A DEEPER LOOK AT MARKET CORRECTIONS

While market corrections occur on a regular basis—and should be expected—staying invested amid the volatility can prove challenging for even the most seasoned investors.

It’s hard to believe, but this week marks the 11 year anniversary from the stock market bottom made on March 9, 2009. And since that bottom, markets have rallied for the past 11 years, racking up a total return (inclusive of dividends) of more than 450%. Yes, 450%. That works out to a 16.8% annualized return. But in a couple short weeks, equity markets have declined nearly 20% from their record highs. And not only have the declines been substantial, the pace at which they occurred was extremely rapid. Fears surrounding coronavirus (COVID-19) and the oil price war between Russia and Saudi Arabia have caused a ripple effect throughout the markets.

WHAT IS A MARKET CORRECTION AND HOW COMMON ARE THEY?

Pullbacks, corrections, bear markets, and downturns—call it what you will, but it all translates to a decline in value of the stock market. Generally speaking, we categorize a pullback as roughly a 5% decline, a correction being 10%, while a bear market tends to be 20% or more. And while they never feel good, we should be used to them as they occur regularly—albeit for different reasons (in this case, coronavirus). The chart below, courtesy of my friends at Capital Group (parent of American Funds), highlights the frequency with which declines tend to occur.

BUT WAIT, IS THIS TIME DIFFERENT? IT FEELS DIFFERENT…

Having advised clients during the 2008-2009 financial crisis, Brexit, the 2010 “flash crash,” the debt ceiling crisis, yield curve inversions, trade wars and tariffs, hurricanes, and more—I’ve experienced first-hand both the apparent fragility of the markets, but also the overwhelming resiliency of the markets. There’s no doubt that the fast-paced movement of the market can distract us, but we must remember that at the end of the day, when we invest, we’re really making an investment in our future. By investing, we are putting faith that the world will go on, people will continue to go to school, to work, they will invent products, services, and cures, and I believe that’s why this time is no different. The current events we’re facing are serious, and they will have implications to be sure, but history tells us that we’ve been through this before. I strongly suspect that when we look back one, two, five, or ten years from now, we will have recalled how challenging this period was, but that we’ll be glad we did not abandon a well-constructed investment strategy. The chart of the S&P 500 index below highlights that we’ve experienced these types of declines on a fairly regular basis. Do you remember late 2018 when the markets were down during the year, almost as much as they are down today? Thankfully, most investors stayed the course and just a few weeks later—in 2019— enjoyed some of the strongest returns in market history.

WHEN WILL THE VOLATILITY END? AND WILL WE FALL INTO A RECESSION?

One of the hardest parts of successful investing is that you must keep faith and courage. If we knew when markets would turn higher or lower, there would be no returns to be had—because there would be no risk. I believe it’s also important to note that virtually no one saw this market decline coming. And just as no one forecasted this decline, I truly doubt that anyone will be able to predict when it will end (shy of a lucky guess). So if we can’t predict, we ought to prepare. I’ve told investors for years that if you need funds in the short term, they shouldn’t be in the market. And this is why. But for longer-term dollars, the events of today should be of little concern.

You’re also hearing rumors of a possible recession. And to be frank, it is possible—because it’s always possible. However, going into March of this year, the U.S. economy was in strong shape with low unemployment, low inflation, an increasing level of personal savings, and a historically low household debt-to-disposable income ratio. I suspect this relative strength will help soften the negative impact from the coronavirus and oil price wars. We also know that the Federal Reserve—along with other central banks around the world— has actively sought to loosen monetary policy as a tool to stave off a recession. So will we fall into recession? I don’t know. And no one can say for sure. But if you’re investing appropriately for your individual objectives, you should keep faith in your planning efforts and focus on what you can control.

ACTION ITEMS FOR INVESTORS IN THE CURRENT ENVIRONMENT

I’ll conclude by offering a few potential action items as you persevere through this period of heightened market volatility:

• Review your financial plan. For most who have planned ahead, they’ve tested their approach for events like these
• Review your portfolio allocation and if it’s no longer aligned with your stated tolerances, consider adjusting
• If you have short-term dollars invested in the market, consider pulling them as we could see further declines
• If your invested dollars are for a goal more than 5 years into the future, I urge you to keep a cool head and avoid trying to outsmart the market by timing or trading
• Evaluate if this is an appropriate time to convert part of your IRA to a Roth IRA while values are down
• Seek opportunities to harvest losses in taxable accounts

CLOSING NOTE

One of my personal goals is always try and get a little better at everything I do. When it comes to investing, I try to learn lessons from others and also from my own past experiences. One lesson I’ve learned is that, often after we’ve experienced previous declines (and subsequent recoveries) clients tell me they wish they had the courage to invest more dollars when prices were lower. Only you can decide if you have the fortitude to do this, but if history is any guide, you may be well-rewarded for taking risk when others chose to panic.

As always, I’m here if you have any questions or if you would like to discuss your personal situation.

Sincerely,
Jeff DeLarme, CFP®
Registered Principal, Financial Advisor

 

Disclosures 

Please note, changes in tax laws or regulations may occur at any time and could substantially impact your situation. While familiar with the tax provisions of the issues presented herein, Raymond James financial advisors are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. The information in this writing has been prepared from sources believed to be reliable, but is not guaranteed by Raymond James Financial Services or DeLarme Wealth Management and is not a complete summary or statement of all available data necessary for making an investment decision. Any information provided is for informational purposes only and does not constitute a recommendation.

Capital Group and American Funds are not affiliated with Raymond James or DeLarme Wealth Management, Inc.

