There has been no shortage of market drama this year, and market uncertainty abounds as we enter 2023.
Through it all, our team at CD Wealth Management continued to send market reminders: This, too, will pass. Focus on the future. Don’t try to time the market. Keep emotions out of market decisions. Stay disciplined.
As with every year, different market themes arose from month to month — and some of those themes occasionally repeated themselves, as history often does.
• After more than 2½ years, COVID continues to play havoc on the global economy. For most of 2022, China continued strict lockdowns and only recently has agreed to ease restrictions after protests from its citizens.
• Russia’s invasion of Ukraine, a war that seems to have no end, brings a tragic loss of lives, an energy crisis in Europe — and maybe the end of Putin’s reign?
• We’re experiencing a bear market. The only thing that goes up is correlations – inflation and higher energy prices, with stocks and bonds both declining.
• Are we in a period of stagflation, deflation or inflation, and what does this all mean?
• The 10-year Treasury note has logged its worst performance in 234 years! The Fed raised rates seven times in 2022, and the Fed funds rate rose from 0 to 4.25%. The entire yield curve is now inverted, with even the 1-month Treasury yielding more than the 10-year Treasury.
• Are we in a recession or not? The Wall Street Journal reports that 90% of investors expect the U.S. to enter a recession before the end of 2023. Everybody seems to agree a recession is coming, but nobody can say for sure.
• The bubble burst on the speculation in the market — crypto, SPACs, NFTs — and high-growth stocks have been decimated as changing risk preferences reined in speculation.
• How have stocks performed since the midterm elections? Historically, a split Congress and White House is the best-case scenario for the markets.
• Tax loss harvesting remains a prudent portfolio management strategy, not just for the end of the year but throughout the year as well — especially in a year like 2022.
Our No. 1 priority is to take care of our clients, and we are proud of the work we have done this year. We wish you a very happy holiday season!
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.
We are in the homestretch for 2022. It is the perfect time to review some year-end planning strategies to ensure your wealth plan reflects changes in your circumstances or goals, the current tax environment and the economic landscape. The end of the year is an important time for making financial decisions that can have an impact in the year ahead — and for years to come.
First, a quick look back at 2022. From a market perspective, this has been a year that won’t be forgotten soon. Here are a few high-level takeaways:
• Bear markets happen. This will not be the last bear market we encounter. The key is to stay invested. Survive the bear market to reap the benefits of the bull markets that follow.
• Things can change quickly. For most of the last decade, we had a zero inflation and zero interest rate environment, but the economy slammed on the brakes — and rates rose drastically. For investors, 2021 was one of the best years and 2022 was one of the worst. However, bull markets can appear just as quickly as a bear markets.
• We went from TINA to TARA. For many years, there was no alternative to stocks (known as TINA, or There is No Alternative). Now, we are seeing TARA (There Are Reasonable Alternatives) with higher interest rates, bonds provide attractive opportunities and money market rates are soon to be over 4%.
• Investing is not easy. We are coming off an incredible decade for the stock market, yet it’s easy for investors to focus on how bad the last 10 months feel. Is that feeling worse than a good 10 years? Greed and fear are timeless. As billionaire investor Seth Klarman commented, “The stock market is the story of cycles and the human behavior that is responsible for overactions in both directions.”
As we prepare to put this year behind us, we recommend that you review the checklist below for planning strategies to consider and discuss.
Income Tax Strategies
Traditional year-end planning focuses on deferring income to a future year and accelerating deductions into the current year.
1. If you anticipate your marginal income tax bracket to increase, you may consider accelerating income into 2022 and deferring deductions to 2023.
2. If you anticipate being in a lower tax bracket next year: • Defer income to postpone paying the tax and have that income at a lower bracket, if possible. • Bunch your medical expenses in the current year to meet the percentage of your adjusted gross income to claim those deductions if you itemize on your tax return. • Make your January mortgage payment in December so you can deduct the interest on this year’s return.
Tax-related Investment Strategies
1. Tax loss harvesting is the strategy of selling securities at a loss to offset a capital gain liability, either for today or in the future. • Harvest losses by selling taxable investments. You must wait at least 31 days before buying back a holding sold for a loss to avoid the IRS wash-sale rule. • Harvest gains by selling taxable investments if you have a tax loss carry forward.
2. Ensure that you have satisfied your required minimum distributions (RMD). • If you fail to take your RMD, this may result in a 50% penalty. • If you own an inherited IRA, a RMD may be required separately for that account as well.
Retirement Planning Strategies
1. Maximize your IRA contributions. You may be able to deduct annual contributions of up to $6,000 to your traditional IRA and $6,000 to your spouse’s IRA ($7,000 if over the age of 50).
2. Make a Roth IRA contribution if under the applicable income limits.
3. Consider increasing or maximizing your 401(k) contribution. Boosting contributions to your 401(k) can lower your adjusted gross income while increasing your retirement savings.
5. Consider setting up a Roth IRA for each of your children who have earned income during the year.
Gifting Strategies
1. Consider making gifts up to $16,000 per person as allowed under the federal annual gift tax exclusion. You can give up to $16,000 this year to as many people as you want without triggering gift taxes. Payments made directly to educational and/or medical institutions on behalf of your intended beneficiary do not count towards your annual exclusion amount or against your lifetime estate tax exclusion.
