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APA Jones 3x4LOAs a Principal and Chief Investment Officer at Allegiant Private Advisors, Benjamin W. Jones, CFP®, AIF, is responsible for establishing the firm’s overall investment strategy, security selection, portfolio management, and research activities. Since joining the firm in 2005, we suspect you have come to know Ben through our market update presentations as well as his Monthly Insights. This month, Ben is sharing his personal story about an unpredictable path to a wonderful life in Sarasota and a career at Allegiant.

As most good things happen in life, my path to Allegiant happened somewhat unexpectedly. I first met Marty Kossoff, President of Allegiant, during the summer of 2004. I was down in Florida on summer vacation when Hurricane Charlie ravaged the area. Feeling fortunate that Sarasota avoided the worst of the storm, I wanted to help those impacted any way I could. I spent my first day in Arcadia passing out water and food to those impacted and the second day on an orange grove in Fort Ogden. It was while working cleanup and repair on that orange grove that I met Marty. The connection: the farm belonged to the family of one of our partners at Kerkering Barberio. Little did I know that this connection would turn into lunch a year later and a job a few months after that. As is often the case, when you give, there’s a good chance you get back much more than you gave. 

The transfer of wealth, your estate plan, communicates many things to those we leave behind. It says who is remembered, who is loved, who is important, and who we trust to be in charge. Therefore, dividing your assets between your children can be a stressful ordeal. Many parents want to be fair to everyone, which may equate to an even split of all assets. For most families, however, an even split doesn’t make the most sense. How you handle this delicate situation with your own family depends on many personal factors. Nonetheless, if you don’t make the division of assets clear in your estate documents, and overlook account titling and beneficiary designations, it could lead to many complications and mistaken messages for your children after you are gone. 

As a parent you might easily forget that you do have the option of leaving your estate to whoever you want, in whatever portions you want. You’re not required to split your assets fairly or evenly (and this may be heresy, but nor are children entitled to an inheritance either). In most cases, parents want to be fair to each child, but it’s important to remember that it’s not a necessity. 

Chart Similarities in Last Four 10 Market Dips

For years, equity markets have moved higher on very limited volatility. But, as we expected at the beginning of the year, 2018 has proven to be quite the opposite, already with corrections in both February and October. Although hard to remember, the S&P 500 has had four 10% corrections over the last 3+ years. The chart above overlays the last four market corrections over a three-month period, with the most recent decline shown in red. Although the current pullback has not lasted for the full three months yet, the general trends of all four periods look very similar. All of these market pullbacks were driven by concerns over trade, interest rates, and commodity price changes. Market pullbacks such as these can be nerve-racking, but often do not turn into a major bear market. However, it is very important to examine economic data during these market pullbacks to evaluate whether any fundamental economic data is flashing red. We are paying close attention to current market trends and the global economic environment to decipher whether or not a bigger economic and market downturn is on the horizon.

Q3 GDP 2018 Chart

Gross Domestic Product (GDP) grew by 3.5% in the third quarter, ahead of estimates which called for growth of 3.3%. Consumer spending, which accounts for over two thirds of the U.S. economy, grew by 4% - its strongest level since 2014. A robust labor market and record high consumer confidence are clearly leading consumers to spend. Government expenditures were also a positive contributor to growth, increasing by 3.3%, up from 2.5% in the second quarter. Despite these two factors driving the headline number higher, there were signs of weakness in some sectors of the economy. Residential investment contracted by 4%, its third consecutive quarterly decline. This weakness comes on the heels of a slowdown in many housing related indicators in the last few months. Higher interest rates and input costs seem to be starting to weigh on the housing market. Nonresidential business investment was also disappointing, growing at only 0.8%. This is underwhelming given an expected boost to business investment that was supposed to come on the heels of this year’s tax cuts. Finally, the always volatile inventory and net exports numbers added 2.1% and subtracted 1.8%, respectively. Overall it was a solid GDP report, despite the pockets of weakness. However, as this year’s fiscal stimulus begins to fade over the next few quarters and higher interest rates continue to provide a headwind, we expect growth to slow as we move into 2019.

Chart Wage Growth

With the U.S. unemployment rate at its lowest level in decades, today’s jobs market has been touted as one of the strongest in history. However, one employment indicator has lagged well below what we have seen in previous economic expansions – wage growth. Americans have simply not seen the increases in their salaries that usually occurs when unemployment is this low. One interesting fact is that in terms of wage growth across different industries, much more wage growth has occurred in lower-paying jobs than jobs with more lucrative salaries. The chart above shows the percentage change in wages for restaurant/fast food workers, manufacturing, and professional and business services over the last five years. As you can see, the wage growth in restaurants has far outpaced those of higher-paying manufacturing and professional service jobs. Much of the increase in restaurant jobs has been driven by increases to the minimum wage, while higher paying jobs have not seen such increases. Recent data has shown that wage growth may finally be materializing, but until that happens, American workers will likely disagree if you classify today as the strongest job market in history.

