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REDW Expands Albuquerque Audit & Assurance Team with Three New Hires

REDW LLC, one of the Southwest’s 10 largest certified public accounting and business consulting firms, is pleased to welcome three new professionals to the Audit & Assurance team in its Albuquerque headquarters: Deidre Grabke, CPA as a Senior Audit Associate and both Alana D. Best and Joshua Lohman Shainin, CPA as Audit Associates.

Deidre Grabke, CPA brings a valuable blend of audit and accounting experience as a Senior Audit Associate that ranges from performing non-profit, corporate, employee benefit plan and single audits to providing accounting management in the hotel/tourism industry, as well as for a credit union and educational institution. Deidre holds both a Bachelor of Accountancy and Master of Accountancy with a minor in Management from New Mexico State University, Las Cruces. She is also a Certified Public Accountant (CPA) licensed in New Mexico, and a member of the American Institute of CPAs (AICPA) and New Mexico Society of CPAs (NMSCPA).

Alana D. Best has joined REDW as an Audit Associate from Trinidad State Junior College, where she wore many hats as the school’s Controller, including Grants Accountant, Capital Asset Accountant, Student A/R Manager, and sometimes Lead Accountant. She holds a Master of Science in Accounting and is soon to complete her Master of Business Administration from Western Governor’s University (WGU). Alana is a student member of both the AICPA and Association of Certified Fraud Examiners (ACFE) and has served as Moderator for four groups connected to the WGU Accountability and Motivation Group, which supports students going through WGU’s self-paced degree program.

Joshua Lohman Shainin, CPA is excited about exploring a new career path at REDW as an Audit Associate, and is already equipped with a New Mexico CPA license. He brings three years of experience as a Senior Defined Benefits Analyst with Fidelity Investments, as well as prior experience as a Staff Accountant with a local CPA firm, where he gained expertise in high wage credit analysis, cost segregation, manufacturing investment credits, healthcare refund credits and sales/use tax applications. Josh holds both a Bachelor of Arts in Economics with a minor in Mathematics and a Master of Business Administration with minors in Finance and Management of Technology from the University of New Mexico. In addition, Josh has worked as a tutor for Sylvan Learning Center, where he was honored as Teacher of the Quarter, and performed analytical work for a New Mexico wind energy organization while serving as a Student Assistant/Supervisor for UNM’s Small Business Assistance Program.

REDW takes great pride in attracting top talent from across the country who see our firm and the Southwest as a place where they can grow both personally and professionally.

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How Tax Reform Will Impact Construction

Every type of industry is impacted by the bill known as the Tax Cuts and Jobs Act (TCJA), and the construction industry was not left out of the party. 

However, the precise impact will depend upon the structure of the business and the nature of its operations. For construction businesses organized as C corporations, these are the most significant changes:

  • Reduction in the corporate tax rate
  • 100-percent bonus depreciation deduction
  • Elimination of the corporate AMT (alternative minimum tax)
  • Modifications of rules for use of certain accounting methods
  • Limitations on interest expense deductions.

A number of these items also affect construction companies organized as pass-through entities, either S corporations or Limited Liability Corporations taxed as partnerships (including General Partnerships, Limited Partnerships or Limited Liability Partnerships). However, there are also considerations specific to flow-through structures, including the applicability of the deduction for qualified business income, also referred to as the Section 199A deduction. This article focuses on a high-level discussion of the important considerations construction companies should focus on in the wake of tax reform.

CHOICE OF ENTITY

Given the wide sweeping changes to both the corporate and individual tax systems brought on by the TCJA, it’s an opportune time for construction businesses to reconsider the tax structure chosen for the business, especially since construction businesses tend to be closely held and therefore organized as flow-through entities. This can be a complex analysis, and would largely be driven by determining the net effective rate as a C corporation versus the rate as a pass-through entity, which will be influenced by many factors including:

  • The state(s) in which the corporation does business (i.e., state effective rate);
  • Whether the owners materially participate in the business;
  • The level of compensation paid or required to be paid to any owners who provide services to the business to ensure reasonable amount of compensation;
  • Whether the entity makes distributions or profits regularly, or whether it would prefer to accumulate profits to grow the business;
  • Whether there is a planned exit from the business in the near future;
  • Whether the business has any international operations; and
  • Whether the business would be eligible for the 199A deduction (discussed below in more detail).

