News & Resources

Smart Advice Insight

Washington Trust Wealth Management Blog

rss

Timely advice & commentary about investing, taxes, financial planning and more.


By Washington Trust / March 20, 2020
 

We understand that current market conditions have made many investors nervous. However, we encourage investors to stay focused on their long-term investment goals, as we anticipate that the financial markets will recover, as they have from virus outbreaks in the past. We recommend that you ensure your near-term cash needs are met and resist the temptation to make any major asset allocation changes as a result of current events.


By Washington Trust / March 16, 2020
 

By Washington Trust / March 9, 2020
 

As concerns regarding the spread of COVID-19 (coronavirus) mount and the financial markets react, the Washington Trust team is here to answer your questions and address your concerns. No one really knows the potential human and economic impact of COVID-19. The U.S. and global economies will surely suffer some negative impact in the near term; however, past experience suggests any damage to the economy and financial markets will be transitory.


SP_PP2020Jan.jpg
By Washington Trust / January 14, 2020

Perspectives & Planning

2019 was icing on the cake to a decade that began with trepidation coming out of the financial crisis and the Great Recession but proved to be extremely rewarding for U.S. investors. We are relatively positive on the 2020 outlook for financial markets and the economy but do not want to get carried away. We would not claim any foreknowledge as to how the 2020’s will unfold beyond the next six months to a year. As the great Yogi Berra said, “It’s tough to make predictions, especially about the future.”

The U.S. economy enters the New Year and new decade on solid ground. Despite fears of a slowdown in the summer, GDP advanced at a healthy rate of just over 2% in the second half of 20191. For the full year, the economy overcame a number of largely self-imposed hurdles and likely grew by 2.3%2, a pace not very different from the tax cut fueled 2.5% growth of 20181. The U.S. is now in the midst of a record long expansion approaching 11 years in duration over which time our economy and financial markets have outperformed that of our peers. For 2020, Washington Trust believes growth will decelerate modestly to 2%2.

A healthy consumer has been the driver of U.S. growth over the past five years and we expect this trend to continue with consumer spending likely to increase by 2.5% in 20202. The economy is at, or near full employment, and incomes are rising. Americans have also significantly increased their savings rate in recent years and with interest rates low, they not only have wherewithal to spend, but the ability to borrow and service their debt. As such, in addition to consumption, housing should continue to make progress over the year and residential investment will likely contribute measurably to GDP. Government spending and widening budget deficits will continue to provide stimulus, although not to the same extent as last year.

Not all areas of the economy are booming, however. Weakness in the industrial sector has persisted. The trade war has taken a toll on business confidence and capital spending has suffered. While the passage of the USMCA (NAFTA 2.0) by Congress and a de-escalation of trade tensions with China offer hope, there is little sign of an imminent turn. The ISM Manufacturing Index is at a multi-year low and the impact of the production halt on the 737 Max by Boeing is on a scale such that it alone could shave 0.2% alone from Q1 GDP5.

Manufacturing could improve as the year progresses and the 737 returns to production and to the air. Greater certainty on trade may also begin to reignite investment. Higher oil prices, which rose sharply in 2019, may revive spending in the oil patch. A softer dollar would help the competitive position of U.S. manufacturers and lessen the trade deficit as would stronger global growth which the IMF forecasts will rise to 3.2% from an estimated 3.0% last year3.

2019 was a great year for financial markets, particularly in the U.S. The S&P 500 Index surged 31.5% while the Bloomberg Barclays Aggregate Bond Index returned a stunning 8.7%3. It was a remarkable turnabout after a disastrous 2018 fourth quarter when the S&P 500 Index declined by 13.4% resulting in a 2018 4.4% full-year loss3. Interestingly, despite the dismal stock market performance, both 2018 economic and corporate earnings growth were superior to that of 2019. 2019 S&P 500 Index earnings edged higher by the low single digits in 20192 versus a 20% jump in 20184.

The gradual transition in Federal Reserve policy from tightening to easing over a six-month period beginning in late December of 2018 and apparently fueled the rally. Investors clearly are more comfortable with a slower ”Goldilocks” scenario than a rapidly growing economy that ultimately results in restrictive monetary policy. The steep decline in interest rates across the yield curve driven by three Federal Reserve rate cuts spurred investors to embrace additional risk in 2019. Not only did stocks rally, but corporate debt also generated mid-teens returns3.

