2018 economic forecast

2018 Midyear Outlook: Will the Economy and Markets Keep Growing?

After the performance we saw last year, we had high hopes for the economy and markets in 2018, but the first half of the year was disappointing. Expectations softened as the stock market pulled back early in the year, economic growth slowed, and risks—largely in trade—rose. As we hit midyear, though, those initial hopes appear to be more realistic than they were even a month ago.

For example, job growth has accelerated this year, bringing us, more or less, to full employment. And with continued wage income growth and ongoing high confidence, consumers are both able—and willing—to spend. Businesses are confident, too, and business investment is showing signs of accelerating. Meanwhile, tax cuts and fiscal stimulus have taken government from a headwind to a tailwind.

With this foundation, we should see continued growth in the second half, fueled by the following:

  • Employment—which is likely to continue to grow, albeit at a potentially slower pace than in the first half of the year
  • Businesses—which should keep and even increase their investment as capacity utilization rises and labor becomes scarcer
  • Government spending—which should continue to revert to growth now that the tax cuts and spending deal are in place

What does this mean, then, for real economic growth? We can expect to see growth of around 3 percent, with the potential for better results. Assuming consumer spending growth of around 3 percent, business investment growth near 5 percent, and government spending growth around 2 percent, this 3-percent figure appears both reasonable and achievable. Combined with an anticipated inflation level of 2 percent for the year, nominal growth should approach 5 percent.

Opportunities and Risks

As always, there are risks to this outlook—both to the upside and the downside.

Looking at the economy, if wage growth increases, consumer spending power could increase more quickly. If consumer borrowing were to pick up, spending could grow even faster. Business investment could respond to improving demand and rise more than expected. Local and state governments could increase investment and hiring more than expected.

Politics presents the greatest risk on the downside. Here in the U.S., the midterm elections will certainly disrupt the political process. If it appears likely that Democrats will take one or both houses of Congress, it could raise substantial economic uncertainties. In the nearer term, the administration’s trade policies could disrupt supply chains and increase costs, which would have consequences for financial markets. Abroad, risks include North Korea and continued political turmoil in Europe. Any of these could result in systemic damage and create real drag on the U.S. economy and financial markets.

Another major downside risk is rising interest rates. In its most recent press conference, the Federal Reserve (Fed) seemed to declare victory on both employment and inflation, which could mean faster rate increases than previously anticipated. Current expectations are for at least two more increases in 2018, and with long-term rates constrained, we could be at risk for an inverted yield curve, which historically has been a sign of upcoming recession.

Turning to the stock market, the rest of 2018 could be quite exciting, in both a positive and a negative sense. Earnings growth should continue to improve overall on the heels of economic expansion, as companies reap the benefits from the tax cuts. As growth accelerates and risks from Europe and North Korea subside, valuations may rise back to previous highs—or even higher on a positive shift in investor sentiment.

There are certainly risks to the market on the downside, however. Valuations are at or above 2007 levels; in other words, they are at historic highs. Profit margins are also at historic highs, and the tailwinds that got them there are disappearing as interest rates rise and wage growth continues to pick up. That’s not to mention that rising interest rates could make bonds more attractive as an investment, which would also weigh on valuations.

Looking at the past three years, a typical lower-end multiple has been 15x forward earnings. Based on current analyst expectations of $176.52 in S&P 500 earnings for 2019, and using a 15x multiple, the 2018 year-end target for the index would be around 2,650, which represents a decline of about 5 percent from mid-June levels. This is a reasonable downside scenario for the end of the year.

If the economy continues to grow, and businesses continue to operate at very high profitability levels, valuations could rise back to around 17x forward earnings. This reasonable upside scenario would leave the S&P 500 around 3,000 at year-end, an increase of almost 8 percent above current numbers.

 Are Things Looking Up?

This is definitely not a prediction of a flat, boring market. Absent the Fed’s security blanket, the market should be more volatile, and it likely will be. A sell-off at some point in the next six months is very possible, with the rising concerns about trade one potential cause. In addition, as rates rise, investors will likely reassess the attractiveness of U.S. stocks versus fixed income. Meanwhile, accelerating wage growth should have a negative effect on profit margins, even as it boosts the economy as a whole.

While the downside risks are real, the ongoing strength of the U.S. economy should protect us from the worst and even continue to offer some upside. The second half of 2018, therefore, seems likely to provide us with more growth in the real economy and financial markets.

Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict.

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Matthew Lang is a financial advisor located at 236 N Washington St, Monument, CO 80132. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 719-481-0887 or at matt@langinvestmentservices.com.

