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Tag: Bear Market

Finding the Silver Lining Amidst Rising Interest and Inflation Rates

Between bear markets in both stocks and bonds and mortgage rates doubling in 2022, is there any good news out there? Believe it or not, there is. Because of the massive rise in inflation this year, starting January 1, 2023, the Federal government is increasing Social Security payouts, raising 401k and IRA contribution limits, expanding the standard tax deduction, and increasing estate tax and annual tax-free gifts limits. For the first time in 14 years, you can also earn 4% on short-term treasury bills. Taking advantage of these changes next year could help you financially. According to the Wall Street Journal, here are some specific ways to improve your financial situation in 2023.

READ — What Does a Recession Mean for Your Finances? 

Social Security and Payroll Tax

Thanks to inflation this year, Social Security checks will be 8.7% higher than in 2022, the biggest increase in 40 years. For retirees, the average check will go up from $1,669 to $1,814. The Social Security payroll tax, which applies to W2 earnings, will go up 8.9% from $147,000 to $160,200, allowing taxpayers to shield an extra $13,200 from being taxed.

READ — Mapping Out Financial Success with Retirement Planning

Bigger Standard Tax Deduction, Higher Tax Brackets Limits, and Higher HSA Amounts

The standard personal tax deduction increases 7% next year, going from $12,950 to $13,850 for individuals and from $25,900 to $27,700 for couples. The HSA healthcare flexible spending account amount will go up from $2,850 to $3,050. All the marginal tax brackets have been adjusted 7% higher to reflect higher inflation. All these changes will help taxpayers keep more of their income.

Higher Estate Tax Limit and Annual Gift Change

Individuals will be able to transfer $12.92 million to their heirs tax-free during their lifetimes. The old amount was $12.06 million. This is a 9.3% increase. Combined couples can give away $25.84 million in 2023. However, this estate tax law is set to revert back to $5 million adjusted for inflation on January 1, 2026, when the 2017 tax cuts expire.

The annual tax-free gift increases from $16,000 to $17,000 next year. Married couples will be able to give away a total of $34,000 a year tax-free. These gifts can be a great way to reduce the size of your estate, particularly if you make them on an annual basis.

Higher 401k and IRA Contribution Limits

There is a 10% increase in the amount of money people can contribute to their 401k(s) in 2023. The limit for 401ks last year was $20,500; in 2023, it will go up to $22,500. The IRA limit will increase by 8% or $500 (from $6000 to $6,500). If you are over 50, the amounts are even higher: $7,500 from $7,000 last year.

Three-Month Treasury Bills Yield 4%

You haven’t been able to earn 4% on short-term treasury bills since 2008. Today, because of the much higher Fed Funds rate, the Federal government is paying 4% on 3-month treasury bills. A year ago, it was practically zero. If interest rates continue to rise, you can reinvest at a higher rate or get your money back when these bills mature. If you want to have 6-9 months of cash in reserve, treasury bills are a great alternative now. Cash is no longer trash.

It’s not all bad news heading into the new year. These inflation-adjusted changes and higher short-term treasury rates are a real benefit to Americans. And suppose the Federal Reserve is successful in bringing inflation down from 8.2% today to a more manageable level in 2023. In that case, we could potentially see a relief rally in both the stock and bond markets and a stabilization in mortgage rates.

READ — Choose Your Own Adventure: What’s Your Investment Path?

 

Important Disclosure:

Thumbnail Fred Taylor HeadshotFrederick Taylor is a Partner, Managing Director at Beacon Pointe Advisors, LLC. The information contained in this article is for general informational purposes only. Opinions referenced are as of the publication date and may be modified due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed. Past performance is not a guarantee of future results. Beacon Pointe has exercised all reasonable professional care in preparing this information. The information has been obtained from sources we believe to be reliable; however, Beacon Pointe has not independently verified or attested to the accuracy or authenticity of the information. The discussions, outlook, and viewpoints featured are not intended to be investment advice and do not consider specific investment objectives or risk tolerance you may have. All investments involve risks, including the loss of principal. Consult your financial professional for guidance specific to your circumstances.

What Does a Recession Mean for Your Finances? 

For some advisors, two negative quarters of Gross Domestic Product means we are in a recession. Other advisors are waiting for the National Bureau of Economic Research (NBER) to officially declare one. NBER defines a recession as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.”

The problem with waiting for the NBER to proclaim a recession is that by the time they do, it may be too late to improve your finances since there is typically several months of lag time before their announcement. Although recessions are challenging, there are actions you can take today to help mitigate the potential long-term damage.

