Pay Up

February 10, 2019

by Steve Stofka

When I was growing up in New York City, each kid’s name was shortened to one syllable, two at the most. New York is a busy town; people didn’t have time to pronounce long names. Guillermo became Will or Bill.  An exotic name like Anastasia was shortened to a rather pedestrian Ann. Melodic names like Florinda became Flo. In a sign of the changing times, N.Y. Representative Alexandria Ocasio-Cortez has became known as AOC. That’s a generous three syllables!

She has proposed a 70% Federal income tax on Adjusted Gross Income over $10 million. That’s a straight 70% haircut on only the income above that threshold. Deductions, credits and favorable tax treatment for capital gains could apply to income below $10 million but everything above that is a bada-bing-bada-boom 70%.

How much revenue would that generate? I used IRS sample data from 2016, the latest available (Note #1) and calculated an extra $218 billion collected on 15,000 returns for tax year 2016 (Note #2). This would have been an additional 14% over the $1550 billion collected in individual income taxes that year (Note #3). It would make up for the corporate taxes that are not being collected because of the 2017 Tax Act.

If AOC’s proposal were passed by the House, it would not make it out of the Senate Finance Committee, which is controlled by Republicans. If it did become law, it would incentivize the accountants and lawyers of the super-rich to craft clever solutions to avoid the tax. Most of them can buy citizenship in another country. They can put income in tax havens (Note #4). They can make hefty political campaign contributions to buy loyalty in Congress.

The rich complain about taxes. Yes, they do pay much of the income taxes collected. It should be all of the income taxes. The 16th Amendment was “sold” to the American people as a tax that would apply only to the rich, the top 1% of incomes. When the amendment was passed in 1913, half of the population worked in farming and thought that the tax would never impact their lives. It didn’t until a few months after the U.S. entered World War 2.

Under FDR, the tax base increased ten-fold and now affected 42% of the population. FDR called it the “greatest tax bill” (Note #5). The American people didn’t think so. Many were not paying their income taxes. As the fate of nations lay bloody on the altar of history, FDR regarded tax delinquency as a personal disloyalty. He turned to economist John Kenneth Galbraith who suggested that employers should be forced to become the tax collector for the government. In 1943, Congress passed legislation requiring that employers withdraw taxes from their employees’ paychecks. Employing more than 7% of the workforce, the Federal government was the largest employer (Note #6). Before employees could feed their families or pay their rent, the government had its taxes.

It’s time for Democrats and Progressives to undo what they did under FDR. World War 2 ended 75 years ago. Let’s return to the original intent of the 16th Amendment and impose most of the income tax burden on the rich.


1. 2016 IRS tax data by adjusted gross income
2. A screenshot below of the IRS spreadsheet with my calculations of revenue collected.
3. A breakdown of 2016 federal revenue
4. The Rolling Stones, Bono, and Mark Knopfler of Dire Straits took advantage of tax havens to avoid paying hefty U.K. taxes on royalties
5. Highlights of IRS history
6. Federal Employees CES9091000001 series / PAYEMS (All employees) series in the FRED database


The Tug of History

February 3, 2019

by Steve Stofka

As we receive our income tax forms, we can be reminded of the reach of history into our daily lives. Over a hundred years ago, the 16th Amendment was passed as a way of paying Civil War debts and pensions. We are paying income taxes because of a horrific war that occurred 150 years ago (Note #1).

Since the recession, politicians on both sides of the political aisle have proposed some version of a universal basic income (UBI) that would replace many individual federal assistance programs. New idea? No. Fifty years ago, President Nixon and more than a thousand economists proposed an income plan to replace the existing welfare plan (Note #2). Democrats opposed the idea because they feared that the proposal would divert some aid from black families in the North, who were Democratic constituents, to white families in the South. Many southern Democrats switched parties in reaction to the “imposition” of civil rights legislation passed by northern Democrats in the 1960s (Note #3). The North and South have traded political parties since the Civil War but the animosities of that war guide current legislation and the fortunes of American families.

