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M a r k e t & E c o n o m y

P e r s p e c t i v e s & P l a n n i n g

While not exactly robust, theU.S. economy is performing im-pressively in a slow growthworld. After a soft start due to theharsh winter, GDP reboundedsharply to 3.9% in the second

quarter. Growth appears to have settled in thevicinity of 2.5% for the balance of the year. We ex-pect that this moderate pace can be maintainedinto 2016, accompanied by continued low inflationand benign monetary policy, characterized by spo-radic 0.25% rate hikes, and minor increases inlong-term Treasury yields, even as the labor mar-ket continues to improve.

The above scenario should provide a healthybackdrop for equities. Yet, U.S. stocks are correct-ing in tandem with global markets. Financial tur-moil in China and a modest devaluation of theyuan in August has triggered volatility worldwide.Global GDP for 2015 is estimated at a mere 3.0%,as emerging markets have faltered. Chinese

growth is slipping. While itis likely to stabilize in a 5%to 6% range, this is a farcry from the double digitrate of a few years back.As a result, commodity-oriented economies, in-cluding Brazil and Russia,are mired in deep reces-sions. Even Canada isstruggling.

In this context, 2.5%growth in the worldslargest economy is an achievement. How-ever, weakness overseas has created head-winds for the U.S. economy. A stronger dollaris further eroding exports. Manufacturinggrowth has ebbed. The freefall in commodityprices has also hit hard with the sharp con-traction in energy exploration reducing capitalspending. It is little wonder that investors are

P l a n n i n g

H i g h l i g h t sMarket The global economys affect on the U.S.

What to expect from the S&P 500

Planning Managing your portfolios taxable income

Steps to reduce capital gains tax liability

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SMARTADVICESUCCESSFUL OUTCOMES

Recently, a professional football player returned the par-ticipation trophies that his sons had received because hefelt that these trophies had not been earned. This fueleddebates around the country on the merits of participationtrophies and likely caused a gazillion dollars being spent

on studies determining the long-term impact that these pieces of plastichave on the psyches of our children. Of course, thirty seconds after receivingthe trophies, and a few forced smiles to appease the obligatory photoshoots, the kids went back to being kids and forgot all about the awards.

Perhaps adults are jealous that they never receive trophies for just partici-pating. Imagine if one day your boss handed you a trophy and said, Greatjob showing up this year! Maybe we would be more likely to show up nextyear. On the other hand, the anti-participation establishment may have apoint; very rarely in the real world do we achieve what we want by simplyparticipating.

This is also true when it comes to managing taxable income within onesportfolio. For example, if the markets end 2015 in the red, many investorsmay expect lower capital gains taxes, and perhaps even capital losses ontheir tax return. However, it is unlikely that simply participating in the marketlosses will achieve that goal.

The tax impact from capital gains generally lag the year in which they tookplace as taxes are only impacted when the gains are realized. Many in-vestors, either directly, or inside their mutual funds, have liquidated stocksin 2015 that have enjoyed years of positive market gains. This is why weexpect realized capital gains to be significant in 2015, despite the S&P 500being down 5.29% as of September 30th. However, the following steps mayhelp reduce 2015 capital gains tax liability:

Harvest losses to offset gainsWhile domestic equities have had a strong run, other asset classes may

Source:BEA, Bloomberg

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I f y o u d l i k e t o d i s c u s s a n y o f t h e i n f o r m a t i o n c o n t a i n e d i n t h i s n e w s l e t t e r , p l e a s e c a l ly o u r r e l a t i o n s h i p t e a m o r 8 0 0 - 5 8 2 - 1 0 7 6 . Y o u c a n a l s o r e a d p a s t e d i t i o n s o f o u r

p u b l i c a t i o n s b y v i s i t i n g o u r w e b s i t e : w w w . w a s h t r u s t w e a l t h . c o m

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increasingly skeptical. We expect full year 2015 S&P 500 earnings growthwill be challenged, given plummeting energy earnings and the multinationalcharacter of many companies in the benchmark.

The impact on U.S. GDP should be modest. The U.S. export sectors shareof the economy is relatively small. Exports to China are roughly 0.5% ofGDP and they are dominated by aircraft and agricultural products which arelargely insulated from Chinas current travails. The consumer sector, not ex-ports or energy, is key for U.S. growth. The benefits of low inflation and dollarstrength for the consumer are obvious as real disposable income rises de-spite mediocre wage gains. While energy sector weakness hindered growthin the first half, our expectation is that retailers will enjoy a strong holidayseason as consumer savings from low energy prices find their way backinto the economy. After years of underbuilding, the housing recovery shouldalso remain on track as job gains help millennials move off their parentssofas and out on their own.

Given that stock market corrections have occurred on average every 18months and that the last one transpired in 2011, it can be argued that it wasonly a matter of time. Volatility is always unsettling but valuation is now muchimproved. Looking ahead to projected S&P 500 2016 earnings of $128, themarket is trading at a P/E ratio under 15x, a level that appears quite reason-able. Therefore, our view is that the selloff in U.S. equities will prove transitory.

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be trading at a loss, such as foreign equities and bond funds. Dependingon the accounting method used, you may be able to hand-pick recently pur-chased share lots that are at a loss. While the 30-day rule prohibits an in-vestor from immediately repurchasing the same asset, it may be possibleto buy similar investments so that you are not left out of the market.

Beware of year-end mutual fund distributionsGenerally in November, mutual funds will release their estimated year-enddistributions. It may make sense to sell funds with large estimated distributionsprior to the funds record date. You can then use the proceeds to buy fundsthat have already gone ex-dividend. This strategy works particularly well if theasset is trading at a loss, but can backfire if the asset is trading at a gain.

The views expressed here are those of Washington Trust Wealth Management and are subject to change based on market and other conditions. Investment recommendations andopinions expressed in these reports may change without prior notice. All material has been obtained from sources believed to be reliable but its accuracy is not guaranteed.Investing entails risk, including the possible loss of principal. Stock markets and investments in individual stocks are volatile and can decline significantly in response to issuer,market, economic, political, regulatory, geopolitical, and other conditions. Investments in foreign markets through issuers or currencies can involve greater risk and volatilitythan U.S. investments because of adverse market, economic, political, regulatory, geopolitical, or other conditions. Emerging markets can have less market structure, depth, andregulatory oversight and greater political, social, and economic instability than developed markets. Fixed Income investments, including floating rate bonds, involve risks suchas interest rate risk, credit risk and market risk, including the possible loss of principal. Interest rate risk is the risk that interest rates will rise, causing bond prices to fall. Pastperformance does not guarantee future results. The information we provide does not constitute investment advice and it should not be relied on as such. It should not be considereda solicitation to buy or an offer to sell any security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon.Please consult with a financial counselor, attorney or tax professional regarding your specific investment, legal or tax situation.

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Source:Factset

Source:Factset

Consider sheltering ordinary incomeOver certain thresholds, which vary depending on filing status, the fed-eral capital gains rate increases to 20%, from 15%. Furthermore, a3.8% Medicare tax could also be tacked on. Therefore, if you know youare going to have sizable capital gains, consider sheltering or deferringordinary income. It may also make sense to accelerate deductions inyears with higher income.

If appropriate, we will implement many of these strategies within yourmanaged portfolios. If you wish to discuss at greater length, please donot hesitate to contact us.