The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Any opinions are those of Jeff DeLarme and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual performance. Individual investor’s results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. DeLarme Wealth Management is not a registered broker/dealer, and is independent of Raymond James Financial Services.

INVESTING THROUGH PRESIDENTIAL ELECTION YEARS

Considerations for investors as we approach the 2020 election

It’s election season, which means nonstop media coverage of the 2020 Presidential Election, and with it, reasons why the markets may be poised for volatility. In this brief, I take a deeper dive into the implications of election season and seek to share a fresh perspective within the current political environment.

THERE ARE ALWAYS REASONS TO NOT INVEST

It seems that every day, investors are swamped with headlines, tweets, and talking heads offering reasons to not invest in the equity markets. Be it talk of tariffs, Brexit, global unrest, recent market highs or market lows, virus outbreaks or political elections – investors have always had reasons to not invest. But for investors who tune out the noise and focus on facts, history shows they’ve been well rewarded. The chart below shows that going back to 1924, markets have been positive in 74% of the years, and negative in just 26%.

DOES IT MATTER WHICH PARTY OCCUPIES THE WHITE HOUSE?

When it comes to returns, it really doesn’t appear to matter who is in the White House as both Democrat and Republican presidents have, on average, enjoyed positive returns. Why might this be? I would submit that there are a few reasons. First, both parties have—at least thus far—still promoted a capitalist market system, one which encourages individuals and companies to innovate, create, improve, and deliver their goods and services. Second, looking only at the party of the president ignores the party composition of congress. Lastly, the markets are impacted by a multitude of factors with the political environment being just one factor among many. The graph below drives home the point that, if history is any guide, markets have rewarded investors regardless of who occupies 1600 Pennsylvania Avenue.

WHAT DOES THE DATA SAY ABOUT ELECTION YEARS & MARKET RETURNS?

Also of interest is the historical returns in election years, which is perhaps of most interest to investors at the moment. Again, looking at the data, we find that election years tend to be positive on average. Specifically, going back to 1928, election year returns for the S&P 500 have averaged 11.8%. I suspect the reason for this is that in election years, little tends to happen in terms of radical policy changes, as compared to the year after elections, in which markets have averaged impressive, albeit lower returns of 9.9%.

PUTTING IT ALL TOGETHER

The market has certainly been strong lately as evidenced by this being the longest expansion in recent history, and so its natural to seek out reasons why the market is due to correct and potentially turn lower. While we don’t know where the markets will go from here, we do know where we are today—unemployment continues to be near historic lows, inflation is mild, the personal savings rate of the average American continues to climb higher, and the stock market continues to trade just a little above historic average multiples. This all suggests that there is little on the foreseeable horizon to derail a sound investment approach. And as the data shows, it is unlikely that the presidential election is going to result in an economic or market downturn. I’ll close by sharing a few words that I find myself saying to investors as they grow concerned with where the markets will go in the future: if your dollars are earmarked for a goal more than 5 years from now, then what the market does in the short-term shouldn’t be of concern. And for your dollars intended for goals within 5 years, those dollars shouldn’t be invested in the stock market. Regardless of your personal political leanings, I hope you stay positive and focused on the big picture, which from where I sit, still looks bright.

Sincerely,
Jeff DeLarme, CFP®
Registered Principal, Financial Advisor

 

Disclosures

Please note, changes in tax laws or regulations may occur at any time and could substantially impact your situation. While familiar with the tax provisions of the issues presented herein, Raymond James financial advisors are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. The information in this writing has been prepared from sources believed to be reliable, but is not guaranteed by Raymond James Financial Services or DeLarme Wealth Management and is not a complete summary or statement of all available data necessary for making an investment decision. Any information provided is for informational purposes only and does not constitute a recommendation.

The S&P 500 is an unmanaged index of 500 widely held stocks, and cannot be invested in directly.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. DeLarme Wealth Management is not a registered broker/dealer, and is independent of Raymond James Financial Services.

NEW YEAR, NEW RETIREMENT LEGISLATION IN EFFECT

How the SECURE ACT could impact your financial future

With the new year comes new legislation which was passed at the end of 2019 as part of the $1.4 trillion appropriations bill. The SECURE ACT—which stands for Setting Every Community Up for Retirement Education — appears to be a step in the right direction for American savers.

I recently sat down and read through the new legislation and what follows are what I believe to be the most important takeaways for investors.

REQUIRED MINIMUM DISTRIBUTIONS NOW BEGIN AT AGE 72

Historically, investors in retirement accounts were required to begin taking their minimum distributions by April 1st of the year following the year they turned 70 and a half. But now, for investors yet to turn 70 1/2, the RMD start date begins at age 72.

The primary benefit to this change is that it affords investors two more years to grow their tax-deferred assets. This also opens up more time for investors to consider making conversions from IRA to ROTH IRAs. Another benefit is that for those individuals (or couples) who are working into their 70’s, they can continue to make IRA contributions, whereas before you were no longer allowed to contribute once achieving age 70 & 1/2.

STRETCH IRA PROVISION ELIMINATED

The rules on inherited IRAs have also changed with the passing of the SECURE ACT. The Stretch IRA strategy allowed for beneficiaries to “stretch” the required minimum distributions across the beneficiary’s life expectancy. For accounts left to younger beneficiaries, this meant the IRA assets could potentially grow for decades. Under the SECURE ACT, non-spouse beneficiaries (including Trusts) must now distribute the entire inherited IRA within 10 years. Aside from potential tax implications, it doesn’t matter whether the beneficiary drains the account a little each year or sporadically. The rule simply states the account must be drained and closed by the 10 year mark. Important to note that if a spouse is the beneficiary, they are exempt from this 10 year distribution rule and are still allowed to transfer their late spouse’s IRA balance into their own IRA account and treat it as their own (though this may not always be advisable depending on the age of the surviving spouse).

