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WSWA Monthly Market Commentary

WSWA Monthly Market Commentary for January 2019

Key Takeaways

  • All major asset classes were up strongly in January, one of the best yearly starts in recent memory, despite the month-long partial government shutdown in the U.S. and continuing uncertainty internationally about the economic impact of trade tariffs and the U.K. ‘Brexit’ negotiations
  • Global real estate took the lead with a monthly return of 9.7%, followed by commodities and U.S. growth stocks at 9% each. The S&P 500 posted an 8% return for the month
  • Recession fears in the U.S. receded as job growth was strong despite the unemployment rate edging up to 4%;Corporate profits continued to grow in the 4th quarter of 2018, though will slow in 2019
  • Fears of a recession due to rising interest rates diminished with Federal Reserve officials holding short-term rates steady at their January meeting and commenting on being ‘patient’ with future rate increases

What a way to start the year!

All major asset classes were up strongly in January, one of the best yearly starts in recent memory, despite the month-long partial government shutdown in the U.S., continuing uncertainty about trade tariffs’ impact on international growth, and the failure of U.K. ‘Brexit’ negotiations.

Global real estate took the lead among major asset classes with a monthly return of 9.70%, followed by commodities and U.S. growth stocks at 8.99% each. The S&P 500 gained 8.01% for the month, with emerging markets equities up 8.77% and developed international equities up 5.72%. U.S. bonds also had a strong month, rising 1.06%.

Morningstar Direct

Source: Morningstar Direct

Among commodities, crude oil prices led the way with a strong rebound from the December 24th low of $42.53, ending the month at $53.79. The S&P GSCI Agriculture index, the second largest component of the S&P GSCI index, stabilized after declining steadily in recent years[1].

West Texas Crude Oil Price
West Texas Crude Oil Price

Source: www.macrotrends.net

GSCI Agriculture Index

GSCI Agriculture Index

International equity markets are well priced for future growth.

Emerging Markets equities (EEM) led the international equity markets in January, followed by the MSCI All Country World Index (ACWI), with Europe, Australasia, and Far East (EAFE) markets not far behind.


[1]https://us.spindices.com/indices/

European markets posted solid returns despite Prime Minister Theresa May’s Brexit plan being voted down by Parliament. After the Brexit agreement was rejected, Prime Minister May survived a ‘no confidence’ vote and promised renewed efforts to negotiate an acceptable exit plan with European Union leadership.

According to Harris Associates, manager of the Oakmark International fund, international markets have been the victim of “overly emotional equity markets” in recent months[2] and U.K. businesses are generating the highest percent free cash flow in the world (6%[3]). Prominent companies such as Daimler, Lloyds, and Tencent are trading at significant discounts to intrinsic value, and the Oakmark International portfolio has a Price/Cash Flow ratio of 4.8x compared to 7.5x for the world, indicating the shares held in the fund are priced significantly lower than the world markets.

Oakmark International, MSCI ACWI, EAFE, and Emerging Markets Equity Returns

Oakmark International

Source: https://stockcharts.com/h-perf/ui

Worries about a near-term recession in the U.S. receded as corporate earnings continued to grow in the 4th quarter of 2018 and employers added more new jobs than expected.

Unemployment in the U.S. remained near historic lows, edging up to 4%[4] due to the temporary addition of government workers furloughed during the partial government shutdown. The labor participation rate continued to increase slowly and job creation exceeded expectations in January with 304,000 jobs added[5].

Fears of rising interest rates derailing the U.S. economy diminished with Federal Reserve officials holding short-term rates steady at their January meeting and commenting on being ‘patient’ with future interest rate increases[6].


[2]https://www.im.natixis.com/us/markets/finding-value-in-overly-emotional-equity-markets
[3] As presented Natixis National Sales Meeting January 10, 2019 Source: Corporate Reports, Empirical Research Partners Analysis as of November 30, 2018. Excluding financials and utilities; data smoothed on a trailing six-month basis.
[4]https://www.wsj.com/articles/global-stocks-edge-up-after-a-january-surge-in-the-u-s
[5]https://www.bls.gov/news.release/empsit.nr0.htm
[6]https://www.federalreserve.gov/monetarypolicy/fomcpresconf20190130.htm

U.S. Unemployment Rate, Participation Rate, and 10-yr. Treasury Yield

Corporate earnings for the 4th quarter were generally near the 5-year average with 10 of the 11 S&P sectors reporting year-over-year earnings growth.

