Mark on the Markets
November 2023

Mark Twain Effect – A Look at Last Month 

"October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February." Mark Twain

The Mark Twain effect is a phenomenon of stock market returns in October that hypothesizes that in this month, returns will be lower than in other months. The name comes from a line in a novel by American writer Mark Twain published in 1894, “The Tragedy of Pudd'nhead Wilson”. In the novel, a lawyer by the name of David Wilson makes a clever, sarcastic comment about owning half a dog. The comment goes over the heads of the town folk, who think he's an idiot and a bit crazy, and thus label him a “pudd’nhead”.

Twain’s quotation is a sarcastic declaration that speculation in stocks is always dangerous. In subsequent years, October was pegged to refer to the 1929, 1987, and 2008 stock market crashes which roughly occurred in October, eventually becoming known as the “October Effect”.

Well, I can agree on one thing with Mark Twain, you should never “speculate” in the stock market.

However, it may surprise you to know that broad market indexes such as the S&P 500 have historically performed well in October (data provided by the St. Louis Federal Reserve).

Nonetheless, last month was an exception to the usual trend.

Economic Jitters

It can sometimes be challenging to pinpoint the ‘why’ behind market movements. This was true last month.

Are investors getting anxious about the economy?

Gross Domestic Product accelerated to a robust annualized pace of 4.9% in Q3, per the U.S. Bureau of Economic Analysis.

However, weakness in smaller company stocks, as illustrated by the sell-off in the Russell 2000 Index (these firms obtain their business primarily in the U.S.), might suggest there were some economic jitters.

It really boils down to economic performance and inflation. The rate of inflation has slowed, but inflation remains roughly double the Fed’s 2% annual target. 

War in the Middle East

On October 7, Hamas, a designated terrorist group by the U.S. and European Union, launched an appalling and unwarranted attack on Israeli citizens and the nation of Israel.

It is difficult to be clinical and objective following the tragedy. Real emotions surface. They have their place. But in this forum, our job is to analyze what is happening through a very narrow prism—i.e., how it might affect investors.

When such an event occurs, investors attempt to measure the potential impact on the U.S. economy.

So far, investors believe the violence will be contained. Oil prices, which briefly rose following the attack, ended the month slightly below where prices stood on October 6 (MarketWatch data).

Perhaps that is because past geopolitical shocks have not had a longer-term impact on stocks. Knee-jerk reactions are rarely profitable.

While what happened in the past is no guarantee of future performance, reviewing 23 separate geopolitical events since Pearl Harbor, the average loss for the S&P 500 on the first day was 1.1%, and the average pullback was 4.7%, according to LPL Research.

The 1973 Yom Kippur War led to the OPEC oil embargo, soaring oil prices, and a steep U.S. recession, but it was an outlier. Today’s oil market is different, geopolitical dynamics in the Middle East are different, and the U.S. is a leading oil producer.

That said, any significant disruption in oil supplies would send the price of crude higher. Such an event can’t be completely discounted.

Investor’s Corner

Successful investors look past short-term anomalies. Investing relies on a sound fundamental plan with technical confirmation. As we’ve said before, the important thing is to recognize what can be controlled, and what cannot. We can’t and you can’t control shorter-term returns. That’s out of our sphere of influence. But there are aspects of investing that we can control.

1. Long-term performance is about time in the market, and selecting securities that show both fundamental and technical opportunities. We do not try timing the market or picking the hottest stock tip. We look for good opportunities that offer long-term rewards. We don’t always get it perfectly but strive to hit our targets by keeping what is working and discarding what’s not.
   
   
2. Behavior plays an important role in long-term returns. Do you react when stocks soar or falter? Does euphoria lead you to become too aggressive? Does market weakness push you to get too conservative after equities have already faltered? It’s all about responding with emotional intelligence, and not reacting out of impulse.
   
   
3. What is the best approach to your financial plan? Your mix of stocks, bonds, and cash (and any other diversified asset class) plays a role. Much will depend on your appetite to take on risk. We encourage everyone to complete our risk questionnaire and understand how you view markets and the resources entrusted to you.

We consistently emphasize your financial plan and your long-term goals. The plan isn’t etched in stone. It is flexible. When life brings about changes, we can adjust. But we encourage adjustments in the variables you can control.

