this way: q3 & q4 2015

14
A LOOK AT THE U.S. ECONOMY ENTERING THE FALL

Category:

Documents


0 download

DESCRIPTION

This Way is Frontier Wealth Management's Quarterly Newsletter.

TRANSCRIPT

Page 1: This Way: Q3 & Q4 2015

A LOOK AT THE U.S. ECONOMY ENTERING THE FALL

Page 2: This Way: Q3 & Q4 2015

Frontier is a private, family-owned wealth advisory firm that collaborates

and advocates for you. We strive to leverage our in-house expertise

to develop and implement a unique path, empowering you

with confidence throughout your financial journey.

TRANSPARENTClear, Open, Accountable

We are authentic in our approach; you will always know

the what, why and how.

ADVOCATESBelievers, Supporters,

Champions

We strive to understand your financial goals and personal aspirations, enabling us to

become your trusted advisors.

ENGAGEDConnected, Collaborative,

Committed

We are here to serve you. Together, our success is based

on clear, open and honest communication.

RESOURCEFULCompetent, Innovative,

Imaginative

Through collaboration, we leverage our in-house expertise to develop a unique path toward

your financial success.

Page 3: This Way: Q3 & Q4 2015

ON THE ECONOMIC FRONTIER: A LOOK AT THE U.S. ECONOMY ENTERING THE FALLAt Frontier, we know you trust us to keep an eye on macroeconomic trends and gauge how they might impact your investments. Therefore, we offer a brief look at the U.S. economy and investment markets in order to keep you informed.

8 NEWS & NOTESWe have several new faces in our offices. Meet our new Team members.

ON THE COVER

Q3 2015

DEPARTMENTS

4

FROM THE BENCH: BUSINESS ENTITIES AND ASSOCIATED TAX IMPLICATIONSWhat to consider when forming a company.

13

4

CLIENT EXPERIENCEWe will be updating our website and joining the social media realm. Be sure to follow us for updates.

13

8

NEWS YOU CAN USENews, numbers, trends and statistics revolved around today's economic environment.

12

13

Page 4: This Way: Q3 & Q4 2015

A LOOK AT THE U.S. ECONOMY ENTERING THE FALL

At Frontier, we know everyone doesn’t have time to keep

an eye on macroeconomic trends and gauge how they

might impact their investments. Therefore, we offer the

following look at the U.S. economy and investment markets in order

to keep you informed about the most important trends that could

affect your finances and portfolio.

Page 5: This Way: Q3 & Q4 2015

Q3 2015 | 5

GDP AND THE STOCK MARKETThe U.S. economy followed up a lackluster first

quarter of the year with a strong second quarter, at

least measured by gross domestic product (GDP).

U.S. GDP increased at an annual rate of 3.7 percent

in the second quarter, compared to falling by 0.2

percent in the first quarter. Overall, GDP growth for

the first half of 2015 was 2.2 percent.

In reality, the U.S. economy probably didn’t

perform as poorly as the GDP numbers would

indicate in the first quarter, and it probably didn’t

perform as well as the numbers would indicate

in the second quarter. In fact, many economists

attribute the strong second quarter to a rebound

from the weak first quarter.

While GDP has been strong since the

first quarter, unfortunately the stock market’s

performance hasn’t. The recently concluded third

quarter was the worst performing quarter for the

major stock market indices since 2011. It was also

the third straight losing quarter for the Dow — the

longest losing streak since the Great Recession and

only the third such streak in nearly 40 years.

On the positive side, the fourth quarter has

typically been strong for the stock market, so

there’s potentially reason for optimism for the rest

of this year. Also, since 1952 the months of August

through October have been the worst months of

the year for the stock market, while the months of

November through January have been the best.

As for GDP, most economists expect the U.S.

economy to cool down slightly throughout the rest

of this year. Kiplinger forecasts a 2.7 percent GDP

growth rate for the second half of 2015 and a 2.5

percent growth rate for the full year. This would

be slightly better than last year’s growth rate of

2.4 percent.

