Broker Check

January 7, 2019

| January 21, 2019
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THE MARKETS

Investors and commentators are focused on every piece of data and seemed poised to overreact to data points less important than ones released this week. Stay patient, and don’t be surprised by continued swings in the market. Please note that when measured by percentages, the current stock market volatility is close to the historical norm. 

The stock market wrapped up 2018 with a couple big swings as investors reacted to a series of major announcements. The news sent stocks lower on Thursday, but those losses were erased when stocks soared after an extremely strong jobs report and indications of a more flexible Federal Reserve.

Last week also put an end to a difficult 4th quarter that made 2018 a tough year for many investors. The S&P 500 dropped 13.5 percent last quarter, which erased the gains from the first three quarters.

Last quarter’s volatility and stock market declines owed much to uncertainty about economic growth. Investors were concerned about a variety of issues, including:

⦁ The Federal Reserve making a mistake. Many in financial markets worried the Fed would raise rates too high, too quickly and stifle economic growth. Last week, the Fed put some     of those fears to rest when its Chair, Jerome Powell, suggested the Fed was willing to stop increasing rates during 2019 if there were signs of economic weakness. Investors rejoiced and the three major U.S. indices experienced significant gains on Friday.

Friday’s job report reassured investors the economy is still humming along. As the accompanying chart shows, more than 300,000 jobs were created in December, and the estimates for October and November were revised upward, too. Wage growth was a healthy 3.2 percent higher year over year. Unemployment rose because more workers entered the workforce or sought out higher-paying jobs. Investors reacted positively to a very good report.

⦁ Weaker corporate profits. Companies were remarkably profitable during the first three quarters of 2018, in part because of the boost from tax reform. However, there were worries fourth quarter earnings would be weaker as the effects of the tax cut stimulus faded. Last week, John Butters of FactSet reported, after three quarters of 25 percent or higher earnings growth, the estimated earnings growth rate for fourth quarter 2018 is 11.4 percent. We feel that 11.4% profit growth is still robust.

⦁ A slowdown in global economic growth. Trade wars and tariffs clouded the outlook for global growth throughout the year. The Economist reported there were signs of economic slowdown in China, and one American technology firm attributed a sharp downturn in its profitability to weaker economic growth in China. There were also signs of economic weakness in Europe. Apple warned revenue would fall about $7 billion short of the mid-range of its previous expectations. The company cited weakness in China as the primary cause of the underperformance. The announcement reinforced the message tariffs are affecting profits and consumer behavior.

⦁ A slowdown in domestic economic growth. Investors have been worried that trade issues, the government shutdown, and other matters could negatively affect economic growth at home. If the government shutdown is resolved quickly, these worries may prove overblown. Last week, Taylor Telford of the Washington Post reported, “…According to interviews with several analysts: The economy is fundamentally strong, and the stock market has overreacted to concerns about a modest slowing.”

As anxiety rose during the fourth quarter of 2018, some investors rushed to the perceived safety of bonds. High demand pushed the yield on 10-year Treasury bonds lower as it dropped from 2.99 percent to 2.69 percent during December.

While increasing bond exposure may have been a prudent portfolio adjustment for investors who were taking more risk than they could bear, those who moved out of stocks on fear missed out. The Standard & Poor’s 500 Index and the Dow Jones Industrial Average posted their biggest one-day point gains on record on December 26, reported Emily McCormick for Yahoo! Finance.

At this point, some investors feel overwhelmed and worried about their ability to reach personal financial goals. If you’re one of them, please give us a call. Sometimes, reviewing life and financial goals, and the reasoning behind portfolio choices, may be reassuring. We look forward to hearing from you.

KEY POINTS FOR THE WEEK

⦁ Markets reacted to a big week of announcements.
⦁ Job growth was extremely strong, and wage growth was very good.
⦁ Fed Chair Jerome Powell signaled flexibility on rates.
⦁ Apple warned weakness in China would affect its quarterly results.

WHAT ARE WE READING?

Below are some articles we paid particularly close attention to this week. We encourage our readers to follow the links.

Astronaut Accidentally Calls 911 from Space

A Dutch astronaut accidentally called U.S. rescue services from space. André Kuipers was orbiting the planet and had to contact NASA’s Johnson Space Center in Houston. Kuipers explained he had to dial 9 before making any call, followed by 011 for an international line. Floating and dialing a phone is much harder than you’d think, and he accidentally missed pressing the important zero.

TAX SEASONS IS HERE AGAIN

It’s only January, but you may want to jumpstart your 2018 taxes since there are a slew of new regulations that may affect you. The Tax Cut and Jobs Act (TCJA) of 2017 went into effect last year so make sure you understand how tax reform may affect your 2018 taxes.

Take a deep breath and read about some of the ways tax deductions and credits have changed. While the changes may be daunting, The Tax Foundation anticipates, for millions of households, filing taxes will be simpler than it has been in the past.

