Park Your Money in Four ETFs To Cut Market Exposure

By Path Financial President and Chief Investment Officer Raul Elizalde

raul imageFrom time to time investors look at reducing their market exposure and “parking” their money safely. Some choose plain cash, but cash has a negative real rate – it does not grow, and inflation eats away at its value.

Some ETFs can provide stability and a moderate return with very low exposure to market risk. While no investment is completely safe (even cash under a mattress can catch fire) these ETFs have solid sponsors, large portfolios and plenty of liquidity. Each one has different characteristics, so using them in combination may be better than settling on any single one.

SHY, for example, has $14 billion of U.S. Treasury notes and bonds with maturities between 1 and 3 years. Its liquidity is excellent and its sponsor, BlackRock’s iShares, is one of the strongest financial institutions around. Because all its holdings are in fixed-rate instruments, its value declines when interest rates go up. Quality is unmatched: the assets are backed by the full faith and credit of the United States Government.

FLOT, also from iShares, has $10 billion of floating-rate securities issued mostly by corporations with an average maturity of about 2 years. These underlying instruments pay interest that moves with market rates, so they tend to benefit when rates climb. Like SHY, it is a very liquid ETF.

CSJ is another iShares ETF. It resembles SHY in that it contains $11 billion in fixed-rate instruments with maturities between 1 and 3 years, but it is mostly comprised of corporate securities, which pay higher rates than the US Treasuries in SHY. Like SHY, its value tends to drop when rates go up. Roughly 16% of its portfolio is made up of supranational and government-guaranteed bonds.

Finally, SPSB is an ETF sponsored by State Street’s SPDRs, another very strong sponsor. Like CSJ, it contains corporate bond holdings between 1 and 3 years. However, there are no supranational or government-guaranteed bonds among its $4 billion in assets, which results in a higher return than CSJ but also higher volatility. Both CSJ and SPSB offer plenty of liquidity with very narrow bid-ask spreads, but their daily volumes are smaller than SHY or FLOT.

We ran a few combinations of these ETFs using approximately seven years of data, looking for an optimal blend of low volatility, high return and minimal drawdowns (i.e. declines from peaks) for that period. A mix that seems to satisfy these elements is a 65% FLOT, 10% SHY, 15% CSJ and 10% SPSB allocation rebalanced monthly, as shown in the graph below. Drawdowns and volatility were minuscule. Returns were moderate, as one would expect for a cash alternative, but accelerated in the last two years as rates rose.

graph one

We tried including other short-term and floating-rate ETFs such as BSV (Vanguard’s short-term bond ETF) and FLRN (State Street’s SPDR Floating Rate) but we found no measurable contribution to the portfolio metrics achievable with the four ETFs we focused on.

While this mix worked well in the past, the optimal blend going forward may contain a larger proportion of FLOT if rates rise, or a smaller proportion of CSJ and SPSB if credit spreads widen along with lower equity prices.

A word of caution: ETFs, like any instrument, can be subject to liquidity constraints. Unlike a mutual fund, owning an ETF does not give the holder direct ownership to the underlying instruments. A serious market dislocation can affect corporate bonds spreads and cause FLOT, CSJ, or SPSB to experience significant price drops or a wide gap between market value and net asset value.

However, barring the unknowable effects of abnormal market conditions, which in any case tend to be temporary, these ETFs offer investors an attractive alternative to cash.

This analysis originally appeared in Raul Elizalde’s investment column. Click here to follow Raul on Forbes.


Raul Elizalde President Path FinancialRaul Elizalde is the Founder, President, and Chief Investment Officer of Path Financial, LLC. He may be reached at 941.350.7904 or

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Earnings Forecasts Optimism Could Spell Trouble for Market

By Path Financial President and Chief Investment Officer Raul Elizalde

photoStock prices depend on future earnings expectations. The current consensus is for earnings per share (EPS) to grow through the end of 2019 by about 30% to record highs. These are risky forecasts: if numbers come out short, stock prices will take a hit. Can investors rely on these forecasts?

first graph

Operating earnings estimates from hundreds of analysts pooled by Standard and Poors’ Capital IQ show that optimism about earnings is strong. This is noteworthy because observers are also contemplating the possibility of a slowdown, or even a recession, in 2019.

