1st Quarter Ends With Markets Mostly Higher

We experienced an unprecedented level of volatility in the first month and a half of 2016.  In the first week alone, both the Dow and the S&P 500 fell nearly 6%.  The downward spiral continued with the lowest point coming on February 11th, when the S&P was down 11.44% for the year and 12.6% from its high in December.  Historically, 2016 was the worst start for the stock market in history.  Reading the headlines or watching TV in late January and early February was difficult as we encountered headlines like “Is this the Start of a Bear Market?”, “Markets In Freefall”, and “Stock Market Crash 2016”.  Concerns on falling oil prices were mostly to blame, though fears of slowing economic growth in China and around the globe also were contributing factors. 

But when looking at the fundamental data, we see companies continuing to grow their earnings and hire workers.  As of yesterday at quarter close, the S&P 500 was actually up 0.77% for the year.  The MSCI Emerging Markets Index, which includes China, is up 5.37% year-to-date.   The chart below (from February) demonstrates the types of headlines we see and also shows the “randomness” in short-term market returns.

While it is painful to sit through these types of markets, selling based on fear during these times is typically one of the worst mistakes an investor can make, as it is often done out of emotion rather than examining the underlying fundamentals.  An investor who sold at the low would have realized that 11.44% loss but also missed the entire upside as well.  While some rebalancing can be done during these times to take advantage of a few mis-pricings, trying to time the perfect entry/exit points are nearly impossible.  To be a successful, long-term investors must understand that markets will experience this type of volatility from time to time and the best course of action is to stay committed to your plan.


March Payroll Numbers:

Job growth in the U.S. maintained its momentum in March as the total nonfarm payroll numbers rose by 215,000 for the month.  As a reminder, economists consider an increase over 200,000 to be a sign of a healthy job market.   The unemployment rate actually ticked up to 5.0% from a previous reporting of 4.9% in February.  This uptick is a positive sign that more people are now actively looking for jobs, which indicates more people are confident that they can find a job.

Over the past few years we have discussed the downward trend in the labor force participation rate, but over the past few months we are starting to see a reversal in this trend.   In March, the participation rate was 63%, which is up from the low of 62.4% in September 2015.  However, this number is still considerably lower when compared to the last two decades.  Some economists and politicians argue that the decrease in the participation rate can be attributed to demographics and the aging baby boomer population.  While we do believe that demographics have played a small role in the overall decrease, we also maintain that this was more of a systemic problem that occurred after the 2008 financial market crash.

Average hourly earnings for all employees increased by 7 cents to $25.43, following a 2 cent decline in February.  Over the year, average hourly earnings have risen by 2.3%.  There has not been much wage pressure over the past decade and this has been a key contributor to very low levels of inflation during that same period .  The increase in wages is also a positive sign that the U.S. economy is on solid footing.

Although this was a slightly better than expected jobs report, we do not expect the Federal Reserve to reverse their current course of action and we expect them to remain data dependent as they consider the timing of the next rate hike.   The current consensus estimate remains for 2 hikes in 2016, with the first hike taking place in June.


Required Minimum Distribution Deadline:

April 1st is the deadline for those who turned 70 ½ during 2015 to withdraw their first required minimum distribution (RMD) from their qualified retirement plan accounts.   Annual distributions are required from these accounts once the account owner turns 70 ½.  However, the account owner has until April 1st of the following year to take their first distribution.   Each RMD thereafter is due to be taken by December 31st of each year.  For instance, an IRA account owner who turns 70 ½ during 2016 can delay their first RMD until April 1st, 2017, but will then have to take their 2017 RMD by December 31st, 2017.  The penalty for failure to take an RMD is 50% of the portion of the RMD not taken.

RMD rules apply to all types of IRAs (except for Roth IRAs), but rules for defined contribution plans (e.g. 401(k), 403(b)) can vary for those who turn 70 ½ and are still working.  If their plan permits, an individual that turns 70 ½ and is still working does not have to start RMDs from their defined contribution plan until they retire.

The calculation for determining the amount of RMDs is based on the balance of the IRA account at December 31st of the previous year, divided by a life expectancy factor provided by the IRS.  The RMD is then recalculated every year thereafter based on the new year-end balance of the account divided by the updated life expectancy factor for the owner’s age.  For those with a spouse that is at least 10 years younger, a Joint Life and Survivor expectancy table can be used to calculate the annual RMD.

Part of the President’s newest budget plan calls for updates to certain tax rules including changes to inherited IRA distributions.  Under the proposal, these accounts would be required to be totally distributed within five years, compared to the current rule which allows distributions to be made over the beneficiaries’ life expectancy.  We will continue to monitor this and other items in the proposal.


IRA Contribution Deadline Approaching:

Taxpayers have until April18th, 2016 to make 2015 tax year contributions to IRA accounts including traditional, Roth, and SEP IRAs.  Individuals that are filing an extension can contribute to SEP-IRAs for the 2015 tax year as late as October 15th.  Qualifying taxpayers are allowed to make contributions to traditional and Roth IRA accounts up to $5,500 and those over the age of 50 are allowed a catch-up contribution of $1,000 for a total of $6,500.


Extension Available for Missouri Flood Victims:

Missouri flood victims have until May 16th to file their federal and Missouri tax returns.  The extension beyond regular due dates also applies to any taxes due as well as quarterly estimated payments.  Qualifying taxpayers need to indicate their eligibility on their returns by including “Missouri flooding” at top of their tax forms.   Indication of eligibility for this can be included on returns that are submitted electronically.  Individuals with businesses in or who reside in one of the 33 counties affected by the floods may qualify for this tax relief.


This publication is provided as a service to our clients and associates of PFA solely for their own use and information.  The material is derived from sources believed to be reliable but its accuracy and the opinions based thereon are not guaranteed and have not been verified.  The content in this publication is for general information only and not intended to serve as individual investment advice.  You should seek independent advice from a professional based on your individual circumstances.