Tax deductions 

This year you will notice sweeping changes to tax deductions. One major change is many of the itemized deductions you may have taken in the past are no longer available. Here are eight deductions you can no longer take:

⦁ Children and other dependents. For 2018, you can no longer take a $4,050 deduction for each dependent you claim. The loss of deduction may be partially or fully offset by an increase in the standard deduction. An increase in the child tax credit may help, too, but it isn’t available to all families, reported Maryalene LaPonsie of U.S. News & World Report.

⦁ State and local tax deductions, including property taxes. There is a $10,000 cap on state and local tax deductions, which may negatively affect people in states with high property taxes and/or high state income taxes. Some states have been introducing legislation and researching options that may help offset the loss of this deduction.

⦁ Mortgage interest deductions. For 2018, there is a lower dollar limit on mortgages qualifying for the home mortgage interest deduction. Taxpayers may only deduct interest on $750,000 of qualified residence loans. In previous years, the limit was $1,000,000.

⦁ Home equity loan interest. If you use a home equity loan to build an addition to an existing home or otherwise improve your home, interest on the loan may be deductible. However, through 2026, if the loan is used for something other than home improvements, the loan interest is not deductible. The home equity loan must be secured by the taxpayer’s home.

⦁ Unreimbursed employee expenses. Prior to 2018, money paid out-of-pocket for supplies, education, or other work-related expenses that were not reimbursed by your company, could be deducted up to 2 percent of adjusted gross income. That is no longer the case, reported Bill Bischoff of MarketWatch.

⦁ Various other itemized deductions. In the past, you may have deducted the cost of tax preparation services, safe deposit box rentals, investment fees, IRA/custodian fees, hobby expenses, and other items. Check with your tax professional to be certain, but many of these deductions are no longer deductible.

⦁ Moving expenses. Relocating just became less attractive from a tax perspective. Through 2026, unless you are with the armed forces, you will no longer be able to deduct moving expenses that are not reimbursed by your employer.

⦁ Alimony payments. For divorces after December 31, 2018, the payer of alimony will be unable to deduct alimony payments. Conversely, recipients of alimony payments may no longer pay taxes on the income, according to Lorie Konish of CNBC.

 

To offset these new exclusions, standard deductions almost doubled for 2018. Under the new law, individuals who file taxes singly may be able to deduct $12,000, heads of household may be able to deduct $18,000, and married couples filing jointly may be able to deduct $24,000.

 In addition, TCJA increased the Child Tax Credit to $2,000 for each qualifying child, double what it was in the past. In addition, the income limits for eligibility begin phasing out at $200,000 of modified gross income (up from $75,000) for a single filer, and $400,000 (up from $110,000) for married couples filing jointly.

Also, if you have dependent children who are 17 or older, or you support parents or other relatives, you may be able to take a tax credit of $500 for each qualifying person through 2025.

While the loss of deductions may increase taxes for some, the Brookings Institute reported, “… in 2018, the TCJA will raise average after-tax income for households in every income group. Households in the lowest 20 percent of the income distribution (about $25,000 or less) will receive an average tax cut of $60, while those in the top 0.1 percent (with income of $3.4 million or more) will get an average tax cut of about $193,000.”

This article does not explain all of the changes introduced by tax reform nor is the information provided intended to be tax advice. You can find additional information about tax law changes on the IRS website. Also, it’s a good idea to talk with a tax professional about how tax reform may affect you.

Caution: Watch out for tax season scams and threats
During this tax season, as in every tax season, be wary of tax scams. Tax fraud is the second most common type of identity theft, according to the Federal Trade Commission’s Consumer Sentinel Data Book 2017.

Scammers often impersonate IRS officials on the phone or in email and snail mail communications. They may make false claims about the status of your taxes in an effort to get you to share personal information. Don’t fall for it. The IRS does not make threatening phone calls about unpaid taxes. It does not demand immediate payment or ask you to update information online.

If you think you have been the victim of a phone scam, contact the Federal Trade Commission onFTC.gov. You can also report unsolicited communications claiming to be from the IRS by emailing phishing@irs.gov.

WEEKLY FOCUS

 "If you concentrate on finding what is good in every situation, you will discover that your life will suddenly be filled with gratitude, a feeling that nurtures the soul."

~ Harold Kushner, Rabbi

"Most of the things worth doing in the world had been declared impossible before they were done."

~ Louis D. Brandeis, American Judge

 

"Worry doesn't help tomorrow's troubles; it ruins today's happiness."