READ — Does an Inverted Yield Curve Portend a Recession?

Credit Card Debt

According to LendingTree, the average annual percentage interest rate offered with a new credit card today is 21.59%. This is the highest interest rate since LendingTree began tracking rates monthly in 2019. There is no reason to pay this rate if there are other ways to pay for credit card debt. 

It may be prudent to pay your monthly bill early so you can avoid being charged this outrageous amount of interest. If you need to borrow from somewhere else to pay credit card bills, it could mitigate the amount of interest you will pay. Home equity lines, brokerage margin accounts, or personal bank lines of credit will only cost 5-6%, a mere fraction of what credit card companies charge.

Retirement Accounts

As tempting as it might be, try to avoid taking money out of your retirement accounts to cover your monthly bills. Your 401k account(s) and IRA(s) are for retirement only.  There are substantial penalties for taking money out of retirement accounts before age 59 1/2. Early withdrawals are subject to inclusion when calculating gross income; additionally, there is usually a 10% penalty.

However, you may be able to use IRA funds to pay your medical insurance premium after a job loss. You can take a hardship withdrawal from your 401k if the plan is held by your employer. It may be best to leave your retirement accounts intact growing tax-free until age 72. At that point, you are required by law to begin taking annual withdrawals.

Adding to your 401k out of your bi-monthly paycheck, particularly if your employer matches, may be beneficial. You could also make the maximum annual contribution to your IRA at the beginning of the year if you are able. Additionally, you could split the maximum annual contribution limit between a traditional IRA and a Roth IRA, or just go all-in on either. If you expect your tax rate to increase in the future, a Roth IRA would be your best bet.

Cash

The general rule of thumb is to have some mattress money or cash to cover up to six months of living expenses. This money is set aside for the purpose of weathering emergencies. During a recession, you may want to increase this amount.  If possible, stashing away a year or 18 months’ worth of savings for living expenses could help provide peace of mind.

The good news is that for the first time in years, you can buy the one-year treasury bond yielding over 3%. Better than that, you can buy I-Bonds, which are referred to as inflation-protected bonds. The current yield on I-Bonds is 9.62%; however, there are some limitations. You can only buy these bonds in $10,000 increments per individual family member in a given calendar year. Also, they can’t be redeemed for a year, and if you withdraw funds within five years, you will owe three months of interest.

Spending

Recessions give all of us a great excuse to cut back on our extra big-item spending. Ask yourself if you really need to take that trip, buy a new car, or remodel the house this year. Frankly, you probably don’t need to do any of those things. Now is not the time to take on extra debt or spend more than you make. If the recession lasts long enough, odds favor inflation coming back down, and if you can wait another year or two, airfare, new cars or remodeling expenses could be much lower than they are today. 

Although economists have varying opinions about whether or not we are in a recession, the stock, bond, and housing markets are signaling that we are in one currently or are rapidly heading in that direction. We are in a bear market, the yield curve is inverted, and the bidding wars for new homes are long gone.

Now that you know this, it may help to curtail your spending on large-ticket items, pay off your expensive credit card debt, keep contributing to your retirement accounts, and save 12-18 months of your living expenses. Also, you could invest emergency cash into I-Bonds or the 1-year treasury bond. Recessions don’t last forever, but it is better to be prepared when they inevitably come.

 

Thumbnail Fred Taylor HeadshotImportant Disclosure: 

Frederick Taylor is a Partner, Managing Director at Beacon Pointe Advisors, LLC. The information contained in this article is for general informational purposes only. Opinions referenced are as of the publication date and may be modified due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed. Past performance is not a guarantee of future results. Beacon Pointe has exercised all reasonable professional care in preparing this information. The information has been obtained from sources we believe to be reliable; however, Beacon Pointe has not independently verified or attested to the accuracy or authenticity of the information. The discussions, outlook, and viewpoints featured are not intended to be investment advice and do not consider specific investment objectives or risk tolerance you may have. All investments involve risks, including the loss of principal. Consult your financial professional for guidance specific to your circumstances. 

Bear Market Rally or New Bull Market? 

Investment returns, as of June 30th, 2022, marked the worst start for both the stock and bond markets in 50 years. Inflation, rising interest rates, negative GDP growth, de-globalization, political unrest, and the war in Ukraine hit investors simultaneously. There was nowhere to hide. Even defensive sectors like gold, TIPs, and REITs were negative in the first half of the year. Cash was the only asset class to remain steady. However, sitting in cash for the long term means you are losing money due to inflation. 

