Portfolio Management Archives | Page 13 of 22

Understanding the importance of market liquidity

Over the last few years, liquidity has been a major driver in the stock market. In a liquid market — one that is not dominated by selling — the bid price and ask price are close to each other. As a market becomes more illiquid, such as during a sell-off like we saw last month, the spread between the bid and ask prices grows — meaning prices become less stable and transparent.

As we have previously written, the Federal Reserve has been buying bonds in an effort to inject liquidity into the market. When the Fed buys bonds, it increases its balance sheet — a list of its assets (such as government securities and loans) and liabilities (including currency in circulation). As seen in the chart below, the balance sheet has reached an all-time high.

The Fed’s balance sheet has ballooned to more than $8 trillion

Chart showing the growth of the Federal Reserve's balance sheet — Source: Bloomberg. Reserve Balance Wednesday Close for Treasury Bills, Treasury Notes, Treasury Bonds, Treasury Inflation Protected Securities (TIPS), and Mortgage-Backed Securities (MBS). Weekly data as of 1/26/2022.

The Fed’s goals include setting monetary policy that stabilizes the nation’s financial system, especially during times of high volatility, and allowing the economy to grow without generating inflation. After a challenging January in which volatility surged, stocks and bonds sold off and major indexes exceeded 10% drawdowns, the Fed now is reducing its bond purchases and soon will begin raising rates.

The Fed’s balance-sheet reduction should not be a near-term issue, as interest rates remain low and servicing the debt remains manageable. However, the speed at which the Fed raises rates will have an impact on the equity markets. (The Fed has not yet outlined a clear plan for how many times it plans to raise rates and how it plans to reduce its balance sheet over time.)

As the Fed injects less money into the economy to slow down inflation, liquidity is being reduced, which can lead to outsized market moves. In the last few weeks, the huge swings in U.S. stocks like Meta (Facebook), PayPal, Netflix and Snap have illustrated what can happen when liquidity dries up. As seen in the chart below, liquidity in U.S. stocks has fallen to levels last seen during the COVID-19 sell-off two years ago.

Lower levels of liquidity exacerbate market swings and make it harder for investors to execute buy and sell orders at a desired price. One measure of equity market liquidity is the market depth of S&P 500 E-mini futures, which investors use to gain exposure to the U.S. stock market. The E-mini S&P 500 is a futures contract that represents one-fifth of the value of a standard S&P 500 contract. The value of the full-sized S&P 500 contract is too large for most small traders, so the E-mini is used instead for speculation and hedging.

Typically, the volume traded in E-mini contracts is many times larger than the full contract — in other words, it is very liquid. Normal volume is roughly $50 million of value at any given time in the E-mini contracts, while today that number stands closer to $5 million, or 1/10th the size of normal liquidity.

Chart illustrating that liquidity has dried up in the U.S. stock market

So, what can we learn from all this? As we continue to gain clarity from the Federal Reserve on inflation and interest rates, volatility will reduce — and liquidity will return to the markets. Many market dynamics and economic indicators suggest that a strong economy remains possible. Strength in corporate earnings, productivity and innovation continue to drive profit margins higher for most companies in the S&P 500. Market corrections are normal, as nothing goes up in a straight line.

Investing is a disciplined process, done over time. It’s important to remember that panic is not an investing strategy. Neither are “get in” or “get out” — those sentiments are just gambling on moments in time.

From a portfolio perspective, we continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been. Making market decisions based on what might happen may be detrimental to long-term performance. The key is to stay invested and stick with the financial plan. Markets go up and down over time, and downturns present opportunities to purchase stocks at a lower value. As we say each week, it is important to stay the course and focus on the long-term goal, not on one specific data point or indicator.

It all starts with a solid financial plan for the long run that understands the level of risk that is acceptable for each client. Regarding investments, we believe in diversification and having different asset classes that allow you to stay invested. The best option is to stick with a broadly diversified portfolio that can help you to achieve your own specific financial goals — regardless of market volatility. Long-term fundamentals are what matter.

Sources: FT, Bloomberg, Investopedia, Goldman Sachs

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This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. Kestra IS and Kestra AS are not affiliated with CD Wealth Management. Investor Disclosures: https://bit.ly/KF-Disclosures

After January’s market volatility, what can investors expect?

