Outlook March 31, 2016

ONE QUARTER DOESN’T END THE GAME

At the March Meeting Fed Chair Janet Yellen announced that the FOMC did not increase the Fed Funds rate as was greatly expected. Reasons for holding off on the next rate rise include inflation firming at a decent pace yet below target and employment remaining steady. Chair Yellen also stated recently that “global economic and financial developments continue to pose risks” impact the pace of rate increases. Market participants showed their support for the Fed’s “Dovish” stance on monetary policy by rallying the broad stock market indices at the end of March.

Living in the modern world we are accustomed to buying foreign goods without a second thought. Coffee from South America, shoes from Italy, clothing made in China, India and Bangladesh, food from Europe, electronics from China, and the list goes on. Naturally, the FOMC is aware of the impact that US monetary policy may have on foreign economies and markets. Our Federal Reserve considers the impact on the global economy although it does not have the charge to be the monetary authority for the world.

News from abroad includes the People’s Bank of China committing to support the Renminbi in an effort to prevent a meltdown. In addition, the European Central Bank implemented a “Negative Interest Rate Policy” (NIRP) on bank deposits intending to encourage bank lending on the Continent. The NIRP as a monetary tool had been employed by the Swiss in the 1970’s, and a couple of times in the last six years by Sweden and Denmark. The impact of the NIRP on deposits of this magnitude is yet to be seen. These actions demonstrate that Central Banks are co-operating with the common purpose of maintaining global financial stability.

Leading indicators are remaining strong on a year-over-year basis, but while the news is encouraging, they do not indicate that the economy is growing at a rapid pace. Tepid is more like it. The economy has grown at about 1.3 percent per year on average over the past seven years, including a higher real growth rate of about 4% in 2014 and 2015, and slight declines on a quarter-to-quarter basis. Recent expectations of growth for the domestic GDP are near zero for the first quarter. This “soft patch” is not the same as a recession. Our research indicates that recessions in the US are typically preceded by a spike in commodity prices. Commodity price indicators remain at low levels and are well below the 2008 peaks. Consequently we believe the risk of recession remains low in the next year.

Sentiment Remains Cautious

Market participants find it difficult to look at the investment climate without using 2008 goggles. We hear from our clients that they fear a repeat of 2008. We see many bright spots in the financial landscape supporting the strength of two key segments of the economy: businesses and consumers. Housing starts and permits reported for February 2016 are more than twice levels reported in April 2009. March’s Conference Board Consumer Confidence Index is at 96.2, light years above the March 2009 low of 25.3. Consumers are nearly five times more confident about the future than they were seven years ago. Homes sales are rising, the personal savings rate is strong and the job market is good. Business activity, as indicated by the ISM, shows that the manufacturing is growing – not shrinking as it was in 2008. More than 14 million jobs have been created since the beginning of 2010. The Unemployment Rate in the U.S. hovers near 5% which we believe to be a very healthy level.

The Stock Market

The S&P500 Index dropped 9.5% between December 29, 2015 and January 15, 2016 due to concerns of a global recession. Interestingly the decline paralleled a fifteen percent drop in oil prices. Fears of an economic decline subsided and the market recovered, ending up 1.5% for the first quarter.

Reported corporate profits in 2015’s fourth quarter were weaker than anticipated capping the third quarter in a row of flat to down earnings. The outlook for the first quarter of 2016 is unappetizing as well. Two factors weighing on earnings of late include the strength in the U.S. dollar and the energy sector recession. Oil prices stabilizing recently are expected to stem the flow of red ink from energy companies by the second half of the year. Strategists estimate that S&P500 Index earnings for 2016 will be eight percent above the prior year.

March 9, 2016, marked the seventh anniversary of the beginning of the equity bull market. Stocks rose from very low values during the Great Recession to recent peaks. Easy monetary policies, low interest rates and a growing economy pushed stocks higher. The three legs of the stock market as we view them are earnings, valuation and sentiment. Earnings for companies in the S&P500 Index declined by 4.2% in the fourth quarter of 2015. Earnings were impacted by a 73% decline in energy stocks’ reported earnings and sales pressures as a result of a strong U.S. dollar. First quarter 2016 earnings are expected to rebound 25% from $23.06 fourth quarter 2015 earnings to $29.00.

