Financial Plan Update Season: Thank you to all the clients that have responded to our financial plan update information request. As we have started working on these plan updates we have seen several examples of how we are generating benefits to our clients:
- Because of the positive market performance in 2017, we are able to recommend reducing portfolio risk.
- We are helping clients maximize the tax benefit of their charitable contributions now that itemized deductions have changed.
- We are able to better estimate the impact of the tax law change if we have updated tax withholding information for our working clients.
As a reminder, for this reason, we are asking all employed AFO clients to load their most recent paystub on to the D3 client portal. We want to take into account your new tax withholding to more accurately calculate your estimated taxes.
Our goal in this process is to use our financial planning skills to help maximize the probability that you can achieve all of your financial goals. Updated financial plans, reflecting your current goals and current market conditions, provide you with the peace of mind that as your life changes, your financial plan reflects those changes. If any other D3 client wants a financial plan update, please contact Adam or Don.
If we do not hear from you regarding your plan update, we will assume your goals are up to date and your assets and liabilities are depicted accurately on your client portal. Your financial plan update will reflect the new tax law changes and updated market conditions.
D3 Website Update: The new website is up and running. Here is a link to a new video that describes some of unique attributes D3 brings to the table when serving clients. We would like your feedback regarding this video. If you think it describes the value D3 provides you, please forward this link to your friends and neighbors.
Upcoming Individual Client Letters and Emails: Clients with individual security holdings and clients with 529 plans have received an email from D3 explaining our responsibility (or more accurately, our lack of responsibility) for those accounts from our compliance officer. Additionally, 20 randomly chosen clients will receive a letter from our auditors (Ashland Partners) asking you to confirm account balances as part of our annual SEC custody audit. If anyone has any questions regarding these emails or letters, please give us a call at 630-271-0033 or 312-526-3680.
Economic growth in the U.S. has continued its slow & steady trend with an annualized 2.2% growth rate for the first quarter of 2018. Economists expect this number to pick up in the latter half of the year as the tax cuts hit consumers’ pockets, potentially increasing consumption expenditures. Additionally, the U.S. economy added 233,000 jobs in May, exceeding job growth expectations and bringing the unemployment rate down to 3.8%. This rate is tied for the second lowest unemployment rate since the late 1960s.
The first quarter of 2018 was a strong quarter for corporate earnings. According to Factset, with 97% of companies reporting, the blended earnings growth rate for S&P 500 companies was 24.6%. Additionally, 78% of companies in the S&P 500 have reported positive earnings surprises. These are encouraging numbers.
Although earnings have been strong and economic growth has been steady, market performance has been subdued. As of May 31st, the S&P 500 index has returned only 2% for the year. The subdued market performance can be attributable to increasing uncertainty pertaining to:
- The future of tariffs imposed by the United States and any subsequent retaliation by other countries.
- The severity and impact of future interest rate hikes by the Federal Reserve, driven by steady economic growth and a very tight labor market.
- A potential Italian exit from the Euro currency and the implications across Europe.
We view the 1st Quarter’s strong earnings season in conjunction with flat stock performance as a “valuation reset”. Forward looking 12-month price to earnings (P/E) ratios have come down to 17 from 19 since the beginning of the year.
Because 2017 was an abnormally good year for stocks, and because 2018 is a year of uncertainty (higher interest rates, questions about equity valuations, potential trade wars, political uncertainty, etc.), we have low expectations for portfolio returns for calendar year 2018. We continue to have confidence in our 10-year average, projected annual rates of returns for our asset allocation models, but due to the uncertainty in 2018, we anticipate that this year may be one year that will generate returns below our average projection.
At this point in time, we see nothing on the horizon to compel us to change our asset allocation models or projected portfolio growth rates. We have been correct about rising interest rates and hopefully we will be correct about continued economic growth.
Over the next month we will be working on identifying capital loss harvesting opportunities for clients with taxable accounts. The purpose of capital loss harvesting is to reduce tax drag for our clients by realizing losses to offset taxable capital gains.
Your financial plan should always dictate the level of risk that you need to take with your investments. Your investments should be structured to maximize the probability of achieving 100% of your financial goals. As your life and the markets change, you should make sure that your financial plan and the resulting portfolio structure continues to reflect your current goals.