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

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

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
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

May Market Update

Trade was the big theme this month once again, with China suggesting it could restrict exports of rare earth elements to the US, as well as a rise in US-Mexico trade tensions Thursday night. Consequently, the prices of oil and other industrial commodities fell, while the price of gold was lifted by a jump in safe-haven demand. Looking ahead, we suspect that any further increase in trade tensions could continue to weigh on the prices of industrial commodities but may provide a boost to gold and silver prices.

The bond market also appears to recognize the danger, with the 10-year Treasury yield plunging this week even before the news of tariffs on Mexico. Ten-year bond buying has actually pushed the yield on long-term U.S. Treasury bonds beneath the yield on short-term bonds. This phenomenon is known as an inverted yield curve, and it is one of the most reliable indicators that the American economy is headed for a recession in the near future. The logic behind this correlation is that in ordinary times, investors will demand a higher yield on long-term bonds than short-term ones, since locking your money into a Treasury for a decade is riskier than doing so for just three months. Federal Reserve drastically raises benchmark interest rates, then that bond will plummet in value.

Therefore, if investors are willing to pay a premium to tether themselves to today’s interest rates, they seemingly believe that inflation isn’t budging for a long time, and that the Federal Reserve will actually be cutting interest rates in the near future — something that the central bank rarely does in the absence of adverse economic developments. The inversion of the yield curve isn’t a new story. The yield on ten-year Treasury notes dipped below the yield on three-month ones in March But this inversion has deepened significantly in recent days.

Mexico and Trade

Trump announced late on Thursday that he would use emergency powers to levy a 5% tariff on all Mexican imports from 10th June onwards, in response to the migrant crisis at the southern border, with the tariff rising in 5% increments every month until it reaches 25% by October. President Donald Trump’s shock announcement of tariffs on Mexican imports could be challenged by Congress, but the possibility that both Mexican and Chinese imports might be subject to a blanket 25% tariff presents a significant additional downside risk to the US economy. With imports from Mexico worth $350bn annually, a 25% tariff could raise $90bn in customs duties and increase domestic prices by at least 0.4%, with the motor vehicles and electronics sectors most exposed. US exports to Mexico, equivalent to 1.3% of GDP, could be hit by retaliation, although Mexico is unlikely to risk a full-blown trade war by responding in kind as the peso has already fallen by 3% since the announcement.

Much like his earlier promise to close to the Southern border, Trump’s latest threats could amount to nothing. The move may be an attempt to force Congress to approve the US Mexico Canada Agreement (USMCA) trade deal, with the White House also announcing yesterday that it will send the agreement to lawmakers within 30 days.

China and Trade

On May 10, the U.S. took tariff rates on $250 billion of Chinese exports to 25%. Retaliation was swift, with China raising tariffs on certain U.S. goods in a range from 5% to 25%. The stock market plunged on Monday, as China responded by raising the tariffs despite Trump warning Chinese officials not to retaliate.

The latest escalation in trade tensions could become a bigger drag on the US economy than previous rounds of tariffs. A 25% tariff on all imports from China would be equivalent to a tax worth 0.6% of GDP, only part of which would be offset by an increase in farm aid. Together with a further hit to US exports from Chinese retaliation, the overall damage to the economy could be as large as 0.7% of GDP. China already levied tariffs on two-thirds of US exports but targeting the remainder of US goods could hurt China more than the US. Those goods include high-tech machinery, semiconductors and other electronics, which Chinese firms would struggle to buy from elsewhere.

A meeting between Trump and Chinese President Xi at the G20 meeting in late June may result in some sort of deal or at least a pause to hostilities. But there is now a serious risk that within another couple of months, tariffs will cover all US-China bilateral trade.

The Fed and Trade

The markets are increasingly betting that escalating trade tensions will be enough to convince the Federal Reserve to cut interest rates, with fed funds futures showing that a 25bp cut before the end of this year is now fully priced in, and more than two cuts expected by the end of 2020. Trade tensions present a downside risk to that forecast, but we think rate cuts will soon come onto the agenda regardless of whether the dispute with China is resolved.

Brexit

Prime Minister Theresa May said last week she would step down as leader of the Conservative Party and then as prime minister, after repeatedly failing to get her Brexit plan through Parliament. May said it was in the “best interests of the country for a new prime minister” to lead Britain through the Brexit process. “I feel as certain today as I did three years ago that in a democracy, if you give people a choice you have a duty to implement what they decide. I have done my best to do that. I have done everything I can to convince M.P.s to back that deal. Sadly, I have not been able to do so.”

