posted on December 13, 2017 12:08
Global stocks climbed 2.0% during November to continue what has been a stellar 2017 for equities. U.S. stocks also had a strong month, with the S&P 500 Index returning 3.1%, putting it up 20.5% year to date as markets continue to post record highs.
- U.S. real GDP growth for the third quarter was revised up to 3.3%, the highest rate of growth since 2014.
- Inflation fell slightly to 2.0% on a year-over-year basis.
- A total of 228,000 jobs were added in November, which beat out analyst expectations.
- The unemployment rate remained at a 17-year low of 4.1%.
- The S&P 500 Index rose 3.1% in November. Consumer Staples and Telecommunications were the leading sectors with gains of 5.7% and 6.0%, respectively.
- U.S. small cap stocks had a steady month, gaining 2.9%.
- International developed large cap markets posted another positive month rising 1.0% overall, led by Japan at 3.0%.
- Emerging markets were quiet in November gaining 0.2%, but remain the best performer of 2017, up 32.5%.
- The 10-year U.S. Treasury yield remained at 2.4% in November.
- Across traditional bond asset classes, TIPS and International bonds had positive returns during November, up 0.1% and 0.5% respectively.
- Short- and Intermediate-term bonds were slightly negative for the month.
- Alternative asset classes had a good month with managed futures up 0.8%, reinsurance up 1.1%, and REITs up 3.1%.
- Despite the positive month, commodities, managed futures, and reinsurance are all down year-to-date with losses of -1.2%, -3.5%, and -0.5%, respectively.
- REITs have been the lone bright spot for alternatives in 2017, up 7.3%.
Capital Gain Distributions: The most wonderful time of the year?
Capital gains distributions aren’t usually the first things that come to mind when we think of the holiday season, but they can have an important impact on the tax efficiency of your portfolio.
A capital gains distribution is the tax-liability that is passed from a mutual fund to its shareholders as a result of the investment actions of that fund during the year. When a mutual fund sells a security at a gain, this creates a taxable event just like if you bought and sold the security on your own. However, mutual funds are not tax-paying entities and are required by law to distribute at least 95% of capital gains to their shareholders on a yearly basis. Mutual funds make these distributions once or twice a year to any shareholders holding the fund on that date, regardless of when they purchased it. Now that we understand what capital gains distributions are, let’s look at how they might impact your tax bill.
The types of accounts that hold mutual funds will determine how these distributions affect you. If you hold mutual funds in tax-deferred or tax-exempt accounts, then these capital gains distributions will have no impact on your taxes for this year. The next point to consider is whether capital gains distributions will qualify as short-term or long-term gains. If the fund held the security for more than a year before it was sold, it is a long-term capital gain. If it was held for less than a year, it is a short-term capital gain. Short-term capital gains are taxed at your ordinary income tax rate, so individuals in a high tax bracket could be paying nearly 40% in taxes on short-term capital gains distributions. Long-term capital gains are taxed at 0%, 15%, or 20% depending on your tax bracket and will therefore always be lower than your short-term capital gains rate.
What strategies does Savant employ to help our clients limit their tax bills? Savant’s Investment Research team focuses on distribution estimates every year at this time so we can proactively avoid purchasing funds with upcoming distributions. We also work to ensure tax-inefficient investments are held in tax-advantaged accounts whenever possible, a strategy known as asset location. Finally, if you find yourself facing a large tax bill due to capital gains, you and your advisor can discuss selling other securities at a loss to help reduce your tax bill. To learn more about any of these strategies please reach out to your advisor.
Read our complete November 2017 Economic & Market Commentary for Market Returns Year-To-Date as of 11/30/2017, Market Returns Longer Term Annualized as of 11/30/2017, Economic Indicators, and an Appendix.
Sources: Vanguard, Morningstar, Cap Gains Valet, FINRA
This is intended for informational purposes only and should not be construed as legal, investment or financial advice. Please consult your legal, investment and financial professionals regarding your specific circumstances.