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30
Jun

Tech Sector Turmoil and the Bear Market

Tech Sector Turmoil and the Bear Market


For the past several years, tech stock gains drove the market to new heights, but when their share values began to plunge, they dragged the broader stock indexes down with them.
During the intensely volatile first 100 trading days of 2022, the stocks of companies in the S&P 500 index delivered their worst performance since 1970.1 The S&P 500 continued to tumble, and the benchmark index descended into a bear market — typically defined as a sustained drop in stock prices of at least 20% — on June 13, 2022. When the market closed, the S&P 500 had dropped 21.8% from its January 3 peak, and the tech-heavy NASDAQ, already in bear territory, had plunged 32.7% from its November 19, 2021 peak.2

Some investors who are nervous about the future and their portfolios seem to have taken a defensive stance by selling riskier assets, including investments in growth-oriented technology stocks.

 

What’s Triggering Market Volatility?

Throughout 2021, U.S. businesses dealt with unpredictable demand shifts and supply shocks related to the pandemic, but near-zero interest rates and trillions of dollars in pandemic relief supported consumer spending, boosted economic growth, and drove record corporate profits. Companies in the S&P 500 posted profits in 2021 that were 70% higher than in 2020 and 33% higher than in 2019, which helped fuel a stock market total return of nearly 29%.3-4

But in the first months of 2022, investors began to worry that the anticipated tightening of monetary policies by the Federal Reserve — intended to cool off stubbornly high inflation — would stifle economic growth and cause a recession. Prices began rising in the spring of 2021 due to high demand, supply-chain issues, and a labor shortage that pushed up wages. Inflation picked up speed in the first quarter of 2022 when China’s COVID-19 lockdowns impacted the supply of goods, and Russia’s invasion of Ukraine sent already high global food and fuel prices through the roof. In May 2022, the Consumer Price Index rose at an annual rate of 8.6%, a 40-year high.5

The relentless acceleration of price increases puts pressure on the Federal Open Market Committee (FOMC), which meets on June 14 and 15, to act aggressively to tame inflation. At the beginning of May, the FOMC raised the benchmark federal funds rate by 0.5% (to a range of 0.75%–1.00%). This was the first half-percent increase since May 2000, and Fed projections suggest there will be more to come.6

Rising interest rates push bond yields upward, and the opportunity for higher returns from lower-risk bond investments makes higher-risk stock investments less attractive. Moreover, stock investors are buying a portion of a company’s future cash flows, which become less valuable in an inflationary environment. Higher borrowing costs can also crimp consumers’ spending power and cut into the profits of companies that rely on debt.

The Downside of Domination

Stocks tracked by the S&P Information Technology Sector Index, which fell 29.2% from a January 3 high, have been hit harder than the S&P 500 as a whole. Plus, like many benchmark indexes, the S&P 500 is weighted by market capitalization (the value of a company’s outstanding shares). This gives the largest companies, most of which are in the tech sector, an outsized role in index performance. As of May 31, the information technology sector still accounted for 27.1% of the market cap of the S&P 500, compared with weightings of 14.4% for health care and 11.2% for financials, the next-largest sectors. Apple, Microsoft, Alphabet, and Amazon, respectively, are the four most-valuable companies in the index; Nvidia is ranked ninth and Meta has fallen to number 11.7

For the past several years, tech stock gains drove the market to new heights, but when their share values began to plunge, they dragged the broader stock indexes down with them. A Wall Street Journal analysis of market data through May 17 found that just eight of the largest U.S. companies — the six previously mentioned, plus Netflix and Tesla (in the consumer discretionary sector) — were responsible for an astounding 46% of the S&P 500’s 2022 losses (on a total return basis).8

These well-known technology companies have grown into massive multinational businesses that have a major influence on everyday life. Some dominate their respective business spaces — social media, smartphones, online search and advertising, e-commerce, and cloud computing — enough to spark antitrust investigations and calls for stricter regulations in the United States and abroad. They also have plenty of cash on hand, which means they may be in better shape to withstand an economic slowdown than their smaller competitors.9

Takeaways For Investors

Spreading investments among the 11 sectors of the S&P 500 is a common way to diversify stock holdings. But over time, a stock portfolio that was once diversified can become overconcentrated in a sector that has outperformed the broader market. Tech-sector stocks notched huge total returns of about 50% in 2019, 44% in 2020, and 35% in 2021, so you may want to look closely at the composition of your portfolio and consider rebalancing if you find yourself overexposed to this highly volatile sector. (Rebalancing involves selling some investments in order to buy others. Keep in mind that selling investments in a taxable account could result in a tax liability.) 10

If you feel shell-shocked after more than five months of market turbulence, try to regain some perspective. Some market analysts view recent price declines as a painful but long overdue repricing of stocks with valuations that had grown excessive, as well as a reality check brought on by waning growth expectations. The forward price-to-earnings (P/E) ratio of companies in the S&P 500 has fallen from 23.3 at the end of 2021 to 17.8 in May 2022, much closer to the 10-year average of 16.9.11-12

It could be a while before investors can better assess how the economy and corporate profits will ultimately fare against fast-rising inflation and higher borrowing costs — and the stock market is no fan of uncertainty. Disappointing economic data and company earnings reports could continue to spark volatility in the coming months.