Since July 1, the markets have rebounded and cut the June 30 losses in half. Instead of being down 20% on the S&P 500, investors are only down 10% year-to-date. The NASDAQ index is up 20% from the low in June. This turnaround has been caused by lower gas prices at the pump, July’s higher employment number, and an improvement on the inflation front. The Consumer Price Index dropped from 9.1% to 8.5% this month. Producer prices showed some improvement, too. Maybe inflation has peaked? If it has, the Federal Reserve can stop being so aggressive about raising short-term interest rates after their September meeting. As of today, it is a coin toss whether they raise interest rates 50 or 75 basis points on September 21st. 

READ — Playing Defense During Bear Markets

So, what do you do as an investor? Change your asset allocation? Invest more cash? Do nothing? All this volatility is what makes it so challenging to be an investor. Every day we are bombarded with headlines that are usually quite negative and scary. It can be hard to feel comfortable about current market conditions, but at least the market seems to be signaling that things aren’t getting any worse. Now is a good time to plan for the remaining four months of the year. 

Asset Allocation 

In retirement accounts, if you have a long-term time horizon, this is an excellent opportunity to increase your equity exposure. Look at your 401k options and make sure you have enough invested in stocks to meet your retirement objectives. Over time, stocks have historically outperformed bonds. However, make sure you are set up for dividend reinvestment. Bear markets are wonderful opportunities to dollar cost average and hopefully buy more shares at lower prices. The same can be said for your ROTH IRAs or regular IRAs. With the markets down in 2022, you are buying stocks at a significant discount from the highs reached in January. 

Cash 

Cash feels good in the short run because you aren’t showing any losses. However, over a longer period, you are losing money on your cash due to inflation. For example, if inflation is 8.5% and cash earns zero, you lose 8.5%. A better way to go would be to buy the one-year treasury bill, which yields over 3%. You can sell the treasury if you need the cash in less than a year (with likely no principal risk) or let the bill mature in a year, and you get your money back. If interest rates are higher, you can reinvest at a higher rate or take this cash and buy more stocks. 

Tax Losses 

If you are like Warren Buffet, you sit tight and don’t worry about the day-to-day volatility of the markets. This is easier said than done. However, you can make lemonade out of a few lemons in your taxable accounts. For example, if you bought a stock in early January this year, you most likely have a loss. Today, you could sell that lemon for a loss and either buy back this stock in 31 days or reinvest the cash into another stock that has better prospects going forward. Tax losses can be used in perpetuity, so if you took some gains earlier in the year, you could use losses to offset the gains or carry the loss forward into the future. 

Nobody can successfully predict whether this rally is transitory or a new bull market; consequently, market timing is a fool’s errand. The stock market has, over a long period of time, usually returned 10% a year and typically goes up 70% of the time, but that doesn’t mean it will continue to do so. Volatility is the price we pay for generational wealth. There is no free lunch. Before the end of the year, look at the asset allocation in your retirement accounts, invest cash into short-term treasuries, and take tax losses in taxable accounts. These are things you can do now while we are still in a bear market or at the start of a new bull market. At the end of the day, at least you are doing something. 

 

Important Disclosure:  

Fred Taylor is a Partner, Managing Director at Beacon Pointe Advisors, LLC. The information contained in this article is for general informational purposes only. Opinions referenced are as of the publication date and may be modified due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed. Past performance is not a guarantee of future results. Beacon Pointe has exercised all reasonable professional care in preparing this information. The information has been obtained from sources we believe to be reliable; however, Beacon Pointe has not independently verified or attested to the accuracy or authenticity of the information. The discussions, outlook, and viewpoints featured are not intended to be investment advice and do not consider specific investment objectives or risk tolerance you may have. All investments involve risks, including the loss of principal. Consult your financial professional for guidance specific to your circumstances.  

 

Thumbnail Fred Taylor HeadshotFred Taylor is a managing director and partner of Beacon Pointe Advisors’ Denver office. He helps individuals and families build wealth, live off their wealth and leave a legacy for future generations. A former economic advisor to Governor Bill Ritter, Fred has more than 35 years of financial services experience.

Playing Defense During Bear Markets

Bear markets are normal, albeit rare, reminders that financial markets don’t always go up. Without them, speculation gets out of control. During periods such as now, the markets must reset to reflect the current interest rate environment, latest corporate profit outlook, inflation expectations, and investor sentiment. Unfortunately, all these factors are proving to be major headwinds to investors.

