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STA Weekly Report – What a Year!

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What a Year!
How Tax Reform is Already Affecting Corporate America

Weekly Technical Comment
New Year’s Resolutions – Get Your Finances in Order

401k Plan Manager


What a Year!

What a year! A stronger economy, better earnings and pro-business policies helped trigger a monster rally in stocks. For those prognosticators that thought that Brexit followed by the election of Donald Trump would unleash market volatility, the exact opposite happened last year. In fact, nine of the ten lowest reading by the VIX or Volatility Index ever were posted in 2017.

While the political situation was highly-charged, the financial backdrop could scarcely have been more perfect. The Dow Jones Industrial Average managed to climb nine months in a row, the longest streak since 1959.

The S&P 500 total return (with dividends) rose every single month in 2017, a feat never before accomplished. For the year, the S&P 500 closed with a19% gain, the Dow rose 25% and the Nasdaq rallied 285.  The FAANG stocks rose an average of 50% in 2017.  May be a time to rebalance?

Asia fared well also – Japan’s Nikkei soared 19%, Hong Kong’s Hang Seng by an 36%, and India’s Sensex by 30% last year. Asia-ex Japan advanced 39% and Emerging Market stocks were up 34%. Places like Vietnam increased 48%!

It wasn’t just equities, either.  Global bonds generated a net positive return of 7%. Gold had the best year since 2010 up 14%. Commodities tend to have low correlations with equities, but even here was saw Brent Crude turned in an impressive 18% rally.

The momentum of this advance can be seen in the number of stocks trading above their 200-day moving average. Our latest calculation was 76% of the S&P 500 stocks were trading above that level. Growth was the place to be in 2017. Growth stocks, those with higher earnings expectations, had a stellar year. Large Cap Growth stocks (Russell 1000 Growth) returned 30.2% while Large Value stocks returned 13.6%. Smaller stocks also had a dramatic difference in returns with Small Growth returning 22.1% while Small Value stocks only rose 7.8%. Only in the last two months did Large Value stocks outperform.

Nothing but good thoughts seem to be in investors’ minds. Bullish levels are at levels last seen before the 1987 market crash. That downturn was also preceded by heavy index fund purchases and Fed rate hikes. Other similarities to current conditions; PE ratios are about the same now as the peak in 1987 and no recession on the horizon.

All in all, 2017 has been one for the books. Aggressive, higher risk investing was rewarded while more conservative, less risky investing lagged. This is not the time to be overly aggressive and we think it best to review your portfolio and consider your risk management strategy as we head into 2018.

How Tax Reform is Already Affecting Corporate America

Without a doubt, tax reform was one of the main developments during the fourth quarter of 2017. Ongoing debate about the shape reform would take ultimately culminated in the signing of a tax reform bill in the second half of December intended to simplify taxation and cut the corporate tax rate to a level that will make the United States more competitive from a corporate income tax perspective.

A tax overhaul could make a big difference for both employees and corporate America, which we are already seeing.


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Year-end bonuses

Almost immediately after the bill was signed by President Trump, several companies announced that they would make bonus payments to employees. With corporate tax rates slashed from 35% to 21%, several companies have already taken the opportunity to pass along some of those savings to employees. AT&T for example, announced a $1,000 bonus for more than 200,000 of its employees. Similarly, we had bonus announcements from Comcast, Stifel, Fifth Third Bancorp, Boeing, Sinclair Broadcast Group, and Texas Capital Bank, to name a few. The year-end bonuses could have certainly helped retail sales during the holiday season, which saw an increase of 4.9% compared to 2016.

Increasing minimum wages

In another boost to workers, several companies announced that wages would also be increasing. At Wells Fargo, the minimum wage increased from $13.50 to $15.00 while at Fifth Third Bancorp they plan to also adopt the $15 minimum wage for all its employees starting in 2018. However, banks have a relatively small share of workers affected by the tax-related wage increase, meaning that the overall economic impact is probably quite small. However, it is symbolic as it shows a direct relationship between lower corporate tax rates and the labor market. That said, it would be far more meaningful to see companies in sectors like retail and food service raise minimum wages in response to tax reform, as it would affect far more American workers.

Changes to executive compensation structures

Changes to executive compensation structures may also be underway in response to the new tax reform bill. We could see increased base salaries for executives and reduced bonus targets. The reason is that previously companies could only deduct $1M of salary expense per executive with the remainder of compensation deductible so long as it was tied to performance-based metrics like profitability. This naturally provided an incentive for corporations to limit executive base pay and grant performance-based compensation instead. However, the tax bill largely eliminates the deduction.

