Quote of the Week
“Teachers open the door, but you must enter by yourself” – Chinese Proverb
Last week was a bad week for the stock markets around the world. Volatility returned with plenty of news and economic releases for the market to digest.
Investors initially were happy about the agreement for the revised NAFTA deal, now called the U.S.-Mexico-Canada Agreement (USMCA), but enthusiasm quickly faded as more important U.S.-China trade worries started to intensify. The USMCA agreement was really mostly a non-event as to any changes made to the prior agreement. The whole opera was really nothing more than a lot of bluff and bluster leading to little change. I think people were relieved that we didn’t start another trade war with our two most important and friendly nations. The net effect is that we can now sell our dairy products to Canada and cars manufactured in North America will now be more expensive. Plus, a lot of auto production will move away from North America. We need to look beyond the headlines and pay attention to the law of unintended consequences.
Last week the 10-year Treasury yield rose above 3.2% for the first time in seven years. Rates on investment grade corporate and municipal bonds also rose to their highest levels in several years. Interest rates are rising on solid economic growth. The uptick in bond yields caused market concern that the good economic news would lead the Federal Reserve to tighten more aggressively in the future. I think this was the reason for the market sell-off on Thursday, Friday, and Monday.
The week ended with the closely watched release of the September jobs report showing the economy creating just 134,000 jobs last month. The Council for Economic Advisers estimated the economy lost 35,000 jobs due to Hurricane Florence, which ravished the Carolinas earlier in the month. The report showed the unemployment rate dropped to 3.7% and hourly wages increased by 2.8%, just short of the post-recession record of 2.9% in August. A sustained pickup in wages indicates a tightening of the labor market and provides support for the Fed to continue to raise interest rates.
This all sounds great, doesn’t it? But beware because if the unemployment rate is at historical lows that means that it will be tough to continue to grow the Gross Domestic Product (GDP) unless we can increase productivity which has shown little signs of increasing recently. Also, with wages increasing it will negatively affect corporate profit growth because that cost will be subtracted from the corporate income statements. Recessions and market declines are closely preceded by increasing wages and low unemployment.
We currently have a buy signal on the S&P 500, so we are invested in our model. I am worried because of the factors discussed above and the fact that the Fed is still intent on raising interest rates. Even though it shouldn’t matter, I think the markets are also worried about the turmoil in Washington. If the Democrats win the House the turmoil will definitely increase. Remember, the markets don’t like change.
Last week the Dow was flat, the S&P 500 was down 1.0%, the Nasdaq was down 3.2%, and the MSCI EAFE was down 2.4%. For the year the Dow is up 7.0%. the S&P 500 is up 7.9%, the Nasdaq is up 12.8%, and the MSCI EAFE is down 6.0%. What concerns me most is the tech heavy Nasdaq is losing its steam and the MSCI EAFE is indicating that the rest of the worlds’ economies are declining.
Umbrella Liability Insurance
When your local weather forecaster tells you that it’s going to rain, what do you do? That’s easy–you reach for your umbrella. So why not purchase an umbrella that can protect you in stormy financial weather? Umbrella liability insurance (ULI) can do just that. By providing liability protection above and beyond the basic coverage that homeowners/renters and auto insurance policies offer, ULI can protect you against the catastrophic losses that can occur if you are sued.
Although ULI can be purchased as a separate policy, your insurer will require that you have basic liability coverage (i.e., homeowners/renters insurance, auto insurance, or both) before you can purchase an umbrella liability policy. ULI is often referred to as excess coverage. If you are found to be legally responsible for injuring someone or damaging someone’s property, the umbrella policy will either pay for the part of the claim in excess of the limits of your basic liability policy, or pay for certain losses that are not covered.
Why now? It’s not even raining
These days, it’s not unusual to hear of $2 million, $10 million, and even $20 million court judgments against individuals. If someone is injured in your home, or if you cause a serious auto accident, you could have to pay such a judgment. If you don’t have an umbrella liability policy at the time of the accident, anything above the limits of your homeowners/renters or auto insurance policy will have to come out of your pocket.
