Broker Check

November 5, 2018

| December 18, 2018
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Stocks recovered some ground last week and then stumbled over unemployment.

Major U.S. stock indices faltered Friday after the Bureau of Labor Statistics (BLS) reported on a popular ‘lagging’ economic indicator – unemployment. (Remember, lagging indicators describe what has happened in the past.) The BLS reported:

“The unemployment rate remained at 3.7 percent in October, and the number of unemployed persons was little changed at 6.1 million. Over the year, the unemployment rate and the number of unemployed persons declined by 0.4 percentage point and 449,000, respectively.”

Employment data for October show the U.S. economy continues to hum along. The economy produced 250,000 new jobs, beating expectations by a wide margin. October’s growth reflects a bounce back from the negative effects of hurricanes on the September data.

Unemployment held steady at 3.7 percent as additional workers entered or re-entered the labor force. Wages increased by 3.1 percent, which was the first-time wages rose by 3 percent since 2009. The strong data points were a mixed blessing for investors. The data show the economy is strong, but that increases the likelihood the Federal Reserve will raise interest rates.

Reuters reported the number of Americans receiving unemployment benefits was at the lowest level in 45 years. That’s good news, but it’s old news. Again, unemployment is a lagging indicator and the report reflected what happened in October.

The stock market, on the other hand, is a ‘leading’ economic indicator. It moves in response to investors’ expectations for the future – and recent gyrations suggest investors aren’t certain what to think. Barron’s Daren Fonda wrote, “The S&P 500 index fell 6.9 percent in October and the stock averages’ wild swings are testing everyone’s mettle.”

Economists are uncertain about what’s to come, too. Kevin L. Kliesen, in an Economic Synopses on the St. Louis Federal Reserve website, wrote, “Historically, a trough in the unemployment rate also tends to be a reliable predictor of a business recession…an economic analyst is nonetheless never sure that a trough has occurred. Indeed, the unemployment rate can move up and down over the expansion.”

There is one thing many analysts think is likely. They expect the Federal Reserve to increase the Fed funds rate so the U.S. economy does not overheat. Paul Kiernan at The Wall Street Journal reported, “Robust hiring and wage gains last month leave the Federal Reserve all but certain to raise interest rates in December and on course to continue gradually lifting them next year.”

Higher interest rates are expected to keep inflation in check by slowing economic growth. Despite Friday’s stumble, major U.S. stock indices finished the week higher.

Third quarter corporate earnings have been strong thus far with approximately 75% of S&P 500 companies have reported earnings with approximately 83% of companies beating earnings estimates but only 61% have beat on revenue. Overall, the average earnings surprise has been positive at 6.66%.

The sectors with the largest earnings surprises for the quarter has been Consumer Discretionary and Energy at 17.66% and 14.31%, respectively. Looking at the stock reaction the next day following earnings, Health Care has been the biggest laggard at 1.89% decline despite earnings surprise on average of 5.29%.

While last week was positive, we encourage investors to prepare for more volatility ahead. Volatility often takes time to wear off. The elections on Tuesday, November 6th, may create some short-term volatility, but if the results are as expected, i.e., Democrats taking the House and Republicans retaining the Senate, we believe the outcome is already reflected in the markets.

Is your financial house in order?

The end of the year is approaching and it's a great time to take steps that can help improve your personal finances. Some items to consider:

⦁ If you're not retired, review your contributions to retirement accounts such as IRAs.
⦁ If you or your spouse is 70½ or older, Required Minimum Distributions (RMD) must be taken before Dec 31. Otherwise you could incur an additional 50% penalty tax.
⦁ Make charitable contributions that you want to be able to claim as a deduction on this year’s tax forms.
⦁ Compare this year's spending against your budget and make any necessary adjustments for next year.
⦁ Do you expect to earn more next year? Consider putting all or part of your expected increase into savings.
⦁ Check your asset allocation and make any necessary changes.
⦁ Take some time to define your family's financial goals and concerns for next year:
⦁ Do you want to save more for retirement? Or for college?
⦁ Is a particular budget category consistently over-budget?
⦁ Do you expect any unusually large bills next year such as college tuition or a new roof?

Taking the time to address these items now can help make next year a success.

Key points for the week

⦁ Global stocks rallied last week after a decline in October.
⦁ October was the worst month for the S&P 500 since September 2011.
⦁ U.S. hiring and wage growth was strong last month.

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

IRS Releases Retirement Plan Limits for 2019.
The IRS increased the limit on elective deferral contributions to 401(k) plans, 403(b) plans, most 457 plans, and the federal government’s Thrift Savings Plan will increase from $18,500 to $19,000 starting in 2019. However, the catch-up contribution limit for those 50 and older remains $6,000. The maximum individual retirement arrangement (IRA) contribution for 2019 will increase $500 to $6,000 and the catch-up contribution remains $1,000 for those age 50 or older. Additional changes can be found via the link above.

A girl and her wheelchair became the 'Notorious RBG' for Halloween
Julia Talbot, a 9-year-old girl from New Jersey, had one of the best Halloween costumes this year. Julia has microcephaly, a condition that causes learning disabilities and has confined her to a wheelchair. But every year, her mother picks a positive female role model and designs a costume that incorporates her wheelchair. This year she decided on U.S. Supreme Court Justice Ruth Bader Ginsburg and turned Julia’s wheelchair into the justice’s bench. Julia’s costume got lots of attention, which her mother says she enjoys.

Thanks to our Men and Women

Veteran’s Day honors those who are providing and have provided armed service to our country. Service to this country began during the Revolutionary War, long before the first celebration of Veteran’s Day on November 11, 1919 (one year after the end of World War I).