We think the potential exists for U.S. markets to provide additional gains in 2020, although on a more modest scale. Equity market valuation is rather lofty with the S&P 500 Index trading at 18.7x our 2020 earnings estimate2, and Federal Reserve interest rate policy could well be on hold for the year. However, the Central Bank remains extremely accommodative and is pumping liquidity into the money market. More importantly, we believe that the Fed is operating under a new dovish paradigm and remains committed to supporting the expansion. The odds of a rate hike appear to be slim; if the Fed does make an interest rate move it will most likely lower rates. We think the probability of a 2020 recession is generally low as financial conditions are highly supportive of growth and believe the 2020 S&P 500 Index earnings will grow at a slightly faster 5% pace2, although past performance does not guarantee future results. Therefore, stocks may well sustain higher valuations and advance mid- to high-single digits, a pace in line with projected earnings growth.

We are also expecting more subdued but positive returns from the fixed income market. Structural factors, especially aging demographics and low or negative rates overseas, will continue to cap U.S. yields. While the short-end of the yield curve appears well anchored at the current level just over 1.5%, the yield curve could steepen a bit if economic optimism continues to improve. We currently forecast that the yield on the 10-year Treasury note will hold in a band of 1.5% to 2.25% over the course of the year2. The 10-year is now trading at a 1.9% yield or just above the midpoint of our target range. With corporate bonds having rallied so sharply in 2019, we do not expect much excess return in this sector. Overall, we suspect that low single digit returns are in store for fixed income investors.

After a decade of terrific equity returns, investors should not become complacent and remain mindful of downside risks. The recent flare-up in the Middle East is a case in point. Over the past decade, the S&P 500 Index’s 13.4% annualized return far surpassed other asset classes including international stocks. However, during the 2000’s, the S&P 500 Index declined 1% annualized while emerging markets compounded at almost 10%3. With returns having again diverged dramatically, this would seem to be an excellent time to review asset allocation with your portfolio manager. As our market guru Yogi Berra also pointed out, “The future isn’t what it used to be.”

Sources
(1) U.S. Bureau of Economic Analysis (BEA)
(2) Washington Trust Wealth Management
(3) Bloomberg;
(4) Factset
(5) Capital Economics
The views expressed here are those of Washington Trust Wealth Management and are subject to change based on market and other conditions. Investment recommendations and opinions expressed in these reports may change without prior notice. All material has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. Investing entails risk, including the possible loss of principal. Stock markets and investments in individual stocks are volatile and can decline significantly in response to issuer, market, economic, political, regulatory, geopolitical, and other conditions. Investments in foreign markets through issuers or currencies can involve greater risk and volatility than U.S. investments because of adverse market, economic, political, regulatory, geopolitical, or other conditions. Emerging markets can have less market structure, depth, and regulatory oversight and greater political, social, and economic instability than developed markets. Fixed Income investments, including floating rate bonds, involve risks such as interest rate risk, credit risk and market risk, including the possible loss of principal. Interest rate risk is the risk that interest rates will rise, causing bond prices to fall. Past performance does not guarantee future results. The S&P 500 Index is an unmanaged index and is widely regarded as the standard for measuring large-cap U.S. stock-market performance. In addition, the S&P 500 Index cannot be invested in directly and does not reflect any fees, expenses or sales charges. Further, such index includes 400 industrial firms, 40 financial stocks, 40 utilities and 20 transportation stocks. The information we provide does not constitute investment or tax advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell any security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. Please consult with a financial counselor, attorney or tax professional regarding your specific investment, legal or tax situation.


By Washington Trust / January 14, 2020

The SECURE Act has passed and the “Stretch IRA” is DOA. What do you need to do to protect your estate/wealth plan?

In a surprise move, the SECURE Act passed as part of the massive end-of-year spending bill that was required to avoid another government shutdown. While there are several positive provisions, Congress paid for the SECURE Act with a very substantial negative provision: eliminating the “stretch” for inherited IRAs and retirement accounts. For most beneficiaries other than surviving spouses, the new rules require that the entire IRA/retirement plan balance be paid out within 10 years.

The SECURE Act generally applies to any IRA holder/401(k) participant who dies after 12/31/19, so 2020 is the year to ensure your estate and wealth planning strategies still work.

