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Politics & Investing

Politics bring out the best in people, right? Well, politics certainly brings out a very passionate side of Americans. Unfortunately, politics has done more to divide us rather than unite us lately.

For the weeks leading up to the midterm election, the stock market whipped back and forth in anticipation of changes to come. By the end of October, the S&P closed down 7%[i], rattling a few investors, but bringing a sigh of relief to many who had long anticipated a market correction.

Some investors cashed out their portfolio, worried of doom ahead due to the political climate. However, Warren Buffet has been quoted saying, “If you mix politics and investing, you’re making a big mistake.” Truly, whenever decisions are based more on emotion or opinion over fact, the results can be damaging to your investment portfolio. Therefore, when the market is volatile, it’s important to focus on the facts.

Since 1946, there have been 18 midterm elections.  At the one-year mark following those midterm elections, the stock market has been up 18 out of 18 times! The stock market has been agnostic in regard to party lines. Despite the midterm election results, Republican President & Republican Congress, Republican President & Democratic Congress, Democratic President & Republican Congress, Democratic President & Democratic Congress, the market has had a positive return, one-year out.[ii] 

The average one-year return following the mid-term election has been 17%. If you calculate gains from the mid-term low, the historical return was even higher at 32%.[iii] This gives good reason for investors not to panic, but rather, ride out the short-term volatility.

Focusing on historical trends, the second year of presidential terms have been the lowest performing year, which would be 2018 in our current presidential term. The third year of presidential terms has shown to be the highest performing year, potentially giving us something to look forward to in 2019[iv].

Despite current market volatility, the US economy is quite strong.  As such, the Fed has raised interest rates 3 times so far in 2018, and has suggested they will raise interest rates a quarter point one more time before the year is over.  While each interest rate increase creates market volatility, the Fed feels the economy is strong enough to sustain the higher interest rates, and the process heeds off inflation, which is important for a strong economy in the long-term.

An influencing factor on market performance at year-end is consumer spending.  If consumer outlook is positive, spending tends to be higher and corporate profits follow suit. This often leads to what is affectionately called the Santa Claus Rally. Costco already has Christmas decorations up and Amazon, Target and Walmart are competing hard for online retail sales.

Aggressive investors who believe Presidential Cycle Statistics might be itching to buy stocks now. It is prudent to remember that past results are not indicative of future results. However, a diversified portfolio that balances both US holdings, international equities and some fixed income for downside protection would give you the ability to capture market rates of return without banking on one company or industry to “hit it big.”

If you’re feeling anxious, or excited, talk to your financial sounding board for a second opinion. A CPA can ensure your next move makes sense from a tax perspective, and a CFP® can ensure the investment suits your risk tolerance.   

On a more somber note, you may have heard about Utah mayor, Maj. Brent Taylor, who was fatally shot last week while serving in Afghanistan. His body returned home to his wife and seven young children (ages 13 to 11 months old), draped under the American flag on Election Day. While in Afghanistan, Maj. Taylor helped to protect the democratic process, protecting Afghani citizens from physical violence so they may cast their ballot. In one of his last Facebook postings, Maj. Taylor wrote, “I hope everyone back home exercises their precious right to vote. And that whether the Republicans or the Democrats win, that we all remember that we have far more as Americans that unites us than divides us. “United we stand, divided we fall.” God Bless America.”[v]

The opinions expressed above are solely those of Kondo Wealth Advisors, Inc., (626-449-7783 This email address is being protected from spambots. You need JavaScript enabled to view it. ) a Registered Investment Advisor in the state of California. Neither Kondo Wealth Advisors, Inc. nor its representatives provide legal, tax or accounting advice.



[i] https://www.msn.com/en-us/money/markets/opinion-this-is-what’s-happened-to-stocks-after-every-midterm-election-since-world-war-ii/ar-BBPmZiQ?ocid=spartandhp

[ii] https://www.msn.com/en-us/money/markets/opinion-this-is-what’s-happened-to-stocks-after-every-midterm-election-since-world-war-ii/ar-BBPmZiQ?ocid=spartandhp

[iii] https://grow.acorns.com/midterm-election-stock-market-performance/?gsi=A3ZbRa8

[iv] https://www.schaeffersresearch.com/content/analysis/2018/09/26/this-presidential-cycle-stat-says-to-buy-stocks-now

[v] https://www.newsweek.com/afghanistan-soldier-killed-us-1200422

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The Failure of Healthcare for Profit

Americans spend more on healthcare than residents of any other developed country in the world. As a result, 14% of the U.S. market cap is weighted in this profitable sector, compared with 9% for the rest of the world. 