Here’s an example of how ULI works to protect you. Say you have an auto insurance policy with a liability limit of $100,000 per accident. You also have a $1 million umbrella liability policy. You’re later found responsible for a serious automobile accident, and the court finds you liable for $700,000 in damages. In this case, your auto insurance would pay the first $100,000 of the judgment, which would satisfy the deductible under your umbrella policy. Your umbrella policy would then cover the portion of the judgment not covered by your auto insurance ($600,000).
You should also be aware that certain types of liability claims (e.g., libel and slander) are not covered under basic homeowners, auto, or other types of insurance policies. An endorsement can be added to these policies to provide some protection against these types of personal injury claims. Or, you can purchase ULI, which does cover these claims.
A typical umbrella liability policy provides the following protection, up to the coverage limits specified in the policy:
- Protection for claims of bodily injuries or property damage caused by you, members of your household, or hazards on your property, for which you are found legally liable
- Personal liability coverage for incidents that occur on or off your property
- Additional protection above your basic auto policy for auto-related liabilities
- Protection against non-business-related personal injury claims, such as slander, libel, wrongful eviction, and false arrest
- Legal defense costs for a covered loss, including lawyers’ fees and associated court costs
What’s not covered?
Umbrella liability insurance typically provides extremely broad coverage. Furthermore, if something is not expressly excluded from coverage, it is covered. Exclusions vary from one insurer to another and from one policy to another, but the following are some items typically excluded from coverage:
Intentional damage caused by you or a member of your family or household
- Damages arising out of business or professional pursuits
- Liability that you accept under the terms of a contract or agreement
- Liability related to the ownership, maintenance, and use of aircraft, nontraditional watercraft (e.g., jet skis, air boats), and most recreational vehicles
- Damage to property owned, used, or maintained by you (the insured)
- Damage covered under a workers’ compensation policy
- Liability arising as a result of war or insurrection
How big of an umbrella are we talking about?
Determining how much liability coverage you need is not an exact science. You might think that you need only enough liability insurance to protect your assets, but a large judgment against you could easily wipe out your assets and put your future earnings in jeopardy. That’s why you should also consider factors such as how often you have guests in your home, whether you operate a home-based business, how much you drive, whether you have teenage drivers in your home, and whether your lifestyle gives the impression that you have “deep pockets.”
Coverage limits vary, but a typical policy will provide liability coverage worth $1 million to $10 million. Of course, as your coverage limit increases, the premium will also increase. You need to decide both how much insurance you need and how much insurance you can afford. You’ll want to have enough protection, but not too much. Look at it this way: Have you ever seen a five-year-old child walking under a big golf umbrella or a 300 lb. football player using a pocket-sized umbrella? One has too much protection and the other not enough. Your insurance agent can help you determine how much coverage you need.
Where can I buy an umbrella liability policy?
Almost any insurer who writes auto and home insurance policies will also sell umbrella liability policies. In fact, you may be eligible for a multipolicy discount if you purchase an umbrella policy from your current insurer. Of course, it’s important to shop around and make sure that you’re getting the right coverage for your needs and the most coverage for your money. If you want to do some research on your own, try surfing the Internet, where you can get price quotes and answers to your questions in an instant.
Copyright 2018 Broadridge Investor Communication Solutions, Inc
By the Numbers
“GET READY – A 65-year old American male in 2018 is expected to live another 19.2 years (to 84.2 years old), an increase of 5 years in the last 40 years. A 65-year old American female in 2018 is expected to live another 21.6 years (to 86.6 years old), an increase of 3 years in the last 40 years (source: Social Security Administration)” – Michael A. Higley, BTN 10-08-2018
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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.
The S&P 500 is an index of stocks compiled by Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. The index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. Indices mentioned are unmanaged and cannot be invested into directly.
Technical analysis represents an observation of past performance and trend, and past performance and trend are no guarantee of future performance, price, or trend. The price movements within capital markets cannot be guaranteed and always remain uncertain. The allocation discussed herein is not designed based on the individual needs of any one specific client or investor. In other words, it is not a customized strategy designed on the specific financial circumstances of the client. Please consult an advisor to discuss your individual situation before making any investments decision. Investing in securities involves risk of loss. Further, depending on the different types of investments, there may be varying degrees of risk including loss of original principal.