Markets Have Good First Quarter

Global equity markets had a good first quarter – especially the tech names. And interestingly, in the fourth quarter of 2022, global equity markets also had a pretty good quarter – except for the tech names.

When the final Wall Street bell of the quarter rang out, NASDAQ had turned in its best quarterly gain since 2020, and the other three major U.S. equity indices turned in solid results too.

For the first quarter of 2023:

• The DJIA advanced by 0.5%;

• The S&P 500 gained 6.9%;

• NASDAQ jumped 16.8%; and

• The Russell 2000 added 2.3%.

The themes that drove market performance in the first quarter centered around inflation, the Fed, and the labor market, as recent inflation numbers hinted at a potential decline. In contrast, labor market numbers suggested that the Fed could continue its pace of rate hikes further into the year.

This quarter's other big theme was a new banking crisis – as Silicon Valley Bank and Signature Bank failed – with SVB being the largest bank failure since 2008. That helped push gold close to its record high.

And as a surprise to many, cryptocurrencies extended their recovery from 2022's disaster, with Bitcoin leaping more than 50%.

Further, we saw that:

• Volatility, as measured by the VIX, trended down this quarter, beginning just north of 21 and ending just shy of 19, although there was a significant spike in mid-March.

• West Texas Intermediate crude also trended down for the quarter, starting at just over $80/barrel and ending at just over $75, with a low of $67/barrel in mid-March.

Market Performance Around the World

Investors were pleased with the quarterly performance worldwide, as all 36 developed markets tracked by MSCI were positive for the first quarter of 2023 – that’s the second quarter in a row that saw all 36 MSCI developed market indices green. And for the 40 developing markets tracked by MSCI, only 28 of those were positive.

Source: MSCI. Past performance cannot guarantee future results

Sector Performance Rotated in Q12023

The overall sector performance for the first quarter of 2023 was ok, as 4 of the 11 sectors lost ground. But of the seven sectors that gained ground, the gains were significant. Compare that to the overall trend for the fourth quarter, which was good, as 9 of the 11 sectors advanced, with six advancing by double-digits, and going back to the third quarter of last year, which was ugly, as 10 of the 11 S&P 500 sectors dropped with only Consumer Discretionary staying positive.

Finally, as happened in each quarter last year, the performance leaders and laggards rotated throughout the quarter, and the ranges were substantial.

Here are the sector returns for the first quarter of 2023 and the fourth quarter of 2022:

Source: FMR

Reviewing the sector returns for just the first quarter of 2023, we saw that:

• Only 7 of the 11 sectors were painted green, although the Information Technology and Consumer Discretionary sectors made giant leaps;

• The defensive sectors (think Utilities and Health Care) struggled during the quarter

• Financials – not surprisingly – was the worst performer, driven down by two significant bank failures; and

• The difference between the best (+21%) performing and worst (-6%) performing sectors in the first quarter was massive.

Two Interesting Rallies This Quarter

Volatility in the Treasury Market

The Fed Raises Rates Again

One of the most talked about events this quarter was the Federal Reserve’s policy meetings, and as expected, the Fed raised official short-term rates by 25 basis points in late March. Further, the “dot plot” pointed to hopes that the Fed might stop raising rates after one final one in May. Most interesting is that the fed funds futures markets ended the week pricing in a 98.2% chance that rates would end the year lower – with a whopping 95% chance that cuts would start this summer.

Source: CME Fed Watch

For perspective, it was almost exactly one year ago, on March 16, 2022, that the Federal Open Market Committee enacted the first of what would become nine consecutive interest rate increases.

GDP Up 2.6% in 4th Quarter

As the quarter ended, the Bureau of Economic Analysis reported that the real gross domestic product increased at an annual rate of 2.6% in the fourth quarter of 2022. In the third quarter, real GDP increased by 3.2%.

This is the “third” GDP estimate released, and it is based on more complete source data than was available for the "second" estimate issued last month. In the second estimate, the increase in real GDP was 2.7%. The revision primarily reflected downward revisions to exports and consumer spending. Imports, a subtraction in the calculation of GDP, were revised down.

U.S. Bureau of Economic Analysis. Seasonally adjusted annual rates.

“The increase in real GDP primarily reflected increases in private inventory investment, consumer spending, nonresidential fixed investment, federal government spending, and state and local government spending that were partly offset by decreases in residential fixed investment and exports. Imports decreased.

Consumer Sentiment Drops

“Consumer sentiment fell for the first time in four months, dropping about 8% below February but remaining 4% above a year ago. This month’s turmoil in the banking sector had limited impact on consumer sentiment, which was already exhibiting downward momentum prior to the collapse of Silicon Valley Bank. Overall, our data revealed multiple signs that consumers increasingly expect a recession ahead. While sentiment fell across all demographic groups, the declines were sharpest for lower-income, less- educated, and younger consumers, as well as consumers with the top tercile of stock holdings. All five index components declined this month, led by a notably sharp weakening in one-year business conditions.

Year-ahead inflation expectations receded from 4.1% in February to 3.6%, the lowest reading since April 2021, but remained well above the 2.3-3.0% range seen in the two years before the pandemic. Long-run inflation expectations came in at 2.9% for the fourth consecutive month and stayed within the narrow 2.9- 3.1% range for 19 of the last 20 months.

But Consumer Confidence is Up

The Conference Board Consumer Confidence Index increased slightly in March to 104.2 (1985=100), up from 103.4 in February.

Further:

• The Present Situation Index—based on consumers’ assessment of current business and labor market conditions—decreased to 151.1 (1985=100) from 153.0 last month.

• The Expectations Index—based on consumers’ short-term outlook for income, business, and labor market conditions— ticked up to 73.0 (1985=100) from 70.4 in February (a slight upward revision).

• However, for 12 of the last 13 months—since February 2022—the Expectations Index has been below 80, which often signals a recession within the next year. “Driven by an uptick in expectations, consumer confidence improved somewhat in March but remains below the average level seen in 2022 (104.5).

“The gain reflects an improved outlook for consumers under 55 years of age and for households earning $50,000 and over. While consumers feel a bit more confident about what’s ahead, they are slightly less optimistic about the current landscape. The share of consumers saying jobs are ‘plentiful’ fell, while the share of those saying jobs are ‘not so plentiful’ rose.

The latest results also reveal that their inflation expectations over the next 12 months remain elevated – at 6.3 percent. Overall purchasing plans for appliances continued to soften while automobile purchases saw a slight increase.”

Sources: The Conference Board; NBER

CPI Records Smaller Increase, But Food Index is Up 9.5% Over the Last Year

The U.S. Bureau of Labor Statistics reported that the Consumer Price Index for All Urban Consumers rose 0.4% in February after increasing 0.5% in January. Over the last 12 months, the all-items index increased by 6.0% before seasonal adjustment.

Source: U.S. Bureau of Labor Statistics.

Specifically:

• The index for shelter was the largest contributor to the monthly all-items increase, accounting for over 70% of the increase, with the indexes for food, recreation, and household furnishings and operations also contributing.

• The food index increased 0.4% over the month, with the food at home index rising 0.3%.

• The energy index decreased 0.6% over the month as the natural gas and fuel oil indexes declined.

