Where's the "Markets in Turmoil" Special?

On the worst stock market day since June 2020, when the stock indexes all lost about 5%, I’m sitting around and wondering, “Hey, where’s the CNBC Markets in Turmoil Special?”

You may be thinking, “My portfolio is down bigly today, and you’re worried about a financial markets TV special?”

Well, yes.

According to financial analyst Charlie Bilello, the S&P 500 has historically generated a positive one-year return every time CNBC has aired one of these specials since 2010. On average, the S&P 500 has seen an impressive 40% one-year return following these episodes (1). “So bring on the Markets in Turmoil special!”

LIBERATION DAY WAS SUPPOSED TO BE GOOD. WHAT HAPPENED?

Kidding aside, the proximate cause of Thursday’s sell-off is President Trump’s announcement on Wednesday afternoon that tariffs on our international trading partners will be hefty.

At first, the markets celebrated when they thought he was only implementing 10% tariffs across the board, but they quickly deflated when, game show style, Trump trotted out his tariff country “score boards” showing the rates that many countries would be paying will be far more. Some countries like Cambodia face tariffs as high as 49%, while Vietnam, widely becoming a manufacturing hub for worldwide companies (such as Nike, Samsung, Unilever, and Intel), faces tariffs of 46%.

In my What’s Going on in the Markets from Sunday, I posited that we may get a post-Liberation Day rally if the tariffs turn out to be lighter than expected. Instead, we got the exact opposite: far worse than anticipated tariffs.

The stock market’s kryptonite is uncertainty. And with Trump’s tariff announcements, we have, dare I say, massive uncertainty. So traders and institutions did what they do when they’re unsure of the overall effect of tariffs on corporate earnings: they sold first and will ask questions later.

Call me crazy, but I don’t think Liberation Day as a coveted national holiday will be a thing anytime soon.

ARE WE THERE YET?

On a year-to-date basis, the S&P 500 index is down about 8.4% and is 12.2% from its intraday all-time high of February 19. The tech-heavy NASDAQ index has lost about 12% year to date, and Small-Cap stocks have had it far worse, down almost double the S&P 500 index.

Historically, the S&P 500 has experienced a 12% pullback approximately once every two years, so this is regular market action. Since this bull (uptrending) market started in October 2022, we had not seen a 12% pullback, so we were overdue for one. It never feels good when you’re in the middle of it.

The question, of course, on everyone’s mind: will it get better or worse?

And the answer is that nobody knows. But based on the steady selling we saw on Thursday, with just a slight pause for a 90-minute market bounce before selling resumed, I would guess that the selling is not yet over.

With many large market participants trading on margin (leverage), it tends to exasperate the selling when large firms overextend themselves. Then, their positions must be liquidated (at the wrong time).

It’s going to take weeks, if not months, to sort out the effects of the tariffs on corporate earnings. I would guess that statisticians will keep tabs on the number of “tariff” mentions on the first 2025 quarterly earnings conference calls starting in earnest next week. And if companies reduce their forward earnings estimates or warn of headwinds ahead, the markets will reprice stocks lower to reflect lower expected earnings. My cynical side forecasts that companies that miss their earnings estimates now have a convenient excuse tucked away in their back pocket.

SELL AND HEAD FOR THE HILLS?

You’ve probably heard the expression: No one ever made a dime panicking.

While uncertainty is the enemy of the stock market, and you don’t have to embrace it, you must also not react with knee-jerk selling because everyone else is. If you have a financial plan, your investing plan considers these occasional roller coaster rides in the markets. Therefore, you don’t throw away your plan at the first sign of volatility. Besides, when you sign up for the higher rates of return of the stock market, volatility is the price you agreed to pay for those higher rates.

One of the secrets to great investing is that you don’t have to know everything. And even if you do, it probably won’t make you a better investor.

Do you know what will?

Better behavior during a market selloff makes you a better investor. Resist the urge to give into your fear and follow the crowds out of the markets before your portfolio supposedly heads to zero (the same applies to resisting the fear of missing out). No wonder every Dalbar study of individual investors year after year shows that the majority never perform as well as the funds they own.

Nibbling here and there on the way down to take advantage of Wall Street’s sales makes for better behavior. Buying when stocks are down appreciably from nosebleed levels: that’s good investor behavior. And trimming positions that are at nosebleed levels, if you own them, is good investor behavior.