Mark on the Charts

The S&P 500 broke the uptrend line in mid-October, and I was watching to see if this would lead to a further breakdown. My concerns, as stated above, were abated as the market seemed to be primarily reacting to geopolitical events, and not responding to deeper systemic issues. What appeared to be, and has now been confirmed, is a market whipsaw. Whipsaws are when the market, or a security's price, changes trend and moves quickly in one direction (in this case down) but then quickly pivots with a sharp reversal (in this case back up). As of this past Friday, November 3, the S&P 500 was again above the trend line closing at 4,358. 

The Value Line Geometric Index is showing the same whipsaw seen in other markets. It is still moving in a range bound and sideways direction. (The Value Line Geometric Index is a broad index of around 1,700 stocks, where each stock is given an equal weight of the index.)

Timely Tax Tidbits

It’s Time to Review Your Year-End Tax Plans 

We sent out our LAST-CHANCE FINANCIAL PLANNING CHECKLIST to clients last month. In it contained a list of actions to take to review taxes and potentially cut your federal tax bill. If you missed our post and would like a reprint of our checklist, please reach out to us and we’ll send you a copy.

Bunching Taxes

The standard deduction for 2023 is $27,700 for married filers and $13,850 for single filers. One tax planning strategy is to accelerate write-offs from 2024 into 2023. This is effective for taxpayers whose itemized deductions surpass the standard deduction in one year but are projected to fall below it in the following year. The concept is this – to concentrate or "bunch" deductible expenses into a single tax year, allowing you to exceed your standard deduction threshold and itemize your deductions instead. The tax planning goal is to lower your overall taxes. Here are a few things to think about in a “bunching” tax planning strategy:

• Charitable giving can work well with bunching. Combine planned charitable gifts scheduled over two or more years into one year - 2023.
• Pay your January 2024 mortgage bill in December 2023 so you can deduct the interest portion when itemizing.
• If your municipality allows it, and if you are under the $10,000 cap, pay your January 2024 property tax bill in December 2023 so you can deduct it.
• And don’t forget about medical expenses if they have gone over 7.5% of your adjusted gross income. IRS Publication 502 lists eligible medical expenses, and the list is quite extensive.

Annual Gift Tax Exclusion

You can give (gift) up to $17,000 to a person in 2023 without having to pay gift taxes, file a gift tax return, or tap into your lifetime estate and gift tax exemption. Even better, the recipient is not taxed on the gift. Married couples can double that amount - $34,000 if you are married ($17,000 for each spouse). 

Help Your Grandchildren with Education

One tax planning strategy is paying tuition directly to the school. The school payment made by you does not count against the $17,000 gift tax exclusion. It will also reduce your taxable estate (the lifetime, gift, estate, and gift tax exclusions for 2023 are $12,920,000 per person).

You can also contribute to a 529 plan. This tax-advantaged vehicle for college tuition and expenses is often used by parents, however, you can provide for your children’s children education (Prov. 13:22). You can gift $17,000 this year, or in a lump sum fund the plan with $85,000 (5 years X $17,000) in 2023. Or if you and your spouse participate $170,000. A special IRS rule allows gift givers to spread one-time gifts across five years’ worth of gift tax returns to preserve their lifetime gift exclusion. Internal Revenue Service. 2021 Instructions for Form 709: Qualified Tuition Programs (529 Plans or Programs). 

The tax code is loaded with opportunities. Between credits and deductions, there are many ways to reduce your tax liability. Wise planning allows us to be better stewards of our resources and to “Repay to Caesar what belongs to Caesar and to God what belongs to God.” Mark 12:17

Tackling Long-Term Care Needs 

It’s hard to think about, but long-term care is an important need for which you should prepare.

How much care might you need? On average, women will need 3.7 years of care, and men will need an average of 2.2 years.

Approximately half of people turning age 65 will require some type of paid long-term care in their lifetimes, according to Morningstar. About 60% of us will need assistance with things like getting dressed, driving to appointments, or making meals, according to the Administration for Community Living (ACL), a division of the U.S. Department of Health and Human Services. Not all of these activities will require paid assistance.

Some of us may require home care, which would include those who need minimal assistance with health-related tasks. Others might benefit from adult daycare, which offers daytime supervision, including meals, recreational and therapeutic activities. It occurs in a community setting.

