Turning Investment Losses into Gains: The Art of Tax-Loss Harvesting

The fall season is a great reminder to harvest. Not every investment will be a winner, but sometimes an investment that has lost money can still do some good.

With both stocks and bonds down in value last year, investors saw numerous opportunities to take advantage of tax-loss harvesting. Even in years where stocks and bonds are up in value, there may be opportunities to harvest losses — especially in a diversified portfolio, where not all asset classes move in the same direction.

What Is the Silver Lining of a Bad Investment? 

You may be able to use your loss to lower your tax liability and better position your portfolio going forward. This strategy is called tax-loss harvesting. The principles behind tax-loss harvesting are straightforward, but there are potential dangers if not done properly. 

Tax-loss harvesting allows you to sell investments that are down in value, replace them with similar investments and then offset realized investment gains with those losses. This helps reduce your tax burden and keeps more money to be invested in the hopes of making up for the losses.

For example: If you had an investment with a short-term gain of $20,000 and you were to sell that investment, you potentially would owe $7,000 in taxes (assuming a 35% ordinary income tax bracket). However, if you had another investment with a $25,000 loss, you could sell that holding at a loss to offset the holding with the gain. 

In this instance, as shown in the chart below, you would not owe the $7,000 gain and would save an additional $1,050 by using an extra $3,000 of losses to offset additional gains.

Chart showing how tax-loss harvesting could benefit an investor.

Capital gains are the profits you realize when you sell an investment for more than what you paid for it, while capital losses are the losses you realize when you sell an investment for less than what you paid. Short-term capital gains are taxed at an ordinary income rate, while long-term capital gains are taxed at a lower capital gains rate.

Long-term capital gains and losses are realized after selling investments that are held longer than one year. Short-term capital gains and losses are those realized from the sale of investments that owned for one year or less. The key difference between short- and long-term gains is the rate at which they are taxed. 

As seen in the chart below, those who have income of less than $89,250 (married filing jointly) may not pay capital gains tax at all. This can be a big benefit for tax planning as well. 

Long-Term Capital Gains Rate for 2023

Chart showing Long-Term Capital Gains Rate for 2023 in different filing and income brackets.

An investment loss can be used for different reasons:

1. The losses can be used to offset investment gains, either today or in the future. Short-term losses can be used to offset short-term gains, and long-term losses can be used to offset long-term gains. The least effective use of short-term losses is to apply them to long-term gains, but this may still be preferable to paying long-term capital gains tax.

2. The losses can help offset $3,000 of income on a joint tax return in one year. Unused losses can be carried forward indefinitely. Realizing a capital loss can be effective, even if you didn’t realize capital gains in that year with the carryover provision.  

If you have mutual fund investments, your short- and long-term gains may be in the form of mutual fund distributions. Harvested losses can be used to offset these gains. Short-term capital gain distributions from mutual funds are treated as ordinary income for tax purposes. Unlike short term capital gains resulting from the sale of securities held directly, the investor cannot offset them with capital losses. 

The Wash-Sale Rule

When performing tax-loss harvesting, one must be aware of the wash-sale rule. The wash-sale rule states that if you sell a security, fund or ETF for a loss and buy the same or substantially identical security within 30 days after the sale, the loss will be disallowed for tax purposes. 

For example, if you own IVV, iShares Core S&P 500 ETF and sell it for a loss, and then purchase SPY, SPDR S&P 500 ETF with the proceeds, the IRS will most likely deem this to be a wash-sale violation, and you will not be able to take advantage of the realized loss. This applies across different accounts: You cannot sell an investment for a loss in one account and buy it back in another account, such as an IRA or spouse’s account.

As always, we recommend that you consult with a CPA if you have questions. If the IRS determines that you have violated the wash-sale rule, the loss is disallowed and added to the cost basis of the new investment.

While no one wants to see their portfolio value decrease, rebalancing the portfolio to create some tax losses can be beneficial to offset future gains or current income. Tax-loss harvesting and portfolio rebalancing are important investment principles that go hand in hand. If you choose to try tax-loss harvesting, be sure to keep in mind that tax savings should not undermine the investment goal.

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

Promo for an article titled Investors Shouldn't Fear October, Even with War Abroad and Worries at Home

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.

Fidelity Investments and Fidelity Institutional® (together “Fidelity”) is an independent company, unaffiliated with Kestra Financial or CD Wealth Management. Fidelity is a service provider to both. There is no form of legal partnership, agency affiliation, or similar relationship between your financial advisor and Fidelity, nor is such a relationship created or implied by the information herein. Fidelity has not been involved with the preparation of the content supplied by CD Wealth Management and does not guarantee, or assume any responsibility for, its content. Fidelity Investments is a registered service mark of FMR LLC. Fidelity Institutional provides clearing, custody, or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC, Members NYSE, SIPC.

Investors Shouldn’t Fear October, Even with War Abroad and Worries at Home

The old saying that markets tend to rally on a wall of worry proved itself at the end of last week and the start of this week. Worries continue to pile up: The U.S. is without a House Speaker, yields continue to rise, a potential government shutdown looms in November, and now there is a war in Israel.

At this time last year, stocks were in a bear market and inflation was soaring. This week marked the bottom of the market in 2022, and as history shows, stocks tend to bottom in October.

Seven of the last 18 bear markets have ended in October, and 18 of the 60 market corrections (a pullback of 10% or more in stocks) have also bottomed in October.

Market shocks and crises are a part of the investing landscape. They are no doubt painful, but we eventually recover, and as we know, there are no guarantees. In moments of crisis or uncertainty, it is easy to wait for clarity before investing, sitting on cash. Since 1987, there have been 23 market shocks, including the 1987 crash, the tech bubble, the global financial crisis, the global pandemic and most recently, the rise of inflation.

The chart below shows that markets have recovered from the shocks to go on and reach new highs, making a long-term perspective critical for investors. Long-term performance tends to be more dependent on the economic cycle than geopolitical developments.

