End of 2nd QTR loss question

[retiredunder50]

Generally speaking, I agree with you. However, when the corporate tax rate is cut from 35% to 21%, that definitely will increase earnings for corporations. When earnings are expected to increase for corporations the stock price can be expected to increase as well.

Federal Reserve Chairman.

I recall the first full year (2018) of the corporate tax rate cut implementation ended up with negative market performance (S&P 500, Dow,...), but yes, generally speaking.

I also recall that the S&P 500 finished last year up 26.89% and posted a record close at least once a month. The broad market index notched 70 such record closes in 2021, the second-highest annual total behind 1995′s 77 closing highs. The Dow Jones Industrial Average climbed 18.73% and the Nasdaq Composite rose 21.4%. I try not to focus on 6 month down markets nor a 12 month performance period with gains. I like to think of long term performance with the visualization of someone walking up a set of steps playing with a yo-yo; plenty of ups and downs but, over time, continued upward trajectory.

 

[Happyras]

I sum it up as ones opinion of a soft landing....Equities were priced high in 2021 with future earning expectations. The Fed's printed way too much money, without the corresponding GDP growth to support it. This inflation is not due to simply short term supply and demand, more by valuation. The only way to fight inflation historically proven is to raise rates>rate of inflation like Volker. “We have set our course to restrain growth in money and credit. We mean to stick with it” (Volcker 1981a).

Of course we know how well that went, with recession leading to deflation at the expense of employment.

The economy officially entered a recession in the third quarter of 1981, as high interest rates put pressure on sectors of the economy reliant on borrowing, like manufacturing and construction. Unemployment grew from 7.4 percent at the start of the recession to nearly 10 percent a year later. As the recession worsened, Volcker faced repeated calls from Congress to loosen monetary policy, but he maintained that failing to bring down long-run inflation expectations now would result in “more serious economic circumstances over a much longer period of time” (Monetary Policy Report 1982, 67).

Ultimately, this persistence paid off. By October 1982, inflation had fallen to 5 percent and long-run interest rates began to decline. The Fed allowed the federal funds rate to fall back to 9 percent, and unemployment declined quickly from the peak of nearly 11 percent at the end to 1982 to 8 percent one year later (Federal Reserve Bank of St. Louis; Goodfriend and King 2005).

The markets have been unwinding nicely and will continue to do so as earnings reveal even todays equities prices can not be supported. We had price drop on equities and soon will have earnings drop as the Fed pushes on to softly decrease demand (not increase supply). Maybe we will only see a short bear market, but the cards are showing us this is more likely leading to a typical recession. The next clue will be earnings, followed by a slight rise in unemployment, but a surprise drop in inflation. This will encourage the Fed.
The Fed's soft landing means deflating stock values slowly over time, so we do not have a 1987 event, but I think a 1981 style recession is a high probability. Enjoy the higher bond yields but sell short covered calls on SPY!

Now if I were emperor I would do everything to drive up GDP, and drive down excess spending, and let inflation run with full employment. Supply will exceed demand naturally and we would have essentially deflationary pressure on labor with shorter work weeks, and higher standards of living for those who work for it. MTCW

 

[frayne]

I can remember reading an investment book years ago that stated if you are going to be losing sleep over a 30% loss of your portfolio, you probably shouldn't be in the the stock market.

 

[pb4uski]

Not an individual person but when the Bureau of Economic Analysis releases the 2nd quarter GDP numbers on July 28th, indicating the second consecutive quarter of negative GDP, and thus officially placing the U.S. in a recession, I expect a market reaction.

Yeah, but which way? The market could view it as confirmation that they were right and go up or as confirmation that they were right and go down.

 

[Qs Laptop]

Yeah, but which way? The market could view it as confirmation that they were right and go up or as confirmation that they were right and go down.

Agreed. But there will be a reaction.

 

[pb4uski]

Maybe, or the market might view it as confirmation that they were right and therefore it's priced in and its a nothing-burger. Perhaps we should do a poll on what the S&P 500 does on that day for the fun of it.

 

[Car-Guy]

So, there is nothing positive going forward?
Or is this avoiding politics?

No to both questions. The OP's question was about stock losses for the first 6 months of 2022... (Not what's coming). I didn't say anything about mine since there was nothing positive to say... The only place I made any money (not buying power) in the past 6 months was in my fixed income investments in my 401k... I guess the only thing I can say positive about that is, I lost buying power at a much slower rate in my fixed income account than I did in in my speculation or investment accounts. At least my fixed income $ value was up even if the buying power was down... My stock plays were down in $ value and buying power...

I think "some" people may think that they only lost 10% (as an example) in value from their stock portfolio (since it only went down 10%) when in reality they are forgetting about the impact of inflation which may be even greater than their actual stock value loss. So while they may have only lost 10% in the value of their portfolio, it may be closer to 20% in buying power.

