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Stock Market Today: Stocks Finish Lower as Traders Mull Recession Odds

The potential for the U.S. to slip into recession was the topic du jour Monday as stocks kicked off the week with a wobbly, uneven session.

Over the weekend, former Goldman Sachs chief Lloyd Blankfein told CBS’ Face the Nation that recession was “a very, very high risk factor.” That opinion was met by a number of other calls Monday morning.

  • SEE MORE The 22 Best Stocks to Buy for 2022

Wells Fargo Investment Institute, for instance, says “our conviction is that the chances of an outright recession in 2022 remain low” but believes odds are growing that 2023 could see an economic contraction. UBS strategists say the chances are different depending on where you look – their global economists say “hard data” points to a sub-1% chance of recession over the next 12 months, but the yield curve implies 32% odds.

“There’s no crystal ball to predict what’s next, but historical trends can come into play here. With the [S&P 500] closing 15% below its weekly record, there’s only been two times in the past 60-plus years that the market didn’t fall into bear territory after a similar drop,” adds Chris Larkin, Managing Director of Trading at E*Trade. “This doesn’t mean it’s bound to happen, but there is room for potential downside.”

Larkin says to keep an eye on major retail earnings this week – which will kick off in earnest with Walmart’s Tuesday report – to get a pulse check on the American consumer.

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Monday itself was a fairly quiet affair. Exxon Mobil (XOM, +2.4%) and Chevron (CVX, +3.1%) were among a number of plays from the energy sector (+2.7%) that popped after U.S. crude oil futures jumped another 3.4% to $114.20 per barrel.

Twitter (TWTR, -8.2%) shares dropped after Tesla (TSLA, -5.9%) CEO Elon Musk spent the weekend questioning how much of Twitter’s traffic comes from bots. Wedbush analyst Daniel Ives said the move feels more like a “‘dog ate the homework’ excuse to bail on the Twitter deal or talk down a lower price.” TWTR stock has now given up all its gains since Musk announced his stake in the social platform.

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The major indexes finished an up-and-down session with mostly weak results. The Dow Jones Industrial Average managed to eke out a marginal gain to 32,223, but the S&P 500 declined 0.4% to 4,008, while the Nasdaq Composite retreated 1.2% to 11,662.

Also worth noting: Warren Buffett’s Berkshire Hathaway will file its quarterly Form 13F soon. Check back here tonight as we examine what Buffett has been buying and selling. 

YCharts

Other news in the stock market today:

  • The small-cap Russell 2000 closed out the session with a 0.5% dip to 1,783.
  • Gold futures gained 0.3% to settle at $1,814 an ounce.
  • Bitcoin was off 1.6% to $29,551.92 (Bitcoin trades 24 hours a day; prices reported here are as of 4 p.m.)
  • JetBlue Airways (JBLU, -6.1%) ramped up its hostile takeover attempt of Spirit Airlines (SAVE, +13.5%) on Monday, urging SAVE shareholders to vote against a buyout offer from fellow low-cost air carrier Frontier Group Holdings (ULCC, +5.9%). JBLU last month offered to buy Spirit Airlines for $33 per share – a premium to the $21.50 per share ULCC offered in February – but SAVE’s board of directors rejected the bid citing concerns over regulatory approval. JBLU followed up in early May with an “enhanced superior proposal,” including paying a $200 million, or $1.80 per SAVE share, reverse break-up fee should regulators block the deal.
  • Warby Parker (WRBY) fell 5.3% after the eyeglass maker reported a loss of 30 cents per share in its first quarter. This was much wider than the per-share loss of 3 cents the company reported in the year-ago period and missed the consensus estimate for breakeven on a per-share basis. Revenue of $153.2 million also fell short of analysts’ expectations. WRBY did maintain its full-year revenue guidance of $650 million to $660 million. “We remain cautiously optimistic on shares as WRBY continues to show ability to grow the top line, open new stores, and is recession resistant as a lower cost option for non-discretionary spend,” says CFRA Research analyst Zachary Warring (Buy). “We see the company leveraging SG&A to become profitable in the second half of 2022.”

Check Out Europe’s Dividend Royalty

If you’re seeking out more stable opportunities amid an uncertain U.S. market … well, the rest of the world is admittedly looking pretty shaky, too. But that doesn’t mean there aren’t a few morsels worth a nibble. 

  • SEE MORE 37 Ways to Earn Up to 9% Yields on Your Money

BCA Research notes that while there’s negative news around the globe, “European benchmarks already discount a significant portion of the negative news.” And looking ahead, inflation there is expected to peak over the summer “as the commodity impulse is decelerating” – that should help stagflation fears recede and help European shares.

Graham Secker, Morgan Stanley’s chief European and U.K. equity strategist, chimes in that his firm remains “overweight [European] stocks offering a high and secure dividend yield.”

We’ve previously highlighted our favorite European dividend stocks, which on the whole tend to produce higher yields than their U.S. counterparts.

