What's on Tap: Geopolitical Tensions and Uncertainty Rise

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  • China Remains Front-of-Mind; Continued Volatility Likely

  • Oil Prices Rise Following Persian-Gulf Attack

  • Geopolitical, Domestic Volatility Influence Fed Expectations

  • Financial Planning Friday: Long-Term Care Insurance

  • Looking Ahead to Fed Press Conference and Economic Data

From Hong Kong to the Gulf of Oman, global tensions are on the rise even as stock markets are recovering from last month’s sell-off. It might surprise you to learn that both the S&P 500 and the Dow Jones Industrial Average are, on a total return basis, within 2% of their all-time highs. 

For the year through Thursday, the Dow and the broader S&P 500 have returned 13.2% and 16.5%, respectively. The MSCI EAFE index, a measure of developed international stock markets, is up 11.4%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index has dropped to 2.61% from 3.28% at 2018’s end. On a total return basis, the U.S. bond market has gained 5.2% for the year.

China Remains Front-of-Mind; Continued Volatility Likely

Massive protests in Hong Kong over draconian extradition laws sought by China didn’t rattle global markets. However, the protests are worth noting in terms of their size and duration inasmuch as they signal a backlash against China’s desire for greater control over any autonomous or semi-autonomous region. We’ll be watching for signs that China’s desire for greater hegemony could lead to global economic or market contagion. 

On that front, the formal U.S.-China trade negotiations have devolved back into presidential tweets and counter-messaging in China’s state-controlled media outlets. The upcoming G-20 summit in Osaka, Japan (on June 28 and 29) could determine whether there is a resumption of U.S.-China trade talks or an escalation of trade turmoil. Right now, it’s unknown whether presidents Trump and Xi will sit down together, let alone provide any clarity on the matter.

We expect continued stock market volatility, as the smallest perceived shift in the state of U.S.-China relations sparks a reaction from traders. In our estimation, the markets have largely priced in the stalemate as status quo.

Oil Prices Rise Following Persian-Gulf Attack

Oil prices had been tanking—down more than 20% since their $66 price peak earlier this year—until an attack on two tankers in the Strait of Hormuz, the critical Persian Gulf passage through which nearly one-fifth of the worldwide oil supply passes. 

While the finger-pointing is igniting renewed tension between Iran and the U.S., as always, we’re looking at it through an investment lens. So far, we think slowing global growth rather than geopolitical pressures are weighing on the oil market—this week, the Organization of the Petroleum Exporting Countries (OPEC) lowered its estimate for 2019 oil demand by 6% from their estimate just one month ago and the International Energy Agency also downgraded its forecast, citing a weaker global growth outlook.

Tensions in the ever-volatile Gulf region merit an attentive eye. But supply and demand in the oil market is a more tangible barometer of where the global economy stands.

Geopolitical, Domestic Volatility Influence Fed Expectations

Remember when the conversation centered on whether the Fed would raise interest rates or not? That talk has turned 180 degrees, with the financial chattering classes pondering whether a rate cut is imminent. This despite economic growth continuing apace, strong employment levels and interest rates that remain conducive to borrowing—just this week, mortgage rates fell to a near two-year low, sending mortgage applications up almost 27% from the week before. That’s simply not something you’d see from a consumer who’s uncertain about their job prospects or financial outlook—and it’s the consumer above all else that’s fueling ongoing economic expansion.

If the Gulf region is built on a foundation of sand, earnings, interest rates and economic data continue to show that the U.S. economy is on bedrock. That may make the elevated prospect for two or more rate cuts from the Fed inside this year seem contradictory. To us, it suggests that tariff actions and trade-war fears, as well as geopolitical and domestic political volatility, are influencing those expectations. 

Next week, the Federal Reserve’s two-day meeting will command Wall Street’s attention—all eyes will be on the official statement and subsequent Wednesday afternoon press conference by Chair Jerome Powell. We don’t think a rate cut is coming out of this meeting. But any hint about the Fed’s expectations for future interest-rate cuts could move markets. 

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Financial Planning Friday: Long-Term Care Insurance

As a Braver Capital Management client, you’re accustomed to taking the long view when it comes to your investments. And it’s a good thing, too—medical advances mean we’re living longer than previous generations. As the life expectancy of older Americans increases, so does the potential need for long-term care (LTC).

The facts are somewhat sobering: A person turning 65 today has a 52% chance of needing LTC at some point; 14% of LTC patients need care for more than five years. And at an average of $100,000 a year for a private room in a nursing home, those costs can really add up. Fortunately, you can protect yourself, your family and your money with LTC insurance.

Do I Need LTC Insurance?

It’s a common misconception that you can rely on Medicare or other types of health insurance to cover “activities of daily living”—bathing, dressing, eating, bathroom needs—if you come to need such help. Medicare pays for medically necessary nursing or home care, not the more involved (and expensive) daily care; the same goes for most supplemental insurers.

This is where LTC insurance comes in. It covers a broad range of services that other insurance won’t, from home health care and modifications (e.g., wheelchair ramps) to assisted living and nursing homes.

Key Features in an LTC Policy

If you are interested in LTC insurance, here are five key factors we recommend you consider: 

  • The track record of the insurer: Your insurance company should have a high financial rating—look for an “A” rating or better on www.ambest.com and a record of on-time payment of claims. 

  • How benefits are paid: Benefits can be paid three ways—reimbursement, indemnity or cash. A reimbursement policy will pay based on the amount of your bill or the daily limit on your policy, whichever is less. Indemnity plans require proof of services but pay the full daily benefit regardless of the cost of your care. Cash plans offer the most flexibility but are also the most expensive. Once you qualify, the daily or monthly benefit is paid to you without any restrictions or receipts. If you expect to receive care from a friend or relative, the flexibility that cash policies provide may be the way to go.

  • How the plan is administered: It’s not only important to understand how much your benefits are, but also how long they last and whether they are paid out monthly or daily. Monthly benefits are becoming more common, affording more flexibility since you may not receive the same level of care every day.

  • Length of waiting period: Called the “elimination period,” this is the number of days you must wait before the policy starts paying—90 days is most common. To minimize premiums, consider an elimination period that only starts paying you back after you’ve used a reasonable amount of your personal assets.

  • The impact of inflation: Nursing home costs have risen at an annual rate of about 3.5% in the last 5 years and costs of assisted living facilities are up 67% since 2004. If you are purchasing a policy when you are younger, say in your early 60s, ensure that your benefits include inflation protection.

LTC insurance isn’t for everyone—you may have family to care for you or have enough assets to pay for care out-of-pocket—and, of course, as with other insurance, you may be paying for something you won’t end up needing.

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Looking Ahead to Fed Press Conference and Economic Data

We expect the Fed’s statement and ensuing press conference with Chair Powell Wednesday afternoon to drown out most other economic news next week. In addition, we’ll get reads on existing home sales, manufacturing and leading economic indicator gauges, homebuilder confidence and new residential construction to round out the scheduled report lot. 

If you’d like to learn more about our tactical or fundamental investment strategies, please contact Steve Johnson at 844-587-7393 or info@bravercapital.com.

Please note: This update was prepared on Friday, June 14, 2019, prior to the market’s close.

This material is distributed for informational purposes only. The investment ideas and expressions of opinion may contain certain forward-looking statements and should not be viewed as recommendations or personal investment advice, or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.

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