Market Indicies (Total Return as of 3/31/2016)
YTD% 1-Year% 3-Year%* 5-Year%*
S&P 500 1.3 1.8 11.8 11.5
NASDAQ (2.8) 0.7 15.7 13.3
Russell 2000 (1.9) (9.8) 6.8 7.2
MSCI World ex-USA** (2.9) (7.8) 2.9 2.9
MSCI Emerging Markets** 5.7 (11.7) (4.2) (3.8)
Source: Bloomberg Finance L.P; *Annualized; **USD

Valuation as measured by the forward S&P 500 Index P/E ratio stands at 16.6x next twelve months’ earnings. The 25-year average forward P/E is 15.8x the next twelve months’ earnings. Based upon this comparison current valuations are reasonable, neither cheap nor expensive. As an indication of yields available today the 10-year treasury yields 1.7%. By comparison the S&P500 Index dividend yield is 2.2% and coupled with future growth presents an attractive alternative in those situations where risk can be tolerated for a period of time. Sentiment or investors’ feelings toward the current environment, remains difficult. Typically the Presidential election cycle is neutral with respect to market performance. It is different this time as the primary election process has become a circus of extremes, emotions and diversions from the real issues facing the U.S. today. Regrettably these emotions swamp earnings and valuations as investors determine the best places in which to invest.

Our investment philosophy begins with an analysis of our clients’ needs for growth and income. Once an Investment Objective has been determined a custom investment program is implemented and managed for our clients. A low return environment provides the back drop for our analysis and underlies our expectations for the near term. Our Wealth Management specialists are available to discuss aligning your investment program to reach your financial goals.

Rich Gartelmann CFP® – (630) 844-5730 rgartelmann@oldsecond.com
Jean Van Keppel CFA® – (630) 906-5489 jvankeppel@oldsecond.com
Brad Johnson CFA®, CFP® – (630) 906-5545 bjohnson@oldsecond.com
Joel Binder, SVP – (630) 844-6767 jbinder@oldsecond.com
Jacqueline Runnberg CFP® – (630) 966-2462 jrunnberg@oldsecond.com
Ed Gorenz, VP – (630) 906-5467 ejgorenz@oldsecond.com
Visit Old Second Wealth Management

Non-deposit investment products are not insured by the FDIC; not a deposit of, or guaranteed by, the bank; may lose value.

Wealth Management Economic Update March 28, 2016

U.S. and World News

  • Brussels_Belgium_360Terrorism ripped through the Belgian city of Brussels this week as explosives were placed at the capital’s airport and metro station, killing 31 and wounding 300 more. Terrorist group ISIS claimed responsibility for the Brussels attacks that took place just four months after another major attack in Paris. One suspect believed to have been involved in the attacks has been arrested and is being questioned. The most recent attacks again shine the spotlight on the European migrant crisis and put Europe’s open borders policy into question.
  • This week President Obama became the first sitting U.S. president since Calvin Coolidge in 1928 to visit Cuba in a historic visit. Obama met with Cuban President Raul Castro in a symbolic measure that indicated the end of the Cold War era conflict between the two nations. Despite the opening up of limited trade between the two countries, vast ideological differences remain.

Markets

  • Markets were down marginally in the holiday shortened trading week. The S&P 500 lost 0.65% and closed at 2,036. Likewise, the Dow Jones fell 0.49% and closed at 17,516. So far in 2016, the S&P is up 0.14% and the Dow is up 1.22%.
  • Interest rates were mostly unchanged this week. The 5 year and 10 year U.S. Treasury Notes are now yielding 1.38% and 1.90%, respectively.
  • The spot price of WTI Crude Oil fell 4.08% this week to close at $39.46 per barrel. WTI Crude is down 1.30% in 2016.
  • The spot price of Gold decreased 3.06% this week, closing at $1,217.05 per ounce. Year to date, gold prices are up 14.70%.

