March 2011 Market Update

“If inflation continues to soar, you’re going to have to work like a dog just to live like one.”
George Gobel, Comedian, 1919-1991 (Quoted during the late 1970’s)

PLANNING COMMENTARY

Everyone agrees that excessive inflation (or the opposite – deflation) is not an economically healthy trend. From a personal finance perspective, the inflation rate used in wealth planning is a key assumption that must be monitored closely. More importantly we want to understand as best we can the potential impact of future inflationary trends on client financial goals like retirement, education and maintaining a comfortable lifestyle. As we review historical inflation rates for specific expenses, we have found that they often experience wildly different trends than the historical averages.

For example, we use in our wealth planning work 3% for general lifestyle expenses (i.e. utilities, food, gasoline, clothing, etc.) although have found that tuition and fee expenses related to attendance at a private four-year university have grown at double that rate in the past (thus we use 6.2% for these expenses in our work). More importantly, we think due to a number of emerging trends that these types of expenses could grow even faster in the future. Public four year university expenses have increased 2.5 times as fast as our baseline rate of 3% and thus we are using rates between 7% and 9% for this type of cost.

Medical care can experience even steeper increases whether due to technological improvements, supply constraints due to baby boomers or cost sharing changes (i.e. business’ and the federal government being unable to afford to share in these costs with individuals as they have in the past). In our work we estimate these changes for future planned expenses relative to what we have found to be true in the past while continuing to consider the impact of current and future trends.

MARKET COMMENTARY

After a dip during the middle of March, the stock market has shrugged off global concerns and uncertainty to continue its upward advance. For the first three months of this year the S&P 500 index has seen a total return of 5.9%. The bond market has generated a small gain of 0.5% since December 31 as measured by the Barclays Capital Aggregate Intermediate Bond index. International stock markets have also shown strength for the first three months of this year with the MSCI EAFE Developed Market stock index increasing 3.4%. Emerging market stocks have been volatile and down for most of the first quarter; however, a 5.7% rally during March has led to a small gain of 1.7% for this year.

Employment and economic numbers in the US continue to look promising. However, as we look out over the balance of the year we are concerned about the spike in food and energy prices and the impact this will have on consumer spending in other areas. The most recent reading of consumer confidence showed a decline because of the bite that higher prices at the pump and grocery are having on everyone’s pocketbook.

We are also paying close attention to what the US Fed may do with monetary policy when they end their second round of quantitative easing in June. We see Treasury yields increasing over the next few years as investors demand a higher return for buying our bonds (due to the fiscal irresponsibility of the US Government). In the bond portion of our portfolios we have reduced the average maturity of our bond holdings to protect against future interest rate increases. And, we continue to assess investment opportunities to guard against inflationary pressures.

CONCLUSION

Inflation can be devastating to long-term financial goals if it is not planned for properly. Saving strategies, appropriate lifestyle decisions and constant goal planning are cornerstones of our wealth planning work that help to deal with these future risks. Also, monitoring appropriate investment holdings and diligently allocating appropriate levels of the portfolio to inflation-protected positions helps protect asset values.

Thank you for the trust and confidence you have placed in our team. We’ll continue to work diligently to protect and plan your financial future.

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The information in this material is only as current as the date indicted, and may be superseded by subsequent market events or for other reasons. Statements concerning financial market trends are based on current market conditions, which are subject to change and which Payne Wealth Partners, Inc. does not undertake to update. While all information prepared in this document is believed to be accurate, any statements of opinion constitute only current opinions of Payne Wealth Partners, Inc., which are subject to change and which Payne Wealth Partners, Inc. does not undertake to update. Accordingly, you should not put undue reliance on these statements.

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Payne Wealth Partners, Inc.
Keystone Financial Consulting
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