Persistent worries about inflation and tightening monetary policy led to January’s market sell-off and NASDAQ’s worst month since the onset of the pandemic in March 2020. The average stock in the NASDAQ composite has experienced a decline of about 47% from its peak, according to a JP Morgan Report. Renewed geopolitical tensions, ranging from the Russia-Ukraine crisis to U.S.-China relations, also are fueling market volatility. And though market volatility is likely to persist, this does not mean that the stock markets will continue to experience similar downward pressure for the remainder of the year.

Volatility in growth companies is to be expected in any market environment. Over the past 15 years, some well-known, fast-growing companies experienced multiple corrections that were similar to the ones we encountered in January. Those who remained invested and weathered the market turbulence have realized attractive returns over the long term.

Chart showing drawdowns and returns for Microsoft, Amazon, Alphabet and Netflix — *Sources: Capital Group, Morningstar Direct. As of Dec. 31, 2021. Corrections defined by share price decline of 10% or greater. Based on daily returns from 2007 to 2021.*

Many positives remain for the current economy. GDP, which was reported last week for 2021, grew at an annualized rate of 5.7% — the fastest growth since 1984. Most economists expect the GDP to grow at a much lower rate for 2022 as fiscal stimulus wanes and monetary policy tightens. The first-quarter GDP is expected to be .1% and around 2% to 3% for the year. While this prediction would mean slower growth this year — thanks to economic drag from COVID and supply-chain tightness — it does not mean a recession is likely. By definition, a recession happens when there are two consecutive quarters of negative GDP growth. Based on economists’ predictions that GDP will be positive and growing, we do not see the economy headed into a recession.

As we wrote last week, the market has tended to rise in periods following initial increases in interest rates. The Fed is intent on normalizing interest rates. The current levels of inflation are driven mainly by supply constraints following a huge shift in demand during the pandemic, not by an overheated economy.

We continue to believe that the path toward monetary policy normalization will be bumpy as the Fed raises rates and tapers bond purchases, and we predict that volatility will continue to exist in the markets. Questions remain as to how many interest rate hikes the Fed will implement in 2022. As the chart below shows, even the change from one week differs on expectations for rate hikes in 2022.

Chart showing Fed fund futures implied number of rate hikes as of January 24 and January 31, 2022.

The uncertainty around Fed policy in a highly fluid environment has been the main driver of recent market volatility. Until there is greater clarity from the Fed on inflation, we expect these choppy market conditions to continue.

So, what can we learn from all this? In markets and moments like these, it is essential to stick to the financial plan and not to panic. It’s important to remember that panic is not an investing strategy. Neither are “get in” or “get out” — those sentiments are just gambling on moments in time. Investing is a disciplined process, done over time.

Sources: American Funds, JP Morgan, Schwab

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Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

When will the Fed raise rates? Here’s what we know today

In financial circles, “inflation hawks” is a term used to describe policymakers who are willing to let interest rates rise to keep inflation under control. As the Federal Reserve transitions from a dovish stance to a hawkish one in 2022, the market has continued its selloff. Investors appear to be pricing in an even more hawkish stance as they brace for possible action on interest rates from the Fed and keep a watchful eye on tensions between Russia and Ukraine. So far, the Fed has not taken action regarding rate hikes, but it has increased the pace of balance sheet tapering, hoping to slow economic growth so that inflation does not overheat.

The Fed has signaled that it is ready to act on inflation as the data supports it. There is much speculation (but no real knowledge) about how much and how often the Fed may raise rates this year and next to stem inflation. The 10-Year Treasury bond — a benchmark for other debt assets such as corporate bonds, auto loans and home mortgage rates — has started to advance in anticipation of higher rates. Once the 10-Year Treasury starts moving higher, other assets tend to follow, creating a natural slowing of the economy.

Consider home prices as an example. When interest rates are as low as they have been over the last several years, home prices tend to rise as demand increases and inexpensive mortgage rates allow people to have access to monies at lower rates. As the 10-Year Treasury begins to rise, mortgage rates will rise as well, thus slowing down the rate of home appreciation as monthly payments rise and the demand for mortgages decreases.

So how do higher rates affect stock market valuations — and why is the NASDAQ selling off more than other major U.S. indexes? As we previously have written, the 10-Year Treasury acts as the risk-free rate, used to discount future cash flows and earnings for stocks. Fundamental stock market analysis estimates future earnings and cash flows of corporations. These future earnings must be discounted back to today’s dollars to estimate the realistic stock price and the value of a company. As the risk-free or discount rates rise, this reduces the value of future cash flows. This is why we are seeing the more growth-oriented stocks of the NASDAQ selling off more than traditional, brick-and-mortar stocks.

