FED HOLDS THE LINE BUT SEES RATE INCREASE EARLIER
The Federal Reserve Board met earlier this month and decided to hold short-term interest rates at 0.25%, where it has been since March 2020 when the pandemic began to grip the United States and the world. The Fed offered some encouraging words regarding how quickly the economy seems to be recovering but emphasized there would continue to be ups and downs along the way. However, 11 of the 18 members believe that there will be two rate increases in 2023, which is about 6 to 9 months earlier than what was previously predicted. In typical fashion, the market declined on the news, with the S&P 500 going down about 150 points before recovering somewhat before the day was over. Further, the Fed declared that they will continue to purchase bonds of $120 billion a month for the foreseeable future. So, what does it all mean? From our perspective, it means the recovery will continue at a better pace than initially thought by most prognosticators. Hopefully, this translates into better earnings which in turn should translate into better stock prices. We believe there will be ups and downs along the way but feel good about the markets at present. Our caution, of course, is that a correction could occur at any time, and we would view it as a buying opportunity in an otherwise healthy economy and bull market.
BANKS ARE OFFICIALLY OUT OF THE DOGHOUSE
Banks received a clean bill of health last Thursday in the latest Comprehensive Capital Analysis and Review (CCAR). Part of the Dodd-Frank Act, the Federal Reserve implemented the annual review in the wake of the Great Financial Crisis to ensure the solvency of banks in dire circumstances. CCAR is a forward-looking stress test that requires the largest banks to subject their balance sheets to hypothetical scenarios of extreme economic and financial stress. Positively, all 23 participants received passing grades and the Fed lifted its previous restriction on banks from repurchasing shares during the pandemic last year. This bodes well for an increased capital return to bank shareholders, both in the form of dividends and share buybacks.
While most investors had anticipated higher capital return from the banks, the results reaffirm the strength of banks’ balance sheets and the robustness of their post-pandemic recovery. More broadly, it reflects the government’s confidence in the economic recovery given the vital role banks play in supporting healthy markets. With the next earnings season approaching quickly, banks will kick off the releases as usual. We will be keeping an eye on the level of credit reserve releases (after having spiked in preparation for pandemic fallout), as well as loan growth, to gauge the health of both Main Street and Wall Street.
AMERICA CONTINUES ITS CHARITABLE NATURE
Despite the pandemic in 2020, bequests from American individuals, foundations, and corporations totaled $471.4 billion to U.S. charities in 2020 according to Giving USA Foundation. This exceeded 2019’s total of $448.7 billion by 5.1%. When you break it down by groups, the vast majority was donated by individuals at $324.1 billion, and foundations contributed $88.3 billion. It seems that in the worst health event in over 100 years that taking care of those less fortunate somehow became a greater priority, which in our opinion, speaks volumes about the American value system.
MODERN WEALTH SURVEY FROM CHARLES SCHWAB
Each year Charles Schwab creates its Modern Wealth Survey. It covers a wide range of people, and this year the median income of respondents was $55,000 and the median investable assets were $37,500. Here are a few factoids from the survey, and it is easy to see the effects of the pandemic on people’s thinking. The amount of money required to “be wealthy” declined from $2.6 million in 2019 to $1.9 million this year. The financial happiness number also declined, dropping from $1.75 million to $1.1 million, while the financial comfort (net worth) dropped from $934,000 to $624,000. For those with a financial plan, 54% felt confident in their future while only 18% of those without a plan felt the same.
THE RICH GOT RICHER BUT SO DID THOSE WITH LOW INCOME
According to the Federal Reserve, our national wealth increased by $26 trillion from March 23, 2019, to December 31, 2019. While the recovery of the economy and the markets had a lot to do with this increase, so did those stimulus checks and enhanced unemployment benefits. The increase has continued this year with total wealth now reaching $154.2 trillion. While those with wealth benefited from an increase in investment values and lower spending, the low end of the income spectrum benefited from the three stimulus checks. Their spending was also lower as consumers remained cautious. For those who lost their jobs, increased and extended unemployment benefits helped. An NBER (National Bureau of Economic Research) paper calculated that for those that were unemployed, 69% were making more not working than when they were working with the median receiving 134% of their working income.
