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Part A


My name is Yinan Hong. I am your portfolio manager from Trailblazer Investment Advisors. I am a CFA holder, equipped with sufficient financial knowledge. I will help my customers manage their wealth and try my best to gain as much as possible. There are three objectives for my clients, Sam and Amy Kratchman with $1,100,000(on an after-tax basis) inheritance. The first one is having enough money for their life after retirement at age 65. The second objective is raising college tuition for their two children. The last one is to buy a beach house with newfound inheritance.




Economic Analysis


GDP Growth

The economic recovery of United States in 2014 became a light spot in global economy after the 2009 recession. The low price level, decreasing unemployment rate, better development of the estate and manufacturing industry made the economy continuously recover. However, some important indexes like the investment of the real estate, income of residents, manufacturing have not reached to the same level as it performed before the recession. The percentage change in Real Gross Domestic Product in 2014 increased in the former three quarters and then decrease in the Q4.

In the first quarter, the change of GDP was 2.1% negative growth1. The most important factor was the abominable weather. The personal consumption expenditures for nondurable goods decreased because [1]the inconvenient of buying. The Gross private domestic investment decreased 6.6% because of the huge lower equipment investment1. The exports decreased extremely and the imports increased. They all led to the negative growth.

Figure1[2]: CCI Index in 2014

The GDP growth reached to 4.0% in the second quarter. By analyzing the components that affected overall GDP growth, personal consumption expenditures and gross private domestic investment played an important role in this significant growth. Consumption contributed 2.56% change in GDP. After the severe weather, the private inventory investment, exports, fixed investment, and non-federal government spending increased. However, 5% more imports negatively impact GDP and offset those positive contributors. Purchasing Managers’ Index (PMI) also indicated that the economic situation would turns better. The overall PMI index was over 50 and kept the upward trend, which represents expansion of the manufacturing sector. Besides, as shown in figure 1, the consumer confidence index had an upward tendency, may because corporates operated better, unemployment rate decreased, and the income of residents increased.

Figure 2[3]

Unemployment rate continuously went down in 2014, and the job market significantly became better. Businesses have added 10.9 million jobs over 57 consecutive months. Private employment has risen by at least 200,00 for ten consecutive months[4]. In every month, there were 241,000 job growth in 2014 and total employment has risen by 2.65 million in the first 11 months of 2014. From the Figure 2, we can see that compare to previous years, the monthly job growth in 2014 was highest. As Figure 3 shows, the unemployment rate in October has decreased to 5.7%. Since July in 2008, it was the first time that the unemployment rate was lower than 6%. The strong increasing new jobs were mainly created by business services, such legal services and administrative services. Medical insurance and retail trade also provided a huge amount of positions, and the recovery of real estate market created lots of jobs for construction. The decreasing unemployment rate strengthened the confidence of consumers with higher income, which simulated the consumption and the investment.

Figure 3[5]

Retailers were not qualified to increase the price because of the consumer market depression, and lower oil prices freed funds for other things from upstream of supply chains, so the inflation risk would not be too high in the short term. Instead of inflation, deflation appeared sometimes. Since 2014, only 4 months reached the Federal Reserve’s goal- 2% inflation growth. Compared to CPI, Federal Reserve focuses more on PCE, because it can show the inflation or deflation for personal consumption expenditures, which can more comprehensively and stably measure the inflation level. Core PCE was lower than 2% in 2014 as the Figure 4 shows. With the recovery of GDP, the CPI kept low.

Figure 4[6]

In 2014, the international trade has become a little better because the European Union out of debt crisis, the economic recovery of Japan, the change of the foreign trade strategies in US. Besides, the “ shale revolution” stimulated tremendous production of oil and natural gas in US, which indicated United States to be more closer to the independence of energy. They all help US decrease the trade deficit. However, under the background of developed economic monetary policies and economic tendency went to different, the currency rate of US dollar will rise a lot. Since 2014, the exchange rate of the Euro to the US has been risen about 8%, which had some negative influence to exports.

Figure 5[7]

President’s aggressive policies respond its recovery included the Recovery Act and the payroll tax cut. President Barack Obama also recapitalized the financial sector, rescue the auto industry and reform financial regulation. To some degree, the Obama Health Care Plan in the US stimulated the personal medical insurance expenditures, and reflected that consumers were more desire to consume. Millions of Americans were more willing to purchase this more “affordable” health care plans and the government offered subsidies to low and middle income Americans. These changes in the health care system are major savings for households, businesses, and the Federal government. The government decreased the government spending. After gaining 9.9% in the Q3, Federal spending declined 7.5% in the fourth quarter due to the 12.5% decrease in defense spending.


Monetary Policy

       Fed used expansionary monetary policy in order to lower unemployment, boost consumer spending, increase private- sector borrowing and stimulate economic growth after the recession. The Fed moved gradually to tighten monetary policy. The committee reaffirms its judgment that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures[8]. This long run goal helped to stable the price, to moderate long-term interest rates and to maximize employment. Although unemployment was above its longer-run normal level and inflation was below 2% objective as Figure 6 shows, the Federal Reserve continued to increase the size of its balance sheet at a reduced pace. The Fed also announced a decision to reduce the monthly increase in its holding s of long-term securities by 10 billion a month to $ 75 billion a month[9].

