Heads Up!

If the stock market decline starts to snowball, you’ll hear about it from the news media—over and over. But we will pass along a thought based upon experience: Don’t become your portfolio’s worst enemy by allowing yourself to get caught up in the negative hysteria. Instead, remind yourself that the market has experienced 20 drops of 10% to 20% since World War II (plus 13 bear-market tumbles of at least 20%). Even so, the market has bounced back each time. Let’s go over some terms you will encounter in the news media:

“Correction” is an investment term being used loosely and often incorrectly by the media. A correction is a series of stock market declines over several days or weeks leading to a 10% to 20% decline from a stock market high. That would be a drop of approximately 2,700 points or more in the Dow Jones Industrial Average (a commonly used index to describe the stock market as a whole). And, most importantly, the stock market typically recovers in a relatively short time of 3 to 12 months.

A “bear market” is a decline of more than 20% from a market high over several days or weeks. A drop of 5,400 points or more in the Dow Jones Industrial average would be called a bear market. Bear market recoveries typically will be longer than corrections.

Market movements described above could happen fast. Trying to decide if a weakness in the stock market is turning into a correction or a bear market is known as timing the market. It’s nearly impossible to do. Just when you’re sure the 5 percent drop will turn into a 10 percent correction, the market rebounds and hits new highs.

Instead of using market timing, our strategy earmarks money you intend to withdraw during the upcoming years: 1, 2, 3, 4 or even 5 years. This money is assigned to more stable bonds and alternative strategy mutual funds. Secondly, we attempt to broadly diversify your portfolio across asset classes and sectors. That means holding a balanced mix of stocks, bonds, and alternative strategies. The stocks will attempt to profit from market upswings. The bonds and alternative strategies attempt to protect part of your portfolio from market drops.

The specific mix of stocks, bonds, and alternative strategies is called your asset allocation. It depends on your personal financial goals. If investors don’t need the money for years, then many investors will want to have a higher mix of stocks. Please contact me if you have questions about your portfolio’s asset allocation or whether enough money is earmarked for future withdrawals.

Did You Know…?

Starting in 2018, the “kiddie tax” is changed substantially. First, a child’s kiddie tax is no longer affected by the tax situation of his or her parent or the unearned income of any siblings – this makes tax return preparation simplified. Second, the taxable income of the child who must file a tax return is taxed using the Trusts and Estates rates – which could result in a higher tax on child’s unearned income like interest and dividends.

Update – Washington

The U.S. stock market has jumped since the November 8th election. We identified 4 initiatives on which the U.S. stock market is speculating to be successfully accomplished early in the Trump administration. What will happen next? It is still to be determined!

The 4 initiatives will have a tremendous influence on the “Heat Map” which forms the basis of our forward looking view of the U.S. economy. We consider the success or failure of the 4 initiatives to be “leading” indicators for the Heat Map.

Below are the 4 Trump administration initiatives upon which the stock market is speculating and what progress, if any, has been made:


  2. Infrastructure spending of up to $1 Trillion over the upcoming 7 to 10 years. PROGRESS MADE ON TAX REFORM POINTS TOWARD PROGRESS IN THIS AREA, TOO. CUMULATIVE PROGRESS TOWARD GOAL: 35%


  4. Roll back of government regulations and Executive Orders considered to be difficult for businesses. ROLL BACKS HAVE CONTINUED. CUMULATIVE PROGRESS TOWARD GOAL: 55%

As the action happens in Washington on these 4 initiatives, don’t be surprised if the political “tug and pull” contest results in a wilder than normal stock and bond market.

We will continue to report in future issues on the progress on each initiative.

The “Heat Map”

Most of the time, the U.S. stock market looks to 3 factors (call them the “pillars” which support the stock market) to support its upward trend – let’s grade each of the pillars.

CONSUMER SPENDING: This grade is A+ (extremely favorable). Consumer spending is expected to strengthen as individuals with lower tax rates spend their windfalls.

THE FED AND ITS POLICIES: This factor is rated C- (Below average).

BUSINESS PROFITABILITY: This factor’s grade is A- (very favorable). Corporations are in the midst of releasing 4th quarter earnings. Earnings season has been stellar, with S&P profits growing at a fast pace.

