Outlook September 30, 2016

HAIL TO THE CHIEF

With the U.S. Presidential elections on the horizon, investors have taken a seat on the sideline awaiting the outcome. Even the Fed has decided to take a step back from their tightening initiatives to avoid any perception of political motivation. Still, this Fed remains motivated to moderate long-term interest rates with the markets pricing in a 25 basis point rate hike post-election.

It is interesting to note that in June of 2015, each the seventeen FOMC participants disclosed “their judgement of the appropriate target level for the Federal Funds rate.” For 2017, “appropriate target levels” ranged from 1% up to 3.875%, a long way off from the current target levels of 0.25% – 0.50%. What a difference a year makes! Clearly, market expectations have changed from that time and the U.S. economy has become mired in a slow growth environment.

Attempts by the Fed to increase rates have been foiled by negative headlines including the earnings recession for U.S. companies, ongoing Eurozone issues which were capped by the United Kingdom’s “BREXIT” vote in June, and escalating geopolitical concerns. Still, we must remember: “Bull markets are born in pessimism, grow in skepticism and die in euphoria.” – Sir John Templeton

Market Indicies (Total Return as of 9/30/2016)
3rdQ% YTD% 1-Year% 3-Year%* 5-Year%*
S&P 500 3.9 7.8 15.4 11.1 16.3
NASDAQ 10.0 7.2 16.5 13.6 18.7
Russell 2000 9.0 11.5 15.5 6.7 15.8
MSCI EAFE** 6.5 2.2 7.1 1.0 8.0
MSCI Emerging Markets** 9.2 16.3 17.2 0.2 3.4
Source: Bloomberg Finance L.P; *Annualized; **USD

Markets & Economic Data
The S&P 500 Index’s total return of 3.9% in the third quarter outshone the Dow Jones Industrial Average’s 2.8% total return for the period and the NASDAQ Composite sailed in with a 10.0% total return. International markets reversed course in the third quarter with the MSCI EAFE Index providing 6.5% total return for the quarter and Emerging Markets (MSCI Emerging Markets Index) posting a 9.2% total return for the period.

While the hunt for yield remains strong among investors, the high valuations of stocks in the Utility, Telecomm, and REIT sectors showed their sensitivity to an anticipated rate hike; with all three of the sectors trading down for the quarter. As of Sept. 30th, the 5-year U.S. Treasury yielded 1.15% and the 10-year yielded 1.61%.

The “risk on” trade was back in vogue with growth stocks outpacing value stocks and small-caps outpacing large-cap stocks during the quarter. As stocks can be a leading indicator for economic outlook, the third quarter results appear to be indicating that the economy is better than advertised both domestically and abroad.

U.S. economic data remains supportive of continued steady growth. While consumer data is mixed, wage growth remains steady and inflation pressures are weak. The housing sector has experienced a positive rate of growth and the outlook remains favorable. Currently, the consumer is the main source of growth for the economy. To spur GDP growth beyond the 1.5% – 2.0% range, there will need to be an increase in corporate investment or exports. The fourth source of economic growth, government spending, is not expected to increase given the current political environment.

Manufacturing in developed countries is growing as indicated by generally favorable PMI readings. The strengthening foreign economies are resulting in an improving profit outlook and favorable investment (630) 906-2000 http://www.oldsecond.com continued on back HAIL TO THE CHIEF OUTLOOK September 30, 2016 conditions. Easing concerns of a hard landing, China reported third quarter GDP growth of 6.7% year-over-year, supported by retail sales growing by 10.7% and infrastructure spending up by 19.4%.

Follow the money!
While eyes are focused on the U.S. elections and probabilities of who will be the next Commander-in-Chief; don’t lose sight of long-term investment goals. We believe that opportunities are defined by the flow of assets.

Earnings
Contracting corporate earnings for U.S. companies over the last six quarters has set the stage for the third quarter earnings season to be an important factor in determining the economic outlook for the U.S. economy. Stabilizing energy and raw material prices are likely to show that earnings in the Energy and Materials sectors are improving along with a better outlook for earnings in 2017. Consensus estimates for 2016 earnings are higher than 2015 and are anticipated to gain six percent into 2017 over 2016.

Yield & Valuation
In the current interest rate environment, higher yielding stocks and bonds have become more appealing to investors. Consequently we have seen an increase in valuation for higher dividend payers such as Utilities, REITs, MLPs and Telecoms. Additionally, the spread on low credit quality debt over Treasury debt has continued to compress below historic averages. The premium investors are paying for higher yielding securities may be a very volatile investment in consideration of the anticipated Fed tightening.

