What’s On Our Minds:

At Tufton, we are value investors. We seek to purchase securities trading at significant discounts to our internal assessment of their values.  Our value philosophy is based on the principles of Benjamin Graham.

If anyone could be considered the father of modern stock analysis, it would be Ben Graham. During the ‘30s, ‘40s and ‘50s, Graham pioneered the ideas of “value investing” and taught the next generation of investors to see the difference between stock evaluation and market speculation.

Graham is possibly the most academic-minded investor of all time. He not only took a purely mathematical approach to investing but also used his knowledge to improve his principals and formulas to educate future investors.  The heart of Graham’s strategy was value. He did not purchase shares assuming a company would have success with a new product or venture. Instead, he found companies that already had solid book values but were selling for below their logical price. He spurned the idea of buying trendy or on-the-rise stocks and believed most investors were just speculators.

Graham’s principles would have no credibility if they had not proved so effective. His concept of a close analysis of a company’s books proved to be extremely useful in an age when few others were doing the same. On one occasion, Graham’s analysis found that the Northern Pipeline Company was trading for $65 a share when it had bond assets worth $95 a share. He purchased a large number of shares and convinced the company to sell the assets, resulting in a $70 dividend. Graham walked away with a huge profit, simply because he was willing to look at the fundamentals of a company.

Graham’s lessons are still a foundational part of modern investing, but his teaching career is possibly best known for the students it produced. Warren Buffett, Walter Schloss and David Dodd are among the most famous students Graham taught at Columbia. Their successes have inspired a new generation of investors and have created a continual public interest in Graham’s theories.

These days, the epitome of Graham’s teachings lives on in his two popular books Security Analysis (1932) and The Intelligent Investor (1949), both of which are still in print to this day.

Last Week’s Highlights:

Major market indexes were up about 1% last week. The Dow Jones and the S&P 500 closed at a record high on Friday. The market rallied toward the end of the week after President Trump said he would announce his “phenomenal” tax plan in coming weeks.  His plan is expected to include a massive cut in corporate tax rates.  Based on last week’s move, it’s clear that investors are optimistic that a reformed tax code will benefit U.S. companies.

On the economic front, the cost of imported goods increased by 0.4% last month, mostly because of rising oil prices.

Despite a court’s decision last week that upheld Obama’s fiduciary rule, the Trump administration is working on a proposal to delay the April 10^th implementation.  A Texas court upheld the rule and rejected a lawsuit filed by business groups that challenged the new regulation. The court ruling could make it tough for Trump to make substantive changes to the new rule in the future.

Looking Ahead:

Federal Reserve Chair Janet Yellen is giving her semiannual testimony on the economy and monetary policy before a Senate committee on Tuesday.  Most are expecting her to stick to the message of three interest rate hikes this year.

Earnings season continues this week. Teva Paramedicals reports earnings on Monday.  On Tuesday, Noble Energy, Vornado Realty Trust, and Discovery Communications post their results. Wednesday we will hear from Pepsico. On Thursday, we get results from Avon Products and TripAdvisor.  We will finish the week on Friday with reports from Campbell Soup and V.F. Corp.

What’s On Our Minds:

What’s on our minds is the same thing that’s been on everyone’s minds lately: the Trump Presidency. We are going to take off our political hats for a moment and put on the economist’s cap. What effects will the Trump White House have on the economy?

(image source:  k schirmann getty images/cnn money & Gwen Sung getty image/cnn money)

The Good

There are promises for many kinds of stimulus that would help the economy grow. A “Highway Bill” or other fiscal stimulus would work differently than monetary stimulus by actually spending real dollars and putting people to work, rather than adjusting federal interest rates, etc., to influence how financial institutions borrow and lend money.

However, the difficulties that the Republican Congress has had in repealing Obamacare something that was supposed to be priority #1, may forebode a long road to serious fiscal action.

Likewise, sensible tax code reform and reduction in financial and other regulation could boost business, but getting there may be more difficult than some had imagined.

The Bad

The “Trump Effect,” whereby a presidential tweet can make or break a company, a treaty, or a trade deal, seems to have had some destabilizing effect. It would be best if the president could tone down the speed and content of his tweets.

Tariffs, too, while good for headlines, are almost universally scorned by economists. They result in a net loss for a country in financial terms. While American businesses may gain on an individual level, American consumers pay the price.

Finally, the tax code overhaul could have “debt spiral” consequences if it is overzealously applied. The results of tax reform are often complicated, and it may be unwise to push a large reform through quickly.

The Uncertain

In geopolitics there is a huge question mark. What will the country’s relationship be with Russia? Are Trump and Putin secret friend, secret enemies, or neither? Will we let Russia’s influence continue to grow in the former USSR and China to become a major world power? Or are we going to reassert ourselves as the global leader both in finance and the military?

In healthcare, Obamacare seems to be on the way out. What will replace it? Trump has said we are going to “take care of everyone,” but what does that mean? Importantly, insurance companies might be in the crosshairs, no matter which way this goes.

And what about that wall? Limiting immigration is certainly bad for the economy as a whole. Will we decide that the security gains are real and worth that sacrifice? What would the effect be on our major trading partners?

Tufton is watching all of these topics carefully. Our long term views on the stock market did not (and likely will not) change, but we continue to be vigilant in guiding our clients’ investments around any stumbling blocks.

Last Week’s Highlights:

Equity indexes finished the week close to where they began.  Markets sold off early in the week but rallied by almost 1% on Friday after a strong jobs report and news that President Trump signed an executive order aimed at rolling back financial regulations.  The market rally was led by Financial stocks.

The US Federal Reserve left interest rates unchanged at its first meeting of 2017.  The fed’s Open Market Committee noted improved consumer and consumer confidence.  Currently, market participants are expecting two, twenty-five basis point increases on interest rates this year.