But we’d also like to shine the spotlight on Europe’s twist on an American income club: the Dividend Aristocrats. The S&P Europe 350 Dividend Aristocrats have somewhat different qualifications than their U.S. brethren, but in general, they’ve proven their ability to provide stable and growing dividends over time.

Read on as we look at the European Dividend Aristocrats.

  • SEE MORE The 22 Best ETFs to Buy for a Prosperous 2022

Walmart Q1 Earnings Likely Boosted By Inflation

The latest consumer price index (CPI) released last week indicates inflation remained sky-high in April. And while rising prices were a headwind for most companies in the first three months of 2022, they likely served as a tailwind for mega-retailer Walmart (WMT, $147.48).

Wall Street will find out this week, with WMT an early entrant on the earnings calendar; WMT will report its first-quarter results ahead of the May 17 open. 

The consumer staples stock has shown resilience amid the recent market volatility, up roughly 2% for the year-to-date compared to a more than 17% decline for the broader S&P 500.  

  • SEE MORE The Best (And Worst) Stocks for Rising Prices

WMT beat on both the top and bottom lines in its fourth quarter thanks in part to its ability to keep prices competitive in a high-inflation environment. And this trend probably continued in Q1, despite a challenging backdrop, says UBS Global Research analyst Michael Lasser (Buy).

“With low prices as its core value proposition, WMT is uniquely positioned to benefit from rising inflation,” the analyst adds. “Its scale helps give it the ability to keep healthy price gaps versus its peers, which can help it achieve further share gains in the grocery channel.  

While Lasser admits there will likely be some “moving pieces” in the report – including unpredictability related to macro headwinds – components such as U.S. same-store sales and full-year guidance will be good.

“We view WMT’s shares as compelling as they offer more certainty than others in this uncertain backdrop,” the analyst says.

Amid tough year-over-year (YoY) comparisons that include last year’s stimulus-related pop, consensus estimates are for Walmart to report a 12.4% drop in earnings to $1.48 per share. Revenue is expected to arrive at $138.8 billion (+0.4% YoY).

Lowe’s Faces Tough Comps in Q1

First-quarter earnings from Lowe’s (LOW, $191.70) are due out before Wednesday’s open. Similar to Walmart, the home improvement retailer is facing hard comparisons from Q1 2021. 

As such, analysts, on average, are calling for a slim 0.9% YoY rise in earnings to $3.24 per share. And revenue is projected to be flat at $23.8 billion.

Still, Lowe’s entered 2022 with momentum following a solid fourth-quarter print, says UBS Global Research analyst Michael Lasser (Buy). 

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Additionally, the consumer discretionary name raised its full-year guidance in February. This reflects an inflation tailwind due to LOW’s “prudent pricing power” that will likely last for at least a few more quarters, the analyst adds. 

“We believe LOW is building a track record of solid execution with every passing quarter,” Lasser says. “Plus, it has several unique drivers to propel its results in the next few years independent of the market growth.”

Kohl’s Top and Bottom Lines Probably Contracted in Q1

Kohl’s (KSS, $47.51) will report its first-quarter earnings ahead of the May 19 open. 

The department store chain ended 2021 with record adjusted earnings of $7.33 per share and year-over-year revenue growth of 21.8% to $19.4 billion.

And Deutsche Bank analyst Gabriella Carbone (Buy) thinks the company is just getting started. “KSS has laid the groundwork for growth along with improving profitability, and is a more nimble company today than it was pre-pandemic,” Carbone says.

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Included in the company’s plans to drive growth are goals for Kohl’s to reach $2 billion in sales from its partnership with beauty company Sephora and expand its operating margin to a range of 7% to 8%.

Carbone adds that these goals “may prove to be prudent as management has greatly considered a number of headwinds,” including supply-chain woes and a tight labor market.

As for the retail stock’s first-quarter results, analysts, on average, expect earnings to arrive at 72 cents per share (-31.4% YoY) and revenue to land at $3.7 billion (-0.5% YoY).

In addition to the company’s financial results, Wall Street will be looking for additional updates on the company’s strategic initiatives. Last Wednesday, shareholders voted on Kohl’s new slate of directors, rejecting an attempt from Macellum Advisors to add its nominees to the board. The activist investor has been pushing KSS to make changes, including unloading some of its real estate and putting itself up for sale.

  • SEE MORE Warren Buffett’s Inflation Plan: Buy, Buy, Buy

Should You Consider a Roth Conversion While the Market is Down?

While a down market may not be a fun time for investors, there are some bright spots and opportunities to be had. Stock market drops like we’ve seen recently might make a Roth IRA conversion more appealing as a strategy for investors.

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Should you consider converting a traditional IRA to a Roth during a down market? There are a few things to consider before pulling the trigger.

What is a Roth Conversion?