It may not be easy to take troubling headlines in stride, but if you have a sufficiently diversified, all-weather investment strategy, sticking to it is often the wisest course of action. If you panic and flee the market during a downturn, you won’t be in a position to benefit from upward swings on its better days. And if you continue investing regularly for a long-term goal such as retirement, a down market may be an opportunity to buy more shares at lower prices.

The return and principal value of stocks fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost. Investments seeking a higher return tend to involve greater risk. Diversification is a method used to help manage risk. It does not guarantee a profit or protect against investment loss. The S&P 500 is an unmanaged group of securities that is considered representative of the U.S. stock market in general. The performance of an unmanaged index is not indicative of the performance of any specific investment. Individuals cannot invest directly in an index. Past performance is not a guarantee of future results. Actual results will vary. Dollar-cost averaging does not ensure a profit or prevent a loss. Such plans involve continuous investments in securities regardless of fluctuating prices. You should consider your financial ability to continue making purchases during periods of low and high price levels. However, this can be an effective way for investors to accumulate shares to help meet long-term goals.

1) SIFMA, 2022
2) Yahoo! Finance, 2022
3) The New York Times, May 31, 2022
4, 7, 10-11) S&P Dow Jones Indices, 2022
5) U.S. Bureau of Labor Statistics, 2022
6) Federal Reserve, 2022
8) The Wall Street Journal, May 19, 2022
9) The New York Times, May 20, 2022
12) FactSet, 2022

To find out more click here
5
May

What a “Fresh Start” Means for Your Student Loans

Hello all,

I hope everyone is enjoying spring, which has has been off to a slow start here in New England!

Federal student loans have been in the news quite a lot since the start of the pandemic, with multiple extensions for federal student loan payment, interest, and collections.  The latest extension is through August 31, 2022.  It is worth nothing that as part of the extension, the Department of Education noted that it will give all federal student loan borrowers a “fresh start” by allowing them to enter repayment in good standing, even those individuals whose loans have been delinquent or in default.  The article below provides some guidance for borrowers, with actions to consider taking before this September.

My best,

Tom


Thomas C. Dettre, CPA, MBA, PFS
President and Founder
True North Financial Planning, LLC
www.TrueNorthFinancialPlanning.com

Federal Student Loan Repayment Postponed for Sixth Time


The U.S. Department of Education recently announced a record sixth extension for federal student loan repayment, interest, and collections, through August 31, 2022.

On April 6, the U.S. Department of Education announced a record sixth extension for federal student loan repayment, interest, and collections, through August 31, 2022.1 The fifth payment pause was set to end on April 30, 2022. The six extensions have postponed federal student loan payments for almost two and a half years — since March 2020 at the start of the pandemic.

Education Secretary Miguel Cardona stated: “This additional extension will allow borrowers to gain more financial security as the economy continues to improve and as the nation continues to recover from the COVID-19 pandemic.”2

A “fresh start”

As part of the extension, the Department of Education noted that it will give all federal student loan borrowers a “fresh start” by allowing them to enter repayment in good standing, even those individuals whose loans have been delinquent or in default. More information about loan rehabilitation will be coming from the Department in the weeks ahead.

The Department’s press release stated: “During the extension, the Department will continue to assess the financial impacts of the pandemic on student loan borrowers and to prepare to transition borrowers smoothly back into repayment. This includes allowing all borrowers with paused loans to receive a ‘fresh start’ on repayment by eliminating the impact of delinquency and default and allowing them to reenter repayment in good standing.”3

What should borrowers do between now and September?

Approximately 41 million Americans have federal student loans.4 There are a number of things borrowers can do between now and September 2022.

  • Seek to build up financial reserves during the next few months to be ready to start repayment in September.
  • Continue making student loan payments during the pause (the full amount of the payment will be applied to principal). Interest doesn’t accrue during the pause. Borrowers who continue making payments during this time may be able to save money in the long term, because when the pause ends, interest will be accruing on a smaller principal balance.
  • Apply for the federal Public Service Loan Forgiveness (PSLF) program if they are working in public service and have not yet applied.
  • Visit the federal student aid website, studentaid.gov, to learn more about PSLF and loan repayment options, including income-based options.
  • Pay attention to the news. There has been increased political pressure on the current administration to enact some type of student loan cancellation, ranging from $10,000 per borrower to full cancellation. There are no guarantees, however. So it wouldn’t be a good idea for borrowers to put all their eggs in this basket.

1-3) U.S. Department of Education, 2022
4) The Washington Post, April 6, 2022

To find out more click here
4
Mar

Colliding Forces: Russia, Oil, Inflation, and Market Volatility

Colliding Forces: Russia, Oil, Inflation, and Market Volatility


Any disruption of Russian oil exports would have a significant effect on global supplies and drive prices higher.

