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Salal Investment Services Newsletter, Second Quarter 2019

photo of Adrian Hedwig

Adrian A. Hedwig

Financial Advisor, CUSO Financial Services, L.P.*
Available at all Salal Credit Union branches
P: 206.607.3481
F. 206.299.9530

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The Markets (first quarter through March 29, 2019)

Person Typing on a LaptopFollowing a tumultuous close to 2018, stocks enjoyed a robust January. Positive feedback from ongoing negotiations between the United States and China, coupled with strong job growth, low inflation, and stable interest rates, helped fuel investor confidence that pushed the major benchmark indexes to levels not seen in 30 years — despite a partial government work stoppage. Each of the indexes listed here posted notable gains, led by the small-cap Russell 2000, followed by the Nasdaq, S&P 500, Global Dow, and the Dow.

Stocks continued to climb in February, albeit not at the breakneck pace of the previous month. Corporate earnings reports were generally positive, and trade talks between the United States and China continued with no deal being reached, but signs of a favorable resolution in sight. The partial government shutdown ended at the end of January. The Federal Open Market Committee indicated that it was inclined to refrain from increasing the federal funds target interest rate range for the foreseeable future. Investors continued to push stocks higher. The Russell 2000 again led the way for February, increasing its value by over 16% over the first two months of 2019. Of the indexes listed here, only the Global Dow failed to gain at least 3.0% (or very close to it) by the end of February.

March saw stock values fluctuate on a fairly regular basis throughout the month. The large caps of the Dow posted minimal end-of-month gains, while the Russell 2000, which had been riding a solid wave of gains during the first two months of the year, took a bit of a dive in March, falling over 2.20% from its February closing value. The Global Dow moved ever so slightly down by the end of March. Only the Nasdaq and S&P 500 posted notable gains for the month.

Nevertheless, the first quarter of 2019 proved to be a positive one for stocks. Each of the benchmark indexes listed here closed the quarter with gains of more than 10% (except for the Global Dow), kicking the year off on very solid footing. Despite signs of a weakening global economy and low inflation, news that the Fed is backing off its plan to increase interest rates helped quell investors’ concerns. Both the technology and energy sectors enjoyed a strong first quarter. By the close of trading on February 28, the price of crude oil (WTI) was $57.26 per barrel, up from the January 31 price of $53.95 per barrel. The national average retail regular gasoline price was $2.623 per gallon on March 25, up from the February 25 selling price of $2.390 but $0.025 lower than a year ago. The price of gold dipped by the end of February, falling to $1,314.40 by close of business on the 28th, down from $1,325.70 at the end of January.

2018 Close
As of March 29
Monthly Change
Quarterly Change
YTD Change
S&P 500
Russell 2000
Global Dow
Fed. Funds
0 bps
0 bps
0 bps
10-year Treasuries
-31 bps
-28 bps
-28 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Latest Economic Reports