Before you embark on a Roth conversion, you need to fully understand what it is. When you have a traditional IRA, those are pre-tax dollars that you’re investing. While the money grows tax-free, when you later go to take a withdrawal, every dollar you pull will be taxed.

With a Roth IRA you are investing post-tax dollars, and when you convert a traditional IRA to a Roth, you pay the full tax during the year that you convert, at ordinary income rates. Then, the dollars that you’ve converted will grow tax-free for the remainder of the time that they sit within the investment. When you later take money out of a Roth, it’s all tax-free, as long as you are 59½ or older and follow a few other rules.

What You Need to Know About a Roth Conversion in a Down Market

When you trigger a Roth conversion, you’ll be responsible for paying the tax due on any pre-tax contributions or earnings within the traditional IRA. The benefit here is that if the market has dropped, it’s likely that your IRA value has dropped along with it – so your full value has gone down, and you’ll be paying taxes on the current value (which is lower, due to the market being down than it was months ago). So, in theory, you can convert a larger portion of your IRA in a down market and pay less in taxes than you could in years when the market is up.

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Here’s an example: If you had a traditional IRA with $100,000 at the start of the year, and due to the market, it is now down to $85,000, you could choose to convert that entire IRA to a Roth and only pay tax on the $85,000 instead of the $100,000 that it was months ago. Assuming that these dollars will rebound in the market in the future, you’ve picked a good opportunity to convert.

It’s important to work with both a financial adviser and your tax professional to determine not only the amount of tax you’ll owe during the year that you perform the Roth conversion, but also how long it would potentially take you to break even.

What are the Pros of a Roth Conversion?

Converting from a traditional IRA to a Roth has many potential benefits for investors. Because a Roth IRA allows for dollars to grow tax-free, all the growth is also tax-free. There are also no RMDs, or required minimum distributions, on a Roth IRA once you turn 72. With a traditional IRA or 401(k), you have a set minimum you must withdraw each year once you hit RMD age, but Roth IRAs do not adhere to this rule.

Tax rates are still relatively low, historically, which means now is as good of a time as any for a Roth conversion, from a tax perspective. Tax parity is another benefit of Roth IRAs because you have different “buckets” of income to pull from at retirement in an effort to keep your taxes low during retirement. Roth IRAs also benefit your spouse and heirs at inheritance time, as the tax-free benefits pass along to them in various ways, depending on the time limit and amount, and their relationship with you, the deceased.

A Few Cautions on Conversions

Roth IRA conversions aren’t all benefits though, there are a few things to be aware of. There’s the five-year rule, where you must wait five years after a conversion before making a withdrawal or else you could incur a 10% penalty. Keep in mind that this five-year rule only applies to those who are younger than 59½. After you reach that age, the five-year rule and its penalties no longer apply.

Triggering a Roth conversion may also increase your adjusted gross income (AGI), which could compound other issues, such as Medicare premiums. This may also increase your tax rate.

The best way to determine if a Roth conversion is the right move for you during the down market is to work with a financial adviser and a tax professional so you can get feedback on your specific financial situation.

Diversified, LLC does not provide tax advice and should not be relied upon for purposes of filing taxes, estimating tax liabilities or avoiding any tax or penalty imposed by law. The information provided by Diversified, LLC should not be a substitute for consulting a qualified tax adviser, accountant, or other professional concerning the application of tax law or an individual tax situation.
Nothing provided on this site constitutes tax advice. Individuals should seek the advice of their own tax adviser for specific information regarding tax consequences of investments. Investments in securities entail risk and are not suitable for all investors. This site is not a recommendation nor an offer to sell (or solicitation of an offer to buy) securities in the United States or in any other jurisdiction.
  • SEE MORE If You Inherited an IRA Recently, You Could Be in for a Mess

Thinking about Rolling Your 401(k) into an IRA? 7 Deciding Factors to Consider

The Department of Labor has outlined new rules for advisers to follow when rolling over retirement plans. Whether it is a 401(k) to an IRA or an IRA from one custodian to another, there are several considerations that need to be evaluated before making a change. If you are initiating a rollover on your own, it may be beneficial for you to evaluate these items as well.

  • SEE MORE When It Comes to Your 401(k), Trust But Verify

You should be able to get all the information you need on your plan from your statements, Annual Participant Fee Disclosure and Summary Plan Description. If you do not have access to these documents, you can usually request them from your human resource department.

All-In Fees and Expenses

Before deciding whether to do a rollover, you will want to compare the fees within your 401(k) plan vs. the fees for the IRA. Fees in the 401(k) could include any mutual fund loads, plan expenses and any underlying fees. Sometimes the fees may be higher in your 401(k), but there may be additional benefits to keeping your funds in the 401(k) wrapper.

It would be up to you to decide whether any benefits are worth the fees. For example, if you are opening an IRA and moving over to an investment adviser there will be additional management fees paid to your adviser, but you may also receive financial advice, retirement planning or wealth management services.

