Mark on the Markets
October 2023

Seasonal Doldrums

As we enter October, we look back on September. Historically, August and September have provided disappointing returns for investors, according to monthly S&P 500 data from the St. Louis Federal Reserve. Since 2010, the average monthly decline for the S&P 500 Index is -1.2%, the worst-performing month (excluding reinvested dividends).

It’s important to note that this isn’t a new trend. Since 1970, the S&P 500 has averaged a 1.0% dip in September. September has finished higher six times since 2010. But last month, September didn’t buck the averages. The S&P 500 Index finished lower for the fourth-straight year.

A Resilient Economy

Last month’s market decline cannot be attributed to economic weakness. In fact, the economy has been surprisingly resilient. There hasn’t been a significant increase in the rate of inflation either. Although gasoline prices have recently risen, the price hikes for most goods and services have moderated. Moreover, unexpected economic resilience may translate into stronger-than-expected corporate profits when Q3 reporting begins this month.

The Fed and Inflation

A jump in Treasury yields and a hawkish tilt by the Federal Reserve generated stiffer headwinds. The Fed held its key rate, the fed funds rate, at 5.25%‐5.50% in September but kept the door open for another .25 percentage-point rate hike this year. While prior projections have indicated the possibility of rate cuts next year, the Fed penciled in fewer reductions, according to its official projections.

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. 

The Fed is walking a tightrope. It hasn’t let up on its tough anti-inflation rhetoric, and it hopes to lower the rate of inflation without tipping the economy into a recession. Fed Chief Jerome Powell repeated the Fed’s 2% annual goal eight times in the opening remarks at the press conference that followed the Fed’s meeting.

Investor’s Corner

Investors had been betting that the Federal Reserve was finished raising interest rates while anticipating a more accommodative stance next year. Without diving into the minutia and academic theory behind interest rates and stock prices, let’s keep it simple. Higher interest rates create stiffer competition for an investor’s dollar.

Successful investors look past seasonal anomalies. While exercises that pinpoint general seasonal patterns make for an interesting discussion and may help uncover some of last month’s weakness, we know that market timing and implementing strategies based on timing aren’t a realistic approach. So, what are we watching now.

1. I’m alert to the fundamental and political noise that is churning in the background. However, I think the new journalists thrive on the negative (and it sells their papers, too). Market pros remind us to look for opportunity when everyone is so pessimistic.
   
   
2. One of the publications I subscribe to and read is Jeffry Hirsch’s “Stock Trader’s Almanac”. According to Hirsch, since 1950 October has been the second-worst month both for the S&P 500 and the Dow Jones Industrial Index. But Hirsch goes on to say that October typically is the end of worst of those averages, and there’s often a seasonal upside bias to the stock market that begins as the leaves turn color and begin to fall.
   
   
3. “The trend is your friend”. I’m watching the trend lines. For now, many market indices are touching support levels. Our discipline is in evaluating trend lines and support areas to determine if a change in our investment strategy is required. For now, trend lines and support areas are holding.

So, our approach is on what we can control, and that is the investment strategy and plan. Successful long-term investing recognizes that a disciplined approach is the shortest path to achieving financial objectives.

Mark on the Charts

The S&P 500 continues to move back to the support area of 4200 to 4300 as we ended September 2023. As I write this newsletter, this support area is being tested. However, the trend line (blue line and market direction) is still pointing upward from the reversal we saw in October 2022. Testing a support area is a healthy response in a healthy market. The wisdom in following the market dictates that “The trend is your friend”. 

The Value Line Geometric Index is still moving in a range bound and sideways, however, it too, is testing the bottom of the range. (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

How Long to Keep Federal Tax Records? 

While this is a question we recommend discussing with your CPA, here are a few things to consider: 

• The IRS generally has three years to question items on your return and to bill you for any additional tax. Three years is also the timeframe to file an amended return to seek a refund.
• The IRS can review up to six years of your returns if you omit more than 25% of your income. And if fraud is proved, there is no limit. Before you discard old returns and records, look over them to see if you might need any parts of them in the future.
• Keep any record that helps establish the adjusted basis of real estate. Also, save your settlement sheet when you buy property, including your home. And don’t throw away receipts or invoices for improvements made to the property as it may be needed to calculate the adjusted basis of your real estate investment.
• Keep records for seven years if you file a claim for a loss from worthless securities, including bad debt deduction.
• Retain files for securities transactions (stocks, ETFs, mutual funds, bonds, Treasury Bills & Notes, etc.) including those showing stock splits, dividend reinvestments and nontaxable distributions.
• If you’ve made nondeductible contributions to IRAs (and Back Door Roth IRAs), or post-tax contributions to 401(k)s, save these records until three years after the accounts are depleted. You must file Form 8606 with your return for the year you make a nondeductible IRA contribution. Retain copies of Form 8606 and your 1040s for each year that nondeductible contributions are made. Also keep a record of Form 5498 or any statements showing the amount of IRA payouts.
• For any property you inherit, you need to have a record of the date-of-death value. For property that you receive as a gift, you need to have a record of the donor’s cost. Keep documentation of these figures until three years after you sell the asset.

Qualified Charitable Distributions (QDC) – Giving without Taxation

If you are 70 ½ or older, you can donate to the charities you support directly from your IRA (or 401k) and you are exempted from paying tax on the distribution. The money given also counts toward your Required Minimum Distribution (RMD). 

Taking RMDs from traditional IRAs (and 401ks) increases your taxable income and could push you into a higher tax bracket. A strategy is to potentially reduce taxes by using QCDs to give to charity and to fulfill all or part of your RMD requirement without increasing your taxable income. 

Notes:

• The maximum annual amount that you can take as QCDs is $100,000.
• The donation must come directly from your IRA through your trustee to the charity. You cannot withdraw the funds and make the donation directly.
• A QCD cannot be claimed as an itemized charitable deduction on your taxes.

Before making a QCD, check with a tax professional or the Internal Revenue Service to see if the charity is IRS-approved.

You can view your account online at Schwab Alliance. If you haven't yet set up your Schwab Alliance credentials, the simplest way to get started is by going to schwaballiance.com, clicking on New User, and creating a Login ID and password. You'll need a Schwab Alliance Login ID and password to access your Schwab account or when using the Schwab Mobile application.

Faith
Driven
Investing

On November 2, we will be hosting a webinar on our process, “Faith Driven Investing”.

We will be sending you a personal invitation to join us and invite your friends and anyone interested in learning more about our process. 

What will we discuss?

• The importance of bringing greater intention on how you use your resources without compromising your beliefs.
• What Biblically Responsible Investing means and how we utilize this method with your investments.
• Dispelling the myths about faith-driven investing

Implementing faith-based investing begins just like any other investment management process - looking for great investments!

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. 

“Get wisdom, get understanding! Do not forget or turn aside from the words of my mouth. Do not forsake her, and she will preserve you; love her, and she will safeguard you; The beginning of wisdom is get wisdom; whatever else you get, get understanding." Proverbs 4: 5-7

If you have any questions or would like to discuss any matters, please feel free to give us a call.  As always, I’m honored and humbled that you have given me the opportunity to serve as your trusted financial advisor.