Happy Spring, Clients and Friends!
This Spring is a particularly exciting time for us as we prepare to host our 10th Annual Cleveland Economic Summit on June 26th. We hope you and your guests will join us for this exciting complimentary event which will take place at the world renowned Cleveland Botanical Gardens from 4:00 pm to 6:30 pm. Be sure to read more below about this year’s program and speakers, including how to RSVP to secure your place at a table.
A lot can change in a decade. When I think back ten years ago, both of my girls were still in school and living at home. Our team at Planned Financial Services was half the size it is today. The Cleveland Browns were just coming off their last winning season in recent history (10-6 in 2007); the iPhone had recently been introduced; Facebook had 100 million users compared to its 1.1 billion today; and we were smack dab in the middle of a global financial crisis. Today, the economy is in one of its longest expansions, corporate profits are at record highs, the unemployment rate is at a 17-year low and S&P 500 earnings have increased at a double-digit clip four out of the past five quarters, which we discuss in this quarter’s Market & Economic Update.
Yet, when we step back and think about the things that have changed in our lives over the course of a decade or more, most of us don’t think about where the DOW or S&P 500 was or what the bond market or inflation were doing. We remember how old our kids or grandchildren were and what was taking place in our families’ lives. Were you celebrating the birth of a grandchild? Your own son or daughter’s graduation from high school or college? Your retirement or a job change? We mark time not by how much we have in our bank or investment accounts, but by the people and things that mean the most to us in life. It’s not how much we have, but how much we can do with what we have.
That’s what we mean when we talk about your Return on Life®. Helping you define the return on life you seek, which includes your goals for your family, business and future; how you want to live each day; and the activities and causes you would pursue today if money were no object is what we focus on every day. We look forward to continuing to provide the timely, relevant and actionable advice you depend on from your team at Planned Financial Services.
What's in It for You?
At-a-glance guide to your 2nd Quarter 2018 Frank Talk newsletter:
- News & Events
- 10th Annual Cleveland Economic Summit Event Details
- Brian Klecan Earns Certified Plan Fiduciary Advisory (CPFA) credential
- Smart Business: Smart Women Awards Recap
- Upcoming Smart Business Northeast Ohio Family Business Conference
- Market & Economic Update
News & Events
You and your guests are invited to join us as we celebrate our 10th year hosting one of the most insightful and informative annual events for the Northeast Ohio business community, the 10th Annual Cleveland Economic Summit.
Our entertaining and informative late afternoon event will feature two distinguished speakers: John Lynch, Executive Vice President and Chief Investment Strategist at LPL Financial and Greg Valliere, Chief Global Strategist at Horizon Investments. Our featured speakers will join your host, Frank Fantozzi, in providing investors, business leaders, and taxpayers with in-depth analysis and keen insight on the key factors that will impact your business, tax strategies and investment decisions in the coming months. Our speakers will answer your questions about the potential impact of tax reform and trade policies on the domestic and global financial markets; and share their outlook and perspectives on the economy, financial markets, business climate and political landscape in 2018.
Tuesday, June 26, 2018
Please RSVP to reserve seats or a corporate table by June 18, 2018 to Michelle Velotta at 440.740.0130 ext. 221 or Michelle@PlannedFinancial.com.
Space is limited.
4:00 pm - 6:30 pm
Cleveland Botanical Garden - Woodland Hall
11030 East Boulevard
Cleveland, OH 44106
Enjoy complimentary parking at onsite parking garage.
(Validate parking ticket with attendant upon arrival).
The Garden will remain open until 8:00 pm following the
Economic Summit. Stroll through, experience, and
become inspired by all it has to offer!
About our speakers…
John Lynch │Executive Vice President │ Chief Investment Strategist, Research, LPL Financial
As chief investment strategist, John Lynch leads the market and economic analysis for LPL’s Research team and is responsible for the firm’s strategic and tactical investment advice. Mr. Lynch joined LPL in 2017 with more than 30 years’ experience in the financial services industry. Previously, he held roles that included senior vice president and chief investment officer for the Mid-Atlantic region of Wells Fargo Private Bank, chief equity strategist with Wells Fargo Asset Management, and chief market analyst for Wachovia and Evergreen Investments. Earlier in his career, he honed his investment skills while working in New York in the securities industry, focusing on equity strategy and portfolio management.
Greg Valliere │ Chief Global Strategist │ Horizon Investments
For more than three decades, Greg Valliere has followed Washington for investors. He specializes in coverage of the Federal Reserve and analyzing the impact of policy and politics on the markets. A graduate of George Washington University, Mr. Valliere co-founded The Washington Forum, linking Wall Street with Washington. He is the former Director of Research at the Charles Schwab Washington Research Group, and a frequent guest on CNBC, Bloomberg TV and radio, CNN, Fox Business News and CBS radio. Mr. Valliere is also frequently quoted in The Wall Street Journal, Barron’s, and The New York Times.
