Broker Check

November 26, 2018

| December 18, 2018
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Global stocks continued to decline as economic weakness and the possibility of further rate increases by the Federal Reserve worried investors. After rallying in late October and early November, global stocks were trading near the lows reached during the October decline.

Last week, the S&P 500 dropped 3.8 percent. Global stock markets also declined, sending the MSCI ACWI 2.7 percent lower. The Bloomberg BarCap Aggregate Bond Index was basically unchanged as gains from government-backed bonds were cancelled out by declines in corporate debt. Oil prices dropped sharply again as a host of negative news pressured prices lower.

Last week, the United States and China continued to spar over trade and other issues. An expert from Moody’s told Frank Tang of the South China Morning Post (SCMP) the United States-China dispute will not be easily resolved:

“Look at the speech Vice President Pence gave in Papua New Guinea at the APEC conference. He didn’t just talk about trade, but also intellectual property, the South China Sea, forced technology transfers. The Administration has an agenda far greater than just tariffs and trade.”

Financial Times reported the Organization for Economic Coordination and Development (OECD) anticipates global economic growth could stumble if trade tensions continue to escalate.

SCMP reported investors are hoping for greater clarity around trade issues when President Donald Trump meets with China’s President Xi Jinping at next week’s G-20 Summit.

Major U.S. stocks indices finished the week lower. It was the biggest drop during Thanksgiving week since 2011, according to

Oil has taken a massive hit since October with prices being slashed by a third. Last Friday, oil took another hit with a 7.7 percent drop down to $50.42 a barrel, the lowest level in more than a year. Oil’s decline reflects some of the same factors affecting stocks as well as some factors to oil.

Here is a summary of why oil has declined so rapidly:

⦁ Factors Affecting Oil and Stocks
Weakening Economic Growth – Oil demand is closely tied to global growth expectations, and these have dropped recently as key economic data has been weaker than expected. This has lowered expected demand for oil in the coming year and raised concerns about how quickly revenue and earnings will grow for the stock market.

Dollar Strength – Oil is priced in dollars. As the dollar has increased against foreign currencies, oil’s decline has appeared even larger. An increasing dollar also lowers the value of foreign earnings and puts pressure on some global markets with large dollar debts.

⦁ Factors Specific to Oil
Supply Increasing – U.S. oil output is growing so rapidly, it has become the world’s number one producer. Technological changes to the drilling process, such as fracking, have lowered the cost to drill and increased the speed at which new supply can be added or dropped. Oil inventories continue to rise, suggesting supply and demand are imbalanced.

Policy Issues – The Trump administration allowed major purchasers of Iranian oil additional time to wean themselves from their supplier. The waivers were larger and broader than expected and other producers had already ramped up production. The combination produced a short-term boost in supply.

Macro Trends – The inflow of new automobile users and higher demand from less-developed countries are being offset by greater energy efficiency and a move away from hydrocarbons in developed markets.

Are Volatile Stock Markets Good for Investors?

When the ups and downs of stock markets leave you stressed and wondering whether stocks really will help you pursue your long-term financial goals, there are two things to remember:

⦁ Historically, over long periods, stocks have tended to move higher.

⦁ For instance, at the start of October 1987, the Standard & Poor’s (S&P) 500 Index was valued at 327. On Black Monday, October 19, the Index lost 22 percent in a single day. By the end of the month, it was trading at 247. Many investors wondered if their savings and investments would ever recover.

By October 31, 2018, the S&P 500 was trading at 2,740.

⦁ In March 2000, the bubble burst. On March 10, the NASDAQ Composite closed at 5,049 and less than a month later, on April 5, the Index was trading at 4,169 – a loss of about 17 percent. Many investors wondered if their savings and investments would recover.

By October 31, 2018, the Nasdaq Composite was trading at 7,304.

⦁ In 2008, when the financial crisis roiled stock markets, the Dow Jones Industrial Average opened the year at 13,044. It finished the year at 8,776, a 33 percent loss. Many investors wondered if their savings and investments would ever recover.

