Market and Portfolio Update

As far as the markets go...we have basically gone a whole lot of nowhere.  We keep hearing about new record highs as the S&P, Dow and NASDAQ rise a small fraction above the previous high.  We are also continually seeing accolades about 2019 double digit returns apparently forgetting that Q4 2018 saw gut-wrenching losses of equal proportion.  These are definitely more catchy headlines than anything to celebrate.  Welcome back the chart of the S&P 500 above.  This chart shows the past two years.  There are just a few technical things I want to point out.  First, please note the green horizontal line on the top portion of the chart.  This is the area where the last 2 rallies stalled out in July and September...we call that "resistance".  Today, the market appears to be trying to break above that line.  That would be a big deal and seen as a "breakout" and could spark another rally.  Tomorrow (10/30) we will hear from the Fed about interest rates.  Also, Apple reports earnings after the close of the market tomorrow.  Either of those could be the catalyst the market needs to a run to new highs.  We'll see.

Next, I would like to draw your attention to the blue line cutting through the middle of the chart.  That is the 200 day simple moving average.  Please note that the line is sloping up...that is a bullish sign and another reason that this rally could be for real.   Lastly, I want you to make note of the two red horizontal lines.  Those are support lines.  A drop to the red line closer to the top would be a 3% drop and more than likely where the market would head if Apple's earnings miss or we get some not so great news about interest rates from the Fed.  On the way down from the upper red line to the lower red line lies the 200-day moving average.  The 200-day would likely act as another area of support (as it has 4 times this year) if we were to see a sharp selloff.  The lower red line would be a 16% drop and would put us firmly in correction territory on the way to a potential bear market.  It would probably take a triple whammy for a drop to the lower red line to occur...bad earnings, an uncooperative Fed, and another trade war fist fight between Trump and Xi Jinping. 

Rest assured that we are prepared for a variety of possibilities because as we all know, it is truly impossible to accurately predict the direction of the market in the short term.

OK, enough about the technicals...let's review some fundamentals.  Generally speaking, the economy is still relatively stable as evidenced by recent Gross Domestic Product (GDP) trends.  GDP for Q1 2019 was 3.1%.  Q2 GDP grew at 2.0% and the estimate for Q3 stands at 1.8%.  We are obviously trending down, indicating an economic contraction but most economists are not calling for a recession yet.  Historically, when we see two consecutive quarters of declining GDP it can signal a possible recession.  However, this would typically be in conjunction with rising unemployment which we are not seeing. 

The bond market has sold off recently sending yields back up from near record lows.  Considering the fact that yields in the US are still higher than many other parts of the world, we would not be surprised to see another bout of buying in the bond market this year sending yields back down.  Do you realize that $15 Trillion or about 25% of government bonds worldwide have Negative Yields?  Yup, it's true.  That number has nearly tripled since last year.  So, here is what that means...

First, let me give you a tradition example.  Here in the USA, I  can buy a 10- year US treasury bond and receive approximately 1.80% in interest each year until my bond matures in 10 years.  That means if I invest $10,000, I will get $180 in interest every year as long as I hold on to the bond and our government remains solvent.  Pretty lousy huh?  Not really.  Let's do the same in Germany where the 10-year "bund" is yielding -0.35%.  If I invest the same $10,000, not only will I receive absolutely no interest, I will have to pay $35 every year just to own the bond.  Crazy isn't it?  Here is another crazy example. mortgage rates in Denmark are negative.  Imagine getting paid to buy a home rather than paying interest on a loan.  Now you may understand why there continues to be such a huge appetite for US bonds even at "low" interest rates.  To add further confusion, the forecasts for bonds and interest rates are very mixed.  Some still fear an inversion of the yield curve.  Others are calling for negative interest rates here in the US and others say we are headed for higher interest rates.  Therefore, we are being extremely cautious with our bond allocations to avoid unnecessary interest rate risk that could lead to losses we would rather avoid. 

As we mentioned earlier, The Fed meets again tomorrow.  The overwhelming consensus is that we will see another 1/4% reduction in the Fed Funds rate.  On October 4th, Fed Chairman Jerome Powell said "the US economy is facing some risks at the moment, but overall is in a 'good place' and the Fed's main job is to keep it there as long as possible".  If we do not see a rate cut, it may send the markets into a tizzy.  As always, the main focus will be on what we get for commentary about the state of the economy and what to expect going forward.  The announcement is slated for 2:15 tomorrow.  Stay tuned.

If you would like to discuss anything further or have any questions or concerns, give us a call or send us an email.

Industry Spotlight

Trades now $FREE

Led by Charles Schwab, TD Ameritrade and the majority of online brokerage firms have eliminated commissions on buying and selling stocks and exchange traded funds (ETFs).  This move will have a profound effect on how investment advisors are able to manage client accounts.  This is a huge positive for RAA and our clients.  It took a very good situation to a great one.  Previously, we had access to approximately 300 commission free ETFs.  If, after doing our research, we found a particular stock or an investment that was not on the list of commission free ETFs, we had to further consider the cost of $6.95 per trade.  This may not sound like much but for smaller accounts or smaller allocations, it could add up.  At RAA, we are tactical and hardly ever make a full allocation all at once.  For example, we currently own a healthcare sector ETF for most accounts.  For a growth-oriented account, our target allocation is 7%.  However, when we first purchased the fund, we allocated 3 1/2% to allow us to "average in" if/when the price came down and we still have a positive outlook on the fund.  Because this particular fund was on the commission free list, we were able to easily and cost effectively add small amounts as the price did drop and now have a full position at a small gain because we were able to buy at lower prices and not worry about trading costs.  Now, with no commissions, we can do the same exact thing for any stock or ETF no matter how small the trade may be...That is Awesome!

