It’s Been a Tough Year So Far

“If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.” – Warren Buffet, legendary investor and CEO of Berkshire Hathaway

The primary function of financial journalism seems to be terrifying us out of ever achieving our financial goals by shrieking about the market’s volatility. We are being reminded of this daily as some of the major stock indexes are now in “official bear market territory,” which is defined as closing 20% below their previous all-time high. Growth stocks, in particular have suffered the sharpest declines.

Every market decline of this magnitude has its own unique precipitating causes. I think it’s fair to say that the current episode is a response to two issues: severe inflation and the extent to which the economy might be driven into recession by the Federal Reserve’s somewhat belated efforts to root out that inflation by tightening monetary policy. Russia’s war on Ukraine, supply chain issues, China’s Covid lockdowns, and the like have piled on, but recession vs. inflation is the main event in my judgment.

Bonds

If you are in or near retirement, then you should most likely have some bonds in your portfolio. Bonds generally hold up well when stock prices move lower. However, bonds have performed poorly this year, too. According to the Wall Street Journal, bonds are having their worst year since 1842.[1] Yes, that was Eighteen Forty-Two. Interest rates have moved sharply higher this year, and bond prices generally move inversely to interest rates. For many investors, this year feels even worse.

Inflation

Inflation is turning out to be anything but “transitory” – the preferred term used by the Federal Reserve until recently. People generally respond to incentives. And every day that passes, the Federal Reserve is incentivizing people to spend money rather than hold it. Why would you hold money losing purchasing power at 8.5% per year (the rate of inflation) when you are earning next to nothing on it in a savings account? This might work for a while. But without a doubt, something must give here. Either short-term interest rates must rise further (the federal funds rate is .75% to 1.00%)…or inflation needs to come down substantially. And this is precisely what market participants are weighing: will the Federal Reserve significantly increase rates and drive the economy into recession? Or will they tolerate higher inflation for longer? They have a “dual mandate” to achieve stable prices and maximum employment. They are in a tough spot.

Regardless, if we go into recession, then we do. There is clearly excess money in the system. Capitalism is a terrific system that, through recessions, washes away the negative effects of poor decisions by government and private-market participants. We then reset the foundation for firmer economic growth.

Is the News All Bad?

No, it isn’t. In fact, over 90% of companies in the S&P 500 have reported first quarter earnings season, and the results are impressive. According to LPL, 74% of S&P 500 companies beat revenue estimates, 78% beat earnings estimates, revenue grew 13.4%, and earnings grew 9.1%. Obviously, market participants didn’t pay too much attention to these numbers when sending stock prices down, because these numbers are strong. Management teams seem to be figuring out how to work around the myriad labor and supply-chain issues. Without a doubt, some earnings numbers (and estimates) are, to an extent, being artificially increased by inflation. But if earnings and estimates continue to increase, then recession is probably not going to be a near-term event. Therefore, fingers crossed that we’re closer to the bottom of this downturn than the top, but much depends on the Federal Reserve.

Stay the Course

For long-term investors, capitulating to bear markets by selling stocks has generally proven to be a tragedy from which their retirement plans may never recover. Our investment policy is founded on acceptance of the idea that the only way to be reasonably assured of capturing the superior returns of stocks is by riding out their periodic declines. Please remember that since 1980, the average decrease in the S&P 500 is just over 14% in any given year – yet the S&P 500 has been positive in 32 out of those 42 years.[2] You should like those odds. Even the inflationary 1970’s saw the S&P 500 positive in 7 out of 10 years.[3]

My mission continues to give you the best chance of reaching the goals set in your financial plan. And that means staying invested. I cannot insulate you from short to intermediate-term volatility, but I can help you to minimize your long-term regret: the regret that follows from selling your stock positions when they’ve bottomed in price – and then resume their long-term advance, as they always have. I continue to counsel…stay the course.

Are There Any Opportunities in This Mess?

Yes! Roth Conversions – and Roth Conversions. Stock prices are already down substantially, and many people should consider converting funds from a traditional IRA to a Roth IRA – especially for married people whose tax rates are scheduled to remain lower through 2025 under the 2017 Tax Cuts and Jobs Act. When share prices are depressed, you can convert the same number of shares to a Roth IRA for a lower tax cost (due to the lower stock price valuation).[4] Then, ideally, the shares rebound in price inside a Roth IRA, and the funds can later be withdrawn tax-free.

Second, for non-IRA accounts, now is a good time to consider selling some investments that have suffered losses so you can book capital losses that can be used to offset capital gains now and in the future. For the right situations, clients can reap large tax gains by doing this.

Conclusion

I know this has been a painful drawdown in stock and bond prices. And I am acutely aware that it could get worse before it gets better. As always, I’m here to talk through the issues and any anxiety you might be feeling. It is a deep privilege to have earned your confidence and trust. Please stay patient, disciplined, stay invested…and stay focused on the goals in your financial plan.

[1] The Wall Street Journal, 05/06/2022
[2] JP Morgan, 04/30/2022
[3] S&P 500, 2022
[4] Whether it is advisable to convert funds to a Roth IRA depends on many variables, including among other things your current tax bracket, your anticipated future tax bracket, the IRMAA Medicare taxes, and your estate planning goals. Please consult your tax advisor prior to converting any funds to a Roth IRA.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Marshall Investment Management, LLC, a registered investment advisor. Marshall Investment Management, LLC and Kirsch Wealth Advisors are separate entities from LPL Financial.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
The information contained in this email message is being transmitted to and is intended for the use of only the individual(s) to whom it is addressed. If the reader of this message is not the intended recipient, you are hereby advised that any dissemination, distribution or copying of this message is strictly prohibited. If you have received this message in error, please immediately delete.

By |2022-05-17T19:23:35+00:00May 17th, 2022|Uncategorized|0 Comments

Inflation to Stagflation?

“When the facts change, I change my mind.  What do you do, sir?”– John Maynard Keynes, British Economist, and pioneer of Keynesian economics.

Until recently, I’ve been an optimist about the direction and impacts of inflation. But two things have caused me to shift my thinking – at least for the near to moderate term. First, the war in Ukraine. Second, the money supply continues to expand at a concerning pace.

Though shifting, the consensus view still seems to be that inflation should subside by year-end as the economy continues to open and supply chain and labor issues resolve. The Fed believes it will be back to near 2% inflation in a couple of years. There is now enough evidence to question this view. Sustained inflation, or perhaps even worse “stagflation” ala 2020’s style, looks like the more probable near-term direction.

Where is Inflation Coming From?

