Weekly Market Notes – February 11, 2019

Weekly_Market_Notes

For the Week of February 11, 2019

The Markets

Friday on Wall Street, positive corporate results offset skepticism over a U.S. – China trade deal by the March 1 deadline. The S&P 500 and the NASDAQ snapped a two-day losing streak, and all three indexes closed the week higher. For the week, the Dow rose 0.32 percent to finish at 25,106.33. The S&P gained 0.11 percent to finish at 2,707.88, and the NASDAQ climbed 0.47 percent to end the week at 7,298.20.

Returns Through 2/08/19 1 Week YTD 1 Year 3 Year 5 Year
Dow Jones Industrials (TR) 0.32 7.91 7.69 19.03 12.42
NASDAQ Composite (PR) 0.47 9.99 7.69 19.43 12.08
S&P 500 (TR) 0.11 8.24 7.04 15.83 10.81
Barclays US Agg Bond (TR) 0.38 1.20 3.22 1.77 2.44
MSCI EAFE (TR) -1.38 5.04 -8.23 8.42 2.21

Source: Morningstar.com. *Past performance is no guarantee of future results. Indexes are unmanaged and cannot be invested into directly. Three- and five-year returns are annualized. The Dow Jones Industrials, MSCI EAFE, Barclays US Agg Bond and S&P, excluding “1 Week” returns, are based on total return, which is a reflection of return to an investor by reinvesting dividends after the deduction of withholding tax. The NASDAQ is based on price return, which is the capital appreciation of the portfolio, excluding income generated by the assets in the portfolio in the form of interest and dividends. (TR) indicates total return. (PR) indicates price return. MSCI EAFE returns stated in U.S. dollars.

 

Estate Taxes — An estimated 2.8 million Americans died in 2018. Of the 2.8 million deaths, an estimated 4,000 (i.e., one in every 700 deaths) died with an estate worth more than $11.2 million, the maximum dollar amount that can be passed estate tax-free per decedent with proper tax planning (source: Tax Policy Center, BTN Research).

Required Minimum Distributions — Clients who turned age 70½ sometime in 2018 must begin taking annual withdrawals from their IRA accounts no later than April 1. If they delay their first withdrawal until April 1, they must also take a second distribution by Dec. 31 (source: Internal Revenue Service, BTN Research).

Way Down — U.S. banks repossessed 230,305 homes in 2018, down 21 percent from 291,579 repossessions in 2017, down 39.3 percent from 379,437 repossessions in 2016 and down 48.8 percent from 449,900 repossessions in 2015. The peak in repossessions: 1,050,500 in 2010 (source: Attom Data Solutions, BTN Research).

 

WEEKLY FOCUS – Making Your Executor’s Job Easier

Being an executor is a serious and time-consuming task performed during a stressful time. Why not make your designated executor’s work easier with a well-organized, clearly communicated overview of your assets and wishes? Here are a few tips to get started.

Create a letter of direction telling the executor where to find everything they need, including passwords to your digital accounts. Privacy policies could make it very difficult for an executor to access your online accounts without them. Don’t reveal passwords in a will, which will become a public document. Also provide the code or keys to your home alarm system, home safe, safe deposit box and locked mailboxes or cabinets. State your funeral and remains preferences. If your will doesn’t address personal items with sentimental value, cover how you want them distributed here as well.

Make some cash available. You may want to make your executor a co-signer on your financial accounts and safe deposit box. Your executor will need to pay bills and cover funeral expenses. And they might need to hire repairs and updates to get your home ready to sell.

Review your estate plan annually to make sure your will, trust and beneficiary designations are current. Your estate plan should include the following documents: a will, medical and financial powers of attorney, an advance health directive, testamentary trust documents, organ donation wishes and guardianship information, if applicable.

Provide other documents and connections. On top of the estate documents, the following may be needed: your birth certificate, death certificate, brokerage statements, insurance policies, real estate deed(s), marriage certificate, divorce decree, military discharge papers, property and income tax records, Social Security records, bank statements, vehicle titles and a current snapshot of assets. It is also an excellent idea to introduce your executor to your lawyer, accountant, financial advisor, banker and insurance agent.

From medical to financial decisions and everything in between, planning an estate can be an uncomfortable subject, especially when you involve your family in the planning. In the end, you want your legacy to be protected. Our office can work with your attorney to plan your estate, help you take the proper steps to protect your family’s future and make your executor’s role easier. Securities America and its representatives do not provide legal advice.

