Wealth Planning Archives | Page 17 of 21

How much should investors worry about inflation?

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

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

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

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

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

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

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

Sources: Goldman Sachs, WSJ, Blackrock, Guggenheim

The Recessions is Long Gone, but the Recovery Continues

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

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

Past performance is not a guarantee of future results.

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

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

The recession is gone, but the recovery continues

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

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

Chart showing the length of recessions and recoveries since 1945

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

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

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

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

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

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

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

Sources: NBER, Seeking Alpha, CNBC, Horizon Investments

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

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

Past performance is not a guarantee of future results.

How will the Delta variant affect your portfolio?

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

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

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

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

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

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

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

Sources: MarketWatch, Goldman Sachs, Charles Schwab

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

Past performance is not a guarantee of future results.

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

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

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

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

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

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

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

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

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

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

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

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

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

Sources: FS Investments, Bureau of Labor Statistics, CNBC

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

Past performance is not a guarantee of future results.

A closer look at socially responsible investing

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Past performance is not a guarantee of future results.

Turbulent times for Bitcoin and other cryptocurrencies

In May, Tesla CEO Elon Musk sent shockwaves through the cryptocurrency market when he tweeted that Tesla had suspended its practice of accepting Bitcoin for vehicle purchases and that it would halt sales of the Bitcoin it had purchased. It was a startling change because, as we wrote in February, Tesla helped Bitcoin surge to a record high when it bought $1.5 billion worth.

The reason for Musk’s recent reversal: the environment. “We are concerned about rapidly increasing use of fossil fuels for Bitcoin mining and transactions, especially coal, which has the worst emissions of any fuel,” he wrote.

Confusing, right? How can Bitcoin and other cryptocurrencies, like Ethereum, be bad for the environment?

A report by Cambridge University states that Bitcoin mining uses 116 terawatt hours of energy consumption per year, which equals .5% of total global electricity consumption. (By the way, 1 terawatt equals 1 trillion watts.) To put that amount into context: Bitcoin miners use more energy than several countries, including Singapore and the Netherlands. In fact, if a country used that much energy, it would be in the top 35 of all countries in the world for energy consumption.

As the price of Bitcoin rises, more miners are logging in and mining for it and other cryptocurrencies in the hopes of becoming rich. For those areas of the world that rely on fossil fuels for energy versus renewable energy, more mining means more “dirty” energy consumption, which is worse for the environment. This is especially notable because roughly 65% of all mining for cryptocurrency takes place in China, which is the world’s largest greenhouse gas emitter.

China and the U.S. are cracking down again on the business of mining cryptocurrency and warning about the speculative nature of the currency. Last week, authorities in China ordered cryptocurrency miners to shut down their operations in the Sichuan province. This is not the first time China has taken action; in 2017, officials issued similar edicts forcing cryptocurrency mining offshore from mainland China.

Then on Monday, the People’s Bank of China urged Alipay not to provide services related to cryptocurrency activities, including account openings, clearing or settlement. This move sent shockwaves through the cryptocurrency markets and thus, the price of cryptocurrencies has seen extreme volatility the last few weeks. As seen in the chart below from JP Morgan, the opinions on cryptocurrency’s long-term possibilities remain widely varied — which contributes to volatility, as different cryptocurrencies are used as trading vehicles, hedges against inflation and for pure speculation.

So, what can we learn from all this? Bitcoin and other cryptocurrencies are still relatively new, as they have been around for a little more than 10 years. They remain a very risky investment that may or may not pay off. Investors should invest only as much as they are willing to lose, and if one does invest, it should be part of a well-diversified portfolio.

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

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

Sources: CNBC, DW.com, JP Morgan Chase

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 portfolio changes we’re making as we enter the third quarter

We’re almost to the midway point of 2021, and what an interesting first half of the year it’s been:

* Thankfully, the economy continues to reopen as more and more people receive their COVID vaccinations.

* Demand continues to outstrip supply for many goods and services, which is leading to higher prices.

* Travel has picked up as people resume their lives, and home prices continue to soar — along with construction costs.

* Meme stocks and cryptocurrency continue to dominate the financial news.

* Interest rates remain near zero, while the 10-year Treasury remains close to 1.5%.

The S&P 500 (stock market) momentum continues to be positive, led by financials and energy, as investors currently favor value over growth. The chart below reflects the different sectors that comprise the S&P 500 over the last year. Energy, Materials and Information Technology are the only sectors that have been the best-performing sector for more than one month. Financials have had the strongest 12-month return but led the S&P sectors in only one month (December).

Chart showing sector movement over the last 12 months

We are reallocating and rebalancing the portfolios and making the following changes for the second half of 2021:

1. We are reducing our exposure in healthcare to a market-weight level from an overweight position. We continue to believe strongly in the healthcare sector for the long term, thanks especially to new innovations, as we saw last year with the rapid production of the COVID vaccine and recent approval of an Alzheimer’s drug.