Other factors should be considered in the choice of entity analysis as well, including legal implications and the associated compliance costs of each structure.

199A Deduction

The TCJA provides a 20-percent deduction for pass-through entities that generate “qualified business income,†subject to certain limitations. Qualified business income is generally active income from a qualified trade or business (this definition generally excludes investment income as well as any income for personal services provided by an owner or shareholder).

A qualified trade or business is typically defined as any trade or business other than a specified service business that includes the following industries: health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investment management, and brokerage services. There is also a broad category included in the definition of trade or business that applies to any business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners. Architecture and engineering were specifically excluded from the qualified trade or business definition. There is much uncertainty around these definitions, and the practitioner community has requested guidance from the IRS and Treasury on these items quickly given that these changes will apply for 2018.

While most construction businesses might seem to fall within the definition of a qualified trade or business, it is uncertain how the law will be interpreted at this point. Assuming that you get over the hurdle for a qualified trade or business, the deduction for qualified business income will be limited to the greater of either: 1) 50 percent of W-2 wages with respect to the trade or business, or 2) 25 percent of the W-2 wages plus 2.5 percent of the unadjusted basis of qualified property.

Qualified business property would generally include assets held at the end of the year, used in the trade or business during the year, and for which the depreciable period has not ended. The depreciable period is the latter of 10 years from the original placed in service date or the last day of the last full year in the recovery period under Section 168.

Assuming a construction business is eligible for the 199A deduction, it could reduce the top federal rate on business income from 37 to 29.6 percent, therefore making a pass-through structure an attractive alternative. However, companies must first evaluate the many planning considerations as summarized above to understand the full impact of tax reform on their business.

Please contact Michael Jacobson or Dean Willingham to discuss tax planning and the impact of tax reform for your construction business.

By Maureen McGetrick| This article originally appeared in BDO USA, LLP’s “BDO Knows Alert†Real Estate newsletter (April 2018). Copyright © 2018 BDO USA, LLP. All rights reserved. www.bdo.com

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Market View (April 2018) – The Quarter in Review

by Daniel Yu, CFA®, AIF®, REDW Stanley Financial Advisors

As we considered this newsletter, the smooth monthly returns experienced in 2017 seem to be a happy and longed for memory. As we noted in earlier newsletters, volatility is the norm while 2017 was the exception. In order to gauge any bout of volatility we have to review it against the broad economic picture. In a 2017 newsletter we discussed the pillars of economic growth (Monetary Policy, Taxation, Government Spending, Regulation, and Trade), and in early 2018 most of these issues were re-evaluated. While Monetary Policy (i.e., rates) and the benefits of the new tax law led the discussion in the early part of the quarter, it was concerns over trade and regulations that dominated the latter part of the quarter.

With the announcement of new trade tariffs on steel and aluminum, we began a rocky ride in the markets as participants have tried to value the impact of each piece of news. Taking a step back, we generally do not support tariffs as they are a tax that benefits a small number while increasing the costs to a broader number. Why shouldn’t consumers be allowed to purchase goods and services from the lowest cost provider? Moreover, tariffs tend to invite retaliation, which slows down the velocity of money or how often money changes hands. As the situation with tariffs develops, we may need to alter our view on future GDP growth.

Regulation is another area under consideration. Various developments in technology are now inviting discussion on if and how they should be regulated. How responsible are social media platforms to monitor and regulate what is said? What changes should happen at Facebook, Twitter, and others? When is regulation a hidden form of censorship? In light of recent crashes, what should be done in the autonomous vehicle arena? What rules and regulations should be in place regarding cryptocurrencies like Bitcoin? Regulations can be difficult to develop and implement, as you want them to both protect the public without stifling innovation and creativity. Regulations are themselves a cost of doing business and in the short term they can lower the growth of a company’s earnings.

On the whole we continue to expect US GDP to accelerate to close to 3% in 2018 as the new tax law should benefit the economy through increased discretionary income, corporate investment, and higher earnings. These benefits will take all of 2018 and probably part of 2019 to filter into the broad economic data. We also expect interest rates to generally climb during 2018 with shorter rates increasing the most, what is called a flattening yield curve.

