Putting October’s selloff scares in context

Tighter financial conditions and elevated worries about the impact of heightened U.S.-China trade tensions are spooking investors–and have helped spark this month’s equity pullback. We retain a preference for selective risk-taking, even as the recent market moves reinforce our call for building greater resilience into portfolios.


Higher interest rates are one of the key contributors to tighter financial conditions this year. Market expectations for future Federal Reserve rate hikes have adjusted upward and are now consistent with our outlook for around three rate rises over the next 12 months. The result: Higher yields on short-term bonds making for greater competition for capital. This is contributing to falling equity prices–mirrored by rising earnings yields–and rising bond yields. The recent move higher in bond yields has been driven by higher real rates–not inflation expectations. See the light blue and green shaded areas in the chart above. A rise in the term premium, the additional return investors demand for holding longer-term debt, has contributed. Investors have reset their return requirements across asset classes, given heightened uncertainty and rising short-term yields. This repricing has escalated since the start of October.

Fortifying portfolios

Part of the recent equity market drop was due to jitters about an intensification of the U.S.-China trade conflict. Some global companies cited trade concerns last week, fueling investor uncertainty about the sustainability of the growth and earnings outlook. Our gauge of overall geopolitical risk has dipped in the past few weeks, but U.S.-China trade tensions are high and we see trade tensions as the biggest global threat to the U.S.-led expansion. Our BlackRock GPS growth indicators point to robust global growth with low inflation–and do not show trade tensions hampering economic activity. However, the negative threat posed by trade protectionism could yet feed through due to highly globally integrated corporate value chains. Third-quarter earnings season will be key to watch in this respect.

icon-pointer.svgRead more market insights in our weekly commentary.

Last week’s decline in the MSCI World Index was the index’s second-largest weekly drop in 2018, although global equities remain in positive territory year-to-date. Equity markets have seen a sharp rotation in leadership, with momentum shares under-performing after a stretch of strong gains. We believe the bulk of the recent selling pressure has been driven by hedge funds unwinding popular crowded positions–especially in technology and growth names. The rise in 10-year U.S. Treasury yields at the start of last week came after Fed officials’ hawkish commentary pushed up market expectations for the path of U.S. policy rates. The rise in market yields has been driven by higher real rates and a higher term premium, often associated with increased uncertainty.

We still see corporate earnings supported by sustained above-trend global growth, and retain our preference for equities over fixed income. But we reiterate our call to focus on portfolio resilience. Companies that disappoint on third-quarter earnings and fourth-quarter guidance risk being acutely punished. We like quality exposures within equities and prefer the U.S. within developed markets due to earnings resilience and stronger balance sheets. In fixed income, we favor short-end bonds but are starting to see opportunities further out on the yield curve in the U.S. and Europe. Over the long term, the rise in yields should eventually point to higher returns across asset classes. Yet we see good reasons why risks will stay elevated or increase further in the short term, pressuring returns.

Richard Turnill is BlackRock’s global chief investment strategist. He is a regular contributor to The Blog.

Investing involves risks, including possible loss of principal.

Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments. Non-investment-grade debt securities (high-yield/junk bonds) may be subject to greater market fluctuations, risk of default or loss of income and principal than higher-rated securities.

International investing involves special risks including, but not limited to currency fluctuations, illiquidity and volatility. These risks may be heightened for investments in emerging markets.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of October 2018 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader. Past performance is no guarantee of future results. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.

©2018 BlackRock, Inc. All rights reserved. BLACKROCK is a registered trademark of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.

Source: https://www.blackrockblog.com/2018/10/15/octobers-selloff-scares-context/


The Company That Saves Portfolio Managers From Themselves

What if you could quantify all of the mistakes you’re making with your trades, and then systematically improve them?
I had the pleasure of sitting down with Essentia founder Clare Flynn Levy to talk about what she’s learned at the forefront of behavioral investing science. Clare is not an academic, she’s a former portfolio manager whose questions about her own performance almost twenty years ago sent he…
Source: https://thereformedbroker.com/2018/10/15/the-company-that-saves-portfolio-managers-from-themselves/

Tax-Efficient Charitable Giving from your IRA

charitable givingYou may have noticed with the new tax law that was passed for 2018, there was a significant change to the standard deduction. At first glance, even the topic of standard deductions seems very tax-tech-y, and something that many folks don’t pay attention to at all. But hidden in the details is something that may be of interest: a better, more tax-efficient way of charitable giving, using your IRA.

Granted, this is not going to apply to everyone. There are some restrictive rules in place. Specifically, you must have an IRA, and you must be at least 70½ years old, subject to Required Minimum Distributions (RMDs). And, you must be in a position where you are inclined to make charitable contributions. You may have made such contributions in the past, but probably not in the manner I’m talking about. Chances are, you probably made out a check to your chosen charity, and then when you did your income taxes you itemized the amount for deduction from your income. This is usually done with a form called Schedule A, which is attached to your standard Form 1040 tax return.

Everything worked just fine in the past with that process. However, some of you may have noticed that, over time, you may have switched from itemizing your deductions (with Schedule A) to using the standard deduction. This occurs when the standard deduction is larger than the total of your itemized (Schedule A) deductions.

I suspect this will be more common starting with your 2018 tax return, because the standard deduction has increased significantly. In 2017, the standard deduction for a married couple filing jointly was $12,700. And if they were both over age 65, the standard deduction was increased to $15,200. For many folks, that’s a lot of charitable contributions! Of course, charitable contributions are only a part of what makes up Schedule A itemized deductions – you’d include your real estate taxes, state and local income tax, sales tax, and medical expenses above a certain amount.

