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PRINCIPLES THAT ENDURE
Service
Expertise
Integrity
Greater Boca Raton
Estate Planning Council
November 13, 2012
David L. Koulish, CPWA®, CFP®
Senior Vice President
Regional Investment Practice Leader - East Region
© 2012 Northern Trust Corporation
northerntrust.com
Financial Market Outlook
2

Election uncertainly removed

Fiscal Cliff

Resolution unlikely prior to year end

Best guess – 3-6 month extension

We expect moderate earnings growth, accommodative monetary
policy and stable commodity prices

Global economic outlook remains mostly cloudy

US economic growth modest but steady

Europe struggles with recession

Emerging markets grow below trend
YTD Performance Update
Dow Jones Industrial Average
+ 4.89%
S&P 500
+ 9.72
NASDAQ
+ 11.51
Eurozone
+ 7.12
Pacific (ex Japan)
+ 12.54
World (ex US)
+ 6.77
T-Bill (13 weeks)
0.106%
10-Year Treasury
1.615
30-Year Treasury
2.749
Gold
Crude Oil
November 9, 2012
3
1730.30
86.07
The Fiscal Cliff Timeline
Important Dates
US Presidential and
Congressional
elections
11/06/12
11/12/12
Lame duck
session begins
4
Debt ceiling
likely to be
reached
Late
Nov/Early
Dec
Fiscal cliff
12/31/12
Sequester takes
effect
01/02/13
01/03/13
New Congress
takes office
Presidential
Inauguration
01/20/13
Late
Feb/Early
Mar
Debt limit likely
reached
What Is the Fiscal Cliff?
Unless the law is changed, or Congress and the president find another way to trim the deficit, on Jan. 1 the following spending cuts and
tax changes will automatically kick in:
Fiscal 2013 impact, annualized dollars: percent of GDP
Spending cuts:
$136 billion,
0.8% of GDP
$87 billion:
0.5% of GDP
Across-the board cuts in domestic and defense
discretionary spending
$35 billion: 0.2%
Expiration of extended unemployment benefits
$15 billion: 0.1%
Reduce Medicare doctor rates
$24 billion: 0.1%
New taxes from Obama health-care law
Tax cuts that expire:
Tax
increases:
$532 billion,
3.1% of GDP
TOTAL
spending
and taxes:
$668 billion
4.0% of GDP
$87 billion:
0.5%
Other tax provisions
$127 billion:
0.7%
Payroll tax holiday ends
$295 billion:
1.7%
Income tax rates to rise to pre-2001 levels;
alternative minimum tax reaches into middle class
Numbers are rounded
Source: Congressional Budget Office, Nomura Securities, The Wall Street Journal-November 8, 2012
5
6
Taxes Up, But By How Much?
TAX POLICY OUTLOOK
2012 LAW
7
SCHEDULED 2013 LAW
POTENTIAL 2013 OUTCOMES
Ordinary Income Tax
Rates
10%, 15%, 25%, 28%, 33%, 35%
15%, 28%, 31%, 36%, 39.6%
10% to 15% - lowest rate
35% to 39.6% - highest rate
Medicare Tax on Net
Investment Income
Not applicable
3.8% on net investment income
above applicable threshold
0% to 3.8% - Medicare surtax
Long-Term Capital Gains
0% - lower income taxpayers;
15% - higher income taxpayers
10% - lower income taxpayers;
20% - higher income taxpayers
0% to 10% - lower income taxpayers;
15% to 20% plus Medicare surtax –
higher income taxpayers
Qualified Dividends
0% - lower income taxpayers;
15% - higher income taxpayers
Ordinary income tax rates
0% - lower income taxpayers; 15% to
39.6% plus Medicate surtax – higher
income taxpayers
Alternative Minimum
Tax Threshold
$45,000 – married filing jointly;
$22,500 – married filing separately; Same as 2012
$33,750 – single/head of household
Range of outcomes includes: complete
repeal, indexed threshold, and low
unadjusted threshold
Real Gross Domestic Product
12
12
3rd Quarter 2012 (Advance Estimate)* - Real GDP increased at
an Annual Rate of 2.0%, or 67.7 Billion Dollars. In the 2nd
Quarter 2012, Real GDP increased 1.3%, or 42.1 Billion Dollars.
10
10
8
8
6
6
4
4
2
2
0
80
0
82
84
86
88
90
92
94
96
98
00
02
04
06
08
10
12
0
0
-2
-2
-4
-4
-6
-6
In percent change from previous quarter,
seasonally adjusted annual rates.
-8
Reagan
G. Bush
Clinton
Bush
-8
Obama
*Data Released October 26, 2012
Shaded areas represent recessionary periods.
Sources: Bureau of Economic Analysis; National Bureau of Economic Research; Copyright © 2012 Crandall, Pierce & Company • All rights reserved.
The information presented herein was compiled from sources believed to be reliable. It is intended for illustrative purposes only, and is furnished without responsibility for completeness or accuracy. Past performance does not guarantee future results.
This illustration is subject to the terms & conditions at www.crandallpierce.com/usage.pdf.Under no circumstances may this illustration be copied, reproduced or redistributed in whole or in part including the data contained herein, without prior written permission.
