Uncategorized

Tax Tips – Tax Reform Changed Small Business Accounting Methods*

If you own a small business, you may be able to use the cash method of accounting, thanks to the passage in late 2017 of the Tax Cuts and Jobs Act.

The act redefines small business as a taxpayer who has average annual gross receipts of $25 million or less for the three previous tax years and doesn’t serve as a tax shelter.

Here are some of the changes in the tax code for small business taxpayers.

  • More small business taxpayers are eligible to use the cash method of accounting with the increase in the average receipts rising from $5 million to $25 million, which is indexed for inflation.
  • Small business taxpayers are exempt from certain accounting rules for inventories, cost capitalizations, and long-term contracts.
  • More small business taxpayers can use the cash method of accounting for tax years after December 31, 2017.

The IRS’s Revenue Procedure 2018-40 describes the procedures for obtaining automatic consent to change accounting methods to comply with the new provisions.

* This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Tip adapted from IRS.gov[12]

[12] www.irs.gov/newsroom/heres-how-tax-reform-changed-accounting-methods-for-small-businesses

Volatility Continues – WEEKLY UPDATE – DECEMBER 10, 2018

Markets went for another wild ride last week, as major domestic indexes swung back and forth. By Friday, December 7, markets had posted their worst weekly performance since March – and the S&P 500 and Dow both moved into negative territory for 2018.[1]

Overall, the S&P 500 lost 4.60%, the Dow declined 4.50%, and the NASDAQ dropped 4.92%.[2] International stocks in the MSCI EAFE also struggled, posting a 2.27% weekly loss.[3] 

Let’s take a look at what is driving this challenging market performance.

Examining Recent Volatility

1. How volatile are stocks right now?
If recent market fluctuations have felt intense to you, there’s a reason: They are. The past three weeks have had the most volatility since 2008’s financial crisis. During this time, domestic indexes have ricocheted between gains and losses. The large swings have occurred both week-to-week and within daily trading.[4] 

2. What is causing the volatility?
Many of the same themes we’ve discussed throughout 2018 are continuing to affect market behavior. Ultimately, many investors are worried that corporate profits and global growth will suffer if trade tension persists and the Federal Reserve continues raising interest rates.[5]  

Concerns about Treasury yields were also on investors’ minds. For part of last week, 3-year Treasury notes had higher yields than 5-year notes. Called an inversion, a higher yield on shorter-term Treasuries can be a sign of a coming recession. The yield spread between 2-year and 10-year Treasury notes, which people focus on more, has not inverted.[6] 

3. Should you feel concerned?
With many headlines to digest, from conspiracy charges against a Chinese tech leader to comments from the Fed, investors had a lot to consider last week.[7] The difference is how they reacted to this information. For some time, markets were basically ignoring headlines. Now, they’ve moved in the opposite direction into what one investment manager called “a period of hypersensitivity.”[8]

Consequently, recent market performance may seem unnerving. As is often the case, however, the reality may be less extreme than what appears at first glance, especially when you look at the fundamentals.

4. What do the fundamentals tell us?
While last week’s market performance saw large fluctuations, the fundamentals we received were far less dramatic. We learned that two sectors beat expectations in November: manufacturing and service.[9] Further, the November labor report revealed fewer new jobs than anticipated, but unemployment is still at historically low levels, as job and wage growth continue.[10]

Remember, risks exist in the markets and economy, and we’re analyzing these details closely. If you have any questions about your financial standing or anything you hear in the news, we are here to talk.

[1] www.cnbc.com/2018/12/07/stock-market-dow-futures-fall-ahead-of-unemployment-figures.html

[2] http://performance.morningstar.com/Performance/index-c/performance-return.action?t=SPX®ion=usa&culture=en-US

http://performance.morningstar.com/Performance/index-c/performance-return.action?t=%21DJI®ion=usa&culture=en-US

http://performance.morningstar.com/Performance/index-c/performance-return.action?t=@CCO

[3] www.msci.com/end-of-day-data-search

[4] www.bloomberg.com/news/articles/2018-12-07/stocks-drubbing-vexes-fund-managers-as-year-end-pressure-mounts?srnd=premium