As noted in my last post, inflation is coming from three distinct places: fiscal “stimulus” funds, monetary policy (interest rates and the money supply), and Covid-induced shortages of labor and supply chain disruptions. The consensus view that inflation will moderate goes like this: the fiscal stimulus funds and giveaways are mostly completed[1], the Fed is tightening monetary policy, and the Covid-induced shortages will resolve as we go through the year. Fingers crossed, but I’ve grown skeptical.

We might be mostly complete with the fiscal giveaways, but that money remains in the system (and it’s not all spent, yet). The supply chain problems will eventually resolve – but pessimism is starting to set in around this issue for a timely resolution,[2] and the Ukraine war will pile on here.

The labor issues continue, and there doesn’t seem to be clear answers as to what is causing the labor participation rate to remain stubbornly low. The data is indicating early retirements, relocation to low-cost areas to work remote, fear of catching Covid at work, effects of long-haul Covid, Covid mandates, and daycare issues. In the 1970’s, we had stagflation coupled with a high unemployment rate. It’s easy to imagine that a continued tight labor market could create even more inflationary pressures should we experience stagflation now.

War

The war in Ukraine is clearly affecting energy markets – this is obvious at the gas pump. In addition, Russia and Ukraine are major producers and exporters of grain.[3] Russia is also a major exporter of fertilizer.[4] Expect more pain at the grocery store as food prices rise due to lower yields/supply. And that’s probably just the beginning of markets becoming distorted due to the war. China was already putting pressure on grains prior to the war as they try to rebuild their pig population after African swine fever. In addition, supply chains are being cut in the seas around Ukraine as insurance companies suspend coverage on shipping in these war zones. So in addition to sanctions, the private market acted quickly to cut off supply routes.[5] Western governments undoubtedly will be reviewing their defense budgets, and Europe is now facing difficult decisions on energy. None of this is a positive for inflation.

Money Supply

Adherents of the economist Milton Friedman are called monetarists. Monetarists believe that the money supply directly impacts inflation. As more money is created by the Federal Reserve and the banks, then inflation goes higher (if it’s not offset by real growth). The Federal Reserve, in contrast, doesn’t believe that the money supply is relevant in measuring inflation anymore. According to Jerome Powell, the head of the Federal Reserve, he believes that the link between the money supply and inflation was broken forty years ago.[6] So who’s correct? Given the imprecise nature of economics, it’s hard to say, but the evidence lately has been favoring the monetarists.

The chart below shows the money supply exploding once Covid struck and is continuing to advance 13% per year – it was growing around 6% per year pre-Covid. And the concerning problem is that inflation’s impact on an economy tends to lag the money supply by about 12 to 18 months.

Where Does Money Come From?

Two places: the Federal Reserve and banks. The Fed has been periodically buying massive amounts of bonds beginning with quantitative easing in 2009 (QE for short). QE was originally invoked as an emergency measure back then. But under Ben Bernanke, QE was resurrected as another monetary tool to boost the economy. QE sounds confusing, but it’s rather straight forward. The Fed buys government bonds from private market participants by “keystroking” money into existence (i.e., printing it). This cash infusion into the economy increases the money supply. Money needs to go somewhere, and now we have large amounts of money chasing limited supply and investment opportunities. This is a bit simplified, but you get the idea. The Fed currently has around $9 trillion (that’s a T) of bonds on its balance sheet.[7]

Banks also create money. Let’s say you deposit $100 in your bank account. The bank, of course, wants to make money on your $100. Let’s say they loan $90 to another customer and keep $10 in reserves. The bank just created money…$90 of it. That $90 is then spent into the economy or deposited in another bank (for further loans to be made).

To deter lending (and suppressing the money supply), the Federal Reserve might increase interest rates (reducing people’s willingness to borrow), sell government bonds to the banks (this soaks up excess funds that banks could otherwise loan), require the banks to keep more money in reserves (less money to loan), or pay the bank a higher interest rate to keep funds at the Fed (at some point, the bank will decide that holding funds at the Fed, risk-free, is better than loaning the funds to the public and taking on the risk of the loan not being repaid). So far, the Fed hasn’t done much.

What is the Fed Doing to Combat Inflation?

The Fed just raised short-term interest rates .25% and last November they began reducing the amount of bonds they are buying. But this might not be enough, and the Ukraine War has just complicated their job. If the Fed tightens monetary conditions too much in an inflationary economy awash with money, then we might be rolling out the term “stagflation” – low or even negative real growth with persistently high inflation. Further, a recession later this year or next cannot be ruled out if the Fed feels it must act aggressively to control inflation. But the Fed will be hesitant to act aggressively in an election year. The Fed is theoretically independent, but they don’t want to be blamed for election results.

Sheesh, Is There Any Good News Out There?

Yes, there is. Companies are aggressively investing and adopting technology to improve productivity.[8] Higher productivity is an absolute good in society. It raises our standard of living by contributing real, meaningful growth to an economy while raising wages for workers without contributing to inflation.

According to the St. Louis Federal Reserve, bank lending does not appear excessive[9] while the “velocity of money” is subdued.[10]  Velocity of money is the rate at which money is exchanged in an economy. If these measures remain stable, then that should help contain inflation. Monetarists believe that a higher velocity of money leads to inflation, so even if the expansion of the money supply begins to contract, velocity could pick up as the economy fully reopens thereby prolonging or worsening inflation.

Fourth quarter earnings reports were outstanding, and analyst estimates remain strong for 2022 and 2023.[11]  Excess money in the system should be a tailwind for stocks and support stock prices as we move through the year.

Lastly, if we go into recession, then we do. Capitalism has always been a relentlessly effective system that washes away excesses that result from poor government and private market decisions. Everything resets, stocks are “returned to their rightful owners”, and we start over. I still believe we remain in a long-term “secular” bull market, though, as always, things like geopolitical events could derail that.

Investing in an Inflationary World

While technology can be a powerful disinflationary force, it’s hard to see this force overcoming the severe shock of the Ukraine war to the world economy and the greatly expanded U.S. money supply.[12] If the monetarists are correct and the Fed is wrong on the money supply issue, then the Fed might be in process of committing the policy blunder of a generation.

Stocks generally do well in an inflationary environment, though they might struggle at first. But eventually, well-run companies can raise prices to keep up with inflation. An inflationary environment tends to favor solid companies that have a history of paying rising dividends. Government and high-quality corporate bonds struggle, but commodities generally perform well. Cash is a loser. Gold can also do well, but past results here are mixed. This new inflationary environment will cause investors to reexamine their assumptions, because investments tend to perform very differently across various levels of inflation.