The recent government shutdown halted paychecks for many thousands of federal employees. The legislation that enables Congress or the President to shut down government was a budget act passed in 1974 by a Democratic Congress. Following President Nixon’s refusal to spend money allocated by a Democratic Congress, Democrats wanted more control of the budget process. Nixon was afraid that the additional spending would further fuel inflation (Note #4).

Two years later, Jimmy Carter was elected President and had to fight with his own Democratic party for budget control. The government was shut down five times during Carter’s four-year tenure, the most of any President. The legislation that emerged from a battle between a Republican President and a Democratic Congress 45 years ago laid the groundwork for today’s battle between a Republican President and a Democratic House. As the families of some Federal workers waited in line at food pantries last month, they might not have appreciated being victims of a historical political feud.

Prompted by the prejudices, concerns and animosities of past generations, we walk through our lives with a legal leash tied around our necks. According to the utopian rhetoric of the Declaration of Independence, our leashes should all be same length. Political and economic realities contradict those sentiments, and underlie the long history of housing, job, voting and regulatory discrimination in this country.

If my family or group enjoys a longer leash, another group must endure a shorter leash. Any equality we reach is a temporary balance in the tug of war for a longer leash. Equality is a happenstance, not a permanent right we have. “But it shouldn’t be that way!” an idealist might protest. It is that way. That’s history.


1. A history of 19th century income tax legislation following the Civil War, and the court decisions which nullified them.
2. Family Assistance Program proposed by Nixon. He and other economists like Milton Friedman called it a “negative income tax”
3. A timeline of the Presidential electoral map
4. A short account of the political impetus behind the act . A summary of the 1974 Budget Act.

Follow the Leaders

January 27, 2019

by Steve Stofka

This week the investment community mourned the death of John Bogle, the founder of Vanguard, the mutual fund giant. He had the crazy idea that mom-and-pop investors should buy a basket of stocks and not attempt to beat the market (Note #1). In 1976, he launched the first SP500 index fund, VFINX, a low-cost “no-brainer” or passive fund. Because people did not want to invest in the idea of earning just average stock returns, the initial launch raised very little money. “Bogle’s folly” now has more than fifty imitators (Note #2).

Vanguard has over $5 trillion under management. Let’s turn to them to answer the age-old question – what percent of my retirement portfolio should be invested in bonds? Bond prices are much less volatile than stocks and stabilize a portfolio’s value. Several decades ago, people retired at 65 and expected to live ten years in retirement. An old rule was that the percentage of bonds and cash should match your age. A 50-year old, for example, should have 50% of their portfolio in bonds and cash. Few advisors today would be so conservative. Many 65-year-olds can expect to live another twenty years or more.

Vanguard, Schwab, Fidelity and Blackrock offer various life cycle funds that have target dates. The most common dates are retirement; i.e. Target 2020, or 2030 or 2040. These funds are composed of shifting portions of stock and bond index funds offered by each investment company. The funds adjust their stock and bond allocations based on those dates. For example, if a 55-year old person bought the Vanguard Retirement Target Date 2020 Fund VTWNX in 2005, it might have been invested 75% stocks and 25% bonds when she bought it. As the date 2020 nears, the stock allocation has decreased to 53% and the bond portion increased to 47%. The greater portion of bonds helps stabilize the value of the portfolio.

In the chart below, I’ve compared the stock and bond allocations of various retirement funds offered by Vanguard (Note #3). Notice that the stock portion of each fund increases as the dates get further away from the present.


A 46-year old who intends to retire in 2040 when they are 67 might buy a Target 2040 fund which is 84% invested in stocks. The bond allocation is only 16%. Using the old rule, the bond portion would have been 46%.

What happens after that target date is met? The fund continues to adjust its stock/bond allocation towards safety. Over five years, Vanguard adjusts its mix to that of an income portfolio – 30% stocks and 70% bonds (Note #4).