OTHER CONCERNS:  The “Heat Map” is indicating the U.S. stock market is in OK shape ASSUMING no international crisis. On a scale of 1 to 10 with 10 being the highest level of crisis, we rate these international risks collectively as a 5. These risks deserve our ongoing attention.

The Numbers

Last week, U.S. Stocks and Foreign Stocks and Bonds all decreased.  During the last 12 months, STOCKS outperformed BONDS.

Returns through 2-2-2018







Bonds- BarCap Aggregate Index







US Stocks-Standard & Poor’s 500







Foreign Stocks- MS EAFE Developed Countries







Source: Morningstar Workstation. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. Three, five and ten year returns are annualized excluding dividends.

“Your Financial Choices”

The show airs on WDIY Wednesday evenings, from 6-7 p.m. The show is hosted by Valley National’s Laurie Siebert CPA, CFP®, AEP®. This week Laurie and guest host Attorney James Ruggiero will discuss: “IRA Trust”

Laurie and Jim will take your calls on this or other topics.  This show will be broadcast at the regular time WDIY is broadcast on FM 88.1 for reception in most of the Lehigh Valley; and, it is broadcast on FM 93.9 in the Easton and Phillipsburg area– or listen to it online from anywhere on the internet.  For more information, including how to listen to the show online, check the show’s website www.yourfinancialchoices.com and visit www.wdiy.org. 

The Markets This Week

Now that was a bad week—and don’t be surprised if it gets worse before it gets better.  The Dow Jones Industrial Average tumbled 1,095.75 points, or 4.1%, to 25,520.96 last week, its largest percentage decline in more than two years. The Standard & Poor’s 500 index dropped 3.9%, to 2762.13, while the Nasdaq Composite fell 3.5%, to 7240.95. Let’s just accept it—we’re in the midst of a correction, and one that was quite overdue. Don’t be surprised if the market’s major indexes decline by double digits from peaks hit just one week ago, as fear of missing out gives way to fear of staying in.

Ultimately, though, we’re betting that the pullback ends up being one to be bought, not sold—and it all goes back to economic data. For now, there’s no sign of a recession—the one thing almost guaranteed to cause a bear market—says Jason Pride, director of investment strategy at Glenmede. He notes that companies have been predicting solid earnings and sales for the rest of the year, something that should eventually support the market, too.

The selloff started last Monday, as bond yields began to rise, and kicked into high gear when Amazon.com (ticker: AMZN), JPMorgan Chase (JPM), and Berkshire Hathaway (BRK.A) announced plans to create a health-care company devoted to lowering costs. That news hit stocks across the health-care sector.

Then, on Friday, a better-than-expected payrolls report—one that contained signs of wage inflation—led to a 665.75-point decline in the Dow, as the 10-year Treasury yield rose to 2.852%, its highest since Jan. 22, 2014.

Based on recent trends, the market was desperately in need of a rest. The S&P 500 had gained 7.5% in just 18 trading days in 2018, putting it on pace to gain 158% this year. The index had gone 99 days without a drop of 0.6% or more before falling 0.7% on Tuesday. “This kind of thing was long overdue,” says Michael Darda, chief economist at MKM Partners.

Even great data aren’t enough to sustain stocks when the good news is already baked into prices. The Citigroup U.S. Economic Surprise Index—a metric designed to measure the extent to which economic data have been beating or missing expectations—had begun declining a few weeks ago from its recent peak. At the same time, momentum indicators such as the National Federation of Independent Business’ survey of small-business optimism have gotten so positive that they can’t get much better. Darda says. “It’s a bit foolhardy to jump on this very modest pullback as an immediate buying opportunity.”

Even after this past week’s decline, the S&P 500 has gone 404 days without a 5% pullback from its all-time high, says Chris Verrone, technical strategist at Strategas Research Partners. Such a drop would only put the index near its 50-day moving average at 2715.15. A 12% drop from the high would put the S&P 500 near its 200-day moving average, at 2532.41. “Put your thumb between those, and you get to where this shakes out,” says Veronne, who expects the pullback to be “unpleasant.”

After Friday’s drop, the S&P 500 still trades at 17.7 times forward earnings. A further drop “would reset the base for equities,” says Glenmede’s Pride. “A pullback like this is healthy.”

Even if it doesn’t feel like it right now.

(Source: Barrons Online)