Battle of the Brackets…Portfolio Management Edition: A Center Spin-Off Competition

Contributed by: Nicholas Boguth, CFA®

I believe certain things make our team outstanding here at The Center, and a few of them were in the spotlight this past month amid the March College Basketball Tournament:

• We constantly practice our company values.

• We have a heavy focus on charitable giving.

• And ultimately, we are just a cool place to work.

In the spirit of education, teamwork, and some friendly competition, we ran a bracket competition with an investment focus (we did a normal bracket game too, but mine was busted the first day, so there is no need to talk about that). Every team member chose an asset class to represent their “team” in the tourney. The winner of each round is the asset class that outperformed over the week, and we are repeating for five weeks until we have our champion.

Some team members chose more stable asset classes like short-term U.S Treasuries or investment-grade bonds, while some chose more volatile options like Emerging Market stocks or commodities. Overall, it is fun for the entire team to collaborate and for all of us (not just those in investment roles) to watch how different asset classes move with economic news*.

*We all know there is no shortage of economic news lately from the U.S. and overseas. Markets have been volatile, and times like these stress the importance of having a plan in place. As always, we are here to help answer any questions you may have about your plan. One small but powerful tool in investment management that we have taken advantage of is tax-loss harvesting during volatile markets. Read more about that here.

The cherry on top of this competition is that we are playing for some of our favorite local charities. The Center’s Charitable Committee donated $1,000 to the winning four team members’ charities of choice. Check out the results from last year, as we ran the same competition using individual stocks instead of asset classes. We will continue to find new ways to collaborate, learn, and partner with charities here at The Center. We hope you follow our blog as we update along the way!

Nicholas Boguth, CFA® is a Portfolio Manager at Center for Financial Planning, Inc.® He performs investment research and assists with the management of client portfolios.

Any opinions are those of Nicholas Boguth, CFA® and not necessarily those of Raymond James. Every Investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment, Prior to making an investment decision, please consult with your financial advisor about your individual situation.

Tips for Investors During Times of Market Volatility

Contributed by: Michael Brocavich, CFP®, MBA

When faced with volatility in the market, emotions can be triggered in investors that can impact their judgment and potentially affect returns. These pullbacks can make folks want to pull up stakes and run – a reaction that is often a mistake, especially for long‐term investors.

The likelihood that we will continue to see volatility this year is high. The Fed has slowed down its bond buying activities and is raising interest rates, the threat of a new COVID variant that could shut down the economy still exists, and there are supply chain and labor issues around the globe. To top it all off, we are gearing up for mid‐term elections in November.

Here are some tips to consider when we do face a volatile market. Having a plan during this time can help provide clarity, confidence, and even strategies to take advantage of the volatility.

• First, we need to remember that market volatility is normal. As investors, when we experience long periods of upward markets with little volatility, we forget how regular market volatility really is. We need to remember that historically, the market will dip by 5% at least three times a year. Also, on average, the market will have a 10% correction once a year. Understanding that volatility is a natural process of investing and challenging to avoid can help curb some emotions triggered by these markets.

• Make sure your employer retirement accounts are rebalanced appropriately. Over the last few years, money invested in stocks have severely outperformed the bond market. Now is a good time to revisit the allocations in your Employer‐Sponsored Retirement plans to make sure your allocation is still within your risk tolerance. You will want to make sure that your allocation to stock funds and bonds funds is appropriate for the amount of risk you want to take. If you are unsure of how you should

• Increase Plan contributions when markets are down. For younger investors still in the accumulation stage, a volatile market is a great time to increase your contributions. Though it may seem scary to increase your contributions when markets are volatile, you are actually buying into the market when prices are on sale. Contributions added when the market is down 5‐10% from the previous high have much more earning power than contributions made when the market is up 5‐10% from its last high.

• Have additional cash on hand to invest in dips and corrections. For investors who have been able to max out their Employer‐Sponsored plans and still have additional cash to invest, a volatile market can make for an excellent opportunity to do so. Consider talking with your advisor about moving extra cash to your investment accounts to invest on dips and corrections. Together, you can develop a strategy to get your cash invested over time or all at once, depending on market conditions.

Stumbling through bad times without a strategy makes a troubling situation even worse. If you do not have a retirement or investment plan, you will not accurately assess the damage when markets do take a dive. This could increase stress and cause investors to make bad decisions.

