“It’s the hap- happiest season of all.”
While holidays don’t make everyone happy, investors should be feeling festive. The Standard & Poor’s 500 Index is up more than 18 percent year-to-date. The Dow Jones Global ex U.S. Index is up about 21 percent year-to-date (refer to the table), and Treasury bond yields are lower than they were at the start of the year.
In addition, the CBOE Volatility Index (VIX), a measure of how unpredictable investors expect the S&P 500 Index to be over the short-term, finished the week below 10. A low VIX reading means investors expect calm markets through the end of the year.
Some are wary of the optimism that pervades markets, though. Barron’s wrote:
“In fact, everything’s going well right now – really well…The Citigroup U.S. Economic Surprise Index – a metric designed to measure the extent to which economic data have been beating or missing expectations – is near its highest level since January 2014, a sign of just how smoothly everything’s been going. The problem is that once the data have been surprising by this much, for this long, it gets hard for good news to provide much more of a boost…”
There was a disappointing piece of economic news last week concerning wages. Unemployment has fallen to a 17-year low (4.1 percent), and unemployment in the manufacturing sector is at 2.6 percent, an all-time low. It appears demand for labor is high and supply is low. That should translate into higher wages, but it hasn’t yet. Average hourly earnings are up 2.5 percent year-on-year. That’s an improvement on October, but not much of one.
A lot of folks are scratching their heads wondering when inflation is going to move higher. The Fed has been expecting it to happen for a while. Maybe 2018 will be the year.
|Data as of 12/8/17||1-Week||Y-T-D||1-Year||3-Year||5-Year||10-Year|
|Standard & Poor’s 500 (Domestic Stocks)||0.4%||18.4%||18.0%||8.8%||13.3%||5.8%|
|Dow Jones Global ex-U.S.||0.0||21.0||20.8||4.1||4.7||-0.8|
|10-year Treasury Note (Yield Only)||2.4||NA||2.4||2.3||1.6||4.2|
|Gold (per ounce)||-2.0||7.9||6.8||1.6||-6.1||4.5|
|Bloomberg Commodity Index||-2.9||-4.0||-4.1||-9.2||-9.9||-7.2|
|DJ Equity All REIT Total Return Index||-9.5||-1.1||-0.1||3.8||8.3||5.7|
S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.
Are you concerned about human obsolescence? Researchers from the University of Oxford and Yale University asked experts at several artificial intelligence (AI) conferences how long it would be before machines became better than humans at various tasks. The answers weren’t encouraging.
Overall, researchers think there is a 50 percent chance that AI will outperform humans at all tasks within 45 years. They also said it’s possible many jobs humans do now will be automated within 120 years. Asian survey participants expect the change to happen more quickly than North American participants do.
Wondering if this might affect you? Here are a few of the time frames as determined by averaging survey participants’ answers. Machines may be better at:
- Translating languages by 2024
- Writing high-school essays by 2026 (Would this be cheating?)
- Driving trucks by 2027
- Working in retail by 2031
- Writing bestselling books by 2049
- Working as surgeons by 2053
While the idea of human employment prospects becoming more limited is disturbing, there is still time to capitalize on shorter-term opportunities. For example, eSports is a booming industry. FactSet reported, “Last year’s League of Legends World Championship sold out the Los Angeles Staples Center in less than an hour…an additional 43 million tuned in online – for context, the 2016 NBA Finals Game 7 broke records with 30 million viewers…” The League of Legends champions took home about $1.5 million in 2017.
If you can’t picture yourself encouraging your loved ones to spend hours playing video games, perhaps an online or bricks and mortar eSports store is an option. According to reports from Statista, the eSports market is growing 40 percent year-over-year globally and is expected to generate about $1.5 billion by 2020.
Weekly Focus – Think About It
“Gamers always believe that an epic win is possible and that it’s always worth trying, and trying now. Gamers don’t sit around.”
–Jane McGonigal, American game designer and author
|Value vs. Growth Investing (12/8/17)
©2004 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) is not warranted to be accurate, complete or timely. Morningstar is not responsible for any damages or losses arising from any use of this information and has not granted its consent to be considered or deemed an “expert” under the Securities Act of 1933. Past performance is no guarantee of future results. Indices are unmanaged and while these indices can be invested in directly, this is neither a recommendation nor an offer to purchase. This can only be done by prospectus and should be on the recommendation of a licensed professional.