As the various market participants interacted through the quarter, we noticed money moving from one asset class to another, reaffirming the argument of having a diversified and asset allocated portfolio. However, volatility can be a difficult thing to endure. If you find yourself worrying about your portfolio, then please call or email your Relationship Manager. A discussion regarding your goals and any potential changes in your risk tolerance could be in order.

Copyright 2018 REDW Stanley Financial Advisors, LLC. All Rights Reserved. This publication is intended for general informational purposes only and should not be construed as investment, financial, tax, or legal advice.

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REDW Principal Mike Allen Elected Board Chair of the Arizona Society of CPAs

REDW LLC, one of the Southwest’s 10 largest certified public accounting and business consulting firms, is proud to announce that Mike Allen, CPA, MBA, a Principal in the Firm’s Phoenix office, has been elected Board Chair of the Arizona Society of CPAs (ASCPA) for the 2018-2019 term, effective May 1, 2018. Mike currently holds the title of Chair-Elect and previously served as the Board’s Secretary/Treasurer, as well as on the Association’s Nominating Committee, Executive Committee, Investment Committee, and Foundation Board.

As the ASCPA’s new Board Chair, Mike’s stated vision for the coming year is “to build on the great work of previous ASCPA Chairs in advancing the cause of all CPAs in Arizona, and to enhance the success of our members through education, advocacy, and increasing the value of the CPA.â€

Mike heads REDW’s Audit & Assurance department. With a long and successful career focused on strategic planning, organizational development, and financial and operations management, he works to promote his clients’ continuing success through the direction expansion of their core business activities and products, as well as the proactive management of their operations and relationships.

Prior to joining REDW in 2011, Mike spent 15 years as the COO, CFO and member of RAM Holdings, LLC. In the 1980s and 1990s, Allen was a partner and director of Erickson Allen PC, CPAs, a public accounting firm that he helped grow from a start-up operation to a multi-million dollar business, ranked as one of the largest in Albuquerque. He holds an MBA from Arizona State University and BBA from the University of Wisconsin – Whitewater.

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Building on the Success of Its Inaugural Financial Literacy Program for Native American High School Students, REDW Rolls Out 2018 Curriculum at Santa Fe Indian School

REDW LLC, one of the largest CPA and business consulting firms in the Southwest, also known as the premier firm serving tribes and tribal enterprises, is proud to announce it has rolled out the second series of its successful financial literacy program for Native American high school students.

The inaugural program, which took place in late 2016 in partnership with Junior Achievement of New Mexico (JA NM), resulted in more than 100 high school seniors acquiring fundamental skills and knowledge in the area of personal finance. At the culmination of the program, the students rated it as the “most impactful curriculum offered of the College Career Readiness classes.†The survey further confirmed, “What made the program most rewarding were the hands-on activities and the opportunity to visualize the direct correlation between personal finances and planning for future purchases, such as a car.â€

Launched on February 22, the 2018 program offers training to grades 9-12, an expansion from the original offering to only high school seniors. Three classes of approximately 65 students, led entirely by volunteers, will receive the curriculum developed by JA NM.

The original impetus for REDW’s financial literacy program was the firm’s strategic partnership formed in 2016 with Notah Begay III, PGA TOUR professional golfer and founder of the Notah Begay III Foundation, NB3 Consulting, and other business ventures. This partnership reflected our shared goal of increasing financial literacy in Indian Country in order to nurture future tribal business opportunities, financial success, and self-sufficiency.

Notah Begay III with students from the Financial Literacy Program

“I’m very excited to see how my partnership with REDW continues to grow stronger and remain true to our shared vision,†said Notah Begay III. “Together, we strive to take a holistic view of top priority needs in Indian Country, and then we look for innovative ways to develop and deliver quality programs to address them. Each of us plays an important role, and I’m thrilled I can use my passion and influence to ensure Native American youth continue to grow as students and, ultimately, as professionals,†added Begay.