These periods of volatility are an opportunity to connect with your advisor, enabling them to act as a sounding board for your concerns. By talking about current events in light of your overall financial plan, your advisor can provide a reassuring perspective to help you stay the course or even invest extra cash during an opportune time.

Michael Brocavich, MBA is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® He has an extensive background in both personal and corporate finance.

Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Past Performance does not guarantee future results.

Inflation Hedges Explored

Contributed by: Nicholas Boguth, CFA®

Our Director of Investments, Angela Palacios, recently wrote about the factors influencing current inflation rates. She shared a helpful chart from JPMorgan and summarized, “you may be surprised to see the strong average performance from varying asset classes in this scenario. Inflation that is reasonable and expected can be a very positive scenario for many asset classes.”

As the debate continues over whether or not inflation is “transitory,” some investors are thinking about how to protect their portfolios from rising inflation.

Most bonds, aside from TIPS, are generally expected to perform poorly if inflation rises. This should make sense as the fixed income stream from a bond investment will deteriorate if inflation rises. To protect against inflation, one might conclude that removing bonds from a portfolio makes sense, but not so fast. Bonds are typically in a diversified portfolio to protect from the more common (and devastating) risk – a stock market decline. Be sure to know how your portfolio’s risk exposure would shift before considering a move away from bonds.

Vanguard recently released some research on the topic of inflation hedging and concluded that commodities were the best asset class to protect from unexpected inflation. While commodities are generally accepted to be pretty good inflation hedges, one major risk of owning them has been on display for the past ten years. Their return stream can look significantly different than stocks’. Admittedly, this has been one of the best decades in history for U.S. stocks and one of the worst for commodities. To demonstrate just how “different” the returns can be, if you would’ve held one of the largest commodity ETFs over the past ten years, you would’ve underperformed the U.S. stock market by almost 400%.

Trailing 10-year performance of two ETFs that represent the U.S. stock market and the broad commodities market. SPY (green line) tracks the S&P 500, and DBC (blue line) tracks a basket of 14 commodities. Total return. Source: koyfin.com.

Some portfolio managers like Ray Dalio or First Eagle portfolio managers, Matthew McLennan and Kimball Brooker, have been long time proponents of gold as a hedge against inflation. Gold can be a powerful diversifier in a portfolio, but has also seen sustained periods of underperformance that may make it hard to hold over the long term. Here’s a similar chart of how a popular Gold ETF has performed over the past ten years compared to the red hot S&P 500.

Trailing 10-year performance of two ETFs that represent the U.S. stock market and the price of Gold. SPY (green line) tracks the S&P 500, and GLD (blue line) tracks the gold spot price. Total return. Source: koyfin.com.

You may even see articles claiming that bitcoin is the best inflation hedge to add to your portfolio. These opinion pieces make some compelling arguments, but it is important to remember that they are just opinion pieces; emphasis on opinion. We haven’t truly had an inflationary period since bitcoin became popular in the past decade, so there is no way of knowing if its performance has any correlation to U.S. inflation.

Above all else, before jumping to action on your portfolio, remember that inflation is quite hard to forecast. There are an infinite amount of moving parts and multiple ways to measure them. Professional forecasters don’t even agree on what it will look like in the next 12 months, let alone the next ten years or the remainder of your investment time horizon. One of the best ways to hedge against inflation is to talk to your financial advisor and understand how rising inflation might affect your financial plan. That is why we’re here.

Want to know what The Center thinks about inflation? Check out these resources: Inflation and Stock Returns and How Do I Prepare my Portfolio for Inflation.

Nicholas Boguth, CFA® is a Portfolio Administrator at Center for Financial Planning, Inc.® He performs investment research and assists with the management of client portfolios.

Opinions expressed are not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Past performance is not a guarantee of future results. Investing involves risk and investors may incur a profit or a loss. Treasury Inflation Protection Securities, or TIPS, adjust the invested principal base by the CPI-U at a semiannual rate. Rate of inflation is based on the CPI-U, which has a three-month lag. Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices rise. 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. Bitcoin issuers are not registered with the SEC, and the bitcoin marketplace is currently unregulated. Bitcoin and other cryptocurrencies are a very speculative investment and involves a high degree of risk.