EXPANDED SECTION 529 PLAN BENEFITS

The legislation also impacts 529 education savings plans which are tax-advantaged accounts to help pay for various education expenses. The SECURE ACT helps expand the expense categories which means that investors can now use these dollars to pay for certain apprenticeship and vocational programs. Additionally, 529 plans can also now be used to pay for qualified student loan payments.

INCREASED TAX CREDITS FOR SMALL BUSINESSES

The SECURE ACT increases the existing tax credit from $500 to $5,000 for employers who start a retirement plan for their employees. Additional tax credits are available for employers who build in “auto enrollment” features.

EXCEPTION TO 10% EARLY DISTRIBUTION PENALTY

For investors who pull funds early (before age 59 and 1/2) from an IRA or 401k plan, they are assessed a 10% early withdrawal penalty, in addition to taxes. For investors who take an early distribution due to a qualified birth or adoption, they are exempt from this 10% penalty (up to a $5,000 distribution).

ADDITIONAL DISCLOSURES IN EMPLOYER SPONSORED RETIREMENT PLANS

Retirement plans will now be required to include a disclosure that illustrates the income stream that could be generated if the participant purchased a single lifetime annuity or a qualified joint and survivor annuity for the employee and their spouse.

CONCLUSION

While I’ve only highlighted the most significant changes that the SECURE ACT created, generally speaking, it appears to be a step in the right direction for American investors and retirees. And while my hope is that the new legislation doesn’t add unnecessary complexity for investors, I do have concerns that the potential for missteps will increase.

Due to the effective elimination of required minimum distributions for inherited IRAs, I would encourage all investors who have named their trust as beneficiary of their IRA to review their trust with a qualified legal professional or estate planning lawyer.

As we conduct financial planning reviews with clients this year, we will be reviewing potential opportunities to take advantage of the SECURE ACT. As always, please do not hesitate to reach out to us with any questions you have.

Sincerely,
Jeff DeLarme, CFP®
Registered Principal, Financial Advisor

 

Disclosures

Please note, changes in tax laws or regulations may occur at any time and could substantially impact your situation. While familiar with the tax provisions of the issues presented herein, Raymond James financial advisors are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. The information in this writing has been prepared from sources believed to be reliable, but is not guaranteed by Raymond James Financial Services or DeLarme Wealth Management and is not a complete summary or statement of all available data necessary for making an investment decision. Any information provided is for informational purposes only and does not constitute a recommendation.

Investors should consider, before investing, whether the investor’s or the designated beneficiary’s home state offers any tax or other benefits that are only available for investment in such state’s 529 college savings plan. Such benefits include financial aid, scholarship funds, and protection from creditors. Investors should consult a tax advisor about any state tax consequences of an investment in a 529 plan.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. DeLarme Wealth Management is not a registered broker/dealer, and is independent of Raymond James Financial Services.

Happy Holidays

 Well, we can officially say Happy Holidays to you as we near the end of November and shift toward the final weeks of the year. Making the season happy for many investors is that most asset classes have shown impressive results to this point – the S&P 500 is up more than 27% and the US Barclays Aggregate index is up nearly 9% on the year. These large relative returns give me pause for a few thoughts:

  1. Let’s celebrate the positive returns this year! It’s my view that in the short-term, the market is nearly impossible to predict, and so when we do get these positive, outsized returns, we should reflect and be grateful that we had the courage not just to invest in the first place, but to stay invested.
  2. Let’s also remember that while the markets generally tend to trend upward over the long-run, there will be periods ahead in which the markets will fall, and our investment accounts will decrease in value. With this outlook, investors should be proactive and ensure they are not putting short-term dollars to work in the market.
  3. It is my opinion that over the past year, nothing material has changed in the economic or political spheres that could potentially explain the large returns being experienced. There are two ways to look at this: the first is to say that, since there’s no obvious explanation, the returns are not warranted. The second (the view I choose to take) is that the markets often behave irrationally, and that over the course of history, there are countless instances of markets acting independently of the general economic or political environment.
  4. When investors think about “average” market returns, they’re generally thinking of a figure in the 8%-10% range…and history tells us that, over a very long period of time, that has been a reasonable estimate. The issue is that the market very seldom returns within this range in a typical individual year. Data from Dimensional Fund Advisors reports that between 1926 and 2018, there have only been about 10 years when the S&P 500 actually returned between 6% and 10% in a single calendar year. This helps drive the point that to have realized these “average” returns, investors typically needed to be invested for the longer term.
  5. The lesson to be learned here is that markets will do what markets do – and we should adjust our course based on the objectives we’re trying to achieve, the tolerance we have for volatility and short-term setbacks, while always being prepared for the unexpected (e.g., have adequate cash on the sidelines)

 

Election Looming

Recent headlines are also full with news of the upcoming 2020 election. In my experience, elections – particularly 2016 and the upcoming 2020 election – often create a great deal of confusion and anxiety for investors. Our research tells us that while there are some trends in market returns in pre-election and election years, they aren’t strong enough to rely upon. Boring but prudent, we believe the best approach is to prepare for all scenarios in lieu of the ability to accurately predict which candidate will prevail.

 

Year-End Planning

December will be here in a few days and this is a great opportunity to relax with family. It’s also a terrific chance to think about your charitable giving strategies. If you’re over 70 ½ and taking Required Minimum Distributions, you should consider if Qualified Charitable Contributions are wise strategies for your situation. For those of you seeking potential deductions on your income taxes, you may want to explore Donor Advised Funds. And lastly, investors would be wise to check with their tax advisor and determine if they could benefit from tax loss harvesting within their taxable accounts.

