Portfolio Management Archives | Page 15 of 22

Strategies for tax savings, no matter what Congress does next

As we near the end of the third quarter, Congress continues to debate infrastructure packages. Many investors are wondering if Congress will pass tax reforms that alter the tax landscape to pay for the new bill. The Biden administration has consistently said it is targeting individuals whose income is greater than $400,000. Our current tax system is considered a progressive system, one in which the average tax burden increases with income. High-income families pay a disproportionate share of the tax burden, as seen in the chart below, which is why the current administration remains focused on increasing taxes for those individuals.

chart showing federal tax rates by income

One of the proposals is to raise the long-term capital gains rates on those who make more than $1 million to pay for infrastructure. The current rate for those earners is 20%, and the new rate would be 39.6%, almost double the current rate. The chart below shows the proposed long-term capital gains rates if the new rates were to go into effect. We believe that the chance of any major tax changes passing is still remote, given the current makeup of Congress.

chart showing long-term capital gains tax rates

We continue to look for opportunities to bolster tax savings for our clients, regardless of whether the proposed tax changes pass in Congress, and we want to highlight three strategies below.

Strategy No. 1: Tax Loss Harvesting

Under current tax law, it’s possible to offset current capital gains with capital losses you’ve incurred during the year or carried over from a prior tax return. Capital gains are the profits you realize when you sell an investment for more than paid for it, while capital losses are the losses you realize when you sell an investment for less than you paid for it.

Short-term capital gains are taxed at ordinary income rates, whereas long-term capital gains are taxed at a lower capital gains rate. Being able to reduce the tax on both short- and long-term capital gains by harvesting losses can help offset the gains one incurs from taking profits. Harvesting the loss has no effect on the portfolio value, as one can use the proceeds from the sale to buy a similar investment.

This allows the investor to maintain a similar asset allocation and reduce federal income taxes, as seen in the example below. Throughout the year, we continue to look for opportunities to harvest losses and take profits, all while maintaining the current risk tolerance.

chart explaining the process for tax loss harvesting

Tax-loss harvesting and portfolio rebalancing can provide nice synergies as they play different roles in portfolio management. When we rebalance a portfolio, we are managing risk in the portfolio by selling holdings that have outsized their target holdings and adding those gains to positions that may have had losses or not grown as much. Often in rebalancing, the portfolio will experience sizeable capital gains. That’s where tax-loss harvesting helps reduce the gains and bring the risk of the portfolio back to its target allocation.

Strategy No. 2: Converting to a Roth IRA

A traditional IRA/401K is funded with pre-tax contributions. Future withdrawals from your IRA/401K are then taxed at ordinary income rates. A Roth IRA/401K is funded with after-tax dollars, and the withdrawals are tax-free, if the qualifications are satisfied. Individuals who have most of their retirement assets in a traditional IRA/401K might consider converting a portion of those assets to a Roth retirement account for tax diversification. With tax rates currently at historically favorable levels, now might be an opportune time to do a Roth conversion, since the IRS treats Roth IRA conversions as taxable income.

chart showing when roth iras are beneficial

Strategy No. 3: Increasing Charitable Contributions

The CARES Act, along with additional stimulus at the end of 2020, provided tax relief to those individuals with charitable intent. For 2021, taxpayers can elect on their income tax return to deduct up to 100% of adjusted gross income for cash gifts made to public charities. Also, under the CARES Act, taxpayers can gift long-term appreciated securities to public charities (including donor advised funds) up to 30% of their adjusted gross income while also making cash gifts to public charities totaling up to 60% of adjusted gross income.

chart explaining rules regarding charitable donations

For those who are charitably inclined and over the age of 70½, this year offers an opportunity to donate more to your favorite charity and potentially reduce your taxable income by donating directly from your IRA to a qualified 501(c)3 organization. The maximum dollar amount for any individual from an IRA is limited to $100,000 per year. A married couple can each donate up to $100,000 from their respective IRA.

So, what can we learn from all this? We will continue to monitor the financial plan and the portfolios to look for opportunities to tax-loss harvest, discuss Roth IRA conversions and potentially donate appreciated stock to your favorite charities. We continue to watch economic data closely and monitor the COVID variants’ effect on the global economy, Federal Reserve policy and China’s increased regulations and restrictions.

