Quote of the Week
“The world is changed by your example, not by your opinion.” – Paulo Coelho
Stocks sold off sharply to start last week, as trade tensions between the U.S. and China drove concerns that global growth could be negatively impacted. As the week unfolded the markets recovered on optimism that the latest tariff news is a temporary setback and that a deal can still ultimately be reached. That was short-lived as the market sold off on Friday with both China and the U.S. appearing to entrench their respective positions. Trade headlines are likely to continue to drive periods of high market volatility into the future.
From a U.S. Equity perspective, high volatility stocks and small-cap stocks continue to develop into a “Bearish” trend. The Russell 2000 (Small Cap Index) is still down -11.8% from its beginning of the 4Q 2018 all-time highs. So far, 459 of the S&P 500 companies have reported aggregate year-over-year sales and earnings growth of 4.5% and 1.4% respectively. That’s down from peak Earnings per Share growth of greater than 24% in the 2Q and 3Q of 2018.
Last week’s April Retail Sales and Industrial Production data confirmed the ongoing narrative of the U.S. economy “slowing at a faster rate.” Headline Retail Sales growth slowed 0.7 of a percent to 3.1% year over year in April, and Industrial Production growth slowed 1.43% to 0.89% year over year in April, the slowest rate of growth since February 2017.
Retail Sales and Industrial Production are the second-highest and fifth highest weighted factors in the 30-factor, dynamically re-weighted predicative tracking algorithm that we use for predicting U.S, Growth. The net result of this data is an equally outsized drop in the predication for 2nd Quarter Real GDP growth slowing to 2.56% year over year and 1.55% Quarter over Quarter. If the current trend holds, this translates to a drop in GDP from the first quarter of 3.2% to 1.55%. As I have stated in a prior letter, the high first quarter GDP number was suspect due to factors that will probably not be repeated.
We are still conservatively invested in all portfolios with over half of the assets invested in fixed income (bonds).
|Name||Wkly %Chg||YTD %Chg||12-mo%Chg|
|Dow Jones Industrials||-0.69||+10.44||+4.24|
|S&P 500||– 0.76||+14.07||+5.40|
|10-yr Treasury Yield||-0.08||-0.30|
|*5-day performance ending Friday|
The future of Social Security and Medicare is always a hot topic. For your reading pleasure (or displeasure) the following is a summary of the annual report of the Social Security and Medicare Trustees.
The Future of Social Security and Medicare: Here’s What Trustees Are Projecting
Most Americans will eventually receive Social Security and Medicare benefits. Each year, the Trustees of the Social Security and Medicare Trust Funds release lengthy reports to Congress that assess the health of these important programs. The newest reports, released on April 22, 2019, discuss the current financial condition and ongoing financial challenges that both programs face, and project a Social Security cost-of-living adjustment (COLA) for 2020.
What are the Social Security and Medicare Trust Funds?
Social Security: The Social Security program consists of two parts. Retired workers, their families, and survivors of workers receive monthly benefits under the Old-Age and Survivors Insurance (OASI) program; disabled workers and their families receive monthly benefits under the Disability Insurance (DI) program. The combined programs are referred to as OASDI. Each program has a financial account (a trust fund) that holds the Social Security payroll taxes that are collected to pay Social Security benefits. Other income (reimbursements from the General Fund of the U.S. Treasury and income tax revenue from benefit taxation) is also deposited in these accounts. Money that is not needed in the current year to pay benefits and administrative costs is invested (by law) in special Treasury bonds that are guaranteed by the U.S. government and earn interest. As a result, the Social Security Trust Funds have built up reserves that can be used to cover benefit obligations if payroll tax income is insufficient to pay full benefits.
Note that the Trustees provide certain projections based on the combined OASI and DI (OASDI) Trust Funds. However, these projections are theoretical, because the trusts are separate, and generally one program’s taxes and reserves cannot be used to fund the other program.
Medicare: There are two Medicare trust funds. The Hospital Insurance (HI) Trust Fund helps pay for hospital care (Medicare Part A costs). The Supplementary Medical Insurance (SMI) Trust Fund comprises two separate accounts, one covering Medicare Part B (which helps pay for physician and outpatient costs) and one covering Medicare Part D (which helps cover the prescription drug benefit).