“We’re excited to once again leverage our partnership with Notah and JA NM to benefit Native American students,†said James Montoya, REDW Principal and Chair of the Financial Literacy Program. “When we began this journey, we knew that achieving positive change would require a long-game strategy. It’s extremely gratifying to see that our commitment to giving back to Indian Country is providing the motivation and focus required to keep this program vibrant into the future,†Montoya added.

“There is a misconception that financial independence is only for some,†said Melissa Nuñez, CFP®, CRPC©, AIF® at REDW Stanley and instructor of one of the classes. “We want these students to realize they are already making financial decisions that will impact their futures. With the right skills and education, they can improve their chances for financial success. Some of them may one day serve on tribal councils, where they will be responsible for the economic health of their communities.â€

The program’s Personal Finance module focuses on the key areas of earning money; spending money wisely through budgeting; saving and investing money; using credit cautiously; and protecting one’s personal finances.

Immediate student outcomes include:

  • Students will learn about what it takes to be successful beyond the classroom.
  • Students will understand the importance of education to their future success.
  • Students will build skills in teamwork, decision-making and interpersonal effectiveness.
  • Students will become aware of post-secondary education and career opportunities.
  • Students will learn how to connect what they learn from the program to their families and communities.

The program’s long-range impact is expected to improve Native American secondary and post-secondary graduation rates, encourage Native American students to pursue business and professional careers, and increase the number of Native American students pursuing accounting, finance or business degrees at major universities in the Southwest region.

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What CEOs Should Know & Do About Cybersecurity

This article originally appeared as a BDO USA, LLP Cybersecurity Alert (February 2018). Copyright © 2018 BDO USA, LLP. All rights reserved. www.bdo.com

During the past few months we have spoken with hundreds of companies’ chief executive officers (CEOs) from numerous U.S. and global industries, including financial services, healthcare, government contracting, automotive, manufacturing, private equity, and law firms, about the importance of cybersecurity. From these conversations, we have concluded that the three most frequently asked questions by CEOs are:

  1. What should we know about cybersecurity?
  2. What should we do about cybersecurity?
  3. How do we assess the quality of our cybersecurity program?

It is vital that CEOs establish the appropriate cybersecurity “tone at the top†for their respective organization, regarding the importance of information security and how cybersecurity is everyone’s shared responsibility in a truly digital world. Establishing an organizational “culture of cybersecurity†has proven to be one of the best defenses against cyber adversaries. It is the people, not the technology, which can either be an organization’s greatest defense, or its weakest link against a cyber-attack.

Further, it is incumbent upon CEOs to learn more about cybersecurity to ensure their company is taking appropriate actions to secure their most valuable information assets. This does not mean that every CEO needs to become a Certified Information System Security Professional (CISSP). Rather, CEOs should increase their knowledge of core cybersecurity concepts and leverage their own leadership skills to conceptualize and manage risk in strategic terms, understanding the business impact of risk.

Five Things CEOs Should Know About Cybersecurity

  1. Cyber-attacks and security breaches will occur and will negatively impact your business. Today, the average cost of the impact of a cyber breach is $4.9 million.
  2. According to most cybersecurity surveys, over 60% of all data breaches originate from unauthorized access from one of your current or former employees, or third-party suppliers.
  3. Achieving information security compliance with one or more government regulatory standards for information security (i.e. ISO 27001, NIST 800-171, HIPAA, NYDFS, etc.) is good, but not sufficient to ensure real cybersecurity.
  4. Cyber liability insurance premiums are significantly increasing in cost and often do not cover all of the damages caused by a cyber breach.
  5. To achieve real information security and data resilience it is vital to combine managed Monitoring, Detection, and Response services with comprehensive disaster recovery and business continuity plans.

