Broker Check

October 15, 2018

| October 22, 2018
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Last week’s stock market performance startled investors. Looking back, it’s easy to identify some of the factors that may have contributed to investors’ unease and shaken confidence in the markets. Ben Levisohn of Barron’s offered a brief rundown that included:

⦁ The yield on 10-year Treasuries rising to a seven-year high. As interest rates move higher, bonds become more attractive to investors who prefer to take less risk. They move money from stocks into bonds and that can push stock prices lower.
⦁ Federal Reserve Chairman Jerome Powell suggesting the Fed funds target rate could move higher. Investors worry the Federal Reserve is too hawkish and will raise rates too high, too quickly, causing economic growth to stumble.
⦁ A speech by Vice President Mike Pence indicating tensions with China may persist. Companies that export to China or manufacture goods in China are at risk if relations between China and the United States don’t improve. Poor relations could affect profits, share values, and economic growth.
⦁ Earnings reports showing tariffs negatively affecting some companies’ profit margins. FactSet reported, “the term ‘tariff’ has been mentioned during the earnings calls of 12 S&P 500 companies to date, with six of these 12 companies citing a negative impact linked to tariffs.”
⦁ The International Monetary Fund (IMF) lowering its economic growth projections. Concern about the impact of trade tensions on companies around the world led the IMF to lower some of its economic growth estimates for 2018, especially in Asia and emerging markets.

Some analysts believe a desire to take profits also helped fuel the downturn, according to Barron’s Randall W. Forsyth.

Whatever combination of events was responsible, the result was markets losing value on Wednesday and Thursday of last week before regaining some lost ground on Friday. Market Semiotics’ Woody Dorsey says that his proprietary sentiment polling found a bullish reading of absolute zero on Thursday, a contrarian indication that “panic” would be short-lived.”

While sharp drops in share values are never comfortable, it’s important to consider the bigger picture. A contributor to Bloomberg Opinion wrote, “This decline follows a market that has tripled since 2009, had zero volatility in 2017…This was the 20th time since the bear market ended in 2009 that the Standard & Poor’s 500 Index had a one-day loss of 3 percent. The NASDAQ-100 Index had its eighth 4 percent down day (although it was the biggest one-day fall since August 2011).”

The drop last Thursday and the bounce on Tuesday were both greater than 500 points as measured by the Dow Jones Industrial Average. This marks the 9th and 10th time this year that the index has moved more than 500 points in a day.

In other words, selloffs are normal and we have experienced them before.

So, what should you take away from last week?

⦁ First, it was a reminder that stocks are volatile investments. They have the potential to deliver higher returns than other asset classes because they require investors to take higher levels of risk.

⦁ Second, stock market volatility is one reason to allocate assets and build well-diversified portfolios. Holding different asset classes and diverse investments within a portfolio can help reduce the sting of unwelcome surprises like a sharp drop in the value of stocks.

⦁ Worries about what the future may hold are likely to ruffle investors and we may see additional bouts of market volatility. The current bull market has been running for a long time. Some analysts anticipate recession and a bear market are ahead. As Barron’s reported, neither appears to be here yet:7

“Other leading indicators, including jobless claims and credit spreads, also held up. ‘I don’t see this all leading to recession,’ says Ed Yardeni, president of Yardeni Research. ‘And, without a recession, I don’t think we get a bear market.’”

Last week’s sell-off caught the attention of many investors who had grown used to the steady climb higher. Sharp moves lower have a way of focusing investor attention on the market’s potential downside while obscuring its strengths. Below are three points to keep in mind when making investment decisions in volatile times.

⦁ Sharp market moves are part of investing. Investors get paid to bear risk, and last week is an example of what long-term investors should expect. Our view is the eerie calm of the third quarter was far stranger than the sharp moves of last week.
⦁ Sharp declines tend to come in clusters. Investors should prepare for sharp moves higher and lower in coming months.
⦁ Investors often add to the volatility in markets. Sharp declines can transition investors from optimistic to pessimistic very rapidly. The selling pressure in the late afternoons offers evidence of investors selling positions after the market has already declined.

No matter how intellectually rational these points seem, downturns tend to leave everyone feeling jittery and uncertain. So, take a moment. Think about your portfolio and how it was built to help you achieve your financial goals. Now, ask yourself:

⦁ Have my goals changed?

⦁ Has my risk tolerance changed?

If the answer to either of these questions is, ‘Yes,’ call us. We’ll sit down, review your goals and risk tolerance, and make sure your portfolio is structured appropriately. We’re hoping for calmer markets ahead, but we may be in for a bumpy ride.

Key points for the week

⦁ U.S. stocks declined sharply last week with the S&P 500 dropping more than 4 percent.
⦁ Concerns about interest rates, economic growth, and trade pressured markets.
⦁ Quarterly earnings will likely influence markets the most in the next few weeks.