Some things to consider and discuss with your advisor:

Including trust provisions as part of your beneficiary designation.
This is more important than ever. Even without the benefits of a “stretch”, avoiding a full payout within 10 years of death has special importance for older parents (whose children might be adults but still too young to inherit so much wealth) and those whose beneficiaries might have spending issues, substance-abuse issues, or special needs. Without the protection of a trust, creditors or a beneficiary’s spouse (or former spouse, in a divorce proceeding) could access inherited retirement funds.

Doing a post-SECURE Act beneficiary check (even if a trust already is named)
Even if you used a trusteed IRA or a trust as beneficiary of your IRA/retirement plan, it may well need updating. Many retirement plan beneficiary trusts were drafted as so-called “conduit” trusts because they automatically qualified for the “stretch”. Conduit trusts mandate that the RMD be passed out to trust beneficiaries each year. The only way to avoid passing out the entire IRA/retirement plan balance in 10 years is to pay the RMDs to an “accumulation trust”, which gives the trustee discretion to keep the RMDs in the trust. Of course, this means that the trust might pay tax on the RMDs at the trust level and at the trust rate, so clients need to discuss with their advisor the relative benefit of delaying payment against potential increase in income tax.

Re-examining Roth.
For folks early in their career/retirement planning, this is another factor to weigh in favor of Roth IRA and 401(k)s, since Roth IRAs and Roth 401(k)s have no lifetime RMDs, and inherited Roth RMDs may be exempt from income tax. Folks further down the path might re-examine Roth conversion strategies (including phased multi-year conversion plans), depending on the deferred capital gain and tax bracket.

Allocating more IRA assets to fund your philanthropic goals.
If retirement assets must be distributed out (and taxed) over 10 years rather than multiple lifetimes, you might want to increase the amount of your qualified charitable distributions (during lifetime) and the amount designated to charitable beneficiaries or your own donor advised fund (at death).

Getting married.
Many unmarried partners address their joint financial planning with their partners through contracts: e.g. joint ownership, a health care power of attorney, a will. Since anyone can be named as the beneficiary of an IRA or an retirement account, the contractual route has worked for planning with retirement plan assets. However, the SECURE Act adversely impacts an unmarried partner, who will be forced to take a 10-year payout in almost all cases, but exempts spousal beneficiaries. For the large numbers of people who have the majority of their wealth in qualified retirement plans, the negative provisions of the SECURE Act may be a sufficient inspiration for some to pop the question!

There will be more clarity around the SECURE Act as the provisions are analyzed and as guidance and regulations are released. What is clear now, however, is that it is important to review your existing wealth and estate plan – especially beneficiary designations - to make sure it still works post-SECURE Act.

For more information, click here to read our FAQs about the SECURE Act.


By Washington Trust / January 14, 2020

The SECURE Act made many sweeping and significant changes for retirement plans, including IRAs. With regard to IRAs, the major changes impact the IRA rules after age 70 and after death.

How does the SECURE Act impact my IRA during my lifetime?
The SECURE Act changed the rules regarding contributions and distributions during an owner’s lifetime.

How did the SECURE Act change the rules for contributions during my lifetime?
The SECURE Act eliminated the maximum age limitation for contributing to traditional IRAs. Before the SECURE Act, contributions were prohibited after age 70.5.

Does this benefit apply to all IRA owners?
Yes – it applies to all traditional IRA contributions on and after 12/31/2019.

Is there a catch?
There is an additional consideration if you plan to use qualified charitable distributions (QCDs). Qualified charitable distributions are certain IRA distributions that are paid directly to charitable organizations. If you meet the QCD requirements, up to $100,000 of your QCD can be excluded from your taxable income. However, that $100,000 maximum exclusion is reduced by any deductions you take for traditional IRA contributions made after age 70.5.

How did the SECURE Act change the rules for lifetime distributions?
In addition to the impact on QCDs, described above, the SECURE Act changed the so-called “required beginning date” from age 70.5 to 72.

What does that mean for me?
Generally, it means that IRA owners do not have to begin taking RMDs until age 72.

Does this benefit apply to all IRA owners?
No. The effective date of this provision is for traditional IRA owners that attain age 70.5 after 12/31/2019.

So what does that mean?
Traditional IRA owners that were born prior to July 1, 1949 remain governed by the old rules. They have to take their RMDs, and they cannot make contributions to their IRAs, even if they are under age 72.