Next week I’ll be headed to Chicago for an investment forum where I’m looking forward to informative conversations on the markets, economy, and financial planning strategies.

Before I close this out, I’d like to give thanks to my Clients for their trust, confidence, and friendship. The number of referrals we’ve received over the past year tells us that we are adding great value while delivering service in a manner they enjoy. I’m also appreciative of Michelle in the office who is reliable, professional, dependable, and extremely competent. And personally, I’m thankful for the opportunity to be in this profession, live where I live in Southern California, and have the family and friends that I do.

Wishing you and yours a very Happy Holiday Season!

Jeff

 

Disclosures:

The opinions expressed above are those of Jeff DeLarme and are subject to change. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past Performance is no guarantee of future results. This wealth briefing has been written for educational purposes and is not a solicitation to invest or buy securities and does not constitute investment advice. Any data included or referenced has been sourced from what are believed to be reliable sources, but should not be relied upon. There is no assurance any of the trends mentioned will continue or forecasts will occur. Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices rise. Rebalancing a non-retirement account could be a taxable event that may increase your tax liability. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. It is not possible to invest directly in an index. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. Neither Raymond James Financial Services nor any Raymond James Financial Advisor renders advice on tax issues, these matters should be discussed with the appropriate professional. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.

THE MARKETS

Halfway through 2019 and both equity and bond markets have delivered outsized returns. As illustrated in the chart below based on data gathered by Raymond James, US stocks continue to lead, followed by international stocks. In fixed income, bonds – as measured by the Barclays Agg Index – posted their best quarter since 3Q of 2011 (up 3.1%)* which was due to a general decline in interest rates (the price of bonds increase as rates fall).

 

While we regularly review portfolios and check-in with Clients, this month I am reviewing our current list of investments and mutual fund/etf managers to determine their relative performance and overall success. Doing so on a regular basis allows us to continue working with those who are performing while placing other managers on watch lists, or if appropriate, removing them from portfolios altogether.

*Source: Raymond James Quarterly Market Review Q2 2019

 

THE ECONOMY

Hard to believe that the 2020 Election season is already underway with more than 20 candidates jockeying for the democratic ticket. With election season comes questions about the impact on the markets and the economy. It seems reasonable to assume that, given the potential for a change in the White House, investors might be better off waiting until post-election night to make changes to their investment strategy. I’ve heard the following statement countless times in my career: “I think I’ll pull some funds out and sit tight until after the election.” History tells us that when it comes to market returns, it really doesn’t matter who is in the White House.

What does seem to matter is that our capitalist market system continues to work – meaning – companies continue to build widgets and provide services for consumers to consume. And with interest rates at these historically low levels, it’s hard to believe that businesses could struggle to create new technologies or build new factories, buildings, etc. It’s also hard to fathom that current rates are preventing folks from buying homes or cars or other goods. At last check, unemployment is at 3.6% – the lowest level since 1969*, inflation is tame, and wage growth is starting to increase. Despite this, many of the smart minds in finance anticipate the Federal Reserve will cut rates in the near future – a tool they could use to try to maintain and even possibly increase growth. Only time will tell, but it seems to me that a recession, while certainly possible, isn’t imminent.

*Source: Raymond James Quarterly Market Review Q2 2019

 

FINANCIAL PLANNING

With summer comes the middle of the year, and a great opportunity to look back on your multiple to-do lists to track your progress. Our team at Raymond James recently published a few timely ideas for you to consider during the summer as we turn toward the second half of 2019:

Planning To-Do’s

Conduct a midyear checkup: Look back on your to-do list progress, make sure your retirement plan is on track, determine if your emergency fund is adequate, and establish a regular savings plan you can stick to each month.

Register with SSA.gov: Check your earnings history for accuracy and review your expected benefits. If you’re close to retirement age, discuss with your advisor when and how you should file to maximize your benefits.

Update your estate plan: Check the beneficiaries of your IRAs, insurance policies, trusts and any other accounts, and update information that is no longer relevant. Ensure your plan protects you and your family in the case of an unexpected event.

Assess insurance needs: Periodically review and update coverage to help ensure proper protection.

Adjust as life changes: Speak with your advisor about major life changes you’ve experienced and how your financial plan could be affected. These changes include marriages, births, deaths, divorces, a sudden windfall and more.

Plan a family meeting: Use the opportunity to talk about “big” things, like your philanthropic legacy, as well as simpler things – like the menu for the next holiday dinner.

Never stop learning: Websites like EdX and Coursera offer free online classes in a range of topics.

 

 

The opinions expressed above are those of Jeff DeLarme and are subject to change. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past Performance is no guarantee of future results. This wealth briefing has been written for educational purposes and is not a solicitation to invest or buy securities and does not constitute investment advice. Any data included or referenced has been sourced from what are believed to be reliable sources, but should not be relied upon. There is no assurance any of the trends mentioned will continue or forecasts will occur. Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices rise. Rebalancing a non-retirement account could be a taxable event that may increase your tax liability. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. It is not possible to invest directly in an index. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The MSCI ACWI (All Country World Index) is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. As of June 2007 the MSCI ACWI consisted of 48 country indices comprising 23 developed and 25 emerging market country indices. The developed market country indices included are: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom and the United States. The emerging market country indices included are: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Korea, Malaysia, Mexico, Morocco, Pakistan, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey. Neither Raymond James Financial Services nor any Raymond James Financial Advisor renders advice on tax issues, these matters should be discussed with the appropriate professional. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.