[5] www.bloomberg.com/news/articles/2018-12-07/stocks-drubbing-vexes-fund-managers-as-year-end-pressure-mounts?srnd=premium

[6] https://www.cnbc.com/2018/12/07/stock-market-dow-futures-fall-ahead-of-unemployment-figures.html

[7] www.bloomberg.com/news/articles/2018-12-06/asia-signals-mixed-start-for-stocks-yields-drop-markets-wrap?srnd=markets-vp

[8] www.cnbc.com/2018/12/07/stock-market-dow-futures-fall-ahead-of-unemployment-figures.html

[9] www.ftportfolios.com/Commentary/EconomicResearch/2018/12/3/the-ism-manufacturing-index-rose-to-59.3-in-november

www.ftportfolios.com/Commentary/EconomicResearch/2018/12/6/the-ism-non-manufacturing-index-rose-to-60.7-in-november

[10] wsj-us.econoday.com/byshoweventfull.asp?fid=485662&cust=wsj-us&year=2018&lid=0&prev=/byweek.asp#top

Tax Tips – IRS Develops ‘Get Ready’ to Help You Prepare for Tax Reform*

The IRS is offering a new publication to help taxpayers better understand tax reform. Called Tax Reform Basics for Individuals and Families, Publication 5307 explains the Tax Cuts and Jobs Act, enacted late last year for 2018, and how it will affect tax filings. The publication targets individual taxpayers and families and what they can expect on their 2018 federal tax returns.

Publication 5307 provides information on:

  • Increasing the standard deduction
  • Suspending personal exemptions
  • Increasing the child tax credit
  • Adding a new credit for other dependents
  • Limiting or discontinuing certain deductions

To download or read the publication, go to https://www.irs.gov/pub/irs-pdf/p5307.pdf.

For more information about preparing for tax filing, go to https://www.irs.gov/individuals/steps-to-take-now-to-get-a-jump-on-next-years-taxes.

* This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

Tip adapted from the IRS.gov[18]

[18] www.irs.gov/newsroom/new-irs-publication-helps-taxpayers-get-ready-for-tax-reform

Markets Rebound – WEEKLY UPDATE – DECEMBER 3, 2018

U.S. markets ended a volatile month on a high note Friday. All three major indices posted impressive increases for the week, buoyed by news from the Fed Reserve and international trade.[1] The S&P 500 jumped 4.85%, and the NASDAQ finished up 5.64% – both gains are almost 7-year highs.[2] Meanwhile, the Dow experienced a 2-year high, increasing 5.16%.[3] Internationally, the MSCI EAFE rose 0.95%.[4]

To better understand last week’s sharp rebound, let’s take a closer look at details surrounding comments by Fed Chairman Jerome Powell and various international developments.

Fed Developments

Last Wednesday, Powell inspired optimism in investors by claiming that interest rates are close to the current neutral range of 2.5-3.5%. His comments seemed to suggest that the Fed may throttle back interest rate hikes.[5] However, minutes released on Thursday from the central bank’s meeting contained no indication that the Fed had changed its policy. Therefore, we can only assume the Fed still plans on a fourth rate hike in 2018, and increases may continue during 2019, but we need to wait for more clarity from the Fed.[6]  

The G20 Summit

At the annual G20 summit, leaders from the world’s 19 biggest economies and the European Union assembled in Buenos Aires. This group represents 85% of the world’s economic output and 2/3 of its population.[7] Here are a few key takeaways from the summit:

  • United States-Mexico-Canada Agreement
    On November 30, President Trump met with Canadian Prime Minister Justin Trudeau and Mexican President Enrique Peña Nieto. They signed the anticipated United States-Mexico-Canada Agreement (USMCA) to replace NAFTA. With the recent U.S. tariffs on Canadian steel and aluminum causing tension, the USMCA may start to ease the strain, although some remain skeptical. Plus, the agreement still needs to pass Congress. Its true outcome is still unknown.[8] 
     
