2018 Second Quarter

Kreitler Financial:

Coming off the hot markets of 2017, 2018 started well enough, notching the 15th straight up month for the S&P 500 that tracks US large companies. As we noted in our First Quarter newsletter, this type of winning streak is very unusual.

We think investors should expect greater market swings than the unusually low volatility we experienced in 2017. However, volatility is not something that long-term investors should fear but rather manage. It is this very risk that gives stocks their greater long-term historical performance relative to less risky asset classes like bonds… A good investment strategy should include sufficient liquidity in the form of cash and high-quality bonds that the investor can ride through the inevitable periods of stock market uncertainty….

Sure enough, US markets peaked in February before dropping, rebounding, and then testing their February lows again. At about -10%, this puts us into what many observers call a correction. Meanwhile, rising interest rates rattled bond markets. The 10-year treasury rose above a 3% yield for the first time since January 2014, causing bond prices to fall.

This is normal. While the return of volatility feels more painful after a 15-month long absence, volatility is the natural state of stock markets and must be both planned for and expected. Bond yields of 3% are still below their long-term historical average, although they feel high relative to the extreme lows caused by post-Financial Crisis monetary policy that pushed the 10-year yield down to almost 1.3%. These market moves highlight the importance of having a long-term focus and investment strategies that permit you to ride through inevitable and unpredictable market drops.  We recently noted the 9th anniversary of this bull market that began in March 2009. Corrections are a normal part of all markets.

There are reasons for long-term investors to remain optimistic. Corporate profits have soared recently on the back of the growing economy and the recent tax reform bill, which is acting as a large fiscal stimulus. The job market is thriving, and labor shortages are driving up wages. For the moment, the US economy has a tailwind.

Many investors value company stocks based on expected profits. They use a price to forward earnings ratio, or forward P/E ratio. Growing corporate profits have caused the S&P 500’s forward P/E valuations to fall from a relatively expensive 18.6 at the end of January to 16.3 on April 27. At these levels, stocks are no longer as expensive. In the bond markets, investors now receive a more reasonable rate of interest than they have for some years. Bank accounts have similarly slowly paid higher rates, too. These trends benefit savers.

Other than the booming economy, the other major force in the markets continues to be central bank policy. The Fed continues to unwind the massive bond purchases it initiated after the Financial Crisis. Draining liquidity from the system by central banks will eventually have an impact. This is a global phenomenon. First, interest rates will have pressure to move higher. This will cause some companies and business models to become unsustainable or even insolvent. Investors may want to focus on profitable business that can weather higher interest rates versus purely growth companies that were the high flyers over the last few years. Second, the Fed action removes money from the system that found its way into many asset classes including equities. Draining liquidity too quickly could put selling pressure on stocks.

Our primary near-term concerns are geo-political. We are also watching US trade policy closely, as President’s Trump brash style creates uncertainty both at home and abroad. It is important to remember, however, that there is a large difference between a trade skirmish and a trade war, and to date there is mostly a battle of words. We have longer-term concerns about debt levels and their possible impacts on growth and inflation, trends that we will continue to monitor over time.

Markets are always trying to predict what will happen. Short-term moves may seem irrational, but are usually investors pricing in multiple potential outcomes. We encourage investors to think long term.

Planning Topics

Charitable giving under the new tax rules: The new tax rule raised the standard deduction to $12,000 for individuals ($13,600 for those over 65) and $24,000 for couples ($26,600 for those over 65). With the deduction for state and local taxes paid limited to $10,000, some people who could previously deduct their charitable giving may find it harder to do now. Three strategies may help.

1) Qualified Charitable Distributions: For those over age 70 ½, you can give up to $100,000 directly from an Individual Retirement Account (IRA). These gifts can reduce your Required Minimum Distribution and are not treated as income on state or Federal tax returns.

2) Donor Advised Funds: Donor Advised Funds allow you to make a single, larger gift in one tax year and then spread the actual cash to charities over subsequent years.

3) “Bunching” deductions: If normal annual giving falls short of the level at which point deductions exceed the standard deduction, bunching them into every other year may help. For example, giving in January and December one year, and then skipping a year, and so on.

Please be proactive in discussing these strategies with us and with your tax adviser to see if you would benefit.

Trusted Contact: New FINRA rules require us to identify trusted contacts for our clients. The purpose is to have an individual assigned whom we may speak with if we suspect the client is being taken advantage of or exploited. The rule is designed to protect vulnerable adults. We will be collecting this information from clients through the normal course of our periodic meetings with you.

The Department of Labor Fiduciary Rule: A Federal Appeals Court overturned the DOL’s Fiduciary Rule, which required all financial professionals who work with IRAs to act in their clients’ best interest. It is expected that the ruling will not be appealed, and the Fiduciary Rule will disappear May 7. The original rule surprised many investors, who may not have realized a broker can consider their own compensation in their recommendations.

We have always embraced a fiduciary standard of putting our clients’ interests first in all our interactions and advice. We believe it is the right thing to do, irrespective of any regulation or lack thereof.

Interesting Trivia

The Financial Times reported on January 24 that the number of stock indexes in the world has exceeded the number of publicly traded companies at over 3 million.

Happenings at Kreitler Financial

We recently installed an espresso machine in the office as part of our continuous efforts to create the best office environment possible. Speaking of environment, in addition to making great coffee, it reduces our plastic trash by over 100 pounds per year by reducing the use of disposable coffee pods. Stop in and enjoy a cappuccino with us.

Congratulations to Bernadette who recently passed the CFP® Certification Examination.

Charlie was named to the Raymond James Global Top 50 recognizing the top advisors across all of Raymond James divisions in the US, UK, and Canada.1 The small group met in February in Toronto for two days to discuss a broad array of topics ranging from geopolitics, portfolio construction, and business management. The group’s guest speakers included a Nobel prize winner in economics, the former commander of the International Space Station, the former head of MI6 (British Intelligence), an Olympic gold medalist, and other business and academic leaders. This was an amazing opportunity and we are honored to have been included.

With warm regards,

Charles F. Kreitler, CFP®
Robert P. Kreitler, CFP®
Founding Partner

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Charles and Robert Kreitler, CFP and not necessarily those of Raymond James. The information has been obtained from sources considered reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Diversification and asset allocation do not ensure a profit or protect against a loss. Investing involves risk and investors may incur a profit or loss regardless of strategy selected. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. RJFS does not provide tax advice. You should discuss any tax matters with the appropriate professional. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

1 Invitees selected based on 2017 fiscal year production. A total of 58 financial advisors were selected across the globe.

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