2. Create a donor advised fund for an immediate income tax deduction and provide immediate and future benefits to charity over time.
3. If you already have a donor advised fund or want to donate to a charity, consider gifting appreciated assets that have been held longer than one year to get the fair market value income tax deduction while avoiding income tax on the appreciation.
4. If over the age of 70½, consider making a direct transfer from an IRA to a public charity. The distribution is excluded from gross income, and you can give up to $100,000 as a tax-free gift from your IRA that may fully satisfy RMD requirements.
5. Consider combining multiple years of charitable giving into a single year to exceed the standard deduction threshold. This is called “bunching.” The chart below shows how the bunching strategy can reduce taxes if executed properly.
Hypothetical example of a married couple with no children.
Standard deduction amounts are for married filing jointly status.
Wrapping up 2022 and Planning for 2023
1. Discuss major life events with CD Wealth Management to confirm you have clarity in your current situation.
2. Communicate with your CPA to provide capital gains and investment income information for a more accurate year-end projection.
3. Check your Health Savings Account (HSA) contributions for 2022. If you qualify, you can contribute up to $3,600 (individual) or $7,200 (family) and an additional $1,000 catch up if over the age of 50.
4. Double-check your beneficiary designations for retirement plans, IRAs, Roth IRAs, annuities, life insurance policies, etc.
5. If you do not already have identity theft protection, consider purchasing a service to help protect you and your family.
The end of the year is a perfect time to review your financial planning needs. This includes reviewing the investment portfolio, assessing year-end tax planning opportunities, reviewing retirement goals, and managing your legacy plans. The checklist above includes just some of the items that may apply to you and your family. We are happy to meet to discuss any of the above to ensure that you remain on track with your financial goals.
The CD Wealth Formula
We help our clients reach and maintain financial stability by following a specific plan, catered to each client.
Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought out, looking at where we see the economy is heading. We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy — and in the stock market.
We will continue to focus on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns. 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.
It is important to focus on the long-term goal, not on one specific data point or indicator. Long-term fundamentals are what matter. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.
Sources: BNY Mellon, Baird, CNBC, Schwab
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.
Just like the waves of the ocean, constant predictions about the stock market ebb and flow from the Wall Street talking heads. As we entered 2022, the average Wall Street market strategist predicted the S&P 500 would close the year at 4,500 (it’s currently at 3,999). Now, as the seas are choppier heading into 2023, three of the largest Wall Street firms predict that the S&P 500 will hit 3,000 — a 25% drop from current levels — at some point during the year.
At the end of the day, no one knows — not even the talking heads at the largest Wall Street firms. These are predictions from traders who are focused on the seasonal tides.
As you can see in the chart below, there have been many unsettling news events over the last 80 years. Looking through a long-term lens, you may be hard-pressed to find a bear market on the chart. This is why we focus on the long term: The trend rises with positive returns over long periods of time.
The stock market has overcome past bear markets and unsettling news.
Growth of a hypothetical $100 investment in the S&P 500 Index (with dividends reinvested)
Sources: RIMES, Standard & Poor’s. As of Oct. 31, 2022. Chart shown on a logarithmic scale. Past results are not predictive of results in future periods.
Despite the uncertain outlook for 2023, there are many reasons for investors to be optimistic:
• Republicans gained control of the House in the midterm elections, and Wall Street has historically preferred political gridlock. The S&P 500 has generated an above-average annual return of 13.6% since 1950 during the years in which Congress is split. The last eight times the S&P 500 finished the midterm election in the red (negative returns), it finished the following year up at least 10.8%, with an average return of 24.6%. • Money market short-term bonds and Treasuries are providing alternatives to the market and are likely to continue rising in the early months of 2023. • Inflation, the biggest thorn in the market side for 2022, is showing signs of slowing with the Consumer Price Index CPI and the Producer Price Index both down more than 1% from their recent highs.
In the short term, December historically also has provided reasons to be optimistic. Following is a breakdown of how major indexes tend to perform in the last month of the year:
• The Dow Jones Industrial Average is up 71% of the time, the highest winning percentage of any month. • The average December return for the Dow is 1.4%, second only to July. • The S&P 500 is up 73% of the time, the highest winning percentage of any month. • The average December return for the S&P 500 is 1.4%, the third-best month of the year. • The NASDAQ is up 61% of the time with an average return of 1.7%, also the third-best month of the year. • The Russell 2000 (Small Cap Stocks) is up 83% of the time, also the highest winning percentage of any month. • The average December return for the Russell 2000 is 2.8%, the best average for any month.
Average Monthly Performance
Source: Dow Jones Market Data
The bottom line: Past outcomes are not predictive of future outcomes in the stock market. We hear this all the time, and they are certainly words to live by. Short-term waves and tide movements may help contextualize short-term moves in the market, but they should not serve as basis for long-term investment decisions.