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.

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: Fidelity, Cambridge Trust, Michael Kitces, Smart Asset, Tax Policy Center, https://www.taxpolicycenter.org/resources/income-measure-used-distributional-analyses-tax-policy-center

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

What’s behind the market’s winning streak?

The market has shown great resilience in 2021; it has been more than 200 days without at least a 5% drawdown for the S&P 500. (The maximum drawdown this year has been 4.2%.) There have been only three years since 1928 with smaller maximum drawdowns. We believe several factors are contributing to the market’s resilience: buying during the dips continues to work effectively, the Fed’s policies are supportive to the markets, a new infrastructure deal is in the works, and corporate earnings continue to be strong.

Chart showing consecutive days without a 5% drawdown since 1957

Dating back to 1957, there have been seven similar instances of going more than 200 consecutive trading days without a 5% drawdown — not necessarily enough instances to be considered statistically significant. However, as the chart below shows, the market on average has had positive returns at 3 months, 6 months and 1 year after those periods. In each of the prior seven instances, the markets have seen a greater than 5% pullback.

Chart showing S&P 500 performance following periods of 200+ consecutive days without a 5% drawdown

We are nearing the end of the summer and heading into September, historically the worst month of the year in terms of average performance, as seen in the chart below. August — also typically one of the worst performing months — has seen a record number of new highs in the S&P 500, the most since 1929.

Chart showing average market returns by month

The market still faces several risks:

* This week, the House of Representatives begins debate on two infrastructure packages. If Congress is unable to pass the trillion-dollar package that the markets are expecting, we could see some market sell-off.

* If the Federal Reserve increases the rapidity of its tapering and buys fewer assets, as we discussed last week, the flow of cash into the economy would decrease, possibly leading to a further economic slowdown.

* COVID variants continue to have an impact on economic growth, both domestically and around the world.

* Market valuations are not inexpensive. A majority of stocks in the S&P 500 across all sectors are trading above both their 50- and 200-day moving averages.

It remains important to stay disciplined in the current economic environment. Investors should stay focused on the long term, not on when to get in and when to get out of the market; that approach is gambling, not investing. Investing is a disciplined process done over time, staying committed during the ups and downs of the market.

So, what can we learn from all this? We believe it is not a matter of “if” but “when” the market will have a drawdown of more than 5%. However, trying to time when that may happen is gambling and not investing. Investors should not overreact to market headlines by making sudden and significant changes to portfolios. We continue to watch economic data closely and monitor the COVID variant’s effect on the global economy, as well as Federal Reserve policy and China’s increased regulations and restrictions.

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.

Sources: Fact Set, LPL, Schwab

Promo for article titled What's the Federal Reserve and Why Does It Matter So Much?

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 is the Federal Reserve and why does it matter so much?

In many of our weekly emails, we mention the Federal Reserve and the actions it may take to help maintain the economy. If you’re not entirely familiar with the Fed and what it does, you may be wondering why we bring it up so often.

The Federal Reserve includes the Board of Governors, regional Reserve Banks and the Federal Open Market Committee (FOMC). The chair and the Board of Governors are political appointees who are chosen by the president and report directly to Congress. (Jay Powell is the current chair.) The Board of Governors oversees the 12 regional Federal Reserve Banks, one of which is in Dallas.

Chart showing the relationship between Congress and the Federal Reserve

The Federal Reserve has five main functions:
1. Conducting monetary policy
2. Promoting financial system stability
3. Supervising and regulating financial institutions and activities
4. Promoting consumer protection
5. Fostering payment and settlement system safety and efficiency

Conducting monetary policy and controlling interest rates are the primary functions from a market perspective. Monetary policy refers to actions taken to control the money supply and achieve goals that promote sustainable economic growth, using tools such as:
1. Open market operations: buying and selling of U.S. government securities (i.e., Treasury bonds)
2. Reserve requirements: setting the percentage of deposits that banks are required to hold
3. Interest on reserves: setting the interest rate paid to banks for their reserves that they are holding
4. Discount rate: setting the interest rate charged to banks that borrow money from a Federal Reserve Bank

A big question that came up in the news this week concerns when will the Fed begin to taper its purchases. The Fed uses monetary supply to help control the economy. When the economy is weak, it can purchase Treasury bonds from the marketplace to add liquidity into the system, which in turn helps boost economic activity. If the Fed wants to slow down the economy to prevent overheating, then it reduces its bond purchases, slowing the additional liquidity and putting the brakes on economic growth. If the Fed wants to reduce the money supply, it can sell bonds in the marketplace, which takes money out of the economy.