• Categories that increased in February include shelter, recreation, household furnishings and operations, and airline fares.

• The index for used cars and trucks and the index for medical care were among those that decreased over the month.

Inflation Over the Past 12-Months

The all-items index increased 6.0% for the 12 months ending February; this was the smallest 12-month increase since the period ending September 2021.

• All items less food and energy index rose 5.5% over the last 12 months, its smallest 12-month increase since December 2021.

• The energy index increased 5.2% for the 12 months ending February.

• The food index increased by 9.5% over the last year.

Food Index

• The food index increased 0.4% in February, and the food at home index rose 0.3% over the month. Five major grocery store food group indexes increased over the month. The index for nonalcoholic beverages increased by 1.0% in February, after a 0.4% increase the previous month.

• The indexes for other food at home and for cereals and bakery products each rose 0.3% over the month. The index for fruits and vegetables increased by 0.2% in February, and the index for dairy and related products rose by 0.1%.

• In contrast, the meats, poultry, fish, and eggs index fell 0.1 percent over the month, the first decrease in that index since December 2021. The index for eggs fell 6.7% in February following sharp increases in recent months.

Existing Home Sales Jump in February

The National Association of Realtors reported that “existing-home sales reversed a 12-month slide in February, registering the largest monthly percentage increase since July 2020. Month-over-month sales rose in all four major U.S. regions. All regions posted year-over-year declines.

• Total existing-home sales completed transactions that include single-family homes, townhomes, condominiums, and co-ops – vaulted 14.5% from January to a seasonally adjusted annual rate of 4.58 million in February.

• Year-over-year, sales fell 22.6% (down from 5.92 million in February 2022).

• The total housing inventory registered at the end of February was 980,000 units, identical to January and up 15.3% from one year ago (850,000).

• Unsold inventory sits at a 2.6-month supply at the current sales pace, down 10.3% from January but up from 1.7 months in February 2022.”

Prices Slide After 131 Months of Gains

• “The median existing-home price for all housing types in January was $363,000, a decline of 0.2% from February 2022 ($363,700), as prices climbed in the Midwest and South yet waned in the Northeast and West.

• This ends a streak of 131 consecutive months of year-over-year increases, the longest on record.

• Properties typically remained on the market for 34 days in February, up from 33 days in January and 18 days in February 2022.

• Fifty-seven percent of homes sold in February were on the market for less than a month.

• First-time buyers were responsible for 27% of sales in February, down from 31% in January and 29% in February 2022.

• All-cash sales accounted for 28% of transactions in February, down from 29% in January but up from 25% in February 2022.

• Distressed sales – foreclosures and short sales – represented 2% of sales in February, nearly identical to last month and one year ago.

Regional Breakdown

• Existing-home sales in the Northeast improved by 4.0%, down 25.7% from February 2022. The median price in the Northeast was $366,100, down 4.5% from the previous year.

• In the Midwest, existing-home sales grew 13.5%, declining 18.7% from one year ago. The median price in the Midwest was $261,200, up 5.0% from February 2022.

• Existing-home sales in the South rebounded 15.9% in February, a 21.3% decrease from the prior year. The median price in the South was $342,000, an increase of 2.7% from one year ago.

• In the West, existing-home sales rocketed 19.4% in February, down 28.3% from the previous year. The median price in the West was $541,100, down 5.6% from February 2022.”

Durable Goods Orders Drop Again

The U.S. Census Bureau announced the February advance report on durable goods manufacturers’ shipments, inventories, and orders:

Source: U.S. Census Bureau, Manufacturers’ Shipments, Inventories, and Orders, March 24, 2023.

New Orders

• New orders for manufactured durable goods in February, down three of the last four months, decreased $2.6 billion or 1.0% to $268.4 billion.

• This followed a 5.0% January decrease.

• Excluding transportation, new orders were virtually unchanged.

• Excluding defense, new orders decreased by 0.5%.

• Also down three of the last four months, transportation equipment drove the decrease, $2.6 billion or 2.8% to $89.4 billion.

Shipments

• In February, the shipment of manufactured durable goods in two consecutive months decreased by $1.5 billion or 0.6% to $274.8 billion.

• This followed a 0.4% January decrease.

• Also down two consecutive months, transportation equipment led the decrease, $1.3 billion or 1.4% to $90.1 billion.

Unfilled Orders

• Unfilled orders for manufactured durable goods in February, down two consecutive months, decreased $1.2 billion or 0.1% to $1,155.4 billion.

• This followed a virtually unchanged January decrease.

• Transportation equipment, down following twenty-one consecutive monthly increases, led the decrease, $0.7 billion or 0.1% to $683.8 billion.

Inventories

• Inventories of manufactured durable goods in February, up twenty-four of the last twenty- five months, increased $0.9 billion or 0.2% to $493.6 billion.

• This followed a 0.2% January decrease.

• Up three of the last four months, transportation equipment led the increase, $0.6 billion or 0.4% to $158.8 billion.

Capital Goods

• Nondefense new orders for capital goods in February decreased $1.0 billion or 1.2% to $82.0 billion.

• Shipments decreased by $0.5 billion or 0.6% to $83.2 billion.

• Unfilled orders decreased by $1.2 billion or 0.2% to $662.6 billion.

• Inventories increased by $0.5 billion or 0.2% to $218.8 billion.

• Defense new orders for capital goods in February decreased $1.2 billion or 7.4% to $14.5 billion.

• Shipments decreased by $0.2 billion or 1.6% to $14.6 billion.

• Unfilled orders decreased by $0.2 billion or 0.1% to $188.9 billion.

• Inventories increased by $0.1 billion or 0.3% to $23.3 billion.

Sources: dol.gov; nar.realtor; umich.edu; census.gov; bea.gov; fidelity.com; msci.com; nasdaq.com; wsj.com; morningstar.com

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Partnering with Outside The Box Financial Planning offers numerous benefits for individuals seeking retirement planning, small business support, wealth management, and beyond.  With their fiduciary duty, comprehensive approach, unbiased advice, transparent fee structure, and ongoing support, OTBFP act as a trusted advisor who prioritizes your best interests. Click here to schedule a complimentary “Fit” meeting to determine if we would make a good mutual fit.

Remember, financial decisions have long-lasting implications, and working with a professional can provide the expertise and guidance necessary to make informed choices that align with your financial aspirations. 

However, if you would like to take a shot at building a financial plan on your own, we offer our financial planning software, RightCapital, free of charge. Click here to get started.

Global Market Commentary: Third Quarter 2022

Markets Have Awful Third Quarter

Global equity markets had an awful third quarter, and when the final Wall Street bell weakly tolled on Friday, September 30th, all major global equity markets were in the red, leading to overall market declines not seen in decades.

Further, entering the fourth quarter of 2022, the DJIA and S&P 500 are both at their lowest since November 2020, while NASDAQ is at its lowest since the end of July 2020.

For the third quarter of 2022:

• The DJIA dropped 6.7%;

• The S&P 500 lost 5.3%;

• NASDAQ lost 4.1%; and

• The Russell 2000 declined by 3.6%.