We will remain well-diversified, but there is enough evidence that we should blend in additional defensive measures against inflation. I have added some exposure to commodities, energy, agriculture, utilities, natural resources, and metals in portfolios. I have also added more exposure to companies that have a consistent history of paying rising dividends. And it seemed prudent to add some focus to cyber security firms.

Inflation is deeply destabilizing to economies and always hurts the lower economic classes most. Let’s hope our leaders question all assumptions as they make decisions that affect the lives of so many Americans. And our thoughts and prayers go out to the people of Ukraine and Russia.

It can be difficult to stay invested, and the events of the last couple of years are testing us. As always, we deeply appreciate your continued confidence and trust. Please stay patient, stay disciplined, and stay invested.

[1] CNBC, 12/09/2021. But there remains plenty more to spend. In addition, the $1 trillion infrastructure bill has yet to be spent.
[2] New York Times, 02/01/2022.
[3] Wikipedia, data is for 2020 wheat exports.
[4] World’s Top Exports, 03/08/2022.
[5] Reuters, 03/08/2022.
[6] Reuters, 02/23/2022 and https://www.youtube.com/watch?v=SGNyCOlIEHY.
[7] FRED Economic Data, 03/16/2022.
[8] Bloomberg, 09/11/2021
[9] FRED Economic Data, 03/11/2022.
[10] FRED Economic Data, 02/24/2022
[11] Yardeni Research Inc, 03/14/2022.
[12] Barron’s, 02/04/2022

By |2022-03-18T21:31:30+00:00March 18th, 2022|Uncategorized|0 Comments

Mr. Market Says “Crappy New Year”

The market weakness that we saw last year with growth stocks has now spread to the rest of the market. The S&P 500 entered “correction” territory in January – meaning more than a 10% drop in value. The NASDAQ was worse. So why is Mr. Market in a bad mood?

Corrections are Normal

First, let’s not forget that 10% corrections are normal. Everyone is entitled to a bad mood from time to time. On average, the S&P 500 corrects around 14% each year (and around 11% in years that end positive)[1]. Election years tend to see more corrections, while the price gains tend to happen in the back half of election years. Elections clear up uncertainty, and markets like that. It’s therefore possible that some of this unpleasantness could be with us for a while.

The Federal Reserve

The Federal Reserve has announced that they are going to begin raising interest rates soon. By itself, this is NOT a negative. In fact, it signals that they’re confident the economy is strong enough to withstand higher rates. You wouldn’t know it based on Mr. Market’s attitude in January, but stocks generally do well around these time periods. If the Fed did not act, they would risk creating greater financial instability in the economy because cheap, excess money inevitably finds its way into unproductive investments. In other words, capital is invested in dubious projects – the old “Bridge to Nowhere” – and cheap excess money can also allow price bubbles to form. This eventually leads to much bigger problems. Think housing crisis in 2008. It’s therefore a good thing the Fed is finally acting.

Many market participants are now concerned about the “pivot” the Federal Reserve has made in articulating a more “hawkish” tone on inflation. Jerome Powell’s public appearance on January 26th did not assuage those concerns. The fear is that the Fed might tighten monetary conditions too much and trigger a recession. It’s certainly possible, but this seems unlikely in an election year. The “yield curve” is flattening[2], so the bond market is sending a strong message to the Fed that it might be unwise to raise interest rates too much.

Inflation

Inflation is coming from three distinct places: monetary policy, fiscal policy, and supply issues related to Covid.

The Federal Reserve controls monetary policy principally through short-term interest rates. They have also been buying bonds from the government to fund the federal government’s spending. The feeling is that the Fed is probably a bit late in tightening monetary policy, so now we’re hearing all this tough talk coming from the Fed. Time to start taking our medicine.

The fiscal part of inflation has its roots in the enormous amounts of money pumped into the economy by the federal government that caused the money supply to swell.[3] The money supply is up 41% versus pre-Covid. This is big. Normally, the money supply expands about 6% per year. This money had to go somewhere, and it fueled demand for goods (services, not so much due to Covid). It most likely inflated our house prices, too. But the money supply is normalizing – we’re only up around 13% in the last year. Though there is lag in its inflationary effects, the hope is that as we continue to normalize the money supply, inflation will calm down. We can only buy so much stuff, right?

Then there is the “supply-side” inflation where supply is being crimped by supply-chain bottlenecks and a persistently poor labor force participation rate. The Fed simply cannot do anything about these problems. This is a multi-faceted problem, but it seems that management teams are navigating these issues better than anyone expected.

So What Do We Make Of This?

The monetary and fiscal aspects of inflation are still playing out along with supply-chain issues, the labor participation rate, and Covid. And throw in the Ukraine crisis for good measure. It’s an unsightly mix, so it’s not surprising that we’re seeing volatility.

Corporate earnings, however, ultimately drive stock prices, and earnings forecasts remain strong for 2022 and 2023.[4] And don’t forget the old maxim, “The cure for high prices is high prices.” People adjust. In addition, management teams will do what they’ve always done – they go to work to solve problems. Supply and demand will ultimately converge to get things back in balance.

The economic fundamentals/backdrop remain strong, and stocks tend to do well in a rate-tightening cycle by the Fed. January reminded me of the selloff in the 4th quarter of 2018 – a near 20% drop that lasted into Christmas Eve sparked by Jerome Powell’s ill-advised statements to the press about raising interest rates (he was new on the job). Like then, there are plenty of reasons to suggest that this selloff will be seen as a mere tempest in a teapot – not the beginning of a big bear market drop.

Opportunities

Don’t let Mr. Market’s mood cause you to forget the opportunities caused by market turbulence. If you’ve been thinking of investing some excess cash, this is probably a good entry point for long-term money. Or if you’re considering a Roth conversion this year, now might also be a good time to have that discussion. Lastly, for taxable accounts (non-IRA accounts), it might be wise to think about booking any losses now instead of waiting for year-end.

Thank you for your continued trust and confidence. In the meantime, stay patient, stay disciplined, and stay invested.

[1] https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/guide-to-the-markets/ see page 16.
[2] https://www.treasury.gov/resource-center/data-chart-center/interest-rates/pages/textview.aspx?data=yield The yield curve reflects interest rates from the present out through 30 years.
[3] https://fred.stlouisfed.org/series/WM2NS.
[4] https://www.yardeni.com/pub/yriearningsforecast.pdf.