I was reminded today of a quote by well-known financial behaviorist and author Morgan Housel, who wrote in his book The Psychology of Money (highly recommended):

“Good investing is about how you behave, not what you know. Investing rewards those who can sit still when everyone else panics”.

THIS TOO SHALL PASS

If you already have a financial advisor and find the markets’ action worrisome, contact him or her (if not, feel free to contact us). Perhaps your risk tolerance is not as high as you thought when the markets kept going up. Sometimes, tweaking your investment allocations can help you sleep soundly again.

While I don’t know when things will turn around, I know that every day gets us closer to a durable bottom. Markets are oversold, and that bounce-back rally could start tomorrow, Monday, or the following week. Buying a little at these levels is almost always a good idea when you look back 12-18 months. And if you need to trim your positions, you can use any rally to help cut your losses.

We have continued to nibble on some added positions for our client portfolios, adjust our hedges (2), and sell option premiums into the elevated volatility. The day will come when we can jettison our hedges, but we’re keeping them for now…

At least until we get a Markets in Turmoil Special.

Disclaimer: None of the foregoing is a recommendation to buy or sell securities. Please consult with your financial advisor before taking any action.

Footnotes:

(1) However, it's worth noting that this data is based on a limited sample size during a predominantly bullish market period. Bilello cautions that the results might not hold in a prolonged bear (i.e., a downtrending) market.

(2) Hedging is any approach to investing that reduces your overall market exposure risk and volatility.

Sam H. Fawaz is the President of YDream Financial Services, Inc., a fee-only investment advisory and financial planning firm serving the entire United States. If you would like to review your current investment portfolio or discuss any other tax or financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fiduciary financial planning firm that always puts your interests first, with no products to sell. If you are not a client, an initial consultation is complimentary, and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client and their financial plan and investment objectives are different.

What's Going on in the Markets March 16, 2025

All the major indexes, including the Dow Jones Industrial Average (30 stocks), S&P 500, Nasdaq, Russell 2000, and even the Wilshire 5000, closed at new 6-month lows on Thursday before a robust bounce on Friday.

Although at its worst moment on Thursday, the S&P 500 index was down almost 10.5% from its recent 52-week high, it managed a decent bounce on Friday but still closed down 8.3% from that peak. Year to date, the index is down 4.1%.

For the week, the S&P 500 lost 5.3%, the NASDAQ dropped 5.8%, and the small caps continued their persistent weakness, falling 5.5%.

Market leadership, especially among technology stocks, showed further deterioration this week, and bearish distribution (institutional selling) continued accelerating. By the end of the week, investor sentiment bordered on extreme fear, one element in the making of a robust market rally.

Though there’s not much to be happy about as an investor, keeping the current pullback in perspective is essential. The S&P 500 index is trading back where it was in mid-September 2024, a mere six months ago. The S&P 500 is still 60% higher than the low made at the start of the current bull market (uptrend) in mid-October 2022.

IT’S THE ECONOMY

Not helping things last Tuesday, the Small Business Optimism Index from the National Federation of Independent Business (NFIB) fell to 100.7 for February (from 102.8 in January and 105.1 in December). The Uncertainty Index rose to its second highest level in the series history—just below the reading reached in October last year.

Uncertainty on Main Street has led to fewer small business owners viewing this as a good time to expand or expecting better business conditions. Enthusiasm over the Trump administration's expected pro-business policies has faded quite a bit.

More favorably, the Bureau of Labor Statistics's Consumer Price Index (CPI) and Producer Price Index (PPI) came in slightly cooler than expected for February, reflecting inflation easing. However, underlying data in both inflation measures indicate that the Federal Reserve’s preferred inflation measure, the Core Personal Consumption Expenditures (or PCE, which comes out at the end of the month), will likely continue to be stubbornly elevated.

Consumer Sentiment drives consumer spending and buoys corporate earnings. Confident consumers are essential to a strong economy, or at least one that can avoid a recession.

Friday’s Overall Consumer Sentiment Index report from the University of Michigan fell dramatically (down 6.8 points to 57.9) for the third consecutive month on concerns ranging from personal finances and the stock market to inflation and labor markets. The Current Conditions Index slid to 63.5, and most concerningly, the Future Expectations Index tumbled 9.8 pts to 54.2, its lowest level since July 2022. Year-ahead inflation expectations spiked to 4.9%, the highest since November 2022.

