Broker Check

October 8, 2018

| October 15, 2018
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The stock market tends to be a leading economic indicator. Last week offered some insight to economics and stock market behavior. The U.S. unemployment rate reached its lowest level since 1969 and wages moved higher, yet major U.S. stock indices lost value.

Why didn’t stock markets move higher? The answer is stock prices tend to be leading indicators. They reflect investors’ expectations for the future. Last week, investors may have been thinking like this:

When unemployment is low, companies cannot always hire enough workers…

To hire more workers, companies raise wages…

Higher wages give workers more spendable income…

More spendable income produces higher demand for goods and services…

Higher demand for goods and services leads to higher prices…

Higher prices (inflation) cause the Federal Reserve to increase the Fed funds rate…

An increase in the Fed funds rate pushes interest rates higher…

Higher interest rates make borrowing more expensive…

Higher borrowing costs may slow business spending…

Slower business spending may cause profits to fall…

Falling profits may cause investors to sell shares…

When investors sell shares, stock prices may drop.

In general, “…while it usually takes at least 12 months for any increase or decrease in interest rates to be felt in a widespread economic way, the market's response to a change (or news of a potential change) is often more immediate,” explained Mary Hall on

At the end of last week, 10-year Treasuries yielded 3.2 percent. Daniel Kruger of The Wall Street Journal reported, “U.S. government bond yields rose to their highest level in years (since 2011) Friday as investors reconsidered the strength of the U.S. economy while selling off stocks that could be hurt by higher borrowing costs.”

One of the best ways to manage stock market volatility is to have a well-allocated and diversified portfolio.

The fourth quarter is off to a more volatile start after a calm third quarter. Many indices were down more than 1 percent on Thursday, and this volatility has continued into this week. Federal Reserve Chairman Jerome Powell said rates have a long way to go to get to neutral, suggesting more rate hikes, which is less favorable for stocks. The VIX, a measure of market volatility, also hit a high of 16.85 after historic lows.

The bad news in stocks also affected bonds negatively. The Bloomberg BarCap Aggregate Bond Index dropped 1 percent. Last week’s performance shows how longer-term bonds don’t offer the same downside protection in an economy growing faster than expected.

September’s employment data was released last week showing the lowest unemployment rate since 1969, an increase in wages, and a slowdown in new jobs. This data is important to monitor as these metrics indicate the overall health of the economy and play a key role in determining how the Fed manages monetary policy.

The unemployment rate dropped to 3.7 percent, a near 50-year low. Wages matched expectations for year-over-year growth at 2.8 percent. U.S. nonfarm payroll, which comprises most jobs, rose 134,000 in September, more than 45,000 below expectations. Most of the shortfall can be attributed to Hurricane Florence and lower labor force participation.

Wage growth is a key determinant of inflation. The economic data for September suggests an even tighter labor market and a continued robust economy. This is putting pressure on wages, which puts pressure on rates. The Fed is likely to stay on track with its current plan of hikes.


Key points for the week

  • U.S. employment data showed continued strength in the labor markets.
  • Lower than normal job growth was affected by Hurricane Florence.
  • Expectations of continued rate hikes pushed volatility higher.


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 Issues Guidance on Deductibility of Meals

The IRS issued guidance last Wednesday clarifying that taxpayers may generally continue to deduct 50% of the food and beverage expenses associated with operating their trade or business, despite changes to the meal and entertainment expense deduction made by the Tax Cuts and Jobs Act (Notice 2018-76). According to the IRS, the amendments specifically deny deductions for expenses for entertainment, amusement, or recreation, but do not address the deductibility of expenses for business meals. This omission has created a lot of confusion in the business community, which the IRS is addressing in this interim guidance. Taxpayers can rely on the guidance in the notice until the IRS issues proposed regulations.


Medicare Open Enrollment from October 15th to December 7th

During Medicare Open Enrollment, individuals are able to make changes to their current Medicare coverage. All individuals covered by Medicare should have received an Annual Notice of Change and/or Evidence of Coverage for their Medicare Advantage or Part D plan. We encourage everyone to review their coverage each year after initial enrollment. Even if they are happy with their current coverage, benefits and premiums may have changed over the year. Keep in mind they can only make changes during open enrollment from October 15 to December 7.

Points to consider:

  • Have your needs changed? Changes could mean a different Medicare plan is a better solution.
  • Review your current plan. Are there comparable, lower-cost plans available?
  • Consider premiums and out-of-pocket costs when comparing plan options.
  • Make sure your doctor still accepts your Medicare Advantage plan.
  • Review your medications to see if they are still on the plan’s list. Also review for quantity restrictions or if prior authorization is needed.


Utah football fans find $1,060 destroyed in shredder

A pair of University of Utah football fans had saved up to $1,060 to go to a game. They had the cash placed in an envelope, but when they tried to pay for the tickets, the cash was missing. Turns out the culprit was their 2-year-old son, who had put the bills through the shredder. The couple posted the loss on Twitter, and it looks like they will earn their money back, as many users have called on them to start a GoFundMe page.