2021 Third Quarter Investment Commentary

Contributed by: Center Investment Department

Crisp Air, Cool Breeze, Fall Leaves. All the things that Autumn brings here in Michigan. As the third quarter comes to a close and we enter the last quarter of 2021, we find a cool breeze passing through markets as volatility picks up - as is often the case in September and October. A diversified benchmark portfolio consisting of 60% stocks (split between U.S.-S&P 500 and International-MSCI EAFE) and 40% bonds (Bloomberg Barclays U.S. Aggregate Bond Index) is up just over 7% year-to-date as of September 30th, with the S&P 500 leading the way at +15.9%, international stocks (MSCI EAFE) at +8.35%, and U.S. Aggregate Bonds at -1.55%.

Check out this video to recap some of our thoughts this quarter and continue to read below for some more detailed insight!

Volatility has picked up as the recovery appears to be in a holding pattern. Investors worry about the delta strain and are concerned about a surge in additional strains that could come with the winter flu season. Stock markets don’t have a clear driver of upward returns right now, and we are currently in the middle of two of the most challenging months (September and October) of the year historically for markets. Until September, the S&P 500 hadn’t experienced a 5% decline (which usually occurs 2-4 times per year) since October 2020. The market broke this long streak in late September. Headlines from the government, worry about bonds rates increasing, Chinese real estate headlines, and inflation fears have caused a pause in the steady upside we all had grown quite comfortable to!

It’s important to remember markets frequently experience short-term pullbacks. The below chart shows intra-year stock market declines (red dot and number), as well as the market’s return for the full year (gray bar). This chart shows us that the market is capable of recovering from intra-year drops and still finishing the year in positive territory, which helps us remember to stay the course even when markets get choppy!

Fed Tapering – Will It Cause Volatility?

Google searches on tapering peaked in late August and again in late September surrounding the Federal Reserve (the Fed) meeting. The Fed has fully telegraphed their intention to make this move that, likely, isn’t starting until late this year. It’s important to remember that tapering isn’t tightening. The Fed is lessening the rate they are buying government bonds. Investors wonder, “Will interest rates spike when they stop buying so much?” The answer is maybe. However, there won’t be as much debt being issued next year without fiscal stimulus as has been in the past year and a half. So, current buyers other than the Fed should be able to absorb supply. Also, U.S. Treasury bonds are still paying much more than other government’s bonds that are similar in quality. If rates go up, they will likely be met with headwinds because pension funds and other governments will want that increased yield buying the bonds and thus forcing rates back down again.

Over the summer, the Fed started to unwind the secondary market corporate credit facility that was announced early on in the pandemic to support corporate bonds and fixed income exchange-traded funds. The Fed’s holdings peaked at $14.2 Billion as the move quickly restored stability in markets at the time – March 2020 - and no further action was needed. They are planning the sales in an orderly fashion as not to disrupt markets.

Washington D.C. – A Game of Political Chicken

There have been a lot of headlines toward the end of the third quarter from the government, including government shutdown possibility, reconciliation, infrastructure bill, debt limit increase, and tax increase plans. 

First, the temporary funding bill and debt limit caused short-term volatility as investors were nervous that politicians not seeing eye-to-eye would cause another government shutdown or worse - default on U.S. debt. Fortunately, the President signed a bill funding the government through December 3rd, just hours before the deadline. You may not realize how often we have stood at this precipice before, though. According to the Congressional Research Service and MFS, “There have been 21 government shutdowns in history when our nation’s lawmakers failed to agree on spending bills to fund government outlays for a fiscal year that begins annually on October 1st. The most recent shutdown, a 35-day stoppage that ended on 1/25/19, was the longest closure in history. 11 of the 21 shutdowns lasted three days or less.” Interestingly enough, there are many similarities between now and 2013 when the FED was rolling out their plan for tapering, debt ceiling debate, and government shutdown. While what happened in the past isn’t necessarily what is going to happen now, we believe it offers a helpful perspective. You can see that in 2013 there was an uptick in volatility and a short-term market retreat, but overall the markets continued to move higher through year-end.