And with that, have a nice day.

 

[Car-Guy]

Here’s a chart by Barry Ritholtz which gives a little more perspective to the current sell off. Lots of volatility over the years, and in comparison, this current decline doesn’t stand out as extreme. https://ritholtz.com/2022/07/nowhere-to-hide/

Well, so far....


Interesting chart... How well I remember the three most extremes in my lifetime on this chart. I hope this one doesn't beat out any of those.

 

[bmcgonig]

We've been ignoring market gyrations since 1987. It's worked out fine. But, sorry to say @Drake3287, 25% is not a "huge hit." Average, maybe?

Easy solution: Stop watching. Check back in a year or two. Or five. We look our portfolio over annually during the Christmas/New Year week. Once in a while we make a trade or two as a result.

You really think there is an actual person who is to blame for the market going down? Who?

Whoever it is it’s the same person to blame for it going up massively in 2020/2021

 

[meleana]

I’m upset. We’ve lost almost 16% stock and bond funds and some ETF’s in mostly IRA’s and a brokerage account.

We are living on our taxable accounts cash until SS at age 70 in 2 and 4 years.

We were supposed to start Roth conversions this year as we are in the 12% tax bracket, but I’m not crazy about taking thousands of dollars out of the cash we have and handing it over to the government while our IRA’s are going down in the toilet.

For the first time, all our accounts fell below $2 million. We are 66 and 68. No pensions.

 

[gooddog]

That means that my latest mark-to-market delta isn't measured in Ferraris.

Measured in Ferraris. Anything to avoid the metric system.

 

[pb4uski]

I’m upset. We’ve lost almost 16% stock and bond funds and some ETF’s in mostly IRA’s and a brokerage account.



We are living on our taxable accounts cash until SS at age 70 in 2 and 4 years.



We were supposed to start Roth conversions this year as we are in the 12% tax bracket, but I’m not crazy about taking thousands of dollars out of the cash we have and handing it over to the government while our IRA’s are going down in the toilet.



For the first time, all our accounts fell below $2 million. We are 66 and 68. No pensions.

I understand that you are upset, but in the whole scheme of things I don't see the connection between Roth conversions which is simple tax rate arbitrage and portfolio movements. But if it make you feel better wait on the conversion until year end and don't do it if you don't want to.

 

[DrRoy]

I’m upset. We’ve lost almost 16% stock and bond funds and some ETF’s in mostly IRA’s and a brokerage account.

We are living on our taxable accounts cash until SS at age 70 in 2 and 4 years.

We were supposed to start Roth conversions this year as we are in the 12% tax bracket, but I’m not crazy about taking thousands of dollars out of the cash we have and handing it over to the government while our IRA’s are going down in the toilet.

For the first time, all our accounts fell below $2 million. We are 66 and 68. No pensions.

When you convert from your regular IRA to your Roth, the idea is to allow for future, untaxed growth in the Roth account. You pay taxes on the transfer amount when it is taken. It is better for you to do this when the market is down. You pay less tax on the smaller amount, and you then have the opportunity for more tax free growth in the future. Go ahead.

 

[meleana]

When you convert from your regular IRA to your Roth, the idea is to allow for future, untaxed growth in the Roth account. You pay taxes on the transfer amount when it is taken. It is better for you to do this when the market is down. You pay less tax on the smaller amount, and you then have the opportunity for more tax free growth in the future. Go ahead.

Thanks, but…
How is it a smaller amount? I would still be converting the same dollar amount as planned. Ex: let’s say I planned on converting $70,000, I still would convert $70,000 so the taxes are the same.

Are you saying pay the taxes out of the converted account and not from my taxable cash account? That I might consider.

 

[latexman]

Thanks, but…
How is it a smaller amount? I would still be converting the same dollar amount as planned. Ex: let’s say I planned on converting $70,000, I still would convert $70,000 so the taxes are the same.

Are you saying pay the taxes out of the converted account and not from my taxable cash account? That I might consider.

I don't think where the tax funds comes from was DrRoy's main point here, though it is a frequent, valid topic of discussion.

The point was, you are converting $70k from a tax deferred fund that has dropped 16%, so it was worth $83k, and we have extremely high hopes it will recover sooner, rather than later, in a tax free fund. Another way to look at it, after it recovers, you paid $8.4k of tax on $83k, which is a 10% tax rate, not 12%.

Note, my examples assume tax funds come from your taxable cash account, since you end up with more in the tax free account that way.

 

[target2019]

Income flow comes into play too. If you have excess income to pay the additional tax now on $10,000 converted amount, that is desirable. You might also have $1,200 laying in a low-interest checking account, and can use that to pay the estimated tax. If you need to pay the estimated tax from converted money then you concede $1,200 of your tax-deferred amount to the USG now.

