We invite you to listen to our first Quarterly Conference Call Commentary of 2019. The speakers on the call are three of the planners of CJM, along with our Portfolio Research Director and we hope you find the information valuable.

The subjects discussed include a recap of 2018 along with some thoughts on the direction of the economy and markets for the coming year. Finally, we will discuss expected changes as we prepare to file our 2018 income taxes.

David D. Greene, CFP®
David D. Greene, CFP®CEO, Financial Adviser
Kevin E. Donovan, CFA
Kevin E. Donovan, CFAPortfolio Research Director
Brian T. Jones, CFP®
Brian T. Jones, CFP®Chairman, Financial Adviser
Jessica Ness, CFP®
Jessica Ness, CFP®Senior Financial Adviser

Dave– Hello and Happy New Year.  I am Dave Greene, CEO of CJM Wealth Advisers, and we want to welcome you to our first quarterly conference call for 2019.  It is our hope that you find this call timely as it relates to the current economic and financial climate as we share some thoughts on investments as well as planning issues.

Now before we head into the questions and answers, the usual disclosure applies: we need to state that none of the comments you hear should be interpreted or understood to be individual investment or planning advice.  You should consult with your planner about your individual situation to build a plan that best suits your needs.  Moving along, I want to introduce the three other speakers who you’ll be hearing from today, Kevin Donovan, our Portfolio Research Director, and two of my fellow planners: Brian Jones and Jessica Ness.

To start things off, I think it makes sense to spend a little time discussing highlights from 2018.  Now when I say highlights, I am really speaking of “major events” since we all know that 2018 ended the year with very few true “highlights”.

IF we go back to February of 2018, we will remember that the US stock market started the year off just as it ended with a pretty significant downturn.  In fact that correction in early 2018 included 2 drops of over 1000 points each in just a 4 day period.  Soon after, we had talks of tariffs and trade wars causing more volatility in March and April but then the markets regained some solid footing in the summer and rose fairly steadily through September.  We are all aware of what then happened in the fourth quarter based on concerns over Federal Reserve interest rate increases, rising trade war tensions, talk of recession and other major economic issues such that the S&P 500 finished the year down 6.2% which was its worst year since 2008.

International and emerging market stocks faired even worse with the MSCI EAFE losing 14% for the year as China concerns, Brexit fears and other international headlines reduced confidence in the global economy.

After bonds spent much of the year in the red, a fourth quarter risk off rally pushed Barclays Aggregate Bond index up to where it ended the year just barely positive but positive none the less.  This prevented 2018 from becoming what would have been just  the third year in history where bonds and stocks declined in the SAME year.

Even with that bit of good news, 2018 will be remembered for the stomach churning fourth quarter that sent stocks reeling.  In retrospect, the 20% decline from the highs felt a bit overblown when we look at some of the fundamental factors in the US and global economy.  So let’s take this opportunity to dig into the weeds a little with Kevin Donovan and Brian Jones to understand where the markets and economy stand and where we might be headed in 2019.  Kevin – can you start things of with some insight on the US economy?

Kevin – Sure Dave.  After almost ten years of steady growth the economy has now become a concern for the market. Since the last recession ended in 2009 we’ve had years of modest 2% to 3% GDP growth yet stocks have boomed.  Last year, economic growth accelerated to more than 3% but stocks declined.  As you mentioned, one of the reasons for the fourth quarter selloff in stocks was the reduced confidence in the economy.

One of the problems with the stronger growth rate in the economy last year was that it is probably unsustainable in the long-run.  Economists don’t expect a recession this year, but GDP growth is expected to slow back down to the 2% to 3% rate that we’ve seen throughout this decade.

Dave – One of the big success stories about this economy has been the strong job numbers.  What impact is that having on the economy?

Kevin – Economics is often a mixture of good news and bad news.  One piece of very good news is that unemployment is at historically low levels.  The bad news is that low unemployment levels can actually hold back the economy from growing at higher rates because employers can’t find qualified workers to fill jobs.  Unless a new supply of workers is found elsewhere, a politically touchy topic, businesses and the economy can’t grow as fast.

Like the economy, corporate earnings are expected to grow at a slower rate this year.  Earnings had a very strong 2018, helped by corporate tax cuts.  This year, the positive impact of those cuts will roll off and earnings growth, like GDP growth, will be lower.  Earnings will still be growing, but at a much lower rate.

Dave – We also invest in international funds so how are economies around the world doing?

Kevin – Let’s start with the big one in the news – China.  It seems like we’ve been debating for a long time whether China will have a soft landing for its once high-flying economy.  It HAS been able to stimulate its economy when necessary, but there are concerns that a trade war and other issues will have too large of a negative impact this time for its government to handle.  Still, like the U.S., China is expected to grow, but at a slower rate.

On the other side of the world, concerns over Brexit continue to cloud the outlook for both Britain and Europe.  And at some point the European Central Bank will have to ween the continent off its fiscal stimulus program which has been aiding European economies. So the outlook there is less clear.

Dave – So putting all of your insights together, any final comments?

Kevin – After years of ignoring all economic risks the market reacted dramatically in the fourth quarter and swung in the completely opposition direction.  It went from being priced for perfection at the beginning of last year to being priced for failure by the end of it.  That kind of fear creates opportunities.