Each economic and market cycle is different from previous ones. There are thoughtful, experienced, and respected economists who can give us all well-reasoned arguments why this bear market is different and why it is not a good time to invest in stocks. But we’d like to close with this comment from Dean Witter in May 1932, a few weeks before the end of the worst bear market in history: “Some people say they want to wait for a clearer view of the future. But when the future is again clear, the present bargains will have vanished. In fact, does anyone think that today’s prices will prevail once full confidence has been restored?”
The CD Wealth Formula
We help our clients reach and maintain financial stability by following a specific plan, catered to each client.
Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought out, looking at where we see the economy is heading. We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy — and in the stock market.
We will continue to focus on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns. 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.
It is important to focus on the long-term goal, not on one specific data point or indicator. Long-term fundamentals are what matter. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.
Sources: Dow Jones Market Data, Forbes, MarketWatch, Standard & Poor’s
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.
Last week, we saw the biggest one-day rally in the stock market in more than two years as Wall Street reacted to better-than-expected inflation data for the month of October. Loosening restrictions in China also contributed to market confidence that inflation may have peaked in the world’s largest economy. The market is hopeful that the Fed will react to the most recent data with smaller interest rate hikes in December. (While the inflation data that was reported in October is backward-looking, the stock market is looking ahead.) The Fed needs to see continued confirmation that inflation has cooled and will not decide on interest rates based on a single data point. Instead, it needs to see a trend of several months of data that shows inflation slowing down.
Meanwhile, cryptocurrency investors have had a year to forget, capped off with the seismic disruption from FTX, the fourth-largest crypto exchange in the world. In a week’s time, the company went from operating as one of the biggest players in the industry to filing for bankruptcy. The unraveling of FTX is sending shockwaves through the industry. We have seen this story play out before with Enron, Madoff, Stanford Financial and more recently, Theranos. Many smart investors, analysts and auditors were duped by FTX, as it seems billions of dollars was stolen from traders and investors.
What was FTX?
FTX was a centralized cryptocurrency exchange that specialized in derivatives and leveraged products, options and leveraged tokens. It also provided a spot market (immediate exchange versus a futures market that would be delivered in the future) in more than 300 cryptocurrency trading pairs. This exchange allowed traders to speculate and make bets on various forms of cryptocurrency.
FTX promoted the ability for liquidity and transacting in coins and tokens. FTX allowed users to connect their “wallets,” place trades, exchange currencies, and buy and sell NFTs. U.S. residents were not permitted to trade on its platform due to regulations. FTX represented itself as being protected from hackers and as a safe place to store cryptocurrency.
What went wrong?
In recent months, as inflation has soared and interest rates have been lifted, the easy money cash from the days of the pandemic has dried up. That is bad news for digital assets, which are considered sponges for excess money. Less money in the money supply means more risk aversion in the market. When money is easy, investors are willing to take on more risk, such as speculating in cryptocurrency. As the year progressed, investors have continued to sell speculative assets, including crypto.
Sam Bankman-Fried was the founder of FTX and the quantitative trading firm Alameda Research. FTX created its own in-house cryptocurrency, FTT, and used customer funds from FTX in a way that flew under the radar of auditors, employees and investors. FTX used customers’ funds without their knowledge and drastically underestimated the amount of currency it needed to keep on hand if investors wanted to cash out on the trading platform.
Bankman-Fried’s trading firm, Alameda, was borrowing from FTX, using FTT tokens (their own cryptocurrency) to back the loans. In early November, rumors spread about liquidity concerns and allegations of misused funds, and investors began withdrawing funds rapidly. The price of FTT fell 75% in one day, making the collateral insufficient to cover the trade. Early last week, rival Binance had agreed to purchase FTX, but the deal fell through after Binance reviewed FTX’s balance sheet. FTX crashed from a $32 billion powerhouse into bankruptcy in less than one week. At the same time, there was a suspected hack of $477 million of cryptocurrency from the exchange hours after FTX declared bankruptcy.
The damage was not isolated to FTT cryptocurrency. Bitcoin, Ethereum and many other cryptocurrencies experienced sharp declines. The Bloomberg Galaxy Crypto Index fell 23% last week, and as shown below, it has fallen 79% from its all-time high a year ago.
Source: Charles Schwab, Bloomberg, as of 11/11/2022. Bloomberg Galaxy Crypto Index is designed to measure the performance of the largest cryptocurrencies traded in USD. Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. Past performance does not guarantee future results.
What is the potential fallout?
Crypto investors are questioning if their bitcoin or Ethereum is safe. FTX and other exchanges are a type of “crypto-casino gambling websites,” said Cory Klippsten, CEO of the financial services firm Swan Bitcoin. “Any exchange is a security risk. With bitcoin, you have the option to take self-custody and take your coins off that exchange.” If investors keep their cryptocurrency off an exchange, it should mitigate the risk of hacking.
While the financial impact is yet to be determined from the FTX collapse, the effect appears to be isolated to the world of cryptocurrency and does not appear on the larger global markets. It is more than likely that big banks will continue to be wary of letting customers trade crypto through margin or loans. We should expect a continued emphasis on regulation in the cryptocurrency world and continued volatility in the price of cryptocurrencies.
