The Northern Star 2/26/18

Message from Jon

Inflation and Interest Rates
If anyone wants to know what the market thinks about inflation and the rise of interest rates' effect on bonds and stocks, all they need do is observe the market conditions of late.
As of Tuesday, I am watching 68.5% of all stocks decline, and the chart has the precision lines of a chainsaw! Interesting enough, our StormGuard Indicator has declined from a +1.39% (high point in the markets in January) to a current level of +0.61%, even after the "recovery" of the most recent market correction.
We are seeing the VIX spike from about 10.25 at the start of 2018 to a high of about 33.5 a month later at the beginning of February, and then retreat to just over 17 as I am writing this newsletter. A 226.83% increase in the volatility index in under 30 days can't be good - and voila' - it wasn't.
Some say the markets are a six-month predictor of the US economy, and if that is the case, we should be preparing for a cloudy and unpleasant forecast later this year. What does this all mean?
Nothing at this point, other than the fact that anytime monetary policy is in flux, you can bet it will send the jitters through the markets like a winter flu. Sometimes, having the flu can be life-threatening. In the majority of the cases, however, it turns out to simply not feel good, but something that we all just live through.
Till we speak again, enjoy the warm(er) weather.
Jon
sources:
https://finviz.com/futures.ashx
https://finviz.com/futures_charts.ashx?p=d1&t=VX
https://finviz.com/

Interest Rates, Treasuries,

and Inflation

WEEKLY UPDATE - FEBRUARY 26, 2018

Last week, the Presidents' Day holiday meant markets were only open for 4 trading days, and during that time, we received comparatively few economic reports. Nonetheless, major domestic indexes showed considerable volatility and posted losses for 3 straight days. By Friday, however, stocks rebounded and ended the week in positive territory.[1] For the week, the S&P 500 gained 0.55%, the Dow added 0.36%, and the NASDAQ was up 1.35%.[2] International stocks in the MSCI EAFE lost ground, dropping 0.50%.[3]

What drove market performance last week?
Once again, inflation and interest rates were on many investors' minds. In particular, multiple reports from the Federal Reserve contributed to performance.
On Wednesday, the Fed released minutes from its January meeting, which indicated that officials had concerns about inflation.[4] The minutes revealed that between rising inflation and economic growth, the Fed sees justification for continued interest-rate increases. In reaction to the news, 10-year Treasury note yields hit their highest level in 4 years.[5]
How do treasury yields and stock prices affect each other?
To say that the interaction between treasuries and stocks is complex would be an understatement. At its most basic, prices for stocks and bonds usually move in opposite directions. When stock prices go up, bond prices drop - and vice versa. For treasuries and other bonds, yields rise when their prices drop. As a result, when the stock market jumps, treasury yields often do, too.[6]
Last Wednesday, however, rising yields may have contributed to a drop in the markets.[7] Why?
Some investors become concerned when 10-year Treasury yields hit 3%, since that percentage level has aligned with bear markets for the past several decades.[8] On Wednesday, the yields hit 2.94% - just a sliver away from that "warning" level.[9]
Please note that the rate-driven analysis triggering this concern is likely far too simple and may not accurately predict what's ahead.[10] With that said, the concern still has the ability to affect investor reactions.
What happened later in the week?
Friday, the Fed shared more information with a new report on its monetary policy. The details helped allay some investors' fears of interest rates increasing too quickly. In reaction, yields on 10-year Treasury decreased to 2.87% - and the S&P 500 had its largest gain in weeks.[11]
What's on the horizon?
After receiving multiple perspectives from the Fed last week - but relatively few new data updates - we should gain significant economic insight this week. From a Gross Domestic Product reading to perspectives on manufacturing and consumer confidence, investors will have many fresh data points to analyze.[12] We will monitor these updates closely and continue to help you stay informed about where the economy stands and what to expect in your financial life.

