Bitcoin Steals Stocks’ Thunder

The Week in Review

  • Job Market Strength
  • Potential Year-End Tax Considerations
  • What’s a Dow Point Worth?
  • Looking Ahead

Stock prices fell in the first half of the week around concerns over a potential government shutdown, the difficult task of reconciling the House and Senate tax bills and the expectation that the Federal Reserve will raise interest rates next week, likely its final policy adjustment with Janet Yellen at the helm. Or maybe it was just investors and traders taking gains after the strong year for stocks here and abroad.

Whatever the reasons, the facts on the ground remain the same. The economy is expanding, job growth remains on an upswing (today’s unemployment report confirmed that once again) and even if the Fed raises rates next week, liquidity is strong.

So, it was also no surprise then that stock prices rose toward the end of the week as the risk of a government shutdown was taken off the table (if only for two weeks) and an agreement was reached on negotiating the United Kingdom’s eventual “Brexit” from the European Union.

For now the general trend remains higher, yet we know that the market’s current winning streak will be interrupted  at some point—whether it’s next week or some months or even years into the future—and that’s okay because gains and losses are part of a normal investment cycle. Markets have often presented investors with declines and still they have delivered strong gains to those with the fortitude and discipline to see through the drops, no matter how deep. For long-term investors, the current fundamental facts support more, not less, domestic and global economic growth, and with that, a concomitant possibility for gains.  

For the year through Thursday, the Dow Jones Industrial Average has returned 25.4%, while the broader S&P 500 has gained 20.0%. The MSCI EAFE index, a measure of developed international stock markets, is up 21.7%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index has climbed to 2.69% from 2.61% at 2016’s end. On a total return basis, the U.S. bond market has gained 3.3% for the year.

From Wall Street to Main Street, the sheer magnitude of the move in bitcoin prices this week had everyone wondering whether the next stop for the e-currency was $100,000 or $100. We believe bitcoin is in a manic phase driven by speculation around the imminent arrival of options trading in the currency, as well as a broader belief that buying bitcoin is a path to easy riches. We are not in that camp, and while some have benefitted from dramatic bitcoin gains, the fact that the price of this unregulated “thing” (which has no intrinsic value, is barely used for its intended purpose except by a very few, and is best known as a means of hiding ill-gotten gains from less-than-legal transactions) is so wildly volatile means that we are happy to watch from the sidelines rather than dive in. To us, bitcoin 2017 smacks of the mania for technology stocks in 2000 and “flip-able” real estate in 2007.

Job Market Strength

We’ve been saying this for so long that it could easily be taken for granted, but it shouldn’t be: A fully employed workforce keeps consumer spending high and our economy growing. The U.S. workforce gained 228,000 jobs in November while the unemployment rate remained at 4.1%—the lowest level since 2000. November marked the 86th month in a row where employers created more jobs than they terminated.

With the economy at full employment and companies reporting a shortage of skilled labor, we’ve been expecting to see wages on the rise, and paychecks were indeed up 2.5% in November from the same time last year. Still, that figure lags the prerecession growth rate. The fact that we aren’t seeing better wage growth with unemployment this low suggests that the economy may have more room to run without a big increase in inflation.

Potential Year-End Tax Considerations

We’ll have a lot more to say on the tax bill once we know what is actually going to become law and, as we’ve said, we aren’t going to make moves based on guesswork. That doesn’t mean we’re not thinking ahead—we know that it’s a topic many clients are following closely. While we continue to monitor the proposed reforms as they evolve, there are a couple of timely year-end topics we’ve been tracking in regards to Roth IRA conversions and real estate and state taxes. As always, consulting a tax professional is advisable before making any impactful decisions or payments.

First, there is a possibility that the legislation would do away with Roth IRA recharacterizations, also known as the “Roth conversion do-over.” Under current law, when you convert a traditional IRA into a Roth IRA, you pay income taxes on the full amount converted; thereafter all withdrawals and earnings are tax-free. If your circumstances change, you are allowed to undo part or all of the conversion and reclaim the taxes paid by October 15 of the following year with no penalty. If this applies to you, be aware that the current proposed legislation will erase this option, and do-overs may be disallowed after December 31, 2017.  

Second, it may be advantageous for people who are not subject to the Alternative Minimum Tax to prepay 2018 real estate and state taxes. It’s unclear whether proposals to do away with deductions on state and real estate taxes will eventually become law, but if you think you may be impacted, we recommend you get in touch with your tax professional before making payments on an accelerated basis. 

What’s a Dow Point Worth?

You may have seen the headline hullabaloo last week (no, we are not referring to Bitcoin)—one we saw was “Dow smashes through 24,000 as markets touch new highs”—when that index crossed its latest 1000-point milestone. After all, these big round numbers look good in large print. But how remarkable was this one? It took the Dow just 43 days to cross the 24000 threshold, a gain of 4.3% from 23000, which translates into a 43.5% annual pace. Sounds impressive, but that was only the fourth-fastest gain for the 23 four-digit milestones since the Dow hit 1000 on November 14, 1972.

The fastest? The 63-day stretch in 1999 when the Dow went from 10000 to 11000 at a 73.7% annualized pace. Other quicker moves were the climb from 20000 to 21000 earlier this year (a 66.3% pace), and from 6000 to 7000 between late 1996 and early 1997 (58.6%).


Sources: Dow Jones and Adviser Investments.

All of this is to say that a Dow point doesn’t buy as much today, with the index in the tens of thousands, as it did when it was in the mere thousands. We’re certainly not going to turn up our nose at a strong run of gains, but we simply aren’t as giddy about these milestones as the pundits in the press might be.

Looking Ahead

Investors will be focused on the Fed next week, with expectations that policymakers will announce a moderate increase in short-term interest rates at the close of its two-day meeting from the current range of 1.00%–1.25% to 1.25%–1.50%. And Janet Yellen will most likely give her final press conference as Fed chair, so we’ll be listening.

Also next week, investors will get reports on job openings, small business confidence, inflation, retail sales, manufacturing and the service sector.

Our thoughts and prayers are with anyone affected by the wildfires in Southern California.

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Please note: This update was prepared on Friday, December 8, 2017, prior to the market’s close.

This material is distributed for informational purposes only. The investment ideas and expressions of opinion may contain certain forward-looking statements and should not be viewed as recommendations or personal investment advice, or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.

Our statements and opinions are subject to change without notice and should be considered only as part of a diversified portfolio. You may request a free copy of the firm’s Form ADV Part 2, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged.

Past performance is not an indication of future returns. The tax information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice. We do not provide legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.

Companies mentioned in this article are not necessarily held in client portfolios and our references to them should not be seen as a recommendation to buy, sell or hold any of them.

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