  • Trade Talks with China
    President Trump and China’s President Xi met on December 1 to attempt resolving trade issues between the two countries. Since last July, the U.S. has hit Chinese goods with a total of $250 billion in tariffs and has threatened more. In turn, China retaliated by imposing $110 billion in tariffs on U.S. products.[9]  Ultimately, both countries agreed to delay any increases in tariffs for 90 days, while they attempt to iron out remaining disputes. If they cannot reach an agreement, President Trump says he will raise rates from 10% to 25%.[10]
  • Other G20 Concerns
    Low oil prices and oversupply continue to worry investors. The leaders from two of the three largest oil-producing countries, Russia and Saudi Arabia, met to discuss reducing production and raising prices.[11] In addition to trade issues and oil, G20 leaders are grappling with different views on climate change and the new spat between Russia and the Ukraine.[12]

Stay Focused

While the Fed and geopolitical issues dominate the news cycle, we’re here to remind you to keep market fundamentals in mind. As a whole, the economy looks strong through 2018.[13] For example, last week we learned:

  • Consumer confidence remains high, though it fell slightly in November. This dip follows an 18-year sustained peak in positive territory.[14] 
  • Q3 Gross Domestic Product increased a solid 3.5%. Business investments performed better than expected, with corporate profits boosting to a new 6-year high.[15] 
  • Unemployment lowered to 3.7%, the lowest it has been in at least 48 years.[16]

As always, we remain dedicated to helping you navigate your financial life amidst economic and geopolitical news. If you have questions about how this information may affect your portfolio, contact us today.

[1] www.reuters.com/article/us-usa-stocks/wall-street-rises-on-trade-hopes-sp-nasdaq-post-best-weeks-in-7-years-idUSKCN1NZ1EZ

[2] http://performance.morningstar.com/Performance/index-c/performance-return.action?t=SPX®ion=usa&culture=en-US

http://performance.morningstar.com/Performance/index-c/performance-return.action?t=@CCOwww.reuters.com/article/us-usa-stocks/wall-street-rises-on-trade-hopes-sp-nasdaq-post-best-weeks-in-7-years-idUSKCN1NZ1EZ

[3] http://performance.morningstar.com/Performance/index-c/performance-return.action?t=!DJI®ion=usa&culture=en-US

www.cnbc.com/2018/11/30/stocks-set-to-open-mixed-as-high-stakes-g-20-puts-trade-in-spotlight.html

[4] www.msci.com/end-of-day-data-search

[5] www.cnbc.com/2018/11/28/markets-see-fewer-rate-hikes-in-powell-comments.html

www.cnbc.com/2018/11/28/forex-markets-dollar-the-fed-us-china-trade-in-focus.html

[6] www.bankrate.com/banking/federal-reserve/fomc-recap/

[7] www.g20.org/en/g20/what-is-the-g20

[8] www.reuters.com/article/us-g20-argentina-usmca/u-s-canada-mexico-sign-trade-deal-trump-shrugs-off-congress-hurdle-idUSKCN1NZ0HE

[9] www.cnbc.com/2018/11/30/timeline-of-us-china-trade-war-as-trump-and-xi-meet-at-g-20-in-argentina.html

[10] www.cnbc.com/2018/12/01/us-china-wont-impose-additional-tariffs-after-january-1-report.html

[11] www.cnn.com/2018/11/30/investing/premarket-stocks-trading/index.html

[12] fortune.com/2018/12/01/g20-statement-2018/

www.usatoday.com/story/opinion/2018/11/30/ukraine-conflict-trump-g-20-push-back-bully-putin-editorials-debates/2147851002/

[13] seekingalpha.com/article/4225786-u-s-good-gets

[14] www.marketwatch.com/story/consumer-confidence-falls-for-first-time-in-five-months-2018-11-27

[15] www.marketwatch.com/story/economy-grew-35-in-third-quarter-pushes-corporate-profits-to-6-year-high-gdp-shows-2018-11-28

[16] www.marketwatch.com/story/wages-may-show-strong-gain-in-november-jobs-report-and-wall-street-wont-like-it-2018-12-01

Tax Tips – How Does Depreciation Deductions Impact Farmers?*

The Tax Cuts and Jobs Act changed how farmers and ranchers can deduct farming equipment for depreciation.

Depreciation deductions allow taxpaying farmers to recoup some of the costs for the use of their property and equipment.