12 Smart Planning Moves to Consider as Tax Reform Looms
It’s hard to believe, but another year is almost behind us. With January just around the corner, now is a great time to review various items you may want to consider as you get set to enter 2018. Many of the IRS publications referenced below are for tax year 2016. Changes are not anticipated when 2017 guides are published.
Before we get started, let me stress that it is my job to assist and help you! I can’t overemphasize this, and I would be happy to review the options that are best suited to your situation. When it comes to tax matters, I recommend you check with your tax advisor.
Right off the bat, let’s talk about what’s on everyone’s mind–tax reform.
- Sweeping changes in the tax code were supposed to be enacted much earlier in the year, but Congress has been preoccupied with health care. Instead, changes appear to be in the pipeline for 2018.
Both the House and Senate have passed their respective versions of tax reform. The House and Senate will now convene a conference–a give-and-take session that is designed to craft a single bill that must then be approved by each chamber. Only then can the President sign the legislation, which will usher in a new tax code.
That said, how we file for tax year 2018 may differ from how we file for tax year 2017.
For example, will the alternative minimum tax (the AMT) be wiped from the tax code? Will Congress kill the estate tax?
Both the Senate and House proposals make few, if any, changes to retirement accounts, but we could see tweaks in a final bill.
Personally, I’m encouraged that the House and Senate have yet to materially alter the tax treatment for retirement accounts and the favorable treatment dividends and capital gains receive.
However, I should point out that the Senate bill changes the way we would account for capital gains, i.e., a first-in, first-out method to calculate gains when a stock is sold. That said, I’m reluctant to speculate how these key categories may emerge if tax reform is signed into law.
Investment and financial planning
- Is it time to rebalance your portfolio? Changes in the market can cause your asset allocation to shift. As we head into the homestretch, we’ve witnessed strong gains in stocks this year, both domestic and international. Year-end is a great time to review your portfolio and make any necessary adjustments.
Typically, I would counsel that profits should be taken next year, pushing the tax burden into tax year 2018.
But I must caution that there is an outside possibility the final version that may land on the President’s desk could produce changes in how capital gains are treated.
- Review your income or portfolio strategy. Are you reaching a milestone in your life such as retirement or a change in your circumstances? Has your tolerance for taking risk changed? If so, this may be just the right time to evaluate your approach.
However, let me caution about making changes based simply on market performance.
One of my goals has always been to remove the emotional component from the investment plan. You know, the one that encourages investors to load up on stocks when the market is soaring and to sell when stocks have taken a beating.
We know that markets rise and fall. I get that declines can be unnerving, I really do. Yet over the long term, markets rise much more than they fall.
While stocks have been on a record run, it’s a good time for me to once again remind you that a disciplined approach that avoids emotional decisions has historically been the shortest path to reaching one’s financial goals.
I know I’ve said this before, but it is a key principle for successful investing.
- Take stock of changes in your life and review insurance and beneficiaries. Let’s be sure you are adequately covered. At the same time, it’s a good idea to update beneficiaries if the need has arisen.
Tax planning in the context of possible changes in the tax code
- Tax loss deadline. You have until December 31, 2017 to harvest any tax losses and/or offset any capital gains. But be careful. There are distinctions between short- and long-term capital gains, and you must be aware of wash-sale rules (IRS Publication 550) that could disallow a capital loss.
- This brings us to mutual funds and taxable distributions. This is a topic best discussed by using an example: If you buy a mutual fund on December 18 and it pays a dividend and capital gain December 20, you will be responsible for paying taxes on the entire distribution, even if the capital gains and dividends collected by the fund occurred throughout the entire year.
Yet, following the distribution, the net asset value of the fund will fall by the amount of the payout. Put another way, your investment in the fund remains the same. It’s a tax sting that’s best avoided. Therefore, it is usually a good idea to wait until after the annual distribution to make the purchase.
- Required minimum distributions (RMDs) generally are minimum amounts that a retirement plan account owner must withdraw annually starting with the year that he or she reaches 70½ years of age or, if later, the year in which he or she retires. However, if the retirement plan account is an IRA or the account owner is a 5% owner of the business sponsoring the retirement plan, the RMDs must begin once the account holder is age 70½, regardless of whether he or she is retired (IRS Retirement Plan and IRA Required Minimum Distributions FAQs).
