Topic: Wealth Planning

The second half of 2023 is fast approaching, and it may hold the potential for fewer surprises now that we have a debt-ceiling deal in place until early 2025. At the same time, global central banks are moving toward a pause in interest-rate hikes, and signs of potential U.S.-China tensions are cooling. That doesn’t mean that the markets don’t have anything to worry about — the ongoing war in Ukraine, stronger inflation than the Fed would like, an expected decline in company earnings, a likely recession in office real estate and potentially residential real estate, and worries that tech stocks, specifically those focused on AI, are in a bubble.

We feel confident that over time, stocks will make new highs yet again, just as they have for the last 100-plus years. The chart below is an interesting reminder that over the last 122 years, the U.S. economy tends to win in the end, despite tough market conditions. The chart measures the Dow over time and considers recessions, market corrections, wars and other news events. The chart’s strong upwards line to the right shows that over the long term, stocks have gone up, despite short-term setbacks and road bumps.

Dow Jones Industrial Average: 122 Years of (Mostly) Bad News

We are now more than 100 trading days into the year. The S&P 500 was up 8.1% through the first 100 days. A good start to the year historically has suggested continued movement higher. When stocks have been up more than 7% during the first 100 days, the rest of the year has been up 89% of the time — and has added another 9.4% on average. 

There’s no doubt that a big part of the performance during the first half of the year is attributable to the “Magnificent Seven,” as Jim Cramer has coined them: Apple, Amazon, Google, Meta, Microsoft, Nvidia and Tesla. Through the end of May, the top 10 largest stocks in the S&P 500 had an average return of 9%, while the other 490 stocks in the index returned -4%. (Remember that past performance is no guarantee of future performance.)

Stocks Up Big as of Day 100 Could Mean More Green

S&P 500 YTD >7% on Day 100 and what happened the rest of the year

Historically, June can be a weak month for stocks; earnings season is over, and the summer doldrums have begun. The S&P has gained only .03% on average, but as the chart below shows, June gains have been 1.2% on average when stocks are up more than 8% this time of year.

June Isn’t Always Weak for Stocks

S&P 500 performance in June, from 1950-present

As we head into the second half of the year, we will be watching the impact of higher interest rates on the consumer and real estate, inflation and how the Fed handles interest rates, and the reopening of China’s economy. The economy has not fully felt the impact of last year’s interest rate hikes and the possibility remains for an additional rate hike or two this summer. 

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: Brouwer & Janachowski, Carson, Fidelity, Schwab

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

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

Past performance is not a guarantee of future results.

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

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS.  Investor Disclosures: https://bit.ly/KF-Disclosures

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

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.

With a week left until the June 1 debt-ceiling deadline, the president and congressional leaders have been negotiating to raise the ceiling and enact some hopeful budget reforms. As we all know, Congress often waits until right before a deadline to take action, but that doesn’t mean there won’t be angst and potential volatility in the markets as we get closer to the deadline.

A default or funding delay in the U.S. Treasury market would have global impacts. As the map below indicates, few nations have a debt ceiling similar to the United States. Our Treasury market is the deepest and most liquid of any nation in the world and a central component of the global financial system. Over the past 22 years, the U.S. has needed to increase the debt ceiling 22 times. Denmark, the only other developed country with a debt ceiling, has increased only once, and it did so out of precaution, not necessity.

We knew coming into 2023 that the two parties would have a standoff over the debt ceiling. We have a divided government and deteriorating fiscal environment. Since January, when the debt ceiling was first breached, the U.S. Treasury has been using extraordinary measures to avoid breaching the debt ceiling.

Spending has increased this year due to higher interest costs and larger payments tied to inflation; those of you who are on Social Security can attest to the nice increase in your monthly payment. At the same time, tax revenues have fallen 6% over the last year, causing the debt ceiling date to be moved up from late July or early August.

What does each party want from the negotiations?

House Republicans are calling for a cap on discretionary (nonessential) spending, rescinding unspent COVID monies and energy-permitting reform. In exchange for those items, they are willing to raise the debt ceiling. Democrats are calling for “clean” legislation, an increase in the debt ceiling without any policy provisions or conditions attached. They do not want spending cuts, especially to Medicare or Social Security, and neither side politically can afford to cut those two government provisions.