Energy, Industrials, and Communication Services led the way with double-digit growth rates in the 4th quarter, though earnings estimates for 2019 are trending lower across most sectors[7].

4th Quarter 2018 Actual Earnings Growth vs. 12/31/2018 Projections

2019 Forecast Earnings Growth vs. 12/31/2018 Projections


[7]https://insight.factset.com/earnings-season-update-february-1-2019
The investment team at Warren Street Wealth Advisors held the line through a difficult 4th quarter of 2018, reaping the reward with a strong start to 2019.

Despite some negative headlines in December, the U.S. economy does not seem poised for a recession and we will remain fully invested across market sectors until evidence to the contrary becomes clear. With the Federal Reserve cautious on raising interest rates, job growth and wages increasing, and trade talks moving forward, we expect market volatility in 2019 to settle closer to historic norms, though not without some bumps along the way.

Despite recent weakness in overseas markets relative to the U.S., we are strong in our conviction that international markets are poised to rebound as stock prices stabilize at attractive levels, particularly in Europe and Emerging Markets, and negative headlines diminish. While economic and fundamental data appear mixed globally, we continue to be broadly diversified as international markets work through the next phase of political and economic developments.

As always, if you have any concerns or questions, the investment and financial planning teams at Warren Street Wealth Advisors want to hear from you! Call, write, or drop by our Tustin or El Segundo offices any time. We are here to help.

 

Marcia Clark, CFA, MBA
Senior Research Analyst
Warren Street Wealth Advisors

Warren Street Wealth Advisors, a Registered Investment Advisor. The information contained herein does not involve the rendering of personalized investment advice but is limited to the dissemination of general information. A professional advisor should be consulted before implementing any of the strategies or options presented. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Past performance may not be indicative of future results. All investment strategies have the potential for profit or loss. 

 

 

 

Market Commentary – December 2018

Market Commentary – December 2018

Key Takeaways

  • Though the U.S. stock market closed the year with its first annual loss since 2008 (S&P 500 -4.38%)(1), investors retained the vast majority of gains earned in 2017 (21.83%.) International stocks as measured by the MSCI EAFE(2) index were down -8.96%, giving up just over half of 2017’s gains (16.84%), and the Barclays Aggregate U.S. bond index ended the year flat at +0.01% after a very strong November and December.
  • Though market turbulence in the 4th quarter felt extreme, volatility over the year didn’t approach the peaks seen after the Dot Com bubble burst in 2001-2002 or during the financial crisis of 2008-2009.
  • Global financial markets tend to exhibit a ‘sector rotation’ pattern of recent losers becoming the next period’s winners. If the pattern holds true, international stocks are poised for a strong year in 2019.
  • 2018’s poor performance followed an unusually steady 10-year period of growth. Investors bold enough to put their money at risk after the market plummeted in 2008 were handsomely rewarded. Investors willing to do the same in 2019 may be rewarded once again.

 

 

 

It wasn’t pretty, but the year is finally over and we already see indications of better times ahead in 2019.

Though the U.S. stock market closed the year with its first annual loss since 2008 (-4.38%) , investors retained the vast majority of gains earned in 2017 (21.83%) and the previous 9 years of recovery post the 2008 financial crisis. Though European stock markets fell behind the U.S. last summer and never caught up, these markets also ended 2018 well ahead of where they started in 2017. International stocks as measured by the MSCI EAFE index were down -8.96% in 2018 compared to +16.84% in 2017, and U.S. bonds ended the year flat after recovering strongly late in the 4th quarter.

Source: https://stockcharts.com/h-perf/ui

Market sectors which lagged in the strong quarters, especially bonds (AGG) and gold (GLD), provided welcome relief during the 4th quarter downturn. International stock markets avoided some of the December tumble and rebounded into January 2019, easing some of the pain from lagging the robust U.S. market earlier in the year.

The return of stock market volatility in the 4th quarter surprised investors, especially compared to an unusually stable 2017.