Market Disturbances Are a Fact of Life

Chart showing how the market performed during and after major global events since 1987.
Sources: MSCI, RIMES. As of August 31, 2023. Data is indexed to 100 on January 1, 1987, based on the MSCI World Index from January 1, 1987, through December 31, 1987, the MSCI ACWI with gross returns from January 1, 1988, through December 31, 2000, and the MSCI ACWI with net returns thereafter. Shown on a logarithmic scale. Past results are not predictive of results in future periods.

So far, the market has taken the war in Israel in stride. Oil prices rose 4% following the news, after having fallen almost 10% last week. If the war remains isolated to Israel and Gaza, the impact to oil and the world economy will be minimal. However, if the war broadens into a regional conflict and Iran is targeted, this could lead to a disruption in the global oil supply of crude oil.

As shown in the chart below, stocks have been mixed following major world events going back to WWII. More than 63% of the time, stocks have been higher one year later, but there have been both major upticks and downturns during that time — with an average return of a little more than 2%. Conflicts may flare up, but they tend not to make investors bearish, outside of a recessionary global economy.

How Do Stocks Do After Major Events?

S&P 500 Index performance after geopolitical and major historical events

Chart showing how the market performed in the months after major geopolitical events, going back to 1940.
Source: Carson Investment Research, S&P 500 Dow Jones Index, CFRA, Strategas 10/9/2023

The U.S. economy remains strong. The economy relies on the consumer, and consumption comes from income. Income comes from employment growth, wage growth and hours worked. All these factors are up, with the pace of weekly income growth stronger than the current pace of inflation. It was announced last week that the economy created 336,000 jobs in September, almost double the expected number.

Additionally, there was a smaller-than-expected rise in wages, which sparked a market rally. The falling wage pressures indicate that the supply and demand imbalance with workers is normalizing as more people return to the workforce. Wage growth, as measured by average weekly earnings, has eased back to the pre-pandemic pace. 

The Fed is unlikely to tighten further if stronger-than-expected wage gains do not accompany stronger-than-expected job gains. Ultimately, corporate profits come from economic growth, and that will eventually play out as earnings season gets under way this week.

As Mark Twain famously said, “October: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February.”

While there is a lot of fear, especially since it is the month of October and the markets have had a rough few months, the market remains oversold. It’s also important to remember that bull markets have dominated bear markets. Since 1950, bear markets have lasted 12 months on average, while bull markets have lasted 67 months and have seen an average return of 265% compared to a decline of 33%.

Market recoveries are rarely straight up, as seen in the first chart, but those investors who can move past the noise and take a long-term view stand a better chance of long-term gains. 

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.

Source: Bespoke Investment, Carson, Capital Group, Horizon

Promo for an article titled Is a Year-End Rally Ahead? Here Are the Indicators We're Watching.

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.

Fidelity Investments and Fidelity Institutional® (together “Fidelity”) is an independent company, unaffiliated with Kestra Financial or CD Wealth Management. Fidelity is a service provider to both. There is no form of legal partnership, agency affiliation, or similar relationship between your financial advisor and Fidelity, nor is such a relationship created or implied by the information herein. Fidelity has not been involved with the preparation of the content supplied by CD Wealth Management and does not guarantee, or assume any responsibility for, its content. Fidelity Investments is a registered service mark of FMR LLC. Fidelity Institutional provides clearing, custody, or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC, Members NYSE, SIPC.

Is a Year-End Rally Ahead? Here Are the Indicators We’re Watching

September lived up to its reputation as historically being the worst month for stocks. The S&P 500 and NASDAQ suffered their biggest monthly losses of the year last month. The S&P 500 could not avoid its first down quarter in a year. 

This past quarter was just the fourth in the past 30 years in which stocks and bonds each declined at least 2.5%. (All four of those quarters have been since 2022!) The correlation between stocks and bonds is back near 25-year highs, as seen in the chart below.

What does this mean?

When inflation is higher, stocks and bonds tend to have a positive correlation, i.e., they move in the same direction at the same time, whether that is up or down. Other factors also affect the correlation, but what this means for you is that during times of higher stock and bond correlation, diversification may not be as effective in mitigating downside risk.

52-Week Rolling Stock/Bond Correlation

Chart showing the 52-week rolling stick-bond correlation.
Source: Federal Reserve, Bloomberg Finance, L.P., as of 9/22/2023

The U.S. avoided a government shutdown with a last-minute deal this past weekend. However, several headwinds remain before the market moves higher: rising bond yields, oil prices and the strong U.S. dollar.

• The 10-year Treasury hit its highest level since October 2007 this week, breaking above 4.7%. Higher bond yields in September put significant pressure on stocks. Bonds impact stocks in several ways. When bond yields are higher, they compete with stocks for investment dollars because they can be more attractive in the short term. Bonds also figure heavily into the way investors think of valuing stocks, especially for growth-oriented companies. In a higher-yield environment, future projected earnings are worth less to investors today. Therefore, companies that are less profitable or have higher growth get hit harder when rates rise.

• In the third quarter, oil prices rose almost 30% to more than $90 per barrel. The increase in prices over the summer reflects a mismatch between supply and demand. Available supply from major oil exporters, such as Saudi Arabia and Russia, took steps to reduce production, driving prices higher. Consumers in turn are paying more at the pump, which cuts into the money that they have available for discretionary spending on items that are not the staples that they need on an everyday basis.

• After the dollar reached levels not seen in almost 20 years, the dollar had been on a downward trajectory since its peak in 2022. But the dollar now has risen almost 7% since the beginning of July. Historically, a strong dollar has meant weaker earnings and sales for companies that generate a large portion of their revenues from overseas. Converting profits from sales overseas in weaker currencies to the stronger dollar can weigh on revenues and, therefore, earnings.

