Carolinas Investment Consulting // Winter 2016 // The Consultant


Dustin Barr, CFA

After three years of strong market gains, 2015 delivered disappointing results. The U.S. stock market eked out slight gains due to dividends. International equities experienced negative returns in U.S. dollar terms, largely due to the 9.3% increase in the value of the dollar.

Emerging Markets equities declined sharply, largely due to lower oil prices, a slowing China and a stronger dollar. Oil prices, after a dramatic decline in prices in the Fourth Quarter 2014, experienced further slides as the price of a barrel of oil fell from $53 at the beginning of the year to $37.

*Source: Zephyr Associates, Inc. All returns represent total return for the stated periods as of December 31,2015.

*Source: Zephyr Associates, Inc. All returns represent total return for the stated periods as of December 31,2015. Note: The following indexes were used for each respective category in the table above: MSCI ACWI Index for World Stocks, S&P 500 Index for U.S. Large-Cap Stocks, MSCI EAFE Index for Developed International Stocks, MSCI EM Index for Emerging Markets Stocks, Dow UBS Commodity Index for Commodities, Barclays US Aggregate Bond Index for U.S. Taxable Bonds, Barclays Global Treasury ex-U.S. for Foreign Government Bonds and Citigroup 3-Month T-Bill for Cash.


Dustin Barr, CFA

In 1798, economist Thomas Robert Malthus became the first economist to tie population demographics with the economy in a famous book entitled “Essay on the Principle of Population”. Malthus’s posited that population growth would outpace the food supply, and it would create mass famine. Malthus’ work is on the required reading list for most economics departments, along with other lasting economists such as Smith and Keynes. Unfortunately for Malthus and fortunately for the human race, his theories were largely disproven. In most cases, human population growth has led to increased economic output through greater labor output and technological advances that increase productivity of the workers. It turns out that economic growth is closely tied to population growth and perhaps most importantly, the growth of the working population.


The stock market has more than doubled since the bottom of the market during the financial crisis; however economic growth and in inflation have remained below average. What is causing such stagnant economic growth despite the vast amount of Federal Reserve stimulus? Economists are currently trying to answer this question, and certainly there are many factors at play. Age demographics could be a factor.

The largest expansion of population growth in the United States began in 1946, just after the end of World War II. Thirty years later, the baby boomers were entering the workforce. In 2012, the first boomers reached the traditional retirement age of sixty-five. From 1976 to 2011, the years in which the boomers were prime workforce participants, the U.S. stock market returned 4,070% and the bond market returned 1,670% cumulatively! Never, in the history of the modern world, have we seen such an economic boom. While there are many other factors that positively attributed to economic growth during this period, including geopolitical stability, business friendly politics, growth of technological developments and easier access to credit, it is hard to ignore the correlation between the population explosion of the 1940s and 1950s with the economic boom of the last thirty-five years.

Investment management firm Research Affiliates provides a wealth of demographics data on their website. The chart below illustrates the age breakdown in the U.S. from 1950 to 2050.

*Source: Research Affiliates, LLC, based on data from the United Nations.

*Source: Research Affiliates, LLC, based on data from the United Nations.

The median age in the U.S. was under 30 years old in 1976; today it is approximately 37, and in 2050 it is projected to be over 40 years old. The percentage of individuals over 70 years old is expected to grow to 16% of the population by 2050, according to Research Affiliates.


Japan, Germany and many other developed nations in Europe and Asia actually have a much older population base than the United States. Some of these countries have experienced even lower (in some cases negative) interest rates and economic stagnation than the U.S. over the last seven years. Further, unlike the United States, many countries will not have the ability to increase their workforce from immigration due to various cultural or political reasons. However, a number of emerging markets countries have experienced baby booms of their own over the last 30 years and may be primed for economic expansion. Much of the world’s population growth has taken place in Asia and Africa.

To illustrate the differences in demographics, let’s look at the U.S. population compared to India. India’s economy has been growing for many years and is in the process of evolving from an agrarian economy to a consumer and manufacturing based economy. This will most likely lead to increased investments in infrastructure and urbanization which could have the potential to unleash powerful economic growth. Perhaps more importantly, the chart above highlights India’s population breakdown by age. The Wall Street Journal recently reported that the United Nations expects India will be the largest nation by population in 2050. The bars with color show the population breakdown by age group in 2015, while the grey bars show the breakdown in 1985.

In 1985, one-third of the U.S. population was between 20 and 39. By contrast, 38% of India’s population was under the age of 14! A large percentage of India’s population had not yet reached working age in 1985. However, in 2015, a third of India’s population is between the ages of 20 and 39, the same percentage as the U.S. in 1985. India appears to have the right demographic mix for an economic boom. It’s important to note that age of population is just one piece of the equation and India’s leaders will need to harness their population’s potential in order to experience an economic boom that even remotely resembles the previous economic growth of the U.S.