Currency
The U.S. market continues to offer superior yields on both Fixed Income and Equity investments compared to its foreign counterparts. Should this differential in rates further increase, foreign flows to the U.S. would strengthen the U.S. Dollar, negatively impacting returns on foreign investments over the short-term. Yet, over the long-term, a stronger dollar would create favorable environment for foreign companies to increase exports to the U.S.

The Wealth Management Officers at Old Second work with clients to develop and implement investment strategies that fit their objectives of growth and income. Particularly in volatile markets, ensuring clients’ exposure to risk is appropriate for their situation remains most important. Challenges in the markets will be met with diligence and care. Our team of experienced professionals is available to help guide you along the path toward achieving your financial goals.

Rich Gartelmann CFP® – (630) 844-5730 rgartelmann@oldsecond.com
Steve Meves, CFA® – (630) 801-2217 – smeves@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.

 

Fed meeting: Wealth Economic Update Sept 26, 2016

U.S. and World News

  • federal_11172872_340The Federal Reserve held its September policy meeting this week and decided to hold the Fed Funds rate at its current level. The decision was not unanimous as there were three dissenting members of the committee that favored raising rates at this meeting. The statement given after the decision included the language “near-term risks to the economic outlook appear roughly balanced” which many interpret as a rate hike being near. The next policy meeting will be held in November but given that it will take place before the Presidential election, it is not expected that a rate hike would occur at that meeting. As a result, the December Fed meeting has become the focus with markets currently pricing in a roughly 50% probability of a hike.
  • The Bank of Japan also held interest rates steady, although speculation was that they could cut rates further into negative territory as opposed to raising them. While they did not move rates, the BOJ did modify its policy framework in an attempt to spur more economic growth. Among the changes, the central bank said it would introduce yield curve controls, eliminate the maturity range of its bond purchases and confirmed that cutting rates further remains an option down the line.

Markets

  • This week the S&P 500 finished up 1.19% and closed at 2,165. The Dow Jones rose 0.76% and closed at 18,261. So far in 2016, the S&P is up 7.51% and the Dow is up 6.83%.
  • Interest rates were down slightly from last week. The 5 year and 10 year U.S. Treasury Notes are now yielding 1.18% and 1.62%, respectively.
  • The spot price of WTI Crude Oil rose 3.84% this week to close at $44.68 per barrel. WTI Crude is up 11.56% in 2016.
  • The spot price of Gold was up 2.14% this week, closing at $1,338.38 per ounce. Year to date, gold prices are up 26.13%.

Economic Data

  • Initial jobless claims came in at 252,000, down from last week’s reading of 260,000. The Labor Department noted no special factors in the data. The four week moving average for claims moved down to 259,000.
  • Housing starts declined -5.8% in August, worse than expectations of a -1.7% drop. Starts on single family (-6.0%) and multi-family (-5.4%) were both weak in the month.
  • Existing home sales declined -0.9% in August, missing expectations of a 1.1% increase. On a regional level, existing home sales declined in the South (-2.7%), West (-1.6%) and Midwest (-0.8%), while sales rose in the Northeast (+6.1%).

Fact of the Week

  • The 6.22 million tax returns from 2014 that reported at least $200,000 of adjusted gross income (AGI) represented 4.2% of all returns filed, received 34.2% of all AGI nationwide and paid 58.2% of all federal income tax paid during that year. (Source: Internal Revenue Service)

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
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.

 

Opportunities and Trends in Commercial Real Estate

Thomas Wallace, Senior Vice President – Commercial Real Estate img_0273

For real estate investors and developers, the ongoing stagnation of interest rates at the current and historically low levels continues to represent an excellent financing opportunity. It also has made it a little more challenging to find attractive deals due to increased competition after several years of recovery in the real estate market. But in our area, these deals remain plentiful.

Investors Are Shifting Their Attention to the Suburbs

As competition in the downtown Chicago market has narrowed return prospects, savvy investors have headed west in search of opportunity.

Demographics have also begun to favor the suburbs. There has been an influx of Millennial renters looking for more value for their leasing dollars. With homeownership currently well below its historical high, investors and developers could benefit in the future, as these young renters start to form families, look for schools and establish roots in the area.

In fact, we’ve been involved in financing more multifamily projects recently. Some of these deals also benefited from a developing trend: deconverting condo complexes into rental units.

Beyond apartment projects, opportunities involving industrial spaces, suburban office properties, self-storage, strip malls with leasing strength and single-credit tenant deals (such as those involving national drugstore chains) also remain robust.

Who Is Investing?

