MARKET UPDATE: SECOND QUARTER 2017

The first quarter set the tone for the market; the second quarter continued the momentum. The S&P 500 posted its strongest first half of the year since 2013, boosted by solid corporate earnings and investors’ expectations for improving economic growth. The Dow Jones Industrial Average rose 8% in the first six months of the year, and the S&P Index gained 9.34%.

Stock returns were positive around the globe in the second quarter as emerging markets and international developed stocks outperformed U.S. stocks. International markets are in the midst of a solid run, offsetting some recently troubled years. A recent acceleration in overseas economic growth and compelling valuations is being reflected in international stock prices.

A widely anticipated Federal Reserve rate hike, the second this year, came as advertised after their mid-June meeting. In addition to adjusting monetary policy, the fed must also reduce their inflated balance sheet by selling trillions of bonds they purchased during the multiple post financial crisis quantitative easing programs. This process will begin later this year and will take years to unwind.

With stocks up, rates down and the dollar weaker, financial conditions have remained consistently favorable. This more than anything may be responsible for the record-low volatility that investors face. But volatility is mean-reverting in nature and we need to be prepared that at some point in the months ahead we will see mean reversion kick in. As a result, it is more important than ever to have a well-diversified portfolio suited to your risk tolerance.

HOLISTIC RETIREMENT AND HEALTH CARE SAVINGS

The debate over our nation’s health care policy has consumed the first few months of the 115th Congress and shows no signs of abating. One of the key pillars of the GOP’s legislative attempts is the American Health Care Act (AHCA) – legislation that significantly expands and enhances health savings accounts (HSAs). HSAs are “super” tax-advantaged accounts that eligible individuals can use for current and future healthcare expenses. “Super” in that contributions to an HSA are pre-tax (like a 401(k)) and earnings on those contributions are not subject to taxation (also like a 401(k)), however, owners of HSA accounts don’t pay taxes on the withdrawal of those contributions and earnings, as long as they go entirely toward paying qualified medical expenses. One must be covered by a high deductible group health insurance policy to qualify for an HSA.

The AHCA would nearly double the contribution limits for HSAs to $13,100 for a household with family health insurance coverage (with a $2,000 catch-up contribution for households age 55 or older). The bill would also broaden the range of items that HSA withdrawals can be used for, including purchase of over-the-counter medications, health insurance premiums, prescription drugs, co-pays, deductibles and other out-of-pocket health care expenses.

The question becomes, “Where should I save – HSA or 401(k)? The American Retirement Association has proposed a simple, common-sense legislative solution that resolves the potential savings conflict and complexity for employers. Under the proposal, employers would be allowed (though not required) to add HSAs as a “sidecar” account to a 401 (k) plan. Plan advisers would then be able to offer HSAs along with 401 (k) plans and provide holistic education, advice and planning to employees who have both accounts. HSA holders would have access to the same kinds of retirement plan investments in their HSA that they do in their 401 (k) – and the same professional advice. The Association is working aggressively to include the proposal in the AHCA or tax reform legislation, whichever moves first.

DEPARTMENT OF LABOR FIDUCIARY RULE

This rule, unveiled by the Department of Labor last spring, requires brokers and advisors who work with tax-advantaged qualified retirement plans to adhere to the Impartial Conduct Standards. The heart of the fiduciary rule, which requires stewards of some $3 trillion in retirement assets to act in clients’ best interest, began to take effect June 9 after a two month delay. The Labor Department has reopened the comment period to solicit feedback from investors, advisers and businesses. Despite having taken partial effect on June 9, a cloud of uncertainty surrounds the rule. The Trump administration’s DOL has signaled that the final effective date of January 1, 2018, is likely to be pushed back and changes to the rule are expected.

SMALL FIRMS LESS LIKELY TO AID SAVERS

New research shows that small-to-medium sized businesses – those with 5 to 250 employees – are least likely to offer retirement savings plans. The survey found that business owners are afraid of the high costs and the organizational resources needed to start a plan. Why, then, do some businesses offer plans? Employers said they want to help workers save, and also attract and retain talent. Pension Parameters Financial Services specializes in providing retirement plan services to the small-to medium sized business marketplace. Our costs are very competitive and you do not need extensive organizational resources to start a plan. We would be happy to provide you with more information on how easy it is to help secure your financial future.

Phone: (212) 675-9360 OR (732) 583-1313

July 2017