By |2022-02-01T21:06:20+00:00February 1st, 2022|Uncategorized|0 Comments

General Principles, Current Observations, and a Look at 2021

General Principles

Last year was another good year for investors. The major U.S. stock indexes closed near record highs, but the story was more mixed under the surface. I thought it might be helpful to remember what guides us in our financial planning and investing decisions. As a reminder, here are the general principles you and I are following:

  • You and I are long-term, goal-focused, planning-driven investors. The best course is for us to formulate a detailed financial plan and to build diversified investment portfolios that match the goals in our plans. We do not develop portfolios based on headlines, what’s “hot”, market movements, or some pundit’s view of the economy.
  • Inflation is in the headlines, but stocks historically have been very effective against inflation. Let’s consider stocks starting in 1965. I don’t think we’re headed into this kind of inflation, but the historical comparison might be helpful – and please remember that this was one of the most difficult stretches for stocks in the modern era precisely because of inflation. Earnings per share in the S&P 500 Index were $5.30 in 1965. By 1981, the earnings per share had climbed to $15.18.[1] In words, S&P 500 earnings nearly tripled. Inflation was almost identical over the same period – up just over 3 times.[2] Then the roaring bull market of the 1980’s started, and stocks have trounced inflation ever since.
  • We understand that diversification means investing in a variety of stocks that include small and mid-sized companies, foreign companies – both developed and emerging markets, real estate, bonds, and sometimes commodities. Diversification typically works wonders by helping us stay invested because it smooths out the highs and the lows of investment markets.
  • We believe in continuously acting on a rational plan versus reacting to current events. Unless our goals have changed, there is generally little reason to make significant changes to our investments.
  • We do not believe the economy can be forecast with much precision. Covid was the ultimate example of this. Likewise, investment markets cannot be consistently timed. We’re therefore convinced that the most reliable way to capture the long-term return of stocks is to ride out their periodic drops in value.
  • There are dozens if not hundreds of benchmarks in the investment world. While benchmarking can be important to evaluate a particular fund or strategy, it can easily lead us astray when we compare one to a diversified portfolio – too many benchmarks would be needed. Regardless, the performance of our investment portfolios relative to any given benchmark over an arbitrary time period is ultimately irrelevant to our investment success. You can beat a benchmark but still go broke in retirement. The most important benchmark is our financial plan, which indicates whether we are on track to achieve our financial goals.
  • We always make sure that we have enough cash (and bonds) for near-term expenses not covered by other (retirement) income so that we can more easily ride out the periodic drops in stocks prices.

Current Observations

  • The U.S. economy continues to recover in dramatic fashion. Earnings estimates were continuously revised higher for U.S. companies as 2021 progressed. Frankly, we’ve never seen so many earnings surprises to the upside.
  • The government provided massive monetary and fiscal relief. Reasonable minds might differ on whether the federal government provided too much or the right amount of relief. But the bottom line is that a tremendous amount of money was injected into the economy, and this helped households and businesses navigate through the government shutdowns and the worst pandemic in 100 years.
  • Inflation is proving to be more than “transitory”, and the labor force participation rate remains stubbornly low. It remains to be seen if these trends persist. We now have, in effect, supply-side inflation, and we haven’t seen this since the 1970’s oil embargos. But there is good reason to believe management teams have considerably more control over the current supply problems than we than we did in the 1970s.
  • Inflation has been surprising to the high side, but there are reasons for optimism. First, companies are now spending huge amounts of money to improve productivity[3] – post-pandemic, it’s become clear that companies must innovate and evolve. If successful, this should offset inflation. Second, technology continues to evolve, even accelerating, and technology is inherently disinflationary. Third, we have a declining birth rate and an aging population. Contrast that with the 1970’s when the Baby Boomers came of age and created a large mismatch in supply and demand. These are powerful, structural reasons to believe that inflation will retreat in the next 12 to 24 months.
  • If inflation is as bad as some media outlets claim, then one might wonder why gold hasn’t moved higher, most commodities are off their highs (some significantly lower), bond yields remain stubbornly low, and the dollar remains strong. Speaking historically, these are not inflationary signs.
  • It appears that the tax proposals set forth by the new administration have lost support. Reasonable minds might again differ on whether we need changes to the tax code. As investors, however, some of the proposals that have lost support can be viewed as a positive.
  • Large U.S. stocks had quite a run in 2021, but small and mid-sized companies are now looking quite attractive. The price-earnings multiple for smaller companies has dropped below large companies, and this is unusual.[4] While this is not necessarily a criterion for investing – and it’s certainly not a prediction – diversified portfolios like ours with exposure to small and mid-sized stocks could benefit nicely in 2022.

2021 Overview

Overall, large U.S. companies performed very well in 2021 along with many “value” companies that had been beaten down in 2020. I’m not sure there is ever a “normal” market, but 2021 was certainly not normal given the virus and massive government stimulus. As an example, Macy’s was up 135.38% last year while Amazon struggled to stay positive and was only up 2.38%. Macy’s was thought to be destined for bankruptcy prior to Covid. Many in our industry are calling this the “reopening trade.”

Real estate and commodities also performed very well. Bonds were mixed to negative. And small and mid-sized growth stocks along with foreign stocks had a very tough year, especially late in 2021. We saw hot inflation readings come through late last year, and Omicron piled on by fueling fears that more lockdowns and labor shortages would continue to feed inflation.

The sentiment turned decidedly negative towards many of the smaller growth and foreign companies near year-end. At the risk of getting too technical, inflation that leads to higher interest rates can cause growth stock prices to decline because future earnings are discounted back to present value at a higher rate of interest…in other words, current valuations are less. At least that’s the consensus reason for the turbulence. And higher interest rates could mean higher borrowing costs for these companies. Lastly, I believe that there was a fair amount of selling at year-end for tax positioning, especially among the more innovative and disruptive growth companies that performed so well in 2020 but struggled in 2021.

I sense that many investors could be overreacting to the inflation data. Yes, the inflation readings have surprised to the high side, but traditional readings of other asset classes don’t indicate 1970’s style inflation at this time. Gold, bond yields, and most commodities as mentioned above have all recently been trending down or holding steady. I’ve been humbled by markets often enough to recognize that I could be wrong, but I believe that inflation should settle down as the data points turn more positive in 2022. Despite the recent negative sentiment, the fundamentals appear to be strong in the smaller, innovative growth positions we’re holding, and when sentiment and fundamentals detach, it usually represents opportunity.

Thank you for continued trust and confidence. I am available by phone if you would like to speak. We wish you and your family a Happy New Year!