Figure 6[10]: PCE Index


Financial Market

Figure 7[11]

From the Figure 7, we can conclude that the overall trend of S&P 500 in 2014 was upward steadily, raising 11.4% for the year. There was sunk in February, August, October and December. The annual total return of S&P 500 is 13.69%, which decreased a lot compared to that in 2013. The interest rate of 10-year US Treasury notes declined from 3.04% in 2013 to 2.17%2014. This decline was more like driven by the future increase of the Federal funds rate. The general decline in interest rate reflects in part the environment of slow global growth and low inflation. The strong employment and low inflation with falling oil price allowed the Fed hike rate in the end of 2014. Low interest rates could lead to a disastrous asset bubble, but the rising interest rates could lead to drop in new hiring or expansion plans. Thus, The Fed considered its wait- and-see strategy in 2014. Technology hardware, storage & peripherals industry performed really well in this year, it may increase about 61%. Compared to other industry tobacco played a little weaker.

Figure 8[12]













GDP growth

The US economy in 2015 was a modest recovery. The domestic economy grew robustly with the rising of personal consumption and investment. For the gross private investment, except the first quarter, other quarters performed worse than last year, especially the nonresidential part. However, the changes of exports in four quarters were negative, which weighed on overall GDP growth.

The first quarter, the economy suffered from the appreciation of dollars, sever weather, and the strike on the west coast which negatively impact the exports, so the GDP grow slowly. The economy of US was performed badly in the first quarter both in 2014 and 2015, which indicated that the foundation of recovery was not firm and still weak.

The second quarter played the best, but its growth was not as significant as 2014. Gross private domestic investment occupied 70% of US economy, which was the core power to drive the economy recovery in the second quarter. From the Figure 9, we can see the consumer confidence awoke from the first cold quarter.

The third quarter and fourth growth was not reach the market expectation. The inventory and investment decrease mainly cause the lower GDP growth. The dropping oil price stroked again the mining industry, accelerating the corporates use the inventories. Besides, the dollar appreciated sharply in part caused the export growth to be slow.

Figure 9[13]: Consumer Confidence Index in 2015

The sharp oil price decrease was the major economic element in 2015. Oil prices slumped to 11-year lows to around $36 per barrel in December in 2015. CEA estimates that lower oil prices directly boosted real GDP growth by 0.2 percentage point during 2015, despite the adverse impacts on domestic energy producers and manufactures that sell to the energy sector[14].

 The main challenge for the US economy is productivity growth. Thus, the President has announced many policies like immigration reform, public investments, tax reform, and expanding markets for U.S. exports13.

Figure 10[15]

From December 2014, the labor market has grown by 2.3 million jobs in this year. Although the pace of job growth was slower than that in last year, it was still an improvement over other years after recession. The private service sectors contributed most in job growth, especially the education and health services sector. The professional and business services sectors also performed really well by adding 534,000 jobs. Besides, the leisure and hospitality sector played an important role in the economy as well. The unemployment rate still went down in this year from 5.7% in January to 5.0% in December, which was below its pre-crisis average. The president supported a range of policies to help promote equality of labor market: such as supporting children in poor families, ensuring the fir criminal justice system. The improvement of the labor market and steadily increasing wages drove the personal consumption expenditures. The mining and logging sector played the worst because the oil prices decreased a lot in this year, and this sector has lost more than 124000 jobs.

Figure 11[16]: Consumer price Index & Core Consumer Price Index

       The CPI growth was negative in January, September and December, and other months ranged from 0 to 0.2%, varied on the edge of deflation. The main reason for the low product price is the decreasing price of energy. Although the core CPI index is stable from 2014, the energy price and related transportation price dragged the CPI drop. The business profit growth space was compassed, which will lead to reduce wages and cut staff in order to keep the profit. The low CPI increase the consumers’ purchasing power at the early stage, but if it became a vicious circle, finally the consumption expenditures would decrease.

The decline in infrastructure quality and the low long-term interest rates provided a good opportunity for the government to invest in infrastructure, which can boosted the productive capacity of US economy. Although it increased the government spending, but reduce a lot of cost from other dimensions. Business can reduce the cost of product; households can consume more with lower maintenance costs; consumers save time for transportation; and labor market can provide more jobs.