The Russian invasion of Ukraine has drawn condemnation and punitive sanctions from the United States, Europe, and their allies. The humanitarian cost of war cannot be measured, and the long-term economic effects could take months or years to unfold. However, the early stages of the conflict pushed oil prices upward and sent the U.S. stock market plunging, only to see stocks bounce back and drop again — with more volatility likely.1

For now, it may be helpful to look at how the Russia-Ukraine conflict might affect the global oil market as well as U.S. consumers and investors.

Expensive Oil

On February 14, a week before the Russian invasion began, the spot price of Brent crude — the global oil benchmark — exceeded $100 per barrel for the first time since September 2014, due in large part to the Russian troop buildup on the Ukrainian border. Prices eased with news that sanctions on Iranian oil might be lifted, but the full-scale Russian invasion again pushed Brent crude above $100 per barrel.2–3

Although geopolitical events played a key role in recent price movements, oil prices have been rising since April 2020 as the global economy reopened and demand increased more quickly than production. After a 20% drop in global consumption during the first months of the pandemic, oil producers cut back just as demand increased and have struggled to catch up. According to the U.S. Energy Information Administration, global production matched consumption in January 2022 and was projected to exceed demand in the coming months, which might pull prices downward.4 However, the Russia-Ukraine conflict could upset the balance.

The Russian Threat

Russia produces about 10% of the world’s oil and is the second-largest exporter behind Saudi Arabia. Any disruption of Russian oil exports would have a significant effect on global supplies and drive prices higher.5–6

The United States — the world’s largest oil producer and consumer — imports only about 3% of its daily oil consumption from Russia, which could be replaced by other sources.7–8 The greatest effect of a disruption would be on Europe, which imports about 25% of its oil and 40% of its natural gas from Russia.9 Central and eastern European countries would be especially vulnerable.10

It’s unlikely that Russia would cut off oil and gas supplies unilaterally, because it depends on the revenue as much as Europe depends on the energy.11 In the longer term, however, Russia may shift energy exports from Europe to China, forcing Europe to develop other sources.12 U.S. and European officials have indicated that sanctions on Russia will not include energy industries, but the exclusion of Russian banks from the SWIFT global payments system could affect the purchase of oil and natural gas.13

Other Russian exports that may be affected by sanctions or a prolonged conflict include wheat, corn, and precious metals like nickel, aluminum, and palladium. Ukraine is also a major exporter of wheat and corn, and Russian and Ukrainian grain supplies are essential to many countries in the Middle East, Africa, and Asia. While any breakdown of these supplies would not directly affect the United States, they could cause widespread hardship and place greater strain on the global economy.14

Pain at the Pump

Theoretically, high oil prices drive inflation because higher expenses for fuel and raw materials for petroleum-based goods may be passed on to consumers. This happened during the 1970s, but the connection has not been so clear in recent years. In 2014, the last time oil prices exceeded $100 per barrel, annual inflation was under 2%.15

Oil prices affect gas prices, and high gas prices are exacerbating a broad inflationary trend driven by supply-chain disruptions and high consumer demand. While general inflation increased 7.5% for the 12-month period ending in January 2022, gas prices increased 40%, and the Russia-Ukraine conflict has pushed them further upward.16 The national average price of unleaded regular gasoline was $3.61 per gallon at the end of February, about 90 cents higher than one year earlier.17

With the Russian invasion, it’s likely that gas prices may spike even higher, driven by global concerns rather than any severe supply issues in the United States. Whether prices stay high might depend in part on consumer behavior. If gasoline consumption remains high regardless of price, it would feed the inflationary spiral, whereas if consumers cut back on driving in response to high prices, it could bring prices downward.18

Geopolitics and the Market

As with inflation, high oil prices theoretically have a negative impact on the stock market due to increased energy costs for businesses and less discretionary income for consumers. However, an older study from the Federal Reserve found surprisingly little correlation between oil prices and stock market performance.19 Even so, rising prices over the last few months have paralleled a period of stock market volatility and seem to be a contributing factor.

The market ups and downs triggered by the Russian invasion suggest that investors can expect rocky times ahead, but it’s impossible to guess how long volatility might last. Most geopolitical events, no matter how serious, have relatively brief effects on the market, often settling in days. However, the Iraqi invasion of Kuwait in 1990 had a major impact, and it took six months for the market to recover.20

Regardless of how events unfold, the stock market is primarily driven by U.S. business activity. Although high oil prices and armed conflict are causes for concern, it’s important to make investment decisions based on logic rather than emotions. For most investors, it’s wise to maintain a steady strategy designed for their personal goals and risk tolerance.

All investing involves risk, including the possible loss of principal, and there is no guarantee that any investment strategy will be successful.

1) The Wall Street JournalFebruary 24 & 28, 2022
2, 4, 7) U.S. Energy Information Administration, 2022
3) oilprice.comFebruary 18, 2022
5, 8, 18) The New York Times, February 14, 2022
6, 11) oilprice.comFebruary 12, 2022
9, 12, 14) The New York Times, February 22, 2022
10) Bloomberg, February 10, 2022
13) CNN, February 26, 2022
15-16) U.S. Bureau of Labor Statistics, 2022
17) AAA, February 28, 2022
19) Federal Reserve Bank of Cleveland, September 12, 2008
20) CNN, February 14, 2022

2
Feb

Retirement Plan Limits Are on the Rise

Retirement Plan Limits on the Rise in 2022


Retirement savers have some reasons to celebrate in 2022.