Estate and Gift Tax Updates

The Federal annual gift tax exclusion has been adjusted for inflation and has increased from $14,000 to $15,000 for 2018.  The basic exclusion amount for gift and estate taxes has increased from $5.49 million per individual to approximately $11.2 million per individual in 2018. This means each individual can make gifts or reduce their estate amount by this $11.2 million and married couples can exclude $22.4 million from estate taxes.

These provisions will remain in effect until December 31, 2025, unless Congress repeals or amends the current tax legislation. If there is no repeal or amendment, the basic exclusion will sunset after that date and revert back to the law in effect for 2017 with inflation adjustments.

In addition, the estate tax rules have changed in several states:

  • DISTRICT OF COLUMBIA - Effective May 2, 2018, estate representatives who are responsible for filing an estate tax return will be required to register for an account, file and submit payment via Please see the link to the estate tax brochure here. In the beginning of 2018, the DC estate tax exclusion was equal to the Federal basic exclusion amount which is currently the $11.2 million. However, members of the DC Council joined in a bill to change the DC estate tax exclusion from $11.2 million to $5.6 million for 2018. This DC budget bill must be approved by Congress and is expected to be approved effective October 1, 2018. Assuming the bill becomes a law, a gross estate with a value over $5.6 million in 2018 will have to file an estate tax return. We will update our website when the bill officially is passed.
  • MARYLAND - The Maryland estate tax exclusion has increased to $4 Million for 2018. The Maryland General Assembly met and passed House Bill 308 which limits the estate tax exclusion to $5 million in 2019. In addition, Maryland will recognize portability between spouses in 2019, so a surviving spouse may elect to use, under certain circumstances, any portion of their deceased spouse’s unused Maryland estate tax exemption.
  • FLORIDA & VIRGINIA - Florida and Virginia repealed its estate tax in 2005 and 2007, respectively, and continue to have no state estate tax.


Retirement Trend

The search for warm weather and affordability has driven some people out of Florida and into Appalachia. In May, Cameron McWhirter of The Wall Street Journal reported on the new trend, which was dubbed ‘half-backing.’ Half-backs are:

“…northern transplants to Florida who are retiring in mountain communities of western North Carolina, northern Georgia, and eastern Tennessee. These retirees are reshaping local economies, boosting everything from tax revenues to restaurant receipts to sales of electric chair lifts for the elderly. Along the way, they are chafing locals who say the migration is pricing them out of homes and bringing in a sort of big-city brusqueness.”

From 2010 to 2017, net migration to counties in the mountainous regions of Georgia, North Carolina, and Tennessee increased 169 percent, while net migration to all U.S. retirement destination counties increased by just 67 percent. That hasn’t pushed these states to the top of the list of retiree destinations, but they’re now in the top 10. Smart Asset reported retirees’ favorite places to relocate are:

  1. Florida
  2. Arizona
  3. North Carolina
  4. South Carolina
  5. Nevada
  6. Texas
  7. Oregon
  8. Idaho
  9. Alabama
  10. Georgia

It’s notable that Texas, Georgia, Oregon, North Carolina, Nevada, Florida, and Arizona are also among the top 10 destinations for Millennials!

If you’re planning to move during retirement – and you are considering one of these states – it’s a good idea to think about the ways current trends are likely to affect property values, home prices, and the cost of living over time.


What do you think?

Athletes who grew up playing pick-up games of baseball, kickball, basketball, street hockey, and other sports with neighborhood kids may have had some advantages they didn’t recognize.

A Brazilian research study, cited by Freakonomics Radio’s show Here’s Why You’re Not An Elite Athlete (Ep. 351), found children who played sports in unstructured environments showed more tactical creativity and tactical intelligence than children who played in structured environments.

In addition, playing multiple sports may be more beneficial than specializing in a single sport, at least when it comes to soccer.

A study by Manuel Hornig, Friedhelm Aust, and Arne Güllich reviewed the training of soccer players in Germany. Practice and play in the development of German top-level professional football players, which was published in the European Journal Of Sports Science, reported athletes who went on to play for the German national team played more pick-up sports as children, and played more types of sports in adolescence, than players who did not make the German team.

“The trick is not just to get lots of children playing, but also to let them develop creatively. In many countries they do so by teaching themselves…Such opportunities are disappearing in rich countries,” reported The Economist. Maybe we should rethink our tactics.


Weekly Focus

“One man practicing sportsmanship is far better than 50 preaching it.”

~ Knute Rockne, University of Notre Dame football coach

"Always bear in mind that your own resolution to succeed is more important than any other one thing."

~ Abraham Lincoln, 16th U.S. president

"I have often regretted my speech, never my silence."

~ Xenocrates, 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 CBOE Volatility Index® (VIX® Index®) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. 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.

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.^TNX?p=^TNX (Number 89)


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