11/11/2020 - Watch for market commentary from our Director of Investments, Angela Palacios, CFP®, AIF®. Let's take a close look at how the presidential election impacted the stock market.
The Center's Complete Third Quarter 2020 Investment Commentary
Contributed by: Angela Palacios, CFP®, AIF®
The year 2020, unlike 20/20 eyesight, has brought investors everything but clarity when it comes to stock markets and the economy.
Watch the video below or read the complete summary for a recap of our thoughts and reflections on the year and what we are paying attention to in the near future.
As if normal volatility of an election year wasn’t enough, the Covid-19 pandemic continues to linger and cases are back on the rise since early September. There is massive uncertainty over the spread of the virus, vaccine trials, business solvency, Americans’ jobs, and government stimulus that will continue to weigh on stock prices.
Despite the volatility and uncertainty surrounding investors through the first three quarters of the year, the performance of some major asset classes remain positive. Large U.S. stocks have ridden the backs of technology and consumer discretionary stocks (or should I say Apple (AAPL) and Amazon (AMZN)?) bringing the S&P 500 to +5.57% through quarter-end (since 12/31/2019). U.S. bonds represented by the Barclays U.S. Aggregate Index are up almost +6.8%, and gold is having a banner year up over +24%. Not everything is rising though. International developed, emerging markets, and small-cap stocks remain in negative territory with three months of trading to go.
Apples are in season…
Our favorite Apple IOS14 update is the new home screen widgets. It is likely tempting to add the large widget to watch updates on the S&P 500, Dow, and NASDAQ performance with every phone notification throughout the day. We understand you watch these numbers too, particularly during the volatility of 2020. Simply watching index returns doesn’t tell the entire story though. In previous years, the largest 5 to 10 companies’ performance contributed to the S&P’s annual return much less than they have this year. As of September 30th, the top five most heavily weighted stocks within the S&P 500 year-to-date (YTD) performance was 35%, with the overall YTD S&P 500 (price return) at 4%. The 495 other companies included in the S&P 500 returned -3% collectively.
The domination in returns has come from household names such as Facebook, Amazon, Apple. Alphabet(Google) and Microsoft. While many fear this rhymes with the technology bubble of 1999, these companies are in very different positions than they were at that time. Heavy cash on the balance sheets and lower Price to Earnings ratios (P/E ratios) now versus then speak to some of these differences.
Politics and Pandemics too intertwined for comfort…
The headlines to watch during these final months of 2020 will be centered on two topics: the November election, and the Covid-19 pandemic. We’ll be watching both closely and constantly reviewing new information as it pertains (or doesn’t) to your financial plans.
One major source of uncertainty following the elections will be any potential new tax code, but there may be less to worry about than you’d think when it comes to potential changes. We are assuming a tight election, and, while we are not in the business of predicting elections, we can gain insight from the past when it comes to potential tax changes. If President Trump remains in office, we’d be looking at 4 more years of the same, but even if the Democratic Party sweeps the executive and legislative branches of government – it may be a tough sell to raise taxes amid a pandemic/recession. Despite a historically low tax environment, there are a lot of businesses that are already struggling and unemployment remains high. While unemployment is off of its record high near 15%, it is still sitting near a historically high measure of 7.9%. This does not favor tax increases. Looking back to when President Obama took office in ’09, we were coming out of the Great Financial Crisis and it took years before there were any significant tax hikes.
More political uncertainty: the Supreme Court justice nomination following the passing of Supreme Court Justice, Ruth Bader Ginsburg. The Senate is currently controlled by Republicans, and they are pushing to get President Trump’s nomination, Amy Coney Barrett, sworn in before the election. The only problem is, Covid-19 may get in the way of a Senate vote as well, with several key members testing positive for Covid-19. With President and First Lady Trump testing positive for the virus, Washington D.C. is on high-alert to protect the health and safety of our government officials. Uncertainty about when the Senate will be able to meet and continue the nomination process may cause some market volatility.
As always, we urge you to check out our blog where we have wrote on many of these topics repeatedly over the years. History doesn’t repeat itself, but it often rhymes, and it has told us that staying the course despite ever-looming market uncertainty has paid off time and time again. This may feel even harder during an election year, but remember that history has shown political parties have no bearing on long-term stock performance. Now stay healthy, stay invested, and go vote!
Angela Palacios, CFP®, AIF®, is a partner and Director of Investments at Center for Financial Planning, Inc.® She chairs The Center Investment Committee and pens a quarterly Investment Commentary.
