2015 Economic Intermission
Every January, I outline the big issues and economic predictions for the year ahead. With six months down, the Independence Day weekend is a perfect intermission, where we can review the highs and lows of Act I, and look ahead to Act II. US Economy: There were great hopes coming into the year, but a trio of events conspired to dash them. For the third time in five years, the US economy contracted in the first quarter of the year (2011, 2014 and now 2015). The combination of bad winter weather, the West Coast port shutdown and shrinking investment in the energy sector due to lower oil prices, caused Q1 GDP to shrink by 0.2 percent. There are a number of encouraging signs that growth has snapped back in the second quarter and beyond: Despite a weak reading in March, job growth is accelerating and wages are edging up; new and existing home sales have reached six to seven hear highs; personal income and spending have jumped; and consumer sentiment is at a five-month high.
Federal Reserve Rate Hikes: Back in January, I predicted that “the first rate hike will occur in the third quarter of the year.” I’m sticking to my guesstimate that the Fed will increase rates for the first time in over nine years at the September meeting, especially after Fed Chair Janet Yellen said that she expects “the economic data to strengthen.”
Oil: Oil prices bounced up from the $40-lows to $60 per barrel and have settled into a trading range. While drivers may miss those sub-$2/gallon prices at the pumps, they can take solace in the fact that prices are down about 90 cents from a year ago.
Housing: The improving economy and labor market, combined with still-low mortgage rates and loosening credit conditions, should help housing in the second half of the year.
Markets: Stocks have bounced around a bit more this year than last, but the story is the same: Investors are laser-focused on Fed rate hikes and the bond yields appear to have started the long-anticipated drop in price and rise in yields.
Greece: I didn’t specifically mention Greece back in January, but I would put this under the category of “geopolitical”. After a five-month standoff, Euro group leaders and Greece officials came to a major impasse at the end of June. At issue was €7.2 of European rescue funds, which Greece needs to make loan repayments throughout this summer. In order to get the lifeline from the Euro group, Greece must agree to more taxes and an increase in employee pension contributions. Greece’s Prime Minister Alexis Tsipras called for a surprise referendum for July 5th, where Greek citizens will have the opportunity to vote on the euro group’s demands and essentially determine whether or not the country remains in the euro zone.
As always, these big picture events are out of your hands, but during the economic intermission here are some actions you can take in your financial life to gain control!
Investments: Review your investment accounts and be sure to rebalance them so that your asset allocations remain in check. Make sure that your allocation remains at your desired levels. If you don’t know what’s the right allocation for you, there are plenty of resources on line that help incorporate your risk tolerance and your investment time horizon. Remember that rebalancing a diversified portfolio is not meant to time the market, but it should help you sell high and buy low, when your emotions might otherwise prevent you from doing so.
If you have any big expenses coming up within the next 12 months, like a college tuition or a home down payment, it’s time to free up cash. You don’t want to risk having to sell an asset if it happens to be down at the wrong moment. Finally, if you work with a financial advisor or broker, schedule an appointment to review your progress. Ask a lot of questions and clarify how you pay for the services.
Retirement: Use EBRI’s “Choose to Save Ballpark E$timate” (www.choosetosave.org/ballpark/) to calculate where you stand. If your cash flow has improved, bump up your retirement plan contribution, even if it's just by one percent!
Homeowners and Renters insurance: Make sure that your property insurance is up to date, especially with the summer tornado, fire and hurricane season upon us. It’s important to review your policy before an event occurs, to make sure that it is adequate. The three biggest mistakes that people make with their homeowners or renters insurance are: 1) under-insuring; 2) shopping for price only and not comparing apples to apples; and 3) not reading policy details before a loss occurs. If you have questions, give your sales agent a jingle and he or she can walk you through some of the fine print.
Estate Planning: Hire a qualified estate attorney to prepare a will, power of attorney and health care proxy/living will. Those with larger estates, or who want more control over the disposition of their assets, may want to consider a revocable or changeable trust. In 2015, the estate tax exemptions are $5.43 million for individuals and $10.86 million for couples.