She announced plans to step down as the leader of the Conservative Party on June 7, with the process to replace her beginning the following week. She will remain as prime minister until a new leader is chosen, probably by the end of July. Britain has taken several economic hits recently, and business leaders are worried about the prospect of more gridlock in Parliament, potentially leading to a harmful “no deal” Brexit on Oct. 31.

Conclusion

May marks the first monthly loss for the market in 2019. That’s a sharp shift from stocks’ record setting run so far this year. The S&P 500 hit an all-time high on April 30, back when investors had factored in a resolution to Trump’s trade wars. Investors have been shifting money into bonds over concerns that economic growth will be hindered by the ongoing trade war. While this may present an opportunity for disciplined investors, it’s best to stay the course and watch cautiously until more political uncertainties draw closer to a resolution.

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

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

April 2019 Market Update

The 3.2% Gross Domestic Product (GDP) gain recorded for the first quarter was much stronger than had been expected just a few weeks ago. However, much of the growth was due to gains in the volatile inventory and international trade categories. These trade and inventory gains are likely to be at least partially reversed in the second quarter. In addition, March data due out this week on real consumer spending, construction activity, international trade in goods, and wholesale and retail inventories could result in a downward adjustment to first quarter GDP estimates. Lower than expected income tax refunds could sap consumer momentum as could recent increases in gas prices. Overall, it appears that growth is still on pace to round out the year at 2% on average.

The U.S. economy added 275,000 private sector jobs in April, according to a report released yesterday, signaling continued strength in the labor market. The ADP National Employment Report, a closely watched gauge of private sector hiring, blew past economists’ expectations. ADP’s analysis is released two days before the Labor Department’s monthly employment report and is considered a key preview of the federal government’s measurement of the hiring situation.

Corporate Profits

Solid GDP growth in the first quarter, combined with slower gains in employment should boost Non-Farm Business Productivity for the first quarter to 2.3% year-over-year, its strongest gain since 2010. In addition, relatively mild wage growth should limit the gain in Unit Labor Costs to just 0.2%–its slowest pace in four years. This suggests companies may be able to sustain positive profit growth in the quarters ahead, as businesses are continuing to restrain labor costs.

164 S&P 500 companies are set to report their first-quarter earnings this week. It appears that S&P 500 operating earnings per share will see a small year-over-year increase in the first quarter. With just over 50% of market cap reporting on Friday morning, 78% of firms had beaten analyst earnings estimates. Even with moderate economic growth, year-over-year profit growth should stay positive for the first three quarters of this year.

The Federal Reserve

This week’s decision by the Federal Reserve affirms the March’s meeting outcome signaling no rate change for the rest of 2019. In the previous meeting, the Fed said low inflation, weak global growth, and tightening financial condition warranted a pause in interest rate hike cycle. The Federal Open Market Committee statement also mentions that it will be patient as it weighs a future interest rate move. On the economic front, the Fed noted that economic activity “rose at a solid rate.”  The global risks which have caused the Fed to pause last year have moderated. The market continues to bet on a rate cut, but the odds of it happening reduced after the Fed’s press conference.

Inflation

Federal Reserve Chairman Powell, speaking at a press briefing Wednesday following the Fed’s decision to leave its benchmark interest rate unchanged, downplayed a recent slide in U.S. inflation, saying “transitory” factors may be dragging it down. His comments helped reverse a drop in bond yields while sending stocks lower, as investors pared back expectations of a rate cut. Inflation has retreated further from the Fed’s 2% target, catching the attention of President Donald Trump, who has been critical of the central bank’s past rate hikes. Trump tweeted on Tuesday that the economy could go “up like a rocket if we did some lowering of rates, like one point, and some quantitative easing.”

Global Markets

Aggregate GDP growth in Emerging Europe appears to have slowed from 1.9% year over year in Q4 to around 1.3% year over year in Q1. While we don’t anticipate much of a rebound in the coming quarters, it does at least appear that the slowdown in regional growth is bottoming out.

Amid global trade tensions that remain unresolved, political turmoil in places like Italy, France, and the U.K., and a slowing China, the global economy is facing a slowdown. We have seen manufacturing activity dip into contractionary territory in many regions, most notably China, Germany, the Euro Area, Taiwan and Korea. Headwinds remain for the global economy which will likely slow but not stall in 2019.

Conclusion

We will continue to monitor our quantitative and dynamic business-cycle models throughout 2019 to maintain a structured approach to how we assess the risks unfolding in the economy, and the opportunities for dislocations versus market pricing. As we move closer to late-cycle economic conditions, we think it makes sense to maintain flexibility and a focus on our asset allocation portfolios in order to take advantage of what we expect will be a dynamic and more volatile environment in 2019.