So far this earnings season, 65% of S&P 500 companies beat mean earnings per share estimates and 52% have turned in better than expected sales figures.

Looking Ahead:

4^th quarter earnings season continues this week with 84 of the S&P 500’s companies are scheduled to report earnings.  Sysco reports on Monday. General Motors and BP report on Tuesday. Exelon and Allergan report on Wednesday. Thursday we will hear from Twitter and Coca-Cola and on Friday we will hear from EMC.

Lately, it appears investors are taking their cues from President Trump as everyone is focused on what his policies mean for the economy and individual companies.  We expect that to continue this week.

What’s On Our Minds:

As education costs continue to rise year after year, the expenses have become an even larger component of a family budget.  According to CollegeBoard.org, four years at a private nonprofit college, including tuition, fees, and room and board costs roughly $175,000 and a public four-year in state college, while less expensive, costs close to $80,000.  One of the best options for families is to save for future education costs by opening 529 plans for their children.

Anyone can open a 529 plan and may list anybody of their choice as the plan’s beneficiary. Also, the plan’s owner can change the beneficiary at any time. For Maryland residents, contributions to the account are tax deductible against your state income tax.

While the state income tax deduction is a good benefit, the real power behind a 529 comes from the tax-deferred growth and tax-free withdraws the the plan allows.  Distributions from the account are tax free so long as the funds go towards education expenses such as tuition, room and board, fees, books, or the purchase of necessary computer technology.  With a long term investment horizon these accounts can grow into considerable assets.  There will be added peace of mind knowing you don’t have to dip into your own personal savings to pay for college and your child or grandchild won’t be burdened by student loans when they graduate.

Tax issues around 529 plans get a bit complicated in that they count as a present interest taxable gift to the beneficiary of the account.  Because contributions technically qualify as gifts, limit your contributions to $14,000 per person to avoid paying federal gift taxes.  When saving for education costs it’s important to remember, the earlier the better!

Last Week’s Highlights:

Last Wednesday, for the first time in history, the Dow Jones Industrial broke through 20,000.  The new high water mark was celebrated on Wall Street.  The S&P 500 and the Nasdaq also closed at record highs on Wednesday.   In general, investor sentiment was up last week and it seemed that many were optimistic that Trump’s economic policies will initiate a growth period.  Since the election, the S&P 500 has risen 7.2%.

Some merger news broke last week. Verizon is considering a merger with Charter Communications and Johnson & Johnson agreed to purchase the biotech firm, Artelion.

In economic news, it was reported that fourth quarter U.S. GDP increased by 1.9%.

Looking Ahead:

The Trump Rally has stumbled a bit going into this week after the President issued an executive order last Friday barring immigrants from seven Muslim-majority countries from entering the US.  The Dow opened below 20,000 on Monday morning.

Earnings season continues this week with Apple, Exxon, and UPS reporting on Tuesday. On Wednesday, the FOMC releases a policy statement on interest rates. Investors are not expecting the Fed to increase rates.  On Thursday, Donald Trump is planning on announcing his Supreme Court nominee and International Paper and Merck release their quarterly results. On Friday, we close out the week with Hershey reporting earnings.

What’s On Our Minds:

Acquisitions in the oil patch are finally back in style. Over the past few weeks, several multi-billion dollar acquisitions have occurred, particularly in the Permian Basin of West Texas. The Permian Basin has been established as the most prolific shale patch in the United States, possibly the world. Given this status, it should be to no one’s surprise that last week, energy bellwether ExxonMobil announced a $6.6 billion acquisition of Permian assets, their largest deal since the acquisition of XTO Energy in 2010. The company will net approximately 250,000 acres, paying roughly $27,000 per acre. On other metrics, Exxon paid $35,000 for each flowing barrel of oil per day – both attractive valuation multiples compared to other transactions in the oil patch.
In another transaction, Noble Energy agreed to purchase Clayton Williams Energy, another Permian based company, for $3.2 billion. The announced price values the assets at approximately $32,000 per acre, slightly higher than Exxon’s purchase price. It’s hard to believe that five years ago, the average price per acre in the same area was just roughly $4,500 when oil was trading in the range of $80 and $120 per barrel. This goes to show the profitability and efficiency of drilling in the shale patches.
All of these transactions come at an interesting time – most analysts expected distressed companies to sell themselves or their assets around the time oil bottomed at $26 per barrel nearly a year ago and the rig count bottomed last May. However, due to the efficiency of shale production (and cheap credit), the drillers prevailed. With interest rates on the rise and the price of oil somewhat range bound, time will tell which companies continue to survive.

Last Week’s Highlights:

Last week, the Dow Jones Industrial Average fell 0.29%, the S&P 500 fell 0.15% while the Nasdaq slipped 0.34%. After beating the S&P 500 in 2016, the Dow is now barely positive on the year (up 0.33%), the S&P 500 is up 1.45% and the Nasdaq is leading the three major indexes, up 3.2%. Investors were focused on President Trump’s inauguration speech as well as rhetoric surrounding his changes to public policy.
Earnings season continued with most companies in the Financial sector reporting fourth quarter results. So far, 13% of S&P 500 companies have reported and 65% have had positive surprises relative to their earnings estimates.

Looking Ahead:

This week, investors will continue to focus on President Trump and his policy initiatives. Earnings from several Dow Jones components will be released on Tuesday. Dupont, 3M, Johnson & Johnson, Travelers, and Verizon will all report before the opening bell. On Wednesday, AT&T and United Technologies will provide investors with their fourth quarter results. Thursday will give investors further insight into the oil patch as Helmerich & Payne and Baker Hughes both report. On Friday, the markets will be focused on the first read of fourth quarter GDP growth.