“Tapering” is a term used to describe the process of gradually stopping asset purchases with no predefined end date or amount. When the Fed begins to taper, it starts the process of buying fewer bonds, which reduces additional money flowing into the economy in hopes of slowing economic growth so that inflation does not overheat. The Fed likes to signal its intentions around tapering well in advance to minimize the impact on the financial markets. Tapering is likely to be a gradual process that will take many months to complete.

*An eagle statue adorns the Marriner S. Eccles Federal Reserve Board Building in Washington, D.C.*

Another action that the Fed uses to help control the economy is setting the discount rate. When the economy slows down, the Fed will lower interest rates to help spur economic activity. This encourages more lending, which in turn adds money to the economy. For example, at the start of the pandemic, the Federal Reserve cut the discount rate from 1.75% to 0%, where it sits today. The move was a drastic one, taken to prompt economic growth; the Fed did not want a repeat of the Global Financial Crisis and acted swiftly and appropriately. When the economy is growing rapidly, the Fed may raise interest rates to help slow economic growth, with the hope that inflation does not spike. Typically, raising rates is a more gradual approach, with smaller increases seen on a quarterly basis instead of a large, one-time increase.

The Fed has many other responsibilities, but its actions through interest rate changes and open market operations have the greatest impact on the market and the economy, which is why we hear about them often in the news.

So, what can we learn from all this? We believe that the Federal Reserve will signal to the markets that it is going to begin tapering asset purchases. We hope it will be an orderly process so market volatility will be more limited than at times in the past. At the same time, tapering signals that the Fed will have the flexibility to raise rates — possibly sooner rather than later. Investors should not overreact to market headlines by making sudden and significant changes to portfolios. We continue to watch economic data closely and monitor the COVID variant’s effect on the global economy and Federal Reserve policy, as well as on China and its increased regulations and restrictions.

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.

Sources: Federal Reserve Bank of St. Louis, Schwab

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 formula for wealth is simple, and it’s non-negotiable

Note: The author first published this piece on Forbes.com.

There is no shortage of intelligence among investment experts on the formulas you should follow to build wealth: saving for college, evaluating exchange-traded funds, determining how long your money will last, for example.

These are the kind of mathematical-plus-analytical insights you pay a good wealth-management professional to understand on your behalf. They include modeling based on inflation rates, rates of return and percentage of stocks vs. bonds, among other variables. Ideally, unless you are truly interested in getting in the weeds, you shouldn’t need to understand the specifics of algorithms.

In my experience, there is a much easier formula for building wealth, and it doesn’t take an advanced degree for you to understand it. In order to successfully build and maintain wealth, the following must be true:

Money (x) Time (x) Strength of Plan (x) Discipline > Poor Choices

There’s a reason this formula includes so much multiplication. If any of the values representing the four key ingredients — money, time, strength of plan or discipline — equal zero, then the product of the formula also will be zero, and you will not be successful.

Money and time are obvious ingredients; the more money you invest and the more time you leave it invested, the better your chances. The strength of your plan matters a great deal, too, and that’s why it’s so important to choose a wealth manager who understands your situation and your goals.

But the fourth ingredient, discipline, often is the difference between just “making ends meet” in retirement and leaving a legacy that ensures your family is secure for generations to come. If there is zero discipline in your approach, you will end up with zero wealth.

Remember: Zero multiplied by any number equals zero.

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When wealth managers talk about discipline, we talk about trust, intentionality and focus:

* Investors must trust the investment plan and the planner’s capability to stay on top of the markets, the economy and the outlook as it pertains to each client.

* Investors must be intentional about following the plan, about living within its parameters and about recognizing changing life circumstances that might alter the outlook.

* Investors must focus on what they can control — and not on what they can’t control, keeping the big picture in mind as the market moves up and down over time.

As with any other human pursuit, the most successful people are the ones who have the discipline to follow their plan to reach their goals. They know themselves well, and they are honest with themselves always.

