Quote of the Week
“An error does not become truth by reason of multiplied propagation, nor does truth become error because nobody sees it.” – Mahatma Gandhi
Last week stocks recorded their worst week this year on worries that escalating trade tensions could further slow global economic growth. Yesterday (Monday) the markets experienced the worst down day of the year with the Dow down 767 points or 2.9%, the S&P 500 down 3.0%, and the Nasdaq down 3.5%. Yesterday’s down day was triggered by the Chinese announcing that they were devaluing their currency. Not only has the trade war with China escalated, but the currency war, which really has been going on for over seven years, has gotten white-hot.
Last week Mr. Trump, who is becoming more and more frustrated with China, announced an additional 10% tariff on more than $300 billion of Chinese goods imported to the U.S. starting September 1st. Crude oil prices experienced the largest one-day drop in over four years before partly recovering later in the week, while the 10-year Treasury yields fell to the lowest level since 2016. Yesterday the yield on the 10-yr U.S. Treasury dropped drastically again to 1.73% in response to the market action on Monday. The drop in Treasury yields is good for bond holders. Remember that bond prices go up when bond yields go down, and since we have a large exposure to Long- term U.S. Treasuries this is good for us.
In what was an action-packed week, the Fed cut rates for the first time in a decade by one-quarter of one percent in response to an uncertain economic outlook, softness in business investment, and below target inflation. The markets immediately sold off on that day because they were disappointed that the Fed did not give guidance that more rate cuts were to follow. Again, the Fed by lowering interest rates is not going to come to the markets’ rescue because if the U.S. and the economies of the rest of the world are slowing at a faster pace, people and businesses are not going to borrow to spend and invest.
Two big things just happened. The ISM Services just slowed to a 35-month low, and U.S. Corporate earnings just slowed to their slowest growth rate since the second quarter of 2016.
In ISM Non-Manufacturing terms (i.e., the U.S. Services economy) it slowed to 53.7 in July vs. June’s reading of 55.1. The cycle high of 60.8 was back in September of 2018. Even though the Service sector is still expanding (above 50 is expansionary and below 50 is contractionary) the rate of downward change is worrying. Remember, the important thing to consider is not whether the reading is good or bad, but the direction and the rate of change. That determines where the direction of things are going so that we are on the right side of the trend.
No worries? How about U.S. Consumer Discretionary Earnings slowing to -1.34% year-over-year.
Now we get to U.S. corporate earnings going into recession. Corporate earnings growth of the S&P 500 companies has slowed from a +24.5% year-over-year in the second quarter of 2018 to +1.2% in the second quarter of this year. With the economies of virtually all the countries in the world slowing, and the trade and currency war with China, I don’t see the downward trend reversing in the near future. Remember it is the rate and the direction of change that dictates our asset allocation. Our current positioning of Utilities, REITs, Gold, U.S. long- term Treasuries, global bonds, and high-grade corporate bonds should do us well. We will keep our heads low until things change. It is crazy out there.
2018 Tax Filing Data Shows Need to Review Withholding
The IRS continues to encourage taxpayers to review the amount of tax they have withheld to avoid an unexpected tax surprise when they file their 2019 tax returns next year. Preliminary 2018 tax filing data seems to show the need for taxpayers to review their withholding in order to make sure the appropriate amount of tax is being withheld from their paychecks to reflect recent tax law changes.
Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act made significant changes to the tax code, and 2018 was the first time that taxpayers filed with the new rules. Among other changes, the legislation modified individual income tax rates and brackets, eliminated the personal and dependency exemptions, raised the standard deduction amounts, limited certain itemized deductions (including the deduction for state and local taxes), increased the child tax credit and its phaseout thresholds, added a credit for other dependents, and increased the alternative minimum tax exemption amounts and the exemption phaseout thresholds.
2018 tax filing statistics
Preliminary data for the 2018 tax year shows that more than 106 million federal income tax individual returns resulted in refunds, with an average refund of $2,879. Over 24 million individual returns showed tax due at the time of filing, averaging $5,160.1 Because of the difficulty many taxpayers seemed to have with their 2018 tax year withholding (some may not have realized changes were needed), the IRS waived certain penalties for many 2018 tax returns. It is important that you get withholding right for 2019 while there still may be time for any adjustments to take effect.
Getting it right
If you have too much tax withheld, you will receive a refund when you file your tax return, but it might make more sense to reduce your withholding and receive more in your paycheck. If you have too little tax withheld, you will owe tax when you file your tax return, and you might owe a penalty. You can generally change the amount of federal tax you have withheld from your paycheck by giving a new Form W-4 to your employer. You can use a number of worksheets for the Form W-4 or the IRS Withholding Calculator (available at irs.gov) to help you plan your tax withholding strategy.
If changes reduce the number of allowances you are permitted to claim or your marital status changes from married to single, you must give your employer a new Form W-4 within 10 days. You can generally submit a new Form W-4 whenever you wish to change your withholding allowances for any other reason.
In general, you can claim various withholding allowances on the Form W-4 based on your tax filing status and the tax credits, itemized deductions (or any additional standard deduction for age or blindness), and adjustments to income that you expect to claim. You might increase the tax withheld or claim fewer allowances if you have a large amount of nonwage income. (If you have a significant amount of nonwage income, you might also consider making estimated tax payments using IRS Form 1040-ES.) The amount withheld can also be adjusted to reflect that you have more than one job at a time and whether both you and your spouse work. You might reduce the amount of tax withheld by increasing the amount of allowances you claim (to the extent permissible) on Form W-4.
You can claim exemption from withholding for the current year if: (1) for the prior year, you were entitled to a refund of all federal income tax withheld because you had no tax liability; and (2) for the current year, you expect a refund of all federal income tax withheld because you expect to have no tax liability.
If you need help, talk to a tax professional about your individual situation.
1Internal Revenue Service, 2019
Copyright 2019 Broadridge Investor Communication Solutions, Inc
By the Numbers
JUST IGNORE IT – The “Bipartisan Budget Act of 2019” was signed into law by President Donald Trump on Friday 8/02/19. The bill increases our nation’s discretionary spending by $324 billion over the next 2 fiscal years (2020-2021) above the statutory caps agreed to by Congress in December 2011 (source: BBA 2019). Michael A. Higley, BTN 08-05-2019
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These are the opinions of Larry Lof and Stephanie Mayoral and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Past performance is not indicative of future results. Due to our compliance review process, delayed dissemination of this commentary occurs.
The S&P 500 is an index of stocks compiled by Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. The index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. Indices mentioned are unmanaged and cannot be invested into directly.
Technical analysis represents an observation of past performance and trend, and past performance and trend are no guarantee of future performance, price, or trend. The price movements within capital markets cannot be guaranteed and always remain uncertain. The allocation discussed herein is not designed based on the individual needs of any one specific client or investor. In other words, it is not a customized strategy designed on the specific financial circumstances of the client. Please consult an advisor to discuss your individual situation before making any investments decision. Investing in securities involves risk of loss. Further, depending on the different types of investments, there may be varying degrees of risk including loss of original principal.