The S&P 500 crossed the 10% correction threshold this week, and while drawdowns in the market never feel good, the chart below shows us this is not the first time we have seen a month like this. (It won’t be the last month like this in our investing lifetime, either.)

Chart showing how the current market drawdown compares with previous ones

How does the market typically perform when the Fed raises rates?

As seen in the chart below, during the last 10 cycles of rising rates since 1969, the forward performance of the market has been positive 80% of the time, with an average 12-month return of almost 7% and a return of almost 20% two years later. We don’t know how many times the Fed will raise rates this year or next, nor do we know where inflation will be in 12 months. But the stock market is the most well-known leading indicator, and we believe a lot of the selling we are seeing now is in advance of the Fed beginning to raise rates.

Chart showing Fed rate hikes and forward performance since 1969

So, what can we learn from all this? So far, 2022 has shown a propensity for avoiding the dips, whereas 2020 and 2021 were about buying the dips. We are experiencing larger market selloffs as the volatility index (VIX) has almost doubled this year. We also have experienced the first market correction in the S&P 500 in more than 400 days. Investing is a disciplined process, done over time. It’s important to remember that panic is not an investing strategy. Neither are “get in” or “get out” — those sentiments are just gambling on moments in time.

Sources: FactSet, Blackrock

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Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

If you’re leaving your job, don’t forget about your 401(k)

On Monday, we experienced a brief correction in the NASDAQ, with the index dropping more than 10% from its recent all-time high. Meanwhile, the S&P 500 index nears more than 400 days without a 10% pullback. Why the discrepancy? Big-cap technology stocks, which play a large role in both the S&P 500 and the NASDAQ, have held up much better in the recent selloff. Growth-oriented companies that have little to no earnings and higher valuations are being sold more rapidly.

The thought behind that move is that with the Federal Reserve beginning to raise rates this year, stocks with higher multiples and lower earnings have higher valuations, and therefore are more negatively affected. The reason for this is that the higher the interest rate used to discount future cash flows, the lower the future earnings are worth as those earnings are being divided by a higher number. As rates fall, the opposite is true, and companies with those same higher growth multiples become more valuable into the future.

Chart showing number of days without a 10% correction in the S&P 500

In November, more than 4.5 million people quit or changed their jobs. At the same time, there were more than 10.6 million job openings, which was down from 11.1 million in October but still a high number by historical standards. The unemployment rate has dropped to 3.9% from 4.2% as reported last week. This number is now closing in on the pre-pandemic low unemployment rate of 3.5%, as seen in the chart below. Why is this happening? COVID-19 burnout and fear are continuing, but many people also have confidence to quit their jobs because of the high number of job openings and rising pay. Wage growth remains strong and is expected to remain that way in 2022.

Chart showing unemployment rate between 1970 and 2020

Anyone who quits a job will need to decide what to do with 401(k) savings in their former employer’s retirement plan. As part of the financial planning process, we conduct ongoing reviews and discuss each client’s current 401(k) plans. We discuss what is in their best interest — not only when they are working and investing in the plan but also at retirement or when they leave their job. When you leave a job, you have four options regarding your 401(k):

• Rollover to an IRA. An IRA will offer more freedom to invest funds as you wish, since 401(k)s typically have limited offerings. In an IRA, one can purchase exchange traded funds (ETFs), individual stocks, mutual funds, individual bonds and other sector-specific holdings. IRAs may come with additional fees for the management and oversight of those assets.
• Leave the money where it is. This assumes that the former employer will allow you to keep the money in the 401(k) plan (not all businesses do). If you leave the money in your old company’s 401(k) plan, you may not be able to borrow against it. Also, if there are not many investment choices offered in the plan, you might be better off transferring to another tax-advantaged retirement plan. Often, investors tend to forget about their past 401(k) plans if they do not roll them into an IRA or new 401(k), and no ongoing portfolio management happens — to their detriment.
• Roll it into the new employer’s 401(k). Not all plans allow for this option. This decision may depend on the investment options provided by the new plan, as well as the cost. This method is preferable to leaving the money with the former company’s 401(k) plan, however, because the money will then be consolidated (and not forgotten).
• Cash out the 401(k). This is the worst of the four options because any monies that are taken out of the 401(k) are counted as ordinary income and can potentially cause one to be in a higher tax bracket. This also may be detrimental to the long-term financial plan.

