Last Friday, at midnight, the U.S. government shut down for the third time this year. This shutdown closed about a quarter of federal offices, and nine agencies have begun to implement contingency plans as the timing of any resolution remains uncertain. The inability to pass a bill which would continue to fund the government stemmed from a disagreement over funding for a wall on the border of the U.S. and Mexico, and recent reports out of Washington do not make it sound like policymakers are close to making a deal. While the direct impact on markets should be minimal, this shutdown does come in the wake of a particularly tumultuous week for the administration.
Recent history might suggest that a resolution will come quickly, but it is not clear how things will play out this time around. President Trump has been adamant that he will only agree to a plan which contains $5 billion in funding for the border wall, rejecting a bipartisan Senate agreement to fund the government until February at the end of last week. While some are calling for a rocky road ahead, and both houses of Congress have stated that they will not be coming back to Washington until December 27th, the Democrats will take control of the House on January 3rd. Importantly, this leaves only a few days to get a deal done before Congressional majorities change, which could encourage the Republicans to work quickly. There is the potential for the shutdown to drag into 2019, but there also seems to be room for a deal to emerge in the interim.
Markets have opened up in the red, reflecting lack of progress in Washington over the weekend, continued concerns about the trajectory of global growth, and the impact of further Fed tightening. It would not be surprising for market volatility to continue into the end of the year, and investors should be sure that portfolios are appropriately positioned for where we are in the cycle. That said, we do not see room for the shut down to have a significant impact on the trajectory of economic growth. Furthermore, as shown in the chart below, average equity market returns have been positive regardless of the composition of the U.S. government. The key at this juncture will be for investors to separate the signal from the noise, and avoid allowing emotion to dictate investment decisions.
David Lebowitz
12/24/2018
This article can be found here.
Hi all,
For a couple of weeks, I have been speaking to folks encouraging them to remain calm and be patient with the markets. Markets have experienced a very sharp and sudden pullback and when investors see their net worth hit with a baseball bat “on paper” it is understandably jarring.
The thing is, that investors that haven’t sold any securities during the pullback, still have the same ownership as a month ago. They felt comfortable with those assets a month back, but now seeing the value of those assets drop 10% in a month it is understandable they might be getting a bit nervous.
When markets drop sharp and fast seemingly without any new information or change of the world outlook they tend to bounce back almost as fast. These types of movements in the markets are called corrections. Corrections are normal, they typically happen once every 12 months within the course of a gradual bull market climb.
This looks like a classic market correction to me, and a great opportunity to put cash to work. Of course, I could always be wrong.
Some things we know:
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US Growth is Slowing – Everyone knows this and has been talking about it ever since the tax cuts were put into action. The tax cuts gave a one-time big bump to economic growth and especially to US corporate earnings. Nobody thought those numbers weren’t going to level off a bit from there even if they do create an environment for better long-term growth.
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The Fed is Raising Rates – Again, no new news there. The Fed has been raising interest rates basically every other quarter for some time now. This is mostly because economic data in the US and abroad looks pretty good, so the Fed is allowing rates to GRADUALLY go to a market equilibrium level. There is no evidence that equity markets and economies can’t continue to go up during gradually rising rate environments. This is far from hyperinflation.
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US vs. China Trade Wresltemania – The supposed trade war has been under way all of 2018 but deciphering between rhetoric and the action is tough. One thing that does seem clear is that the impact of actual policy action is gradually baking into the numbers. Global economies are adjusting and revising at a glacier pace, not a tidal wave. The comparisons to Smoot-Hawley Tariffs of the late 1920s are off base because the US is picking fights 1v1 instead of 1vAll, and more importantly the rest of the world isn’t following suit.
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The Trump Administration is Erratic – Nothing new here, and economies and markets don’t care.
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US Debt & Deficit is Massive – No new news here. However, I do see this as a major potential risk at some point in time apart from the drag it will inevitably be on future generations. If everyone continues to hold a belief in the stability of the US and the ability and likelihood of the US to service (and maybe even pay off) the national debt then this is a non-issue. If widespread sentiment shifted from confidence to lack of confidence it would be potentially catastrophic. A risk, but certainly not a likely one in the relative near-term.
Capital markets are a function of supply and demand. Over the very short-term no one has any idea where things are going, as sentiment is 100% the driver. However, over the longer-term forward returns will reflect the quantity and healthiness of stock supply in relation to current sentiment (prices). Currently, broad economies and publicly traded corporations remain poised for solid growth. Publicly traded corporations (stocks) remain historically inexpensive relative to the earnings forecasts. Coming into the week the US stocks as judged by the S&P 500 are priced at 15.18x forward earnings, international developed markets are at 12.26x forward earnings.
Wyatt Swartz
November 2nd, 2018
The post can be viewed on Investopedia here.
Question Headline:
What are some strategies to minimize the impact of taxes for high earners in a high-tax state?
Question Body:
My wife and I make $900,000 combined. We live in California, and pay a lot of taxes. Most of our income comes from our salaries and bonuses. We’d like to minimize the impact of taxes. What might be some good choices for us to consider? Tax-exempt bonds won’t work, and tax-loss harvest has a marginal impact on our net income. Is real estate investing a good idea? What ideas should we consider?
Answer:
You and your wife pay a lot in taxes because you are high earners. This is a good problem to have, but it doesn’t make the problem any more painful. There are a number of things you should be doing to lessen the burden of taxes while also investing and accumulating wealth.
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Maxing Out Employer Retirement Plans: If you and your wife have an employer retirement plan such as a 401k through work, you each need to be maxing your contributions out.
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Maxing out Health Savings Account (HSA)/Flexible Spending Account (FSA)
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Maxing out Non-deductible IRA contributions, and possible converting into a Roth IRA annually: If you and your wife do not have pre-tax (traditional) IRAs you could each make maximum non-deductible contributions to an IRA and convert the account into a Roth every year. If you do have pre-tax IRAs consider conversations and still open another separate IRA to make non-deductible IRA contribuitons.