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 of that year.
The RMD rules also apply to 401(k), profit-sharing, 403(b), 457(b) or other defined contribution plans as well as SEP IRAs and Simple IRAs.
Don’t miss the deadline or you could be subject to steep penalties!
- Contribute to a Roth 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. There are income limits, but if you qualify, you may contribute $5,500, or $6,500 if you are 50 or older (IRS Retirement Topics–IRA Contribution Limits).
If you satisfy the requirements, qualified distributions are tax-free. You can make contributions to your Roth IRA after you reach age 70½ and there are no requirements to take mandatory distributions.
You may also be eligible to contribute to a traditional IRA, and contributions may be fully or partially deductible, depending on your circumstances. The same contribution limit that applies to a Roth IRA also applies to traditional IRAs. Total contributions for both accounts cannot exceed the prescribed limit.
You can make 2017 IRA contributions until April 17, 2018 (Note: statewide holidays can impact final date).
- Consider converting a traditional IRA to a Roth IRA. There are a number of items you may want to consider, including current and future tax rates as well as the potential for tax reform, but if the situation is right, it can be advantageous to convert to a Roth IRA.
- College savings. Tax reform looms large over college savings accounts. A limited option, called the Coverdell Savings account (IRS Publication 970) gets the ax in the House bill. The Senate bill maintains the status quo, according to the Senate Finance Committee document, “Tax Cut and Jobs Act and College Access.”
Currently, total contributions for a beneficiary cannot exceed $2,000 in any year. Any individual (including the designated beneficiary) can contribute to a Coverdell ESA if the individual’s modified adjusted gross income for the year is less than $110,000. For individuals filing joint returns, the amount is $220,000. Contribution limits get phased out after hitting the respective limits.
If reform passes, the House proposes that Coverdell Savings Accounts be converted into 529 plans. A 529 plan allows for much higher contribution limits, and earnings are not subject to federal tax when used for the qualified education expenses of the designated beneficiary. Contributions, however, are not deductible.
- Achieving a Better Life Experience (ABLE) account. This is a savings account for individuals with disabilities and their families. For 2017, you can contribute up to $14,000. Distributions are tax free if used to pay the beneficiary’s qualified disability expenses, which may include some education expenses (IRS Publication 907, Fidelity—ABLE).
- Charitable giving. Whether it is cash, stocks, or bonds, you can donate to your favorite charity by December 31, potentially offsetting any income. Did you know that you may qualify for what’s called a “qualified charitable distribution (QCD)?” A QCD is an otherwise taxable distribution from an IRA (other than an ongoing SEP or SIMPLE IRA) owned by an individual who is age 70½ or over that is paid directly from the IRA to a qualified charity (“Rules to Do an IRA Qualified Charitable Distribution”–www.kitces.com). The IRA owner must be at least 70½ when the distribution is made.
You might also consider a donor-advised fund. Once the donation is made, you can realize immediate tax benefits, but it is up to the donor when the distribution to a qualified charity may be made.
Michael L. Schwartz, RFC®, CWS®, CFS
P.S. Please feel free to forward this commentary to family, friends, or colleagues. If you would like us to add them to the list, please reply to this email with their email address and we will ask for their permission to be added.
Michael L. Schwartz, RFC, CWS, CFS, a registered principal offering securities and advisory services through Independent Financial Group, LLC., a registered broker-dealer and investment advisor. Member FINRA-SIPC. Schwartz Financial and Independent Financial Group are unaffiliated entities.
This information is provided for informational purposes only and is not a solicitation or recommendation that any particular investor should purchase or sell any security. The information contained herein is obtained from sources believed to be reliable but its accuracy or completeness is not guaranteed. Any opinions expressed herein are subject to change without notice. An Index is a composite of securities that provides a performance benchmark. Returns are presented for illustrative purposes only and are not intended to project the performance of any specific investment. Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. Past performance is not a guarantee of future results.
* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
* The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices.
* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
* Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.
* The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
* Past performance does not guarantee future results.
* You cannot invest directly in an index.
* Consult your financial professional before making any investment decision.
* To unsubscribe from our “market commentary” please reply to this e-mail with “Unsubscribe” in the subject line, or write us at “firstname.lastname@example.org”.