The enthusiasm may be due in part to the strong acceleration of operating EPS growth that started in mid-2016. Remarkably, a related set of numbers – corporate profits before tax from the U.S. Bureau of Economic Analysis (BEA) – lack the same vitality. The BEA numbers, in fact, have more or less stalled since 2010, and there is little indication that they are ready to take off.

To be sure, the two sets are quite different. The S&P numbers only pertain to public companies belonging to the S&P 500, while the BEA numbers are intended to cover all corporations, public or not. Additionally, while both figures are calculated before tax, various other accounting items are treated differently.

Nevertheless, the rate of growth for both tends to move in the same direction, with peaks and troughs reached at the same time, as in 1994, 2003-04 and 2010-11. One key observation would be whether the gap between the BEA numbers and operating earnings narrows or widens at the end of the second quarter. If both measures continue to diverge, the chance that operating EPS will achieve the 2019 targets will diminish.

second graph

It is important to point out that the strong earnings growth rates of 2003-04 and 2010-11 were possible because of the low starting points caused by prior recessions. In comparison, the strong rate projected for 2019 would have to be reached after almost 10 years of expansion. It may be harder for earnings to accelerate from the current high base.

Plenty of research throws doubt on the ability of analysts to predict earnings far in advance, and this is borne by the evidence. According to Standard & Poors, only 9% of analysts were able to forecast current quarter EPS correctly in the last five years. Most forecasts exceeded the actual numbers, or came out short.

This is not surprising. Not only there are many exogenous, unpredictable factors affecting earnings, but also the accounting input needed to make forecasts is hopelessly complex. As Mike Thompson, S&P Investment Advisory chairman said on a recent TV interview, “you almost need forensics to understand some of the accounting that goes on to get to EPS.”

So is the current projection for the next seven quarters of earnings achievable? Yes, it is, but that is not saying much. Any projection is possible. One as optimistic as the current one may also need a generous serving of luck to come true.

This analysis originally appeared in Raul Elizalde’s investment column. Click here to follow Raul on Forbes.


Raul Elizalde President Path FinancialRaul Elizalde is the Founder, President, and Chief Investment Officer of Path Financial, LLC. He may be reached at 941.350.7904 or

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Why 2019 Recession Is Possible Despite Unemployment At 50-Year Lows

By Path Financial President and Chief Investment Officer Raul Elizalde

path imageBy most measures, employment is as strong as it has ever been. For example, initial unemployment claims as a percentage of the labor force are by far the lowest since records started. The May 2018 unemployment rate dropped to 3.8%, a level touched only once since 1969 – on April 2000, just as the stock market peaked before a 30-month-long bear market and the economy fell into a recession.

Strong economic indicators are always welcome, but they do not guarantee that growth can be sustained. Take retail sales, for example: they are now at a record high, but they were also at record highs just before the two previous recessions. How can this be?

first graph

Forecasting the economy is just as difficult as forecasting the stock market. Economists are very good at explaining what already happened and why, but not so at predicting what will happen next.

They know this. Prakash Loungani, an economist at the IMF, showed in a study that professional forecasters missed 148 out of 153 world recessions. This is not surprising: Economic indicators very rarely flash any warnings before a recession actually arrives. Economic downturns seem to come unexpectedly.

Regardless of the difficulties, analysts are always looking for clues. One measure that has received attention as a predictor of future recessions is the shape of the yield curve. It seems that when longer-term rates drop below short-term rates, a recession often follows. But this is also true for unemployment claims: a recession seems to follow whenever they drop below 300,000.

second graph

This is a difficult set of facts to rationalize. On one hand, it is easy to speculate that when longer-maturity rates drop below shorter rates it is because the market expects future economic activity to weaken. On the other hand, explaining why strong levels of employment precede a recession is not easy, even though it is also appears to be true.

While the yield curve today is not yet at levels associated in the past with approaching recessions, this may be due to technical reasons that could have moved the threshold upwards, such as negative rates still widespread elsewhere. But unemployment levels are well beyond recession-preceding thresholds, and in any case both indicators are moving in a direction that should cause concern.

Still, it is not obvious why economic indicators often show their best performance before the economy takes a turn for the worse. One explanation could be that it is difficult to rein in distortions when the economy is firing on all cylinders.

Sometimes this is due to politics. When the economy is sluggish, policymakers in charge are accused of ineptitude or lack of concern. To prevent this, they tend to stimulate growth regardless of consequences, and the strategy eventually backfires.