Every wealth manager has a list of former clients who wouldn’t listen, who thought they knew better than their planning professional because they’d heard about a hot tip, an IPO or the latest trend in get-rich-quick trading. (Honestly, some of their schemes are just fancier-sounding versions of Beanie Babies and baseball cards).

You are paying your wealth manager to do a job for you, but you have a role to play as well. Emotion can cloud people’s minds where their finances are concerned, and without discipline, even the best-laid plans will fizzle.

Which brings us to this hard truth: Money doesn’t equal intelligence. Don’t confuse being rich for being wealthy — or for being smart.

It’s true that being smart can help you make money. But so can being born into a rich family. Money alone doesn’t equate to wealth, and if it is not treated with a disciplined approach — one that removes emotion from the process — it will be fleeting.

No matter which formula you try to use.

Promo for an article titled A Closer Look at Socially Responsible Investing

A PDF version of this article is available here.

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.

There’s a semiconductor shortage, and it affects everything

Semiconductors are critical to all sectors of the market, and they’ve been in short supply around the world this year because of pandemic-related factory closures and limited manufacturing, increased demand for electronics and the U.S.-China trade war. Chips aren’t just used for video games; the chart below shows the broad reliance on semiconductors across all industries. Semiconductor chips are in cars, medical devices, smartphones, datacenters, utilities, airplanes and even devices such as toothbrushes and washing machines. Without semiconductor chips, most businesses’ operations would cease to exist.

Chart showing how semiconductors are used in different sectors

As companies continue to report second-quarter earnings, a common theme in their reports is very strong semiconductor orders, coupled with low inventories, leading to longer lead times and above-average pricing. As we have written before, this is Supply and Demand 101: Strong demand and low supply lead to higher prices. Businesses look to pass these higher costs to consumers in an effort to protect their profits. However, when raising prices on their input costs, they risk undermining demand for their product, thus lowering profits and prices in the long run.

This gap between supply and demand in semiconductor chips is expected to continue widening. It takes time to add supply; a company cannot just build a new semiconductor manufacturing plant overnight. Manufacturing a chip typically takes more than three months, requiring very clean facilities, large factories — and tens of billions of dollars. Existing chip plants already run 24 hours a day, seven days a week. Manufacturers of semiconductors have expressed confidence in their ability to grow capacity, but any such expansion will be incremental and probably will not close the demand gap for one to two years.

Earnings growth remains robust today, with more than 70% of companies in the S&P 500 having already reported second-quarter earnings. Earnings growth is nearly 85% higher than the prior year. Supply chain disruptions, caused by semiconductor shortages, rising input costs and wages may have an impact on profit margins and slower future earnings growth. Equity markets look forward, anticipating what may happen in the future, and semiconductor supply and demand will have an impact on earnings — and therefore, the market — for the near future.

So, what can we learn from all this? We believe investors should not overreact to market headlines by making sudden and significant changes to portfolios. We continue to closely watch economic data and monitor the COVID variant’s effect on the global economy and Federal Reserve policy, as well as China and its increased regulations and restrictions.

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.

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: JP Morgan, CNBC, Bloomberg

Promo for recent article titled How Much Should Investors Worry About Inflation

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 much should investors worry about inflation?

The S&P 500 recovered quickly last week from the brief pullback on Monday, as the spread of the Delta variant, higher inflation and concerns over China’s growth and policy scared the market. It has now been more than 179 trading days since the last 5% drawdown in the S&P 500. This stretch is almost twice the length of the historical average of 94 days between 5% pullbacks in the market, and it now ranks as the 15th-longest period without a 5% decline in the last century. The longest on record was 404 days, ending in February 2018, as seen in the chart below.

Chart showing time lapsed between 5% drawdowns in the S&P 500

Investors worry that inflation will lead to a market correction, especially after June’s surprise of 5.4% year-over-year inflation. However, if one looks at the underlying causes of the recent run up in inflation, it continues to be driven by a few smaller categories. As seen in the chart below, most of the recent jumps in inflation were due to price increases on new and used autos, car rentals, hotel stays and airfare. Increased prices for car rentals, hotel stays and airfare are in response to the surge in demand for travel after a year of restrictions due to the pandemic. The largest increase was in used cars, which grew at 10.5% over the month, and many economists think that wholesale used car prices have already peaked. Hotel prices are almost above pre-COVID levels. For inflation to remain elevated, however, more widespread price increases will need to factor into Consumer Price Index (CPI) increases. Healthcare and housing are the largest weighted categories within CPI. Healthcare prices were flat month over month, and homeowner rents showed no acceleration in May.