Economic Data

  • Initial jobless claims came in at 265,000 which was unchanged from last week’s reading. The Labor Department noted no special factors in the data. The four week moving average for claims moved slightly up to 259,750.
  • Existing home sales declined by -7.1% in February, worse than an expected -3.0% drop. Sales of existing single family (-7.2%) and multi-family (-6.6%) fell during the month.
  • New home sales were in line with expectations, rising 2.0% during February. Despite the increase, the West region was the only one to see gains in new home sales while the Midwest, South and North regions saw declines.

Fact of the Week

  • The average holding period of a stock in the United States has fallen from about 8 years as of 1960, to only 1.3 years today. The average holding period of stocks hit its low of 1.0 years in 2010 (Source: Strategas Research Partners).

Please contact a member of the Wealth Management Department if you have any questions about this information.

Rich Gartelmann CFP® – (630) 844-5730 rgartelmann@oldsecond.com
Jean Van Keppel CFA® – (630) 906-5489 jvankeppel@oldsecond.com
Brad Johnson CFA®, CFP® – (630) 906-5545 bjohnson@oldsecond.com
Joel Binder, SVP – (630) 844-6767 jbinder@oldsecond.com
Jacqueline Runnberg CFP® – (630) 966-2462 jrunnberg@oldsecond.com
Tamara Wiley, CFP® – (630) 844-3222 twiley@oldsecond.com
Ed Gorenz, VP – (630) 906-5467 ejgorenz@oldsecond.com

Visit Old Second Wealth Management

Non-deposit investment products are not insured by the FDIC; not a deposit of, or guaranteed by, the bank; may lose value.

 

Rolling Forecasts: Tell a Better Story About Your Firm’s Future

Michael Kozak, Executive Vice President and Chief Credit Officer

David Mottet, First Vice President—Commercial Lending

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Michael Kozak

Preparing the annual company budget can lead to a shared leap of faith. After all, a budget is often the result of much time and effort, as numerous stakeholders peer into the future to forecast sales and expenses based on educated guesses about market and business conditions. From there decisions are made throughout the year, including how much financing may be needed. Then, expenses are trimmed to stay in line with the budgeted numbers, and success is defined by how well the firm tracked its forecasts.

It’s a common practice, and it can be effective, but it’s not necessarily a best practice for every company.

March_Mottet_David_2012

David Mottet


A Better Way?

More companies and entrepreneurs are leveraging technology to create “living” budgets instead. These rolling forecasts deliver updated projections throughout the year—typically at least quarterly—to incorporate market changes, as well as variations in revenue and expense trends.

By aligning a firm’s time horizon with its business cycle, rolling forecasts can link business drivers—event-driven updates—to budget targets. This lets decision makers manage with improved responsiveness and agility, since they can make adjustments for current conditions.

OSB-0051_Kozak-Infographic_FINAL

Why Your Lender Cares

Because the current business environment moves faster and is more reactive than traditional budgeting approaches allow for, rolling forecasts can result in a more adaptive budget since they provide more than a best guess at a single point in time.

Rolling forecasts can also help with loan requests for a very simple reason: Banks prefer not to lend companies less than needed or more than is required. In other words, the more accurate the budget forecast, the more realistic the analysis and verification of your financing needs will be.

Also, bankers appreciate any improvement in accuracy when making credit decisions. Rolling forecasts are especially helpful where growing companies are involved. These companies are especially challenged when it comes to projecting future needs, since they will differ significantly from the past.

To discuss how improving budget forecasts could benefit your business and potentially improve the efficiency of your firm’s use of credit, contact your Old Second banker by clicking here.

