June 2018

Market Update

The Federal Reserve met on June 13 and unanimously voted to raise the benchmark federal-funds rate by a quarter point to a range between 1.75 and 2%. This is the second rate raise of the year with two more expected before the year ends. If the economy continues to be strong, we expect that the Fed will continue to push rates up into 2019 as well.

Aside from the Fed, there are other major events and trends affecting the markets. Recently a judge sided with AT&T in their effort to purchase Time Warner, a move the government was suing to stop. With this blockbuster merger moving forward, I think it likely will set a precedent and we may see the rate of mergers pick up later this year.

We are also seeing unemployment figures coming in extraordinarily low, although wage increases remain stubborn. Corporate profits reported year to date have generally been very strong, partially due to the tax reform passed in 2017.

As always, politics continue to influence the market. The threat of tariffs and protectionism has jostled markets at times throughout the year. However, for all of the boisterous talk, when the posturing subsides it seems the markets believe that ultimately negotiations will allow for relatively open and free trade to continue. The world is changing quickly; it was not long ago that North Korea was firing off missiles and we seemed to be at a point where a war could have been possible at any moment. For now, that threat seems to have subsided after the summit in Singapore between U.S. and North Korean leaders. While there has been increased volatility in the stock market this year, when you compare that to what is going on around the world it seems pretty tame. Perhaps the prospect of lasting peace and denuclearization being brokered under these unlikely circumstances is hard for the market to price.

Year to date stock performance is still positive, albeit with increased volatility, and there certainly has been a return to reality from the huge returns of 2017. As of June 21st the S&P 500 is up 3.5%, while the Mid Cap 400 is up 5.3% and the SmallCap 600 is up 12.7%. On the fixed income/bond side, things are not as pretty: the Barclays U.S. Aggregate is down 2% while the Bloomberg Barclays corporate long term debt index is down 7.1%.

The 10 year treasury has been hanging right around 3%, which is way up from its 52 week low of just over 2%. The increase in interest rates has rippled through the economy; 30-year fixed rate mortgages are now around 4.5%, CDs are starting to pay some decent interest and, as noted above, fixed income portfolios that are not properly allocated can be exposed to substantial losses.

If the disparity in the market continues through this year, perhaps at the end of the year we can look back and see that portfolio diversification and asset allocation have added value again—after a handful of years of large cap US equities leading the way. I also think that the wide differences in returns validates the tactical management of assets that our firm generally implements for our clients. Reviewing the negative performance in the fixed income asset class, I believe our firm’s investment strategies over the last number of years—utilizing tactical core portfolios and, for higher net worth investors, implementing individual bond and laddered bond portfolios—is proving to be a good solution. To learn more about our bond strategies, please read this article.

We welcome all of your questions. If you have any, please do not hesitate to call or email us.

Best,
Nathan
President, Kuhn Wealth Management

Bonds and Rising Interest Rates

Interest rates have been rising with the 10-year treasury yield now bouncing around 3%—a large increase from rates that were close to 2% a year ago. These rising interest rates have certainly started to impact the bond market: the Barclays US Aggregate is down 2.2% year to date, intermediate corporate index is down 1.9%, and long-term corporate index is down 6.8%.

The difference in return between shorter and longer bonds is due, in large part, to duration. Average duration is a measure of a fund or ETFs interest rate sensitivity. The longer the duration (the bigger the number), the more sensitive that position is to shifts in interest rates. Duration gives an indication of how a fund’s net asset value will change as interest rates move. For example, a duration of 5 would indicate if interest rates increase by 1% then we should expect the principal value to decrease by 5%; if the duration were 10 we would expect a 10% decrease in value, etc.

At Kuhn Wealth, we tend to utilize tactical strategies to manage our clients’ portfolios, and we continue to see allocations favor shorter duration funds and ETFs as rates continue to rise. For clients with larger accounts we also utilize portfolios of individual bonds and bond ladders. We typically employ these strategies when the allocation toward fixed income is over 250K. That means someone in a 80/20 allocation we may look to carve out the bond allocation at a portfolio of around 1 Mil. For someone in a 60/40 allocation we may look for that carve out at around 700K. The 250K is not an exact figure, but around that dollar amount is where we feel we can achieve appropriate diversification.

When we put a bond ladder in place for a client, we spend a good amount of time reviewing with them the strategy, implementation, and expectations. As a quick explanation, a bond ladder is a portfolio of individual bonds from various issuers across a variety of sectors; the “laddering” is achieved by selecting bonds with staggered or “laddered” maturities. For example, 10 bonds might mature every year for 10 years; thus, each year, as bonds mature, the proceeds can be used to buy new bonds maturing in 10 years. This staggering of maturities is where the term “laddered bonds” is derived. The advantage to this strategy is that we can mitigate the duration risk outlined above. When interest rates rise these portfolios will likely go down in value; however, we can control the duration risk by holding bonds to maturity where they will mature at par. This is an advantage over a fund or most ETFs where there is no maturity date.

If you are a client of our firm and would like to discuss, review, or have any questions about your fixed income allocation, please do not hesitate to call. If you are not a client and you would like us to help evaluate the current potential risks in your fixed income investments/allocations, please contact us as we are more than happy to help.