Reasons for Optimism

On the flip side, the S&P 500 experienced its best seven-month start to the year since 1997. The August and September slump may be setting up stocks for a year-end rally. There are reasons to be optimistic, but during times like this, you must look harder through the forest to find those trees.

• The fourth quarter is typically the best quarter of the year for stocks. The S&P is up almost 80% of the time and averages a positive return of 4.2%, twice as strong as the next closest quarter. One possible reason is that the third quarter has traditionally been the weakest, and the market maybe rebounding from that.

• The government was able to avoid a shutdown for another 45 days at current funding levels. The legislation buys time for Congress to reach an agreement on spending for the next year. As we have written previously, government shutdowns historically have not caused a major reaction in the markets. Shutdowns can increase volatility, which we have seen over the last few weeks, with the VIX index rising.

• Student loan payments started accruing interest again on Sept. 1, with payments coming due Oct. 1 after a long pause. Loan repayments started to surge this summer; so far, that has not adversely affected consumer spending.

The Fourth Quarter Is Historically the Strongest of the Year

S&P 500 Index quarterly returns (1950-2022)

Chart showing historical performance of the markets by quarter since 1950.
Source: Carson Investment Research, YCharts 12/30/2022

The average 10-year Treasury yield since 1926 is 4.8%, right around the level where we are today. As the chart below illustrates, the best market returns have been in periods of low interest rates, as well as when rates are at their highest levels. This may be because we have not had many times of high inflation, and when those conditions did occur, we saw raging bull markets that followed.

In every instance below, the stock market has produced a positive return when looking at a long-term view in terms of years, not days. We can’t stress enough to you, our clients, that during times of higher volatility and increasing negative sentiment, it is imperative to see the stock market as a long-term investment. Over the long term, it has paid off to stay invested in stocks and ride out the short-term waves.

Starting Interest Rates vs. the Stock Market Since 1926

Chart showing starting interest rates vs. the stock market since 1926.
Source: Shiller, YCharts, Returns 2.0 (S&P 500 and 10-Year Treasuries)

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: Bloomberg, Carson, Schiller, CNBC, FS Investments

Promo for an article titled What Does the Fed’s ‘Higher-for-Longer’ Stance Mean for Investors?

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.

Fidelity Investments and Fidelity Institutional® (together “Fidelity”) is an independent company, unaffiliated with Kestra Financial or CD Wealth Management. Fidelity is a service provider to both. There is no form of legal partnership, agency affiliation, or similar relationship between your financial advisor and Fidelity, nor is such a relationship created or implied by the information herein. Fidelity has not been involved with the preparation of the content supplied by CD Wealth Management and does not guarantee, or assume any responsibility for, its content. Fidelity Investments is a registered service mark of FMR LLC. Fidelity Institutional provides clearing, custody, or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC, Members NYSE, SIPC.

What Does the Fed’s ‘Higher-for-Longer’ Stance Mean for Investors?

As expected, the Fed did not raise the Fed Funds rate last week, but it did leave the door open for at least one more rate hike this year. The Fed also indicated that fewer interest rate cuts may happen next year than had been previously expected. The bias position of “higher-for-longer” caught the market somewhat by surprise, as the Fed’s board of governors moved rate projections for next year to just 50 basis points (.50%) of interest rate cuts, compared to the 100 basis points (1.00%) reduction from the June forecast.

Fed Chairman Jerome Powell said the Fed is concerned that continued economic growth could reignite inflation. Instead of wondering how high rates will go, investors are now wondering how long they will remain high.

Markets did not react favorably to the news. Other circumstances continue to weigh on the market as well, most notably the pending government shutdown and autoworkers strike. While we don’t believe a government shutdown negatively affects the market over the longer term, the uncertainty caused by a shutdown can have short-term implications.

For example: The Fed is data dependent, and if there is a shutdown, key data may not be available for the Fed to interpret. If the shutdown were to last for several weeks, this could impact the Fed’s decision as to whether to raise rates; the shutdown’s economic impact would lead to additional headwinds, potentially giving the Fed pause.

In some ways, Chairman Powell’s rhetoric may be geared toward the stock market. If he were to pivot to a more dovish tune — favoring lower rates sooner — this may push the market higher (for both stocks and bonds) and could result in loosening of financial conditions. This in turn could also reignite inflation — which is exactly what he wants to avoid.

The Fed is working hard not to allow inflation to rear its head again, after it has steadily declined over the last six months.

The underlying data still suggests that inflation is moderating, even though August CPI was higher than expected. As we have written before, shelter costs — a measure of rents only and the largest component of CPI — continue to drop as rents appear to be flattening out or declining in many cities. 

At the same time, the unemployment rate rose from 3.5% to 3.8% in August. The labor market is a key factor for the Federal Reserve for setting policy, and it is showing softness. As seen in the chart below, the U.S. nonfarm payroll — which represents about 80% of all workers — is a measure of how many people are employed in manufacturing, construction and goods. While it saw an uptick in the last few months, the level of nonfarm payroll remains well below the last three years.

This is a good sign for the Fed, as one of the goals of lowering inflation is raising unemployment. The supply chain of workers also is on the rise, as the employment-to-population ratio (for prime-age workers) has recovered to where it was in the late 1990s and early 2000s.

A Cooling Job Market Could Remove Pressure for Additional Rate Hikes

Monthly change in U.S. nonfarm payroll employment (thousands)

Chart showing the monthly change in U.S. nonfarm payroll employment since 2021.
Sources: Bureau of Labor Statistics, Refinitiv Datastream, U.S. Department of Labor. Figures are seasonally adjusted. As of Aug. 31, 2023.

The investor’s mood has shifted over the last few months, going from optimism about the year’s strong start to negativity and concern that the market is going lower. Volatility, as measured by the VIX index, rose 25% last week from levels not seen since before the pandemic. The market, as measured by the S&P 500 Short Range Oscillator, is moving closer to oversold territory. Oil prices are hovering around $90 per barrel. The 10-year Treasury has climbed to more than 4.5%. A government shutdown is on the horizon. 