As part of our fiduciary responsibility and oversight — as well as our financial-planning process — we discuss all these options with our clients when they are leaving a job. We want to ensure that we are making decisions in our client’s best interests and walking them through all their options.

So, what can we learn from all this? We expect increased volatility in 2022 as the Federal Reserve Bank figures out its strategy to combat inflation. There has not been a 10% correction in the S&P 500 in almost 400 days, but when a correction does occur, we will continue to stay the course and provide the same level of guidance we always do.

It all starts with a solid financial plan for the long run that understands the level of risk that is acceptable for each client. Regarding investments, we believe in diversification and in having different asset classes that allow you to stay invested. The best option is to stick with a broadly diversified portfolio that can help you to achieve your own specific financial goals — regardless of market volatility. Long-term fundamentals are what matter.

Sources: Schwab, Federal Reserve Bank

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Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

What kind of growth can investors expect in 2022?

In all, 2021 was a solid year for the financial markets. The economy’s ability to adapt to the pandemic, the vaccine rollout, additional financial stimulus and easy monetary policy all supported strong performance. Growth in large-cap U.S. equities was primarily driven by gains among the S&P 500’s largest tech holdings. Severe supply-chain bottlenecks and a surge in energy prices supported a strong commodity performance. Small-cap U.S. equities trailed their large-cap counterparts but still produced returns greater than their 20-year average of 11%.

Outside the U.S., equities in developed markets had another strong year. Emerging markets, on the other hand, were hurt after a correction in the Chinese stock market and continued lockdown measures. Finally, U.S. fixed income decreased as long-term interest rates ended the year higher than where they started.

Chart showing 2021 returns by asset class

The Chinese stock market had a correction in 2021, and questions remain about the Chinese economy. The property market downturn, triggered by the collapse of Evergrande, is a large drag on China’s economic growth. In the past, downside growth risks in China have been quickly countered by monetary and fiscal stimulus. This time may be different as signals point toward Chinese leaders being worried about excessive leverage in the property sector. With China’s 2022 growth projections being around 5%, this may take some pressure off global inflation.

In 2022, the central narrative will be how markets react to the Federal Reserve and other major central banks transitioning away from an extraordinary 18-month period of stimulus. Return and income-seekers will need to navigate a backdrop of favorable but moderating growth, high valuations, low and rising yields, and ongoing COVID-related question marks — in particular, an uncertain path for inflation.

The U.S. economy is poised for a year of moderating but above-trend economic growth. Robust household income and accumulated savings leave the consumer in a strong position heading into the year. Businesses have record levels of cash on hand, which may lead to record levels of investment. Unemployment is at 4.2%, and wages are up. Excess cash has been moving into the equity markets, and in 2021, inflows into equities were more than the past 19 years combined.

Inflation remains the primary focus for most investors. Moderating demand, rebalancing demand from goods to services and healing the supply side should allow inflation to rates to reduce in the second half of the year. Wage inflation and strong labor demand are the key risks to this scenario. At the same time, we are keeping a close watch on fiscal policy. For now, President Biden’s Build Back Better plan is on ice. If this plan were to be resurrected, we would watch closely and keep you informed every step of the way.

So, what can we learn from all this? We are hopeful that 2022 will be a turning point in the global pandemic and that policy makers will wean economies and markets off fiscal and monetary stimulus. Vaccine manufacturing continues to ramp up, and new therapeutics to fight COVID continue to be available in the U.S. and abroad. Inflationary pressures should ease but still settle at an elevated level than the recent past. We believe that diversification and the discipline to stay invested over the long-term are more important than ever. We are optimistic for a successful 2022!

The key is to stay invested and stick with the financial plan. Markets go up and down over time, and downturns present opportunities to purchase stocks at a lower value. As we say each week, it is important to stay the course. and focus on the long-term goal, not on one specific data point or indicator.

Sources: BofA Global Investment Strategy, Blackrock, Bloomberg, JP Morgan, Russell Investments

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Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

Investment outlook: What will move the markets in 2022?

We are excited for 2022 and are looking forward to a great year ahead. It’s hard to believe we are nearly two years into the pandemic. It has been a balancing act on a global scale as governments and central banks gauged how much fiscal and monetary stimulus was needed to boost economies without creating runaway inflation.