Charitable Giving and the New Tax Code

The tax law changes enacted this year are having an impact on the economy and the decisions both corporations and individuals are making. While it is hard to measure the direct impact of such changes, figures indicate that individuals may indeed be spending more as take-home income has increased, although some of those savings are likely being errored with higher gas prices. The changes may also have influenced corporate decisions, as we are seeing an increase in capital expenditures and perhaps a willingness of corporations to spend more domestically.

As advisors, we examine how the tax code can impact our clients. That includes what new strategies could benefit our clients and what old strategies may no longer be applicable. I believe charitable giving is one area, where working with our clients’ accountants, we can help our clients be more tax efficient.

A Change to Standard Deductions

The new tax law nearly doubles the standard deduction – up to $24,000 for a married couple. Thus, many more people will be claiming the standard deduction rather than itemizing deductions on their tax forms. For those individuals who end up claiming a standard deduction, contributions to charities would no longer provide a specific tax benefit.

Giving from IRA Accounts

There are a few strategies to consider when making charitable contributions, especially in light of the new tax laws. A strategy that has been used for years—and one that will likely become more widely utilized with the tax changes—is for individuals age 70½ to contribute funds to a charity directly from an IRA account. These contributions can satisfy RMD requirements while at the same time making the contributions very tax efficient. There are limits to this strategy; it is important to consult a tax advisor for specific guidance.

Donor Advised Funds

Another strategy, which I have written about before—and one that has already seen a huge increase in popularity with the new tax laws—is the use of Donor Advised Funds. A Donor Advised Fund is a family foundation alternative that provides a simple, flexible and efficient way to manage charitable giving. Clients can enjoy immediate tax advantages, then make grants on a flexible time table.

Under the new tax code, it could make sense to aggregate charitable donations into one year. For example, let us assume an individual is making annual charitable donations of $10,000. However, on a yearly basis under the new tax rules, they are still best off claiming the standard $24,000 deduction. In this case they would no longer realize a tax benefit for the charitable contributions. Utilizing a Donor Advised Fund, they could make a one time $50,000 contribution to the Donor Advised Fund and itemize deductions for that year, thus gaining a tax advantage for the contributions. Then, over the course of the next 5 years, they could donate the $10,000 per year from the Donor Advised Fund.

Another fantastic reason to consider a Donor Advised Fund is that appreciated assets can be donated to them. Consider someone who purchased a stock years ago for $10,000, and that stock is now worth $40,000. They could contribute the $40,000 to the Donor Advised Fund, getting the tax advantage on that contribution, while at the same time not having to realize the capital gains on the sale. While there are limitations as to deductibility of charitable contribution as a percentage of income and so forth, this is a very efficient tax planning strategy and something we work closely with our clients’ tax advisors with to coordinate.

Are you interested in learning more about Donor Advised Funds? We have experience with set up and management and would be happy to discuss this with you in more detail. Also, if you have questions pertaining to making charitable contributions from an IRA account, please give us a call.

Financially Plan for Your Future

We have long believed that a sound financial plan can be your guiding light in times of uncertainty and volatility. It’s empowering and motivating, providing you with the clarity needed to make important decisions with confidence. We’re here to help you—not pressure you—to organize and optimize the resources you have available to best meet your goals, in a way that makes sense for your stage in life.

If you are curious about the financial planning process, please know our goal is to make it easy for you to grasp, manage, and maintain your financial health. We utilize industry-leading software and have developed a streamlined approach, all designed to make financial planning less complicated and less overwhelming. The first step is simple: schedule a consultation and software demo. We’ll guide you from there.

If you’re interested in learning more about financial planning, please call or email us today.

As of 6/19/2018. The opinions expressed are those of the writer and does not necessarily represent the views of the presenting party, nor their affiliates. Past performance and predictions are not a guarantee of future results. The material contained hearin is obtained from sources believed to be reliable, but its authenticity, accuracy or completeness is not guaranteed. Projections are inherently limited and should not be relied upon as an indicator of future results. Investments in securities involve a high degree of risk and should only be considered by investors who can withstand the loss of their investment. The S&P 500 Index is a widely recognized capitalization – weighted index that measures the performance of the large-capitilization sector of the U.S. stock market.  The S&P MidCap 400® measures the performance of mid-sized companies, reflecting the distinctive risk and return characteristics of this market segment. The S&P SmallCap 600® measures the small-cap segment of the U.S. equity market and is designed to track companies that meet specific inclusion criteria to ensure that they are liquid and financially viable. The Barclays U.S. Aggregate Bond Index measure the performance of the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, mortgage-backed securities (agency fixed-rate and hybrid adjustable rate mortgage (ARM) pass-throughs) asset-backed securities and commercial mortgage-backed securities. Direct investment in an index is not possible. Because investor’s situations and objectives vary, this information is not intended to indicate direct investment advice and suitability for any particular investor. This material is not to be interpreted as tax or legal advice. Please speak with your own tax and legal advisors for advice/guidance regarding your particular situation.

Securities offered through Concorde Investment Services, LLC (CIS), Member FINRA/SIPC. Advisory services offered through Kuhn Wealth Management, Inc., a state registered investment advisor. Kuhn Wealth Management, Inc. is independent of CIS and Concorde Asset Management, LLC, all of whom are unaffiliated with third party sites, and cannot verify the accuracy of nor assume responsibility for any content of linked third party sites. Information available on third-party sites is for informational purposes only.