Source: Raymond James Chief Investment Officer, Larry Adam

In September, we gained some clarity on the tax increase proposals to assist in paying for the infrastructure bill. Check out our blog on some of the details, as well as our upcoming webinar! Capital gains tax proposals can potentially disrupt markets in the near term, but the increase in those taxes would go into effect as of mid-September 2021 (retroactively). This is important because it prevents a rush of selling to harvest capital gains before an effective date.

China Headlines

Why has China and emerging markets lagged recently? China is the 2nd biggest economy in the world and the 2nd biggest equity market in the world. China represents 35% of the Emerging Market index, so when China lags, the entire asset class tends to lag too. Active management can be important in this area to navigate the complexities of these varying countries. China has shifted gears recently, choosing to focus on social stability (or “Common prosperity”) rather than pure growth as in the past. China’s Communist Party has turned its eye to the ultra-wealthy, politically outspoken citizens and technology usage.

Most alarmingly, however, has been Evergrande’s debt woes. Evergrande is one of China’s largest real estate developers with a massive amount of debt. They have been forced to sell off assets in order to meet debt repayments, which is having a ripple effect through their customers, suppliers, competitors, and employees. This is so impactful because one-third of China’s Gross Domestic Product is related to real estate. As you can see in the chart below, housing represents over three-quarters of financial assets in China versus a much lower percentage (less than one-third) here in the U.S.

Initially, there was fear of contagion spreading from the Chinese High Yield debt market to the U.S., but this hasn’t occurred.

We remain disciplined in the consistent and proactive execution of our investment process that is anchored in the fundamentals of asset allocation, rebalancing, and patience. From time to time, we may choose to express our forward-looking opinions of the state of stock and bond markets but always strive to do so without subjecting you to unnecessary risks. Even though we close this quarterly note similarly each time, please understand that we thank you for the trust you place in us to guide you through your investment journey!

We have more thoughts to share on investment current events coming soon. Stay tuned for our investment blogs about inflation hedges and Biden’s corporate tax rate proposal.

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.

Any opinions are those of the author and not necessarily those of Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. 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. 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 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. 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. Dividends are not guaranteed and must be authorized by the company's board of directors. Special Purpose Acquisition Companies may not be suitable for all investors. Investors should be familiar with the unique characteristics, risks and return potential of SPACs, including the risk that the acquisition may not occur or that the customer's investment may decline in value even if the acquisition is completed. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance is not a guarantee or a predictor of future results. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

Inflation and Stock Returns

Contributed by: Nicholas Boguth

There is a lot of talk about inflation in the news lately, and whether or not the recent spike is “transitory” or if the recent rise in price levels will persist into the coming months, years, or even longer. The problem with forecasting inflation is that it cannot be accurately forecasted. It is a complex topic with ever-changing variables beyond the Fed and money supply including (but not limited to) consumer spending, saving rates, supply chains, government policy, demographics, technological advancements, and much more.

For some high-level context, I wanted to look at the relationship between inflation and stock returns over the past 30 years.

Below, you’ll see a scatter-plot of 1-year changes in CPI and the S&P500. What stands out to me is that an overwhelming majority of those dots are in the top right corner of the graph – positive inflation and positive stock returns. A lot of news headlines we see will put the word “fear” directly next to the word “inflation” because, well…that is what headline writers are paid to do. The reality is that if you look at the long term history of stock performance, you will see that it is positive a vast majority of the time regardless of what happened with inflation.

Source: Morningstar Direct. S&P 500 TR. Monthly return data.

 Investors need to prepare one way or another, and a great way to do that is to talk to your financial advisor and make sure that you are setting yourself up for success no matter what happens with inflation. Helping to maximize your probability of success is something we help all of our clients with, and it may look different for each investor depending on time horizon, risk tolerance, and investing/spending goals. Give us a call or shoot us an email if you have any questions on how to help maximize yours.

Nicholas Boguth is a Portfolio Administrator at Center for Financial Planning, Inc.® He performs investment research and assists with the management of client portfolios.

The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Indices are not available for direct investment.  Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. 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 Nick Boguth and not necessarily those of Raymond James.

How Do I Prepare my Portfolio for Inflation?

Contributed by: Angela Palacios, CFP®, AIF®

Inflation is common in developed economies and, generally, more healthy than deflation. When consumers expect prices to rise, they go out and purchase goods and services now rather than waiting until later. While it is likely that inflation will continue to trend higher here in the U.S. in the coming months the question is “Can this harm my portfolio’s ability to help me achieve my goals?” Consider the following factors contributing to or detracting from the inflation outlook.