Here are some of the changes to the tax code:

  • New farming equipment and machinery is considered five-year property. If you put equipment or machines in service after December 31, 2017, the period of recovery is five years (from seven years).
  • Grain bins, cotton-ginning equipment, fences, and other land-improvement equipment are exempt from the shorter recovery periods.
  • Used equipment falls under the seven-year rule.
  • Farming equipment put in service after December 31, 2017, does not have to adhere to the 150% declining balance method.
  • New and certain types of used equipment obtained and put in service after September 27, 2017, may qualify for the 100% first-year bonus depreciation but only for the tax years it was first used.
  • You may expense section 179 property. Section 179 property is tangible, purchased (not leased), used more than 50% in your business, put in service in the current tax year, and acquired from someone to whom the farmer is not related. The new tax code increased the maximum deduction to $1 million (from $500,000).

Other provisions are available, and you can find more information on the IRS website.

* This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

Tip adapted from the IRS.gov[17]

[17] www.irs.gov/newsroom/tax-reform-changes-to-depreciation-deduction-affect-farmers-bottom-line

Why Did Stocks Drop? – WEEKLY UPDATE – NOVEMBER 26, 2018

Last week was a tough one for markets. The S&P 500 dropped 3.79% and experienced its worst results during a Thanksgiving week since 1939.[1] While the index officially entered correction territory on Friday, it closed 10.2% below its most recent record high.[2] Meanwhile, the Dow and NASDAQ continued the downward trend, losing 4.44%, and 4.26%, respectively.[3] International stocks in the MSCI EAFE also declined, posting a 1.12% loss.[4]

Reading these results may feel quite unpleasant and elicit concerns about what is ahead. As is often the case, the story behind the numbers can help us understand the complexity and what this performance means.

Why did stocks drop?

Plummeting oil prices were one of the biggest drivers behind the market’s losses, as investors worried that too much oil is available.[5] These concerns have contributed to oil experiencing seven weeks of losses in a row and dropping more than 20% so far this month.[6]  

While oil was a key focus last week, many other details were also on investors’ minds. Major tech companies continued to struggle and posted sizable losses for the week.[7] In addition, the markets still don’t know how the Brexit deal, political challenges in Europe, and ongoing trade tension will all work out.[8]  

Examined together, these challenges can create questions about the strength of global growth.[9]  

Will the market losses continue?

No one can predict the future, but a few data points and perspectives can help deepen understanding of the current environment. We believe the following two details are important for you to know:

  1. Trading was light last week: The days before and after Thanksgiving had trading volume that was much lighter than normal, which often happens during this time period.[10] This lower volume can exacerbate pricing trends, such as the declines we saw with oil.[11] As a result, Friday’s performance may be less significant than it seems on the surface.[12]

    2. Black Friday shopping was strong: Brick-and-mortar stores had people lined up for discounted buys, and online purchases were 28.6% higher than in 2017. The holiday season is very important for retailers, and these initial results indicate consumer spending may remain strong through year’s end.[13]   

In the coming weeks, we will gain a clearer understanding of many market influences. President Trump and Chinese President Xi are scheduled to meet this week at the G20 summit to discuss trade. Right now, the markets may be assuming these talks won’t solve the trade tension and that an economic slowdown could be ahead. Investors may also doubt whether oil-producing countries can slow production fast enough to counter reduced demand.[14]  

Other experts believe we are experiencing a disconnect between what investors are feeling and what is truly happening in the economy. As a result, a so-called “Santa Claus” rally could occur as consumer spending continues during the holiday season.[15] 

But these perspectives are opinions, not a crystal ball. No one can say for sure how these complex scenarios will play out. Rather than rely on guesswork or headlines, we’ll continue to look for clear trends and insight that support your long-term goals. If you have questions or want to talk about your current investments and strategy, we are here for you.