© 2018 Commonwealth Financial Network®

Veteran Benefits

A Guide to Federal Veterans Benefits

There are two separate agencies overseen by the U.S. Department of Veterans Affairs (VA): the Veterans Health Administration and the Veterans Benefits Administration. The Veterans Health Administration determines eligibility for medical benefits, while the Veterans Benefits Administration determines eligibility for financial benefits. The agencies operate independently and have separate eligibility criteria for their programs. As such, if you qualify for medical benefits, it does not guarantee that you will qualify for financial benefits.

Eligibility for medical and monetary benefits depends on your discharge status. Generally, a veteran will satisfy the discharge requirement if his or her classification is “honorable” or “general under honorable conditions.” A veteran with a discharge classification of “other than honorable conditions,” “bad conduct,” or “dishonorable” may not be eligible for VA benefits.

Medical benefits

The Veterans Health Administration provides health care for former service members. All veterans are eligible for VA hospital and outpatient care, unless they received a dishonorable discharge from active military service. Congressional funding to the Veterans Health Administration, which changes every year, may affect veteran access to care.

You will be enrolled in one of eight priority groups when you apply for medical benefits. Your assignment to a priority group will be based on several factors, including your service-connected disability rating, status as a combat veteran, and income. Priority Group 1 has the highest priority for enrollment.

Special eligibility for combat veterans. Under the National Defense Authorization Act for Fiscal Year 2008, all veterans who served in a combat theater of operations after November 11, 1998, are entitled to five years of VA health care from the date of separation from military service. Combat veterans are automatically enrolled in Priority Group 6.

Agent Orange exposure. The VA presumes that Agent Orange causes certain cancers (e.g., multiple myeloma) and other diseases (e.g., type 2 diabetes mellitus, ischemic heart disease, and Parkinson’s disease). The full list of diseases presumed to be caused by Agent Orange is available here: www.publichealth.va.gov/exposures/agentorange/conditions/index.asp.

This “presumptive policy” for Agent Orange grants eligibility for medical care to veterans who served in either Vietnam or Korea during certain time periods. If you have a presumptive condition, you do not have to prove a causal connection between your military service and your illness.

For Vietnam, the period begins on January 9, 1962, and ends on May 7, 1975. Service in Vietnam includes duty on a ship that operated on inland waterways. Note, however, that exposure to Agent Orange is not presumed for “Blue Water Veterans” who did not serve aboard ships that operated on inland waterways. For Korea, the period includes service in areas around the Korean demilitarized zone between April 1, 1968, and August 31, 1971.

TRICARE. Active service members, retired service members, qualified family members, and certain survivors can receive health care through the TRICARE plan. Care may be offered through either military or civilian providers depending on your status, the TRICARE option you choose, and the availability of care at military facilities.

Compensation and pension benefits

The Veterans Benefits Administration administers financial programs for eligible veterans. Eligibility largely depends on whether you have a service-connected disability or a nonservice-connected disability.

Service-connected compensation. Service-connected compensation is not a pension benefit; rather, it is disability compensation for injuries or diseases that occurred while on active duty or were made worse by active military service. Essentially, it awards you a certain amount of monthly income to compensate for potential loss of income in the private sector due to a disability, injury, or illness incurred in the service. To qualify, your active-duty discharge must be above the dishonorable level.

Service-connected pension. Veterans and their spouses use two types of service-connected pension benefits to pay for long-term care: (1) Aid and Attendance and (2) Housebound. You must be permanently disabled and confined to your home to be eligible for a Housebound pension. The VA assesses your eligibility for Aid and Attendance based on three criteria: (1) wartime service, (2) declining health, and (3) limited financial resources.

The wartime service requirement is specific to the veteran. You must have at least 90 days of active service, including at least 1 day within a defined wartime period. The VA recognizes the following wartime service periods:

  • World War II: December 7, 1941, to December 31, 1946
  • Korean conflict: June 27, 1950, to January 31, 1955
  • Vietnam era: February 28, 1961, to May 7, 1975 (in country) and August 5, 1964, to May 7, 1975 (generally)
  • Gulf War: August 2, 1990, to a date that will be determined by a future law or a presidential proclamation

The need for health care focuses on the condition of the applicant, not the veteran. For example, a healthy veteran may apply for Aid and Attendance to assist his or her spouse. In some cases, a veteran’s surviving spouse may need a personal care assistant. The VA determines the need for health care based on whether the applicant requires help with at least two of the following activities of daily living: (1) bathing, (2) eating, (3) dressing, (4) using the bathroom, and (5) transferring from a chair or bed. The applicant will also meet the health care requirement if he or she needs skilled nursing care or is legally blind.