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

Social Security Wage Base Increases for 2019
The Social Security Administration (SSA) announced that the maximum earnings subject to the Social Security component of the FICA tax will increase from $128,400 to $132,900 for 2019. This means that for 2019, the maximum Social Security tax that employers and employees will each pay is $8,239.80 ($132,900 x 6.2%). A self-employed person with at least $132,900 in net self-employment earnings will pay $16,479.60 ($132,900 x 12.4%) for the Social Security part of the self-employment tax. The Medicare component remains 1.45% of all earnings, and individuals with earned income of more than $200,000 ($250,000 for married couples filing jointly, $125,000 for married filing separately) will pay an additional 0.9% in Medicare taxes. Other 2019 cost-of-living adjustments announced by the SSA are available at the link above.

Good Read
This week brought to mind Malcolm Gladwell’s “The Tipping Point: How Little Things Can Make a Big Difference.” The book illustrates how small adjustments in behavior by a few people can lead to the birth of major trends. This week’s market action seemed similar in the fundamentals were hardly changed from two weeks earlier. Yet, the results were far different. Gladwell is a great writer, and his emphasis on social trends is fascinating.

Social Security Cost of Living Increase for 2019 will be 2.8%
63 million Social Security beneficiaries will see a 2.8 percent increase in benefits next year. This is the largest increase in 6 years. There was no increase in benefits in 2016 and only 0.3% in 2017. The COLA also increase the amount Social Security beneficiaries can earn prior to full retirement age without giving up benefits. The earnings limit for current Social Security beneficiaries that have not reached full retirement age rises to $17,640 next year. Beneficiaries that earn more than this limit and have not reached full retirement age, will see their Social Security benefit reduced by $1 for each $2 over this limit.

NEW THREAT, SMISHING

When I first saw the word smishing, I assumed it was some new lingo the kids came up with to further stump us adults. Jokes aside, smishing is a very serious matter and since October is Cybersecurity Awareness Month, it’s the perfect time to discuss it.

What is smishing? According to Experian, a credit reporting bureau in the U.S., smishing is yet another tool used by cybercriminals to obtain personal information and steal identities. You’ve probably heard of ‘phishing,’ which is an attempt to get people to provide sensitive information via email, like credit card numbers or passwords. Smishing is a mashup of SMS (short message service) and phishing.

Basically, it’s phishing via text. The fraudsters use malware to send an SMS, and once someone downloads the link, the malware is activated, tricking people into sharing sensitive information.
What are some examples of popular smishing scams? We’ve all heard of the phishing scams like “I’m a prince and I want to wire $10 million to you, all I need is your bank account information,” or “If you click this link you will get rich quick!” But these SMS scam messages can be more difficult to spot. Here’s one example from Experian:



Another example might be a text saying that if you fail to click on the link and provide personal information, whatever company they’re pretending to be will start charging daily for the service. Delete these immediately.

How can you disrupt fraudsters trying to smish you? Rod Griffin, director of public education at Experian, suggests treating your phone like a computer. On a computer, you have antivirus software to prevent fraudsters gaining access to your computer. Since your phone does pretty much everything your PC does, if not more, why not purchase antivirus software for that as well? Don’t let the fraudsters out-tech you. And, of course, never click on suspicious links that come in via text.

To make sure you haven’t been recently smished, check your credit report regularly to see if any suspect accounts have been opened in your name.

Weekly Focus

“In the business world, the rearview mirror is always clearer than the windshield.”

~ Warren Buffett, American businessman, speaker, and philanthropist

"There are two ways of spreading light; to be the candle or the mirror that reflects it."

~ Edith Wharton 1862-1937, Pulitzer Prize-winning American Novelist

"Sometimes when you innovate, you make mistakes. It is best to admit them quickly and get on with improving your other innovations."

~ Steve Jobs, Apple Computer co-founder
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.

The NASDAQ composite is an unmanaged index of securities traded on the NASDAQ system. Raymond James is not affiliated with and does not endorse the opinions or services of Malcolm Gladwell or his book.

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/heres-why-more-scares-are-ahead-for-the-stock-market-1539390914?mod=hp_LEAD_1
https://www.wsj.com/articles/surging-yields-raise-threat-of-tipping-point-for-stocks-1538913600
https://www.bloomberg.com/view/articles/2018-08-21/central-banks-are-too-hawkish
https://www.reuters.com/article/us-usa-trade-china/factbox-impact-of-u-s-china-trade-tariffs-on-u-s-companies-idUSKBN1KK23E
https://insight.factset.com/more-sp-500-companies-see-negative-impact-from-fx-than-tariffs-in-q3
https://www.imf.org/en/Publications/WEO/Issues/2018/07/02/world-economic-outlook-update-july-2018
https://www.barrons.com/articles/why-the-stock-market-went-loco-1539361320?mod=hp_LEAD_3
https://www.bloomberg.com/view/articles/2018-10-11/the-stock-market-meltdown-that-everyone-saw-coming
https://www.brainyquote.com/quotes/warren_buffett_385064

https://www.amazon.com/Tipping-Point-Little-Things-Difference/dp/0316346624/ref=sr_1_1?ie=UTF8&qid=1539696117&sr=8-1&keywords=tipping+point+malcolm+gladwell
http://www.ssa.gov/policy/docs/quickfacts/prog_highlights/RatesLimits2019.html

 

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