THE MARKETS

With the first quarter of 2019 in the books, equity and fixed income markets have delivered one of their strongest starts in decades – a welcome start to the year given the way 2018 ended. So, what explains the strong start? A few thoughts: encouraging trade talks between China and the U.S., increased U.S. wage growth, positive corporate earnings, but perhaps most of all is the Federal Reserve’s cautious tone regarding future interest rate increases.

Many in the financial media sounded alarms that 2019 would be a dismal year, but for patient investors, the opposite has occurred thus far. US Stocks and Bonds are up nearly 14% and 3% respectively, according to data from Dimensional Fund Advisors (Source: DFA 1ST Quarter 2019 Review).  And with many portfolios having recovered from much of the 2018 year-end rout, this may be a good time to review your overall asset allocation to ensure it’s aligned to your goals.

This is also an opportune time to reevaluate which of your dollars should be in the market (and susceptible to market fluctuation), and which dollars should be set aside in low-risk, capital preservation vehicles.

Lastly, many investors are worried about the next recession and what that could mean for their portfolios. To that end, we continue to engage with industry experts and research analysts who have a pulse on the global economy. While we should expect volatility to occur at any time in the financial markets, for now, let’s enjoy one of the best first quarters in nearly 30 years.

 

THE ECONOMY

Some big economic news since our last writing as the Federal Reserve recently provided guidance that indicates they plan to hold rates steady between now and the remainder of the year.  This was a positive sign for the equity markets as it signals that the Fed does not want to stunt economic growth – which is what raising rates could likely do at this point. Important to note that while the Fed is not raising rates, they are not reducing rates either, which would typically signal concerns that the economy is in trouble. Instead, the Federal Reserve seems poised to hold rates where they are—what some economists refer to as the “Goldilocks” level.

In other positive news, wage growth for the period of February 2018 to February 2019 increased 3.4% according to data tracked by the U.S. Department of Labor. Accordingly, this represents the highest increase since 2009.

Also interesting to note is that one aspect of the yield curve has inverted (the 2 month treasury bill rate recently traded higher than 10 year treasury yield), drawing concerns that a recession could be imminent. However, research we’ve read indicates that we should be looking at the 2-year treasury vs. the 10-year treasury—which so far, has yet to invert. We’ll continue to keep an eye on the yield curve as it could foreshadow darker times ahead for the economy.

 

FINANCIAL PLANNING

If you’re like most investors, you’ve probably already filed your 2018 taxes. Hopefully you weathered the new tax reform changes with a positive outcome. Based on conversations we’ve had with our network of CPA professionals, many clients are feeling the impact of lower paycheck withholding rates, whereas other clients are benefiting from the higher standard deduction and the larger child tax credits and the new qualified business income deduction.

Regardless of your experience, now is a great time to review your portfolio for potential changes you can implement for the rest of 2019 so as to be well-positioned for a favorable tax year.

We’ve also noted a significant increase in the number of IRA to Roth IRA conversions and qualified charitable contributions. If you’re unsure of these strategies and want to learn more, please reach out to us for more information.

 

ADDITIONAL SPRING PLANNING INFORMATION

  • 2019 IRA/Roth IRA contribution limits have increased to $6,000 year ($7,000 if age 50 or older) and 401k limits have increased to $19,000 ($25,000 if over age 50)
  • Consider pulling your Credit Report and reviewing for accuracy
  • Review and update your estate plan. Also, review and update your various beneficiary designations – and don’t forget to check your life insurance policy beneficiaries as well
  • Plan your charitable giving for the rest of the year—and if you’re over the age of 70, consider if making these charitable contributions from your retirement account makes tax sense

 

Disclosures:  The opinions expressed above are those of Jeff DeLarme and are subject to change.  Investing involves risk. Past Performance is no guarantee of future results. This wealth briefing has been written for educational purposes and is not a solicitation to invest or buy securities and does not constitute investment advice. Any data included or referenced has been sourced from what are believed to be reliable sources, but should not be relied upon.

Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices rise. Rebalancing a non-retirement account could be a taxable event that may increase your tax liability.

Neither Raymond James Financial Services nor any Raymond James Financial Advisor renders advice on tax issues, these matters should be discussed with the appropriate professional.

THE MARKETS

With 2018 almost at a close, many investors are flat-out exhausted and frustrated with the results – or lack of results for that matter – delivered by the markets. And it’s easy to understand why as at this point in the year, many stock (equity) and bond (fixed income) indices are flat or negative. What’s more is that for the first time in many years, we’ve experienced multiple 10% corrections in the equity markets. On average, we tend to see just one of these 10% corrections per year, with the operative word being “average.”

There are many reasons for much of this volatility we’ve seen – the mid-term elections, the ongoing trade war with China, and perhaps most importantly, rising interest rates. As counterintuitive as it may seem, rising interest rates can negatively impact stock prices and bond prices at the same time. This is because when interest rates rise, bond prices fall. And stocks tend to fall when interest rates rise because investors seemingly have less incentive to take risk in stocks if other saving vehicles offer higher interest rates. The silver lining here is that rising rates typically means higher income generation within the fixed income portion of portfolios and higher yields on savings accounts.

So, what do we make of this volatile year and what can we do going forward? For one, we need to understand that most all markets tend to deliver negative returns on occasion. We would submit that these negative years are the price we pay for the positive years, which have historically occurred far more often than negative years do. Secondly, we need to be mindful of which markets we’re invested in and, consequently, exposed to. As an example, in most accounts, we’ve reduced the duration of our fixed income portfolios – favoring shorter-term bonds over longer-term bonds because quite frankly, we don’t see much value right now in long-term bonds. In line with our expectations, shorter-term bonds are slightly positive on the year, while longer-term bonds have lost nearly 6% this year. (Source: Morningsar Index Returns November 28, 2018).