So, with those items added together with your charitable contributions, it’s quite possible for many taxpayers to breach the standard deduction amount and qualify to itemize.

But for 2018, the standard deduction for the same married couple, over age 65, will be $26,600 – an increase of more than $11,000 over the 2017 amount. (There are many other changes to the tax laws including the elimination of personal exemptions that makes this increase less valuable, but that’s a topic for another time.) Because of the new amount, along with some limitations that have been put in place on certain itemized deductions, many if not most taxpayers will be using the standard deduction for the first time in 2018.

With this in mind – you might wonder about whether it’s worthwhile to make those charitable contributions any more… after all, if you can’t itemize, those contributions won’t help your tax situation out, so why bother? (Many charities are looking at this as well and are quite concerned!) Hopefully, you were planning your usual support of the charity, just not getting the tax benefit from it like you have in the past.

But what if there was a way to be tax-efficient with your charitable giving? If you meet the restrictions I mentioned above (at least 70½ years old, and subject to RMDs from your IRA), you have exclusive access to a very tax-efficient way of charitable giving from your IRA. It’s called a Qualified Charitable Distribution (QCD), and it’s been around for quite a while – but I suspect it will become more popular with the changes in the tax law.

Charitable Giving from Your IRA

Below is a partly-fictitious interaction that I had with my father. You need to know that he’s far better looking in real life than I can make him look with my writing, for example. We had a similar discussion but I’ve fleshed this out much more and included purely made up figures to simplify the example.

Me: So, have you noticed the changes to the standard deduction from the new tax law? Probably won’t have to itemize your deductions this time around…

Dad: Yeah, we’ll still make the same charitable contributions we have in the past – but losing that deduction along with all the other changes will be hard to swallow. (See, I couldn’t make him look as dignified in writing as he really is. Try to cope with it.)

Me: Well, did you know there’s another way you can make those contributions, and still get benefit on your tax return? It’s called a Qualified Charitable Distribution (QCD).

Dad: I’ve heard of that, but never bothered to look into it. Seems like a lot of paperwork to do pretty much the same thing as we’ve always done.

Me: Au contraire! (We hardly ever speak in french, that was only for dramatic purposes.)

I’ll show you how it works:

Your income is $65,000* before any deductions. In the past, your itemized deductions came up to $20,000, and your personal exemptions were $8,100 so your taxable income was $36,900. Your itemized deductions included $10,000 that you send to various charities through the year, and the rest is real estate tax and medical expenses. Your annual RMD from your IRA is $5,000. (*All of these figures are completely made up, nice round figures to help with the example.)

In 2018, since your itemized deductions are less than the standard deduction, you’d just use the standard deduction. So your $65,000 income minus $26,600 equals $38,400 (remember there are no personal exemptions in 2018). That’s a higher taxable income than you had in 2017, because of the changes to the law. The lowered tax brackets would mean a lower overall tax bill, but you’re paying tax on a higher amount of income – and you didn’t change anything!

Now, if you used a QCD for your RMD of $5,000, your taxes would look a bit different. The QCD amount is not included in your income, so the income figure is reduced off the start to $60,000. Then then new standard deduction of $26,600 is subtracted, for a taxable income of $33,400. That’s $3,500 less than last year, and you didn’t have to itemize. How about that?

Dad: Well, that’s pretty amazing. So I only have to use this QCD and I can reduce my taxable income by $5,000?

Me: It gets better. Since you make a total of $10,000 in charitable contributions every year, you could use the QCD to distribute that full $10,000 to your chosen charities, and reduce your taxable income by that full amount.

If you send the full $10,000 to your chosen charities using QCD, your overall taxable income would be reduced even further, down to $28,400. That works out to a $1,200 reduction in taxes!

Dad: Well – I bet it’s really a hassle to do these QCDs. I don’t like hassles. (True statement. He doesn’t like hassles.)

Me: Not at all. You already have to notify your IRA custodian annually to have your RMD withdrawn. All you need to do is tell them to send the specified amounts to your chosen charities as Qualified Charitable Distributions. Then they take care of the rest of it. And the documents you get at the end of the year for your tax return are all set up so that you (or your tax preparer) can handle the transaction just as I described.

And so it went (fictitiously).

So if you fit into the parameters outlined above, you too could use this method to have more tax-efficient charitable giving. If you need more details, just reach out to me.

The post Tax-Efficient Charitable Giving from your IRA appeared first on Getting Your Financial Ducks In A Row.

Source: https://financialducksinarow.com/12731/tax-efficient-charitable-giving-ira/

Chart o’ the Day: Synchronized Global Meh

My friend Ari Wald has a good note out this weekend from his perch as Oppenheimer’s market technician. He points out this year, interest rates have risen above 3% after a decade below, and that the last time we’ve seen something like this occurred in the late 1950’s. He sees the washout in the percentage of stocks now below technically oversold conditions as setting up a tactical buying opportunity but h…
Source: https://thereformedbroker.com/2018/10/14/chart-o-the-day-synchronized-global-meh/

This Week on TRB

I got to check out Slash with Myles Kennedy and the Conspirators at the Paramount this week thanks to my pal Joe Fahmy, a friend of the band. It was incredible to watch them do their show and hang out beforehand with Brent, Myles and the whole crew. They’re incredible musicians and Slash is just absolutely epic. Myles pays close attention to the markets and even checks out the Halftime Report on CNBC from time to…
Source: https://thereformedbroker.com/2018/10/13/this-week-on-trb-265/