On October 31, 2018, the Dow was trading at 25,381.

The point of this brief history of stock market downturns is U.S. stock markets are volatile. They suffer losses and experience gains. However, over time, indices have generally trended higher.

For investors with long-term financial goals, that can be good news. Those who can tolerate volatility may find including stocks in well-allocated and diversified portfolios help enhance returns over time. Investors with shorter time horizons or those that are relying on their portfolios for income, should maintain a diversified portfolio that include a significant weighting to fixed income. Keep in mind, of course, that past performance is no guarantee of future results. If you would like to review your portfolio allocation or discuss any concerns about the stock market, please give us a call.

⦁ Market volatility may create opportunities.

When a portfolio loses value in uncertain markets, it’s natural to wonder whether you should sell. Sometimes, investors do so without considering how the decision will affect their long-term goals. While selling isn’t always a mistake – perhaps, your asset allocation is out of balance or you want to harvest tax losses – selling without a strategy may be erroneous.

Here are a few tips that can help investors avoid mistakes and make the most of opportunities during periods of market volatility:

Keep perspective. As the examples above demonstrate, stock market downturns are normal. Historically, markets have recovered and delivered positive returns over the longer term.

Stay the course. Our natural instinct for self-preservation leads some investors to sell when markets drop. This locks in losses. In the past, when investors have been patient, they’ve typically recovered lost value when markets moved higher again.

Buy low. During periods of market fluctuation, wealth managers may find opportunities to buy stocks of attractive companies at attractive prices. By investing in well-priced opportunities, investment advisors may position their clients for stronger performance.

Review your asset allocation. If you haven’t done it recently, review your asset allocation strategy. Does it still match your target allocation? Sometimes, after periods of strong market performance, a portfolio will need to be rebalanced.

Review your risk tolerance. If market volatility is causing you to lose sleep, it’s possible your risk tolerance has changed or is lower than you anticipated. If that is the case, reducing overall portfolio risk may be a wise choice.

Harvest tax losses. Talk with your tax professional about whether you could benefit by selling investments during a downturn and taking the losses for tax purposes.

Consider a Roth conversion. If you’ve been thinking about converting a Traditional IRA into a Roth IRA, completing the move during a market downturn could reduce the amount of taxes owed.

Whether you’re investing for short- or long-term financial goals, it’s important to recognize the opportunities created by market volatility, and work with your financial advisor to make the most of them.

If you would like to discuss your portfolio and possible strategies for your financial goals, please give us a call.

Key points for the week

⦁ Stocks continued to decline on concerns over slowing growth.
⦁ Oil prices have fallen rapidly in the last month after increasing much of the year.
⦁ The European Union approved the negotiated Brexit agreement. The British Parliament is the agreement’s next stop.


Last Wednesday, the IRS issued proposed regulations that addressed issues and made revisions regarding the temporary increase in estate and gift tax lifetime exemption tax enacted by legislation known as the Tax Cuts and Jobs Act.

For gifts made and estates of decedents dying before Jan. 1, 2018, prior law provided an exclusion from taxable gifts or estates of $5 million per person, indexed for inflation after 2011. For gifts made or estates of decedents dying after Dec. 31, 2017, and before Jan. 1, 2026, the TCJA increased the amount to $10 million per person, also indexed for inflation after 2011. Thus, the amount for 2017 was $5.49 million per person and, for 2018, $11,180,000 per person (rising to $11.4 million in 2019).

The TCJA also granted the IRS authority to prescribe regulations how any differences between the estate and gift exclusion amount at the time of a decedent’s death and at the time any gifts made by the decedent will be treated.

Commenters have raised questions about inconsistent tax treatment that could arise as a result of the temporary nature of the increased exclusion amount. Particularly, these commenters pointed out, the sunset of the higher basic exclusion amount after 12/31/2025 and reversion to the lower amount could, in effect, retroactively deny taxpayers who die after 2025 the full benefit of the higher exclusion amount applied to previous gifts.