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* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. The Morgan Stanley Capital International Europe, Australia and Far East Index (MSCI EAFE Index) is a widely recognized benchmark of non-U.S. stock markets. It is an unmanaged index composed of a sample of companies representative of the market structure of 20 European and Pacific Basin countries and includes reinvestment of all dividends. Barclays Capital Aggregate Bond Index is an unmanaged index comprised of U.S. investment-grade, fixed-rate bond market securities, including government, government agency, corporate and mortgage-backed securities between one and 10 years. Written by Securities America, Copyright February 2019. All rights reserved. Securities offered through Securities America, Inc., Member FINRA/SIPC. SAI# 2419016.1

Weekly Market Notes – February 4, 2019

Weekly_Market_Notes

For the Week of February 4, 2019

The Markets

Following a blockbuster January jobs report, stocks closed mostly higher Friday. The U.S. added 304,000 new jobs in January, the largest gain since February of 2018. The Dow Jones advanced for the sixth week in a row. For the week, the Dow rose 1.33 percent to close at 25,063.89. The S&P gained 1.62 percent to finish at 2,706.53, and the NASDAQ climbed 1.38 percent to end the week at 7,263.87.

Returns Through 2/01/19 1 Week YTD 1 Year 3 Year 5 Year
Dow Jones Industrials (TR) 1.33 7.57 -2.09 17.91 12.50
NASDAQ Composite (PR) 1.38 9.47 -1.65 16.28 12.10
S&P 500 (TR) 1.62 8.13 -2.17 14.07 10.98
Barclays US Agg Bond (TR) 0.53 0.81 2.27 1.94 2.39
MSCI EAFE (TR) 0.94 6.51 -12.63 7.41 2.65

Source: Morningstar.com. *Past performance is no guarantee of future results. Indexes are unmanaged and cannot be invested into directly. Three- and five-year returns are annualized. The Dow Jones Industrials, MSCI EAFE, Barclays US Agg Bond and S&P, excluding “1 Week” returns, are based on total return, which is a reflection of return to an investor by reinvesting dividends after the deduction of withholding tax. The NASDAQ is based on price return, which is the capital appreciation of the portfolio, excluding income generated by the assets in the portfolio in the form of interest and dividends. (TR) indicates total return. (PR) indicates price return. MSCI EAFE returns stated in U.S. dollars.

 

Some Don’t Pay Anything — 50.2 million of the 150.3 million tax returns filed in tax year 2016 (the latest year tax data is available), legally did not pay any federal income tax, i.e., 33 percent of all returns paid nothing. The remaining 100.1 million tax returns paid $1.45 trillion of federal income tax (source: Internal Revenue Service, BTN Research).

Sales Price — The median sales price of existing homes sold in the United States in Dec. 2018 was $253,600, down from an all-time peak median sales price of $273,800 from June 2018. The low point for this statistic was $154,600 in January 2012 during the 2008-12 real estate crisis. (source: National Association of Realtors, BTN Research).

Crazy High — For the 13 consecutive years from 1951-1963, the top individual marginal tax rate was at least 91 percent. The top individual marginal tax rate for 2019 is 37 percent (source: Internal Revenue Service, BTN Research).

 

WEEKLY FOCUS – Splitting Retirement Plans When Divorcing

Is divorce or legal separation in your future? If you or your spouse have money in retirement plans, you’ll most likely have to share the assets. It’s important to understand what governs the division of these assets to ensure the right party is responsible for paying applicable taxes. The type of retirement plan – IRA or qualified plan – determines the rules.

A separate legal term applies to each type of division. IRAs use a process known as transfer incident to divorce, while 403(b) and qualified plans, such as a 401(k), are split under the Qualified Domestic Relations Order (QDRO). You need to clearly define into which category each of the retirement assets fall when you submit your information to the court, so they’re listed correctly in the divorce or separation agreement.

A transfer incident to divorce isn’t taxed. The movement of funds can be classified as either a transfer or a rollover by the IRA custodian, depending on the circumstances of the division and the wording in the decree. The recipient takes legal ownership of the assets after the transfer is complete and assumes sole total responsibility for taxes on any future transactions or distributions.

