Tax Update

Fall is typically an opportune time to take stock of one’s finances in preparation for the upcoming income tax preparation season. For many taxpayers, income taxes for the 2018 calendar year may prove to be a much simpler process due to the passage of the Tax Cuts and Jobs Act late last year. However, that doesn’t mean that there aren’t any opportunities to take some strategic steps now to save on income taxes come April 2019.

A Balancing Act

The second quarter has been in many respects a continuation of the first quarter wherein financial markets have provided investors with little or no return on their investments. Today’s markets appear bewildered and subject to relatively sharp moves based on news stories and political maneuvering. Rising interest rates, potential trade wars, geopolitical concerns (populism, EU difficulties, sanctions) and a growing fear that the end is near for the long, but weak, economic expansion in the US all bear some responsibility for the confusion. Markets are driven by fundamentals and by emotions.

Auditors and our Research Process

Our research process starts with a screen to narrow down our investable universe to a more manageable number of names. As the screen is reviewed, more names are removed from consideration due to unattractive qualitative factors, such as extreme cyclicality of revenues or earnings. A few names are targeted at a time for a deep qualitative dive, which includes a checklist of characteristics we want the company to demonstrate, such as sustainable margins and shareholder friendly management.

Opportunity Funds: Great Tax Savings, but Caveat Emptor

he Tax Reform and Reconciliation Act that passed last year contains provisions that allow for significant tax benefits for targeted investments in certain economically distressed communities. The legislation incentivizes development in these areas by allowing deferral and/ or reduction of capital gains taxes regardless of the source of the gains. The goal of this program is to spur development and the law is a descendant of enterprise zones championed by the late Jack Kemp.

Return of Volatility

The first quarter of 2018 marked the return of the kind of volatility that investors have not seen for some time. In just the first ninety days of 2018, the S&P had 25 separate sessions where prices moved up or down more than 1%. This compares with only 10 such moves during the entire course of 2017. Thus, in the first few months of this year, investors are being treated to almost three times the level of volatility experienced in all of 2017. If last year was an unusually quiet ‘kiddie’ ride at the park in volatility terms—2018 by comparison is a return to more ‘thrills and chills.’

Does Market Timing Work?

The increase in Internet connectivity in the past two decades has brought with it countless benefits in terms of productivity and access to knowledge. It has also brought investors 24/7 access to stock market news as well as their investment portfolios. This level of access can be useful, but overexposure can often leave investors feeling panicked or that they need to ‘do something’—to time the market.

Facebook: The (anti)Social Network

“ Users are fickle, Friendster has proved that. Even a few people leaving would reverberate through the entire userbase. The users are interconnected, that is the whole point. College kids are online because their friends are online, and if one domino goes, the other dominoes go, don’t you get that?”
–“The Social Network (2010)”: Mark Zuckerberg’s character to Eduardo Severin on the importance of the network staying up.

Growth Ahead, Monetary Questions Remain

• Synchronized global growth continues as expansion enters 9th year after the Financial Crisis
• Central Banks own $11 trillion of government bonds, mortgage debt and corporate bonds
• Monetary stimulus will end and tightening begins in 2019
• Fundamentals should determine investment decisions and personal circumstances govern asset allocations
With the end of 2017, we can look back over the past nine years and take stock of how the world has fared. Memories of the 2008-2009 Great Recession are still quite vivid for some, but for many more, enough time has passed that fear has yielded to participation in the bull market.