For long-term investors, however, it can be helpful for stocks to pull back and catch their breath. The economy is picking up steam as economists have raised GDP expectations for the remainder of the year. The Fed did not change its long-run rate expectations. Credit markets remain solid, and the U.S. economy continues to create jobs.

Two additional strong forces, artificial intelligence and industrial policy, could continue to move markets higher. AI continues to improve efficiencies, which in turn raise profit margins. Fiscal policy has incentivized companies to invest in manufacturing, clean technology and infrastructure projects. These trends are projected to continue for many years and potentially deliver support to equity markets.

The chart below is a good reminder that a down performance in August and September doesn’t mean the fourth quarter will play out the same way. Since 1952, the S&P has returned an average of 7% during the fourth quarter when August and September were negative.

Down Big in August and September Isn’t a Bad Thing

S&P 500 performance when down 1% or more in both August and September

Chart showing S&P 500 performance in the fourth quarter when the market is down 1% or more in both August and September.
Source: Carson Investment Research, FactSet 9/24/2023

When the markets are feeling the most negative is a time to feel optimistic. You can always find reasons to be negative and feel like the market will go down, but there also is always the ability to be optimistic and find market opportunities.

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.

Source: CNBC, Capital Group, Bloomberg, Bureau of Labor Statistics, JP Morgan, Carson Financial

Promo for an article titled Here's Why Patience May Be an Investor's Greatest Asset.

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.

Fidelity Investments and Fidelity Institutional® (together “Fidelity”) is an independent company, unaffiliated with Kestra Financial or CD Wealth Management. Fidelity is a service provider to both. There is no form of legal partnership, agency affiliation, or similar relationship between your financial advisor and Fidelity, nor is such a relationship created or implied by the information herein. Fidelity has not been involved with the preparation of the content supplied by CD Wealth Management and does not guarantee, or assume any responsibility for, its content. Fidelity Investments is a registered service mark of FMR LLC. Fidelity Institutional provides clearing, custody, or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC, Members NYSE, SIPC.

Here’s Why Patience May Be an Investor’s Greatest Asset

Anxiety is rising about the stock market and the economy — and we are still months away from the next election year, when tensions surely will rise. Everywhere we turn, we see negative headlines about a potential government shutdown, inflation ticking back up, a potential recession, the UAW strike, the Fed’s plan for interest rates, student loan payments, a possible real estate crash, bankruptcies rising, and credit card debt surpassing $1 trillion for the first time.

These are legitimate concerns, but we think the chances of them becoming larger issues are smaller than many people expect.

Let’s first address the elephant in the room: the fast-approaching deadline for a potential government shutdown. During the last 20 government shutdowns since 1976, the market has been down only .3% on average, with the largest drawdown being 4.4% and the highest gain being 8%. A potential shutdown may cause only modest losses in economic output — and as is always the case, certain sectors may benefit, such as defense and healthcare.

Stocks Tend To Be Mixed During Shutdowns

S&P 500 returns during prior U.S. government shutdowns, %

Sources: U.S. House of Representatives, Bloomberg Finance L.P., Haver Analytics. Analysis as of Sept. 7, 2023. Note: Start date refers to the date that funding ended, and end date refers to the date that funding was restored.

Turbulent markets in 2022 and the prospect of higher money market and Treasury yields led investors to flock into money market funds and Treasury bills. Money market funds are at an all-time high of over $5.6 trillion. Cash investments remain attractive to many investors today, but the Fed appears to be nearing a turning point. 

No one knows for sure when the Fed will stop raising rates. However, the markets are projecting that we are very near peak rates and that rates may decline starting next year. Sitting in cash may feel very comfortable with rates over 5%, but the benefit of cash is eroded by moderate inflation. Additionally, cash or Treasury bills may see little additional upside once the Fed finishes raising rates. 

History shows that in the 18 months after when the Fed finishes raising rates, yields on cash-like investments have gone down rapidly. At the same time, both equity and fixed income returns were strong in the year that followed and remained strong for the five years that followed as well.

After Fed Hikes, Long-Term Results Outpaced Cash

Results have been front-loaded following the final Federal Reserve hike in the last four cycles (%)

Sources: Capital Group, Morningstar. Chart represents the average returns across respective sector proxies in a forward-extending window starting in the month of the last Fed hike in the last four transition cycles from 1995 to 2018 with data through 6/30/23. The 60/40 blend represents 60% S&P 500 Index and 40% Bloomberg U.S. Aggregate Index, rebalanced monthly. Long-term averages represented by the average five-year annualized rolling returns from 1995. Past results are not indicative of results in future periods.

After student-loan payments were paused in March 2020 because of the pandemic, borrowers will be forced to start payments again in October. Americans paid about $70 billion toward student loans in 2019; it is unlikely we will go right back to this level. Many people continued to pay their loans and didn’t take the government up on its free pass. 

The Biden administration recently cancelled $39 billion in loans for 800,000 borrowers. At the same time, a new plan called Saving on a Valuable Education could benefit another 20 million borrowers, forgiving loan balances after 10 years of payments, compared with 20 years previously.

Because of the pandemic, people didn’t spend as much as they typically would have. Much of that excess savings is now gone. Some fear that consumers are tapped and that without excess savings, the economy will not be able to grow. In actuality, the savings rate has grown over the past year, from 3.2% to 4.5%, but that growth not apparent if one is looking only at excess savings.

When the Fed raises rates as sharply as it did over the last 18 months, it often is viewed as a precursor to a recession. Many anticipate a recession because of an anticipated real estate crash and potential bankruptcies from an inability to refinance debt and banks not lending money.

What we have seen so far is that the economy has not slowed down — and if it does slow, it may just lead to slower growth, not necessarily a contraction or recession.

