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 The recent pullback in global stock markets has caused some concern that the bull market in equities is winding down. There is even some concern that this pullback is among the initial signs of an upcoming recession. 

To gain some better historical perspective on the recent movement in the stock market, let’s take a look at historical intra-year market declines versus calendar year returns.1

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Historically, equity markets have been very volatile in mid-term election years. Since 1962, the S&P 500 has had an average intra-year pullback of 19% in mid-term election years.1 

In fact, equity market returns have historically been very tepid before Election Day in early November.  In mid-term election years since 1950, the market has returned an average of just 0.96% in the first 10 months of the year, but markets have typically rebounded in the final 2 months of the year, returning an average of 4.24% across November and December. 2

The recent market pullback has wiped out 2018 gains and the S&P 500 is now roughly flat for the year. Again, historically the first 10 months of a mid-term election year are typically flat only to see a relief rally in the final 2 months of the year once the results of the election are known with certainty.

Will history repeat itself in 2018? While it is nearly impossible to forecast stock market returns over a specific time frame (particularly for a brief 2-month window), there are reasons to be optimistic going forward:

Corporate earnings remain strong3:

81% of the 140 companies in the S&P 500 that have reported third quarter earnings (as of October 23, 2018) posted earnings per share that beat Wall Street expectations, with only 10.7% of companies reporting earnings below expectations.  Over the last 25 years, an average of 64% of companies reported earnings that beat Wall Street estimates with 21% of companies missing expectations.4

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A Check-in on European Risk

Fears of a fiscal showdown between Italy’s new government and the European Union (EU) have roiled Italian assets this year – and renewed concerns about EU cohesion. How worried are we? We see a limited risk of near-term flare-ups but are skeptical about the Italian government’s commitment to fiscal discipline and Europe’s ability to cope with the next downturn. We see better risk-return tradeoffs in non-EU assets.

Italian assets have taken a hit this year. The selloff was sparked by fears that Italy’s populist government would breach the EU’s key budget deficit limit of 3% of gross domestic product (GDP), as the two major parties in the new governing coalition had vowed to cut taxes and boost welfare spending in their campaign. Italian 10-year government bond yields spiked after the March election, while local stocks fell. See the chart above. Italian assets have recouped some losses recently, only after Rome repeatedly assured it would respect EU rules in its soon-to-be released budget. We see scope for a further recovery in Italian asset prices, but do not see them returning to pre-election levels anytime soon. Why? A number of structural factors are weighing down both Italian and European assets. This helps explain why European stocks have underperformed other global developed markets in 2018.

BlackRock's Budget Base Case
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If you miss or ignore any of these important, applicable dates, you could hurt your retirement finances.

As summer comes to an end, don’t forget that October ushers in some critical deadlines—some of which carry penalties. To learn more about these deadlines and the dates to put on your calendar, read on. Also note that while this is not IRA-specific, October 15 is generally the last day to file an individual income tax return that’s on extension.

October 1—Simple IRA Establishment

This is the last date in which an employer can establish a SIMPLE IRA plan, effective for 2018. Those plans established after October 1 would not be effective until January 1, 2019, at the earliest. Notably, an exception applies for a newly established business. If you’re a new employer that started your business after October 1, you can establish a SIMPLE IRA plan for the plan year by the end of the same calendar year as soon as administratively feasible after your business came into existence.

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A recent survey from the American Institute of CPAs found that 63% of individuals who either have $250,000 in investable assets and/or $200,000 in household income were likely to tweak 2018 financial planning strategies as a result of the new tax law.

Most of the respondents indicated that ‘tweaking’ their financial plans would be in an effort to reduce taxable income, and the 2018 Tax Cut and Jobs Act offers a few new methods to do just that.¹

Here are four:

  1. Lump Your Charitable Contributions Together – in the new tax law, the charitable giving deduction has remained in place for taxpayers who itemize. The thing is, however, that many taxpayers are expected to take the standard deduction in 2018 instead of itemizing, since it has jumped to $12,000 for individuals and $24,000 for married couples.

    One method to get over the standard deduction, however, would be what many CPAs call “bunching,” or making a few years’ worth of charitable donations in a single year. That way, you could itemize your deductions in one year, and perhaps take the standard deduction the next.
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Should You Be Concerned About the Height of the Market?

