Insights: quarterly newsletter from RKL Wealth Management LLC (Spring 2017)
A Message to Our Clients
Contributed by: Judson S. Meinhart, Wealth Advisor
“In the old world, you devoted 30% of your time to building a great service and 70% of your time to shouting about it. In the new world, that inverts.” – Jeff Bezos, Amazon CEO
It’s been roughly 15 months since we reintroduced ourselves as RKL Wealth Management. During that time, we have maintained a singular focus on building and refining a service model that provides our clients with a distinct and superior wealth management experience, and quite frankly, we may have forgotten to “shout” about how great it is. Well, consider our voices raised.
Your trust in our firm, and in your advisors, has given us the opportunity to grow to a point where we can realize more operational efficiencies. Leveraging these opportunities to deliver a better overall client experience allows us to broaden our focus from that of investment management to the larger, more encompassing picture of wealth management. This shift may have been subtle to you, but it has been impactful to us.
This shift means that you now have a team of professionals responsible for overseeing every aspect of your RKL Wealth Management experience. This team consists of individual specialists with the education, experience and expertise to add value in every aspect of your financial life. The focus on total asset management means that your investment strategy is aligned to your specific personal and estate objectives. Whether you are in the accumulation, preservation or estate transition stage of your life, your RKL Wealth Management team has you covered.
We look forward to serving you with our enhanced approach to wealth management as we move forward throughout 2017.
Market & Economic Update
By: Nicholas A. Boyer, Chief Investment Strategist
For those closely following the news or mainstream media, the first quarter of 2017 felt like a violent and exhausting roller coaster ride. The public was dealt a litany of extraordinary political and economic headlines, the balance of which were negative, including:
- Global protests of President Donald Trump’s inauguration
- Record highs in U.S. equity markets (Dow hits 20,000…then 21,000!)
- The abrupt resignation of a newly appointed national security adviser
- Sweeping accusations of political scandal enveloping both U.S. political parties
- The prospect of trade wars with China and Mexico
- The official start of Brexit
- A failed healthcare bill on Capitol Hill
- Another 0.25% hike in the fed funds target rate by the Federal Reserve
From an individual investor’s perspective, it’s perfectly reasonable to be alarmed by such weighty headlines and remarkably easy to get caught up in the “doom and gloom” chronicle of financial markets and the global economy. For our team, however, these are the moments when we take note of the narrative but intensify our efforts to uncover the facts and study the data, in order to distill it into useful information and discount the “noise.” This is also when we encourage our clients to disregard the spectacle, temper emotions and remain committed to a patient, strategic, longterm approach to financial affairs.
Economic Data Solid
As it turns out, economic releases have been solid through the first quarter of 2017 and continue to point to an improving outlook for growth in the U.S. and globally. While the most recent employment report in the U.S. came in below expectations, the report also confirmed that household employment grew significantly, that the unemployment rate dropped to 4.5% and importantly, employment among millennials increased 2.5%, highest since August 2015. Other employment releases were also quite strong: the ADP employment report surged past expectations signaling private U.S. businesses added 263,000 jobs in March, while unemployment claims plunged by 25,000 bringing the 13-week average for unemployment claims to a 43-year low. Further, a sampling of other key economic readings for capital goods shipments, durable goods orders, new home sales and the Philadelphia Fed’s Business Outlook Survey all surpassed analyst expectations. Importantly, consumer sentiment indicators also remained strong, as the University of Michigan Sentiment and Current Conditions indices firmly beat estimates and Bloomberg’s Consumer Comfort index remains at a 10-year high.
Globally, key manufacturing indicators in Europe, Japan and India confirmed steady economic expansion, while European retail sales surged and the Eurozone unemployment rate continued its rapid decline. In China, analysts have noted that the most critical economic figures, namely real gross domestic product and the consumer price index, are improving, while the housing picture has steadied and consumer spending has continued to increase.
Financial Markets Strong
From a market standpoint, despite mercurial headlines, the VIX – a popular measure for volatility of the S&P 500 index – declined nearly 12% in the first quarter. Both U.S. and global equity markets delivered a strong first quarter, with the total return of the S&P 500 above 6% and the MSCI All Country World Index over 7%. Notably, the MSCI Emerging Market Index delivered more than 11% in total return through the quarter. U.S. Mid Cap remained strong with over 5% total return, while U.S. Small Cap cooled but remained positive, returning 2.5% in Q1.
