PAYCHECK PROTECTION PROGRAM

The Paycheck Protection Program (“PPP”) authorizes forgivable loans to small businesses to pay their employees during the COVID-19 crisis. The following contains recommended strategies for using those funds in compliance with the rules of the program.

The Paycheck Protection Program is a loan designed to provide a direct incentive for small businesses to keep their workers on the payroll. SBA will forgive loans if certain criteria are met and the money is used for specific qualifying expenses. No collateral or personal guarantees are required. Neither the government nor lenders will charge small businesses any fees.The loan amount is based on 2.5 times your average monthly payroll up to a maximum of $10mm. Payroll includes U.S. based  W-2 employees up to $100k per employee. Sole proprietors should use 2019 Schedule C income to determine loan amount.

You can apply through any existing SBA 7(a) lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. You should consult with your local lender as to whether it is participating in the program. 

Once you have been approved for the funds and the distribution is made to your account, you have 8 weeks to meet the criteria for loan forgiveness under the program. If you do not meet the requirements, a portion or all of your distribution will convert into a 2 year loan at 1% interest with a 6-month deferral. 

Here are some tips to ensure compliance and maximum forgiveness with the PPP rules:

To receive loan forgiveness, you have 8 weeks starting on the day the loan is disbursed into your account to spend the funds on qualifying expenses.

At least 75% of your loan must go towards:

  • Gross pay;
  • ER paid health care;
  • ER match retirement;
  • State unemployment tax;
  • Severance pay

Up to 25% of your loan may go towards:

  • Rent
  • Business loan interest
  • Utilities

Maximize qualified expenditures during the 8-week period to meet the 75% requirement by paying wages more frequently, making retirement contributions, and early bonuses if necessary. Be sure not to exceed the 100k cap on total gross wages. If you cannot meet these expense requirements, the portion of your loan deemed not forgivable will convert into a 2 year loan at 1% with a 6 month deferment period.

It’s important to track these expenses to ensure you do qualify for maximum forgiveness on the loan. It is the borrower’s responsibility to provide proof of qualifying expenses. First, we recommend you set up a separate bank account to track what your spending for future audits to avoid claw backs and disallowed costs. A clear audit trail with separate dedicated bank account easiest way to go. Where possible, avoid commingling of funds with your existing business assets. If you have already deposited the funds into your regular business account, we recommend you move the funds you have not yet used into a separate account and create a clear audit trail of the funds you have already spent as well as the transfer into the new account. Also, be sure to write down the reasons your businesses needed the loan to support your attestation that your business was impacted by Covid-19. In the event of an audit, you will want to have clear evidence that your business was adversely affected.

There are two major reductions that can effect your loan forgiveness. Loan forgiveness will be reduced if either of the following occurs:

Employees who made less than $100,000 of compensation in 2019 have their compensation reduced by 25% or greater or the number of full-time employee equivalents is less than the same number of employees during either (you may choose the more favorable period):

     February 15, 2019 through June 30, 2019; or

     January 1, 2020 through February 29, 2020.

Treasury Department has stated that you can hire employees back by June 30, 2020 and still qualify for forgiveness.

Avoid double dipping into other programs designed to help small business. The Employee Retention Credit is not allowed if you take a Payroll Protection Program loan. In general, higher average payroll tends to favor using the PPP, while lower salaries may make using the Employee Retention Credit a better move. In either case, you cannot use both. If you have all or a portion of your PPP loan forgiven, you cannot use the deferral of payroll taxes provision. If you receive a PPP loan and use it to pay your own compensation, you likely will not qualify to receive unemployment assistance until the loan has ‘run out’.

Do not misuse PPP funds. If you realize you made an error, contact your bank to remedy the error immediately. Misuse of PPP funds is subject to criminal penalties.

Callan Capital does not provide individual tax or legal advice, nor does it provide financing services. Clients should review planned financial transactions and wealth transfer strategies with their own tax and legal advisors. Callan Capital outsources to lending and financial institutions that directly provide our clients with, securities based financing, residential and commercial financing and cash management services. For more information, please refer to our most recent Form ADV Part 2A which may be found at http://www.adviserinfo.sec.gov.

COVID-19 Timeline

December 31, 2019, China alerted the WHO to several cases of unusual pneumonia in Wuhan, a port city of 11 million people in the central Hubei province. The virus was unknown.

January 1, 2020, several of those infected worked at the city’s Huanan Seafood Wholesale Market, which was shut down. As health experts worked to identify the virus amid growing alarm, the number of infections exceeded 40.

January 7, 2020, Chinese officials announced they had identified a new virus, according to the WHO. The novel virus was named 2019-nCoV and was identified as belonging to the coronavirus family, which includes SARS and the common cold.

January 11, 2020, China announced its first death from the virus, a 61-year-old man who had purchased goods from the seafood market. Treatment did not improve his symptoms after he was admitted to hospital and he died of heart failure on the evening of January 9. 

January 13, 2020, the WHO reported a case in Thailand, the first outside of China, in a woman who had arrived from Wuhan.

January 15, 2020, a US man returned from Wuhan on Jan. 15, two days before passenger screening was instituted at three major airports in the United States, but he had no symptoms at the time.

January 17, 2020, as a second death was reported in Wuhan, health authorities in the US announced that three airports would start screening passengers arriving from the city.

January 20, 2020, the US man who returned from Wuhan on Jan. 15 tested positive for the virus in Washington State.

January 21, 2020, United States confirmed its first case in Washington state, a man who traveled to the Wuhan area.

January 23, 2020, Wuhan was placed under effective quarantine as air and rail departures were suspended.

January 30, 2020, the WHO declared coronavirus a global emergency as the death toll in China jumped to 170, with 7,711 cases reported in the country, where the virus had spread to all 31 provinces. The WHO declares the coronavirus outbreak as a Public Health Emergency of International Concern (PHEIC). The United States issues a Level 4 travel advisory for all of China.

February 5, 2020, CDC began shipping diagnostic test kits to more than a hundred labs in the United States.

February 12, 2020, United States confirmed fourteenth case. Some U.S. states found testing kits distributed by CDC deliver “inconclusive” results.

February 21, 2020, mainland China, the death toll reached 2,236 as the confirmed cases of the infection rose above 75,400. In Italy, the region of Lombardy reported the first local transmission of the virus with three new cases bringing the total in the country to six infections.

February 25, 2020, U.S. senators received a classified briefing on the Trump administration’s coronavirus response. U.S. CDC warned that spread to the United States is likely and that people should prepare. San Francisco became the first U.S. city to declare a state of emergency over COVID-19.

February 29, 2020, the United States reported its first death, a man in his fifties with an underlying health condition. Washington state declared a state of emergency.

March 3, 2020, Italy announced the death toll in the country reached 77. U.S. Federal Reserve cut its benchmark interest rate by half a percentage point.

March 7, 2020, the coronavirus killed nearly 3,500 people and infected another 102,000 people across more than 90 countries. China’s Health Commission reported 99 new cases, down from 143 cases the day before, with a total of 80,651 cases nationwide. Official data, meanwhile, showed China’s exports plunging 17.2 percent in the first two months of the year after the outbreak brought much of the country to a halt.

March 11, 2020, the WHO declared the coronavirus outbreak a pandemic, as Turkey, Ivory Coast, Honduras and Bolivia confirmed their first cases. 

March 16, 2020, New York Mayor Bill de Blasio ordered the city’s bars, theatres and cinemas to close down, as the number of cases continued to rise in the US.