The themes that drove market performance in the third quarter were the same worries that drove markets in the first two quarters and toward the end of last year. And the two most dominant themes continue to be inflation and the Fed – with the former rising to 40-year highs and the latter causing Wall Street to worry that the course of rising rates would lead to a recession.

The other themes were at odds with one another at times: rising consumer and investor confidence; rising food and gas prices, negative GDP numbers, a cooling-off of the housing market, better than expected manufacturing data; not-so-great corporate earnings, continued supply-chain bottlenecks and more social unrest.

Further, we saw that:

• Volatility, as measured by the VIX, trended up this quarter, beginning the quarter under 27 and ending the month over 31, although there was a dip in the middle of the quarter.

• West Texas Intermediate crude trended down for the quarter, starting at just over $105/barrel and ending the quarter at just under $80, slightly higher than where it stood one year ago.

Market Performance Around the World

Investors were unhappy with the quarterly performance worldwide, as all 36 developed markets tracked by MSCI were negative for the third quarter of 2022 – with most recording negative returns in the double digits. And for the 40 developing markets tracked by MSCI, 38 of them were negative too, with only the EM Latin America and EFM Latin America and Caribbean Index both gaining about 1%.

Source: MSCI. Past performance cannot guarantee future results

Sector Performance Rotated in Q22022

The overall trend for sector performance for the third quarter was ugly, as 10 of the 11 S&P 500 sectors dropped, with only Consumer Discretionary staying positive. And as if those numbers weren’t bad enough, the performance leaders and laggards rotated throughout the quarter, and the ranges were substantial.

Here are the sector returns for the second and third quarters of 2022:

Source: FMR

Reviewing the sector returns for just the third quarter of 2022 and the first nine months of the year, we saw that:

• Almost all sectors were painted red for the third quarter, with only the Consumer Discretionary sector painted green;

• 2 of the 11 sectors saw double-digit declines in the third quarter, whereas 7 recorded a double-digit decline in Q2;

• The interest-rate sensitive sectors (Information Technology, Financials, and Real Estate specifically) struggled as the Fed raised rates; and

• The differences between the best (+4%) performing and worst (-13%) performing sectors in the third quarter were big.

GDP Down in 2nd Quarter

The Bureau of Economic Analysis released its third estimate of 2nd quarter's GDP and announced that it decreased at an annual rate of 0.6%, following a decrease of 1.6% in the first quarter. This third estimate was the same as was announced in the second estimate in August.

• The smaller decrease in the second quarter, compared to the first quarter, reflected an upturn in exports and an acceleration in consumer spending.

• Profits increased 4.6% at a quarterly rate in the second quarter after increasing 0.1% in the first quarter.

• Private goods-producing industries decreased by 10.4%, private services-producing industries increased by 2.0%, and government decreased by 0.2%.

• Overall, 9 of 22 industry groups contributed to the second-quarter decline in real GDP.

Housing Was Mixed

On September 20th, the U.S. Census Bureau and the U.S. Department of Housing and Urban Development jointly announced the following new residential construction statistics for August 2022:

Building Permits

• Privately‐owned housing units authorized by building permits in August were at a seasonally adjusted annual rate of 1,517,000.

• This is 10.0% below the revised July rate of 1,685,000 and 14.4% below the August 2021 rate of 1,772,000.

• Single‐family authorizations in August were at a rate of 899,000; this is 3.5% below the revised July figure of 932,000.

• Authorizations of units in buildings with five units or more were at a rate of 571,000 in August.

Housing Starts

• Privately‐owned housing starts in August were at a seasonally adjusted annual rate of 1,575,000.

• This is 12.2% above the revised July estimate of 1,404,000 but is 0.1% below the August 2021 rate of 1,576,000.

• Single‐family housing starts in August were at a rate of 935,000; this is 3.4% above the revised July figure of 904,000.

• The August rate for units in buildings with five units or more was 621,000.

Housing Completions

• Privately‐owned housing completions in August were at a seasonally adjusted annual rate of 1,342,000.

• This is 5.4% below the revised July estimate of 1,419,000 but is 3.1% above the August 2021 rate of 1,302,000.

• Single‐family housing completions in August were at a rate of 1,017,000; this is 0.4% above the revised July rate of 1,013,000.

• The August rate for units in buildings with five units or more was 318,000.

Mortgage Rates Jump

According to data compiled by Bankrate on the last day of the quarter:

• 30-year fixed rate: 6.83%

• 15-year fixed rate: 6.00%

• 5/1 ARM rate: 5.22%

• 30-year fixed jumbo fixed rate: 6.81%

Producer Price Index Drops

The Producer Price Index for final demand fell 0.1% in August, seasonally adjusted, the U.S. Bureau of Labor Statistics reported. Final demand prices decreased by 0.4% in July and advanced by 1.0% in June.

On an unadjusted basis, the index for final demand moved up 8.7% for the 12 months that ended in August.

In August, the decrease in the index for final demand is attributable to a 1.2% decline in prices for final demand goods. In contrast, the index for final demand services advanced by 0.4%.

• Prices for final demand fewer foods, energy, and trade services moved up 0.2% in August following a 0.1% rise in July.

• For the 12 months that ended in August, the index for final demand for fewer foods, energy, and trade services increased by 5.6%.

Final Demand

Final demand goods: The index for final demand goods fell 1.2% in August after declining 1.7% in July. The August decrease can be traced to a 6.0% price drop for final demand energy. Conversely, the index for final demand goods, fewer foods, and energy rose 0.2%, while prices for final demand foods were unchanged.

Product detail: In August, over three-quarters of the decrease in prices for final demand goods is attributable to the index for gasoline, which fell 12.7%.

Prices for diesel fuel, jet fuel, chicken eggs, primary basic organic chemicals, and home heating oil also declined. In contrast, the index for construction machinery and equipment increased by 2.6%. Prices for beverages and beverage materials and for electric power also rose.

Final demand services: The index for final demand services increased by 0.4% in August, the fourth consecutive rise. Sixty% of the August advance can be traced to a 0.8%increase in margins for final demand trade services. (Trade indexes measure changes in margins received by wholesalers and retailers.) Prices for final demand services, less trade, transportation, and warehousing, also moved higher, rising 0.3%. Conversely, the index for final demand transportation and warehousing services decreased by 0.2%.

Product detail: Forty percent of the price increase for final demand services can be attributed to margins for fuels and lubricants retailing, which rose 14.2%. The indexes for securities brokerage, dealing, investment advice, and related services; loan services (partial); transportation of passengers (partial); portfolio management; and chemicals and allied products wholesaling also increased. In contrast, prices for truck transportation of freight decreased by 1.9%. The indexes for guestroom rental and for food and alcohol retailing also fell.

Leading Indicators Drop

The Conference Board Leading Economic Index for the U.S. decreased by 0.3% in August 2022 to 116.2 (2016=100) after declining by 0.5% in July. The LEI fell 2.7% over the six-month period between February and August 2022, a reversal from its 1.7% growth over the previous six months.

From the Conference Board release:

“The US LEI declined for a sixth consecutive month, potentially signaling a recession. Among the index’s components, only initial unemployment claims and the yield spread contributed positively over the last six months—and the contribution of the yield spread has narrowed recently.