We see many positives for the financial markets heading into 2022:

1. Global growth continues to be positive.
2. Monetary and fiscal policy are still supportive of growth, even in the face of tapering and possible interest rate hikes in 2022.
3. Congress recently passed legislation to raise the debt ceiling for all of 2022.
4. There is potential for peak inflation and lower inflation for the second half of 2022.
5. The easing of supply chain issues should help both emerging and developed international markets.
6. Consumer spending is strong, and balance sheet savings rates are higher.

The S&P 500 has traded above the 200-day moving average for all of 2021. The chart below suggests that when the S&P 500 is above its 200-day moving average, forward returns are often favorable.

Chart showing the longest streaks for S&P 5-00 above the 200-day moving average

Clearly, inflation and its effect on the stock market are on the top of everyone’s mind. Remember that some inflation can be healthy for companies because it allows them to raise prices and increase profitability. Also, as seen in the chart below, stocks and bonds have generally provided solid returns, even during times of higher inflation. It is during the extremes that the markets often tend to struggle, but as inflation moderates, stocks and bonds can have strong years.

Chart showing average annual returns at different inflation rates from 1970 to 2021

Political uncertainty often has a noticeable short-term effect on the markets. An analysis of more than 90 years of equity returns reveals that stocks tend to have lower average returns and higher volatility for the first several months of midterm election years. The trend often reverses, and markets have tended to return to their normal trajectory. Remember, the numbers below are just averages; it is important not to try to time the market. Elections generally create a lot of noise, so it is important to look past the short-term highs and lows and focus on the long-term picture instead.

S&P 500 Index average returns since 1931

The markets and the global economy are not without risks. History shows us that the biggest risks in a typical year are hiding in plain sight, not suddenly appearing out of nowhere. Risk appears when there is a high degree of confidence among market participants expecting a specific outcome that doesn’t pan out. If we look to identify the unexpected, we see the following as potential risks to the global markets in 2022:

1. Supply chain shortages turn into gluts: Whether it’s semiconductors, used cars or a variety of products, any potential supply glut in 2022 may lead to a fall in inflation. Excess inventory would promote price cuts and pose risks to industries that have thrived on pricing boosts from shortages.
2. Rate hikes slower than expected: Surging inflation has led the Fed to anticipate three rate hikes in 2022. If inflation eases, the expectations for the number of rate hikes may change as well.
3. China: The World Bank cut its forecasts for China’s economy in 2022 after the nation’s continued attempts to restrict business, break up large technology companies and remove bitcoin mining.
4. COVID outbreaks and new strains: Investors may have grown confident in trading rotation in and out of stocks depending on the seasonality and COVID flare-ups. If the current and future waves have less impact on the overall economy, the stocks that have led us out of the economic doldrums may not have the same effect going forward.
5. Geopolitical surprises: The biggest worry could be a military conflict, whether that is China and Taiwan, an invasion of Ukraine by Russia or even a regional conflict in the Middle East.

History doesn’t always repeat itself, but similarities often exist. While inflation on a year-over-year basis is high, this is not the runaway inflation of the 1970s. Today’s inflation is more akin to the 1920s and 1950s, when we witnessed booms in productivity and innovation and the rebuilding of an economy boosted by a new generation of household spending, along with new infrastructure spending. The markets may experience elevated volatility in the coming year as the above risks test the markets. We will continue to keep you informed and invested through the ups and downs of 2022.

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So, what can we learn from all this? We are hopeful that 2022 will be a turning point in the global pandemic and that policymakers will wean economies and markets off fiscal and monetary stimulus. Vaccine manufacturing continues to ramp up, and new therapeutics to fight COVID continue to be available in the U.S. and abroad. Inflationary pressures should ease but still settle at a level higher than the recent past. We believe that diversification and the discipline to stay invested over the long term are more important than ever. We are optimistic for a successful 2022!

From a portfolio perspective, we continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been. Making market decisions based on what might happen may be detrimental to long-term performance. The key is to stay invested and stick with the financial plan. Markets go up and down over time, and downturns present opportunities to purchase stocks at a lower value. As we say each week, it is important to stay the course, focusing on the long-term goal and not on one specific data point or indicator.

Sources: Capital Group, Charles Schwab, BNY Mellon

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

2021 in the rear-view mirror

As 2021 comes to an end, let’s reflect on the rollercoaster ride we took together.