The U.S. healthcare system is a $2.5 trillion industry, one of the most profitable in the world. Between 2015 and 2016, the net income of health insurers jumped 46%, according to insurance company rating firm, A.M. Best.¹ In the second quarter of 2017, the nation's top six health insurers reported $6 billion in profits, up more than 29% from a year ago.² In the second quarter of this year, publicly-traded health care companies amassed $47 billion in profits on $545 billion of revenue.³ As a result, U.S. healthcare costs 17.8% of Gross Domestic Product, nearly double that of other nations.⁴

Ironically, this high cost has brought us worse, not better, outcomes. Compared to other developed nations, the U.S. ranked last in life expectancy, and experienced the worst maternal mortality rates (triple that of the United Kingdom), and more infant deaths.⁵

Even more shameful, a 2009 study by the U.S. Centers for Disease Control and Prevention found that life expectancy varies significantly according to your skin color. The average African American can expect to live to just 75, the same life expectancy that white Americans enjoyed back in 1979.⁶

The Commonwealth Fund, which ranks the health systems of developed countries, found similar results. Americans pay the most for healthcare but have a healthcare system that has ranked dead last for the last 20 years.⁷ It concluded that in the U.S., health care is a privilege, not a right. Today, 27 million Americans remain without healthcare coverage, often because they can't afford coverage, or live in a state that didn't expand Medicaid (state-sponsored coverage for those with low income and assets).⁸ 

In the U.S., life-saving drugs cost a fortune. Americans often pay thousands of dollars more for their drugs than people in other countries pay for the exact same pills. Unlike other countries, where the governments haggle with drug companies for lower prices on behalf of its citizens, Medicare is forbidden to negotiate with drug companies.

This already dire situation is likely to take a turn for the worse. Trump's recent tax law gave several big gifts to corporations. It included repatriation at a low 15.5% of $620 billion that corporations held tax-free overseas. In addition, Trump gave corporations a permanent tax cut from 35% down to 21%. According to the Congressional Budget Office, this will add $1.8 trillion to the national deficit over the coming decade. How do they plan to reduce this massive deficit? House Speaker Paul Ryan said, "We're going to get back to entitlement reform, which is how you tackle the debt and the deficit."⁹ 

The lynchpin in "entitlement reform" is an attack on Medicare benefits. Medicare is a very popular program even among Trump supporters, but after the election, Republicans won't have to worry about retribution. After the midterms, we can expect efforts to cut Medicare benefits and increase premiums during the lame duck session before the next Congress is sworn in on January 2019.

The slashing of social protection benefits adds to a growing gap between rich and poor in an economy where the top 1% of the U.S. population already owns 38.6% of the total wealth.¹º Therefore, an effort to reform healthcare in America is actually a demand for large-scale income redistribution, which is one reason the U.S. political system will be so resistant to a fundamental change.

 

¹ FactCheck.org 10/20/2017

² CNBC 8/5/2017

³ Axios 8/3/2018

⁴ ⁵ The Guardian 3/13/2018

⁶ Business Insider 6/23/2017

⁷ The Atlantic 6/22/2018

⁸ Bloomberg 4/4/2018

⁹ Washington Post 12/1/2017

¹º Los Angeles Times 6/1/2018

 

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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Stock Market Plunges in Fear

If you’re a superstitious investor, you might be blaming the recent decline in the stock market on the October Effect, or the theory that stock prices decline in October.  This Wednesday, the Dow Jones Industrial dropped nearly 832 points or 3.15%, the third-worst point decline in the history of the market[i].  Don’t start selling all your stocks just yet.  To keep things in perspective, the Dow fell 23% on Black Monday in 1987 (also in the month of October, out of interest)[ii].  We’re nowhere near that and the current US economy is quite strong.  We’ve experienced numerous mini-corrections in the stock market since the bottom of the Great Recession in March 2009.  This is hopefully another mini-correction that was overdue and will bring momentum driven stock prices back to their true valuation. 

