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Topic: COVID-19

What’s behind the Fed’s inflation policy change?

Last week, the Federal Reserve bank announced to the market a change that has been a few years in the making. The Fed will no longer be strictly beholden to a 2 percent inflation target or an employment mandate. 

As seen by the chart below, inflation has exceeded the 2 percent target only 13 percent of the time in the last five years. In 2018, the Fed raised rates consistently until the market dropped almost 20 percent in the fourth quarter and then reversed course in January 2019.

Going forward, the Federal Reserve will target an average inflation rate of 2 percent over time. Average inflation targeting implies that when inflation is below the 2 percent level for a period of time, the Fed will work to push inflation over the target level for an unknown period of time to compensate for the lower inflation level. 

The Fed did not specify over what period of time it will seek to maintain the average inflation above or below 2 percent or what tools it may use to achieve its goals.

The Fed currently relies on three main tools of monetary policy:

1. Adjustments to short-term interest rates

2. Quantitative easing

3. Forward guidance

Adjustments to the Fed Funds rate have long been the standard instrument for tightening or loosening the supply of money in circulation, incentivizing people to either save or spend more. Quantitative easing is when large-scale asset purchases are made by the central bank to put downward pressure on longer-term interest rates, making monetary policy more accommodative. Forward guidance is the path of future short-term rates.

Other central banks also use negative interest rates as a monetary policy tool; however, the Federal Reserve bank does not believe that this is a desirable option. Despite the amount of money that central banks around the world have added to the economy since the global financial crisis, inflation has remained low. The world has witnessed Japan having very aggressive monetary policy for 30 years with no resulting inflation or growth.

The Fed also is embracing the idea that the economy can allow unemployment rates to head much lower without adverse consequences on consumer prices and worrying that if we become fully employed again, as we were pre-pandemic, it will have to raise rates because of fear of inflation. 

Given that inflation is below the current 2 percent target and unemployment is still high due to the pandemic, the changes that the Fed made are not likely to have any big, immediate impact on monetary policy decisions. As the economy recovers, the new statement suggests that the Fed will be holding off on tightening the money supply even if unemployment falls back to the pre-pandemic levels and inflation rises above the 2 percent target. 

The implication of the policy change is that the Fed will not be hiking interest rates for years. How long exactly is unknown, and only time will tell, but the next policy review is in five years, and many think that is a logical timeline. 

What does this mean for equity and fixed income markets? This new policy stance is more supportive for equity and bond markets and negative for the U.S. dollar. 

So what can we learn from all this? The investment maxim of “don’t fight the Fed” will take on new meaning as we will watch and see how the Fed will respond with its new policy.

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. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS. Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

In the news: Holiday sales predictions, air travel and inflation

With just about nine weeks until the presidential election and global pandemic developments making headlines every day, there is no shortage of news for the conscious investor to study. We are always watching out for the developments that will affect our economic outlook, and here are a few that caught our eye this week, including a change in inflation policy, tough times for nonprofits and predictions for the holiday shopping season.

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The Fed Just Announced a Major Inflation Policy Change – Here’s Why That Matters

From Forbes: Federal Reserve Chairman Jerome Powell announced last week that the central bank would aim to maintain inflation that averages 2 percent over time. It’s a change from the Fed’s earlier policy, under which it raised rates to keep inflation from going higher than 2 percent.

TL;DR: The COVID-19 pandemic cut inflation nearly in half, and by April of this year it had reached its lowest level in a decade. Under the Fed’s new policy, it will tolerate periods of higher inflation in order to balance out periods of lower inflation and to focus on keeping unemployment low.

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United CEO Says Air Travel Demand Will Roar Back Once There’s a Coronavirus Vaccine

From CNBC: Few industries have been hit as hard by the pandemic as air travel, but new United CEO Scott Kirby says he believes his business will rebound, especially when it comes to business travel, after a vaccine is approved and distributed.

