q1: 2016 happy new year! d · people support, the following organizations: the cure starts now...

2016

[1] INVESTMENT & FINANCIAL INSIGHTS Q1: 2016

By Stephen Brown

o you find yourself reflecting on the past year and wondering what you can do in 2016 (that you may have been putting off) to improve

your situation? Whether it’s personally, profession-ally, or financially – there is always room to improve upon YOU. Stock Yards Bank is always trying to find ways to improve – starting with our community. If our community improves and grows, our people improve and grow, and we grow and improve as a company. Stock Yards Bank and Trust makes an effort to reach out and help the Cincinnati and Northern Kentucky communities. As a local bank we take pride in helping and caring for our region and its residents. Our dedicated staff can be seen volunteering at local events and participating in fundraisers for local charities around town. In 2015, the bank and employees helped, through financial support or people support, the following organizations: the Cure Starts Now Foundation, the Cincinnati Concours d’Elegance, the Arthritis Foundation, the United Way of Greater Cincinnati, the Madeira Outdoor Bike Race, and Be Concerned, LLC. No matter what your New Year’s resolutions may be, it is always prudent to review your personal, estate, and financial plans. If this has been on your “to do” list for quite some time, perhaps 2016 is the year to contact one of our talented advisors to assist you in reviewing and updating these important pieces of your life.Best of luck in 2016!♦

DHappy New Year!

A N E W S L E T T E R F R O M T H E C I N C I N N A T I / N K Y M A R K E T O F S T O C K Y A R D S B A N K & T R U S T C O M P A N Y

STEPHEN BROWNCincinnati Market Executive

DAVID BROOKSDirector of Wealth Management

ERIN ARNOLD, CTFAWealth Advisor

Q1: 2016

[email protected](513) 824-6104



Economic & Market Outlook: Q1, 2016


he final quarter of 2015 provided investors with positive returns from the stock market. The

Standard & Poor 500 overcame a weak month in December to have a positive return of 6.85% for the fourth quarter. The index returned a sub-par 1.38% for all of 2015. Bond investors did not fare as well in the

quarter with a return of -0.69% from intermediate term, high quality bonds. Bonds for the calendar year had a return of 1.07%. Volatility in the financial markets has increased significantly since the first of the year with the stock market erasing all of the fourth quarter’s gains in the first few weeks of the New Year. We expect volatility to remain high throughout 2016. The capital markets generally do not react well to uncertainty and there are a number of uncertainties that will plague investors this year.The first uncertainty relates to the Federal Reserve. During the fourth quarter, the Fed increased short term interest rates for the first time in seven years. The end of seven years of zero interest rate policy will be a challenge for both the economy and the capital markets. Strategists worry that the Federal Reserve will disrupt the fragile recovery by increasing interest rates too quickly. The debate will continue in 2016 over the magnitude, timing, and frequency of future interest rate increases.Commodity price declines also have investors on edge. Commodities, and especially oil, declined throughout 2015. The decline in oil prices reflected both increasing supplies and a lack of demand. Economists worry that the decline in commodities is a precursor to slower manufacturing growth worldwide, which could lead to a decline in economic activity. Declining global growth would negatively impact corporate earnings and be a risk to stock prices.Slowing global economic growth is also worrying investors. A recession in Japan, continued slow growth in Europe, and slowing growth in China all could have negative implications for domestic market and economic growth. The recent decline in the Chinese stock markets has been one of the primary causes for the decline in U. S. stock prices. Econo-mists fear that slowing growth in China will eventual-ly spill over into the developed world at a time when

TCentral Banks are limited as to the policy responses available to combat weak economic activity. Interest rates in most industrialized countries are at or near zero already and world debt levels would limit another round of quantitative easing.Politics is also a major source of ambiguity. 2016 is a presidential election year. Not only is who will be elected to office unknown but what the policies of the new administration will be is also in doubt. Changes in tax laws, immigration policy, and our reaction to the many world geopolitical risks could have a positive or negative impact on the stock and bond markets. There is no way at this time to predict the outcome of the election or what policies will eventu-ally be enacted into law.Finally, earnings growth has become more uncertain. Earnings are the fuel that propel stock prices higher. For several years, companies have generally been reporting weaker than expected sales but have met net earnings numbers through accounting changes, share buy-backs, tax deferrals, or expense control measures. The one-time nature of these methods has lowered both the quality of earnings gains and caused analysts to reduce earnings expectations for 2016. Slower than expected earnings growth would be detrimental to future stock market gains and would increase market volatility.Fortunately, all of these uncertainties have been widely discussed in the financial press and major news media for quite some time. Investors are already familiar with these negatives and their possi-ble impact on the capital markets is likely already reflected in prices. What has not been as widely discussed are some of the positives that we are seeing in the economy and markets today. Chinese growth has been slowing for several years but still has outpaced growth in the developed world. China is transitioning from a manufacturing dominat-ed economy to a consumer driven economy. The transition is ongoing and has not been a smooth one, resulting in Chinese stock market disruptions, curren-cy devaluation, and slower economic growth estimates. The link between the U. S. and Chinese economies is not large enough to disrupt our econom-ic growth. Exports to China were less than one percent of our total dollar GDP. In the long run, the transition to a consumer oriented economy should help stabilize the Chinese economy and have a positive impact on global capital markets. Chinese stock market declines have been cited as a reason for increased volatility in our own markets. However, the decline in Chinese stock prices are less


