August, 2017 Review and Outlook

Highlights of this Update:

1. Markets, Office closed for Labor Day Holiday.
2. I.G. Annual Client Event invitations coming with details.
3. Take a look at Trust Co. of America’s new investor website.
4. Is a ROTH IRA conversion for you?
5. S. stock indices inch higher in August.
6. Interest rates lower, bond prices higher.
7. Stock volatility remains subdued.
8. Markets shrug off geopolitical tensions (for now).
9. Corporate earnings exceed forecasts.

READ ON FOR FURTHER DETAILS………………………………

Hurricane Harvey:

We extend our thoughts and prayers to all those impacted by the hurricane that devastated parts of south Texas.  We do have clients in that area that were affected and fortunately none of them or any of their family members were injured. 

Labor Day:

The U.S financial markets will be closed Monday, September 4^th for the Labor Day holiday.  Our offices will be closed as well.  We wish all of you and your families a very safe and happy Labor Day!

Watch Your Mail for Your Invitation:

Formal invitations will be going out in the mail this next week with details of our upcoming annual client event on September 28^th.  We are pleased that we were able to reserve space for our event at the Jones Assembly in downtown Oklahoma City.  Seating is limited, so be sure to make your reservations early and you are welcome to bring a guest(s) this year.

Trust Company of America’s Client Website:

You can now access a new TCA website that will help inform you about Trust Company of America and who they are. The new website (www.investor.trustamerica.com) explains the role TCA plays in their relationship with you as our clients and the protections they as custodian offer client assets. You can read about TCA’s history of innovation and safety. This investor-facing website features easy navigation tabs and quick-view information for a user-friendly experience. You can find detailed information about TCA’s regulatory oversight, insurance protection, cybersecurity efforts, and more. The site also has a page and link that will enable you to sign up for paperless statements to “go green.” To visit and bookmark the site, go to: www.investor.trustamerica.com

To Convert or NOT To Convert in 5 Easy Steps

What is a Roth IRA conversion?

A Roth IRA conversion is the process of moving IRA or employer plan assets

to a Roth IRA.

1. When will you need the money? If you have an immediate need for the funds or need

them to continue your current standard of living, then a Roth IRA conversion is probably

not for you. However, if you have no immediate need for the funds, a Roth IRA

conversion is potentially a great way for the funds to grow tax-free over your lifetime.

2. Where will the money come from to pay the tax? In nearly all cases, the money to

pay the tax on a Roth IRA conversion should come from outside (non-retirement account)

funds in order for the conversion to make sense. When a Roth IRA conversion is made, it

triggers a taxable event, so your ability to pay that tax with outside money will go a long

way in determining whether a Roth IRA conversion is right for you.

3. What do you think future tax rates will be? If you believe your income tax rate will

be the same or higher in retirement, then converting funds to a Roth IRA NOW makes

more sense, since you will be paying the tax at a lower rate. On the other hand, if you

think your income tax rate will be much lower in retirement, you may want to forgo a Roth

IRA conversion and take advantage of lower tax rates in a later year.

4. Other reasons to consider a Roth IRA conversion. You may have favorable tax

attributes in the year of the conversion such as large charitable deductions, net operating

and tax credits; you will not have to take required minimum distributions starting at age

70 ó; you will have the ability to make contributions even after age 70 ó if there is

eligible earned income; you can provide an income-tax-free inheritance to your heirs.

5. Other reasons to NOT consider a Roth IRA conversion. You have an aversion to

paying the income tax up front; you do NOT trust that the government will keep their

tax-free deal; you plan to name a charity as your Roth IRA beneficiary, and it will NOT

have to pay income taxes on the money it receives.

(Ed Slott & Company)

The Markets:

The major U.S. stock indices inched higher in August off their July closing levels.  The Dow Jones Industrial Average eked out a gain of .26% in August, closing the month at 21,951.14. The Standard & Poor’s inched just .05% higher, and is now 10.40% higher so far in 2017 after eight months. (Google Finance)

Interest rates moved lower last month, with the yield for the 10 year U.S. Treasury dropping .18% to end at 2.12% on August 31^st. (U.S. Treasury) With interest rates declining, bond prices rose as we had expected and the move did benefit our portfolios overall. The rate for a 30-year fixed mortgage is now in the 3.66% range and 2.875% for a 15-year fixed mortgage. (Bankrate.com)

Oil dropped $2.94 per barrel in August, closing at $44.20 while gold rose $44.20 per ounce, ending the month at $1,311.75. (CNBC)

For much of the year, the overall stock market has exhibited an unusual lack of volatility. In fact, one must go all the way back to the week ended September 9, 2016 before finding a Friday-to-Friday period in which the S&P 500 Index fell by more than 2% (MarketWatch closing data for the S&P 500).