Volatility in 2018 was more than double that of 2017, though did not approach the peak volatility seen during the financial crisis of 2008-2009 and post the Dot Com bubble/credit crisis in 2001-2002. The pattern seems to be that periods of unusual stability are often followed by a spike in volatility. We know that the past isn’t always reflective of the future, but as Mark Twain is reported to have said: “History doesn’t repeat itself, but it often rhymes.”

Just as periods of stability are often followed by turbulence, extreme market moves are commonly followed by reversion toward the mean (average).

This tendency is illustrated by the two charts below. The first chart shows the drop in the SPY and EFA ETFs in the period between July-November 2011. Notice the jagged ups and downs just after the drop, followed by a fairly steady up-trend through 2013, though not without some negative surprises along the way.

We see a similar pattern in the 4th quarter of 2015 before the start of the bull market of 2016-2017.

And while the downturns are painful, they tend to be relatively brief compared to the recovery period.

 

  • Dot Com bust lasted from early 2000 to early 2003, followed by 5 years of positive returns
  • Financial crisis crash lasted from late 2007 to early 2009, followed by 9 years of mostly positive returns
  • Less dramatic declines in 2011 and 2015 were followed by 3 years of positive returns

Asset class returns tend to follow a ‘sector rotation’ pattern with prior period winners commonly falling in the rankings in subsequent periods, and prior period losers tending to rise in the rankings.

Source: Morningstar Direct

Though historical context is helpful, we need to face forward when making investment decisions. Following the crowd and expecting history to repeat itself without considering the underlying drivers of returns isn’t likely to be a successful strategy in the coming year.

Though market conditions vary from year to year, the investment team at Warren Street Wealth Advisors believes international stocks in particular have been hit by political and economic ‘headline risk’ more than actual financial distress. Many European companies such as BNP Paribas (one of the largest banks in Europe), Daimler (maker of Mercedes Benz), and Lloyds Banking Group (a leading U.K. financial service firm) are poised for a strong rebound in 2019. In emerging countries, stalwart firms such as Samsung and Taiwan Semiconductor remain solid global players, with disruptors such as Alibaba and Tencent making their presence felt beyond their home base in AsiaPacific.

Another important thing to remember is that the stock market is not the real economy. Fundamental strength in corporate balance sheets should keep the global economy, and the markets, positive in 2019.

GDP reflects the value of goods and services produced in a country – ultimately, GDP reflects corporate earnings. Robust U.S. GDP growth early in 2017 led to tight labor markets and rising inflation, supporting the Federal Reserve’s plan to ‘normalize’ short-term interest rates(3). Though GDP growth is expected to slow in 2019, the Federal Reserve forecasts a positive growth rate of approximately 2%. Not stellar, but certainly not in recession territory. And not so strong as to require the Fed to increase their pace of raising short-term interest rates, since modest GDP growth is unlikely to spark inflation. The International Monetary Fund is projecting similar modest positive growth for developed nations, and near 5% growth for emerging economies.

 

 

Growth Projection for U.S. GDP

Source: Factset

 

 

Growth Projection for the World

Source: International Monetary Fund

 

Economic fundamentals should ultimately find their way into stock prices, but the markets often become overly optimistic or pessimistic along the way.

As we mentioned in our November commentary, S&P 500 corporate profits were very strong in the 4th quarter of 2018. And for the calendar year, growth in corporate profits was 20.3% due in part to the reduced corporate tax rate(4). This is the highest growth rate we’ve seen since 2010 when profits jumped nearly 40% coming out of the Great Recession of 2008-2009. All 11 sectors of the S&P 500 reported positive growth for the year, with 9 of the 11 sectors reporting double-digit growth.

 

 

You might be surprised to see that Energy companies reported the highest calendar year earnings growth of all the 11 sectors. Despite the 4th quarter fall in oil prices, oil has actually increased when compared against the prior year-end. Materials and Financials also posted strong earnings growth in 2018, a fact not reflected in their December closing stock prices.

As shown in the chart above from Fidelity Research(5), the biggest losers in the S&P 500 were not Technology companies which were grabbing most of the news headlines, but rather Industrials, Financials, Materials, and Energy firms. Industrials and materials were hard hit by concerns over trade tariffs and a slowing, though still strong, pace of new home building(6). Energy equipment and services firms suffered from falling oil prices hurting profit margins. Financial firms also struggled as increasing short-term funding rates squeezed investors’ profit expectations.

