April 2018

November 15, 2019

Dear Client,

As the first quarter of 2018 ends, once again there is no shortage of news headlines sending shock waves through the stock market. There is an ongoing investigation into Russian Meddling in the 2016 Presidential Election and what, if any, implications will come of that for the Trump Administration. We have a revolving door of White House hirings and firings that have affected the stock market. Also, we have a new Fed Chief at the helm, as Jerome Powell has taken over from the steady hand of Janet Yellen. As a result, inflation fears and a rise in interest rates seem to have investors on edge. Talk of Tariffs and a possible all out trade war are of concern as well.

Also, the new Tax Cuts and Jobs Act took effect, and as Sheryl Rowling, from Morningstar Advisor, stated, “it was a rushed, complex, and far reaching tax overhaul.” Its effect on individual taxpayers may vary widely, based on your own unique circumstances. Enclosed you will find a piece titled “Tackling the New Tax Law in 2018,” (double‐sided). It’s a good summary of some of the key changes.

Charitable giving is something that is near and dear to many of our clients, and since standard deductions are increasing significantly, it’s possible those charitable gifts by check may no longer be deductible at tax time. Qualified Charitable Distributions, as mentioned in an earlier letter, may be a great option for many. Giving directly from your IRA allows for some of that required minimum distribution to be sent directly to charitable organizations, thus saving you taxes by reducing your taxable income from the RMD. Bunching charitable gifts may also be an option, as outlined in this handout. Some may find that a Donor Advised Fund could also work well. We are here to help with any questions that you may have on this tax planning option.

While a fast start to January ensued with the stock market climbing almost 10% in the first few weeks of the year, seeing the Dow Jones Industrial Average reaching an intraday high of 26,616.71 on January 26th; February brought the long awaited return to volatility, with almost a 12% correction and quickly shedding over 3000 points, to reach an intraday low of 23,360.29 on February 9th. As of the end of this quarter, we have recouped almost a 1/3 of the drop, with the Dow now standing around 24,160. This puts the Dow slightly negative by close, to 2.5 % so far in 2018. Please keep in mind that in these situations, it’s not uncommon for the market to retest the low before recovering from a correction.

What initially caused this pullback was the threat of higher inflation and a rise in interest rates. All this was prompted by Tax cuts, regulation rollbacks and a far reaching budget deal that the President signed into law which will boost government spending by hundreds of billions of dollars. The question arises, does this pull forward the next recession, as the Fed needs to combat inflation and raise rates quicker (even though the economic backdrop, where the fundamentals were solid before these additional fiscal policies where put in place). Our investment committee gets the sense that we are entering a different phase of this long running bull market as the sort of goldilocks scenario that the market has been under, may be passing. Certainty something we will be monitoring closely.

The unemployment rate ended 2017 at 4.1%, inflation at about 2.1% and GDP growth at 2.3%. Forecasts put unemployment dipping to 3.8% by year end and inflation might start to run a little bit higher at 2.6%, by the end of 2018. Some forecasts peg the GDP for 2018 around 3%. All very solid numbers and would reflect an economy that is doing well. Corporations are also doing very well, with 2018 projected to post one of the best year‐over‐year earnings gains in a long time. Put it all together and one would believe it may be a decent year for stock market gains again.

Yet, as we get deep into this extended bull market, it would only make a bit more sense to prepare for more volatility and lower returns in the next few years. While trying to time the next recession will certainly turn out to be a fool’s game, it’s been said, “we will be in a recession when we are in a recession”! Something to be mindful of, the stock market typically moves 6 – 9 months in advance.

We have also included a handout named “Mental Accounting: Sum of the Parts,” which shows risk and return characteristics of assets since 1970. As you can see, a “Total Portfolio” invested 20% in each of the 5 asset classes, produced an annualized 9.8% through the number of recessions and recoveries we have experienced in last 47 years. With that said, everyone’s comfort level is different and it’s imperative that you are comfortable with your risk and allocation.

Our investment committee is monitoring the news flow closely and its impacts on the direction of the stock market and interest rates. In the meantime, we will continue to stress the importance of rebalancing your portfolio and tempering return expectations for the foreseeable future.

As always, if you have any questions at all, on any of these issues, please give us a call.


Bryan Bastoni, CFP