MARK HOLLOWAYChief Investment Officer

a reflection of economic conditions and more a reflection of the inefficiency of a market that has only recently been open to foreign capital inflows. The lack of foreign investment and strict state control measures limit liquidity in the Chinese capital markets and contribute to wide swings in their stock prices that have little to do with our markets at home. The connection of Chinese stock prices to our markets may already be overstated.Recent U. S. economic data have been very positive. Employment has increased throughout 2015 and recently accelerated in the fourth quarter. New job creation, hours worked, wages, unemployment benefit filings, and labor participation rates have all improved. This has positive implications for consumer spending which is directly correlated with employment. Consumer spending is by far the most important part of domestic economic growth making up over two-thirds of our GDP. These gains alone should offset a slowing manufacturing sector and prevent the United States from falling into a recession in 2016. Continued economic expansion will be positive for corpo-rate profits and the stock market.Increasing interest rates are not always a negative. The Federal Reserve would have to be very confident in future economic growth before ending its zero interest rate policy. The minutes of recent Federal Reserve meetings indicate that economic growth is sustainable and that inflation is under control. The Federal Reserve has also indicated that the pace of future rate hikes will be slow and deliberate to

insure that economic growth continues. During the last period of Federal Reserve short term rate increases (2003-2007) long term interest rates remained relatively stable and the stock market had a positive return.

Our security selection process has been very successful during periods of stock market volatility. The screening and valuation work we perform tends to focus on compa-nies with conservative financials and strong cash positions; characteristics that allow companies to better weather market volatility and uncertainty. We also favor high quality companies with long records of sustainable positive sales and earnings growth trading at reasonable valuations. These types of companies are generally favored by inves-tors during periods of uncertainty. Most of the companies in our core portfolio not only pay dividends but have a history of growing those dividends. Dividends are a more certain source of return during volatile times and provide a safety net for stock prices.Please contact your wealth advisor for more detail regard-ing our economic and capital market outlook. As always, we appreciate the opportunity to work with you. ♦


KARA ENDRES, CFP®Financial Planner


(continued on pg. 4)

The Bipartisan Budget Act of 2015, signed into law on November 2, 2015, brings to an end the advanced Social Security claiming strategies often utilized by higher net worth retirees. The “�le and suspend” and “restricted application” claiming strategies are being eliminated in an e�ort to improve the solvency of the Social Security program.

WHAT IS CHANGING?

One strategy that was eliminated is the “�le and suspend” strategy. This strategy allowed an individual, at Full Retirement Age (“FRA”), to �le for bene�ts and then immediately suspend receiving them in exchange for an 8.00% annual increase in bene�ts until age 70. This “�le and suspend” strategy activated the record of the spouse who �led for

Advanced Claiming Strategies for Social Security Coming to an Endbene�ts, and in turn, permitted a spousal bene�t to be collected. Under the legislation passed in November, an individual can no longer collect bene�ts from another person’s work record if said person has elected to suspend his or her bene�ts. Therefore, in order for a spousal bene�t to be collected, the other spouse must have �led and be receiving bene�ts.

The second strategy that is coming to an end is called the “restricted application.” This type of application permits an individual to �le for bene�ts and then restrict the type of bene�t received to the spousal bene�t, exclusively. While receiving a spousal bene�t his or her personal bene�t would continue to grow at 8.00% each year until age 70. Upon his or her 70th birthday, the individual switches to his or her maximum Social Security bene�t. Under the new guidelines, however, when �ling for spousal bene�ts, the Social Security Administration (“SSA”) will �le an individual for personal bene�ts as well, and the higher bene�t will be paid. This new automatic �ling

“There is no way at this time to predict the outcome of the election or what policies will eventually be enacted into law.”

and selection process eliminates the possibility for anyone to �le on another person’s record while deferring their own bene�ts.

WHO IS AFFECTED?

Anyone currently receiving bene�ts under a “restricted applica-tion” or utilizing a “�le and suspend” strategy is not a�ected by the changes in Social Security rules. In addition, anyone that turned age 62 on or before December 31, 2015, is still permitted to �le a “restricted application” in its previous form.

Individuals who wish to “�le and suspend” under the old rules must turn age 66 on or before May 1, 2016 (180 days after the law was enacted) and all �ling must be completed with the SSA by April 29, 2016. If an individual turns age 66 by May 1, 2016, and does not take action with the SSA by the above stated deadline, he or she will forfeit his or her ability to utilize the “�le and suspend” strategy.

IS SOCIAL SECURITY PLANNING STILL VALUABLE?

Although these changes simpli�ed the ways in which bene�ts are taken, Social Security optimization planning is still an essential part of a comprehensive �nancial plan. Deciding when to start bene�ts and how to use them e�ectively are important questions that can have complicated answers. As a result, please contact your advisors at Stock Yards Bank & Trust Company to help plan the best strategy for your family. ♦

(continued from pg. 3)

We provide the information in this newsletter for general guidance only. It does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, investment, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, expressed or implied, including but not limited to warranties of performance, merchantability, and �tness for a particular purpose.

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q1: 2016 happy new year! d · people support, the following organizations: the cure starts now...

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