[1] www.bloomberg.com/news/articles/2018-11-22/asia-stocks-to-slip-end-weekly-drop-pound-jumps-markets-wrap?srnd=markets-vp

http://performance.morningstar.com/Performance/index-c/performance-return.action?t=SPX®ion=usa&culture=en-US

[2] www.reuters.com/article/us-usa-stocks/wall-street-drops-sp-500-confirms-correction-idUSKCN1NS1FA

[3] http://performance.morningstar.com/Performance/index-c/performance-return.action?t=!DJI®ion=usa&culture=en-US

http://performance.morningstar.com/Performance/index-c/performance-return.action?t=@CCO

[4] www.msci.com/end-of-day-data-search

[5] www.reuters.com/article/us-usa-stocks/wall-street-drops-sp-500-confirms-correction-idUSKCN1NS1FA

[6] www.reuters.com/article/us-global-oil/oil-plunges-nearly-8-percent-despite-talk-of-output-cut-idUSKCN1NS012

[7] www.cnbc.com/2018/11/23/stock-markets-dow-set-for-losses-as-trading-resumes-for-half-day.html

[8] www.bloomberg.com/news/articles/2018-11-22/asia-stocks-to-slip-end-weekly-drop-pound-jumps-markets-wrap?srnd=markets-vp

[9] www.bloomberg.com/news/articles/2018-11-22/asia-stocks-to-slip-end-weekly-drop-pound-jumps-markets-wrap?srnd=markets-vp

[10] www.marketwatch.com/story/when-does-the-stock-market-close-on-black-friday-2018-11-23?dist=markets

[11] www.marketwatch.com/story/6-key-reasons-the-bottom-is-falling-out-of-oil-prices-on-black-friday-2018-11-23

[12] www.reuters.com/article/us-usa-stocks/wall-street-drops-sp-500-confirms-correction-idUSKCN1NS1FA

[13] www.marketwatch.com/story/stocks-poised-to-open-lower-in-black-friday-trade-notch-weekly-loss-of-more-than-3-2018-11-23?dist=markets

www.reuters.com/article/us-usa-stocks/wall-street-drops-sp-500-confirms-correction-idUSKCN1NS1FA

[14] www.reuters.com/article/us-global-oil/oil-plunges-nearly-8-percent-despite-talk-of-output-cut-idUSKCN1NS012

[15] www.marketwatch.com/story/stocks-poised-to-open-lower-in-black-friday-trade-notch-weekly-loss-of-more-than-3-2018-11-23?dist=markets

Tax Tips – IRS Provides Resources to Help Small Businesses with Taxes*

The IRS offers small business leaders helpful information on taxes.

Last year’s Tax Cuts and Jobs Act may have helped bolster revenue for many businesses, but understanding tax reform can be challenging.

Many small business owners may be able to take advantage of new 20% tax deductions on their qualified business income. To learn more, go to https://www.irs.gov/tax-reform.

The agency also provides detailed information on technical aspects of the tax law. The Tax Reform Guidance page provides a list of guides.

The drop-down articles provide some easy links to information and the Frequently Asked Questions answers common tax questions: https://www.irs.gov/newsroom/tax-reform-resources.

Publication 15, Circular E, Employer’s Tax Guide provides a more in-depth overview of employers’ tax responsibilities.

Tax Reform News has links to news articles and fact sheets about tax laws.

Other details may apply, and you can find more information on the IRS website.

* This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

Tip adapted from the IRS.gov[10]

[10] www.irs.gov/newsroom/irs-resources-can-help-small-businesses-better-understand-how-tax-reform-affects-their-bottom-line

Analyzing Data Amid Declines – WEEKLY UPDATE – NOVEMBER 19, 2018

Markets experienced more volatility last week, as perspectives on trade, tech, and retail pulled investor sentiment back and forth. Although domestic indexes were up on Friday, November 16, they still posted losses for the week.[1] In all, the S&P 500 dropped 1.61%, the Dow declined 2.22%, and the NASDAQ gave back 2.15%.[2]  International stocks in the MSCI EAFE ended the week down 1.51%.[3]

A major topic over the past couple weeks has been the ongoing, significant declines in oil prices. Last week, we did experience one turnaround – on Friday, signs that oil production may decrease next month helped oil prices start to rebound. This pricing increase contributed to S&P 500 energy stocks rising 1.1%.[4] 

In addition to oil’s current trajectory, let’s examine some of the key October data we received last week:

1. Retail Sales Beat Projections
October’s retail sales were the highest in 5 months – up 4.6% from this time last year.[5] While some of this growth comes from rebuilding efforts after the latest hurricanes, the overall data suggests that consumer spending remains strong. As a result, we may be able to expect ongoing economic growth.[6] 