In January, while we were still in the midst of the global pandemic, we witnessed an insurrection at the Capitol. Thankfully, our government was able to usher in a smooth presidential transition and we quickly returned to business as usual.

Throughout the year, different market themes arose — and some repeated themselves often. Some of the trends and headlines seemed transformational, but in hindsight, the market continued marching on — so much so that you may not even remember some of the issues that captured our attention.

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• Special-purpose acquisition companies — better known as SPACs — became one of Wall Street’s hottest trends, accounting for more than two-thirds of Nasdaq’s initial public offerings in January.

• “Meme stocks” — including GameStop, AMC Entertainment and Blackberry — made headlines with excessive trading volume from investors who targeted them on social media.

• Cryptocurrency investors saw high volatility with fluctuating valuations and changing regulations.

• COVID continues to weigh heavily on the minds of investors, from the availability and adoption of vaccinations and boosters to the emergence of variants.

• Inflation – from transitory to the highest inflation reading since the early 1980s — caused some investors to worry about a market correction.

• The cost of shipping a container spiked, and supply-chain bottlenecks sent a ripple effect through the economy.

• Commodity prices — such as lumber and used car prices — rose and fell.

• Housing prices reached record-setting levels, thanks to the pandemic and a move toward a remote workforce.

• The pandemic intensified discussions about sustainability and the financial markets, bringing Environmental, Social and Governance (ESG) investing more into the mainstream.

Panic is not a strategy when dips occur. When the market falls and volatility rises, the plan is to stay the course and consider those opportunities as buying chances, not as a time to panic and sell.

We gladly welcomed clients back to our office in 2021, and we look forward to seeing you again in our office in 2022. We continue to stay connected with you through Zoom or in person. Our team continues to have our daily internal meetings every morning and night via Zoom to ensure we stay connected and work together.

Our No. 1 priority is to take care of you, our clients, and we are proud of the work we have done this year. We are grateful for you!

————

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

This year-end financial checklist will help you plan and save

As 2021 comes to an end, the time has come to review some year-end strategies to ensure that your wealth plan reflects any changes in your circumstances or your goals, the economic landscape and current tax environment. We recommend that you review the following checklist for planning strategies to consider; some may apply to you, while others may not. We recommend speaking with your CPA or accountant to review as well.

Income tax strategies

• Traditional year-end planning focuses on deferring income to a future year and accelerating deductions into the current year. However, if you anticipate that your marginal income tax rates will increase next year — whether due to increased income or changes in tax legislation — you may consider accelerating income into 2021 and deferring deductions to 2022.

• If you anticipate being in a lower taxable income bracket in 2022:

— Defer income and any sale of capital gain property (if possible) to postpone taxable income.

— If you are itemizing on your tax return, bunch your medical expenses in the current year to meet the percentage of your adjusted gross income needed to claim those deductions.

— Make your January mortgage payment in December so that you can deduct the interest on your 2021 tax return.

Tax-related investment strategies

• Tax-loss harvesting is the strategy of selling securities at a loss to offset a capital gain tax liability. It involves selling a taxable investment that has declined in value, replacing it with a similar investment and using the loss incurred to offset any gains.

— Short-term losses are best used to offset short-term gains, and long-term losses can be used to offset long-term gains. Losses can help offset $3,000 of income on a joint tax return in one year.

— Be aware that the IRS wash-sale rule dictates that you must wait at least 31 days before buying back a holding that is sold for a loss.

• Make sure you have satisfied your required minimum distribution (RMD). Once you turn 72 years old, you are required to take minimum distributions from your traditional IRAs and most employer-sponsored retirement plans.

— RMDs were not required in 2020 after Congress passed the CARES Act in response to the pandemic, but minimum distributions resumed in 2021, and failure to take them may result in a 50% penalty.

— You may have an RMD for an inherited IRA, depending on when you inherited it. (Tax laws have changed for newly inherited IRAs.)

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Retirement planning strategies

• Maximize your IRA contributions. You may be able to deduct annual contributions of up to $6,000 to your traditional IRA and $6,000 to your spouse’s IRA ($7,000 if over age 50).

• Make a Roth contribution if you qualify under the applicable income limits.

• Consider increasing or maximizing your 401(k) contribution. For 2021, the maximum is $19,500 for those who are younger than 50 and $26,000 for those who are 50 or older.

• Consider contributing to a Roth 401(k) plan if your plan allows.