In all cases this makes sense when that $10,000 is forced income down the road, aka RMD. In the future the tax will be at least 22%, which is a significant difference.

As you see, the amount being converted in a year can be very different between $10,000 and $70,000 converted. I, for example, can easily find $1,200. Others may not. Seven times that amount causes me to pause.

I try to keep my eye on the ball, that I am converting shares of VTSAX, so I convert more shares at $10,000 now than I did when VTSAX cost 10% more last year. In the future, if stocks rise, I go ahead of the game.

As I think about the conversion challenge, I pass through 3 stages of thought. 1) This is a great deal. 2) I must pay more tax. 3) How much tax can I afford this year? 4) Do I ever really win a game 10 years in the future?

 

[COcheesehead]

I’m upset. We’ve lost almost 16% stock and bond funds and some ETF’s in mostly IRA’s and a brokerage account.

We are living on our taxable accounts cash until SS at age 70 in 2 and 4 years.

We were supposed to start Roth conversions this year as we are in the 12% tax bracket, but I’m not crazy about taking thousands of dollars out of the cash we have and handing it over to the government while our IRA’s are going down in the toilet.

For the first time, all our accounts fell below $2 million. We are 66 and 68. No pensions.

I am not a big advocate of Roth conversions for a number of reasons, you can google that topic and I don’t want this thread to go off track, but taking out cash now when the market is down is the equivalent of creating your own sequence of return risk scenario. Do what makes you feel comfortable, but Roth conversions are not necessary or sometimes not even recommended.

 

[meleana]

I don't think where the tax funds comes from was DrRoy's main point here, though it is a frequent, valid topic of discussion.

The point was, you are converting $70k from a tax deferred fund that has dropped 16%, so it was worth $83k, and we have extremely high hopes it will recover sooner, rather than later, in a tax free fund. Another way to look at it, after it recovers, you paid $8.4k of tax on $83k, which is a 10% tax rate, not 12%.

Note, my examples assume tax funds come from your taxable cash account, since you end up with more in the tax free account that way.

Thanks. I understand now what you were saying.

I guess to justify the fact that I hate taking out big chunks of change for the next 4 years out of my cash accounts to send to the IRS, I was thinking let’s say I don’t do the conversions. (our FA says we don’t “have” to to have a decent retirement). We die and our son inherits the Traditional IRAs and has to pay taxes. Poor him. But ok- he might also inherit some of that money in our cash accounts because we didn’t send it to the IRS depending on when we pass.

OR- What if instead we do the conversion and pay the taxes out of the converted account. Yes- less money in there for son to inherit or for us to use later on. We can’t touch the money anyway for 5 years. We die and son inherits the Roth with less money in it, but doesn’t have to pay taxes so less hassle and might still inherit our cash account if any money is still in it because we didn’t send it to the IRS for conversions. Is that so bad?

 

[DrRoy]

Thanks, but…
How is it a smaller amount? I would still be converting the same dollar amount as planned. Ex: let’s say I planned on converting $70,000, I still would convert $70,000 so the taxes are the same.

Are you saying pay the taxes out of the converted account and not from my taxable cash account? That I might consider.

Ah, perhaps the taxes would not be less, but when the market is down, the share price of your investment is also down. The value of your $70K amounts to more shares of investment, which gives you more growth when the market recovers.

 

[SecondCor521]

Thanks. I understand now what you were saying.

I guess to justify the fact that I hate taking out big chunks of change for the next 4 years out of my cash accounts to send to the IRS, I was thinking let’s say I don’t do the conversions. (our FA says we don’t “have” to to have a decent retirement). We die and our son inherits the Traditional IRAs and has to pay taxes. Poor him. But ok- he might also inherit some of that money in our cash accounts because we didn’t send it to the IRS depending on when we pass.

OR- What if instead we do the conversion and pay the taxes out of the converted account. Yes- less money in there for son to inherit or for us to use later on. We can’t touch the money anyway for 5 years. We die and son inherits the Roth with less money in it, but doesn’t have to pay taxes so less hassle and might still inherit our cash account if any money is still in it because we didn’t send it to the IRS for conversions. Is that so bad?

Every dollar in your traditional IRA has associated with it a tax bill.

One of the following cases will happen (there might be others; these are the most common I think):

1. You'll voluntarily Roth convert that dollar now and pay the tax bill now at your marginal rate now.

2. You'll involuntarily RMD that dollar later and pay the tax bill then at your marginal rate then.

3. You'll donate the dollar via QCD or beneficiary designation. No taxes, but you don't get to spend the dollar (or what's left of it after taxes).