Republicans have passed a bill out of the House that would raise the debt ceiling but would also mandate $4.8 trillion in spending cuts. As of now, this bill does not have the votes to pass the Senate. The most likely outcome is a cap on discretionary spending and pulling back in unspent COVID dollars. The biggest discretionary spending item is defense spending. The White House has proposed keeping this flat from fiscal 2023 to 2024 and then a 1% increase in 2025. The chart below shows the impact of proposed curbs on discretionary spending in dollar terms.

Discretionary Spending

FY, Billions of dollars

As we get closer to the deadline, most economists and political talking heads are anticipating this turning into a two-step process. The first step would provide a short-term debt ceiling increase. The second step would fill in details and would be paired with another increase in the debt ceiling to get past the 2024 presidential election. While it feels like we are in unchartered territory and Congress has never been this acrimonious, we have been here before. As a matter of fact, Congress has been able to come to a resolution 78 times in the past 63 years.

The actual threat of a default of the U.S. debt is extremely low. It is important to know that the deadline is not the same as the default date. The U.S. Treasury is expected to have a small cushion of funds on June 1 that should provide several additional days of breathing room.

On June 15, the Treasury department has a large tax collection from quarterly payments. This may be more akin to a government shutdown, where the Treasury would have to prioritize other government spending but would have enough funds for Medicare, Social Security, defense, etc. We are entering a period of fiscal restraint and austerity compared to the last few years, as we have become accustomed to the environment of fiscal stimulus and cutting taxes.

It is more important than ever to focus on what we can control at times like these. We shared this illustration last week, but it is worth repeating. What drives market returns is the right side of the seesaw: time in the market, controlling your behavior, savings rate and asset allocation.

What Drives Investment Returns

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: Baird, Fidelity, Schwab

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

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

Past performance is not a guarantee of future results.

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

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS.  Investor Disclosures: https://bit.ly/KF-Disclosures

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

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.

It seems like the stock market can’t get away from the never-ending drama that emanates from our nation’s capital. Congress has always raised the debt ceiling when needed, but concerns are building as the sides remain far apart and political divisiveness is as bad as ever.

The standoff has heightened uncertainty about the economy, as default would risk sending bond yields higher — and stocks and the U.S. dollar lower. Volatility is likely to increase in the financial markets. This is the scenario that played out in the 2011 debt-ceiling fight, and it is likely that we will see it happen if history repeats itself.

If no deal is reached, the Treasury has a couple of options:

1. Technical default. This is defined as an extended period of non-payment of interest and principal on the debt. In the U.S., assuming an agreement was eventually reached, investors would receive interest and principal payments, likely with accrued interest.  

2. Creative possibilities. The Treasury could issue premium bonds that would generate a price above par, giving the Treasury additional cash. Another option could be that the Treasury could invoke Section 4 of the 14th Amendment, which some argue could give the president authority to order the nation’s debts be paid, regardless of the debt ceiling.

The other big debate revolves around whether the Fed will continue to raise rates to combat inflation. One of the benefits of higher rates from the Fed has been the return of attractive cash and short-term fixed-income returns. The chart below shows the massive inflows into money market funds since the pandemic.

There is now more than $5.2 trillion invested in the money market. With money market rates close to 5%, it is understandable that investors have moved monies from their regional or national bank to take advantage of the higher savings rates. Yields for very short-term Treasuries are elevated compared to those even a few months farther out, as investors shy away from the risk that interest on Treasury bills could be deferred.

ICI Money Market Fund Assets (USD Trillions)

A big question facing investors is just how long short-term bond yields may remain at historically high levels. If inflation remains sticky, we may be in for higher rates than the market has priced in. This would give investors the ability to earn more on cash and short-term CDs and Treasuries for a longer time — which may cause some investors to time their reentry into the market since they are earning near 5% on cash and cash equivalents.

You always want to have emergency cash sitting in something, and right now that’s giving you a nice return. When the Fed decides to cut interest rates, whether later this year or next year, money market, short-term Treasury and CD rates will fall as well. When rates fall, bond prices will rise, which is what we saw often before the Fed raised rates in March 2022. If this were to happen, as many believe it will, bond returns will be additive to total return.