The VA will assess income and net worth to determine financial eligibility for Aid and Attendance. It considers all sources, including social security benefits, and deducts household and medical expenses to calculate monthly net income. The net worth will include retirement assets. Different sources cite $80,000 as the maximum net worth you can have to qualify for Aid and Attendance. The VA does not list this amount in its regulations; however, it will look at other factors, such as age, when it assesses net worth and financial eligibility.

Other pension benefits. The VA pension programs benefit veterans who have limited income and, in some cases, health problems unrelated to service. Pension benefits are available to you only if you received a discharge other than dishonorable. Currently, veterans receive three types of pensions: Improved, Old Law, and Section 306. Only the Improved Pension is available to new applicants, however.

You are eligible for Improved Pension benefits if you are 65 and older; served at least 90 days of total active service, 1 day of which was during a wartime period; and have limited income and assets that are not excessive. If you are younger than 65, you may be eligible for Improved Pension benefits if you are permanently and totally disabled.

The amount of Improved Pension benefits you receive depends on your marital status, whether you have dependent children, and whether you are able to care for yourself. Pension benefits are designed to supplement your other sources of income, and the VA pays you the difference between your countable family income and your yearly income limit. Pension benefits are generally paid in 12 equal monthly installments, rounded down to the nearest dollar.

Keep in mind: The VA takes into consideration certain expenses paid by you—such as those related to medical care, education, or the last illness or burial of a dependent—when calculating your countable family income. In addition, some sources of income will not reduce your pension benefit. These include Supplemental Security Income, welfare benefits, and some wages earned by dependent children.

Death pension. A fixed monthly pension is available to qualified survivors of low-income veterans. The monthly benefit amount depends on other sources of income and the number of dependents.

Don’t assume: Apply! Many veterans are not getting benefits because they assume they don’t qualify. No matter your circumstances, it is well worth your while to apply for VA assistance. If your claim is denied, you can appeal the decision and may receive benefits on the second try.

Where to apply

You can apply for federal benefits by going to http://vabenefits.vba.va.gov/vonapp, by calling 800.827.1000, or by visiting your regional Veterans Affairs Office. (Please note: Each state offers Veteran Service Officers who assist with determining eligibility for benefits and the application process. They represent their state’s veterans during the federal and state benefits process.)

Third-party assistance with applications

Applying for benefits can be daunting, and you may find individuals or organizations that charge a fee to advise you on the process. Just remember: only the veteran, an accredited Veterans Service Organization, or an accredited VA attorney may apply for benefits on behalf of a veteran. The rules are strict—no one else can file a claim. Also, neither an accredited VA attorney nor an accredited organization may charge a fee to file an application for veteran benefits.

It’s also important to know that firms unrelated to the VA market financial products to veterans. These products are usually annuities and are sold on the basis that they will facilitate eligibility for benefits. You should discuss the financial product offered with your adviser to determine its tax implications and its impact on your overall financial plan.

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.

Matthew Lang is a financial advisor located at 236 N Washington St, Monument, CO 80132. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 719-481-0887 or at matt@langinvestmentservices.com.

 

© 2018 Commonwealth Financial Network®

Trade War

Is It Time to Worry About a Trade War?

On March 1, 2018, President Trump announced that the U.S. plans to impose tariffs on steel and aluminum imports. Markets around the world were shocked by the news, with major U.S. indices declining more than 1 percent just when it looked like they were recovering from the February downturn. Why did markets react so strongly? Is this a more serious threat going forward? In a word, yes.

First, let’s define what’s going on and why it matters.

A closer look at tariffs

The good. Tariffs are a charge on imports—essentially, a tax. Say a ton of steel costs $100. The 25-percent tariff Trump proposed would require the seller to pay $25 to the U.S. government. That would, in effect, mean the seller has to choose between selling the steel for $75, raising the price to $125 to net the same amount, or doing something in between. Practically, sellers will raise prices. This is the desired outcome, as it will allow producers here in the U.S. to sell their products for higher prices. Therefore, these tariffs are good for the steel and aluminum industries.

The bad. The problem is that they are bad for anyone else that uses steel or aluminum, such as car manufacturers, builders, and the energy industry. Their input costs have just gone up substantially. According to a UBS analyst, Ford’s costs just went up by $300 million, while GM’s went up by $200 million. Other companies will be similarly affected.

Companies like Ford and GM will have two choices here:

  1. They can raise prices, which will start to push up inflation; or
  2. They can eat the higher costs and make less money.

Either way, this is bad for the stock market, as it plays out across the economy. Both higher inflation and lower profits make stocks worth less—hence, the market reactions around the world.