Netflix Inc. was the first company to restructure executive compensation in direct response to the tax overhaul. For example, the Chief Content Officer brought in a salary of $1M in each of the last three years, before tax reform. Now, for 2018, his base pay will balloon to $12M. The Chief Product Officer will similarly see a large increase in his base salary to $6M. However, it is unlikely to be alone in making similar changes.

Tax reform still a boon to Investors

Despite all the bonuses being paid out and changes in compensation structure in direct response to the reduced corporate tax rate, the share of savings captured by American workers is still very small. Instead we think the largest portion of tax savings will largely benefit shareholders through increased dividends and share buybacks. Since 2009, companies have shown an accelerating appetite for returning cash to investors, and we believe tax reform only stands to help continue the trend.




Weekly Technical Comment

Commodities Are Historically Very Cheap Versus Stocks

I suggested last week that stocks may be sending an inflationary message. Commodity prices (and stocks tied to them) usually do better in the later stages of a business cycle as inflation pressures start to build. We may be entering that stage. One of the reasons why investors may be turning toward commodity assets is that they’re currently the cheapest in more than half a century relative to stocks. Chart 1 compares the Reuters/Jefferies CRB Index (brown bars) and the S&P 500 back to 1957 when the CRB was created. The chart shows that commodities have gone through long periods of strength and weakness. They surged during the hyper-inflationary 1970s then fell for two decades between 1980 and 2000. They rose strongly between 2002 and 2008. but it’s been downhill since then. By the start of 2016, the commodity index had fallen to the lowest level since the early 1970s. But its chart pattern suggests that higher prices may be in store (more on that shortly). My main purpose here, however, is to show how cheap commodities have become relative to stocks.

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Commodity/Stock Ratio May Be Bottoming

The weekly bars in Chart 2 give a closer look at the CRB/SPX ratio for the last two years. Two things are worth noting. First, the 14-week RSI line (solid line) is rising faster than the ratio which is a positive sign. Secondly, the ratio may be forming a “double bottom” (see circles). That may be the first sign that the tide is starting to turn in favor of commodities. The daily bars in Chart 3 give a closer look at that potential “double bottom” in the CRB/SPX ratio. To signal a relative strength bottom, however, it still has to clear its August/November peaks. And it needs to clear its 200-day moving average. The CRB Index itself also needs to achieve a bullish breakout of its own.

CRB Index Appears to Be Bottoming

The weekly bars in our last chart show the Reuters/Jefferies CRB Index in an apparent bottoming formation that began at the start of 2016. A secondary bottom formed this summer was higher than the first which is a positive sign (rising trendline). The price bars appear to be heading back up for a challenge of the peaks formed in spring 2016 and early 2017. A decisive close above those twin peaks would confirm a commodity bottom. That rising price trend is supported by the blue 10-week average being higher than the red 40-week line. In addition, the 14-week RSI line (top of chart) has climbed over 50. A decisive upside breakout on its price chart would most likely draw even more attention to commodity markets and stocks tied to them.


Weekly Snapshot of Global Asset Class Performance


If you have any questions, please feel free to email me at


STA Investment Committee

Luke Patterson, CEO & Chief Investment Officer
Mike Smith, President
Andrei Costas, Senior Investment Analyst (Equity Strategies)
 Nan Lu, Senior Investment Analyst (Fixed Income Strategies)



New Year’s Resolutions – Get Your Finances in Order
By: Scott Bishop, MBA, CPA/PFS, CFP®

Many of you made new year’s resolutions to eat healthier, lose weight and be better to your family.  For those of you reading this newsletter, I bet you at least thought about making some Financial “New Year’s Resolutions”.  Your friends at STA Wealth want to help you reach your financial resolutions and goals.  I was just interviewed by Cameron Huddleston at Go Banking Rate for some New Years Resolution’s that you can consider…at no cost!

On the STA Money Hour, daily at 12pm on 950AM KPRC in Houston, we have talked several times about how to better plan for your future.  As we enter the New Year, it is a great time to get organized to start next year on the right foot with the right plan!  Below, I have listed some steps that you can take to get your finances ready by year-end.

First off, read this linked article to see if you are on track given your sage in life:   Proper Planning to Avoid Money Worries.  Once you see where you are, here are some follow-up steps to help your New Year’s Resolutions become reality!