How does the SECURE Act impact my IRA after my death?
The SECURE Act eliminates the so-called “stretch IRA” for most non-spouse beneficiaries. Instead, it requires that the full balance of the IRA be distributed within 10 years after your death, rather than over the lifetime of your beneficiary.

Does this new rule apply in all cases?
No – there are some exceptions to the 10-year rule, and there is an effective date rule that “grandfathers” in certain IRAs.

What are the general exceptions?
In general, the 10-year rule does not apply to:

  • your surviving spouse
  • your minor child (until he/she reaches majority)
  • certain disabled and chronically ill beneficiaries
  • a beneficiary who is not more than 10 years younger than the IRA owner

What are the “grandfather” rules?
Generally, the rules only apply to inherited IRAs where the owner dies after 12/31/2019. Therefore, inherited IRAs where the owner died before 12/31/2019 are governed by the old life expectancy rules.

Please note, however, that “grandfathering” only applies to the IRA owner’s designated beneficiary. When the original inheritance beneficiary dies, any beneficiary that she/he names for the inherited IRA will be governed by the SECURE Act 10-year payout rules, unless an exception applies.

This overview provides general information based on currently available data, since the IRS has not issued any final regulations or guidance to date. All material has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. This FAQ does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. Please consult with a financial advisor, attorney or tax professional regarding your specific investment, legal or tax situation as this is not intended as legal or tax advice.


Specify Alternate Text
By Washington Trust / October 18, 2019

U.S. financial markets have soared year to date through September 30, 2019. Not only has the Standard & Poor's 500 Index (S&P 500 Index) surged 20%, but bond prices have also climbed with the Bloomberg Barclays Aggregate Bond Index advancing 8.5%1. Investors are struggling to ascertain the message of the markets. Does strength in stocks presage robust growth, or do plummeting interest rates, which caused bonds to rally, signal a sharp slowdown?

Economic growth has moderated in the United States. However, the outlook is still reasonably solid. The robust first-quarter GDP of 3.1%2 slowed to a more sustainable 2% in Q22. Based on available data the economy probably also grew near 2% in the most recent quarter, and we expect growth to hold close to this pace as 2019 concludes3.

We sense that recession risk is not especially elevated at this time, and while economic expansion should continue well into next year, recent data are mixed. The consumer appears to be in excellent shape with a robust labor market providing a solid foundation as unemployment in the U.S. sits at 3.5%, a 50-year low4. One of the better forward-looking indicators, initial unemployment claims, is near a historic low as well. Consumer spending is strong, but the consumer does not seem overextended, with the savings rate hovering around 8% and debt service quite manageable2.

While personal consumption has been healthy, the same cannot be said for the industrial sector. Capital spending surged after the passage of tax reform but quickly fizzled. Manufacturing appears to have been a casualty of friendly fire from the trade war. Tariffs have increased costs, particularly on intermediate goods thus far, and supply chains have been disrupted. Furthermore, the on-again/off-again nature of the negotiations and tariffs has created uncertainty. Consumer confidence may be holding near cycle highs, but CEO confidence has plummeted to the lowest level since the depth of the recession in early 2009. Problems at Boeing and the General Motors strike create further short-term pressures.

Weakness abroad is a significant factor in the industrial sector’s malaise. We are hard-pressed to find a major economy growing faster in 2019 than in 2018. Global growth will likely slow to 3.2% this year from 3.6% in 20186. With Germany on the cusp of a recession, Europe is a major cause for concern. We have not been particularly troubled by the potential impact of Brexit, but it does represent another incremental negative for a region struggling to grow 1%. China has long been regarded as the engine of global growth, but growth in that geography, while still impressive at around 6%, is slowing steadily with ripple effects felt globally.

Given the global slowdown, central banks have begun to respond. In the United States, the Federal Reserve has already implemented two quarter percent rate cuts, lowering federal funds to a range of 1.75% - 2.00%. Another quarter percent rate cut is likely before year-end, and further cuts are possible in 2020. Bond yields have fallen sharply as well, with the yield of the 10-year Treasury Note declining a full percentage point since year-end to 1.68%. The resulting drop in mortgage rates has resuscitated a moribund housing market. Residential construction should provide a substantial contribution to GDP growth in the coming quarters. U.S. new-vehicle sales have also perked up.