With regard to stocks, we’ve tended to favor U.S. stocks over international companies, and as a result, we’ve largely been able to avoid the extended sell-off in international and emerging markets that has taken place this year. Looking ahead, we believe that quality international companies may now be more attractive given their recent declines.

We’ve also finally seen a pullback in technology stocks which we suspected might occur as noted in our July Wealth Briefing.  And with many market indices like the S&P 500 being heavily weighted towards technology companies, we’re not surprised to see some of these recent declines in the market. It’s also important to note over the last few weeks – and as we suggested could occur, value-oriented companies have begun to outperform relative to growth-oriented companies (Source: Morningstar Index Returns November 28, 2018). We’ll be watching closely to see if this rotation towards value-oriented companies continues.

Lastly, in a year like this we are reminded that investing may seem simple, but it’s typically not easy.

 

THE ECONOMY

The U.S. economy continues to appear very healthy with near full-employment, improving wage growth, tame inflation, and strong GDP figures.  The Federal Reserve Chair, Jerome Powell, recently announced that interest rates are near “neutral” and this was encouraging news for the market. We’ll continue to keep an eye on the Fed’s interest rate policy as it could certainly impact portfolios. As for where the economy is headed – it’s hard to say. If we had to venture a guess, we would anticipate continued positive growth, albeit at a slightly lower rate than in the recent past. Experience tells us that trees don’t grow to the sky forever and that we will eventually see some hiccups ahead.

 

YEAR-END PLANNING

Each year, around this time, we consult with our team of CPAs and Estate Attorneys to learn what steps investors can take to best position themselves for success. Here are some thoughts for you to consider and as always, be sure to discuss with your tax professional before implementing.

  • Consider any tax-loss harvesting opportunities within your portfolio
  • Review your payroll withholding rates with your employer to limit the potential for surprises come tax time
  • Review opportunities for charitable contributions as a way to give to causes you care about, while also potentially reducing your tax obligation. And if you’re over 70, ask about qualified charitable distributions.
  • Determine how much you are eligible to contribute to retirement accounts, and if possible, maximize those contributions
  • For business owners, review your retirement plan options and also consider pre-paying expenses for 2019
  • Consider possibly converting part of your pre-tax accounts to a Roth IRA

As always, we are here for you to answer questions, review your portfolio and your important goals, and work consultatively with your other professionals.

 

Disclosure: The S&P 500 index is owned by the Standard & Poors company and cannot be invested in directly. The Nasdaq Composite Index is owned by Nasdaq and cannot be invested in directly. The Dow Jones Industrial Average is owned by Dow Jones (News Corp) and cannot be invested in directly. The opinions expressed above are those of Jeff DeLarme and are subject to change.  Investing involves risk. Past Performance is no guarantee of future results. This wealth briefing has been written for educational purposes and is not a solicitation to invest or buy securities and does not constitute investment advice. Any data included or referenced has been sourced from what are believed to be reliable sources, but should not be relied upon.

The companies engaged in the technology industries are subject to fierce competition and their products and services may be subject to rapid obsolescence.

International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility.

Which “market?”

People often talk to me about the market and what it’s doing – or in some cases – not doing. I regularly receive unsolicited comments such as: “the market is on fire” or “the market is way too high –  it’s about to crash” or “my friend told me to just buy an index fund that tracks the market.” When I hear these comments, I typically reply with, “which market are you referring to, exactly?” Here’s what I’m really asking – are we talking about the U.S. equity (stock) markets and if so, are we talking about Large U.S. equities, or Small U.S. equities? Value or Growth equities? Or perhaps global equities? My guess is that in most cases, people are referring to the U.S. equity markets – and they’re probably getting their information by looking at the S&P 500 Index, the Dow Jones Industrial Average Index, or the Nasdaq Composite Index. But the trouble with using these indices for purposes of evaluating the  “market” is that they often tell very different stories. Hopefully the table below will help explain what I mean:

Source: Morningstar, as of July 5, 2018

 

The table above highlights three of the more commonly referenced equity (stock) indices as well as the number of stocks included in the index, their respective year-to-date return, and interestingly, the amount that each index is allocated to technology stocks.

 

The first takeaway you’ll likely notice is the difference in returns across these three “markets.” Someone looking at the Dow might be disappointed with the market this year, while someone paying attention to the Nasdaq Composite would likely be pleased. But as you probably figured out on your own, one of the drivers behind the disparity of the above returns is the amount that each index is allocated to – or tracks – technology companies. It should be no surprise then that technology stocks in general have been performing well in 2018, as evidenced by the strong year-to-date return in the technology-heavy Nasdaq Composite Index.

 

The second takeaway is while the “market” may be hitting new highs – and yes that may be a scary time to invest money or stay invested  – there are likely segments of the market that are not hitting highs, and those segments may present attractive investment opportunities.

 

The following table shows that not all aspects of the “market” have performed the same for 2018:

Source: Morningstar, as of 7/5/2018

 

What this means for investors

I believe there are a few considerations that investors can take away from this information. The first is to consider if owning an investment that simply tracks an index – without concern for its underlying composition – is appropriate for their goals and risk tolerance. This form of investing, referred to as passive investing or index investing, has become very popular over the past few years, but I’m concerned that the potential downsides of this approach haven’t been discussed to the same extent as their purported benefits.

 

Another consideration is that investing in the “market” via a fund that tracks an index – such as the Nasdaq Composite referenced earlier – may actually result in a lack of diversification despite, being invested in thousands of stocks. Why? Because as illustrated in the table above, more than 40% of the index is invested in the technology sector alone. This may be great news while tech stocks are on the rise, but when they decline, it’ll be a different story.