Wealth Management Economic Update March 21, 2016

U.S. and World News

  • The Federal Reserve met this week and decided to keep interest rates unchanged, a result which was expected by markets and forecasters. The Fed indicated a more cautious approach to future monetary policy and lowered its internal projections to just two interest rate hikes in 2016, down from the four projected to begin the year. Fed officials pointed to global economic and financial developments as the cause for their concern and noted that while inflation has picked up in recent months, it remains below the committee’s long-run objective.
  • President Obama has nominated Judge Merrick Garland to the Supreme Court following the death of long-serving conservative Justice Antonin Scalia. Merrick would be the 113th Supreme Court justice if confirmed. Standing in his way however, is the Republican controlled Senate which has vowed to not hold any confirmation hearings for any Obama nominee as they believe that the seat should be filled by the next president following this year’s election.
    Embed from Getty Images

Markets

  • Markets continued to rally this week and have broken into positive territory for 2016. The S&P 500 added 1.37% and closed at 2,050. Likewise, the Dow Jones rose 2.26% and closed at 17,602. So far in 2016, the S&P is up 0.80% and the Dow is up 1.72%.
  • Interest rates fell amid the rally in equity markets this week. The 5 year and 10 year U.S. Treasury Notes are now yielding 1.39% and 1.88%, respectively.
  • The spot price of WTI Crude Oil gained 2.21% this week to close at $39.35 per barrel. WTI Crude has risen 0.56% in 2016.
  • The spot price of Gold increased 0.48% this week, closing at $1,255.40 per ounce. Year to date, gold prices are up 18.31%.

Economic Data

  • Initial jobless claims came in at 265,000 which was an increase from last week’s reading of 259,000. The Labor Department noted no special factors in the data. The four week moving average for claims moved slightly up to 268,000.
  • Retail sales declined by -0.1% in February, in line with forecasts, reflecting lower vehicle and gas station sales. Core retail sales (excludes gas and autos) were unchanged in February, lower than forecasts of a 0.2% increase. Additionally, core retail sales during the prior two months were revised down -0.3%, adding to an overall disappointing report.
  • Consumer Price Index (measure of inflation) declined by -0.2% in February, in line with forecasts. This was largely due to a -6% decline in energy prices during the month. Headline inflation is now up 1.0% over the last 12 months.
    • Core CPI (excludes food and energy costs) rose by 0.3%, better than expectations of 0.2%. This brings the increase of core prices to 2.3% over the last 12 months.

Fact of the Week

  • The exchange traded fund (ETF) industry has grown from 80 funds in the year 2000 to now 1,603 funds today managing over $2.1 trillion in assets. (Source: Strategas Research Partners)

Please contact a member of the Wealth Management Department if you have any questions about this information.

Rich Gartelmann CFP® – (630) 844-5730 rgartelmann@oldsecond.com
Jean Van Keppel CFA® – (630) 906-5489 jvankeppel@oldsecond.com
Brad Johnson CFA®, CFP® – (630) 906-5545 bjohnson@oldsecond.com
Joel Binder, SVP – (630) 844-6767 jbinder@oldsecond.com
Jacqueline Runnberg CFP® – (630) 966-2462 jrunnberg@oldsecond.com
Tamara Wiley, CFP® – (630) 844-3222 twiley@oldsecond.com
Ed Gorenz, VP – (630) 906-5467 ejgorenz@oldsecond.com

Visit Old Second Wealth Management

Non-deposit investment products are not insured by the FDIC; not a deposit of, or guaranteed by, the bank; may lose value.

 

Wealth Management Economic Update March 14, 2016

U.S. and World News

  • European Central Bank President Mario Draghi announced additional easing this week in an effort to spur growth in the still struggling European Union. Draghi announced several cuts to interest rates, including lowering the deposit rate further into negative territory to -0.4% from -0.3%. Additionally, the ECB announced that its Asset Purchase Program would be extended until at least March 2017, that the amount of bonds purchased each month would be increased from €60 billion to €80 billion and that corporate bonds would now be part of the purchases. Markets reacted favorably initially following the announcement, however they fell back when during his post-meeting press conference, Draghi indicated that interest rates were unlikely to fall further.
  • north-korea_320Tensions continue to escalate in North Korea as leader Kim Jong-un has ordered his country’s scientists to conduct more nuclear tests and urged them to boost the nation’s nuclear attack capability. Further unconfirmed reports from Pyongang have the country in possession of miniaturized nuclear warheads to mount on ballistic missiles. North Korea has also threatened military steps against South Korea in addition to firing short-range ballistic missiles off its eastern coast.