With the overnight Federal Funds rate higher than the 10-year Treasury yield, the yield curve has inverted; and this may be an indication that monetary policy remains too tight. The Federal Reserve is likely to continue reducing short term rates to ensure there is a positive slope across the maturity spectrum. Foreign central banks are also taking steps to provide economic stimulus. China has cut reserve requirements. The European Central Bank recently resumed asset purchases and will likely cut rates further. Likewise, for Japan. However, for central banks that have already implemented negative rates, policy options are relatively limited.

Aggressive policy measures are required to construct a more optimistic economic scenario. China is willing and able to apply a fiscal stimulus, and a large-scale program could have a global impact. There has also been a discussion of fiscal stimulus in Germany, which would be extremely welcome after years of fixation on balanced budgets. In the U.S., greater certainty on trade policy could unleash suppressed capital spending.

We remain relatively constructive on financial markets despite valuation concerns and worries over trade, the Mideast, and even impeachment. Investors are understandably jumpy, especially after the experience of 2018, when stocks were up 10% during the first nine months of the year, only to crater in Q4. Shares have rallied sharply this year to be sure, but the S&P 500 Index is up only 4% from a year ago while mid-cap and small-cap stocks are down. With earnings likely to grow in the mid-single digits, perhaps valuation is fair rather than extreme.

Furthermore, unlike a year ago, when the Federal Reserve was tightening every quarter like clockwork, the Fed is now easing to provide support to the economy. With the precipitous drop in interest rates, equities should be able to support higher valuations, and we now believe that the S&P 500 Index should potentially trade in a range of 15x-19x forward earnings. A year ago, with bond yields 1.5% higher, our valuation range was 14x-18x.

Bond investors, unfortunately, will need to get used to current levels. We believe that the yield of the 10-year Treasury will remain in a range of 1.25% - 1.75%. With bond yields paltry, investors will have to view bonds as a necessary diversifier in a balanced portfolio rather than a return generator. The dividend yield of the S&P 500 Index at 2.0% is once again higher than the yield of the 10-year Treasury note. Investors may wish to consider a higher allocation to dividend growth stocks to enhance income over time.

Sources: (1) Bloomberg; (2) U.S. Bureau of Economic Analysis (BEA); (3) Washington Trust Wealth Management (4) U.S. Bureau of Labor Statistics; (5) The Conference Board; and (6) International Monetary Fund (IMF)
The views expressed here are those of Washington Trust Wealth Management and are subject to change based on market and other conditions. Investment recommendations and opinions expressed in these reports may change without prior notice. All material has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. Investing entails risk, including the possible loss of principal. Stock markets and investments in individual stocks are volatile and can decline significantly in response to issuer, market, economic, political, regulatory, geopolitical, and other conditions.
Investments in foreign markets through issuers or currencies can involve greater risk and volatility than U.S. investments because of adverse market, economic, political, regulatory, geopolitical, or other conditions. Emerging markets can have less market structure, depth, and regulatory oversight and greater political, social, and economic instability than developed markets. Fixed Income investments, including floating rate bonds, involve risks such as interest rate risk, credit risk and market risk, including the possible loss of principal. Interest rate risk is the risk that interest rates will rise, causing bond prices to fall. Past performance does not guarantee future results. The S&P 500 Index is an unmanaged index and is widely regarded as the standard for measuring large-cap U.S. stock-market performance. In addition, the S&P 500 Index cannot be invested in directly and does not reflect any fees, expenses or sales charges. Further, such index includes 400 industrial firms, 40 financial stocks, 40 utilities and 20 transportation stocks. The information we provide does not constitute investment or tax advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell any security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. Please consult with a financial counselor, attorney or tax professional regarding your specific investment, legal or tax situation.


Specify Alternate Text
By Washington Trust / July 25, 2019

Given its longevity and the fragility of the global economy, concerns abound over the expansion’s durability. There is little indication, however, of an impending downturn. U.S. GDP was off to a solid start in the first half of 2019, paced by a robust 3.1% annualized advance in Q11 and moderate growth of just over 2% likely for Q2. Our full year forecast, for GDP to increase in a range of 2% - 2.5%, is intact2.

We continue to expect that growth will be consumer led. While consumer spending was disappointing in the first quarter, it rebounded nicely in April and May. Between the government shutdown earlier in the year and the trade war, consumer confidence has been volatile but continues to hold healthy levels and understandably so. The unemployment rate and jobless claims are hovering near 50 year lows. Job growth has been accompanied by steady, if unspectacular, wage gains. The recently announced trade war truce between the U.S. and China will hopefully provide a further confidence boost.

