The S&P 500, an index of 500 stocks that represents the broader US stock market, fell almost 8% last week after tariffs began, and is down just over 13% year to date. It can seem scary and overwhelming. And stock prices may continue to fall further this week.
With that in mind, the worst thing that you can do at this point is panic and sell your investments. Right now, you have not lost any shares. The value of the shares you own has declined. But the companies are still there, and so is your investment in them. Until the tariffs were announced, most US companies were doing well. Their balance sheets were strong, meaning they are not over-leveraged and have strong cash positions.
We don’t know what the future holds. If tariffs and trade negotiations work out, the market should rebound quickly. The story I like to tell is that of a client who was sailing across the Pacific. Her husband had the watch, and she had brought tea up on deck to keep him company. As they were sailing along, with nothing except ocean and sky visible for miles, they came to a complete and sudden stop. Then the bow rose up, the boat rolled back, and took off again, will full sails the entire time. Turns out they had hit a sleeping whale. An unexpected stop for something that was otherwise cruising along.
I’m hoping that’s what happens here. We stop, roll back, and then pick up steam again. A protracted trade war does not help anyone.
Regardless, you should move to take advantage of this drop. Tax loss harvesting, where an investor captures losses to lower their immediate tax bill, is a great move in volatile markets. This is something that your advisor should be doing on a daily basis and not merely in December.
A Roth conversion is where an investor moves money from a traditional retirement account to a Roth account. The investor pays taxes on the value moved but no penalties. Future growth in the Roth is tax free. Depending on your income this can be a hugely advantageous move. You can move more shares for the same tax bill by doing conversions when the market is down.
If you own concentrated stock positions with large unrealized gains, meaning the price you paid is much lower than the current price, a market drop provides an opportunity to diversify with a lower tax bill. And finally, if you have cash on the sidelines, now is a great time to invest. When a store puts things on sale, people don’t generally run out of the store screaming – they flock to the store to buy more.
We are also starting to see mortgage rates come down. Mortgages are generally based on the 10-year Treasury rate. That number is dropping, as investors believe that rates will be lower in the future. This key indicator dropping allows the US Treasury to refinance our national debt at a lower price. It also gives homeowners who feel stuck in their current homes the ability to move. While rates have not dropped far enough for refinancing to make sense for many people, it is something to keep an eye on.
Your action item this week is to talk with your advisor and tax professional about a Roth conversion.
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CovingtonAlsina is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.