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the author, and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. Any opinions are those of Angela Palacios, and not necessarily those of Raymond James. Expression of opinion are as of this date and are subject to change without notice. There is no guarantee that these statement, opinions or forecasts provided herein will prove to be correct. Individual investor’s results will vary. Past performance does not guarantee future results. Rebalancing a non-retirement account could be a taxable event that may increase your tax liability The forgoing is not a recommendation to buy or sell any individual security or any combination of securities. The companies engaged in the communications and technology industries are subject to fierce competition and their products and services may be subject to rapid obsolescence. Gold is subject to the special risks associated with investing in precious metals, including but not limited to: price may be subject to wide fluctuation; the market is relatively limited; the sources are concentrated in countries that have the potential for instability; and the market is unregulated.
How Are Fearless Billionaires On The Campaign Trail?
Contributed by: Jaclyn Jackson, CAP®
If you thought this blog was about Donald Trump, your leg was just pulled. This candidate’s name starts with a “J.B.”, that’s right – Jeff Bezos (pulled again). On August 26th, the Amazon Founder and CEO became the first person ever worth an unprecedented $200 billion. This happened just before 2020 required the best August returns since 1984 and US markets recovered from deep pandemic-facilitated lows by exceeding mid-February pre-pandemic highs. All the while in true Tale of Two Cities form, a global pandemic has millions of Americans reconciling above-average unemployment rates and highlighted a variety of social disparities through seemingly targeted infection rates. Amazon, specifically, has received unfavorable headlines during the pandemic as essential workers strike against the alleged lack of virus-related safety precautions taken by the company and unsatisfactory compensation.
Democratizing Capitalism
Although wealth inequality isn’t new, the pandemic amplified its implications. (As of writing this) Presidential elections are approaching. Like most elections, economics lead the ballot. Observing recent history’s populist-leaning politics, Pershing Square Capital founder and billionaire hedge fund manager, Bill Ackman suggests democratizing capitalism in his latest letter to investors. In the letter, he touted capitalism as the best system for maximizing the size of the economic pie. Yet, warns the lack of wage growth for most Americans facilitates Black Swan-like risks for investors as lower/middle-income Americans advocate radical change that overhauls modern capitalism. Essentially, social unrest poses a threat to investors. Ackman’s solution was creating programs that widen market participation (and subsequent gain participation) to individuals who can’t traditionally invest thereby restoring faith in capitalism.
Aligning Interests
Which brings it back to Jeff Bezos. Many anticipate the CEO will follow Tesla and Apple’s lead, by splitting Amazon stock. On the surface, stock splits are superficial. Technically, they don’t equate to any value change for a company. However, stock splits have historically been used to signal a company’s strength or hint that something good might be on the horizon for the company. As illustrated by the latest Tesla and Apple stock splits, many investors take note and likely load up on company stock consequently boosting the company’s value.
So, what does Jeff Bezos splitting Amazon stock have to do with Bill Ackman’s thoughts on saving capitalism? Amazon is one of the few businesses to profit during the pandemic directly contrasting the experience of small business owners and the general public alike. It becomes more challenging for the average person to praise Jeff Bezos’ extraordinary wealth when their experience mirrors Amazon employees who are frustrated by the inability to work safely or receive adequate compensation. At the current stock price, many cannot join in on Amazon’s success. By lowering the individual stock price, a stock split increases access to a wider range of investors. More participants in Amazon’s meteoric rise could increase their customer base, increase customer loyalty, and even discourage (at least in public opinion) attempts to break up the company as it moves into a monopolistic stratosphere. Perhaps designing a way for Amazon’s essential workers to more easily invest in the company could solve compensation distress. Jeff Bezos wins the day by making Amazon stocks more accessible; he sets his business and himself up to potentially gain more wealth and with a wider range of investor participants, he gets buy-in from the average individual. Bezos’ success becomes the average person’s success and their interests align in capitalism; Ackman’s resolution in practice.
No matter the political view, most Americans would agree that democracy is the blood and bone of our nation. Whether we are practicing democracy through voting or considering new ways to exercise democracy (as Bill Ackman explored), we are uplifting the country’s greatest strength.
Jaclyn Jackson, CAP® is a Portfolio Administrator at Center for Financial Planning, Inc.® She manages client portfolios and performs investment research.
The forgoing is not a recommendation to buy or sell any individual security or any combination of securities. Be sure to contact a qualified professional regarding your particular situation before making any investment or withdrawal decision. The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Jaclyn Jackson and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Individual investor's results will vary. Past performance does not guarantee future results. Investments mentioned may not be suitable for all investors.
2 Reasons Why Your Investment Portfolio Needs Adjusting
Contributed by: Abigail Fischer
It’s historically proven, the age-old advice urging you to stick with your investment plan through thick and thin. The Center preaches this, especially during market volatility. But maybe your financial advisor has recently suggested making a change in your investment plan. How could this be? Well, there are two possible reasons: either your circumstances changed or new information emerged about the market.
