2018Q1 Quarterly Commentary

April 16, 2018

Quarterly Commentary

Market Recap

Volatility returned emphatically in the first quarter, with the market making some of its biggest moves in months. After going all of 2017 without a move up or down in the S&P 500 of 2%, there were six such moves in the first quarter. To paraphrase Shakespeare, all this sound and fury signified relatively little, with the S&P500 concluding the first quarter down a scant -0.8%.

While there were some worrisome developments in the first quarter — notably white house personnel turmoil, battling tariff announcements, inflationary fears, and the misuse of data at Facebook — the good news is that the US economy does not appear to be near a recession.

On March 28, the US Bureau of Economic Analysis announced that Real gross domestic product (GDP) increased at an annual rate of 2.9% in the fourth quarter of 2017. Furthermore, in the March Manufacturing ISM® Report On Business®, the nation’s supply executives indicated that economic activity in the overall economy grew for the 107th consecutive month.  Unemployment rate remained unchanged at 4.1%.

Table 1

Key Index Returns

S&P 500 (Large) -0.8%
Russell 2000 (Small) -0.1%
EAFE (International) -1.5%
MSCI Emerging Markets 1.4%
Barclays Agg (Taxable) -1.5%
Barclays Muni (Tax-Free) -1.1%
DJ-Real Estate -5.9%
Bloomberg Commodity -0.4%

Coming as they did so late in the economic cycle, the 2017 tax cuts have prompted concerns among some economists that they would fuel inflation. For now, those concerns have been allayed, as the CPI-U increased a modest 0.2% in February; rising 2.25% over the last 12 months.

In view of “realized and expected labor market conditions and inflation”, the Fed raised the target range for the federal funds rate to 1.5% to 1.75% — its sixth since December 2016 and the first under its new chairman, Jerome Powell.

The global economy continued to experience a robust and broadly synchronized expansion, propelled by accommodative monetary policies, tight labor markets and robust global trade. According to the OECD, global growth is “projected to increase from 3.7% in 2017 to around 4% in 2018 and 2019”.


Outside Perspectives

“Recent Market Volatility”

February 2018

Dimensional Fund Advisors

After a period of relative calm in the markets, in recent days the increase in volatility in the stock market has resulted in renewed anxiety for many investors.

From February 1–5, the US market (as measured by the Russell 3000 Index) fell almost 6%, resulting in many investors wondering what the future holds and if they should make changes to their portfolios. While it may be difficult to remain calm during a substantial market decline, it is important to remember that volatility is a normal part of investing. Additionally, for long-term investors, reacting emotionally to volatile markets may be more detrimental to portfolio performance than the drawdown itself.

Intra-Year Declines

Exhibit 1 shows calendar year returns for the US stock market since 1979, as well as the largest intra-year declines that occurred during a given year. During this period, the average intra-year decline was about 14%. About half of the years observed had declines of more than 10%, and around a third had declines of more than 15%. Despite substantial intra-year drops, calendar year returns were positive in 32 years out of the 37 examined. This goes to show just how common market declines are and how difficult it is to say whether a large intra-year decline will result in negative returns over the entire year.

Exhibit 1

US Market Intra-Year Gains and Declines vs. Calendar Year Returns, 1979-2017

In US dollars. US Market is measured by the Russell 3000 Index. Largest Intra-Year Gain refers to the largest market increase from trough to peak during the year. Largest Intra-Year Decline refers to the largest market decrease from peak to trough during the year. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes.


Reacting Impacts Performance

If one was to try and time the market in order to avoid the potential losses associated with periods of increased volatility, would this help or hinder long-term performance? If current market prices aggregate the information and expectations of market participants, stock mispricing cannot be systematically exploited through market timing. In other words, it is unlikely that investors can successfully time the market, and if they do manage it, it may be a result of luck rather than skill. Further complicating the prospect of market timing being additive to portfolio performance is the fact that a substantial proportion of the total return of stocks over long periods comes from just a handful of days. Since investors are unlikely to be able to identify in advance which days will have strong returns and which will not, the prudent course is likely to remain invested during periods of volatility rather than jump in and out of stocks. Otherwise, an investor runs the risk of being on the sidelines on days when returns happen to be strongly positive.

Exhibit 2 helps illustrate this point. It shows the annualized compound return of the S&P 500 Index going back to 1990 and illustrates the impact of missing out on just a few days of strong returns. The bars represent the hypothetical growth of $1,000 over the period and show what happened if you missed the best single day during the period and what happened if you missed a handful of the best single days. The data shows that being on the sidelines for only a few of the best single days in the market would have resulted in substantially lower returns than the total period had to offer.

Exhibit 2

Performance of the S&P 500 Index, 1990-2017

In US dollars. For illustrative purposes. The missed best day(s) examples assume that the hypothetical portfolio fully divested its holdings at the end of the day before the missed best day(s), held cash for the missed best day(s), and reinvested the entire portfolio in the S&P 500 at the end of the missed best day(s). Annualized returns for the missed best day(s) were calculated by substituting actual returns for the missed best day(s) with zero. S&P data © 2018 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. One-Month US T- Bills is the IA SBBI US 30 Day TBill TR USD, provided by Ibbotson Associates via Morningstar Direct. Data is calculated off rounded daily index values.