Waiting for the world to react

These are only the first-order effects, of course. The next shoe to drop will be how other countries respond. If we are lucky, they will take legal action through multilateral bodies such as the World Trade Organization, which will result in negotiations. If we are unlucky, they will start imposing retaliatory tariffs of their own, targeted to cause maximum pain to the U.S. economy. We don’t know what those will be. But we can be quite sure they will be designed to hit the U.S. economy as hard as possible, in order to force us to remove the tariffs. This is how trade wars start, so it will be critical to watch those responses.

The next set of effects will be geopolitical. When you look at the actual sources of steel and aluminum imports, Canada tops the list. By angering and damaging our closest neighbor—at the same time as we are trying to renegotiate NAFTA—the possible damage just increases.

The net effect of the tariffs, then, will be economic damage, higher inflation, and greater geopolitical uncertainty. On the corporate side, it will be lower profits for the vast majority of companies. On the consumer side, it will be higher prices for many goods and, likely, lost jobs in export industries. That is why this issue is worth watching closely.

Pay attention, but don’t panic

That said, there is a real possibility that this is either a trial balloon or a negotiating tactic. The U.S. has tried to impose tariffs before, only to pull back as the costs became clear. Trump’s announcement is not the same as actual action. This could all pass away, particularly as the rapid market response shows very clearly the potential costs. It is too early to be overly concerned, but we should definitely pay attention.

Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict.

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 Matthew Lang is a financial advisor located at 236 N Washington St, Monument, CO 80132. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 719-481-0887 or at matt@langinvestmentservices.com.

Authored by Brad McMillan, managing principal, chief investment officer, at Commonwealth Financial Network®.

 © 2018 Commonwealth Financial Network®

Equifax security breach tips

INFO SECURITY ALERT: Equifax Breach Affects 143 Million Consumers

INFO SECURITY ALERT: Equifax Breach Affects 143 Million Consumers

By Matthew Lang, Lang Investment Services.  Monument, CO 719-481-0887

Last week, news broke that Equifax, one of the three major credit bureaus, suffered a massive database breach. It’s estimated that the information of 143 million consumers was compromised, including:

  • Social security numbers
  • Dates of birth
  • Addresses
  • Driver’s license numbers
  • Credit card information (for approximately 209,000 consumers)

The good news is that many Equifax executives sold their stock shares after they knew what happened, but before the public knew…..whew….now we can all rest easy knowing they won’t miss the loan payments on their yachts.  However, for the rest of us who may be negatively affected by having some of our most valuable information exposed, here are some steps to take to protect your personal info.

Due to the high potential impact of this breach, I recommend taking the following steps:

 1) Determine whether you may have been affected. Through the Equifax self-service portal, you can quickly determine whether your information may have been compromised. Enter your last name and the last six digits of your social security number, and you’ll find out whether Equifax believes you’ve been affected. This process takes only a couple of minutes.

2) Enroll in Equifax’s credit monitoring and identity theft protection. Equifax is now offering one free year of TrustedID Premier, its credit monitoring and identity theft protection product, to all U.S. consumers, even if you aren’t a victim.

Once you enter your information in Equifax’s self-service portal, you’ll be given the option to enroll in TrustedID Premier. Click Enroll, and you’ll be provided with an enrollment date. Be sure to write down this date and return to the site on or after that date.

For more information, visit the Equifax FAQs page regarding the incident.

3) Be wary of e-mails that come from Equifax. Because of the high number of victims, Equifax is notifying only the 209,000 consumers whose credit card information may have been affected via postal mail. Do not trust e-mails that appear to come from Equifax regarding the breach. Attackers are likely to take advantage of the situation and craft sophisticated phishing e-mails.

4) Monitor your accounts for suspicious activity. Equifax’s free TrustedID Premier service can help you monitor your credit—but be sure to monitor your other important accounts for any suspicious activity.

5) Go to the other credit companies, Transunion and Experian, and initiate a credit freeze.  You will need to unfreeze your credit when you apply for loans, but as long as you keep track of the PIN it is easy to unfreeze and refreeze your credit when needed.

6) Get a copy of your credit report.  Most states require the credit agencies to offer a free copy of your credit report at least once a year.  I would suggest getting a copy of and checking for accounts you don’t recognize.

 We all know that hackers are always working the online world trying to steal your data.  Identify theft is rampant all over the world.  No matter what we do, most of us will at some time be exposed to a data breach, but all we can do is try to protect ourselves.  Equifax is not the first or the last company which will be hacked, heck, even the IRS was compromised a couple years ago.  I hope no one has negative repercussions from this event, but if any of us do, then we can just take it one step at a time.

 

Matthew Lang is a financial advisor located at 236 N Washington St, Monument, CO 80132. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 719-481-0887 or at matt@langinvestmentservices.com.