1. Your circumstances changed
Retiring in 2020 or the near future? Wow, what a way to end your career, and congratulations! There may be a case to make your portfolio more conservative so that when volatility hits, you see less downturn than you might in a more aggressive model. Read this if you’re concerned about your 401k balance fluctuation.
Big purchase ahead? Sticking with your investment plan is a long-term view. When you’ve set your sights on a making a big purchase soon, consider taking a portion of your portfolio to cash or a short-term fixed income fund.
Your paycheck comes from your portfolio? Consider taking the next six months of expenses in cash or a short-term fixed-income fund so that when you hear market news, you can sleep soundly knowing your next portfolio paycheck will not be affected.
None of these apply but you’re unsure about your portfolio allocation? Read this.
2. New information about the market
As interest rates fell in March, we saw a short-term opportunity to tactically overweight the Strategic Income portion of the Fixed Income category in some portfolio models. Generally, Strategic Income funds invest in high-yield bonds, emerging market debt, international bonds, asset, and mortgage-backed securities. This short term strategy was sought out by our Investment Committee as we aim to add value to our clients’ portfolios during market volatility. We closely tracked the Bank of America US High Yield Index Option-Adjusted Spread and set a point where we would tactically switch the allocation back to short and long term fixed income funds. Here’s one of the charts we watched:
![Ice Data Indices, LLC, ICE BofA US High Yield Index Option-Adjusted Spread [BAMLH0A0HYM2], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/BAMLH0A0HYM2, August 28, 2020.](https://images.squarespace-cdn.com/content/v1/54341a03e4b08690c01bc8de/1599151169950-8HUBLRL93UWPKOW56JKT/Center+for+Financial+Planning%2C+Inc.+Retirement+Planning)
Ice Data Indices, LLC, ICE BofA US High Yield Index Option-Adjusted Spread [BAMLH0A0HYM2], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/BAMLH0A0HYM2, August 28, 2020.
The Investment Committee saw an opportunity in the gold market. Gold is primarily seen as a hedge against inflation risk within the US Market. As the Federal Reserve printed cash at a rapid pace in April 2020, the value of the US Dollar slipped and many investors flocked to gold as a hedging measure. Gold can also be seen as a consistent store of value during a choppy period of high unemployment and low business activity; its long-term value has steadily increased.
The fiduciary standard of seeking return while managing risk is our priority. A strong investment portfolio compliments a clear financial plan. As your circumstances change and the market gives us more information, we are committed to your personal financial goals within the financial planning process. As always, please contact your Center Financial Planner for advice on your specific situation.
Abigail Fischer is an Investment Research Associate and Investment Representative at Center for Financial Planning, Inc.® She gained invaluable knowledge as a Client Service Associate, giving her an edge as she transitions into her new role in the Investment Department.
This market commentary is provided for information purposes only and is not a complete description of the securities, markets, or developments referred to in this material. Any opinions are those of the author and not necessarily those of Raymond James. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance does not guarantee future results. Diversification and asset allocation do not ensure a profit or protect against a loss. Investing in commodities is generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising. Gold is subject to the special risks associated with investing in precious metals, including but not limited to: price may be subject to wide fluctuation; the market is relatively limited; the sources are concentrated in countries that have the potential for instability; and the market is unregulated.
Were You In The Right Portfolio?
Contributed by: Nicholas Boguth
Talk about volatility…within 6 months, the S&P 500 hit an all-time high, fell over 33%, then climbed over 38%! As I write this*, we are almost back to an all-time high in the stock market.
I recently wrote about asset allocation as the single biggest decision you will make in your investing lifetime. There are many QUANTITATIVE factors that should go into your asset allocation such as your financial goals, time horizon, savings rate, liquidity needs, and return expectations (just to name a few), but there is a QUALITATIVE factor that stands out among the rest: how you feel about your portfolio.
Market crashes such as the one we experienced in March offer unique opportunities to reevaluate our portfolios; specifically the aforementioned “feeling”. When the stock market fell 10%, then 20%, then 30%...how did you feel? Were you frantically watching the news worried about your financial future or comfortable in your recliner watching your favorite Netflix series? Were you checking your statements daily with rising blood pressure or confident in your advisor and financial plan?
Which asset allocation are you in? Mostly stocks, mostly bonds, or somewhere in between? Back in March, that single decision would have altered your stock market experience more than anything else, and it will continue to drive your experience going forward. If you are not confident in (or unsure of) your asset allocation, we’d love to help.
*Indexes above represented by: Bond – BbgBarc US Agg Bond TR, and Stock – S&P 500 TR. Return data as of 7/20/2020.
Nicholas Boguth is a Portfolio Administrator at Center for Financial Planning, Inc.® He performs investment research and assists with the management of client portfolios.