Copyright © 2012 CRANDALL, PIERCE & COMPANY • All rights reserved. • 14047 West Petronella Drive • Libertyville, Illinois 60048 •1-847-549-6015 • Internet: www.crandallpierce.com
8
The Great Moderation
HISTORY OF U.S. INFLATION
20
15
10
5
0
-5
-10
-15
Inflation year-over-year (%)
25
-20
-25
1872
1882
1892
1902
1912
1922
1932
Over the past several decades inflation has
moderated greatly, and is currently hovering
around 2%.
1942
1952
1962
1972
1982
2002
2012
However, many investors are concerned that
inflation will once again emerge as a threat to
the economy given the massive expansion in the
balance sheets of global central banks.
Source: Robert Shiller Database, Northern Trust. Inflation is represented by the Consumer Price Index (CPI) from 1913 through 2012;
prior to 1913, inflation is represented by the Robert Shiller Database.
9
1992
Percent
Percent
U.S. Government Yield Curves
4.5
4.5
•
4.0
4.0
3.5
2.5
•
•
2.0
1.5
•
•
•• •• ••
••
••
•
5
1.0
0.5
3 Years Ago
October 30, 2009
•
2.5
1.5
•
•
•
•
•
3.0
2.0
•
•
•
•
1.0
0.0
•
•
•
•
3.0
0.5
3.5
•
1 Year Ago
October 31, 2011
•
•
•
3 Months Ago
July 31, 2012
0.0
•
October 31, 2012
•
•
10
Maturity in Years
3020
Month end observations: 3 months, 6 months, 1 year, 2 year, 3 year, 5 year, 7 year, 10 year, 30 year
Yield Curves Represent the last Business Day of the Month
Source: Federal Reserve Board • Copyright © 2012 Crandall, Pierce & Company • All rights reserved.
The information presented herein was compiled from sources believed to be reliable. It is intended for illustrative purposes only, and is furnished without responsibility for completeness or accuracy. Past performance does not guarantee future results.
This illustration is subject to the terms & conditions at www.crandallpierce.com/usage.pdf.Under no circumstances may this illustration be copied, reproduced or redistributed in whole or in part including the data contained herein, without prior written permission.
Copyright © 2012 CRANDALL, PIERCE & COMPANY • All rights reserved • 14047 West Petronella Drive • Libertyville, Illinois 60048
10
1-847-549-6015 • Internet: www.crandallpierce.com
10 Year Government Bond Yields
Percent Per Annum
16
16
14
14
12
12
10
10
8
8
6
6
4
4
2
2
Eisenhower
55
58
Kennedy
61
Johnson
64
67
Nixon
70
73
Ford Carter
76
79
Reagan
82
85
G. Bush
88
91
Shaded areas represent recessionary periods.
Clinton
94
97
Bush
00
03
06
Obama
09
12
Last Observation October 2012
Sources: Federal Reserve Board • Copyright © 2012 Crandall, Pierce & Company • All rights reserved.
The information presented herein was compiled from sources believed to be reliable. It is intended for illustrative purposes only, and is furnished without responsibility for completeness or accuracy. Past performance does not guarantee future results.
This illustration is subject to the terms & conditions at www.crandallpierce.com/usage.pdf.Under no circumstances may this illustration be copied, reproduced or redistributed in whole or in part including the data contained herein, without prior written permission.
Copyright © 2012 CRANDALL, PIERCE & COMPANY • All rights reserved. • 14047 West Petronella Drive • Libertyville, Illinois 60048•1-847-549-6015 • Internet: www.crandallpierce.com
11
Financial Market Outlook – Real Assets
IT’S THE REAL YIELD
Current negative TIPS yields just reflect reality.
4
3
1
0
-1
U.S. 10-year bond
U.S. 10-year inflation protected security
1-Oct-10
1-Jan-11
1-Apr-11
1-Jul-11
1-Oct-11
1-Jan-12
1-Apr-12
1-Jul-12
-2
1-Oct-12
Source: Northern Trust, Bloomberg. Data through 10/10/2012.
 Recent interest rate increases are driven
by higher inflation expectations.
12
Negative real rates highlight the cost of
inflation insurance in the current
environment.
Chartbook Released 10/16/2012.
Yield (%)
2
13
14
15
Financial Market Outlook – Emerging Market Equities
AN UNUSUAL LAGGARD
Emerging-markets stocks have materially trailed U.S. equities during the last year.
60
Russell 3000
50
40
30
20
10
0
-10
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
Apr-12
Jul-12
Oct-12
Source: Northern Trust, Bloomberg. Data through 10/10/2012.
Slowing emerging-market growth is well
discounted in markets.
16
An eventual turn in growth should bolster
share performance.
Chartbook Released 10/16/2012.
Total return (%)
MSCI Emerging Markets
We expect the macro environment to keep valuation levels below
historical averages.
GLOBAL EQUITY P/E AND P/FE
30
25
20
1 Std Dev*
15
Average*
10
Current
5
0
P/E
P/FE
P/E
US Large
Index
P/E
EAFE
P/E Ratio
Current
15 Yr.
Avg.
US Large
14.2
EAFE
P/FE
Current
19.9
13.4
13.2
19.9
Emerging
12.1
US SMID
22.3
P/FE
P/E
Emerging Markets
P/Book
15 Yr.
Avg.
Current
15 Yr.
Avg.
17.2
2.1
11.9