On the fixed income side, bond market volatility, as measured by CBOE 10-Year Treasury Note Volatility Index, interestingly declined even further in the first quarter, despite markets absorbing another Fed rate hike. The U.S. Aggregate Bond index returned just 0.81% in the first quarter, with U.S. Corporate Bonds contributing 1.2%, while separately U.S. High Yield delivered 2.7%. In a theme reminiscent of the past several years, while investors remained largely underweight duration (interest rate sensitivity) relative to the U.S. Aggregate Bond index, longer-duration fixed income strategies outperformed on the quarter.
Global Monetary Policy Still Stimulative
Despite the 25 basis point hike by the Federal Reserve, the market’s expectations for future rate hikes actually declined, following the release of the latest Federal Open Market Committee (FOMC) minutes which indicated that future rate hikes will be supplemented with balance sheet reductions, as the Fed begins the process of reducing its holdings of U.S. Treasuries and U.S. mortgage-backed securities in an effort to unwind from quantitative easing. The market’s reaction to this measure pushed real bond yields lower, as investors bet that the Fed balance sheet reductions will be used as a substitute (rather than supplement) for rate hikes, and may actually result in a net easing of monetary policy in the near term. Going forward, investors will be watching closely how the Fed implements this balance sheet reduction strategy and how the mechanics of this activity will impact the term structure of interest rates. In our view, it is too early to tell how this will impact the yield curve, although we would urge caution in viewing this as a dovish move, and would note that it gives the Fed more flexibility to affect monetary policy without being limited to rate hikes alone.
All of that said, to put global monetary policy in perspective, in March the Bank of England increased its balance sheet by 35% Year over Year (YoY), while the European Central Bank increased its balance sheet by 39% YoY, and the Bank of Japan increased its balance sheet 4.5% Month on Month to an astounding 490.1 trillion Yen. Even if the Fed begins to shrink its own balance sheet rapidly this year (which is unlikely given that the pace will likely be slower in order to temper market effects), this would still represent an extremely stimulative global monetary policy regime. Judging by the amount of assets on central bank balance sheets alone, it will take much more than a few years for policy makers to fully unwind the global monetary stimulus of the past decade.
Outlook Positive: Opportunities Ahead for Patient, Long Term Investors
In our view, the market will continue to discount geopolitical headlines, as it always has, but the near and intermediate direction of markets currently remains “policy-driven,” as investors respond to the policy decisions of central banks (monetary) and governments (fiscal). While analysts continue to debate whether the Fed minutes were dovish or hawkish, we find it more important to acknowledge that the Fed’s future actions are still firmly “data-dependent,” in that one way or another, the Fed will have to respond to the hard data – specifically upcoming readings of inflation, labor market conditions and economic growth. If this data continues to improve, the Fed will have to continue to raise rates to avoid “falling behind the curve,” and it still remains possible that balance sheet reductions will have a more significant impact on Treasury yields than currently anticipated. In either case, the more rapid interest rates rise the larger the adverse impact will be on yield-oriented strategies and traditional fixed income portfolios.
On the equity side, the Fed noted in its minutes that stock valuations are “quite high,” which undoubtedly contributed to the selloff in stocks and risk assets following the release of the minutes. Nevertheless, Evercore ISI strategist Dennis DeBusschere points out, “one of the main supports for the rally in U.S. and global equities over the past year has been the relative attractiveness of stocks to bonds. Focusing on the U.S., the forward earnings yield on the S&P remains higher than Baa-rated yields and is unusually close to the rate offered by high yield bonds. Looking at the total normalized spread between the S&P earnings yield and each of the bond series [included] (10yr, Baa, High Yield) compared to its history over the past 26 years shows the stock market as unusually attractive.” However, he further notes that looking only at more recent, post-crisis asset price behavior changes the result: “focusing on just the last 10 years and valuing stocks relative to corporate bonds (excluding Treasuries) leaves the S&P looking fairly valued today.”
Ultimately, it’s impossible to know with certainty whether the next 12 months will bring an equity market correction (-10% decline or greater), or a major bond market selloff due to rapidly rising rates; and yet we find the current environment underscores the importance of asset allocation in one’s investment process. While we continue to believe in the future of the U.S. and the global economy, and feel that owning high-quality global companies remains unquestionably the best way to grow wealth over time, our investment process allows us to reject the superficial choice of trying to make bets on which asset class will do best over the next quarter. Instead, what we do know is that if our portfolios appropriately reflect our time horizons and objectives, we are better positioned to avoid financial impairment in any scenario, and moreover, we are much more likely to find opportunities to purchase assets – either stocks or bonds – at better valuations and thus better expected returns.