Markets

  • Markets continued to gain back ground this week. The S&P 500 added 1.16% and closed at 2,022. Likewise, the Dow Jones rose 1.31% and closed at 17,213. So far in 2016, the S&P is down 0.60% and the Dow is down 0.57%.
  • Interest rates rose along with the equity markets this week. The 5 year and 10 year U.S. Treasury Notes are now yielding 1.50% and 1.99%, respectively.
  • The spot price of WTI Crude Oil gained 7.10% this week to close at $38.47 per barrel. WTI Crude has fallen 1.69% in 2016.
  • The spot price of Gold decreased 0.76% this week, closing at $1,249.45 per ounce. Year to date, gold prices are up 17.75%.

Economic Data

  • Initial jobless claims came in at 259,000 which was a decrease from last week’s reading of 278,000. The Labor Department noted no special factors in the data. The four week moving average for claims moved down to 267,500.

Fact of the Week

  • The cost of tuition, fees, room and board at an average in-state public college has increased 5.6% per year over the last 30 years, bringing those costs to $19,548 for the 2015-2016 school year. Had these costs only risen by the rate of inflation (as measured by the Consumer Price Index) over the last 30 years (2.7% per year), then a year of college would cost $8,515 for the current year. (Sources: College Board, Department of Labor)

Please contact a member of the Wealth Management Department if you have any questions about this information.

Rich Gartelmann CFP® – (630) 844-5730 rgartelmann@oldsecond.com
Jean Van Keppel CFA® – (630) 906-5489 jvankeppel@oldsecond.com
Brad Johnson CFA®, CFP® – (630) 906-5545 bjohnson@oldsecond.com
Joel Binder, SVP – (630) 844-6767 jbinder@oldsecond.com
Jacqueline Runnberg CFP® – (630) 966-2462 jrunnberg@oldsecond.com
Tamara Wiley, CFP® – (630) 844-3222 twiley@oldsecond.com
Ed Gorenz, VP – (630) 906-5467 ejgorenz@oldsecond.com

Visit Old Second Wealth Management

Non-deposit investment products are not insured by the FDIC; not a deposit of, or guaranteed by, the bank; may lose value.

 

Accessing the Keys of an Effective Employee Retirement Savings Plan

Sean O’Connor, First Vice President/Retirement Benefits Officer

OConnorSAttracting and retaining skilled workers is challenging enough for any company. But for those who don’t offer a retirement plan, it’s even harder. It doesn’t have to be. With the right trustee, even smaller companies can afford a state-of-the-art retirement plan.

A Bank With a Plan

Full-service commercial banks, like Old Second, offer a range of benefit plan solutions to their business clients. While a company may not think to look to their bank for such services, those who do can find a sophisticated yet cost-effective solution, especially when it comes to their retirement plan.

As a community bank with a full-service trust company, we’ve served in a fiduciary capacity and as an asset manager for decades. It’s this wealth management experience that enables us to address the concerns that keep many companies from successfully offering a retirement plan benefit.

But, ultimately, our corporate plan clients’ success comes from our commitment to incorporating these five key elements into each of our plans.

OConnor-InfographicFive Key Elements to a Successful Plan

1. Communication that keeps participants engaged

An effective employee communications plan reaches each participant in a way that is most comfortable for them—whether that is Web based and interactive or through onsite meetings and customizable materials.

2. Investment options that accommodate all participants

Appealing across the range of age groups, lifestyle preferences and risk profiles of diverse workforces requires access to a variety of investments, including target date funds. A solid history of generating long-term results for clients also helps, along with an open architecture platform to suit each company’s investment needs.

4. The ability to fulfill fiduciary responsibilities

Business owners already wear too many hats. They need to be able to rely on a trustee with demonstrated experience in protecting and directing a firm to fulfill its fiduciary responsibility toward plan participants.

4. Administrative and compliance expertise

The right trustee will help with annual testing, discrimination limits and reporting. They’ll also provide timely and accurate record-keeping, on both a daily and balance-forward basis.