Today, the market is dominated by strong, experienced real estate investors who have the economies of scale needed to build one- and two-story, 200-plus-unit apartment building projects.

Developers who can buy distressed office properties, rehab them and lease the resulting suites at Class A rental rates are also quite active. Additionally, we are seeing growing opportunities for clients with 1031 exchange funds who are interested in single-credit tenant deals where the strength of the tenant drives the deal and the service provided enhances the livability of the area. Examples of this would be deals involving properties leased to large national chains like Walgreens or CVS.

Access to a Competitive Advantage

As investors and developers move beyond the Chicago city limits, it helps to have a resource with deep roots in the area. And, in a competitive deal-making environment, it can help to work with a lender that can customize financing structures and approve them with speed.

Thanks to a rare combination of experience and a flat organizational structure, banks with local experience like Old Second have the freedom to be more creative when it comes to customizing financing structures in instances that don’t quite fit the standard transaction formula. It also means decisions are made, not passed up the organization, saving real estate borrowers time and frustration.

Whether you are a seasoned developer or a professional real estate investor—or if you are looking to complete a 1031 exchange—we invite you to call us at 630-906-2000.

You can also visit us here. We can’t wait to talk to you about what we can do for you today.

Russia-US-Syria: Wealth Economic Update Sept 19, 2016

U.S. and World News

  • syria_aleppo_340The United States and Russia have agreed on a cease-fire in Syria with support from Syrian President Bashar Assad, and as part of the deal, Syria will continue to strike at the Islamic state for one week until the U.S. and Russia take over. The cease-fire was successful in its first full day with no recorded combat deaths and a cautious effort to deliver aid to fortified areas has begun. However, the ability of the U.S. and Russia to work together on the fight against ISIS has been questioned as they have begun to accuse one another of failing to do their part in the agreement.
  • Greece has stated that it plans to tell its creditors that it is unable to comply with the labor reforms set by the IMF for its €86 billion bailout. The terms of the labor reform is a ban on the right of workers to collectively negotiate wages and conditions.
  • The Bank of Japan plans to continue the use of negative interest rate policy for monetary easing. Negative interest rate policy has been in use by the BOJ since February in an effort to meet their 2% inflation target. The policy has come with repercussions such as a stronger Yen and lower margins for financial institutions.
  • The market currently has priced in a 20% probability of a 0.25% rate increase from the Federal Reserve next week.

Markets

  • After a volatile week, the S&P 500 finished up 0.59% and closed at 2,139. The Dow Jones rose 0.25% and closed at 18,124. So far in 2016, the S&P is up 6.26% and the Dow is up 6.04%.
  • Interest rates were up slightly from last week. The 5 year and 10 year U.S. Treasury Notes are now yielding 1.20% and 1.69%, respectively.
  • The spot price of WTI Crude Oil fell 5.82% this week to close at $43.21 per barrel. WTI Crude is up 16.60% in 2016.
  • The spot price of Gold was down 1.33% this week, closing at $1,310.21 per ounce. Year to date, gold prices are up 23.48%.

Economic Data

  • Initial jobless claims came in at 260,000, up slightly 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 down to 261,000.
  • Retail sales declined by 0.3% in August compared to consensus estimates of a decline of 0.1%. The decline in oil prices transitioning to lower gasoline station sales is part of the reason for this.
  • The Consumer Price Index (CPI) increased by 0.2% in August compared to consensus estimates of 0.1%. The increase reflects increased prices in medical care commodities and services.

Fact of the Week

  • More than 1 in 3 employed Americans (36%) work for companies that do not offer an employer-sponsored retirement plan, a total of 55 million workers lacking access to a plan (source: AARP, DOL).

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
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.

 

Interest rate outlook: Wealth Economic Update September 12, 2016

U.S. and World News

  • European Central Bank President Mario Draghi

    European Central Bank President Mario Draghi*

    The European Central Bank decided to hold interest rates at their record low levels and refrained from adding any new stimulus to the economy. Investors had anticipated that ECB President Mario Draghi would take more action or at least provide clearer indications of future actions. However Draghi stated, “Our program is effective and we should focus on its implementation.”

  • Markets were hit with their worst day in months on Friday, largely believed to be due to comments made by historically dovish Boston Fed President Eric Rosengren. Rosengren stated that “a reasonable case can be made” for raising interest rates and that the Fed faced increasing risks if it waited too much longer to hike. He did not specifically address September’s policy meeting but these comments, coupled with the ECB’s inaction have led many investors to believe that a September rate hike is very much on the table.