Available Services

Some retirement plans, such as 401(k)s, provide added creditor protection, the ability to take out a loan or take hardship withdrawals, which are not available with IRAs. In certain circumstances you may be able to keep some asset protection if 401(k) funds are rolled into a separate IRA and not commingled with other IRA funds. Some 401(k) providers provide investment education to participants that may be valuable if you are a younger investor.  You will also want to look at your vesting schedule and company match to determine whether they may be affected. In addition, some retirement plans offer Roth 401(k) contributions, which may not be available to you otherwise.

Available Investments and/or Products

Several 401(k)s offer participants limited investment options. On one hand, that could be viewed as a positive, because when there are too many choices it can confuse participants and make it harder to manage the plan. However, some plans’ limited options may be  more expensive, such as actively managed funds, and they might not offer any low-cost index options.

  • SEE MORE 2 Alternatives to Required Minimum Distributions

If you roll over funds into an IRA you then have access to a much wider universe of investments. That said, this should not be your only decision criteria. Some company retirement plans offer a “BrokerageLink” option, which allows you to move funds from the “core” 401(k) account to a brokerage account –  another way to access more investment options. Some plans have restrictions on what can be invested in a BrokerageLink so you would want to consult the plan document before deciding.

Guaranteed Income/or Interest Rates

Are you invested in anything earning a guaranteed interest rate that you will lose by moving from a 401(k) to an IRA or other plan? For example, TIAA CREF’s 401(k) offering has TIAA Traditional, which could be earning 3%-4% –  a great return in this environment. You may not want to roll out funds into an IRA and lose access to this option.

Tax Considerations

If you are required distribution age but still working past retirement (providing you are not an over 5% owner in the company), you can defer taking money out of your 401(k). Unfortunately, if you have an IRA on the side, that IRA is subject to required distributions at age 72, even if you continue to work. If you leave the funds in the 401(k) you can still contribute and don’t have to take money out.

One caveat related to the Roth part of a 401(k): If you are age 72 and a greater than 5% owner or retired you have to take a distribution from the Roth side. A way to get around this is to roll the Roth 401(k) balance into a Roth IRA prior to age 72.

Also, if you happen to be in a zero-income year and all you have is retirement funds and need cash, it may make sense to take a taxable distribution rather than do a rollover.

Distribution Considerations

If your 401(k) retirement account is invested in an insurance product or annuity you will want to evaluate whether there are any surrender charges. Usually annuities cannot be moved to IRAs in kind. Some annuity products may have certain benefits that will be lost if liquidated, so you will want to make sure you understand how your product works before making a decision.

Some plans may offer annuity options rather than a lump sum, which would be lost if you roll your 401(k) over to an IRA. You will want to look at the financial implications of the lump sum vs. the annuity options to see which option is better for your situation, especially if you have a spouse who can receive survivor benefits.

You will also want to check if there are any in-service distributions options or guaranteed payment options.

Beneficiary Considerations

If you are married, your 401(k) must list your spouse as beneficiary unless your spouse signs a waiver. You can list anyone on an IRA as a beneficiary, so you may want to review your estate planning and beneficiaries if you make any changes.

  • SEE MORE If You Inherited an IRA Recently, You Could Be in for a Mess

How Psychology Affects Your Search for a Financial Adviser

  • SEE MORE 5 Quick and Dirty Questions to Pick a Financial Adviser

Selecting the right financial adviser is an important but difficult decision. Key considerations include whether your prospective adviser has the right technical skills, charges fair fees and puts your interests first. Focus on these factors and you’ll find thousands of qualified advisers. But which factors should you prioritize when finding the best one for you?

Turns out, you should be looking to psychology. A 2019 Vanguard study found that a client’s emotional relationship with their adviser – not their fees or technical skills – accounted for over half of the perceived value of the engagement. These feelings have real consequences for your bottom line.

  • SEE MORE Why Financial Literacy Alone Will Always Fail

Another series of Vanguard studies found clients who work with advisers have better investment returns than those who don’t. To explain this effect, the studies examined the individual impact of numerous factors, including a range of technical skills, like optimizing asset location and implementing the most cost-effective strategies. Turns out behavioral coaching, a psychological factor, accounted for half the total effect – double that of the most impactful technical skill.

While you’re interviewing a prospective adviser, here are some other considerations and questions to ask:

What are your values?

Financial planning is the process of helping clients achieve their goals – whether those goals are to be financially independent, support a charity or anything in between. Advisers are trained to respect and help fulfill all their clients’ goals. But if your goals and values are contrary to an advisers’, it can be difficult for them to take your perspective and make the best recommendations. For example, an adviser who tends to prioritize attaining financial independence may consistently push back on your goal to donate 10% of your income to charity.

An adviser who shares your deeply held values will have an easier time empathizing with your financial situation and is more likely to make recommendations that you’ll implement.

Will we get along?

