Evans Wealth Management Blog

Articles written by Evans Wealth Management are designed to educate clients & potential clients on concepts important to their financial future.
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From March Madness to Market Madness

Each year, basketball fans look forward to the NCAA Basketball tournament and the time of year affectionately called, March Madness. However, this year it was cancelled and replaced by market and economic madness brought on by the coronavirus. In short-order, millions have lost their jobs, businesses are on the cusp of distress and investors are experiencing the fastest peak-to-bear market decline in history. While the virus is disrupting our daily life in many ways, there is hope.

  • The Fed has cut the Fed Funds Rate by 100 basis points to 0.25%. Additionally, they plan to reintroduce quantitative easing (QE) by buying $500 million in Treasury bonds and $200 billion in mortgage-backed securities. These actions are meant to ease the strains on the global funding markets.
  • Congress has also acted by passing a fiscal stimulus bill worth an estimated $2.2 trillion. It includes loan guarantees to small businesses, checks to consumers, suspension of federal loan payments and many other forms of aid to those most impacted. These steps and more will likely limit the damage and set the stage for the recovery.

Until then, keep in mind this isn’t the first time our country has experienced economic distress. The average bear market decline from 1956 to the present is 37% and each was followed by a strong market rally. This bear market is likely no worse than the others seen throughout history, and the economy will rebound just as it has in the past.  

The number of virus cases in China and South Korea is declining. It is a little more challenging here at the moment, but if we all do our part in staying quarantined, the return to our normal lives will undoubtedly trigger the beginning of a new market rally.

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One Unexpected Key to US Economic Growth: Baby Boomers

225,000 jobs were created in January boosting the economy and propelling stocks to new highs. Financial journalists attributed the boom in new jobs to mild winter weather. However, a deeper understanding of the causes of economic growth suggests another trend at work.

Specifically, baby boomers are working longer than anyone anticipated. In the accompanying chart, you will notice the percentage of those over 65 choosing to continue to work is steadily climbing higher. With the number of people in the labor force a key component of economic growth, this overlooked trend is an important contributor to our current economic success.


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The Four Most Common Elder Scams

Over two million elders fall victim to scams every year with many more going unreported. The average loss for victims over eighty years old is near $2000. To protect the savings of our elderly parents, it is necessary for us and them to be aware of the techniques being used. Below are the four most common scams.

  • The most popular scam is calling the elderly as a representative of Social Security or another governmental program. In order to receive extra benefits, many elders will grant the scammers access to their accounts. It is important to know that the government agencies associated with these programs will never call to sell something or ask for personal information.
  • Many lonely elders are more likely than one would think to shower online love interests with thousands of dollars. This money can be difficult to get back. In order to keep one’s loved ones protected, a periodic review of their financial records and possibly becoming the power of attorney on their accounts can help identify this scam.
  • Another very effective scam is threatening a grandparent by demanding ransom for a grandchild or other close relative. This scam, on average, robs elders of $9000. Elders are advised to remain calm when receiving this call and to confirm the situation. After discovering a scam, one should report the phone number to the local police.
  • Phishing is a way for scammers to call and receive access to the personal information of vulnerable elders. Elders should call the institution directly in order to confirm the legitimacy of the supposed offer and become more cautious clicking on unfamiliar links.

In order to protect more elders from these relatively successful scams, it is important to engage in dialogue about these popular scamming techniques with loved ones. Many elders become embarrassed and hide the fact they were scammed. Family members and friends must ask questions and ensure that the victims feel comfortable sharing the details of the scam to prevent more fraud in the future.

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A Tax Break for Those with Company Stock

If you work or have worked for a successful, publicly traded company, there is a relatively unknown tax break you should be aware. It deals with net unrealized appreciation (NUA) arising from company stock inside an employer retirement plan. Here are some important points to consider before taking advantage of this opportunity.