The industrial side of the economy has been more lackluster. Capital spending accelerated after the passage of tax reform and then tailed off. Exporters may be reluctant to invest amid all the uncertainty over tariffs and a truce rather than an actual peace agreement may be insufficient. The ISM (Purchasing Managers) Manufacturing Index has fallen close to a three-year low but is still in expansion territory3.

Employment growth has slowed a bit in 2019 but remains well above levels needed to absorb new entrants to the labor force. It is well known that there are more job openings than there are available workers. We suspect that some of the softness in job creation is related to a shortage of skilled workers rather than a retrenchment by employers. It is surprising that wage growth is only a moderate 3.1%, retreating from 3.4% six months ago4.

We have been wondering for nearly two years when a flagging supply of workers would impact the economy. According to the Bureau of Labor Statistics, the labor force shrunk slightly during the first six months of 2019. Given the aging population and declining (legal) immigration, it is unclear if many folks are left to come off the sidelines to fill job openings. From an economic point of view, U.S. demographics are not encouraging and no longer terribly different from the rest of the developed world, which at some point will be an impediment to growth. For now, job growth continues its unprecedented run.

A more hopeful sign for the economy is that productivity in the first quarter hit a 9-year high of 2.4%. Productivity is key to generating sustainable economic growth and rising per capita income. It has been mired closer to 1% for some time, leading many economists to reduce their long term run rate for the economy below 2%. It is entirely possible that this upsurge is merely a result of better cyclical growth and temporary in nature. However, should rising productivity prove durable due to improving technology or other factors, it would provide the basis for an upgrade to the underlying trend of the economy.

Tariffs aside, a weaker global economy remains a cause for concern. We are hard pressed to name a major economy that will grow faster in 2019 than in 2018. Europe seems to be floundering yet again and has few viable policy options to revive growth. China also continues to slow and even the current 10% tariffs on many of its products will shift manufacturing elsewhere, but the government is willing and able to add both monetary and fiscal stimulus to counteract a slowdown.

The U.S. is relatively insulated from slowing global growth but not immune. On the policy front fiscal stimulus will also ebb. On the bright side, the Federal Reserve has announced its intent to support and preserve the expansion. As such, we expect the Fed to cut the Fed Funds rate as soon as the end of July. Bond yields have been declining all year and the yield on the 10-year Treasury has plummeted 69 bp to a mere 2.0% as of June 305. Mortgage rates have fallen in turn. This has breathed life into a moribund housing sector.

It is often noted that expansions do not die of old age and this one should survive into 2020 and, perhaps, beyond. After all, Australia’s current expansion is approaching three decades in length. In the post-war period, recessions have been attributed to three sources. Overly restrictive monetary policy has been cited as the major cause through the 1990’s, while the recessions of 2000 and 2007 were the result of bursting financial bubbles. The oil embargo of 1973 also spawned a downturn.

None of these conditions appear on the horizon. Federal Reserve easing is imminent. Never has the Fed cut rates when the economy in the prior month added over 200,000 jobs but there is always a first time. While asset prices are elevated, we do not believe they are divorced from reality as in 2000 and 2007. Furthermore, our banking system is currently much healthier, and credit is widely available and inexpensive. Finally, the boom in U.S. energy production has obviated concern over an oil shock.

Financial markets were certainly heartened by the Fed’s dovish turn in the first half of the year. Returns for major equity markets, domestic and international, were uniformly in double digits. The U.S. remained the standout as the S&P 500 Index rallied 18.5%. The bond market as measured by the Bloomberg Barclays Aggregate Index advanced 6.1%, while oil and gold improbably surged as well. High yield bonds gained an equity-like 9.9%. Investors struggled to explain this “everything rally” and reconcile how equity investors and bond investors could simultaneously be so bullish.

After hiking rates like clockwork every quarter in 2018 and suggesting that they could well do the same in 2019, the Fed took additional rate hikes off the table in January and now a rate cut or even two seems probable in 2019. While the U.S. economy is running at or near full employment, inflation is well below the Fed’s 2% target as it has been for most of the past decade and it is difficult to argue that lower rates will cause any short-term harm to the economy. Presently short-term Treasury bills yield more than the 10-year Treasury note5. An inversion of the yield curve is commonly considered an indicator of overly tight monetary policy and a harbinger of recession. The Fed will likely try to eliminate this condition.