Many mortgages and loans remain at very low rates, as many borrowed aggressively when rates were at historical lows. The economy has remained strong but is not overheating, even with slowing inflation and a tight labor market. With a higher stock market and home values, investors feel comfortable and are not as concerned about savings.

There will always be reasons to worry or wonder if you should try to time the stock market — especially given the concerns we’ve listed above that can seem overwhelming. However, not doing anything can be a very powerful choice, especially when short-term yields are over 5%. Investor emotions are real; and as we have written before, Loss Aversion Theory tells us the fear of losing money is stronger than the joy that comes from making money. 

Losses in the past — such as 2008, 2011, 2018, 2020 and most recently last year — can leave scars for investors. However, as we continue to write weekly, we are in this for the long term —and markets don’t idle for long. Investors in cash may end up stuck if they wait too long to get back into the market.

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.

Source: CNBC, Capital Group, Bloomberg

Promo for an article titled 4 Strategies to Help Investors Worry Less About the Markets.

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.

Fidelity Investments and Fidelity Institutional® (together “Fidelity”) is an independent company, unaffiliated with Kestra Financial or CD Wealth Management. Fidelity is a service provider to both. There is no form of legal partnership, agency affiliation, or similar relationship between your financial advisor and Fidelity, nor is such a relationship created or implied by the information herein. Fidelity has not been involved with the preparation of the content supplied by CD Wealth Management and does not guarantee, or assume any responsibility for, its content. Fidelity Investments is a registered service mark of FMR LLC. Fidelity Institutional provides clearing, custody, or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC, Members NYSE, SIPC.

How Your Donation Can Benefit Charity — and Your Finances — on NTX Giving Day

With NTX Giving Day just days away on Sept. 21, it’s a wonderful time to think about making charitable donations for both philanthropic and tax purposes! No matter what your interests are, making gifts to the causes you care about can be one of the most meaningful uses of your money. In the end, of course, what really matters is helping an organization that matters to you; the tax benefits are just icing on the cake.

Charitable giving can offer both a financial benefit for you and your family as well as the intangible rewards that come with helping others and your community. Most donations to charitable organizations come in the form of checks or credit card payments. However, there may be more efficient ways to donate that can help both the charity and your pocketbook.

It’s important to understand the benefits of different types of donations.

Cash, Check or Credit Card

This is the most simple and straightforward way of donating to charity. It is important to keep a bank record or a receipt from the charity to substantiate a cash gift. For contributions in 2023, the annual income tax deduction limits for cash gifts to public charities increased to 60% of adjusted gross income (AGI). If contributions are made in excess of those limits, the excess may be carried over for up to five years.

If you do not have appreciated assets to give or want to give cash, some donors may find that the total of their itemized deductions will be slightly below their standard deduction. In that case, it could be beneficial to combine or bunch several years of tax contributions into one year.

Chart showing the benefits of tax-smart donation planning.
Standard deduction amounts are for married filing jointly. This example is hypothetical and for illustrative purposes only.

Appreciated Stock

Given the recent increases in the standard deduction, donating appreciated assets such as stock can have tremendous advantages. Gifts of stocks that have been held long enough to qualify as long-term capital gains (more than one year) can be deducted at the fair market value rather than your original purchase price. The downside is that your deduction can offset only up to 30% of your adjusted gross income (AGI).

Stocks that have not been held long enough to qualify for long-term capital gains (less than one year) receive a deduction for their cost basis, rather than fair market value. However, the deduction can offset up to 50% of AGI. Often, clients may donate the stock with the biggest winnings, which maximizes savings on capital gains, and then buy back the same stock with cash, which in turn raises the cost basis.

The chart below shows the difference between selling appreciated stock and then donating cash to charity compared with gifting appreciated stock. Not only would the individual save on taxes, as the charity does not pay capital gains tax, but the charity would also receive additional monies!

Chart showing the benefits of gifting stock to charity.
This example is hypothetical and for illustrative purposes only. The example does not take into account any state or local taxes or the Medicare net investment income surtax. The tax savings shown is the tax deduction, multiplied by the donor’s income tax rate (24% in this example) minus the long-term capital gains taxes paid.

IRA Qualified Charitable Distributions (QCD)

This is an option only for donors over the age of 70 1/2. Qualified Charitable Distributions allow individuals to give up to $100,000 annually directly from their IRA to charitable organizations. Donor Advised Funds are excluded; the donation must go to a qualified charity.

The QCD reduces the value of the IRA and does not count towards the donor’s taxable income. It also counts towards satisfying the annual required minimum distribution. Starting in 2023, donors can also direct a one-time, $50,000 QCD to a charitable remainder trust or charitable gift annuity.

Donor Advised Fund (DAF)

Picture a Donor Advised Fund as having your own family foundation without the headache and administrative hassle of setting one up. A DAF is a charitable account established at a public charity or community foundation that allows donors to recommend grants over time.

The donor decides the timing of the donation, the charity that will receive the donation and the amount of the charitable donation made from the fund. The donor claims the tax deduction upon funding of the DAF. There is not a requirement that the DAF has to distribute 5% of the fund each year, which may allow the DAF to grow, expanding the available dollars to donate to charities. Donor advised funds also can be a charity beneficiary of IRA assets.

At CD Wealth Management, charitable giving plays a significant role in our company. We believe in giving back with our time as well as with our pocketbook.

We support many causes in North Texas and encourage our team to be involved and to give back. Each year, during the holiday season, we make charitable donations in each of our team members’ names to their charities of choice as an additional thanks and at the same time helping a great cause.

It is part of our culture, part of who we are as a firm and who we are as individuals. Please do not hesitate to reach out to us to discuss your charitable options to help you determine the best way to give for your situation.

On Thursday, Sept. 21, visit the NTX Giving Day website to join the tens of thousands of others helping charities in North Texas! (Please note: All funding options above may not be available through NTX Giving Day.)

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.

Source: Schwab

Promo for article titled September's Surprising Potential: 5 Reasons for Investor Optimism.