  • This tax break only applies to stock in the company in which you were employed, and it needs to reside inside the employer retirement plan (e.g., 401K plan). To reap the full benefit, it should have experienced significant appreciation in value. You must be at least 55 years of age to avoid the 10% penalty associated with withdrawing the funds.
  • One must withdraw their entire plan balance as a lump sum distribution within the course of a year. The NUA applicable shares are placed in a taxable account rather than an IRA. The cost basis of the shares is taxed at ordinary income tax rates in the year of the distribution. However, the appreciation will be taxed at long term capital gain tax rates at the time of sale.
  • The key to this strategy is for the shares to have significant appreciation. The more appreciation, the larger the tax benefit. For those with a large capital loss or capital loss carry-forward, timing the sale of the appreciated company stock with a capital loss from another investment would add further benefit to the strategy as the two could offset each other.

The details of this strategy involve complexity, but the tax saving benefits could be substantial. If you are considering the applicability of this strategy to your situation, feel free to reach out. I’d love to answer any questions and discuss how it might fit into your overall plan for funding your future.

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What to Expect From Social Security in 2020

The Secure Act has dominated recent headlines; however, the Social Security Administration has released the changes for 2020 and they are just as important for those nearing or in retirement. Below is a quick overview of what to expect for this year.

  • You are receiving a raise! Social Security checks are increasing by 1.6% this year. Sure there have been larger increases, but every extra dollar helps offset inflation.
  • Unfortunately, the increase will have a modest impact on your lifestyle due to the 6.7% increase in the Medicare Part B premium. At first glance, you might assume a hold-harmless situation exists. However, the larger Medicare increase is applied to a smaller amount than the social security increase; therefore, the hold-harmless situation isn’t likely to apply to many people.
  • The cost-of-living adjustment raised the earnings threshold to $18,240 for those filing prior to full retirement age and $48,600 for those applying the year of full retirement.
  • The new taxable wage base is $137,700, up from $132,900.
  • Finally, the maximum social security benefit for a person retiring in 2020 is $3,011, up from $2,861.

Hope you find the above helpful as you plan for retirement.

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The Year No One Expected

The books have closed on 2019 and it was one for the ages. When the dust settled, the S&P 500 closed the year up 31%. A great year by any measure. The economic recovery that began in July, 2009 finished its 10th year and is now the longest running economic expansion in US history.  Various factors driving the market included the following:

  • Entering 2019, investors were on edge as the Federal Reserve president had spent the entire fourth quarter preparing markets for up to three rate increases. Concern subsided when on January 4th, he completely reversed course and embarked on three Fed rate decreases. Currently, there is no reason to believe rates will increase in the near future.
  • Trade tensions dominated the headlines all year. By the end, China signaled a willingness to sign a Phase One deal. Considering the political polarization inside the US, it was encouraging to see any two groups work together on an agreement benefiting both parties.
  • US GDP growth remained above 2%, unemployment continued at record lows, job creation and wage growth progressed and consumers found reasons to spend. With everyone working, earning more and then spending some of their earnings, economic growth was the result.

2019 defied the expectations of experts and investors alike. It was a truly remarkable year. With that said, the manufacturing sector continued its decline and the overall pace of growth may not create the same level of opportunity enjoyed in recent years. Economic growth is slowing from the elevated levels of previous years, but the current pace feels sustainable.

All the best in the New Year!

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Can the US Economy Survive a Decline in Manufacturing Jobs?

In 1950, manufacturing jobs represented 37% of total private sector employment. Today, it represents 10%. Will the seeming demise of the manufacturing sector cause the US economy to stumble? Click the link below to view a short, but informative video on the subject.


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The 2020 Social Security COLA Announcement

Last week, the Social Security Administration (SSA) announced the COLA (cost of living adjustment) for current recipients will be 1.6% in 2020. The increase will be welcome news, but have you ever wondered how the COLA is calculated?

Since 1975, Social Security’s COLA is tied to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). What might surprise you is how few months of the index are used in the calculation. Only readings from the third quarter (July through Sept) are considered.