“Furthermore, labor market strength is expected to continue moderating in the months ahead. Indeed, the average workweek in manufacturing contracted in four of the last six months—a notable sign, as firms reduce hours before reducing their workforce. Economic activity will continue slowing more broadly throughout the US economy and is likely to contract. A major driver of this slowdown has been the Federal Reserve’s rapid tightening of monetary policy to counter inflationary pressures. The Conference Board projects a recession in the coming quarters.”

Further:

• The Conference Board Coincident Economic Index for the U.S. increased by 0.1%in August 2022 to 108.7 (2016=100), after increasing by 0.5% in July.

• The CEI rose by 0.6% over the six-month period from February to August 2022, slower than its growth of 1.5% over the previous six-month period.

• The Conference Board Lagging Economic Index for the U.S. increased by 0.7% in August 2022 to 115.4

Consumer Confidence Up

The Conference Board’s Consumer Confidence Index increased in September for the second consecutive month. The Index now stands at 108.0 (1985=100), up from 103.6 in August.

• The Present Situation Index – based on consumers’ assessment of current business and labor market conditions – rose to 149.6 from 145.3 last month.

• The Expectations Index – based on consumers’ short-term outlook for income, business, and labor market conditions – increased to 80.3 from 75.8.

Present Situation

Consumers’ appraisal of current business conditions was more favorable in September.

• 20.8% of consumers said business conditions were “good,” up from 19.0%.

• 21.2% of consumers said business conditions were “bad,” down from 22.6%.

Consumers’ assessment of the labor market improved.

• 49.4% of consumers said jobs were “plentiful,” up from 47.6%.

• 11.4% of consumers said jobs were “hard to get,” down slightly from 11.6%.

Expectations Six Months Hence

Consumers were more positive about the short-term business conditions outlook in September.

• 19.3% of consumers expect business conditions to improve, up from 17.3%.

• 21.0% expect business conditions to worsen, down from 21.7%.

Consumers were more optimistic about the short-term labor market outlook.

• 17.5% of consumers expect more jobs to be available, up from 17.1%.

• 17.7% anticipate fewer jobs, down from 19.6%.

Consumers were mixed about their short-term financial prospects.

• 18.4% of consumers expect their incomes to increase, up from 16.6%.

• Conversely, 14.3% expect their incomes will decrease, up from 13.9%.

Investor Consumer Rises

“The Global Investor Confidence Index increased to 108.8, up 1.5 points from August’s revised reading of 107.3. The increase was led by a 7.7-point jump in Asian ICI to 100.1. North American ICI rose as well, up 2.4 points to 109. European ICI, meanwhile, fell 5.5 points to 100.1.”

The release further stated:

“Despite heightened equity market volatility experienced globally, risk sentiment expressed by institutional investors remained steady in September as the Global ICI rose slightly to 108.8. As anticipated, European investors were rattled by a continued energy crisis, diminishing growth prospects, and hawkish global central banks; as a result, the EMEA ICI tumbled 5.9 points. Going forward, it will be important to monitor whether the dip in European investor confidence persists, given the market’s negative reaction to the UK’s recent fiscal plans. Overall, the increase in the September Global ICI can be largely attributed to Asia-Pacific investors as risk appetite grew in tandem with the reopening of borders and easing of restrictions in Macau and Chengdu, China.”

Consumer Sentiment

“Consumer sentiment confirmed the preliminary reading earlier this month and was essentially unchanged from the month prior, at less than one index point above August. Buying conditions for durables and the one-year economic outlook continued lifting from the extremely low readings earlier in the summer, but these gains were largely offset by modest declines in the long run outlook for business conditions. As seen in the chart, sentiment for consumers across the income distribution has declined in a remarkably close fashion for the last 6 months, reflecting shared concerns over the impact of inflation, even among higher-income consumers who have historically generated the lion's share of spending.”

The median expected year-ahead inflation rate declined to 4.7%, the lowest reading since last September. At 2.7%, median long run inflation expectations fell below the 2.9-3.1% range for the first time since July 2021. Inflation expectations are likely to remain relatively unstable in the months ahead, as consumer uncertainty over these expectations remained high and is unlikely to wane in the face of continued global pressures on inflation.

Compensation Up

Compensation costs for civilian workers increased 1.3%, seasonally adjusted, for the 3-month period ending in June 2022, the U.S. Bureau of Labor Statistics reported.

• Wages and salaries increased 1.4% and benefit costs increased 1.2% from March 2022.

• Compensation costs for civilian workers increased 5.1% for the 12-month period ending in June 2022 and increased 2.9% in June 2021.

• Wages and salaries increased 5.3% for the 12-month period ending in June 2022 and increased 3.2% for the 12-month period ending in June 2021.

• Benefit costs increased 4.8% over the year and increased 2.2% for the 12-month period ending in June 2021.

Sources: bls.gov; umich.edu; census.gov; msci.com; fidelity.com; nasdaq.com; wsj.com; morningstar.com

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Partnering with Outside The Box Financial Planning offers numerous benefits for individuals seeking retirement planning, small business support, wealth management, and beyond.  With their fiduciary duty, comprehensive approach, unbiased advice, transparent fee structure, and ongoing support, OTBFP act as a trusted advisor who prioritizes your best interests. Click here to schedule a complimentary “Fit” meeting to determine if we would make a good mutual fit.

Remember, financial decisions have long-lasting implications, and working with a professional can provide the expertise and guidance necessary to make informed choices that align with your financial aspirations. 

However, if you would like to take a shot at building a financial plan on your own, we offer our financial planning software, RightCapital, free of charge. Click here to get started.

If you've been reading or watching the news lately, you know a lot is happening in the financial world.

You've heard about changes in interest rates, rising inflation, and the potential of a looming recession.

If the headlines have caused you some anxiety, you’re not alone. We've all been through a lot, financially and personally, over the last couple of years. You may feel like any sense of certainty has gone out the window.

But we're here to reassure you. The best course of action during times of uncertainty is to stick to the financial plan you and your financial advisor have developed. Markets and circumstances will shift and change, but a well-developed financial plan will help you weather the storms. And if you haven’t crafted a financial plan yet, perhaps now is the time. 

Read on to find answers to your latest financial questions. 

What’s Happening in the Financial News?

Let's start by diving into what's happening in the financial news. In 2022, and in the last couple of years, the news has been full of dramatic headlines and financial uncertainty. But what is all this talk about the Federal Reserve raising interest rates and a tighter monetary policy? To understand, it's important to know what's been going on with inflation.

Inflation has been accelerating

In June of 2022, inflation rates jumped to 8.5%, the highest they've been since the 1980s. For some context, the Fed tries to maintain inflation at a rate of 2% over the long run.

Lately, you’ve likely experienced inflation at the gas pump or grocery store. You’re paying a lot more for these necessities than you were a year ago.

So, what is inflation? Inflation is a decrease in money's purchasing power, which results in higher prices for goods and services. 

Part of the reason inflation has been accelerating so quickly is due to widespread supply shortages in the wake of the pandemic. When supply goes down, demand goes up.

The real effects of accelerated inflation include a higher cost of living. We're paying more for gas, groceries, and rent than we were a year ago — roughly 8.5% more across the board. 