ECONOMIC CALENDAR
Monday: New Home Sales
Tuesday: Durable Goods Orders, Consumer Confidence
Wednesday: GDP
Thursday: Motor Vehicle Sales, PMI Manufacturing Index, ISM Mfg Index
Friday: Consumer Sentiment

Notes: All index returns (except S&P 500) exclude reinvested dividends, and the 5-year and 10-year returns are annualized. The total returns for the S&P 500 assume reinvestment of dividends on the last day of the month. This may account for differences between the index returns published on Morningstar.com and the index returns published elsewhere. International performance is represented by the MSCI EAFE Index. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

How Do You Choose a Tax Preparer?*

Choosing a tax preparer isn't like choosing drapes, a new sofa set, or even a lawn care company. Preparing taxes is serious business. One number in the wrong column, one decimal point out of place, or one missed deduction, and you may be paying big time.
So, how do you find a good, reliable tax preparer who knows what i's to dot and what t's to cross? Here are 10 tips from the IRS to help you find the right preparer:

Check their qualifications. The IRS's Directory of Federal Tax Return Preparers with Credentials and Select Qualifications is a good starting point.
Check their history. The Better Business Bureau may identify any red flags. Check for disciplinary actions and the license status for credentialed preparers.
Ask about service fees. Avoid preparers who base fees on a percentage of the refund or who boast bigger refunds than their competition.
Ask to e-file. Taxpayers should make sure their preparer offers IRS e-file.
Make sure the preparer is available. Taxpayers may want to contact their preparer after this year's April 17 due date. Avoid fly-by-night preparers.
Provide records and receipts. Good preparers will ask to see a taxpayer's records and receipts.
Never sign a blank return. Don't use a tax preparer who asks a taxpayer to sign a blank tax form.
Review before signing. Before signing a tax return, review it. Ask questions if something is not clear. The preparer should give you a copy of the completed tax return.
Ensure the preparer signs and includes a PTIN. All paid tax preparers must have a Preparer Tax Identification Number. By law, paid preparers must sign returns and include their PTIN.
Report abusive tax preparers to the IRS. Most tax return preparers are honest and provide great service to their clients. However, some preparers are dishonest. Report abusive tax preparers and suspected tax fraud to the IRS. Use Form 14157, Complaint: Tax Return Preparer. If a taxpayer suspects a tax preparer filed or changed a return without the taxpayer's consent, the taxpayer should file Form 14157-A, Return Preparer Fraud or Misconduct Affidavit.

* This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

Tip courtesy of IRS.gov[14]

[1] wsj-us.econoday.com/byweek.asp?day=20&month=2&year=2018&cust=wsj-us&lid=0

www.cnbc.com/2018/02/23/fed-sees-economy-past-full-employment-but-with-only-moderate-wage-gains.html

[2] http://performance.morningstar.com/Performance/index-c/performance-return.action?t=SPX®ion=usa&culture=en-US

http://performance.morningstar.com/Performance/index-c/performance-return.action?t=%21DJI®ion=usa&culture=en-US

http://performance.morningstar.com/Performance/index-c/performance-return.action?t=@CCO

[3] www.msci.com/end-of-day-data-search

[4] www.marketwatch.com/story/heres-why-stock-market-investors-need-to-keep-an-eye-on-the-yield-curve-2018-02-22

[5] www.cnbc.com/2018/02/23/us-stock-futures-dow-data-earnings-and-politics-on-the-agenda.html

[6] finance.zacks.com/correlation-treasuries-stocks-10871.html

[7] www.marketwatch.com/story/heres-why-stock-market-investors-need-to-keep-an-eye-on-the-yield-curve-2018-02-22

[8] www.cnbc.com/2018/02/23/us-stock-futures-dow-data-earnings-and-politics-on-the-agenda.html

[9] www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield

[10] www.marketwatch.com/story/heres-why-stock-market-investors-need-to-keep-an-eye-on-the-yield-curve-2018-02-22

[11] www.cnbc.com/2018/02/23/us-stock-futures-dow-data-earnings-and-politics-on-the-agenda.html

www.bloomberg.com/news/articles/2018-02-22/asian-stocks-set-to-edge-higher-dollar-slides-markets-wrap