The picture below is important to remember during times like these. What drives investment returns is the right side of the seesaw: time in the market, investment behavior (not making rash decisions), saving more than spending and diversification in the portfolio. The items on the left side of the seesaw — politics, media, news, headlines, opinions from talking heads — are just noise. 

Noise does not drive long-term investment returns. To participate in the upside of the bull market, you must survive and stay invested through a potential recession or debt-ceiling crisis. If there is not an agreement and we see volatility pick up — or a market sell-off — think back to the picture below and remember the four things that matter for long-term investment performance.

What Drives Investment Returns

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: Baird, Bloomberg

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.

Last week, the Federal Reserve bank raised interest rates another 25 basis points (0.25 percentage point), taking the Fed Funds rate to 5%. This was the 10th time the Fed has raised rates since March 2022. However, this time the Fed hinted that the tightening cycle is nearing or at an end. The Fed has made no indication that it will reduce rates anytime soon, and some Fed governors are still talking about possible rate hikes. Still, the stock and bond markets are signaling that they will probably begin to reduce interest rates later this year or early next year.

Federal Funds Target Rate Crests 5%

The range hasn’t been this high since August 2007.

In the face of higher interest rates, the stock market has continued to hang tough despite continued regional bank worries with First Republic Bank failing last week and increasing concern about the commercial real estate market. Over the last month, the S&P 500 has remained steady and traded in a narrow range. What might surprise you is that going back over the past 52 weeks, the S&P 500 was virtually flat, despite the negative headlines of record high inflation, a bond market crash, aggressive Fed hikes, the war in Ukraine, lockdowns in China and two of the three largest bank failures ever.

That is not to say that there hasn’t been volatility over the past year, but as we always preach, staying invested pays off. If you chose to get out back in October, when the market was hitting its bottom, you would have missed the market’s move to get back to where you were last May. The chart below is another strong reminder why we advocate for staying invested, especially when times are the toughest.

The April employment data suggests that the economy remains strong and resilient. The economy created 253,000 jobs in April, well above economists’ expectations. For the first four months of 2023, the economy created more than 1.1 million jobs. The unemployment rate has fallen to 3.4%, the lowest level since 1969! 

The biggest reason that the employment picture matters is that consumption makes up about 70% of the economy. Consumption is driven by income, and income is made up of strong employment, wage growth and hours worked. Even better news is that income growth is running above inflation. That means people have more money in their pockets, which is a positive for the economy.

Unemployment Rate at Lowest Level Since 1969

There is no sign of an economic slowdown yet, with one big caveat: the debt ceiling. As we wrote recently, all eyes are on the debt-ceiling negotiations, and the clock is ticking. Treasury Secretary Janet Yellen informed Congress last week that cash balances are estimated to be depleted by early June. The Senate, House and President Biden have seven calendar days of overlap for discussion before then.

Days With House and Senate in Session and President Biden Available

We remain hopeful that a resolution will be reached, though political games raise the likelihood of a time-sensitive outcome, possibly with the need to extend the deadline. Should there be a need to extend the deadline, there may be additional volatility. We will continue to monitor the negotiations and the economy closely and keep you informed.

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, CNBC, JP Morgan

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

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

Past performance is not a guarantee of future results.

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

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS.  Investor Disclosures: https://bit.ly/KF-Disclosures

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

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.

Are we in a recession — or will we be in a recession soon? Will it be a hard or soft landing? Will the debt ceiling push us into a recession? How bad will it be on the stock market? 

These questions weigh on the minds of investors, business owners and decision makers — and the noise seems to grow louder each day. The Federal Reserve has been raising rates aggressively to combat inflation with the hopes of slowing the economy and wage growth. Essentially, the Fed is hoping for an economic slowdown and more layoffs. 

Doesn’t that sound like a recession?

Economic data is backward-looking by nature, while the stock market is anticipating where companies are headed and what their future valuation should be. Historically, the stock market has anticipated (and therefore priced in) improving economic conditions before they arrive. This makes market timing difficult and reinforces the importance of weathering the downturn. 