I realize I sound like a broken record, but it bears repeating:  We expect the growth RATE of the economy and of earnings to be lower, but we do expect growth to continue.

Dave – Thanks Kevin.  Helpful thoughts on the economy and markets.  Brian, can you add some thoughts on what 2019 may look like for investors?

Brian – Lets take a moment to look at all the things that are going right in our economy to start 2019. Interest rates, even after Federal Reserve increases last year, remain for the most part low; that’s a positive. In addition, employment numbers remain very strong, indicating strength in the overall economy. Earnings will definitely slow down in 2019 compared to 2018 as Kevin pointed out but overall remain positive. Add to this consumer spending, which is 2/3 of the U.S. economy, continues to expand, which is also a huge positive. While the stock market did not reflect these strengths as we closed out the year, we do believe that the underlying economy remains healthy and on track for muted growth in 2019.

Dave – Wow, Brian.  A surprisingly positive perspective.  Let me switch gears to another topic – stock market valuation.

Brian – Last year when we recorded this session we talked about “valuations” and valuations were high given 2017’s stock market run up. This year is the complete opposite. Now we have a stock market that is down considerably from its highs. There are companies, with strong balance sheets, low debt and positive earnings whose shares are on sale. The question in 2019 is who is the buyer given all of the global macro and political uncertainties at the moment? I’ll give you one very large buyer in 2019. Companies themselves.

According to the economic research firm MacroMavens, U.S. companies bought more than $700 billion dollars of their own stock in 2018. They estimate that companies in 2019 will spend even more to buy back their own shares, especially now that their stock prices cost less than they did last year at this time.

Dave – So are these stock buy backs new?

According to Barron’s since 2011, corporate stock buybacks have totaled some $4 trillion dollars. All this additional buying has helped push stock prices up. We expect this trend to continue, which bodes well for stocks in 2019. In addition, we think the Federal Reserve will (indeed, has already begun) to moderate their expectations for future rate increases. This also should help the markets by capping interest rate increases for the time being.

Dave – Enough of the sunshine Brian, what kind of clouds and/or stormy weather do you see in 2019?

Brian – We expect the market volatility that we saw in 2018 to continue into 2019. This means wild swings in the markets, which in and of itself is enough to require an antacid or two depending on the week. We believe a focused and disciplined approach will help investors survive the daily onslaught of tweets, sound bites, and market dips.

In general we believe 2019 will be a volatile one. Stock and bond markets have the potential to move erratically to the up and downside all year long. We believe that investors should be realistic about return expectations given the volatility and most importantly be patient with the markets. Markets behave in such ways at times and it is at times like these that patience and discipline can keep us focused on the long term.

Dave – Thanks Brian. Now let’s shift gears and talk about a financial planning topic.  Jess, after the New Year excitement dies down, we enter another magical time of year – tax season.  What can you share to help us get through it?

Jess –  Dave, I must admit that I’m feeling some déjà vu since we talked about taxes in our first quarter podcast last year, given that tax reform had just been passed.  It’s hard to believe it has been a year already, and now it is time to file our taxes based on these new rules.

This was dense legislation but there are a few highlights worth mentioning, so you don’t get caught by surprise when you file your taxes this year.

More folks will probably use the standard deduction, instead of itemizing, due to the standard deduction almost doubling in size.  Plus, many itemized deductions have now been restricted or eliminated entirely. Most notably is the deduction for state and local taxes, referred to as the SALT deduction, which is now limited to $10,000.  Personal and dependent exemptions have gone away. And all seven marginal tax brackets have shifted down.

Dave – So, Jess, should our clients expect a similar tax bill as before or will it be dramatically different?

Jess: Overall, our clients should expect to pay about the same amount, maybe a little less, in total tax.  However, if your refund isn’t as large, or you owe more than expected, there may be a few reasons why.  First, the loss of some itemized deductions I mentioned a few minutes ago could have a big impact.  Second, for our working clients, the amount of tax withholding from your paycheck was automatically adjusted and many people could find that they have to write a check to the IRS just to make up for less withholding from their paychecks.  Third, investments may have generated a lot in capital gains in 2018.  We saw a big increase in capital gain distributions from mutual funds, given that stocks have risen for a number of years prior to last year’s volatility.

Now, actually filing our taxes will be interesting this year too.  If you recall, one of the loudly stated goals of tax reform was to redesign the IRS forms and schedules.  The main form, the 1040, has been redesigned to almost fit on a postcard.  This means the bulk of the information will now be on supporting schedules.  A few new schedules were created and many were completely redesigned.  So for all of the paper filers out there – be warned that the process will look quite different this year so give yourself plenty of time.  If you use tax software, little should change so expect to see roughly the same interview format as before.

Dave – So Jess, how might all this change what our client’s can expect as far as their Pershing 1099 tax info?

Jess – One thing is the same, and that’s when you can expect to receive your 1099 tax documents from Pershing.  Most clients should receive them in the middle of February, however, don’t send the information to your just accountant yet.  Wait and expect to see a final revised 1099 at the end of February or early March.

As always, give us call to talk through the potential impacts on your specific situation.

Dave – Thanks Jess! And, with that, we want to thank you for taking the time today to listen to our thoughts on the markets and some issues facing us as investors.  We also hope you found the information on the planning impact of tax reform helpful.

We encourage you to share this recording with friends, co-workers, neighbors or family that you think might benefit.

Thanks again for listening.