March 17, 2020, Italy reported 345 new coronavirus deaths in the country over the past 24 hours taking its total death toll to 2,503 – an increase of 16 percent. The total number of cases in Italy rose to 31,506 from a previous 27,980, up 12.6 percent – the slowest rate of increase since the contagion came to light on February 21.

March 18, 2020, Italy, meanwhile, recorded 475 new deaths, the highest one-day toll of any nation, taking its total to 2,978. The total number of infections in the country reached 35,713. For the first time since the start of the epidemic, no new domestic cases were reported in China. 

March 19, 2020, Italy overtook China as the country with the most coronavirus-related deaths, registering 3,405 dead compared to 3,245 in China.

March 21,2020, Europe remains the epicenter of the coronavirus with Italy reporting 793 new fatalities, its biggest daily increase, bringing the total number of deaths to 4,825 amid 53,578 cases. Spain is the second worst-hit country in Europe with more than 21,000 infections and at least 1,000 deaths. To help each European country to contain the pandemic, the EU has taken the unprecedented step to suspend rules on public deficits, giving countries free rein to inject spending into the economy as needed.

March 25, 2020, The White House and Senate leaders of both parties struck an agreement on a sweeping $2 trillion measure to aid workers, businesses and a healthcare system strained by the rapidly spreading coronavirus outbreak.

March 26, 2020, the total number of coronavirus cases globally surpassed 500,000. 

Important Disclaimer

Callan Capital does not provide individual tax or legal advice, nor does it provide financing services. Clients should review planned financial transactions and wealth transfer strategies with their own tax and legal advisors. Callan Capital outsources to lending and financial institutions that directly provide our clients with, securities based financing, residential and commercial financing and cash management services. For more information, please refer to our most recent Form ADV Part 2A which may be found at http://www.adviserinfo.sec.gov.

CORONAVIRUS UPDATE

What began with a handful of mysterious illnesses in a market in Wuhan, China has since turned into a pandemic that has traversed the world. First detected on December 31, 2019, the novel coronavirus has infected tens of thousands of people. It has triggered unprecedented quarantines, a stock market upheaval and historical government intervention. As the country and its health-care system prepares, much is still unknown about the virus now named Covid-19. As a continuation of our update on the new government aid packages released today, the following is a brief on several topics we believe are key to our recovery from the pandemic.

TRUMP AND FAUCI
President Trump’s latest call to reopen the United States economy by Easter has put him at odds with public health officials. The potential downside if we open too soon is enormous. Public health experts and even some Republican lawmakers have been uneasy about the idea of rushing to boost a lagging economy before the virus is fully contained. They have warned of potentially catastrophic consequences, including a spike in infections and deaths that could lead to overrun hospitals, and argued the health of the nation should be the priority. In a tweet, President Trump said “We can do two things together. THE CURE CANNOT BE WORSE (by far) THAN THE PROBLEM!” 

Dr. Anthony Fauci, the head of the National Institute of Allergy and Infectious Diseases and a prominent member of the White House’s coronavirus task force, added that a timeline for the lifting of restrictions on parts of the country by Easter Sunday should be “flexible.” “You may not want to essentially treat it as just one force for the entire country, but look at flexibility in different areas,” Fauci said. “So I think people might get the misinterpretation you’re just going to lift everything up. . . .That’s not going to happen. It’s going to be looking at the data. And what we don’t have right now that we really do need, we need to know what’s going on in those areas of the country where there isn’t an obvious outbreak.” 

Fauci has openly tempered expectations for a quick coronavirus vaccine and an end to the epidemic on the press conference stage with Trump, even as the president promised everything was under control and a vaccine would be ready soon. But Dr. Fauci also said there was a limit to what he could do when Mr. Trump made false statements. “I can’t jump in front of the microphone and push him down,” Dr. Fauci said. “OK, he said it. Let’s try and get it corrected for the next time.”

POSSIBLE VACCINES AND TREATMENTS

There are currently no FDA-approved drugs specifically for the treatment of patients with COVID-19. Based on data from China, Fauci said about 80% of people who get infected “do really quite well” and recover without any medical treatment. But about 10% to 15% get seriously ill, particularly those in high-risk groups such as the elderly or patients with other medical problems. Currently, clinical management for those who have COVID-19 includes infection prevention, control measures and supportive care such as supplementary oxygen and ventilatory support in the most severe of cases.

According to the CDC, the US Food and Drug Administration cleared the way for New York to experiment with different treatment drugs. The CDC notes that there are a number of drugs that have been approved for other ailments as well as several investigational drugs that are being studied in clinical trials taking place across the world. The World Health Organization said on March 6 that it has received applications for 20 vaccines in development and many clinical trials of therapeutics are underway.

Earlier in the week, President Trump and members of his Cabinet met at the White House with executives of 10 pharmaceutical companies to discuss ways to speed the development of a vaccine for the coronavirus. In China, scientists have been testing a combination of HIV drugs against the new virus, as well as an experimental drug named Remdesivir that was in development to fight Ebola.

President Donald Trump has pledged to “slash red tape like nobody has even done it before” to accelerate the development of a coronavirus vaccine. But his push could backfire if the government moves too fast. Testing a vaccine must proceed in stages, not only to make sure that it works but to make sure it is safe. This is a process that can take months, if not over a year, according to Dr. Anthony Fauci. Testifying before the Senate on Tuesday, he made it clear that neither a coronavirus treatment nor a vaccine can be ready quickly. Fauci has said it could take 12 to 18 months to make a vaccine available, but even that timetable could be overly ambitious. The most promising technologies haven’t been tested on massive groups of people and public health officials typically take their time when vetting vaccines targeted at millions. In some cases, a vaccine that hasn’t been properly tested could make people sicker. And if there are complications, the public relations problems could mount, spurring an anti-vaccination sentiment. Fauci indicated potential treatments may come before a vaccine.

OUR HEALTHCARE SYSTEM

Healthcare officials battling the coronavirus are making the difficult decision to limit testing to conserve critical resources, even as more test kits become available. The balancing act means that despite an increase in drive-thru testing sites and point-of-care tests that deliver results in minutes, some of the hardest-hit areas are still restricting evaluations to health care workers and the most vulnerable patients.

Instead of broad, community-wide testing, cities in California and New York are focused on making sure only the sickest people and health care workers get tested. Doing so also slows the use of personal protective equipment (PPE) like masks, gowns and gloves, which are facing a nationwide shortage. “We’re in a much different place than we were two weeks ago, and we’ll be in a much different place in a week. The supply chain just isn’t there at the moment, so you do have to make those tough decisions about prioritization.” said Scott Becker, CEO of the Association of Public Health Laboratories.

According to the Harvard Global Health Institute, the coronavirus could end up causing between 10 million and 34 million hospital visits and about a fifth of those patients will require intensive care. “The risk to our health-care workers is one of the great vulnerabilities of our health-care system in an epidemic like this,” he said. “Most ERs and health-care systems are running at capacity in normal times.”

In light of the fact that there isn’t enough space in hospitals to deal with an explosive outbreak, it’s important to do what can be done to slow transmission. As Aaron Carroll, professor at Indiana University School of Medicine summed up “A crucial thing to understand about the coronavirus threat — and it’s playing out grimly in Italy — is the difference between the total number of people who might get sick and the number who might get sick at the same time.”

In Italy, which has been particularly hard hit, doctors and hospitals have become so overwhelmed that the Italian College of Anesthesia, Analgesia, Resuscitation and Intensive Care has published guidelines calling for doctors to approach patients with a wartime triage sensibility; and it has discussed a potential age limit for access to care. One advantage the U.S. has over the Italian health care system is a greater number of intensive care unit (ICU) beds. But while the US has more ICU beds than European countries do on average, the availability of those beds is still deeply concerning. “It’s estimated that we have about 45,000 intensive care unit beds in the United States. In a moderate outbreak, about 200,000 Americans would need one,” said Carroll.

