In The News...
Employment and earnings both got a boost.
Jobs report: Unemployment fell to 4.1% in October, which is the lowest jobless rate since Dec. 2000. The monthly survey shows that +261,000 jobs were added in October, which may be skewed because the previous month's jobs data was artificially low due to Hurricane Harvey and Irma. It may be more appropriate to consider the average of the two months as a more representative hiring trend. Rather than +18,000 new hires on September and +261,000 in October, a blended gain of +140,000 in each month is more reasonable.
Here is a 30-year historical look at unemployment, which you can see has steadily declined since late-2010:
Earnings season ends: Ninety percent of companies in the S&P 500 have reported financial results for the 3rd quarter. Both sales and profits were better than expected, per the data provider FactSet, as revenues rose +5.8% (vs. +4.9% expected) and profits rose +6.1% (vs. +3.1%). The Energy sector was the runaway winner in both respects, while Materials and Technology were the next-best sectors. Utilities was the worst-performing sector and the only one that saw both sales and earnings decline during the quarter.
In The Market...
The S&P 500 dipped -0.14% this past week. Let's look under the hood:
The weekly winning streak was finally snapped. The S&P 500 had risen in eight-straight weeks, which came to an end with the slight loss. Early on it looked like the streak would be extended to nine, but just as the S&P neared 2,600 it quickly reversed course on Thursday and Friday. I mentioned a few weeks back that 2,600 might become a point of resistance that prevents stocks from broadly rising much further in the near term. So far that is the case.
Digging beneath the surface, it was a strange week. Some of the growth-oriented sectors (Industrials, Materials) were down while the more defensive sectors (Consumer Staples, Utilities) gained. Normally this type of defensive investor behavior would set up well for bonds to rise too but that was not the case. Investment-grade bonds had an unusually bad week (down -1%) and high-yield bonds declined the most in 3 months.
When high-yield bonds start to fall that can often be a sign that stocks will soon follow suit. For now it does not look to be any more than a speed bump. In fact, I believe recent high-yield bond losses presents a buying opportunity, based on past price trends shown in the following chart for the fund, ANGL:
This is what is called a "fallen angel" high-yield bond fund. We purchased this for a number of client accounts. Rather than being comprised of companies with consistently sub-investment-grade debt status, this fund contains corporate debt issued by companies whose debt ratings were recently downgraded from investment-grade to high-yield (or "junk") status. In theory these companies are experiencing short-term financial issues and will soon again be upgraded to investment-grade status. That theoretical bet would mean greater demand for those bonds in the future, which plays in the favor of owning this fund over a more traditional high-yield bond fund that owns debt of companies that are perpetually junk status.
But purely looking at the historical price trends in the chart above, you will see how today's price (a) seems to follow a pattern of past instances (b, c, d). If such is the case, I would expect ANGL to rebound soon. If not, we will measure that risk and adjust accordingly.
In Our Opinion...
I have had discussions with a number of people recently about the tax benefits of donating before year-end. Assuming you itemize your taxes, the tax amount you stand to avoid by making a cash donation would be equal to:
(Donation amount) x (Tax rate the donation would have otherwise been assessed)
So, if you donate $1,000 and that money would have otherwise been taxed 25%, you avoided $250 in taxes.
I feel this is important because as much as many people want to be charitable, they overstate what they consider to be "savings". In the above example, instead of paying $250 in tax dollars to Uncle Sam, you would be donating $1,000 and avoiding $250 in taxes, which nets out to be $750 out-of-pocket. This is more than if you just paid $250 in taxes, but for whatever reason when it comes to the out-of-pocket amount (charity aside) the concept is misunderstood.
I get asked whether it would be smart to donate. That is really difficult to answer because we all have different motivations and requirements for donating. For me, I like to have personal involvement with an organization if I am going to make a significant donation. I also like to have some idea of how the money will be used. I donate out of goodwill rather than financial incentive. If there is tax incentive, great. If not, oh well. Again, to each their own.
I know some people who will write a check and are unconcerned with how the money is used. I find this most common among Baby Boomers. I know others who are more compelled to donate if they know precisely how the money will be used and receive updates on the cause. I find this more common among the under-30 crowd. Then there are those who fall somewhere in the middle, myself included, who want to have some personal involvement but do not need status updates or reassurance. These perceived generational differences were first highlighted to me by someone I know on the King County Advisory Board for the Salvation Army. Since he mentioned it I have since observed these same tendencies. Just some food for thought.
Charitable donations are timely right now because they must be made prior to Dec. 31 in order to qualify for 2017. The amount you can deduct will be limited, based on the type of organization you donate to and the type of asset you donate (e.g. cash vs. other property). Donations to public charities are capped at 50% of your adjusted gross income (AGI). Let me or Gale know if you would like more information, including help calculating the tax benefits.
In Our Portfolios...
In last week's blog I overlooked one of the proposed benefits within the Republican tax plan. It involves 529 college savings plans. The proposed tax reform would improve 529 plans in two distinct ways:
- 529 savings could be used tax-free to pay for up to $10,000 in qualified expenses for either high school or elementary school. This is a valuable change considering the number of kids who attend private high schools.
- 529 accounts can be established when the baby is in the womb. Currently, 529 plans cannot be set up until the baby is born. This means up to an additional 8 months (or so) of extra time to save toward future education expenses. Time is your best friend when it comes to building wealth.
These are small wins, but wins nonetheless. As a refresher, the biggest benefit of setting up a 529 college savings plan is that the earnings grow tax-free if eventually used to pay for education expenses (i.e. tuition, room/board, supplies). This provides the best available vehicle for parents and grandparents to save for their kids and grandchildren. If you would like more information, including the pros/cons of the 529 plan relative to other savings options, let us know.
What's New With Us?
A quick reminder to provide us any address changes if you move. It is important that we maintain updated contact information for you on your account(s). If you started using a different email more than the one that this blog is delivered to, please update me in that regard as well.
Happy Veterans Day to those of you who served our country.
Have a great weekend!
Brian E Betz, CFP®