Ten Things CEOs Should Do About Cybersecurity

  1. Ensure everyone in the organization from the top-down receives appropriate cybersecurity education and awareness training.
  2. Hire an independent company to conduct a cyber risk assessment against government regulatory compliance requirements and industry standards to identify potential gaps in your company’s information security policies, processes, plans, and procedures.
  3. Verify that periodic penetration testing by certified Ethical Hackers is being conducted to identify potential cybersecurity vulnerabilities in your organization’s information systems.
  4. Require a timely and effective software patch management program be implemented by your Information Technology team to mitigate known security vulnerabilities as quickly as possible.
  5. Ensure the organization has 24/7/365 monitoring, detection, and response capabilities for its information systems.
  6. Verify the organization has an appropriate cyber breach incident response plan, including the policy and procedures related to ransomware attacks.
  7. Hire an independent firm to conduct a cyber liability insurance coverage adequacy evaluation.
  8. Establish information security key performance indicators (i.e. number of cyber-attacks, number of data breaches, network uptime, network downtime, cost of cyber breaches, cost of cyber insurance, cost of information security as a percentage of total company IT cost, etc.).
  9. Ensure your company has well-documented and periodically tested disaster recovery and business continuity plans to quickly recover lost or stolen data to mitigate potential damages of cyber breaches.
  10. Mandate additional layers of information security via encryption, multi-factor authentication, and highly restricted access to your company’s most valuable information assets.

Seven Strategic Questions a CEO Should Ask to Begin the Process of Assessing The Quality of their Cybersecurity Program

  1. What is the threat profile of our organization based on our business model and the type of data our organization holds?
  2. Who may be after our data – nation states, sophisticated international criminal organizations, or ideologically motivated hacktivists?
  3. Does our cybersecurity strategy align with our threat profile?
  4. Is cybersecurity risk viewed as an enterprise-wide risk issue and incorporated into the overall risk identification, management and mitigation process?
  5. What percentage of our IT budget is dedicated to cybersecurity? Does it conform to industry standards? Is it adequate based on our threat profile?
  6. Is there someone in our organization dedicated full-time to our cybersecurity mission and function, such as a Chief Information Security Officer?
  7. Is the cybersecurity function properly aligned within our organization? Aligning the CISO under the CIO may not always be the best model as it may present a conflict. Many organizations align this function under the risk, compliance, audit or legal functions – some with direct or “dotted line†reporting to the CEO.

It has become abundantly clear that some CEOs simply do not know enough about cybersecurity and that their Chief Information Officers and Chief Information Security Officers do not always provide them with an accurate portrait of the cyber risks their company is facing every day. Other CEOs appear to be suffering from a “knowing†versus “doing†gap.

From our consulting experience and research, we understand that many CEOs are well aware of the cyber risks, but for one or more reasons, often short-term financially motivated, they are choosing not to do what needs to be done in order to reduce the probability and/or impact of a cyber breach in their organizations. In the world of cybersecurity the old adage is quite true: “You can pay now, or you can pay much more later!â€

As an independent member of the BDO Alliance USA, REDW has access to an extraordinary depth of talent in the rapidly moving cybersecurity field. Leaning on that experience, REDW’s dedicated CyberHealth Team can help you address and get meaningful answers to the seven questions. Please contact Marcus Clarke at 505-998-3224 or mclarke@redw.com to schedule a complimentary 30-minute consultation.

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REDW Welcomes Leyendecker and Reeders to Its Albuquerque Team

REDW LLC is pleased to announce the addition of Parker Leyendecker as a Tax Senior Accountant at REDW’s Albuquerque headquarters, and Christine Reeders as a Senior Consultant to the Business Software Solutions team.

Parker Leyendecker is a skilled tax professional with experience in tax provisions, and in preparing a variety of corporate and partnership tax returns. He specializes in returns for high-net-worth individuals with complex state issues, as well as nonprofits. Parker holds both a Bachelor of Business Administration – Accounting, and Master of Accounting – Tax from the University of New Mexico Anderson School of Management.

Christine Reeders brings 22 years of experience in helping companies maintain their Enterprise Resource Planning (ERP) software. She has particular expertise in distribution, manufacturing, process analysis and process improvement, and in implementing Electronic Data Interchange (EDI). With a Master of Business Administration with majors in Finance and HR Management from the College of Santa Fe, Christine understands accounting processes and procedures and has a passion for teaching. Our clients will benefit from her many years of experience conducting business software trainings.

 

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The Four C’s of Financial Planning and the Custody Rule

by Laura Hall, CIMA®, AIF®, Senior Portfolio Manager/Director of Client Services, REDW Stanley Financial Advisors

From Capital Conversations (Winter 2018) – View Newsletter

As a wealth management company affiliated with REDW LLC, one of the largest regional CPA firms in the U.S., REDW Stanley Financial Advisors is able to offer our clients an array of financial planning services.