Many IRA and retirement plan limits are indexed for inflation each year. Although the amount you can contribute to IRAs remains the same in 2022, other key numbers will increase, including how much you can contribute to a work-based retirement plan and the phaseout thresholds for IRA deductibility and Roth contributions.

How Much Can You Save in an IRA?

The maximum amount you can contribute to a traditional IRA or a Roth IRA in 2022 remains $6,000 (or 100% of your earned income, if less). The maximum catch-up contribution for those age 50 or older remains $1,000. You can contribute to both a traditional IRA and a Roth IRA in 2022, but your total contributions cannot exceed these annual limits.

Can You Deduct Your Traditional IRA Contributions?

If you (or if you’re married, both you and your spouse) are not covered by a work-based retirement plan, your contributions to a traditional IRA are generally fully tax deductible.

If you’re married, filing jointly, and you’re not covered by an employer plan but your spouse is, your deduction is limited if your modified adjusted gross income (MAGI) is between $204,000 and $214,000 (up from $198,000 and $208,000 in 2021) and eliminated if your MAGI is $214,000 or more (up from $208,000 in 2021).

For those who are covered by an employer plan, deductibility depends on income and filing status. If your filing status is single or head of household, you can fully deduct your IRA contribution in 2022 if your MAGI is $68,000 or less (up from $66,000 in 2021). If you’re married and filing a joint return, you can fully deduct your contribution if your MAGI is $109,000 or less (up from $105,000 in 2021). For taxpayers earning more than these thresholds, the following phaseout limits apply.


If your 2022 federal income tax filing status is: Your IRA deduction is limited if your MAGI is between: Your deduction is eliminated if your MAGI is:
Single or head of household $68,000 and $78,000 $78,000 or more
Married filing jointly or qualifying widow(er) $109,000 and $129,000 (combined) $129,000 or more (combined)
Married filing separately $0 and $10,000 $10,000 or more

Can You Contribute to a Roth?

The income limits for determining whether you can contribute to a Roth IRA will also increase in 2022. If your filing status is single or head of household, you can contribute the full $6,000 ($7,000 if you are age 50 or older) to a Roth IRA if your MAGI is $129,000 or less (up from $125,000 in 2021). And if you’re married and filing a joint return, you can make a full contribution if your MAGI is $204,000 or less (up from $198,000 in 2021). For taxpayers earning more than these thresholds, the following phaseout limits apply.


If your 2022 federal income tax filing status is: Your Roth IRA contribution is limited if your MAGI is: You cannot contribute to a Roth IRA if your MAGI is:
Single or head of household More than $129,000 but less than $144,000 $144,000 or more
Married filing jointly or qualifying widow(er) More than $204,000 but less than $214,000 (combined) $214,000 or more (combined)
Married filing separately More than $0 but less than $10,000 $10,000 or more

How Much Can You Save in a Work-Based Plan?

If you participate in an employer-sponsored retirement plan, you may be pleased to learn that you can save even more in 2022. The maximum amount you can contribute (your “elective deferrals”) to a 401(k) plan will increase to $20,500 in 2022. This limit also applies to 403(b) and 457(b) plans, as well as the Federal Thrift Plan. If you’re age 50 or older, you can also make catch-up contributions of up to $6,500 to these plans in 2022 (unchanged from 2021). [Special catch-up limits apply to certain participants in 403(b) and 457(b) plans.]


Plan type: Annual dollar limit: Catch-up limit:
401(k), 403(b), governmental 457(b), Federal Thrift Plan $20,500 $6,500
SIMPLE plans $14,000 $3,000

Note: Contributions can’t exceed 100% of your income.

If you participate in more than one retirement plan, your total elective deferrals can’t exceed the annual limit ($20,500 in 2022 plus any applicable catch-up contributions). Deferrals to 401(k) plans, 403(b) plans, and SIMPLE plans are included in this aggregate limit, but deferrals to Section 457(b) plans are not. For example, if you participate in both a 403(b) plan and a 457(b) plan, you can save the full amount in each plan — a total of $41,000 in 2022 (plus any catch-up contributions).

The maximum amount that can be allocated to your account in a defined contribution plan [for example, a 401(k) plan or profit-sharing plan] in 2022 is $61,000 (up from $58,000 in 2021) plus age 50 or older catch-up contributions. This includes both your contributions and your employer’s contributions. Special rules apply if your employer sponsors more than one retirement plan.

Finally, the maximum amount of compensation that can be taken into account in determining benefits for most plans in 2022 is $305,000 (up from $290,000 in 2021), and the dollar threshold for determining highly compensated employees (when 2022 is the look-back year) will increase to $135,000 (up from $130,000 in 2021).