Inflation is not an event; it is a process that has many steps and takes time to unfold. Imbalances in the U.S. economy remain from the global pandemic, leading to significant short-term inflationary pressures. Supply and demand for labor is a perfect example of this imbalance. Demand for labor is strong while supply is limited, thanks in part to early retirement, healthcare concerns and family considerations, along with unemployment insurance payments. This mismatch is creating upward wage pressure. The Federal Reserve does not believe that we are facing a serious threat of long-term inflation, but we are experiencing a temporary period as the economy processes some short-term supply and demand imbalances, such as wage increases.

So, what can we learn from all this? We believe that investors should not overreact to the potential rise in inflation by making sudden and significant changes to portfolios. We continue to closely watch economic reports such as Consumer Price Index (CPI), unemployment and GDP growth. We also continue to monitor the COVID variant’s effect on the global economy and Federal Reserve policy, as well as China and its increased regulations and restrictions.

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.

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 achieve your own specific financial goals — regardless of market volatility. Long-term fundamentals are what matter.

Sources: Goldman Sachs, WSJ, Blackrock, Guggenheim

The Recessions is Long Gone, but the Recovery Continues

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 recession is gone, but the recovery continues

The COVID-19 recession is officially the shortest and one of the deepest recessions on record. February and March of 2020 saw a staggering 31.4% drop in gross domestic product (GDP), followed by a massive snapback of 33.4%. GDP is widely considered the most common indicator used to track the health of an economy. It represents the total dollar value of all goods and services produced by an economy over a specific period. Economists use GDP as one of many factors to determine whether an economy is growing or receding.

The chart below, updated to reflect the most recent recession of 2020, ranks all the U.S. recessions dating back to 1945. The average recession lasts just over 10 months, but on average, the ensuing expansion typically lasts many months longer. We are still in the expansion phase of the economy as we continue to recover from the global pandemic.

Chart showing the length of recessions and recoveries since 1945

Monday’s market selloff is a reminder of the importance of staying the course and not making drastic moves when the market has a large down day. As we wrote last week, the Delta variant has caused COVID-19 cases to jump dramatically in the U.S., primarily affecting unvaccinated people. Investors sold stocks, worried that the variant would lead to further restrictions in the global economy. As we discuss every week, it is of paramount importance to remain focused on the long term and not to panic or sell into a day like Monday. The chart below shows the importance of staying invested and not trying to time the market. Missing just the 10 best days in the market could severely hurt one’s overall portfolio over the long run.

Chart showing the opportunity cost of missing the market's 10 best days

There may be some instances of additional restrictions being reimplemented, but overall, economic restrictions will continue to be lifted, and we should soon see a return to a new, post-pandemic normal. We already are seeing a resurgence for restaurants, airline travel and other service-oriented parts of the economy.

The Federal Reserve continues to watch inflation closely — especially after last week’s CPI report showing that inflation has grown at 5.4% year over year, as shown in the above chart. The response by the Federal Reserve has been that the spike in inflation is temporary and remains a supply-and-demand issue that will abate slowly as the world economy continues to reopen. When prices surge, buyers may pull back their level of purchases, which in turn could cause prices to fall. (This is evident in the recent tumble of lumber prices.) Also, several disinflationary forces are at work, such as increased productivity of the American workforce, globalization of goods and services and an aging population retiring from the workforce. Even with inflation reaching its highest levels since 2008-2009, the Fed remains stalwart in its stance of transitory inflation, and the bond market seems to agree, as we have seen the longer-term Treasury bonds give up much of the gains from earlier in the year.

So, what can we learn from all this? We continue to watch economic reports such as Consumer Price Index (CPI), unemployment and GDP growth closely. We also continue to monitor the COVID variant’s effect on the global economy and Federal Reserve policy, as well as on China and its increased regulations and restrictions. Strong market fundamentals remain intact as the economy continues to reopen. Market volatility has increased over the last week, as we thought may happen nearing the end of summer and heading into the fall.

