Gill Capital Partners February 2019 Market Commentary

What are we talking about at Gill Capital Partners?

Our Investment Committee meets weekly to review portfolio allocations, macro-economic events and our investment managers. Below are some areas that are top of mind within the Committee.

 Stock Market Rebound

The fourth quarter ushered in the return of equity volatility. As the chart below shows, the S&P 500 index fell roughly 20% from the all-time highs seen at the end of September before bottoming on December 26th. It has rallied significantly since then, and now sits only 5% below its all-time highs.

Our View:

While stock market corrections are never enjoyable for investors, they are a part of the process. Disciplined investors are rewarded by adhering to their allocation plan, rebalancing portfolios, and removing emotion from investment decisions.

 Current Economic Outlook & Portfolio Positioning

A quick overview of major economic fundamentals:

Earnings: Q4 earnings season is just wrapping up, and as of this writing, 420 of the 500 companies in the S&P 500 have reported earnings from Q4. Revenues grew 6.37% year over year, and earnings grew 10.87% year over year. As expected, earnings growth has slowed from the 20+% growth rates we saw earlier in 2018, but we are still seeing sales and earnings growth. We anticipate the growth rate to decline further over the course of 2019, though we still expect to see positive earnings growth.

Labor Market: The monthly jobs report released earlier this month by the Bureau of Labor Statistics (BLS) showed 304,000 new jobs added during the month of January, with the unemployment rate ticking up slightly to 4%. The report also showed a small pickup in wage growth during the month. The Wall Street Journal estimates there are around 6.89 million job openings in the US, but according to January’s latest unemployment numbers, there are only 6.5 million unemployed individuals to fill them.

Interest Rates: Interest rates have once again fallen precipitously as the Federal Reserve has come out and softened their toned with respect to future increases.

 Our View:

U.S. fundamentals are still strong. Corporate earnings and sales are growing, albeit at a slower pace. The labor market is very strong, and some signs of wage inflation are beginning to present themselves. Interest rates are no longer a headwind to economic growth, debt refinancing or the housing market, as many feared just a few short months ago. We foresee a “tug of war” continuing between a Federal Reserve that wants to raise interest rates further and a stock market that dislikes higher interest rates. While the Federal Reserve is taking a pause for the moment, strong fundamentals will likely provide a backdrop for the Federal Reserve to resume interest rate increases in the back half of the year. We continue to think emerging markets present an interesting upside opportunity, as any resolution on trade could propel these stocks significantly higher. We continue to avoid lower credit quality bonds as we do not like the risk/reward tradeoff currently. We do believe we are entering a period of slower growth, and stock market volatility will likely continue. Given the recent equity rally, combined with our more subdued views on economic growth, we are rebalancing portfolios to slightly more conservative target allocations, and making sure portfolios are finely tuned. Now is an excellent time to review your overall allocation with your advisor.

 Tax Tip – Using IRA Required Distributions for Charitable Giving

Tax season is upon us and the 2018 tax year ushered in plenty of new rules and regulations based on the new tax law passed at the end of 2017. CPAs are working diligently to interpret new components of the tax law that have just recently been clarified. A key takeaway is that individual tax filers that have historically itemized deductions on their returns now have far fewer deductions available to them. One of the most impactful strategies that still exists is making charitable donations utilizing IRA distributions. IRA distributions (Roth excluded) are taxable to investors as current income in the year that they are distributed. This can be a significant source of income for many individuals who were able to accumulate large IRAs through years of prudent savings. When charitable contributions are made out of an IRA, taxable income is reduced pro-rata. This strategy is particularly effective for those individuals who are already making charitable donations. To take advantage of this strategy, donations need to be made directly from the IRA. We are happy to help implement or discuss this strategy if you have questions.

 As always, please let us know if you have any question or concerns, or if we can provide assistance with any other financial planning matters including education, taxes, insurance or estate needs.