  • Employment: Total employment rose by only 20,000 in February after adding 311,000 new jobs (revised) in January. The average monthly job gain in 2018 was 223,000. Notable employment increases for February occurred in professional and business services (42,000) and health care (21,000). Employment in construction declined by 31,000 in February, partially offsetting an increase of 53,000 in January. The unemployment rate declined by 0.2 percentage point to 3.8% in February, and the number of unemployed persons decreased 300,000 to 6.2 million. Among the unemployed, the number of job losers and persons who completed temporary jobs (including people on temporary layoff) declined by 225,000. This decline reflects, in part, the return of federal workers who were furloughed in January due to the partial government shutdown. The labor participation rate was unchanged at 63.2% in February, as was the employment-population ratio (60.7%). The average workweek fell by 0.1 hour to 34.4 hours for February. Average hourly earnings increased by $0.11 to $27.66. Over the last 12 months ended in February, average hourly earnings have risen 3.4%.
  • FOMC/interest rates: Following its last meeting in March, the Federal Open Market Committee did not increase the federal funds target rate. The Committee’s report was dovish, noting that economic growth appeared to be slowing, as were business and consumer spending. No rate increases are projected for the year, although that could change. The FOMC does not meet again until the end of April, with its report issued on May 1.
  • GDP/budget: The third and final estimate of the fourth-quarter gross domestic product showed the economy grew at an annualized rate of 2.2%. The GDP expanded at a rate of 3.4% in the third quarter. For 2018, the GDP advanced at a rate of 2.9%. Of note, consumer spending (personal consumption expenditures) rose by 2.5% in the fourth quarter, and 2.6% for the year. Also of note, business investment rose 5.4% for nonresidential fixed investment. On the other hand, residential investment was weak, falling by 4.7%. The federal budget deficit was $234 billion in February after enjoying an $8.7 billion surplus in January. Through the first four months of fiscal year 2019, the government deficit is $544.2 billion. Over the same period for fiscal year 2018, the deficit was $391.0 billion.
  • Inflation/consumer spending: The report on consumer income and spending, one that is favored by the Federal Reserve as an inflation indicator, showed personal income decreased 0.1% in January but increased 0.2% in February, while it decreased 0.1% in January (the latest report has income and expenditures for January and only income for February). Disposable (after-tax) income fell 0.2% in January, but increased 0.2% in February. Consumer spending (personal consumption expenditures) decreased 0.1% in January, after plummeting 0.5% the previous month.
  • The Consumer Price Index increased 0.2% in February after being unchanged in January. Over the previous 12 months, the CPI rose 1.5%. Core prices, which exclude food and energy, climbed 0.1% for the month after advancing 0.2% in January. Core prices were up 2.1% over the previous 12 months.

  • According to the Producer Price Index, the prices companies received for goods and services inched up 0.1% in February after falling 0.1% in January. A 1.8% increase in energy prices pushed goods prices 0.4% higher in February. Producer prices increased 1.9% over the 12 months ended in February.

  • Housing: Following a mundane 2018, it’s taken the housing sector some time to pick up steam in 2019. Fortunately, February may be the month where sales pick up the pace. Sales of existing homes vaulted 11.8% in February after plunging 1.2% in January. Year-over-year, existing home sales remain down 1.8%. The February median price for existing homes was $249,500, up from $247,500 in January. Existing home prices were up 3.6% from February 2018. Total housing inventory for existing homes for sale in February increased to 1.63 million, up from 1.59 million existing homes available for sale the prior month. Sales of new homes also improved in February. Sales of new single-family houses in February were 4.9% higher than January’s rate, and 0.6% above the February 2018 estimate. The median sales price of new houses sold in February was $315,300 ($303,900 in January). The average sales price was $379,600 ($358,000 in January). Inventory was at a supply of 6.1 months (6.5 months in January).
  • Manufacturing:The manufacturing sector remained somewhat stagnant in February, as industrial production edged up 0.1% after falling 0.4% in January. In February, manufacturing production dropped 0.4% for its second monthly decline, although manufacturing output is 1.0% above its year-earlier level. Orders for durable goods increased 0.4% in January — the latest figures from the Census Bureau (again, due to the government shutdown). Transportation led much of the increase, as new orders excluding transportation fell 0.1% in January. Shipments of manufactured durable goods decreased for the third consecutive month in January, falling 0.5% from the prior month.
  • Imports and exports: The latest information on international trade in goods and services, out March 27, is for January. For that month, the goods and services deficit was $51.1 billion, down $8.8 billion from December’s figures. January’s exports were $1.9 billion more than December exports. Imports were $6.8 billion less than December imports. Compared to January 2018, the goods and services deficit decreased $1.9 billion, or 3.7%.
  • International markets: In Great Britain, Prime Minister Theresa May was unable to gain parliamentary approval of the exit deal she negotiated with the European Union. Parliament could do no better as it failed to find consensus on any kind of Brexit plan. The European Union agreed to extend the deadline for a deal to April 12, with the proviso that a further extension would be possible only if the United Kingdom agreed to hold European election on May 23, which Prime Minister May does not wish to do. The eurozone’s fourth-quarter GDP advanced at an annual rate of 0.2%, dragged down by sluggish consumer spending. The negotiations between the United States and China continue to drag on. Apparently, the two sides are trying to come up with a plan that provides increased U.S. exports to China, greater access to American companies, and added protection of intellectual property.
  • Consumer confidence:The Conference Board Consumer Confidence Index® dropped from 131.4 in February to 124.1 in March. Consumers expressed growing doubt over the labor market following the latest jobs report (see above). The Present Situation Index, which gauges how consumers feel about current business and labor market conditions, declined in March from 172.8 to 160.6. Consumers’ outlook for income, business, and labor market conditions over the short term also fell.