• Consider setting up a Roth IRA for each of your children who have earned income during the year.

• Determine the optimal time to begin taking Social Security benefits if you over age 62.

Gifting strategies

• Consider making gifts up to $15,000 per person as allowed under the federal annual gift tax exclusion. In 2022, the gift tax exclusion is projected to increase to $16,000 per person.

• Take advantage of the ability to deduct up to 100% of adjusted gross income (AGI) for a cash gift to a public charity in 2021.

• Create a donor advised fund for an immediate income tax deduction and provide immediate and future benefits to a charity over time.

• If you already have a donor advised fund, consider gifting appreciated assets that have been held longer than one year to get the fair market value income tax deduction while avoiding income tax on the appreciation.

• Combine multiple years of charitable giving into a single year to exceed the standard deduction threshold.

• If you are over age 70 ½ (or 72, depending on your date of birth), consider making a direct transfer from an IRA to a public charity. The distribution is excludable from gross income.

Wrapping up 2021, planning for 2022

• Work with your CPA to provide capital gains and investment income information for a more accurate year-end projection.

• Check your Health Savings Account contributions for 2021. If you qualify, you can contribute up to $3,600 (individual) or $7,200 (family), plus an additional $1,000 catch-up if you are over 55.

• Discuss major life events with CD Wealth Management to confirm you have clarity in your current situation.

• Double-check your beneficiary designations for employer-sponsored retirement plans, IRAs, Roth IRAs, annuities, life insurance policies, etc.

• Review that you have a trusted contact on each of your accounts to help protect assets against fraud.

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So, what can we learn from all this? The end of year is a perfect time to review your financial planning needs. This includes reviewing the investment portfolio, assessing year-end tax planning opportunities, reviewing retirement goals and managing your wealth transfer and legacy plans. The checklist above includes just some of the items that may apply to your family. We are happy to meet to discuss any of the above to ensure that you remain on track with your financial profile.

Sources: BNY Mellon, Forbes, RBC

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

Here’s why market volatility doesn’t change our outlook

Last week, the stock market pulled back in a very volatile week as investors grappled with the potential impact of the Omicron COVID variant and commentary from Fed Chair Jerome Powell that the risk of inflation has increased. Powell also said the Fed may consider speeding up its bond purchase tapering plans and hinted at potential earlier rate hikes in 2022.

As a refresher, the VIX index is a measure of forward-looking stock market volatility for the next 30 days. The VIX is known as the fear gauge; it reflects the market’s short-term outlook for stock price volatility as derived from option prices on the S&P 500. On Monday, the VIX topped out at 35, after having traded at below 20 for most of October and November — that’s a 75% increase in the volatility index in a very short period. As the chart below shows, we have had many short-lived, volatile market movements over the past 20 months. In hindsight, the spikes in volatility have allowed investors to continue to “buy the dip” in the accompanying market sell-offs. As volatility then wanes, the market recovers.

Chart showing the VIX volatility index from 2015 to today

One of the primary causes of the recent increase in volatility is inflation. The Fed belatedly acknowledged inflation risks, and we expect it to start raising rates next year. What matters is not that they are going to raise rates, but the rate trajectory and where they end up next year and going forward. The chart below shows the Fed estimate as well as the market estimate for interest rates. Both the market and the Fed predict that short-term rates will be around 1.75% in 2024, which would be a slow, steady increase from where they are now: 0-0.25%.

The Fed’s view of the path of rate hikes vs. the market’s view

Chart showing the Fed's view of interest rates versus the market's view from now until 2024 and beyond

Note: The 12/15/2027 eurodollar futures rate was used for the Longer-Run market rate. Source: Bloomberg. Fed estimate as of 9/22/2021. The market estimate of the federal funds rate using eurodollar futures (EDSF). As of 11/10/2021.

Also weighing on the markets and causing increased volatility is the work Congress still has to do before the end of the year, with several large issues to resolve:

* Defense spending bill: Congress is near agreement to authorize $770 billion in military spending.

* Keeping government open: President Biden signed a stopgap spending bill that will keep the Federal Government running through Feb. 18.

* Social spending bill: The Build Back Better Plan could also drag into next year as negotiations on how to fund the bill continue.

* Raising the debt ceiling: The estimated deadline is Dec. 15. Raising the debt ceiling does not allocate new spending; it only authorizes the Treasury to make good on current obligations.