All three sentiment indexes are now at historically low levels rarely seen outside of recessions. The rapid decline in Consumer Sentiment reflects increased uncertainty about individuals’ perceptions of their financial situation. Uncertainty regarding the future can quickly materialize into a slowdown if consumers cut back on spending or delay big purchases.

This sentiment report marks the most significant two-month increase in inflation expectations since 1980. Consumer attitudes have rapidly changed since the end of last year, and this report headlines the collapse of speculation and exuberance that drove the stock market last year.

IS EVERYTHING BAD OUT THERE?

By most measures, the current pullback has been somewhat orderly, with few signs of investor panic or institutional wholesale dumping of stocks. Some would prefer to see signs of investor panic and some kind of “whoosh” to the downside to signal that a bottom might be in. Instead, what’s happened is a slow “drip” lower akin to water torture that persists for an unknown duration.

As optimistic and pessimistic investors pray for a sustainable bounce, they tend to have opposite objectives. The optimist wants the market to go up to validate their “buy the dip” mentality and produce profits as rewards for their bravery. The pessimistic investors recall past severe market cycles and feel trapped in the market. They will use any bounce or rally to sell stocks and perhaps declare, “Never again!”

These opposing forces are at play on any market day. Still, when the markets decline persistently, as we’ve seen since February 20, the battle between optimists and pessimists can bring about strong emotions and perhaps opposite actions or reactions to the fear, uncertainty, and doubt surrounding a weak market.

So how has this resolved itself in similar scenarios in the past?

A COUPLE OF QUANT STUDIES

We can look to quantitative (quant) studies to help answer the foregoing question.

Analyzing past market historical statistics, often called quantitative analysis, can lead one to believe the market is predictable by studying past patterns. Nothing, and I mean nothing, has definitive predictive power, but humans tend to repeat behaviors repeatedly, making some of these quantitative measures somewhat valuable for review and consideration. They are mere data points in a collection that make up the bulk of market-generated information.

Here are summaries of a couple of quantitative studies from Carson Investment Research:

Quant Study 1: Since World War II, the S&P 500 index has experienced 48 market pullbacks of 10% or more (a 10% pullback is called a “correction” by many). If you subscribe to the notion that a 20% pullback constitutes a definitive bear (downtrending) market, then 12 of those 48 pullbacks (25%) went on to pull back 20% or more. That means that 75% of the time, a 10% pullback did not lead to a bear market.

Quant Study 2: In addition, if we are heading for a 20% pullback, this would be the third 20% pullback in less than five years, something that has never happened since 1950 (which doesn’t mean it can’t happen). Going back to 1950, the last time we had three bear markets this close to each other was between 1966 and 1973, a period spanning 6.9 years. So, another bear market in 2025 would be pretty rare.

So, while most 10% corrections don't evolve into bear markets, the hot money traders' continued complacency and quick-bounce expectations can often precede more significant downturns. Buying the dip, which has worked for years, works until it doesn’t.

GREEN SHOOTS OR BROWNOUTS?

Friday’s bounce notwithstanding, the current price action favors more potential downside unless the market immediately follows through on Friday’s rally to the upside. The market is now significantly oversold, which is historically associated with strong bounces or significant trend changes (from downside to upside). In addition, March corrections frequently stage oversold bounces into recoveries into the end of the calendar quarter.

On another positive note, the next few weeks are seasonably favorable for a continued bounce or rally. This means that historically, this time of the year has been favorable for the markets. If Friday was the spark for a bounce, it could entice more participants to join so they don’t miss the bounce. After all, a rout we’ve seen over the past four weeks deserves more than a one-day wonder rally like we saw on Friday. Indeed, we’ve seen strong reactions to past selloffs comparable to this one. But as they say, “past results don’t guarantee future performance.”

WHAT NOW?

If you’ve been anxious or nervous about market action over the past few weeks, you likely have too much exposure to the stock market. Therefore, it’s prudent to talk to your financial advisor about reducing your overall risk to the “sleeping point.”