US equity markets have been trading at or near all-time highs recently as the S&P 500 and Nasdaq Composite both reached new highs multiple times in August.1 This news has led some skeptics to believe that a US stock market at a record high level could be a cause for concern.

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Saving for Retirement and Potential Health Care Costs

Your friend Jody has recently started a new job and she has several options for saving for her retirement and future health care costs.

Jody’s new employer offers a 401(k) with a match of up to 3% of her salary. They also offer a Health Savings Account (HSA) option. Jody lives in a state that does not tax withdrawals from HSAs for qualified medical expenses and contributions to HSAs may be deducted from taxable income for state income tax purposes.

In addition, Jody also has a Roth IRA which she is using to save for her retirement.

Jody is in very good health and would prefer to have a health plan that limited her upfront health care costs while allowing her to save for future expenses. She is comfortable with a high deductible plan. She is financially secure and doesn’t plan on touching the money in her Roth IRA until retirement.

Assume Jody meets the eligibility requirements to participate in her employers 401(k) program, enroll in a Health Saving Account, and simultaneously has enough to contribute to a Roth IRA.

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Trade issues may continue to cause trouble but shouldn’t derail the bull market or end the economic expansion.

Investor sentiment was mixed last week. Negatives included concerns about market liquidity, sparked by the rising value of the U.S. dollar and fears of contagion from some emerging markets. Ongoing trade issues also posed a general concern, particularly fears surrounding a potential new round of U.S./Chinese tariffs. On the positive side, investors focused on strong U.S. economic data that pointed to accelerating growth. The negatives won in the end, as the S&P 500 Index fell 1% for the week, after rising during eight of the nine previous trading weeks.

Liquidity Concerns Appear Overstated

Some investors are growing more concerned about shrinking liquidity as the Federal Reserve raises rates and shrinks its balance sheet, the value of the dollar climbs and select emerging markets such as Turkey and Argentina experience currency crises. Of all of these factors, we are most concerned about the rising dollar. The increase is not overly problematic by itself, but we would be more worried if interest rates were higher and rising more quickly and/or if economic growth were decelerating.

On balance, we recognize that market liquidity is growing more constrained and the current economic cycle and equity bull market are in their later stages. But we believe such concerns are overwrought. The global banking system remains healthy and global monetary policy is still relatively easy, which suggests that a liquidity squeeze isn’t in the cards.

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When we talk about saving and investing for the future, the conversation usually steers quickly towards retirement planning – IRAs, 401(k)s, pensions, Roth IRAs, and so on. After all, retirement is when all of your careful saving, well-intentioned investing, and hard work pays off. It’s when you’re finally supposed to be able to live the good life.

But investing isn’t always about retirement planning. Nor should it be. While it’s true that many people share the same goal of retiring with financial security, there are myriad of other life goals that require careful saving, planning, and investment returns.

J.P. Morgan Asset Management created a graphic that effectively illustrates this point:

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We’ve all heard the term “don’t put all your eggs in one basket”. Of course, this concept can be easily applied to investing. Many sophisticated investors understand that investing in only one stock, or only one asset class, or only one anything is risky. However, the question of whether or not you should invest in just one money manager is rarely directly addressed.

A key objective of diversified investing is to build a portfolio that is spread across multiple asset classes in an effort to lower the overall volatility of the portfolio.

If you invest your entire portfolio in one single stock it’s clear that your entire portfolio will be tied to the fortunes, and therefore risk of that one company. Adding additional investments to the portfolio can lower the overall volatility and risk of the portfolio, especially if you are adding additional holdings with low correlations to one another.

In other words, if your portfolio zigs, you want to add something that zags to get the most effective diversification benefit.

To take this further, if your portfolio is made up entirely of one large cap telecom stock, adding a second and third large cap telecom stock may give you little in the way diversification benefit if each of these companies have similar factors that drive their returns. Ideally, a portfolio will be well diversified among different sectors. That way, if one sector is performing poorly, this poor performance may be offset by other sectors with stronger performance. Likewise, geographical diversification is important to help mitigate the impact of a poorly performing market.

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