Conclusion: Though we can’t predict the future, periods of extreme market movements are often followed by reversion toward the mean. The underlying economic data remains solid and sooner or later investors will incorporate this reality into global stock and bond prices. In the meantime, the investment team at Warren Street Wealth Advisors is watching the data, rebalancing into weakness, and looking forward to a smoother ride in 2019.

 

 

 


Marcia Clark, CFA, MBA
Senior Research Analyst
Warren Street Wealth Advisors

Warren Street Wealth Advisors, a Registered Investment Advisor. The information contained herein does not involve the rendering of personalized investment advice but is limited to the dissemination of general information. A professional advisor should be consulted before implementing any of the strategies or options presented. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Past performance may not be indicative of future results. All investment strategies have the potential for profit or loss. 

 

 

 

 

 

Sources

  1. All returns retrieved from Morningstar Direct
  2. EAFE = Europe, Australasia, Far East
  3. https://insight.factset.com/2017-look-back-2018-predictions-0
  4. https://insight.factset.com/sp-500-2018-earnings-preview-highest-earnings-growth-in-eight-years
  5. https://eresearch.fidelity.com/eresearch/markets_sectors/sectors/sectors_in_market.jhtml
  6. https://tradingeconomics.com/united-states/housing-starts

 

Word on the Street – A Conversation with Marcia Clark, CFA, MBA

Word on the Street – A Conversation with Marcia Clark, CFA, MBA

A sit down with our Senior Research Analyst to discuss the US market, international markets, and how we are approaching both for investors.

For this Word on the Street, I sat down with Marcia Clark to discuss a recent report that stated leading economic indicators in the US are positive. Marcia and I discussed what this report means for investors and how it relates to our stance at Warren Street.

Enjoy.

Yesterday (October 18th), Blake shared a report that talked about long-term economic indicators looking good in the US. However, we have heard a lot from Blake on investing overseas in international and emerging markets. If the US looks so good, then why are we doing this?

M.C.: Even though indicators [in the US] are strong right now, we are still in an established economy, and it’s not possible for a huge economy like ours to grow as quickly as a smaller and more dynamic one. Smaller economies tend to grow faster than developed economies because they have to build out infrastructure to support new businesses. This infrastructure improves productivity which in turn drives economic growth. Since 2000, emerging economies have grown about twice as fast as developed economies.

How long will this period of US strength continue, and how long will we have to wait for emerging markets to have another boom?

M.C.: The US is currently experiencing one of the longest expansions in our history. While we’re grateful for the stable growth, we know this can’t go on forever. It’s extremely difficult to know when the end is coming or how bad it’s going to be, so what do we do? We hope for the best but prepare for the worst. To make an analogy – most of us don’t expect a house fire, but we still carry insurance. In the investment business, it’s wise to look over all markets to find the best opportunities and spread out the economic risk. 

When we spoke about the report that Blake shared, you said, “when the US gets sick, the world sneezes.” If the US is not sick at the moment, why does the rest of the world seem to be dragging this year?

M.C.: When we say the US isn’t sick, how are we measuring that? Most people look at the S&P 500 and say the US is doing great compared to global averages, but if we take out the huge technology companies such as Google, Amazon, and Netflix, the US market isn’t that much further ahead. Many other countries experienced a “Great Recession” fallout in 2008-2009 far worse than the US, leaving them behind the US on the economic recovery timeline, particularly in regards to unemployment. Add to that the continuing struggle of European countries to integrate thousands of refugees from wars and conflicts in the Middle East and you can see why Europe and its neighbors are having a tougher time than the US.

Some people say that emerging markets are not a great value right now. If that is true, then why are we continuing to add to our position with them?

M.C.  The US is largely insulated from many global challenges, but at the same time, the US is so well developed that there aren’t a ton of market-changing innovation opportunities here either. So, we look overseas. The first thing to understand about emerging market economies is that they are not a homogenous group. For example, you wouldn’t compare emerging economies in peripheral Europe to those in Africa or South America. When we look to add exposure in a diverse sector like EM, we investigate active asset managers with a track record of identifying the best risk-reward trade-off in that broad landscape.

So what you are saying is, when we talk about adding emerging market exposure, we are not getting all of the emerging market economies. What does Warren Street look at for their emerging market exposure?