To determine the next year’s COLA, the SSA compares the average reading from the current year’s third quarter CPI-W with the average reading from the third quarter of the previous year. If the current year’s reading is higher than the previous year’s, it implies inflation happened which increases the COLA for SS recipients.

The other interesting aspect of the COLA calculation relates to the index itself. The CPI-W tracks the increase in general price level for urban wage earners and clerical workers not retirees. It means the index has an underweight to expenses like healthcare and housing which are important to seniors and an overweight to the cost of education, apparel and transportation which aren’t impacting seniors’ budgets nearly as much.

What does a 1.6% increase mean to current beneficiaries? Since the average retired worker and disabled person receive approximately $1473 and $1236 per month, the 2020 COLA increases their checks $24 and $20, respectively. This increase is most helpful in offsetting any potential increase in Medicare premiums.

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5 Steps to Protecting Your Personal Information

Over the past few years, some of the largest data breaches in history have been reported. Between Equifax, Marriott and Yahoo, billions of individuals’ data has been exposed to hackers and other unsavory types. In a world where more of our life is conducted online, protecting your data is becoming increasingly important. In the spirit of Cybersecurity Month (October), the following are 5 steps you can take to protect your personal information.

  1. Create a secret email address for your financial accounts. Frequently, your email address is the user id to numerous websites. With the data breaches, our email addresses are available to hackers essentially opening your entire digital world to them. For sensitive accounts, consider using a secret email address. This email address should be unidentifiable meaning don’t use your name, initials or any identifying info. Protect it with a strong password to increase the difficulty in hacking the account.
  2. Enable 2-step verification on email and financial accounts. Passwords are your first layer of security. However, you need an extra layer of protection for important websites like banks, email and social media. Two-step verification can be added to any account that supports the technology. When you log into an account, you are sent a passcode to be entered to gain access to the account. Even if a hacker has your password, they can’t gain entry without the secondary passcode which changes every time you login. 
  3. Use Wi-Fi with extreme caution. We all like free internet service, but many times it comes with unintentional costs. These networks are completely open enabling hackers to potentially gain access to any account you visit while on it. At minimum, avoid logging into bank accounts or checking email while on it. Ideally, use your phone’s data connection which provides a private connection or install a VPN (virtual private network) on your computer to secure your web surfing.  
  4. Freeze your credit and your children’s. By default, our credit files are open to anyone who knows just enough about us to get by the customer service rep. With all the data breaches, basic phone, address, email and SSN info is available to anyone who looks hard enough. Freezing your credit file prevents any new credit from being issued in your name.
  5. Update all your software, always. 70% to 80% of all security breaches are due to outdated software. Hackers exploit vulnerabilities in unpatched software by installing malware and viruses on unprotected devices. Make sure all updates are installed by enabling the auto-update feature in the Security or Settings tab.

The above won’t make you a cybersecurity expert nor close every vulnerability, but they represent a good first step in protecting your personal information. Save yourself some time, money and frustration by acting today on the above suggestions and vowing to take your data’s security more seriously going forward.

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It Could Have Been Worse!

The market was crazy fickle this month with multiple rallies and declines packed within a mere four-week period. Blame it on news related to world economic growth slowing, the Fed’s next rate decision or the US / China trade talks. By month’s end, participants should be glad the market only posted a slight decline in what was an overall very turbulent period for stock prices.

Uncertainty wasn’t limited to the US. The UK elected a new prime minister on the promise to exit the European Union by October with or without a deal. Trade tensions and weakening economic data also contributed to the volatility. Overall, developed country returns outperformed emerging countries but both saw declines for the period.

The winner for the month was US fixed income markets. As investors sought a haven from the stock market rollercoaster, they drove bond prices higher and yields lower. The Barclay’s Aggregate index gained 2.6% for the month. The rally in long-term bonds resulted in the yield curve inverting causing speculation about the economic expansion ending soon.

In the US, large caps outperformed small cap stocks. Value struggled to compete with growth largely due to the collapse in the energy sector which composes a larger percentage of the small cap and value indices. Defensive sectors such as staples and utilities held up best. Overall, it was a challenging month for equities worldwide in August.


