Resilient Economy and Fed Comments Spark Stock-Market Highs

  • Fed Sparks Market Rally; Interest-Rate Cut Appears Imminent

  • Dow’s 27,000-Point Milestone Gets Media Attention

  • Tax Considerations Should Guide Roth Conversion Decision

  • Looking Ahead to Earnings Season

Expectations that Federal Reserve policymakers will trim interest rates at their July 31 meeting cheered traders this week. The Dow Jones Industrial Average broke into record territory Thursday, cresting at 27139. (As we write this, the S&P 500 has crossed over 3000, putting it at a new high as well.)

Asian and European markets joined the party Friday, rallying on news of industrial growth in Europe and signs of further economic stimulus from the European Central Bank.

For the year through Thursday, the Dow Jones Industrial Average and the broader S&P 500 have returned 17.6% and 21.0%, respectively. The MSCI EAFE index, a measure of developed international stock markets, is up 13.9%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index has fallen to 2.59% from 3.28% at 2018’s end, though it’s up from last week’s 2.45%. On a total return basis, the U.S. bond market has gained 5.7% for the year.

Fed Sparks Market Rally; Interest-Rate Cut Appears Imminent

Just a week ago, the surprisingly strong jobs report had traders concerned the Federal Reserve might only cut interest rates 25 basis points (0.25%) at its July meeting or, perish the thought, not cut them at all. Those fears and the ensuing dip in stock prices were short lived.

Fed Chair Jay Powell’s remarks before Congress Wednesday sounded familiar themes: Slowing economies overseas and geopolitical crosscurrents (such as tariffs) could be a drag on the U.S.’s relatively strong economy. Powell’s testimony was read as a sign that an interest-rate cut is in the offing, sparking the stock market’s rally.

Stocks jumping on the prospect of economic weakness sounds contradictory, but as we said last week, in the perverse thinking on Wall Street, sometimes bad news is good news if it means the Fed will cut rates. Plus, the traders doing the buying are assuming that the U.S. economy is slowing, but still growing.

Dow’s 27,000-Point Milestone Gets Media Attention

Big round numbers such as the 27000 milestone crossed by the Dow Jones Industrial Average this week get a lot of media attention—and while we are obviously thankful for the positive trajectory, such media milestones are basically irrelevant.

First of all, these 1,000-point thresholds only get easier to cross as numbers get bigger. For example, it’ll only take a 3.7% gain for the Dow to eclipse 28000 from here. And for such a relatively small overall increase, it’s been a pretty long slog since we first crossed the prior milestone of 26000 back in January 2018—373 trading days to be exact. That translates into an annual rate of return of just 2.5%. Looking back since the Dow first reached 1000 in 1972, that’s one of the slowest climbs from a prior threshold. You can see in the chart below how this latest 1,000-point milestone compares to the others over the years. 

Note: Chart shows rate of gain (%) based on the number of trading days it took to cross each 1,000-point Dow Jones Industrial Average milestone.  Source: S&P Dow Jones Indices.

Note: Chart shows rate of gain (%) based on the number of trading days it took to cross each 1,000-point Dow Jones Industrial Average milestone.

Source: S&P Dow Jones Indices.

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Tax Considerations Should Guide Roth Conversion Decision

Roth IRAs are a powerful retirement savings vehicle—but should you trade in your traditional IRA for one?

The answer comes down to taxes.

What makes them so popular is that money placed in a Roth IRA can grow tax-free and then be withdrawn tax-free in retirement. Money you contribute to a traditional IRA also grows tax-free, but you pay taxes on the money you withdraw during retirement—and you are required to take the money out at some point.

As great as tax-free growth and tax-free withdrawals are, Roth IRAs aren’t a free lunch. If you want to convert a traditional IRA into a Roth, you have to pay income taxes on the amount you transition.

That means that timing and tax rates are crucial factors in whether a conversion makes sense for you. Generally, if you have a low-income year due to early retirement or some other reason, it may make sense to take the opportunity to convert. This strategy can be especially effective if you’ve elected to defer Social Security to age 70, dropping your tax rate even further.

That doesn’t mean you must wait until you’re poised to retire to convert. Tax rates are currently at historical lows. If they rise in the future, making the move now may look like a smart decision.

Here are five considerations as you contemplate converting traditional IRA assets to a Roth:

1. Time Frame. The longer you have before you need the money, the more sense it makes to convert assets to a Roth IRA. Once you convert to a Roth, qualified withdrawals will never be taxed. Leaving those assets untouched for as long as possible to grow tax-free over time allows you to get the most juice out of the conversion.

2. Paying for the Conversion. If taxes on the conversion are paid from IRA money, less is left in the Roth to grow, eroding the benefit of the conversion. The best practice is to cover the tax bill from cash on hand or taxable investments. If you can’t cover the taxes with other moneys, conversion might not be wise.  

3. Required Minimum Distributions (RMDs). You are required to withdraw money from traditional IRA accounts starting at age 70½. But you are not required to take money out of your Roth. If you don’t need to tap into IRA funds to cover living expenses, a Roth IRA gives you the freedom to choose when or if you take withdrawals over your lifetime.

4.  Legacy. Roth IRAs are a better asset to pass to your heirs than traditional IRAs. Where traditional IRAs create taxable income, inheritors don’t have to pay tax on Roth IRAs and can choose how they want to draw the account down over time. In other words, your heirs will thank you if you convert to a Roth.

5.    Where You’ll Live in Retirement. Individual states tax retirement income differently. If you plan to move to another state in retirement, check to see whether required distributions from IRAs are excluded from your state income tax. If so, you may save more on taxes by sticking with a traditional IRA than you would converting to a Roth. 

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Looking Ahead to Earnings Season

Next week, earnings season gets into full swing. We’ll be keeping our eyes on reports from bellwethers such as financial firms Goldman Sachs, JPMorgan Chase, State Street, BlackRock, Charles Schwab, Bank of America, American Express and Wells Fargo; the transport sector’s JB Hunt, CSX and Union Pacific; health care’s Johnson & Johnson, Abbott Labs and UnitedHealth; business services firms IBM and Texas Instruments; and consumer-spending-focused eBay and Netflix.

If you’d like to learn more about our tactical or fundamental strategies, please contact Steve Johnson at 844-587-7393 or info@bravercapital.com. In the meantime, all of us at Braver Capital Management wish you a safe, sound and prosperous investment future.

Please note: This update was prepared on Friday, July 12, 2019, 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.

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