We fully recognize that downturns are not pleasant, but the markets historically have come out the other side much stronger. In the past, the stock market has tended to anticipate recoveries, rebounding ahead of any turn in the economy.

Returns Following the 5 Largest Market Declines Since 1929

Companies’ underlying fundamentals – revenue, profitability, cash flow, assets and liabilities — are the key determinants of stock returns across time. In other words, earnings are the key contributor to total return. For companies that reinvest earnings into revenue growth, better margins help investors weather the storm of a potential recession and come out stronger. Even as uncertainty clouds the big picture, companies that can maintain earnings growth throughout market cycles will remain prized, and their stock prices rewarded.

Fundamentals Dictate Long-Term Returns

S&P 500 Index sources of total return, 1988-2022

So, if we have a recession, what happens next? The U.S. still has a solid labor market. Household balance sheets remain strong. Inflation is moderating, and the Fed is near the end of the rate-hike cycle. This means strong wages and consumer confidence could boost consumer spending, providing additional help to a range of industries. 

Economists already predict that the Federal Reserve will have to begin lowering the Fed Funds rate later this year or next to stimulate the economy. A housing recovery could ensue, as mortgage rates could then begin to drop. Lower mortgage rates could provide a tailwind to construction spending and spending for other durable goods, like household appliances.

This may be the most widely anticipated recession in decades. Many investors remain focused on the timing and severity of the next recession. What if the recession is already priced into the market? Investors may be better served to prepare for what happens after a potential recession — and how we can benefit from the recovery instead of listening to the drumbeat of headlines about when a recession could happen.

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: Capital Group, Blackrock, S&P

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.

In January, we wrote about the impending debt ceiling and the Congressional showdown that was likely to occur. The current debt limit of $31.4 trillion was surpassed early in the year, and at that point, the U.S. government was not able to issue any new debt. It has been relying on emergency funds to meet short-term obligations. According to Congressional budget forecasts, emergency funding could run out as early as June.

The debt ceiling is the maximum amount the federal government can borrow to finance obligations that lawmakers and presidents have already approved. Increasing the debt ceiling does not authorize new spending commitments; rather, it allows the government to meet its existing obligations. 

Congress established the debt ceiling more than 100 years ago, and it has been modified more than 100 times since World War II. Its purpose was to make it easier for the federal government to borrow money, but it has become a political battleground that makes its way into the news every few years. Each time the ceiling comes up for debate in Congress, lawmakers wrestle over the ability to restrict the growth of borrowing.

If the government were no longer able to borrow, it would not have enough money to pay its bills in full, including interest on the national debt. It would probably have to delay payments or default on some of its commitments, potentially affecting Social Security payments and federal worker salaries, for example. Thankfully, this has never happened, so no one knows exactly how the Treasury would handle the situation. 

When Congress is divided, as it is today, a standoff can occur — and the creditworthiness of the U.S. government is at stake. These showdowns are not new; they have occurred under the control of both political parties and have always been resolved before the government had to default. The closest we have come to default was in 2011, when Standard & Poor’s downgraded the U.S. credit rating. In 2013, negotiations led to a 16-day government shutdown, and in 2018, we saw a shutdown of three days, followed later by a 35-day shutdown.

Debt Ceiling Showdowns Occur Regardless of Who Controls the White House

Over time, these showdowns did not tend to have a significant long-term impact. Even if the debt ceiling creates volatility in the market, now is not the time to take impulsive action. Well-managed companies adjust to shifting conditions, and the best companies ultimately learn to thrive, even in times of crisis. Markets have survived a great variety of disruptions in the past. The chart below shows different debt-ceiling showdowns. Over the long run, the market has trended up, despite the short-term volatility caused by debt disruption.

Markets Have Powered Through Debt-Ceiling Standoffs in the Past

The markets have historically been resilient. Even if this crisis is new, market volatility is not. Investors who stay the course have historically benefited over the long term. The chart below goes back only to 2009, but it is very telling. See how many events could have been a cause to panic or sell. Clearly, COVID accounts for the largest drop in the chart, but you will be hard-pressed to find the 2011 and 2013 debt crises. Those 15% to 20% drops in the market are barely noticeable. 