Notable Market and Economic Happenings:

  • Despite the above backdrop, two-thirds of S&P 500 industry groups have rising 200 day moving averages with 80% above their respective industry moving averages. It suggests a positive long-term outlook.
  • When you compare YTD 2019 with years having a similar trading pattern, it suggests a better than average return outcome for the remainder of the year with less downside volatility than a typical year. This stands in sharp contrast to the prevailing market expectation.
  • The bond market is pricing in a 50% chance of two rate cuts between now and the end of the year.


Inspirational Thought for the Day:

“Everyone wants to live on top of the mountain, but all the happiness and growth occurs while you’re climbing it.” – Andy Rooney

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Social Security Claiming Strategies and Your Retirement

According to a recent study, social security represents approximately 33% of all income received by US retirees. This amounts to a staggering $1.0 trillion in annual benefits. While this sounds like great news for retirees, the research also suggests the impact could have been even greater if more had waited to enroll. Essentially, the lost income from sub-optimal claiming strategies was greater than the actual impact.

Below are a few interesting points from the study.

  • Current retirees will collectively lose $2.1 trillion in wealth because they made a sub-optimal decision about when to claim social security. This represents approximately $68,000 per household.
  • Only 4% of retirees make the financially optimal decision about when to claim.
  • It was estimated that 57% of retirees would have built more wealth if they had delayed claiming until 70 years old. Only 6.5% would have had more wealth if they had claimed prior to 64 which is when 70% of retirees claim currently.

The goal in claiming social security is to begin the income stream as soon as possible without sacrificing benefits over the long haul. There are multiple options to consider before making the decision and the optimal combination of decisions is different for everyone.

If you would like to better understand the social security system in order to optimize your retirement income, you are invited to attend the upcoming seminars taking place on September 12th and October 10th in the Alpharetta, GA area.

Feel free to click the following link, https://socialsecurityauthority.com/ to learn more and to register. Hope to see you soon!


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The Most Underappreciated Source of Big Returns

Daniel Yergin writes in his book entitled, “The Quest,” the biggest energy story of the last four decades has nothing to do with oil or gas. In fact, it has nothing to do with solar, wind, nuclear or other sources of alternative energy. Care to guess what it is?

It is conservation and efficiency.

Would you believe the biggest impact on our energy resources is not the source of our energy but how much further we can go on the same level of energy today compared to the past? It is estimated the US uses 60% less energy per dollar of GDP today than in 1950. Case in point, the average miles per gallon of all vehicles has doubled since 1975. Essentially, conservation and efficiency have enabled us to travel twice as far using the same amount of energy.

The beauty of efficiency is it’s largely under our control. What it lacks in attention-grabbing appeal from the public, it more than makes up for in impact on our life.

This concept applies to many areas of our life.

The finance world’s version of conservation and efficiency is saving and frugality. These are largely under our control and have a 100% chance at being effective in improving our finances. However, they aren’t nearly as exciting as seeking big investment returns.

Consider two investors. One earns a 10% return and the other 9% per year. But, the second investor only needs half as much money to live as the first. In time, the second investor will have far more money because the second investor’s income is going further despite the marginally lower return.

Had you rather spend countless hours attempting to raise your investment return when the odds of significant improvement are low or increase your return by eliminating the bloat in your finances which will always work?

Long term happiness comes from the freedom to do what you want, when you want and with who you want. It requires a solid asset base which is difficult to obtain when undisciplined spending exists.

Jack Bogle made the point in his recently released book entitled, “Enough,” with the following antidote. Two people are at a party given by a billionaire. The one informs the other that the host, a hedge fund manager, earned more money in a single day than the guest had made from his wildly popular novel over its entire history. The guest/author responded, “Yes, but I have something he will never have … enough.”

Where do you find yourself today? Do you have the “enough” mindset? or Are you spending countless hours pursuing an insatiable desire for more? The answer might lead to the biggest financial breakthrough of the decade in your life.