This year’s series of events has no historical parallel: a growth surge from a global pandemic, a supply-driven spike in inflation and a change in Federal Reserve monetary policy that is being tested in real time.

The COVID shock was more like a natural disaster than the economic restart from a global financial crisis. Economic activity surged, and corporate profits rebounded at a rapid pace.

Demand for goods — rather than services — along with supply-chain bottlenecks have driven prices higher. We expect that prices eventually will be higher than pre-COVID levels, but supply and demand ultimately will determine where they settle. As supply-chain bottlenecks open and more goods are available to the public, prices will come down as demand decreases. At the same time, the service industry also will begin to see increased demand, which may reduce the demand for goods, in turn reducing prices as well.

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So, what can we learn from all this? COVID is still taking a terrible toll on the U.S. and the world. Even with the new Omicron variant, the U.S. economy looks solid and supply-chain bottlenecks may be easing. We think investors need to be ready to ride the COVID rollercoaster for years to come. Panic is not a strategy when dips occur. When the market falls and volatility rises, the plan is to stay the course and consider those opportunities as buying chances, not as a time to panic and sell.

Sources: Bloomberg, Blackstone, Fidelity

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

How we’re handling the market sell-off and talk of inflation

Last Friday, news of a COVID-19 variant identified in South Africa and new travel restrictions sent markets tumbling and injected volatility into the markets. The Dow Jones Index slid 900 points to suffer its worst day since October 2020. The news was exacerbated in the stock markets, as the Friday after Thanksgiving is typically a low-volume trading day and a shorter trading day due to the holiday. Oil prices fell more than 12% in one day, with news of potential lockdowns across the globe, though President Biden reiterated that the U.S. will not initiate economic lockdowns or new travel restrictions.

The market has continued its sell-off this week as Moderna and Regeneron separately commented on the effectiveness of the current vaccines against the new variant. At the same time, Fed Chairman Jerome Powell told the Senate that he expects tapering could wrap up a few months sooner than anticipated and that it is time to stop describing inflation as “transitory,” opening the possibility for the Fed to raise rates in early 2022.

The chart below reflects the overall market returns through Nov. 26. While the markets have had a strong year, most underlying holdings are trading in a correction mode. This further supports that the underlying market may not be as expensive as many people fear.

Chart showing year to date return and drawdown numbers for major indexes

It hasn’t been the smoothest of sailing for fixed income investors in 2021. Bond yields have ridden waves of optimism and pessimism about the economic outlook for most of the year. The chart below reflects the year’s big swings in the 10-year Treasury. As we near the end of the year, short-term yields have moved up in anticipation of tightening monetary policy — while the 10-year Treasury has fallen back from the levels seen in October, despite inflation.

Chart showing the 10-year Treasury yield

With more discussion of inflation — and more economists predicting that rates will rise next year — we recently made a portfolio reallocation within our fixed income portion of the portfolio:

1. We are shortening the duration of the fixed income portion of the portfolio. As a refresher, duration is a measure of how long it takes for a bond to repay the principal using both income and principal. In an environment of rising interest rates, we are hopeful that a shorter duration will protect against falling principal compared to longer-duration bonds.

2. We are maintaining similar credit quality within fixed income but adding a short-duration position to hedge against rising rates. We removed our longer-duration investment grade corporate bond position.

3. We also increased the weighting in our strategic income holding to produce additional income in a low interest rate environment.

Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought-out, looking at where we see the economy and rates heading.

We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy. We strategically have new cash on the sidelines and buy in for those clients on down days or dips in the market, as one does in a 401(k) every other week. We speak with our clients regularly about staying the course, not listening to the economic noise and trading memo stocks.

So, what can we learn from all this? Hoping that an outcome will or will not occur is not a strategy. In light of new COVID variants, we think investors need to continue to be ready to ride the rollercoaster for years to come. With the most recent quarter’s record earnings, the overall valuation of the market has come down. That does not mean we won’t experience dips and corrections, but when they happen, the plan is to stay the course and consider those opportunities as buying chances — not a time to panic and sell.

It all starts with a solid financial plan for the long run that understands the level of risk that is acceptable for each client. Regarding investments, we believe in diversification and in having different asset classes that allow you to stay invested. The best option is to stick with a broadly diversified portfolio that can help you to achieve your own specific financial goals — regardless of market volatility. Long-term fundamentals are what matter.

Sources: CNBC, Schwab

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Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.