What’s On Our Minds:

The investment professionals at Tufton Capital believe that a long-term, buy and hold investment strategy is the to safest, and smartest, way to build wealth in the stock market.  Quite simply, it’s been proven time and time again to return exponential gains on invested capital.

Cultivating Your Portfolio

The term “buy and hold” doesn’t mean investing and forgetting about your portfolio for the next 20 years. There are ways to cultivate and prune your portfolio while still maintaining a long-haul investing strategy. For instance, if a company you invest in changes fundamentally, you may not want to continue owning that security. If the overall market changes dramatically, as it has in the past, you may actually benefit from selling an investment or group of investments. Finally, changing goals as you get closer to retirement may warrant a more conservative portfolio.

Bad Markets

The typical investor is tempted to get out of a bad market by selling when prices are low, which is a poor strategy. The economy fluctuates between good and bad all the time, and those who constantly buy and sell will be hit the hardest in a bad economy. By holding on to your investments, you’ll be better able to ride out a down market, especially if your portfolio is diversified.

Taxes and Fees

Frequent trading results in higher fees, so long haul-investors pay less while fees eat up much of a day trader’s profits. Additionally, short-term gains are taxed at a higher rate than long-term gains. Even if you have the fortune of timing the market successfully, your profits will be diminished by taxes and fees.

Investing for the long-haul is the best investing strategy for the majority of investors because it not only ensures modest gains but is also less likely to yield major losses. A long-haul investment strategy is based on informed, careful decision making and patience.

Last Week’s Highlights:

Investors were focused on the beginning of fourth quarter earnings season and political headlines last week.  Stocks were slightly lower.  After getting close earlier this month, the Dow Jones just can’t seem to crack the 20,000 point threshold.

President-elect Donald Trump held his first press conference in more than five months on Wednesday. Investors were looking for him to cover taxes, fiscal policy, or infrastructure spending but he didn’t elaborate on those topics.

Looking Ahead:

The market was closed on Monday for Martin Luther King Day.

Some important earnings announcements will be coming out this week including CSX on Tuesday, Netflix on Wednesday, and General Electric on Friday.

On Friday, Donald Trump will be sworn in as President. Investors are expecting a shift towards pro-growth policies that should result in better economic and earnings growth.  Trump’s economic plans are broad and he hasn’t gone into specifics but he will likely focus on corporate tax cuts, repatriation of foreign cash, a fiscal push towards infrastructure spending, and perhaps some protectionist tariffs.  We will have to wait and see if Washington can keep the bull market going in 2017.

What’s On Our Minds:

Often, members of Tufton’s Investment Committee are asked why our firm doesn’t use mutual funds in our clients’ accounts.  While mutual funds may offer the benefit of diversification to small investors, our team doesn’t believe they are the best answer for clients with sizable assets. Sure, we could easily free up some time by directing assets to outside managers but we believe that mutual funds have a few key drawbacks.

First, they limit an advisor’s ability to customize a portfolio and manage risk effectively. Second, they add an additional layer of fees, which reduces an investor’s returns. Third, they are inefficient for investors who want to manage their tax bills.

We also believe the limited transparency of mutual funds is problematic. Most investors don’t know what stocks they are holding in the fund, and some funds disclose their holdings only semi-annually. An investor may have 50 stocks or more in a single fund. Imagine tracking your portfolio if you own five or ten stock funds – that can add up to 500 or more stocks in your portfolio.  Why not just buy an index fund for a fraction of the price? Diversification is a good thing, but not so for over-diversification.

Fortunately, our clients enjoy a customized approach to managing their money. We invest in a diversified portfolio of individual stocks and bonds to meet your goals.

If you would like to hear more about our investment philosophy, please feel free to give one our portfolio managers a call.

Last Week’s Highlights:

Stocks increased last week. The S&P 500 was up 1.7% and closed at an all time high on Friday. The Dow Jones also had a good week and came very close to hitting 20,000 for the first time in history.  The December jobs report was solid. It showed the economy added 156,000 jobs and that hourly earnings rose by 2.9% through 2016. These results are in line with the Federal Reserve’s plan to increase rates two or three times in 2017.

The department store sector took it on the chin last week after Kohl’s and Macy’s reported downbeat holiday sales reports.  With the advent of online shopping, brick and mortar stores are struggling.

Looking Ahead:

Analysts are gearing up for 4^th quarter earnings season with Alcoa reporting after the closing bell on Monday.  Delta Airlines reports its results on Thursday before the bell and Friday we will get results from Bank of America, Wells Fargo, and JPMorgan.

As of Monday morning, some merger news has come to light. Japanese drug maker Takeda Pharmaceiticals announced it is purchasing cancer treatment company Ariad for $5.2 billion. Ariad’s shares were up 75% on the news. M&M candy maker, Mars announced it is acquiring veterinary supply company VCA (WOOF) for $7.7 billion.  Mars already has a large pet food business and VCA should help the business with future growth.  On Monday, WOOF was up 27% in pre-market trading.

What’s On Our Minds:

It’s official: the bull market continued in 2016!  While investing with a “rear-view mirror” mindset is rarely a lucrative strategy, with the benefit of hindsight, a quick look back at 2016 helps set the stage for the year ahead.

A main take away from 2016 is that sticking to a disciplined investment process was extremely important.  With a bull market that may have felt a bit long in the tooth, it was crucial to remain invested.  Markets had a horrendous start to the year; stocks fell by 11% between Jan. 1 and Feb. 10^th.  At the time, many thought the U.S. economy may have been headed for a recession.  With all the pessimism, it may have felt like a good time to take money off the table. However, this was a great time to get out your shopping list; stocks were on sale!