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One for the Record Books!

Barring some unforeseen event, the current economic expansion will become one for the record books next month. According to the National Bureau of Economic Research, the expansion beginning in July, 2009 has run exactly 10 years (120 months) matching the 1990’s expansion as the longest on record. By the end of July, it will have broken the record.

Image result for record breakingWhile the current expansion is the longest on record, it has also been the slowest since at least World War II according to the St. Louis Federal Reserve.

Economic booms such as the one we are currently enjoying can encourage risky behavior. Consumers can take on too much debt. Businesses can over-invest and build too much capacity. Investors can become over-confident and drive the stock market to unrealistic levels (late 1990’s) or speculation can run rampant in the housing market (late 2000’s).

With this as a backdrop, it seems appropriate to remind ourselves expansions don’t die of old age. They are triggered by various events. Below is a reminder of some of the most common causes of economic downturns.

  1. Rising inflation leads to rising interest rates. In the early 1980s, the Federal Reserve pushed interest rates to historically high levels in order to snuff out inflation. The Fed’s policy prescription succeeded but, led to a deep and painful recession.
  2. The Fed can miscalculate. A policy mistake can be the trigger, for instance if the Fed raises interest rates too quickly and restricts business and consumer spending. This is a derivative of point number one.  There were fears the Fed was headed down this road late last year. Credit markets tightened, and investors revolted until the Fed reversed course.
  3. A credit squeeze can suppress growth.In 1980, the Fed temporarily implemented credit controls that briefly tipped the economy into a recession.
  4. Asset bubbles burst. The 2001 and 2008 recessions were preceded by speculative excesses in stocks and housing.
  5. Unexpected financial and economic shocks jar economic activity. The OPEC oil embargo in the 1970s exacerbated inflation and the 1974-75 recession. The tragedy of 9-11 jolted economic activity in 2001. Iraq's invasion of Kuwait pushed oil up sharply, contributing to the 1990-91 recession. Such events don't occur often, but their possibility should be acknowledged.

The silver lining in today’s environment is the lazy pace of growth experienced these last 10 years. Slow and steady appears to have prevented excesses from building up in much of the economy. As long as investors remain skeptical and cautious, the odds of enjoying continued economic prosperity are good.

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The New Influence on Our Money

Charles Schwab and Company recently released its Modern Wealth Survey. The results suggest a change in all Americans but particularly the younger generations’ money influences. Below are key points from the survey.

  • Americans’ financial decisions are being influenced by social media. 57% report paying more attention to how their friends spend than save. 60% wonder how their friends can afford expensive experiences they see posted on social media.
  • Of the listed money management influences, social media was ranked by far the worst money management influence. Family members and friends were considered the best influences.
  • The pressure to spend as a result of social media is strongest with Gen Z and the Millennials. They reported being the most likely to spend as a result of something they saw on social media. Their likelihood to spend due to social media was approximately double that of Gen X and Boomers.
  • Despite most Americans considering themselves savers, 59% live paycheck-to-paycheck.
  • On the bright side, 63% of those with a formal financial plan feel financially stable while approximately 50% of those without financial plans are concerned they don’t have enough money to retire.
  • Americans with financial plans were more than twice as likely to exhibit discipline when it comes to their finances (e.g., pay bills and save each month, have an emergency fund, … etc.).
  • Wealth is increasingly being defined as the “way they live their life” rather than a specific dollar amount.

A key takeaway is social media and its “fear of missing out” phenomena is increasing the pressure on all Americans to spend. The pressure is felt the strongest among the younger generations. When we spend beyond our means, it impacts your long-term financial stability.

The other key takeaway is saving and investing habits of those with written financial plans are dramatically better than those without a plan.

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Trade Concerns Whipsawed Stocks in May

Trade negotiations dominated the headlines in May stalling the rally enjoyed to date. Given the strong market performance, investors may have been pricing in a trade deal between the US and China. When the prospects of a deal started to fade in early May, market participants became a little anxious about the future. For all the negative headlines, the S&P 500 is only down approximately 6.5% from its all-time high.