These strategies can guide our own portfolio allocation. I have not checked the allocations of Schwab, Fidelity and others in the industry but I would guess that they have similar allocations for their life cycle funds.


1. History of Vanguard Group
2. More than fifty funds invest in the SP500 index according to Consumer Reports
3. Vanguard’s Target 2020 fund VTWNX , 2025 Fund VTTVX , 2030 Fund VTHRX, 2035 Fund VTTHX, and 2040 Fund VFORX
4. Vanguard’s Income Portfolio VTINX 

Fault Lines

January 20, 2019

by Steve Stofka

If your twin brother went away on a spaceship a month ago and looked at the current price level of the SP500, he wouldn’t see much change. What a month it has been! A 7% drop in stock price the week of December 17th, followed by a Christmas Eve when Santa left a lump of coal in investor’s stockings, followed by a government shutdown.

Let’s say your twin brother went off to the Romulan Galaxy on a spaceship flying near the speed of light on October 1, 2007. He has just come back and has aged a few weeks. You have aged a great deal. The financial crisis, the housing crisis, the job crisis, the crisis crisis. No wonder you look older. There are too many crises.

Your twin brother notes a similarity in the behavior of the stock market the past few months and the fall of 2007 when he took his starflight cruise. What similarity you ask? He hauls out his Romulan graphing tool and shows you a plot comparison of SP500 prices (SPY) in the fall of 2007 and the fall of 2018. Not only does your twin brother look younger but he also got a Romulan grapher on his journey. It is not fair.


“In both periods, prices fell about 15% in 15 weeks,” your brother says.

“They happened to fall the same percentage in the same amount of time,” you answer.  “That probably happens all the time and we just don’t notice.”

“15-20% drops in as many weeks doesn’t happen all the time,” your brother says. “It happens when there are fault lines forming. It happened in December 2000, January 2008, again in August 2011 during another government shutdown, and now.”

“Sure, there are some trade problems and the government shutdown,” you protest, “but the economy is good. Employment is at all- time highs, wage gains were over 3% last month, and inflation is relatively tame.”

“Everything was still pretty good in December 2000 and January 2008,” your brother responds. “‘A healthy correction after a price boom,’ some said. ‘The market is blowing off the excess froth before going higher,’ others said. At both times, there was something far more serious going on. We just didn’t know it.”

“You got pretty smart in the time you were gone,” you tell your brother. “Can I get one of those Romulan graphers?”

“Yes, I bought one for your Christmas present 11 years ago,” your brother says and hands you a grapher from his spacesack. “Tell me, what are these picture phones that people are carrying around now? I don’t remember them from when I left. And what’s Facebook?”

Decline of Income Growth

January 13, 2019

by Steve Stofka

On the week before Christmas, the stock market fell more than 7%. I wrote about the historical trends following previous falls of that magnitude. The week opened on Dec. 17th with the SP500 index. Two months was the shortest recovery period after 7% falls in 1986 and 1989. In a previous budget showdown in 2011, the market recovered after five months, but shutdowns are just one component of a complex economic environment. If the outlook for corporate profits looks positive, the market will pause during a long showdown, as it did in October 2013.

Investors wanting to contribute to their retirement plans can do so in a measured manner. The uncertainties that produce tumultuous markets take some time to resolve. Although the market rose for five straight days in a row this week, it was not able to reach that opening level of 2600 three weeks ago.


Let’s turn to a persistent problem: the lack of income growth. Beginning in the early 1970s, the annual growth rate in real personal income began to decline (Note #1). I calculated ten-year averages of annual growth to get the chart below. 5% annual inflation-adjusted growth during the 1960s became 3% growth during the 1980s and early 1990s. The dot-com and housing booms of the late 1990s and early 2000s kicked growth higher to 3.5%. In 2008, annual growth (not averaged over ten years) went negative and reached as low as -4.9% in May 2009. Following the Financial Crisis, the ten year average is stuck at 2% growth.