M.C.: We aren’t investing directly in these countries, so we don’t have a country-by-country economic forecast. However, the fund managers we use do this full-time. Some even send members of their investment teams to these emerging countries to understand the political landscape, the sentiment of the population, and the vibrancy of the economy. Our job is to vet these managers thoroughly, check their track record across different economic cycles, and review their current country allocation against our thoughts on world conditions. From there, we then choose the best manager for the job.

Taking a step back to a previous question, what happens when the US does finally get sick? What happens to world economies in that landscape? Similar to your quote, I have heard “when the US gets sick, the world gets the flu.”

M.C.: It is true that the US impact on other countries is stronger than their impact on us, but the US economy is fairly insulated because we buy and sell so much within our own borders. In times when the US is struggling, other nations step up their trading with each other and muddle through until the US economy bounces back. As we talked about earlier, there are plenty of differences between the economic environment in the US and elsewhere – developed countries have done better than us plenty of times in the past. Remember that less developed countries are even less correlated with the US than developed nations. So when the US is sick, oftentimes the best place to look is smaller nations that are building their own economies in their own regions.

Taking a look back at the US economy, if the outlook is good, then why don’t we add more to the US stock market?

M.C.: Our job at Warren Street Wealth is to keep you safe and help you grow your assets. Even the most successful investors don’t have a crystal ball. They don’t get it right every time, so diversification is the only “free lunch” – we would be foolish not to take advantage of it.

The US is only about 40% of the world market. If we only invested in the US, we are closing ourselves off to an additional 60% of opportunities available to us. That just seems silly. Good stuff is happening all around the world, so let’s reach out and find it.

What do you say to the investor that only believes in the US stock market?

M.C.: For investors with a very long time horizon without the need to draw on their funds unexpectedly, the US stock market might be your only investment. But most of us don’t have the luxury of leaving our money in the market for 40 years and weathering all the storms that come our way. As fiduciaries of your assets, we have an obligation to protect your assets and help you achieve your long-term financial goals. We may not capture 100% of the upside, but we are confident that we are going to keep you from experiencing 100% of the bad times.

Anything else you would like to share?

M.C.: The world is a very big place, and sometimes we don’t know what exciting things are happening on the opposite side of the planet. Being open-minded about where you send your capital could unlock amazing things in other places.

Lastly, there is a fantastic set of information on the global economy that can be found at the IMF’s website: Real GDP by Country


Cary Warren Facer
Founding Partner
Warren Street Wealth Advisors

Warren Street Wealth Advisors, a Registered Investment Advisor. The information contained herein does not involve the rendering of personalized investment advice but is limited to the dissemination of general information. A professional advisor should be consulted before implementing any of the strategies or options presented. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Past performance may not be indicative of future results. All investment strategies have the potential for profit or loss. 

 

Why Having a Financial Professional Matters

Why Having a Financial Professional Matters

A good financial professional provides important guidance and insight through the years.

What kind of role can a financial professional play for an investor? The answer: a very important one. While the value of such a relationship is hard to quantify, the intangible benefits may be significant and long lasting.

A good financial professional can help an investor interpret today’s financial climate, determine objectives, and assess progress toward those goals. Alone, an investor may be challenged to do any of this effectively. Moreover, an uncounseled investor may make self-defeating decisions.

Some investors never turn to a financial professional. They concede that there might be some value in maintaining such a relationship, but they ultimately decide to go it alone. That may be a mistake.

No investor is infallible. Investors can feel that way during a great market year, when every decision seems to work out well. In long bull markets, investors risk becoming overconfident. The big-picture narrative of Wall Street can be forgotten, along with the reality that the market has occasional bad years.

This is when irrational exuberance creeps in. A sudden market shock may lead an investor into other irrational behaviors. Perhaps stocks sink rapidly, and an investor realizes (too late) that a portfolio is overweighted in equities. Or, perhaps an investor panics during a correction, selling low only to buy high after the market rebounds.

Often, investors grow impatient and try to time the market. Poor market timing may explain this divergence: according to investment research firm DALBAR, the S&P 500 returned an average of 8.91% annually across the 20 years ending on December 31, 2015, while the average equity investor’s portfolio returned just 4.67% per year.(1)       

The other risk is that of financial nearsightedness. When an investor flies solo, chasing yield and “making money” too often become the top pursuits. The thinking is short term.