We recently lowered our target for the yield on the 10-year Treasury to a range of 2.0% - 2.5% from 2.50% - 3.0%2. Negative bond yields prevail throughout much of the developed world and will continue to place a ceiling on yields here at home. Furthermore, the Federal Reserve will shortly curtail reduction of its balance sheet and eliminate a source of supply of U.S. government debt to the market. Absent an improvement in the global economy, we may be forced to lower our target range yet again.

The S&P 500 Index is hovering at record levels and now trades at a Price/Earnings multiple of 18x 2019 earnings, the top end of our valuation range. Earnings growth is likely to be tepid this year and increase by at most 5%. We remain cognizant that current policies concerning trade, immigration, and, even, easy money may be desirable politically in the short term but could pose risks to economic growth in the long run. Therefore, we cannot argue in favor of increasing equity exposure. Nonetheless, with interest rates in decline and near historic lows and little sign of imminent recession, we are cautiously optimistic. A few years ago, the acronym “TINA” was in vogue, an abbreviation for “there is no alternative” to equities. We seem to have returned to that state for the time being.

Sources: (1) U.S. Bureau of Economic Analysis (BEA); (2) Washington Trust Wealth Management; (3) Institute for Supply Management (ISM); (4) U.S. Bureau of Labor Statistics; and (5) Factset Data Service

The views expressed here are those of Washington Trust Wealth Management and are subject to change based on market and other conditions. Investment recommendations and opinions expressed in these reports may change without prior notice. All material has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. Investing entails risk, including the possible loss of principal. Stock markets and investments in individual stocks are volatile and can decline significantly in response to issuer, market, economic, political, regulatory, geopolitical, and other conditions.

Investments in foreign markets through issuers or currencies can involve greater risk and volatility than U.S. investments because of adverse market, economic, political, regulatory, geopolitical, or other conditions. Emerging markets can have less market structure, depth, and regulatory oversight and greater political, social, and economic instability than developed markets. Fixed Income investments, including floating rate bonds, involve risks such as interest rate risk, credit risk and market risk, including the possible loss of principal. Interest rate risk is the risk that interest rates will rise, causing bond prices to fall. Past performance does not guarantee future results. The S&P 500 Index is an unmanaged index and is widely regarded as the standard for measuring large-cap U.S. stock-market performance. In addition, the S&P 500 Index cannot be invested in directly and does not reflect any fees, expenses or sales charges. Further, such index includes 400 industrial firms, 40 financial stocks, 40 utilities and 20 transportation stocks. The information we provide does not constitute investment or tax advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell any security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. Please consult with a financial counselor, attorney or tax professional regarding your specific investment, legal or tax situation.


Specify Alternate Text
By Washington Trust / July 25, 2019

In our last Financial Empowerment article, we talked about the basics of financial planning. We reviewed the process and the major information needed to start building a plan. Of those pieces of information, we discussed income, expenses, assets, and liabilities.

Today, we are going to focus a little more on one of those topics: income.

There are two overarching types of income: current and anticipated.

  1. Current income is obvious. If you’re working, that is a form of current income. If you’re collecting social security, that is current income. If you’re collecting alimony, rental income, a pension; that is all current income. Current income is a steady income stream with a defined start date and an estimated end date. Pretty simple, right? You should be able to easily document all your current income streams because they are already a part of your financial life. Create a list of all current income streams, their values, and their estimated end date.
  2. Anticipated income can be a little opaque. Are you planning on downsizing your home and investing the proceeds? Is there a future financial inheritance upon the passing of a prior generation? These are examples of anticipated income.These are examples of anticipated income, or future positive cashflows with unknown start dates and values. You know monies will be coming but you don’t know exactly when nor how much. How do we deal with such unknowns? Not to worry; we start by making a list. List all your future anticipated income but leave the values, start dates, and end dates blank. We never want our financial plan to be too pessimistic, but we definitely don’t want our plan to be falsely optimistic. Thus, we are going to err on the side of conservatism. The later the start date, the sooner the end date, and the smaller the income value, the more conservative the plan will be. If you think you’re going to sell your home sometime between 2020 and 2025 and invest between $50,000-$75,000 of the proceeds, a conservative approach would be to mark this anticipated income as $50,000.00 in 2025 from “Home Sale Proceeds.” If you anticipate a future inheritance of between $500,000-$750,000, write down $500,000 in a future year well beyond the prior generation’s life expectancy. By using the low end of an anticipated value range and by pushing out the cashflow date, we are making the plan more conservative. Any miscalculations should fall in your financial favor.

