First Quarter 2018 Economic Update
January 12, 2018
U.S. & World Economy
It seems like 2017 closed with something for everyone: Republicans got a tax bill signed and a new Supreme Court Justice; Democrats got to keep their Obamacare and gained government seats; 90% of individual tax payers will see a jump in paychecks in 2018; investor assets hit all-time highs; and businesses (large and small) are receiving tax and regulation relief with a consumer base at a 17-year high confidence level. All of the aforementioned helped our client portfolios achieve one of our best years ever. However, we are not dancing in the end zone yet. Rather – after quick smiles – we are studying the game tapes and fine-tuning for 2018. Discipline, discipline.
The economic outlook for the U.S. and the world looks optimistic for 2018 and securities prices have run up to new highs in anticipation – leaving little room for any disappointments. Therefore, while we expect a healthy economy and earnings background, politics, world events, wars and high profile character disappointments will likely produce more typical volatility. We expect a 5% drop in long-term bond values followed by a 10%+ drop in U.S. equities sometime this coming year as the “new normal” (weak GDP growth and inflation) returns to “old normal” (3% GDP and rising inflation).
Coming off a bumper year for our portfolios, we feel well rewarded for the hard work we put in to make tactical tilts to our diversified models. These tilted models beat their benchmarks across the board in 2017. Our tactical tilts consisted of the following: overweighting to selected funds we felt had a chance for higher return/less risk, and choosing active vs. passive management in funds we felt could achieve greater alpha for the manager’s efforts and expenses. Looking to the future, we believe there are fewer opportunities to truly add alpha so we anticipate making minor changes in the portfolios to put our models in line with our original strategic model targets.
You can also expect to see a few operational changes in the first half of the year as we adopt protocols and systems to make our interactions more efficient, effective and secure. We look forward to the migration to a new portfolio reporting system which is more user-friendly and intuitive, particularly for smart phone users. Additionally, we plan to make a push to deliver the majority of our quarterly portfolio reports electronically. And lastly, we are adopting an e-signature solution for many of our forms so please be on the lookout and contact us with any questions you have about how to use the new system. We value your opinion and will welcome your feedback on these operational changes.
What an amazing year! As you can see, each line item in the chart below is void of negative returns. In general, it was advantageous to be in risky assets such as Global Equities. This was augmented if your equity exposure was in Emerging Markets or International exposures, especially in Asia Pacific. The market favored growth style vs. value investing. Global Equity was the best asset class and Global Fixed Income showed the least return from the broad asset class standpoint. Our risk-based investor models held strategically weighted allocations in each of these sectors. Full year gross returns ranged from 13.4% on the conservative portfolios to 18.9% on the aggressive growth portfolios.
Going forward, we are taking a more cautious view on U.S. equity but leaving global equities “as is.” We are trimming from Global Fixed Income with the anticipation of rate hikes and the upside potential of Global Fixed Income not in favor. We are looking more carefully into the Alternatives asset class to include different strategies and we are leaving Real Assets at the current allocation. There are signs of inflation picking up from the slightly positive return on commodities and the trend of rising oil prices.
The prolonged bull market still seems to be thriving as I write this newsletter. Being cautious seems insensible at this point, however, instead of focusing on capturing the full upside potential our portfolio we will be focused on protecting downside this year. There are several reasons to be optimistic because of the new tax reform which is estimated to steady global growth (evidenced by data). Even though we are experiencing Global Equities at all-time highs – especially U.S. equity values – for the risky assets, it doesn’t make sense to be overly optimistic for upside potential.
A New Year and a New Tax Bill…
What I love most about my role as a trusted advisor and wealth strategist is being able to help my clients navigate their way toward optimum financial health. This entails understanding the latest laws (and their impacts), as well as structuring new plans for protecting the integrity of my clients’ investments and financial decisions along the way.
Below are a few highlights of the new tax bill, effective January 1st, 2018:
- The bill preserves deductions for charitable contributions, mortgage interest, retirement savings, and property taxes. It limits the deduction on mortgage interest to the first $750,000 of the loan.
- State taxpayers can deduct up to $10,000 in state and local taxes, including property taxes. They must choose between property taxes, income taxes or state taxes.
- Those paying alimony will lose their deduction, but those receiving alimony will no longer be taxed on the income. This change begins in 2019 for divorces signed in 2018.
- Interest on home equity lines of credit can no longer be deducted. Current mortgage-holders aren’t affected.
- The bill allows taxpayers to deduct medical expenses that are equivalent to 7.5% or more of their income.
- It doubles the standard deduction for everyone. A single filer’s deduction increases from $6,350 to $12,000. The deduction for Married and Joint Filers increases from $12,700 to $24,000
- The bill repeals the Obamacare tax on those without health insurance.
- Personal exemptions are now eliminated. Taxpayers currently subtract $4,150 from income for each person claimed.
- The bill doubles the estate tax exemption for the next ten years to $11.2 million for singles and $22.4 million for couples, adjusted for inflation.
- It keeps the Alternative Minimum Tax, increasing the exemption from $54,300 to $70,300 for singles and from $84,500 to $109,400 for joint.
- It lowers the maximum corporate tax rate from 35 percent to 21 percent. Clients who are sole proprietors (Schedule C) may consider forming an entity in 2018.
Let’s talk strategy. Contact Us to discuss the latest tax bill changes and any potential impact on your comprehensive financial plan.
Optivest Foundation Summary: 2017
by Trish Van Mourick, Executive Director
The Optivest Foundation made distributions totaling in excess of $824,000 in 2017.
- Continuing our multi-year involvement in southern Madagascar with hundreds of pastors trained, churches built, water drilling equipment delivered and other infrastructure developed
- Providing funds to assist Operation Mobilization and A21 in rescuing and training for women and children caught in the trap of human trafficking
- Sourcing microfinance loans and using the holistic approach to addressing poverty through the ministries of Hope International and Edify
- Providing funds to help equip families and marriages through the ministry of HomeWord
- Continuing our multi-year commitment to the building and development of Northrise University in Ndola, Zambia
- Funding the completion of a multi-year pledge to expand the facilities and ministry at Forest Home, a local Christian retreat and conference center in Forest Falls, CA
- Providing funds to expand production capabilities for PB&J in Nkhoma, Malawi
- Funding continued projects in the Dominican Republic through Plant With Purpose
- Providing funds to support two “Forever Homes” for orphaned children with Acres of Love in Johannesburg, South Africa
- Over $137,503 was distributed to individuals in need through our benevolence fund
- Several staff members participated in ministry trips near and far, including: Mexico, Peru, Madagascar and the United States
The Optivest Foundation also provided a number of scholarships to local college students, supported missionaries in several countries around the world and assisted with funding pastoral training both here in the U.S. and abroad.
2017 was a tremendous transition year for Optivest. We added industry veteran Bart Zandbergen, CFP® as Senior Wealth Advisor and Stella Choi, CFA®, CFP® as Director of Portfolio Management who was responsible for implementing our successful risk-based model portfolios for Optivest clients. As 2018 commences, we continue to refine our portfolio models and upgrade our different portfolio software systems to enhance our management and reporting capabilities.
Thank you for your trust as we continue our efforts to become the premier go-to wealth management firm in Orange County.
Until Next Time,
Mark, Leslie, Bart and Stella