Highlights of Social Security Trustees Report
- Social Security’s total cost is projected to exceed its total income (including interest) in 2020 and remain higher for the next 75 years. The U.S. Treasury will need to withdraw from trust fund reserves to help pay benefits. The Trustees project that the combined trust fund reserves (OASDI) will be depleted in 2035, one year later than projected in last year’s report, unless Congress acts.
- Once the combined trust fund reserves are depleted, payroll tax revenue alone should still be sufficient to pay about 80% of scheduled benefits for 2035, with the percentage falling gradually to 75% by 2093.
- The OASI Trust Fund, when considered separately, is projected to be depleted in 2034. Payroll tax revenue alone would then be sufficient to pay 77% of scheduled benefits. These figures are unchanged from last year’s report.
- The DI Trust Fund is expected to be depleted in 2052, 20 years later than projected in last year’s report. The significant depletion date change reflects the fact that both benefit applications and the total number of disabled workers currently receiving benefits have been declining over the past few years. Once the DI Trust Fund is depleted, payroll tax revenue alone would be sufficient to pay 91% of scheduled benefits.
- Based on the “intermediate” assumptions in this year’s report, the Social Security Administration is projecting that the cost-of-living adjustment (COLA), announced in the fall of 2019, will be 1.8%. This COLA would apply to benefits starting in January 2020.
Highlights of Medicare Trustees Report
- Annual costs for the Medicare program exceeded tax income each year from 2008 to 2015. There were fund surpluses in 2016 and 2017. In 2018, expenditures exceeded income, and this year’s report projects that costs will exceed income by increasing amounts (excluding interest income). The report notes that in 2007, assets represented 150% of expenditures, but by the beginning of 2019, the ratio of trust fund assets to expenditures had fallen to 66%.
- The HI Trust Fund is projected to be depleted in 2026, the same year as projected in last year’s report. Once the HI Trust Fund is depleted, tax and premium income would still cover 89% of estimated program costs, declining to 78% by 2043 and then gradually increasing to 83% by 2092. The Trustees note that long-range projections of Medicare costs are highly uncertain.
Why are Social Security and Medicare facing financial challenges?
Social Security and Medicare are funded primarily through the collection of payroll taxes. Because of demographic and economic factors, including higher retirement rates and lower birth rates, there will be fewer workers per beneficiary over the long term, worsening the strain on the trust funds.
What is being done to address these challenges?
Currently, not much, but both reports urge Congress to address the financial challenges facing these programs soon, so that solutions will be less drastic and may be implemented gradually, lessening the impact on the public. Combining some of these solutions may also lessen the impact of any one solution.
Some Social Security reform proposals on the table are:
- Raising the current Social Security payroll tax rate. According to this year’s report, an immediate and permanent payroll tax increase of 2.7 percentage points to 15.1% would be necessary to address the long-range revenue shortfall (3.65 percentage points to 16.05% if the increase started in 2035).
- Raising or eliminating the ceiling on wages currently subject to Social Security payroll taxes ($132,900 in 2019).
- Raising the full retirement age beyond the currently scheduled age of 67 (for anyone born in 1960 or later).
- Reducing future benefits. According to this year’s report, to address the long-term revenue shortfall, scheduled benefits would have to be immediately and permanently reduced by about 17% for all current and future beneficiaries, or by about 20% if reductions were applied only to those who initially become eligible for benefits in 2019 or later.
- Changing the benefit formula that is used to calculate benefits.
- Calculating the annual cost-of-living adjustment for benefits differently.
Copyright 2019 Broadridge Investor Communication Solutions, Inc
By the Numbers
IMPACTED BY TARIFFS – 41% of the apparel and 72% of the footwear produced worldwide is manufactured in China (source: American Apparel & Footwear Association). Michael A. Higley, BTN 05-20-2019
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These are the opinions of Larry Lof and Stephanie Mayoral and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Past performance is not indicative of future results. Due to our compliance review process, delayed dissemination of this commentary occurs.
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