In response to rising inflation, the Federal Reserve increased interest rates

What, if anything, can be done to combat rising inflation? That's where the Federal Reserve comes in.

The Federal Open Market Committee (FOMC) makes decisions about open market operations on behalf of the Federal Reserve. Their main goals are to keep employment up, stabilize prices, and moderate long-term inflation rates. One of their main jobs is to control the supply of money in the US economy, which influences inflation rates.

When inflation is high, the FOMC tends to raise interest rates, which increases the cost of borrowing. The idea is to make borrowing less appealing, reducing the amount of money in circulation. This slows demand and therefore lowers prices.

 In June 2022, the FOMC voted to raise interest rates by 0.75%, or 75 basis points. And in July, the FOMC raised interest rates by another 75 basis points, for a total of 150 basis points so far this year.

This interest rate, also known as the Federal Funds Rate, is an important indicator of the economy. It's the rate at which banks charge each other to lend Fed funds overnight. It directly impacts consumer interest rates on mortgages, auto loans, and credit cards.

This is all part of a tighter monetary policy

Along with rising inflation and higher interest rates, you've probably been hearing the term “tighter monetary policy” being tossed around in the financial news.

A tighter monetary policy aims to slow down an “overheated” economy. An overheated economy is one experiencing high levels of inflation following a period of economic growth.

One way to cool an overheated economy is to slow inflation by raising interest rates. This makes borrowing less attractive — and more expensive. The result is a smaller amount of money circulating through the economy. 

Increasing the reserve requirement, the amount of money banks are required to have on hand, is another way of taking money out of circulation and increasing the cost of borrowing. 

On the other hand, a tighter monetary policy makes saving more attractive. This is because higher interest rates on savings accounts work in a savings account holder's favor. 

There’s talk of a recession

So, why all the fear in the news?

In response to the tighter monetary policy, stocks have been dropping, and there's a fear of a looming recession. Interest rates will likely continue to rise, making it more expensive for those applying for a mortgage, paying off debt, or getting a car loan. 

There are a few signs — like the fact that the economy shrank in early 2022, turbulence regarding political disruptions and the ongoing pandemic, and increased interest rates, that indicate the potential for a recession. But that doesn’t mean you should make any drastic decisions.

How You Should Respond to The Financial News

A lot of this news sounds scary. After living through 2008, the fear of a recession is real. But that doesn't mean you should panic. The truth is, no one knows exactly what's next. The economy is cyclical, and ebbs and flows are normal. The worst thing you can do is make knee-jerk reactions in response to what you hear in the news.

So, what should you do?

In general, less is more. If you've been working with a trusted financial advisor to balance a well-diversified portfolio as you approach retirement, you're on the right track. It's times like these when you have to sit tight and weather the storm.

If you’re managing your money without a professional’s perspective, this might be the time to get some trusted advice. If you’re feeling anxious or uncertain, a financial planner is a great person to consult.

Finally, you can make sure your emergency savings account is fully funded. As we mentioned earlier, one upside of higher interest rates is that your savings account benefits. 

Make sure your emergency savings are fully funded so you can be prepared in case of tough times. This means if something does happen and you need extra cash, you won’t have to dig into your hard-earned retirement funds. 

Work With a Financial Planner to Prepare For the Future

At Outside the Box Financial Planning, we take a personal approach to financial planning. When the financial news is unsettling, it can be tough to make level-headed decisions. Instead, you might be tempted to act on impulse.

The best thing you can do is have a trusted financial planner in your corner — one who’s ready to help you through whatever happens. We do more than manage your assets. We ease your concerns so you can feel financially secure and prepared.

To see if we can help you feel more secure in your financial future, click here to schedule a conversation today.

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Partnering with Outside The Box Financial Planning offers numerous benefits for individuals seeking retirement planning, small business support, wealth management, and beyond.  With their fiduciary duty, comprehensive approach, unbiased advice, transparent fee structure, and ongoing support, OTBFP act as a trusted advisor who prioritizes your best interests. Click here to schedule a complimentary “Fit” meeting to determine if we would make a good mutual fit.

Remember, financial decisions have long-lasting implications, and working with a professional can provide the expertise and guidance necessary to make informed choices that align with your financial aspirations. 

However, if you would like to take a shot at building a financial plan on your own, we offer our financial planning software, RightCapital, free of charge. Click here to get started.

The year-end holidays approach and bring lots of things to do. Yet with holiday cheer there are financial plans to make, too.

Consider these financial opportunities before 2022 arrives.

MAKE FINANCIAL GIFTS

As we count our many blessings and share time with our loved ones, we can express our thanks through giving to others. Donate to your favorite charity before year-end.

Generally speaking, the amount of charitable cash contributions taxpayers can deduct on Schedule A as an itemized deduction is limited to a percentage (usually 60%) of the taxpayer's adjusted gross income. But did you know that the IRS has temporarily suspended limits on charitable contributions?

Sure it might change, but as of now, qualified contributions are not subject to this limitation and individuals may deduct qualified contributions of up to 100% of their adjusted gross income.

To qualify, the contribution must be a cash contribution and made to a qualifying organization. Contributions of non–cash property do not qualify for this relief. Taxpayers may still claim non–cash contributions as a deduction, subject to the normal limits.

You can gift assets or cash to your child, any relative, or even a friend, and take advantage of the annual gift tax exclusion. Any individual can gift up to $15,000 this year to as many other individuals as he or she desires a couple may jointly gift up to $30,000. Whether you choose to gift singly or jointly, you've probably got a long way to go before using up the current $11.7 ($23.4 million for couples) lifetime exemption.

Grandparents, aunts, uncles, and parents too can fund 529 college saving plans this way, but it is worth noting that December 31st is the 529 funding deadline.

MAX OUT RETIREMENT PLANS

Most employers offer a 401(k) or 403(b) plan, and you have until December 31st to boost your contribution. This year, the contribution limit on both 401(k) and 403(b) plans is $19,500 for those under 50 (it's going up by $1,000 next year) and $26,000 for those 50 and older. This year, the traditional and Roth individual retirement account contribution limits are $6,000 for those under 50 and $7,000 for those 50 and older.

But be careful because high earners face contribution ceilings based on their adjusted gross income level.

Remember IRA cash-outs. Once you reach age 72 you are required to take annual Required Minimum Distributions (RMDs) from your retirement accounts.

Your first RMD must be taken by April 1st of the year after you turn 72. Subsequent RMDs must be taken by December 31st of each year. If you don't take your RMD, you'll have to pay a penalty of 50% of the RMD amount.

Did you inherit an IRA? If you have and you weren't married to the person who started that IRA, you must take the first RMD from that IRA by December 31st of the year after the death of that original IRA owner. You have to do it whether the account is a traditional or a Roth IRA.

Consider dividing it into multiple inherited IRAs, thus extending the payout schedule for younger inheritors of those assets. Any co–beneficiaries receive distributions per the life expectancy of the oldest beneficiary. If you want to make this move, it must be done by the end of the year that follows the year in which the original IRA owner died.

If your spouse died, then, you should file Form 706 no later than nine months after his or her passing. This notifies the IRS that some or all of a decedent's estate tax exemption is carried over to the surviving spouse.