A QDRO is used to divide qualified retirement plan assets between the owner and their current or ex-spouse or children or other dependents. Like transfers incident to divorce, QDROs are tax-free transactions so long as they are reported properly to the courts and the IRA custodians. QDRO assets can be rolled into a qualified plan, or a traditional or Roth IRA. Before a divorce settlement, any transfer from a qualified plan not considered a QDRO by the IRS is subject to tax and penalty.

Dividing retirement assets in a divorce can be less difficult if the correct information is provided to all parties involved. If the courts and custodians of the IRA and/or qualified plan recognize your divisions as QDROs or transfers incident to divorce, there shouldn’t be tax consequences. Lack of attention to detail can make this stressful time even more complicated and expensive, especially if large sums of money are involved.

Call our office, we are available to help you and your legal counsel provide the information needed to divide your retirement plan assets.

Securities America and its representatives do not provide tax advice; coordinate with your tax advisor regarding your specific situation.

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* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. The Morgan Stanley Capital International Europe, Australia and Far East Index (MSCI EAFE Index) is a widely recognized benchmark of non-U.S. stock markets. It is an unmanaged index composed of a sample of companies representative of the market structure of 20 European and Pacific Basin countries and includes reinvestment of all dividends. Barclays Capital Aggregate Bond Index is an unmanaged index comprised of U.S. investment-grade, fixed-rate bond market securities, including government, government agency, corporate and mortgage-backed securities between one and 10 years. Written by Securities America, Copyright February 2019. All rights reserved. Securities offered through Securities America, Inc., Member FINRA/SIPC. SAI#2408976.1

February 2019 Market Outlook – Conflicting Signals

I hope everyone has survived the arctic blast covering most of the country, even those of you suffering in the 30’s-40’s degrees in Florida.

As we enter February, I am seeing a number of conflicting signals.

On the economy:

  • The positive signs are continued strong employment, improving wages for employees, and a Federal Reserve that seems to be cautious on interest rates.
  • The negative signs are slowing business investment and the housing market; declining business and consumer sentiment, especially expectations about the future.

Given that the consumer accounts for roughly 2/3 of the economy, and the history that declining consumer expectations precede recessions (although not in every case) this is a potential red flag.  The still open issues of US/China trade and a potential second government shutdown on February 15th also serve to potentially impact economic growth.

2.1.2019_MONTHLY_OUTLOOK_CHART_1

Source: SentimenTrader  – Recessions in gray bars

 

On the investment front:

  • The positive signs are  – the extreme volatility we experienced at the end of 2018 has subsided; corporate earnings for the 4th quarter of 2018 have been pretty good so far; and a more patient Federal Reserve has reduced the concern of interest rates rising too fast.
  • The negative signs are – February is historically weak month for equities; the stock market went from extremely oversold at the end of December 2018 to overbought at the end of January 2019; investor sentiment has gone from Fear at the end of 2018 to Greed right now; 2019 has had a similarly strong start to 2018  (Jan 2019 +7.8%, Jan 2018 + 5.6%), recall we had an 8.6% decline in stocks in February 2018.

S&P 500 by month:  1986 – 2018

Source: Strategas                                                                                                                                             source: CNN Money

 

Given the conflicting signals our outlook is cautious.  The fundamentals look okay, with solid corporate earnings, modest inflation, a strong labor market and a newly dovish Fed. The government shutdown will contribute to anemic GDP growth in the first quarter, but a snap-back is likely in the second quarter — as long as another shutdown is avoided. Stay tuned.

I hope this report proves informative.

We have added a new tool to help those nearing or just beginning retirement to explore their readiness for retirement.  It’s an easy interactive tool.  Please share it with family, friends and colleagues.

https://www.ready-2-retire.me/JimMcCarthy

 

 

February Calendar of Events   (comments and additions for future months are always welcome)

  • February is Black History Month.  Let’s all strive for understanding and acceptance for people of all colors, nationality, and religions.

 

February  2nd                   Groundhog Day – rooting for no shadow

February 14th                  Valentine’s Day

February 18th                  Presidents Day

 

Sources: SentimenTrader, Strategas, CNN Money

 

 

Although information herein has been obtained from sources deemed reliable, its accuracy and completeness are not asserted. All opinions and estimates included in this report constitute the judgment of the financial advisor as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.

Investing involves risk and you may incur a profit or a loss. Diversification does not ensure a profit or ensure against a loss. There is no assurance that any investment strategy will be successful.  Past performance is no assurance of future results.