16.9
14.4
11.2
23.1
19.7
Source: Bloomberg and Bernstein. Data through 10/12/2012.
*Data based on monthly values beginning in January 1988.
17
P/FE
P/FE
US SMID
P/Sales
Current
15 Yr.
Avg.
2.9
1.3
1.6
2.1
11.8
1.3
19.3
1.6
P/Cash Flow
Dividend Yield
Current
15 Yr.
Avg.
Current
15 Yr.
Avg.
1.5
9.2
12.3
2.0%
1.7%
0.7
0.9
7.1
9.5
3.5%
2.5%
1.9
1.0
1.3
7.9
8.4
2.9%
2.4%
2.0
0.9
0.9
10.3
11.2
1.3%
1.4%
More Losers Than Winners
ELECTION OUTCOME’S EFFECT ON EQUITIES
18
INDUSTRIALS/MATERIALS
Overall Mixed
Overall Modestly Negative
Overall Modestly Negative
Help
TECH/TELECOM
•HC Providers/Managed Care: an
additional 35 million people to receive
health insurance coverage
•Tech: renewal of R&D tax credits (also
supported by Republicans)
Hurt
HEALTH CARE
•Energy: discouragement of natural gas
exports reduces input costs, somewhat offset
by regulation
•Medicare Health plans: less favorable
reimbursement environment •Medical
Device cos./Commercial Health plans:
higher taxes and structural uncertainty
from health exchanges
•Tech: unlikelihood of tax holiday or any
•Broad Industry: environment/regulatory
increase in visas for foreign workers, and
hurdles to hinder growth •Defense: Obama
more restrictions relating to M&A •Telecom: budget less favorable
may become less attractive if dividend tax
increases
FINANCIALS
Overall Negative
Overall Negative
Overall Negative
Help
ENERGY/UTILITIES
•Dollar stores: continued unemployment
assistance •Drugstores: expanded
healthcare coverage
•Alternative/Renewable Energy: likely to
receive subsidies and benefit at the expense
of traditional energy
•Financials: Fed’s accommodative attitude
toward financial instruments to remain intact
Hurt
CONSUMER
•Restaurants: higher employment costs
related to mandated insurance coverage
•High-end Retail/Travel: possible tax hikes
•Oil and Gas: continuation of restrictive
environment (hydraulic tracking scrutiny)
•Coal Plants: carbon reduction plans
•Banks: Dodd-Frank Act expected to be fully
implemented, mildly offset by support for
residential mortgage markets and lending
19
The 16 Trillion Dollar Inheritance
1400
3,500
3,500
1200
1200
1000
1000
800
800
2,000
1,500
1,500
1,000
1,000
500
500
Federal Government
Receipts
1.40
1.60
1.50
1.40
1.20
1.20
1.10
1.10
1.00
1.00
0.90
0.90
65 70 75 80 85 90 95 00 05 10 15
200
200
0
0
-200
-200
4,500
4,500
4,000
4,000
3,500
3,500
2,500
September 2012
$ 51,036
3,000
Federal Government
Annual Deficit Per Capita
Total Gross
Federal Debt
17
16
15
14
13
12
11
10
9
8
7
6
5
4
3
2
1
50,000
50,000
40,000
40,000
2,500
2,000
2,000
1,500
1,500
1,000
1,000
500
500
0
0
-500
-500
-1,000
-1,000
65 70 75 80 85 90 95 00 05 10 15
30,000
Total Gross Federal
Debt Per Capita
30,000
20,000
20,000
10,000
10,000
Dollars
1.30
400
Dollars
1.30
400
3,000
Dollars
1.50
Federal Government
Expenditures Per
Dollar of Receipts
Expenditures Per $ of Receipts
Expenditures Per $ of Receipts
1.60
600
The Result
17
16
15
14
13
12
11
10
9
8
7
6
5
4
3
2
1
Trillions of Dollars
2,000
Federal Government
Annual Deficit
600
Billions of Dollars
2,500
Billions of Dollars
2,500
Billions of Dollars
3,000
Expenditures
1400
Trillions of Dollars
4,000
3,000 Federal Government
Billions of Dollars
The Effect
4,000
Dollars
The Problem
65 70 75 80 85 90 95 00 05 10 15
Shaded areas represent recessionary periods.
Sources: Bureau of Economic Analysis; Bureau of the Census; U.S. Department of the Treasury, Bureau of the Public Debt; Copyright © 2012 Crandall, Pierce & Company • All rights reserved.
The information presented herein was compiled from sources believed to be reliable. It is intended for illustrative purposes only, and is furnished without responsibility for completeness or accuracy. Past performance does not guarantee future results.
This illustration is subject to the terms & conditions at www.crandallpierce.com/usage.pdf.Under no circumstances may this illustration be copied, reproduced or redistributed in whole or in part including the data contained herein, without prior written permission.
256S
20
Copyright © 2012 CRANDALL, PIERCE & COMPANY • All rights reserved • 14047 West Petronella Drive • Libertyville, Illinois 60048
1-847-549-6015 • Internet: www.crandallpierce.com
-CCCXX-
21
Financial Market Outlook – Tactical Allocation Impact
We
like U.S. equities over other developed markets given
the better underlying fundamentals and less tail risk.
EQUITIES
United States
Although
Dev. Ex-U.S. valuations are attractive, structural
issues are likely to hamper the region’s growth.
Dev. Ex-U.S.
EM countries are continuing to ease, which may
reaccelerate growth and boost market returns.