TL;DR: The Transportation Safety Administration says passenger levels are down 70 percent over last year. United, which has parked 40 percent of its fleet, could cut as many as 36,000 jobs starting in October; the airline is not planning on seeing 2019 passenger levels again until 2024.

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FDA Chief Promises Transparency for COVID-19 Vaccine Review

From Bloomberg: The head of the U.S. Food and Drug Administration promised that the review of a potential COVID-19 vaccine would be transparent to the public and that data alone would be behind the agency’s decision to approve and distribute it.

TL;DR: A vaccine is considered crucial to end the pandemic and revive the U.S. economy, as well as to President Trump’s re-election campaign. The agency has found itself trapped between accusations of moving too slowly, behind a political agenda, or too quickly, without sufficient data. “I would not participate in any decision that was made on anything other than science,” Commissioner Stephen Hahn said.

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How COVID-19 Will Shape Holiday Retail Shopping in 2020

From Inc.: Businesses that are hoping to recover from a challenging economy in 2020 by capitalizing on holiday sales would do well to understand consumer trends and opportunities based on the pandemic and its ripple effects.

TL;DR: The economy may pose challenges, but experts say consumers are likely to find a way to spend. Stores would do well to optimize their physical spaces and staffs for in-and-out shopping or curbside pickup and to cater to people who are socially distancing. Home entertainment should be a popular category, and food spending could decline this year. Also, there may be far more returns than normal, based on the rise in online shopping and the decline in shopping in person.

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How COVID is Causing Pain at Five of the Nation’s Largest Nonprofits

From The Dallas Morning News: Charities across the U.S. say they are being squeezed by competing realities of COVID-19: a drop in donations that is leading to layoffs or furloughs, and economic effects that are causing their services to be more in demand.

TL;DR: Texas is particularly vulnerable to strain on nonprofits, which account for one of every eight jobs in the state. The nonprofit sector is the third-largest workforce of any U.S. industry, with more than 100,000 more workers than the nation’s manufacturers, and though billions in government aid have poured into small businesses, some say nonprofits have been an afterthought.

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.

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.

Summer doldrums? Not this year

As we near Labor Day weekend, the typical summer doldrum has been anything but typical: NBA and NHL playoffs in August on TV and summer vacations in the backyard instead of the Hamptons for stock and bond traders.    

Normally, the markets plod along in August, waiting for Labor Day and the return of vacationers back to work. The summer of 2020 continues to see markets drive higher while the economy plods along, waiting for another stimulus package to help struggling small businesses.

The average S&P 500 return in August over the past 15 years has been -.17 percent. In 2020, the S&P 500 return through Aug. 25 is 5.13 percent.  Historically, volatility accompanies the meager market returns during the month of August. The chart below reflects that current one-month realized market volatility is 10.2 percent. With the current economic circumstances and global macro environment, the current level of volatility is historically mild.

S&P rolling one-month realized volatility

We are just a few months removed from volatility being at all-time highs, and as the markets have recovered, volatility has receded. The most widely known measure of implied volatility is the CBOE Volatility Index (VIX). 

The VIX is a measure of the market’s expectation of future volatility. Year-to-date volatility remains higher than normal as measured by the VIX Index, however, well off the high set on March 20. Risks remain in the economy and the market with the global pandemic, upcoming presidential election, trade tensions and geopolitical tensions. 

The market feels complacent and continues to shake off these risk factors.  Oil price and interest rate volatility have disappeared for the time being, largely in part to government intervention. The Federal Reserve stimulus programs will remain in effect through 2020, and we believe that Congress will pass an additional relief package before year’s end. Multiple vaccines are in human trials, and we continue to see additional monies flow into vaccine candidates.

So, what can we learn from all this? Accurately predicting the next market move and timing the market is extremely difficult and can adversely affect the long-term performance of your portfolio. Riding out future market volatility in addition to having a diversified portfolio means staying the course.

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.

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.