Would if we could be friends with everyone, but some personalities just don’t mesh. Don’t think you need to overthink this (although you’re welcome to). Consider what kinds of people you tend to get along with. Remember that you may be spending many years working with your adviser, so it helps to like them and feel like you get along.

At a minimum, feel free to avoid working with someone who gives you a bad first impression. While our first impressions are not always accurate, they can tell us a lot – and quickly! For example, one study found it takes just a fraction of a second to decide whether you should trust someone.

How will you communicate your recommendations and coach me?

It is critical that you fully understand the recommendations your adviser is making. Otherwise, you won’t implement them! Consider your learning style. How do you understand things most easily: in writing? With charts and graphs? Whatever your answer, find an adviser whose communication style matches your learning style.

Often, recommendations take some time to implement and have many steps. Some folks struggle to follow through – especially if they have anxiety around money. The best advisers coach their clients throughout the process.

Not all great coaches are the same. Phil Jackson, winner of 11 NBA championships, was known as a “Zen Master.” Bill Belichick, the NFL coach with the most Super Bowl wins, is much more detail-oriented and logistical. Consider what motivates you to stick with a plan and try to find an adviser who fits your coaching needs.   

Keep in mind that some folks are better communicators than others. How well an adviser communicates has a real impact on their clients. For example, a study investigating clients’ trust in their financial advisers found the adviser’s communication skills were twice as important as their technical competency.

Do you have good experiences working with people from my background?

Individual differences are not the only thing to consider when selecting a financial adviser. Your adviser’s cultural background and cultural competency can affect whether you have a successful relationship.

When people share similar experiences and backgrounds, they often have an easier time communicating and empathizing with one another. Moreover, financial advising has not always been offered or provided equitably to women, people of color and members of many other minority backgrounds. Research released by The American College Center for Economic Empowerment and Equality underscores this point: Three in five Black women expressed difficulty in finding financial professionals or advisers they trust, per the study.  It’s why efforts like the CFP® Board’s diversity and inclusion initiatives are critical to increase the representation of people from all backgrounds in financial planning and meet the needs of our diverse society.

That said, the client and adviser don’t need to share a cultural connection to have a successful relationship. Many financial advisers have excellent cross-cultural communication and cultural competence. Some of the best thinking comes when people with different perspectives can work together to come up with innovative solutions.

Ultimately, you should establish a relationship you value with an adviser you trust. Exactly how you make that decision is up to you. To start that process, consider resources like https://www.letsmakeaplan.org/ and https://www.xyplanningnetwork.com/ that can connect you with  advisers held to fiduciary standard.

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2 Strategies to Reduce Taxes from the Sale of Your Business

Recently, one of my colleagues took me aside and asked what I could do to help a 40-year-old client who sold his business last year for $40 million. He wanted to shelter the proceeds from capital gains taxes and possibly fund a trust for his family. We both already knew that the opportunity to reduce the tax recognition on the capital gain had long passed.

Had he sought our advice long before he was committed to the sale of this business, we could have explored some valuable options. Here are two of them.

The Qualified Small Business Stock Exclusion

One option our client may have considered is to investigate qualifying his business for Small Business Stock treatment under Section 1202 of the Internal Revenue Code (IRC). Section 1202 was added through the 1993 Revenue Reconciliation Act to encourage small business investment. A Qualified Small Business (QSB) is any active domestic C corporation engaged in certain business activities whose assets have a fair market value of not more than $50 million on or immediately after the original issuance of stock, regardless of any subsequent appreciation (IRC § 1202 (d)(1)).

  • SEE MORE Preparing Your Family-Owned Business for Sale?

Qualified Small Business Stock that is issued after Aug. 10, 1993, and held for at least five years before it is sold may be partially or wholly exempt from federal capital gains taxes on the value of the shares sold, up to the greater of $10 million in eligible gain or 10 times the aggregate cost basis in the shares sold in each tax year (IRC § 1202 (b)(1)). Be aware that this limitation applies to each separate shareholder, and a trust, or multiple trusts, established and funded with QSB Stock gifted by a qualified QSB shareholder may enable much more than $10 million in gain exclusion. For QSB shares acquired after Sept. 27, 2010, the capital gain exclusion percentage is 100%, and it is excluded from alternative minimum taxes and the net investment income tax with the same five-year holding requirement (IRC § 1202 (a)(4)).

But only certain types of companies fall under the category of a QSB. To be a QSB, the domestic corporation must engage in a “Qualified Trade or Business” (QTB). Such a business will generally manufacture or sell products, as opposed to providing services and expertise. Businesses that generally will not qualify are those offering services in health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, banking and insurance, as well as hospitality businesses such as hotels and restaurants (IRC § 1202 (e)(3)).

To qualify and continue as a QSB, the business must follow certain rules (there are many, and these are the most basic): It must be a domestic C corporation when the stock is issued and when sold, and at least 80% of its assets must be used in the active conduct of one or more QTBs during substantially the entire five-year holding period. If the business is already an LLC or S corporation, it may still qualify if the business reorganizes and revokes the subchapter S election and issues new stock in the C corporation, then meets the holding period before selling.

