Nola Kulig
Kulig Financial Advisors
Longmeadow, MA, 01116 USA
413-565-2839
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Election Year Upset: The Trump Effect on Markets

November 27th, 2016

I find that once again, rather than writing on the idea of financial plenty, thankfulness for that abundance and charitable giving, events in Washington, D.C. dictate that I discuss other topics. Last year, it was the impact of a Congressional budget deal on Social Security claiming strategies. This year, it is of course, the election results and the market’s reaction.

This month’s post looks at the following topics:

  • A Trump presidency and its potential impact on:
    • Government spending and inflation
    • The markets
    • Your portfolio
  • Charitable Giving
  • Kulig Financial’s Holiday Schedule

Potential Ramifications of a Trump Presidency

Many of you have asked me what, if anything, to do differently with your portfolios in an election year. Those questions came before the election, and I responded that if you had a portfolio risk level that was right for you, then you did not need to do anything differently. That risk level should take into account poor markets, if they occur, for whatever reason. As you know, I also believe that it is impossible to time markets—i.e., make short term tactical moves, consistently successfully. It is very easy to make investment mistakes, and there have not been many (any?) investors shown to consistently get that right.

What prompted those questions were prognostications by market “experts” who pounded the table for exiting the market just prior to the election. I do not know what they were recommending after the election, or what signposts they would be looking for to re-enter the market.

I am also not sure which candidate they all expected to win. If it was Trump, their forecasts were right for exactly one day, as the market plunged. But then it turned completely around the following day, erasing the previous losses and then some for a total gain of 1200 points for the Dow Jones average.

The bond markets were also volatile. During the stock market decline, US Treasury yields plunged, with the 10-year note falling 17 basis points, then climbing 37 basis points (a basis point is 1/100th of a percentage point).

So what caused these manic-depressive shifts in the market? Initially, the markets were behaving in a typical “risk off” trade, which is typical in times of uncertainty–investors tend to desert stocks and rush toward high quality bonds. But then the markets took another look and decided that Trump’s presidency would be more like Ronald Reagan’s, with buoyant government spending and tighter money. Some think markets were also soothed by Trump’s conciliatory acceptance speech, assuaging concerns about his previously erratic behavior.

Trump has proposed infrastructure spending to jump start the economy, along with constructing the infamous “wall” and other agenda items. With control of both houses of Congress going to the Republicans, the markets decided some of Trump’s proposals may actually happen. The scenario reflected in its sharp swing upward is one of fiscal stimulus with a positive impact on the economy and stock market, rising inflation, and a corresponding increase in bond market yields (depressing bond prices).

There are several problems with this scenario, with one of the biggest being that there is a lack of detail on the proposals. How Congress will act is also unknown. We do not know whether Republicans will rally around a Trump agenda, or hold onto deficit reduction goals which caused so much sparring with a Democratic administration. The Republicans also narrowly outnumber Dems in the house, so it is possible that Democrats may act as a barrier to Trump proposals. There simply is so little we really know at this point.

I think this recent example of mistaken short-term forecasts demonstrates the folly of basing portfolio strategy on that type of outlook. I think it also proves the worth of a diversified portfolio. If you have invested according to strategies designed at Kulig Financial Advisors, you have an appropriate allocation to stocks, and since they are diversified, you have exposure to the groups which have performed well in the recent upswing. Your bond portfolio does not include long term bonds, which were most negatively impacted by the recent tick upward in rates. It also included TIPs (Treasury Inflation Protected bonds), which did relatively well in the Make America Spend scenario recently favored by the markets.

I anticipate another question, which is now that markets are embracing a higher growth, more inflationary scenario, would that merit a change in portfolio strategy? My response is mostly no. We certainly would not recommend buying more stock, unless you are underweight that asset class; you may find you are overweighted after the last upswing in stock prices, and in addition, they have factored in a lot of economic growth in a very short time and are highly valued. Neither would we recommend leaving the bond market; growth outside the US remains low, and there remains slack in the economy, which could mean that we do not experience high inflation. In addition, you will want your bond money to reinvest at higher rates, should they occur. Also, as mentioned earlier, we have not ventured into long-term bonds and generally do not due to their higher interest rate risk.

The sole area where we do not have much portfolio exposure, which we have been reviewing for a while, is in the commodity arena, which could benefit from a Trump inflation scenario. If we do add this asset class to portfolios, it would be a small percentage as a hedge against an inflationary scenario that may not be kind to stocks or bonds. However, we have found the structure of most commodity funds troubling, as they are heavily weighted toward oil, making oil prices the dominant driver of returns to these products. Also, they do not offer income, which clearly does not meet the needs of some clients. We will keep you posted on our thinking as it develops, either in this newsletter, or individually as seems appropriate for your portfolios.

Charitable Giving

Despite the unpredictable world we live in, I am grateful to be in a profession where I may add to the abundance of my clients. In turn, we may share that abundance with others, whatever our level of income or assets. I also know I am grateful for all of my clients. I truly enjoy each and every one of you.

We are also grateful to be building our business year after year, thanks to you. To give back to the community and commemorate all of you, we are donating 10% of Kulig Financial Advisor’s profits to the Foundation for Financial Planning, which is a non-profit devoted solely to pro bono financial planning. For more on this organization, please see http://www.foundation-finplan.org/ and know a part of every dollar you spend here goes to support a worthy cause.

Kulig Financial’s Holiday Schedule

We plan to be closed both the week of Thanksgiving (week of November 21st) and December 19th through January 1st. Then we will be back at it, refreshed and ready to start another year.

A happy Thanksgiving to all!

