It is tongue in cheek when we title this newsletter “Early Winter”. While Winter has not yet officially begun, no matter where you are in the country, Winter began way too early this year. We missed those wonderful, mild days of October and November. Instead, we got unusually cold days followed by the early onslaught of the “Grey Season” where the sun disappeared for long stretches of time. Then, we got thumped by “Daylight Robbing” time…and sundown was at 4:30 PM. Not fair at all. However, chin up hearty New Englanders, Spring is only four months away…give or take two months! Key West is sounding pretty good right now!
For 31 months, the stock market made gradual and sometimes spectacular gains, except for a market correction in February 2018 (that was reversed in a few short months). Yes, we had the best of times for market returns. Can you even remember how you felt during that period?
If not, let us remind you of how satisfying it was to open your monthly statement to see it go up…almost every month!
Now market volatility and rolling advances/declines have returned. What happened to cause this sudden change?
Well, this is a partial list for your consideration:
Federal Reserve Chairman Jay Powell in early October stated that interest rates were going to be on the rise for the foreseeable future through 2019 and that we were far from the “neutral” rate that would neither stimulate or inhibit the U. S. economy. For good measure, he also said that the Fed could go beyond neutral if it was so inclined. The markets interpreted this policy as the Fed driving the economy into the ditch, causing a Recession (possibly in 2019). That triggered bond and stock market reactions that were swift and brutal. The stock market had a 10% plus stock correction (and we have not recovered from that despite Chairman Powell backing off his October comments).
President Trump, virtually at the same time as the Fed announcement, tweeted that he was imposing a series of tariff increases on friends and foe alike. And, he would hike them to extremely high levels if productive trade negotiations did not start immediately with virtually all major trading partners in the world. We have not seen anything like this since prior to the Great Depression. The market was not amused; and expressed dissatisfaction immediately.
Tariffs as Weapons of Potential Mass Economic Destruction
Tariffs don’t sound that bad. There have been mild tariffs in place for long period of time. However, escalating tariffs with major trading partners can lead to a trade war. And, war has casualties. It can lead to restricted flow of goods and services, less business production, slower economic growth and serious problems for almost everyone. It is like throwing sand into an engine…with bad consequences. If not stopped in a short period of time, recessionary forces take over that could envelop all major economies. Not good for you and me, or General Motors!
2019 Corporate Earnings
In 2018, we have seen record corporate earnings due to better economic conditions and the substantial impact of the corporate tax cuts enacted last year. However, the tax cut was a onetime item, not to be duplicated in 2019. Most market analysists are projecting lower earnings growth rates in 2019 as a result. To compound the situation, most economists are predicting lower economic growth from the highs of 2018. This combination may mean below average stock market returns in 2019.
Special Counsel Investigation
The Mueller investigation is winding its way to conclusion, although the exact date is unknown. So far, there have been numerous indictments, some convictions and jail sentences for Russian operatives and the campaign aides/government appointees of the President. Speculation that the President may someday be indicted or impeached has the country in a state of uncertainty. And, as we now know, markets really do not like uncertainty. Stay tuned.
Tax Impacts of Portfolio Management for 2018
It has been a very active 2018 in portfolio management here at Compass Rose. In February, we were quite successful in raising cash during the correction and putting it to work in productive investments that produced handsome gains by August/ September. In early August, we began to harvest those gains and continued that practice through September and October…to preserve as many gains as we could. Raising cash also provided a buffer to the downturn in October/November.
Our harvesting strategy resulted in significant realized gains in taxable accounts. To moderate potential tax impacts for 2018, we sold certain positions that had substantial losses to offset the gains. Unfortunately (or fortunately!), there were not enough losses to come close to offsetting the gains. Therefore, we encourage all clients who have taxable accounts (non-retirement accounts like IRAs) to check their December statements for a tally of realized gains. You can call us or your CPA to help identify the tax liability that might be due in April 2019.
Succession Planning at Compass Rose
We have a responsibility to plan for the eventual departure of Compass Rose Advisors. While Karen and Jim plan to be here for many more years, we felt it was necessary to update our 2012 continuity agreement due to growth of the firm and complexity of the business.
Today, we are pleased to announce that there is a new legal agreement in place for enhanced continuity. Although we don’t anticipate using this agreement unless there is a catastrophic event, we feel very secure in knowing that our clients will be served by three other highly experienced Financial Advisors. Our succession partners are terrific people, excellent professionals and operate in a very, very similar ways to us. Their operational and portfolio management approach is a great match.
Please note that this is mutual arrangement. Should anything happen to their key personnel, we are their succession partners at that point.
We feel that we have delivered a great solution to problem that may never happen. But, we think you should know that a comprehensive plan is in place should the unthinkable occur.
During this holiday season, we want to take a moment to tell you that we very much appreciate the opportunity to work with you and your family. We value you not only as clients, but as friends. We share the ups and downs of life, and we confide in each other. We keep our eyes on what is best for you and your financial well-being. We love doing this and hope that you feel it too. Have a holiday season full of wonder and joy from all of us at Compass Rose!
Jim, Karen and Bill