The ACL defines long-term care as “a range of services and supports you may need to meet your personal care needs. Most long-term care is not medical care, but rather assistance with the basic personal tasks of everyday life, sometimes called Activities of Daily Living (ADLs).”

The definition seems a bit on the dry side, so let’s take a more practical approach.

ADLs include:

• Shopping for groceries or clothes
• Managing money
• Housework
• Caring for pets
• Bathing
• Using the bathroom
• Taking medication
  

6 Steps to Long-Term Care Planning

Planning is critical, but many people are not sure what is covered by insurance, and others are often misinformed about what is covered by Medicare. Here are six steps to help you think—and begin planning for—your possible long-term care needs.

1. Gauge the likelihood of needing care.
2. Review potential costs.
3. Assess available resources.
4. Create a long-term care fund.
5. If insurance is the answer, investigate whether a stand-alone or hybrid policy makes sense.
6. If government-funded care is part of the solution, think through the ramifications.

Medicare and most health insurance plans, including Medicare Supplement Insurance (a Medigap policy), do not pay for long-term care.

What does Medicare cover?

• Medicare covers up to 100 days of nursing home care. For many, that may not be enough.
• Medicare can help with costs for skilled-home health or other skilled in-home services. What is skilled-home health? It is a wide range of health care services that can be provided in your home for an illness or injury. These might include monitoring a serious injury or illness, injections, patient and caregiver education, and nutrition therapy. The goal is to help you recover, regain independence, become more self-sufficient, or slow any decline in health.
• Generally speaking, long-term care services by Medicare are provided for a short period of time.
  

Medicare does not pay for non-skilled assistance with ADLs, which make up most long-term care services.
If needed, you will have to pay for long-term care services that are not covered by a public or private insurance program.

What about Medicaid?

Medicaid is available to those who meet strict income and asset guidelines. Unlike Medicare, which is health insurance, Medicaid is public assistance.

Medicaid will count wages, Social Security benefits, pension, veteran benefits, bank and investment accounts, trusts and annuities, and your property.

In most states, Medicaid looks at your income over the last five years, according to the American Council on Aging. 

Assets that were transferred or gifted during that period may count against you. We would advise that you not try to transfer financial assets to qualify for Medicaid.

Medicaid eligibility occurs on a rolling basis. You could make just $1 over the monthly income limit and end up on the hook for the cost.

Developing Financial Strategies

Which option is best will depend on various factors, including age, health status, the likelihood of needing care, and your financial situation. Some people use their own assets to pay for care. Be advised you may have tax consequences for drawing on an IRA, 401k, or qualified plan. 

Let’s look at these potential resources.

A reverse mortgage can be complicated, but it may offer you the cash needed to help with long-term care. Other borrowing options may be available, too, including a home equity loan.

Long-term care insurance is an alternative. The cost will vary depending on the benefits. Younger, healthy people who are at low risk of needing long-term care in the next 25 years may benefit from a long-term care policy. Costs will rise for those who are older or have health problems. You may not qualify if your health is compromised, or you are already receiving end-of-life care services. Typically, you become eligible for benefits when you can no longer perform two ADLs. Most policies have a waiting period before you receive benefits. However, many insurance companies no longer offer traditional policies. Those that do may raise premiums annually, and the cost may be high.

Hybrid life insurance offers unique features that may offer financial assistance. What is a hybrid policy? It combines life insurance with long-term care insurance. The policy may pay for long-term care or a death benefit if the policy isn’t used to pay for care. Another option is a long-term care annuity, which provides a benefit based on your investment. However, it has become challenging for insurers to provide these policies due to today’s interest-rate environment.

Other avenues

Some states offer PACE (Program of All-Inclusive Care for the Elderly), which is a combined Medicare and Medicaid program. It may pay for some or all the long-term care needs of a person with Alzheimer’s disease.

SHIP, the State Health Insurance Assistance Program, is a national program offered in each state that provides one-on-one counseling and assistance with Medicaid and Medicare.

Final thoughts

How you should approach long-term care will depend on your circumstances. We have offered a basic outline of various options. If you have additional questions or concerns, we encourage you to reach out to us.

I hope you’ve found this review to be educational and helpful. Investment management may be a long and difficult path. Our goal is to be a guide to you as you run the race and keep the faith. 

“Even to your old age I am he, even when your hair is gray I will carry you; I have done this, and I will lift you up, I will carry you to safety." Isaiah 46:4