July 2017

The Headline You Haven’t Heard This Year

There has been no shortage of headline drama this year. Between North Korea, Trump’s tweets, and the Illinois budget, journalists have more than enough to keep busy. But one area that has been notably calm is the market. The S&P 500 has quietly continued its climb and, as of July 7th, is up nearly 9.5% for the year. Even more remarkable is the sustained level of low volatility that has accompanied the market’s recent gains. While the stock market continues to plug along, I wanted to write just a little bit about the often-overlooked bond market. Where I believe some interesting developments are just starting to occur.

First, a little bit of information on the bond market: the bond market is an essential piece of the US and Global economy. It provides liquidity and funding for both public expenditures and private industry. Because it lacks the typical headline news and flash of the stock market, it may be surprising for you to learn that the US bond market alone represents over $40 trillion in value, compared to under $20 trillion for the US stock market. It affects your investment portfolios and other aspects of day-to-day life, including home and auto loan rates, and influences how much your American dollar will be worth when you travel overseas.

The bond market has been relatively quiet over the last number of years. This year, while interest rates have increased slightly from their lows, it has certainly been far from a drastic rise in rates. The Federal Reserve raised rates, most recently in June by a quarter of a point; this was the third consecutive quarterly rate raise. Still, the ten-year treasury rate is only at 2.39% (as of July 7th)—barely up from the 2.198% level prior to the rate raise. It is also interesting to note that the yield on 30-year treasuries is only about 2.9%, for a difference of only around 0.5%—historically, that is a very small difference in yield between the 10-year and 30-year treasury. The small yield spread between 10- and 30-year treasuries may indicate that investors are anticipating a prolonged period of continued low interest rates and inflation.

Barring a drastic change in the economy, I expect that the Federal Reserve will raise rates one more time in 2017. It also seems likely that they will continue to raise rates into 2018. If these increases do end up occurring, I think they—like like the previous increases—will only modestly move rates.

An even more interesting story pertaining to the fixed income market is the Reserve’s plan to slowly begin to shrink the central bank’s enormous portfolio of bonds and other assets. It appears this tapering will likely begin in the late summer or fall. Based on information I have read, the Federal Reserve is planning to ease into this process very slowly rather than by selling inventory, which, in theory, could flood the market and drive up rates quickly. Instead, the Fed plans to allow debts to mature without using all of the proceeds to purchase more bonds. Basically, rather than becoming a seller of fixed income they are simply winding themselves down as a purchaser. This will still leave a lot more debt to be absorbed into the market.
It is hard to know how much of an impact this will have on overall rates. The Federal Reserve would like to see rates move higher, but they do not want them to spike—as a drastic spike could grind lending and our recent economic growth to a halt. Of course, none of these changes happen in a vacuum and there are many variables at play here. Personally, I think that both low inflation and even lower rates internationally in countries like Germany, will keep our rates from moving anywhere quickly.
With all of that said, here are some of the points that are key for us and our clients:

• We will continue to deploy portfolios that appropriately diversified.
• We would like our clients to take note that the asset managers we work with have been making changes, and will likely continue to make changes to the fixed income portion of their portfolios.
• When it is feasible to do so (typically for high net worth investors)– we continue to suggest strategies where bonds are owned directly rather than through mutual funds or ETFs, thereby effectively controlling duration risks.

This can be a tricky topic. If you have any questions about the markets or anything related to your finances, please do not hesitate to reach out.

Best,
Nathan

Source: Wall Street Journal and Bloomberg

Our New Office Space

It took some time following our move, and we are happy to say that all of our construction and updates are completed and we are settled into our new office space! We think the space looks great and look forward to your visit.

Here are some before and after pictures. As the pictures show, a lot of work went into the updates and the final look really speaks to the continued growth of our firm. We also want to say a special thank you to Karla for all of her hard work—thank you, Karla!

Illinois Avoids Downgrade to Junk…for Now

736 days and one veto later, Illinois finally passed a budget. For our many clients that live in Illinois or at one point called Illinois home, it’s likely neither the political drama nor fiscal woes come as any surprise.