You cannot invest directly in any index. Pass performance doesn’t guarantee future results. Investing involves risk regardless of the strategy selected, including asset allocation and diversification. The S&P 500 is an unmanaged index of 500 widely held stocks that’s generally considered representative of the U.S. stock market. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US-dollar denominated, fixed-rate taxable bond market.
Second Quarter Investment Commentary 2020
Contributed by: Angela Palacios, CFP®, AIF®
As the economy slowly opened and our grocery store shelves were restocked, the second quarter became one of the best in decades. Tailwinds such as government stimulus, positive trends in “flatting the curve”, economic reopening, good news on virus treatment, and hope of a vaccine gave investors the confidence they needed to flock back into stocks. This comes in stark contrast to the first quarter with a dizzying correction for the S&P 500 down 34% in about one month.
Many are left wondering if this is too good to be true and there are several different and all very valid view points on this matter.
How can equities be back to near-peak levels when we are still in a pandemic?
As indexes recovered much of what they lost in the first quarter, some investors are left scratching their heads wondering how this could be when businesses lost out on so much during the shutdown of the economy. At first glance, this does seem to be strange. There are several possible reasons this has occurred.
1. The hardest hit companies were small businesses not reflected in large indexes like the S&P 500. When people couldn’t frequent their local small businesses for the goods they needed during the shutdown they turned to online shopping from big box places in droves. So, what small businesses have lost, large businesses have gained (at least in the short term).
2. Government provided assistance in the form of forgivable debt to small businesses and issuing checks directly to individuals. So, not only, were people stuck at home with nowhere to spend their income (other than fixed bills), but they were also given stimulus checks. For many, this provided a much needed back stop to pay important bills like a mortgage or car payment. However, the data also shows that much of this has been put away for a rainy day. Check out the historical chart below of the M1 Money Stock (the amount of money held by individuals that is ready to spend. ie. currency and checking account deposits in the US). We have never seen a spike of this magnitude.
As businesses have reopened, many goods and services are in high demand like automobiles and home improvement. People are now spending the money they couldn’t spend while stuck at home and the market is pricing this into results that should be reflected in the next quarter’s earnings reports.
3. Lower interest rates mean home owners can refinance debt at lower interest rates, putting more money in their pockets and less in the bank’s pockets. People can also buy new cars with 0% financing. Lower interest rates also leave those seeking income on investments with very few places to turn other than equities to replace the loss in income.
What could cause the markets to head right back down?
I have this feeling that the economy is balancing on the edge of a knife right now. The momentum is forward toward recovery but several risks could slow or undermine that momentum:
A resurgence of the virus – COVID-19 alone isn’t the cause of a potential market pull back, but this does increase the probabilities of parts of the economy having to close for periods. A good case in point is the recent closure of indoor bar service in parts of Michigan after several bar gatherings have been identified as sources of local spikes in cases. I don’t think we will see widespread shut down of economies again but there will be pockets of this occurring.
Expiration of supplemental unemployment benefits – If people are unable to go back to their jobs, or find new ones, the loss of the extra unemployment income at the end of July could be a significant hit to consumer confidence. This means that the e-spending habits that are currently boosting the economy, could go away very quickly. I view this as the largest risk to the recovery right now because unemployment is at 11.1% nationally with Michigan being one of the hardest-hit states for job loss. As shown by the chart below, we have not experienced such widespread job loss in a recession in recent history. The jobs data from the Bureau of Labor Statistics for June shows that we are adding a large number of jobs back so, for right now, we appear to be improving on this front.
Governments failing to provide more stimulus if needed – How politics play out is always an unknown that cannot be predicted but if shutdowns become more widespread again, people will look to the government for more assistance. If this isn’t provided we could see a swift correction. I believe, if needed, we will see more stimulus in the future as the government has proven with it’s actions that it does stand ready to support the economy.
How many small business will survive? This is a question that only time will tell but the risk is high that many will not. They represent a large employer in the economy so major closures will have a highly negative impact on employment numbers.
What are we doing in response?
The Investment Committee is discussing topics like “How to invest through periods of low to negative interest rates?” and “How do we best help clients achieve their financial goals when deficits and current valuations could be a long term anchor to portfolio returns?” Our Jaclyn Jackson, CAP® recently wrote the blog How To Invest In Turbulent Markets where she articulates what we can control, representing a great summary of what we do behind the scenes for our clients.
Not long ago the markets and the economy seemed to be in freefall, but we just had one of the best quarters ever for market returns. It is important to remember that investors look at whether things are getting better or worse; this is a large driver of markets. At the end of the first quarter, things were getting worse and investors had no idea where a bottom could be or how long we would be shut down. Since then, much has improved, we have more knowledge on this virus and the economy continues to improve which explains why the markets are up (even though the magnitude may not make intuitive sense). These vast swings in sentiment have created many opportunities for changes in portfolios. If you ever have questions regarding the addressed topics and how it relates to your portfolio, please don’t hesitate to reach out to discuss. We are here for you and thank you for your continued trust.