Our international counterparts struggled to gain traction as well. The internationally developed markets held their own better than emerging countries or the US. Of the developed countries Australia, Japan and Canada declined the least.

Bond investors and the Federal Reserve appear to be at odds with each other. Investor disapproval was signaled via the yield curve inversion (17 bps) at the end of the month.  The Fed continues to expect inflation that never materializes; bond investors are more focused on growth. With 2nd quarter GDP expected at 1.7%, they would prefer a more proactive Fed. Overall, it was a solid month for bond investors.

During May, large-cap stocks declined the least earning the honors for best performing segment of the US stock market. Growth outperformed value stocks and the defensive sectors including Utilities and Healthcare were impacted the least. It was a difficult month for US equities.


Notable Market and Economic Happenings:

  • With 95% of S&P 500 companies having reported, 1st quarter earnings are projected to rise 1.4% (Refinitiv). 75% of companies topped analyst estimates.
  • 2nd and 3rd quarter earnings estimates have declined modestly but remain in the low-single digits. Despite the trade headwinds, the US economy appears poised to grow, albeit at a slower pace than last year.
  • With the S&P 500 decline, its dividend yield has increased to 2.1%. It is comparing favorably to the 10-year Treasury yield at approximately 2.1% also. If you are looking for a reason to buy stocks, this is a start.


Inspirational Thought for the Day:

“What lies behind us and what lies before us are tiny matters compared to what lies within us.” – Henry S Haskins

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GDP Growth Exceeds Expectations Continuing the Rally

April was another strong month for investors. The much better than expected first quarter gross domestic product (GDP) number and corporate earnings season results were the primary drivers. Specifically, first quarter GDP came in at 3.2% which was much stronger than the 2.5% expected. Financials, mega cap tech stocks and industrials posted particularly strong earnings for the period.

It was a global rally as the international developed markets gained with the EAFE index ending the month up 2.8%. Emerging country stocks trailed their developed counterparts but nevertheless ended up 2.1%.

The investment grade portions of the US fixed income markets were largely flat for April. It was the riskier segments of the bond market posting the strongest returns. Leading the way were high yield bonds which rose 1.4% and the bank loan sector finishing up 1.8%.

During April, mid-cap stocks were the best performing segment of the US market. Growth outperformed value and the Financial, Communication and Materials sectors shined the brightest in what was a solid month for US equities.


Notable Market and Economic Happenings:

  • The average S&P 500 stock was up 3.5% for the month and 18.5% year-to-date. Stocks with low P/E ratios outperformed high P/E stocks in April.
  • Year-to-date, firms with heavy international revenue exposure outperformed their domestic-oriented peers and stocks that performed poorly in 2018 have bounced back the most in 2019.
  • At the end of April, nearly 200 companies had reported earnings with 65% of them exceeding their earnings estimate.


Inspirational Thought for the Day:

“Think twice before you speak, because your words and influence will plant the seeds of success or failure in the mind of another.” – Napoleon Hill

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A Warning When Using IRA Funds to Pay for College

It is that time of year when we celebrate our graduates and turn our attention to paying for college. According to the National Center for Education Statistics (NCES), the average cost of one year of college can be over $39,000. It is no wonder many parents turn to their IRAs to help fund it.

Originally, IRAs were established to encourage saving for retirement. Rules were developed to tax and penalize those withdrawing funds prior to 59.5 years of age. However, exceptions were allowed in certain instances enabling you to avoid the penalty. One such exception is paying qualified higher education expenses.

The IRS nor the Tax Court has had any problem with the use of IRA funds paying qualified expenses. However, they both have taken issue with what taxpayers have provided as proof the funds were used for qualified higher education expenses.