4. Your son will inherit the dollar inside the IRA and probably have to withdraw it sometime in the subsequent 10 years at his marginal rate then.

Setting aside case #3, you can see that that tax bill will be paid. It's just a matter of by whom, how much, and when.

The growth inside the IRA just create more dollars with the same tax bill attached, so I ignore it for my analysis.

Personally, I try to minimize how much, so I compare the marginal rate of #1, #2, and #4 and try to pick the lowest tax bill.

 

[Al18]

Convert as much into the Roth IRA now, because you will be paying more in taxes once you turn 72 and RMD’s kick in, you will be in the 25% tax bracket! You can pay the Roth IRA conversion taxes from the IRA.

 

[harllee]

If you are upset by the relatively small amount of loss so far this year in the stock market then you have too much invested in the market. Really, so far the losses are nothing compared to 2008. In 2008 I had the majority of my assets tied up in stocks and had many sleepless nights. I had taken too much risk. I held on and did not sell but as soon as things recovered I cashed out a bunch of stocks and went to a much more conservative asset allocation. I put a significant portion of my assets in cash (mainly CDs). Now I don't concern myself at all about the relatively small loss in the stock market that we have seen so far. It is just part of the normal cycle.

 

[foxfirev5]

Even though I'm a participant, I'm not really feeling the impact of the loss in my equity holdings. With an LMP/RP approach I have plenty set aside to ride out a pretty long downturn. Due to my personal situation I extended my Treasury STRIP ladder out to 2040 when rates approached 3.5%. This was not due to any brilliance on my part, only to address my wife's concerns regarding my possible demise. Now that I'm not dead and probably doing better than before, I wonder what to do. The overwhelming advice has been to keep durations short since everybody knows interest rates are going up.

Even though I could erase the rash move to safety at considerable profit, I know I will stay with the plan. It's good enough and the LMP is a minority position. ( My overall maturity is under 6 years) After 40 years of ups and downs I realize more each day that nobody knows nothin' and pure luck is a real factor. I never thought Series I bonds would be a factor even though I've bought them for years. Never sell the market at a loss and only sell at a profit when you know you will need the cash.

Meanwhile my 50% - now 42% equity stake is on it's own. If it grows the kids will have more, or I may get a boost in old age. Who knows. There are many factors to consider. You need to develop your own plan. Everbody is different.

 

[RunningBum]

Every dollar in your traditional IRA has associated with it a tax bill.

One of the following cases will happen (there might be others; these are the most common I think):

1. You'll voluntarily Roth convert that dollar now and pay the tax bill now at your marginal rate now.

2. You'll involuntarily RMD that dollar later and pay the tax bill then at your marginal rate then.

3. You'll donate the dollar via QCD or beneficiary designation. No taxes, but you don't get to spend the dollar (or what's left of it after taxes).

4. Your son will inherit the dollar inside the IRA and probably have to withdraw it sometime in the subsequent 10 years at his marginal rate then.

Setting aside case #3, you can see that that tax bill will be paid. It's just a matter of by whom, how much, and when.

The growth inside the IRA just create more dollars with the same tax bill attached, so I ignore it for my analysis.

Personally, I try to minimize how much, so I compare the marginal rate of #1, #2, and #4 and try to pick the lowest tax bill.

Yes, exactly. Meleana, read this closely.

Maybe it helps to view the IRA as I do. I see it as money I can't access until I pay the taxes. In any of my personal financial documents, I consider not only the value of an IRA, but also the deferred tax liability against it. When I convert or withdraw from an IRA, I don't think so much about the taxes I spent, but rather the amount I have freed (reduced by the taxes) for me to use however I want.

 

[N02L84ER]

Every dollar in your traditional IRA has associated with it a tax bill.

One of the following cases will happen (there might be others; these are the most common I think):

1. You'll voluntarily Roth convert that dollar now and pay the tax bill now at your marginal rate now.

2. You'll involuntarily RMD that dollar later and pay the tax bill then at your marginal rate then.

3. You'll donate the dollar via QCD or beneficiary designation. No taxes, but you don't get to spend the dollar (or what's left of it after taxes).

4. Your son will inherit the dollar inside the IRA and probably have to withdraw it sometime in the subsequent 10 years at his marginal rate then.

Setting aside case #3, you can see that that tax bill will be paid. It's just a matter of by whom, how much, and when.

The growth inside the IRA just create more dollars with the same tax bill attached, so I ignore it for my analysis.

Personally, I try to minimize how much, so I compare the marginal rate of #1, #2, and #4 and try to pick the lowest tax bill.

I agree with the above analysis. You also stated in this thread that "We cannot touch the money anyway for 5 years." This is not true if you opened any Roth IRA more than 4 years ago.