Angela Palacios, CFP®, AIF®
Partner & Director of Investments
Angela Palacios, CFP®, AIF®, is a partner and Director of Investments at Center for Financial Planning, Inc.® She chairs The Center Investment Committee and pens a quarterly Investment Commentary.
Opinions are those of the author and not necessarily those of Raymond James. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Past performance doesn't guarantee future results. Investing involves risk regardless of the strategy selected The S&P 500 is an unmanaged index of 500 widely held stocks that's generally considered representative of the U.S. stock market. You cannot invest directly in any index.
How To Invest Your Money In Turbulent Markets
Contributed by: Jaclyn Jackson, CAP®
Navigating daily market fluctuations through COVID-19 has been challenging. With every newsfeed from Washington or new economic data numbers, markets react. So what do we make of this as investors? Well, it truly depends on your circumstance. For individuals who have a long investment horizon and stable finances, there may be an opportunity to take advantage of market inefficiencies.
For individuals who have experienced (or anticipate) financial changes, it may be time to reevaluate your investment approach. Here are a few ideas to discuss with your advisor when considering investment strategies during the coronavirus pandemic.
Strategies for Long-Term Investors
For long-term investors, volatile markets should not discourage commitment to your investment plan. Staying invested, reestablishing your asset allocation, gradually investing, and generating tax opportunities are still valuable to progressing your investment aims. Think about the following strategies:
Rebalance - Rebalancing is a systematic way of adapting the commonly suggested investment advice, “buy low and sell high”. It disciplines investors to trim well-performing investments and buy investments that have the potential to gain profits. In our current environment, that looks like trimming from bond positions and investing in equities for many people. Importantly, rebalancing helps investors maintain their established asset allocation; someone’s predetermined investment allocation suited to meet their investment objectives. In other words, rebalancing helps investors maintain the risk/return profile meant to enhance their probability of meeting long-term goals.
Dollar-Cost Average - A gingerly alternative to rebalancing is dollar-cost averaging. Investors who use this strategy identify underexposed asset classes and invest a set amount of money into those assets at a set time (i.e. monthly) over a set period (i.e. 1 year). This method helps investors buy more shares of something when it is inexpensive and fewer shares of something when it is expensive. Buying at a premium when the market is up is stabilized by taking advantage of prices when the market is down. Therefore, the average cost paid per share of your investment is cheaper than just paying the premium prices. Having a dollar-cost averaging strategy in place now, while markets have dipped, helps you buy more shares of investments while they cost less.
Tax Loss Harvest - Selling all or part of a position in your taxable account when it is worth less than what you initially paid for it creates a realized capital loss. Losses can offset capital gains and other income in the year you realize it. If realized losses exceed realized gains during that year, realized losses can be carried forward (into future years). Harvesting losses could help investors replace legacy positions, diversify away from concentrated positions, or stow away losses for more profitable times.
Do Nothing - The key here is to stay invested. The challenge with fleeing investment markets when they are down is that it is incredibly hard to time reinvesting when they will go back up. Missing upside days may inhibit full recovery of losses. According to research developed by Calamos Investments, missing the 20 best days of the S&P 500 over 20 years (1/1/99 – 12/31/19) reduced investment returns by two-thirds. Time, not market timing, supports you in meeting your investment goals.
Strategies Amid Financial Hardships
Many people’s employment and financial situations have changed. Understandably, some have to review their ability to invest. If you are concerned about losing your job or potential health issues, it is time to revisit your savings. Could your rainy day resources cover 6-8 months of financial needs? If not, you will likely need to build up savings. For those who are experiencing financial challenges, consider the following strategies:
Add to emergency funds by lowering or pausing retirement account contributions. Luckily, you do not have to liquidate part of your retirement account with this strategy. Staying invested gives your portfolio a chance to benefit from long-term performance. If your employer matches retirement account contributions, continue to invest up to that amount, then add to savings with the balance of your normal participation amount. Once savings needs are met, resume full investment participation.
Rebalance your portfolio to provide liquidity. As noted above, rebalancing takes earnings off the table from investments that have performed well. However, instead of reallocating to other investments, use proceeds to increase your rainy day savings. This method prevents you from selling off positions that are at a loss.
Jaclyn Jackson, CAP® is a Portfolio Administrator at Center for Financial Planning, Inc.® She manages client portfolios and performs investment research.
Please note, the options noted above are not for everyone. Consult your advisor to determine which options are appropriate for you. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Diversification and asset allocation do not ensure a profit or protect against a loss. Rebalancing a non-retirement account could be a taxable event that may increase your tax liability. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.
