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November Financial Minute: A taxing time–7 ideas to ease the burden

| November 09, 2018

Well, I am glad to see October in the rearview mirror! Between hurricanes, rain, rain and more rain, it was a particularly wet and gloomy month. I was finally able to get the tractor out and cut the 4 foot-high pasture in between the passing of Hurricane Michael and the arrival of the next storm front.  So that at least was encouraging.  What wasn't so encouraging was the fact that our solar production was down in the dumps because of all the cloud cover.  

So what is it about the month of October? The stock market crash of 1929 ushered in the Great Depression.  Black Monday 1987, also October, was driven by computer trading and portfolio insurance, though an economic calamity did not ensue.  During October 2008, the S&P 500 Index lost nearly 17%, the biggest monthly decline of the financial crisis (St. Louis Federal Reserve).  Then there is the lesser-known Panic of 1907, which shaved 15% off the Dow Jones Industrials during…yes, October (St. Louis Federal Reserve). 

Despite its ghoulish reputation, if we look back as far as 1970, the broad-based index of 500 major U.S. stocks has averaged a gain in October. October ranks number three in performance when using the median return. In case you’re wondering, September is the weakest month, on average. 

Between 2009 and 2017, we’ve experienced three declines in October, each losing just under 2%. In the six periods that saw an advance, the S&P 500 averaged a 5.3% advance–impressive.  This year was different. The Dow lost 5.1%, and the S&P 500 Index gave up 6.9% (WSJ)


There isn’t a specific catalyst. When investors place sell orders, there isn’t a “reason to sell” on the ticket. But, we can reflect on the various themes that cast a shadow on shares.

1.  Interest rates and a policy mistake 

October started on a soft footing after Fed Chief Jerome Powell said the fed funds rate is “…a long way from neutral at this point (where rates neither stimulate nor restrict growth), probably” (Q&A with Judy Woodruff PBS anchor).

It’s a curious remark. The Fed has hiked rates eight times in almost three years and stocks performed admirably, because the rate increases were in response to a firmer economy. Besides, we are only three rate hikes away from neutral using the Fed’s own estimate.

Still, his remark suggested a more aggressive posture might be brewing inside the Fed. He has not clarified. The fear? Raise rates too quickly and the Fed risks throwing the economy into a recession. It would amount to a policy mistake.  Raise rates too slowly, and there is a risk of overheating. You know, an economic boom ensues that may lead to inflation and eventually a bust.

The Fed’s gradual approach is designed to thread the needle. While the direction of rates may matter, the level remains low.

2. Slowing global growth and trade tensions 

China is slowing down and growth in Europe has softened. For firms doing a significant share of business overseas, the profit outlook has dimmed. 

But, as investors look ahead to 2019, they are once again fretting about the impact of U.S. trade policy on earnings. Q3 profits have been quite strong–up 26.2% through November 1 (Refinitiv, formerly Thomson Reuters, 70% of S&P 500 firms reported). Yet, commentary regarding tariffs injected a cautious tone into sentiment. It’s especially acute for industrials that rely on China’s market. 

Simply put, concerns bubbled to the surface that benefits from deregulation and the tax cuts might be offset by a trade war.

3,  The so-called October effect 

Let’s revisit the initial question–what is it about the month of October? 

On September 21, Jason Zweig wrote in the Wall Street Journal, “Investors’ fear of September and October is based less on evidence and more on what psychologists call ‘availability’—the human tendency to judge how likely an event is by how easily we can recall vivid examples of it.”  In other words, dramatic sell-offs are seared into our memories. But, we don’t recall the S&P 500’s eight percent advance in October 2015. 

Zweig adds, “Average returns on U.S. Treasuries appear to be higher in fall than in spring, suggesting that investors seek safety in the darker months. Stock analysts’ earnings forecasts are less optimistic in fall and winter than in spring and summer.”  We receive even less sunlight in November and December! But the final two months of the year historically finishes strong, at least on average. 

These may or may not be reasonable explanations for the so-called October effect. Such explanations aren’t rooted in the economic fundamentals but in the behavioral aspects of investors.    It’s why I repeatedly emphasize the importance of adhering to the investment plan. It is a long-term roadmap that takes unexpected sell-offs into account. It places a barrier in front of an emotional response. 

Final tally and perspective 

With all the angst we’ve seen in the financial press, the S&P 500 lost 9.9% from closing peak to trough (St. Louis Fed 9/20-10/29).  It’s not quite an official correction, which would be a loss of 10%.  While I understand the speed of the pullback may be disquieting, a sell-off of 5%-10% is modest by historical standards. 

Since 1980, the average intra-year peak-to-trough dip has been 14% (LPL Research). Yet, stocks are much higher today than when Ronald Reagan became President. Why? Stocks have a long-term upward bias–average annual gain, including dividends, 12.6% since 1980. 