Our investment committee has discussed inflation at length for several years now. Here are some highlights from our discussion.

Factors influencing inflation in the short term and long term:

1. Large amount of monetary and fiscal stimulus

   There has been a record amount of stimulus being pushed into the pockets of American’s by the government. The consumer is healthier than it has ever been and demanding to purchase.

2. Supply chain disruptions

   Whether due to shipping constraints or lack of manpower, companies can’t make enough of many different products to meet current demand. Does this sound familiar? It should because a year ago all we could talk about is not having enough toilet paper and disinfectant wipes. People were paying big prices for even small bottles of hand sanitizer.

   Fast forward one year and the shelves are now overflowing with these items and prices have normalized. Once people have spent the money they accumulated over the past year, demand will likely return to normal.

3. Starting from a very low base

   The point to which we are comparing current inflation is one of the biggest influences on the calculation. Right now, for year-over-year inflation, we are comparing to an economy that had very little to no economic activity occurring. When you compare something to nothing, it looks much larger than it actually is. A year from now we will have a more normal comparison base.

4. Wage inflation

   One of the biggest factors in the lack of inflation over the past decade was a lack of wage inflation. We are now seeing wage inflation because companies can’t hire enough people to meet the current demand for their goods or services. Wages are going up trying to entice people back to work. Once government transfer payments slow or run out, many of these individuals will likely return to the workforce again causing wages to return to more normal levels (although it is possible wages settle at a new base that is higher than they were before).

5. A complete lack of velocity of money

   While banks are flush with cash, they still aren’t lending. Why? Because the banks, due to banking regulation changes over 10 years ago, only want to loan large amounts of money to someone who is creditworthy. The creditworthy consumer is so healthy that they don’t need to borrow money.

6. Technology increasing productivity

   A large portion of the country just increased productivity by reducing commute time over the past year via remote working capabilities. Companies that would never have considered allowing remote work now find themselves reducing office space and making permanent shifts in working style. This is just one example of how growth in technology can increase productivity which, over time, puts downward pressure on prices.

It is important to understand what investments could do well if we are surprised and inflation is around the corner.

First of all, your starting point is very important. Are you starting from low inflation or are your inflation levels already elevated? The answer is we are starting from a long stretch of time with very low inflation rates. So in the chart below you would reference the lower two boxes. Then you need to ask, is inflation rising or falling. Low and rising inflation is the bottom left box. You may be surprised to see the strong average performance from varying asset classes in this scenario. Inflation that is reasonable and expected can be a very positive scenario for many asset classes.

In our Second Quarter investment commentary we will dive a little deeper into the asset classes that perform well and how we think about incorporating that into your portfolios!

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.

Q4 2020 Investment Commentary

Contributed by: Center Investment Department

Closing the books on an eventful 2020

I think we can all agree that 2020 has been unlike anything we have experienced before! If 2020 had a spokesperson, it would be Mayhem from the Allstate commercials. From disturbing scenes of social unrest and racism to a major pandemic, crazy devastating wildfires and an ongoing trade war, not to mention, murder hornets and a very eventful election there have been many reasons why this year has been astounding!

The pandemic has been truly heartbreaking for the average American and the economy, despite this, the S&P 500 ended 2020 with fantastic returns of nearly 18.5%. Again, we are experiencing a large disparity in returns between technology companies and “value” stocks as represented by the Russell 1000 value index, up only 2.8% for the year in stark contrast. Check out the below chart showing the returns of the various S&P 500 sectors for 2020.

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VIDEO: If you’d like to see our friendly faces...click to watch our commentary!

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During the last quarter of the year, Emerging Markets and Small company stocks staged a large comeback as investors’ risk appetite increased.

However, whatever party equity markets were having, the economy was not invited!

Economic Update

Efforts to resume business amid the pandemic were rewarded during the latter half of 2020. Reeling back from a historical low of -31.4% during the second quarter, real GDP was 33.4% in the third quarter of 2020. That is a substantial comeback, but still around 3.5% shy of where it was during the fourth quarter of 2019. In other words, GDP is headed in the right direction, but we still have some catch-up work to do for full economic recovery. October readings support positive momentum for 4Q20 numbers. However, the surging cases of coronavirus infections over the holiday season may reflect slower growth at the end of the quarter and into 1Q21.

