believe that half of 2015 is gone and even harder to believe that we have a presidential election coming up in “only” 16 months. Of course, with all the candidates coming out, especially on the Republican side, it is going to be an interesting 10-12 months while the primaries play out.

Speaking of playing out, the first half of the year has had its share of surprises (good and bad), but at the end of it the S&P 500 was up 1.23%, the Dow Jones Industrial Average eked out a gain of .04%, the Russell 2000 Index was up 4.75%, the MCSI EAFE gained 5.52%, and the bond market ended fractionally lower with a loss of .10%. Obviously, the issues with Greece, China, and Puerto Rico weighed heavily on the last few days of June. At the beginning of the year we said investors should be happy with a 6% return from the broad equity markets, and we see nothing that changes that view at this time.

Perhaps the biggest surprise for many investors was the decision of the Fed to not raise interest rates… just yet. The negative GDP of the first quarter at -0.2% (final revision) and what we expect will be a modest rebound in the 2nd quarter have not given the Fed the cover it needs to start raising rates. No one seems to want them to do the inevitable. The World Bank, the International Monetary Fund, Wall Street, foreign governments, etc. are all afraid that when the Fed starts to raise rates it will have terrible repercussions not only in the US, but around the world. So what will it take for the Fed to get the cover it needs/wants?

Continued job growth averaging over 200,000 new jobs per month will be important. This should lead to a shrinking supply of workers which will cause employers to likely have to raise wages to keep their good people. This in turn will cause some wage inflation and along with robust consumer spending could translate into enough inflation at the core level to make the Fed feel comfortable in raising rates in a very measured way over a long period of time, but not likely before September.

But keep in mind that the Fed only controls short-term rates; the bond market controls long-term rates. In anticipation of an interest rate rise, the yield on 10-year Treasury has risen from 2.12% to 2.42% over the past six months and is likely to continue to rise. When interest rates rise, the price of bonds decline. The longer the maturity of the bond the greater the decline. In other words, a bond that matures in a few years will not see the same percentage decline in value as interest rates go up as the bond that matures in 10, 20, or 30 years.

Although there is a lot more that could be said about bonds and interest rates, let’s turn our focus to equities. Volatility will continue to haunt investors and this summer could be a wild ride, perhaps even producing the long awaited and overdue 10% correction. But by the end of the year there is a good chance the equity markets will see additional modest gains from where we are today. Corporate revenues should go up, albeit modestly, as consumers head to the malls and businesses feel more confident that the sky is not falling. Gentle inflation will potentially give companies the ability to increase prices. The dollar, which began its rise against other major currencies about a year ago and has hurt the profits of multinational companies as a result, has moderated. These multinational companies will now be reporting earnings year over year against that higher dollar, and thus, the currency translation will not have as great an impact. The US will likely produce a GDP increase for the year between 1.75% and 2.25% in spite of the bad first quarter.

There will be plenty for investors to fret about the next six months but, based on current fundamentals, the equity markets should finish the year slightly higher than where they are today. Of course, it is not what we know, but what we do not know that causes us the most concern. Patience is the key watch word, as it generally is.

· Americans are flunking out of Social Security University, or at least they are flunking a test which was recently given by Massachusetts Mutual Life Insurance Company to 1500 adults. Only 28% got a passing grade which means 72% may be making bad decisions about one of the most important retirement benefits available. Here is a sampling of the 10 true/false questions that were asked: 1) Full retirement age is 65; 2) You can continue working and collect your full Social Security; 3) You have to be a US citizen to collect; and 4) As a divorced person, I can collect on my former spouse’s benefit. How did you do? The first question is false. Full retirement age today is 66 and it will rise slowly between now and 2022 to 67. Number 2 is also false. If you elect to take Social Security prior to your full retirement age and you earn over $15,720 in 2015 you must return $1 of Social Security benefits for every $2 over this amount. Once you reach full retirement age you can earn as much as you want without paying some back. The third question is also false. Anyone who accumulates 40 quarters of Social Security tax payments is eligible, regardless of nationality. And at this point, we bet you think the answer to number four is also false. Right? Wrong! It is true. If you were married to your former spouse for at least 10 years and his/her benefit is larger than yours, you may file under his or her benefit, even if he or she has remarried. If you would like to take the full test, use this link: If you are thinking about what Social Security strategy to use, please give us a call and we can help you determine the best way to take benefits.

· One of the basic tenets of a solid financial plan is to have an Emergency and Opportunity fund. While each individual circumstance is different, the general guideline is to have 3-6 months’ worth of expenses in this account which is usually invested in a very liquid account like a savings or money market account. One never knows when the car will need new tires, the air conditioner will go out in the middle of the summer, or the vacation of a lifetime will present itself at an unbelievably low price. In the worst of situations, this account is important for medical emergencies, or in case of a job loss. According to a recent survey by almost three out of 10 families have no Emergency and Opportunity fund to rely upon. This is the highest level in the five years that has been compiling the data. Another 21% have less than three months of expenses tucked away.

· With our economy headed in the right direction (jobless claims low; unemployment continuing to improve; new home sales not booming, but up; existing home sales and prices up; consumer spending at the highest level in six years, etc.) and the Eurozone having produced positive GDP for the first time in years during the first quarter of the year, what does the Greek crisis really mean in the long run? While there is no doubt that in the short run it will have a psychological effect on the markets around the world, in the long run it is not likely a systemic risk to the worldwide economy.

Just a few short months ago, the Greeks threw out a group of politicians that were trying to get Greece on a sounder financial footing. This meant the Greeks had to suffer through an “austerity” program that included a reduction in government benefits, including pensions, fewer government services, higher taxes, etc. With unemployment running near 25%, it wasn’t too big of a surprise to see the Greeks elect a new government that promised to end the austerity programs. After all, if someone is going to offer it for “free”, why wouldn’t you vote for them? Surprisingly, about 70% of Greeks do not want to leave the European Common Union (ECU). However, when you add the qualifier about staying in the ECU involves austerity, then the number drops to about 49%.

The new government called for a Greek vote on July 5th to determine what the Greeks want to do. This caused the various negotiating parties to all quit talking, at least officially, and led to all of the concern the past few days. The results of Sunday’s vote will cause more turmoil, no matter which way it goes. If the Greeks vote to essentially leave the ECU, they will face even harsher economic disaster in our opinion as they will have to create their own currency and who outside of Greece will want to trade with an unknown currency from a bankrupt country? On the other hand, if the Greeks vote to stay, then the current government is likely to resign power and Greece will be leaderless until a new election is held.

Greece will remain in the headlines for some period of time and the noise may be loud at times, but we do not expect the Greek crisis to derail the rest of the world.


©7/1/15 ProVise Management Group, LLC

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