A good financial professional helps a committed investor and retirement saver stay on track. He or she helps the investor set a course for the long term, based on a defined investment policy and target asset allocations with an eye on major financial goals. The client’s best interest is paramount.

As the investor-professional relationship unfolds, the investor begins to notice the intangible ways the professional provides value. Insight and knowledge inform investment selection and portfolio construction. The professional explains the subtleties of investment classes and how potential risk often relates to potential reward. Perhaps most importantly, the professional helps the client get past the “noise” and “buzz” of the financial markets to see what is really important to his or her financial life.

This is the value a financial professional brings to the table. You cannot quantify it in dollar terms, but you can certainly appreciate it over time.

 

 


Blake StreetBlake Street, CFA, CFP®
Chief Investment Officer
Founding Partner
Warren Street Wealth Advisors

Blake Street is an Investment Advisor Representative of Warren Street Wealth Advisors, a Registered Investment Advisor. Information contained herein does not involve the rendering of personalized investment advice, but is limited to the dissemination of general information. A professional advisor should be consulted before implementing any of the strategies or options presented.

This material was prepared by Marketing Pro, Inc. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Past performance may not be indicative of future results. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals may materially alter the performance, strategy, and results of your portfolio.Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results.Economic factors, market conditions, and investment strategies will affect the performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark. Nothing in this commentary is a solicitation to buy, or sell, any securities, or an attempt to furnish personal investment advice. We may hold securities referenced in the blog and due to the static nature of content, those securities held may change over time and trades may be contrary to outdated posts.

Citations.
1 – zacksim.com/heres-investors-underperform-market/ [5/22/17]

Tax Deductions Gone in 2018

Tax Deductions Gone in 2018
What standbys did tax reforms eliminate?
Provided by Aileen Danley, CFP®, MBA

Are the days of itemizing over? Not quite, but now that H.R. 1 (popularly called the Tax Cuts & Jobs Act) is the law, all kinds of itemized federal tax deductions have vanished.

Early drafts of H.R. 1 left only two itemized deductions in the Internal Revenue Code – one for home loan interest, the other for charitable donations. The final bill left many more standing, but plenty of others fell. Here is a partial list of the itemized deductions unavailable this year.(1)

Moving expenses. Last year, you could deduct such costs if you made a job-related move that had you resettling at least 50 miles away from your previous address. You could even take this deduction without itemizing. Now, only military servicemembers can take this deduction.(2,3)

Casualty, disaster, and theft losses. This deduction is not totally gone. If you incur such losses during 2018-25 due to a federally declared disaster (that is, the President declares your area a disaster area), you are still eligible to take a federal tax deduction for these personal losses.(4)

Home office use. Employee business expense deductions (such as this one) are now gone from the Internal Revenue Code, which is unfortunate for people who work remotely.(1)

Unreimbursed travel and mileage. Previously, unreimbursed travel expenses related to work started becoming deductible for a taxpayer once his or her total miscellaneous deductions surpassed 2% of adjusted gross income. No more.(1)

Miscellaneous unreimbursed job expenses. Continuing education costs, union dues, medical tests required by an employer, regulatory and license fees for which an employee was not compensated, out-of-pocket expenses paid by workers for tools, supplies, and uniforms – these were all expenses that were deductible once a taxpayer’s total miscellaneous deductions exceeded 2% of his or her AGI. That does not apply now.(2,5)

Job search expenses. Unreimbursed expenses related to a job hunt are no longer deductible. That includes payments for classes and courses taken to improve career or professional knowledge or skills as well as and job search services (such as the premium service offered by LinkedIn).(5)

Subsidized employee parking and transit passes. Last year, there was a corporate deduction for this; a worker could receive as much as $255 monthly from an employer to help pay for bus or rail passes or parking fees linked to a commute. The subsidy did not count as employee income. The absence of the employer deduction could mean such subsidies will be much harder to come by for workers this year.(2)

Home equity loan interest. While the ceiling on the home mortgage interest deduction fell to $750,000 for mortgages taken out starting December 15, 2017, the deduction for home equity loan interest disappears entirely this year with no such grandfathering.(2)