While market volatility can be nerve-racking for investors, reacting emotionally and changing long-term investment strategies in response to short-term declines could prove more harmful than helpful. By adhering to a well-thought-out investment plan, ideally agreed upon in advance of periods of volatility, investors may be better able to remain calm during periods of short-term uncertainty.

Questions from Clients

I just received the 2018 Notice of Appraised Value on my home and it’s gone way up. How do I protest?

If you want to protest your 2018 property tax bill, you have until May 15th to do so.

Per Texas law, the taxable appraised value (not the market value) for a homestead cannot go up more than 10% in a year. This 10% cap applies to homeowners who own the home on Jan. 1 in the year that the assessment is made. Thus if you purchased your home in Feb. 2017, the 10% cap is applicable starting Jan. 1, 2018.

If you purchased a home within the last 12 months and the purchase price was less than the appraised value, take your bill of sale with you to your protest.

If you have owned your home for more than a year, ask your realtor for comps in your neighborhood and see if you can make a case for a lower value than what the taxing authority assessed.

Modes of Protests

  • File protest by mail or in person (self-prepare)
  • E-File Online (self-prepare and schedule your protest online),
  • Engage a third-party service provider. Such third-party services usually take 40% of any tax savings, but do not charge a fee if there is no change to the assessment.

Filing and Appeals Process

File Notice of Protest online or by mail by May 15th. After filing, you’ll get a letter (first-come, first-served) from the Appraisal Review Board with two schedules: (1) an informal meeting with a ARB staffer (this is where most protests end); and (2) a formal meeting with an ARB  three member panel where the process works more like an informal trial with swearing in of the homeowner, examinations, questions, and closing statements (schedule two weeks after the informal meeting with the staffer).

If you still disagree with your assessed value after going through the above process, there are other options including a binding arbitration as well as filing a lawsuit in state district court. I hope that your protest does not go this far.

Link to the TCAD E-File Notice of Protest: https://www.traviscad.org/eservices/

Tax Season is Upon Us!

A few last-minute things to keep in mind. . .

You can contribute to your IRAs for the 2017 tax year up to the April 17 deadline. Contribution amounts for 2017 are $5,500 with an additional catch up contribution of $1,000 if the taxpayer is over the age of 50. For SEP IRAs, the due date for making a contribution is as late as October 15th, if you file an extension. Maximum SEP contribution amounts are currently $54,000 for the 2017 tax year.

April is also a good time to work on additional planning items including making sure you are not overpaying or underpaying your estimated taxes,  forecasting required minimum distributions (RMDs) for the year if you are over age 70.5, and potentially maxing out your current marginal tax bracket by taking advantage of Roth conversions.

Also, please be aware that 2017 is the last tax year in which advisor fees are deductible on Schedule A. Going forward we will likely be shifting advisory fee payment from taxable to qualified accounts since the tax benefit is going away as well as to reduce transactions in your taxable accounts.

If you have any tax planning questions or issues that arise over the next few weeks, let us know. We are happy to partner with your CPA to help minimize your tax liabilities.

As always, please remember to send us your completed 2017 tax return at your earliest convenience!

At Barnett Financial

Barnett Financial Once Again Tops in Austin!

We’re happy to announce that Barnett Financial has once again been mentioned on a couple “best-of” lists. It was named as:

  • One of the “top Financial Planning Firms” in Austin in the April 6, 2018 issue of the Austin Business Journal.
  • One of the “Top 10 Best Financial Advisors in Austin” by AdvisoryHQ.

We feel privileged to be included on these lists. It’s nice to be noticed. But far more important than any list is the satisfaction we get from serving you and from the referrals we get from you and from professionals around town.

Best Wishes to Jessica!

It’s with sadness that I announce the departure of Jessica from the Barnett Financial team. Jessica has been a key part of our team for over 15 years, and has become well-known in the industry in her own right.

Jessica is moving on from a formal role with Barnett Financial to work on her own business, but will always be a part of the Barnett Financial family. Please join me in wishing Jessica best of luck in her growing business venture.

Please contact Stephanie for all matters that Jessica previously handled.

New Quarterly Reports and Client Portal!

Over the last couple of months we have been busy preparing new quarterly reports and a new document vault. The new quarterly reports are modelled on the old reports; you should notice only some minor differences.

Initially, the document vault will be quite similar to the ModestSpark tool you are used to seeing. However, once we all get more comfortable with it, we will launch some dynamic online reporting capabilities that we think you will find interesting. If you are interested in being a “beta tester”, please let us know. We’d be glad to turn it on for you.

The new reports are launching this month for those of you in this billing cycle. The rest of you will receive your new reports in coming months.

The client portal will launch on Wednesday, April 18. On that date, we will send an email from “noreply@barnettfinancial.com” with your login credentials. We will separately send instructions on how to login and upload documents.

We’re excited to share these new items with you and hope you’ll find them useful.

If any issues arise as you use the new document vault, contact Chris.