The CD Wealth Formula
We help our clients reach and maintain financial stability by following a specific plan, catered to each client.
Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought out, looking at where we see the economy is heading. We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy — and in the stock market.
We will continue to focus on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns. 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.
It is important to focus on the long-term goal, not on one specific data point or indicator. Long-term fundamentals are what matter. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.
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.
If you are 72 or older, you should have recently received a letter that outlines the required minimum distribution (RMD) you must take from your retirement accounts. This is happening because when you reach age 72, IRS rules require you to make annual withdrawals from the following types of tax-deferred retirement accounts: 401(k), 403(b), 457(b), Traditional IRAs, SEP IRAs and SIMPLE IRAs.
Why do RMDs exist?
If you have been saving part of your income in any of the tax-advantaged retirement accounts listed above, you have not paid income tax on those dollars. The government lets you delay paying taxes, but RMDs are how the government ensures it will eventually get its tax dollars on that income. For investors, the benefit of tax deferral is that while we know we’ll pay income tax eventually, we can pay less in retirement than we would during our working years.
Still, it is not unusual for people to find themselves in the same tax bracket — or even a higher one — in retirement. Income from investments outside of retirement accounts, combined with Social Security and RMDs, can add up quickly. At the end of the day though, the difference in tax brackets may not be as big as once projected when comparing retirement and non-retirement income.
When do I need to start taking withdrawals?
You must start taking RMDs when you turn 72 — or continue to take RMDs if you reached age 70 ½ before Jan. 1, 2020. Your first required withdrawal doesn’t have to be made until April 1 of the year after you turn 72. After your first withdrawal, the IRS requires you take RMDs by Dec. 31 each year.
The first time you take an RMD, if you were to wait until April 1 of the following year, then you would have to take a second distribution that same year. Doing so could affect Social Security and Medicare benefits and could lead to a higher-than-anticipated tax bracket.
There is one exception: People still working after age 72 usually may delay taking RMDs from their employer-sponsored plan until they retire. (If you are in that situation, please double-check with the IRS and your company.) However, if you own 5% or more of the business sponsoring the retirement plan, RMDs must begin once you turn 72, regardless of your retirement status.
How much am I required to withdraw?
Your required minimum distribution is based on your account value on Dec. 31 of the previous year. The IRS calculates RMDs by taking the sum of your tax-deferred retirement accounts and dividing it by a number based on life expectancy. The chart below illustrates how your RMD is calculated. As you age, the denominator gets smaller each year, so as you grow older, you are required to take out more money the following year. The cost of miscalculating or failing to withdraw the full amount is steep: The IRS charges a 50% penalty on any withdrawals not taken!
How can I minimize the tax impact of RMDs?
If you are 70 ½ or older, you can contribute up to $100,000 per year in a qualified charitable donation (QCD). For married couples, each spouse can make a QCD up to $100,000 — for a potential total of $200,000. QCDs can be made only to certain charitable organizations, and they cannot be made to donor advised funds. If you make a donation that exceeds the RMD, the extra distribution can’t be carried over to meet the distribution the following year.
The RMD is the smallest amount you must withdraw from your retirement account after you reach a certain age. If you have multiple retirement accounts, you may withdraw money from each account or from one account, as long as you ensure that the required minimum amount is withdrawn. Each dollar withdrawn is taxed as ordinary income.
Depending on your tax bracket, it may make sense to take money out of your retirement accounts before age 72. Once you reach age 59 ½, you can take money out of your retirement accounts without a 10% penalty, but you will still owe taxes on the money taken out. It is very important to spend time with your financial team so you understand your options to maximize your income and avoid a costly tax mistake.
The CD Wealth Formula
We help our clients reach and maintain financial stability by following a specific plan, catered to each client.
Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought out, looking at where we see the economy is heading. We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy — and in the stock market.
We will continue to focus on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns. 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.
It is important to focus on the long-term goal, not on one specific data point or indicator. Long-term fundamentals are what matter. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.
Sources: Fidelity, Schwab, Securian
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.
October saw the best month on record for the Dow since 1976 — a nice reversal after a tough September. The market continues to focus on inflation as the Federal Reserve meets this week to announce a fourth consecutive increase of 75 basis points.
We also have been receiving questions about what next week’s midterm elections may mean for the market — and for your portfolios. The United States is undergoing probably the greatest bout of political volatility since the Civil War. In six of the seven federal elections since the Financial Crisis of 2008, voters have removed the party in power over either the Senate, the House or the presidency.
It is difficult to predict who will win an election, but it is even more challenging to predict how the market will react. The market does not care who wins, but which policies are eventually enacted — and how they may affect the economic landscape. Changing a portfolio based on potential election outcomes is not a prudent decision. The chart below provides some perspective; no matter which party is in the White House and which party controls Congress, the markets have performed well over the long term.
Average Annual S&P Performance Based on Partisan Control
1933-2019 (excluding 2001-02, when Sen. Jeffords changed parties)
Here are a few potential implications from the upcoming midterm election:
1. Stocks have done well under every possible party configuration. Through peace and war, high taxes and low taxes, the market has persevered. Most partisan combinations saw double-digit returns, except for one, and that may have been due to bad luck.