2. Financial stocks remain inexpensive on a price-to-earnings multiple basis, and we are adding additional exposure to the asset class. We believe that small stocks will continue to benefit from the economic reopening, and we are increasing our current allocation. With both moves, we continue to balance growth and value in the portfolio.

3. From a fixed-income perspective, we are further reducing our current weighting in high-quality corporate bonds and adding to our strategic income fund that provides diversification to different asset classes within fixed income. As interest rates rise, certain segments within fixed income invest in bonds that rise with higher rates and provide increased flexibility within the portfolio.

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 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 strategically have new cash on the sidelines and buy in for those clients on down days or dips in the market, like one does through a 401K every other week. We speak with our clients regularly about staying the course and not listening to the economic noise and trading meme stocks.

In the short term, the outlook for the global economy looks strong. The Federal Reserve bank has reiterated that it plans to allow inflation to increase for the foreseeable future and is unlikely to raise short-term interest rates in the near future. The Fed also is closely watching employment numbers and adjusting the money flow and bond purchases based on job reports.

So, what can we learn from all this? We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been. Making market decisions based on what might happen may be detrimental to long-term performance. The key is to stay invested and stick with the financial plan. Markets go up and down over time, and downturns present opportunities to purchase stocks at a lower value.

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

Source: Schwab

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

Past performance is not a guarantee of future results.

‘Meme stocks’ are moving; are they a good investment?

The term “meme stocks” seems to be making a daily appearance in the news: stories of young investors trading on companies that are on the verge of bankruptcy and promoting large gains and losses. BANG stocks, a spoof on the fabled FANG stocks (Facebook, Apple, Netflix and Google), are now Blackberry, AMC Entertainment, Nokia and GameStop. These stocks continue to see excessive trading volume from retail investors who have targeted them on social media.

Dogecoin, which started as a cryptocurrency parody, is another example of a meme stock and has seen its value skyrocket on Elon Musk’s tweets. The chart below highlights meme stocks and their growth in market capitalization based on the rise in stock prices year-to-date. AMC has seen its company market capitalization rise an astounding 7,296% in the first five months of the year.

For most investors, the phenomenon of meme stocks has no real impact. If GameStop or AMC were to come crashing back to Earth, it is more than likely that this would have very little impact on the overall market. These stocks were first targeted on a Reddit forum titled “Wall Street Bets,” which looks at the most heavily shorted stocks on Wall Street. The reason institutional investors short a stock is that they believe the stock price is too high and the company is fundamentally flawed and overvalued. Short selling occurs when an investor borrows shares and then immediately sells them, hoping to buy them back later at a lower price. When investors buy the stock back, or “cover the short,” they return the shares to the lender and hope they can profit if the shares have gone down in price.

A short squeeze is when a short seller — someone betting against a stock — is squeezed out of their position by excessive price action to the upside. A group of investors on social media is targeting a company, like AMC, that currently has tremendous, short interest. (This means that many investors are “shorting” the stock in the hopes that the stock price drops.) All the while, retail investors are buying the stock and purchasing call options, pushing the stock price higher and in turn, forcing the investors who are trying to short the stock to sell. This action forces the stock price even higher.

Meme stocks remain a very risky trade, as this group of stocks are not investments — they are gambles. These companies are not trading on underlying financial results and prospects. Regulators, like the Securities and Exchange Commission, are beginning to take a closer look at social media activity and its impact on the financial markets. If rules are implemented on investment content or group coordination, meme stocks could face stiff regulation limiting potential upside and possibly causing these same stocks to crater. Meme stocks carry much higher risk because of their reliance on social media, and while there may be instances of traders making money, you are more than likely to lose.

So, what can we learn from all this? Trading in meme stocks brings a high amount of risk, and those who want to buy the BANG stocks should be prepared to lose their investments. Remember the first rule of gambling: Never gamble what you can’t afford to lose.

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

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

Sources: Marketwatch, Yahoo Finance

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.

Capital gains strategies, regardless of Biden’s plan

Last Friday, President Biden unveiled detailed explanations on how the administration plans to pay for the new $6 trillion budget. The biggest surprise in the proposal is that the administration is seeking a retroactive effective date on a capital gains tax rate hike from 20% to 39.6% for households making more than $1 million. If you add in the net investment income tax for high-income earners, this raises the top long-term capital gains tax rate to 43.4%, up from the current 23.8%.

“This proposal would be effective for gains required to be recognized after the date of the announcement,” the Treasury Department said, referring to an address to Congress on April 28. The purpose of the backdating proposal is to avoid a sell-off ahead of the capital-gains rate hike, if it were to be approved.

A historical review of legislation suggests tax-rate decreases are easier to implement on a retroactive basis from a policy and political standpoint. With life’s only certainties being death and taxes, the tax implications of a transaction would ideally be known at the time of the event — and not retroactive.