Brian Klecan Earns Certified Plan Fiduciary Advisory (CPFA) Credential
Our lead Retirement Plan Advisor with 401(k) Prosperity®, Brian Klecan, AIF®, recently earned the Certified Plan Fiduciary Advisory (CPFA) credential, further demonstrating his knowledge, expertise and commitment to working with retirement plans and helping plan fiduciaries manage their roles and responsibilities. 401(k) Prosperity® is the corporate retirement and institutional investment planning division of Planned Financial Services. For more information on how your experienced 401(k) Prosperity® team helps create simplicity in a complex world, visit us at 401(k) Prosperity®.
2018 Smart Business: Smart Women Breakfast Recap
PFS Wealth Advisor, Cynthia Yang, CFA®, CIPM, was honored to serve as an award presenter, recognizing the achievements of some of the region’s most distinguished women business leaders and entrepreneurs. Topics of discussion included the #MeToo movement, including how executives can build a workplace and culture that provides opportunities for everyone. The panel discussed how to instill the ideals of inclusion and diversity in team members and how leaders can be authentic, yet still culturally conscious.
Smart Business: Family Business Conference and Family Business Achievement Awards
PFS will once again participate as a sponsor of the Smart Business: Family Business Conference and Family Business Achievement Awards on Thursday, September 6, 2018. The interactive workshop and awards program, presented by Cuyahoga Community College, will feature a dynamic line-up of keynote speakers and panelists, including Frank Fantozzi, who will share real life examples of what separates success stories from failures. Attendees gain perspectives from both industry experts and actual family business owners to address the real issues facing family-owned businesses every day. Visit Smart Business online for more information or to register for the event.
Are you a NE Ohio business owner?
Consider joining us at the Smart Business
Northeast Ohio Family Business Conference in September.
Visit our online Newsroom to learn more about recent PFS news, awards and recognition
Market & Economic Update
*First quarter earnings season was excellent by almost any measure. The numbers were strong even without the boost from the new tax law. In this week’s commentary, we recap the outstanding near-complete first quarter earnings season, highlight some of the key themes, and show why a potential peak in earnings growth is not cause for immediate concern.
We expected a strong first quarter earnings season and we got it. Growth was very impressive, with S&P 500 Index earnings growing 26% year over year, the best since the fourth quarter of 2010. Even when excluding the impact of the new tax law (estimated at 6–7%), earnings growth accelerated from the prior quarter and approached 20%. A broad range of sectors produced substantial upside surprises.
Overall, just about any way you slice it, it was an excellent earnings season; other notable highlights:
- S&P 500 earnings have now increased at a double-digit clip four out of the past five quarters.
- The streak of consecutive quarters with earnings exceeding expectations is now 36, based on Thomson Reuters’ data.
- The percentage of companies beating earnings estimates at just over 78% is the highest since FactSet began tracking the data in 2008.
- The magnitude of the upside surprise, at 7.5%, was the biggest since 2010.
- Revenue grew more than 8% year over year, fastest since 2011 (and in line with the fourth quarter of 2017).
- Estimates for the next four quarters rose during reporting season, a relatively rare positive development.
Cause for Applause
Why so good? As we pointed out in our earnings preview in April, in addition to the new tax law, several other factors contributed to the strong numbers:
- Better economic growth. Accelerating economic growth in the U.S., based on gross domestic product, helped boost corporate profits. U.S. economic growth was 2.9% year over year for the first quarter (2.3% quarter-over-quarter annualized), above recent trends. Growth remains generally solid around the world too.
- Robust manufacturing activity. The U.S. manufacturing sector is booming, with the Institute for Supply Management (ISM) Manufacturing Index averaging near 60 year-to-date. Earnings are closely linked to the manufacturing sector.
- Weak U.S. dollar. During the first quarter, the average U.S. Dollar Index level was more than 10% below the year-ago quarter, which propped up overseas earnings for U.S.-based multinationals.
- Higher oil prices. A more than 20% jump in oil prices from the year-ago quarter drove a sharp rebound in energy sector profits.
Several themes have emerged during this strong first quarter earnings season:
- Companies with more overseas revenue exposure generally grew earnings faster. According to FactSet data, companies with more than half of their revenue outside the U.S. grew earnings 7% faster, on average, than those with less than half of their revenue coming from outside the U.S. The drop in the U.S. dollar was a big factor here in addition to stronger growth in developing economies.
- Buybacks are on the rise. Proceeds from the tax boost are clearly giving buybacks a lift. Goldman Sachs forecasts a record $650 billion in share buybacks in 2018, up 23% from 2017. Buyback authorizations year to date are up 48% versus the same period last year. Capital spending is also on the upswing.