When Stock Markets Fall 20%
Contributed by: Nicholas Boguth
We are supposed to know that stocks are risky, but that doesn’t make holding onto them any easier during turbulent times like these. Hopefully this post provides some optimism for anyone invested in stocks, both domestic and international.
What happened if you invested $1 in a stock market after it crashed 20% or more?
I took 15 stock indexes representing the largest economies in the world and found the date when they fell 20% from an “all-time high” like the U.S. markets did this past March. I counted 68 of these drawdowns in Morningstar’s database. Below is the performance of $1 over the 10 years following each drawdown.
This is a hypothetical example for illustration purposes only. Investors cannot invest directly in an index.
In this example, blue lines ended positive. Red lines ended negative. $1 invested after a 20% drawdown turned positive 64 out of the 68 times. There were only 4 negative time periods (Hong Kong & Italy in ’73, Brazil & Italy in ’08). In the worst 10 year period, the index was down 28% and ended at $0.72. The best instances returned over 600%, and even all the way up to 1,100%!
The economy is tanking, should I get out of the market?
Every investor has thought about this question at least once, probably multiple times, during his or her lifetime. I’m not going to answer it for you here, because there is no universal answer. Investing is not one-size-fits-all. Time horizon, spending goals, cash flows, risk tolerance, and your entire financial plan will affect the decision. We work with our clients to ensure that they have a plan in place before it is too late. If you are unsure of your plan, or need to create one, feel free to reach out to us by phone, email, or on our social media.
Source: Morningstar Direct. Indexes and dates shown below. Total return, monthly data.
Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance doesn't guarantee future results. Investing involves risk regardless of the strategy selected, including diversification and asset allocation. Holding investments for the long term does not insure a profitable outcome.
International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility.
Nicholas Boguth is a Portfolio Administrator at Center for Financial Planning, Inc.® He performs investment research and assists with the management of client portfolios.
A free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets. The MSCI World Index consists of the following 24 developed market country indices: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom, and the United States. With Net Dividends (Total Return Index): Net total return indices reinvest dividends after the deduction of withholding taxes, using (for international indices) a tax rate applicable to non-resident institutional investors who do not benefit from double taxation treaties. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the United States & Canada. As of June 2007 the MSCI EAFE Index consisted of the following 21 developed market countries: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom. (Total Return Index) - With Net Dividends: Approximates the minimum possible dividend reinvestment. The dividend is reinvested after deduction of withholding tax, applying the rate to non-resident individuals who do not benefit from double taxation treaties. MSCI Barra uses withholding tax rates applicable to Luxembourg holding companies, as Luxembourg applies the highest rates. The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. The MSCI EAFE Index consists of the following 21 developed market country indexes: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom. The MSCI Hong Kong Index is designed to measure the performance of the large and mid-cap segments of the Hong Kong market. With 43 constituents, the index covers approximately 85% of the free float-adjusted market capitalization of the Hong Kong equity universe. The MSCI Japan Index is designed to measure the performance of the large and mid-cap segments of the Japanese market. With 323 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in Japan. The MSCI Germany Index is designed to measure the performance of the large and mid-cap segments of the German market. With 59 constituents, the index covers about 85% of the equity universe in Germany. The MSCI United Kingdom Index is designed to measure the performance of the large and mid-cap segments of the UK market. With 96 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in the UK. The MSCI France Index is designed to measure the performance of the large and mid-cap segments of the French market. With 77 constituents, the index covers about 85% of the equity universe in France. The MSCI Italy Index is designed to measure the performance of the large and mid-cap segments of the Italian market. With 24 constituents, the index covers about 85% of the equity universe in Italy. The MSCI Canada Index is designed to measure the performance of the large and mid-cap segments of the Canada market. With 89 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in Canada. The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represent approximately 8% of the total market capitalization of the Russell 3000 Index.
How To Invest In A Bear Market
Contributed by: Center Investment Department
In a Q+A, our Director of Investments Angela Palacios, CFP®, AIF® provides valuable advice on the dos and don’ts of investing in a bear market. A “bear market” is when assets fall at least 20% or more from their high. We are currently facing a bear market.
What is a bear market and what triggers them?
A variety of situations can cause a bear market. They can be event-driven, which explains the current bear market. A black swan event like COVID-19 or a shock in commodity prices like the price war on oil can cause bear markets that lead to recessions. In the case of late 2018, that brief bear market was driven by the trade-war escalation. This example did not lead to a recession. Financial imbalances like high inflation, increasing interest rates from the Federal Reserve, or banks being too leveraged (like in 2008) are all issues that can trigger a bear market and lead to an eventual recession.
What's good/bad about investing in a bear market?
