July Market Commentary

After posting strong results in the first half of 2019, financial markets took a slight breather in July. US stocks and bonds posted modest positive returns and international stocks posted modest negative returns. Investors were awaiting the main event at the end of the month – the Federal Open Market Committee (FOMC) meeting on July 30-31, followed by a press conference on July 31st.

At the conclusion of the July FOMC meetings, Federal Reserve Chairman Jerome Powell did something the Federal Reserve has not done in nearly 11 years – they lowered interest rates! Mr. Powell made good on his promise in June when he commented that the Federal Reserve will act as appropriate to sustain the economic expansion. During his July announcement, Mr. Powell stated that the Federal Reserve intended this reduction to be a mid-cycle adjustment to its interest rate policy.

To clarify, he does not believe this is the beginning of a lengthy interest rate cut cycle, although this is widely debated in the investment community. With global growth slowing, increasing concerns about ongoing tariffs and low inflation, the Federal Reserve made a pre-emptive cut in interest rates in order to potentially get ahead of an economic slowdown in the U.S.

Contrary to the Federal Reserve, the Trump administration believes the Federal Reserve should more aggressively reduce interest rates. Interest rates outside the United State are significantly lower. In order to maintain U.S. trade competitiveness, the administration’s view is U.S. interest rates should reflect the level of interest rates elsewhere. Therefore, the debate about interest rate policy is one of the most covered business media topics. This has created a significant amount of tension between the Trump administration and the Federal Reserve, the latter of which is attempting to maintain its independence from political interests and influence.

Overall, second quarter corporate profits are coming in better than expected. However, future earnings forecasts for a few economically sensitive companies are moderating, as industrial growth is slowing, and businesses are holding back a bit on spending. This should be expected as the U.S. trade skirmish with China drags on with no end in sight. To emphasize this point, the Trump administration on August 1st announced an additional round of tariffs on Chinese imports starting September 1st. The longer the trade issues persist, the risk of a global recession increases in 2020. Ongoing uncertainty regarding global trade, including the United Kingdom’s exit from the European Union, is contributing to weakening global economies. To this end, central banks around the world have already lowered interest rates or are considering rate cuts soon.

Our investment team remains vigilant in assessing the current political and economic headwinds facing investors today. We recognize the current trade disagreements may lead to continued slowing global economic trends and potential volatility in the financial markets. In addition, historically, the August-October months have witnessed some of the weakest returns in the stock market. However, with low interest rates and a U.S. economy still growing, we do not believe a recession in the U.S. is imminent. Therefore, we view weakness in the stock market associated with trade disagreement flare-ups as attractive opportunities for long-term investors.

Tax Planning

With the passage of the Tax Cuts and Jobs Act, tax planning became even more critical to truly maximize your tax savings. We strongly recommend that your tax planning is not simply a year end meeting with your CPA and/or financial advisor. It is truly an on-going process throughout the year. While 2019 tax planning really started on January 1st, there are many things you can still do to prepare yourself for a much better tax outcome in 2019 than in 2018.

If your pass-through business income qualifies for the Qualified Business Income (QBI) deduction, consider the following planning items:

  • If you are an S-corporation, reducing your salary will allow for more business income subject to the 20%deduction and reduces your payroll taxes. Of course, reasonable compensation standards must be considered. Additionally, look at the potential negative impact of a reduced salary on maximizing retirement plan contributions.
  • If you are a specified service trade or business (as defined under the QBI regulations) and over the taxable income phase out limit of $315,000, consider further maximizing qualified plans such as 401ks, profit sharing plans, and/or defined benefit plans to lower your taxable income to qualify for the deduction.
  • Another option for reducing your income to qualify for the deduction is maximizing the bonus or Section 179 depreciation on new business equipment.

Be sure you are on track to maximize qualified plan contributions and HSA contributions.

  • For 2019, 401k contribution limits are $19,000 for those under age 50 and $25,000 for those over age 50.
  • For 2019, HSA family contributions are $7,000 while individuals can contribute $3,500. For those over age 55, another $1,000 can be contributed.

Charitable Contribution considerations:

  • “Bunching” contributions every other year to take full advantage of the standard deduction in one year (with few or no charitable contributions) and itemizing deductions in another year (by making multiple years’ worth of contributions in one year).
  • Donating appreciated assets from non-retirement accounts is highly tax efficient. This will not only provide a great tax deduction, but will also allow you to avoid the capital gains tax on the appreciation of those assets over the years. Given the stock market gains over the past number of years, many folks have assets with significant unrealized gains that can be avoided by donating them directly to charities.
  • Does a Donor Advised Fund make sense to allow for the “bunching” of charitable contributions while still allowing grants to various charities throughout the year? If so, make it truly efficient by donating appreciated assets to the fund vs. cash. We can help with this strategy.
  • If you are over 70 ½, taking required minimum distributions from an IRA, and are charitably inclined, consider a Qualified Charitable Distribution. This charitable contribution, directly from your IRA,
    satisfies the required minimum distribution and eliminates both the income from the distribution and the charitable contribution. This is pretty powerful if you don’t itemize deductions and do not truly need the cash flow from these required distributions.

The bottom line is that with tax law changes come opportunities. Those opportunities can only be maximized with proper planning and time to implement. We highly recommend a review of your tax situation now in order to allow for truly maximizing your 2019 tax savings. We are here – ready, willing and able to assist with your tax planning needs.

Come Grow With Us

We are getting close to completing three more office spaces. We expect to have these finished by early September.

Save the Dates

The Annual Salt Lick Creek Farm Party
Saturday, September 28, 1:00 – 7:00 pm
The Annual 9258 Wealth Management Holiday Open House
Thursday, November 21, 4:00 – 8:00 pm