If you are the chief investment advisor of your portfolio, take advantage of any rally or bounce to reduce your exposure to better suit your overall risk tolerance. (1)

I won’t repeat everything I said in last week’s What’s Going on in the Markets March 9, 2025. But it bears repeating that we anticipate having a correction of 10% or more at least 1.1 times per year, so this lousy action is normal and shall eventually pass.

A 10% correction turns into a 15% correction about every 40 months (0.3 times yearly). So sure, it could get worse before it gets better, but I’m still not seeing wholesale evidence of a full-on recession or bear market headed our way. We don’t yet have enough proof of that.

If this turns out to be a garden variety correction, and I think it is, taking advantage of the opportunity will pay off for those who have a long-term investing time horizon and are brave enough to step up and buy (it’s never easy to do so, but we did some light buying for our clients last week.) (1)

One of my favorite financial advisors, Keith Fitz-Gerald, often says, “History shows very clearly that missing opportunity is more expensive than trying to avoid risks you can’t control.”

I agree wholeheartedly. Focus on what you can control, and don’t miss the opportunities.

(1) Disclaimer: Nothing in this article recommends that you buy or sell any security. Please consult with your financial advisor before taking any action.

Sam H. Fawaz is the President of YDream Financial Services, Inc., a fee-only investment advisory and financial planning firm serving the entire United States. If you would like to review your current investment portfolio or discuss any other tax or financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fiduciary financial planning firm that always puts your interests first, with no products to sell. If you are not a client, an initial consultation is complimentary, and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client and their financial plan and investment objectives are different.

Sources: InvesTech Research and The Kirk Report

Essential Year-End Tax Planning Tips for 2024

Tax planning becomes essential for individuals and businesses as the year ends. Proactively managing your finances before the calendar flips to 2025 can help minimize your tax burden and set you up for a financially secure new year.

Many clients submit their information yearly to have us optimize their 2024 and future years’ taxes. Proactively estimating and making side-by-side multi-year tax projections has permanently saved some clients thousands of dollars in taxes.

Here are some things to consider as you weigh potential tax moves between now and the end of the year.

1. Consider deferring income to next year

The old rule used to be “defer income.” The new rule is “time income.”

Consider opportunities to defer income to 2025, especially if you may be in a lower tax bracket next year.

For example, you may be able to defer a year-end bonus or delay the collection of business debts, rent, and payments for services. Doing so may enable you to postpone tax payments on the income until next year.

If you have the option to sell real property on a land contract rather than an outright sale, that can spread your tax liability over several years and be subject to a lower long-term capital gain rate (which could be as low as 0%.) On the other hand, if you’re concerned about future tax rate hikes, an outright sale or opting out of the installment method for a land contract sale can ease the uncertainty that you’ll pay higher rates on the deferred income.

If your top tax rate in 2024 is lower than what you expect in 2025 (say, because you are retiring or because of significant gains or a big raise or bonus expected in 2025), it might make sense to accelerate income instead of deferring it.

Be mindful of accelerating or bunching income, which can potentially 1) increase the taxability of social security income, 2) increase Medicare premiums, 3) raise your long-term capital gains rate from 0% to 20%, or 4) decrease your ACA health insurance premium credit.

2. Time your deductions

Once again, the old rule used to be “accelerate deductions.” The new rule is “time deductions.”

If appropriate, look for opportunities to accelerate deductions into the current tax year, especially if your tax rate will be higher this year than next.

If you own a business and are in a high tax bracket, consider accelerating business equipment purchases and electing up to a full expense deduction (via bonus depreciation or Section 179 expensing.)

If you itemize deductions, making payments for deductible expenses such as qualifying interest, state, and local taxes (to the extent they don’t already exceed $10,000), and medical expenses before the end of the year (instead of paying them in early 2025) could make a difference on your 2024 return.

For taxpayers who typically itemize their deductions, the strategy of “bunching” deductions can significantly impact them. Instead of spreading charitable contributions, medical expenses, and other deductible costs across multiple years, consider consolidating them into one year. By “bunching” these deductions, you may exceed the standard deduction threshold and maximize your itemized deductions for the year.

For example, if you typically donate $2,000 annually to charity but are not receiving a tax benefit because you are utilizing the standard deduction, consider making multiple years of contributions in 2024. This could help you exceed the standard deduction amount, allowing you to itemize your deductions and providing more tax benefits (see below.)

