Evans Wealth Management Blog

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

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

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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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The Winning Streak Continues

The stock market is off to a great start as prices climbed for the second straight month in February. The 11.3% return experienced to date is the 5th strongest start to a year on record.

The bullishness was likely the result of promising US-China trade talks, a more dovish stance being communicated from the Federal Reserve and the end to the partial government shutdown. While the shutdown served to depress household and corporate sentiment in January, economic indexes such as the ISM Non-Manufacturing and other readings in February improved seeming to suggest the economic expansion remains intact.

During February, small cap stocks outperformed their large cap peers and growth outperformed value.

Notable Market and Economic Happenings:

  • Economic growth came in at a healthy 2.6% quarter-over-quarter in Q4 2018 extending the streak of >2% growth quarters to 7.
  • 90% of S&P 500 companies are trading above their 50-day moving average signaling strong market breadth.
  • Through late February, the S&P 500 has been up 73% of trading days. The seven prior years with similar strength saw gains the remainder of the year every time.
  • The deadline for the UK leaving the European Union (i.e., Brexit) is approaching (March 29th ). While many believe the deadline will be extended, the uncertainty could result in market uncertainty toward the end of the month.

Inspirational Thought for the Day:

“When you decide to become a means to an end, your money will become a means to an end also.” – Andy Stanley

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How to Reduce Your Chances of an IRS Audit

It is that time of the year again --- tax season. The annual ritual is dreadful enough when it goes smoothly so the last thing you want is to be audited. While the average taxpayer has a 1 in 160 chance of being audited, there are several areas the IRS scrutinizes that can dramatically increase your odds. The following is a list of ten areas attracting the most IRS attention.

  1. Not Reporting Taxable Income: Businesses are required to report certain expenses to you and the IRS. They are reported to us via W-2 or 1099 forms. The IRS will match these amounts with the amounts reported on your tax return. Discrepancies increase the chance of an audit.

  2. Taking an Alimony Deduction: Alimony is no longer deductible under the new tax law, but both the payor and recipient are required to report it. Discrepancies between these amounts increase your chances of an audit.

  3. Running an All Cash Business: Certain businesses such as restaurants, ride-sharing, taxis, hair salons, … etc. receive a high percentage of payments in cash. The opportunity to underreport income causes the IRS to scrutinize these businesses more than most. Owning or working for these types of businesses raise your changes of being audited.

  4. Writing off a Hobby Loss: Is it a hobby or a business? It is an important question because business losses are deductible while hobby losses are not. Keep in mind, the goal of a business is to earn a profit. If you report losses in three of the last five years, the IRS may view your business as a hobby and disallow the business deductions.

  5. Claiming 100% Business Use of a Vehicle: This is another area considered ripe for abuse. If you claim all vehicle miles were 100% business use, make sure to document your mileage and own another car.

  6. Deducting Unreimbursed Business Expenses: Most employees are reimbursed for business expenses. If you aren’t, the deduction is only allowable to the degree unreimbursed expenses were greater than 2% of your AGI. Deductions greater than average raise red flags at the IRS.

  7. Claiming a Home Office Deduction: To claim this deduction you must have a dedicated space in your home that is used exclusively for work. The rules allow you to prorate a portion of home expenses such a utility bills. Greater than average deduction amounts raise red flags at the IRS.

  8. Claiming Large Charitable Donations: Claiming above-average deductions compared to others in your income range draw scrutiny. The key is to keep good records as proof of your donation.

  9. Deducting Entertainment Expenses: The new tax law does not allow entertainment expense deductions. However, travel and meals are at least partially deductible. Make sure to keep good records on the amount spent, place you met, who you met with and the purpose of the meeting to ensure deductibility.

  10. Not Reporting a Foreign Bank Account: In the past, one could avoid taxes by establishing a bank account outside the US unknown to the IRS. They are cracking down on these attempts to hide money. If you have over $10,000 collectively in foreign accounts during the past year, you are required to file special forms to report them by April 15th. Contact your local financial professional or CPA for more on the filing requirement.

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