Market-Moving News[i]
Inching higher
The S&P 500, the Dow, and the NASDAQ each rose more than 1%, climbing for the fifth week in a row to extend the market’s recovery from a sharply negative start to September. The S&P 500 and Dow pushed their record levels higher while the NASDAQ ended less than 2% below its historic peak.
Rising yields
The yield of the 10-year U.S. Treasury note climbed for the fourth week in a row as a monthly report on inflation prompted investors to dial back expectations for the pace of further interest-rate cuts. The yield of the 10-year note closed at 4.08% on Friday—up from 3.98% at the end of the previous week and well above a recent low of 3.62% on September 16.
Earnings life-off
Earnings season got into full swing on Friday as two major U.S. banks released third-quarter results; shares of both institutions climbed following their reports. As of Friday, analysts were forecasting that earnings for all companies in the S&P 500 would rise by an average of 4.1% overall, according to FactSet.
Inflation’s grip
A monthly Consumer Price Index reading came in slightly higher than expected, adding to uncertainty over the pace of further interest-rate cuts over the short term. Consumer prices rose at a 2.4% annual rate in September—down from August’s 2.5% reading but just above the 2.3% consensus forecast of economists. Moreover, September’s core inflation figure excluding energy and food prices was 3.3%, above the previous month’s 3.2% rate.
Fed rate debate
Minutes released on Wednesday from the U.S. Federal Reserve’s September meeting showed that there was robust debate among policymakers over the half-percentage point rate cut that was ultimately approved. Some officials argued for a smaller quarter-point reduction, although only one of the 12 voting Fed members ended up opposing the half-point cut in the final vote tally.
Sentiment slips
An indicator that tracks U.S. consumer sentiment unexpectedly fell for the first time in three months. Friday’s preliminary reading from the University of Michigan’s Consumer Sentiment Index was 68.9, down from a reading of 70.1 the previous month. Most economists had expected a small increase.
Buyback update
Companies in the S&P 500 boosted their stock buyback spending to nearly $878 billion in the 12-month period that ended in June 2024, up 8% from the same period a year earlier, S&P Dow Jones Indices reported. However, spending on stock repurchases in this year’s second quarter was down 0.4% compared with the first quarter.
Retail report ahead
A report on U.S. retail sales scheduled to be released on Thursday will indicate whether a recent positive trend extended into September. The Commerce Department reported last month that sales rose 0.1% in August; the agency also revised July’s gain to 1.1%, up from an initially estimated figure of 1.0%.
The Week Ahead: Oct 14-18
- Monday
- No major reports scheduled
- U.S. bond market holiday closure, stock market open
- Tuesday
- No major reports scheduled
- Wednesday
- Export and import prices, U.S. Bureau of Labor Statistics
- Thursday
- Retail sales, U.S. Census Bureau
- Business inventories, U.S. Census Bureau
- Industrial production and capacity utilization, U.S. Federal Reserve
- Housing Market Index, National Association of Home Builders
- Weekly unemployment claims, U.S. Department of Labor
- Friday
- Housing starts, U.S. Census Bureau
- Housing starts, U.S. Census Bureau
Philosophy Quote of the Week[ii]
Honesty as Our Default
“How rotten and fraudulent when people say they intend to ‘give it to you straight.’ What are you up to, dear friend? It shouldn’t need your announcement, but be readily seen, as if written on your forehead, heard in the ring of your voice, a flash in your eyes – just as the beloved sees it all in the lover’s glance. In short, the straightforward and good person should be like a smelly goat - you know when they are in the room with you.”
Marcus Aurelius, Meditations, 11.15
All of us have used phrases like that before. “I’m going to be straightforward with you here…” “I’ll be honest…” “No disrespect but…” Empty expressions or not, they prompt the question: If you have to preface your remarks with indicators of honesty or directness, what does that say about everything else you say? If you say you’re being honest now, dows that mean you usually aren’t?
What if, instead, you cultivated a life and a reputation in which honesty was as bankable as a note from the U.S. Treasury, as emphatic and explicit as a contract, as permanent as a tattoo? Not only would it save you from needing to use the reassurances that other, less scrupulous people must engage in, it will make you a better person.
Tax Tips[iii]
Tax Tips for New Businesses and Self-Employed Taxpayers
America is a free country, promoting entrepreneurial growth, even more so with the current tax laws. If you start a business you must know about your federal tax obligations and opportunities that are available. You may need to know about income AND payroll taxes.
Here are five basic tax tips that can help get your business off to a good start:
- Business structure
- As you get started you need to choose your business structure. Some common types include sole proprietorship, partnership and corporation. You may also choose to be an S corporation or Limited Liability Corporation (LLC). You’ll report your business activity using the IRS forms which are right for your business type.
- Business taxes
- There are four types of business taxes: income, self-employment, employment, and excise. The type of taxes your business pays usually depends on which type of business you choose to establish. You may need to pay your taxes by making estimated tax payments.