Other times, imbalances happen without blunt policy interventions, such as when asset values take off and build a bubble. Policymakers are leery of taking the punchbowl away when everybody seems to be getting rich, even though that is precisely what they should be doing. But bad policy is often good politics.

Are there any such dangers lurking in the US economy today?

To many, stock market valuations appear overstretched. In addition, the combination of a huge tax cut, a spending increase and an aggressive trade stance adopted by the Trump administration, while intended to keep the expansion going, may not end up well.

The Fed could raise rates too quickly, for instance, if it thinks that the economy is running the risk of overheating or inflation pressures start to mount. Given the enormous amount of private debt built up after years of rock-bottom rates, this could drive some debtors to insolvency and trigger a broad crisis.

Another scenario would be that lower taxes and higher spending cause public debt levels and budget deficits to explode, forcing a drastic reversal of policy that could choke growth. This is not idle speculation. Virtually nobody that has looked carefully at the details of current fiscal policy, among them the Congressional Budget Office, the Tax Policy Center and the Joint Committee on Taxation, believes that the current largesse could create enough growth and pay for itself.

The U.S. expansion may be close to its end just because of old age, given that it has lasted almost nine years and is now the second longest in U.S. history. While economic indicators are strong, they were also strong just before past recessions. And anyone who thinks that a recession is unlikely should keep in mind that it also seemed unlikely to professionals trained to predict recessions 148 out of the last 153 times.

This analysis originally appeared in Raul Elizalde’s investment column. Click here to follow Raul on Forbes.


Raul Elizalde President Path FinancialRaul Elizalde is the Founder, President, and Chief Investment Officer of Path Financial, LLC. He may be reached at 941.350.7904 or

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Business sectors are set for massive changes this fall

By Path Financial President and Chief Investment Officer Raul Elizalde

2018-06-04 14_05_27-Sector ETFs Are Set For Massive Changes This FallThe Global Industry Classification Standard (GICS) is a taxonomy system developed by MSCI and Standard & Poor’s that organizes companies into 11 economic sectors. This classification is applied to sector indices, which are in turn used to build ETFs and mutual funds that track them.

But the GICS system was created almost 20 years ago, and the world has changed a lot since then.

Facebook, for example, is no longer the online curiosity it was when it first started. It is now a huge delivery system for content, marketing and advertising. So it no longer seems appropriate that it should coexist in the same “information technology” box as Akamai, for example, which builds internet delivery networks and focuses on security and reliability.

To accommodate these changes the good folk at GICS have produced a preliminary list of more than 200 companies around the world that will be reclassified to reflect better what they actually do today. A final list will be published in July, and changes will be effective in September.

The technology sector will lose many big names to a new communications sector (a rebranding of the current telecommunications sector) such as Alphabet, Google and Twitter. Consumer discretionary will lose Comcast, Disney and Twenty-First Century Fox to communications as well.

These huge changes will fundamentally change the technology, communications and consumer discretionary sectors. Investors unaware of these changes will be in for a big surprise.

For example, the market cap of the communications sector will jump from today’s $1.7 trillion to perhaps as much as $10 trillion, according to a study from State Street, one of the largest ETF providers. Consumer discretionary and technology will shrink.

Additionally, as the State Street study points out, communications will be far more correlated to the S&P 500 than before. It will also include 13 stocks in the top 50% of returns in 2017, a huge change for a sector that today has a large proportion of high-dividend, defensive stocks. Furthermore, historical studies of sector volatility and correlation will be rendered largely useless. Investors who strive to build efficient portfolios using that data will find themselves in the dark.

ETFs, which have been the investors’ vehicle of choice to track indices, will be particularly affected. For example, State Street’s SPDR Technology Sector XLK, Consumer Discretionary XLY and Telecommunications XTL that track the S&P Select Sector indices (built around GICS) will be revamped to mirror the new compositions.

Vanguard, which also has sector ETFs (the Technology VGT, Telecommunications VOX and Consumer Discretionary VCR) structured as a class of their mutual funds adopted an interesting approach. Between May and September they will track custom MSCI Investable Market Transition indices to avoid sudden changes to the funds, in lieu of the current MSCI Investable Market Indices.