Markets

  • This week the S&P 500 was down 2.36% and closed at 2,128. The Dow Jones fell 2.15% and closed at 18,085. So far in 2016, the S&P is up 5.64% and the Dow is up 5.78%.
  • Interest rates moved up during the week, particularly following Boston Fed President Rosengren’s comments. The 5 year and 10 year U.S. Treasury Notes are now yielding 1.22% and 1.67%, respectively.
  • The spot price of WTI Crude Oil rose 3.21% this week to close at $45.70 per barrel. WTI Crude is up 14.11% in 2016.
  • The spot price of Gold was up 0.20% this week, closing at $1,327.83 per ounce. Year to date, gold prices are up 25.14%.

Economic Data

  • Initial jobless claims came in at 259,000, moving down from last week’s reading of 263,000. The Labor Department noted no special factors in the data. The four week moving average for claims moved down to 261,000. 

Fact of the Week

  • The average interest rate paid by the U.S. government on its debts was 2.26% as of July 31st. This has come down more than 2% from an average 4.38% the government paid eight years ago. Every 1% increase in the cost of debt for the nation’s estimated $14 trillion in debt is equal to an additional $140 billion in annual interest payments. (Source: Treasury Department)

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
Ed Gorenz, VP – (630) 906-5467 ejgorenz@oldsecond.com

Visit Old Second Wealth Management

*Image of Mario Draghi, Photo credit: World Economic Forum, via Wikimedia Commons. License: Creative Commons Attribution-Share Alike 2.0 Generic license. (See, https://commons.wikimedia.org/wiki/File:Mario_Draghi_-_World_Economic_Forum_Annual_Meeting_2012.jpg).

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

 

Brazil impeachment: Wealth Economic Update September 6, 2016

U.S. and World News

  • brazil_91582989_340Brazil’s senate has voted 61-20 to impeach suspended President Dilma Rousseff. She was on trial for her role in altering government fiscal accounts by using illegal loans from state banks to hide the true fragile state of Brazil’s finances in order to get re-elected in 2014. Acting President Michel Temer has been sworn in as her replacement. Rousseff claims the ouster was a parliamentary coup and pledged to appeal her impeachment, calling on supporters to fight the conservative agenda she believes has been empowered by her dismissal.
  • President Obama has appointed a seven member board that will oversee the financial restructuring for debt-laden Puerto Rico. Obama drew from a list of candidate in finance and academia who were recommended by leaders in Congress. Puerto Rico’s governor, Alejandro Garcia Padilla, was also named to the board but since he is not seeking a second term, he will be replaced by his successor in November.

Markets

  • This week the S&P 500 was up 0.56% and closed at 2,180. The Dow Jones rose 0.62% and closed at 18,492. So far in 2016, the S&P is up 8.16% and the Dow is up 8.06%.
  • Interest rates were down marginally this week. The 5 year and 10 year U.S. Treasury Notes are now yielding 1.20% and 1.60%, respectively.
  • The spot price of WTI Crude Oil fell 7.05% this week to close at $44.28 per barrel. WTI Crude is up 10.56% in 2016.
  • The spot price of Gold was up 0.29% this week, closing at $1,324.98 per ounce. Year to date, gold prices are up 24.87%. 

Economic Data

  • Initial jobless claims came in at 263,000, a minor increase from last week’s reading of 261,000. The Labor Department noted no special factors in the data. The four week moving average for claims moved down to 263,000.
  • The monthly employment report showed a gain of 151,000 jobs during August, below the expected 180,000. Figures for the prior two months were revised down a combined 1,000 jobs, bringing the three month average for job gains to 232,000.
    • Headline unemployment remained at 4.9% and the labor force participation rate was also unchanged at 62.8%.
    • Average hourly earnings rose 0.1% in August, missing expectations of 0.2%. On a 12 month basis, wages have risen 2.4%, down from 2.7% in July.
  • Personal Consumer Expenditures (PCE, measure of inflation) was flat in July, in line with expectations. Over the last year, headline inflation has risen 0.8% as measured by PCE.
    • Core PCE (excludes food and energy prices, preferred measure of inflation by the Fed) rose 0.1% and is now up 1.6% year over year, both in line with estimates.
  • The Case-Shiller home price index moved down -0.1% in June, which was in line with consensus expectations. Results were mixed with 11 of the 20 surveyed cities seeing price increases. Over the last 12 months, home prices have risen 5.1%.

Fact of the Week

  • As of August 18th, the U.S. national debt stood at $19.445 trillion. It had taken 293 days (since 10/30/15) to add the latest $1 trillion of debt. It took America 205 years (1776 to 1981) to accumulate its first $1 trillion of debt. (Source: Treasury Department)

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
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.