What’s past is prologue

Several events in 2018 will impact 2019 and beyond. Here are a few that will have a positive effect.

The Federal Reserve Chairman, Jerome Powell, confirmed that there are no plans to end the monthly reductions in the Fed’s bond holdings. The funds the Fed receives for these securities are dollars that the Fed printed in an attempt to accelerate the growth of the economy in the past. By reducing these holdings, two Fed goals are met. First, the inflationary impact of printed money is reduced. Second, the Fed builds its ability to act in a future recession. While there are always individuals opposed to this action, there is a long history of this economic theory — going back to Joseph suggesting saving in good years for the famine in the future. The fear of the Fed’s inability to act is therefore reduced in 2019.

Security research continued to confirm that Quality is indeed a major factor in successful stock investing, especially when combined with Value. This has been a long time coming, because this is not the case with Bonds. AAA bonds are safest but not the highest in risk-adjusted returns. So, it was not much of a leap to assume the same would be true of stocks. More than twenty years ago, Standard & Poor’s (S&P) had a white paper on their website indicating that Quality stocks outperformed the market. S&P also had a Quality rating on a large number of stocks. Quality was in such ill repute that S&P changed the name of the Quality Rating to S&P Stock Rating. At that time there were less than ten, and probably no mutual funds with “quality” in their name. Now there are 124 out of the 29,118 funds — 0.42%.

We have used Quality as a major factor for more than fifty years. In addition to the higher returns this factor leads to, we like not losing capital permanently. We understand that markets fluctuate, and that volatility is a price you pay for outperformance. We also believe that our clientele understands that the high — quality portfolios we recommend will recover after market declines. We have one of the lowest levels of panic selling in the industry. Quality remains long after the declines are forgotten.

The Banks in 2018 had a good year. Not one single bank failed. Strong banks are essential for a strong economy. A positive sign for the future.

The Tax Reform Bill played out as expected. The IRS reported that the government has begun to collect more money than the previous year. WHAT? Yes — greater economic activity, higher salaries, dividends, share buybacks, corporate profits, and funds returned to the U.S. all increased tax receipts. What about the deficit? That was a different spending bill. All of the tax advantages will continue in 2019. The reported earnings of corporations will not get another boost from the tax bill, but the cash will be there for all the above activities.

I know that politics makes the future look gloomy, but I am optimistic. More on that next letter.

A couple housekeeping notes:

1. 2019 IRA contribution limits are up this year: $6,000 if under 50 years old and $7,000 if over 50. We suggest making your contributions earlier in the year.
2. The new Fidelity app is a wonderful tool to add to your phone if you don’t already have it. With it, you can easily deposit checks to your accounts from anywhere.

Katz Family Financial