That sure went fast.  2018 I mean.  You blink and the year is over.  Funny how time works like that.  There is never quite enough of it.  With your time being at a premium it can be tough to keep up on all the changes going on throughout the year that can affect your financial life, so we thought this might be a good time for a quick recap.  Here are three major events that occurred in 2018 that may impact you down the road.  As always, if you’d like to discuss one of these in more detail feel free to give us a call.

The Tax Cuts & Jobs Act went into effect

The Tax Cuts & Jobs Act.  This was a BIG one.  The much-publicized result was that it lowered the marginal tax rates for many Americans.  However, whether or not you see the full benefit depends on your individual situation.  The bill increased some deductions like doubling of the standard deduction from $6,000 to $12,000 for individuals and $12,000 to $24,000 for couples filing jointly, increasing the child tax credit from $1,000 to $2,000 per eligible child, and introduced a new $500 credit for dependents who are too old to qualify for the child tax credit.  It also eliminated the personal exemption, the ability to deduct work-related moving expenses (exception for active duty military required to move), and miscellaneous itemized deductions you may have used for unreimbursed employee business expenses. 

The big overarching theme for individuals is that because of the increased standard deduction and decreased itemized deductions many more people will just take the standard deduction instead of claiming all their individual expenses, charitable donations, etc…  That may make this year more complicated, but future years easier. 

For business owners, there is a whole new calculation to learn called the 199A Qualified Business Income Deduction.  Let’s just say it involves multiple formulas depending on income, type of business, and tax filing status beyond the scope of this summary.  Generally, this change, along with the reduction in the corporate tax rate to 21%, should be a net positive in the tax column for businesses.  One thing to keep in mind is that many of these provisions sunset, or cease, in 2026 so be careful making irrevocable changes based on this round of tax provisions.  

The economy did great, the stock market did not 

This is a tough one for many to reconcile.  Currently, in the US the unemployment rate is historically low, sitting at 3.9%.  We just had the strongest holiday retail sales numbers in five years and the Gross Domestic Product, or GDP (which measures the production output of the US), is growing at a good rate of about 3%.  We have low inflation and lower gas prices which all support a positive outlook for consumers in the US economy.  So why did most investments do so poorly?  The major stock asset classes were down anywhere from 4.5% – 15.5%.  How about bonds? Up 1.5% –  down 3.5%.  Commodities?  Down about 5.5%.  Real Estate?  Flat to down.  Ugh.  Most areas gave up all their gains for the year and incurred the listed losses in the fourth quarter of 2018.  This was another great lesson that stock market returns are not always connected to business fundamentals in the short term.

In our opinion, if you are still saving for retirement this is a great opportunity to “buy in” at a discount.  The stock market is the only place where people want to run out of the store when everything is on sale.  Going against the trend and increasing your savings rate during a downturn can be very beneficial.  If you are not saving, but spending, the equation flips.  That is why we preach having a diversified portfolio.  Even if you need to take distributions from an account, you can sell the investments that held up the best, allowing the more depressed assets, like stocks, time to recover.  Having a diversified portfolio provides you with this flexibility. 

Interest rates are on the rise    


The Federal Reserve increased interest rates four times in 2018.  This led to a modest increase in short-term rates.  At the same time, long term interest rates held steady causing what we call a flattening of the yield curve.  That is a fancy way of saying you don’t earn much more interest in investing for a longer time period than you do for a short time period.  An example is that you can currently purchase US treasuries with a maturity of one year and expect to earn 2.6% or you could pick a ten-year maturity and only receive 2.74%!  Why would you let someone keep your money for ten years when you can earn almost the same rate in one year and have the opportunity to invest again at a higher rate next year?

This has other effects on the economy as well.  Mortgage rates went from 4% a year ago to top 5% on a 30-year mortgage in November.  Surprisingly since then, they have come back down to almost 4.5% which drove a 25% increase in mortgage applications in December.  Despite this hiccup, the trend is certainly upward. 

Changing rates has a few implications for all of us moving forward.  The first is the potential to finally earn a larger return on cash or cash-like investments.  This allows more conservative investors some reprieve as the long-term return prospects of bonds increase with higher yields, despite short-term price decline (Side note: Bond prices move in the opposite direction as interest rates so as rates rise bond values decrease).  Second, is an increase in the cost to borrow.  Mortgages, car loans, & HELOCs will gradually become more expensive.  That helps explain why there was a surge in mortgage activity as buyers rushed to secure the lower rates before they increase again.  We all have to account for higher expenses baked into our future borrowing.

There are a few others that just missed the list in 2018 like our ongoing trade wars, political infighting, and data breaches.  As 2019 chugs on and stories develop, we’ll do our best to keep you updated.  Thanks for reading and best wishes in 2019.