The Markets

• Equities: The year 2018 may ultimately mark the end of what was nearly a 10-year bull run. At the start of the year, January was a good month; February and March were not. However, as spring approached, growth in equities began to pick up steam, leading to record highs in several of the benchmark indexes during the summer months. But by October, volatility began to increase, as investor concerns about the impact of a trade war between the world’s largest economies was enough to prompt sell-offs, sending stock prices lower. November was a little better, but December proved to be tumultuous. Ultimately, the benchmark indexes listed here could not match their 2017 year-end values. In fact, several of the benchmark indexes suffered their worst annual losses in many years.

• Each of the benchmark indexes listed above fell well below their respective 2017 year-end closing values. Compared to 2017, the Russell 2000, which had eclipsed its 2017 closing mark by over 13% in September, ended the year down over 12%. The Global Dow was not far behind, falling more than 11% by the end of December. The large caps of the Dow and S&P 500 ended the year down 5.6% and 6.2%, respectively. The Nasdaq, which led the way for much of the year on the strength of tech stocks, gave all of the gains back, dropping almost 4% below where it started the year.

• Bonds: As stock prices soared during the first half of 2018 and interest rates moved incrementally higher, the demand for long-term bonds was marginal. Yields on 10-year Treasuries rose almost 30 basis points in January as bond prices fell. Long-term bond yields continued to climb, reaching 3.0% in July. However, as volatility increased for stocks, the yield on long-term bonds began to fall as demand drove prices higher. Ultimately, the yield on the benchmark 10-year Treasuries closed 2018 at 2.68%, up from the 2017 closing yield of 2.41%.

• Oil: Oil prices began 2018 at over $60 per barrel and continued pushing higher through January, reaching almost $70 per barrel in May. Oil prices remained in the $60 range for most of the fall, spiking to almost $76 in early October. But fears of overproduction began pushing oil prices lower in November. Prices continued to fall, hitting a low of nearly $42 per barrel in mid-December. Ultimately, oil prices closed 2018 at $45.81 per barrel — their first annual loss since 2015. As oil prices rose and fell, so did prices at the pump. Retail regular gasoline prices closed the year around $2.321 per gallon on December 24, about $0.151 less than a year ago.

• FOMC/interest rates: The Federal Open Market Committee raised interest rates four times during 2018. Each time the target range increased by 25 basis points. The first increase occurred in March, followed by a rate increase in June, an increase in September, and a final bump occurring in December. For the year, the target range has increased 100 basis points, from 1.25%-1.50% to 2.25%-2.50%. Following each rate increase, the Committee expressed the expectation that the labor market would remain strong and the economy would continue to expand, while noting that private business investment had slowed. The Committee changed its stance by the end of the year and reduced its forecasts from four rate increases in 2019 to two 25-basis-point rate increases in 2019.

• Currencies: The dollar maintained a relatively strong position throughout much of 2018. The Wall Street Journal Dollar Index, which measures the U.S. dollar against the currencies of 16 other countries, closed 2018 at $89.67, up from its 2017 year-end mark of $85.98. Another currency index, the ICE U.S. Dollar Index, which measures the dollar relative to a basket of six foreign currencies, closed 2018 about 4.5% higher — its best annual gain in several years.

• Gold: Through the first quarter of 2018, gold hovered around $1,350 a troy ounce. Rising interest rates, favorable stock market returns, and a strong dollar helped to push gold prices lower during the summer months. However, as stock prices faltered, gold prices pushed closer to their early-year values, finally closing 2018 at $1,284.70.

The Economy (through November 2018)

• Employment: The U.S. labor market was solid throughout 2018. Employment growth averaged 209,000 new jobs per month in 2018, compared with an average monthly increase of 174,000 new jobs in 2017. The unemployment rate ended the year (as of November 2018) at 3.7% — lower than the 4.1% rate at the close of 2017. Over the year, the unemployment rate and the number of unemployed persons declined by 0.4 percentage point and 641,000, respectively. According to the Bureau of Labor Statistics, there were 6.0 million unemployed persons in November 2018, down from 6.6 million unemployed in November 2017. The labor force participation rate was 62.9% in 2018, up slightly from last year’s rate of 62.7%. The employment to population ratio was 60.6% (slightly better than 60.1% in 2017). In 2018, the average workweek was 34.4 hours (34.5 hours in 2017). Average hourly earnings in 2018 were $27.35, an increase of 3.0%, or $0.80, over $26.55 in 2017.

• GDP/budget: Economic growth, as measured by the gross domestic product, expanded throughout the year, increasing at an annual rate of 3.4% in the third quarter of 2018. The first-quarter GDP rose 2.2%, followed by a 4.2% gain in the second quarter. Gross domestic product essentially measures what the economy produces, such as goods and services. On the other hand, gross domestic income measures all income earned from the production of goods and services, such as wages, profits, and taxes. GDI rose 4.3% in the third quarter of 2018, compared to a 1.3% increase in the third quarter of 2017. The average of gross domestic product and gross domestic income, a supplemental measure of U.S. economic activity that equally weights GDP and GDI, increased 3.8% in the third quarter, compared with an average annual increase of 1.9% in 2017. The federal deficit was roughly $779 billion for fiscal year 2018, an increase of $113 billion over the 2017 fiscal year deficit of $666 billion. The government fiscal year runs from October through September.