For those with significant medical expenses, it’s important to note that only the portion of medical expenses exceeding 7.5% of your adjusted gross income (AGI) can be deducted. If you’re close to reaching that threshold, consider scheduling medical procedures, doctor visits, or purchasing necessary medical equipment before the year ends. Remember that medical expenses are only deductible in the year they are paid, so timing matters.

3. Make deductible charitable contributions

Making charitable donations can reduce your taxable income while supporting causes that matter to you.

If you itemize deductions on your federal income tax return, you can generally deduct charitable contributions, but the deduction is limited to 60%, 50%, 30%, or 20% of your adjusted gross income, depending on the type of property you give and the type of organization to which you contribute. Excess amounts can be carried over for up to five years.

You can use checks or credit cards to make year-end contributions even if the check does not clear until shortly after year-end or the credit card bill does not have to be paid until next year.

As you consider year-end charitable giving, there are a few strategies to keep in mind:

• Qualified Charitable Distributions (QCDs): If you’re 70½ or older, you can direct up to $105,000 (2024 limit) from your IRA to a charity as a QCD. This donation counts toward your required minimum distribution (RMD) and is excluded from your taxable income (and can reduce the taxation of social security income.) QCDs cannot be counted as deductible charitable donations.

• Donor-Advised Funds (DAFs): DAFs allow you to make a significant charitable contribution in 2024 and receive the tax deduction now while deciding which charities to support over the next several years. This is a strategy to help with the bunching of itemized deductions described earlier.

• Appreciated Stock Donations: Donating appreciated stocks that have been held for over one year instead of cash generally provides a double benefit. It allows you to avoid paying capital gains tax on the appreciation while receiving a charitable deduction equal to the investment’s fair market value.

4. Bump up withholding to cover a tax shortfall

If it looks as though you will owe federal income tax for the year, consider increasing your withholding on Form W-4 for the remainder of the year to cover the shortfall. Time may be limited for employees to request a Form W-4 change and for their employers to implement it in 2024.

The most significant advantage in doing so is that withholding is considered to have been paid evenly throughout the year instead of when the dollars are taken from your paycheck. This approach can help you avoid or reduce possible underpayment of estimated tax penalties.

Those taking distributions from their IRAs can also request that up to 100% of the distribution be paid toward federal and state income tax withholding to help avoid underpayment of estimated tax penalties.

These increased withholding strategies can compensate for low or missing quarterly estimated tax payments.

5. Save more for retirement

Deductible contributions to a traditional IRA and pretax contributions to an employer-sponsored retirement plan such as a 401(k) can reduce your 2024 taxable income. Consider doing so if you still need to contribute up to the maximum amount allowed.

For 2024, you can contribute up to $23,000 to a 401(k) plan ($30,500 if you’re age 50 or older) and up to $7,000 to traditional and Roth IRAs combined ($8,000 if you’re age 50 or older). The window to make 2024 employee contributions to an employer plan generally closes at the end of the year, while you have until April 15, 2025, to make 2024 IRA contributions.

Various income limitations exist for eligibility to make traditional and Roth IRA contributions. Regardless of your income, however, you can make a non-deductible IRA contribution. Such a contribution can be subsequently converted to a Roth IRA at little or no tax cost for many (this is known by many as the “back-door” Roth.) If a Roth IRA conversion doesn’t make sense, the non-deductible contribution adds cost basis to your traditional IRA, reducing future taxation of IRA distributions or Roth conversions. Note that Roth contributions are not deductible and Roth-qualified distributions are not taxable.

Speaking of Roth Conversions, if you expect your tax rate to be higher in future years, or you’re in a low tax bracket in 2024, converting some or all your traditional (pre-tax) IRA or 401(k) funds into a Roth IRA in 2024 may be beneficial. While this conversion triggers taxes now, it can reduce future tax liabilities, as qualified withdrawals from a Roth IRA are tax-free.

Owners of small businesses with retirement plans may have until the due date of their tax returns (plus extensions) to make some retirement plan contributions. Check with your tax advisor for your particular small-business retirement plan.

Some small business retirement plans must be set up by 12/31/2024 to allow for a deduction for the 2024 tax year.

If you have a small business, check with your tax advisor to ensure your retirement plan deductions are correctly balanced with the qualified business income deduction, assuming your small business is eligible.