Business owners' retirement plans. If you have income from self-employment, you can save for the future using a self-directed retirement plan, such as a Simplified Employee Pension (SEP) plan or a one–person 401(k), the so-called Solo (k). You don't have to be exclusively self–employed to set one of these up – you can work full–time for someone else and contribute to one of these while also deferring some of your salary into the retirement plan sponsored by your employer.

Contributions to SEPs and Solo (k) s are tax–deductible. December 31st is the deadline to set one up, and if you meet that deadline, you can make your contributions as late as April 15th next year (or October 15th with a federal extension).

You can contribute up to $58,000 to a SEP and this rises to $61,000 next year.

If you contribute to a 401(k) at work, the sum of your employee salary deferrals plus your Solo (k) contributions can't be greater than the $19,500/$26,000 limits. But even so, you can still pour up to 25% of your net self-employment income into a Solo (k).

IRS INCREASES CONTRIBUTION LIMITS FOR NEXT YEAR

The Internal Revenue Service announced that the amount individuals can contribute to their 401(k) plans in 2022 has increased to $20,500, up from $19,500 for 2021 and 2020.

From the IRS website:

Highlights of Changes for 2022

"The contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan is increased to $20,500, up from $19,500. The income ranges for determining eligibility to make deductible contributions to traditional Individual Retirement Arrangements (IRAs), to contribute to Roth IRAs, and to claim the Saver's Credit all increased for 2022.

Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. If during the year either the taxpayer or the taxpayer's spouse was covered by a retirement plan at work, the deduction may be reduced, or phased out, until it is eliminated, depending on filing status and income. (If neither the taxpayer nor the spouse is covered by a retirement plan at work, the phase–outs of the deduction do not apply.) Here are the phase–out ranges for 2022:

• For single taxpayers covered by a workplace retirement plan, the phase–out range is increased to $68,000 to $78,000, up from $66,000 to $76,000.

• For married couples filing jointly, if the spouse making the IRA contribution is covered by a workplace retirement plan, the phase–out range is increased to $109,000 to $129,000, up from $105,000 to $125,000.

• For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the phase–out range is increased to $204,000 to $214,000, up from $198,000 to $208,000.

• For a married individual filing a separate return who is covered by a workplace retirement plan, the phase–out range is not subject to an annual cost–of–living adjustment and remains $0 to $10,000.

The income phase–out range for taxpayers making contributions to a Roth IRA is increased to $129,000 to $144,000 for singles and heads of household, up from $125,000 to $140,000. For married couples filing jointly, the income phase-out range is increased to $204,000 to $214,000, up from $198,000 to $208,000. The phase–out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost–of–living adjustment and remains $0 to $10,000.

The income limit for the Saver's Credit (also known as the Retirement Savings Contributions Credit) for low- and moderate–income workers is $68,000 for married couples filing jointly, up from $66,000; $51,000 for heads of household, up from $49,500; and $34,000 for singles and married individuals filing separately, up from $33,000.

The amount individuals can contribute to their SIMPLE retirement accounts is increased to $14,000, up from $13,500.

Key Employee Contribution Limits That Remain Unchanged

The limit on annual contributions to an IRA remains unchanged at $6,000. The IRA catch–up contribution limit for individuals aged 50 and over is not subject to an annual cost–of–living adjustment and remains $1,000.

The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan remains unchanged at $6,500. Therefore, participants in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan who are 50 and older can contribute up to $27,000, starting in 2022. The catch–up contribution limit for employees aged 50 and over who participate in SIMPLE plans remains unchanged at $3,000."

How much inflation can the country afford before we’re in trouble?

Let’s discuss.

First, let’s get on the same page about some basics.

If you’ve noticed the price of a thing increasing over time (say, your favorite candy bar or the cost of college tuition), that’s inflation in action.

Economists use the broad increase (or decrease) in prices of goods and services across the country as a measure of economic health.

When inflation is stable and predictable, it’s a sign of a basically healthy, growing economy.

But, high inflation can quickly eat away at the purchasing power of your dollars, indicating that the economy might be overheated.

Deflation, or a decline in prices, can be a warning sign of a shrinking economy.

Recent data highlighted a surprise spike in inflation, indicating that prices increased faster than economists expected last month.1

Could this be a worrisome sign that the economy is overheated? Could $50 burgers be in our future?

Maybe.

On the other hand, could it be a temporary blip caused by the economy emerging from the pandemic-driven slowdown, complicated by supply chain issues?

Very possible.

Are the headlines catastrophizing?

They usually are.

Let’s look at the data.

The Consumer Price Index (CPI), one of the major indexes economists use to track inflation, showed a surprising spike in April, igniting fears of runaway inflation.

Core CPI (which excludes the highly volatile categories of energy and food) showed a 0.9% increase in April month-over-month and 3.0% year-over-year. That’s much higher than the expected 0.3% and 2.3%, respectively.1

However, digging a bit deeper, we see that just two categories of goods (used cars and transportation services) accounted for the vast majority of the surge.2

That suggests things like flights and train travel suddenly became more expensive after a year of rock-bottom prices.

Is that runaway inflation or the normalization of prices as the world reopens?

We can't tell from a single data point, but it's not unusual to see prices increase in sectors that experienced a severe slowdown last year.

And the jump in used car prices? Well, many folks are turning to the second-hand market right now, in part because new cars are caught up in global supply chain bottlenecks for things like semiconductors and raw materials.3

Inflation is something to keep an eye on, especially in a year when so many of the usual variables have been thrown into flux. An ongoing surge in prices could hurt our wallets as our dollars buy less over time.

However, a single monthly spike following a very weird period for the economy is not cause for alarm yet; we should prepare ourselves for more odd numbers coming out of different parts of the economy in the weeks and months to come.

Shortages of everything from ketchup to gasoline could lead to price increases and fluctuations as supply chains attempt to disentangle from pandemic disruptions.4

Should we expect markets to react to inflation (and other) headlines?

A negative market reaction is not surprising after weeks of strong performance. We should expect volatility ahead as we (and the economy) adjust to a post-pandemic world.

Bottom line: Expect the unexpected in 2021.

Partnering with Outside The Box Financial Planning offers numerous benefits for individuals seeking retirement planning, small business support, wealth management, and beyond.  With their fiduciary duty, comprehensive approach, unbiased advice, transparent fee structure, and ongoing support, OTBFP act as a trusted advisor who prioritizes your best interests. Click here to schedule a complimentary “Fit” meeting to determine if we would make a good mutual fit.

Remember, financial decisions have long-lasting implications, and working with a professional can provide the expertise and guidance necessary to make informed choices that align with your financial aspirations. 

However, if you would like to take a shot at building a financial plan on your own, we offer our financial planning software, RightCapital, free of charge. Click here to get started.

Does it feel like 2021 yet?

The twists and turns so far make it seem like 2020 is dragging into a second season.

As an American, I’m shocked and worried, and I’m wondering how political disagreements turned into excuses for violence.

As a financial professional, I know that the politics, protests, and rioting in DC are just one-factor affecting markets.

I honestly don’t know what will happen over the next few weeks, but I can help you understand how it affects you as an investor.

Why did markets surge the day the Capitol was attacked?