 

In addition, looking at the “market” can often be misleading for investors. The reality is that many companies and sectors have actually performed quite poorly as of late, and in some cases may present attractive investment opportunities. But to someone who sees that the “market” just hit another high, they may feel that all prices are too rich (when, in reality, perhaps just one or two sectors appear to be overpriced). Instead, investors should consider evaluating their personal progress relative to a blended index better matched to their unique portfolio.

 

I’ll close by saying that I’m not looking to pick on technology companies, but rather to understand and call-out when any one industry or sector appears to be the dominant source of returns in an index – and therefore, a potential risk to investors.

 

So the next time someone says, “the market is really hot right now” or “the market is tanking” – you may pause to ask, “which market?”

 

 

The S&P 500 index is owned by the Standard & Poors company and cannot be invested in directly. The Nasdaq Composite Index is owned by Nasdaq and cannot be invested in directly. The Dow Jones Industrial Average is owned by Dow Jones (News Corp) and cannot be invested in directly. Investing involves risk. Past Performance is no guarantee of future results. This wealth briefing has been written for educational purposes and is not a solicitation to invest or buy securities and does not constitute investment advice.. Any data included or referenced has been sourced from what are believed to be reliable sources, but should not be relied upon.

MARKET MALAISE?

The first four months of the year are in the books, and the equity markets are mostly flat in terms of returns. What we have seen in this first trimester is the return of volatility, and our first 10% correction in well over a year. Understandably, many investors are wondering if the markets are primed to run up from here, fall, or zig and zag but stay relatively flat. History may be a useful guide here…according to the chart below, declines of 10% have historically been better buying opportunities than reasons to sell.

Average Annualized Returns after Market Decline of more than 10%

*Source: Dimensional Fund Advisors. Market decline of 10% is defined as a month in which cumulative return from peak is -10% or lower. Annualized compound returns are computed for the 1-, 3- and 5-year periods subsequent to a market decline of at least 10%. 1,093 observations for 1-year look-ahead. 1,069 observations for 3-year look-ahead, and 1,045 for 5-year look-ahead. 1-year, 3-year, and 5-year periods are overlapping periods. The bar chart shows the average returns for the 1-, 3-, and 5-year period following a market decline of at least 10%. January 1990–Present: S&P 500 Total Returns Index. S&P data © 2016 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. January 1926-December 1989; S&P 500 Total Return Index, Stocks, Bonds, Bills and Inflation Yearbook™, Ibbotson Associates, Chicago. For illustrative purposes only. Index is not available for direct investment; therefore, its performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results. There is always a risk that an investor may lose money.

Rising rates

We continue to keep an eye on interest rates and the potential of an inverted yield curve, which research suggests may foreshadow a recession (see our March Wealth Briefing). So far, rates have increased in the short-term but also in the intermediate-term, with the 10-year U.S. Treasury Bond recently hitting 3.0% for the first time since January 2014. This is seemingly good news for fixed-income investors and savers who may notice higher rates on their bank and money-market accounts. For borrowers of student loans, cars, or home mortgages, rising rates may become a more prominent headwind. For now, we’ll keep rising rates in perspective as according to data compiled by Raymond James and Freddie Mac, the 30 year mortgage rate was just 4.62%, up from 4.10% a year ago, but still well below the long-term average of 8.16%. (Source- Raymond James, Freddie Mac, May 4, 2018.)

When the markets are volatile, and there seem to be more headlines supporting an imminent decline in the markets or economy, I think it’s important to remember that, as investors, we are often rewarded for our discipline, as highlighted below.

Markets have rewarded discipline

*Source: Dimensional Fund Advisors

 

Summer months

I’m excited to share that on May 7th, one of our clients – someone I’ve worked with since 2008 – turned 100 years young! Every time I visit with Thelma and her granddaughter, I’m reminded of why I’m in this business. I’m also reminded to save and invest for the long-haul because, if we’re lucky and prepared, you might be spending more years retired than you did working.

Later this month, I’ll be heading to Washington, D.C. for the Raymond James National Conference for Professional Development – an annual conference where many advisors from across the U.S. gather to share ideas, resources, and meet thought leaders in our industry. I’ll also be in New York for a 5-day workshop, preparing for Level 2 of the Chartered Financial Analyst exam. Michelle will be holding down the office, and I will be available via email or phone should you need to reach me while I’m away. In June and July, we’ll be reaching out to schedule annual reviews should you like to sit down and discuss your personal situation.

Thank you for reading these Wealth Briefings. I hope you find them to be insightful, informative, and….brief. Michelle and I are here for you with any questions you may have about your portfolio, the progress toward your important financial goals, or anything else related to your finances.

We appreciate your trust, confidence, and friendship.

The S&P 500 is an unmanaged index of 500 widely held stocks. The MSCI World Index is designed to measure the equity market performance of developed markets. The 10-year Treasury Note is a debt obligation issued by the United States government with a maturity of 10 years upon initial issuance. Bank accounts offer FDIC insurance and a fixed rate of return whereas the return and principal value of investment securities fluctuate with changes in market conditions. If bonds are sold prior to maturity, you may receive more or less than your initial investment. Holding bonds to term allows redemption at par value. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices rise. No investment strategy can guarantee success.