Public behavior is going to play a big factor in determining if and when there’s a huge surge beyond the health care system’s capacity. Experts say social distancing and hygienic practices like methodically washing one’s hands and cleaning potentially infected surfaces could slow the pace at which coronavirus spreads through the population, if enough people observe these practices. This in turn could “flatten the curve” of new coronavirus cases, ensuring that hospital capacity isn’t dramatically exceeded.

The strategy is seeing some results in Washington state, the first state to test positive for the virus. Washington state Gov. Jay Inslee says number of cases is still rising, but not as steeply as before. “It is a glimmer of hope,” he says. “It’s suggestive that some of the things we are doing together is having some modest improvement,” Inslee says. But for every note of optimism, the governor adds caution. “We shouldn’t be within ten thousand miles of champagne corks on this,” he says. “Because if we do not continue to increase [the downward pressure on the infection rate], a lot of people are going to die across the state of Washington.” It’s a delicate balance for governors right now, as they try to show the public evidence that the disruption of social distancing is working, without giving people reason to lower their guard.

THE ECONOMY

Financial markets have moved swiftly and are now pricing in a global recession, with the S&P 500 falling into bear market territory and both investment grade and high yield bond spreads widening significantly. This recession, however, should be treated differently than the recession triggered by the 2008 financial crisis. The areas affected by social distancing (leisure, hospitality, retail and transportation) represent a larger percentage of overall employment, but a smaller share of GDP than the finance and construction industries did in 2008. From an earnings perspective, industries impacted by social distancing represent a smaller portion of overall S&P 500 earnings than financials did in 2008.  While early indications suggest that this could be a deep recession, experts agree that much of the recession and subsequent recovery will be determined by how long the pandemic lasts and whether the policy response rises to the challenge. “The question is: How long does it last, the social distancing,” said Louise Sheiner, policy director for the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution. “Nobody really knows. We’re all flying blind here. This is something really different than we’ve ever seen. . . the longer it lasts, the more staying power it has. The more businesses go under, the more people lose their jobs. . . .If we’re lucky on the medical front, then yes it could bounce back very quickly. And if we’re not lucky it could be much worse.”

While virus containment is seen as determining the duration of the recession, another key factor is whether job losses are temporary or permanent. While a lot of businesses will not recover from this, the ones that do are anticipated to be able to recover relatively quickly. “It’s very hard with any recession to know if it’s a V [shaped] or a more gradual [U shaped] recovery,” said Michael Graetz, former Treasury official under George H.W. Bush, “But this is a resilient economy and it seems to be a time-limited problem,” he added. “The key is to marshal all the resources to get out of it as soon as we can.”

CONCLUSION

Even in the midst of the crisis, all of this is worth considering for long-term investors. The last few weeks have seen sharp declines in risk assets in very volatile trading. There may well be worse to come for markets, as numbers on both fatalities and the economy still have the potential to shock investors. In any crisis of extreme uncertainty, risk assets tend to fall well below long-term fair values so now is the time to stay disciplined. Expect sharp ups and downs in the markets until our healthcare policies begin to turn the tide on the coronavirus. There are a lot of unknowns—these conditions call for patience and avoiding giving in to panic. Selling investments out of fear right now could potentially lower diversification benefits and prevent investors from experiencing gains when coronavirus-related volatility ultimately subsides, and economic activity begins to recover.

Click HERE to view a timeline of the virus.

Important Disclaimer

Callan Capital does not provide individual tax or legal advice, nor does it provide financing services. Clients should review planned financial transactions and wealth transfer strategies with their own tax and legal advisors. Callan Capital outsources to lending and financial institutions that directly provide our clients with, securities based financing, residential and commercial financing and cash management services. For more information, please refer to our most recent Form ADV Part 2A which may be found at http://www.adviserinfo.sec.gov. The S&P 500, or simply the S&P, is a stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the United States. It is one of the most commonly followed equity indices, and many consider it to be one of the best representations of the U.S. stock market.

UPDATE-STIMULUS PACKAGE AND FED MEASURES

As the country and the world grapple with a still-expanding global pandemic, international economic activity has been disrupted and markets have been wildly volatile in recent weeks. While staying safe and healthy is of utmost importance in everyone’s mind, people are also understandably concerned about the long-term effect the virus may have on the economy, markets and their own financial lives. One thing is clear—we are living in unprecedented times.

As a follow up to our last communication, below is a summary of the most recent government measures to stabilize the economy and the market.

The White House and Senate leaders reached a deal early Wednesday morning on a massive stimulus package. The proposal will inject approximately $2 trillion into the US economy, providing tax rebates, four months expanded unemployment benefits and a slew of business tax-relief provisions aimed at protecting individuals, families and businesses impacted by the novel coronavirus. It’s the third piece of bipartisan legislation to address the pandemic this month, with two emergency stimulus bills already signed into law. But this latest deal eclipses the earlier packages in scope and spending and amounts to what could be the most ambitious economic rescue effort in American history.

THE NEW STIMULUS PACKAGE

Senate Majority Leader Mitch McConnell, R-Ky., described the legislation, known as the CARES Act, as necessary emergency relief and vowed to put partisanship aside to get it done. “No economic policy can fully end the hardship so long as the public health requires that we put so much of our commerce on ice,” McConnell said in a speech on the Senate floor on Wednesday. “This isn’t even a stimulus package. It is emergency relief. Emergency Relief. That’s what this is.”

The deal includes $500 billion for a major corporate liquidity program through the Federal Reserve, $367 billion for a small business loan program, $100 billion for hospitals and $150 billion for state and local governments,. $30 billion in emergency education funding, and $25 billion in emergency transit funding. It will also provide $25 billion in direct financial aid to struggling airlines and $4 billion for air cargo carriers, two industries that have taken a big hit in the economic downturn.  The house was expected to vote to approve the law today and President Trump has already said he would sign the bill. This morning, news of a possible delay hit the markets, but the bill has since passed.

Payments to Individuals and Families:

The Senate bill will provide a one-time $1,200 check for individuals making up to $75,000 AGI per year or $2,400 for married couples filing jointly who earn less than $150,000 AGI. There is a phase-out between $75,000 and $99,000 in income, those with incomes greater than $99,000 will not receive a check. The bill also provides an additional $500 per child. 

Taxes:

The Treasury announced this week that it would also grant a 90-day extension for filing federal taxes. Initially, only the payment due date for the 2019 tax year was delayed past the traditional April 15 deadline. Now both the delayed filings and payments are due July 15. Taxpayers are still able to file for an extension after July 15.

Unemployment:

Unemployment benefits will be extended to four months and the maximum unemployment insurance benefit will be raised by $600 per week. Unemployment hit 5.5% today (up from a historic low of 3.5% in February) and most economists predict the rate will increase to between 8% and 13% in the coming months as a result of the virus. U.S. Treasury secretary Steve Mnuchin has predicted unemployment in the US could reach 20%. Even with the additional funding in the bill, the unemployment system isn’t designed to handle the surge of new applicants for jobless claims and how they plan to get money into the hands of those who need it is still unclear.

Stock Buybacks:

The bill bans stock buybacks for any corporation that accepts government loans during the term of their assistance plus one year. Democrats also added a provision to ban businesses owned by the president, vice president, members of Congress and the heads of federal executive departments from receiving loans or investments through the corporate liquidity program. The prohibition also applies to their children, spouses and in-laws.

Border Wall:

The Senate bill prevents the Pentagon from shifting $10.5 billion in coronavirus funding to a counterdrug account it has been using to fund the U.S.-Mexico border wall.