Investment fees and expenses. This deduction has been repealed, and it should also be noted that the cost of investment newsletters and safe deposit boxes fees are no longer deductible.  In some situations, investors may want to deduct these fees from their account balances (i.e., pre-tax savings) rather than pay them by check (after-tax dollars).(5)

Tax preparation fees. Individual taxpayers are now unable to deduct payments to CPAs, tax prep firms, and tax software companies.(3)

Legal fees. This is something of a gray area: while it appears hourly legal fees and contingent, attorney fees may no longer be deductible this year, other legal expenses may be deductible.(5)

Convenience fees for debit and credit card use for federal tax payments. Have you ever paid your federal taxes this way? If you do this in 2018, such fees cannot be deducted.(2)

An important note for business owners. All the vanished deductions for unreimbursed employee expenses noted above pertain to Schedule A. If you are a sole proprietor and routinely file a Schedule C with your 1040 form, your business-linked deductions are unaltered by the new tax reforms.(1)

An important note for teachers. One miscellaneous unreimbursed job expense deduction was retained amid the wave of reforms: classroom teachers who pay for school supplies out-of-pocket can still claim a deduction of up to $250 for such costs.(6)

The tax reforms aimed to simplify the federal tax code, among other objectives. In addition to eliminating many itemized deductions, the personal exemption is gone. The individual standard deduction, though, has climbed to $12,000. (It is $18,000 for heads of household and $24,000 for married couples filing jointly.) For some taxpayers used to filling out Schedule A, the larger standard deduction may make up for the absence of most itemized deductions.(1)


 

Aileen Danley

Aileen Lau Danley CFP®, MBA
Relationship Manager
CERTIFIED FINANCIAL PLANNER®
Warren Street Wealth Advisors

 

 

 

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Warren Street Wealth Advisors, LLC is a Registered Investment Advisor. The information posted here represents opinion and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional.  Nothing in this commentary is a solicitation to buy, or sell, any securities, or an attempt to furnish personal investment advice. We may hold securities referenced in the blog and due to the static nature of content, those securities held may change over time and trades may be contrary to outdated posts.

Citations.

1 – forbes.com/sites/kellyphillipserb/2017/12/20/what-your-itemized-deductions-on-schedule-a-will-look-like-after-tax-reform/ [12/20/17]
2 – tinyurl.com/y7uqe23l [12/26/17]
3 – bloomberg.com/news/articles/2017-12-18/six-ways-to-make-the-new-tax-bill-work-for-you [12/28/17]
4 – taxfoundation.org/retirement-savings-untouched-tax-reform/ [1/3/18]
5 – tinyurl.com/yacz559c [1/8/18]
6 – vox.com/policy-and-politics/2017/12/19/16783634/gop-tax-plan-provisions [12/19/17]

Marketing the Safety Out of It

A growing theme in investing is to target and invest only in the least volatile stocks in the market. One simple example of this is take the S&P500, which is a representation of the 500 largest publicly traded stocks in the United States, and only invest in the 10% of companies with the lowest standard deviation of the 500. This would produce names such as AT&T, Coca-Cola, and Johnson & Johnson. 

This simple concept traditionally would result in an investor owning a lot more safety, blue chip, and high dividend yielding stocks. Not a bad bet in a historic context. Looking forward however, we have an accelerating concern over the price of these types of companies, which may lead to them not being as safe as one would expect.

One metric we look at to value stocks is the Price to Earnings ratio, the easiest way to describe this is what price is an investor willing to pay for every dollar a company earns in profit? A higher P/E ratio implies more expensive,  a lower one implies cheap. Comparing a stock, or an index, such as the S&P500 to its historical average P/E can give you a relative idea of whether something is expensive or cheap compared to historical  standards.
Historically, going back to 1972, the companies in the lowest 10% volatility bucket in the S&P500 (as measured by standard deviation) produce a historical median P/E ratio of roughly 13. As is stands today that same low volatility class of stocks trades between a P/E ratio of 23 to 24.

Low Vol Record PEChart provided by Ned Davis Research, Inc.

Why is this troubling? Well, when prices revert to the mean, and investors are willing to pay less for those same dollars of earnings, it spells trouble for those who hold these assets, especially those who have been chasing the stability and dividends these stocks were expected to provide.

