The first three months of 2018 were very entertaining if you like market volatility and drama. January started the year off strong as we saw equity market gains across the board. February and March were both negative months with markets experiencing greatly increased volatility, including two trading days in which the Dow Industrials lost over one thousand points. Higher interest rates and increased fears of inflation caused the bond market to also drop during the first quarter. This was one of those quarters where gains were hard to come by regardless of how you were invested.
The current bull market began nine years ago during the Great Recession of 2008-2009. During this nine-year run, the equity market has had a few corrections, defined by a 10% drop. In February the market dropped 10% from its January highs, rallied, and then fell to the 10% level once again. In times like these the question is always, “Is this a temporary pull back and thus a buying opportunity?” or “Is this the early stages of a deeper sell off and thus a chance to sell?” We believe the answer depends on your time horizon. The stock market is highly priced right now and a deeper sell off would not be surprising. However, we also feel that we remain in the midst of a longer-term secular bull market that has more time to run.
From an economic viewpoint conditions in the U.S. continue to look great. Corporate earnings are forecast to have double digit increases over last year, helped by large corporate tax cuts. New jobs growth continues its nine-year upward trend and the unemployment rate is roughly 4%. Two things concern us on the economic front: rising interest rates and inflation; and the recent increase in trade protectionism. Both issues have the ability to derail the current economic expansion and bring the markets down to lower levels.
The new tax law that went into effect at the beginning of the year included increases in the estate tax exemption and the annual gift tax exclusion. The Federal estate tax exemption is now $11.2 million for individuals and $22.4 million for married couples. Because of this very few people will need to worry about paying Federal estate taxes. The annual gift tax exemption, or the amount each person can gift without using any of their gift tax exemption amount, is now $15,000.
We have taken steps to reduce the risk of market pullbacks in our portfolios. We do not know where the markets are headed in the short term, but we feel very comfortable holding stocks for the longer term and will increase our stock holdings should the market get back to more reasonable valuations. Please feel free to contact us if you would like to discuss our thoughts in more detail.