Student Loans:

The bill would defer payments for federally owned student loans for six months, through Sept. 30, 2020. Previous versions of the bill included forgiveness of between $10,000 and $30,000 in loans per borrower; however, those provisions were ultimately cut from the final bill.

Small Business Loans:

The bill creates an employee retention tax credit for firms hurt by the coronavirus to allow deferral of payroll taxes for two years and $350 billion for small businesses impacted by the pandemic in the form of loans. The bill also dramatically expands the Small Business Administration’s ability to guarantee loans, but millions of companies could seek these guarantees all at once, putting enormous pressure on the system. The bill also creates a Treasury Department Special Inspector General for pandemic recovery and a Pandemic Response Accountability Committee to oversee loans to businesses.

THE FEDERAL RESERVE PLAN

The unfolding market shock and economic crisis wrought by the coronavirus has the Federal Reserve busy. “While great uncertainty remains, it has become clear that our economy will face severe disruptions,” the Federal Reserve said as it revealed the plans to stabilize the economy. “Aggressive efforts must be taken across the public and private sectors to limit the losses to jobs and incomes and to promote a swift recovery once the disruptions abate.”

The Federal Reserve says it will buy bonds and mortgage-backed securities “in the amounts needed” to keep markets working smoothly, unveiling a plan that also includes measures to make sure credit is available to businesses and consumers. The open-ended plans escalate an earlier emergency move that called for the Federal Open Market Committee to buy at least $500 billion in Treasury securities and at least $200 billion in mortgage-backed securities.

Federal Reserve Chairman Jerome Powell admitted Thursday that the U.S. economy may be slipping into a recession but said the long-term outlook will depend on how quickly the coronavirus pandemic is contained. “We may well be in a recession,” Powell said on NBC. “But I would point to the difference between this and a normal recession. There is nothing fundamentally wrong with our economy. Quite the contrary. We are starting from a very strong position.” The Fed introduced a wave of unprecedented stimulus measures this month, including slashing interest rates, pledging to buy unlimited bonds, and instituting credit programs for companies as businesses struggle to remain afloat while the coronavirus outbreak slashes economic activity around the country.

CONCLUSION

While no one has seen a situation quite like the mass global shutdowns spurred by the Coronavirus, history does speak to the importance of staying invested through severe market turbulence as best days often follow the worst. Diversification can show some of its greatest benefits in the most difficult times. Staying disciplined through all of the volatility is critically important—now more than ever.

Click HERE to read more about the economic impact of the virus.

Click HERE to view a timeline of the virus.

Important Disclaimer

Callan Capital does not provide individual tax or legal advice, nor does it provide financing services. Clients should review planned financial transactions and wealth transfer strategies with their own tax and legal advisors. Callan Capital outsources to lending and financial institutions that directly provide our clients with, securities based financing, residential and commercial financing and cash management services. For more information, please refer to our most recent Form ADV Part 2A which may be found at http://www.adviserinfo.sec.gov. The S&P 500, or simply the S&P, is a stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the United States. It is one of the most commonly followed equity indices, and many consider it to be one of the best representations of the U.S. stock market.

Market Update 2020- A Look Back & A Look Ahead

Market Recap and Expectations

As we enter the next decade, it’s nice to reflect back on the last 10 years.  The S&P had exceptional returns and was up over 300% from 2010-2019. In 2019 alone, the S&P 500 was up 31.5%–another remarkable year.  Going into 2020, our expectations of future returns are far more muted.  We’re starting 2020 with above average valuations in the S&P 500 at 18.1 times price to earnings ratio from December 31, 2019.  While some of this can be explained by lower inflation and interest rates, it should be cause for some concern.  In addition, corporate margins are being squeezed by labor shortages, higher labor costs and trade related expenses which all can impact earnings growth. Fixed Income shows similar valuation concerns.  The 10-year treasury note started the last decade yielding 5% and ended yielding 1.92%.  We anticipate the outlook for high quality fixed income is in the low single digits. We also believe there are pockets of value particularly investing outside the US in both developed and emerging stocks.  We expect that diversification particularly outside the US will play a very important roll going forward. 

Recession Fears

The risk of a recession occurring within the next year appears to have faded –the yield curve returned to normal after its previous inversion and incoming economic data is comfortably above recessionary levels. While improved financial conditions make a recession unlikely, admittedly, it is still probably too early to sound the all clear. Until recently, there had been a steady buildup of recession indicators over the preceding couple of years. In addition, the yield curve did un-invert before either of the previous two recessions began. But, all things considered, the risk of an imminent recession now appears to be genuinely quite modest.

The Fed

The Fed paused its easing cycle at its most recent meeting by leaving the fed funds target range unchanged at 1.50%-1.75% and striking a more upbeat tone about the economy in its policy statement. With economic growth appearing to stabilize and inflation anticipated to remain relatively low, we expect interest rates to remain unchanged for the foreseeable future. Echoing the language from the previous statement, officials noted that while “job gains have been solid” and consumption growth “strong”, investment and exports remain weak spots. Chair Jerome Powell reiterated in his press conference that it would take a “material reassessment” of the outlook to convince officials to cut rates again.

Boris

European leaders were toasting British Prime Minister Boris Johnson’s overwhelming election victory. Britain is now expected to leave the E.U. on Jan. 31 and enter an 11-month limbo state where Britain will still be subject to E.U. rules and will be able to trade with Europe as though it were a full-fledged member. But leaders will have to make a furious dash to reach a trade deal and work out their post-Brexit relationship before Dec. 31, 2020, when the transition period is set to end. Failure could mean the same no-deal breakup that both sides have said they want to avoid.

Trump

Trump was impeached on party lines for an obstruction of justice charge for not allowing aides to testify and an alleged abuse of power. The market does not seem too concerned about the news. The Republican-controlled Senate is not likely to indict the president, meaning he faces a Bill Clinton-like impeachment scenario. No U.S. president has ever been indicted by the Senate in an impeachment trial. Trump’s poll numbers have not taken any significant hits as a result of the trial and he remains competitive in swing states he won in 2016. If Trump wins a second term next November, his party will need to maintain the Senate or take back the House. If Republicans lost both chambers, Democrats would likely move to impeach him immediately in 2020, creating market volatility only a few are forecasting.

GDP

We expect GDP growth to slow from 2.3% this year to mid 1% in 2020 because of outstanding political uncertainties. Due to aggressive rate cutting by the Fed, we expect the economy to avoid a recession, but the trade war and next year’s presidential election mean the economic outlook is more uncertain than usual. The slowdown in GDP growth this year has been driven by weakness in business investment and exports, with consumption growth proving to be far more resilient.

Trade

We do not expect a resolution to the trade war with China this side of the 2020 election. Although the president announced that he would sign a phase one trade deal between the U.S. and China on Jan. 15, this by no means takes worries about tariffs and supply chain disruptions off the table as Trump has pulled back from nearly-complete trade deals over the perception of being unfairly treated.

The SECURE Act

Just last week legislation was enacted that makes substantial changes to the U.S. retirement system. Here is a summary of some of the more impactful changes:

  • Part-time employees are now included in 401(k) plans beginning Dec. 31, 2020.
  • The 72(t) penalty is waived for pre-59½ plan distributions used for childbirth or adoption expenses up to $5,000. A 72(t) election allows IRA owners to withdraw funds from their retirement account before age 59½ if certain conditions are met.
  • 72(t) penalty is waived for pre-59½ plan on qualified disaster distributions up to $100,000. Income tax on a qualified disaster distribution can be spread over three years.
  • Up to $10,000 of 529 plan money can be used to pay off student debt. An additional $10,000 can be used to pay student debt for each of the plan beneficiary’s siblings.
  • The required minimum withdrawal start age is raised from age 70½ to age 72 This only applies to individuals who have not attained age 70½ by Dec. 31, 2019.
  • The age cap for contribution to an IRA, which used to be age 70½, has been eliminated.
  • Inherited IRAs have essentially lost the “stretch” provision allowing qualified beneficiaries to take required minimum distributions over their life expectancy; instead all the assets will be distributed within 10 years.