The Bureau of Labor Statistics (BLS) tracks total employee compensation costs, including benefits and government mandated taxes (Note #2). I compared ten-year averages of both series, income with (blue line) and without (orange line) benefits. The trend over five decades is down, as before. When the labor market is tight, employers have to offer better benefit packages and the growth in total compensation is higher than income without benefits. When there is slack in the market, employees will accept what they can get, and the growth of total compensation is less.


Beginning in early 2008, we see the dramatic effect of the last recession and the financial crisis. Income growth went negative, but income with benefits plunged 19% by January 2009. With unemployment stubbornly high, employers could attract employees with rather skimpy benefit packages. The ten-year average growth of income with benefits (blue line) sank to 1%, a full percent below income without benefits. In the last two years, the two series are starting to converge but the trend is below 2% growth.

The data contradicts those who claim that income growth is low because employers are spending more in benefits.


1. Real personal income series at Federal Reserve. An explanation of various types of personal income at Federal Reserve
2. Fed Reserve Series PRS85006062 Less PCEPI Chain Type Inflation Index.

Place Your Bets

January 6, 2019

by Steve Stofka

This will be my tenth year writing on the financial markets. As I’ve written in earlier posts, we’ve been sailing in choppy waters this past quarter. In 2018, a portfolio composed of 60% stocks, 30% bonds and 10% cash lost 3%. In 2008, that asset allocation had a negative return of 20% (Note #1). We can expect continued rough weather.

If China’s economy continues to slow, the trade war between the U.S. and China will stall because a slowing global economy will give neither nation enough leverage. Will the Fed stop raising interest rates in response? If there is further confirmation of an economic slowdown, could the Fed start lowering interest rates by mid-2019? Ladies and gentlemen, place your bets.

Thanks to good weather and a strong shopping season, December’s employment reports from both ADP and the BLS were far above expectations (Note #2). Wages grew by more than 3%. Will stronger wage gains cut into corporate profits? Will the Fed continue to raise rates in response to the strong employment numbers and wage gains? Ladies and gentlemen, place your bets.

The global economy has been slowing for some time. After a 37% gain in 2017, a basket of emerging market stocks lost 15% last year. Although China’s service sector is still growing, it’s manufacturing production edged into the contraction zone this past month (Note #3). Home and auto sales have slowed in the U.S. What is the prospect that the U.S. could enter a recession in the next year? Ladies and gentlemen, place your bets.

The partial government showdown continues. The IRS is not processing refunds or answering phones. If it lasts one more week, it will break the record set during the Clinton administration. Trump has said it could go on for a year and he does like to be the best in everything, the best of all time. Could the House Democrats vote for impeachment, then persuade 21 Republican Senators (Note #4) to vote for a conviction and a Mike Pence Presidency? Ladies and gentlemen, place your bets.

When the winds alternate directions, the weather vane gets erratic. This week, the stock market whipsawed down 3% one day and up 3% the next as traders digested the day’s news and changed their bets. Interest rates (the yield) on a 10-year Treasury bond have fallen by a half percent since November 9th. When yields fell by a similar amount in January 2015 and January 2016, stock prices corrected 8% or so before moving higher. Since early December, the stock market has corrected by a similar percentage. Will this time be different? Ladies and gentlemen, place your bets.

Staying 100% in cash as a long-term investment (more than five years) is not betting at all. From a stock market peak in 2007 till now, an all cash “strategy” earned less than 1% annually. A balanced portfolio like the one at the beginning of this article earned a bit less than 6% annually. Older investors may remember the 1990s, when a person could safely earn 6% on a CD. Wave goodbye to those days for now and place your bets.



  1. Portfolio Visualizer results of a portfolio of 60% VTSMX, 30% VBMFX and 10% Cash
  2. Automatic Data Processing (ADP) showed 271,000 private job gains. The Bureau of Labor Standards (BLS) tallied over 300,000 job gains.
  3. China’s manufacturing output in slight contraction
  4. The Constitution requires two-thirds majority in Senate to convict an impeached President. Currently, there are 46 Democratic Senators and Independents who caucus with Democrats. They would need to convince 21 Republican Senators to vote for conviction to get a 67 Senator super-majority. 22 Republican Senators are up for re-election in 2020 and might be sensitive to public sentiment in their states.