While it's easy to confuse positive stock market returns with economic growth, they are quite different. We can see this in the context of employment. Thirty-four percent of the S&P 500’s growth in 2020 can be attributed to technology, yet the technology sector only represents 2% of the US labor market. On the other hand, government, agriculture and other services, which is almost 40% of the labor market, is not even represented in the S&P 500. Concisely put, US stock strength doesn’t necessarily represent strength in the economy.

Digging into unemployment numbers, the unemployment rate decreased slightly to 6.7% in November. Nonfarm payrolls increased by 245,000 during the same month. Note, this is the weakest pace of payroll increases since the start of the recovery, which reflects a larger challenge. While 56% of the jobs lost between February and April have come back, only about 7% of that comeback has happened since September. We’re witnessing how hard it has been to have business and job growth while maintaining measures created to prevent the spread of covid-19. Both are important, so future job growth is dependent on how we negotiate the two moving forward.

Finally, let’s talk about inflation. Headline CPI and core CPI rose 0.2% month on month in November. Year on year, headline CPI was 1.2% and core CPI was 1.6%. Headline and core personal consumption expenditures (PCE) were generally flat, at 1.1% and 1.4% year on year, respectively. Due to low energy prices and economic slack, inflation ended lower in 2020 than in 2019. However, 2021 may be a different story. With a vaccine-facilitated boost to economic activity, prices hit hardest by the pandemic (think sporting events, dining, concerts, hotel rates, airfare, rent) could strengthen. We’ll likely see depressed prices start to go up. Many suspect the Federal Reserve will recognize this inflation is based on temporary factors, and will not raise interest rates to compress it. We are keeping an eye on how things play out. Overall, 2021 could foster a low and rising inflation environment.

Other investment headlines: Tesla & Bitcoin

You may have noticed two headlines gaining a lot of attention in the 4th quarter from two of the most volatile investments seen in 2020: Tesla and Bitcoin. Tesla finally recorded its fourth consecutive profitable quarter in a row which prompted its entry into the S&P 500. This means that if you own any fund that tracks the index, you now own a piece of TSLA! Albeit a small piece, as it makes up about 1.5% of the index.

Bitcoin was also back making headlines as it broke past its previous high from late 2017 and rose above $28k per BTC by the end of the year. Is the digital currency a speculative asset with no value or the world currency of the future? That is yet to be decided, but as it currently stood at year-end its market cap was ~540B – about the same market cap as Berkshire Hathaway.

COVID-19

The COVID-19 pandemic took a turn for the worse during the 4th quarter of 2020. Cases, hospitalizations, and deaths all continued to climb, but December brought us a glimmer of hope as the FDA expedited the approval process for two vaccines to be distributed across the country. Governor Whitmer gave guidance for the prioritization in Michigan, and the first phase began in December with health care workers who have direct exposure to the virus receiving round 1 of the 2-round vaccine. All essential frontline workers will follow, starting first with those aged 75 and older, then ages 65-74 and adults ages 16-64 with underlying medical conditions, finishing up with the rest of adults aged 16 and over. Click here for more details. We hope that these vaccines are a light at the end of the tunnel, and wish you all health and happiness going into the New Year.

Government Update

The $900 billion fiscal stimulus act continued to face headwinds in the final hour as President Trump changed his stance on the support to families. He called for an increase to the prior negotiated $600 stimulus payments to $2,000. The House narrowly voted in favor of this package and the change, only to be met by resistance in the Republican-led Senate. Voting on this was delayed resulting in $600 stimulus payments getting issued.