Are tech stocks in a bubble?

The ongoing strength in large cap technology stocks has many investors wondering if there is another bubble in the making. The Nasdaq 100, as measured by the ETF, QQQ, is up 27.85 percent year to date, while the S&P 500 is up 4.75 percent for the year. 

The top 10 holdings of QQQ, which comprise almost 60 percent of the index, are all part of the so-called FAANG (Facebook, Amazon, Apple, Netflix and Google) stocks. At the same time, the top five holdings of the S&P 500, Apple, Microsoft, Amazon, Facebook and Google, make up more than 22 percent of the current index, and a big reason that the stock market returns are now positive year to date.

Investors have been willing to pay an increasingly higher price for these FAANG stocks as they continue to show massive innovation, whether through 5G, the ever-growing cloud business, or taking advantage of the stay-at-home economy caused by the pandemic.

These stocks have provided shelter from lockdown-sensitive stocks like restaurants, hotels and airlines. Cloud spending and internet streaming are proving to be mostly recession-resistant, and the at-home environment has accelerated these growth trends.

Analysts valuate these companies by looking at a myriad of financial ratios: P/E (price-to-earnings), P/B (price-to-book), P/S (Price to Sales) and PEG (price/earnings to growth), to name a few. Back in the late 1990s and early 2000s, many of the newly public growth technology companies were unprofitable and had zero revenues and earnings. These companies were far from becoming innovators and game-changers.

As seen in the chart below, at the peak of the dot-com bubble, the top 50 companies in the S&P 500 produced a P/E ratio of 40.2x, while the bottom 450 stocks had a P/E ratio of 19x. Today, the top 50 companies are trading at a P/E of 25.7x, while the bottom 450 are trading at a multiple of 20.8x. 

Fast-forward to today, the leading companies in the Nasdaq 100 are large revenue and profit generators, with a few exceptions. The price gains we have seen over the last six months in the stock market have been justified by solid earnings growth, and as a result, we have seen valuation spreads widen between these technology companies and the rest of the market. 

It is important to keep in mind that stocks trade based on future earnings and are forward-looking in nature. The earnings expectations for the top large cap companies are high, and we should expect these companies to face volatility in the near future with growing regulatory pressure, ad-spending boycotts, the upcoming election and potential corporate tax changes.

So, what can we learn from all this? The best option is to stick with a broadly diversified portfolio that can help you to achieve your own specific financial goals and not place all your eggs in one sector basket.

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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.

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. 

Investing involves risk, including the possible loss of principal.  Past performance does not guarantee future results.  Asset allocation alone cannot eliminate the risk of fluctuating prices and uncertain returns.  There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio in any given market environment.  No investment strategy, such as asset allocation, can guarantee a profit or protect against a loss.  Actual client results will vary based on investment selection, timing, and market conditions.  It is not possibly to invest directly in an index.

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.

Rising gold prices: What does this mean?

Following the global financial crisis of 2008 and 2009, and the Euro crisis of early 2010s, investors made large bets on gold as a hedge against rising inflation. As the risk of inflation remained low and the risk of the Euro currency disunion faded, gold prices eventually fell by almost 50 percent.  This was in spite of aggressive fiscal policy and increase in public debt outstanding. Sound familiar?

Investors are concerned about many of the same issues today (as seen by the recent surge in gold prices to all-time highs in the chart below): fear of growing inequality, capital destruction, declining productivity, large expansion of monetary policy and rising debt levels. Gold has seen a large shift on the demand side through a rally in Gold Exchange Traded Fund, GLD, driven by investor buying. Another factor helping the rally in gold prices is the fact that China’s gross domestic product (GDP) is quickly converging to U.S. levels, and that they could become the largest economy in the world. 