Fidelity’s U.S. sector ETFs track U.S.-only versions of the MSCI Investable Market Indices, which will change as well. On the other hand, some of Blackrock’s US-only sector ETFs will be unaffected, such as the Technology IYW and the Telecommunications IYZ, because they track US-only Dow Jones Sector indices that are not aligned with GICS. Adding to the confusion, Blackrock’s global sectors ETFs such as the Global Telecom IXP are linked to GICS definitions, and will change.

This is enough to make any investor’s head spin. What investors must remember is that some of the sector funds they use today may no longer represent their investment objectives after September. Keeping abreast of the upcoming changes will go a long way to avoid surprises down the road.

This analysis originally appeared in Raul Elizalde’s investment column. Click here to follow Raul on Forbes.


Raul Elizalde President Path FinancialRaul Elizalde is the Founder, President, and Chief Investment Officer of Path Financial, LLC. He may be reached at 941.350.7904 or

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Forbes Names Raul Elizalde as Contributing Columnist Covering Market Trends & Investing

Raul Elizalde President Path FinancialForbes has named Sarasota investment advisor Raul Elizalde as a full-time contributor for its website, which boasts a monthly digital readership of roughly 53.9 million. Elizalde has been a guest contributor for Forbes for over a year; beginning May 2018, he will write under his own byline ( covering market trends, investment mistakes, and overlooked risks. His first column, “Sector ETFs Are Set For Massive Changes This Fall,” is already online at Elizalde is the founder and chief investment officer of Path Financial, a Florida-registered investment advisory firm.

Elizalde focuses on analyzing historical trends to avoid current and future market risks and minimize investment vulnerability for his clients. As a former Wall Street strategist, Elizalde has advised portfolio managers across the US and the globe, and has made presentations at the World Bank, appeared as a market commentator on television (Reuters and Bloomberg TV) and has been quoted in the financial pages of The Wall Street Journal, The Washington Post, the Financial Times and The New York Times. Elizalde’s economic and investment analyses have been published online by some of the most respected financial media in the country, including Investopedia, Morningstar, Motley Fool, the Street and Yahoo! Finance. He also shares his insights monthly through Path Financial’s free, subscriber-based newsletter, “Straight Talk.”

In 2008, Elizalde relocated his family to Sarasota from New York City where his Wall Street career included positions as Global Fixed Income and Quantitative Strategist for ING Barings, Head of Research at Santander Investment Securities, and Fixed Income and Emerging Markets Strategist for Banc of America Securities. He holds an MS degree in engineering from University of Buenos Aires, Argentina, and an MBA degree from University of California at Los Angeles. He was licensed as a NYSE Supervisory Analyst and currently holds a NASAA 66 Investment Advisor Representative license.

Elizalde is the past chair and current member of the Asset Management Committee at State College of Florida. Path Financial, LLC, is located at 1990 Main St., in Sarasota, Florida, and is a Florida-registered investment firm, partnered with preferred account custodians Charles Schwab & Company and TD Ameritrade. For more information, call 941.350.7904, or connect on Twitter (@pathfin) and

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Why the trade tantrum is bad for stocks

today imageThe tariffs and penalties recently announced by the US represent a significant change in US relationships with its trade partners that creates uncertainty and stokes market volatility. Worse, they offer no outcome that would make the whole thing worthwhile. This is because the US has a lot to lose by alienating traditional partners who could help achieve its goals. This is not good for the stock market.

Let’s start with the botched attempt to impose steel and aluminum tariffs. The vast majority of economists opposed it and, in fact, Forbes did not find a single one who thought it was a good idea.

A tariff on goods imported into the US is a tax charged to US buyers. When a tariff is sufficiently high, the final price of the import becomes higher than the price of the same good produced domestically, which in theory should boost local production. This was the goal for the steel and aluminum tariffs announced in March.

All this may sound like a good idea. Yet, domestic buyers of those metals, who use them to make other things in the US, warned that they would have to raise prices for US consumers. Commerce Secretary Wilbur Ross argued tenaciously that the tariffs’ effect on local prices would be minimal (“less than six-tenths of one cent on a can of soda, less than half of one percent on a car”).

If what Secretary Ross says is true, then those particular tariffs served no purpose because such tiny price increases can be easily absorbed by consumers. Will anybody rush to deploy massive amounts of capital on new aluminum smelters or steel plants to replace imports? Most likely, any domestic substitution effect would come in the form of a small increase in capacity utilization.