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: NBER, Seeking Alpha, CNBC, Horizon Investments

Promo for recent article on the COVID Delta variant and its impact on the recession

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 will the Delta variant affect your portfolio?

In our client letter last week, we wrote that one of the factors to watch in the second half of the year is the effect of COVID variants. Late last week, the Olympics announced it was banning fan attendance after Tokyo declared its fourth state of emergency. While Japan still has not reached the level of having 50% of its population vaccinated, it is encouraging that many major countries (including China) are beyond that threshold. We may see additional restrictions and lockdowns in other parts of the world with the continuing transmission of the Delta variant. For example, Israel has delayed reopening its borders, and Europe has tightened curbs on U.K. visitors.

The Delta variant, first identified in India, already is a dominant factor in the U.K. and is growing in many other countries. The World Health Organization said the variant has been detected in more than 96 countries, and the U.S. Centers for Disease Control and Prevention said it accounts for 20% of all cases. The pickup in variant cases has renewed some investor concerns about global growth, but high vaccine efficacy and faster-than-expected vaccine rollout should help offset the variant’s economic impact.

Despite recent concerns about the Delta variant and the potential reduction of fiscal and monetary stimulus, stocks have continued to climb to all-time highs. The S&P 500 and Dow Jones Index have gone almost eight months without a pullback of more than 5%. Earlier this year, the NASDAQ had a brief correction of more than 10%, but it recovered quickly and now is trading at an all-time high as well.

The chart above highlights that during past bull markets dating back to 1946, the second year of the bull market’s run — which we are now in — has seen various degrees of market pullbacks. If the S&P 500 has a pullback and/or a correction — whether in 2021 or 2022 — we will continue to stay the course and make necessary adjustments to the portfolios.

So, what can we learn from all this? We are closely watching economic reports such as Consumer Price Index (CPI) and employment data. We also are monitoring the COVID variants’ effect on the global economy and Federal Reserve policy, as well as its effect on China and its increased regulations and restrictions. Strong market fundamentals remain intact as the economy continues to reopen. Market volatility remains at a low level and may pick up as we near the end of the summer, headed into the fall.

Sources: MarketWatch, Goldman Sachs, Charles Schwab

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.

5 factors that will shape our economy in the next 6 months

It is hard to believe we are already more than halfway through 2021. The U.S. equity markets had a strong start to the year — in fact, if the year ended today, the return on the S&P 500 would be higher than the return for seven of the last 10 years.

Fixed income (bonds) has remained negative for this year as longer-term interest rates, such as the 10- and 30-year Treasury bonds, have increased since January. (As interest rates move up, bond prices fall, and vice versa.) In June, we saw a strong reversal in the fixed-income market, and bonds performed well as the 10-year Treasury rates continued their decline.

For the second half of the year, we are closely watching the following major themes:

Inflation and Employment: The bond market recently has been acting as if the inflation threat is already over. We have seen prices of lumber fall back to Earth, while oil prices are near $75 per barrel. Last Friday’s job report showed a 3.6% year-over-year hike in hourly earnings. The labor market showed strength in June, adding 850,000 jobs, and the U.S. economy added 3.3 million jobs in the first half of the year. Meanwhile, the unemployment rate rose to 5.9%, up from 5.8% in June. The good news is that the economic recovery continues, and growth is strong. There is a broad expectation that labor supply will return in the fall as kids go back to school and unemployment benefits cease in most states.

Chart showing payroll employment figures since January 2019; the number is at its high point since a large drop in early 2020

The Federal Reserve Bank: All eyes remain on the Federal Reserve Bank and what it will do with interest rates in the next few years. The inevitable question: When will the Fed begin the tapering of asset purchases? Tapering is the reduction of the rate at which the Federal Reserve or bank accumulates new assets on its balance sheet. When the Fed is purchasing large amounts of bonds and other securities, it is increasing liquidity in the financial markets to maintain stability and promote economic growth. As the Fed begins to taper, it is reducing the pace of its purchase of Treasury bonds, which in turns reduces the amount of money it feeds into the economy. Bond yields rise in reaction to the Fed’s tapering. The common assumption is that the Fed will prepare the markets for tapering by the end of the year.

