Fourth Quarter 2016

In a stunning “Brexit-like” victory, Donald Trump won the Electoral College by a comfortable margin (306-232) despite lagging in the polls until Election Day. But, this doesn’t tell the whole story since Hillary Clinton won the popular vote. Clearly, this reflects a deep divide in our country. 
 
Ironically, this divide may not be bad. In theory, an unpopular president will be forced to lead a bipartisan movement to address our country’s woes, like the $19.5 trillion national debt, a flagging economy, and failing health care and entitlement systems. The focus needs to be on where we agree, not where we disagree. Although this is likely to alienate the vocal minority of bothparties, Congressional leadership would do well to recognize that 70-80% of the American people are tired of gridlock2.
 

Benchmarks

 

12/31/2015

 

09/30/2016

 

% Change

Dow Jones Industrial Average (DJIA)

17,425.03

18,308.15

↑ 5.1%

Standard & Poor’s 500 Index (SPX)

2,043.94

2,168.27

↑ 6.1%

NASDAQ Composite Index (COMP)

5,007.41

5,312.00

↑ 6.1%

Russell 2000 Index (RUT)

1,135.89

1,251.65

↑ 10.2%

Federal Funds

0.25%

0.25%

Unchanged

10Y US Treasury Bond

2.27%

1.60%

↓ 29.5%

30Y US Treasury Bond

3.01%

2.32%

↓ 22.3%

London Gold PM

1,062.25

1,322.50

↑ 24.5%

 
Remember, when bonds prices rise, yields fall and vice versa.
Investor reactions to President-elect Trump have been mixed. While domestic stocks have pushed toward new highs, bonds have been pummeled. Clearly, investors have been cheered by the prospect for an improved economic environment stemming from lower business and personal taxes, less regulation and greater spending for infrastructure. But, greater growth (and potentially greater short-term deficits) means higher inflation and interest rates ahead. 
Election results aside, we believe the Fed will increase the funds rate by at least ¼ of 1% at its December meeting. Year-to-date, consumer prices (excluding food and energy) have increased by 1.5%, the greatest rate of increase in several years. To a great extent, this is being fueled by rising wages and benefits, as well as rising commodity prices. Quite frankly, a rate increase may be long overdue.
 
2017 Social Security Update
If you’re receiving benefits, you’ll receive a slight 0.30% raise January 1st. For example, the 2016 average monthly benefit for all retired workers of $1,355 will increase to $1,360. But, most of this increase is likely to be absorbed by increases in Medicare Part B premiums (see below).
If you’re receiving benefits and still working,you may be subject to the annual earnings test. If you’re under full retirement age (FRA), your benefits will be reduced by $1.00 for each $2.00 you earn over $16,920. Except, if you reach FRA in 2017, they’ll be reduced by $1.00 for each $3.00 you earn over $44,880 until you reach FRA. Once you reach FRA, there is no reduction in benefits no matter how much you earn.

Important!
If you’re subject to the annual earnings test, Social Security will recalculate your benefit at full retirement age and reinstate some benefits. Here’s how this works. Let’s say your full retirement age is 66 and you take early benefits at 62. They will be reduced based on your early retirement of 48 months. Now, let’s say you lose some or all of your benefits for 24 months based on the annual earnings test. When you reach full retirement age, Social Security will recalculate your benefit based on an early retirement of 24 months, not 48 months. 

If you’re still working and paying into Social Security,the base wage will increase from $118,500 to $127,200 (7.34%). So, a worker earning at least $127,200 will pay an extra $539, as will his employer.  Self-employed workers will pay an extra $1,078. The largest increase since 1983, it’s largely due to the rising wage environment and no base wage increase in 2016. 
 
2017 Medicare Premium Update
Most Medicare recipients receive “free” Part A (Hospital) benefits based on their payment of Medicare taxes during their employment years. But, they must pay premiums to receive Part B (Medical) and Part D (Prescription) benefits, as highlighted below.
 
Medicare Part B Premium. About 70% of all current Medicare recipients will see their Part B premium increase from $104.90 to $109.00 based on a statutory “hold harmless” provision designed to protect seniors. Specifically, it prevents their Part B premium increases from exceeding the dollar amount of their Social Security benefit increases. The standard premium will be $134.00 for the remaining 30% of beneficiaries. And, some beneficiaries will pay even higher premiums based on their 2015 modified adjusted gross income (MAGI), as illustrated in the following Table.
 
2017 Medicare Part B (Medical): Income-related Monthly Adjustment Amounts (IRMAA)

2015 Modified Adjusted Gross Income Brackets

 

Total

Single Taxpayers

Married Taxpayers

IRMAA

Premium

$85,000 or less

$170,000 or less

$0

$134.00

$85,001 to $107,000

$170,001 to $214,000

53.50

187.50

$107,001 to $160,000

$214,001 to $320,000

133.90

267.90

$160,001 to $214,000

$320,001 to $428,000

214.30

348.30

$214,001or more

$428,001 or more

294.60

428.60

This illustration assumes the Medicare Part D national base premium. 
The total premium will be higher or lower depending on the specific plan premium.
 
Outlook & Strategy
Like it or not, change vs. the status quo has prevailed. Although its magnitude, direction and timing remain unknown, we have a reasonably optimistic outlook and recommend staying the course as it unfolds. 
 
Equity strategy.
Moving toward year-end, we expect earnings growth to reignite. This bodes well for current valuations, not to mention potentially higher valuations down the road. Accordingly, we recommend clients hold a well-diversified portfolio of high quality “blue chips” at the mid-point of their strategic allocation ranges. 
 
Cash and fixed income.
Given the increased likelihood rates will rise, we recommend clients hold bonds meeting our investment guidelines and commit new money to “ultra” short-term bonds. As before, this is notthe time to “stretch” for current yield as risks outweigh potential rewards. 
 
1The economic and market data provided herein was obtained from sources we deem reliable but do not guarantee. All opinions are those of Asset Planning & Management, Inc. as of the date of publication. They are subject to change based on economic and market changes, and other factors.”
2Quinnipiac University, September 2016.

Disclosures

Click on the links below to find out more
about Asset Planning & Management's
Form ADV Part 2, Privacy Policy
and Disclosure Statement.

Form ADV Part 2

Privacy Policy

Disclosure

Company Info

Asset Planning & Management, Inc.

422 West Riverside Ave. Suite 722
Spokane, WA 99201
Phone: 509-838-4175 or 888-864-8827
Fax: 509-838-4206
Email: info@assetplanning.com