This will also greatly help when it comes to re-balancing accounts.  In other words, making small tweaks as the market bobs up and down to keep our allocations and risk under control.

If you have any questions, please contact us.

Long Term Care

 Long Term Care planning has become an integral focal point of the overall financial planning process.  Both the CFP board and The American College have made it clear that we need to be discussing the risks and possible solutions as we create, review and maintain retirement plans.  Because of the importance, we will likely include Long Term Care education and strategies in our newsletter for the foreseeable future. 

November is Long Term Care awareness month.  As such, we want to provide some food for thought and provide some further education.

The industry has quickly shifted away from traditional long term care insurance where you pay a non-guaranteed annual premium for a future benefit if and when you are deemed chronically ill by a medical professional.  The biggest complaints we hear and read about refer to large premium increases and the fact that these policies are "use it or lose it".  Consumers and advisors alike have found more comfort in newer "linked benefit" life insurance policies that offer a guaranteed premiums for a future benefit that can be in the form of long term care, death proceeds or cash value to use for any purpose.  Another concern we often come across is from investors that find themselves rolling into retirement with the majority of their assets in IRA or 401(k) accounts and limited sources of income.  There are many in this situation that want long term care protection but do not know how they can afford to pay for it.  We have spend a great amount of time over the past several months researching different companies and their products to ensure we are able to provide the best solutions to our clients. Today, we want to briefly tell you about a very unique solution we found to address this concern.  Typically, when we fund a linked benefit insurance policy, we either move a lump sum of excess cash savings or fund with discretionary income over a 5-10 year period.  However, not everyone with a desire for coverage can do that.  Here is the good news.  We have found a solution in which we can re-position qualified retirement money and receive long term care insurance via a linked benefit policy.  As we detailed above, one would also have a death benefit and access to cash value as well.  If you fall into this category and would like to discuss how this may work for you, please contact us to schedule an appointment.

We are excited to be able to offer solutions to our clients for this very important area of planning.

Above are some statistics that really shed light on the importance of this topic.  Once again, we would like to ask you to start having discussions about long term care with your loved ones and please let us know how we can best assist in helping you answer your questions and addressing you concerns. 

To Roth or Not to Roth

Determining if a Roth conversion is right for you.

Anyone can convert their eligible IRA assets to a Roth IRA regardless of income or marital status. Prior to 2010, only those account owners who had a modified adjusted gross income below $100,000 were eligible to convert.  Despite its advantages, Roth may not be the preferred option for all investors. There are a couple of very important factors to consider before you decide if a conversion is right for you - taxes and time. 

How much will the tax bite be? 

How much time do you have until you intend on using the money in the Roth IRA?

If you would like to discuss if a Roth IRA conversion makes sense for your particular situation, please let us know so we can review with you. 

*Unlike a Roth IRA contribution, conversions need to be done by December 31st of the current tax year.  

Considerations for owners of Roth IRAs

Generally, converted assets in the Roth IRA must remain there for at least 5 years to avoid penalties and taxes. Distributions from a Roth IRA are tax-free and penalty-free provided that the 5-year aging requirement has been satisfied and at least one of the following conditions has been met:

You reach age 59½

You pass away

You become disabled

You make a qualified first-time home purchase

RMDs are not required during the lifetime of the original owner of a Roth IRA.

RMD amounts are not eligible to be converted to a Roth IRA.

The Tax Cuts and Jobs Act eliminated the ability to convert back to a tradition IRA for conversions processed in the 2018 tax year and beyond.

Medicare and Open Enrollment Season

Many soon-to-be retired folks may think of enrolling in Medicare as a once-in-a-lifetime event that's timed to coincide with their retirement date and Social Security claiming decisions. But such a set-it-and-forget-it attitude about health care coverage options in retirement can be a costly mistake.  Each year, insurance companies can make changes to Medicare plans that affect out-of-pocket costs for monthly premiums, deductibles, drug costs and provider networks and pharmacies.  Medicare beneficiaries have the opportunity to re-shop their health care and drug coverage choices during the annual open enrollment season which runs from October 15th through December 7th every year for coverage that begins the following January 1st.  However, in reality, few do.  The stakes are higher than usual during this year's open enrollment period because there are new rules for prescription drug coverage, changes for new enrollees in Medigap supplemental insurance plans and new benefits available in all-inclusive Medicare Advantage plans in 2020.

Open Enrollment is also a very important time of year for individuals and families contemplating which choices are best for their specific situation.  The choices may look more like a bowl of alphabet soup than anything else...HMO, FSA, HRA, EAP, etc...

Sadly, a lot of people just want to do whatever they can do quickly because they either do not understand their choices or the financial impact one choice may have over another.  These are important decisions and there are a lot of common mistakes.  Some people sign up for high deductible plans but fail to take advantage of a Health Savings Account (HSA).  Other, younger and healthier people opt for more expensive, low deductible plans not understanding that they may be better off in a high deductible plan. 

Although we are by no means experts in employee benefits, we want you to know we are here as a resource if you would like to discuss your options.  

Please let us know if you have any other feedback or questions. 

We would love to hear from you !