More importantly, as the chart above shows, the trend is up and to the right for those who stay invested. Over time, the market tends to go up, despite a multitude of reasons to sell. Over the next many weeks, we will hear a lot of noise about the impending debt showdown. If the U.S. misses a payment in June, it can and will cause a short-term shock to the markets. 

This is not a time to panic, but a time to potentially put additional monies to work in the market — if cash is available and part of the overall financial plan. Hindsight has shown that these are buying opportunities — but of course, past performance is not a guarantee for future success.

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: Capital Group, S&P, Ritzholtz

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.

Lately, it seems everywhere you turn there is talk of ChatGPT. (We even asked ChatGPT to help us write this article! ☺︎)

What is ChatGPT?

If you go directly to the source and ask ChatGPT what it is, you’ll get the following answer:

“I am an AI language model trained by OpenAI. I am a computer program designed to process and generate human-like text. I do not have my own thoughts or feelings, but I can analyze and understand written and spoken language, and I can use that understanding to respond to questions and prompts. I can also generate original texts based on a given prompt. I am trained on a large dataset of human-generated text and can use that knowledge to answer any questions and engage in conversations on a wide range of topics.”

Clear as mud, right?

As opposed to Siri or Alexa, these neural networks are trained on huge quantities of information from the internet of deep learning. (GPT stands for generative pre-trained transformer.)

The model behind ChatGPT was trained on all sorts of web content including websites, books, social media, news articles and more. It has been trained to provide answers to questions based on feelings, to auto-detect words and to provide outputs based on the inputs given to the users. The models have also been trained to chat with humans, continuously reinforcing learning from the feedback it receives from humans. Over time, it shifts its pattern and its responses based on the inputs and feedback.

How can you use ChatGPT?

Access ChatGPT by going to chat.openai.com or by downloading the app. If it is your first time, you will need to set up a free account with OpenAI and register with your email address and phone number. There is no limit to how much you can use ChatGPT in a day. Recently, OpenAI added a premium service, costing $20 per month, for heavy users to limit downtime and gain priority access to new features with faster response times.

Using the ChatGPT chatbot is fairly simple; all you need to do is type in your text and receive the information. The key is to be creative and see how ChatGPT responds to different prompts. If you don’t get the intended result, try rewording your question or give ChatGPT further instructions.

How are others using ChatGPT?

ChatGPT won’t answer every possible question, as it does have safeguards in place to “build a safe and beneficial artificial general intelligence.” In addition to answering simple questions, the model has many functions. It can compose essays, describe art in great detail, have philosophical conversations and even write code. Some of the most common uses of the tool include:

• Generating ideas and brainstorming. This can be helpful with your next blog post, new recipes or party ideas.
• Finding personalized recommendations. ChatGPT can act as your shopping assistant or offer you movie recommendations tailored to your likes or dislikes.
• Understanding complicated topics. ChatGPT can give you a succinct, clear overview in layman’s terms.
• Employing a writing assistant. It can provide customized content that you can use in a variety of situations.
• Translating a language. As of now, ChatGPT can translate text into 95 different languages.
• Getting assistance with travel plans. It can help with everything from finding flights and accommodations to suggesting popular destinations, attractions and restaurants.
• Advancing your career. ChatGPT can help you with job searches, interview preparation and even career advice.

What are the disadvantages?

Despite its advanced capabilities, ChatGPT is not without its limitations. Among its top limitations are:

• Lack of common sense. While it can generate human-like responses, ChatGPT does not possess human-level common sense and lacks background knowledge that we may have. This means that it can provide nonsensical or inaccurate responses to certain questions or situations.
• Lack of emotional intelligence. It does not possess true emotional intelligence. ChatGPT cannot detect emotional cues or respond appropriately to complex situations.
• Limitations in understanding context. ChatGPT doesn’t get sarcasm or humor, and it can struggle to grasp subtle forms of communication.
• Limitations of handling multiple tasks at once. As of now, ChatGPT performs best when given a single task or objective.
• Limited knowledge. Although ChatGPT has access to a vast amount of information, it is not able to access all of the knowledge that humans have.
• Computational costs and power. ChatGPT is highly complex and sophisticated. It requires substantial resources to operate efficiently, which means it can be expensive.