We show our gratitude for the brave men and women in numerous ways such as parades and placing a wreath at the Tomb of the Unknowns. Women’s contributions have not always been in an official service capacity, but women’s service has been reflected in many ways:

⦁ Revolutionary War – women couldn’t serve so they assisted in camp as cooks, seamstresses, and nurses
⦁ Mexican-American War – actual numbers aren’t known, but many women, disguised as men, served and fought next to their male counterparts
⦁ Spanish-American War – Army Nurse Corp created in 1901 and Navy Nurse Corp created in 1908 were the first times women were officially part of the American military
⦁ World War I – Navy and Marine Corp enlist women as stenographers and typists at pay equal to the men who previously performed these duties
⦁ World War II – Army, Navy, Marine Corp, and Coast Guard all enlisted the service of women “for the duration of the emergency…” as we fought on two fronts
⦁ 1948 – President Truman signed into law women’s permanent status in the armed services entitling women to veteran’s benefits
⦁ Korean War – Female enlisted reservists were involuntarily called to active duty – a first
⦁ 1980 – 8.5% of those serving in military are women; surpassing the 2% ceiling set by the 1948 Act
⦁ 2012 – The Navy has put its first female officers on submarines and certain female ground troops have been attached to combat units in Iraq and Afghanistan
⦁ 2013 – The Army has begun recruiting female pilots and crew chiefs

Whether male or female, young or old, we honor all those who have sacrificed for the freedoms we enjoy in this country. If we can serve you better, please let us know.

Here’s an unexpected retirement saving trick.

If you’re concerned your adult children are not saving enough for retirement, send them a photo of themselves that’s altered so they appear to be older, perhaps age 60 or 70. (You can do this for yourself, too.)

One reason Americans don’t begin saving early enough, or save as much as they should for retirement, is ‘present bias.’ When asked to choose between two possible rewards, research shows that people tend to choose the one that will be received sooner.

For instance, imagine you have chocolate and fruit salad. Which will you choose to eat today and which will you choose to eat next week? Researchers found that 83 percent of people chose chocolate today and fruit salad next week.

Try this one.

You can watch one movie today and another movie tomorrow. Your choices include ‘Anchorman,’ ‘Clear and Present Danger,’ ‘The Piano,’ and ‘Schindler’s List.’ What movie will you watch today? Which will you watch tomorrow?

Researchers found a higher percentage of participants chose to watch lighter films on the day they were asked and more intellectually taxing films later.

When presented with the choice to vacation today or save for retirement, it’s little surprise many people choose the former. The rewards associated with retirement are often far into the future. As a result, until a person is within a decade or so of retirement, it’s easy to rationalize spending on other things and not setting aside money for the future.

There is a way to overcome present bias. When people ‘get to know’ their older selves by spending time looking at altered photos, they tend to save more for the future.

Weekly Focus

"Creating a new theory is not like destroying an old barn and erecting a skyscraper in its place. It is rather like climbing a mountain, gaining new and wider views, discovering unexpected connections between our starting point and its rich environment."

~ Albert Einstein, physicist

“If we now care little about ourselves in the further future, our future selves are like future generations. We can affect them for the worse, and, because they do not now exist, they cannot defend themselves. Like future generations, future selves have no vote, so their interests need to be specially protected. Reconsider a boy who starts to smoke, knowing and hardly caring that this may cause him to suffer greatly fifty years later. This boy does not identify with his future self.”

~ Derek Parfit, British philosopher

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.

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.

https://www.barrons.com/articles/stock-rally-fizzles-in-wake-of-strong-payrolls-report-1541201581?mod=hp_DAY_8
https://www.investopedia.com/ask/answers/what-are-leading-lagging-and-coincident-indicators/
https://www.bls.gov/news.release/empsit.nr0.htm
https://www.reuters.com/article/us-usa-economy-unemployment/u-s-labor-market-tightening-manufacturing-slowing-idUSKCN1N64XA
https://www.barrons.com/articles/stock-market-fear-1541091809?mod=hp_LEAD_3
https://research.stlouisfed.org/publications/economic-synopses/2018/06/01/recession-signals-the-yield-curve-vs-unemployment-rate-troughs
https://www.wsj.com/articles/fed-will-likely-raise-rates-after-strong-jobs-report-1541176431
https://www.reuters.com/article/us-usa-economy/u-s-job-growth-soars-annual-wage-gain-largest-since-2009-idUSKCN1N70AJ
https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3949005/
https://www.behavioraleconomics.com/resources/mini-encyclopedia-of-be/present-bias/
https://canvas.harvard.edu/files/2761311/download?download_frd=1 (Pages 10, 14-16; Course taught by Brigitte C. Madrian, https://scholar.harvard.edu/bmadrian/classes/api-304-behavioral-economics-and-public-policy)
https://pdfs.semanticscholar.org/2b03/cdc6119a5578cd284d8fe9de99e1f169a8fb.pdf (Pages 262-263, 265)
https://books.google.com/books?id=ulhHdvbDRUkC&pg=PA319&lpg=PA319&dq=If+we+now+care+little+about+ourselves+in+the+further+future,+our+future+selves+are+like+future+generations.+We+can+affect+them+for+the+worse,+and,+because+they+do+not+now+exist,+they+cannot+defend+themselves.+Like+future+generations,+future+selves+have+no+vote,+so+their+interests+need+to+be+specially+protected.&source=bl&ots=lVFartNzpF&sig=LgqLWOkCgwMIpj5ixgDFIqNMJuw&hl=en&sa=X&ved=2ahUKEwil5t3plbbeAhVRmeAKHbX1AhYQ6AEwAHoECAAQAQ#v=onepage&q=319&f=false
https://www.irs.gov/pub/irs-drop/n-18-83.pdf

RJ Approval # 2310318

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