As always, we will continue to closely monitor developments in financial markets and the economy, and encourage our clients to reach out at any time to discuss our strategy and individual portfolios in further detail.
Lowering the Cost of Investing
Recently, you may have seen advertisements touting that Charles Schwab is lowering commissions for the retail investor. During the month of February, Schwab twice reduced the standard online stock and ETF trade commissions, first to $6.95 per trade and then again to $4.95. In the fine print, however, it specifies that these low rates only apply to customers who receive online statements.
We’re happy to explain that this caveat does not apply to RKL Wealth Management clients, and all of our clients who custody at Charles Schwab have been enjoying lowered commissions on stock and ETF purchases since February, in addition to $15 commissions on mutual fund trades. Thank you, Chuck!
Should You Delay Your First RMD?
By: Amy L. Strouse, RKL Tax Manager
Owners of an IRA or qualified plan account are required to take a Required Minimum Distribution (RMD) on an annual basis beginning with the year that they reach 70½ years of age. Account owners may recognize their RMD requirement, but some may not be aware that they have the option to delay the first RMD until April 1 following the calendar year in which they reached age 70½ (or April 1 following the calendar year in which they retired, in some cases).
Why would an account owner delay taking this first distribution? One reason might be if you expect to be in a lower income tax bracket in the following year, perhaps because you’re no longer working or will have less income from other sources. However, if you wait until the following year to take your first distribution, your second distribution must be made on or by December 31 of that same year.
Receiving your first and second RMDs in the same year may not be in your best interest. Since this “double” distribution will increase your taxable income for the year, it will probably cause you to pay more in federal income taxes (and state income taxes, depending on state of residency). It could even push you into a higher federal income tax bracket for the year, and result in you paying a larger percentage of your Medicare Part B premium for that year. In addition, the increased income may cause you to lose the benefit of certain tax exemptions and deductions that might otherwise be available to you. So the decision of whether to delay your first required distribution can be important, and should be based on your personal tax situation.
Illustration of the Impact of Delay
You are single and reached age 70½ in 2016. You had taxable income of $25,000 in 2016 and expect to have $25,000 in taxable income in 2017. You have money in a traditional IRA and determined that your RMD from the IRA for 2016 was $50,000, and that your RMD for 2017 is $50,000 as well. You took your first RMD in 2016. The $50,000 was included in your income for 2016, which increased your taxable income to $75,000. At a marginal tax rate of 25 percent, federal income tax was approximately $14,521 for 2016 (assuming no other variables). In 2017, you take your second RMD. The $50,000 will be included in your income for 2017, increasing your taxable income to $75,000 and resulting in federal income tax of approximately $14,488. Total federal income tax for 2016 and 2017 will be $29,010.
Now suppose you did not take your first RMD in 2016 but waited until 2017. In 2016, your taxable income was $25,000. At a marginal tax rate of 15 percent, your federal income tax was $3,289 for 2016. In 2017, you take both your first RMD ($50,000) and your second RMD ($50,000). These two $50,000 distributions will increase your taxable income in 2017 to $125,000, taxable at a top marginal rate of 28 percent, resulting in federal income tax of approximately $27,982. Total federal income tax for 2016 and 2017 will be $31,271– $2,261 more than if you had taken your first RMD in 2016.
Odds & Ends
Peer Named Women of Influence
RKL Wealth Management is proud to announce that our Executive Vice President, Laurie M. Peer, CPA, CFP®, was named one of Lehigh Valley Business’ 2017 “Women of Influence,” in recognition of her professional achievements, leadership qualities and community involvement.
The annual “Women of Influence” awards program recognizes 25 female leaders in the Greater Lehigh Valley making an impact on their companies, industries and communities. Laurie and her fellow recipients will be honored at a ceremony on Wednesday, May 10 at Cedar Crest College in Allentown. Congratulations on this well-deserved honor, Laurie!
Connerton Retirement
In early March, Stephanie Connerton stepped down from her position as Chief Compliance Officer for RKL Wealth Management. Steph intends to transition into retirement with a reduced work schedule at an employer closer to her home. We thank Steph for her 11 years of service to the firm and its clients, and we wish her all the best in her future endeavors. RKL WM Executive Vice President Laurie Peer is currently managing the firm’s compliance responsibilities on an interim basis.
Hinerdeer Holds Fundraising Fiesta
RKL Wealth Management Trader Mike Hinerdeer cooked up support for Lancaster Hospice & Community Care with his 11th annual Taco Soup Lunch on March 22, 2017, held at the firm’s Lancaster office. Sales of Hinerdeer’s homemade soup and all the trimmings raised over $1,100 for the hospice.