Strong Reactions

December 30, 2018

by Steve Stofka

Happy New Year!

Dramatic trading days signal a down market. In the week prior, the SP500 index lost over 7%. On Monday, Christmas Eve, the stock market fell to a level that would traditionally signal the beginning of a bear market, which is 20% below a recent high closing price. After a huge rally on Wednesday and a lot of volatile trading this week, the index gained 3%.

A disruptive stock market underscores the importance of asset allocation. The SP500 has lost 10% in December. A conservatively balanced fund like Vanguard’s Wellesley Income (VWINX) lost 1.8%. The fund is actively managed and has 40% stocks, 60% bonds/cash. A fund of index funds, VTHRX, lost 7.8%. It has a more aggressive mix of 65% stocks and 35% bonds/cash.

As I noted a few weeks ago (Hat Trick), there have been repeated signs of a struggle between hope and fear, between competing estimates of future earnings. 7% weekly price falls occur at crises or turning points. In the past sixty years, there have been only fifteen such weeks. Let’s take a look at the most recent.

In August 2011, then President Obama walked away from an informal budget deal with House Speaker John Boehner. The market lost almost 20% but fell short from hitting that mark. Once a budget deal was negotiated, the market recovered but it took five months to make up the losses.


Three years earlier, in October 2008, the market lost more than 7% in a week when negotiations for a bank bailout fell apart. This was a month after the bankruptcy of investment firm Lehman Brothers ignited the financial crisis. The market would take 39 months to recover that October price level. On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act (Note #1). Senate Democrats made many concessions to win a few Republican votes for the bill to gain passage. Once it became clear that the stimulus funds would be trickled into the economy over several years, the market tanked, losing 11% during the month of February. In a final week of capitulation, the market lost 7% in the first week of March. This was the turning point.

A 10% weekly price drop in April 2000 heralded the end of the dot-com boom. The market would not recover for 83 months, almost seven years. An even worse fall came after the market opened following the 9-11 attack. The indictment of the international accounting firm Arthur Anderson sparked doubts about the financial statements of other companies and helped fuel an 8% drop in July 2002.

With six weeks of 7% price drops, the 2000s was the most tumultuous decade since the Great Depression. Strong reactions in the market deserve our attention and caution.

1. The American Recovery and Reinvestment Act 

Stormy Seas

December 23, 2018

by Steve Stofka

For the past two months, the stock market’s volatility has doubled from late summer levels. The Fed announced its intent to continue raising interest rates in 2019 at least two times, and the market nosedived in response. It had been expecting a more dovish policy outlook from Chair Jerome Powell.

What does it mean when someone says the Fed is dovish, or hawkish? Congress has given the Fed two mandates: to manage interest rates and the availability of credit to achieve low unemployment and low inflation. That goal should be unattainable. In an economic model called the Phillips curve, unemployment and inflation ride an economic see-saw. One goes up and the other goes down. To rephrase that mandate: the Fed’s job is to keep unemployment as low as possible without causing inflation to rise above a target level, which the Fed has set at 2%.

There are periods when the relationship modeled by the Phillips curve breaks down. During the 1970s, the country experienced both high unemployment and high inflation, a phenomenon called stagflation. During the 2010s, we have experienced the opposite – low inflation and low unemployment, the unattainable goal.

Convinced that low unemployment will inevitably spark higher inflation, the Fed has been raising interest rates for the past two years. The base rate has increased from ¼% to 2-1/2%. The thirty-year average is 3.15%. Using a model called the Taylor Rule, the interest rate should be 4.12% (Note #1).  After being bottle fed low interest rates by the Fed for the past decade, the stock market threw a temper tantrum this past week when the Fed indicated that it might raise interest rates to average over the next year. Average has become unacceptable.