Please consider the charges, risks, expenses and investment objectives carefully before investing. Please see a prospectus containing this and other information. Read it carefully before you invest or send money.

Information provided should not be construed as legal or tax advice.  You should discuss any tax or legal matter with the appropriate professional.

 

Weekly Market Notes – January 28, 2019

Weekly_Market_Notes

For the Week of January 28, 2019

The Markets

The week closed with a broad-based rally on Wall Street following news that President Trump and lawmakers had reached an agreement to reopen the government for three weeks. The Dow and the NASDAQ achieved their fifth straight week of gains, but the S&P 500 posted its first weekly loss of the year. For the week, the Dow rose 0.12 percent to close at 24,737.20. The S&P lost 0.21 percent to finish at 2,664.76, and the NASDAQ gained 0.11 percent to end the week at 7,164.86.

Returns Through 1/25/19 1 Week YTD 1 Year 3 Year 5 Year
Dow Jones Industrials (TR) 0.12 6.16 -4.12 18.77 11.95
NASDAQ Composite (PR) 0.11 7.98 -3.32 16.61 11.66
S&P 500 (TR) -0.21 6.41 -4.28 14.72 10.54
Barclays US Agg Bond (TR) 0.30 0.28 1.05 1.83 2.34
MSCI EAFE (TR) 0.48 5.52 -14.70 7.92 1.98

Source: Morningstar.com. *Past performance is no guarantee of future results. Indexes are unmanaged and cannot be invested into directly. Three- and five-year returns are annualized. The Dow Jones Industrials, MSCI EAFE, Barclays US Agg Bond and S&P, excluding “1 Week” returns, are based on total return, which is a reflection of return to an investor by reinvesting dividends after the deduction of withholding tax. The NASDAQ is based on price return, which is the capital appreciation of the portfolio, excluding income generated by the assets in the portfolio in the form of interest and dividends. (TR) indicates total return. (PR) indicates price return. MSCI EAFE returns stated in U.S. dollars.

 

Costs Less Today — The average price of gasoline nationwide was $2.24 a gallon as of Friday, Jan. 18. The average price of gasoline nationwide in 1969 was 35 cents. After adjusting for 50 years of inflation, the 35-cent price in 1969 is equivalent to $2.48 in 2019 dollars (source: AAA, Department of Labor, BTN Research).

Trillions — The U.S. stock market was worth $27.4 trillion as of Dec. 31, 2018. The S&P 500 makes up 81 percent of the total U.S. stock market capitalization as of Dec. 31, 2018, equal to $22.1 trillion (source: BTN Research).

Invest for Three Years — Since 1926, 84 percent of the rolling three-year periods for the S&P 500 index (i.e., the 91 separate three-year periods beginning 1926-28, then 1927-29, . . . 2016-18) have produced a positive return. (Source: BTN Research)

 

WEEKLY FOCUS – Health Care Considerations Before Retiring

Amid retirement anticipation, it is crucial to take the time to make wise decisions regarding health care coverage.  Here are some things to consider at various times.

Retiring at any age: While some Medicare Advantage plans cover dental and routine vision services, regular Medicare and Medigap plans don’t. If you’re not planning to buy a Medicare Advantage plan or stand-alone dental and vision plans, take advantage of dental and eye checkups and services before leaving your employer.

Retiring early: Losing a company health plan before 65 requires finding an alternative. While it’s becoming rare, some companies offer employees health benefits in retirement, often a more affordable option. Additional possibilities include: COBRA (available up to 18 months), coverage on a spouse’s plan, working part-time to obtain insurance or a plan from a private or government exchange.

Retiring past age 65: By law, employer group health plans in companies that employ 20 or more people must cover employees at any age who continue working. If you are adequately covered under a group health plan based on current employment (not COBRA) in an organization with at least 20 employees, you will not pay a late enrollment fee for Medicare Part B or Part D. And a Medicare supplement plan can’t turn you down as long as you sign up during the Medigap Open Enrollment period – the six-month period that begins when you turn 65 and are enrolled in Part B. While on an employer-sponsored plan, you can sign up for Medicare Part A, but it is wise not to sign up for Part B since you could lose your guaranteed issue of a Medigap plan.