2. The stock market is influenced by many factors, of which only a few are attributable to a president or Congress. Political actions are a small piece of the pie. For example, the 1973-1974 oil shock and the 2008 recession accompanied two of the worst markets in recent history. They both happened to occur when there was a Republican president and Democratic Congress. While certain policy decisions may have impacted these outcomes, a tremendous amount of geopolitical and financial complexity led to the ultimate result.
3. A Democratic House and Democratic Senate is the least probable outcome — but the clearest with regard to policy implications. If the Democrats were to win both the House and Senate, President Biden would be able to focus on remaining portions of the Build Back Better program, including additional spending, tax increases and opposition to fossil fuel infrastructure. The market may like this outcome the least.
4. A Republican House and Democratic Senate would probably bring gridlock after Jan. 3, along with a lame-duck session in Congress in November and December. Such a split in Congress would make it difficult for any real legislative policy changes to occur. As the chart above shows, the market has performed well with this political mix.
5. Republican control of the House and Senate would give them the most leverage. There could still be action during the lame-duck session, but it would require more compromise. The big issue between Congress and White House would be the debt ceiling that must be raised at some point in 2023. When one party controls Congress and the other party controls the White House, the market historically has seen positive results.
Simply getting to the election has acted as a catalyst for the stock market. The chart below shows the S&P 500 performance for the six months following midterm elections going back to 1950, and in each case, we have seen positive returns. The S&P 500 has not declined in the 12 months following a midterm election since 1942. Volatility in the market tends to be higher during midterm election years, and this year has been no different — with inflation, rapidly rising interest rates and geopolitical turmoil overseas.
Politics is an emotional game. and some of our worst biases and behavioral mistakes show up when we let our emotions influence our decision making. Investing is no different. We are here to work with you through the political noise and election-year volatility, regardless of the political winds.
Here Comes the Best 6 Months of the 4-Year Presidential Cycle
S&P 500 performance, November-April during midterm years
The CD Wealth Formula
We help our clients reach and maintain financial stability by following a specific plan, catered to each client.
Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought out, looking at where we see the economy is heading. We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy — and in the stock market.
We will continue to focus on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns. 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.
It is important to focus on the long-term goal, not on one specific data point or indicator. Long-term fundamentals are what matter. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.
Sources: American Funds, Baird, Carson
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.
Last Friday, stocks capped off a volatile week of trading after the previous day’s release of the Consumer Price Index (CPI) for September came in hotter than expected. Initially, this weighed on the markets as investors braced for the Federal Reserve to continue aggressively raising rates. After the release of the CPI report on Thursday, the S&P 500 opened down more than 2.4%, but by the end of the day, we had witnessed the fifth-largest intraday reversal from a low. The S&P 500 ended up 2.6% Thursday, reinforcing just how volatile this market is – much like previous bear markets. Then on Friday, the S&P gave back the gains from the day before, ending down 1.55% for the week.
The increase in volatility is not just in the stock market. Volatility has spiked in a range of markets from currencies to bonds, raising concern about the ability of the global economy to cope with higher U.S. rates. If these trends continue, the Fed may moderate its pace of tightening and slow the pace of reducing its balance sheet. The dollar has surged to new all-time highs on a trade-weighted basis, driven by a combination of relatively high U.S. yields and demand for safe-haven assets during global political turmoil. Fed officials have made it clear that financial market volatility alone will not affect their rate decisions.
As seen in the bar chart below, the only positive asset class other than cash through the first three quarters of the year has been commodities. (And gold, the most well-known commodity, is down almost 10% year to date.) In some instances, bonds are down as much as stocks this year. This begs the question: Is asset allocation dead? Does the old-style box chart investing —allocating money into growth and value, small cap, mid cap, large cap and international stocks as well as in bonds, as seen in the second chart below — not work anymore?
U.S. Markets YTD % Returns
Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and not subject to fees. It is not possible to invest directly in an index. Note: Views are from a U.S. dollar perspective. Source: Kestra Investment Management with data from FactSet. Index proxies: Bloomberg Municipal Bond Index, Bloomberg US Aggregate, Bloomberg US Treasury Inflation Protected Notes (TIPS), Bloomberg US High Yield-Corporate, S&P 500, MSCI World ex USA, MSCI EM, Dow Jones US Select REIT, Dow Jones Global X US, and Bloomberg Commodity Index. Data as of September 29, 2022.
U.S. Equity Style Box Performance
Source: Morningstar Direct, Morningstar Indexes. Data as of September 30, 2022.
For investors whose experience this year has them questioning asset allocation, the following may provide perspective on why we believe it remains effective.
• What we have seen in 2022 is unusual. The aggregate bond index (AGG) has been around since 1976. Since that time, the index has been negative four times, the worst being a decline of 2.9% in 1994. In each of those years, the S&P 500 has been higher by an average of more than 20%. This year appears to be an anomaly.