In weighing the two factors, unemployment and inflation, the Fed is dovish when they give greater importance to unemployment in setting interest rates. They are hawkish when they are more concerned with inflation. The Fed predicts that unemployment will gradually decrease to 3.5% this coming year. Unemployment directly affects a small percentage of the population. Inflation affects everyone. The Fed’s current policy stance is warily watching for rising inflation.

The stock market is a prediction machine that not only guesses future profits, but also other people’s guesses of future profits. As the market twists and turns through this tangle of predictions, should the casual investor hide their savings in their mattress?

These past five years may be the last of a bull market in stocks; 2008 – 2012 was the five-year period that marked the end of the last bull period that began in 2003 and ran through most of 2007. Here are some comparisons:

From 2014-2018, a mix of stocks returned 7.7% per year (Note #2). A mix of bonds and cash returned 1.96%. A blend of those two mixes returned 4.91% per year.

From 2008-2012, that same stock mix returned just 2.66% per year. The bond and cash mix returned 5.5%, despite very low interest rates. A blend of the stock and bond mixes returned 5.26%.

For the ten-year period 2008 thru 2017, the stock mix earned 7.7%. The bond and cash mix returned 3.54% and the blend of the two gained 6.35% annually. On a $100 invested in 2008, the stock mix returned $13.5 more than the blend of stocks and bonds. However, the maximum draw down was wrenching – more than 50%. The $100 invested in January 2008 was worth only $49 a year later. Whether they needed the money or not, some people could not sleep well with those kinds of paper losses and sold their stock holdings near the lows.

The blend of stock and bond mixes lost only a quarter of its value in that fourteen-month period from the beginning of 2008 to the market low in the beginning of March 2009. The trade-off between risk and reward is an individual decision that weighs a person’s temperament, their outlook, and the need for to tap their savings in the next few years.

A rough ride in stormy seas tests our mettle. During the market’s rise the past eight years, we might have told ourselves that our stock allocation was fine because we didn’t need the money for at least five years.  If we are not sleeping because we worry what the market will do tomorrow, then we might want to lower our stock allocation. Sleeping well is a test of our portfolio balance.


1. The Atlanta Fed’s Taylor Rule calculator
2. Calculations from Portfolio Visualizer: 30% SP500, 30% small-cap, 20% mid-cap, 20% emerging markets. Bond mix: 70% intermediate term investment grade bonds, 30% cash. The blend of the two was half of each percentage: 15% SP500, 15% small-cap, 10% mid-cap, 10% emerging markets, 35% bonds, 15% cash.

Income Inequality Up, No Down

December 16, 2018

by Steve Stofka

Up or down?

According to a recently updated analysis of 2015 income data by the Economic Policy Institute (EPI), Jackson, Wyoming leads the list of census statistical areas for income disparity (Note #1). Jackson is a ski resort and a natural wonderland where rich families live in expensive homes. It is a micropolitan, not a metropolitan statistical area (MSA) like Columbus, Denver or New York City. Most of the top statistical areas for income disparity in this study are resort areas. Workers in resort towns are typically low income, skewing measures of income disparity higher.

The Brookings Institute (BI) filtered out these resort data outliers in their analysis (Note #2). Large coastal cities topped the list of MSAs. The EPI study used the ratio of the top 1% of incomes to the bottom 99% to calculate disparity. They found that it was increasing, a common trope of the political left. BI calculated their disparity by using a ratio of the top 5% of incomes to the bottom 20% of incomes. BI found that disparity remained the same overall. They did note that more cities saw a declining disparity. Methodology matters.

Wealthy people are attracted to states with no income tax, and most of the top statistical areas listed by EPI are in such states. Wyoming is one of nine states that do not tax most or all personal income (Note #3). Taxpayers who claim some of their income as earned in that state can save a good deal of money on taxes. Taxpayers can meet the rules of residency used by the Census Bureau and IRS by living the most days in a certain state (Note #4). Individual states may require that a person have that state’s drivers license, voting record or other proof of residency (Note #5).