Conclusion

Going forward, the double-digit returns of 2019 will be hard to repeat. Despite the trade war, political turmoil and more, virtually all major assets posted record performance last year, and even the most optimistic predictions put the chances of repeating that feat at slim. With a notable amount of political uncertainly still in the mix, the outlook for both monetary and fiscal policy depends crucially on the outcome of the November 2020 presidential election. Given political risk, persistent threats to growth, and high asset prices, we believe investors should expect lower economic growth, more modest returns and periodic spells of volatility as things shake out in the near term.

Disclaimers
Past performance does not guarantee future results, which may vary. This material is provided for informational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities. Callan Capital does not provide individual tax or legal advice, nor does it provide financing services. Clients should review planned financial transactions and wealth transfer strategies with their own tax and legal advisors. Callan Capital outsources to lending and financial institutions that directly provide our clients with, securities-based financing, residential and commercial financing and cash management services. For more information, please refer to our most recent Form ADV Part 2A which may be found at www.adviserinfo.sec.gov

The S&P 500 Index is widely regarded as the best single gauge of the U.S. equities market. This world-renowned index includes a representative sample of 500 leading companies in leading industries of the U.S. economy.  Although the S&P 500 Index focuses on the large-cap segment of the market, with approximately 75% coverage of U.S. equities, it is also an ideal proxy for the total market. An investor cannot invest directly in an index

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be a recommendation for any specific investment product, strategy, plan feature or other purposes. By receiving this communication you agree with the intended purpose described above. Any examples used in this material are generic, hypothetical and for illustration purposes only. None of Callan Capital, its affiliates or representatives is suggesting that the recipient or any other person take a specific course of action or any action at all. Communications such as this are not impartial and are provided in connection with the advertising and marketing of products and services. Prior to making any investment or financial decisions, an investor should seek individualized advice from a personal financial, legal, tax and other professional advisors that take into account all of the particular facts and circumstances of an investor’s own situation.

Opinions and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors.

PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS
Copyright 2019 Callan Capital, All Rights Reserved.

1250 Prospect St. Suite 1, La Jolla, CA 92037
4611 Bee Cave Rd. Suite 201, Austin, TX 78746
www.callancapital.com

September Market Update

The impeachment inquiry launched by the House Democrats against President Donald Trump will dominate the headlines over the coming months. The Democratic leadership were convinced to pull the trigger by the revelation that Trump had asked the Ukraine new President to investigate the family of Joe Biden. It would be a surprise if the House Democrats didn’t eventually vote to impeach but, with Trump continuing to enjoy strong support from his own party, it would be an even bigger shock if the Republican-controlled Senate voted with the two-thirds majority needed to remove him from office. The investigation will make it even harder for Trump and the House Democrats to agree on anything else. The chances of the USMCA trade deal being passed before the election are now slim and there is arguably a greater risk of another government shutdown later this year.

Thus far, the market has generally ignored the daily escalation in rhetoric down in DC between the Trump administration and Democrats on the impeachment front. September saw the Dow Jones Industrial Average and S&P 500 rise 3.1% and 2.5%, respectively.

The Economy

We continue to expect GDP growth to slow to little more than 1% annualized over the coming quarters, as slowing consumption growth, escalating trade tensions and global economic weakness take their toll. Under those circumstances, we anticipate one final 25bp interest rate cut from the Fed in December to try to head off a recession, but the trade war and next year’s presidential election mean the outlook is more uncertain than usual. We suspect that a slowdown in real income growth will weigh on consumer spending, with real consumption growth slowing from 2.7% this year to 2.3% in 2020. Nevertheless, with household debt servicing costs close to a record low and the saving rate high, a more severe downturn remains unlikely.

Trade

We do not expect a resolution to the trade war with China this side of the 2020 election. Together with the continued weakness of global economic growth, that will remain a drag on export growth, which we expect to be only 0.2% this year and 1.1% in 2020. Weakening domestic demand will hold back import growth to slightly less than 2% both this year and next.

The Fed

In the near-term, we expect the Fed to follow up with one more 25bp interest rate cut in December which, together with the 50bp of loosening already implemented in the past few months, should be enough to stabilize economic growth in 2020. Further ahead, the outlook for both monetary and fiscal policy depend crucially on the outcome of the November 2020 presidential election.

Central bank activity has been a primary focus for investors with 8 of the top 10 developed market central banks meeting in the month of September. While only the ECB and the Federal Reserve reduced their target policy rates, the forward guidance from other central bankers suggests broad-based easing in the months ahead as the global economic outlook continues to dampen. However, while trade tensions continue to weigh on the outlook, a concerted effort from global central banks to provide stimulus should be supportive of global growth. Still, it will take some time for stimulus to make its way through the financial system and we suggest investors should therefore proceed with caution.

Brexit

Boris Johnson will launch his bid to secure a Brexit deal, with allies admitting they could know “by the weekend” whether the EU will engage in a plan to resolve the Irish border issue. Mr. Johnson’s allies say they expect Britain to submit to Brussels its formal proposals for a Brexit deal after the prime minister closes the Conservative party conference in Manchester. Patience is wearing thin on the EU side as negotiators wait for detailed UK proposals. One EU diplomat complained that Mr. Johnson was pursuing a “kamikaze” approach by threatening the rest of the EU with no-deal and while leaving a revised offer so late in the day. 

Conclusion

Analysts say the market should be able to weather the impeachment inquiry, and even if the Senate takes it up, there’s little chance the president would be convicted by the GOP controlled body. The Fed is being proactive in its attempts to stave off a recession. Still, with growing political uncertainty globally, a balanced approach in portfolios is warranted. Declining interest rates bode well for high-quality duration, while low, but steady growth still leaves some room for stocks to grind higher.

Disclaimers
Past performance does not guarantee future results, which may vary. This material is provided for informational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities. Callan Capital does not provide individual tax or legal advice, nor does it provide financing services. Clients should review planned financial transactions and wealth transfer strategies with their own tax and legal advisors. Callan Capital outsources to lending and financial institutions that directly provide our clients with, securities-based financing, residential and commercial financing and cash management services. For more information, please refer to our most recent Form ADV Part 2A which may be found at www.adviserinfo.sec.gov

The S&P 500 Index is widely regarded as the best single gauge of the U.S. equities market. This world-renowned index includes a representative sample of 500 leading companies in leading industries of the U.S. economy.  Although the S&P 500 Index focuses on the large-cap segment of the market, with approximately 75% coverage of U.S. equities, it is also an ideal proxy for the total market. An investor cannot invest directly in an index

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be a recommendation for any specific investment product, strategy, plan feature or other purposes. By receiving this communication you agree with the intended purpose described above. Any examples used in this material are generic, hypothetical and for illustration purposes only. None of Callan Capital, its affiliates or representatives is suggesting that the recipient or any other person take a specific course of action or any action at all. Communications such as this are not impartial and are provided in connection with the advertising and marketing of products and services. Prior to making any investment or financial decisions, an investor should seek individualized advice from a personal financial, legal, tax and other professional advisors that take into account all of the particular facts and circumstances of an investor’s own situation.