Eye on the Month Ahead

At the close of February, there was guarded optimism that a trade accord between the United States and China would come to fruition. As we leave March, negotiations are still ongoing with no real signs of progress being made. In any case, April may bring with it a heartier employment report while there’s hope that the residential sector will continue to advance. A big unknown heading into April is the aftermath of the Brexit saga and its impact on the global economy.

Data sources: Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Department of Commerce (GDP, corporate profits, retail sales, housing); S&P/Case-Shiller 20-City Composite Index (home prices); Institute for Supply Management (manufacturing/services). Performance: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.
The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. The U.S. Dollar Index is a geometrically weighted index of the value of the U.S. dollar relative to six foreign currencies. Market indices listed are unmanaged and are not available for direct investment.

Know Your Mutual Funds

Almost 100 million Americans, representing about 44% of U.S. households, owned mutual funds in 2018. Saving for retirement was the primary goal for 73% of investors; other goals included saving for college or a house, building an emergency fund, or providing current income.1

Retired Couple Outside Embracing

Mutual funds offer a convenient way to participate in a broad range of market activity that would be difficult for most investors to achieve by purchasing individual securities. With almost 8,000 funds available on the U.S. market, you should be able to find appropriate investments to pursue your goals.2 However, it’s important to periodically examine the mix of funds you hold.

If you are approaching retirement or already retired, this may be a good time to assess the risk level and growth potential of your funds, along with any other investments in your portfolio. Keep in mind that even though it is generally wise to reduce risk as you near retirement, you may also need to pursue long-term growth opportunities.

The following overview describes some basic types of funds in rough order of risk, from lowest to highest. Investments seeking to achieve higher returns also carry an increased level of risk.

Money market funds invest in short-term debt investments such as commercial paper and certificates of deposit and are typically used as a cash alternative. Although a money market fund attempts to maintain a stable $1 share price, you can lose money by investing in such a fund. Money market funds are neither insured nor guaranteed by the FDIC or any other government agency.

Municipal bond funds generally offer income that is free of federal income tax and may be free of state income tax if the bonds in the fund were issued from your state. Although interest income from municipal bond funds may be tax exempt, any capital gains are subject to tax. Income for some investors may be subject to state and local taxes and the federal alternative minimum tax.

Income funds concentrate their portfolios on bonds, Treasury securities, and other income-oriented securities, and may also include stocks that have a history of paying high dividends.

Balanced funds, hybrid funds, and growth and income funds seek the middle ground between growth funds and income funds. They include a mix of stocks and bonds and seek to combine moderate growth potential with modest income.

Growth funds invest in the stock of companies with a high potential for appreciation but low emphasis on income. They are more volatile than many types of funds.

Global funds invest in a combination of domestic and foreign securities. International funds invest primarily in foreign stock and bond markets, sometimes in specific regions or countries. There are increased risks associated with international investing, including differences in financial reporting, currency exchange risk, economic and political risk unique to a specific country, and greater share price volatility.

Sector funds invest almost exclusively in a particular industry or sector of the economy. Although they offer greater appreciation potential, the volatility and risk level are also higher because they are less diversified.

Aggressive growth funds aim for maximum growth. They typically distribute little income, have very high growth potential, tend to be more volatile, and are considered to be very high risk.

Bond funds (including funds that contain both stocks and bonds) are subject to the interest rate, inflation, and credit risks associated with the underlying bonds in the fund. As interest rates rise, bond prices typically fall, which can adversely affect a bond fund’s performance. U.S. Treasury securities are guaranteed by the federal government as to the timely payment of principal and interest. Dividends are not guaranteed.