Gold’s rise has largely paralleled a historic decline in the U.S. dollar, which has fallen nearly 10 percent compared to a basket of its peers since mid-March. Central banks and governments around the world have spent or committed more than $20 trillion in financial support for the global economy since the pandemic outbreak, putting additional downward pressure on currencies and increasing the value of gold. With the virus now affecting the U.S. more than most major economies, our outlook has weakened and become more uncertain, relative to other countries. As other countries have a better handle on the virus, they also have seen a greater confidence in the Euro compared to the dollar.

The 10-year Treasury has fallen close to .50 percent in recent weeks.  As bond yields continue to contract, the price of gold has increased, as precious metals and bond yields often display an inverse relationship. The Fed will be very resistant to negative interest rates and for good reason. The Fed believes that negative rates are not effective, and the countries that have gone negative have had more severe challenges and created new financial market distortions. Therefore, it brings to question, how much lower can yields go from here? However, as real rates continue to move lower and investors continue to purchase TIPS (Treasury Inflation Protection Securities) for fear of future inflation, gold prices can continue to move higher.

Higher debt, though, can be a drag on economic activity which keeps demand in check and prevents inflation from accelerating. If inflation does eventually accelerate, it would likely be several years from now, when the unemployment rate has returned to a much lower level. At the same time, the U.S. Federal Reserve would have to relax its 2 percent inflation target and agree to finance a portion of government spending through additional money creation. More than likely, the huge Fed spending is preventing deflation right now, not creating massive inflation.

What can we learn from all this?  The best option is to stick with a broadly diversified portfolio that can help you to achieve your own specific financial goals. For now, inflation is not a near-term concern, but an area of focus in the future.

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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.

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.

The Headlines You Should Read This Week

With so many factors causing markets to move, we’re always on the lookout for the biggest stories, the ones that will affect our economic outlook. This week’s headlines cover Big Tech, the race to a COVID vaccine and even the return of disinfectant wipes.

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We Looked at How the Stock Market Performed Under Every U.S. President Since Truman – and the Results Will Surprise You

From Forbes: With fewer than 100 days left until the election, some investors are worried about the economic pros and cons of either candidate, but at least one expert believes Wall Street’s fixation on politics is misplaced.

TL;DR: There may be a relationship between the actions of a president and the performance of the market, but in general, the economy may have more to do with business cycles than the occupant of the White House. No matter who’s in office, investors can take comfort that in the long run, “buy and hold” worked best.

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Amazon, Apple, Facebook and Google Prepare for Their ‘Big Tobacco Moment’

From The New York Times (subscription required): Congressional hearings for the heads of Amazon, Apple, Facebook and Google promise to be a spectacle. Whether it’s more theater than substance, some say the hearings show momentum toward regulations.

TL;DR: “The C.E.O.s don’t want to be testifying. Even having this collective hearing creates a sense of quasi-guilt just because of who else has gotten called in like this — Big Pharma, Big Tobacco, Big Banks,” said Paul Gallant, a tech policy analyst at the investment firm Cowen. “That’s not a crowd they want to be associated with.”

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Moderna, Pfizer Coronavirus Vaccines Begin Final-Stage Testing

From The Wall Street Journal (subscription required): Two of the most advanced experimental coronavirus vaccines entered the pivotal phase of their studies this week, with the first subjects receiving doses of vaccines developed by Moderna and Pfizer.

TL;DR: Researchers plan to enroll 30,000 people in separate last-stage — or phase 3 — trials, the results of which will determine whether the vaccines protect against symptomatic COVID-19 and whether they should be cleared for widespread use.

Related: Think twice before speculating on a COVID-19 cure (CD Wealth Management)

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Why Disinfectant Wipes Aren’t Returning as Fast as Toilet Paper

From CNBC: While toilet paper has mostly returned to the shelves since the panic buying of the early pandemic days in March, disinfectant wipes are still in short supply, thanks to supply chain disruptions due to competition with PPE manufacturers for the same raw materials.

TL;DR: The return of disinfectant wipes and cleaning supplies may lag behind demand well into 2021, even with companies ramping up production efforts. Manufacturers predict demand will last even beyond introduction of a COVID vaccine because of long-term shifts in consumer behavior.