So, what caused the stock market to tumble?  There are a multitude of factors that have brewed from concern to fear, consummating the market correction we witnessed this week. 

One major concern is rising interest rates.  The Fed has been slowing and consistently raising interest rates since 2015[iii].  During the Great Recession, the Fed was holding the economy together with all-time low interest rates.  Now that the economy is stronger, the Fed is raising interest rates to heed off rampant inflation.  The fact that the Fed feels the economy can withstand higher interest rates is a positive indicator that the economy is on track. 

Rising interest rates create a ripple effect. Corporations have benefited from 10 years of ultra-low borrowing rates to fund business operations and growth.  Those days are no-more and the cost of future borrowing will certainly come at a higher cost.  Further, during the recession, banks and bonds were offering customers less than 1% in return, so investors were driven to the stock market for better earnings.  Now that the 10-Year Treasury is yielding 3.21%[iv], some investors are cashing out their stock investments for a very dependable investment backed by the full faith and credit of the US Government.  This drives stock prices down and, in theory, hurts a company’s ability to raise more capital through equity markets cheaply. 

Another stock market concern weighing on investors all year has been the possibility of the US in a trade war.  On September 30th, the US signed a new trade agreement with Canada and Mexico that replaced the prior North American Free Trade Agreement (NAFTA).  The new United States-Mexico-Canada Agreement (USMCA) brought about some relief to investors.  However, the US and China have imposed tariffs and retaliatory tariffs on each other throughout the year, giving investors concerns that the tit-for-tat behavior is nowhere close to resolving soon.  The rising cost of inputs for US corporations on imported goods paired with higher labor costs, could potentially cut into profit margins and investor returns.  This hesitation was evident as stock prices swung up and down weekly, despite strong quarterly earnings reports by corporations. 

These conditions created unbearable tension that was finally released through a mini-correction in the stock market this week. 

So, what’s an investor to do?  The recent stock market volatility can be battled with a well-balanced and highly diversified portfolio.  When the stock market declines rapidly, many investors sell their equity investments and reposition into more secure investments like bonds or fixed income.  Investors who have been disciplined in asset class investing and held their fixed income allocation during the booming 2017 and volatile 2018 market benefit from this shift.  That’s because asset class investors already hold fixed income in their portfolio, so while market movers are jumping in and driving the price of fixed income higher, those who already hold the position benefit from the gains. 

Further, those who have employed a diversification strategy don’t have all their eggs in one basket.  This week, we saw the technology sector take a sharp decline.  Tech stocks have been the darling of the market this year, setting new market highs daily.  Apple made headlines for reaching $1 trillion in market capitalization in August of this year.  However, on Wednesday, it was one of the most actively traded stocks of the day, losing 4.63%[v] in value.  Likewise, Twitter lost 8.47% and Netflix lost 8.3%[vi] in value.  Investors who employ a diversification strategy have been locking in gains in the tech sector systematically throughout the year and repositioning those gains into sectors of the market that were underheld and undervalued.  With broad diversification, when one sector of the market declines, the impact on the overall portfolio is nominal. 

Some news outlets or market pundits will make bold, attention-grabbing headlines announcing the end of a long-run bull market or the start of a new recession.  However, their goal to draw viewership or get more clicks online can be irresponsible and self-serving.  More responsible commentators will state the obvious – No one can tell the future. 

Market corrections are normal and healthy for the overall economy as these “brake checks” prevent market bubbles from developing.  Economists have reiterated that the US market is fundamentally strong.  This September, unemployment moved to a 49-year low[vii].  Wage growth is starting to pick up, with the median base pay for workers in the United States climbing 1.6% in June[viii].  Corporate profits are high and consumer spending has been strong.  Despite increased market volatility, economists feel that good long-term returns are possible over the next couple of years. 

These moments present an interesting opportunity for investors to re-examine their portfolios and overall investment philosophy.  For ambitious investors, it might present a buying opportunity.  If you feel your investments need a review, reach out to a Certified Financial Planner™ or a trusted investment advisor for a second opinion.  They’ll be happy to ensure you’re on the right track for the market to come. 