We assist clients in clarifying their vision, goals and objectives for their financial future. We assess and analyze where they are now, and then develop a written strategic plan with specific action steps that can help our clients achieve these goals and objectives and realize their vision.

In delivering financial planning services to our clients, we follow the Four C’s:

  1. We review the “here and now†and bring Clarity to the client’s resources, goals and objectives.
  2. We bring Creativity to the development of design ideas for all areas under discussion, such as estate, investment, retirement and business planning. These design ideas are filtered through the lenses of taxation and risk management. We do not make recommendations without understanding the impact they may have over all of the planning areas.
  3. We believe in Coordination and close collaboration with our clients’ other financial, legal and tax advisors to avoid gaps in their planning and wealth management efforts. We welcome the opportunity to work with other professionals in our clients’ lives to ensure the best possible outcome. Only by seeing the entire financial picture can we truly help our clients.
  4. Finally, we act as the Catalyst for getting things done. Having a sound financial plan and properly drafted legal documents are important, but it is critical to follow through after those documents are finalized to ensure that clients achieve their wishes, goals and objectives. We can take the lead in making sure that proper execution and implementation of those good ideas happen.

REDW Stanley is unique in that we coordinate both internal and external advice, and we design strategies for our clients that are ideal and unique – not just those solutions that “everyone else is suggesting.†We first seek to understand what our clients want, model the best alternatives, educate the client, and then proactively create their plan. At the client’s request, we also monitor and update their plan. We believe our clients have their best chance of realizing their goals with our help.

We analyze income and estate taxes, business structures, investment alternatives, risk management solutions, lifestyle management, and all areas that affect a client’s financial health. Many advisors only want to work with clients with high incomes and net worth. Although this group is the most targeted by financial sales people, it is also the least well served because of the narrowly focused products sold by advisors who are not trained to utilize the “cross-disciplinary process†that the planning professionals at REDW Stanley use in approaching, addressing and solving client financial needs. We can help clients at all stages of their financial lives with that “cross-disciplinary process.â€

To give you some idea of the complexities of financial planning, we have included a Financial Planning Map. At first glance, the “Map†may be overwhelming – but an individual’s financial life may be simple or complex, depending upon a variety of factors. Not everyone at every stage of his or her financial life needs or wants planning. For those whose interest has been piqued by the Map and who wish to learn more about the REDW Stanley planning process, give your Relationship Manager a call.

But do notice, at the very bottom of the Map, a word that forms the basis of all financial planning at REDW Stanley: Fiduciary.

You may be aware of the buzz in the press about the Department of Labor and the Fiduciary rule directed at only retirement accounts that was supposed to go into effect in April 2017. That rule has now been delayed, and when it may be fully implemented is anyone’s guess. In any event, REDW Stanley has been a fiduciary to our clients since the firm’s founding. We have always assumed
the role of fiduciary when tending to all of our client’s needs – not just those that involve retirement plans.

Being a fiduciary to our clients means that REDW Stanley advisors must give clients advice that is in the client’s best interests. We put your interests first, and as we work with you to help you move toward your financial goals, objectives and vision, we recommend strategies that benefit only you. As a fee-only firm, we accept no other payments or income except what our clients pay us for the services we provide to them.

The Custody Rule

As a Registered Investment Advisory (RIA) firm, REDW Stanley’s regulator is the Securities and Exchange Commission (SEC). Last year, the SEC issued guidance for RIAs regarding the Custody Rule. This guidance was in part a reaction to the increase in fraud and identity theft that consumers have experienced. In 2017, 16.7 million consumers experienced fraud or identity theft, surpassing the previous record of 15.4 million victims in 2016.

We take compliance with the SEC seriously, and that guidance affected our ability to transfer dollars on an “as needed basisâ€Â at the direction of our clients. As a result, we are no longer able to direct movement of money on behalf of our clients with our custodians, Charles Schwab or T. D. Ameritrade, on an “as needed basis.†Our clients retain the right and the ability to move money via a phone call or a signed form to the appropriate custodian, but it is no longer possible for clients simply to call their Relationship Manager and ask that we transfer dollars per your instructions, as many have done in the past.