What is causing this? Let’s take a look at the major contributors:

Fed policy. While artificially low interest rate policy is intended to push investors into riskier assets, some investors still want safer assets. Low volatility stocks have higher dividend yields, making them bond proxies.

Sector attribution. The low volatility group is concentrated in Utilities, Financials, and Consumer Staples, which have high dividend yields and P/E ratios that are above their long-term averages.

High valuations for the broad market. The median P/E for the S&P 500 is 24.0, well above its historical norm, which has pushed investors into “safer” stocks.

Secular trends. Fear is a stronger emotion than greed, so investors have flocked to “safer” assets.

Industry innovation. ETFs have enabled investors to more easily buy themes like low volatility.

The first three factors are the most likely the first ones to threaten this crowded trade. The one that has me the most troubled is the fifth factor. Industry innovation has led to specialized investment products that make it very simple for retail investors to buy into this wave of low or minimum volatility assets. We’re seeing these assets recommended in droves to competitor’s clients, with little to no consideration given to how crowded or expensive the trade may be.

These assets in the broad context of a well diversified portfolio may make sense, but from my perspective every asset has a time and a place. Currently, I would not be overpaying for safety by using these low volatility factors we’ve explored above. There are other ways. Like always, when assets deviate from a historical valuation range, it can take quite awhile to be proven right and see them correct. We’re not yelling fire in a crowded theater but would like to see investors better educated on the risks ahead.

 

Thank you for reading!

Blake Street
Written by: Blake Street, CFA®, CFP®, Chief Investment Officer

Blake Street is an Investment Advisor Representative of Warren Street Wealth Advisors, a Registered Investment Advisor. The information posted here represents his opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional.  Nothing in this commentary is a solicitation to buy, or sell, any securities, or an attempt to furnish personal investment advice. We may hold securities referenced in the blog and due to the static nature of content, those securities held may change over time and trades may be contrary to outdated posts.

Retirement Planning Isn’t Just For “Retirees”

Retirement Planning Isn’t Just for “Retirees”
By: Joe Occhipinti

 

When people discuss the topic of saving or planning for retirement, the picture that often comes to mind is that of an employee that has been working for the same company for 20+ years and is on the verge of retirement.

When I hear about planning and saving for retirement, I find myself thinking about those who are 20+ years away and need to make the most of one variable that cannot be replaced – time.

Time is precious, and when it comes to preparing for retirement making up for lost time is one of the most difficult things to do. One of the most basic ways we see this is employees missing out on years of 401(k) matching contributions from their employer. A match can be a 100% return on your investment, assuming you are fully vested. That’s a tough return to beat in any financial market.

Too often financial planning and saving for retirement gets thrown to the wayside as something that can be put off for another year. For some, that could be an additional 6% of their salary they are choosing to forgo in their 401(k). If you got an additional 6% of your salary per year added to your retirement account, then how much sooner do you think you’ll be able to retire? How much stronger would your retirement look?

The other key piece of a strong retirement is a financial plan. A sound financial plan should you help surface all facets of your financial picture and ultimately how each piece helps or hinders you from achieving your long term goals. This includes budgeting, savings, investing, and managing risk.

Debt is probably the most often overlooked and underestimated piece of planning. Holding on to excessive debt during your working years can really put a damper on your ability to retire, especially if you have a large amount prior to retirement. Don’t let lack of planning be the sole reason for you to not get the retirement you’ve been dreaming of.

The final thoughts I will leave you with are: 1) Do I want to retire? 2) If I begin contributing to my 401k today, then how much do my chances of a successful retirement increase? 3) Am I managing debt appropriately? 4) Have I put enough time into financial planning to build a strong retirement?

Take the necessary steps to put you on track for retirement, whether that’s 2 or 20 years away.

 

 

warrenstreetadvisors006

Joe Occhipinti
Wealth Advisor
Joe@Warrenstreetwealth.com
714.823.3328

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor.
The information posted here represents opinions and is not means as personal or actionable advice to any individual, corporation, or other entity, Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this presentation is a solicitation to buy, or sell, any securities, or an attempt to furnish personal investment advice. We may hold securities referenced in the presentation and due to the static nature of content, those securities help may change over time and trade may be contrary to outdated posts.