- Employer identification number (EIN)
- You may need to get an EIN for federal tax purposes. Search “do you need an EIN” on IRS.gov to find out if you need one. If you need one, you can apply online for free, if you do it by yourself. You must apply online, Monday-Friday between 8am-5pm EST.
- Accounting method
- An accounting method is a set of rules that determine when to report income and expenses. Your business must use a consistent method. The two that are most common are the cash method and the accrual method. Under the cash method you report income in the year that you receive it and deduct expenses in the year you pay them. Under the accrual method you report income in the year you earn it and deduct expenses in the year you incur them. This holds true even when you receive the income or pay the expenses in a future year.
- Employee health care
- The Small Business Health Care Tax Credit helps small businesses and tax-exempt organizations pay for health care coverage they offer their employees. A small employer is eligible for the credit if it has fewer than 25 employees who work full-time or a combination of full-time and part-time. Beginning in 2014, the maximum credit is 50% of premiums paid for small business employers and 35% for premiums paid for small tax-exempt employers, such as charities since 2017, employers employing at least a certain number of employees (generally 50 full-time employees or a combination of full-time and part-time employees) will be subject to the Employer Shared Responsibility provision.
Tips for Self-Employed Taxpayers
If you are an independent contractor or run your own business there are a few basic things to know when it comes to your federal tax return.
- Self-employment income can include income you received for part-time work. This is in addition to income from your regular job.
- You must file a Schedule C, Profit or Loss form Business, or Schedule C-EZ, net Profit from Business, with your Form 1040.
- You may have to pay self-employment tax as well as income tax if you made a profit. Self-employment tax includes Social Security and Medicare taxes. Use Schedule SE, Self-Employment Tax, to calculate the tax. Ensure you file the schedule with your return!
- You may need to make estimated tax payments. People typically make these payments on income that is not subject to withholding. You may be charged a penalty if you do not pay enough taxes throughout the year.
- You can deduct expenses you paid to run your trade or business. You can deduct most business expenses in full, but some must be capitalized. This means you must depreciate (write-off) the expense over a period of years.
- You can deduct business costs only if they are both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and proper for your trade or business.
- You may be able to hire your children to assist you in your occupation and receive a tax business deduction for paying them wages to help you. Also, their wages may not be taxable under certain conditions.
- You can deduct health insurance premiums (including Medicare) on your personal tax return without itemizing.
- You may be eligible for the Qualified Business Income Deduction of up to 20% of your profits as a business deduction (available since 2018).
Home Office Deductions
If you work from home, a simplified option is available to figure the deduction for business use of your home. Here are six tips form the IRS about the home office deduction:
- Generally, in order to claim a deduction for a home office, you must use a part of your home exclusively and regularly for business purposes. Also the part of your home used for business must be
- Your principal place of business, or
- A place where you meet clients or customers in the normal course of business, or
- A separate structure not attached to your home, such as a studio, garage or barn
- If you use the actual expense method, the home office deduction includes certain costs that you paid for your home. For example, if you rent your home, part of the rent you paid could qualify. If you own your home, part of the mortgage interest, taxes and utilities could qualify. The amount you can deduct usually depends on the percentage of your home being used for business.
- Beginning with 2013 tax returns, you may be able to use the simplified option to claim the home office deduction instead of claiming actual expenses. Under this method, you multiply the allowable square footage of your office by a prescribed rate of $5. The maximum square footage is 300 square feet. The deduction limit using this method is $1,500 per year.
- If your gross income from the business use of your home is less than your expenses, the deduction for some expenses may be limited.
- If you are self-employed and choose the actual expense method, use Form 8829, Expenses for business Use of Your Home, to figure the amount you can deduct. You claim your deduction on Schedule C, Profit or Loss from Business, if you use either the simplified or actual expense method. See the Schedule C instructions for how to report your deduction.
If you are an employee, you must meet additional rules to claim the deduction. For example, in addition to the above tests, your business must also be for your employer’s convenience.
Remember – always contact your tax professional for help! That’s what you pay them for!
Financial Planning Month[iv]
Financial Planning vs. Investment Strategy: Which Is More Important?
If your experience with your financial adviser has been all about focusing on investment management rather than on holistic financial planning, you might want to consider a different approach.
By Michael E. Lewis II, CFP®, CLU®, ChFC®, published December 22, 2022
When you think about the counsel offered by your financial adviser, is it truly holistic financial planning or really just investment management? This distinction is important under any circumstances, but particularly amid the extreme market volatility we’ve seen this year. So, what is holistic financial planning?
Holistic financial planning revolves around extensive conversations between you and your adviser, focusing on the life you want to live. Ideally, it also entails active coordination between your adviser and other financial specialists in your life, such as your accountant, estate planner and insurance professional.
Many investors do a good job of putting different elements in place regarding their financial planning, but it tends to be done in silos. The various financial professionals aren’t really talking to one another, and it’s up to you to try to coordinate everything.