THE CHINA SWOON AND ITS IMPACTThe big economic news of the summer was China’s

swoon and the resulting stock market pullback that

occurred. China’s stock market began falling in late

June and early July as it became apparent that its

once red-hot economy was cooling considerably,

pulling other world stock market indices down with

it. Here, the Dow Jones Industrial Average dropped

from 18,144 early in the summer on June 23 to 15,666

late in the summer on Aug.25, a 14 percent decrease.

Meanwhile, the S&P 500 fell from 2,124 on June 23

to 1,868 on Aug. 25, a 12 percent decrease.

So what’s going on in China and why does

it have such a big economic impact all over the

world? First, China is the world’s second largest

economy, so its economic impact tends to affect the

world economy. And for the past quarter century,

China’s economic growth has been robust, soaring

at or near double digits almost every year. But

China’s growth is starting to slow down. It topped

10 percent in 2010 but fell to just 7.4 percent last

year, the lowest level in 25 years. And in the second

quarter of this year, it fell to 7 percent. Although

these appear relatively strong compared to the rest

of the world, they mark a significant slowdown

Page 6: This Way: Q3 & Q4 2015

6 | Q3 2015 FRONTIER WEALTH MANAGEMENT

in China. In fact, the Chinese government says 7

percent is the minimum level of growth necessary

to maintain a steady level of employment for its

growing population of 1.35 billion people.

Among the current concerns about China

are a severe housing slump and a slowdown in

manufacturing activity, which recently fell to a

15-month low. This affected commodity prices

like gold, copper and silver, as China is the world’s

largest consumer of industrial metals. Amid all

the hand-wringing over China, though, it’s worth

noting that the Chinese stock market is extremely

volatile: The 30 percent drop in the Shanghai

Composite Index over the summer followed a 150

percent rise, so a correction wasn’t unexpected.

In fact, this is a good reminder of the importance

of putting the recent pullback in U.S. stock markets

in perspective. Though it’s true that major market

indices have experienced a pullback since early

summer, this comes in the midst of one of the third

longest running bull market in the past 80 years

— over six years and counting. In comparison, the

average bull market lasts only about three and a

half years.

FED STANDS PAT ON INTEREST RATESLast month, the Federal Reserve (the Fed) answered

the question that economists and investors had

been wondering about all summer long. At the

Federal Open Market Committee (FOMC) meeting

on Sept. 17, the Fed decided not to raise interest

rates from the near-zero level they have been for

nearly seven years.

As recently as early summer, many economists

were fairly certain that the Fed would raise interest

rates in September. But the summer swoon seems

to have prompted the Fed to hold off on a rate

hike until early 2016. Specifically, it cited risks

from abroad and downward pressure on inflation

resulting from a high dollar and low commodities

as the main reasons not to raise rates now.

One Federal Reserve Bank president said the

decision to stand pat on interest rates was a “close

call.” He believes that the arguments for and against

an interest rate hike are about balanced now. The

U.S. economy is strengthening, he noted, but global

economic developments like China’s slowdown

continue to pose risks, as does the downward pressure

on inflation. He believes the next appropriate step is

to gradually raise rates, starting either later this year

or early next year, as the U.S. economy nears full

employment and inflation gradually rises toward the

Fed’s target of 2 percent.

OTHER KEY ECONOMIC INDICATORSHere is a brief look at a few other key economic

indicators and statistics:

UNEMPLOYMENT: The latest numbers indicate

that the employment situation in the U.S. continues

to improve gradually. In August, the unemployment

rate dropped to 5.1 percent, which the Fed considers

to be consistent with full employment. However,

the number of new jobs created in August fell

Page 7: This Way: Q3 & Q4 2015

Q3 2015 | 7

to 173,000 from 245,000 in June and July. One

reason some economists cite for this drop is a large

number of layoffs in the manufacturing and mining

industries, which are feeling the effects of lower energy

and commodity prices and slow growth in China and

other emerging markets.