Opinions and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors.

PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS
Copyright 2019 Callan Capital, All Rights Reserved.

1250 Prospect St. Suite 1, La Jolla, CA 92037
4611 Bee Cave Rd. Suite 201, Austin, TX 78746
www.callancapital.com

August Market Update

In a week of mixed economic data releases, the US and China announced they would resume trade talks next month – pushing the S&P 500 back toward a record high and tempering market expectations for additional interest rate cuts by year end.

The two sides will resume low-level talks over the next couple of weeks, ahead of a planned higher-level meeting in Washington early next month. With the ceasefire after the June G20 meeting lasting barely a month before President Donald Trump announced a new round of tariffs covering the remainder of Chinese imports it’s important to keep expectations cautious about this new round of negotiations. The talks will come too late to prevent the planned increase in the tariff rate to 30%, from 25%, on $250bn of Chinese imports on October 1st. At best, a new thawing in the relationship might persuade Trump to delay further the introduction of a 15% tariff on roughly $150bn of Chinese imports of consumer goods and electronics which are currently scheduled to take effect in mid-December.

Any deal that would see the removal of the tariffs already imposed seems unlikely, at least within the next 12 months. At this stage, both sides have an incentive to wait until after next year’s presidential election in November. The Chinese will be hoping that Trump loses. Trump will be hoping that the ongoing conflict is a vote winner – and that if he wins, we believe the Chinese will be out of options and forced to make a deal. Ahead of next year’s election, the question is whether we will see a further escalation in the trade war, with progressively higher tariffs and the possible introduction of non-tariff measures too? Given the gradual ratcheting up of tariffs over the past two years, it would be a surprise if we didn’t see any continued escalation next year. But we suspect it will be relatively modest, particularly if signs begin to emerge that the earlier tariff rounds were weighing on the US economy.

The Economy

Mixed data reported a fall in the manufacturing index to 49.1, a three-year low, which triggered renewed fears of a recession. With the US consumer seemingly single-handedly keeping the global economy afloat, August’s retail sales figures, due next Friday, will be particularly closely watched. Core CPI inflation continued to edge higher again in August to 2.3%. CPI has been boosted by unusually large gains in used vehicle prices. With auto dealers still carrying plenty of inventory, new vehicle prices are likely to decline too. Gasoline prices fell by 3% last month as well.

The Federal Reserve

The sharp fall in market interest rates over the past 12 months is starting to support the economy, with activity growth in rate-sensitive sectors like durables consumption and housing rebounding in recent months. With income growth slowing and the manufacturing sector being hammered by weak global demand, this won’t prevent a further economic slowdown, but it does make it a little more likely the economy can weather the trade war and avoid an outright recession.

The plunge in market interest rates this year has been driven mainly by shifting expectations for Fed policy, as officials backed away from further rate hikes and then started cutting rates, with the markets ramping up expectations of further loosening to come. Following the plunge in rates since the start of this year, however, the real two-year Treasury yield is no higher now than it was in early 2017, while the actual borrowing costs facing consumers and firms are also falling sharply. Recent data suggest that the boost from lower interest rates is starting to feed through to the economy. The decline in corporate bond yields should provide some support for business equipment investment growth, offsetting some of the damage from heightened trade uncertainty.

Brexit

Earlier this week, political upheaval once again shook the United Kingdom. In a surprising turn of events, newly-appointed Prime Minister Boris Johnson’s government lost its majority after a former Conservative minister joined the Liberal Democrats. Following this shake-up, the odds of a no-deal Brexit, not so long ago a strong possibility from the hardline Conservative administration, appear to have somewhat declined. In response to this ongoing confusion, Bank of England Governor Mark Carney announced that the central bank estimates a 5.5% contraction in the UK economy in the event of a “worst case scenario” Brexit, involving severe disruption to the trade of goods and services and damage to UK financial institutions in the event of no deal. Moreover, Carney reiterated that the Bank of England would remain uninvolved in the precipitous fall of Sterling, which has declined substantially since the original vote in June 2016.

Conclusion

Realize that the media has a huge impact on your perceptions and can easily drive your decision-making process. Data shows that from 1997 to 2016, the average U.S. investor performed about 70% worse than the rate of return on the S&P 500. This data says that the average investor gained about 2.3% in annualized returns, versus the 7.7% annualized return of the S&P 500. One major contribution to this large gap is the judgment of the investor. When we react to news, we tend to make quick, uninformed investment decisions–which lead to financial losses over time. With all of the political uncertainly affecting the markets today, a resolution to one of these major issues like China or Brexit could change the picture and cause markets to rally. We feel using history as a guide, approaching your investments with balance and diversification in a portfolio you feel comfortable sticking with through various market cycles makes the most sense. We don’t recommend trying to guess the timing of the market or following someone claiming to know the future. Instead, we recommend systematically and methodically re-balancing your portfolio as the market moves up and down and take the emotional knee-jerking out of the picture. Be willing to check yourself and make sure your pre-conceived notions are not affecting your perception of the situation.

Disclaimers
Past performance does not guarantee future results, which may vary. This material is provided for informational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities. Callan Capital does not provide individual tax or legal advice, nor does it provide financing services. Clients should review planned financial transactions and wealth transfer strategies with their own tax and legal advisors. Callan Capital outsources to lending and financial institutions that directly provide our clients with, securities-based financing, residential and commercial financing and cash management services. For more information, please refer to our most recent Form ADV Part 2A which may be found at www.adviserinfo.sec.gov

The S&P 500 Index is widely regarded as the best single gauge of the U.S. equities market. This world-renowned index includes a representative sample of 500 leading companies in leading industries of the U.S. economy.  Although the S&P 500 Index focuses on the large-cap segment of the market, with approximately 75% coverage of U.S. equities, it is also an ideal proxy for the total market. An investor cannot invest directly in an index

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be a recommendation for any specific investment product, strategy, plan feature or other purposes. By receiving this communication you agree with the intended purpose described above. Any examples used in this material are generic, hypothetical and for illustration purposes only. None of Callan Capital, its affiliates or representatives is suggesting that the recipient or any other person take a specific course of action or any action at all. Communications such as this are not impartial and are provided in connection with the advertising and marketing of products and services. Prior to making any investment or financial decisions, an investor should seek individualized advice from a personal financial, legal, tax and other professional advisors that take into account all of the particular facts and circumstances of an investor’s own situation.

Opinions and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors.

PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS
Copyright 2019 Callan Capital, All Rights Reserved.

1250 Prospect St. Suite 1, La Jolla, CA 92037
4611 Bee Cave Rd. Suite 201, Austin, TX 78746
www.callancapital.com

Moving for Tax Breaks

In recent years, high-tax states began to suspect a tax-dodging trend as more taxpayers changed residences while still maintaining ties to their former home states. As a result, these states have been more aggressive with their residency audits. Increasingly, states are challenging former residents who attempt to change their domicile to another state.

Although the rules vary among states, generally speaking, most states define a “resident” as an individual who is in the state for other than a temporary or transitory purpose. States consider a person’s “domicile” to be the place of his or her permanent home to which he or she intends to return to whenever absent from the state for a period of time. Most claim the right to tax an individual’s income if they are believed to be a resident and domiciled in that state.