[1] https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/spearn.htm
[2] See https://www.bls.gov/data/inflation_calculator.htm
[3] https://www.yardeni.com/pub/capspendind.pdf and https://www.economist.com/leaders/2021/05/27/firms-are-rediscovering-their-love-for-capex-good.
[4] https://www.yardeni.com/pub/stockmktperatio.pdf. See Figures 3 and 4.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Marshall Investment Management, LLC, a registered investment advisor. Marshall Investment Management, LLC and Kirsch Wealth Advisors are separate entities from LPL Financial.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing involves risk including loss of principal.
The information contained in this email message is being transmitted to and is intended for the use of only the individual(s) to whom it is addressed. If the reader of this message is not the intended recipient, you are hereby advised that any dissemination, distribution or copying of this message is strictly prohibited. If you have received this message in error, please immediately delete.

By |2022-01-06T22:08:18+00:00January 6th, 2022|Uncategorized|0 Comments

Mr. And Mrs. Saver Discover the Benefits of Roth IRA Conversions

“Anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.” – Supreme Court Justice Learned Hand in Gregory v. Helvering, 69 F.2d 809, 810 (2d Cir. 1934).

Often, I like to remind clients gently that their money eventually will go to one of four places: the government, a nursing home, a charity, or the family. Which one would they like? Funny how the answer is always the same…not the first two. But to make that happen, we need to do some planning.

How would you like to accumulate another $300,000 to $500,000 by the time you and your spouse are 90 years old? This extra money could cushion against further longevity, to transfer a larger inheritance to your heirs, or to make a larger donation to charity at your death. And imagine you could do this without working longer, spending less, or taking more investment risk…sounds interesting, right?

In a newsletter format, I certainly cannot say that we can do this for you. But I will tell you that my typical married clients can do this. The opportunity, however, will begin dwindling over the next couple of years.[1] Clients of this office are typical “millionaire next door” types who have done everything correctly but are, unfortunately, a little heavy in their 401k or IRAs. As you know, funds in 401k plans and IRAs must be distributed and taxed eventually…there is no way around that.

The way we help clients create this additional wealth is by converting $50,000 to $100,000 per year from their IRA accounts to Roth IRA accounts and paying the taxes from an outside source (i.e., a savings account or another non-IRA investment account). It works because tax rates for married people are set to increase in 2026…please read on.

Basics of Roth IRAs

The Roth IRA became a savings option in 1998. Unlike a traditional IRA, Roth IRA distributions are tax-free if you play by the rules of a Roth. In contrast, while the growth of a traditional IRA is tax-deferred, the distributions are always taxable.

There are two ways to get funds into a Roth IRA. You can either contribute or convert. Contributions are limited based on the annual contribution limit and your income. Employers have also been able to offer a Roth 401k option since 2006 that ease but, do not eliminate, the restrictions. But one can convert an unlimited amount from a traditional IRA regardless of income. Now, there are practical limits to how much one might convert, but there are no restrictions like there are on contributions.

Conversions cause the amount converted to become taxable income in the year of conversion (while contributions must be made with after-tax funds). Let’s assume Mr. and Mrs. Saver, both recently retired, have over $1 million in their traditional IRA accounts and, after speaking with their very sharp financial planner, decide to convert $100,000 to a Roth IRA. Mr. and Mrs. Saver also have $90,000 in a savings account earning very little interest and a small brokerage account worth $60,000. Their other income consists of Social Security and pension income that totals $80,000 per year. By converting $100,000 to a Roth IRA, the Savers will have to report an additional $100,000 on their taxes for 2021 and will now pay taxes on $180,000 of income (less standard or itemized deductions). For most people in Colorado, this means that the Savers will owe an additional $26,000 to $29,000 in tax. But that $100,000, which is now in a Roth IRA may grow tax-free for them and their heirs.

Tax Cuts to be Eliminated in 2026

The Tax Cuts and Jobs Act of 2017 (“2017 Act”) reduced tax rates for married people. For my clients, the reduction is generally 12% to 15%. So if they were paying $1,000 in tax, now they’re paying $850 to $880. A provision in the 2017 Act states that these lower tax rates will “sunset” in 2026 – meaning that they will expire, and we will revert to the old, higher tax rates in 2026. Now, Congress could do anything, including extending the lower rates or passing altogether new tax laws. But gridlock and a return to the old rates seems likely.

A Stunner for Mr. and Mrs. Saver

Now imagine Mr. and Mrs. Saver sitting there wondering whether they should accelerate the tax burden and pay taxes over the next five years rather than waiting to withdraw their funds when the tax rates are scheduled to increase in 2026. The 24% tax bracket for married people filing joint under the 2017 Act currently goes to $329,850 for 2021. When that sharp financial planner for Mr. and Mrs. Saver ran the projections into the future, the Savers said they were “stunned” to see that they could have another $364,000 in total assets by the time they reached their early 90s.[2] “Finally!”, Mr. Saver shouted, “I can justify the fees I’m paying you.” “You’re funny, Mr. Saver,” said the financial planner relieved that the Saver’s were seeing the wisdom in doing this.

But wait, it gets better because the Savers have children. Right before Covid struck, Congress passed the SECURE Act in December 2019. Without wading into politics, this was, in essence, an estate tax aimed at people like Mr. and Mrs. Saver. That’s because, when they both pass away, their IRA accounts must be emptied within ten years if going to their adult children. For Mr. and Mrs. Saver, they anticipate that their two children will be in their high-income years when inheriting their IRA accounts. If the IRA accounts must be emptied within ten years during the time when their kids are in their high income-earnings years, it’s easy to understand that much of this money will end up going to the government.

“Now wait just another minute,” said Mr. Saver, “there’s more?!” Actually, there is, said the financial planner. From doing proper planning, it is clear that the Savers will not need 100% of their required minimum distributions (RMDs) during retirement to live their life and fund their goals. Funds held inside Roth IRAs do NOT have a RMD requirement.[3] Even if they did, there would be no tax due. But more importantly, the funds can continue to grow tax-free inside the Roth IRA while the Savers are alive (and for ten years with their children).

Mr. and Mrs. Saver Decide to Convert

Once they understood things, Mr. and Mrs. Saver decided to convert $100,000 this year to a Roth IRA, and they are now planning to do the same for the years 2022 through 2025. By paying the taxes sooner, they remove future earnings from being taxed AND their RMDs will be less, so therefore less tax payments for the government. The Savers will still have traditional IRA funds when they pass away. But after talking it over, they like the idea that they can give this money to charity while their kids (on an after-tax basis) inherit the same amount of money in Roth IRA accounts. The Savers nod approvingly when they realize that only the government is losing on this strategy.