Getting a full view of the employment picture,

however, requires looking beyond just the broad

unemployment rate. For example, a large number

of people have left the labor force altogether by

retiring or no longer looking for a job — they are

no longer counted as unemployed. Conversely, the

number of people entering the labor force has been

declining since 2013. Both of these factors bring the

unemployment rate down. In addition, there are

many people working part-time who are counted as

being employed but would rather find a full-time job.

INFLATION: The Consumer Price Index for All

Urban Consumers (CPI-U) decreased in August by 0.1

percent on a seasonally adjusted basis after climbing

by 0.1 percent in July, according to the U.S. Bureau

of Labor Statistics. Meanwhile, the core U.S. inflation

rate increased by 1.8 percent on an annual basis in

August, nearing the Fed’s target of 2 percent.

Digging deeper into the inflation statistics, food

prices are up 1.6 percent over the past year, while

energy prices are down 15 percent and gasoline

prices are down 23 percent. Prices for medical care

rose 3.4 percent, 3.1 percent for shelter and 2.1

percent for transportation over the past year.

HOUSING: After three months of gains, sales of

existing homes dropped in August by 4.8 percent to

5.31 million, according to the National Association

of Realtors. The drop came despite slowing growth

in home prices and a relatively high percentage

share of first-time buyers (32 percent).

However, year–over–year sales rose in August

for the 11th consecutive month and are 6.2 percent

higher than they were one year ago, when at 5

million. In addition, the median existing home

price rose year-over-year for the 42nd consecutive

month in August — it now stands at $228,700, up

4.7 percent from last August when it was $218,400.

ENERGY: As noted above, energy prices remain low,

including gasoline. Low gas prices act almost like a tax

cut by putting more money in consumers’ pockets.

Having more disposable spending on everyday items

helps boost consumer spending and economic growth.

The U.S. Energy Information Administration predicts

the national average price for a gallon of regular

gasoline will fall further to $2.11 during the fourth

quarter and average $2.38 per gallon in 2016. Low gas

prices are obviously good news for consumers, but bad

news for oil and gas industries.

DON’T PANIC OVER MARKET CORRECTIONSWe realize the stock market correction that occurred

over the summer made it difficult for some investors

to sleep well at night. However, such corrections

are a normal and even healthy part of the markets

and investing. If you have any questions about your

portfolio in light of today’s volatile markets, please

don’t hesitate to give us a call. u

Page 8: This Way: Q3 & Q4 2015

8 | Q3 2015 FRONTIER WEALTH MANAGEMENT

By Mark Howe, CFP®

Senior Financial Planner

Many business entities

exist in today’s

business world.

These include a Sole Proprietor, Limited Liability

Company (LLC), Limited Partnership (LP), “C”

Corporation and “S” Corporation. When it comes

to forming a business entity, several variables will

from the bench.

BUSINESS ENTITIES AND ASSOCIATED TAX IMPLICATIONS WHAT TO CONSIDER WHEN FORMING A COMPANY

influence the decision. Two of the most common

and important factors among business owners are

the layer of asset protection and tax ramifications.

It is important to discuss the appropriate business

entity for your particular situation with both a

CPA and business attorney. This is applicable not

only at the formation of the business, but also

with current business operations. Doing so can

help save taxes both now and in the future, while

also mitigating liability exposure.

Page 9: This Way: Q3 & Q4 2015

Q3 2015 | 9

SHOULD YOU INCORPORATE?Business owners sometimes may not understand

all of the business entity options, but generally

all business owners want to maximize their

asset protection layers while taking into

account the cost and value of the layer of

protection. Therefore, one of the first items to

address is what type of entity would provide

appropriate liability protection. Generally, this

is initially fulfilled by incorporating to form a

corporation, LLC or LP. Corporations, LLCs

and LPs protect against personal liability from

business lawsuits by separating personal assets

from business assets. The difference in liability

protection is that a corporation’s shares could

be seized (giving up partial control of the

corporation), but an LLC or LP would not give

business management control to a creditor (a

creditor could only obtain a charging order

against an LLC or LP, which would enable a

creditor to receive dividends and/or income

that the business owner would have received if

management decided to make a distribution).