5. Dedication to cost effectiveness

While plan sponsors can’t control the performance of the securities markets, they can control how much they pay in plan fees. A trustee who recognizes this and works to contain costs—and for opportunities to reduce them—can add to participants’ returns over the long run.

As an experienced plan administrator, we work with each of our clients to develop a solution that meets the firm’s objectives. We can also analyze existing plans and recommend ways a company can improve participation and satisfaction. In many cases, we can also convert an existing plan into a new one with minimal disruption.

To learn more about how we can do for your company’s benefits plan, click here.

 

Non-deposit investment products are not insured by the FDIC; not a deposit of, or guaranteed by, the bank; may lose value.

Wealth Management Economic Update March 7, 2016

U.S. and World News

  • Last weekend’s G20 summit failed to yield a comprehensive plan for spurring global growth. World leaders met in Shanghai and called for more fiscal measures and structural reforms to revive the global economy but also cited a number of risks to growth, including a potential British exit from the European Union. In a joint statement, the G20 leaders said, “Monetary policies will continue to support economic activity and ensure price stability but monetary policy alone cannot lead to balanced growth.”
    Embed from Getty Images
  • North Korean leader Kim Jong Un has ordered his country to be ready to use its nuclear weapons at any time and to turn its military posture to “pre-emptive attack” mode. Un told his military that this was necessary due to “growing threats from enemies.” The comments mark further escalation of tension on the Korean peninsula after the U.N. Security Council imposed harsh new sanctions against North Korea.

Markets

  • Markets continued to gain back ground this week. The S&P 500 added 2.71% and closed at 2,000. Likewise, the Dow Jones rose 2.24% and closed at 17,007. So far in 2016, the S&P is down 1.73% and the Dow is down 1.85%.
  • Interest rates rose along with the equity markets this week. The 5 year and 10 year U.S. Treasury Notes are now yielding 1.38% and 1.88%, respectively.
  • The spot price of WTI Crude Oil gained 10.71% this week to close at $36.29 per barrel. WTI Crude has fallen 7.26% in 2016.
  • The spot price of Gold increased 2.90% this week, closing at $1,258.95 per ounce. Year to date, gold prices are up 18.65%.

Economic Data

  • Initial jobless claims came in at 278,000 which was an increase from last week’s reading of 272,000. The Labor Department noted no special factors in the data. The four week moving average for claims moved down to 270,250.
  • The February employment report showed 242,000 non-farm jobs created, beating expectations of 195,000. The prior two months’ figures were revised up a combined 30,000, bringing the three month average for job gains to 228,000.
    • The headline unemployment rate remained at 4.9%, in line with expectations. The unemployment rate held steady despite the solid addition of new jobs due to a 0.2% increase in the labor force participation rate to 62.9%. Participation is now up 0.5% in the last six months.
    • Wage growth disappointed in the month, falling -0.1% while estimates were for 0.2% growth. Over the last 12 months, wage growth now stands at 2.2%, down from 2.5% in the prior month.

Fact of the Week

  • Since the inception of the Dow Jones Industrial Average in May of 1896, there have been 23 trading days taking place on ‘Leap Day’, including this past Monday. Of those 23 trading days, 16 have been negative, including 13 of the last 17 Leap Days. The average return for the Dow Jones on Leap Days is -0.1%. (Source: Crossing Wall Street)

Please contact a member of the Wealth Management Department if you have any questions about this information.

Rich Gartelmann CFP® – (630) 844-5730 rgartelmann@oldsecond.com
Jean Van Keppel CFA® – (630) 906-5489 jvankeppel@oldsecond.com
Brad Johnson CFA®, CFP® – (630) 906-5545 bjohnson@oldsecond.com
Joel Binder, SVP – (630) 844-6767 jbinder@oldsecond.com
Jacqueline Runnberg CFP® – (630) 966-2462 jrunnberg@oldsecond.com
Tamara Wiley, CFP® – (630) 844-3222 twiley@oldsecond.com
Ed Gorenz, VP – (630) 906-5467 ejgorenz@oldsecond.com

Visit Old Second Wealth Management

Non-deposit investment products are not insured by the FDIC; not a deposit of, or guaranteed by, the bank; may lose value.