10/20/17 – Stocks Higher as Dow Closes Above 23,000 for First Time

Stocks Higher as Dow Closes Above 23,000 for First Time

  • Thursday was the 30th anniversary of the Black Monday stock market crash
  • Could tax reform affect retirement savings?

Stocks finished the week higher as earnings reports kicked into high gear. So far, earnings have been mixed with companies like Johnson & Johnson and IBM exceeding expectations while GE, Proctor & Gamble and Philip Morris International disappointed. On the week the Dow gained 2.0% while the S&P 500 increased 0.9%.

Thirty years ago yesterday, the Dow fell 22.6%. That’s incredible. The index lost almost a quarter of its value in one day. Dubbed Black Monday, it remains the single largest daily drop in history by almost a 2:1 margin. A 22% drop equates to a loss of approximately 5,200 Dow points today. Fortunately, I don’t see anything in the current market suggesting we’re in for another crash. Bank balance sheets are strong, the labor market remains healthy, we’re beginning to see real wage growth and Europe/Asia are trending in a good direction. We are at all-time highs on the stock indices and it’s natural to think we must be at a peak. There have been a variety or articles and commentary making that same point recently. However, people have made those arguments for the last five years and yet stocks kept climbing. With interest rates near historic lows, stock valuations look okay to me, even though valuations are above the historic average. We continue to hold a slightly higher than normal cash balance, but overall I’m happy with how we’re positioned for the current economic and market situation. Read More

As the tax reform discussion continues talk about reducing the deduction for retirement savings is back in the news. Currently, individuals are allowed to contribute pretax money into 401k and IRA accounts. The 401k limit is $18k a year for people under 50 and $24k a year for those 50 and older. For Traditional IRA accounts, the limits are $5,500 and $6,500 for the same age brackets. The financial services industry will vigorously fight this change, but I think it could be a good thing for individual investors. If you reduce or eliminate the tax deduction for 401k’s and IRAs, these accounts would essentially be treated like a Roth 401k or  Roth IRA. With a Roth account, there is no tax deduction in the current year, but withdrawals in the future are tax-free and the accounts grow tax-free. Some will argue that people will save less without the deduction. That’s probably true, but people will need to save less since there will be no future tax liability on the accounts. This is why the financial services industry will fight it. They would rather have more assets under the management today because they can make more money and won’t be paying the taxes in the future anyway. Read More

Oil rose this week, increasing 0.5% to close at $51.66/barrel. The yield on the 10-yr Treasury moved higher, up to 2.38% from 2.28% last week. The average rate on a 30-yr moved lower, to 3.88% from 3.91% last week.

Close Weekly YTD
Dow Jones 23,328.63 2.0% 18.0%
S&P 500 2,575.21 0.9% 15.0%
Oil 51.66 0.5% (4.1%)
10-yr Treasury (∆ in bps) 2.38 11 (6)

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