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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.      

by Chief Investment Officer Benjamin W. Jones, CFP®, AIF®

AllegiantPA Economic Dashboard Portrait September 2018
Our Economic Dashboard remains completely green. However, prudent investors should always prepare for the next downturn. And, just as you prepare for a hurricane when things are calm at the start of hurricane season, investors should prepare for a market downturn when markets hit all-time highs. We are entering the investment world’s equivalent of hurricane season. 

As such, Allegiant developed our own proprietary Pre-Recession Checklist utilized for each and every client. Click here for more details.

Chart Expectations vs Current Situation

With U.S. consumer confidence hitting an 18-year high this past month, it is safe to say that Americans are feeling pretty good about the current economic environment. However, if you look below the surface, this extreme level of optimism may actually be a cause for concern. The chart above shows the spread between how confident consumers feel about their current situation compared to how confident they feel about the future (current situation – future expectations), while the red shaded vertical lines indicate recessions and how long they lasted. What is interesting is that when the spread between these two widens significantly, generally a recession follows shortly thereafter. As of today, we are seeing the second widest gap between the indicators in history, surpassed only by a reading during the Tech Boom of the late 1990s. This chart is a great reminder that when everyone around you is feeling extremely confident about the economy, it is wise to step back and remember that all economic booms come to an end at some point. While the majority of economic data in the U.S. still remains robust, the team at Allegiant understands that at some point the economic tide will turn, and we will make changes to our client portfolios along the way to ensure that they are ready for whatever the next few years may bring.

As financial professionals, we are frequently reminding people that the future is uncertain. In discussions of the investment market, we hear others say that there’s no crystal ball, that they are only making an educated guess, or, as a favorite economist once put it, “To make a good prediction, state what is going to happen, or when it’s going to happen, but never both.” While most investors understand that the lack of predictability in the markets is inherent, we often overlook the fact that our own futures are equally unpredictable. Financial plans, the gold standard of many advisors, require intensive budgeting, predictions of future spending, and understanding how you will feel about risk and safety in the future. These inputs are then used in conjunction with scenario analysis to determine how achievable your goals truly are. As with any engineering, the better the inputs, the better the outputs. However, like the markets, not one of our clients has a crystal ball that enables an accurate vision of your future life. So, if the actual result will certainly be different then the predicted outcome, why go through a financial planning process at all? There are a few very good reasons.