States with no income tax have high sales and gasoline taxes to help fund local infrastructure and services. Those on the political left claim that these regressive taxes hurt working families. Conservatives reject the progressive definition of “fair” taxation. On principle, tax rates for common goods and services should be equal. In addition, homeowners with expensive homes contribute more to the commonweal in higher property taxes and their employment of service labor for upkeep maintenance, repair and remodel.

The BI study highlights a problem that will continue to divide the country. The states with the highest income inequality are in states that vote Democratic. Representatives in those states are responding to a real problem, but Democrats want higher federal tax rates for taxpayers in all states to fix a problem in a few densely populated coastal states. A consistent feature of Democratic platforms are national solutions to local problems. Republicans counter that states should solve their own problems. However, Democratic politicians have already jacked up tax rates in states with high income disparity.  They are concerned that wealthy taxpayers will flee high tax states and make the problem worse. They are right. Wealthy taxpayers are leaving high tax states like New Jersey.

If you think you have a solution to this political problem, please mail your solution to “Santa Claus, c/o North Pole” and have a wonderful Christmas.


1. EPI analysis of 2015 income data, updated in July 2018
2. Brookings Institute analysis of income data
3. Alaska, Florida, Nevada, S. Dakota, Texas, Washington and Wyoming do not tax personal income. New Hampshire and Tennessee tax investment income only. Those states have higher sales and gasoline taxes. Bankrate (
4. Census Bureau residence rules – count people where they live for most of the year. If they have no permanent residence(s), use their residence on April 1st of the census year. Snowbirds and others who split their residence should use the place where they spend the most days.
5. Colorado residency rules for tax purposes Also, Intuit’s guidelines on multi-state tax filing

Hat Trick

December  9, 2018

by Steve Stofka

For the third time in six weeks, the SP500 fell below its 200-day moving average. This ten-month average of trading activity is a benchmark that indicates mid to long-term sentiment. It is a tug of war between the bulls and the bears, the buyers and sellers, over the developing trade war between the U.S. and China.

Technical market watchers call a crossing below the 200-day a Death Cross, a too dramatic name for something that may occur once or twice a year. Less frequently does it happen twice in a two-month period – a Double (Note #1). Rarely does it occur three times in such a short period of time – a Hat Trick (Note #2).

Hat Tricks signal strong investor worry about one or more structural conditions that will impact future earnings. The situation may resolve, and the market regain its upward trend. If the situation does not resolve, expect further price declines.

What does this mean for the casual investor? Contributions to an IRA at current prices will be priced as though you had dollar-cost averaged (DCA) each month of this year. As I showed in 2011 (Note #3), the DCA strategy has produced the highest long-term returns on the SP500. Look at the monthly bar on the chart below.

History is the only guide we have to investor behavior. Previous Doubles occurred in 2015 and 2012. Previous Hat Tricks developed in 2011 and 2010, producing strong price corrections (Note #4) in response to budget duels between Republicans and President Obama (2011), and debt crises in the Eurozone (2010).

In hindsight, the Hat Trick that occurred during four weeks in August 2007 signaled that this was more than a well-deserved correction in the housing market. Don’t we wish we had the clarity of a rearview mirror? Another Hat Trick a few months later in November and December 2007 coincided with the beginning of the recession that lasted 20 months and chopped 60% off the price of the SP500. Another Hat Trick in May and June 2008 came just months before the onset of the Financial Crisis in September 2008.

A Hat Trick accompanied the peak of the housing market in 2006, and the peak of the dot-com market in 2000. It signaled the start and end of the 1990 recession.

Lesson: be cautious.


1. In technical analysis, this double bottom forms a ‘W’ and indicates a possible exhaustion of selling before a reversal to the upside.
2. Hat Trick is a name I made up for 3 dips below the 200-day in a two-month period.
3. I compared various IRA investing strategies in May 2011
4. Price declines in 2010 and 2011 barely escaped being classified as bear market corrections, defined as a closing price 20% below a previous closing high price.