While the world watched the violence in DC with horror, markets quietly rallied to new records the same day.1

That’s weird, right?

Well, not really.

I think it boils down to a few things.

1. Computers and algorithms are dispassionate, executing trades regardless of the larger world.

2. Markets don't always react to short-term ugliness. Instead, they reflect expectations about economic and business growth plus a healthy dose of investor psychology.

3. With elections officially at an end, political uncertainty has dissipated.

Overall, I think investors are looking past the immediate future and hoping that vaccines, increased economic stimulus, and economic growth paint a positive picture of the future.

The Democrats control the White House and Congress. What does that mean for investors?

If you’re like a lot of people, you might think that your party in power is good for markets and your party out of power is bad.

That makes for a stressful experience every four years, right?

Fortunately, that’s not the case at all. Markets are pretty rational with respect to politics and policy.

While businesses and investors generally dislike increased taxes and corporate regulation, the Democrats hold such slim majorities in the House and Senate that it limits their ability to pass many big policy changes.

Also, the Democrats’ immediate agenda is very likely to be focused on fighting the pandemic and passing more stimulus aid, both of which should support stock prices.

Does that mean markets will continue to rally?

No guarantees, unfortunately. With all the frothy market activity and rosy expectations about the future, bad news could knock stocks down a peg or two.

A correction is definitely possible, and some strategists think certain sectors are in a bubble.

The bottom line, expect more volatility.

What comes next?

I wish I could tell you.

I’m optimistic that the light at the end of the tunnel is getting closer and we can start going back to normal.

I’m proud of what scientists and medical professionals have been able to accomplish in such a short amount of time.

I’m grateful for the folks around me.

How about you?

What’s your take? I'm interested to hear your thoughts.

Let me know ivan@otbfinancialplanning.com

September has historically been the worst month of the year for investors. So much for the notion of “Sell in May and Go Away.” If you subscribed to that so-called market strategy in 2020, here is what you would have missed:

The S&P 500 was up:

• 4.5% in May;

• 1.8% in June;

• 5.5% in July; and

• 7.0% in August.

And don’t forget, those four months of S&P 500 gains were on the heels of April’s 12.7% increase.

Five consecutive up-months for the S&P 500. And the S&P 500 just recorded its best August since 1986. If you need more stunningly good news, consider this:

• Over the past 5 months, the S&P 500 is up 35.4% – its best five-month run since October 1938.

The notion of “Sell in May and Go Away” seems downright absurd right now, doesn’t it?

But now we’re headed into September – historically the worst month for the stock market. Will this time be different?

The September Swoon

The “September Swoon” is a seasonal trend in the stock market and one that has been well documented by researchers and the press.  The fact is, September has historically been the worst month on the calendar for stocks – from 1928 through 2019, the S&P 500 Index has fallen an average of 1.0% in September, according to Standard & Poor’s and Haver Analytics.  February averages -0.1% and May averages -0.2%, the only other months with an average loss over those 90+ years.

Seasonal Trends

Seasonality is based only on the analysis of years of historical data.  A seasonal trend is discovered if a pattern emerges in this analysis, in terms of average performance in a certain month.

It’s important to remember, however, that due to financial, psychological, and political factors, stock market behavior can run completely contrary to the seasonal trend in a given year (as it did in 2019, 2018 and 2017). 

Because the stock market in September has shown markedly different behavior, on average, for 90+ years, these results are not coincidental.  There is a genuine seasonal trend.

Possible Reasons for the September Swoon

So, why does the stock market generally drop in September?  What causes the September Swoon?  Economists and financial analysts have studied this topic, but no one has reached a definitive conclusion.  Here are some of the hypotheses:

Summer vacation:  This hypothesis holds that traders and investors are more likely to sell their stocks after returning from their August vacations or long, Labor Day weekends.  Trading volume tends to decline during the summer, and then investors – especially professional investors – get back to trading from their computers.

Third-quarter:  Many mutual funds have fiscal years ending in the fall, provoking them to sell their losing stocks for “window-dressing” purposes.  This term describes the process of a portfolio manager making cosmetic changes at the end of the quarter because they list their holdings at the beginning of a new quarter – their list of holdings looks better without the poor performing stocks.

Tax losses: Investors begin to sell declining stocks to harvest their tax losses, getting ahead of other investors who sell at year-end.  This hypothesis also draws support from the observed “January effect,” where investors buy back the stocks that they sold for tax purposes. 

Tuition time:  With this hypothesis, many investors must sell large amounts of their stock holdings to pay their children’s tuition bills at colleges, universities, and prep schools.  And for most, the school year begins roughly in September.

Seasonal Affective Disorder (SAD):  A university study suggested that the sharp drop in the amount of daylight in New York City in September might trigger Seasonal Affective Disorder (SAD), a type of depression related to changes in seasons.  As a result, according to this hypothesis, some investors become more risk-averse, so they sell losing stocks, unwilling to wait for things to get better. 

Cultural trends (summer vacations, back-to-school in the fall), regulations and taxes (third quarter, tax losses), and even psychological effects of weather (seasonal affective disorder) have been offered as explanations for this strange September market trend. Unfortunately, none of these explanations has been proven, frustrating researchers who seek reasons for patterns in the stock market.  Maybe each of these factors contributes to the trend.  No one really knows the reason for the September Swoon.

Should You Change Your Portfolio?

If someone discovered a convincing explanation for the September Swoon, would this help investors?  Probably not.  Savvy investors might jump the gun, selling stocks in August, and then others might try to beat them by selling in July.  Of course, the seasonal September pattern would then disappear, replaced by some other trend. 

But even if there is no proven reason for this September Swoon, shouldn’t an investor make changes, anyway?  Because of this seasonal trend toward declining stock values in September, traders and investors might be inclined to alter their portfolios.

However, the September Swoon is based on an average, the average monthly performance of the stock market since before the Great Depression.  While September is, on average, the worst month for stocks, this doesn’t mean that each individual September is bad.  In fact, this “September Swoon” notion did not hold true in 2019, 2018, or 2017 (2016 was down 0.12%). No one knows the definite reason for this 90+-year “September Swoon”, so trying to guess which year will be bad is a fool’s game. 

Seasonality vs. Market Timing

Remember, there is a difference between market timing and seasonality.  Seasonal trends reflect how the market will behave in particular months as part of a long-term trend.  Market timing is based on short-term price patterns.  Timing the market perfectly is, of course, impossible.  As discussed above, seasonal trends are grounded in the analysis of years of data, but not every year is identical. 

It is important to remember that investors who trade frequently spend more time and pay more commissions, but they do not necessarily make more money.  The buy-and-hold strategy might be best for you. A knowledgeable financial advisor who understands you and your goals can help.

Partnering with Outside The Box Financial Planning offers numerous benefits for individuals seeking retirement planning, small business support, wealth management, and beyond.  With their fiduciary duty, comprehensive approach, unbiased advice, transparent fee structure, and ongoing support, OTBFP act as a trusted advisor who prioritizes your best interests. Click here to schedule a complimentary “Fit” meeting to determine if we would make a good mutual fit.

Remember, financial decisions have long-lasting implications, and working with a professional can provide the expertise and guidance necessary to make informed choices that align with your financial aspirations. 

