Heads Up!

The probability of a bond market sell-off has risen during the past 3 months due to: (1) an increase in deficit spending due to the new tax law; (2) an increase in deficit as a result of the Bipartisan Budget Act; (3) the Fed’s decision to sell $200 to $400 Billion of Treasuries instead of buying Treasuries; and (4) Secretary Mnuchin’s statements on allowing a weaker dollar.

This is something we have anticipated for some time. Interest rates are beginning to move higher, from almost 10 years at historic lows. If interest rates were to rise sharply, the principal value of bonds and bond mutual funds already owned in your portfolio may decrease. Long-term maturities would decrease the most.  In preparation, our asset allocation models have substantially reduced the maturity of bonds in an attempt to manage the effect of a bond market selloff (if one were to occur). We are watching this event closely and will keep you posted on any further impact this may have on our overall fixed income strategy.

Heads Up!

The Bipartisan Budget Act of 2018 enacted this week changes the income tax law for…….2017!!!  How could Washington pass legislation in February to change last year’s tax law? What about the income tax forms and software already produced – how will they cope with these changes? What were they thinking? It doesn’t matter – we have to deal with the change.

First, the changes do not affect all income tax payers or returns. We have listed the areas which will be affected below. The affected taxpayers will have to wait for the software to be updated. IF YOU ARE NOT AFFECTED BY ANY OF THE CATEGORIES BELOW, WE CAN GO FORWARD AND COMPLETE YOUR TAX RETURN WITHOUT DELAY.

  1. Extends exclusion from gross income of discharge of Qualified Principal Residence indebtedness
  2. Extends mortgage insurance premiums treated as Qualified Residence Interest through 12/31/17
  3. Extends above the line deduction for Qualified Tuition and related expenses through 12/31/17
  4. Extends the credit for Non-business Energy Property
  5. Extends and modifies the credit for residential energy property
  6. Extends the credit for new qualified fuel cell motor vehicles
  7. Extends the credit for alternative fuel cell motor vehicles
  8. Extends the credit for energy-efficient new homes
  9. Extends the credit and adjusts the phase-out of the energy credit
  10. Modifications to hardship distributions and hardship withdrawals from cash or deferred arrangements

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.

Heads Up!

Thomas Lee, head of research at Fundstrat Global Advisors, notes that the S&P 500’s rise has gone parabolic. Its 6%-plus gain this month trounces the 2% average monthly advance from September to December 2017 and the 1.2% average monthly gain from January through August 2017. Rather than being worrisome, these accelerations into a new year have historically led to even more upside. Only eight years have played out like this since 1928, and just two—in 1929 and 1946—were followed by big drops in the market. The other six times—in 1936, 1951, 1989, 1997, 2006, and 2017—resulted in an average gain of 20% over the remainder of the year. If that scenario plays out, the S&P 500 could close the year near 3350, Lee says.

Source: Barrons Online

Heads Up!

Interest rates in the bond market are rising. For example, one of the most important bonds, the 10 Year maturity U.S. Government Bond, has seen its interest rate rise from 2.4% at the beginning of January to 2.66% on Friday. This is a big increase in the world of bonds. If Interest rates continue to rise at this pace, investors will see losses in long-term maturity and intermediate-term maturity bonds as well as similar bond mutual funds. Our models have already severely reduced the amount of long-term and intermediate-term bonds. And, rapidly rising interest rates will make the stock market susceptible to a correction. We will monitor interest rates closely.

Heads Up!

According to Charles Schwab research and strategy specialists: “Going into 2018, global earnings growth continues to be strong, while interest rates and inflation remain low and relative valuations of stocks to bonds reasonable–typical of the later stages of a market cycle.

We anticipate solid growth in 2018 and don’t see a recession on the horizon. However, with markets priced for ongoing moderate growth and low volatility, the risks we’re monitoring include the potential for higher inflation and more central bank tightening than expected.

  • Global economic growth lifting earnings is likely to be a key driver for both U.S. and international stocks in 2018.
  • Falling correlations across global stock markets bolster the case for diversification.
  • We expect inflation to rise due to a tight labor market and accelerating wage growth.
  • The Federal Reserve is poised to raise rates two to three times in 2018.