Before leaving an employer plan, compare premium and out-of-pocket costs between Medicare and your employer’s health plan. High-income earners, in particular, may save by staying on their work policy. Individual Medicare beneficiaries with incomes greater than $160,000 and less than $500,000 pay a $433.40 total monthly premium for Medicare Part B in 2019.1 Add a Part D premium – that ranges from $10 in some states to over $170 per month – and a Medigap policy, which could cost anywhere from $68 to $449 per month, and a work plan may be more cost effective.2,3

Planning for potential health care expenses has never been more important. Whether you’re retired or still working, we can help you find the best vehicles to put money aside for health care.

1https://www.cms.gov/newsroom/fact-sheets/2019-medicare-parts-b-premiums-and-deductibles

2https://boomerbenefits.com/new-to-medicare/parts-of-medicare/medicare-part-d/

3https://www.healthmarkets.com/resources/medicare/cost-of-supplemental-health-insurance-for-seniors/

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* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. The Morgan Stanley Capital International Europe, Australia and Far East Index (MSCI EAFE Index) is a widely recognized benchmark of non-U.S. stock markets. It is an unmanaged index composed of a sample of companies representative of the market structure of 20 European and Pacific Basin countries and includes reinvestment of all dividends. Barclays Capital Aggregate Bond Index is an unmanaged index comprised of U.S. investment-grade, fixed-rate bond market securities, including government, government agency, corporate and mortgage-backed securities between one and 10 years. Written by Securities America, Copyright January 2019. All rights reserved. Securities offered through Securities America, Inc., Member FINRA/SIPC. SAI# 2398914.1

Credit Report Reminder

We hope your holidays were wonderful. Now that all the holiday spending is hitting your credit card statement, it is a good time to check those credit reports.
 
The Fair Credit Reporting Act (FCRA) requires each of the nationwide credit reporting companies — Equifax, Experian, and TransUnion — to provide you with a free copy of your credit report, at your request, once every 12 months. Here is a link to the Federal Trade Commission website: http://www.consumer.ftc.gov/articles/0155-free-credit-reports
 
To get your credit report online visit this site: https://www.annualcreditreport.com/index.action
Click on “request your free credit report.”
 
Since you get 1 report each year from each reporting company my suggestion is to spread them out during the year. For example, request Equifax in January, Experian in May, and TransUnion in September. That way you can see any changes made throughout the year.
 
If you would rather make the request by mail , print and complete the attached Annual Credit Report Request Form and mail it to: Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281. Again, I would print 3 copies and make separate requests throughout the year.
 
Review each report for inaccuracies or incomplete information and follow the supplied instructions on how to get these corrected.
 
Please call me if you have any questions on this information.

Weekly Market Notes – January 14, 2019

Weekly_Market_Notes

For the Week of January 14, 2019

The Markets

Stocks fell slightly Friday. The ongoing partial government shutdown, concern over an economic slowdown in China and a decline in energy shares contributed to the decline. For the week, the Dow rose 2.42 percent to finish at 23,995.95. The S&P gained 2.58 percent to finish at 2,596.26, and the NASDAQ climbed 3.45 percent to end the week at 6,971.48.

Returns Through 1/11/19 1 Week YTD 1 Year 3 Year 5 Year
Dow Jones Industrials (TR) 2.42 2.93 -4.02 16.34 10.50
NASDAQ Composite (PR) 3.45 5.07 -3.33 14.55 10.80
S&P 500 (TR) 2.58 3.63 -4.34 12.80 9.33
Barclays US Agg Bond (TR) -0.04 0.18 0.66 1.93 2.41
MSCI EAFE (TR) 2.89 3.90 -13.08 6.63 1.36

Source: Morningstar.com. *Past performance is no guarantee of future results. Indexes are unmanaged and cannot be invested into directly. Three- and five-year returns are annualized. The Dow Jones Industrials, MSCI EAFE, Barclays US Agg Bond and S&P, excluding “1 Week” returns, are based on total return, which is a reflection of return to an investor by reinvesting dividends after the deduction of withholding tax. The NASDAQ is based on price return, which is the capital appreciation of the portfolio, excluding income generated by the assets in the portfolio in the form of interest and dividends. (TR) indicates total return. (PR) indicates price return. MSCI EAFE returns stated in U.S. dollars.

 

Super Seniors — The number of Americans at least age 75 is projected to double over the next 20 years, rising from 23 million in 2020 to 45 million in 2040 (source: Census Bureau, BTN Research).

They Forgot to Plan — Sixty-two percent of the 43 million Americans on Social Security receive at least 50 percent of their retirement income via their monthly Social Security benefit (source: Social Security Administration, BTN Research).