Getting Started/Budgeting

  1. Start to get your budget under control
  2. Review Credit Card Statements and/or Bank/Debit Card Spending
  3. Start using Quicken or to track expenses
  1. Start giving yourself a weekly “cash budget” vs. going to ATMs (and stop using non-free ATMs)
  2. Determine Strategy to pay down debt (and work into budget) – Order
    1. High Interest non-deductible
    2. High Interest deductible
    3. Lower interest
    4. Note: Feel good about yourself…find a way to pay off lowest balances first and DON’T CHARGE WHAT YOU CAN’T PAYOFF GOING FORWARD!
  3. Review your FICO Score – see if you can get it improved ( or other services)
  4. Plan for discretionary spending items like vacations and Christmas spending and work into budget NOW vs. at time of event.
  5. Plan to save for longer term goals like new house or vacation house
  6. Consider refinancing your house if not done already (keep eye on interest rates – up almost 0.50% in last several weeks).
  7. Update your W4 if you are getting to large a refund or had a surprise tax owed.
  8. Review at the credit cards you are using to consider:
    1. Lower interest rates if you carry a balance (see FICO comment as well)
    2. The Rewards offered – based on usage, more rewards/miles?
    3. 0% Interest on balance transfers – but track and be careful!



  1.  In your budgeting, don’t forget to determine what you can put into employer plan:
    1. At least do match
    2. If not maxing, increase by 1%-2% and work into budget
  2. Medicare (and ObamaCare) Open Enrollment – are you in the right plan for your needs (healthcare utilization, prescription drugs, change in family situation)
  3. Employer Open Enrollment for Benefits – Have you picked the right plans?
    1. Enough Life Insurance
    2. 401k investments and deferral
    3. Does HSA Plan make sense?
  4. Review Your Portfolio – Has it performed to your goal “Hurdle Rate” and benchmark (not necessarily S&P 500). Given outlook are you properly allocated to stocks, bonds or cash.
  5. Determine, if available Roth vs. Traditional IRA/401k (lower the tax bracket, more Roth makes sense)
  6. If you are in retirement and/or low income year consider a Roth Conversion. This would need to be done by December 31st (if wrong can always “do over” recharacterize).
  7. Social Security Maximization Strategies (as you approach 62, FRA and age 70) – maxing with spousal and/or survivor’s benefits.
  8. Meet with a financial planner to see where you are in terms of your retirement (are you on track) – meet with a fiduciary (not just product pusher), fee-based, CFP, CPA/PFS, etc.
  1. On Track – Change savings, Hurdle Rate, Goals
  2. Pension/Social Security Maximization
  3. Risk Management
  4. Retirement Budget
  5. Optimized Tax Distribution Plan in Retirement (like STA’s R.I.T.E Plan™)



  1. Start college savings plan
    1. UTMA, 529 Plan, Pre-Paid college plans – START EARLY
  2. Review and assure year-end 529 Plan distributions (match expenses to distributions)
  3. Review available Tax Credits/Deductions (many have income limitations)
    1. Student Loan interest
    2. American Opportunity Credit
    3. Lifetime Learning Credit
  4. Research available grants and/or other financial aid.


Other Planning – Tax, Estate and Risk Management:

  1. Review your Estate Plan and get a Will done – best if with an attorney, but if you can’t afford an attorney right now, consider online services like LegalZoom (it is better than nothing).
  2. Sit with your insurance agent:
    1. Do you have enough life insurance (when considering work)?
    2. Have you considered or do you have disability and long-term care Insurance?
    3. Are there in your property-casualty coverages (car, home, umbrella, professional, etc.)?
  1. Review your 2016 Tax Return and Meet with Tax Team:
    1. Review these Year-End Tax Planning Basics.
  1. Consider year-end Charitable Planning – if needed and desired consider Donor Advised Fund (especially if you want to give a lot for tax planning and have not identified charities)
  2. Review your portfolio’s tax situation and consider Year-end Tax Loss Harvesting and “Tax Placement” changes between your retirement and taxable accounts


Important Disclosure

The information herein has been obtained from sources believed to be reliable, but we do not guarantee its accuracy or completeness. Neither the information nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by  STA Wealth Management, LLC), or any non-investment related content, made reference to directly or indirectly in this presentation will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this presentation serves as the receipt of, or as a substitute for, personalized investment advice from STA Wealth Management, LLC. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  STA Wealth Management, LLC is neither a law firm nor a certified public accounting firm and no portion of this article should be construed as legal or accounting advice. A copy of the STA Wealth Management, LLC’s current written disclosure statement discussing our advisory services and fees is available for review upon request.  ALL INFORMATION PROVIDED HEREIN IS FOR EDUCATIONAL PURPOSES ONLY – USE ONLY AT YOUR OWN RISK AND PERIL.


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