The tariff gambit, in short, was ill-considered because it offered small potential upside compared to the possible downside of an escalation of tit-for-tat tariffs that could detonate a broader trade war. It is unsurprising that the administration eventually watered down the initial proposal as it also became clear that the main villain in its eyes, i.e. China, was unlikely to suffer much from tariffs on aluminum and steel.

The US then changed tack, announcing $60bn in tariffs and penalties specifically on Chinese imports, this time in response to US accusations of intellectual property theft.

The feeling that the US is itching for a confrontation with China is unmistakable. But the US has a lot to lose and the room for error is small.

The US is the largest exporter of goods and services in the world (China is larger just on goods) and therefore has the most at risk if a trade war unfolds. Additionally, foreigners hold 42% of all outstanding US Treasuries – 64% of which is held by governments. The fact that such a large proportion of US creditors are foreign is not a point of strength in negotiations.

More generally, a trade war could negatively affect the benign market outlook generated by other policies, such as the 2017 tax cut bill. While that bill created serious long-term problems (see How the tax bill made the next recession much more painful, 1.23.2018) there is no doubt that it gave stocks a short-term boost. A trade war, on the other hand, has no positive effects on the stock market.

A trade war will hurt US exports, corporate profits, and growth. US imports will also suffer, which will lead to higher inflation if cheap imports are substituted by more expensive local products.

While curbing intellectual property theft is a desirable goal, it is unlikely to be achieved through a trade war. Most experts agree that a coordinated approach by the US and other nations also affected by China’s actions would be more direct and have a higher chance of success.

For example, the US, Europe, and other allies could tighten restrictions on Chinese acquisitions of companies that own sensitive technology, or demand an easing on China’s regulations that force foreign companies to joint-venture with locals to establish a presence there. Alas, the US policy has so far been more directed at venting grievances with US allies over cars (Germany) or lumber (Canada), rather than convincing them to coalesce around common interests.

The US decision of abandoning the Trans-Pacific Partnership (TPP) also complicates the issue.

The TPP was advanced by the US to strengthen commercial and investment ties with much of the Pacific Rim. It excluded China, thus reining in its ambitions while reinforcing US influence on the region. When the US walked away from the TPP, China quickly moved in to revive talks on the competing, and far more advantageous (to China) Regional Comprehensive Economic Partnership, or RCEP. In addition, the US-less TPP’s successor – the Comprehensive Progressive Trans-Pacific Partnership, or CPTPP – now also includes China.

As the US surrenders influence in Asia, it cedes power to China. Pounding traditional partners over the head with tough rhetoric on trade simply drives them away, hurting US influence elsewhere. Meanwhile, confronting China’s ambitions in Southeast Asia is not made any easier by the rather inexplicable absence of a US ambassador to South Korea or the chaos in the State Department, which is currently awaiting the confirmation of a new Secretary of State after the sudden dismissal of Rex Tillerson.

In sum, the trade tantrum is not positive for the stock market. Since the bull run is already quite long in the tooth, some will see the trade issue as a possible catalyst for the rally’s end.

We believe that a full-on trade war is unlikely, but tensions need to be defused. The US must also formulate a coherent trade policy and refocus diplomacy on global cooperation favorable to US interests rather than confrontation with allies. Otherwise, the bull market could end soon.
What now?

We are a Registered Investment Advisor held to a fiduciary standard of care. We believe that our portfolio management process, focused on measuring and managing risk, can be very effective at creating a sensible balance between risk and return, partly by measuring financial and investment conditions often and adjusting exposure to risk through a well-defined process. We implement this process for our clients and we tailor it for their specific circumstances, always putting their interests first. That means we do not profit from transactions or from selling any products. Our only compensation is based on the assets we manage, which goes a long way of aligning our interests with yours. We can also help you evaluate your current goals and establish an investment plan aiming at achieving steady, long-term returns while managing downside risk. You can download our report describing our investment methods and goals, or contact us if you would like to know more about how Path Financial’s investment process can work for you. We’ll be happy to set up a confidential meeting to discuss your path to financial success. Read more.


Raul cropped for facebookRaul Elizalde is the Founder, President, and Chief Investment Officer of Path Financial, LLC. He may be reached at 941.350.7904 or

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How the tax bill made the next recession much more painful

today blog photoIf the stock market rally was a party, someone would be wondering if the punch bowl should be taken away. The tax bill, instead, has refilled the bowl to the brim. Party fun goes on, and the coming hangover has just gotten worse.

