PASSING THE STRESS TEST: The U.S. Federal Reserve Bank performed stress tests on the nation’s 35 largest banks. 34 passed and were given specific permission to reward their shareholders with dividends. Two banks, Goldman Sachs and Morgan Stanley, were required to keep their dividends at the same level as last year. These banks claim the issues that caused this are temporary due to some accounting that had to be done after the new tax law. The bank that failed was the U.S. division of Deutsche Bank. The purpose of these stress tests is to gauge whether financial institutions have enough capital and are sufficiently well-managed to continue lending during periods of financial upheaval. No one wants another 2008. The Federal Reserve announced that banks have added $800 billion in high quality assets to their balance sheets since 2009. The stress tests indicated that banks could lose as much as $578 billion in a downturn, but would have sufficient capital to keep lending.
MARKETS HAVE A NEGATIVE WEEK, BUT A POSITIVE MONTH AND QUARTER: Market losses early in the week, due once again to trade policy concerns, created a hole too big to overcome. However, the week ended on a positive note with broad gains on Friday due to several factors. Trade rhetoric cooled a bit. Oil prices buoyed energy stocks. The Fed’s announcement of the bank stress tests sent the financial sector in the right direction. Tech stocks continued their rally. Despite stocks having another negative week, the S&P 500, Dow Jones Industrial Average and the NASDAQ Composite all registered positive months (June) and quarters (April through June).
KNOW YOUR PLAN FEES: A very large portion of the working population in the U.S. work in small businesses. Small business owners serve as fiduciaries for the retirement plans they offer. Yet, according to recent research by Pew Charitable Trusts, over 80% of such owners do not describe themselves as “very familiar” with how much their employees pay in fees to their retirement plans. Although fees can change from year to year, only 49% of small business owners stated that they read the annual fee disclosure and had understood it. 44% had not read it at all.
JAPAN’S CENTRAL BANK: The Bank of Japan, much like Europe, is slowing down the pace of its debt purchases. It reduced debt purchases for the third time in June. When central banks buy government debt it is a way to essentially create more money to help stimulate the economy. The U.S. Fed did this for awhile before stopping and then raising interest rates. Japan and Europe are following the U.S. Fed’s movements, just a couple of years behind.
“BUNCHING”: This is a new term I heard last week, and it makes a lot of sense for some taxpayers. Under the new tax law that is now in effect the standard deduction has doubled. Single taxpayers will enjoy a standard deduction of $12,000 and married-filing-jointly taxpayers get $24,000. The joint congressional committee that drafted the legislation estimated that the number of taxpayers using the standard deduction in 2018 will rise to 135 million, with only 20 million taxpayers electing to itemize.
A potential consequence might be lower charitable giving. If 135 million people are claiming the standard deduction, then keeping track of, and itemizing, their charitable deductions will be irrelevant. Will overall charitable giving decrease? I certainly hope not, but logic would indicate that it will.
One way to continue to utilize the charitable deduction, even if you are in standard deduction territory, is to “bunch” your charitable gifts. Do you give $10,000 in charitable gifts each year? Instead of giving $10,000 this year, bundle or “bunch” your gifts in one year. Let’s say you have $100,000 in a taxable investment account or in savings, and you give $10,000 per year to charity. Give $30,000 this year instead, using your taxable account to help you fund it, and then replenish the $30,000 with the money you normally would have given to charity in the off years. You can also use a Donor Advised Fund for this purpose so the charity you support actually receives the gifts as it normally would.
By bunching your gifts, you choose to itemize in that particular year, getting the full benefit of the itemized charitable deduction, and use the standard deduction in the years you are not making the bunched charitable gifts.
1826: Of course, we celebrate 242 years of independence this coming Independence Day on July 4. But one of the most compelling stories in the early days of the republic was what happened on the 50th anniversary of that occasion. Thomas Jefferson and John Adams had a very interesting relationship. They were on the committee of five that drafted the Declaration of Independence. After independence was achieved and the Constitution went into effect, they became fierce political rivals. Later, they slowly reconciled and became close friends once again. As the 50th anniversary of the Declaration of Independence loomed, Adams (in Massachusetts) and Jefferson (in Virginia) clung to life, sick and dying in bed. Both of them hung on until the fourth of July, and died on that day, forever linked in history in their lives and in their deaths. Let’s let the courage they showed in reconciling with one another be the legacy we focus on in 2018.