• Inflation/consumer spending: Inflation, as it relates to consumers, had reached the Federal Reserve’s stated target rate of 2.0%, only to fall below that level in November. The personal consumption expenditures (PCE) price index, the measure of the increase in the prices of goods and services purchased by consumers, was 1.8% higher in November 2018 compared to November 2017. Core PCE, which excludes the volatile food and energy components, expanded at an annual rate of 1.9% in 2018. Personal (pre-tax) income increased 4.1% in the third quarter of 2018 compared to an annual rate of 4.4% in 2017. After-tax income (disposable personal income) increased 4.0% in the third quarter of 2018 after expanding at an annual rate of 4.4% in 2017. Another measure of inflation, the Consumer Price Index, measures the price level of a basket of consumer goods and services purchased by individuals. Over the 12 months ended November 2018, the CPI rose 2.2% (2.1% in 2017).

• Housing: A lack of inventory, coupled with rising mortgage interest rates, contributed to a rather lackluster performance in the housing sector. Through November, existing home sales are down 7.0% from a year ago. The November annual sales rate of 5.32 million was notably lower than the 5.72 million rate for November 2017. The median existing-home price for all housing types in November was $257,700, up 4.2% from November 2017 ($247,200). November’s price increase marks the 81st consecutive month of year-over-year gains. Total inventory of existing homes for sale in November was 1.74 million — 4.2% greater than last November (1.67 million).

• Manufacturing: Manufacturing and industrial production performed better in 2018 than the prior year. The Federal Reserve’s index of industrial production revealed that total industrial production rose 3.9% over the 12 months ended in November 2018. Over the same period, the output of consumer goods increased 1.5% and production of business equipment expanded 4.1%. Capacity utilization for manufacturing increased 2.0% over the past year. New orders for manufactured durable goods (expected to last at least three years) increased by 8.4% from 2017. Shipments were up 7.2%. Capital goods — tangible assets used by manufacturers to produce consumer goods — also expanded in 2018. New orders for capital goods increased by 8.5%, and shipments of capital goods expanded by 7.3%.

• Imports and exports: From January through October, the international trade deficit for goods and services was $503 billion, or 11.5% greater than the deficit over the same period in 2017. The goods deficit totaled $729 billion, while services had a surplus of $226 billion. Exports increased from $1.944 billion in 2017 to $2.093 billion. Imports increased from $2.400 billion to $2.600 billion. Import prices increased 0.7% over the past 12 months ended in November. Export prices expanded by 1.8% over the 12 months ended November 2018.

• International markets: International equities did not enjoy the same upward momentum in 2018 compared to the prior year. Economic expansion stalled for many international economies as heightened trade tensions between the United States and several of its trade partners and tighter monetary policies cast a shadow over economic expansion. Following demands for more favorable trade terms, the United States imposed tariffs on imports from several of its trade partners. While negotiations ultimately resolved trade wars with some countries, notably Mexico and Canada, a major impasse still exists between the United States and China. The impact on both countries has been palpable, particularly in China, where fixed-asset investment, retail sales, and industrial output have each decreased in 2018 compared to 2017. In Europe, Great Britain is scheduled to leave the European Union soon, yet it remains unclear under what terms Brexit will take place. Also, several countries tightened their respective monetary policies in 2018 on the heels of economic growth in 2017. The lower interest rates in 2017 that helped propel consumer spending and business investment began to rise in 2018, hindering equity and economic expansion.

Every year, the Internal Revenue Service announces cost-of-living adjustments that affect contribution limits for retirement plans and various tax deduction, exclusion, exemption, and threshold amounts. Here are a few of the key adjustments for 2019.

Employer retirement plans

• Employees who participate in 401(k), 403(b), and most 457 plans can defer up to $19,000 in compensation in 2019 (up from $18,500 in 2018); employees age 50 and older can defer up to an additional $6,000 in 2019 (the same as in 2018).
• Employees participating in a SIMPLE retirement plan can defer up to $13,000 in 2019 (up from $12,500 in 2018), and employees age 50 and older can defer up to an additional $3,000 in 2019 (the same as in 2018).

IRAs

The combined annual limit on contributions to traditional and Roth IRAs increased to $6,000 in 2019 (up from $5,500 in 2018), with individuals age 50 and older able to contribute an additional $1,000. For individuals who are covered by a workplace retirement plan, the deduction for contributions to a traditional IRA is phased out for the following modified adjusted gross income (AGI) ranges:

The modified AGI phaseout ranges for individuals to make contributions to a Roth IRA are:

Estate and gift tax

• The annual gift tax exclusion for 2019 is $15,000, the same as in 2018.
• The gift and estate tax basic exclusion amount for 2019 is $11,400,000, up from $11,180,000 in 2018.

Kiddie tax

Under the kiddie tax rules, unearned income above $2,200 in 2019 (up from $2,100 in 2018) is taxed using the trust and estate income tax brackets. The kiddie tax rules apply to: (1) those under age 18, (2) those age 18 whose earned income doesn’t exceed one-half of their support, and (3) those ages 19 to 23 who are full-time students and whose earned income doesn’t exceed one-half of their support.

Standard deduction

Alternative minimum tax (AMT)