We’ve experienced several sell-offs in recent years. Blame Brexit, the European debt crisis, China worries, the Ebola scare, the Japan earthquake/tsunami/nuclear disaster, U.S. debt downgrade, and much more.  When the risks that jolted short-term traders failed to materially alter the economic outlook, stocks recovered. 

We’ve had growth scares before, and they occurred when activity was not as robust as today. Early 2016 comes to mind, when oil prices had collapsed, turmoil appeared in credit markets, and recession fears surfaced. Today, credit markets are functioning normally, the outlook for the U.S. economy is favorable, and odds of a near-term recession remain low. 

If you have any questions, thoughts or concerns, let’s talk. 

Table 1: Key Index Returns


                                       MTD %             YTD %      3-year* %

DJIA                                    -5.1                1.6     12.4

NASDAQ Composite          -9.2                 5.8     13.1

S&P 500 Index                    -6.9                1.4     9.3

Russell 2000 Index          -10.9                -1.6     9.2

MSCI World ex-USA**        -8.0              -11.5     1.0

MSCI Emerging Markets**  -8.8             -17.5     4.1

Bloomberg Barclays

US Aggregate Bond TR     -0.8               -2.4      1.0


Source: Wall Street Journal,, MarketWatch, Morningstar

MTD returns: Sep. 28, 2018-Oct. 31, 2018

YTD returns: Dec. 29, 2017-Oct. 31, 2018


**in US dollars

A taxing time–7 ideas to ease the burden 

Taxes–you can’t avoid them, but you can make the annual ritual a little less, well, “taxing” with proper planning and preparation. And, you may be able to reduce this year’s burden. I’ll offer more details next month but let’s get started today with an overview. 

1. Record keeping. Come January, you’ll be receiving your W-2s, 1099s, form 1098 (mortgage interest), itemized lists of donations to charities, and more. 

Decide now where you would like to store your records. Do you do your own taxes every year or does a tax professional prepare your return? In either case, have the necessary records in an easily accessible location. That way, you’re not scrambling when tax time begins.

2. Changes in marital status and withholdings. Whether you are getting married or are going through a divorce, a change in marital status can have a significant impact on your tax liability. You may need to complete a new W-4 form with your employer. If you are self-employed, an adjustment in quarterly payments may be in order. 

If possible, it’s best to avoid the need to write a big check to the IRS that triggers an underpayment penalty. While some folks enjoy getting a big refund each year, the April windfall comes in the cost of an interest-free loan to the government.

3.  Maximize retirement contributions. If you participate in an employer-sponsored plan, let’s see if you can contribute the maximum amount. More importantly, by not participating in any portion of the employer match, you are passing up a free gift–a gift that will pay dividends via long-term appreciation.

4.  Charitable donations. The standard deduction has been raised and fewer folks will benefit from itemizing. Still, many find satisfaction in donating cash to their favorite causes even if a tax benefit is not forthcoming. 

Some charities gladly take non-cash donations. It’s a great way to remove items from your home you no longer need, and someone less fortunate will benefit. If the value of all noncash donations exceeds $500, you will be required to complete Form 8283 (IRS: About Form 8283, Noncash Charitable Contributions).

5.  Health care coverage. Tax reform eliminated the penalty for failing to have health insurance, but the individual shared responsibility provision was eliminated for tax year 2019. If you or family members do not have the minimum essential coverage, you may be subject to a penalty when you file for 2018. 

Most taxpayers will simply check a box to indicate that each member of their family had qualifying health coverage for the whole year (IRS: Health Care Law: Do You Have Minimum Essential Coverage?)

6.  Health savings accounts. If you have a Health Savings Account (HSA) eligible plan, you can contribute up to $6,900 for your family. The contribution limit for self-only coverage is $3,450 (IRS: 2018 HSA contribution limit for individuals with family HDHP coverage).Contributions can help lower your taxable income, and you’ll have a savings account that’s available to assist for qualified medical expenses.

7.  Gift taxes. Are you giving gifts this year? If so, be aware that anything over $15,000 triggers the gift tax. There is a $30,000 exclusion for couples (IRS: Frequently Asked Questions on Gift Taxes). The gift tax is generally paid by the donor, not the recipient of the gift. 

This is not an all-inclusive list, and you may not have had any significant changes in your financial situation this year, But, getting an early start can prevent the troubles that always seem to surface in April. 

As with any tax situation, feel free to contact your tax advisor.

I hope you’ve found this review to be educational and helpful. If you have any concerns or questions, please feel free to reach out to me at  and we can talk. That’s what I’m here for.  Kind Regards, Rudy