To find out more click here.
19
Nov

Employer Open Enrollment: Make Benefit Choices That Work for You

Greetings to all,

I hope everyone has been enjoying autumn, as we transition into the holiday season.

This is the time of year when many employers roll out open enrollment, a window of time when employers introduce changes to their benefit offerings for the upcoming plan year.  As the article below describes, it is important to review benefit offerings for the upcoming year, while paying particular attention to changes to benefits and costs.  This is also a good opportunity to look for potential tax savings.

Note that planning tips and other info are now posted on my website, https://truenorthfinancialplanning.com/, under Resources/Blog.  Feel free to check it out.

My best,

Tom

13
Aug

Should You Be Concerned About Inflation?

Greetings to all,

I hope everyone is enjoying summer.  It is hard to believe it is mid-August already!  It’s not just the weather that has been warm lately – inflation has also been heating up.  Rising inflation has been in the news a lot lately, and almost anyone looking for a used car or housing has experienced higher prices.  As the article below describes, there are multiple reasons for recent price increases across multiple parts of the economy.  Time will tell how temporary, or “transitory”, the current trends are.

 

The next few months may indicate whether inflation is slowing down or changes in monetary policy are necessary.

If you pay attention to financial news, you are probably seeing a lot of discussion about inflation, which has reared its head in the U.S. economy after being mostly dormant for the last decade. In May 2021, the Consumer Price Index for All Urban Consumers (CPI-U), often called headline inflation, rose at an annual rate of 5.0%, the highest 12-month increase since August 2008.1

The CPI-U measures the price of a fixed market basket of goods and services purchased by residents of urban and metropolitan areas — about 93% of the U.S. population. You have likely seen price increases in some of the goods and services you purchase, and if so it’s natural to be concerned.

larger question is whether these price increases are temporary, caused by factors such as supply-chain issues and labor shortages that will be resolved as the economy continues to emerge from the pandemic, or whether they indicate a fundamental imbalance that could cause widespread long-term inflation and hold back economic growth.

Most economists — including Federal Reserve Chair Jerome Powell and Treasury Secretary Janet Yellen — believe the current spike is primarily due to transitory factors that will fade in the coming months. One example of this, cited by Powell in a recent press conference, is the price of lumber.2–3

Supply and Demand

Early in the pandemic, many lumber mills shut down or cut back on production because they expected a major slowdown in building. In fact, demand for housing and home renovation increased during the pandemic, as many people who worked from home wanted more space, a different location, or improvements to their current homes. Low supply and high demand sent lumber prices soaring.4

Sawmills geared up as quickly as they could and were reaching full capacity just as demand began to ebb, with builders cutting back due to high prices and homeowners using their discretionary income to buy other goods and services. Suddenly the supply exceeded demand, and prices began to drop. Wholesale lumber prices are still higher than before the pandemic, and it takes time for price drops to filter down to the retail level, but it’s clear that the extreme inflation was transitory and has been reversed. The lumber story also suggests that consumers and businesses will cut back on spending for a product that becomes too expensive rather than spend at any price and feed an inflationary spiral.5

Chips and Cars

Another example of pandemic-driven imbalance between supply and demand is used car and truck prices, which have skyrocketed almost 30% over the last 12 months and represent a substantial portion of the overall increase in CPI. Used vehicles are hard to find in large part because fewer new cars are being built — and fewer new cars are being built because there is a shortage of computer chips. A single new car can require more than 1,000 chips, and when auto manufacturers were forced to close their factories early in the pandemic and new vehicle sales plummeted due to lack of demand, chip manufacturers shifted from producing chips for cars to producing chips for high-demand consumer electronics such as webcams, phones, and laptops.6–8

As the economy reopened and the demand for cars increased, chip producers were unable to shift and increase production quickly enough to meet the needs of auto manufacturers. The chip shortage is expected to reduce global auto production by 3.9 million vehicles in 2021, a drop of 4.6%. Unlike lumber, the chip shortage may take some time to resolve, because chip manufacturing is a long, multi-step process and most chips are manufactured outside the United States. The federal government has stepped in to encourage U.S. manufacturers to build new facilities and increase production.9

Fundamental Forces

Imbalances between supply and demand are to be expected as the economy reopens, and most such imbalances should work themselves out in the marketplace. But other forces could fuel more extensive inflation. Massive federal stimulus packages have provided consumers with more money to spend, while ongoing stimulus from the Federal Reserve has increased the money supply and made it easier to borrow.

Although unemployment is still relatively high at 5.9%, millions of jobs remain open as workers are hesitant to return to positions they consider unsafe in light of the pandemic, are unable to work due to lack of child care, and/or are rethinking their careers in a post-pandemic world.10–11This may change in September as extended unemployment benefits expire and children return to school, but the current imbalance is forcing many businesses to raise wages, especially in lower-paying jobs.12

The increases so far are primarily “catching up” after many years of low wages and should be absorbed by businesses or passed on to consumers with moderate price increases.13 However, if wages and prices increase too quickly and consumers earning higher wages are willing to spend regardless of rising prices — because they expect prices to rise even higher — the wage-price inflation spiral could be difficult to control.