Asset allocation and diversification are methods used to help manage investment risk; they do not guarantee a profit or protect against investment loss. Mutual fund shares, when sold, may be worth more or less than their original cost.

Mutual funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

1-2) Investment Company Institute, 2018


Four Tips for Planning a Career Change

Changing careers can be rewarding for many reasons, but career transitions don’t always go smoothly. Your career shift may take longer than expected, or you may find yourself temporarily out of work if you need to go back to school or can’t immediately find a job. Consider these four tips to help make the financial impact of the transition easier.Back of Man Looking into Bustling City Street

1. Do your homework

Before you quit your current job, make sure that you clearly understand the steps involved in a career move, including the financial and personal consequences. How long will it take you to transition from one career to the next? What are the job prospects in your new field? How will changing careers affect your income and expenses in the short and long term? Will you need additional education or training? Will your new career require more or fewer hours? Will you need to move to a different city or state? Is your spouse/partner on board?

You should also prepare a realistic budget and timeline for achieving your career goals. If you haven’t already done so, build an emergency cash reserve that you can rely on, if necessary, during your career transition. It’s also a good time to reduce outstanding debt by paying off credit cards and loans.

Assuming it’s possible to do so, keep working in your current job while you’re taking steps to prepare for your new career. Having a stable source of income and benefits can make the planning process much less stressful.

2. Protect your retirement savings

Many people tend to look at their retirement savings as an easy source of funds when confronted with new expenses or a temporary need for cash. But raiding your retirement savings, whether for the sake of convenience, to raise capital for a business you’re starting, or to satisfy a short-term cash crunch, may substantially limit your options in the future. Although you may think you’ll be able to make up the difference in your retirement account later — especially if your new career offers a higher salary — that may be easier said than done. In addition, you may owe income taxes and penalties for accessing your retirement funds early.

3. Consult others for advice

When planning a career move, consider talking to people who will understand some of the hurdles you’ll face when changing professions or shifting to a new industry or job. This may include a career counselor, a small-business representative, a graduate school professor, or an individual who currently holds a job in your desired field. A financial professional can also help you work through the economics of a career move and recommend steps to protect your finances.

4. Consider going back to school

You might be thinking about pursuing additional education in order to prepare for your new career. But before applying to graduate school, ask yourself whether your investment will be worthwhile. Will you be more marketable after earning your degree? Will you need to take out substantial loans?

In your search for tuition money, look first to your current employer. Some employers might cover the full cost of tuition, while others may cap reimbursement at a dollar amount. Generally, you’ll be able to exclude up to $5,250 of qualifying educational assistance benefits from your taxes.

In addition, it’s likely that you’ll have to satisfy other requirements set by your employer to be eligible for reimbursement benefits. These may include, and are not limited to:

  • Discussing course of study with a manager or supervisor prior to enrolling (and receiving approval)
  • Pursuing a degree or training that is job related
  • Maintaining a minimum grade-point average
  • Working a certain length of time for the company before taking advantage of the benefit
  • Meeting eligibility requirements for regular benefits

Check with your human resources department to learn more about tuition reimbursement qualifications. Be sure to find out whether you can continue to work at your company while you attend school part-time.

Students attending graduate school on at least a half-time basis are eligible for Uncle Sam’s three major student loans: the Stafford Loan, Perkins Loan, and graduate PLUS Loan. Also, at tax time, you might qualify for certain tax benefits, such as the Lifetime Learning credit. For more information, see IRS Publication 970, Tax Benefits for Education.

*Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (member FINRA / SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. The credit union has contracted with CFS to make non-deposit investment products and services available to credit union members.
Prepared for Salal Investment Services by Broadridge Investor Communication Solutions, Inc. Copyright 2019.
Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual’s personal circumstances.
To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice. This communication is strictly intended for individuals residing in the state(s) of WA, OR, OH, IA and CA. No offers may be made or accepted from any resident outside the specific states referenced.