Author unknown

 

Links & Disclaimers

RJFS and SPC do not offer or provide legal or tax advice. Tax services and analysis are provided by the related firm, S&M through a separate engagement letter with clients. Portions of this newsletter were prepared by Carson Group Coaching. Carson Group Coaching is not affiliated with RJFS, SPC or S&M.  The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material.  The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  This information is not intended as a solicitation of an offer to buy, hold or sell any security referred to herein.  There is no assurance any of the trends mentioned will continue in the future.  Any opinions are those of the author and not necessarily those of RJFS.  Any expression of opinion is as of this date and is subject to change without notice.
Opinions expressed are not intended as investment advice or to predict future performance.  Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.  Past performance does not guarantee future results.  Investing involves risk, including loss of principal.  Keep in mind that there is no assurance that any strategy, including diversification and asset allocation, will ultimately be successful or profitable nor protect against a loss. Consult your financial professional before making any investment decision.  Stock investing involves risk including loss of principal. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stock companies maintained and reviewed by the editors of the Wall Street Journal. Please note direct investment in any index is not possible.
The MSCI Emerging Markets is designed to measure equity market performance in 25 emerging market indices. The index's three largest industries are materials, energy, and banks. Investing in emerging markets can be riskier than investing in well-established foreign markets.
The MSCI ACWI (All Country World Index) is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. As of June 2007, the MSCI ACWI consisted of 48 country indices comprising 23 developed and 25 emerging market country indices. Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices rise.
The Barclays Capital Aggregate Index measures changes in the fixed-rate debt issues rated investment grade or higher by Moody's Investors Service, Standard & Poor's, or Fitch Investors Service, in that order. The Aggregate Index is comprised of the Government/Corporate, the Mortgage-Backed Securities and the Asset-Backed Securities indices.
Links are being provided for information purposes only.  RJFS, SPC and S&M are not affiliated with and do not endorse, authorize or sponsor any of the listed websites or their respective sponsors, and they are not responsible for the content of any website, or the collection or use of information regarding any website's users and/or members.

https://www.economist.com/finance-and-economics/2019/01/05/what-the-market-turmoil-means-for-2019
https://www.bloomberg.com/news/articles/2019-01-04/powell-says-fed-ready-to-adjust-policy-if-needed-can-be-patient
https://www.cnn.com/2019/01/04/investing/dow-stock-market-today/index.html
https://www.nytimes.com/2018/12/27/us/politics/trump-tax-cuts-jobs-act.html
https://insight.factset.com/sp-500-2018-earnings-preview-highest-earnings-growth-in-eight-years

https://insight.factset.com/largest-cuts-to-quarterly-sp-500-eps-estimates-since-q3-2017 (download report)
https://www.cnbc.com/2019/01/04/stock-market-comeback-is-now-in-the-hands-of-china-us-trade-talks.html
https://www.washingtonpost.com/business/2019/01/04/stock-market-has-been-going-down-down-down-so-why-do-so-many-analysts-think-itll-go-way-up-this-year/?noredirect=on HYPERLINK

"https://www.washingtonpost.com/business/2019/01/04/stock-market-has-been-going-down-down-down-so-why-do-so-many-analysts-think-itll-go-way-up-this-year/?noredirect=on&utm_term=.59bd81bd0720"& HYPERLINK

"https://www.washingtonpost.com/business/2019/01/04/stock-market-has-been-going-down-down-down-so-why-do-so-many-analysts-think-itll-go-way-up-this-year/?noredirect=on&utm_term=.59bd81bd0720"utm_term=.59bd81bd0720

https://finance.yahoo.com/quote/%5ETNX/history?p=%5ETNX
https://finance.yahoo.com/news/stock-futures-rise-christmas-eve-sell-off-134312777.html
https://richardlangworth.com/success
https://www.economist.com/graphic-detail/2018/12/27/is-there-any-truth-to-the-idea-of-midwestern-nice
https://www.nationalservice.gov/vcla/state-rankings-volunteer-rate
https://www.apa.org/pubs/journals/releases/psp-a0034434.pdf
https://www.goodreads.com/quotes/tag/midwest
https://taxfoundation.org/90-percent-taxpayers-projected-tcja-expanded-standard-deduction/
https://www.irs.gov/credits-deductions-for-individuals
https://money.usnews.com/money/personal-finance/taxes/articles/2018-02-09/10-tax-deductions-that-will-disappear-next-year
https://www.irs.gov/newsroom/interest-on-home-equity-loans-often-still-deductible-under-new-law
https://www.marketwatch.com/story/the-little-noticed-tax-change-that-could-affect-your-return-2018-03-19
https://www.cnbc.com/2018/08/14/two-ways-new-alimony-tax-rules-affect-your-retirement-savings.html
https://www.irs.gov/pub/irs-pdf/p5307.pdf
https://www.brookings.edu/blog/up-front/2018/01/02/once-the-tax-bill-is-paid-for-low-and-middle-income-households-will-be-worse-off/
https://home.kpmg.com/content/dam/kpmg/us/pdf/2018/02/tnf-new-law-book-feb6-2018.pdf
https://www.ftc.gov/system/files/documents/reports/consumer-sentinel-network-data-book-2017/consumer_sentinel_data_book_2017.pdf
https://www.irs.gov/newsroom/how-to-know-its-really-the-irs-calling-or-knocking-on-your-door-0

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