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Economic Uncertainty Drives Gold Price to a Record High

From NPR: It should come as no surprise that gold prices started going up as coronavirus started to spread; in uncertain times, investors tend to put their money in gold because it’s considered a “safe haven” for investors worried over instable financial markets.

TL;DR: Even though high gold prices traditionally indicate uncertainty, financial markets have generally been performing well, thanks to aggressive steps taken by the Fed. But many experts caution that market instability could be likely to continue until there is a COVID-19 vaccine, and there also are market experts who suggest that gold prices could continue to climb in the meantime.

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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.

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.

Think twice before speculating on a COVID-19 cure

As hundreds of companies around the world race to develop vaccines and drug therapies that could help end the COVID-19 pandemic, reports of successful or failed trials wildly affect individual stock prices and can trigger swings in the overall market. These stories have a knack for stirring up investors’ emotions as we all hope to move past this pandemic and return to a new “normal.”

A vaccine prepares the body’s immune system to be able to resist a specific disease and prevent it from causing sickness and spreading to others. At this point in time, there are more than 125 experimental candidates globally in the clinical evaluation stage, and another 115 candidates are in the pre-clinical stage. Clinical studies are conducted in three phases:

Phase I: A small study of healthy people tests the safety and immune response of the vaccine at different doses.

Phase II: A random, double-blind controlled study of hundreds of people further assesses safety, efficacy and optimal dosing.

Phase III: If all goes well, then thousands of people are tested in Phase III.  These larger studies are challenging as they test how well the vaccine works in an environment where the virus is spreading.

In developing a vaccine, not one of these crucial steps can be skipped, and typically a vaccine takes up to 12 to 18 months before becoming available. In this case, the government is accelerating the timeline to speed up the phases, and massive public investment has allowed drug makers to get a head start on manufacturing doses while waiting for human trials to conclude. 

Is hope on the horizon?

Needless to say, a COVID-19 vaccine is not imminent, but unprecedented levels of dollars are being spent in an effort to develop successful treatments and therapies to help COVID-19 patients. New biotechnologies, financial support and cooperation between governments and industry leaders could shave several years off typical developmental timelines.

It is rarely easy to predict which new products will perform well enough in multiple rounds of studies to earn regulatory approval. Headline-induced price swings suggest that investors are making decisions driven by hopes and fears, and possibly based on limited information, instead of a realistic assessment of long-term earnings potential. 

Investors need to be wary of banking on a particular company to emerge as the winner in the COVID-19 race just because they are the apparent leader right now. It’s impossible to know which, if any, of the experimental vaccines will be successful. Also, it’s possible that there are multiple drug makers that win regulatory approval for the vaccine.

Now more than ever, it is important to maintain an investment strategy based on your own goals, time horizon and risk tolerance.  All investing involves risk and there are no guarantees that any investment strategy, especially which biotech or pharmaceutical stock wins the COVID-19 vaccine race, will be successful.

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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.

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.

Q3 outlook: Jobs on the rise, but so are coronavirus cases

Yesterday’s unemployment numbers were significantly above expectations, and the current unemployment rate is now at 11.1%, a decrease from the previous number of 13.3%.  A large contributor to the decline of the jobless rate was a plunge in those on temporary layoff as the economy continues to reopen and companies who have received PPP loans bringing back furloughed employees.

The market reacted positively to yesterday’s news with U.S. stocks trading higher, even as we continue to see rising numbers of new coronavirus cases. 

WHAT’S DRIVING THE MARKETS?

The overall rebound in the stock market has been driven by the aggressive fiscal and monetary stimulus packages, progress in Coronavirus treatments and containment, as well as optimism for a quick economic recovery.  The U.S. added 4.8 million jobs in June compared with expectations of 3.7 million and the unemployment rate fell for the second straight month.  Stocks rallied after testimony to Congress by Federal Reserve Chairman Jerome Powell and U.S. Treasury Secretary Steve Mnuchin, who committed to anchor the U.S. economy through the public health disaster.