It is critical that management of the company understands all of IRC Section 1202’s requirements and agrees to maintain the business in a manner that continues to satisfy the active business requirement and the asset investment limitations, and avoid the pitfalls related to stock redemptions, tax elections and conversions.

To summarize, in order for the QSB shareholder to claim the tax benefits upon sale, the following must apply: The shareholder may be a person or business not organized as a C-Corp; the QSB stock must be original issue and not purchased in trade for other stock; the shareholder must hold the QSB stock for at least five years; and the QSB issuing the stock must devote more than 80% of its assets toward the operation or one or more QTBs.

The Tennessee Income Tax Non-Grantor Trust Strategy

Most states conform to the QSB stock exclusion and also exclude capital gains tax on QSB stock when sold as required in IRC § 1202. The exceptions are California, Mississippi, Alabama, Pennsylvania, New Jersey, Puerto Rico, Hawaii and Massachusetts. If you live in one of those states, you may want to consider a concurrent trust strategy described below to eliminate all capital gains taxes on the sale of QSB stock. But even in conforming states, the QSB shareholder can claim additional exclusions greater than the $10 million exclusion limitation by gifting into multiple trusts so all the possible gain from the sale is excluded.

  • SEE MORE The Cure for the Great Resignation: Hire Older Workers

Shareholders living in a nonconforming state or expecting an aggregate capital gain much greater than the $10 million cap may use a Tennessee Income Non-Grantor Trust (TING) to eliminate all federal and state taxation on the sale of the QSB stock gifted to the TING prior to an agreement to sell. Tennessee law enables a person who owns a highly appreciated asset, like QSB stock, to reduce or eliminate his resident state capital gains taxes on the sale of the QSB stock through a TING. While several other states also have laws that support this strategy, Tennessee legislators have adopted the best parts of other states’ laws. To be clear, a taxpayer already living in a state with no state income tax may use resident state trusts to spread the capital gain resulting from the sale of QSB Stock.

The grantor will gift the QSB stock to one or more TINGs (a gift of QSB stock is an exception to the original issue rule under IRC § 1202 (h)(2) and the five-year holding period is not interrupted by a gift to a trust under IRC § 1202 (h)(1)). The trustee may then sell the QSB stock in a manner that allows treatment as a long-term capital gain. If the TING makes no distributions in the tax year in which the QSB stock meeting all the requirements is sold, the sale will be excluded from federal and state capital gain recognition.

The Sourced Income Rule Affecting Trust Taxation

The client’s resident state may seek to tax at least some of the income of a nonresident TING if the client’s resident state has a close interest in the trust’s assets, such as through real property located in or a business operating in that state. This is known as the Sourced Income Rule. Some states think they have a sufficient connection to levy a tax on a nonresident trust simply because the settlor or a beneficiary of the trust lives in that state, or the trustee has an office in that state. That broad application of the definition of a resident trust may be misplaced, but many of our clients want to avoid any expense from litigating against a state taxing authority.

However, if the tax savings are substantial, then a client considering a TING should be aware that the Supreme Court has unanimously ruled that the state of North Carolina overstepped its taxing authority when it sought to tax trust income based solely on the residence of a trust beneficiary. North Carolina argued that its taxing authority included any trust income that “is for the benefit of” a state resident. The Supreme Court disagreed and ruled in the case of North Carolina Department of Revenue v. The Kimberley Rice Kaestner 1992 Family Trust “that the presence of in-state beneficiaries alone does not empower a state to tax trust income that has not been distributed to the beneficiaries where the beneficiaries have no right to demand that income and are uncertain ever to receive it.” This ruling may serve to restrain other state taxing authorities from applying an overly broad application of their resident trust rule.

Both of these strategies used together can be highly beneficial for a QSB shareholder living in a QSB nonconforming state or one who expects the total capital gain from a sale to exceed the $10 million cap on a QSB capital gain exclusion. However, these strategies also require that the QSB management and the QSB shareholder plan many years ahead of any contemplated sale.

  • SEE MORE Planning to Sell Your Business to Key Employees?

8 Facts You Must Know About Bear Markets

There are few things scarier than a bear market, but steep and sustained drawdowns in stocks are an absolute fact of investing life. Markets go through cycles; always have, always will. 

It’s also true that despite being inevitable and unpleasant, bear markets are not entirely all bad. An irony of bear markets is that they’re one of the exceedingly rare times when long-term retail investors can actually have an advantage over the pros.

Traders and tacticians are under constant pressure to do something, even as a receding tide lowers all boats. Contrast that with retail investors, who are luxuriously free from clients yelling at them all day. Normies can just sit back and dollar-cost average into stocks at increasingly cheaper prices.