2018 could be the year 10-year Treasury bond yields exceed the three-year high of 2.6%.”

Heads Up!

We are optimistic about the long-term prospects of the U.S. economy. The new tax law will add $1.5 Trillion of stimulus. The upcoming Infrastructure bill will probably be passed in 2018 which will add upwards of $1 Trillion in stimulus. The economy should accelerate as a result of the stimulus. An accelerating economy adds to corporate profits and thus to stock prices over the next 5 to 10 years. All this stimulus is not good for bond investors because interest rates will probably rise during the upcoming 5 to 10 years. Higher interest rates means bonds that you already own will go down in value – and long-term maturity bond prices decline the most. We have already taken steps in portfolios to reduce maturities to attempt to protect portfolios against the risks of higher interest rates.

In the short-term, the stock market could experience a wave of selling in early 2018. Some stock investors have delayed taking profits until 2018 to take advantage of the new tax law rules. It is difficult to predict the length or severity of the selling pressure or even if it is noticeable. But, in the event the stock market drops, we would view this as a buying opportunity (keeping in mind our long-term favorable view).

Heads Up!

After a week of intense negotiations, the Tax Bill has passed by both the Senate and the House with expectations the President will sign ASAP. This final Tax Bill carries a January 1, 2018 effective date for most provisions. It will impact virtually every individual and business on a level not seen in over 30 years according to the tax specialists at CCH Wolters Kluwer.

For the vast majority of individual taxpayers, the general recommendation at this time is to accelerate payment of deductions into 2017 and delay the receipt of income into 2018 when possible. Thus, making charitable contributions NOW, paying state and local taxes NOW, and payment of medical bills NOW makes sense.

There are many complications in the hundreds and hundreds of pages of the Tax Bill. We believe the best approach is provide basic information to you today and field your questions as they arise. To get started, we provide a Tax Briefing from CCH Wolters Kluwer – click here for the Tax Briefing, or visit our website to find the link at valleynationalgroup.com/tax.

Our tax software will be updated as soon as possible according to our providers’ time lines. As soon as the software is updated we can provide detailed answers to your questions. Until that time, we can provide general guidance and advice. Feel free to contact us – we have the answers!

Heads Up!

House and Senate Republicans are getting closer to an agreement on a final version of the extraordinarily important tax bill and could reach such a deal this week. We could see final version of the bill at the end of the week with a possible vote in both the Senate and the House next week.

No matter when we see the final version, there will be very little time to figure out how it affects you, and to take advantage of year-end tax planning opportunities. For example, some experts predict 90% of taxpayers will not itemize after 2017 if the Bill becomes law. This means 2017 could be the last year 90% of taxpayers can deduct charitable contributions (those affected taxpayers should consider prepaying 2018 and 2019 charitable contributions before 12/31/17). We will not know for sure which of these strategies are right for you until we see the final version of the bill. So, we will stay alert.

The Weekly Commentary will continue to report on this time critical topic as it is finalized.

Heads Up!

The income tax Bill made progress through the Senate this week to make substantial changes in the formula to calculate your federal income taxes. Many of these changes will have a negative impact on your income taxes. The Bill is not guaranteed to pass, but, the probability is high that it will become law.

The next step is for the joint conference between the House and the Senate to hash-out their differences.  These differences are significant, and we cannot forecast how they will be reconciled.

We had an opportunity to pose a direct question to Congressman Charlie Dent as to his estimate of when we will see the final version of the bill. He could not make an estimate – there are too many variables.

No matter when we see the final version, there will be very little time to figure out how it affects you, and to take advantage of year-end tax planning opportunities. For example, some experts predict 90% of taxpayers will not itemize after 2017 if the Bill becomes law. This means 2017 could be the last year 90% of taxpayers can deduct charitable contributions (those affected taxpayers should consider prepaying 2018 and 2019 charitable contributions before 12/31/17). We will not know for sure which of these strategies are right for you until we see the final version of the bill. So, we will stay alert.

The Weekly Commentary will continue to report on this time critical topic as it is finalized.