 

Reading the Economy

When considering the current situation, it’s helpful to look at other measures of inflation.

Base effect. On a purely mathematical level, high 12-month CPI increases in March, April, and May 2021 reflect the fact that the CPI is being compared with those months in 2020, when prices decreased as the economy closed in response to the pandemic. This comparison to unusually low numbers is called the base effect. To avoid this effect, it’s helpful to look at annualized inflation over a two-year period, comparing prices now with prices before the pandemic. By that measure, current inflation is about 2.5%, a little higher than the average over the last decade but not nearly as concerning as a 5.0% level.14

Core inflation. Prices of some items are more volatile than others, and food and energy are especially volatile categories that can change quickly even in a low-inflation environment. For this reason, economists tend to look more carefully at core inflation, which strips out food and energy prices and generally runs lower than CPI-U. Core CPI rose at an annual rate of 3.8% in May 2021, which sounds better than 5.0% until you consider that it is the highest core inflation since June 1992. The good news is that the 0.7% monthly increase from April to May was lower than the 0.9% rise from March to April, suggesting that core inflation may be slowing down. (The CPI-U increase also slowed in May, rising 0.6% for the month after a 0.8% increase in April.)15

Sticky prices. Another helpful measure is the sticky-price CPI, which sorts the components of the CPI into categories that are relatively slow to change (sticky) and those that change more rapidly (flexible). The sticky price CPI increased just 2.7% over the 12-month period ending in May 2021. By contrast, the flexible component of the CPI increased 12.4% over the year.16 This suggests that a variety of factors — such as problems with supply chains, labor, and extreme weather — may be moving prices on flexible items, but that underlying economic forces are moving more stable prices at a relatively moderate rate.

The Fed’s Arsenal

The Federal Open Market Committee (FOMC), an arm of the Federal Reserve, is charged with setting economic policy to meet its dual mandate of fostering maximum employment while promoting price stability. The Fed’s primary economic tools are the benchmark federal funds rate, which affects many other interest rates, and its bond-buying program, which injects liquidity into the economy. Put simply, the Fed lowers the funds rate and buys bonds to stimulate the economy and increase employment, and raises the rate and stops buying bonds or sells bonds to put the brakes on inflation.

The federal funds rate has been at its rock-bottom range of 0.0% to 0.25% since March 2020, when the Fed dropped it quickly in the face of the pandemic, and the Federal Reserve is buying $120 billion in government bonds every month, much less than it did early in the pandemic but still a substantial and steady injection of money into the economy.17 (Unlike an individual or a regular bank that must spend money to purchase bonds, the central bank buys bonds by creating an electronic deposit in one of its member banks, thus creating “new money” that can be used to lend and circulate into the economy.)

Some inflation is necessary for economic growth — without it, an economy is stagnant — and in 2012, the FOMC set a 2% target for healthy inflation, based on a measure called the Personal Consumption Expenditures (PCE) Price Index. The PCE price index uses much of the same data as the CPI, but it captures a broader range of expenditures and reflects changes in consumer spending.

More specifically, the FOMC focuses on core PCE (excluding food and energy), which remained below the 2% target for most of the last decade. In August 2020, the FOMC changed its policy to target an average PCE inflation rate of 2% and indicated it would allow inflation to run higher for some time to balance the time it ran below the target. This is the current situation. Core PCE increased at a 12-month rate of 3.4% in May 2021, but so far the Fed has shown little inclination to take action in the short term.18 The FOMC projects PCE inflation to drop to 3.1% by the end of the year and to 2.1% by the end of 2022.19

At its June meeting, the FOMC did indicate an important shift by projecting the federal funds rate would increase in 2023 to a range of 0.5% to 0.75%, effectively two quarter-point steps. (In March, the projection had been to hold the rate steady at least through 2023.) Fed Chair Powell also indicated that the FOMC has begun “talking about talking about” reducing the monthly bond purchases.20 Neither of these signals suggests any immediate action or serious concern about inflation. However, the fact that the funds rate remains near zero and that the Fed continues to buy bonds gives the central bank powerful “weapons” to employ if it believes inflation is increasing too quickly.

The next few months may indicate whether inflation is slowing down or changes in monetary policy are necessary. Unfortunately, prices do not always come down once they rise, but it may be helpful to keep in mind that prices of many goods and services did decline during the pandemic, and the higher prices you are seeing today might not be far out of line compared with prices before the economic slowdown. As long as inflation begins trending downward, it seems likely that the current numbers reflect growing pains of the recovery rather than a long-term threat to economic growth.

U.S. Treasury securities are backed by the full faith and credit of the U.S. government as to the timely payment of principal and interest. The principal value of Treasury securities fluctuates with market conditions. If not held to maturity, bonds could be worth more or less than the original amount paid. Projections are based on current conditions, are subject to change, and may not come to pass.

