A new presidential era began last Friday with Donald Trump's inauguration, and the market reaction was far more restrained than its response to his election. For weeks after the presidential election, we saw markets defy expectations and post significant gains. In fact, the Dow grew by over 1,500 points between November 8 and December 12.
In the four days of trading last week, major U.S. indexes continued the sideways performance we've seen since December. Despite the very small trading range over the last few weeks, Friday's market performance marked one milestone not seen since John F. Kennedy's election: index gains on inauguration day. Nonetheless, we still see a market that has been in a holding pattern for weeks. The S&P 500 has barely moved since the day before the Fed raised rates on December 14.
Why has the Trump Bump paused?
The markets are incredibly complex and multifaceted, so one answer cannot fully explain their performance. However, after rallying in anticipation of Trump's promises for lower taxes, decreased regulation, and increased government spending, investors are now waiting to see which policies will come to fruition. No one knows for sure what policy changes or political developments lay ahead. We must look closely at fundamentals to see beyond the headlines and find a clearer view of where the U.S. economy stands today.
What are the fundamentals telling us?
During the current corporate earnings season, 63 companies have reported their fourth-quarter results so far. Of these companies, 63% beat earnings-per-share estimates and 46% exceeded their sales estimates.
Last week, we also saw:
- The Consumer Price Index increase by 0.3% for December
- Industrial production increase by 0.8% for December, erasing its November decline
- Housing starts rebound by 11.3% for December after dropping 39.4% in November
This week, three factors will give us a deeper view of economic performance: 1) fourth-quarter GDP reports, 2) consumer sentiment data, and 3) home sales figures. By analyzing data rather than focusing on hype and predictions, we remain committed to your long-term financial health.
What should you focus on?
No matter your political perspectives, moments of change can elicit emotional reactions from even the most rational investors. As always, emotions have no place in investing.
Consider this: After former-President Barack Obama's election in 2008, the S&P 500 dropped 15.5% by inauguration day, as his transition period coincided with the deepening financial crisis. Investors who allowed emotions to take over at that point and left the markets could have missed the S&P 500's 12% average annual growth each year Obama was in office.
We believe now is the time to continue focusing on your unique risk tolerance, your long-term goals, and the economic fundamentals, not who is in office.
We will continue to monitor economic and market evolution as it occurs, and we will closely watch the political division that seems to grip our country. In the meantime, we are here to answer any questions you may have and help you find the clarity you need.
Quote of the Week
"Concentrate all your thoughts upon the work at hand. The sun's rays do not burn until brought to a focus."
--Alexander Graham Bell
Golf Tip of the Week
Get Out of Trouble with a Great Punch Shot
Going far off the fairway and finding your ball stuck in the trees is never fun - but if this happens to you, you're not alone. Everyone experiences this frustration eventually. To fix the situation, you need to be able to hit a great punch shot. Here are a few tips to get you back on the fairway.
- Find the widest gap that you can hit through. Why? Threading the ball through a tight gap will more than likely result in you remaining stuck in the trees rather than clearing them.
- Identify the trajectory you need to hit the ball and get out of the trees cleanly. More than likely, you'll need to keep low. Use a low-lofted club, played back in your stance.
- Hit the ball with a swing that is short, smooth, and controlled to avoid hitting fast and flying the ball high.
Financial Question of the Week
Should I convert to a Roth IRA?
Turning your individual retirement account into a Roth IRA is not a totally black-and-white decision. In order to make a smart choice, you must first understand the rules, especially relevant tax laws.
Traditional IRAs are largely based on income tax deferral, which means you get a tax break on your contributions in the current year. In retirement, your withdrawals incur income tax. With a Roth IRA, you make after-tax contributions to the plan while your investment earnings incur no income taxes, and on the back end you again pay no income tax on withdrawals from the plan.
Roth IRAs hold another advantage, one that becomes increasingly important as you age through retirement. Virtually every other tax-sheltered plan requires you to begin taking required minimum distributions (RMDs) no later than 70½. Roth IRAs stand alone among plans as they do not require RMDs. This allows you to continue accumulating money in your Roth during the time when you must draw down the balances of your other retirement accounts - possibly reducing the risk that you'll outlive your money.
Everybody's situation is different, so it's important to focus on what may make sense for you. Ask yourself a few questions to help determine the factors that matter most in making your decision.
- How does your tax situation impact your decision?
- What effect could future market performance or your plans for retirement have?
- What other considerations might impact your decision?
Please contact my office if you would like help estimating the potential long-term tax and financial impact of converting to a Roth IRA.