Uncertainty in Washington: A bipartisan group of Senators has agreed to a $1.2 billion infrastructure bill, and the president has announced support for it. However, the devil will be in the details; if the bill passes, there is no agreement in place on how to pay for it. As we have written before, passing tax reform to pay for the infrastructure bill will be difficult, given the current makeup of Congress.

COVID variants: Concerns over the current Delta variant and rising Gamma variant may give some people pause about returning to work. The economy is booming in the U.S. as progress has been made with regards to vaccinations. In parts of the world where vaccinations lag, economies have not reopened to the same extent as in America.

China: China appears to be cracking down on technology companies and bitcoin mining, as we recently discussed. Newly proposed rules seek to restrict Chinese companies from trading on the U.S. stock exchanges. China wants to restrict foreign governments, such as the U.S., from having access to the data of Chinese companies trading on our exchanges. These attempts to restrict business, break up large technology companies and remove bitcoin mining from mainland China could slow down China’s economic growth.

The biggest second-half theme for the markets remains the health of the overall economy. As long as interest rates stay low, additional stimulus from the Fed continues and more people return to work, the economy will continue to expand. The Fed will have its hands full making sure that the economy remains strong (but not too strong) and the recovery continues both here and abroad.

So, what can we learn from all this? Economic reports for the second half of the year will be closely watched — inflation, wages, commodity prices and employment data, to name a few. How the Federal Reserve Bank reacts may affect how long our economy continues this unprecedented recovery.

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.

Sources: FS Investments, Bureau of Labor Statistics, CNBC

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.

A closer look at socially responsible investing

ESG Investing (also called “socially responsible investing”) is not a new fad or trend, but it is making headlines more often in mainstream market commentary. ESG stands for Environmental, Social and Governance, and the abbreviation was first used in a 2004 report published by the United Nations. The table below highlights a broad overview of issues under each umbrella.

A chart that outlines the issues covered by Environmental, Social and Governance concerns. For Environmental, the issues are energy consumption, pollution control, tackling climate change, and waste management. For Social, the issues are human rights, child and forced labor, community welfare and stakeholder health and safety. For Governance, the issues are quality of management, board independence, mitigating conflicts of interest and board diversity.

A recent example of governance changes in the corporate world was the changing of the makeup of Exxon’s board through the addition of three board members who are political activists. Shareholders voted against Exxon’s recommendations and instead elected new board members who are focused on climate change as well as financial performance. Morningstar’s CEO recently called ESG investing the “new normal,” and the CEO of Blackrock, in his last two annual letters to shareholders, emphasized that ESG principles are “core to long term value creation” for clients.

ESG investing means investing in companies that predominantly focus on environmental and social responsibility.

The goal of ESG investors is to drive capital to companies that work to meet or exceed commonly established standards in each of the three realms. Independent and third-party research groups use a set of criteria to rank and evaluate each company for ESG investing.

1. Environmental: What impact does a company have on the environment? This can explore what chemicals are used in manufacturing and sustainability efforts used in a supply chain, for example.

2. Social: How does the company improve its social impact, not just internally, but also within the community? This explores how a company advocates for social good in the wider world, examining its hiring practices and inclusiveness in the workforce.

3. Governance: How do the board and management drive positive change? This also can involve a company’s leadership makeup and how it interacts with shareholders.

The pandemic has intensified discussions about sustainability and the financial markets, and as the chart below shows, the rise of ESG investing has increased eight-fold since 2000. Almost half of investors currently invest in ESG products — almost double the number of investors since 2019. Investors are placing a significant emphasis on companies’ ESG policies, and the factors driving demand for sustainable business practices are not going away. Proponents of ESG investing argue that sustainability makes for good business and that companies that focus on ESG principles benefit from increased profitability and therefore, higher valuations.

A chart showing the rapid rise in sustainable investing in the United States from 1995 to 2020

So, what can we learn from all this? ESG criteria are an increasingly popular way for investors to evaluate companies and how they manage their businesses. Many mutual funds and exchange traded funds (EFTs) now offer funds that employ ESG criteria. As with any investment, an investor must weigh the pros and cons and assess the trade-offs any investment offers. Investors should only invest as much as they are willing to lose, and if one does invest, it should be a part of a diversified portfolio.

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.

Sources: Robb Report, US SIF Foundation, JustBureaucracy.com, Bloomberg

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.