As we wrote about last week, tax changes are far from certain, and a lot of ideas are being thrown around in Washington. We are approaching our financial planning with maximum flexibility. It is safer to plan for what we know, rather than what we don’t know, and that is our approach. We believe the proposals in their current state will not pass through Congress, but we also cannot begin to predict precisely what will pass.

Having said that, the following are capital gains tax strategies that we already use for your benefit:

1. Donating appreciated securities to charity or a donor advised fund. This is a tax-smart way for those who are charitably inclined to donate money. The market value of the security on the date of donation is a charitable tax deduction, and there are no capital gains taxes on the donated assets.

2. Tax loss harvesting. This strategy involves realizing tax losses on holdings and then using those losses to offset realized gains. Any remaining losses incurred in a year can be carried over to subsequent years and help offset future capital gains.

3. Converting traditional IRA assets to Roth IRA. This works well for those in lower income tax brackets. Investing in stocks with higher growth potential in a Roth IRA will negate any taxation of future capital gains. There are no taxes in the year of the gain, and the money can be withdrawn tax-free at retirement (if certain rules are followed). Also, assets in an inherited Roth IRA are tax-free to beneficiaries upon withdrawal if the five-year rule was met prior to death. This includes capital gains that were realized in the account along the way.

So, what can we learn from all this? Avoiding potentially higher capital gains rates may be a good idea, if it makes sense in the context of your overall financial plan. It is important to remember that the proposed tax changes are just that — proposals, not laws. Changes can and will occur, and there is no guarantee that the proposal or introduced bills will become law. In our opinion, as of today, a wait-and-see approach is the best path until we have further clarity. However, concern about changes in estate tax law is a good reason to consult with estate attorneys to discuss the current plan. We will be ready and proactive if tax law changes occur.

From an investment portfolio perspective, we continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, not making investment decisions based on where we have been.

Making market decisions based on what might happen may be detrimental to long-term performance. The key is to stay invested and stick with the financial plan. Markets go up and down over time, and downturns present opportunities to purchase stocks at a lower value.

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

Sources: National Law Review, The Hill, New York Times

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.

Keeping an eye on possible tax changes under Biden

There has been much speculation about the possibility of higher taxes on the horizon to pay for the recent stimulus and potential infrastructure bill. President Biden has released a $1.8 trillion American Families Plan (AFP), and a bill has been introduced into Congress titled “For the 99.5% Act.”

Biden’s plan and the proposed Congressional act are far from becoming law. There appears to be very little consensus within Congress about AFP, and if it were to become law, there would be extensive negotiations; the final bill may look drastically different and potentially watered down from the current proposal. We are staying apprised of the tax negotiations so we can be proactive rather than reactive if changes occur. We will be ready to help you.

We do not believe there is extensive planning to be done today in response to the potential bill, but we do want to share some of the potential tax changes that are being discussed. It is likely that taxpayers will have time to implement strategies if they become law.

1. Taxpayers making less than $400,000 per year probably will not see an increase in their taxes. Most of the proposed increases appear to target higher-income households. Many middle- to low-income households may see their tax bills decrease.

2. Under the AFP, taxpayers making more than $400,000 could see their marginal rate increase from 32% (married filing jointly) and 35% (single) to 39.6%. For those who itemize, there may be opportunities to increase charitable deductions and reduce tax liability.

3. Capital gains over $1 million also may be taxed at the 39.6% marginal tax bracket; the proposal creates a fourth capital gains tax bracket. The remaining capital gains rates of 0%, 15% and 20% would still exist.

4. The step up in basis on inherited assets could be removed for estates with gains over $1 million ($2.5 million for married couples). This would not apply to family businesses or farms. If passed, this change would impact estate planning and gifting strategies.

5. Notably absent from the AFP is a provision to lower the estate tax exemption from the current $11.7 million per person ($23.4 million for a married couple). At death, this amount can pass free of federal estate taxes. However, the proposed “For the 99.5% Act” would reduce the federal exemption from $11.7 million to $3.5 million per person. At this point, the current exemption will sunset back to the previous limit of $5.49 million (inflation adjusted) in 2025.

So, what can we learn from all this? It is important to remember that the American Families Plan is only a proposal and the “For the 99.5% Act” is not a law. Changes can and will occur, and there is no guarantee that these proposals will become law. As of today, we believe a wait-and-see approach is the best path forward until we have further clarity. However, concern about changes in estate tax law is a good reason to consult with estate attorneys. We will be ready and proactive if tax law changes occur.

From an investment portfolio perspective, we continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, not making investment decisions based on where we have been. Making market decisions based on what might happen may be detrimental to long-term performance. The key is to stay invested and stick with the financial plan. Markets go up and down over time, and downturns present opportunities to purchase stocks at a lower value.

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

Source: Schwab

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

Past performance is not a guarantee of future results.