• The picture is more complicated on a quarterly basis. Since 1970, the S&P 500 has had 50 negative quarters, and the AGG has been lower in 16 of them. During the worst quarter of 2008, when stocks were down the most, the AGG was up. The third quarter of 1981 had been the worst quarter for the AGG until the second quarter of this year. The chart below shows the AGG’s total return each year. The red dots show the largest peak-to-trough decline each year. The average intra-year decline has been 3.2% versus an average decline of 14% for stocks. Historically, after bad years of performance, bonds tend to deliver strong returns in the years that follow.
Bloomberg U.S. Aggregate Annual Returns and Intra-Year Declines
Sources: Bloomberg, FactSet, JP Morgan Asset Management. Returns are based on total return. Intra-year drops refers to the largest market drops from a peak to a trough during the year. For illustrative purposes only. Returns shown are calendar year returns from 1976 to 2021, over which time period the average annual return was 7.1%. Returns from 1076 to 1989 are calculated on a monthly basis; daily data are used afterwards. Guide to the Markets — U.S. Data are as of September 30, 2022.
• Bonds can go down as well as stocks. The historical correlation between the S&P 500 and the AGG is close to zero. Stocks and bonds tend to each go their own ways relative to performance, rather than moving in decidedly opposite directions. It is also important to remember that bonds, like stocks, can and will go down, especially in an environment of rising interest rates.
• Dislocations can create opportunities. We do not think that traditional asset allocation is dead. While all but cash and commodities are negative this year, stock and bond valuations have improved. Diversification within stocks and bonds will continue to add value to a portfolio. Vanguard’s chief economist for the Americas, Roger Aliaga-Diaz, recently commented that “market volatility means diversified portfolio returns will always remain uneven, comprising periods of higher or lower – and, yes, even negative returns.” He went on to add:
“The broader, more important issue is the effectiveness of a diversified portfolio, balanced across asset classes, in keeping with the investor’s risk tolerance and time horizon.”
The CD Wealth Formula
We help our clients reach and maintain financial stability by following a specific plan, catered to each client.
Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought out, looking at where we see the economy is heading. We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy — and in the stock market.
We will continue to focus on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns. 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.
It is important to focus on the long-term goal, not on one specific data point or indicator. Long-term fundamentals are what matter. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.
Sources: Kestra Investment Management, Morningstar, CNBC, Vanguard, JP Morgan
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.
The S&P 500 reached a new low last week, closing 25% down from its January peak. Markets may fall even more from here: Since 1961, the average peak-to-trough decline during drawdowns of 25% or more has been 38%. However, historical drawdowns of 25% or more have delivered a forward one-year return of 27% on average, with longer investment time frames proving even more compelling.
Timing the bottom of this market is difficult, if not impossible, for those considering going to the sideline and waiting to get back in after the market falls further. History suggests that those who stay the course have been rewarded.
Source: Bloomberg and Goldman Sachs Asset Management. As of October 6, 2022
We read a lot about market returns averaging 8% to 10% per year, but as the chart shows below, such returns are not common at all. The 8% to 10% average comes from many years of outsized returns, followed by weak or negative returns and a few years of average returns. If you are not invested in the market or decide to move to the sidelines, it becomes much harder to obtain average returns. We cannot control the sequence of returns – i.e., what the market does on a yearly basis. It’s no secret that investing is not predictable; the market can be up 10% one year and down 10% the next year.
When you are in the accumulation phase, the sequencing of returns does not have a significant impact on your ending balance. However, when you are entering retirement or taking annual distributions from the portfolio, the sequence of returns can make a big difference. A down market early in retirement — on top of taking distributions from the portfolio — can eat into your wealth through no fault of your own, other than bad timing.
While we can’t control bear markets, we can control how we respond to them. The key to overcoming sequence-of-return risk is to draw down as little as possible during that down period. Here are some strategies for the newly or nearly retired to consider:
Revisit your need for distributions:
Take another look at how you are planning to fund your expenses and consider alternate strategies to minimize how much you take out. For example:
• Healthcare expenses: If you funded an HSA account, make sure you use those funds for qualified health expenses before withdrawing from the portfolio.
• Charitable giving: Consider making a large gift to a donor-advised fund during an up year in the market. That fund will become your charitable checkbook so that you do not have to tap into the portfolio during down years in the market.
• Flexible withdrawals: Consider taking out more during up markets and pulling back when the market is struggling. This could help you ride out the down market by withdrawing as little as possible.
Build up cash accounts
One way to limit how much you need from retirement accounts is to build up liquidity in your cash accounts. By maintaining short-term cash and cash equivalents — such as CDs, fixed income, and money market accounts — you can keep from having to draw down your retirement funds prematurely. For the first time in many years, money market rates and short term bond rates offer attractive yields, and you can get paid to be in cash with those monies.
Be wary of debt
It makes sense to enter retirement with as little debt as possible. Excessive debt in retirement can affect not only your financial health, but also your physical and mental health as well, due to the strain of paying off debt without income from work.
Know your retirement account options
Once you reach a certain age (72) or older and have a traditional IRA or 401K, the IRS requires you to take an annual required minimum distribution (RMD). Roth IRAs do not have RMDs, allowing you to withdraw funds without penalty or tax. It may make sense before retirement to convert some or all of a traditional IRA to a Roth IRA. This does require that you pay tax on the conversion amount at the time of the conversion. During a down market, doing a Roth conversion can reduce the taxes that you will pay since the value of the IRA is down, and it allows a future market recovery to happen in a tax-free account.