Most importantly, a patient long-term investor who is diversified in accordance with his or her age, stage in life and risk tolerance can not only wait out a bear market, but profit from it. Remember: The market can be miserable at times, but its long-term trend is always to the up and right.

A familiarity with the basics of bear markets should help investors better cope with the next one. To that end, we’ve compiled the following eight facts you must know about bear markets.

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Stock Market Today: Stocks Paper Over Lousy Week With Wild Friday

Wall Street spent most of Friday applying some vibrant lipstick to what was otherwise a pig of a week for investors.

A broad market rally – one that saw each of the S&P 500’s 11 sectors finish higher – wasn’t a response to any new positive catalysts. Quarterly reports were light today, with most investors flipping the earnings calendar to next week’s retail-heavy slate.

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And Friday’s most noteworthy datapoint was the University of Michigan’s latest consumer sentiment index reading, which dropped from 65.2 in April to 59.1 in May – a 10-year nadir that was well lower than the 64.1 reading expected.

Sometimes the market just enjoys a relief rally.

“Following a week of heavy selling, but with inflationary pressures easing just at the margin, and the Fed still seemingly wedded to 50-basis-point hikes for each of the next two FOMC meetings, the market was poised for the kind of strong rally endemic to bear market rallies,” says Quincy Krosby, chief equity strategist for LPL Financial.

He adds that given the Federal Reserve is only at the beginning of its rate-hike cycle and would like to see demand pull back further, “this rally will most likely weaken.”

Of course, even if this is just a pause before more market declines, investors don’t necessarily have to time the bottom to buy in at a decent valuation.

“This is still an attractive entry point, as we do not believe this is 1999/2000,” says Nancy Tengler, CEO and CIO of asset management firm Laffer Tengler Investments.

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The buying was strongest in consumer discretionary stocks (+3.9%) such as Amazon.com (AMZN, +5.7%) and Tesla (TSLA, +5.7%), along with technology plays (+3.3%) including Nvidia (NVDA, +9.5%) and Advanced Micro Devices (AMD, +9.3%).

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Energy (+3.4%) was also bid higher amid a big pop in oil; U.S. crude futures finished 4.1% higher to $110.49 per barrel, helping to spark new highs in gasoline futures prices.

Notably absent from the rally was Twitter (TWTR, -9.7%), which sank after Elon Musk tweeted that the deal was “temporarily on hold.” 

All the major indexes put up spectacular gains Friday, though for the week, it was still losses all around: The Nasdaq Composite (+3.8% to 11,805) still finished off 2.8% for the week, the S&P 500 (+2.4% to 4,023) was down 2.4% across the five days, and the Dow Jones Industrial Average (+1.5% to 32,196) closed the week 2.1% in the red.

YCharts

Other news in the stock market today:

  • The small-cap Russell 2000 bounced 3.1% to 1,792.
  • Gold futures had no such luck. The yellow metal was off 0.9% to a 14-week low of $1,808.20 per ounce.
  • Bitcoin snapped back 5.1% to $30,034.99. (Bitcoin trades 24 hours a day; prices reported here are as of 4 p.m.)

Keep Your Guard Up Against Inflation

Inflation is prevalent virtually everywhere – including on corporate America’s earnings calls.

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We’re most of the way through the first-quarter earnings season, and over the past few months, publicly traded companies keep repeating the “I” word as they discussed their most recent financial results.

FactSet used its Document Search technology to track mentions of the term “inflation” on corporate earnings calls, According to their senior earnings analyst, John Butters, of the 455 S&P 500 companies that have conducted earnings conference calls from March 15 through May 12, “377 have cited the term ‘inflation’ … which is well above the five-year average of 155.”

In fact, this is the highest overall number of S&P 500 companies citing inflation on their calls going back to at least 210. (The previous record? 356 … in the final quarter of 2021.)

It’s another signal that inflation continues to be a persistent problem – and with forecasts calling for still-high inflation to come, more active investors might do well to pack a little more protection. We’ve previously analyzed other ways to stay in front of inflation, such as stocks with pricing power and inflation-fighting funds.

Today, we look at another batch of investments that can help harness high inflation, with a focus on commodities, real estate and other areas of the market.

Kyle Woodley was long AMD, AMZN and NVDA as of this writing.

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New Mexico Wildfire and Wind Victims Get More Time to Pay Taxes

The IRS has granted victims of the recent New Mexico wildfires and straight-line winds more time to file various individual and business tax returns and make tax payments. Specifically, victims of the fires and winds that began on April 5, 2022, have until August 31, 2022, to file and pay tax returns and payments due between April 5 and August 30.

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The tax relief is available to anyone in any area designated by the Federal Emergency Management Agency (FEMA) as qualifying for individual assistance. At this point, only affected taxpayers who live or have a business in Colfax, Lincoln, Mora, San Miguel and Valencia Counties qualify for the extensions, but the IRS will offer the same relief to any taxpayers in other New Mexico localities designated by FEMA later.

