Thank you to everyone that was able to make it to the 6th Annual Cody’s Dash for Down Syndrome.

Help us support the 6th Annual Cody’s Dash for Down Syndrome.

Where: Ten Thousand Villages on Selby Avenue.

When: Friday, April 21st from 5:00 – 8:00 PM.

10 – 20% of sales go to support Cody’s Dash!

More information here.

Presented by Mark Gallagher

With the recent market declines both abroad and here in the U.S., there is increasing fear that this is it—the big one that will take us back to the depths of 2008. Although that level of fear is certainly understandable, a closer look at the real economic and market situation around the world suggests that the volatility we are now seeing—and that we may well continue to see—is perfectly normal. Indeed, this kind of volatility is why stocks can, over time, yield the returns they do. Which means that these periodic declines are not only normal, but necessary.

This, however, does not really answer the question. How normal is this current decline—and how would we know if we are headed back to 2008? Is there a way to tell?

How normal is this decline?
Let’s start with the easy question first. Right now, we are down about 9 percent from the market peak. Since 1980, declines during a calendar year have ranged between 2 percent and 49 percent, with the average decline at just over 14 percent. So, the market could drop another 5 percent, and we’d still only be at the average decline for a typical year.

Another way to look at this is to see how often a decline of any given size occurs. Markets experience a 10-percent decline every year, on average, and this is only the second we’ve seen in the past three years. In that sense, we are overdue, but how much worse can this get?

How can we tell if we’re headed for another 2008?
There are no guarantees, of course, but if we look at past bear markets (defined as declines of 20 percent or more), we can make some observations.

First, of 10 such events since 1929, 80 percent of them happened during a recession. The U.S. economy, despite some slowing trends, continues to grow; we are not in a recession. A growing economy tends to support market values and limit declines.

Second, 40 percent of past bear markets came during times of rapidly rising commodity prices—the 1973 oil embargo, for example. Rising prices tend to choke off economic activity and slam profit margins. Now, of course, we have low and dropping commodity prices, which encourage economic growth and help profit margins, at least here in the U.S. This is, overall, the opposite of a problem.

Third, during 40 percent of past bear markets, the Federal Reserve (Fed) aggressively raised interest rates. With rates still one step from zero—and likely to stay very low for some time—we again have the opposite conditions from those that fuel a bear market. The Fed continues to add stimulus to the economy, which has supported the market so far, and will continue to do so. Rather than being part of the problem, this Fed is determined to remain part of the solution.

Finally, half of the bear markets were born when market values were extreme. Current valuations are high, but they are nowhere near previous peaks. In fact, although an adjustment to lower valuations is painful, as we are seeing, it also means the risk of a further drop dissipates, which takes us back to the fact that periodic drawdowns are not only necessary, but healthy.

Almost all bear markets have more than one of these traits; right now, we have (at most) one and really more like one-half of one. In fact, for two of these traits, we actually have the opposite of a problem. This doesn’t mean that we won’t see further declines, but it does suggest that they are less likely—and would probably be short-lived.

We can also look at recent history to see how much more trouble we might see if the situation does worsen. In 2011, when Greece almost declared bankruptcy and broke up the European Union, for example, we saw a pullback of 19 percent, which almost met the standards of a bear market. In 1998, during the Asian financial crisis, we also saw a pullback of 19 percent. Despite the headlines, our current international economic situation is nowhere near as bad of either of those years. And even with those declines, the annual return for each year wasn’t disastrous: in 2011, the market ended flat, and in 1998, it actually gained 27 percent.

So, what can we expect in 2016?
It does not seem likely that we will see that kind of gain in 2016, but it also does not seem likely that we will see a massive and sustained decline that takes us back to 2008. Worst case, if the Chinese situation gets as bad as the Asian financial crisis, or the Greek crisis, we could see additional damage, but we probably won’t see anything worse than what occurred during those pullbacks.

With a growing economy, with strong employment and spending growth, and with low oil prices and interest rates, the U.S. is well positioned to ride out any storms. More so, in fact, than we were in 2011. As the island of stability in the world, we are also very attractive to foreign investors—as we can see by the strength of the dollar.