APA Jones 3x4LOHere we go again - the fickle nature of markets is once more shining through. Last month I wrote about U.S. stock markets hitting new all-time highs and although contrary to popular belief, that meant it was time to prepare for a downturn, which we got. It has been quick and steep. And, it may not be over. A real test of the 400-day moving average is certainly possible, similar to the market decline of mid-2015 through early-2016. Why is this a good comparison? They both revolved around the same concerns and same fear.  

Chart Small Business Optimism Index

The chart above shows the Small Business Optimism Index, along with recessions, indicated by the red shaded bars. An index reading of 100 represents neutrality, meaning that small businesses are neither optimistic nor pessimistic. In August, the index hit a new all-time high of 108.8, representing an extremely positive outlook of small businesses. As the memory of the last recession fades consumers are more willing to spend and small businesses are finally seeing the benefit. However, the rapid rise in optimism to new all-time highs gives cause for concern. While economic data continues to look good, there are growing concerns that the economic expansion could be hitting peak growth. While a recession may not be right around the corner, weaker growth could begin to negatively impact confidence levels.

DSC01844 PaulCantor 72DPIPaul B. Cantor CFA / CFP® / AIF®, Principal, Chief Operating Officer, CERTIFIED FINANCIAL PLANNER™

I arrived at Allegiant in a somewhat circuitous fashion. I had come to Sarasota to visit my dear friends Marty and Chris. We have been friends since our college days at the University of Rochester. Despite distance and careers, we had always stayed in touch. I had recently retired from a 30-year career in Investment Management on the institutional side of Wall Street. I was a card-carrying member of Workaholics Anonymous but had decided to leave it all behind. I had spent the last 20 plus years working at hedge funds as a trader, analyst, and portfolio manager. Operating at the highest levels of financial competition had been professionally and financially rewarding, but I did not want to become the richest person in the graveyard. So, I left Manhattan, where I had grown up and spent my entire career, and moved to the East Coast of Florida.  

I was 50 years old and hoping that the move would be positive for my wife and me. During the visit, Marty asked me what I was going to do when I grew up. We talked shop, and after many months of discussions we hatched the idea for me to join Allegiant. It was an opportunity for me to work with a friend to help grow a business, mentor the next generation of our professionals, and help create the foundations for a company that would excel and grow long after its founders - the partners at Kerkering Barberio, Marty Kossoff, and Conni Arledge (who retired last year from Allegiant) – were gone. We wanted the company to have a strong culture of caring and compassion that functioned with preeminent professional excellence in the wealth advisor role. How could I pass up an opportunity and challenge like that? In May of 2014, I officially started as Chief Operating Officer of Allegiant Private Advisors, and it’s been one of the best decisions in my life.  

By Phoebe Trumpler, CPA and Shareholder at Kerkering Barberio 

We are fortunate to present this article on foreign tax reporting requirements written by Phoebe Trumpler, CPA and Shareholder at Kerkering Barberio. The Allegiant Private Advisors team is proud of our 22-year partnership with Kerkering Barberio, one of the leading independent accounting firms in Florida. Through KB, Allegiant advisors have access to top-notch tax advice for our clients, and in this article, Phoebe outlines just some of the considerations necessary if you’ve lived, worked, or invested overseas. 

Before 2011 if a U.S. taxpayer had offshore financial assets, world-wide income was supposed to be reported, bank and brokerage accounts offshore were supposed to be disclosed on the Foreign Bank Account Report (FBAR), and certain other informational and compliance reporting was required. There wasn’t a great deal of IRS scrutiny and there were known tax havens around the world for those who wanted secrecy. Attitudes and awareness changed in 2011 with the new U.S. Foreign Account Tax Compliance Act (FATCA). 

Change was actually in the wind several years before that. In 2007 Bradley Birkenfeld, an American private banker working in Switzerland, disclosed to the U.S. Department of Justice information about violations by U.S. clients at UBS Geneva using Switzerland’s secret banking laws. He received a reported $104 million under an IRS whistleblower program as well as a prison term and a fine of $30,000 for his role in the violations. His disclosures ultimately led to the UBS Geneva release of previously privileged information on U.S. tax evaders. FATCA became law. Over the next decade taxpayers and CPAs alike learned that ignorance is no longer bliss when it comes to reporting world-wide income and offshore financial assets. 

Coming out of the 2008 global financial crisis, investors valued U.S. and international markets similarly. However, throughout the subsequent expansion the valuation gap progressively widened, with the U.S. holding a premium over international equities. The top panel of the chart above displays the price to earnings multiple of the Russell 3000 and the MSCI ex U.S., which represent the U.S. and international markets, respectively. The bottom panel represents the relative premium or discount given to the U.S. market compared to international markets. As shown, U.S. markets currently carry a 40% premium to international markets. 

Chart Diverging Valuations

In recent years many investors believed the prospects for increased coordinated global growth would lead to a narrowing of this premium gap. However, the gap has widened further in 2018 as trade uncertainty, country specific risk, emerging market currency issues, and stagnation of key international economies have caused international valuations to decline. The current premium gap represents one of the largest premiums over the past few decades. It is quite possible that over time this valuation gap may return to historical averages. How valuations converge, whether through changes in earnings or changes in prices is something we are watching closely.