However, if you would like to take a shot at building a financial plan on your own, we offer our financial planning software, RightCapital, free of charge. Click here to get started.

CARES Act Benefits For Individuals

The Coronavirus Aid, Relief, and Economic Security act – the CARES Act – is the largest economic bill in U.S. history and was designed to “provide emergency assistance and health care response for individuals, families, and businesses affected by the 2020 coronavirus pandemic.”

Spanning close to 900 pages, the comprehensive aid package covers a lot, including direct payments to Americans, expanded unemployment insurance, changes to retirement rules and billions of dollars in aid to businesses.

The CARES Act builds upon earlier versions of federal government support and is the third such bill, coming shortly after the “Coronavirus Preparedness and Response Supplemental Appropriations Act” and the “Families First Coronavirus Response Act” were approved.

Here are a few highlights that might be of interest to individuals:

Rebate for Individuals

The bill would provide a $1,200 refundable tax credit for individuals ($2,400/joint). Additionally, taxpayers with children will receive a flat $500 for each child. The rebates would not be counted as taxable income.

The rebate does phase out as follows:

• Starts to phase out at $75,000 for singles and completely gone at $99,000

• Starts to phase out at $150,000 for married joint filers and completely gone at $198,000

• Starts to phase out at $135,000 for a head of household filers

Unemployment Expansion

Unemployment insurance assistance now includes an additional $600 per week payment to each recipient for up to four months plus extend benefits to self-employed workers, independent contractors, and those with limited work history. The government will provide temporary full funding of the first week of regular unemployment for states with no waiting period and extend benefits for an additional 13 weeks through December 31, 2020.

Waiver of 10% Withdrawal Penalty

The 10% penalty for early withdrawals from IRAs and retirement accounts is being waived for 2020, subject to a maximum allowable withdrawal of $100,000.

Withdrawal amounts are taxable over three years, but taxpayers can recontribute the withdrawn funds into their retirement accounts for three years without affecting retirement account caps.

Required Minimum Distributions

For 2020, individuals expected to take Required Minimum Distributions will not be required to withdraw that amount from their IRA or retirement plan.

Coronavirus-Related Distributions

The CARES Act allows for “Coronavirus-related Distributions” which allow participants in IRAs and retirement plans the ability to take a qualifying withdrawal and pay those funds back without tax or interest over a 3-year period. The withdrawal is subject to a $100,000 limit.

There are qualifications for Coronavirus-Related Distributions, however, including:

• Personal, spouse or dependent diagnosis with COVID-19

• Quarantined, furloughed, laid off, or work hours reduced because of COVID-19

• Unable to work due to lack of childcare due to COVID-19

• Own a business that is closed or shortened hours due to COVID-19

• Other factors later specified by the IRS

Retirement Loans

For those unable to meet the Coronavirus-Related Distributions criteria, withdrawals from retirement plans in the form of a loan exists.

Generally speaking, those loans need to be repaid over 5 years and cannot exceed $50,000 or half the vested account value, whichever is less. Now, however, the amount is doubled so that one can take a loan up to $100,000 or half of the vested account value, whichever is less. The loan still needs to be repaid, but payments can be deferred up to 1 year after the loan is taken.

Your Financial Advisor

As with all federal government programs, there are rules, deadlines, and qualifications that can be difficult to decipher. The fact is that while this is by far the largest economic bill in America’s history, it is near impossible for any bill to take into account every unique situation.

So, before you go down a path that might not be in your best interest, set up a CARES Act Benefits Consultation by clicking here or email me at ivan@otbfinancialplanning.com.

This is especially important as the CARES Act is bill number three. And Washington has been talking about bill number four, which will undoubtedly bring more economic relief and changes.

How this late-winter, coronavirus-induced market turbulence affects you depends upon how old you are. For people in or near retirement, it is scary – yet there are ways to offset a shrinking stock portfolio. Regardless of your age, look at market dips as opportunities, not threats.

Eleven Trading Days for the Record Books

For the last part of February and at least through the first third of March, the stock market could be described as “tumultuous.” The S&P 500 Index, the DJIA and NASDAQ are all off more than 10% from recent highs.

The nasty coronavirus is somewhat to blame, but that would be much too simple:

·       Oil was in free-fall

·       The Federal Reserve cut rates by 25 basis points in an emergency meeting

·       Fed-watchers think another 100 basis point rate cut is coming, pushing rates to almost 0

·       Every single one of the 11 S&P 500 sectors is in the red YTD, with the Energy sector off over 40% and the Financials and Materials sectors off over 20% YTD

And here are some history-making days to think about: from February 24th through March 9th, there were 11 trading days:

·       Those 11 trading days saw 5 of the 7 largest one-day-point-losses for the DJIA in history

·       Those 11 days also saw the two best-one-day-point-gains for the DJIA in history too

Now Might be a Good Time to Invest

How such market action, which is normal, impacts you financially and psychologically depends on where you are, age-wise. If you are younger and have long investment time frames relative to your goals, a market dip can be your friend. For example, let’s say you have young children and are saving for them in a 529 college savings plan, and college is a number of years away. If your account is down along with the market, compared to a previous high point, consider adding money.

Ditto if you are saving for retirement in a 401(k), individual retirement account or similar plan. If you save regularly, dollar cost averaging works. That’s where you invest a set amount on a regular schedule, perhaps at the first of each month. When stocks decline your contribution buys more cheaper shares and less expensive shares. Over time your average share cost is less than the current share price.

Is Opportunity Knocking?

If you are retired or some other life event has forced you to live off of your savings, naturally, you are nervous amidst scary headlines and histrionics of media commentators during significant market declines.

But consider heeding the words of the legendary investment manager John Templeton, who famously counseled, “Buy when there is blood in the streets.”

Occasionally you get event-driven market routs such as the aftermath of 9/11 in 2001 and the debt crisis of 2008. In your life span as an investor, you have hopefully saved for rainy days, kid’s educations, future retirement and life-enriching experiences like global travel. When markets dropped, you should have dropped in extra funds. It’s likely that you never bought at the bottom, as that is obvious only with 20/20 hindsight.

Your Investment Policy is Critical

The key is a sound investment policy that allows a cushion – in money market funds or other safe and low-volatility repositories that provides living expenses without having to sell stocks at low levels. Alternative investments in real estate, private equity and financing, energy infrastructure, etc., may also provide cash flows to supplement living needs without selling stocks.

You also may focus on value stocks with good dividends and reasonable P/E ratios. Such portfolios eschew aggressive growth stocks that pay no dividends and have no profits. A hot story may sell, but do economic fundamentals underpin the stock value?

Big Picture

No one likes to see markets continuing to set one-day point-drop records. And while the media continues to scream that the sky is falling, it’s not.

Remember that through the first few months of 2020, we see:

• Low and declining energy costs

• Low and declining interest rates

• Low inflation rates

• Easy monetary policy

• Low unemployment (50-year low)

• A stable housing market

The sky is not falling as winter 2020 comes to a close. But rain clouds and storm fronts can be vexing, unless you are prepared with rain gear. A comprehensive investment policy is the financial planning equivalent of rain gear. You may not be singing in the rain, but you will maintain peace of mind.