Monetary Policy

Because the unemployment rate dropped steadily and the labor market structure improved, the Federal Reserve would consider raise interest rates. If the inflation rate touched 2% target, the Fed would execute. In Sept. 15, the unemployment rate was close to 5%, but the inflation rates were far away from 2%, so the Fed extended to raise interest rates. The Federal Reserve continues to purchase long-term debt securities, but the overall size of its holdings keep approximately constant. The foundation of the economy is too weak, so raising the interest rate was not a good idea at that time. It may prevent the GDP growth. First, it did not benefit the domestic consumption and investment. High interest rate would decrease the loan, lowering the economic activities gradually. Once increasing the interest rate, the profits of the corporates would decrease significantly, which would influence the wages and consumption. Until Dec. 16, 2015 the Fed finally raised interest rates, ending the extraordinary period of government intervention in financial markets.

The government promoted worker voice and raised the minimum wages in order to divide rents more equally in a well-functioning competitive market.

Financial Markets

Figure 12[17]

The annual return of S&P 500 in 2015 was 1.38%, which decreased a lot compared to 13.69% in 2014. The unexpected decline in commodity prices, especially crude oil, the appreciated dollar, soft economic growth and the currency devaluation in China all impact the stocks. Besides, the Fed increased the interest rate in December. The dramatic drop of oil price decimated energy-stock earnings. High currency of dollar made U.S. corporations sold worse in market abroad. The YTM of 10 year UST was 2.24%. High-yield corporate bonds fell sharply to -5.0% and it also impacted the no energy high-yield corporates. The best sector performer in 2015 is consumer discretionary stocks, such as Amazon and Netflix. The worst is energy sector, which down more than 25%.



GDP growth

       In former two quarters of 2016, the GDP growth was not very significant. The first quarter was only 0.8% and second quarter is 1.4%. The inventories decreased, the profits were difficult to increase, the consumer confidence declined as Figure 13 shows, which indicated that consumers were worried about the economy. Until July, the consumer confidence index seemed going up.

Figure 13[18]: Consumer Confidence Index in 2016

       Fortunately, the second quarter turns better. The personal consumption expenditures contributed most for the second quarter’s growth. From March, core CPI index began increasing and got rid of the deflation risk. The tendency of this index seems continuously going up. From Figure 15, the unemployment rate in 2016 is not as that in 2015 decline steadily. In the second quarter it dropped a while, then went up and almost kept at 4.9% in the third quarter. The labor market created 151,000 new jobs in August. Now the unemployment rate was 5.0%, which may decrease at 4.7% at the end of the year. The solid labor market, rising wages and rising consumer confidence stimulate the consumption.

Figure 15[19]: Unemployment Rate in 2016

However, the gross private domestic investment declined to negative 7.9%, which weighed the GDP growth a lot. The low oil price and rising election uncertainty put more pressure on business investment and consumer confidence.

Figure 14[20]: CPI index & core CPI index in 2016

Net X is negative in the first quarter but had a tendency to be positive to the GDP. The strong dollar is an important factor weighed on exports. The government spending in the second quarter grew the least in these three years. It expended credits for lower-income brackets, boost public investment in infrastructure system and raise the minimum wage to help the poor in order to cut the growing debt problem.




Monetary Policy

In 2016 former 3 quarter, FOMC unchanged policy because the global economic and financial developments have increasing risk. The economy in the first quarter  did not performed well, so the IMF cut its outlook U.S. economic expansion in 2016 0.2% from the growth forecast, considering the weak energy industry, the stronger dollar and the uncertainty of whether U.K. would leave the European Union or not. The Federal Reserve has not changed the interest rate in June and September and maintained the federal funds rate target range at 1/4 to 1/2, considering the vote of Brexit and the lower down employment rate. The Fed also kept its holdings of longer-term securities at sizable levels over the first half of the year.


Financial Market

       British citizen voted to leave the European Union in June, which impact the global financial market. It increased the uncertainty about economic growth in the U.K. Right after the vote, all major U.S. indices declined by about 5%. Although the fall in equities reversed within a week, the S&P 500 index reached an all-time high. There are only about 15% of GDP is related to international trade and investors were anticipating a possible increasing interest rate at least 18 months before it. Thus, Brexit did not impact a lot on U.S. as other economics.

Figure 15[21]: S&P 500 Index in 2016

       From following graph, we can see the tendency of yield of 10 year US Treasury in 2016 is downward.

Figure 16[22]: US 10-YR





Works Cited

Board of Governors of the Federal Reserve System, “ Monetary Policy Report,”, February 11, 2014

Council of Economic Advisors, “The Economy in 2014,”, December 23, 2014

Jason Furman, Sandra Black and Jay Shambaugh, “ The 2016 Economic Report of the President,”, February 22, 2016

“ President Economic Report,” Whitehouse.gove, December 23, 2015

“S&P 500 Index,” quotes, WSJ, October 9, 2016

“Sectors & Industries Overview,” Fidelity Investment, October 9, 2016

“Unemployment rate,” Bureau of Labor Statisitcs, October 9, 2016

U.S. Bureau of Economic Analysis, “Table 1.1.1. Percent Change From Preceding Period In Real Gross Domestic Product,” (accessed September 29, 2016).

“US 10-YR,” Data, CNBC, October 9, 2016






[3] Bureau of Labor Statistics








[15] Data from Bureau of Labor Statistics






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