  • Location of employment
  • Location of business relationships and transactions
  • Serving on the board of directors for a business or charity
  • Residence—whether a person’s former residence was sold, rented, or retained, and whether he or she rented or purchased real property in the new state
  • The amount of time spent in the state versus amount of time spent outside the state (183-day rule)
  • Where the taxpayer is registered to vote
  • Location of the school a family’s child attends
  • Memberships in country clubs and social organizations
  • Where charges are incurred, location of bank accounts, investments, and ATM withdrawals
  • Freeway fast-lane pass charges
  • Records of airline frequent-flier miles
  • Jurisdiction issuing a driver’s license, vehicle registration, professional license, or union membership
  • Church attendance and membership
  • Location of doctors, dentists, accountants, and attorneys
  • Official mailing address and where mail is received

Each state also has specific rules that can trigger audits. Three major red flags are 1.) a significant increase in taxable income in the year of residency change; 2.) a spouse with a different state of residency; and 3.) filing a resident state return in the first year after a move and then filing a non-resident state return the next year.

Taxpayers have the burden of proving which states they spend time in during the year. If you live elsewhere but travel on a regular and frequent basis to another state, it is a good idea to maintain a diary that clearly indicates the dates you are in a specific state, accompanied by supporting records such as transportation tickets and receipts.

Just as establishing as many ties as possible to the new state can be helpful when a change of domicile is desired, it’s also helpful to try and sever ties to the old domicile. When domicile challenges arise, they almost always revolve around the old state being unwilling to give up its status as “domicile,” rather than an issue of the new state refusing to accept that status.

Unfortunately, there’s no single bright-line test that can be used to “prove” a change in domicile, because it’s based on a determination of “intent” that simply isn’t always clear. But the good news is that there is a long list of “dos” and “don’ts” that individuals can follow to help give themselves the best opportunity at proving a bona fide change that can result in lower income taxes, lower real estate taxes, enhanced creditor protection, and other valuable benefits.

Important Disclaimer

Callan Capital does not provide individual tax or legal advice, nor does it provide financing services. Clients should review planned financial transactions and wealth transfer strategies with their own tax and legal advisors. Callan Capital outsources to lending and financial institutions that directly provide our clients with, securities based financing, residential and commercial financing and cash management services. For more information, please refer to our most recent Form ADV Part 2A which may be found at http://www.adviserinfo.sec.gov.

July 2019 Market Update

The Federal Reserve cut rates this week by a quarter of a point. According to the Fed, the cut was a response to “the implications of global developments for the economic outlook as well as muted inflation pressures.” Fed Chair Jerome Powell characterized it as a “mid-cycle adjustment to policy” that provides some insurance to protect against downside risks.

Powell suggested that this cut won’t be followed by another at the next meeting in mid-September. The statement regarding the cut offered an almost identical assessment of economic conditions to the one issued in June. Labor market conditions were described as “strong” and GDP growth as “moderate”. There was no suggestion that Fed officials were more worried about the economic outlook than they were before. That’s not a surprise since the incoming activity data have been fairly resilient over the past six weeks, with GDP growth only slowing to a still healthy 2.1% annualized in the second quarter.

The vote to cut was not unanimous, with Esther George and Eric Rosengren preferring to leave rates unchanged. That wasn’t a complete surprise since both has publicly expressed their opposition to a cut in the run up to this meeting. But two dissents are a little unusual and suggests there was a broader minority of non-voting officials who were also uncomfortable with the rate cut.

Economic Growth

The economic expansion enters its 11th year in July, making it the longest expansion since 19001. However, growth is set to decelerate further, and resume its expansion average pace of roughly 2%. Second-quarter GDP growth slowed to 2.1% annualized, from 3.1% in the first quarter, but that drop off would have been even bigger if not for a surprisingly strong gain in government expenditure this quarter. Government spending increased by 5.0%, the strongest quarterly gain in a decade.

The week ahead is the peak week in the earnings season with 168 of S&P 500 companies set to report. So far, with 54% of S&P 500 market cap in the door as of Friday morning, 77% of firms have beaten earnings expectations, compared to 69% and 74% over the past two quarters respectively. However, in absolute terms, the year-over-year gain in earnings per share is tracking just 2% for the quarter, all of which can be accounted for by a reduction in share count due to strong buybacks. This buyback effect will likely fade in coming quarters, both due to the diminished impact of cash repatriated in response to the Tax Act of 2017 and because, at higher stock prices, it simply takes more dollars to reduce share count in a significant way.

Almost 10 years of monetary stimulus, economic growth and falling unemployment have succeeded in boosting home prices, bond prices and stock prices. However, they have not had a meaningful impact on consumer prices. Oil’s collapse brought headline inflation down, and despite a temporary rebound in oil prices, it failed to lift inflation. The Fed has acknowledged this persistently low inflation by lowering its projections for year-end inflation to just 1.5%.

China and Trade 

Trump announced Thursday that he would impose a 10% tariff on a further $300 billion in Chinese imports, a move set to hit American consumers more directly than his other tariffs so far. The new import taxes, which Trump later said could go “well beyond” 25%, will be imposed beginning Sept. 1 on a long list of goods expected to include smart-phones, laptop computers and children’s clothing. “If the U.S. is going to implement the additional tariffs, China will have to take necessary countermeasures,” Foreign Ministry spokeswoman Hua Chunying said at a regular briefing in Beijing on Friday. She didn’t elaborate on what the measures would be. “China won’t accept any maximum pressure, threat, or blackmailing, and won’t compromise at all on major principle matters,” Hua said.


The Market

Long-term interest rates remain very low, especially compared to historical averages.  The 10 year treasury hit 1.84 after the tariff announcement, which means investors are guaranteed a loss in real terms after accounting for inflation). In addition, a more dovish Fed could bring short term rates even lower from here. Therefore, in this rate environment and at this stage in the economic cycle, diversification in fixed income investing outside of treasuries has become increasingly important. 

Market volatility in the fourth quarter of 2018 brought equity valuations closer to their long-run averages; however, equity markets have moved higher this year and have achieved new market highs. Although valuations do not appear to be overextended, they are not cheap either on an absolute basis. However, valuations relative to fixed income remain attractive.  It is important for investors not to be positioned too aggressively, as many uncertainties, such as the Fed’s next move, trade and growth, remain, and may cause volatility ahead.

The Debt Ceiling

The Senate passed a broad, two-year budget deal on Thursday that boosts spending and eliminates the threat of a debt default until after the 2020 election, while reducing the chances for another government shutdown. The government spends more money than it brings in through revenue, and it covers the difference by issuing debt. But the Treasury Department can only issue debt up to a limit set by Congress, known as the debt ceiling. If the debt ceiling is not lifted, the government could fall behind on some of its payments, which could spark another financial crisis.

The government now spends roughly $4.4 trillion and is expected to bring in roughly $3.5 trillion in revenue, leaving a gap of $900 billion. A number of Senate Republicans, including some who support Trump strongly on most issues, were reluctant to go along. The national debt now stands at $22 trillion, but the deal makes no attempt to rein in spending, take on entitlements, or make any structural changes many Republicans say are necessary to reform Washington’s dysfunctional budget process.

Conclusion

For investors, this has been an exceptionally positive year so far, with large cap U.S. stocks gaining more than 20%2 even as interest rates drift down in anticipation of an easier Fed. However, with a clearer big picture, we believe it is more important to take advantage of valuation opportunities both within particular sectors of the U.S. equity and fixed income markets and in lagging stock markets overseas.