WHAT ARE WE LOOKING FOR?

We are looking for continued decrease in unemployment rates in addition to monitoring the second wave of COVID-19 cases.  Currently, COVID-19 cases are on the rise in most states and the government is unable to restrain public behavior such as ensuring mask compliance. 

We expect the road ahead will be filled with uncertainty and volatility; however, Powell’s promise this past Tuesday to continue doing whatever it takes to support the U.S. economy until it gets back to where it was before the pandemic has been a relief to investors and the U.S. markets.

Despite everything that the world is facing with the global pandemic, upcoming election in November and social protests, this quarter has started in a positive direction.  The lowest number of companies on record have provided forward looking guidance for upcoming earnings.  Technology and healthcare stocks have continued to provide a strong beacon of light for this market and we do not anticipate a sector rotation at this point in time.

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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.

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.

You still have time to make an IRA contribution for 2019

Due to the coronavirus tax filing extension, there’s still time to make a regular IRA contribution for 2019. You have until your tax return due date (not including extensions) to contribute up to $6,000 for 2019 ($7,000 if you were 50 or older on  Dec. 31, 2019).

For most taxpayers, the contribution deadline for 2019 is July 15, 2020.

You can contribute to a traditional IRA, a Roth IRA, or both, as long as your total contributions don’t exceed the annual limit (or, if less, 100 percent of your earned income). You also may be able to contribute to an IRA for your spouse for 2019, even if your spouse didn’t have any 2019 income.

Traditional IRA

You can contribute to a traditional IRA for 2019 if you had taxable compensation and you were not age 70½ by Dec. 31, 2019.   However, if you or your spouse were covered by an employer-sponsored retirement plan in 2019, then your ability to deduct your contributions may be limited or eliminated, depending on your filing status and modified adjusted gross income (MAGI). (See table below.)

Even if you can’t make a deductible contribution to a  traditional IRA, you can always make a nondeductible (after-tax) contribution, regardless of your income level. However, if you’re eligible to contribute to a Roth IRA, in most cases you’ll be better off making nondeductible contributions to a Roth, rather than making them to a traditional IRA.

Income phaseout ranges for determining 2019 deductibility of traditional IRA contributions:

Covered by an employer-sponsored plan and filing as single/head of household:

* Deduction reduced if your MAGI is $64,000-$74,000.

* Deduction eliminated if your MAGI is $74,000 or more.

Covered by an employer-sponsored plan and filing as married filing jointly:

* Deduction reduced if your MAGI is $103,000-$123,000.

* Deduction eliminated if your MAGI is $123,000 or more.

Covered by an employer-sponsored plan and filing as married filing separately:

* Deduction reduced if your MAGI is $0-$10,000.

* Deduction eliminated if your MAGI is $10,000 or more.

Not covered by an employer-sponsored retirement plan, but filing a joint return with a spouse who is covered by a plan:

* Deduction reduced if your MAGI is $193,000-$203,000.

* Deduction eliminated if your MAGI is $203,000 or more.

Roth IRA

You can contribute to a Roth IRA even after reaching 70½  if your MAGI is within certain limits. For 2019, if you file your federal tax return as single or head of household, you can make a full Roth contribution if your income is $122,000 or less.

Your maximum contribution is phased out if your income is between $122,000 and $137,000, and you can’t contribute at all if your income is $137,000 or more. Similarly, if you’re married and file a joint federal tax return, you can make a full Roth contribution if your income is $193,000 or less. Your contribution is phased out if your income is between $193,000 and $203,000, and you can’t contribute at all if your income is $203,000 or more.

And if you’re married filing separately, your contribution phases out with any income over $0, and you can’t contribute at all if your income is $10,000 or more.