What’s the future of ChatGPT?

The obsession with AI is not slowing down anytime soon. It will be fascinating to watch how ChatGPT continues to be integrated into other applications and uses. ChatGPT has the potential to be transformative not only in the personal space but also the business landscape. The ability to automate routine tasks, provide data analysis, support multiple languages and improve data accuracy could change the way resources are allocated – i.e., more jobs for computers and fewer jobs for humans.

The future impact will depend on how quickly and effectively businesses adopt the technology and integrate it into their companies. Ultimately, ChatGPT and AI are not going away, so we will need to learn how to use them effectively — and quickly.

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: CNBC, DigitalTrends, Forbes, Investopedia

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 we move into the second quarter of the year, we want to provide a recap of the first quarter and our thoughts on what we see for the months ahead. As is typical with the markets, the first three months of 2023 were anything but dull:

• After raising rates last year by 425 basis points (4.25%), the Federal Reserve raised rates again by 25 basis points in both February and March.
• The money supply, measured by M2, went negative, and quantitative tightening basically went unnoticed. 
• The yield curve remains inverted. (Remember, every recession has been preceded by an inverted yield curve, but not every inverted yield curve leads to a recession.)
• Gold prices are near all-time highs.
• Egg prices soared to historic levels.
• The war in Ukraine entered its second year with no apparent end in sight. 
• Capping it all off, significant bank failures in both the U.S. and Europe triggered a short sell-off and revived worries of the 2008-2009 financial crisis.

Through all of this, the market was higher for the first quarter, led by the NASDAQ and large-cap technology stocks. Last year’s laggards – technology, consumer discretionary and communication services – turned into first-quarter leaders, while last year’s leaders — energy and utilities — were the laggards. 

Money market funds soared with total inflows of $5.1 trillion, far exceeding the pandemic peak of $3.2 trillion. This was a result of the Fed raising rates nine times over the last year as well as a lack of confidence in small and regional banks following the Silicon Valley Bank fallout. We expect to see a dramatic tightening in lending standards enacted this year. Small to mid-size banks are likely to be subject to stricter regulations, such as higher capital and liquidity requirements, periodic stress testing and restrictions on types of investments banks can employ in their bond portfolios (similar to the largest financial institutions).

Looking ahead, the equity environment remains focused on inflation, residual banking turmoil, the Fed and interest rates and the prospect of a recession, both here and abroad. We continue to watch the labor market — which showed strength in March with the unemployment rate near a 50-year low — consumer liquidity constraints, commercial real estate markets and how these factors play out on corporate earnings and ultimately margins. 

Expectations about the Fed and interest rates have shifted in the wake of the banking crisis, and the market is forecasting that we may be close to peak rates for the current cycle. If that is the case, equities could benefit. The chart below shows that in the six-month periods after federal funds have peaked, stocks gained an average of 11%. In the seven such cycles going back to 1981, five were positive and losses were relatively small in the two periods where stocks were negative.

Russell 1000 6-Month Forward Returns Following Peak Rates

Stocks have had two consecutive quarters of strong returns. History shows that consecutive 5% quarters rarely happen in the middle of a bear market. More often than not, they happen at the start of a new bull market. As the chart below shows, the rare signal suggests the potential for more strength. Two quarters later, stocks have been higher 21 out of the past 23 times after this bullish signal.

Back-to-Back 5% Quarterly Gains Rarely Lead to New Bear Markets

Consecutive 5% Quarterly Gains for the S&P 500

We expect volatility to continue as overall market sentiment is historically low. The consumer remains strong, despite increased credit card debt and decreased savings levels. For now, the positives outweigh the negatives in the current market. The Fed seems to be nearly through raising rates, inflation continues to fall, global manufacturing is rebounding, China continues to reopen, and employment remains strong. The key for investors is to remain calm and look past the turbulence — and be ready to act when opportunities arise.

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: BofA Merrill, Carson, Horizon

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.