When an expert adviser is looking at everything to ensure proper coordination, it not only optimizes your ability to live the life you want, but it will build your confidence in the plan. Accordingly, you’ll be much less likely to panic or make unwise decisions when the market experiences significant volatility.
Coordination Among Financial Professionals Is Key
Think of it like running a Fortune 500 company. The board of directors (in this case, the client/family) creates the vision and explains it to the CEO (the adviser), who must then ensure that all the individual departments of the company (silos) work individually and collectively to execute that vision.
If the sales and distribution departments operate independently and rarely communicate, major issues could arise. The same is true when an investment strategy operates independently of cash flow and expenses. If an adviser doesn’t know that a client has been planning to take a substantial distribution from their investment account, is it the client’s fault for not telling the adviser or the adviser’s fault for not asking?
An adviser focusing only on investments isn’t serving as the figurative CEO, who ensures that everything is coordinated and possesses the relevant expertise. Rather, the client is the CEO in this scenario, and the adviser is just running the investment department. Coordination of silos by the client is better than no coordination, but that won’t necessarily prevent unwise decisions. An expert adviser can do so by leveraging comprehensive knowledge and continually emphasizing the overall financial plan with each client.
Power of Planning With a Trusted Financial Planner
I believe that the financial services profession is generally very honorable, and most advisers are good people who keep their clients’ best interests in mind. But the majority of the industry has been built around product placement. Looking back 40 or 50 years, it was all about selling stocks to retail investors who had little access to relevant investing information on their own.
Over time, extensive information about investment options has become widely available to the general public. Yet I think the industry still tends to believe its value is based on reading the tea leaves of the market and making allocations that help drive returns. In reality, the true value of a top adviser now is helping to align a client’s capital with their vision, values and concerns — not being reactionary and saying because the market has gone up or down, you should be underweighting this or overweighting that.
Planning is powerful, so make sure to have a trusted planner. When an advisory relationship is based on financial planning rather than investment management, your goals are clearly articulated. The associated cash flow, time and expense of achieving them are mapped out, and the allocation of capital is based on that road map.
If the market is down 20%, and the only conversations you ever had with an adviser revolved around investment management, how do you get to a place of emotional security so you don’t panic and lock in losses? It’s up to the adviser to ensure your relationship instills you with confidence and comfort even amid market volatility.
Investing mistakes are usually fear-based and due to short-term thinking. Because, historically speaking, markets are volatile in the short term, and none of us can predict what will happen. But in the long run, the data clearly shows that markets go up.
Cookie-Cutter Questionnaires Are Problematic
Too often in the industry, a client’s high-level asset allocation has been determined by a generic questionnaire intended to gauge risk tolerance and time horizon. Besides not being nearly customized enough, the inherent flaw of this approach is that the same person might answer these questions differently from one week to the next — depending on whatever is happening in their life.
How are you feeling about their job? What did you see on the news the night before? Did your neighbor recently get in an accident?
These and many other factors can easily influence responses, and such questionnaires aren’t likely to determine a global allocation that you can really connect with and feel confident about.
Asset allocation shouldn’t be determined by emotion. We focus on doing the math first, including a financial planning exercise to determine cash-flow requirements throughout the rest of your life, while best avoiding sequence-of-returns risk. Because if you live a long, happy, healthy life, like we hope all of our clients do, you might spend at least 30 years in retirement. You’re going to see market downturns and volatility during that time, and it’s important not to overreact to them.
I always ask clients to keep me updated on how they want to live and the things they want to do so we can evolve their global allocation. People tend to be very comfortable with that approach because the planning has been conducted first and they understand it. Investing recommendations are always connected to the overall plan. So if a client ever asks about the reasoning for a certain investment or allocation, I can respond by saying, “Because we’ve discussed how your goals are A, B and C, and that has led us to implement these strategies in pursuit of them.”
Finding the Right Fit
Decades ago, when individual investors lacked access to so much important information, it was valuable for the financial industry to offer investment management as a standalone product. With changing times, holistic financial planning now clearly offers the greater value proposition.
That said, many investors aren’t familiar enough with the concepts to know the difference between a true financial plan and simply an investment strategy. If you’re not sure, I’d recommend thinking about when the last time was that your adviser reviewed your tax returns, estate planning documents and insurance policies. If the answer is never, then it’s probably just an investment management relationship — and you deserve a better approach.
[i]https://www.jhinvestments.com/weekly-market-recap#market-moving-news, accessed 10.14.2024.
[ii] Holiday, Ryan. The Daily Stoic: 366 Meditations on Wisdom, Perseverance, and the Art of Living. Kindle edition, page 304. Accessed 10.14.2024.
[iii] Hockensmith, Robert F. 52 Ways to Outsmart the IRS, Weekly Tax Tips to Save You Money. Kindle edition, page 181-186, accessed 10.14.2024.
[iv]https://www.kiplinger.com/retirement/financial-planning-vs-investment-strategy-which-is-more-important, accessed 10.14.2024.