The importance of global investing has never been greater. Returns for international equities have largely lagged the United States in recent years, but demographic trends suggest that ignoring international markets could be costly to future investment returns.

We expect that opportunities both abroad and in the United States will arise from the demographic changes. As the developed world’s population ages there may be increased demand for innovative healthcare, new technology that lengthens workers careers, and inventions that increase productivity with a smaller workforce. Further, immigration of populations across borders may change the demographic equation of developed and developing nations and thus the prospect for future investment returns. In the end, we believe that a long-term approach to global investing will increase the chances of achieving our client’s desired investment returns and accomplishing their goals.

Abby, Bryan, Katherine, and Richard
Community Service

WE ARE THRILLED TO ANNOUNCE new members who have recently joined the CIC family. Please welcome Abby Bennett, CFP®, to our Financial Planning team upon relocating from Washington, D.C. where she served high net worth families for a wealth management Firm. Katherine Shermansky joined us as Chief Financial Officer with 20 years of accounting experience at several companies. Bryan Zeiss became our 8th Consultant bringing 13 years of investment experience, most recently as Vice President with Wells Fargo Securities. Richard Fountain, Operations Associate, is our newest team member and a recent Davidson College graduate. He provides support in Relationship Management and Client Services.
Also, please join us in congratulating Ted Highsmith for recently completing his Certified Financial Planner® designation and Kitt Kirchner in her new role as Consultant.



In late June, markets received a jolt of uncertainty as news broke on the Greece situation and Chinese equity market drop. While the increase in volatility is concerning, it’s important to keep in mind that we are just now reaching average volatility levels and are nowhere near the levels we saw in the 2011 European debt crisis or the 2008 financial crisis.

The developments in Greece appear to be far more political than financial, and the risk of contagion is relatively low. China most likely poses a greater risk as the recent market declines followed a rampant increase in stock prices, which were largely driven by margin trading. It’s quite possible that China will be successful in staving off a crisis; however, valuations are elevated, and the use of leverage is concerning.

In addition to the news cycle abroad, the markets are closely following the Fed’s impending decision to raise rates for the first time since 2006. We would be surprised to see anything more than a modest rate hike in 2015, unless economic data turns strongly positive. The Fed tends to lock in growth before addressing inflation, and we have no reason to believe that this time will be any different (see article on page 2 for commentary on what to expect in a rate hike scenario).

Recent market events highlight the importance of big picture, long-term investing. We remain focused on interest rate levels, global economic signals, and corporate earnings, as we believe these factors should have a greater impact on longer-term investment returns than the Greek news cycle. Now, more than six years into the equity bull market, we should be mindful that equity returns will most likely be lower in the future five years than they have been in the previous five years. However, given the improving labor market, cheaper oil prices and historically low interest rates, there is reason to believe that equity markets still have an upward trajectory.


Social Security and Tax Code Changes

Congress had a busy year-end, implementing substantial changes to both tax and entitlement laws. On the Social Security front, two popular claiming strategies, which boosted retirement income for some couples by more than $60,000, are being phased out.

FILE-AND-SUSPEND- Effective May 1, 2016, suspending one’s bene t will disallow the claiming of any benefits off of that individual’s work record, including their spouse’s. To be grandfathered into the old rule – suspending one’s bene t while still allowing a spousal bene t to be paid – you must be at least age 66 and take action before the April 30, 2016 deadline.

RESTRICTED APPLICATION- The option to take a spousal benefit while letting one’s own retirement benefit grow until age 70 will no longer apply for those born January 2, 1954 or later. Instead, claimants will automatically get the larger of the two benefits when they file.

Social Security is a complicated and often confusing topic that is worthy of discussion with your financial planner. Even though some strategies are closing, there are still opportunities to increase potential lifetime benefits.

THE PROTECTING AMERICANS FROM TAX HIKES (PATH) ACT OF 2015- finally addressed key tax planning provisions that had annually kept many
in an end-of-year tax limbo. For the past decade, these so-called “Tax Extenders” have lapsed, only to be reinstated by Congress late in the year

The table below lists key PATH Act provisions that were retroactively reinstated and made permanent. Several others were only extended through 2016.


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R. Wade Austin
Oliver R. Cross III
R. Christopher Gammon, CFA, CFP®
Christopher K. Grogan
Thomas E. (Ted) Highsmith
David A. Perkins, J.D., CPA, CFP®
and George H. Edmiston, Jr., President & Founder

Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional.

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