2. Inflation Picked Up
The consumer price index had its largest monthly increase since the beginning of 2018. From gas to rent to cars, U.S. retail prices rose in October. Inflation is still relatively stable, however, which should mean that the Federal Reserve will continue on its current, gradual path of interest-rate increases.[7] 

3. Industrial Production Increased
Industrial production only grew by 0.1% in October, but the latest data also indicated that previous months were higher than originally thought. In fact, mining reached its highest point ever in August as production of oil and gas surged. Ultimately, this report paints a somewhat mixed picture for manufacturing: For now, output remains solid, but manufacturers have several concerns, including trade and global growth. Production has slowed since August, and we’ll now have to wait to learn whether this decline continues or rebounds.[8] 

Examined together, last week’s data may show that the economy still has strength, but questions remain. We will continue to monitor these and many other reports to help gain a clearer perspective on what may lie ahead.

As we look to this week, we want to take a moment to say thank you for being one of our valued clients. We recognize the trust you place in our team and are thankful for your relationship during this holiday – and every week of the year.

[1] www.bloomberg.com/news/articles/2018-11-15/asia-stocks-to-track-u-s-gain-brexit-slams-pound-markets-wrap?srnd=markets-vp

[2] www.reuters.com/article/us-usa-stocks/sp-dow-advance-on-trade-optimism-nvidia-sinks-nasdaq-idUSKCN1NL1K9

http://performance.morningstar.com/Performance/index-c/performance-return.action?t=SPX®ion=usa&culture=en-US

http://performance.morningstar.com/Performance/index-c/performance-return.action?t=!DJI®ion=usa&culture=en-US

http://performance.morningstar.com/Performance/index-c/performance-return.action?t=@CCO

[3] www.msci.com/end-of-day-data-search

[4] www.reuters.com/article/us-usa-stocks/sp-dow-advance-on-trade-optimism-nvidia-sinks-nasdaq-idUSKCN1NL1K9

[5] www.ftportfolios.com/Commentary/EconomicResearch/2018/11/15/retail-sales-rose-0.8percent-in-october

[6] www.cnbc.com/2018/11/15/us-retail-sales-oct-2018.html

[7] www.marketwatch.com/story/consumer-inflation-posts-biggest-jump-in-nine-months-on-higher-cost-of-gas-rent-used-cars-cpi-shows-2018-11-14

[8] www.marketwatch.com/story/industrial-production-inches-up-in-october-as-fed-finds-record-mining-output-2018-11-16

Tax Tips – 100% Depreciation Deduction Benefit for Business Taxpayers*

If you’re a business owner, you can reap the benefits this year of changes in the tax code enacted in December 2017. You can write off most of your depreciable business assets in the year the assets were used.

Here is what you need to know about the new deductions:

  • Business assets with 20-year recovery periods or less may be eligible.
  • Machinery, equipment, computers, appliances, and furniture may qualify for the deduction.
  • Only property that was acquired and put in use after September 27, 2017 qualifies.
  • Eligible property must be included on a return filed on time. Certain exceptions may apply.

The IRS provides information on the types of property that qualifies for the deductions. For more information, go to https://www.gpo.gov/fdsys/pkg/FR-2018-08-08/pdf/2018-16716.pdf.

Other details may apply, and you can find more information on the IRS website.

* This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

Tip adapted from IRS.gov[18]

[18] www.irs.gov/newsroom/new-100-percent-depreciation-deduction-benefits-business-taxpayers

The Impact of Oil and Elections – WEEKLY UPDATE – NOVEMBER 12, 2018

Last week, markets experienced a 4-day winning streak before dropping on Friday, November 9. Despite those losses, domestic indexes posted gains for the week.[1] The S&P 500 increased 2.13%, the Dow added 2.84%, and the NASDAQ was up 0.68%.[2] International stocks in the MSCI EAFE had slight growth, ending the week up 0.20%.[3]

From interest rates to corporate profits, investors had a number of topics to consider.[4] In this update, we want to focus on two key details that drove markets: oil prices and midterm election results.