Please be aware of your occasional cash needs and allow plenty of time to become accustomed to the new process. As always, if you have questions, call your Relationship Manager. This is an interesting time, with market volatility increasing and taxes due April 17th. If there is something that the professionals at REDW Stanley can do to be helpful to you and your family, please contact your Relationship Manager. We are here to help.

Did you know?

  • Throughout the year, REDW’s Albuquerque and Phoenix offices are both committed to holding seminars on topics that are timely and important to our clients. Accordingly, on February 28th our Albuquerque office is hosting a talk on what the new Tax Cuts and Jobs Act of 2017 may mean for business clients. And on March 1st, our Phoenix office is co-hosting a morning seminar with National Bank of Arizona titled, “Taking the Politics (and Jargon) out of Tax Reform.†For more information or to register for either event, please visit redw.com/events.
  • Since the inception in 1988 of the Morgan Stanley Capital Group International All Country World Index (also known as the MSCI AC World Index), there has only been one year in which all the monthly returns for the year were positive. If you guessed that year to be 2017, Congratulations! You were right. One pundit suggested that, since 2017 was a year with gains in all months, 2018 might bring more volatility in global stocks – evidence that sometimes even pundits make accurate predictions.
  • We appreciate when our clients experience joyous life events. Recently, two couples, both clients, welcomed a new addition to their families. One couple are first-time parents of a boy (who joins four cousins whose parents are also REDW Stanley clients), and the other are grandparents who added a fifth grandchild to the clan.

Copyright 2018 REDW Stanley Financial Advisors, LLC. All Rights Reserved. This publication is intended for general informational purposes only and should not be construed as investment, financial, tax, or legal advice. 

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Market View (February 2018) – Recent Volatility

by Daniel Yu, CFA®, AIF®, REDW Stanley Financial Advisors

As we noted in our recent Year in Review newsletter, we expected volatility to increase in 2018, and here in the early days of February 2018 we see that volatility increasing as the S&P 500 has declined more than 5% in the last two days. Many headlines say that the recent decline is due to increased worries over inflation, and how the Federal Reserve will react to unexpected inflation news. While that may be a part of the rationale for there being more sellers than buyers, we tend to think this is a rather weak argument. Although the two main inflation indicators the Federal Reserve uses have been accelerating in recent months, they are not indicating a rapid return of inflation.  It seems other reasons exist for the recent downturn.

At the beginning of the year the forward Price Earnings (P/E) ratio of the S&P 500 was about 18.2x, which was above the 25 year average of 16.0x, but within one standard deviation, and not near the 22x (or more) of the 2000 dot.com bust.  Also, fixed income rates have been increasing most of 2018.  The US Ten Year Treasury began the year with a rate of 2.45%, but has recently increased to 2.79%, which makes fixed income investments more attractive than they were when the year began.  We could be seeing the rotation of assets from equities to fixed income. Finally, the S&P 500 had a positive return for January which makes 15 consecutive months where the S&P 500 had positive monthly returns. This is highly unusual for the S&P 500, and declines were to be expected.

Could the declines we have seen be the beginning of a correction? Yes, it could.  Are we expecting a broad economic recession?  No, we are not. We anticipate the fiscal stimulus from the recent tax law to take about 12-18 months to fully show up in the market place in terms of changes to household income, and changes to spending at both the household and corporate level.  In terms of US GDP growth, we continue to expect for growth to be about 3% in 2018 which is above the 2.1% of recent years.  While we evaluate many economic indicators, we are particularly heartened by the ongoing growth in manufacturing, retail sales, job creation, and wages. We are also seeing ongoing growth in international and emerging markets.

The recent market declines reinforce our ongoing commitment to providing diversified and asset allocated portfolios to our clients.  Every market cycle has corrections, and having a diversified portfolio helps to reduce some of the volatility from equities during such periods.  Despite the recent downturn we continue to have a positive long term outlook for equities.  If you have experienced a change in financial circumstances or goals, or if you are concerned about the recent volatility then please contact your relationship manager for a discussion.

Copyright 2018 REDW Stanley Financial Advisors, LLC. All Rights Reserved. This publication is intended for general informational purposes only and should not be construed as investment, financial, tax, or legal advice.

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