Frequent Flyers — The top 1 percent of Americans, ranked by their dollar usage of health care, represent 22.8 percent of total health care expenditures (source: Agency for Healthcare Research and Quality November 2016 study, BTN Research).

 

WEEKLY FOCUS – What to Do With a Work Windfall

If you recently received a bonus from your employer, or expect one soon, it’s time to create a thoughtful plan for how you’ll use it. Everyone’s situation is different, but here are some smart ways to save or spend your extra income.

Indulge a little. Ward off frugal fatigue with a controlled splurge on something not typically in your budget. You might use 10 to 25 percent of your bonus to reward your hard work with something fun.

Invest in yourself. Perhaps you’d like to take a class to improve your skills, attend a business conference, purchase exercise equipment or a gym membership, or hire a professional or health coach.

Invest in an outside retirement savings account. You can still count contributions to a traditional or Roth IRA toward 2018 if you make them by this year’s tax deadline. To contribute the maximum amount ($5,500 under 50, $6,500 if 50 or older) to a Roth for 2018, you must have a modified adjusted gross income below $120,000 if you are single or $189,000 if you’re married and file jointly. But even if your income is too high for a Roth, you can contribute post-tax dollars to a traditional IRA, where they will grow tax-free.

Qualify for free checking. While free checking accounts are becoming rather rare, many banks waive fees with a minimum balance requirement. Using a chunk of your bonus to earn free checking may save you more than you’ll earn in a typical savings account.

Rebalance your portfolio. If investment gains or losses have thrown off your portfolio’s original allocation to different types of assets, you may want to rebalance. Or you may choose to alter proportions of various classes because your goals or situation have changed. Instead of selling holdings at a potentially inopportune time, you can introduce new money in areas you wish to expand.

Share the wealth. Researchers say people who donate bonus money to charity or spend it on others report greater happiness than those who spend it on themselves.*

We’re here to help you reap the rewards of your success and build a brighter tomorrow. Call our office to schedule time to discuss what you want to accomplish in 2019 and beyond. *https://psychology.unl.edu/can-money-buy-happiness

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* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. The Morgan Stanley Capital International Europe, Australia and Far East Index (MSCI EAFE Index) is a widely recognized benchmark of non-U.S. stock markets. It is an unmanaged index composed of a sample of companies representative of the market structure of 20 European and Pacific Basin countries and includes reinvestment of all dividends. Barclays Capital Aggregate Bond Index is an unmanaged index comprised of U.S. investment-grade, fixed-rate bond market securities, including government, government agency, corporate and mortgage-backed securities between one and 10 years. Written by Securities America, Copyright January 2019. All rights reserved. Securities offered through Securities America, Inc., Member FINRA/SIPC. SAI# 2379609.1

January 2019 Monthly Outlook – What It Is Ain’t Exactly Clear

“There’s something happening here. What it is ain’t exactly clear.” — Buffalo Springfield

This seems an appropriate line for the financial markets over the last few months.

Through the third week of September 2018, the stock market was at an all-time high and the US economy was humming along at roughly 3+% GDP.  Since that all-time high on 9/20/18, the S&P 500 plunged almost 20% into Christmas Eve, before bouncing back a bit to close down 6.2% for 2018.  The steep selloff didn’t just affect the S&P 500.  In fact, the only asset class that made money for all of 2018 was Cash.  Even bonds, which usually see gains when stocks see declines, finished 2018 dead flat for the year.

The decline in the market at the end of the year was typical of what we expect at the beginning of a recession or other economic downturn. A decline of -20% or more is technically considered a bear market, which is something we haven’t experienced since 2011.  Not all big market declines have signaled a recession, but once a market decline reaches 20 percent, the odds are higher, according to Bespoke Investment Group. Of the 13 bear markets for the S&P 500 since World War II, eight of them overlapped with some part of a recession. They also looked at ‘near bear’ markets where the S&P falls 19 percent but it doesn’t fall 20 percent … there have been five of those so far … only one occurred in conjunction with a recession. While we didn’t “technically” hit a bear market (S&P drop was 19.8%), it was too close for comfort.