When Mr. and Mrs. Saver were first told about this strategy, Mr. Saver resisted. “I’ve always been told that you defer, defer, defer taxes. Why on earth should I pay taxes now when I can wait? Plus, I’m 65 years old. This is for younger people.” “I get it,” said the empathetic financial planner. “That has been the traditional way of thinking about these conversions, and other clients have expressed similar concerns.” But even Mr. Saver finally admitted that, once he understood things, the benefits were too large to ignore. As Mr. Saver was leaving the financial planner’s office, he was laughing and said, “It took me a while, but now I’m convinced. You sure are a lot smarter than you look!” “You’re funny, Mr. Saver”, the financial planner said again, knowing that the amount of good he was doing for this family would be intergenerational.

Beware Some Potential Issues

This new approach to their financial plan sounds great, but their sharp – and admittedly handsome – financial planner told them that they must consider some potential issues. First, there is a 5-year rule that says they cannot withdraw earnings for five years after a conversion. They can withdraw principal, but not earnings. Second, if they end up with more income than they anticipate in any given year, they could trigger higher Medicare Part B premiums. The conversion would remain very much a net positive for the Savers, but the financial planner admitted that people are, shall we say, less than enthusiastic about paying more for their Medicare premiums. Third, there is 3.8% Medicare tax that, depending on other assets and income, could be triggered if the Savers’ income exceeds $250,000. Again, the conversion should most likely go forward – but this tax must be considered. Lastly, the Savers are told to talk with their tax preparer and make sure that they pay any estimated taxes due during the year of a conversion. Otherwise, a tax penalty could be assessed.

Summary

I don’t know of any better way than this to boost financial security for a married couple without taking additional investment risk, telling them to work longer, or to spend less. I want to emphasize that everyone’s situation will be different than Mr. and Mrs. Saver. But if you have interest in exploring this topic, then please reach out to schedule some time to talk.

Nobody can predict what Congress will do with tax rates. But the law as it stands today is that we will revert back to higher rates in 2026 for married people. You’ve been warned, so please act. I have read through the Biden tax proposals that were released on September 13th, and there is nothing in this release that indicates they are going to disturb this strategy.[4]

Bottom Line: Do yourself and your kids (and possibly a charity) a favor and consider converting traditional IRA funds to a Roth IRA. The temporary, lower tax rates in effect through 2025 are providing a unique opportunity to build wealth at the government’s expense.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Past performance is no guarantee of future results.
[1] This assume that the tax cuts of 2017 “sunset” in 2026 and rates move back up to where they were in 2017.[2] This analysis assumes that the old, higher tax rates go back into effect in 2026.[3] Though your adult children would have to empty an inherited Roth IRA within 10 years, but there would be zero tax paid on these distributions.[4] https://waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/SubtitleISxS.pdf

By |2021-12-07T19:14:59+00:00September 21st, 2021|Uncategorized|0 Comments

How Long Will This Bull Market Last?

Nobody can consistently time markets, but investors can lean into trends. And one powerful, current trend is a long-term bull market – oftentimes called a “secular” bull market. This discussion gets a little wonky, but please stick with it.

If you stayed invested through Covid, then you most likely feel good about your account values. I am keenly aware, however, that much of the media will run with the apocalyptic crisis of the day claiming that stocks are priced too high and doomsday lurks around the corner. The media oftentimes deliver the precisely wrong message at precisely the wrong time. How many predictions have you heard since the 2009 Great Recession that the bull market in stocks is about to end?

Bull and Bear Markets Defined

A bull market is one in which stock prices have increased 20% or more – and a bear market is one in which stock prices have declined 20% or more. Most often, people use the S&P 500 to discuss such markets. When referring to these markets, people are typically referring to “cyclical” markets, which tend to be short-term. “Secular” bull and bear markets, however, are based on a longer-term trend rooted in psychology. I believe that the current Secular Bull Market began in March of 2009.[1]

What Drives Secular Bull and Bear Markets?

Psychology, and specifically fear, primarily drives secular markets: fear of loss and fear of missing out (FOMO). Some might call FOMO greed or euphoria. Call it what you want – it’s all the same. When sober thinking stops and risk is disregarded, it’s a sign that FOMO has taken over. We have not seen FOMO/greed/euphoria in stock prices since the late 1990s during the dot.com era.

Think of a secular market as an entire market cycle that is based on these emotions. Lots of things change over the years, but human emotions do not change. It takes a long time to beat out of market participants every ounce of fear or optimism that they acquired over many years.

Consider how Secular Bull Markets typically end. Over time, people grow more comfortable with risk, whether it’s simply buying stock, borrowing money, or starting a new business. Perhaps you would even invest in a friend’s new venture. Everyone begins to participate, including borrowers, lenders, management teams, and investors…in other words, all participants in the economy. As people grow more comfortable with risk, they begin investing in projects that, frankly, should not get funded. It’s a sort of narcissistic optimism, if you will – they see the project as they want it to be, not as it is.

It takes years for FOMO to overcome collective fear and pessimism and vice-versa. You don’t see it month-to-month or even year-to-year. But over 15 to 20 years, it builds…deeply. Eventually, dumb ideas get funded by lenders, money piles into markets by people who are afraid of missing out on a rising stock market, and new investment vehicles come to market that, in normal times, would be unthinkable. At that point, an adult called Capitalism enters the room and shuts down the party.[2] Like a person who eats spoiled food, Capitalism forces these dumb ideas out of the system violently and quickly. People and companies get wiped out and file for bankruptcy while stock prices can decline 40% or more. But it eventually cleanses the system of toxic ideas so we can start over. A new era of pessimism has now begun…in other words, a Secular Bear Market!

Prior Secular Bear Markets

The last two Secular Bear Markets took place from 1968 to 1982 and 2000 to 2009. The S&P 500 topped out at 108.4 in 1968, and it hit 102.4 in 1982. Tough times indeed during the Great Inflation. The S&P 500 topped out at 1527.5 in March of 2000 and bottomed at 676.5 in March of 2009 – even tougher times! Were there “cyclical” bull markets in between? Yes, of course! [3] But it took many years to change the collective mood from FOMO to extreme fear and pessimism. A Secular Bear Market also took place from 1929 to 1949 – prior to the formation of the S&P 500.

Prior Secular Bull Markets

Secular Bull Markets have run from 1949 to 1968, 1982 to 2000, and 2009 to today.

During the 1949 to 1966 run, the S&P 500 started at 13.6 in 1949, and it topped out at 108.4 in 1968. That was nearly an 8x increase from the bottom over 19 years.

During the 1982 to 2000 run, the S&P started at 102.4 in 1982, and it topped out at 1527.5 in 2000. That was nearly a 15x increase from the bottom over 18 years!