BIAS CAN HURT FINANCIALLY
A recent Morningstar study looked at four types of bias when it came to decision-making around investments. They pointed out that when investors act on these biases, they can hurt themselves financially. The first is known as “present” bias where there is a tendency to value a smaller reward today rather than worry about longer-term goals like retirement. In other words, why not take that vacation I always wanted to do even though it costs more than I can really afford.
“Base rate” bias makes current information more likely to influence investor decisions without considering the probability of the event occurring. Think of a “miracle” drug that enters Phase III testing where an investor thinks it will make it, when according to the National Institute of Health, 58% of the drugs tested in Phase III fail.
One of our favorite biases is “overconfidence.” The investor just “knows” the next stock pick is going to rise because the last two selections did – “I can’t miss.” Finally, there is “loss aversion” bias, where an investor is more fearful of loss relative to the potential for gains. Because the market went up so much in 2020 during the recovery from the bear market in the spring, the investor is afraid of losing those gains and gets out of the market. Thus, they miss the continued upward movement over the longer term. Morningstar notes that investors can mitigate these biases by putting the three-day rule into effect. Before acting on impulse, wait three days and see if you still feel the same way.
TAKE IRA MONEY EVEN WHEN YOU DON’T NEED IT?
Why in the world would anyone take distributions from their IRA or other retirement accounts earlier than required when they do not need the money? One answer could be to do a Roth conversion. It is not unusual for someone who retires before Required Minimum Distributions to begin to be in a lower tax bracket than when they were working. Lower income usually means a lower tax bracket. We all tend to think about what we pay in taxes as the tax bracket we are in. The top bracket of 37% starts at $523,601 for singles and at $628,301 for a married couple filing jointly. Because of our progressive tax system – the more you make, the higher percentage you pay. However, no matter how much you make, the first dollar is taxed at 10%. Thus, if you are in a lower tax bracket now than when you were working, it might be a good idea to tax some of your retirement funds before your tax rate potentially goes up. However, you want to be careful because you do not want to drive yourself into the next higher bracket.
For example, suppose you have joint income of $150,000 and are in the 22% tax bracket that tops out at $172,750. If you take $22,750 out of your IRA you will only pay 22% on that withdrawal, or an extra $5,005, and could move this to a Roth IRA. To get the most bang for your buck, we typically advise clients to move all $22,750 into the Roth IRA and pay the taxes with non-retirement money outside of the IRA. Roth IRAs grow tax-FREE, not tax-DEFERRED and there are no required distributions from a Roth IRA, at least not until the owner dies. The beneficiaries get the Roth IRA proceeds tax-free. If you would like to discuss this in greater detail, please contact us.
INVESTING THROUGH THE DECADES AGES 20 – 40
There are several factors to consider when plotting your financial future. For example, women often make less than their male counterparts, take career breaks to care for the family, have higher healthcare costs, and typically a longer retirement due to longevity. Therefore, it’s important to optimize your money at every stage in life. Below are a few things to consider as you enter the decades of your 20s to 40s.
Your 20s is a defining decade both personally and professionally as you gain your “sea legs” in your career and possibly a long-lasting relationship in a marriage. During this time, it is essential to learn about investing, enroll in your company’s benefits plan, and begin saving in a personal and individual retirement account (IRA). In addition, start paying down debts you may have incurred for your education, a car, or credit card.
As you transition into your 30s, you become more comfortable and experienced in your career. This is a great decade to ramp up investing in your retirement and personal investment accounts. Shoot to save and invest at least 15% of your paycheck a year. Your money will begin to accumulate and compound, making it easier to reach your retirement goals. Try to increase your savings every year and when you get a raise.
In your 40s, it is time to reflect and see if you are achieving your financial goals. Consider hiring a financial planning professional to make sure you are on track. Though we think a financial planning professional is vital at any decade if you have not started working with one, start then.
At ProVise, we believe that financial success consists of small but intentional financial decisions throughout your lifetime, and we are committed to guiding you through each of those decisions. In addition, we pride ourselves on excellent client relationships and want to see you succeed.