1. Oil Prices Declined
Oil prices continued to fall last week, posting the most consecutive daily declines in at least three decades.[5] In fact, West Texas Intermediate (WTI) futures, a key oil benchmark, is officially in bear market territory. WTI has fallen more than 20% below its highest point over the past year.[6]  

What does this drop mean for markets?
Some investors believe the price declines are another sign that the global economy is slowing down. Historically, people have used oil prices as one way to decipher economic health because they can correlate with global growth. When crude oil prices drop, greater economic challenges are often ahead.[7] 

This recent decline may have a less concerning explanation. The United States sanctioned Iran last week while allowing eight nations to continue buying oil from the country for now.[8] All of these waivers resulted in 1 million more barrels of Iranian oil being on the market than expected, the opposite of the anticipated tightening supply.[9]  

Bottom line: The oil price decline may be more of a symptom of disrupted supply and demand, rather than an indication of the global economy’s health.[10]  

2. Midterm Elections Brought Few Surprises
The long-awaited midterm elections occurred last week, and the results matched expectations for a split Congress.[11] These results contributed to the midweek market rally we experienced.[12]  

How could the results affect markets?
Post-midterm market results are generally strong. Over the past 18 midterm elections, stocks have always had positive returns from their lows in October to the year’s end. Some investors even believe that October’s struggles were a sign of the markets pricing in the election results about a month early.[13]   

Taking a historical, long-term view, the current arrangement of a Republican president and a split Congress has resulted in 12% annual returns since 1936. The chart below shows how markets have performed through each potential party-control scenario.[14]

 

Although stocks have often done well when Washington experiences gridlock, the current scenario also makes a government shutdown or increased investigations into President Trump more likely. With either of these actions, market volatility could follow.[15]

Bottom line: The election results could help bolster market performance. The split Congress also brings potential for political uncertainty that increases volatility for investors.[16]

In many ways, this week’s market behavior underscores the complex, interconnected relationships between geopolitics and the markets. If you have any questions or would like to dive deeper into how these situations affect your financial life, we’re here to talk.

[1] www.marketwatch.com/story/dow-looks-set-to-sink-by-triple-digits-after-fed-update-as-oil-extends-fall-2018-11-09?dist=markets

[2] http://performance.morningstar.com/Performance/index-c/performance-return.action?t=SPX®ion=usa&culture=en-US

http://performance.morningstar.com/Performance/index-c/performance-return.action?t=!DJI®ion=usa&culture=en-US

http://performance.morningstar.com/Performance/index-c/performance-return.action?t=@CCO

[3] www.msci.com/end-of-day-data-search

[4] www.cnbc.com/2018/11/09/stock-market-us-futures-lower-after-fed-decision.html

[5] www.reuters.com/article/us-usa-stocks/oil-slide-china-worries-send-wall-street-tumbling-idUSKCN1NE1GQ

[6] www.cnbc.com/2018/11/09/stock-market-us-futures-lower-after-fed-decision.html

www.investopedia.com/terms/w/wti.asp

[7] www.marketwatch.com/story/stock-market-investors-wrestle-with-a-glut-of-bearish-signs-as-oil-prices-plunge-2018-11-10

[8] www.reuters.com/article/us-usa-stocks/oil-slide-china-worries-send-wall-street-tumbling-idUSKCN1NE1GQ

[9] www.marketwatch.com/story/stock-market-investors-wrestle-with-a-glut-of-bearish-signs-as-oil-prices-plunge-2018-11-10

[10] www.marketwatch.com/story/stock-market-investors-wrestle-with-a-glut-of-bearish-signs-as-oil-prices-plunge-2018-11-10

[11] www.bloomberg.com/news/articles/2018-11-07/this-time-stocks-got-it-right-now-about-that-october-rout

[12] www.cnbc.com/2018/11/09/stock-market-us-futures-lower-after-fed-decision.html

[13] www.bloomberg.com/news/articles/2018-11-07/this-time-stocks-got-it-right-now-about-that-october-rout

[14] www.cnbc.com/2018/11/05/market-history-shows-investors-should-hope-for-gridlock-on-election-day.html

[15] www.cnbc.com/2018/11/05/market-history-shows-investors-should-hope-for-gridlock-on-election-day.html

[16] www.cnbc.com/2018/11/05/market-history-shows-investors-should-hope-for-gridlock-on-election-day.html