TARIFFS

Recent headlines have focused much on the Trump administration’s decision to place tariffs on steel and aluminum imports into the United States. While only time will tell what the true impact will be, we thought we’d share our thoughts on how these new tariffs may impact the markets. But first, let’s review what a tariff is. A tariff is effectively a tax placed on imports into the United States. They serve a few purposes, including; to punish the exporting country, to protect U.S. based industry, and to generate tax revenue. So, what’s with this new tariff on steel and aluminum of 25% and 10%, respectively? Well, it’s a movie we’ve seen before – but this time with a different cast of characters. In 2002, President George W. Bush enacted the U.S. Steel Tariff of 2002 which he subsequently dropped in late 2003 due to fears of retaliatory action from the European Union. Later, in 2009, President Obama placed a 35% tariff on tires imported from China – but as a result, Americans ended up importing tires from countries other than China, resulting in higher prices for tires. We suspect that now, much as in 2002 and 2009, the current tariffs may negatively impact the economy but to a limited extent and not to the point of triggering a wide-reaching economic downturn. As we move forward, we will be keeping a close eye on the NAFTA negotiations – but an even closer eye on the reactions of our trade partners who are
impacted by the newly placed tariffs.

PREDICTING A RECESSION?

On March 5th, the Federal Reserve Bank of San Francisco published their economic outlook. In reading through the document, I was struck by something they observed and documented in their report: every U.S. recession over the past 60 years was preceded by an inverted yield curve. An inverted yield curve (chart 3), occurs when short-term interest rates are higher than longer-term rates. A year ago, the yield curve was upward sloping (chart 1), which is considered normal. Currently, the yield curve is flattening (chart 2) but it hasn’t yet inverted.

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Source: YCharts

So, will the yield curve invert in the near future? And if so, will it lead to the next recession? The answer is: maybe. It’s possible that the Federal Reserve may hold off on raising rates due to fears that the curve will flatten and ultimately invert. It’s also possible that long-term rates could tick higher and maintain the upward sloping shape that a normal curve exhibits. While we don’t have a crystal ball, we are preparing for this potential event by suggesting that investors reduce their exposure to longer term bond investments and instead, consider bonds with shorter-maturities. We also think this is an opportune time for investors to review the risk they’re exposed to across their entire portfolio. and consider rebalancing to an appropriate allocation. I’ll close this section with a saying I’ve heard countless times over my career in wealth management which hopefully underscores the need to stay on top of your portfolio allocation…. “if you don’t rebalance your account – the market will do it for you.”

TAXES

By now, you are likely in the midst of filing your taxes – or working with your tax professional to do so. Listed below are a few questions we recommend asking your CPA/tax professional as you wrap up your 2017 returns:

  • Am I eligible to contribute to a Traditional IRA, Roth IRA, or SEP IRA? If not, does it make sense to convert a part of my Traditional IRA to a Roth?
  • What else could I be doing to help mitigate the impact of taxes?
  • Do you recommend that I explore a Donor Advised Fund?
  • What impact do you see the new tax reform having on my taxes for 2018 and beyond?

We are here to talk if you have any questions or concerns. As always, thank you for your trust, confidence, and friendship.

Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. Holding bonds to term allows redemption at par value. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices rise. Contributions to a Donor Advised Fund are irrevocable. Rebalancing a non-retirement account could be a taxable event that may increase your tax liability. Raymond James financial advisors do not render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. Past performance may not be indicative of future results. Investing involves risk and investors may incur a profit or loss. No investment strategy can guarantee success.

THE MARKETS TAKE A BREATHER

For over a year, we’ve cautioned that the equity markets are due for a correction – the problem is that we just couldn’t tell you when that correction would occur. Well, this may be it. Despite a strong start to 2018, stock markets have pulled back recently based on fears of rising interest rates. The markets appear to be concerned that the Federal Reserve may raise interest rates multiple times over the coming year – a strategy similar to tapping the brakes on a speeding car. If the Federal Reserve does raise rates, the questions will be: by how much will they rise – and how frequently will they be raised? Bottom line – the market doesn’t like uncertainty, and as a result, uncertainty often leads to volatility. The good news is that volatility can lead to opportunity for investors to buy investments at lower prices. Also, higher interest rates typically translates to more interest on your savings accounts, money-market accounts, certificates of deposit (CDs), and other fixed-income investments.

So while it’s never enjoyable to watch the markets decline – we think it’s worth noting that that corrections are normal events, and they are part of long-term investing success. We would also point out that generally speaking, diversification appears to be helping as many quality fixed income investments have zigged when equities have zagged.

Lastly, let’s keep things in perspective: a rise or fall of 700 points in the Dow Jones Industrial Average today may seem like a big number – but it is a move of roughly 3%. Compare that to Fall of 2008, when a 700 point drop represented a 7% move in the market.

A FEW NOTES FOR TAX SEASON

We’ve spent a great deal of time reading about the new tax law – and we’ve been talking with our network of CPAs and tax professionals on the impact, nuances, and potential benefits it may have for investors. While I anticipate that new tax strategies will develop from the tax law changes, I thought the following items were worth sharing as you prepare to file:

  • 529 College Savings accounts can now be used for qualified expenses for K-12 education as opposed to higher education under the previous tax law
  • Home equity loan interest is no longer deductible, and new home mortgage interest is only deductible up to $750,000 of a mortgage
  • 60% of adjusted gross income is the new limit with regards to deductible, charitable contributions – up from 50%
  • The estate tax exemption has been increased to $11.2 million per person or $22.4 million per married couple

As in past years, we are available this tax season to collaborate and consult with your tax professional as you work to achieve all that is important to you.*

FINAL THOUGHTS

Please do not hesitate to contact us if you have any questions, concerns, or would like to review your portfolio and the progress toward your important financial goals. Also, we are available for you and those you care most about should a friend or family member want a second-opinion on their approach given the market environment we are in.

Thank you for your trust, confidence, and friendship.