In addition to income types, we need to consider cost of living adjustments. They’re not just for pensions! As we’ll discuss in our next article, expenses go up over time. Thankfully, so do many income sources. If you anticipate the value of an income source to grow over time, make note of it. Determine if you think it will increase at a greater or lesser rate than normal inflation. Follow the conservative rule with your cost of living adjustment growth rates, as well. The lower the cost of living adjustment growth rate, the more conservative the plan.

In our next article, we will touch on some of the finer points when calculating and documenting your expenses. Remember, take it all one step at a time. These are the steps to turn financial stress into financial empowerment.


Specify Alternate Text
By Washington Trust / July 17, 2019

As seen on The Rhode Show

It goes without saying that Alzheimer’s is one of the most devastating diagnoses an individual can receive. It is equally difficult for their loved ones. While it might be the last thing you want to focus on, one of the first things you should consider after a diagnosis is putting together a financial, estate, and care plan.

Step 1: Organize and assess your legal and financial documents

Because of its degenerative nature and the gradual loss of memory and judgment associated with Alzheimer’s and dementia, advance-planning is critical. Assessing your legal and financial documents and discussing your wishes with family is the first step towards ensuring that decisions about your care and finances are carried out as you wish. Sit down with your loved ones and go over the following:

Legal documents: Living wills; Medical and durable powers of attorney; Wills and Trusts, including supplemental needs trusts. If you do not already have estate planning documents in place, make sure you reach out to an estate planning attorney and explain that your need for a plan is immediate. Even if you do not think you need an estate plan, basic health and financial power of attorney will be necessary for your family to assist you.

Financial documents: Bank account information; Deeds, mortgage papers or ownership statements; Insurance policies; Ongoing or outstanding bills; Pension and other retirement benefit summaries; Social Security payment information; Stock and bond certificates.

Additional financial responsibilities: Paying bills, possibly passwords to bill paying websites; Benefits claims; Tax return preparation, Investment decisions.

Step 2: Seek guidance from a financial professional

After you’ve gathered all your financial and legal documents you should meet with a financial professional to go over those documents and assess the gaps and opportunities. Financial professional such as those at Washington Trust Wealth Management are valuable sources of information and can be one of your greatest resources during an otherwise difficult time. A financial advisor can:

  • Analyze your investment portfolio with long-term care needs in mind 
  • Create a financial plan for your future 
  • Assist you and you family with carrying out your plan and wishes 
  • Identify potential financial resources 
  • Identify potential tax deductions 
  • Determine whether certain financial products, such as a Trusteed IRA, which allows your IRA to be administered during your incapacity, would be beneficial to you and your family.

Step 3: Estimate costs and build them into your plan

Planning for your financial needs means considering every cost you might face now and in the future. This is a hard number to estimate as the needs of a person with Alzheimer’s change and progress over time. Sadly, Alzheimer’s is one of the most expensive conditions. While insurance may cover some of the costs, they may not cover all. Work with your financial and legal advisors as well as your family to plan for these expenses as much as possible. A few of the most common and costly care expenses include ongoing medical treatment, diagnosis and follow-up visits, prescription drugs, in-home care services, and full-time residential care services

A comprehensive financial plan, combined with sound investment advice, will help you and your family find peace of mind during this transition in your life.


The opinions expressed in this blog are those of the author and may not reflect those of Washington Trust Wealth Management. The information in this report has been obtained from sources believed to be reliable, but its accuracy and completeness are not guaranteed. Any opinions expressed herein are subject to change at any time without notice. Any person relying upon this information shall be solely responsible for the consequences of such reliance. Performance is historical and does not guarantee future results.

Such information does not constitute legal or professional advice as all situations are unique and are based on individual facts and circumstances.

Subscribe to Our eNewsletter
Loading

Washington Trust, the "W" logo, Washington Trust Wealth Management and Halsey Associates are registered trademarks of The Washington Trust Company.
Weston Financial is a subsidiary of The Washington Trust Company. Halsey Associates is a part of Washington Trust Wealth Management, a division of The Washington Trust Company.

Not FDIC Insured | No Bank Guarantee | May Lose Value | Not a Deposit | Not Insured by any Federal Government Agency