 

Summer “Vacation”: Off Hours Activities that Provide More Perspective

August 26th, 2015

July is traditionally the time for vacations, and I did take a short one. But some other time away put way more perspective on markets, portfolios and financial plans.

Early in July, I accompanied my daughter as a co-team leader on a church youth group mission trip. Our destination was not far, just to New York, but in some ways we traveled a long way from our cozy life in Longmeadow.

We were sent by an agency call YSOP (Youth Service Opportunities Project—see www.ysop.org) to various non-profit groups in the greater New York area to serve as volunteers. To say that this was nothing like my typical expense account trip to New York was an understatement, but it was good to be in a completely different mode in the city. We worked in soup kitchens, day care centers serving children of incarcerated mothers, and the kids made and served a sit down dinner for homeless people. The youth were great. It was hot and humid, we commuted on the subway for hours, the work was demanding, and we slept on the floor of a church at night, but not one of them complained. It was an intense and meaningful trip that we are so glad we did.

My other volunteer effort is joining the finance committee of the YWCA of western Massachusetts (http://www.ywworks.org/). This organization is the largest of its type in the commonwealth, offering shelter, support and self-sufficiency for women and girls in our community. I am only just getting started with the people who run that organization, but am already impressed with what they have accomplished and am eager to work with them helping other women.

So if all we have to worry about is our money, rather than our personal safety or where our next meal is coming from, we are all truly blessed. May you all remain so in the years ahead!

Seven Savvy Charitable Giving Strategies

December 4th, 2013

As we approach the end of the year, our thoughts turn not only to thankfulness for the blessings in our lives, but also to giving back. One of the great pleasures of achieving your financial goals may include charitable giving, and this post discusses several financially smart ways to give.

The following are only general descriptions of techniques. Please consult a tax advisor and/or an estate planning attorney for advice on your specific situation.

Cash Gifts

Most of us are familiar with this one. Contributions by check or cash are one of the most common ways we give. If you can itemize deductions, it may be possible to shelter up to 50% of income from cash gifts. Of course, you need to obtain and keep receipts for your records.

Gifts of Assets

Gifts of appreciated assets might include stocks, bonds or other property. Donating appreciated assets is much more favorable from a tax perspective than selling the asset and then making a donation. By donating the appreciated asset itself, you may avoid paying capital gains taxes, and obtain an income tax deduction for the full value of the asset, not just its original cost.

Of course, if you have a loss, the opposite strategy applies. Then you would want to sell the asset, take the tax loss, and then make your charitable donation. The loss you take may be used toward offsetting capital gains.

Retirement Plan Gifts

You may be aware that funds in an Individual Retirement Account (IRA) may be subject to estate taxes at your death. But you may not also be aware that your heirs may also have to pay income taxes on retirement assets they inherit.

If you are over age 70 1/2, one way to deal with this issue is to use special provisions which expire at the end of 2013. For now, it is still possible to make tax-free gifts directly from your traditional or Roth IRA. While you may not take a deduction for such contributions, you do not have to report the withdrawal on your tax return as income. You may do this for amounts up to $100,000.

This approach can be particularly advantageous if withdrawals from your IRA cause your Social Security income to be taxed at higher rates, or if you have reached the limit for how much you can deduct.

Giving Through Life Insurance

If you no longer need life insurance for spousal support or other loved one, you may want to redirect the proceeds toward charitable gifts.

Gifts by Will or Living Trust

If you wish to make gifts out of your estate, this can easily be accomplished by revising your estate planning documents accordingly.

Gifts That Provide Income

It may also be possible to use special giving techniques that allow you to retain income for life or some other period.  Many charitable organizations have programs that facilitate such gifts, which may have significant tax savings.

Donor Advised Funds

Donor advised funds can be an excellent way to not only further your charitable giving, but also to offset higher than normal income that may bump you into a higher tax bracket. For example, you may want to offset the additional income caused by a conversion of a traditional IRA to a Roth, or an unusually large bonus. Of course, the 50% income limit mentioned in the section on cash gifts applies.

This is an especially good solution if you are not sure in advance to which organizations you want to contribute, a potentially thorny issue if it is a larger than usual gift. Organizations like Fidelity and Vanguard both have these programs with reasonable minimum contribution levels and moderate management fees.  Once you make your contribution to these funds, the gift is irrevocable; but in the future, you may nominate an organization for a grant in the denomination you want (subject to a fund company minimum; please see each vendor for details). You may also choose to make the investment selections for your contribution.

Link to the IRS for Details

For detail on IRS requirements, please see http://www.irs.gov/uac/Newsroom/IRS-Offers-Tips-for-Year-End-Giving-2012. Since some of these tips are for 2012, please check for updated specific dollar limits, etc., as an update of the giving tips is not yet out for 2013.

In addition, if you are considering donations in response to a natural disaster, you may want to scroll to the relevant section of this link: http://www.irs.gov/uac/Newsroom/IRS-Releases-the-Dirty-Dozen-Tax-Scams-for-2013. While this was written last tax season, the section on charitable giving scams may be worth your perusal, especially if you have been approached by an organization in connection with say, the typhoon in the Philippines.

Dear readers, I hope that this has been a prosperous year that enables you to give. If this has been a tougher year financially for you, or if you are saving to meet those financial goals, then consider a gift of your time. Gifts of time and effort are often priceless in this time-stretched society we live in.

Happy Holidays!

Investment advisor representative of an investment advisory services offered through Garrett Investment Advisors, LLC, a fee-only SEC registered investment advisor. Tel: (910) FEE-ONLY. Kulig Financial Advisors may offer investment advisory services in the state of Massachusetts and other jurisdictions where exempted.