Data from historical bear markets indicate that they are excellent investment opportunities, however, it is the most difficult time to invest. Bear markets allow us to tax-loss harvest to offset future capital gains, ultimately reducing our tax bills. We can rebalance out of positions that may not be our highest conviction investing ideas that we have had to hold on to due to high capital gains embedded in those positions.
What investments are best for a bear market and why?
We believe “Core Fixed Income” is often the best strategy to offset the downside risk from equities. These include positions like U.S. Treasuries and High-Quality Corporate debt. Generally, when equities are going down, investors are buying these types of investments. Cash is also a good insulator during times like this. Even though interest rates are low, there is no substitute for its safety. It is very important to always have your next 6-18 months of cash needs set aside so you don’t have to liquidate during times of market turmoil.
What should a brand new investor know about building a portfolio in a bear market? Is it a good time for newbies to enter the market while prices are down?
Start building a portfolio regardless of whether we are in a bull market or a bear market. The old saying goes, “Time in the market is more important than timing the market”. Most investors save systematically throughout their lives rather than investing in one lump sum. We save every month through our 401(k) deferrals or every year when we get that bonus from work. Dollars go farther in bear markets because the shares of the mutual fund you are buying are now on sale. Investing is the only time in life when buying something on sale doesn’t feel good, but it should if you have a long time horizon to save.
What advice do you have for managing a portfolio in a bear market and when it begins to turn bullish again? For example, how do you manage risk and asset allocation to stay on target with your goals?
The investing strategy and financial planning goals should be developed during quieter times. Thinking ahead to how you should react during times like this is crucial because in the moment our emotions are very difficult to overcome. A rebalancing strategy also needs to be developed at the same time you are developing your investment strategy. It is a concept that sounds simple but can be very easy to neglect. When markets are doing great and there is very low volatility (like January of this year), you may be tempted to let your best-performing investments run just a little bit longer before rebalancing…meaning you hold your stock positions rather than rebalancing into bonds. In other years that may have been fine, but this year it was not. So, having thresholds around how much stock and bonds you have in your portfolio can take the guesswork out of when to rebalance. That is extremely important at the depths of a bear market because one of the best ways to help your returns coming out of a bear market is simply to rebalance back to your target allocation of stocks and bonds. When markets are down, this means selling bonds and buying stocks.
We hope you found this informative. If you have additional questions, please contact your advisor!
This material is being provided for information purposes only. Past performance doesn't guarantee future results. Investing involves risk regardless of the strategy selected, including diversification and asset allocation. Rebalancing a non-retirement account could be a taxable event that may increase your tax liability.
First Quarter Investment Commentary 2020
Contributed by: Angela Palacios, CFP®, AIF®
As the first quarter of 2020 comes to an end, COVID‐19 has brought the world together in an unusual way. We are now using strange new language like “social distancing” and “shelter in place”. Many of us are now meeting via Zoom (daily users of the videoconferencing platform skyrocketed from 10 million to 200 million). On the lighter side, #QuarantineMadeMeDoIt is trending on social media and we may be watching TV shows that weren’t worth our time before. Schools have been canceled in some states, forcing families to juggle their careers and childcare. Layoffs are a difficult reality for many at this time (luckily, not any Center employees due to smart planning!). We can only stay positive and hope that the drastic efforts to stop the spread of the coronavirus are effective. There is no doubt that COVID‐19 will make history books and there will be many lessons learned as we digest the far‐reaching consequences of this time.
How Did Markets Perform?
The spread of COVID‐19 began in China late last year and impacted their domestic markets, but not the global markets. As the virus spread globally, markets around the world reacted. With the virus came fear manifesting in many different ways, from hoarding toilet paper to hoarding cash. Investors were selling anything they could with a “sell first, ask questions later” mentality. The stock market saw wild swings that haven’t occurred since the 2008 recession. However, the current swings feel much worse because they happened over less time. The markets were generally either negative or positive in a large way each day with an average daily movement of 5% during March! The circuit breakers were triggered on 3 separate occasions, pausing trading for 15 minutes each time (this occurs when the S&P drops by 7% on any given trading day).
Here’s how various indexes closed the quarter:
Monetary Stimulus
The Federal Reserve (the Fed) responded first to COVID‐19 aiming to keep financial markets from spiraling out of control. While their actions could not prevent the economic downturn that is already upon us, the Fed could create more accommodative financial conditions that would help cushion the landing of a recession and support the economy’s eventual recovery. In the near term, the Fed’s actions have aimed to support smooth functioning in financial markets and ensure that the problems on Wall Street do not spill onto Main Street. Below is a timeline of their actions to help support the various functions of the financial markets.