For the previous three years, from 2019 through 2021, portfolios that were heavily positioned in growth stocks turned out to be profitable. Today you need a different game plan. You need some defense in the portfolios to ride out this difficult market. Bonds have acted as a great buffer to the stock market in the past. However, due to rising interest rates, 30-year bonds were down as much as stocks in the first quarter of this year. Now you need to have more of a value tilt — owning companies that pay dividends and have bonds with shorter maturities and good credit quality.

What makes this market particularly hard — and, unlike the bear markets from COVID-19 in the spring of 2020 or the Great Financial Crisis in 2008-2009 — it is FED induced. This means the Federal Reserve will not save markets and cut interest rates or provide unlimited liquidity. In fact, they are doing the exact opposite by raising interest rates to kill inflation. I have never seen this before in my 38-year career. The Federal Reserve has always cut interest rates and provided liquidity in times of major market corrections or bear markets.

The Federal Reserve aims to bring inflation back down to its 2-percent target without throwing the economy into a recession, otherwise known as a “soft landing.” This is incredibly difficult to do and hasn’t happened since 1994. A more likely scenario will be a harder landing and a possible recession due to higher interest rates. If the stock, bond, and real estate markets correct 15 to 30 percent, this destruction in paper wealth will, in theory, slow things down enough to kill excessive inflation as people cancel trips, stop buying homes, and tighten their belts.

It may make more sense to own companies in the sectors that not only pay dividends but can also raise their dividends regardless of what is happening in the economy.

What Does This Mean for Your Portfolios?

Reduce risk where you can. The highest Price Earnings (PE), or growth stocks, particularly in the technology and healthcare sectors that don’t pay dividends, are the most vulnerable in a recessionary or rising interest rate environment. It may make more sense to own companies in the sectors that not only pay dividends but can also raise their dividends regardless of what is happening in the economy.

Bonds with a longer duration are more interest-rate sensitive. When interest rates go up, these bonds will lose their value much faster than individual 1-3 Year U.S. Treasury Bonds yielding almost 3 percent. Bonds are down 5 to 20 percent in 2022, so these short treasury bonds are very liquid and can be converted to cash to add back to equities when the bull market resumes. Right now, treasuries are a good place to diversify with decent income.

There is absolutely no reason to pay extra capital gains taxes in a potentially down year, especially if you can use losses in your favor. Turn lemons into lemonade.

Lastly and importantly, if you have any gains in your taxable portfolios from earlier sales this year, it may make sense to take tax losses to offset gains.  A good goal is to be as tax neutral as possible by the end of the year. There is absolutely no reason to pay extra capital gains taxes in a potentially down year, especially if you can use losses in your favor. Turn lemons into lemonade.

Bear markets are like fevers — they must run their course. They do end, but only when there are no more sellers, volatility gets to extreme levels, and investor sentiment is incredibly bearish. This can happen at any time, which is why it makes it so difficult to time the markets. If you get out of the market completely, you not only lose any chance of making back what you have lost on paper but also miss out on collecting any dividends or interest while waiting it out. History has proven time and time again that going to all cash is not the best move to make. Bear markets take nerves of steel and patience, but as our CIO Michael Dow is famous for saying, volatility is the price you pay for long-term wealth.

What Lies Ahead This Summer?

Fed Chair Jerome Powell has told the markets that short-term interest rates will be raised at their June and July meetings. I suspect after their July meeting, Powell will see if they must raise rates again in September, as the FED doesn’t meet in August. The short-term pain in the markets will be worth it if the Federal Reserve can bring inflation down from over 8 percent today back to the 2-3 percent range. If they don’t, we could have a return to the painful 1970s and a period of stagflation (no growth and high interest rates). The FED wants to avoid this at all costs, as do we.

 

Thumbnail Fred Taylor HeadshotFred Taylor is a managing director and partner of Beacon Pointe Advisors’ Denver office. He helps individuals and families build wealth, live off their wealth and leave a legacy for future generations. A former economic advisor to Governor Bill Ritter, Fred has more than 35 years of financial services experience.

 

Important Disclosure:
Frederick Taylor is a Partner, Managing Director at Beacon Pointe Advisors, LLC. The information contained in this article is for general informational purposes only. Opinions referenced are as of the publication date and may be modified due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed. Past performance is not a guarantee of future results. Beacon Pointe has exercised all reasonable professional care in preparing this information. The information has been obtained from sources we believe to be reliable; however, Beacon Pointe has not independently verified or attested to the accuracy or authenticity of the information. The discussions, outlook, and viewpoints featured are not intended to be investment advice and do not consider specific investment objectives or risk tolerance you may have. All investments involve risks, including the loss of principal. Consult your financial professional for guidance specific to your circumstances.