Emerging Mkts.
In a moderate growth environment with highly
accommodative monetary policy, REITS should perform well.
REAL ASSETS
Global REITs

Gold
Global
We
need stronger global growth to become more
supportive of broad commodities.
Nat. Resources
FIXED INCOME
High Yield
Positive
fundamentals, high corporate cash levels, and low
interest rates leave us continuing to favor high yield over
investment grade fixed income.
Invest. Grade
Our
neutral weight to TIPS is a low volatility hedge against
inflation risk.
Inf. Linked
Underweight
With
Cash
Equal-weight
monetary policy easing supports Gold.
Overweight
a near-zero expected return over our investment
horizon, we remain underweight cash.
Note: Strategic weighting in ( ), Tactical weighting in bars.
22
Chartbook Released 10/16/2012.
Barron’s
November 12, 2012
23
Disclosures
IRS CIRCULAR 230 NOTICE: To the extent that this communication or any attachment concerns tax matters,
it is not intended to be used, and cannot be used by a taxpayer, for the purpose of avoiding any penalties
that may be imposed by law. For more information about this notice, see
http://www.northerntrust.com/circular230.
LEGAL, INVESTMENT AND TAX NOTICE: This information is not intended to be and should not be treated as legal advice, investment
advice or tax advice. Readers, including professionals, should under no circumstances rely upon this information as a substitute for
their own research or for obtaining specific legal or tax advice from their own counsel.
OTHER IMPORTANT INFORMATION: This presentation is for your private information and is intended for one-on-one use only. The
information is intended for illustrative purposes only and should not be relied upon as investment advice or a recommendation to
buy or sell any security. Northern Trust and its affiliates may have positions in, and may effect transactions in, the markets,
contracts and related investments described herein, which positions and transactions may be in addition to, or different from,
those taken in connection with the investments described herein. Opinions expressed are current only as of the date appearing in
this material and are subject to change without notice.
Past performance is no guarantee of future results. Periods greater than one year are annualized. Performance assumes the
reinvestment of dividends and earnings and is shown gross of fees, unless otherwise noted. Returns of the indexes and asset class
projections do not reflect the deduction of fees, trading costs or expenses. It is not possible to invest directly in an index. Indexes
and trademarks are the property of their respective owners, all rights reserved. A client's actual returns would be reduced by
investment management fees and other expenses relating to the management of his or her account. To illustrate the effect of
compounding of fees, a $10,000,000 account which earned a 8% annual return and paid an annual fee of 0.75% would grow in
value over five years to $14,693,281 before fees, and $14,150,486 million after deduction of fees. For additional information on
fees, please read the accompanying disclosure documents or consult your Northern Trust Representative.
There are risks involved in investing including possible loss of principal. There is no guarantee that the investment objectives or any
fund or strategy will be met. Risk controls and asset allocation models do not promise any level of performance or guarantee
against loss of principal. All material has been obtained from sources believed to be reliable, but the accuracy, completeness
and interpretation cannot be guaranteed.
Investments, securities products and brokerage services are:
Not FDIC Insured | No Bank Guarantee |
24
May Lose Value