1.7.2019_monthly_outlook_chart_1

What was different about 2018, compared to most significant downturns, is that economic fundamentals have been very positive all year. Previous instances where the market declined while earnings performance was still very positive were almost always driven by externalities such as: government budget fights, debt ceilings, or tariff wars.  In 2008 it was the housing crisis.  The 2010 and 2011 downturns were driven by non-valuation issues like 2010’s flash crash, and the fiscal cliff.  In 2016 it was Brexit (Britain leaving the EU).  In 2018 it was the combination of the Federal Reserve raising interest rates and the trade war instigated by Washington.

 

“And now we welcome the new year. Full of things that have never been.” – Rainer Maria Rilke

I spent the last three days in meetings and on calls with Chief Investment Officers and economists from JP Morgan, Fidelity and several other firms.  My goal was to get as much input as possible in order to guide my approach going into 2019.

The general consensus was that the US economy is “still growing but slowing.”  The range of estimates for GDP is from 2% to 2.5% for 2019.  Basically, the US economy is moving into the late stage of an extended economic expansion, as is most of the developed world.  One concern is that both China and the United Kingdom are close to or in a recessionary stage.  The two biggest risks for 2019 are policy errors on trade and monetary policy.  If the US and China can’t come to a trade agreement, higher tariffs will lead to higher costs to consumers and likely job losses at manufacturers.  There is a saying that ‘economic expansions don’t die of old age, they get killed by the Fed’.  Whether the Fed is able to navigate keeping employment solid and inflation in check, without going too far and choking off growth remains a significant question.  Offsetting these risks are continuing positive effects from the 2017 tax cuts, perhaps increased fiscal spending on infrastructure, and deregulation that helps corporate profits.

Barring a policy misstep, there are no signs of an economic recession on the horizon.  Employment remains very strong.  Wages have started to rise.  These are both positive for consumers and consumer spending makes up roughly 67% of the US economy. Interest rates and inflation, while both rising,  are still low by historical standards.

The diagram above is a hypothetical illustration of the business cycle. There is not always a chronological, linear progression among the phases of the business cycle, and there have been cycles when the economy has skipped a phase or retraced an earlier one. * A growth recession is a significant decline in activity relative to a country’s long-term economic potential. We use the “growth cycle” definition for most developing economies, such as China, because they tend to exhibit strong trend performance driven by rapid factor accumulation and increases in productivity, and the deviation from the trend tends to matter most for asset returns. We use the classic definition of recession, involving an outright contraction in economic activity, for developed economies. Source: Fidelity Investments (AART), as of Nov. 30, 2018.

 

From an investment point of view, the bull market that started after the housing crisis in 2008/2009 remains intact.  And while almost 10 years old, it is far from the longest bull market in history.

1.7.2019_monthly_outlook_chart_4

One thing is certain – volatility is the theme of the markets for the foreseeable future.  2018 saw 64 trading days where the S&P 500 moved up or down by 1% or more. There were 21 trading days with greater than 2% moves +/-.  Of those 21, 7 happened in December alone.  2019 is going to be no different – we opened the year with a flat day followed by a 2+% down day.  Today, January 4, 2019, the third trading day of the year, the S&P 500 is up 3.3% as I am writing this report at 2:15pm.  (2017 saw just 8 trading days with 1% +/- moves and no trading days in excess of 2% +/-)

In many ways, the market is at a make or break point. On the one hand, valuations have come down a lot and economic growth remains stable in the US. If the negative risks I have discussed in this report are resolved positively, 2019 could look a lot more like 2017. A positive outcome is therefore dependent on the resolution to the trade situation and how the Fed proceeds. The alternative is that economic fundamentals continue to deteriorate in Asia and Europe, trade continues to slow, and investors start pricing in a recession. I still believe that, if for no other reason than political expediency, there is a high probability that the trade war will be put on hold or ended in the short term. If I’m right about that, then I think the market fundamentals are very supportive of higher prices.

I hope this note provides useful information.  Please feel free to share it with family and friends.

 

January Calendar of Events   (comments and additions for future months are always welcome)

  • January is National Blood Donation Month.  I’m donating on the 18th.  How about you?

 

January   5th                    My granddaughter Isys turn 13.  God help my daughter and son-in-law.

January 10th                    My better half, Eloise’s birthday.

January 15th                    the 9th anniversary of my independent practice – thank you to all my loyal clients.

January 21st                    Martin Luther King Day.  Let’s pray for more racial tolerance and understanding.

 

Sources:  Morningstar, Fidelity Investments, Bespoke Investment Group, Investopedia, Raymond James & Associates

 

 

 

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