Tax Court Memo 2018-202 reminds us of the importance of keeping documented proof the funds were used in a manner qualifying for the exception. In this case, the taxpayers supplied email that were judged by the court as appearing inauthentic and other documents failed to prove the distributed amounts were used to pay for qualified higher education expenses. It caused the amounts to be subject to the 10% early withdrawal penalty.

The takeaway from this example is receipts for all eligible expenses should be kept in the event you are audited. Additionally, Form 5329 must be filed to claim the exception.

It should also be noted the taxpayers in this example prepared their own tax returns via tax preparation software and represented themselves in Tax Court. They walked out of court with a $65,235 federal income tax deficiency and an accuracy-related penalty of $12,378. Maybe, professional tax preparation is much more cost-effective than they thought.

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A Quick Assessment of the State of the Economy

The S&P 500 is near its record high following a four-month rally. What can we expect for the remainder of the year? The following are three statistics to inform your opinion.

  • According to the National Federation of Independent Business, small business owners were slightly less optimistic compared to a year ago. However, 2018 was the all-time peak and the current number is still quite strong from a historical perspective. Considering this group creates 75% of all new jobs, it is encouraging.
  • The 60 economists surveyed by The Wall Street Journal raised their forecast for 1st quarter growth from 1.3% to 1.5%. Similar surveys have noted the same trend. The Atlanta Fed’s GDPNow forecast which grows more accurate following a quarter-end is forecasting a 2.3% growth rate for the same period. It raises the possibility an upside economic surprise is possible.
  • The latest job openings rate remains near a record high. The latest figures on jobs open versus the number of unemployed remains at all-time highs also. An economy creating jobs is good for wage growth. Since a large portion of our economy is tied to consumer spending, this a very good sign.

These and other metrics seem to suggest the economy remains strong.

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What a Great First Quarter!

The first quarter may have come to an end but investors don’t want the market advance it experienced to end. The last three months posted the strongest quarterly gains since the first quarter of 1998 and the best individual quarter in 9.5 years. The rally was likely fueled by a Federal Reserve committed to not raising rates and positive comments related to US-China trade talks.

The February Non-Farm Payroll report showed the economy only added 20,000 jobs. This was significantly below the 200,000 trend causing market participants to question the durability of the market rally. However, the March report was back on trend seeming to suggest February’s results were due to one-time events.

During March, large cap stocks outperformed their small cap peers and growth outperformed value. Most all sectors were positive during the month with Information Technology and Real Estate leading the market higher.

Notable Market and Economic Happenings:

  • The S&P 500 ended the first quarter with a 13.7% return.
  • The most widely followed emerging market index (EEM) managed a new high on Friday. China and countries allied with China are leading the advance.
  • The only FAANG stock trading at a six-month high is Facebook.
  • 1st quarter earnings reports begin this week. Analyst expectations for earnings are fairly low so earnings misses could punish individual holdings.
  • The ride sharing company, Lyft (LYFT), IPO’d one week ago at a price of $72 per share. Investors are valuing it at 10X revenues despite losing approximately $1.0B in 2018.

Inspirational Thought for the Day:

“The measure of intelligence is the ability to change.” – Albert Einstein

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Key Points from Warren Buffett's Recent Shareholder's Letter

It’s common practice for the president or CEO of a company to include a letter to shareholders in the annual report. Berkshire Hathaway’s chairman and CEO, Warren Buffett, doesn’t buck the trend.

His annual letter (http://www.berkshirehathaway.com/letters/2018ltr.pdf) captures plenty of attention, and this year was no exception. The focus is on the investments and operating performance of Berkshire Hathaway, but the Oracle of Omaha also includes many sound principles for wealth creation as well as his general thoughts about the U.S. economy.

Buffett’s record

Image result for warren buffett


From 1965-2018, the market value of Berkshire Hathaway has posted a compounded annual gain of 20.5%, more than double the S&P 500’s advance, which averaged 9.5%, including reinvested dividends.

There are two things that pop out here. First, Buffett's enviable record and his ability to create long-term wealth using time-tested principles. Second, the S&P 500’s record illustrates that a well-diversified stock portfolio has been a critical component of a long-term financial plan.