1, 6, 10, 14) U.S. Bureau of Labor Statistics, 2021
2, 17, 19–20) Federal Reserve, 2021
3) Bloomberg, June 5, 2021
4–5) The New York Times, June 21, 2021
7) CBS News, June 22, 2021
8–9) Time, June 28, 2021
11) CNBC, June 8, 2021
12–13) CNBC, May 22, 2021
15) The Wall Street Journal, June 22, 2021
16) Federal Reserve Bank of Atlanta, 2021
18) U.S. Bureau of Economic Analysis, 2021

3
Jun

Reach Your Spending and Financial Goals

Understanding spending is important to understanding your overall financial situation, and to effective financial planning.  I sometimes say to people that I can crunch numbers all day long, but it won’t be meaningful unless it’s grounded in how you live.  When people start to keep track of their spending, there are invariably surprises, and I often hear “I can’t believe I spend so much on x, y, or z”.  Understanding provides a basis to make mindful decisions about spending, and coordinating spending priorities with financial goals can help get you on track to meet your goals.  Very often, even modest adjustments to spending can make a big difference in achieving financial goals.

I encourage everyone to take a look at the content below, and start taking steps to get on a good financial track for your situation…and to stay on track if you are already headed in the right direction.

Note that planning tips and other info are now posted on my website, https://truenorthfinancialplanning.com/, under Resources/Blog.  Feel free to check it out.

12
Apr

How The American Rescue Plan Act Can Help You

Greetings to all, and happy spring!  I hope everyone is enjoying the longer and warmer days.

Many of you are likely aware of the recent passage of the $1.9 trillion American Rescue Plan Act, which provides relief funding to individuals and businesses, as well as to a variety of federal programs, state and local governments and other priorities.

The news headlines about this plan have highlighted key individual relief provisions, such as stimulus checks and extended unemployment assistance.  There are many more relief provisions involving housing, health insurance, student loans, child and dependent tax credits, business relief, and others.  This month’s edition of Tom’s Tips focuses on key individual relief provisions in the American Rescue Plan – those that are better known, as well as the less well known and understood provisions.  I encourage everyone to take a look at the content below and see what provisions may apply to you.

Note that planning tips and other info are now posted on my website, https://truenorthfinancialplanning.com/, under Resources/Blog.  Feel free to check it out.

17
Feb

Myths and Facts about Social Security

Social Security is an important, and even vital component of retirement income and retirement planning.  However, there are many aspects of Social Security that are often not well understood, and even misunderstood.  This month’s edition of Tom’s Tips focuses on myths and facts about Social Security, in an effort to increase understanding and facilitate planning.

Note that planning tips and other info are now posted on my website, http://www.truenorthfinancialplanning.com/, under Resources/Blog.  Feel free check it out.

5
Jan

Six Keys to More Successful Investing

The start of a year is a good time to review how we manage different aspects of our finances.  Saving and investing to meet major financial goals such as retirement are important elements of financial planning.  This month’s edition of Tom’s Tips outlines six keys to more successful investing.  Focusing on each of these consistently over time can lead to better investment results, and a higher probability of achieving goals.  A good approach is to keep it simple; investing doesn’t need to be complicated to be successful.

A successful investor maximizes gain and minimizes loss. Though there can be no guarantee that any investment strategy will be successful and all investing involves risk, including the possible loss of principal, here are six basic principles that may help you invest more successfully.

Long-term compounding can help your nest egg grow

It’s the “rolling snowball” effect. Put simply, compounding pays you earnings on your reinvested earnings. The longer you leave your money at work for you, the more exciting the numbers get. For example, imagine an investment of $10,000 at an annual rate of return of 8 percent. In 20 years, assuming no withdrawals, your $10,000 investment would grow to $46,610. In 25 years, it would grow to $68,485, a 47 percent gain over the 20-year figure. After 30 years, your account would total $100,627. (Of course, this is a hypothetical example that does not reflect the performance of any specific investment.)

This simple example also assumes that no taxes are paid along the way, so all money stays invested. That would be the case in a tax-deferred individual retirement account or qualified retirement plan. The compounded earnings of deferred tax dollars are the main reason experts recommend fully funding all tax-advantaged retirement accounts and plans available to you.

While you should review your portfolio on a regular basis, the point is that money left alone in an investment offers the potential of a significant return over time. With time on your side, you don’t have to go for investment “home runs” in order to be successful.

 

Endure short-term pain for long-term gain

Riding out market volatility sounds simple, doesn’t it? But what if you’ve invested $10,000 in the stock market and the price of the stock drops like a stone one day? On paper, you’ve lost a bundle, offsetting the value of compounding you’re trying to achieve. It’s tough to stand pat.

There’s no denying it — the financial marketplace can be volatile. Still, it’s important to remember two things. First, the longer you stay with a diversified portfolio of investments, the more likely you are to reduce your risk and improve your opportunities for gain. Though past performance doesn’t guarantee future results, the long-term direction of the stock market has historically been up. Take your time horizon into account when establishing your investment game plan. For assets you’ll use soon, you may not have the time to wait out the market and should consider investments designed to protect your principal. Conversely, think long-term for goals that are many years away.