In June, the market sold off by 6% when panic was induced following Britain’s Brexit referendum.  Yet again, gloom had taken over on Wall Street. The market didn’t stay down for long though.  Stocks recovered the 6% over the next two weeks. In the rear-view mirror, the Brexit episode was yet another great buying opportunity. Over the summer, things calmed down as investors waited to see how the election would pan out.

Not many were expecting the Trump win in November, and stock market futures were down big overnight on news that he was going to win.  Clearly, the market had priced in a Clinton win.  To the surprise of many, by the time the opening bell rang the next morning, markets actually opened in the green.  It is likely that most investors will remember this surprise election result as the highlight of the year as it showed how uncertainty can effect investor sentiment.  The market continued its “Trump Rally” through the end of the year with hopes that Donald Trump will cut taxes, decrease regulations, and pass some sort of infrastructure spending program.

By the end of the year, the S&P 500 was up 9.54% and the Dow Jones was up 13.42%.  Looking back, it wasn’t a bad year.

Last Week’s Highlights:

It was a quiet week on Wall Street last week as the Trump Rally lost a bit of its steam during the abbreviated week of trading.  The S&P 500 lost just over 1% on light volume.  We hope all of our clients and friends had a wonderful holiday season!

Looking Ahead:

Markets were closed on Monday for the New Year’s holiday.  On Tuesday, Congress heads back to work and the ISM manufacturing index for December will be reported. On Wednesday, Ford Motors reports its sales from December and the Fed will release minutes from its December meeting.  Thursday, we will see earnings results from Walgreens and Monsanto. On Friday, November’s import/export numbers will be released by the Commerce Department.

What’s On Our Minds:

With the end of the year quickly approaching, most folks are enjoying the holidays but some might be a bit worried about their tax situation for 2016.

Taxes are an inevitable part of investing. The tax code complicates investment planning, and the impact of taxes has been steadily increasing as investment planning becomes more individualized.  With careful planning, you can minimize the effect that taxes have on your investments. Your focus should be on the return generated at the end of your investing time horizon—after tax and transaction returns—making taxes an important concern for all investors.

Types of Taxes

A seemingly endless list of potential taxes could affect your investments, portfolio and net worth. Some of the more critical ones are as follows:

• Interest: Interest you earn on investments (typically from bonds and large cash holdings) is subject to tax rates that are the same as your ordinary income tax rate.
• Dividends: You’ll have to pay taxes on dividends that come from stock you own, but dividends are taxed with preferential treatment in comparison to ordinary income and interest income. To receive this treatment, the dividend must meet several requirements to be considered a qualified dividend.
• Capital Gains: When the value of your investments in stocks, bonds and other assets increases from the purchase price and you sell it for a profit, you’ll trigger a capital gains tax. Similar to dividends, long-term capital gains are taxed at lower rates than ordinary income.
• Estate Tax:  For investors with significant holdings, estate taxes can have a substantial effect on the total value they can pass on to heirs or charity. Planning for estate taxes is especially important, and there are many strategies to maximize the value of portfolio holdings.

Tax-advantaged Accounts

• Retirement Accounts: One of the most prominent ways to take advantage of tax-friendly regulations is to create retirement accounts. These accounts include 401(k)s or 403(b)s (depending on type of employer), Individual Retirement Accounts (IRAs) and Keogh plans. All of these accounts qualify for preferential tax treatment and therefore are often referred to as qualified accounts. The benefits of deferring taxes can dramatically compound over time. For example, $1,000 invested in an IRA at a tax-deferred rate of 8 percent grows to $10,063 over 30 years. In a taxable account (assuming 28 percent tax rate), the funds would grow to only $5,366.  Roth and traditional IRAs are both effective ways to save for retirement. With a Roth IRA, you contribute money that has already been taxed in exchange for the ability to make tax-free withdrawals upon retirement. In a traditional IRA, your contributions are pre-tax, but you pay taxes on distributions later on. But how do you choose between the two? Your choice depends on how you think your future tax rate compares to your current tax rate. If you assume your individual tax rate is not going to change between now and retirement, then the net result will be the same regardless of which type of IRA you choose. When looking at changing tax rates, it is most important to focus on both the changing landscape of tax rates as a whole, as well as how changes in your income will affect which tax bracket you fall under. Generally, as people age they earn more money and enter higher tax brackets. In this case, and assuming no change in the overall level of taxes, it would be more beneficial to pay the taxes now, at a lower rate. However, if you believe that your tax rate will decrease, then traditional IRAs will be more beneficial.

Tax-advantaged Investments

• Municipal Bonds: In addition to tax-advantaged accounts, you can also choose tax friendly investments. For instance, municipal bonds are an ideal way to invest in fixed income while limiting the effect of taxes. Municipal bonds are any bonds issued by a U.S. city or other local government. The interest received by bondholders is generally exempt from the federal income tax and from income tax in the state in which they are issued. On the other hand, municipal bonds are usually priced higher to account for these tax effects. However, the tax exemption on interest income will be more beneficial for individuals with significant income. Therefore, investing in municipal bonds may minimize the tax effect on investments for individuals in higher tax brackets.

In addition to taxes, you should also be aware of the effects of transaction costs and fees on your investments’ growth. Tax-advantaged accounts help to alleviate these costs as well, making them practical for investors who want to save for retirement or education expenses. The uncertain outlook for taxes as they relate to investment planning makes it critical to stay up to date with new developments, and discuss strategies to minimize your tax burden with your financial and tax advisor.

Last Week’s Highlights:

The Federal Reserve increased interest rates last week by 25 basis points, to between 0.5% and 0.75%. Fed Chair Janet Yellen stated, “considerable progress the economy has made” when explaining the rationale behind the decision.  For the most part, investors had expected this decision.