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.



[i] https://www.cnn.com/2018/10/10/investing/stock-market-today-techs-falling/index.html

[ii] https://www.cnn.com/2018/10/10/investing/stock-market-today-techs-falling/index.html

[iii] https://www.cnn.com/2018/10/10/investing/why-stock-market-down/index.html

[iv] https://ycharts.com/indicators/10_year_treasury_rate

[v] https://finance.yahoo.com/quote/AAPL/history?p=AAPL

[vi] https://finance.yahoo.com/most-active/

[vii] https://www.cnn.com/2018/10/10/investing/why-stock-market-down/index.html

[viii] https://www.usatoday.com/story/money/economy/2018/07/05/us-wage-growth-in-june-was-2018s-strongest-so-far/36579285/

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Fiduciary Rule Protecting Investors is Dead

Here's a proposition to you -- how would you like to work with a financial advisor who doesn't have to work in your best interest, and is able to increase his or her profitability by steering you towards retirement investment products that have hidden payments to the advisor, contain fees that are concealed from you, and under-perform other less expensive choices?

No? How about a relationship in which your financial advisor is legally required to act in your best interest, has to fully disclose how he or she is being compensated, and must place your interests before their own?

This last choice recently suffered a slow and painful death under the Trump administration. It is called the Fiduciary Rule, which was approved under Obama, and was supposed to be implemented in April 2017. It demanded that retirement advisors act in the best interests of their clients, and put their clients' interests above their own. It left no room for advisors to conceal conflicts of interest, and stated that all fees and commissions for retirement plans and retirement planning advice be clearly disclosed in dollar form to clients.

Wall Street banks and brokerage firms fought it from the beginning, because it limited commissions and protected consumers from high-risk investment products. They longed for the good old days, which the Council of Economic Advisors (CEA) described as "A system where Wall Street firms benefit from backdoor payments and hidden fees if they talk responsible Americans into buying bad retirement investments -- with high costs and low returns -- instead of recommending quality investments." ¹ The CEA report found that the abuses cost working and middle-class families $17 billion per year in losses.

In a height of cynicism, the Wall Street firms argued that the Fiduciary Rule would prevent brokers and annuity agents from giving advice to their clients, at the same time maintaining that the same brokers and annuity agents are actually salespeople who are not obligated to have a relationship of trust with their clients.

One of the first things that Trump did after taking office was to call the Fiduciary Rule into question, and delay its implementation for 180 days, giving Wall Street additional time to wield its wealth and power to lobby Congress. Then in June, a U.S. District Court threw out the Fiduciary Rule. The Consumer Federation of America called it "a terrible day for retirement savers."

What can you do now to protect yourself? First, sort through all the alphabet soup. There are many designations used by financial salespeople that sound impressive, like financial consultant, wealth manager, vice president, financial planner, financial advisor, and many more. Some designations only require that the salesperson sit though a one-day course. Check out a potential advisor's background, and find out what their credentials mean.

A Certified Financial Planner™ has to serve as a fiduciary when doing financial planning in order to maintain the certification. A CPA is also required to act as a fiduciary to retain the license. A firm that is a Registered Investment Advisor (RIA) must also act as a fiduciary.

Even if an advisor is a fiduciary, it makes a difference where they work. The firm that the fiduciary works for may restrict what investments he or she can pick from. An independent Registered Investment Advisor can choose from the whole universe of investment products, including low-cost mutual funds and exchange-traded funds. However, fiduciaries who work for some brokerage firms or banks must select their recommendations from house funds or lucrative mutual fund partners that are more profitable to the firm.

Don't be afraid to ask a lot of questions. If what the salesperson is pushing sounds too good to be true, it very often is. Ask how much the advisor gets paid, how they get paid, and what the various fees mean. Ask if he or she is legally obligated to act in your best interest, as a fiduciary. And then ask them to put it in writing.