Source: Performa, Federal Reserve
Take a look at the last point “What’s Next?” Well, the Magic 8‐Ball was correct. The Fed further expanded facilities to support municipal and high‐quality corporate bonds. They also purchased highly liquid fixed income exchange‐traded funds to further support the bond markets. These actions were straight from the toolkit developed through the financial crisis of 2008‐2009 (except for purchasing the exchange‐traded funds). Back then, it took the Fed nearly a year to deploy these actions. Thankfully, this year it was deployed in a matter of weeks.
Fiscal Stimulus
This accommodative policy from the Fed made it easier for large‐scale fiscal stimulus to be financed by cheap debt. The government responded with the CARES Act, a $2 Trillion stimulus package. It makes history as the largest stimulus package in the U.S. The goal is to inject a large amount of money into the economy to carry businesses and individuals through this hopefully short, but very challenging time. Learn more about the CARES Act here.
The rising national debt levels in the U.S. are a concern, however, there may be a reason to go into more debt. “If ever there is a time for the government to add to our debt, it is now,” says Kenneth Rogoff, a Harvard economist who often speaks on the risks of the spiraling national debt. He says, “We are in a war, the whole point of not relying on debt excessively in normal times is precisely to be able to use debt massively and without hesitation in situations like this”.
There is a risk of the national debt growing and burdening society in the years to come. This will be on our minds in the coming years. However, it is good to remember that our country’s debt burden, or interest, is a far smaller percentage of GDP than back in 1999. There are two reasons for this. Our GDP has grown since 1999 and interest rates the government pays on the debt are far lower. Think of how much more home you can afford when your mortgage interest rate is 2.7% instead of 6%.
Below is an excellent graphic displaying tools that have been used and what options remain.
An Oil War
Our eyes aren’t only on the coronavirus pandemic. An oil war was brewing between Russia and Saudi Arabia. We are in the midst of a price war because both countries did not agree on a response to a falling demand. They decided, instead, to flood the world with an abundance of cheap oil. This pushed oil prices to their lowest levels in 18 years (of course when gas is cheap, we can’t go anywhere!). More seriously though, couple this with people consuming less oil because of the pandemic keeping us home and this has spelled disaster for energy company stock prices. As I write this, the price war appears to be de‐escalating and there are talks of cutting production to support oil prices.
The Economic Fallout
Despite the unprecedented response from both the U.S. government and the Fed, the pandemic will surely leave its mark on the economy. Early data is being released and it is ugly. Manufacturing/service activity has drastically slowed and unemployment is on the rise.
However, ugly was expected by markets and much of the ugliness has been potentially priced in. We may see the equity market lows retested (or even go a bit lower) in the coming weeks before everyone gets back to work and the economy restarts. This will be highly dependent on flattening the coronavirus curve. If we see positive results from the stay‐at‐home orders and the virus infection rates slow, the markets could recover in the coming weeks and months even as the economy falls into a recession.
What Is The Center Doing In The Meantime?
Accounts have had higher than normal activity this year due to the volatile markets. After a strong 2019, our process called for rebalancing from stock to bonds to keep recommended asset allocations on target. We monitor to make sure any upcoming cash needs are set aside ahead of time. After the sharp drawdown in markets, for many, we have needed to rebalance from bonds back into stocks. We have been able to proactively tax-loss harvest for those who needed it and identify investment opportunities to take advantage of. For example, the Investment Committee is keeping an eye on U.S. Equities after reviewing the policy responses available to be deployed around the world. We feel the U.S. should be better positioned for recovery after the effects of the pandemic start to wear off.
In the Center’s 35 year history we have been through bear markets and surely will again after this. Bull markets follow bear markets and much of the recovery usually comes in the front end of the bull market and often well before the economy starts to recover. While we can’t predict when the next bull market will begin, your portfolio must be positioned properly for when that happens. It is important to stick to a thoughtful plan that was established during quieter/more rational times. Try to tune out the media and focus on your long‐term goals.
Thank you for the trust you place in us to manage your wealth and to advocate for your financial wellness. There could be no greater responsibility, especially during uncertain times. We strive to stay in touch and hope our communications via email, phone, and Zoom has been helpful. If you have questions or concerns please reach out to your planner! This is why we are here for you!
Angela Palacios, CFP®, AIF®, is a partner and Director of Investments at Center for Financial Planning, Inc.® She chairs The Center Investment Committee and pens a quarterly Investment Commentary.
There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. This material is being provided for information purposes only. Past performance doesn't guarantee future results. Investing involves risk regardless of the strategy selected, including diversification and asset allocation. Holding investments for the long term does not insure a profitable outcome. You cannot invest directly in any index. The S&P 500 is an unmanaged index of 500 widely held stocks that are generally considered representative of the U.S. stock market. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represent approximately 8% of the total market capitalization of the Russell 3000 Index. The MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 22 developed nations. The MSCI Emerging Markets is designed to measure equity market performance in 25 emerging market indices. The index's three largest industries are materials, energy, and banks.