- Trade policy not (yet) having much impact. Although a fair number of companies highlighted the uncertainty surrounding trade policy, particularly industrial companies, the first quarter came too soon for enacted tariffs to have material impact. Further, the potential for more tariffs does not appear to have negatively affected companies’ guidance.
- Cost pressures emerging. Some companies cited wage and input cost pressures, which is normal at this relatively late stage of the business cycle. But overall profit margins rose during the first quarter, both on a year-over-year and quarter-over-quarter basis. Business is simply good enough that companies have been able to mostly offset higher costs, even excluding the impact of the new tax law.
As Good as It Gets?
We mentioned that the peak earnings narrative might garner some attention. It certainly has—more than we anticipated—in part because Caterpillar’s management stated that the first quarter may be the “high-water mark” for the year on the company’s earnings call.* The 26% earnings growth rate expected for the quarter may be as good as it gets for the rest of the current business cycle. Consensus estimates call for slower growth over the course of 2018, as wage and other cost pressures have started to build, and comparisons get tougher in 2019 after the anniversary of the tax law passes. But does that mean a recession is forthcoming? Is peak earnings growth a good time to sell stocks? We don’t think so. We identified S&P 500 earnings growth peaks and calculated the number of months from those dates until the next recession. The average time to recession based on the last 12 earnings growth peaks since 1953 is about 4 years. Should this relationship hold, we could expect a recession in mid-2022, which would make the current U.S. economic expansion the longest ever, at 13 years old.
The short time to recession following the 2000 earnings growth peak (9 months) was a product of the dotcom bubble; conditions today are not as extreme in terms of over-exuberance and over-investment. Also note that the S&P 500 was up an average of 59% during these periods between the earnings growth peak and the start of the next recession, meaning selling at these peaks may not be the best strategy.
As a result, we are not overly concerned about an earnings growth peak and believe more good earnings growth may be ahead of us. Assuming the economic expansion continues well into 2019 as we expect, while benefits from the new tax law (e.g., capital spending incentives and buybacks) are still cycling through, S&P 500 earnings per share growth in 2019 may reach or potentially exceed its long-term average of 7–8%.
First quarter earnings season was excellent by virtually any measure, while several tailwinds remain in place that suggest strong earnings may continue in the coming quarters. Earnings growth may slow, but an earnings growth peak does not necessarily mean a recession is looming. We reiterate our 2018 S&P 500 earnings forecast of $152.50 per share, representing growth in the mid-teens; this estimate may prove conservative given the substantial impact of the new tax law that is still cycling through. We expect strong earnings growth to drive a double-digit return for the S&P 500 in 2018, though as we have seen recently, those gains may come with higher volatility.*
We continue to watch the financial markets, economy, and geopolitical factors closely and adjust our portfolios in response to market activity to ensure our clients’ investment strategies are aligned with their stated investment objectives. And as we mentioned in our last edition of Frank Talk, we continue to keep a close eye on how recent changes in the tax law may impact you in the months and years ahead. We’ve always been firm believers that a personalized wealth management strategy that incorporates tax planning is critical to helping you capture opportunities and avoid unintended consequences. So, please don’t hesitate to reach out to your experienced team of wealth advisors that includes a Certified Public Accountants (CPAs) and an IRS-licensed Enrolled Agent if you or someone you know has questions or concerns about how tax reform may impact your personal or business finances.
We remain committed to providing you with the education, advice, and insight to help you retain a long-term perspective and focus on your individual goals throughout the year. Your Return on Life® is always our top priority. If you need additional help or if someone you know needs our advice, remember, we’re only a phone call away at 440.740.0130. We are always honored to help our clients’ friends and business associates take greater control of their future with guidance from the PFS team. We welcome and are grateful for the many introductions our clients continue to provide.
Real People. Real Answers.
Health, Happiness, and Good Fortune,
President & Founder
CPA, MST, PFS, CDFA, AIF®
*Research sources provide by LPL Financial May 2018.
IMPORTANT DISCLOSURES: The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal, and potential liquidity of the investment in a falling market. All investing involves risk including loss of principal.
DEFINITIONS: Gross domestic product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments, and exports less imports that occur within a defined territory.
INDEX DESCRIPTIONS: The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The Institute for Supply Management (ISM) Manufacturing Index is an economic indicator derived from monthly surveys of private sector companies and is intended to show the economic health of the U.S. manufacturing sector. A PMI of more than 50 indicates expansion in the manufacturing sector, a reading below 50 indicates contraction, and a reading of 50 indicates no change. The U.S. Dollar Index measures the performance of the U.S. dollar against a basket of foreign currencies: EUR, JPY, GBP, CAD, CHF and SEK. The U.S. Dollar Index goes up when the dollar gains “strength” compared to other currencies.
Investment advice offered through Planned Financial Services, a Registered Investment Advisor and separate entity from LPL Financial.
John Lynch, LPL Financial; Greg Valliere, Horizon Investments; and Planned Financial Services are all separate, unaffiliated entities.