The IRS will also work with other people who live outside the disaster area but whose tax records are in the disaster area. Call the IRS at 866-562-5227 if you face this situation. This also includes workers assisting the relief activities who are affiliated with a recognized government or philanthropic organization.

Deadlines Extended

The deadlines that are pushed back include the April 18, 2022, due date for filing a 2021 personal income tax return and paying 2021 taxes. In addition, wildfire and wind victims in the designated area have until August 31 to make 2021 IRA contributions. They also get more time to make the estimated tax payments due on April 18 and June 15, 2022.

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The due date for quarterly payroll and excise tax returns normally due on May 2 and August 1, 2022, are extended to August 31 for New Mexico wildfire and wind victims, too. Penalties on payroll and excise tax deposits due from April 5 to August 30 will also be waived as long as the deposits are made by August 31, 2022.

Taxpayers don’t need to contact the IRS to get this relief. However, if an affected person receives a late filing or late payment penalty notice from the IRS, he or she should call the number on the notice to have the penalty abated.

Deduction for Damaged or Lost Property

Victims of the New Mexico wildfires and straight-line winds may be able to claim a tax deduction for unreimbursed damaged or lost property. To do so, they typically must itemize and file Schedule A with their tax return. However, victims who claim the standard deduction may still be able to deduct their losses if they can claim them as business losses on Schedule C.

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The deduction can be claimed on the tax return for the year the damage or loss of property occurred or for the previous year. So, for any destruction in 2022, the deduction can be claimed on either a 2021 tax year return or a 2022 return. In either case, you must write the FEMA declaration number on the return claiming the deduction. For the recent New Mexico wildfires and straight-line winds, the number is DR-4652-NM.

If you decide to claim a deduction for 2021, you can amend your 2021 return by filing Form 1040X. For this purpose, you must file the amended return no later than six months after the due date for filing your return (without extensions) for the year in which the loss took place. So, for New Mexico wildfire or wind losses in 2022, you would need to file an amended 2021 return by October 16, 2023. Affected taxpayers claiming the disaster loss on a 2021 return should also put the Disaster Designation (“New Mexico Wildfires and Straight-Line Winds”) in bold letters at the top of the form. See IRS Publication 547 for details.

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Could Musk’s Twitter Buyout Hit the Skids?

Anyone who expected turbulence amid Elon Musk’s quest to acquire Twitter (TWTR) got precisely what they anticipated Friday morning, when the Tesla (TSLA) CEO tweeted that the Twitter deal was “temporarily on hold.”

TWTR shares plunged roughly 15% in Friday’s premarket trade following Musk’s tweet, which linked to a May 2 Reuters story about Twitter’s recent statement that “the average of false or spam accounts during the first quarter of 2022 represented fewer than 5% of our [monetizable daily active users] during the quarter.”

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Musk later tweeted that he is “still committed to acquisition,” which helped cut into the losses somewhat, though another seed of doubt was already sown. 

“[Musk] is clearly intent in querying the company’s estimate that spam accounts make up less than 5% of active daily users – a key metric given that establishing an accurate number of real tweeters is considered to be key to future revenue streams via advertising or paid for subscriptions on the site,” says Susannah Streeter, senior investment and markets analyst for U.K. firm Hargreaves Lansdown.

But she also raises the possibility of an ulterior motive.

“There will also be questions raised over whether fake accounts are the real reason behind this delaying tactic, given that promoting free speech rather than focusing on wealth creation appeared to be his primary motivation for the takeover,” Streeter says. “The $44 billion price tag [of the Twitter deal] is huge, and it may be a strategy to row back on the amount he is prepared to pay to acquire the platform.”

That price tag might seem like even more of a stretch now than when Musk first got involved with Twitter.

“I am offering to buy 100% of Twitter for $54.20 per share in cash, a 54% premium over the day before I began investing in Twitter and a 38% premium over the day before my investment was publicly announced,” Musk said in April when he declared his bid for the social media platform.

Since then, the S&P 500 and the communication services sector have both declined by double digits, with many high-priced technology and tech-esque shares plunging precipitously.

Twitter, to be fair, is roughly flat since then. But this latest hurdle puts his once seemingly imminent Twitter deal even further in doubt among investors and analysts alike.

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The market has yet to price TWTR shares at the $54.20 per share Musk offered in April. Not even after Musk revealed earlier this month that backers such as Andreessen Horowitz, Sequoia Capital and Oracle (ORCL) founder Larry Ellison were lined up to help provide more than $7 billion in financing.

As of Thursday’s close, TWTR shares were trading 15% below Musk’s $54.20-per-share bid. In Friday’s premarket trade, that number was nearly 30%.

Wall Street’s pros appear mildly skeptical the Twitter deal closing, too. According to S&P Global Market Intelligence, the 27 analysts who currently cover Twitter have an average price target of $51.50 and collectively consider the stock a Hold.

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