Volatility Continues

Weekly Market Update — December 10th, 2018

Markets went for another wild ride last week, as major domestic indexes swung back and forth. By Friday, December 7th, markets had posted their worst weekly performance since March—and the S&P 500 and Dow both moved into negative territory for 2018.[i]

Overall, the S&P 500 lost 4.60%, the Dow declined 4.50%, and the NASDAQ dropped 4.92%.[ii] International stocks in the MSCI EAFE also struggled, posting a 2.27% weekly loss.[iii]

Let’s take a look at what is driving this challenging market performance.

 Examining Recent Volatility

  1. How volatile are stocks right now?

If recent market fluctuations have felt intense to you, there’s a reason: They are. The past three weeks have had the most volatility since 2008’s financial crisis. During this time, domestic indexes have ricocheted between gains and losses. The large swings have occurred both week-to-week and within daily trading.[iv]

  1. What is causing the volatility?

Many of the same themes we’ve discussed throughout 2018 are continuing to affect market behavior. Ultimately, many investors are worried that corporate profits and global growth will suffer if trade tension persists and the Federal Reserve continues raising interest rates.[v]

Concerns about Treasury yields were also on investors’ minds. For part of last week, 3-year Treasury notes had higher yields than 5-year notes. Called an inversion, a higher yield on shorter-term Treasuries can be a sign of a coming recession. The yield spread between 2-year and 10-year Treasury notes, which people focus on more, has not inverted.[vi]

  1. Should you feel concerned?

With many headlines to digest, from conspiracy charges against a Chinese tech leader to comments from the Fed, investors had a lot to consider last week.[vii] The difference is how they reacted to this information. For some time, markets were basically ignoring headlines. Now, they’ve moved in the opposite direction into what one investment manager called “a period of hypersensitivity.”[viii]

Consequently, recent market performance may seem unnerving. As is often the case, however, the reality may be less extreme than what appears at first glance, especially when you look at the fundamentals.

  1. What do the fundamentals tell us?

While last week’s market performance saw large fluctuations, the fundamentals we received were far less dramatic. We learned that two sectors beat expectations in November: manufacturing and service.[ix]Further, the November labor report revealed fewer new jobs than anticipated, but unemployment is still at historically low levels, as job and wage growth continues.[x]

ECONOMIC CALENDAR

Monday: JOLTS

Tuesday: PPI-FD

Wednesday: CPI

Thursday: Jobless Claims

Friday: Retail Sales, Industrial Production

Notes: All index returns (except S&P 500) exclude reinvested dividends, and the 5-year and 10-year returns are annualized. The total returns for the S&P 500 assume reinvestment of dividends on the last day of the month. This may account for differences between the index returns published on Morningstar.com and the index returns published elsewhere. International performance is represented by the MSCI EAFE Index. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

If you wish to get rich, save what you get. A fool can earn money; but it takes a wise man to save and dispose of it to his own advantage.”

― Brigham Young

Tax Reform Changed Small Business Accounting Methods

       If you own a small business, you may be able to use the cash method of accounting, thanks to the passage in late 2017 of the Tax Cuts and Jobs Act. The act redefines small business as a taxpayer who has average annual gross receipts of $25 million or less for the three previous tax years and doesn’t serve as a tax shelter.

Here are some of the changes in the tax code for small business taxpayers.

  • More small business taxpayers are eligible to use the cash method of accounting with the increase in the average receipts rising from $5 million to $25 million, which is indexed for inflation.
  • Small business taxpayers are exempt from certain accounting rules for inventories, cost capitalizations, and long-term contracts.
  • More small business taxpayers can use the cash method of accounting for tax years after December 31, 2017.

The IRS’s Revenue Procedure 2018-40describes the procedures for obtaining automatic consent to change accounting methods to comply with the new provisions.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

Tip adapted from IRS.gov[xi]

 

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If you have any questions or would like to learn more about developing strategies to pursue a prosperous and safe future, contact me today at Derek.Merkler@Parsonex.com! You can also visit my website to learn about how I help our service members and veterans plan for and achieve financial independence.

My blog discusses a myriad of financial topics and challenges, book reviews, and commentary on current events in the financial world to benefit our military and veteran community.  I attempt to be as thorough as possible when examining each subject but can never account for every possible scenario.  Please remember to consult with your advisers for advice on your particular situation.  Thank you for reading!

Advisory Services offered through Parsonex Advisory Services, Inc. 8310 S. Valley Highway, Ste. 110, Englewood, CO 80112 (303) 662-8700.


 

[i]https://www.cnbc.com/2018/12/07/stock-market-dow-futures-fall-ahead-of-unemployment-figures.html

[ii]http://performance.morningstar.com/Performance/index-c/performance-return.action?t=SPX&region=usa&culture=en-US

http://performance.morningstar.com/Performance/index-c/performance-return.action?t=%21DJI&region=usa&culture=en-US

http://performance.morningstar.com/Performance/index-c/performance-return.action?t=@CCO

[iii]https://www.msci.com/end-of-day-data-search

[iv]https://www.bloomberg.com/news/articles/2018-12-07/stocks-drubbing-vexes-fund-managers-as-year-end-pressure-mounts?srnd=premium

[v]https://www.bloomberg.com/news/articles/2018-12-07/stocks-drubbing-vexes-fund-managers-as-year-end-pressure-mounts?srnd=premium

[vi]https://www.cnbc.com/2018/12/07/stock-market-dow-futures-fall-ahead-of-unemployment-figures.html

[vii]https://www.bloomberg.com/news/articles/2018-12-06/asia-signals-mixed-start-for-stocks-yields-drop-markets-wrap?srnd=markets-vp

[viii]https://www.cnbc.com/2018/12/07/stock-market-dow-futures-fall-ahead-of-unemployment-figures.html

[ix]https://www.ftportfolios.com/Commentary/EconomicResearch/2018/12/3/the-ism-manufacturing-index-rose-to-59.3-in-november

https://www.ftportfolios.com/Commentary/EconomicResearch/2018/12/6/the-ism-non-manufacturing-index-rose-to-60.7-in-november

[x]http://wsj-us.econoday.com/byshoweventfull.asp?fid=485662&cust=wsj-us&year=2018&lid=0&prev=/byweek.asp#top

[xi]https://www.irs.gov/newsroom/heres-how-tax-reform-changed-accounting-methods-for-small-businesses

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