Note, LLC and LP asset protection laws vary

by state (Nevada, South Dakota and Wyoming

generally have better asset protection laws).

Yet, it is possible for a business operating in one

state (e.g., Kansas) to register in another state

(e.g., Nevada) and consequently be governed

by Nevada state laws.

Both an LLC and LP are similar in that each

provides personal asset protection from the

business. The primary difference is LLC owner(s)/

member(s) are not protected from the liability

of another owner(s)/member(s). However, LPs

do provide such liability protection from other

partners. As a result, LPs are very popular among

professionals, such as accountants or attorneys,

in order to protect one partner from being jointly

liable with another partner.

Finally, if you are the only owner of your

business and you elect to not incorporate, you

are, by default, a sole proprietor. As a result, you

would be subject to unlimited personal liability,

including business debts and obligations.

WHICH TYPE OF CORPORATION SHOULD BE ELECTED?Essentially, there are two types of corporations

– “C” Corporations and “S” Corporations.

Two of the most common

and important factors among

business owners are the

layer of asset protection and

tax ramifications. It is important to discuss the

appropriate business entity for your particular

situation with both a CPA and business attorney.

This is applicable not only at the formation of

the business, but also with current business

operations. Doing so can help

save taxes both now and in the

future, while also mitigating

liability exposure.

Page 10: This Way: Q3 & Q4 2015

10 | Q3 2015 FRONTIER WEALTH MANAGEMENT

Both “S” Corporations and “C” Corporations

are entitled to limited liability. Although

certain specific requirements must be met

to elect “S” Corporation status, the primary

difference between a “C” Corporation and an “S”

Corporation is taxes. “C” Corporations pay taxes

on income at the entity/company level, as high

as a 35 percent top tax rate (this is currently

one of the hot tax items being discussed in

Washington, D.C., as tax inversion has become

more common among large “C” Corporations).

These corporations determine their taxable

income, pay corporate income taxes and then

distribute the remaining earnings as dividends

to the owners/shareholders. These dividends

are then taxable to the owners of the corporation

(while not deductible to the corporation itself).

Therefore, “C” Corporations are commonly

referred to as being “double taxed,” initially

at the corporate level and then again at the

shareholder level. Once incorporated, a company

is “C” Corporation unless it elects to file for “S”

Corporation status.

“S” Corporations, once electing “S”

Corporation status and meeting “S” Corporation

requirements, have income, capital gains and

losses, deductions, and credits passed through

to its owners/shareholders, much like how a sole

proprietor or partnership would be taxed. The

income from an “S” Corporation is taxed only to

the shareholders and is generally not subject to

corporate income tax.

The most common forms of businesses are: • Sole Proprietorships• Partnerships (LP)• Corporations ("C" Corporation and "S" Corporation)• Limited Liability Companies (LLC)

The type of business entity you choose will depend on: • Liability • Taxation • Record Keeping

SOLE PROPRIETORSHIPA sole proprietorship is the most common form of business organization. Sole proprietors can operate any kind of business. It must be a business, not an investment or hobby.

• Shop or retail trade business• Large company with employees• Home based business• One person consulting firm

PARTNERSHIPA partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business.

CORPORATIONSA corporate structure is more complex than other business structures. It requires complying with more regulations and tax requirements. It may require more tax preparation services than the sole proprietorship or the partnership. Corporations are formed under the laws of each state and are subject to corporate income tax at them federal and generally at the state level.

When you form a corporation, you create a separate tax-paying entity. Unlike Sole Proprietors and Partnerships, income earned by a corporation is taxed at the corporate level using corporate tax rates. Regular corporations are called C corporations because Subchapter C of Chapter 1 of the Internal Revenue Code is where you find general tax rules affecting corporations and their shareholders.

The Subchapter S corporation is a variation of the standard corporation. The S corporation allows income or losses to be passed through to individual tax returns, similar to a partnership. The rules for Subchapter S corporations are found in Subchapter S of Chapter 1 of the Internal Revenue Code.