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.

Fidelity Investments and Fidelity Institutional® (together “Fidelity”) is an independent company, unaffiliated with Kestra Financial or CD Wealth Management. Fidelity is a service provider to both. There is no form of legal partnership, agency affiliation, or similar relationship between your financial advisor and Fidelity, nor is such a relationship created or implied by the information herein. Fidelity has not been involved with the preparation of the content supplied by CD Wealth Management and does not guarantee, or assume any responsibility for, its content. Fidelity Investments is a registered service mark of FMR LLC. Fidelity Institutional provides clearing, custody, or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC, Members NYSE, SIPC.

September’s Surprising Potential: 5 Reasons for Investor Optimism

The drumbeat of negative news and noise remains constant. For some investors, it may be hard to remain optimistic with all the headlines about high inflation, higher interest rates, political discourse and a potential government shutdown — not to mention the upcoming election.

These feelings are valid — but they are only feelings. Feelings are not necessarily based on data and do not necessarily reflect how the stock market views the world. Feelings can be influenced by which political party you favor, but the market doesn’t care which party you like. It cares only about where the market is headed.

Here Comes the Worst Month of the Year

S&P 500 Index Average Monthly Returns (1950-2022)

Chart showing average monthly returns for S&P 500 from 1950-2022.
Source: Carson Investment Research, YCharts 9/2/2023 (1950-2022)

Historically, September has been the worst month for stocks and is one of two months that have been negative in a pre-election year cycle. Going back to 1945, the S&P 500 declined more than half of the time, with an average return of -0.73%. Going back to 1960, however, the last three months of the year have seen positive returns following a negative September. So while the immediate forecast for September may seem ominous, it is important to see the entire forest and not just the one tree in front of you.

Chart showing how September has performed against October, November and December in the markets since 1960.

If September is historically the stock market’s worst month, why would this September be any different? There are always silver linings to be found in the market if you look for them.

• Artificial intelligence: AI has fueled much of the rally for the year. Even outside of the technology sector, companies have jumped on the bandwagon and are embracing how AI can transform their businesses.

• Cash, cash, cash: Investors are holding more than $5.5 trillion of cash that is waiting to be invested into the market. Excess cash could help the market drive further gains.

• Apple: Wall Street is expecting the company to debut the next iPhone as well as new watches next week. Apple is the largest component of the S&P 500 at 7.35% of the overall index, and as Apple tends to move, the market follows. 

• ARM IPO: British chip design firm ARM Holdings is set to go public next week in the largest technology IPO for the year, with an estimated value at $52 billion. Investors are hoping that this breathes new life into the IPO market that has seen very little action since 2002. Mega cap tech companies are publicly talking about wanting to own stock in ARM.

• Credit spreads: A credit spread tells us how much extra interest over Treasury bonds investors are demanding from corporations that want to borrow money. If investors are worried about a recession, they may expect lending to companies to be riskier and, therefore, demand higher interest rates to compensate for the additional risk. As of today, spreads remain tight, and as seen in the chart below, they are not showing signs of stress compared to the recessionary periods in gray.

Credit Markets Show No Stress

Chart showing credit spreads since before 2000.
Source: Carson Investment Research, YCharts 8/25/2023

The last nine times that the market has been up more than 15% for the first seven months of the year and then had a negative August, the market averaged an 11.4% return over the final four months of the year. Will 2023 experience similar returns? Only time will tell, but as seen in the numbers below, the results have been positive 100% of the time.

Clues September Could Surprise Higher

S&P 500 Performance After a Big First 7 Months and Negative August

Chart showing how markets performed in years like this one, with a big first 7 months and a negative August.
Source: Carson Investment Research, FactSet 9/2/2023

The month of September remains a mystery. With the Federal Reserve meeting later this month, the possibility of higher rates remains — along with a potential government shutdown on Oct. 1. There are always silver linings to find in the market, as we outlined above, and we are looking forward to the remaining four months of the year. One thing that we can count on is that the markets are never dull. The markets remain forward-looking and focused on earnings over the long run — not on a day-to-day basis.

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: Carson, CNBC, Yahoo

Promo for an article titled Fall Financial Forecast: Be Prepared to Weather the Market’s Changes.

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.

Fidelity Investments and Fidelity Institutional® (together “Fidelity”) is an independent company, unaffiliated with Kestra Financial or CD Wealth Management. Fidelity is a service provider to both. There is no form of legal partnership, agency affiliation, or similar relationship between your financial advisor and Fidelity, nor is such a relationship created or implied by the information herein. Fidelity has not been involved with the preparation of the content supplied by CD Wealth Management and does not guarantee, or assume any responsibility for, its content. Fidelity Investments is a registered service mark of FMR LLC. Fidelity Institutional provides clearing, custody, or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC, Members NYSE, SIPC.

Fall Financial Forecast: Be Prepared to Weather the Market’s Changes

As we wind down the summer and get ready to enjoy Labor Day weekend, we are looking forward to cooler weather and calmer markets than we have seen in August. The month played out like we thought it would, with the markets taking a respite from the strong start to the year and stocks falling nearly 5% from the late July peak.

Each year, the S&P 500 typically experiences three corrections of 5% or more and one correction of at least 10%. (In March, we saw a pullback of nearly 8% after the failure of Silicon Valley Bank.) On average, a bear market happens almost every three years. Interestingly, the markets typically see more than seven 3% corrections in a year. 

It is vital to remember that volatility is normal — even in a bull market. Thinking of volatility in the stock market as a series of speed bumps rather than a roadblock can help you remain focused on the long-term plan rather than the short-term pain. 

Volatility Is the Toll We Pay to Invest

S&P 500 per year (1950-2022)

Chart showing volatility in the S&P 500.
Source: Carson Investment Research, Ned Davis Research @ryandetrick

Michael Burry, known for correctly predicting the epic collapse of the housing market in 2008, recently made news with another big bet against the stock market. It’s important for investors to remember that he is a trader who runs a hedge fund. He is not focused on long-term investing. He is hoping that one of his bets hits it big, and he then keeps a large portion of his investors’ profits. He is hoping for one big hit, but the assumption is that he knows he will have many strikeouts along the way.