6. Take required minimum distributions

If you are 73 or older, you generally must take required minimum distributions (RMDs) from traditional IRAs and employer-sponsored retirement plans (special rules may apply if you’re still working and participating in your employer’s retirement plan.)

If you reach 73 in 2024, you must begin taking minimum distributions from your retirement accounts (traditional IRAs, 401(k)s, etc.) by April 1, 2025. However, delaying the 2024 RMD until 2025 will require you to include both the 2024 and 2025 RMDs into 2025 income.

You must make the withdrawals by the required date—the end of the year for most individuals. The penalty for failing to do so is substantial: 25% of any amount you failed to distribute as required (10% if corrected promptly).

In 2024, the IRS finalized somewhat complicated regulations relating to RMDs from inherited IRAs after December 31, 2019.

In general, under the SECURE Act, unless an exception applies, the entire balance of a traditional or Roth IRA must be fully distributed by the end of the 10^th year after the year of death.

In addition, depending on the age of the original IRA owner, heirs must take an RMD every year until the 10^th year, when the remaining account balance must be distributed. These rules require careful and sometimes complex, multi-year planning for large inherited IRAs, so it’s essential to consult your tax advisor.

Review your accounts to ensure you’ve met your RMD requirement for the year, and if applicable, consider making charitable contributions through a QCD.

7. Weigh year-end investment moves

I often tell folks, “You should not let the tax tail wag the investment dog.” That means that you shouldn’t let tax considerations drive your investment decisions.

With that in mind, lower-income taxpayers may be subject to a 0% long-term capital gains rate for up to about $47K of taxable income for single filers and $94K for joint filers. For “kids” under 26, up to $2,600 of long-term capital gains are taxed at 0% if filed on their own tax returns (not filed with parents’ returns.)

Regardless, it’s worth considering the tax implications of any year-end investment moves that you make. For example, if you have realized net capital gains from selling securities at a profit, you might avoid being taxed on some or all those gains by selling losing positions (also known as tax loss harvesting.)

Any capital losses over and above your capital gains can offset up to $3,000 of ordinary income ($1,500 if your filing status is married filing separately) or be carried forward to reduce your taxes in future years.

Wash sale rules prevent investors from selling an investment at a loss and re-purchasing the same or substantially similar security within 30 days in any of their or spouse’s accounts (including retirement accounts). Doing so invalidates the loss for the current year, and the loss deduction is suspended until the new security is ultimately sold. If you wait 31 days to repurchase the same (or substantially similar security), the wash sale rules do not apply.

Digital assets like Bitcoin are not subject to wash sales rules, so there’s no harm in harvesting a loss and then immediately re-purchasing the same digital asset if desired.

8. Contribute to 529 Education Savings Plans

If you’re planning to save for education expenses, the end of the year is an excellent time to consider contributions to a 529 education savings plan. There is no federal tax deduction for 529 plan contributions, but the account grows tax-free if the funds are used for qualifying educational purposes.

Many states offer a limited tax deduction or credit for 529 plan contributions (some states even allow for a deduction for a 529 plan rollover from another state’s 529 plan.) In many states, contributing to a 529 plan you don’t own (say for a sibling, grandkid, nephew, niece, cousin, or friend) also allows for a state tax deduction.

There’s a five-year “super-funding” strategy for those needing to accelerate their college funding. This strategy allows you to contribute up to five years’ worth of gifts to a 529 plan in a year ($90,000 for individuals, $180,000 for married couples). A gift tax return must be filed, but it may not be taxable if this is the only gift made to that person in the current year. This can be a great way to accelerate your child’s education savings.

With the ability to 1) fund private K-12 education, 2) repay some student loans up to $10,000, and 3) rollover some leftover 529 plan funds to a Roth IRA after college graduation, worries about overfunding a 529 education savings plan are far less than they used to be.

In summary, year-end tax planning is a valuable opportunity to control your finances and reduce your taxable income for the year. Reviewing your financial situation, consulting with your tax advisor, and implementing these year-end strategies will ensure that you enter 2025 knowing you’ve made proactive decisions to optimize your tax savings.

Don't hesitate to contact us if you would like to discuss a tax plan that fully utilizes all available strategies.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client, an initial consultation is complimentary, and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client and your financial plan and investment objectives are different.