In case you’re wondering, Berkshire Hathaway’s overall gain has been 2,472,627% versus the S&P 500’s still-impressive 15,019%.

One more data point – Buffet continues to perform well, topping the S&P 500 Index in eight of the last 11 years.


Focus on the forest–not the trees

Your financial plan is comprised of many parts. This would equate to what Buffett calls the “economic trees.” In other words, let’s not get to caught up on any one investment.

“A few of our trees are diseased and unlikely to be around a decade from now. Many others, though, are destined to grow in size and beauty,” Buffett writes.

He won’t get every investment right. Neither will we. Berkshire holds a substantial position in Kraft Heinz (KHC), whose shares recently tumbled after the company delivered poor results and slashed its dividend.

But, if we review the portfolio as we’d view the forest, we find a diversity of trees, wildlife, and plants. It’s a work of beauty. Your portfolio is built from the bottom up. Like the forest it’s very diversified, and it is created with your financial goals in mind.

As Buffett opines (and we agree), “I have no idea as to how stocks will behave next week or next year. Predictions of that sort have never been a part of our activities.”

That said, how did the 19.8% drop in the S&P 500 Index (September peak to Dec 24th trough) sit with you? With your input, we do our best to gauge your tolerance for risk. If you found yourself fretting over the volatility, let’s talk.

On the other hand, if you slept soundly, it would suggest your investment mix in relation to risk is on target.

“At Berkshire, the whole is greater–considerably greater–than the sum of the parts.” We feel the same way about your financial plan.


The American tailwind

Warren Buffett is bullish on America.

In 1942, he invested $114.75 in three shares of Cities Service preferred stock. At the time, the country was mobilizing for what would be a massive war effort.

If Buffett had invested his $114.75 into a no-fee S&P 500 index fund, and all dividends had been reinvested, his stake would have grown to $606,811 (pre-taxes) on January 31, 2019 (the latest data available before the printing of his letter).

The U.S. was victorious in WWII, but challenges never cease.

We’ve endured the cold war, the divisiveness of the 1960s, OPEC’s oil embargo, double-digit inflation, soaring interest rates, a rising federal deficit, the tragedy of 9-11, the war on terrorism, the financial panic of 2008, the ensuing Great Recession, falling home prices, and more.

Let’s say that you had had the foresight to see the oncoming explosion in the federal deficit, one that is up 40,000% over the last 77 years.

“To ‘protect’ yourself,” Buffett said, “You might have eschewed stocks and opted instead to buy three ounces of gold with your $114.75. And what would that supposed protection have delivered? You would now have an asset worth about $4,200.” Compare that to the performance of the S&P 500!

What is this nation’s secret sauce? The answer is complex and difficult; yet, the overarching theme lies in front of us.

The experiment called the United States has birthed and attracted the best and the brightest. Freedom and opportunity are its calling cards. Today, we are the wealthiest nation on Earth, and we continue to ride the wave of innovation and enjoy the benefits.

But, is that wave about to crash on the shore?

A recent piece by Morgan Stanley entitled, Millennials, Gen Z and the Coming ‘Youth Boom’ Economy, complements Buffett’s optimistic viewpoint. The population of the Millennials will overtake the Baby Boomers this year, and “Gen Z, born between 1997 and 2012, will overtake the Millennials as the country's largest cohort by 2034,” it said. For the U.S. economy, “The demographic tailwinds created by these high-population cohorts could be significant, delivering the kind of ‘youth jolt’ that the Baby Boomers were famous for.”

Sure, we can’t know when the next recession will ensue or some of the challenges we’ll face as a nation in the coming years. Yet, as Buffett sums up his annual letter, “Over the next 77 years, the major source of our gains will almost certainly be provided by The American Tailwind. We are lucky–gloriously lucky–to have that force at our back.”

Shorter-term risks never completely abate. But Warren Buffett’s message has been consistent. Don’t bet against America.

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