1, 2 https://am.jpmorgan.com/us/en/asset-management/gim/protected/adv/insights/economic-overview

Disclaimers
Past performance does not guarantee future results, which may vary. This material is provided for informational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities. Callan Capital does not provide individual tax or legal advice, nor does it provide financing services. Clients should review planned financial transactions and wealth transfer strategies with their own tax and legal advisors. Callan Capital outsources to lending and financial institutions that directly provide our clients with, securities-based financing, residential and commercial financing and cash management services. For more information, please refer to our most recent Form ADV Part 2A which may be found at www.adviserinfo.sec.gov

The S&P 500 Index is widely regarded as the best single gauge of the U.S. equities market. This world-renowned index includes a representative sample of 500 leading companies in leading industries of the U.S. economy.  Although the S&P 500 Index focuses on the large-cap segment of the market, with approximately 75% coverage of U.S. equities, it is also an ideal proxy for the total market. An investor cannot invest directly in an index

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be a recommendation for any specific investment product, strategy, plan feature or other purposes. By receiving this communication you agree with the intended purpose described above. Any examples used in this material are generic, hypothetical and for illustration purposes only. None of Callan Capital, its affiliates or representatives is suggesting that the recipient or any other person take a specific course of action or any action at all. Communications such as this are not impartial and are provided in connection with the advertising and marketing of products and services. Prior to making any investment or financial decisions, an investor should seek individualized advice from a personal financial, legal, tax and other professional advisors that take into account all of the particular facts and circumstances of an investor’s own situation.

Opinions and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors.

PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS
Copyright 2019 Callan Capital, All Rights Reserved.

1250 Prospect St. Suite 1, La Jolla, CA 92037
4611 Bee Cave Rd. Suite 201, Austin, TX 78746
www.callancapital.com

June Market Update

In last week’s meeting between Presidents Trump and Xi at the G-20, both sides agreed to resume negotiations and hold off on imposing new tariffs. Trump pledged not to introduce the much feared 25% tariff on an additional $300bn in Chinese imports as trade negotiations continue. Had those tariffs gone into place, they had the potential to do significant damage to second-half economic and earnings growth prospects.

As a result, Wall Street opened at a record  on renewed hopes of a US-China trade deal after the leaders of the world’s two biggest economies agreed to restart negotiations. The S&P 500 rose 1.2%, enough to make a new high in opening trade. Technology stocks are also up after the U.S. reversed policies preventing American companies from selling software and equipment to Chinese telecommunication giant Huawei. The tech-loaded Nasdaq Composite made an opening gain of 1.8% on the news.

The good news caused China’s renminbi to strengthen after haven assets like gold weakened today on hopes of a US-China trade deal on the horizon. China’s CSI 300 index of major Shanghai and Shenzhen-listed stocks rallied 2.9%. Haven assets lost some luster, with gold falling 1.1%. The yield on the 10-year US Treasury rose 1.2 basis points as investors continued to move out of the debt. We’ve been here before, however, and many analysts are warning that a trade deal between the US and China remain elusive, and that recent economic indicators were still weak.

Economic Growth

We continue to expect Gross Domestic Product (GDP) growth to slow in the second half of this year, which may prompt the Federal Reserve to cut interest rates. The Fed signaled at the June Federal Open Market Committee meeting that interest rates are likely to be cut over the coming quarters. Although markets are convinced the first cut will come in July, we still think that a temporary truce in the trade war means it is more likely that cut will be delayed until September. Regardless of the exact timing and overall magnitude of the coming rate cuts, the substantial drop back in long-term borrowing costs that we have already seen is a good reason to believe that economic growth will enjoy a modest recovery from mid-2020 onwards.

It was inevitable that GDP growth would slow once the impact of last year’s fiscal stimulus began to fade, particularly as the full impact of the Fed’s interest rate hikes is still flowing through. That drag from an increasingly more adverse policy mix has been exacerbated by a slowdown in other parts of the global economy in the second half of last year, particularly in Europe and China.

While this week brought some more positive news on investment, the modest gain in real consumption in May, together with revisions to previous months’ data mean second-quarter consumption growth now looks set to be 3.8% annualized, a little weaker than the 4% gain we had predicted.

Consumer Confidence numbers this coming Tuesday and Consumer Sentiment numbers on Friday should remain at high levels. If consumer spending continues to grow solidly, the economy should be able to avoid recession. And if there is no recession, earnings should continue to grow, however slowly.

Recent manufacturing momentum has slowed markedly. Over the past few quarters, there has been a notable deterioration in the distribution of global growth, with the services sector continuing to look relatively healthy but the manufacturing sector coming under a great deal of pressure. We believe this is largely due to dovish monetary policy globally and the continued tension of the trade wars. The uncertainty is dragging on business confidence, business investment and exports. Manufacturing momentum can be a good proxy for what we can expect GDP growth to look like. Policy uncertainty remains elevated, and when businesses are not confident in the outlook, the first thing they typically pull back on is investment spending. Although it feels as if we are making forward progress on trade relations with China, and there should be more clarity on the Brexit timetable, there are still a number of issues that remain unresolved. As such, while global manufacturing may begin to show some signs of life in the coming months, the more important issue for investors will be whether uncertainty is rising or falling.

Oil Prices

Oil prices are up, OPEC and its allies look to extend supply cuts until at least the end of 2019 at their meeting in Vienna this week. Oil prices climbed, boosted by brighter prospects for global trade as well as an extension of production cuts by Opec+. Brent crude oil, the global benchmark, rose 2.3% to $66.24 a barrel. Iran – under U.S. sanctions alongside OPEC ally Venezuela – joined top producers Saudi Arabia, Iraq and Russia in supporting an extension of a supply cut deal until at least December.

Bond and Stock Market

Usually, stocks go up when investors are increasingly bullish about the economy, and Treasury bond yields typically fall when investors are increasingly bearish about the economy, but these two effects are happening simultaneously. The apparent contradiction is difficult to reconcile.  The conflicting signals in the stock and bond markets may simply be a short-term anomaly.  It is really too close a call, for now, as to whether the stock market or the bond market has it right. Consequently, investors should not bet too heavily on one outcome or the other but rather remain well diversified.

For long-term investors, it is important to emphasize that the global economy trends upward over long-time horizons. We believe most successful investors will likely be those who focus on valuation rather than timing.

Disclaimers
Past performance does not guarantee future results, which may vary. This material is provided for informational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities. Callan Capital does not provide individual tax or legal advice, nor does it provide financing services. Clients should review planned financial transactions and wealth transfer strategies with their own tax and legal advisors. Callan Capital outsources to lending and financial institutions that directly provide our clients with, securities-based financing, residential and commercial financing and cash management services. For more information, please refer to our most recent Form ADV Part 2A which may be found at www.adviserinfo.sec.gov

The S&P 500 Index is widely regarded as the best single gauge of the U.S. equities market. This world-renowned index includes a representative sample of 500 leading companies in leading industries of the U.S. economy.  Although the S&P 500 Index focuses on the large-cap segment of the market, with approximately 75% coverage of U.S. equities, it is also an ideal proxy for the total market. The CSI 300 Index is a free-float weighted index that consists of 300 A-share stocks listed on the Shanghai or Shenzhen Stock Exchanges. Brent Crude is a major trading classification of sweet light crude oil that serves as a benchmark price for purchases of oil worldwide. The Nasdaq Composite Index is the market capitalization-weighted index of over 3,300 common equities listed on the Nasdaq stock exchange. An investor cannot invest directly in an index.

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be a recommendation for any specific investment product, strategy, plan feature or other purposes. By receiving this communication you agree with the intended purpose described above. Any examples used in this material are generic, hypothetical and for illustration purposes only. None of Callan Capital, its affiliates or representatives is suggesting that the recipient or any other person take a specific course of action or any action at all. Communications such as this are not impartial and are provided in connection with the advertising and marketing of products and services. Prior to making any investment or financial decisions, an investor should seek individualized advice from a personal financial, legal, tax and other professional advisors that take into account all of the particular facts and circumstances of an investor’s own situation.

Opinions and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors.

PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS
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