At times, the upward climb in stocks has been exciting. At other times, it’s been pretty dull. And maybe that helps explain some of the shrill headlines that have been popping up on financial websites – websites that thrive on clicks and ad dollars.

Those who adhere to a disciplined investment plan, one that focuses on long-term performance, shouldn’t be too concerned. But we did witness a little bit of volatility creep back into the major indices last month, even as many of these same indices finished the month slightly higher.

What was noticeably absent was the lack of a meaningful market response when North Korea tested a missile that flew over Japan during the last week of August. Yes, stocks opened lower the following day but quickly rallied to finish in positive territory.

We have once again seen North Korea antagonize the world just this weekend with another event supposedly testing a hydrogen bomb.  The markets may react to this event until some clarity as to what may actual occur is achieved.

Two observations—

First, absent a serious crisis, investors appear to be pricing in North Korea’s unpredictable missile tests. Hence, we saw a muted reaction to what was a very provocative act of aggression.

Second, at least in the shorter term, investors don’t believe the situation will spiral out of control.

In no way are we trying to downplay the seriousness of what is going on. But from a short-term investment perspective viewed through the narrow lens of the market, geopolitical uncertainties just haven’t had much effect on stock prices as of this date.  That could change, but once any uncertainties can be resolved, the markets will most likely again focus on corporate earnings and the direction of the U.S. economy.

Earnings, earnings, earnings

Any real estate agent will tell you it’s location, location, location. While short-term market sentiment can be swayed by any number of factors – both positive or negative – longer-term, it’s earnings, earnings, earnings for stock prices.

With second quarter earnings season set to conclude, companies posted sales and profits that were much better than analysts had expected, according to Thomson Reuters. Thomson Reuters also reported that S&P 500 profits were up 12.1% from a year ago, the second consecutive double-digit increase. Profits were forecast to rise 8.0% as Q2 ended.

Bottom line – rising revenues and profits, in response to modest growth at home and an acceleration in economic growth around the world, has played a big role in supporting stocks. And it has occurred amid growing tensions with North Korea and dysfunction in Washington.

Simply put, investors have been focused on the fundamentals that drive stocks and have been looking past media-driven headlines.

Speaking of media headlines

Congress must pass and the president must sign a continuing resolution or pass a budget by September 30, or the government will shut down.

Of course, the government doesn’t completely shut down. Military, air traffic control, and other essential services continue, including checks for Social Security and Medicare. But non-essential government employees will stay at home and national parks would close.

Short-term traders get jittery, but the data going back to 1976 suggest any market impact is limited.

There have been 18 government shutdowns since 1976 (NBC News). The worst impact on the market: the S&P 500 Index fell 4.42% (1979). Number two and three, both in the 1970s, saw a drop of just over 3%. One year following the shutdowns, the S&P 500 was up in 16 of the 18 closures. From a market perspective, historically it has had minimal short-term impact and virtually no long-term effect.

The debate over the debt ceiling is another matter. Congress must raise the debt ceiling or the Treasury could default. It’s something that has never happened before. Republican leaders in both the House and Senate have said the ceiling will be raised before the limit is breached, likely in early October.

Bottom line—both narratives could increase volatility in September. While history strongly suggests long-term investors would likely look past a government shutdown, a breach of the debt ceiling, which is unlikely, would send financial markets into uncharted waters.

We appreciate the privilege to be of service and if you have any questions or we can be of further service in any way, please don’t hesitate to call or email us at any time.  We hope you have a great Labor Day!

God Bless,

Your TEAM at F.I.G. Financial Advisory Services, Inc.

 

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¹ The Dow Jones Industrials Average is an unmanaged index of 30 major companies which cannot be invested into directly.  Past performance does not guarantee future results.

³ The S&P 500 Index is an unmanaged index of 500 larger companies which cannot be invested into directly.  Past performance does not guarantee future results.

⁵ New York Mercantile Exchange front-month contract; Prices can and do vary; past performance does not guarantee future results.

⁶ London Bullion Market Association; gold fixing pricing; Prices can and do vary; past performance does not guarantee future results.