LIMITED LIABILITY COMPANYA Limited Liability Company (LLC) is a relatively new business structure allowed by state statute. LLCs are popular because, similar to a corporation, owners generally have limited personal liability for the debts and actions of LLC. Other features of LLCs are more like a partnership, providing management flexibility and the benefit of pass-through taxation. Owners of an LLC are called members.

— Information from www.IRS.gov

BUSINESS ENTITIES AT A GLANCE

Page 11: This Way: Q3 & Q4 2015

Q3 2015 | 11

Shareholders/owners who are also employees

of an “S” Corporation receive W-2 income for

their services, and, as a result, pay payroll taxes

(Social Security and Medicare taxes) on this

income. However, when shareholders of an “S”

Corporation receive dividends from the business,

the dividends are not subject to payroll taxes. This

tax treatment is why many employee-business

owners of “S” Corporations pay themselves a

relatively low W-2 salary and, consequently,

distribute larger corporate dividends. Note, the

IRS requires reasonable compensation (W-2

income) to be paid in such circumstances.

In summary, the difference between a

“C” Corporation and an “S” Corporation is

purely the manner in which the two entities

are taxed. From a business law and asset

protection perspective, “C” Corporations and

“S” Corporations are identical.

CAN YOU HAVE THE BEST OF BOTH WORLDS?Though many variables should be considered

when forming a business, many business owners

place asset liability protection and taxes as some

of the top priorities. Therefore, the next logical

step is to determine how a business owner can

have personal liability protection and receive

the greatest tax benefit. Because there are so

many business entities, many business owners

are unaware that a company can be established

as one type of entity while choosing to be taxed

in a more favorable manner. For example, many

small business owners frequently elect to form

an LLC or LP for the personal liability protection

(in addition to being relatively easy to form such

business structures). In addition, a business can

then elect to be taxed as an “S” Corporation for

the tax benefits (avoiding the “double taxation”).

Therefore, the small business owner would

have created personal liability protection, while

potentially creating a more tax-efficient entity.

Furthermore, many states offer state

income tax advantages on dividends paid by

“S” Corporations. For example, the State of

Kansas no longer taxes distributions of profits

from an “S” Corporation (assuming reasonable

compensation is paid to the owner). And as a

result, many companies currently in Kansas are

now either electing “S” Corporation status, or

“S” Corporations are moving from a neighboring

state (i.e., Missouri) to Kansas, simply for the

state income tax advantages.

The many nuances and details involved in the

different business entities can be complicated.

Factors to consider when forming or changing

business entities involve many variables, and

generally only two of those variables have been

discussed in this article. It is critical to obtain

expert advice when deciding which entity to

choose or whether to change current business

entities. Therefore, discussing all variables of

your particular situation with both a CPA and

business attorney is recommended. u

Page 12: This Way: Q3 & Q4 2015

12 | Q3 2015 FRONTIER WEALTH MANAGEMENT

The third quarter was the worst quarter for the S&P since 2011 — in fact, so far this year the stock market has a 0.92 correlation with 2011’s; a remarkably similar pattern. Were the similarity to persist, it would bode well for the fourth quarter this year. In 2011, the S&P was up a robust 6%.

— CHARLES SCHWAB

BANK $1 MILLION (IT'S EASIER THAN YOU THINK)

DESPITE ALL THE BAD NEWS ...

news you can use.

Households' leverage has fallen by more than 30% since the 2009 peak.

The economy has

been growing and jobs

have been expanding

for more than six years.

30-year fixed mortgage rates are 3.84%, only 40 bps higher than their all-time lows of 2012.

Housing starts (new privately owned houses) have increased by an annualized 15% rate for the past six years.

The private sector has

created more than 4

million net new

jobs since 2007.

The dollar is still one of

the world's strongest

currencies.

FOURTH QUARTER COMEBACK?

Inflation has averaged only

2% for the past 10 years.

When it comes to saving for retirement, most Americans don't even know how behind they are. What's more, research shows that savings trends are getting worse, despite a decades-long push to enroll workers in 401(k)s and other employer plans.

