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Fourth Quarter 2017

The Markets

Politics dominated the headlines in 2017 and the strong market performance surprised many. One of the most remarkable things, for U.S. markets, was the lack of volatility. The largest decline last year was only 3%. The average decline every year, for the last 37 years, has been about 14%. All stocks performed well, so it was just a matter of degree. International, both developed and emerging markets, outpaced the U.S. for the first time since 2012. Globally, however, all stocks surged for the year. Despite rising interest rates and much speculation to the contrary, the U.S. aggregate bond market was up 3.5%. The price of oil was up 12% from the 2016 close. Can it continue? Many economic forecasts we follow, like Raymond James, JP Morgan and BlackRock (to name a few), make the case for earnings momentum to continue with the backdrop of lower corporate taxes, continued strong economy and earnings. Interest rates are likely to continue to go up this year – maybe as many as three times. Emerging markets had an outstanding year, but earnings have not yet reached the previous 2011 levels, which mean they could have room to run especially if the dollar is stable. While markets could continue to be positive for some time (we saw it before in the 1990s), as they continue to increase, it will be critical to adjust risk along the way. We do not see euphoria yet, which is typically when markets top out or peak, but caution is prudent. While markets are calm, geopolitical risk remains high.

Bitcoin is its own animal that has had wild swings – both up and down – as regulators are determining what and how they will address it from a consumer protection standpoint. We are including a separate piece with information, if you were curious, and want to know more about it.

Tax Reform

Just before year-end, with barely time to plan, a tax bill was passed, significantly reducing corporate tax rates. Some of the provisions are summarized below, but much of the bill is not yet clearly understood as to the impact and how to take advantage. Hopefully, you made your charitable contributions and paid your property taxes in 2017.

Here are some of the changes:

Standard Deduction & Personal Exemption

  • The standard deduction has been doubled for both single and married filing jointly coming in at $12k and $24k, respectively. While this may benefit those who already did not itemize, it may push some into taking the standard deduction. The major gripe here is that this may reduce the attraction for some to make charitable donations if they can no longer be deducted. It also provides less reward for home ownership.
  • The personal exemption has been removed which just means…fewer deductions.

Itemized Deduction

  • There is now a cap of $10k on state & local taxes. This will impact those who live in high tax states such as California and New York. There was a rush at year end for many to consider pre-paying their 2018 taxes.
  • Eliminated the ability to deduct Home Equity Loan interest.
  • Eliminated the miscellaneous deduction box…which includes the ability to deduct investment management and tax preparation fees.
  • Retroactive to 2017, medical expenses that exceed 7.5% will now be deductible for all, not just those who are 65 and older.

Happy News for 529 Plans

  • 529 plans can now be used for K-12 education expenses to include private, elementary, middle & high schools (up to $10,000 per year). Previously, they were limited to just higher education. No longer will there be a need to use Coverdell Education Savings Accounts which have strict rules regarding contribution and income limits.

Lowering of Marginal Tax Brackets & Business Taxes

  • Tax brackets were kept at 7, with the individual marginal rates being decreased until 2025.
  • Lowers corporate income tax rate permanently to 21%

Municipal Bonds

  • Eliminates the ability to issue tax-exempt advanced refunding bonds (pre-res) after December 31, 2017.
  • Preserves tax-free private activity bonds and tax-exempt stadium bonds.

Individual Insurance Mandate Repeal

  • Repeals requirement from Obama’s health law that requires people pay a penalty for lack of health insurance.

Many of these changes will sunset in 2025 (except for the corporate income tax deduction) and will not be retroactive in 2017. However, the medical decrease will be retroactive to 2017.

Resource Center

Since the new year is resolution time, my recommendations are Fitbit, which tracks my activity all day, as well as the Amazon Echo Dot, which is a hands-free, voice-controlled device that uses Alexa to play music, control smart devices and so much more. Both were holiday gifts and I will be using both for 2018 as we ramp up our technology skills for the year.

I am also getting groceries delivered to the door from Blue Apron and my local grocery “Meijer” delivery app! So easy.

Happy New Year!

Every year seems to bring new surprises and opportunities. We hope you had a peaceful and joyful holiday season and that 2018 holds peace and happiness for you.

Best Regards.

The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Morningstar Commodities Broad Basket Category is a composite of returns of all funds in this category. The MSCI EAFE is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 21 developed nations. The Barclays US Aggregate Index is an unmanaged market value weighted performance benchmark for investment-grade fixed rate debt issues, including government, corporate, asset backed, mortgage backed securities with a maturity of at least 1 year.

Financial Market Update* Year-to-date change as of December 31, 2017
S&P 500 Index 21.83%
Morningstar Commodities
Broad Basket Category 3.66%
MSCI EAFE US$ (International) 25.03%
Barclay US Aggregate Bond 3.54%

*Indexes are for illustrative purposes only. One cannot invest directly in any index. Assumes dividends are reinvested.
Source: Morningstar

Past performance may not be indicative of future results. Expressions of opinions are as of this date and are subject to change without notice. Any opinions are those of Sherri Stephens and not necessarily those of RJFS or Raymond James. Stephens Wealth Management Group is independent of RJFS.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and investors may incur a profit or a loss regardless of strategy selected.

Diversification and asset allocation do not ensure a profit or guarantee against a loss. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. You should discuss any tax or legal matters with the appropriate professional.

Dividends are not guaranteed and must be authorized by the company’s board of directors. Investments mentioned may not be suitable for all investors. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters.

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