We fully recognize that bear markets are painful and challenging for all investors. Planning for retirement is a long road trip. On most long road trips, you are bound to run into some trouble — unexpected pit stops, flat tires or even a cracked windshield. But these bumps don’t last for the whole trip, and they do not ruin the overall journey. It is more important than ever to keep perspective and realize that these down markets don’t last forever, and good times have historically lasted much longer than the bad.
The CD Wealth Formula
We help our clients reach and maintain financial stability by following a specific plan, catered to each client.
Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought out, looking at where we see the economy is heading. We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy — and in the stock market.
We will continue to focus on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns. 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.
It is important to focus on the long-term goal, not on one specific data point or indicator. Long-term fundamentals are what matter. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.
Sources: Goldman Sachs, Kestra Asset Management, Robert Baird, NYU
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.
Time slows down for no one. It is hard to believe we are already in the fourth quarter of 2022.
The third quarter of the year saw financial assets continue their decline, as all asset classes — other than cash — delivered negative returns. The Fed’s third consecutive rate hike of 75 basis points (.75%) put further pressure on stocks and bonds. The summer rally we saw in July and early August was erased during the second half of the quarter as inflation continued to rear its ugly head.
The strong correlation of returns between stocks and bonds remained, as bonds were down almost 5% for the quarter. Credit quality in bonds has remained stable this year. However, slower growth, persistent inflation and higher rates could increase credit risk in the coming months. The S&P 500 and NASDAQ both had their worst months since 2008, and the Dow had its worst month since 2002.
International stocks remain challenged by higher energy costs and the ongoing war in Ukraine. Developed markets were down over 9%, and emerging markets were the worst performing in the third quarter, down over 11%. The United Kingdom took strong action last week to step in and purchase bonds to help their markets with additional liquidity.
As we head into the fourth quarter, the main drivers of the market continue to be inflation, China’s path to reopening from the pandemic and war in Ukraine. At the end of the third quarter, we saw a big bounce in short-term interest rates, with the 2-year Treasury trading close to 4.3%. As rates rise, bond prices fall. We are currently seeing high-quality fixed income valuations sitting near 10-year lows.
At the same time, S&P 500 forward Price to Earnings (PE) multiples are almost 10% below their long-term averages. These attractive valuations in stocks and bonds historically have led to significant long-term investment opportunities. The chart below shows how the market has responded following a bad month of September — and as we previously wrote, this September was one for the record books. The only instance of a continued slide occurred during the Great Financial Crisis, and we do not believe that this market is similar.
What do we expect for the fourth quarter?
As earnings season starts in a few weeks, most companies are in the process of reducing their earnings forecast based on continued inflationary pressures and higher borrowing costs from rising rates. Only 7% of stocks in the S&P 500 are trading above their 50-day moving average. A month ago, that number was more than 90%. Leading economic indicators continue to show weakness in the global economy, and more economists think a recession may occur in 2023. As we have written many times, the stock market is a leading indicator. By the time the recession arrives, the stock market will be looking ahead and ramping up for the recovery phase.
Here’s what are we watching:
The Federal Reserve: The Fed has forecasted that the Fed Funds rate may move closer to 4.5% by the end of the year. Short-term rates have risen along with the higher Fed Funds Rate. If the Fed indicates it may ease interest rate hikes, we could see a market rally.
International banks: Over the weekend, rumors of potential liquidity issues at Credit Suisse spread through the markets. Questions about risk management and the firm’s ability to compete against larger Wall Street banks sent the stock plunging. Investors fear another “Lehman Brothers moment,” but since the Great Financial Crisis, we have seen a complete overhaul of the banking system to minimize another Lehman scenario.
Market volatility: Market volatility is always unsettling, but historically it is not unusual. We view volatility as an opportunity to purchase more of what you own when we have larger movements in the market.
Midterm elections: As we recently wrote, the S&P 500 has historically outperformed the market in the 12-month period after the election, with an average return of 16.3%. Since 1962, the S&P 500 has not experienced a negative return either six or 12 months following the election. The stock market has historically preferred when one party is in the White House and the other party controls Congress, even if no major legislation is passed.
Bear markets do not last forever. We are in a bear market for the Dow, S&P 500 and NASDAQ. Going back to 1929, the average bear market lasts 20 months and has an average loss of 41%, as seen in the chart below on the right. However, the average bull market lasts 51 months and has an average return of 161%. The chart on the left shows how long it may take to get back to the all-time market highs seen in January, depending on the average annual return achieved. Staying invested during these times allows you to participate on the upside when the market recovers – which, historically, it always has.