As always, there were short-term “cyclical” bear markets that punctuated these Secular Bull Markets. The last Secular Bull Market saw three nearly 20%+ dips in stock prices that happened in 1987, 1990 and 1998. And we have seen similar events since 2009.

The Secular Bull Market prior to these two was the infamous Roaring 1920s that ended in deep despair and ushered in the Great Depression.

Where Are We Today?

If we use March of 2009 as the starting point – and some commentators use a later date – we are only 12 years and currently at a 6.2x increase from the bottom. I wouldn’t be surprised if we hit 10,000 on the S&P 500 in the next six years or so. Plenty of residual fear remains in this market from the 2009 Great Recession – that’s a good indicator that we’re not through with this run. If we top out around 10,000, then that would be consistent with the prior Secular Bull Market of 1982 to 2000. And the economic forces at work today are arguably greater than those from the prior two Secular Bull Markets. Consider the advances in robotics, artificial intelligence, genomics, battery storage, industrial innovation, 3D and 4D printing, cloud computing, and mobile technology. The internet powered the end of last Secular Bull Market and set the stage for the current technological improvements – 7 billion minds are connecting globally and solving all sorts of important problems. That might sound naïve to a pessimist. But remember: pessimists have never been very good stock investors.

Three stages to a Secular Bull Market

As an advisor, I learned a tremendous amount from Jeff Saut while he was the Chief Investment Strategist at Raymond James. He would talk about Secular Bull Markets having three legs: the relief or “wall of worry” leg, the high-powered earnings leg, and the euphoria leg. I believe we are now transitioning from the 2nd to the 3rd leg. The early signs of euphoria have begun: think cryptocurrencies, “SPACs”, and so-called “meme” stocks AMC and Gamestop. Stay tuned, lots more risk-taking likely to come.

The last leg of a bull market can persist for a long time. Alan Greenspan quipped about markets being “irrationally exuberant” in 1994 – six years prior to that Secular Bull Market coming to an end!

Consider that many financial advisors and investors have never seen, much less participated in, a Secular Bull Market. FOMO will feel good to them while it will scream caution to us who have experienced the tough times. Millions of new, young investors apparently began trading stocks during Covid. You’ve most likely heard the term “smart money” – well, perhaps large amounts of “not-so-smart” money are entering the system. This was brought home to me by my 19-year old daughter in late May. We were cooking dinner one night, and she asked, “Dad, remember when you told me not to invest in cryptocurrencies?” I nodded cautiously. She said, “Well, I will have you know that I made $2,500 on dogecoin!” “Really? Have you sold it?” She said, “No…I think it’s going to keep going up.” OMG – and people…I don’t say OMG!! Where did I go wrong? You might say that this is the modern-day equivalent of the shoeshine boy giving stock tips during the last phase of a Secular Bull Market. Either that, or she is on her way to becoming a speculator extraordinaire.

What Could Go Wrong?

Lots of things: war, unimaginable terrorism, a disastrous geopolitical event, or a pathogen that is more deadly than Covid, etc. We call these types of things “black swan” events – something that is unpredictable and devastating. As always, putting your capital behind companies with great ideas to improve our lives always carries risks. Therefore, I would not recommend crafting a reckless investment strategy – it remains prudent to match your investments to the time when you will need the money per a well-constructed financial plan. But you might take comfort that we could have many more years of positive investing returns ahead of us.

Summing it All Up

Be confident in the strength of this raging bull. If history is a guide, we probably have another 4-6 years left – perhaps more. That doesn’t mean we won’t see significant pullbacks in stock prices before it’s over. But I believe this bull has plenty more room to run until we get to collective FOMO. Plenty of fear remains left over in markets from 2009, but I would expect that to dissipate over the coming years.

Bottom Line: Stay patient, stay disciplined, and stay invested!

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Past performance is no guarantee of future results.
[1] There is no precise definition of when these secular markets begin and end. For an even more optimistic discussion on the current Secular Bear Market, see https://am.jpmorgan.com/blob-gim/1383635875343/83456/PI-EQT-SECULAR_2020_r2.pdf.
[2] More often than not, the Federal Reserves gets blamed for taking away the party’s punchbowl. Undoubtedly, the Fed can play a role, but remember that the Fed is an easy, political target to blame. The Fed wasn’t formed until 1913, and there were plenty of economic busts prior to that time. Don’t confuse correlation with causation.
[3] There were even great years for stock investors in the 1930s during The Great Depression. The Dow Jones Industrial Average gained 66.7% in 1933, 4.1% in 1934, 38.5% in 1935, and 24.8% in 1936. But the pessimism wasn’t done with the onset of the second wave of the Great Depression in 1937 when the DJIA lost 32.8%. See https://www.macrotrends.net/1319/dow-jones-100-year-historical-chart.

By |2021-07-17T13:50:01+00:00July 17th, 2021|Uncategorized|0 Comments

Inflation

As we all know, the media simply rolls from one crisis theme to the next. Catastrophic journalism continues to be alive and well. The latest crisis theme is inflation. But like most media-induced “crises”, I’m not too concerned about this one. Inflation certainly could get uncomfortable over the next six to twelve months, but there are reasons to think it won’t take root like the “Great Inflation” of the 1970s. There is a lot here, so I will do my best to break it down and explain things simply.

Government Actions

Both the Federal Reserve (monetary) and Congress (fiscal) acted strongly when Covid struck – much more aggressively than during the so-called Great Recession in 2008. The Federal Reserve has implemented extreme easy money policies including – but certainly not limited to – anchoring short-term interest rates near zero. On the fiscal side, Congress injected money directly into the system via “stimulus” checks, forgivable loans, expanded unemployment benefits, and deferred payments on rents and mortgages. Add all this up, and it’s like giving your 3-year old grandson a 6-pack of Mountain Dew and a box of Ding Dongs. Look out! The money supply has increased about 26 to 30% in the last year – it normally increases about 5-7%.[1] So there is a ton of money sloshing around in the system.

Severe supply chain disruptions and labor shortages are also putting pressure on prices. It appears that some government actions could be contributing to these pressures, though it’s not entirely clear. My hope is that the pressures will resolve once all states fully reopen and generous unemployment benefits are reduced.

Markets

The bond market has mostly shrugged off the inflation concerns, but the dollar has been under pressure – so there is cause for concern. Interest rates follow inflation, and the yield on the 10-year government note shot up to around 1.75% from .9% in the first quarter on inflation concerns. That caught market participants by surprise. However, the yield has fallen back near 1.45% as of this writing. Commodity prices have risen substantially. So has real estate. And the various consumer and producer inflation indexes are showing that inflation is now working its way into the system.

