2nd Quarter 2019

Kreitler Financial:

Our Views on the Investing Landscape

The first quarter of 2019 was a great one for financial markets. From the Christmas Eve low to the close of the quarter, the S&P 500 rallied over 20%. Stocks had their best start to the year since 1998.1

After the brutal December market rout, this was a welcome relief. We have been preparing clients for higher volatility than what many investors have become accustomed to in recent years. Many investors were surprised by the December market rout, only to be surprised again by the rapid recovery. Wild swings like this—up and down—are a test of investors’ patience and discipline.

Quarter Market Review-YTD as of March 29, 2019

Market Index

YTD Return

Bloomberg Barclays US Aggregate Bond Index


S&P 500 Composite Index


Russell 2000 Index


MSCI EAFE (TR) Gross Index


MSCI EM (Emerging Markets) Gross Index


*Source: RJ Investment Strategy Quarterly

The financial press frequently attempts to explain market moves by writing something along the lines of ‘there were more sellers than buyers’. This by definition is nonsense. For every seller there must be a buyer or no transaction takes place. What is true, however, is that sellers in the difficult December period were forced to take bad prices, and we were generally happy to be buyers.

Whenever market prices change, as investors we face a very important question. Has the underlying value of the investment changed, or has there just been a temporary price change? The market is always happy to provide a price. Those who are impatient must take whatever price the market offers at that time. On the other hand, investors who have the luxury of choosing when to take the market’s price can use this to their advantage. Price is recognized instantly; value is generally found over time.

After such a major market explosion, a natural question is, can it keep going up? In our experience, trying to guess short-term market moves is usually the wrong question to be asking. The markets, with all their unpredictability, have historically rewarded time in the market over timing the market.

The current bull market hit its 10-year anniversary in March. This is impressive, but it is also not unprecedented. In the past, secular bull markets have run 16-18 years. (1949-1968, 1982-1998, 2009-?)

In the US and globally, the economy continues to grow, but that growth is decelerating. In our Q1 newsletter, we wrote that this deceleration was to be anticipated on a year-over-year basis given the rapid expansion in 2018, and therefore is not something to be alarmed by. Major economic indicators remain strong. One of the investment services we follow, BCA, says in July the expansion will be the longest in US history and it looks like the expansion will continue. January marked 100 consecutive months of job growth. Unemployment rates of women and minorities have been hitting record lows. These are truly impressive figures. Still, we are late in the expansion.

US markets are having a record run of outperformance against the rest of the world. Historically these relationships have tended to flip. We continue to find valuations attractive overseas, yet this requires patience for global investors.

If our basic thesis is that the world looks pretty good, what could upset this? Markets react to surprises, and so it is always likely that the thing you do not see is what moves them. A major geopolitical event is always possible and the most probable type of market-moving shock. We are aware of many possible options. Meanwhile, our major investment themes continue to play out. Political impasse has taken hold in Washington as the Democrats control the House after last year’s election, making it very difficult for either party to advance major legislation. The China/US trade talks continue to progress and both sides are signaling greater interest in a deal.

One thing that we expected that did not occur was a bout of volatility associated with Brexit, which has been postponed for further negotiation from its March deadline to until at least October. This continued uncertainty can cause real harm to the companies directly affected by Brexit. They need to make decisions to operate efficiently, sometimes years in advance. Recent articles have highlighted manufacturers hoarding supplies to make sure they can weather a worst-case scenario ‘no-deal Brexit’. This has consequences up and down the supply chain. In the meantime, a solution stays always just out of reach.

Portfolio Rebalancing

The major market moves in December triggered changes in our portfolios. We monitor portfolios continuously for a drift in their asset allocation. For example, if stock allocations rise or fall significantly, this signals that the risk of a portfolio has changed relative to its goals and action is needed. We also continuously monitor for opportunities to tax loss harvest, or sell a security to realize a capital loss for tax purposes and simultaneously replace it with a similar security to maintain the portfolio asset allocation. After the December drop, we reviewed client portfolios to identify those that were underweight stocks, and we used the market drop as a buying opportunity.

After the sharp rally, we find ourselves in the opposite position. As we begin to perform comprehensive reviews on portfolios, we are finding that many are now overweight stocks. This is quite natural given the rise in the markets and our rebalancing discipline.

In some cases, this creates a tax challenge because stock positions purchased in December and January have short-term unrealized capital gains. This can lead to an interesting trade off— in order to control risk by selling stocks that have gone up in value, you can have adverse tax consequences of short-term capital gains, which are taxed at the same rate as earned income instead of the lower long-term capital gain tax rate.

This is where managing portfolios at the household level can have strong advantages. If trades can be placed in retirement accounts where realized capital gains and investment income are not taxed, you can sell stocks to potentially help manage risk without a tax consequence. This is more complicated to manage in this way, but we feel the tax advantage is well worthwhile. While taxes cannot be eliminated, they can be managed. Very few investment advisers are able to do this effectively.

News and things you should know

This is the first time taxpayers are seeing the impact of the 2018 Tax Cut and Jobs Act. The impact on each taxpayer varies, but we have heard a few themes in talking with clients and their tax advisers. Many people were concerned that with the loss of the state and local tax deduction, their tax bill would increase. In most cases, however, this seems to have been largely offset by the changes in rates and brackets. Overall, the impact has been smaller than people initially thought for high-tax states like Connecticut. On the less positive side, the IRS changed the standard withholding tables, which reduced taxes withheld throughout the year for many filers. This meant a higher paycheck at the time, but many ended up owing taxes at filing. This has frustrated many even though the total taxes they have paid is less. Please contact us if we can help you plan around these tax changes.

Beau Tillinghast successfully completed the requirements to become a Certified Financial Planner™ professional. Please take a moment to congratulate Beau the next time you see him.

Kersti Melchiore, Director of Client Experience, participated in the Women’s Shape Half Marathon in New York. Bob participated in the National Squash Tournament for Seniors in Washington D.C. He says new packages of bees are on their way as his bees faced a challenging winter.

Bob was featured in an article in Greenfield Hill Neighbors highlighting Fairfield residents who have had experiences with Presidents over the years. Bob worked in the Office of Management and Budget during the Nixon, Ford, and Carter administrations. If you are interested, please let us know and we would be happy to share it with you.

With warm regards,

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

1Source: Alpine Macro
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. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The MSCI EAFE (Europe, Australasia, and Far East) is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 22 developed nations. The MSCI Emerging Markets is designed to measure equity market performance in 25 emerging market indices. 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. The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stock of companies maintained and reviewed by the editors of the Wall Street Journal. The NASDAQ composite is an unmanaged index of securities traded on the NASDAQ system. The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index. Investing in commodities is generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions. No statement within this material should be construed as a recommendation to buy or sell a security or to provide investment advice. Holding investments for the long term does not ensure a profitable outcome. Rebalancing a non-retirement account could be a taxable event that may increase your tax liability. Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Contribution limits apply to Roth IRAs. In addition, with a Roth IRA, your allowable contribution may be reduced or eliminated if your annual income exceeds certain limits. Contributions to a Roth IRA are never tax deductible, but if certain conditions are met, distributions will be completely income tax free. Roth 401(k) plans are long-term retirement savings vehicles. Contributions to a Roth 401(k) are never tax deductible, but if certain conditions are met, distributions will be completely income tax free. Unlike Roth IRAs, Roth 401(k) participants are subject to required minimum distributions at age 70½.

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