Our Wish List for the Coming Year

The new year is fast approaching and we are getting ready to close the books on an eventful 2016. And what a year it was!


The year started with a thud as global equity markets declined precipitously on recession fears in January reaching an ultimate bottom in mid-February, down 10.2% to start the year.

Those fears were proven unfounded and markets rallied 16% over the following four months (up 4.5% for the year through June 23). Interest rates moved lower and high yielding dividend paying stocks led the markets higher, a break from the typical pattern of safer stocks falling behind in bull markets.

The rally was interrupted by a surprise vote by the British people to leave the European Union. Global equity markets reacted negatively fearing a bigger breakup of the European Union (down 5.3% over two days). The relative safety of bonds attracted investors driving interest rates to new lows in early July.

Brexit proved to be a minor bump in the road and equity markets recouped losses in a matter of weeks, rallying to new all-time highs later in the summer due to improving U.S. economic data. Rates moved higher on increasing inflation and expectations of a Fed rate hike in the back half of the year. In reaction, the safe stocks that were market leaders in the first half lost pace with riskier stocks tied directly to increased U.S. economic growth.

With the U.S. Presidential election nearing, the stock market was particularly weak (down nine straight days in one stretch) as investors braced for the possibility that Donald Trump could win the Presidency. The day before the election, markets rallied 2% on favorable news for the Clinton campaign. As election results came in favoring the Trump ticket, equity futures sold off violently overnight, down over 5% at one point. But by early morning the narrative had shifted to a unified Republican White House and Congress that would lead to lower corporate taxes, lower regulation, and higher growth.

Since the election the S&P 500 is up 2% (through the end of November) and interest rates have jumped dramatically with the 10 year U.S. treasury climbing 75 basis points (a +40% increase). The rally in equity markets has been significantly bifurcated; led by bank stocks (up 12.6%), and smaller companies (up 10.7%), and companies tied to highly cyclical industries like energy and construction. With rising interest rates, high paying dividend stocks have been under pressure with consumer staples, utilities, and real estate investment trusts all posting negative returns. The performance differential between assumed safe and risky stocks has been particularly dramatic with S&P high volatility index outperforming the low volatility index by a full 12%! This is not the outcome many who feared the results of a Trump victory would have anticipated in advance. From Brexit to the U.S. election, it was a difficult year for professional forecasters. We are reminded of the ever quotable Yogi Berra who might have put it best, “It’s tough to make predictions, especially about the future.”


With the lessons of 2016 fresh, we will avoid trying to make too many predictions for 2017. Instead, we have put together a list of things we are hopeful for in 2017 that we would like to see under our tree this holiday.

New Records for the Bull Market in U.S. Stocks

Since the low in March of 2009, the current expansion in U.S. equity markets has lasted 92 months; the second longest bull market in modern U.S. history (See FIGURE 1).

Leadership From High Quality Companies

We always advocate viewing investment performance over long periods of time. No strategy or approach works every calendar year. Historically, when equity markets are particularly strong, lower risk securities will lag their riskier counterparts. Over longer periods of time in both bull and bear markets, investing in high quality companies with strong cash flows that return money to shareholders has proven to outperform passive benchmarks. When our approach falls out of favor over short periods of time it can test investors ability to stay disciplined. 2016 has proven to be one of those times and a particularly challenging period for our investment style. This has been most evident in the second half of 2016 and post-election when interest rates have rise  (See FIGURE 2). Strong security selection can overcome these style factors and lead to outperformance, but we hope the holidays mark a change in leadership that provides a tailwind for our approach in 2017. It’s worth noting, in similar past periods of style underperformance, those who stayed the course were rewarded through the end of the cycle.

