Fed and Trade Bruise Markets
August 2, 2019
Markets sustained a one-two punch this week. On Wednesday, the Federal Reserve disappointed investors by reducing interest rates by a “mere” 0.25% as part of a midcycle adjustment, while on Thursday, the Trump administration announced a new 10% tariff on $300 billion of Chinese goods. The rate cut disappointment and renewed trade uncertainty tagged the market’s glass chin, resulting in the worst weekly performance for the market this year. Even a strong jobs and wages report on Friday, and late session agricultural trade deal, were not enough to stave off a bruising -3.10% decline for the S&P 500 for the week.
Fed Does Right, Markets Dislike
As predicted, the Fed cut rates by 0.25% on Wednesday, but that was of little solace to markets who had wished for more. The cut was deemed a “miss” relative to investors overly optimistic expectations heading into the FOMC meeting. Chairman Powell, who is not necessarily known for his Fed speak acumen, managed to disappoint investors further during his comments at the press conference when he suggested that Wednesday’s rate cut was likely not “the beginning of a long series of rate cuts”. While that may be true, tone is everything for markets. This, taken in conjunction with the revelation that two FOMC members had dissented from the rate cut vote on the basis that they believed a rate cut was unnecessary, was enough to put markets firmly on the ropes by Wednesday afternoon. Fortunately, by Thursday investors were more agreeable to a cup half full interpretation. The Fed said they are not seeing a deceleration warranting a bigger cut, and in addition to the explicit easing with the rate cut itself, the Fed announced it would end the runoff of the Fed’s portfolio two months earlier than planned, easing conditions further. Had that been all for the week, investors likely could have regrouped in the corner, but it was not to be.
Stick and Move
Concerned that China was attempting to stall trade negotiations until after next year’s election, the White House announced on Thursday that it would impose an additional 10% tariff on $300 billion worth of Chinese goods, starting September 1st. The about face came just as the U.S. and China had broken from formal, face-to-face discussions in Shanghai a day earlier. The proximal reason provided by the White House for the new tariffs was China having reneged on volume commitments for U.S. agricultural purchases and China’s failure to stem the illegal exporting of fentanyl to the U.S. The reality, however, is that the Administration is probably looking for a bigger stick to weaken China’s resolve as their economy continues to slow and as their debt levels increase to fund their stimulus projects. It is a risky strategy to be sure, but understandable given the marked shift in the Chinese strategy since May, where they now appear to be running out the clock prior to the 2020 election in hopes they might negotiate with a more friendly administration.
The Fed and tariffs got most of the attention this week, but there were some late points. 164,000 jobs were added in July. The unemployment rate held at 3.7%, while average hourly wages grew 3.2%. These are healthy numbers all around. Not to be outshined, a small trade victory was announced in the final hours of trading whereby the U.S. will increase beef exports by nearly three-fold to the EU. These may be small, moral victories but they helped to snap the rampant pessimism and stemmed what had been shaping up to be a TKO.
The Week Ahead
Next week should be a bit sleepier, with no major economic releases aside from inflation and China trade.
Use this Estate Planning Tool to Avoid Probate
In estate planning, ensuring beneficiary designations are current and consistent with your wishes is essential to avoiding pitfalls and helping the people you care about receive your assets. Naming a transfer on death (TOD) beneficiary is one estate planning tool that will allow your named beneficiary to become the owner of your bank account or investment account when you pass away. It avoids probate and can make a potentially complicated and lengthy process much easier for surviving loved ones. If you have multiple beneficiaries, you may divide a TOD account in any percentage allocations you desire.
Here is how this relatively simple and straightforward process works. To add TOD instructions to an account, the account holder completes a form that designates the beneficiaries who can claim the assets when the account holder passes away. When an individual with a TOD account dies, the beneficiary sends a copy of the death certificate to the account holder’s bank or investment company. That account is then re-registered in the beneficiary’s name at the time of death. A TOD account skips the probate process and can save your heirs time, stress, and money. It also takes precedence over a will, so it’s important to carefully designate beneficiaries on all of your estate planning documents and paperwork for all accounts and assets you own individually or jointly, including bank accounts, retirement accounts, securities, vehicles, and real estate. For accounts that may be jointly owned with rights of survivorship, the joint registration transfers account ownership upon the first death, usually directly to the surviving account holder. TOD becomes effective for joint accounts if both owners pass away simultaneously. Some states have strong spousal inheritance laws, so you may want to work with an advisor to ensure your estate plan is structured properly if your intended beneficiaries include someone other than your spouse.
Not every estate requires probate, however for estates that may be more extensive or where meticulous estate planning has not been conducted, probate can be protracted and costly. Probate is a legal, court-supervised process through which an executor is assigned to a deceased person’s estate to properly distribute assets to heirs and designated beneficiaries according to the decedent’s will (where a will exists), and any debt owed to creditors is paid off. Each state has specific laws in place to govern the process, and it generally begins with authenticating a will, a petition to open probate, and naming an executor. At a high level, probate may then involve locating the decedent’s assets, reviewing insurance policies, appraising assets and property, preparing and filing tax returns, paying any debts owed from estate funds, and ultimately, the executor will petition the court for permission to distribute what is left of the decedent’s assets to the beneficiaries named in the will. The court may grant this only after the executor has submitted a complete accounting of every financial transaction that was engaged in throughout the probate process. It can sometimes take years for an estate to be settled through probate.
It is important to note that the beneficiaries you name will have no access or rights to a TOD account while you are alive. You may also change the beneficiaries at any time so long as you are deemed mentally competent. However, beneficiaries should be made aware of the assets they may inherit so they may prepare ahead of time. When receiving income from a TOD account, the beneficiary is responsible for any related taxes, such as capital gains or inheritance taxes.
Some estate planning strategies such as having a will and naming beneficiaries are fairly simple. There are a number of other planning strategies that can help your estate avoid probate that may be more complex, such as the use of trusts. Please feel free to call our office at (214) 891-8131 if you would like to learn more.