Oil prices increased last week as OPEC members, including Russia, agreed to cut output by 558,000 barrels a day. Oil prices increased to 51.90 dollars per barrel which is the highest it has traded in the last 17 months.

Donald Trump announced some important appointments last week. He tapped Exxon CEO, Rex Tillerson to be Secretary of State Rick Perry as energy secretary, and Goldman Sachs’ Gary Cohn as chief economic adviser.

Looking Ahead:

There are a few important economic reports in the coming this weeks.  The Purchasing Managers’ Index (PMI), which is an indicator of the economic health of the manufacturing sector, will be released on Monday.  Also on Monday, Janet Yellen will deliver a speech on the state of the job market and the electoral college will officially cast their votes for president.  Existing home sales will be released on Wednesday, durable goods and personal income and spending on Thursday.  On Friday, consumer sentiment and new homes sales numbers will be released.

What’s On Our Minds:

With the end of the year quickly approaching, it’s time to look back at what’s happened and how it will affect your financial future.  Go through these important items so that you can go into the new year with financial peace of mind.

INVESTMENTS

• Consider tax-loss harvesting to lower taxes on capital gains.

By selling positions that are down this year, you can use the losses to reduce up to $3,000 of taxable income. If your total losses surpass $3,000, you can roll over excess losses to offset gains in another year. If you have losses from a previous year, calculate how they affect your gains or losses from this year.

• Check your performance.

Are your investments on track to meet your goals? If your portfolio is lagging behind the appropriate benchmarks, it may be time to reconsider your investments.

INCOME TAX

• Review your tax withholdings.

Have you had a major life change (employment change, marriage/divorce, a new child) that affects your income tax? Check to make sure your tax withholdings have been properly adjusted. Having low withholdings can lead to tax penalties, while having too high of withholdings prevents you from accessing your money until your tax return is filed.

• Estimate your AGI.

Determine your adjusted gross income (AGI) with the help of your tax advisor. Your AGI will help determine your tax bracket, which you’ll need for investment and retirement planning.

• Estimate your AMT.

Determine whether you will be subject to the Alternative Minimum Tax (AMT) and if there are ways to mitigate your AMT liability.

GIVING

• Reduce your estate through gifts.

You are permitted to give up to $14,000 ($28,000 for married couples) a year per recipient as an untaxed gift. Gifts above this value will consume part of your lifetime/estate tax exemption amount, $5.45 million in 2016.

• Donate to charity as a way to reduce taxes.

You can lower taxable income by 50 or 30 percent with a gift to a public charity or by 30 or 20 percent with a gift to a private foundation. If your gifts exceeds these limits, you can roll over the excess deduction for up to 5 years.

RETIREMENT ACCOUNTS

• If you are retired, make sure you’ve taken all necessary required minimum distributions (RMDs). 

RMDs may be one of the most important items to review when going over your finances at the end of the year. Standard IRAs require these distributions be taken annually after the year you turn 70 ½; standard 401(k)s require them annually after you retire or turn 70 ½ (whichever is earlier). Failure to take an RMD will trigger a 50 percent excise tax on the value of the RMD.

• Max out contributions to an IRA and employer retirement plan for the year. 

Both IRAs and 401(k)s have annual contribution limits. If you find you have excess savings and have not reached your annual limit, it may be a good idea to make additional contributions. Similarly, you may also consider making greater monthly contributions to your accounts next year, spreading out the cost of contribution. The deadline for IRA contributions is usually April 15 of the following year; 401(k) deadlines may be restricted to the calendar year, depending on your employer. If your children or grandchildren make less than $132,000 per year, consider gifting them $5,500 so they can make a Roth IRA contribution.

• Consider converting a traditional IRA to a Roth IRA.

Did you have a good tax year? It may be an opportune time to convert a portion (or all) of your traditional IRA to a Roth IRA and pay your taxes at a lower rate. It is important to understand, however, that Roth accounts have contribution limits placed on them, so keeping a traditional IRA might be beneficial. Before making any changes, consider seeking the help of a professional accountant who can help you with the conversion and calculate your new tax liability.

Last Week’s Highlights:

Markets continued their rally last week as indices continued to break records.  The rally was broad; no sectors booked a loss last week.  Among industries, chipmakers and banks had a particularly strong week as they outperformed the market.  Since the election, investors have been favoring financial companies on the assumption that Trump’s administration will work to create a much more lenient regulatory environment.  In general, a brighter economic outlook is favoring stocks.

The selloff in the bond market continued last week which is translating into higher rates and lower prices across the board.

Looking Ahead:

All eyes will be on the Federal Reserve this week as investors are expecting them to raise short-term interest rates on Wednesday.  Janet Yellen will also talk about the Fed’s plans for 2017 during her press conference. Also on Wednesday, November retail sales and industrial production figures will be released.  On Thursday, we will also get weekly jobless claim number.

Companies are releasing earning this week as well. On Wednesday, Pier 1 Imports releases their results and on Thursday Oracle released their numbers.

What’s On Our Minds:

Last week, we saw some good employment numbers as the Bureau of Labor Statistics (BLS) reported 178,000 new jobs in November and a jobless rate that ticked down to 4.6%. This has been the longest continuous streak of job growth on record. The economy has added almost 16 million jobs since 2010. All good news, right?

Hopefully, yes. But a tiny detail from the White House’s statement reminds us that all good things do come to an end. In the statement, the White House boasts that this is the lowest unemployment since August 2007, but we remember that was two months before the S&P 500 reached its peak before the financial crisis. Now, of course, we can’t point to one metric and forecast a recession, but we returned to one of our favorite charts that we put together using the St. Louis Fed’s excellent online tool.