Second, during any given period of market or economic turmoil, some asset categories and some individual investments historically have been less volatile than others. Bond price swings, for example, have generally been less dramatic than stock prices. Though diversification alone cannot guarantee a profit or ensure against the possibility of loss, you can minimize your risk somewhat by diversifying your holdings among various classes of assets, as well as different types of assets within each class.

 

Spread your wealth through asset allocation

Asset allocation is the process by which you spread your dollars over several categories of investments, usually referred to as asset classes. The three most common asset classes are stocks, bonds, and cash or cash alternatives such as money market funds. You’ll also see the term “asset classes” used to refer to subcategories, such as aggressive growth stocks, long-term growth stocks, international stocks, government bonds (U.S., state, and local), high-quality corporate bonds, low-quality corporate bonds, and tax-free municipal bonds. A basic asset allocation would likely include at least stocks, bonds (or mutual funds of stocks and bonds), and cash or cash alternatives.

There are two main reasons why asset allocation is important. First, the mix of asset classes you own is a large factor — some say the biggest factor by far — in determining your overall investment portfolio performance. In other words, the basic decision about how to divide your money between stocks, bonds, and cash can be more important than your subsequent choice of specific investments.

Second, by dividing your investment dollars among asset classes that do not respond to the same market forces in the same way at the same time, you can help minimize the effects of market volatility while maximizing your chances of return in the long term. Ideally, if your investments in one class are performing poorly, assets in another class may be doing better. Any gains in the latter can help offset the losses in the former and help minimize their overall impact on your portfolio.

 

Consider your time horizon in your investment choices

In choosing an asset allocation, you’ll need to consider how quickly you might need to convert an investment into cash without loss of principal (your initial investment). Generally speaking, the sooner you’ll need your money, the wiser it is to keep it in investments whose prices remain relatively stable. You want to avoid a situation, for example, where you need to use money quickly that is tied up in an investment whose price is currently down.

Therefore, your investment choices should take into account how soon you’re planning to use your money. If you’ll need the money within the next one to three years, you may want to consider keeping it in a money market fund or other cash alternative whose aim is to protect your initial investment. Your rate of return may be lower than that possible with more volatile investments such as stocks, but you’ll breathe easier knowing that the principal you invested is relatively safe and quickly available, without concern over market conditions on a given day. Conversely, if you have a long time horizon — for example, if you’re investing for a retirement that’s many years away — you may be able to invest a greater percentage of your assets in something that might have more dramatic price changes but that might also have greater potential for long-term growth.

Note: Before investing in a mutual fund, consider its investment objectives, risks, charges, and expenses, all of which are outlined in the prospectus, available from the fund. Consider the information carefully before investing. Remember that an investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporate or any other government agency. Although the fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in the fund.

Dollar cost averaging: investing consistently and often

Dollar cost averaging is a method of accumulating shares of an investment by purchasing a fixed dollar amount at regularly scheduled intervals over an extended time. When the price is high, your fixed-dollar investment buys less; when prices are low, the same dollar investment will buy more shares. A regular, fixed-dollar investment should result in a lower average price per share than you would get buying a fixed number of shares at each investment interval. A workplace savings plan, such as a 401(k) plan that deducts the same amount from each paycheck and invests it through the plan, is one of the most well-known examples of dollar cost averaging in action.

Remember that, just as with any investment strategy, dollar cost averaging can’t guarantee you a profit or protect you against a loss if the market is declining. To maximize the potential effects of dollar cost averaging, you should also assess your ability to keep investing even when the market is down.

An alternative to dollar cost averaging would be trying to “time the market,” in an effort to predict how the price of the shares will fluctuate in the months ahead so you can make your full investment at the absolute lowest point. However, market timing is generally unprofitable guesswork. The discipline of regular investing is a much more manageable strategy, and it has the added benefit of automating the process.

 

Buy and hold, don’t buy and forget

Unless you plan to rely on luck, your portfolio’s long-term success will depend on periodically reviewing it. Maybe economic conditions have changed the prospects for a particular investment or an entire asset class. Also, your circumstances change over time, and your asset allocation will need to reflect those changes. For example, as you get closer to retirement, you might decide to increase your allocation to less volatile investments, or those that can provide a steady stream of income.

Another reason for periodic portfolio review: your various investments will likely appreciate at different rates, which will alter your asset allocation without any action on your part. For example, if you initially decided on an 80 percent to 20 percent mix of stock investments to bond investments, you might find that after several years the total value of your portfolio has become divided 88 percent to 12 percent (conversely, if stocks haven’t done well, you might have a 70-30 ratio of stocks to bonds in this hypothetical example). You need to review your portfolio periodically to see if you need to return to your original allocation.

To rebalance your portfolio, you would buy more of the asset class that’s lower than desired, possibly using some of the proceeds of the asset class that is now larger than you intended. Or you could retain your existing allocation but shift future investments into an asset class that you want to build up over time. But if you don’t review your holdings periodically, you won’t know whether a change is needed. Many people choose a specific date each year to do an annual review.
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To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.Prepared by Broadridge Advisor Solutions Copyright 2021.
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