Shortly after the bill passed, Walmart, AT&T, Comcast and many other companies announced $1,000 bonuses to hundreds of thousands of employees. And this is peanuts compared to the large and permanent reduction in the corporate tax rate corporations get. The breaks extend to a mountain of profits accumulated abroad and a variety of loopholes that may lower taxes even further when they bring them back.

Corporate America was already flush with cash. The extra pile courtesy of the tax bill will spur some marginal increase in business investment and wages (as the $1,000 bonuses show), but the historical relationship between taxes and economic activity suggests that this effect is bound to be small.

Far more importantly, the extra money will accelerate stock buybacks. Data by the US Federal Reserve shows that corporate repurchases of stock have been a major source of demand for equities and arguably the most important factor in pushing stocks higher in recent years. Because it operated under the radar of individual investors, general belief in the soundness of the bull market never caught on. But now the tax cut is in place, and people are increasingly aware that offshore money will mostly go to dividends and repurchases. This is bringing a lot of investors in, pushing stocks even higher.

The tax cut, therefore, not only will have some marginal effect on economic activity, but also a hugely positive impact on the demand and supply of stocks. This makes it without a doubt a positive for the stock market. So what is not to like?

In our view, the tax cut comes exactly at the wrong time.

Back in the aftermath of the financial crisis the world desperately needed a fiscal shot in the arm – lower taxes, higher spending, or both. But politicians in the US and Europe, claiming concern by high levels of debt, declared that austerity was the only acceptable way to fight the crisis and denied the world of this medicine.

This was an enormous policy error. Without any fiscal help, central bankers were forced to engineer a global recovery through aggressive monetary loosening, at the cost of severe distortions such as zero (or negative) interest rates, massive asset inflation, and a huge accumulation of private debt.

But monetary authorities accomplished their goal. The world is firmly in growth territory, the US is at full employment, and inflation has stayed low. Not only we came out in pretty good shape, but conditions are now ideal for dealing with those distortions created by “unconventional” policies.

The tax bill, however, injects a sharp fiscal stimulus that not only is unnecessary at this time but also creates the opposite problem. If the economy speeds up too much or inflation starts rising, central bankers could be forced to raise rates too quickly to keep things under control. This is dangerous in a world with high indebtedness. And once again, fiscal and monetary policies will be at odds.

Even if inflation stays low and the economy does not overheat, the tax cut is bound to increase levels of public debt by at least $1TN over the next decade, according to the Congressional Budget Office, the Joint Committee on Taxation, and the Tax Policy Center. This will leave even less room for deploying fiscal tools (i.e. higher spending and/or even lower taxes) to fight the next recession when it comes.

This is a serious issue. While things look good right now, the business cycle is not dead. The current expansion has been running for 104 months straight, and we are well positioned to break the 120-month all-time record. When the streak ends, the size of outstanding public and private debt are very likely to be much larger than in 2008.

And it is a good bet that, unless the world’s political landscape changes radically, politicians will again be horrified by levels of debt and refuse to stimulate the economy through fiscal means, just as they refused during the last crisis. Monetary authorities will have no choice but loosening policy way too much, and the cycle will start all over again from a more extreme point of indebtedness.

Thus the tax bill has quite certainly, and unnecessarily, made future downturns far more painful than they needed to be. But when people party they don’t think about hangovers, especially when everybody was served another round. Higher stock prices in the short term are likely. What may happen later will not be as fun.


Raul cropped for facebookRaul Elizalde is the Founder, President, and Chief Investment Officer of Path Financial, LLC. He may be reached at 941.350.7904 or

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How the New Tax Bill Affects You

By: Oxana Saunders

path picWhile many of us are preoccupied with the recent volatility of the stock market, it is important to remember that we are in a tax filing season, and April 17 (this year’s deadline) is just a little over nine weeks away. Last year’s Tax Bill has many people wondering what their taxes will look like next year and whether any of these changes will have an impact on their 2017 filings.

The Tax Bill document is quite complex and even many tax professionals are still sorting out all the changes. A notable change for 2017 is medical expenses: If you itemize and have high expenses, the threshold for deduction temporarily goes back to 7.5% from 10%.