We plotted three data series. Each series we scaled down to be represented on the same axis:

1. Initial claims for jobless benefits as a percentage of the civilian labor force (blue). Taking this commonly viewed number as a percentage of the labor force adjusts for the fact that we have seen an increase in the US population over time.
2. The civilian labor force (red),which includes all employable persons, not just those employed, which has steadily risen over time, albeit more slowly in recent years.
3. The Labor Force Participation Rate, or the percentage of employable people who either have work or are seeking work.

The level of initial claims is at the lowest it’s been since records are available. We also see that the labor force participation rate, green, has been declining in recent years. The factors causing this are likely varied, and a combination of automation and workforce changes which lead to discouraged workers, or those who have removed themselves from the workforce. This is a sort of “shadow unemployment,” meaning that these people might want more work, but have given up their search. There are also those who would like full-time positions but who have only been able to find part-time work. To account for these underemployed people, the BLS provides several employment measures that add back discouraged and otherwise marginally attached workers:

This graph looks significantly different from the previous graph, in that the current employment situation does not appear from these data to be as overheated.

We continue to monitor both of these graphs. We also keep in mind that the character of the American workplace has changed dramatically, where the Internet has enabled companies to produce much more output with drastically fewer employees. It is possible that there is a new, higher equilibrium unemployment rate, or a “natural rate of unemployment”. Determining that exact (and unobservable) number will prove to be difficult even for the crack economic team at Tufton Capital.

Last Week’s Highlights:

Stocks were mixed last week as investors sold technology stocks, bought financial services stocks, and the energy sector rallied on news that OPEC agreed to cut production levels.  Overall, the Dow Jones was flat, the S&P 500 fell a bit, and the NASDAQ was down over 2.5%.

We had a strong jobs report last week and we are nearing full employment levels.  The jobless rate fell to 4.6%, leading many to believe that the fed will raise interest rates later this month.

In politics, President-elect Donald Trump made a few important appointments last week. He chose former Goldman Sachs banker Steven Mnuchin as Treasury Secretary and billionaire Wilbur Ross as Commerce secretary.  These appointments had financial stocks on the move higher as many believe these two will decrease regulations on the industry.  Over the weekend, Trump tweeted warnings to companies planning on outsourcing business abroad saying they should be prepared to face “retribution”.  On the other side of aisle, house Democrats re-elected Nancy Pelosi as their leader.

Looking Ahead:

News out of Italy could have international investors on high alert this week. Early on Monday, Prime Minister Matteo Renzi said that he would resign following defeat in a referendum on constitutional reform.  That being said, polls had predicted a “no” on the referendum so the fallout should be muted.

On Monday, the ISM nonmanufacturing index for November is reported.  On Tuesday, Bob Evans, Michaels and Toll Brother report their quarterly results. On Wednesday, H&R Block, lululemon, and Vera Bradley report their earnings.  On Thursday, Broadcom, Liberty Tax, and Ceina report earnings and Baker Hugh should discus merger plans with GE’s energy division during their investor meeting.

What’s On Our Minds:

This week, investors’ eyes will be on OPEC and their meeting in Vienna, Austria. The members of the Organization of Petroleum Exporting Countries (OPEC) will come together on Wednesday to decide on whether or not to cut oil production in their respected countries. Saudi Arabia, the world’s largest oil producer with production of approximately 10.5 million barrels per day, has allegedly proposed that they will cut 4.5% of their production if Iran freezes their own production at roughly 3.8 million barrels per day. In addition, the Saudis also desire additional outside countries, such as Russia, to agree to freeze as well. Production levels would be verified by a third party to avoid any kind of cheating.

OPEC is in quite a situation as Saudi Arabia is no longer the world’s swing producer. US shale producers can react to increases in the price of oil in a matter of days to weeks. Christof Ruhl, Head of Global Research at the Abu Dhabi Investment Authority, presented the chart diagram below nearly two years ago before the November OPEC meeting and the argument still holds true today. In the current situation, with lower oil prices, OPEC countries obviously have lower oil sales than they did when oil was at $100 per barrel. If they cut production, propping up the price of oil, US shale producers will ramp up production and take market share from OPEC. As OPEC loses market share, sales will again be lower.

Could this be the end of the traditional OPEC as we know it? Only time will tell.

Source: Christof Ruhl – Abu Dhabi Investment Authority

Last Week’s Highlights:

For the third week in a row, stocks were up on continued reflationary hopes following the US presidential election.  On Tuesday, for the first time since 1999, the Dow Jones, the S&P 500, the Nasdaq, and the Russell 2000 all set record highs. Domestic small-caps had a particularly good week as investors believe these companies will benefit from accelerated growth and tax reform.

Existing home sales were reported at 5.6 million. Durable goods sales were up 4.8% month over month. Jobless claims were reported and are down to 251,000.

American shoppers unofficially kicked off holiday shopping season on Friday. As has been the trend in recent years, brick and mortar store sales are shrinking and online sales are growing. On Thursday and Friday, online sales surpassed $5 billion with more than $1.2 billion coming from mobile devices.

Looking Ahead:

Thanksgiving is now behind us and Americans are back to work after a holiday packed full of turkey and rivalry football  games.  Online holiday sales will continue on “Cyber Monday”.  On Tuesday, Third Quarter US GDP will be released and Chicago O’Hare airport workers are set to go on strike.  OPEC is having a meeting on Wednesday where they will try to agree on a production cut. On Thursday, we will get automotive sales figures from November. Friday is a big day as November’s jobs report will be released.

What’s On Our Minds:

Our focus in recent weeks has been on the election and while we like to keep our topics fresh from week to week, it would be remiss for us to ignore the effect that the election’s results are having on financial markets.