A Rational and Balanced Plan for Taxes and Fiscal Spending

Republican control of both the White House and of Congress has very rapidly changed expectations for fiscal policy for the next four years. The messaging from the President-elect and other policy makers imply significant spending on infrastructure and defense (up to one trillion dollars assigned to infrastructure projects) and major cuts to both personal and corporate tax rates. Fiscal conservatives will argue that the tax cuts will spur growth, but it’s hard to imagine a scenario where a combination of increased spending and decreased tax receipts does not swell the national debt. In an interview on CNBC, newly nominated Treasury secretary Steven Mnuchin stated tax reform is the top priority and he promised the largest tax overhaul since the Reagan administration. It’s important to note that today’s politicians are faced with a much different debt picture (See FIGURE 3) and room for error seems much smaller. While it would be great if Santa could deliver a lower tax bill next year, what we really want to see is smart policy that favors long-term prosperity over short-term growth. The exact policy choices remain unclear to us at this point, but a combination of offshore cash repatriation, tax loophole elimination, and public and private investment partnerships for infrastructure should play a role. We remain optimistic that this can be accomplished.

Household Formation and Population Growth

While much of current discussion has centered on what Washington can do for economic growth, we would like to see some help from demographics. Growth in new household formations averaged less than 1% since the last recession (See FIGURE 4 on page 4). This is well below historical precedent in and out of recessions. Demographics could help us get our holiday wish here. Census data indicates that the number of people turning age 30 will sharply accelerate over the next three years. This is very similar to a trend the U.S. witnessed in the early 1980s when the baby boomer generation was also hitting similar levels. New household formation would ease some of the pressure the economy faces from an aging demographic. This could lead to increases in home ownership rates, which are at 30 year lows, and an increase in birth rates, which are well below pre-recession levels. All of this would be a boon for consumption, which makes up 70% of U.S. GDP.

Rising Wages and Falling Income Inequality Narrowing

Many of the “surprise” political events we witnessed in 2016 can trace their roots back to a growing rise in populism. There has been a growing schism between the “haves” and “have nots” brewing for quite a while that was ignited after the financial crisis with a backlash against Wall Street. The political fallout has been particularly acute this year. A growing portion of the population feeling disenfranchised threatens stability and invites volatility to capital markets. Income inequality and low wage growth are ostensibly the major issues. In the U.S. specifically, wage growth has averaged 1% to 2.5% since the last recession. This compares unfavorably to the prior three expansions where wage growth averaged 3% to 4% (See FIGURE 5 on page 5). To make matters worse, wage increases have not been uniform, a trend that has been in place for over thirty years. A study by Emmanuel Saez1 at UC Berkeley states that the top 1% families captured 58% of total real income growth per family from 2009 to 2014. Other Saez studies in conjunction with Thomas Piketty cite this long-term trend. In 1970, the top ten percent of the population earned a third of the total national income but by 2012 it earned half. Unemployment has reached a cycle low of 4.6%, a figure many economists would consider the natural rate of full employment. The typical setup would be for wage growth to accelerate from here which would fulfill a lot of holiday wishes, not just ours.

Productivity Growth

It may be related to the lack of wage growth, but productivity growth has also been largely missing in this cycle and we hope to see it return this coming year. Since 2010, labor productivity growth has averaged a paltry 0.6% per year (See FIGURE 6 on page 5). This has been the worst five year run in productivity growth since the late 1970s and well below the average of the last 30 years of 2.1% per year. Essentially GDP growth has been missing a 1.5% driver. In fact, this has been declining since the end of the internet driven tech boom in the late 1990s. Smart increases in fiscal spending and tax policy that spurs more innovation are potential triggers to a pickup. We would expect productivity enhancements to lead to wage gains and a virtuous circle; where wage gains lead to increased consumption and business investment which leads to more productivity gains.

1 “Striking it Richer: The Evolution of Top Incomes in the U.S.”

A Patriot’s Super Bowl Victory

The recent Cubs’ World Series victory had me thinking of what it used to be like for a Boston sports fan. The fan base that was once the tortured souls of the “curse of the bambino” has been awfully spoiled over the last decade and a half. The Patriots have had six Super Bowl trips and four wins since Tom Brady took over for Drew Bledsoe in 2001. The Celtics had a new version of the “Big Three” winning a title in 2008. In 2011, the Bruins took home the Stanley Cup. And most dramatically, the Red Sox vanquished 86 years of misery in 2004 and have won the title two times since. My kids have grown up only knowing championships, much different than my painful childhood memories of Bill Buckner. But my son is only one and has still not witnessed a title. Hopefully Santa can tap Coach Belichick for a win this February.