This scenario has sometimes been called a “clawback” of applicable estate and gift tax exemption amounts. Consequently, the IRS is proposing a special rule for such cases:

⦁ Where the portion of the estate and gift tax exclusion as of an individual’s death is less than the sum of the credit amounts allowable when gifts were made during a period when the exclusion amounts were higher, the estate tax credit may be based on the greater of the two amounts.

For example, if an unmarried individual made taxable gifts of $9 million, all of which were sheltered from gift tax by the cumulative $10 million in basic exclusion amount allowable on the dates of the gifts, and the individual dies after 2025, when the basic exclusion amount is $5 million, the special rule would allow the applicable credit amount against estate tax to be based on a basic exclusion amount of $9 million.

The new proposed rules will be effective when they are finalized. The IRS is inviting comments on the proposed regulations.

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

When Are Sales Too Good to Be True?
Important tips from Consumer Reports on sales gimmicks that all consumers should be aware of this holiday season.

Chick-fil-A honors World War II Veteran with free food for life
In the season of giving, an Ohio Chick-fil-A decided to do something special for a local war veteran. Ernie, a 92-year-old veteran, had been going to Chick-fil-A every weekday and ordering the same meal for about a year. The workers grew fond of Ernie as he always asked about their day, and they would often join him at his table. Ernie was honored by getting free Chick-fil-A for life at their store.

Americans are hard working and generous.

Take a guess: How many hours do Americans work each year relative to Europeans?

Here are a few hints provided by The Economist and Expatica:

⦁ The average American has 23 vacation days each year.
⦁ The Spanish and the Swedes average 36 vacation days each year.
⦁ Workers in the European Union are guaranteed at least 20 paid days of holiday each year, excluding public holidays.
⦁ The United States has 10 public holidays.
⦁ The British have 8 public holidays.
⦁ Germans may enjoy as many as 13 public holidays, depending on where they live.

So, how many hours do Americans work relative to our European counterparts?

In a typical year, Americans work 100 hours more than the British, 300 hours more than the French, and 400 hours more than the Germans, on average. The Economist reported:

“In 2017 the average American took 17.2 days of vacation. That was a slight rise on the 16 days recorded in 2014 but still below the 1978-2000 average of 20.3 days. Around half of all workers do not take their full allotment of days off, which averages around 23 days. In effect, many Americans spend part of the year working for nothing, donating the equivalent of $561 on average to their firms.”

That’s pretty generous.

There is a case to be built for the importance of taking more vacation time, according to the Harvard Business Review. “Statistically, taking more vacation results in greater success at work as well as lower stress and more happiness at work and home.”

Food for thought as you consider New Year’s Resolutions.

Weekly Focus

"If we did all the things we were capable of, we would literally astonish ourselves."

~ Thomas Edison, Inventor

“When you are inspired by some great purpose, some extraordinary project, all your thoughts break their bonds: your mind transcends limitations, your consciousness expands in every direction, and you find yourself in a new, great, and wonderful world. Dormant forces, faculties, and talents become alive, and you discover yourself to be a greater person by far than you ever dreamed yourself to be.”

~ Patanjali, Hindu author and philosopher

“When I stand before God at the end of my life, I would hope that I would not have a single bit of talent left, and could say, "I used up everything you gave me."

~ Erma Bombeck, writer

"Do what you can with what you have, where you are."

~ Theodore Roosevelt, 26th U.S. President

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.  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.

Diversification and asset allocation do not ensure a profit or protect against a loss. Keep in mind that there is no assurance that any strategy will ultimately be successful or profitable nor protect against a loss.

Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.

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.

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.^GSPC/history?period1=557384400&period2=568101600&interval=1d&filter=history&frequency=1d^IXIC?p=^IXIC^IXIC/history?period1=951890400&period2=955774800&interval=1d&filter=history&frequency=1d^DJI/history?period1=1167631200&period2=1230789600&interval=1d&filter=history&frequency=1d^DJI/history?period1=1509598800&period2=1541134800&interval=1d&filter=history&frequency=1d


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