It may take years for his investment theory to play out — if it plays out at all. We don’t have insight as to changes he makes or when he may decide to close out his short bet against the market. This is not the first time that he or other outspoken hedge fund traders have made bold predictions on the direction of the market. The chart below provides some interesting perspective on Burry’s recent warnings and how the market has fared for the six months that followed. This is a good reminder not to listen to the noise or get caught up in the headlines about large bets against the market.

Burry-ed

Six-month annualized S&P 500 rise after Michael Burry warnings

Chart showing returns after warnings made by Michael Burry.
Quotes on Aug. 28,2019; March 13, 2020; June 16, 2021; Sept. 29, 2022; Jan. 31, 2023. Sources: Factiva, FactSet

As fall approaches, we will begin to hear more discussion of a potential government shutdown on Oct. 1. Despite the debt-ceiling agreement earlier this year, Congress has not agreed on spending levels for fiscal 2024.

Historically, government shutdowns have not had a major impact on GDP or the stock market. The last six government shutdowns occurred in quarters with positive GDP growth. If another shutdown were to occur, this would be the seventh. However, Moody’s — the only one of the three major rating agencies that has not downgraded the U.S. debt — has commented that a shutdown this fall could lead to either a potential downgrade or put the U.S. on watch for one. 

A shutdown may lead to higher spending, which could continue to keep the economy humming along. At the same time, the U.S. is experiencing higher interest service costs due to higher interest rates, higher spending on entitlements and lower tax revenues. All of these factors are worsening the federal deficit. It is more than likely that after the 2024 election, we will be looking at a period of fiscal austerity to rein in spending.

Real GDP Growth Rate During Past Government Shutdowns

Percentage change from the preceding quarter

Chart showing the GDP growth rate during past government shutdowns.
Source: U.S. Bureau of Economic Analysis

This year’s key players — the Federal Reserve Bank, Wall Street and Main Street — all suggest that the outlook feels better today than at this time last year. With the market pulling back some in August, valuations look less lofty heading into the final quarter of the year. For fixed-income investors, better protection is being provided as well, with interest rates near peak. It is important to remember that even bull markets see periods of volatility — and volatility is perfectly normal for this time of year.

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: Carson, FactSet, U.S. Bureau of Economic Data

Promo for article titled Inflation, Growth and Uncertainty: Unraveling the Factors Driving Bond Yields.

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.

Fidelity Investments and Fidelity Institutional® (together “Fidelity”) is an independent company, unaffiliated with Kestra Financial or CD Wealth Management. Fidelity is a service provider to both. There is no form of legal partnership, agency affiliation, or similar relationship between your financial advisor and Fidelity, nor is such a relationship created or implied by the information herein. Fidelity has not been involved with the preparation of the content supplied by CD Wealth Management and does not guarantee, or assume any responsibility for, its content. Fidelity Investments is a registered service mark of FMR LLC. Fidelity Institutional provides clearing, custody, or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC, Members NYSE, SIPC.

Inflation, Growth and Uncertainty: Unraveling the Factors Driving Bond Yields

While we may hear about bonds or fixed income in the news, they typically don’t draw as much attention with retail investors because they are not as well understood or as alluring as stocks. While stocks fell for the third week in a row, bond yields moved higher. In just the last month, 10-year Treasury yields have gone up over 50 basis points (0.5%), reaching their highest levels since 2007. Yields across the globe are at their highest levels since 2008.

The Federal Reserve bank controls short-term rates. We have often heard about how many times the Fed has raised rates over the last year and a half. With the higher rates, we earn more interest on our cash, as money market rates are now over 5%. But what is driving long-term rates higher?

Inflation

Inflation has been front and center since the recovery from the pandemic. As we wrote last week, year-over-year inflation continues to come down compared to prices, but items generally cost more than they did than a few years ago. While the trend remains one of cooling and expectations are that prices should continue to fall, the Fed continues its rhetoric of higher rates for a longer time — and there still is the possibility of one or two more rate hikes.

Growth

We have been waiting for a recession for more than a year. The economy has survived rate hikes of more than 525 basis points (5.25). At the same time, most people who want a job can find one, and the unemployment rate is near historical lows at 3.5%. The consumer is still eager to spend, and credit card debt broke the $1 trillion mark for the first time.

The housing market is showing signs of stabilizing, even with 30-year mortgage rates reaching levels not seen for many years. The infrastructure bill passed last year has hopes of revitalizing spending in infrastructure and manufacturing. Artificial intelligence is expected to change the way we live and work for the better, and the U.S. GDP continued to grow at an annual rate of 2.4% in the second quarter.

Uncertainty

Investors tend to require more yield or compensation for locking up money over a longer time versus short-term periods of time. For bonds, that means demanding a higher yield for bonds that mature in 10 years than those that mature in two years. When things are more uncertain, investors demand even higher yields. A few events recently have added to bond anxiety, and thus higher yields:

• Fitch downgraded the credit rating of U.S. Government debt by one notch, from AAA to AA+.

• At the same time, the U.S. government is issuing more debt than expected to pay for spending, due to a combination of lower tax revenues and higher interest costs from higher interest rates.

• The Bank of Japan raised rates on its 10-year bond to 1.0%. The Bank of Japan is a large buyer of U.S. Treasuries, and with higher rates being offered in Japan, it may choose to shift its buying to its own bonds.

A combination of better growth and uncertainty seems likely to be behind the higher rates. A more resilient economy could mean that the Fed plans to keep interest rates higher for longer, even if it doesn’t raise rates again.

Higher bond yields mean that bonds offer more income and protection than they did a month ago.