Health and Happiness

Last on this list, but first in priority, we hope for health and happiness for all our clients, colleagues, family, and friends. It has been an easy year to get caught up in the markets, politics, and world events. The end of the year is a perfect time to reflect on what is really important. We at BFM all wish you a very happy holiday and good fortune this holiday season and into the New Year.


Market Commentary Disclaimer: This publication is for informational purposes only and should not be considered investment advice or a recommendation of any particular security, strategy or investment product. The information contained herein is the opinion of Boston Financial Management and is subject to change at any time based upon unforeseen events or market conditions.

Annual Gifting—When Is the Best Time?

by Amy Sahler, Director of Fiduciary Services

We recommend making your gifts early in January to be certain you don’t lose any gifting opportunities. For those who have not yet made their annual gifts, it is important to ensure that any individual or charitable gifting is completed prior to December 31, 2016, to qualify as gifts in the current tax year. Many asset managers have gifting deadlines beyond which they cannot guarantee that gifts will be made before year end.

When making gifts, either to individuals or charities, there are some simple steps to consider.

Gifts to Individuals—the Basics:

  • Annual exclusion gift—The amount you may give to any one individual each year without using your gift tax exemption; the amount is $14,000 for 2016 and is indexed to inflation.
  • Medical and educational exclusions—There is a 100% exclusion when you make direct payments for someone’s medical bills or tuition expenses; payments must be made directly to the health care provider or educational institution.
  • To the extent that aggregated gifts to any individual exceed $14,000 in a calendar year, the donor must report the gifts on a Federal Gift Tax Return (Form 709); although reportable there is no gift tax consequence until an individual’s lifetime exemption is exhausted (currently $5.45 million).
  • A gift in the form of a check is not considered “completed” until the check is processed by the donee’s bank; the check needs to be deposited or cashed by December 31, to qualify as a 2016 gift.
  • In-kind gifts of stock are generally complete once the shares are received by the donee.

Gifts to Charities—the Basics:

  • A charity must be “qualified’ in order for the gift to be tax deductible. The IRS Select Check tool lists qualified charities. In addition, donations to churches, mosques, synagogues, and temples are deductible even if not listed in the IRS Select Check database.
  • Monetary gifts include cash, checks, electronic funds transfer, credit /debit card and payroll deductions. For gifts of$250 or more to qualify as a deduction you MUST receive written acknowledgement from the charity at the time of the gift to substantiate the gift per IRS regulations.
  • IRA Owners over 70½ may gift up to $100,000 annually to charity using their Required Minimum Distribution (RMD); the gift is not tax deductible, but is excluded from their adjusted gross income (AGI).
  • Appreciated securities—A gift of low basis stock enables the donor to claim an income tax deduction for the full fair market value of the asset (subject to IRS limitations) while the charity can sell the securities without realizing a taxable capital gain. The gift needs to be in the hands of the charity for it to be considered complete.
  • Household items such as clothing, furniture, and appliances must be in good condition to claim a tax deduction. If the value of an item exceeds $500 it needn’t meet this standard provided a qualified appraisal of the item is included with your tax return and accepted by the IRS.
  • Special IRS rules apply to gifts of cars, boats, and planes donated to charity.

For further detail on how best to meet your gifting goals please contact your Investment Manager or a member of our Fiduciary Services or Estate and Financial Planning team.

Important: This article does not contain any legal or tax advice. You should always consult with your attorney, accountant or other professional advisors before changing or implementing any tax, investment or estate planning strategy.

IRS Circular 230 Disclosure: Pursuant to IRS Regulations, we inform you that any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax related penalties or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.


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