Forces That Should Keep Inflation Under Control

Technology, an aging demographic, government policies that favor regulation – though this can cut both ways – and a mid-term election next year should all work together to keep inflation under control. Higher taxes could also play a role. I have written for years that technology doesn’t get enough credit for keeping inflation under control. Nothing has changed with that thesis. If anything, Covid accelerated technology’s impact.

The Great Inflation of the 1970s

In retrospect, the causes of the Great Inflation of the 1960s and 70s shouldn’t have been a surprise. Demographics, easy Fed policies, elimination of the last link to the gold standard, and a heavy reliance on Middle East oil primarily led to the inflation. First, the Baby Boomers began hitting the system with a tsunami of demand. We simply couldn’t increase supply fast enough to meet demand like we can today. Second, Fed historians generally agree that the Federal Reserve was too easy with the money supply – and they are certainly easy today! Third, once Nixon closed the gold window to foreign banks, all discipline that a gold standard forced on the U.S. was eliminated. Hopefully, we’ve learned a bit since then. Fourth, we relied heavily on Middle East oil that was painfully brought to light during the 1973 and 1979 oil crises – and please note that energy was a much larger percentage of the economy back then. Let’s hope that we can continue to maintain the energy independence that we’ve achieved over the last 15 years or so. Lastly, throw in LBJ’s Great Society spending initiatives and the Vietnam war, and you had an inflationary hot mess. Yes, today’s situation has parallels to the 1970s, but I believe that better demographics and improved technology will keep us from another Great Inflation.

Stocks

If inflation ends up surprising to the upside, you will want to own stocks over bonds. Stocks are generally a good asset class that can handle inflationary pressures. Now, it won’t be pretty in the short-term, because stock prices will adjust to reflect new assumptions. But management teams can generally respond with price increases and improvements in productivity via technology. Assuming things don’t get too uncertain, management teams should be able navigate the current environment and continue to make profitable investments for shareholders. As a bondholder, however, you’re stuck with the rate of interest on the bond you purchased.[2] Therefore, bonds can be a bad place to be during periods of unexpected inflation.

Summing it up

Most of the inflation so far has been contained on the goods side – not services. But the concern here is that the Federal Reserve might have to increase interest rates sooner than expected if inflation runs too hot, especially if inflation expectations get imbedded into wages. That would certainly cause disruption in markets. And frankly, that might happen. If it does, then it does. Please know that we have set up financial plans to account for these inevitable dips in stock prices. And if it does happen, it’s best to think opportunistically, such as moving available cash into stocks or converting traditional IRA funds to a Roth IRA.[3] Investing is never risk-free.

Bottom Line: Nobody knows for sure where these inflationary pressures end up, and it could get rather uncomfortable before it gets better. But like all uncertainties, I believe that sticking to a strategy pursuant to your financial plan gives you the best chance of reaching the goals in your financial plan. After inflation, you can bet the media will be on to the next journalistic catastrophe. In the meantime, stay patient, stay disciplined, and stay invested!

Todd

[1] https://fred.stlouisfed.org/series/WM2NS[2] Unless you own U.S. Government Treasury Inflation Protected Securities (TIPS).[3] When stock prices are down, it can be a good time to move shares of stock to a Roth IRA. You can convert the same number of shares at a lower tax cost. Then, assuming stock prices rebound, the shares rebound inside a tax-free vehicle.
Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.

By |2021-07-16T15:41:02+00:00June 17th, 2021|Uncategorized|0 Comments

Growth Stocks Get Overdue Market Correction in First Quarter

Thank heavens we finally got a correction in growth stocks during the first quarter.  As painful as this sell-off has been for some positions, we badly needed to get some of the euphoric excess out of this market.  The catalysts that have sparked the selloff are being attributed to a sharp rise in U.S. government bond yields (i.e., interest rates) and inflation expectations.  The yield on the 10-year government note jumped dramatically in the first quarter – about 88% as of this writing from a low of .93% at the beginning of the year to around 1.75%.  Folks, that’s big!  This gets a bit wonky – so please forgive me – but the thinking is that growth companies are now worth less because their future earnings must be discounted at a higher rate.  Perhaps.  And I will admit that there is plenty more intellectual fun to be had by geeks like me with this discussion, but let’s set that aside for now.

The focus in most media circles has been on the “macro” factors – inflation, interest rates, government debt, etc.  While these are certainly valid concerns, I believe that more attention will turn to earnings as the year goes on.  Earnings estimates have been strong and rising.  My hope is that investors will realize that solid management teams with great ideas are still going to make money for shareholders despite higher interest rates.  The innovative themes that led the rally remain in place (i.e., robotics, artificial intelligence, genomics, battery storage, industrial innovation, 3D printing, cloud computing, mobile technology, etc.)

Now to the psychology part of this missive.  Stocks are best used as long-term investments to accumulate wealth slowly over time – not as speculative, gambling devices.  But when things get a little too good, people cannot stand the fear of missing out.  Alas, a little euphoria tends to bring weak participants into markets.  Human nature – as it always has been, and so it will ever be.  These “investors” are generally the last ones to get in when things are good and the first ones to get out when trouble arises.  You might say that stocks are then returned to their rightful owners!  Based on market data, it appears that we are seeing this story play out again with growth stocks.

One of the managers in our investment models has been elevated to near rock-star status for her performance last year causing large amounts to flow into her fund at the beginning of the year.  Moreover, websites have sprung up that mimic her trades as if everything she buys only goes up.  This behavior is ridiculous and stupid – it’s a complete disregard of risk.  Eventually Mr. Market is relentlessly efficient, and corrections send these sorts of “investors” back to the sidelines.  And right on cue, her fund sold off hard beginning in mid-February.

I’ve also followed the stories in Gamestop and AMC with great interest and concern.  They’re fascinating stories, and a lot of quick money was made and lost.  Apps like Robinhood have brought in a new, younger generation of market participants who, uh-um, shall we say…seem to have some different attitudes towards investment risk.   Ultimately, the broader participation should be positive for markets, but these new behaviors certainly appear to be causing some volatility in the short-term.

I know it’s never easy to watch certain stock positions go down, but please think of these times like you would when pruning a tree.  By removing the dead branches, new and healthier growth will emerge.  A more committed investor base should provide stocks a more stable foundation for longer-term potential growth moving forward.

Bottom LineStay patient, stay disciplined, and stay invested!

By |2021-03-30T16:51:10+00:00March 30th, 2021|Uncategorized|0 Comments
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