While campaign promises don’t always come to complete fruition, based on recent market movements, it’s clear that investors are expecting a lot out of Trump.  Specifically, his plans to rebuild the country’s infrastructure through a stimulus package, cut taxes on corporations and individuals, and increase trade barriers are being seen has major policies that could improve our domestic economy and thus, move the market.  While these plans have been good news for equity markets, it has triggered a selloff in the fixed income market.

Global bond yields, which rise as bond prices fall, have been falling since the Brexit in June, but the selloff has accelerated since Trump’s upset victory.  The rationale behind the continued sell off is that Trump’s policies will provide a boost to inflation, which is the enemy of long-term bonds, because it erodes the value of interest payments.  Furthermore, bonds just seem less attractive compared to stocks when hopes of economic growth is on the horizon.

All of this action in the market is exciting, but we continue to remind our clients and friends of the importance of sticking to a long term investment plan.  Instead of speculating how new policies may affect the investment landscape, we believe it is best to focus on underlying fundamentals and make investments accordingly.  With the benefit of hindsight, recent market moves can be viewed as an example of how tough it is to predict short-term market moves.  Media pundits had many convinced that a Trump victory would be calamitous for the markets, but we’ve seen numerous record highs since his election.  As is usually the case, we believe that calm heads prevail over the long-term.

10 Year Treasury Since 6/1/2016    

Last Week’s Highlights:

It was another busy week on Wall Street. The Dow Jones finished the week marginally higher last week after reaching numerous record highs. The S&P 500 had a better week and was up 80 basis points due to its lower exposure to industrial and financial services sectors.  With only a few weeks left in the year, both indexes are up by more than 6% year to date.

Janet Yellen delivered remarks to the Joint Economic Committee of the US Congress on Thursday. She stated that the economy is making good headway and that a hike in interest rates could be coming “relatively soon”.  Markets are currently pricing in a 25 basis point hike for the next FOMC meeting in December.

Retail sales numbers came in strong last week. Merchants in the U.S. reported increased retail sales in October by 0.8%.  These numbers should bolster the Fed’s pending decision to increase rates next month.

Looking Ahead:

Higher yields and a strong dollar should continue to dominate financial headlines this week.

On Tuesday, Barnes & Noble, Campbell Soups, Chico’s FAS, GameStop, Dollar Tree, and Hewlett Packard Enterprises report their quarterly results.

Some important economic data comes across the wire this week. U.S. existing home sales are released on Tuesday and Global Flash Purchasing Managers’ indices will be released on Wednesday.

It will be a short week for investors as domestic markets will be closed on Thursday for Thanksgiving and the stock market closes at 1 PM on Friday.

What’s On Our Minds:

Many would agree that we were put through the ringer with divisive campaign rhetoric this year.  Well, it’s finally come to an end and the uncertainty is behind us.  Folks on both sides of the aisle were surprised by last week’s election results but many would probably agree that it’s nice to have the contentious campaign season in the rear view mirror.

After a majority of market pundits had predicted that a Donald Trump victory would send equity markets crashing, the markets have been on a tear since he delivered his quelled down acceptance speech on Wednesday morning.  Perhaps this is a sign of a new Donald Trump?  The pollsters may have expected a Clinton landslide and market pundits predicted a doom and gloom if Trump won, but markets posted one of their strongest weeks in history.  Rather than panic selling, investors repositioned themselves for how the election results will effect public companies, financial markets and the economy.

While Trump had some grandiose ideas and lofty rhetoric on the campaign trail, it will be interesting to see how his policies play out now that he’s actually headed to Washington.  Like any campaign, it’s likely that a good deal of Trump’s campaign rhetoric won’t actually be implemented in legislation.  For instance, he has said that his wall is now probably going to just be a fence.  On a corporate level, Trump’s campaign promises to slash the 35% corporate tax rate for some of the largest U.S. companies to 15% is being seen as a rallying point for investors.  On the national level though, a trade war with China probably won’t make investors and US consumers very happy. Whatever happens, we’ll have to wait and see how Trump handles the transition from twitter ranting Donald to Mr. President in White House.

While the president may be a significant figure in influencing the financial markets, it’s important to remember that stock and bond prices are closely tied to fundamentals that don’t just change on the flip of a dime.  With that in mind, instead of trying to speculate, the Tufton investment team remains focused on investing in high quality yet undervalued companies that may be temporarily out of favor in the financial markets.

The S&P 500 Index Last Week

Last Week’s Highlights:

Stocks rose last week as investors weighed what a Trump Presidency means for the markets and the economy.  Initially, futures crashed on Tuesday night with news that Trump was going to win but then, to many peoples’ surprise, domestic markets rebounded sharply on Wednesday morning.  The rally in blue chip stocks continued through Friday.  Trump’s promises of decreased regulation and increased infrastructure spending had investors repositioning themselves into shares of industrial companies and banks.  Biotech and pharma stocks had also had a big week after investors previously priced expected a Hilary Clinton victory. Many of these stocks had been beaten up after Secretary Clinton had promised increased government regulation over these industries during her campaign.  Companies benefitting from the Affordable Care Act had a tough week as many believe Trump will repeal and replace it.

The biggest reaction to the election occurred in the bond market. US Treasurys have sold off because many believe that Trump’s economic policies will lead to higher inflation.  Bond yields, which move inversely to bond prices, rose to the highest level of the year last week.

By the close on Friday, the Dow Jones Industrial average was up 5.4%, closing at a record high. This was the index’s strongest week in 5 years.  The S&P 500 also had a strong week, up 3.8%.