With yields near the peak, this may provide an opportunity for investors to extend the duration (think of maturity) of their fixed income portfolio to lock in some of the highest rates we have seen since 2007. One way to accomplish this is a laddered bond portfolio of Treasuries.

A bond ladder, illustrated below, refers to purchasing bonds in a stepladder fashion with consecutive maturities to reduce credit risk, interest rate risk and volatility in a portfolio. For example, one may purchase an even amount of bonds maturing in increasing spans of time. As the bonds mature, you replace them in the next step of the ladder. If rates go down, you want to extend the bond ladder farther into the future. If you are worried rates will rise, you would want to shorten the bond ladder.


Chart showing examples of how a bond ladder works.


Most economists are not expecting the Fed to raise interest rates much further than where they are today, with the Fed Funds rate at 5.25-5.50%. With inflation on the decline, there is discussion of disinflation starting to rear its head, especially with vehicle and shelter prices easing further. With the government issuing more supply of Treasuries to cover a rising deficit and fund the tax shortage, longer-term bond yields continue to rise and decrease the spread between the short-term Treasuries and longer-term Treasuries. 

Higher long-term bond yields mean investors expect the Fed to keep rates on the higher side for a longer time, especially with the strong recent run of economic data. Expectations for future growth are shifting higher as the economy continues to prove its resilience. Ultimately, the bond market is signaling that rates may have to be higher than we have been used to over the past decade, which can be a good thing for investors seeking income.

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: JP Morgan, Schwab

Promo for an article titled As Inflation Falls and Net Worth Rises, Many Still Feel the Pinch.

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.

Fidelity Investments and Fidelity Institutional® (together “Fidelity”) is an independent company, unaffiliated with Kestra Financial or CD Wealth Management. Fidelity is a service provider to both. There is no form of legal partnership, agency affiliation, or similar relationship between your financial advisor and Fidelity, nor is such a relationship created or implied by the information herein. Fidelity has not been involved with the preparation of the content supplied by CD Wealth Management and does not guarantee, or assume any responsibility for, its content. Fidelity Investments is a registered service mark of FMR LLC. Fidelity Institutional provides clearing, custody, or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC, Members NYSE, SIPC.

As Inflation Falls and Net Worth Rises, Many Still Feel the Pinch

The S&P 500 fell for the second week in a row, but the losses were minor. Technology stocks were hit the hardest last week, while energy stocks surged. Credit card debt broke the $1 trillion mark for the first time; some economists think this is a sign that the consumer is tapped out and simply buying on credit.

It is important to remember that net worth has risen over the past few decades from $44 trillion in 2000 to $150 trillion today. Since 2000, credit card debt has gained 106%, but net worth has gone up almost 250%! Credit card debt accounts for 21% of disposable income, which is lower than the average of 26% over the past 20 years.

Inflation remains top of mind for most people over the last 18+ months. While the news continues to tell us that inflation is coming down, most people aren’t feeling the decrease in prices in their pocketbook: Food prices are still higher than where they were a few years ago and overall, it feels to most like it just costs more to live today than it did a few years ago.

Consumer Price Index (CPI), which tracks a basket of goods and services purchased by households, continues to be watched closely for signs that inflation is dropping.

In July, inflation was up 3.2% year over year, well below the June 2022 level of 9%. Energy, food and vehicle prices lead the charge on the way down. Over the past year, energy prices have been down 12%, food inflation eased to 4.9%, and used car prices fell by 6%. Energy prices have helped reduce headline inflation. Over the last three months, headline inflation has been running at a 1.9% annual rate. Cars and shelter make up 50% of the core inflation basket. (Shelter does not include home prices, only a measure of rents.)

Inflation is moving in the right direction – lower – but remains more persistent than expected over the first half of the year. Core goods dropped from 12% to .8% over the past year, while core service inflation has slowed only to 6.1% in July, down from a peak of 7.3% in February. When you take out food and energy, overall inflation has seen less progress, especially in services. The Fed target level of 2% remains the goal, but we may not see that until sometime next year.

Inflation vs. the Stock Market: 1928-2022

Chart showing average market returns from 1928 to 2022 when inflation is over or under 3%.

The stock market has experienced above-average returns when inflation was below average and has seen below-average returns when inflation was above average. Since 1928, inflation has been below 3% about 55% of the time; the average return in those occasions has been 15.7%. 

The market has experienced positive returns while inflation is over 3%, but nowhere near the average annual return of lower inflation. Higher inflation doesn’t guarantee lower stock market returns, but it makes sense that the markets aren’t happy with an increase in economic volatility.

The U.S. economy has expanded in the first half of the year, as measured by GDP. Consumer spending — which is 65% of GDP — remains resilient, partially as seen through the increase in credit card debt and increased net worth. Labor markets remain very tight, with unemployment at 3.5%. The Fed’s choices over the next few months will be critical for the markets to successfully navigate either a “soft landing” recession or no recession at all. 

Although inflation continues to move in the right direction, the economy remains strong, which may continue to keep prices higher than the Fed would like. As of now, economists think that the Fed will not raise rates in September, and many are forecasting the end of the interest-rate cycle. If that is the case, that should be a positive for the market as we head into the latter part of the year.

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: A Wealth of Common Sense, Carson Wealth, JP Morgan

Promo for an article titled What Does the U.S. Credit Rating Downgrade Mean for Investors?

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.

Fidelity Investments and Fidelity Institutional® (together “Fidelity”) is an independent company, unaffiliated with Kestra Financial or CD Wealth Management. Fidelity is a service provider to both. There is no form of legal partnership, agency affiliation, or similar relationship between your financial advisor and Fidelity, nor is such a relationship created or implied by the information herein. Fidelity has not been involved with the preparation of the content supplied by CD Wealth Management and does not guarantee, or assume any responsibility for, its content. Fidelity Investments is a registered service mark of FMR LLC. Fidelity Institutional provides clearing, custody, or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC, Members NYSE, SIPC.