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

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

March 2019 Market Update

The incoming monthly activity data suggest that GDP growth has slowed from 2.6% annualized in the fourth quarter to only around 1.5% in the first. The rebound in consumer confidence suggests that consumption will continue to recover from the plunge in December, while a potential trade deal with China could give a temporary lift to exports. The sharp fall in the trade deficit in January was mainly due to a larger than expected drop in imports. Nonetheless, with imports on pace to be flat or to have fallen slightly in the first quarter, net trade is on track to be a positive for first quarter GDP growth. It is certainly possible that growth picks up again in the second quarter.
However, with the fiscal boost having faded and the continued slowdown in durables consumption, a sustained recovery looks unlikely. We expect GDP growth to remain below its 2% potential pace this year, ruling out any further rate hikes from the Fed and ensuring that market expectations of rate cuts will continue to grow. While the economic slowdown has been widespread, it has been particularly tough in Europe and, to a lesser extent, Asia. The U.S. economy has held up relatively well, despite many political uncertainties.

The Market
U.S. stocks edged lower last week, with some sector volatility (financials, industrials) and significant price swings in bonds. Disappointing European manufacturing data in combination with a more “dovish” Fed led the 10-year treasury yield to fall the most in two years and U.S. investment grade bonds to rise the most in four years. The Fed’s revised economic projections, which now imply no rate hikes this year, together with the announcement that it will halt its balance sheet run-down in September, came as a positive surprise for the markets.

Yield Curve
Last week a closely watched economic indicator, the yield difference between the 3-month T-bill and the U.S 10-year inverted. Normally a yield curve is upwards sloping as long-dated bonds are inherently riskier than short-dated bonds due to the risks associated with time. An inverted yield curve is where yields of short-dated bonds rise above the yields on long-dated bonds, historically this has been a sign of an impending recession. Historically, equity returns post-inversion are quite strong. Since the 1970’s when the 3-month T-bill and the U.S. 10-year inverted it took on average another 350 days before the equity market peaked, with an average return of 22%. While the market performance following inversions historically has been positive, it doesn’t always happen so we encourage investors to remain cautious. With that in mind, investors shouldn’t immediately change their portfolios, however, a slightly more cautious stance at this late stage in the cycle may be warranted.

Trade
Media reports indicate that the U.S. and China are close to agreeing to a trade deal. China is set to boost market access for U.S. firms by cutting tariffs and easing foreign ownership rules, as well as strengthening protection of intellectual property. China has also agreed to not deliberately devalue its currency. China is also pledging to ramp up purchases of US goods. In return, the U.S. will not pursue further tariffs on Chinese goods and will remove most, or all, of the punitive tariffs currently in place.
The tariffs don’t appear to have had much impact on the economy anyway. Firms absorbed part of the impact by cutting margins and the tariffs were offset by an appreciation of the dollar against the renminbi (yuan). Core inflation is lower now than when tariffs were first imposed. US exports to China did drop in the second half of last year, but that was due largely to direct intervention by Chinese authorities, which cut off purchases of US energy and agriculture. Even if those tariffs were reversed, it would likely only add only a few tenths of a percent to annualized GDP growth.

Brexit
The EU granted a short extension on Brexit, pushing back the deadline by at least two weeks, from March 29th to April 12th. The postponement removed the risk of the UK leaving the EU without a deal this past Friday. However, Parliament is still facing the same four Brexit options it always has; deal, no deal, revoke Article 50 or a significant delay to Brexit by an extension of Article 50. Meanwhile, the economy seems relatively resilient to the Brexit uncertainty.

Eurozone
The European Central Bank (ECB) reverted to a stimulus monetary policy, lowering rates in an unexpected move as the bank made sharp cuts to its forecasts for both growth and inflation this year. The announcement sent the euro down 0.6% against the dollar. Mario Draghi, president of the ECB, said economic data showed a “sizeable moderation” in growth. Expectations on economic growth in the euro area are now 1.1% this year, down from earlier forecasts of 1.7%. The extent of the measures announced by the ECB underline its concerns over slowing growth in the eurozone. Its decision to push back on any plans to raise rates anytime soon follows similar moves from central banks around the world, including the US Federal Reserve and the Bank of England.

Conclusion
While predicting market movements perfectly is impossible, it is possible for long-term investors to prepare for changing economic conditions. We believe owning a diversified portfolio with the right mix of equities and bonds for your comfort with risk helps alleviate the negative effects of volatility on your portfolio over the long term.
Volatility is a normal part of investing, and we expect periodic swings in asset prices as the cycle continues to age. What’s important to remember is that despite some weaker indicators, the economic fundamentals still appear positive, and occasional pullbacks in the market are normal and to be expected.

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

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