The package includes new funding for:

• Small businesses with an expansion to the PPP program highlights including:

  • Guaranteed funding for first-time applications

  • Second loans with more expansive forgivable uses

  • Easier forgiveness process for loans under $150,000

  • Clarification that businesses can still deduct the (otherwise deductible) expenses of funds paid with this loan

  • Excludes publically traded companies and a business must demonstrate a 25% drop in revenue or more from 2019

• The second round of individual checks for individuals and families with phase-out starting at $75,000 of income. $600 per adult and child

• Extension of federal unemployment benefits including an additional $300 per week benefit to unemployed workers until March 14, 2021

• Moratorium on evictions through January 2021

• Various funding for state/local programs highlights including

  • $82 Billion to schools and colleges

  • $27 Billion to state highway, transit, rail and airports

  • $22 Billion to state healthcare funding

Restrictions placed on the Federal Reserve

The Federal Reserve (Fed) found itself amid the political battle of the stimulus package. It looks like the Fed may have to discontinue at the end of 2020 and potentially not be able to restart programs under the same terms that were backed by CARES Act funding, including:

• Primary Market Corporate Credit Facility – loans to investment grade businesses experiencing dislocation due to the pandemic

• Secondary Market Corporate Credit Facility – the ability for the Fed to purchase investment-grade corporate debt to facilities liquidity in the credit markets

• Municipal Liquidity Facility – allows the Fed to purchase short term bonds from certain states, counties and cities to ensure access to funds throughout the pandemic

• Main Street Lending Program – support for small and medium-sized business loans

• Term Asset-Backed Securities Loan Facility- support for AAA bonds backed by assets such as student/auto/credit card loans backed by the Small Business Administration (SBA)

Fed Chair Powell stated that these lending programs can still be restarted using Treasury’s Exchange Stabilization Fund but the effort to restrict this particular aspect of the Fed’s lending authority can be viewed as Congress stepping in and exerting oversight powers to limit how far the Fed can go in support of critical market functions. We will be watching the evolution of this debate and if the Fed’s communications become more restrained as a result. In the future, we may not be able to expect the Federal Reserve to step in and start buying secondary market issues to support prices.

The new Biden Administration

The run-off election held on January 5th in Georgia determined who holds the Senate. Democrats needed to win both of the Senate seats in Georgia to split the Senate 50-50. This meant that the democrat Vice President would be the tie-breaking vote giving a slight edge to the Democrats. This was the last major hurdle in understanding the makeup of the government for the next couple of years. This democratic advantage paves the way for a more ambitious President Biden legislative agenda. See our post-election update webinar for a summary of potential agenda items for the Biden administration. A shortlist includes President-Elect Biden’s proposed tax increases on corporations, income for those in the highest tax bracket, capital gains and estate taxes, aggressive health care changes, and the Green New Deal. While markets and the economy may favor party splits between the Presidency and Congress, an all-Democratic situation has still yielded positive outcomes for markets. The below chart shows that 27% of the time the Democrats have been in control and GDP growth has been at its best during these times and returns have been good as well.

In the short term, we could see some near-term weakness in market reaction but President Biden has announced that we can expect a third wave of stimulus payments of $2,000 (or at least the additional $1,400 they were hoping for in the second round) so this could outweigh the risks of market downside in the near term. This still requires a 60 vote in the Senate to pass and may take until March to do so.

There could be some potential impacts to investors that we will be watching closely. Most notable are:

• Corporate tax rate increases and a minimum tax for corporations seems to be the biggest potential impact to markets under a Democratic sweep

• Changes to capital gains tax rates and the preferential tax rate on qualified dividends (although could be limited to those with incomes over $1 Million) could affect individual investor behavior

It’s important to remember that many factors impact markets with politics making up a small portion of those factors!

Hopefully in 2021 Mayhem sticks with the commercials but regardless of what happens, we are here as your partners to get you through whatever is thrown our way and help you achieve your financial goals. Thank you for the trust you place in us.

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Sector Returns: Sectors are based on the GICX methodology. Return data are calculated by FactSet using constituents and weights as provided by Standard & Poor’s. Returns are cumulative total return for stated period, including reinvestment of dividends. 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. Bitcoin issuers are not registered with the SEC, and the bitcoin marketplace is currently unregulated. The prominent underlying risk of using bitcoin as a medium of exchange is that it is not authorized or regulated by any central bank. Bitcoin and other cryptocurrencies are a very speculative investment and involves a high degree of risk. Investors must have the financial ability, sophistication/experience and willingness to bear the risks of an investment, and a potential total loss of their investment. Securities that have been classified as Bitcoin-related cannot be purchased or deposited in Raymond James client accounts. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

Post-Election Market Update

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.

Tune in for market commentary from our Director of Investments, Angela Palacios, CFP®, AIF®. Let's take a close look at how the presidential election is impa...

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.

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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.