What’s Going on in the Markets August 6, 2024

With the lazy, hazy days of summer come the doldrums in the stock markets—or so everyone thought.

July went out with a bang as the market rally broadened significantly to include small-caps and mid-caps, while the red-hot technology stocks took a breather. Sure, the S&P 500 index was only up 1%, but the small caps were up 11%, the mid-caps were up 7%, and even the bonds were up 3%.

But since then, if July was the lion, August has been the bear. The S&P 500 index is down 5% in just three August trading days, the small caps have given back almost 10%, and the tech-heavy NASDAQ 100 has slid 7.5%. In the digital age, markets move fast.

Now, mind you, the S&P 500 is still up about 15% over the last 12 months (and up 9.5% year-to-date), but every 10-12 months, we should expect a 5%- 9% pullback in the markets. We had a 5.3% pullback in April, but the last time we saw a pullback of this size ended last October. The markets have been remarkably calm over the past year, and we went 356 trading days without a 2% daily pullback in the S&P 500 index. That may be why this pullback feels so jarring.

Pundits and the media will posit several reasons for the pullback, such as:

·       The Federal Reserve is on the cusp of making a policy mistake by keeping interest rates higher for longer and is pushing the country into a recession.

·       The July monthly jobs report, which was out on Friday, spooked traders and investors as it came in much lighter than expected, and the unemployment rate ticked up. This fanned the fears that a recession was on the way (there’s always a recession on the way; the trick is knowing when we’re in one.)

·       Over the weekend, news broke that legendary investor Warren Buffet sold half of his stake in Apple during the past quarter and is stockpiling cash.

·       The possibility of a bigger, more freely spending government—regardless of party—is giving traders fits. The markets crave certainty, and summertime offers little of it in election years.

·       Escalating tensions in the Middle East.

·       The unwinding of a long-running Japanese Yen carry trade, in which traders sold the Yen and invested it in higher-paying countries and other opportunities for months if not years. Now, that trade is unwinding and directly affects the world’s stock markets.

You can cite any of the above reasons for the selloff, but the selling will stop when the fear that’s getting the better of so many traders and investors goes away. But certainty about the election is about three months away. Absent a market crash, any possibility of a short-term interest rate cut is about 45 days away. So, buckle up, meanwhile.

In our client portfolios, we’ve been getting defensive by taking some money off the table for weeks now. We are hedged with money market cash earning 5%, Treasury Bills, bonds, inverse funds, and options sold against our positions. We’re prepared to get more defensive if things get worse, but this is a time to look for quality stocks and funds that were too expensive about a week ago. We did some shopping for some clients last week.

We’ve had a fantastic start to the year, and historically, an election year tends to be volatile from the summer into September/October. Once the overhang from the election uncertainty is gone, the market should resume its uptrend by the end of the year.

In short, as I’ve repeated before, the secret to success in accumulating wealth is not to get scared out of your positions. It’s never about completely avoiding risk in the markets but reducing risk. If you’re losing sleep over your investments, consider reducing your exposure or contact us to help determine if you’re overly invested.

Meanwhile, try and stay cool!

If you would like to review your current investment portfolio or discuss any other retirement, tax, or financial planning matters, please don’t hesitate to contact us at 734-447-5305 or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client, an initial consultation is complimentary, and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client and your financial plan and investment objectives are different.

Real Estate Commission Changes Coming

For decades, it’s been a well-known and accepted truism. Anytime you plan to sell your home with the help of a real estate agent, you are expected to pay a 6% commission on the sale. Sure, there have been discount brokers and ways to get your home listed on the Multiple Listing Services (MLS) on the cheap, but deep down, you knew that if you didn’t pay at or near 6%, your property might not get the same attention as others who did.

That’s about to change.

In March 2024, the National Association of Realtors (NAR) reached a landmark $418 million settlement after losing an antitrust lawsuit filed by a group of home sellers. As many as 50 million people who paid commissions on homes sold in recent years could receive a small amount from the class-action settlement. The powerful industry group also agreed to change long-standing practices related to sales commissions. (1)

Background

For decades, many real estate agents have had little choice but to join NAR and follow its rules regarding local MLS — the databases most brokers use to list information about properties for sale. Listing brokers typically cooperated with buyer's agents and split the commission paid by the seller, with the amounts communicated via the MLS in data fields that were only visible to agents.