While Illinois has gone without a budget multiple times in recent years (despite, of course, it being a constitutional requirement), what made this year’s saga even more dramatic was the looming potential downgrade to “junk” status of Illinois bonds. If a budget had not been passed, Illinois could have become became the first state to have its bonds downgraded to junk; a status that could have drastically increased the borrowing costs for the state.

While a budget managed to pass, and with it eliminate the threat of a near-term downgrade, little to nothing was done to actually address the financial problems facing the state. The increase in tax rates should prevent a near term crisis in liquidity, and the longer-term issues facing the state are far from resolved. This budget continues the state’s tendency to delay difficult budget decisions and instead offer a temporary solution that could, in the long run, do more harm than good.
While a state bond junk likely would have caused problems in Illinois’ economy, the tax increases may also have long-term problems. The new budget moved the individual income tax rate from 3.75% to 4.95% and increased the corporate rate from 5.25% to 7%. It is true that the tax increase will increase revenue in the short term; the long-term impact of such a tax increase remains to be seen. Already, Illinois is one of the least tax-friendly states, largely because of astronomical property taxes. Increasing the effective tax rate on residents may further diminish an already shrinking tax base. According to the US Census Bureau Illinois led the Midwest in net out migration rate at a rate of 9 per 1000 residents. Not only is it hard to imagine if the migration numbers will look any better after the tax increases; it is also hard to know what impact these increases will have on Illinois ability to bring businesses to the state.

This is a good time to review your finances to ensure you are making investments that help ensure you are as tax efficient as possible. First, you should make sure you are contributing up to your ability in your employer’s retirement account (i.e.; 401(K), 403B, and 457). If you or your spouse does not have a retirement account available at work, an IRA account may be an option. Are children’s or grandchildren’s college expenses on the horizon? If so, you may want to consider using a 529 plan as they offer state tax benefits in Illinois.

Another provision in the new taxes is an elimination of personal exemptions for singles with income of 250K and married couples with incomes over 500K. These exemptions are for property tax credit and a credit related to paying for private elementary and high school tuition. While we always suggest letting investment decisions be the priority – we should keep these thresholds in mind as decision are made for individuals with incomes near these amounts.

If you are an Illinois resident you should be prepared for lower take home-pay as the tax increase will likely reduce your pay check. If you generally owe the state a lot of money at the end of the year that number maybe even bigger this year – you may want to consult your tax advisor to review the withholding allowances on your form W-4, to avoid a surprise at tax time.

Source: A bulletin provided by the Illinois Department of Revenue.

As of 07/20/2017. Sources: www.wsj.com, www.bloomberg.com, http://www.revenue.state.il.us/Publications/Bulletins/2018/FY-2018-01.pdf.

The opinions expressed are those of the writer and does not necessarily represent the views of the presenting party, nor their affiliates. Past performance and predictions are not a guarantee of future results. The material contained hearin is obtained from sources believed to be reliable, but its authenticity, accuracy or completeness is not guaranteed. Projections are inherently limited and should not be relied upon as an indicator of future results. The S&P 500 Index is a widely recognized capitalization – weighted index that measures the performance of the large-capitilization sector of the U.S. stock market.  Direct investment in an index is not possible. Because investor’s situations and objectives vary, this information is not intended to indicate direct investment advice and suitability for any particular investor. This material is not to be interpreted as tax or legal advice. Please speak with your own tax and legal advisors for advice/guidance regarding your particular situation.

Securities offered through Concorde Investment Services, LLC (CIS), Member FINRA/SIPC. Advisory services offered through Kuhn Wealth Management, Inc., a state registered investment advisor. Kuhn Wealth Management, Inc. is independent of CIS and Concorde Asset Management, LLC, all of whom are unaffiliated with third party sites, and cannot verify the accuracy of nor assume responsibility for any content of linked third party sites. Information available on third-party sites is for informational purposes only.