It’s been a year of renewed volatility in the markets, with some big swings just in the last few weeks. We are hearing the same few things put forward as the causes: fear of a slowdown in global growth, rising interest rates, a trade war with China, and a flattening yield curve.
Here is a brief look into those four factors:
A slowdown in global growth: Global growth has moderated, and this affects the stock prices of non-U.S. companies as well as the strength of U.S. exports. China, Japan, and Germany have been sluggish, and the prospect of a disorderly Brexit has also contributed to uncertainty.
Rising interest rates: Concern is up about rising interest rates, but that concern is beginning to moderate. The Fed will probably raise rates again at its meeting this week, as planned, but whether they will raise rates again in March, and especially after March, is unclear.
Trade war: Trade tensions are creating anxiety and may be hampering business investment and hiring. Tariffs have been in the news lately. A tariff is basically a tax on imported goods. The aim of a tariff is to increase the price of the incoming product so that the domestically produced option, or one from a “more fair” trade partner, is more appealing. President Trump has been imposing or threatening numerous tariffs, especially on Chinese goods, with the goal of getting U.S. companies to use more goods produced in the U.S. or from other trade partners.
What might be troublesome with this strategy is that many of the tariffs are being imposed not on finished products but on materials and parts, like steel and aluminum. When the costs of materials rise, a company’s choices are to reduce costs elsewhere (often labor), absorb the increased cost for lower profit (not good for stock prices), or pass the cost along to the end user (not good for consumers). Also, not surprisingly, countries whose goods we are imposing tariffs on retaliate by imposing tariffs on our exports. This tit for tat escalation often leads to a protracted “trade war.”
The yield curve: Typically, a long-term bond pays more interest than a short-term one. The difference between the interest rates is the “spread.” When the 10-year bond is higher, the spread slopes up. But when interest rates on the two-year are higher than a 10-year, the spread slopes down, and the curve is inverted.
Banks make money by borrowing short-term at low interest rates and lending long-term at higher rates; that is where their lending profits come from. When the spread is negative, banks have less incentive to issue loans, and that can negatively affect the economy because it reduces access to capital.
At this point, the two-year has not passed the 10-year, but in early December, the 3-year passed the 5-year.
Given all of this turmoil and risk, some analysts have been trimming profit forecasts for 2019.
What to do
Market declines are a part of investing, a part that we may have forgotten about a little bit over the last 9 to 10 years, which officially gave us the longest-running bull market in history back in August. The best course of action is to make a plan and stick with it, knowing that the market rewards long-term investors who don’t react to ups and downs by making emotionally driven decisions.
That said, there are a few things to be thinking about that might affect your portfolio.
6 smart year-end financial planning moves
1. Review your income or portfolio strategy
Will 2019 bring a change in your circumstances? Has your tolerance for taking risk changed in the up-and-down market we have been experiencing lately? If so, this may be the right time to review your approach.
2. Take note of changes in your life that may require action
Review your insurance and your account beneficiaries. Let’s be sure you are adequately covered, and let’s update beneficiaries if the need has arisen.
3. Remember the tax loss deadline
You have until Monday, December 31 to harvest any tax losses and/or offset any capital gains. Be aware of the distinctions between short- and long-term capital gains and any wash-sale rules (IRS Publication 550) that could disallow a capital loss.
We have already rebalanced client accounts to take advantage of tax losses where appropriate, in relation to individual circumstances and target portfolio allocation.
4. Don’t miss the RMD deadline
Required minimum distributions (RMDs) are minimum amounts a retirement plan account owner must withdraw annually, generally starting with the year you reach 70½.
The first payment can be delayed until April 1 of the year following the year in which you turn 70½. For all subsequent years, including the year in which you were paid the first RMD by April 1, you must take the RMD by December 31.
The RMD rules apply to traditional IRAs, SEP IRAs, Simple IRAs, and 401(k), profit-sharing, 403(b), 457(b) or other defined contribution plans. They do not apply to ROTH IRAs.
For accounts like this under our management, we monitor the RMD amounts that need to be withdrawn and will be in touch with you as required.
5. Contribute to a Roth IRA or traditional IRA
A Roth gives you the potential to earn tax-free growth (not just deferred tax-free growth) and allows for federal-tax-free withdrawals if certain requirements are met.
You may also be eligible to contribute to a traditional IRA, and contributions may be fully or partially deductible, depending on your circumstances. Total contributions across both accounts cannot exceed the prescribed limit.
You can contribute to either one in addition to your workplace retirement plan.
There are income limits, but if you qualify, you may contribute $5,500, or $6,500 if you are 50 or older. In 2019, limits will rise to $6,000 and $7000, respectively.
You can make 2018 IRA contributions until April 15, 2019.
6. Wrap up charitable giving
Whether cash, stocks or bonds, you can donate to your favorite charity by December 31, potentially offsetting income.
Given the increase in the standard deduction and limits on state income and property taxes, annual year-end gifts to your favorite charity may not exceed the higher thresholds. However, you may qualify for what’s called a “qualified charitable distribution (QCD)” if you are over 70½ years old.
A QCD is a distribution from an IRA or inherited IRA that is paid directly from the IRA to a qualified charity, is not taxed, and counts as part of your RMD. This becomes even more valuable with the recent tax reform if you will no longer see an advantage from itemizing; an RMD that goes first to you and is then donated to a charity may not provide any tax benefits.
You might also consider gifting in early January instead of December, and then again in December, to reap the tax advantages from itemizing in 2019. Your accountant should be able to help you see if this would work to your advantage.
We hope you have found this educational and helpful. Please reach out to us for a complimentary risk assessment and consultation.