Plaintiffs claimed that NAR (and brokers that require agents to be NAR members) conspired to artificially inflate commissions through an industry-wide practice requiring the seller to pay commissions to brokers on both sides of the transaction. They believed this helped to uphold a nationwide standard of five to six percent of the sales price, which is significantly higher than the commissions paid in many other countries. (2)

Practice Changes

Effective August 17, 2024, NAR will implement the following new policies related to how real estate brokers are compensated to handle transactions. (3)

1. Commission offers for buyer's agents can no longer be required to appear in the MLS, though they are still permitted. Listing agents can advertise specific commission offers on brokerage websites and over the phone, text message, or email. Home sellers and their agents will negotiate directly with buyers and their agents regarding compensation.

2. Buyers must discuss and set compensation directly with their agents before touring homes, as sellers do with listing agents. They will be asked to sign written representation agreements that outline the agents' services (e.g., showing property, negotiating offers, transaction management) and how much they charge. This is to help ensure that buyers are fully aware of the costs they could be responsible for paying.

Implications for Buyers and Sellers

These changes are intended to allow more room for negotiation and spur competition, which could help lower sellers' costs. Commissions have always been baked into transaction prices, so home prices would likely be reduced in markets where sellers' costs fall.

Some economists believe commissions could drop as much as 30% if buyer's agents face pressure from potential clients to discount their fees, but savings of this magnitude aren't guaranteed. (4) The impact on real estate commissions will ultimately depend on market conditions, which can vary greatly by location and how sellers, buyers, and agents respond to the new practices.

Like other businesses, brokerages have overhead that includes rent, liability insurance, marketing, and other operating costs. Most individual agents must split sales commissions with their brokers (from about 60/40 up to 80/20 for the most productive agents) or pay fees to the company.

A buyer's agent sometimes shows property to clients over days to months and may write numerous offers for deals that never come together. Many experienced buyer's agents — long accustomed to receiving the same commission as the listing agent — may be reluctant to work for less, even if they must justify their value more regularly.

Buyers will determine the commission for their agents, but the money may or may not come from their pockets. For example, an offer could be made contingent on the seller paying the buyer's share of the commission or include a request for a general credit toward closing costs in the amount needed to pay the buyer's agent. Current lending guidelines and regulations prevent most buyers from adding commission costs to their mortgages. A rule pertaining to Veterans’ Administration (VA) loans, which specifically prohibited borrowers from paying agent commissions, has been temporarily suspended. (5)

In some cases, sellers might agree to cover buyers' commissions, as it has long been customary and could still be in their best interests. Nationwide, home prices have risen more than 50% since 2019, and high interest rates have made mortgage payments much less affordable. (6) This means sellers with equity tend to be in a better position to pay commissions than potential buyers, many of whom may struggle to come up with enough cash for the down payment. For these reasons, a seller willing to pay all or some of the buyer's commission may receive more offers and a higher final price than one who refuses to do so. This assumes, of course, the current cooling of the housing market continues.

Online sites have made it easier to shop for a home without using an agent, so more buyers might brave the market on their own if they think they can pocket the savings. Yet buying a home is the biggest financial transaction many people will make in their lifetimes, and the issues that arise during the process can be unexpected. There are many situations in which buyers could benefit from having their own representation, especially if they are inexperienced or unfamiliar with the local market.

First-time buyers, responsible for 31% of existing home sales in May 2024, may have more confidence and make more informed decisions if they work with a trusted professional. (7) However, many will need help from sellers to pay their agents' fees, putting them at a bigger disadvantage than ever against buyers with more access to cash in competitive markets.

Negotiating commissions among all parties is likely to make it harder to strike deals in general, so buyers may have to search longer and write more offers before they are successful. It's also possible that sellers will see little change in commission costs in the coming months while the market is in flux. But in time, the new rules could spark innovation that creates new business models and expands lower-cost options.

If you would like to review your current investment portfolio or discuss any other retirement, tax, or financial planning matters, please don’t hesitate to contact us at 734-447-5305 or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client, an initial consultation is complimentary, and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client and your financial plan and investment objectives are different.

1) The Wall Street Journal, March 15, 2024

2, 4) The New York Times, May 10, 2024

3, 5, 7) National Association of Realtors, 2024

6) The Wall Street Journal, June 27, 2024