One of the problems is obviously procrastination — it's hard to resist the immediate gratification you get from spending. The other, less obvious hurdle involves financial literacy. Most people don't grasp the power of compound savings. A team of researchers found that the majority of

people believe that savings grow in a straight line. Only 22 percent understand that the growth is exponential. As your savings compound, you earn interest on interest, so your money grows faster and faster.

What that means is that while

it can take a long time to save your first $1 million, it's a lot quicker to get to $2 million. If more Americans understood that — and acted on it — there would be good reason to be optimistic about retirement.

— Money.com, October 2015

$2 million

$1.5 million

$1 million

$500,000

Age 20 61 71

THE MILLION-DOLLAR EFFECT OF COMPOUND INTEREST

Time to $1 million: 31 years

Time to $2 million: 10 years

Page 13: This Way: Q3 & Q4 2015

Q3 2015 | 13

news & notes.

AROUND THE FRONTIER OFFICES

F rontier has added several new faces to our

team! In our Wichita office, Melissa Cropp,

has joined us as the Front Office Administrator.

Melissa has a background in administration

and management, and brings her passion for

interacting with clients, staff and the public to

create team-focused environments.

In our Denver office, we’ve welcomed

Marissa MacDonald as the Front Office

Administrator and Shannon Nielsen as a

Client Service Specialist. As the Front Office

Administrator, Marissa is the first person to

greet clients in the Denver office. After working

in hotels during college, she gained several

years of experience in the hospitality industry

and developed a genuine passion for working

with people. Shannon has more than 10 years’

experience in the investment management

client experience.

WEBSITE UPDATES

W ithin the next couple of months,

Frontier's website will undergo some

updates to content, graphics and navigation.

Frontier will also be launching a new weekly

blog, in addition to joining the social media

Melissa Reglein

(Kansas City)

Marissa MacDonald

(Denver)

Melissa Cropp

(Wichita)

Shannon Nielsen(Denver)

industry. Prior to joining Frontier, Shannon

worked for two Registered Investment Advisory

firms in the San Francisco Bay area.

Melissa Reglein, Integration and Support

Specialist, joins us from Phoenix, Arizona,

and will be traveling to all the offices on a

regular basis, guiding newly hired advisors and

staff through their transition process. Prior

to joining Frontier, Melissa was Integration

Specialist with Wells Fargo Advisors for

nine years.

To learn more about Melissa, Marissa,

Shannon and Melissa, please check out their

biographies at www.Frontierwealth.com. u

@frontier_wealth

linkedin.com/company/ frontier-wealth-management

facebook.com/frontierwealthmanagement

realm. Be sure to follow us on Twitter, Facebook

and LinkedIn for company updates, articles of

interest and more. u

Page 14: This Way: Q3 & Q4 2015

The commentary is limited to the dissemination of general information pertaining to Frontier Wealth Management, LLC's

("Frontier") investment advisory services and general economic conditions are as of September 30, 2015. This information should

not be used or construed as an offer to sell, a solicitation of an offer to buy or a recommendation for any security, market sector

or investment strategy. There is no guarantee that the information supplied is accurate or complete. Frontier is not responsible

for any errors or omissions, and provides no warranties with regards to the results obtained from the use of the information.

Nothing in this newsletter is intended to provide any legal, accounting or tax advice and Frontier does not provide such advice.

This information is subject to change without notice and should not be construed as a recommendation or investment advice. You

should consult an attorney, accountant or tax professional regarding your specific legal or tax situation.

KANSAS CITY 4435 Main Street, Suite 1100Kansas City, MO 64111815.753.5100

ALBANY515-B1 N. Westover BoulevardAlbany, GA 31707229.888.5346

DENVER10375 Park Meadows Drive, Suite 500 Lone Tree, CO 80124303.770.0154

ST. LOUIS11975 Westline Industrial DriveSt. Louis MO 63146314.762.6800

WICHITA1625 N. Waterfront Parkway, Suite 150Wichita, KS 67206316.689.8333