By understanding the history and economic context of today’s turmoil, it is clear that although markets may get worse in the short term, the foundations remain solid, which should lessen the effect and duration of any further damage. Yes, the headlines are very scary, but things actually aren’t that bad. So, we will be postponing the end of the world . . . again.

Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. All indices are unmanaged, and investors cannot invest directly in an index. Unlike investments, indices do not incur management fees, charges, or expenses. Past performance is no guarantee of future results.
Mark Gallagher is a financial advisor located at Gallagher Financial Services at 2586 East 7th Ave North Saint Paul, MN 55109. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 651-774-8759 or at mark@markgallagher.com.
Authored by Brad McMillan, CFA®, CAIA, MAI, chief investment officer at Commonwealth Financial Network.

© 2016 Commonwealth Financial Network®

As you may know, on Friday, December 18, 2015, President Obama signed into law the Consolidated Appropriations Act of 2016, which contains the Protecting Americans from Tax Hikes (PATH) Act of 2015. This act makes permanent several key tax provisions that had previously expired or were set to expire within the next two years. Each of these provisions was made retroactive to the beginning of 2015.

Qualified Charitable Distributions

The Qualified Charitable Distributions (QCD) provision permits taxpayers who are at least age 70½ to make tax-free distributions directly from an IRA or a Roth IRA to a qualified charity.

The donation is limited to $100,000 per person (married taxpayers filing jointly may exclude up to $100,000 donated from each spouse’s own IRA) and partially or fully satisfies the taxpayer’s required minimum distribution for the current tax year.

A few additional notes:

The withdrawal is a tax-free distribution; thus, the amount excluded from gross income is not tax-deductible. The benefit is available to taxpayers who do not itemize deductions and, therefore, would not otherwise be able to take a deduction. For taxpayers who do itemize, the rollover will be excluded from the calculation of their adjusted gross income (AGI).
Donations from an inherited IRA are eligible if the beneficiary is at least age 70½.
Donations from a SEP-IRA or SIMPLE IRA are not eligible.
The charitable recipient must be a 501(c)(3) charity. Nonoperating private foundations, supporting organizations, and donor-advised funds do not qualify.

These provisions will apply retroactively to QCDs made from January 1, 2015, going forward.

State and local sales tax deduction

Under PATH, taxpayers are now permitted to deduct sales tax payments instead of state and local income taxes on their federal returns. This is particularly important for individuals living in states without an income tax, such as Florida, Texas, and Washington.

Qualifying child tax credit

PATH has permanently set the refundable portion of the $1,000 per qualifying child tax credit at 15 percent of earned income in excess of $3,000.

Earned Income Tax Credit

The increased Earned Income Tax Credit for families with three or more children has been made permanent, as has the reduction in the marriage penalty.

American Opportunity Tax Credit

The American Opportunity Tax Credit, which was slated to expire in 2017, has also been made permanent. This provision allows a credit of up to $2,500 to offset the cost of postsecondary education for some taxpayers.

529 account distributions

PATH expands the definition of qualified higher education expenses (QHEE) to include computer equipment and technology, as well as related software, Internet access, and services for beneficiaries during enrollment years. In addition, refunds of tuition paid with 529 distributions are considered QHEE and can be rolled back into a 529 account within 60 days of the refund. This provision is effective for distributions or refunds made in 2015. Also, for refunds made in 2014, the provision will be effective for refunds recontributed to a 529 within 60 days of enactment.

Rollovers to SIMPLE IRAs

Taxpayers will now be permitted to roll assets from traditional and SEP-IRAs, as well as from employer-sponsored retirement plans such as a 401(k), into a SIMPLE IRA, provided that the plan has existed for at least two years. Rollovers from Roth IRAs will not be permitted. This provision will be effective for rollover contributions made after enactment.

We are continuing to monitor these changes closely and are ready to discuss your tax planning strategy with you in light of this legislation. If you have any questions or concerns about the information shared here, please feel free to call our office at 651-774-8759