¹ Forbes 7/20/2018

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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New Tax Rules Affect Parents

The Tax Cuts and Jobs Act of 2017 went into effect on January 1, 2018 and started the year off with a bang.  Most notably, the tax reform act imposed a new cap on state and local tax deductions at $10,000 for married filing jointly couples and $5,000 for single filers.  In other words, if you’re single and the sum of your property, state and local taxes exceeded $5,000 during the year (which is easily achievable in California due to high property values), too bad – you don’t get to deduct all the expenses you paid!  Corporations received a huge tax break due to the lowering of the top tax bracket from 35% down to 21%, mostly on the backs of the Middle Class.  The threshold for itemizing taxes went up, and many expenses that qualified for a tax deduction in prior years were eliminated or phased-out, making taxes “simpler” but also resulting in a larger expense, for many. 

 

529 Flexibility

However, one positive outcome of the Tax Cuts and Jobs Act (TCJA) is new flexibility created around 529 College Savings Plans.  A 529 plan is an education savings vehicle that functions much like a Roth IRA.  You put after-tax money into the account, and the growth on the investment is tax-free if the money is utilized for qualified education expenses.  Qualified expenses include tuition, room and board, books and supplies, to name a few. 

 

Previously, the earmarked 529 savings was meant for higher education costs such as university or trade school expenses.  Under the new law, you can now draw annually up to $10,000 per child, tax-free, to pay kindergarten through 12th grade tuition at a public, private or religious school[i].  Given the new benefit, many parents and grandparents are interested in starting the tax-free savings plans as soon as a child is born rather than waiting until traditional college planning has begun.

 

The Tax Cuts and Jobs Act is a federal law, but not all states and educational institutions sponsoring 529s have been able to adopt the new flexibility standards allowing distributions for K-12 education.  In California, legislative change is still pending, therefore, it is important to check with your CPA and 529 sponsor prior to making any withdrawals, so as not to trigger a 10% early withdrawal penalty unexpectedly. 

 

Like many other tax benefits that disappeared, the TCJA rules eliminated tax deductions for interest paid on home equity loans or home equity lines of credit.  For those in a pinch to put their kids through college, the equity loans were an appealing option because the interest paid was tax deductible.  With the removal of any benefits to carry equity loans, many parents are turning towards saving early to stretch hard-earned dollars.

 

Student Loan Interest Deduction Saved

The new law leaves the student loan interest deduction unchanged at $2,500.  However, as mentioned, the threshold to qualify for itemization is higher.  Also, when student loans are cancelled due to death or disability, they are now tax-exempt[ii]

 

Alimony Taxation Changes

New divorcees (divorced post-2018) are also affected significantly under the new TCJA rules.  Under the new laws, alimony is no longer considered taxable income to the recipient[iii], essentially lowering their taxable income and possibly making it easier for the family to qualify for needs-based financial aid.

 

While the new tax laws were supposed to make taxes simpler, change always seems complicated.  The finance industry is scrambling to learn and be complaint with the new rules before the 2018 tax filing season rolls around.  There is still time to initiate planning this year that could reap tax benefits or avoid tax pitfalls.  Consult your CPA or Certified Financial Planner™ before the year is over to make sure you’re on track and taking advantage of available options. 

 This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.


[i] https://www.irs.gov/newsroom/529-plans-questions-and-answers

[ii] https://www.studentdebtrelief.us/news/discharging-student-loans-no-longer-taxable-income/

[iii] https://www.marketwatch.com/story/new-tax-law-eliminates-alimony-deductions-but-not-for-everybody-2018-01-23

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EDUCATIONAL WORKSHOPS

2019 TENTATIVE SCHEDULE 

YOUR 2019 INVESTMENT STRATEGY

Saturday, March 16, 2019

10:00 a.m. - 12:00 p.m.

South Pasadena Public Library Community Room**

1115 El Centro St.

South Pasadena, CA  91030

**This activity is not sponsored by the City of South Pasadena or the South Pasadena Public Library

 

 

YOUR 2019 INVESTMENT STRATEGY

Saturday, March 23, 2019

9:00 a.m. - 11:00 a.m.

Ken Nakaoka Center*

1670 W. 162nd St.,

Gardena, CA  90247

*not sponsored by the City of Gardena

 

 

Contact Us

300 North Lake Avenue, Suite 920
Pasadena, California 91101
Phone: (626) 449-7783
Fax: (626) 449-7785
Email: info@kondowealthadvisors.com

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