529 plans have been expanded as well: starting in 2018, parents may now use $10,000 per year from 529 accounts to pay for K-12 education tuition (see our previous blog on the topic).

Personal exemptions go away in 2018, which could result in higher taxes for married couples filing jointly with children.

Below is a link to a timely Investopedia article that we found very useful in summarizing some of the biggest changes in the tax code, and how they may impact you.

investopedia smaller

For any questions how tax changes may affect your personal finances, call us at 941.350.7904 for a free consultation.


Oxana Saunders Vice President Path FinancialOxana Saunders is the Vice President of Path Financial, LLC. She may be reached at 941.894.2571 or

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How to Handle the Flash Crash of 2018

path flash crashAfter a meteoric rise, the stock market lost more than 6% in only two days. Why did this happen, and where do we go from here?

At the close of Monday, February 5 2018, the S&P 500 gave up more than all the year’s gains. Put in perspective this is not a large move: the index is roughly back to where it was just a couple of months before. Also, there are no clear fundamental reasons behind the decline: both the economy and corporate earnings are strong, unemployment is low, and the global economy is in good shape.

Some reasons behind the sharp fall are most likely technical, such as the high levels of margin debt, elevated P/E ratios, side-effects brought about by the purchase of insurance by some market participants, and so on. These kind of factors rarely portend a large, structural move to the downside.

There are, however, some fundamental weaknesses in the system. The most important is the enormous increase in private sector debt that both households and non-financial corporations have accumulated in the last few years. When and if interest rates rise too much or beyond a certain threshold, a much more serious credit-driven problem can materialize and evolve into a full-fledged crisis that could profoundly affect markets. The quick rise in interest rates last week may therefore have something to do with the stock market move, but we think that rates are not yet close to trigger widespread credit problems.

As we described in a recent newsletter, the recent tax cut is another reason for concern. This is because coming at a time of full employment it can cause the economy to overheat and inflation to climb, driving the Federal Reserve to tighten monetary policy. This could trigger the kind of credit crisis we fear.

Additionally, the tax cut is likely to create a large increase of public debt, which would limit options to fight the next inevitable recession and thus turn a normal deceleration of the economy into a more serious downturn.

We believe, however, that we are not yet at the edge of recession or a negative credit event. The swift market fall seems due, instead, to the kind of technical factors that we mentioned earlier. If so, it could be useful to explore what happened in similar situations in the past when stocks had technically-driven two- or three-day declines of more than 6-7%.

We looked at the history of the S&P 500 since its inception and we identified nine such instances, from the “Kennedy Slide” of 1962 to the China-driven volatility of August 2015. We did not include the Crash of 2008 because it was not a mere technical decline but the result of serious fundamental concerns about the viability of the banking system. While technical factors could have exacerbated the 2008-2009 market rout, they were clearly not the cause.
path image for post
In all these instances we observed that after a few days, weeks or months the market recovered virtually all the lost ground. While the market fell more than 6% twice during the bear market of 2000-2003, it also found full relief soon after, even if it eventually resumed its downward march.

In conclusion, it seems that it rarely pays to sell immediately after a sharp two- or three-day move. Waiting for markets to stabilize instead appears to be a better strategy, because prices eventually tend to rebound even if they keep falling later on. This appears to be the case especially after climbing for a while, as can be seen in the charts of 1987, 1989, 1997, 1998, 2000, 2011 and 2015.

Even though we are concerned about the longer-term market outlook due to the stretched credit conditions, we think that investors who want to reduce their exposure to risk assets will not have to wait long before the market reaches a better point if they want to sell.


Raul cropped for facebookRaul Elizalde is the Founder, President, and Chief Investment Officer of Path Financial, LLC. He may be reached at 941.350.7904 or

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Using 529 savings for private elementary and high school tuition

By: Oxana Saunders

saving for collegeIn a past blog, we wrote about 529 college savings plans as one of the tax efficient ways to start funding children or grandchildren college tuition. With the recently passed tax bill, parents can now use 529 plan savings to pay for private elementary and high school tuition as well.

While 529 contributions cannot be deducted on the federal tax return and Florida does not have income tax from which contributions can be deducted, all growth is tax-free.

For more details on recent changes to 529 college saving accounts, click on the image below.

saving for college website image


Oxana Saunders Vice President Path FinancialOxana Saunders is the Vice President of Path Financial, LLC. She may be reached at 941.894.2571 or

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