Income phaseout ranges for determining 2019 eligibility to contribute to a Roth IRA:

Filing as single/head of household:

* Ability to contribute to a Roth IRA is reduced if your MAGI is $122,000-$137,000.

* Ability to contribute to a Roth IRA is eliminated if your MAGI is $137,000 or more.

Filing as married filing jointly:

* Ability to contribute to a Roth IRA is reduced if your MAGI is $193,000-$203,000.

* Ability to contribute to a Roth IRA is eliminated if your MAGI is $203,000 or more.

Filing as married filing separately:

* Ability to contribute to a Roth IRA is reduced if your MAGI is $0-$10,000.

* Ability to contribute to a Roth IRA is eliminated if your MAGI is $10,000 or more.

Even if you can’t make an annual contribution to a Roth IRA because of the income limits, there’s an easy workaround. You can  make a nondeductible contribution to a traditional IRA and then immediately convert that traditional IRA to a Roth IRA. Keep in mind, however, that you’ll need to aggregate all traditional IRAs and SEP/SIMPLE IRAs you own — other than IRAs you’ve inherited — when you calculate the taxable portion of your conversion. (This is sometimes called a “back-door” Roth IRA.)

If you make a contribution  — no matter how small — to a Roth IRA for 2019 by your tax return due date and it is your first Roth IRA contribution, your five-year holding period for identifying qualified distributions from all your Roth IRAs (other than inherited accounts) will start on Jan. 1, 2019.

Finally, note that 2019 is the last tax year for which the age 70½ restriction on traditional IRA contributions applies. Due to passage of the SECURE Act in late 2019, beginning with the 2020 tax year, investors over the age of 70½ will be able to contribute to a traditional IRA provided they have compensation equal to at least the amount of the contribution (spousal IRA rules will remain in effect). Keep in mind that if you’re using a back-door Roth IRA strategy for 2019, the age 70½ rule still applies.

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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.

S&P 500 Index is an unmanaged group of securities considered to be representative of the stock market in general. You cannot directly invest in the index.

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.

How can the market rebound when the economy still hasn’t?

Many of you ask us on a regular basis, “How can the market rebound so fast when the economy is still partially shut down and millions of Americans are unemployed?” There is a normal level of disconnect between the stock market and the economy, as the stock market is a leading indicator. The market will normally sell off before the economy turns south and will recover before the economy picks back up. This is never more clear than today.

As you peel back the onion on this stock market rally, look at what is driving the market higher from the March lows. You will notice that most of the sectors in the S&P 500 are still negative year-to-date, as is the overall stock market, and those that are negative, are mainly down double digits. While it should not surprise us that most sectors are in the same camp as the market, what is surprising is which sectors are in the red and which are in the black. 

It is abnormal because the sectors that usually lead the stock market out of a recession-induced downturn are not doing so now. Instead, leadership has come largely from big tech stocks and pharmaceuticals, rather than financials and cyclical sectors that closely track the ups and downs of the economy, such as industrials and consumer discretionary stocks. This time, it is very different as we have the first ever global pandemic. 

In March and May, we continued to tweak our portfolios and increase our exposure to technology and health care stocks. Throughout the entire downturn, Technology and Health Care, along with Biotech stocks, are leading the way. In the last few weeks, the cyclical sectors are starting to catch up, as you can see from the table below. It is healthy for the market to have sector rotation and not just two or three sectors leading the way, while the rest of the market struggles.

Markets continue to move higher off a rotation-driven rally as investors move into those economically sensitive value stocks. At the same time, we still have a global pandemic with many businesses shutdown, employees working from home, nationwide protests and an election coming up in November. 

We believe that technology and health care continue to be very strong sectors to own. We will continue to closely track the markets, the sector rotation and continue to tweak the portfolios as necessary.

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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.

S&P 500 Index is an unmanaged group of securities considered to be representative of the stock market in general. You cannot directly invest in the index.

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.