Equity scenarios: Bull, bear and in between
Source: FactSet, NBER, Robert Shiller, Standard & Poor’s, J.P. Morgan Asset Management. (Left) The current peak of 4797 was observed on January 3, 2022. (Right) *A bear market is defined as a 20% or more decline from the previous market high. The related market return is the peak to trough return over the cycle. Bear and bull returns are price returns. **The bear market beginning in January 2022 is currently ongoing. The “bear return” for this period is from the January 2022 market peak through the current rough. Averages for the bear market return and duration do not include figures from the current cycle. Guide to the Markets — U.S. Data are as of September 30, 2022.
The CD Wealth Formula
We help our clients reach and maintain financial stability by following a specific plan, catered to each client.
Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought out, looking at where we see the economy is heading. We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy — and in the stock market.
We will continue to focus on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns. 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.
It is important to focus on the long-term goal, not on one specific data point or indicator. Long-term fundamentals are what matter. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.
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.
Last week, the Federal Reserve raised the Federal Funds Rate by another 75 basis points (.75%) for the third consecutive meeting. The current range is 3.00% to 3.25%. The Fed expects the Federal Funds Rate to reach 4.50%, implying another 125 basis points (1.25%) of tightening through interest rate hikes. Chairman Jerome Powell hinted that the goal of taming inflation is likely to induce a recession: “Reducing inflation will likely require a sustained period of below-trend economic growth. No one knows whether this process will lead to a recession or, if so, how significant the recession will be.”
At the same time, the Bank of England, Sweden’s central bank, Bank of Canada and European Central Bank have all raised rates by a minimum of 50 basis points (.50%) in the last few weeks. The global outlook is driven by the impact of central bank actions, as well as war in the Ukraine and lockdowns in China.
Powell’s comments pushed stocks sharply lower and sent the U.S. dollar to a 20-year high. (See our previous article: What Does a Stronger U.S. Dollar Mean for You?) Last Friday, stocks closed at their lowest levels since the pandemic in 2020. Stocks have struggled since an unexpectedly hot inflation report in August shocked investors who were looking for price relief. On top of the recent inflation report and the Fed raising rates again, September historically has been the worst month in the stock market, dating back to 1897. Since 1944, only two months have averaged negative returns, with September averaging down .56%, as shown in the chart below.
Theories abound as to why this is the case. It is generally believed that investors come back from summer vacation and want to sell holdings to lock in gains for the year, while others speculate that September marks the beginning of the period when mutual fund companies start to pay distributions, which triggers tax-loss selling. October has seen the largest decline in terms of percentage — think of the crash of 1987 — but historically has been a strong month on average, returning almost 1%.
Source: CFRA BMO
Historically, when stocks have decreased in value, the bond market has been there to offer a “buffer” or help mitigate downside risk. As the chart shows below, in each instance that the S&P 500 has decreased, going back to 1977, bonds have increased. However, that has not been the case this year. Through the end of August, the S&P 500 and the Bloomberg U.S. Aggregate Bond Index are down double digits. Over the last many years, the stock market has been the primary source of returns as money market and bond yields have been close to 0%. These conditions are sometimes called “TINA,” an acronym for “There Is No Alternative.”
We are moving from TINA to TARA — There Are Reasonable Alternatives. With the Fed Funds rate at 3% and the 2-year Treasury bond over 4%, savers can earn more money on their cash alternatives, and investors do not have to reach for excess yield either in the stock market or through lower credit risk in the bond market.
Sources: Capital Group, Bloomberg Index Services Ltd., Standard & Poor’s. Returns above reflect annual total returns for all years except 2022, which reflects the year-to-date total return for both indexes. As of August 31, 2022.
The Fed has made it abundantly clear that it is willing to sacrifice growth for lower inflation. Growth expectations were revised lower for this year and next. The Fed’s new forecast for 2023 Gross Domestic Product (GDP) is 1.2%, with an unemployment rate of 4.4%. The Fed needs both GDP to decline and the unemployment rate to increase for inflation to return to its 2% target level. This is because if the overall output of the economy is increasing, price increases may follow as demand outpaces supply. If GDP is declining, corporate profits are less, and demand is decreasing — which in turn may lead to price decreases.
Much of the most recent inflation increase has been attributed to wage growth. If unemployment increases, then the upward pressure on wages may subside, bringing inflationary pressures down. The economy will be better off the sooner the unemployment rate reaches the “natural rate of employment,” which is the rate that is neither too low and inflationary nor too high and recessionary. At the same time, for the economy to turn the corner, demand and growth need to subside to help with inflationary pressure.
Should inflation begin to recede through a soft labor market and slowing GDP, markets may rebound on prospects for an end to the aggressive rate hikes of 2022. We will need to see several months of evidence that services inflation and wage inflation are trending down. It is critical to remain forward-looking and invested. The fourth quarter is historically the strongest quarter of the year. Missing out on the market rebound, when the largest up days typically occur in a bear market, can be detrimental to the long-term plan that has been constructed for both the good and bad times.
The CD Wealth Formula
We help our clients reach and maintain financial stability by following a specific plan, catered to each client.
Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought out, looking at where we see the economy is heading. We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy — and in the stock market.
We will continue to focus on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns. 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.
It is important to focus on the long-term goal, not on one specific data point or indicator. Long-term fundamentals are what matter. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.
Sources: American Funds, CFRA BMO, Schwab
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.