Looking Ahead:

Domestic equity markets will begin the week trading at all-time highs.  31 S&P 500 companies will be releasing earnings this week.  Home Depot, Target, Cisco, and Wall-Mart are included in the bunch.  We will also get some economic reports this week. Retail sales will be reported on Tuesday, industrial production will be reported on Wednesday, and inflation data will be reported on Thursday.  Members of the Federal Reserve are also speaking this week. With big moves currently occurring in the bond markets and an interest rate bump expected next month, their comments will be followed closely.

What’s On Our Minds:

Can’t we just get this election over with already?  Unfortunately not, but we are almost there. While technically not an event from last week, we would be remiss in not pointing out the big market move this morning after Hillary Clinton was cleared by the FBI regarding the newly-discovered emails. It has become fairly evident that the markets are hoping for a Democratic victory.

The division in American politics is real and often frightening. The FBI’s involvement in politics has many people even more concerned about the direction of our political system and the way we conduct elections. However, we hope and believe that calm heads can prevail. Further, we know that whatever the outcome of the election, there will be plenty of work to do in evaluating the economic effects of the new president-elect’s plans. If your favored candidate doesn’t win, it might seem like the end of the world, but financial markets will keep on trading, and investing wisely will still be important to secure your future.

Last Week’s Highlights:

The markets took it on the chin last week.  By Friday, markets had declined for 9 straight days,  the longest losing streak since 1980.  Trump’s momentum and a general feeling of uncertainty surrounding the election weighed on global markets with the S&P 500 giving up nearly 2%.

It wasn’t all bad though.  The U.S. jobs report was good on Friday and third quarter GDP grew more than expected.  The country saw strong wage growth in October with the Fed reporting that non farm payrolls increased by 161,000.  The unemployment rate is now down to 4.9%.  The Fed didn’t raise interest rates going into the election but gave some hints that they will likely increase rates soon.  Investors are expecting a bump in rates in December.

It was a crazy week in the energy business with crude oil prices ticking down 9.5% to $44.07 on news that crude stock piles grew much more than expected.  Ironically, gasoline prices rose 15% because a pipeline in Alabama ruptured.

In company news, GE struck a deal to combine its oil and gas business with Baker Hughes.  Generic drug manufacturers are being investigated by the federal government for alleged price collusion.  These companies include Teva, Mylan and Endo.

Looking Ahead:

With all the election hype it’s easy to forget that we are still in the thick of third quarter earnings season. Chemours and Sysco report earnings on Monday. CVS, Johnson Controls, and News Corp report their results on Tuesday. Mylan and Wendy’s will share their quarterly results on Wednesday.  Thursday we will get reports from Disney, Kohl’s and Macy’s. Finally, on Friday, Armstrong Flooring and J.C. Penney post their third quarter numbers.

On Tuesday Americans head to the polls. Markets will probably experience some short term volatility around the election as investors figure out who will be leading our country for the next four years.  Election jitters will be in full force.

The bond market will be closed on Friday for Veteran’s Day.  Tufton would like to thank all Veterans for their service to our great country.

What’s On Our Minds:

Over the past few weeks, the news headlines have been filled with many merger and acquisition deals and this morning continued the trend as the oil and gas service company Baker Hughes agreed to combine with General Electric’s oil and gas business. In terms of market value of the deals, October represented the second largest month ever for US listed companies. Other deals included communication company CenturyLink’s acquisition of Level3 Communications for $34 billion, AT&T’s acquisition of Time Warner for $108 billion, chipmaker Qualcomm’s acquisition of European based NXP Semiconductors for $47 billion, and British American Tobacco’s agreed buyout of the rest its stake in cigarette maker Reynolds America for $58 billion.

This past quarter represents the sixth straight quarter of earnings declines for S&P 500 companies. Facing diminishing earnings, corporate executives are looking for new ways to grow their businesses (and bonuses). Many executive bonuses are partly dependent on year over year growth in their company’s earnings per share (EPS). When growth declines or disappears, executives look to other sources of generating revenue, such as acquiring other companies.

Seeing that the M&A business has heated up this year, we would be willing to bet that a good bit of investment bankers will be very happy with their year-end bonus checks in December!

Last Week’s Highlights:

Stock market indexes were mixed last week. The Dow increased just a bit, and the S&P 500 lost some value. For the most part, third quarter earnings announcements drove results last week.

It was announced that U.S. GDP increased at an annual rate of 2.9% in the third quarter.  This was up from just 1.4% in the second quarter.  The accelerated GDP number reflects an upturn in private inventory investment, increased exports, less decreases in local government spending, and an upturn in federal government spending.

Twitter’s stock has been beaten up this year, and the company announced it is planning on laying off 9% of their employees to focus on profits.  Meanwhile, Snap (the parent company of social app Snapchat) is planning on raising up to $4 billion in an IPO deal.  Based on these metrics, Snapchat is being valued anywhere between $25 and $40 billion.  Clearly, Twitter has lost some of its birdsong while Snapchat is snapping along nicely.

Finally, on Friday afternoon the presidential race heated back up when the FBI announced it would re-open investigations into Hilary Clinton’s emails after discovering related emails on Anthony Weiner’s laptop during an unrelated investigation.  Markets decreased on the news, which shows investors were probably expecting (and perhaps even hoping for) a Clinton victory next week.  What we know for sure is that any bit of uncertainty introduces pessimism to the markets.

Looking Ahead:

The presidential election is just over a week away, which should dominate headlines this week, but we are still in the thick of third quarter earnings season.  Home improvement giant Lowes reports earnings on Monday. Occidental Petroleum reports on Tuesday. On Wednesday, we will get results from Qualcomm. The Fed will announce its interest rate policy moving forward on Wednesday but it’s unlikely that they will raise rates right before the election.  They should give some signals as to whether they will raise rates in December.  CBS and Starbucks report earnings on Thursday. On Friday, the October jobs report is released.