With the Downturn and Recovery, a Teachable Moment

Let’s talk about a teachable moment.

Did you just hear that rubber band snap?

The global stock market was up over 11% in the first two months of 2019, more than fully recovering the loss incurred in 2018. All of the loss in 2018 was in the fourth quarter, mostly December, hence the rubber band analogy. The sharp loss in December 2018 stretched the rubber band so far that it snapped back quickly.

Hence the teachable moment, as this is a common phenomenon in the stock market. Whenever there is a dramatic downturn, there is frequently, but not always, a dramatic recovery. If only you had closed your eyes for a while, you would have missed it. Hence the peril of watching your portfolio value daily, weekly, or even monthly. Short-term volatility is a fact of life in the stock market. Don’t sell during a downturn and you won’t lose money.

Dramatic downturns can be an opportunity to take tax losses in taxable, non-retirement accounts by selling one fund and buying a nearly identical fund, thus staying invested but not violating IRS wash sale rules. Dramatic downturns are also an opportunity to rebalance your portfolio by selling bonds and buying stocks at lower prices or investing new cash in stocks. Long-term investors win in this process.

Turning to a financial planning note, taxpayers are in the midst of filing their first tax returns under the Tax Cuts and Jobs Act of 2017. One major change is the increase in the standard deduction, which has resulted in many taxpayers not being able to itemize tax deductions like charitable gifts. However, a select group of taxpayers does have the opportunity to make charitable gifts on a tax-free basis.

If you are over 70 ½ and have an IRA, you can request the IRA custodian (like TD Ameritrade) to issue a check directly payable to a charity as a qualified charitable distribution, or QCD.

This distribution counts toward the required minimum distribution (RMD) but is not taxable if reported as a QCD on your income tax return. Consider this a special benefit of being a senior citizen! We are happy to discuss this with you if you qualify. It is a no-brainer!

During 2018, the Federal Reserve had indicated that they expected to continue raising interest rates in 2019, and it was widely expected that there would be two increases of 0.25% each. The Federal Reserve has since softened their statements, and the chance of interest rate increases is now lower than last year.

The Fed faces a balancing act between allowing the economy to grow but not so fast that it stokes inflation. Inflation has picked up slightly but remains at historically low levels, which is good.

In closing, we noted last month that the groundhog only has about a 40% accuracy rate. This year’s forecast of an early spring appears to be off the mark so far!

As always, please contact us with any questions, news, or comments.