Maximizing your 401k Contributions: Nuances to Save you Money

Contributed by: Nick Defenthaler, CFP®, RICP®

When starting a career, we are always told to contribute at least the minimum needed to get the full company match in our 401k (typically between 4% and 8%, depending on how your plan is structured). “Never throw away free money!” is a phrase we use quite often with children of clients who are starting that first job out of college.

But what about those who are well established in their career and fully maximizing 401k contributions ($22,500 for 2023, $29,000 if you are over the age of 50)? They should not have to worry about not receiving their full employer match, right? Well, depending on how your 401k plan is structured at work, the answer is yes! 

Let me provide an example to explain what I am referring to:
Let’s say Heather (age 54) earns a salary of $325,000 and elects to contribute 18% of her salary to her 401k. Because Heather has elected to contribute a percentage of her salary to her 401k instead of a set dollar figure, she will max out her contributions ($29,000) by the end of June each year. Let us also assume that Heather receives a 5% employer match on her 401k – this translates into $16,250/yr ($325,000 x 5%). If Heather does not have what is known as a “true up” feature within her plan, her employer will stop making matching contributions on her behalf halfway through the year – the point at which she maxed out for the year and contributions stopped. In this hypothetical example, not having the “true up” feature would cost Heather over $8,000 in matching dollars for the year!

So, how can you ensure you receive the matching dollars you are fully entitled to within your 401k? 
The first step I recommend is reaching out to your benefits director or 401k plan provider and asking them if your plan offers the “true up” feature. If it does, you are in the clear – regardless of when you max out for the year with your contributions, you will be receiving the full company match you are entitled to. 

If your plan does not offer the “true up” feature and you plan on maximizing your 401k contributions for the year, I would strongly suggest electing to defer a dollar amount instead of a percentage of your salary. For example, if you are over 50, plan on contributing $29,000 to your 401k this year, and if you are paid bi-weekly, elect to defer $1,115.38 every pay period ($1,115.38 x 26 pay periods = $29,000). Doing so will ensure you maximize your benefit by the end of December and not end up like Heather, who maxes out by the end of June and potentially loses out on significant matching dollars.  

Subtle nuances such as the “true up” 401k feature exist all around us in financial planning, and they can potentially have a large impact on the long-term success of your overall financial game plan. If you have questions on how to best utilize your employer’s 401k or retirement savings vehicle, please don’t hesitate to reach out to us for guidance. 

Nick Defenthaler, CFP®, RICP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® Nick specializes in tax-efficient retirement income and distribution planning for clients and serves as a trusted source for local and national media publications, including WXYZ, PBS, CNBC, MSN Money, Financial Planning Magazine and OnWallStreet.com.

Examples are hypothetical and are not representative of every employer's retirement plan. Not all employers offer matching 401(k) contributions. Please contact your employer's benefits department or retirement plan provider for terms on potential matching contributions.

Any opinions are those of Nick Defenthaler, CFP®, RICP® and not necessarily those of Raymond James. Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc.

Finding the Right Asset Allocation

Contributed by: Jaclyn Jackson, CAP®

**Register for our LIVE investment event or our investment WEBINAR on Feb. 23!

Most delicious meals start with a great recipe. A recipe tells you what ingredients are needed to make the meal and, importantly, how much of each ingredient is needed to make the meal taste good. Just like we need to know the right mix of ingredients for a tasty meal, we also need to know the asset allocation mix that makes our investment journey palatable.

Determining the Right Mix

Asset allocation is considered one of the most impactful factors in meeting investment goals. It is the foundational mix of asset classes (stocks, bonds, cash, and cash alternatives) used to structure your investment plan; your investment recipe. There are many ways to determine your asset allocation. Asking the following questions will help:

• What are my financial goals?

• When do I need to achieve my financial goals?

• How much money will I be investing now or over time to facilitate my financial goals?

Seasoning to Taste

Now, suppose equity markets were down 20%, and your portfolio was suffering. Would you be tempted to sell your stock positions and purchase bonds instead? Figuring out an asset allocation based on goals, time horizons, and resources is essential but means nothing if you can’t stick with it. A recipe may instruct us to “season to taste” for certain ingredients. In other words, some things are subjective, and our feelings greatly influence whether we have a negative or positive experience. For asset allocation, understanding your risk tolerance helps uncover personal attitudes about your investment strategy during challenging market scenarios. It gives insight into your ability or willingness to lose some or all of your investment in exchange for greater potential returns. When deciding our risks tolerances, we must understand the following: 

• The risks and rewards associated with the investment tools we use.

• How we deal with stress, loss, or unforeseen outcomes

• The risks associated with investing

Following the Recipe

When we follow a recipe closely, our meal usually turns out how we expected. In the same way, committing to your asset allocation increases the likelihood of meeting your investment goals. Understanding your risk tolerances can reveal tendencies to undermine your asset allocation (i.e., selling or buying asset classes when we should not). Fortunately, there are a few strategies you can employ to help stay on track. 

• If you are risk-averse, diversifying your investments between and among asset categories can help improve your returns for the levels of risks taken.

• If you find yourself buying or selling assets at the wrong time, routinely (annually, quarterly, or semi-annually) rebalancing your portfolio will force you to trim from the asset classes that have performed well in the past and purchase investments that have the potential to perform well in the future.

• If you find yourself chasing performance or buying investments when they are expensive, buying investments at a fixed dollar amount over a scheduled time frame, dollar cost averaging, can help you to purchase more shares of an investment when it is down relative to other assets (prices are low) and less shares when it is up relative to other assets (more expensive). Ultimately, this can lower your average share cost over time.

Finding the right asset allocation for you is one of the most important aspects of developing your investment plan. Luckily, understanding investment goals, time horizons, resources, and risk tolerances can help you mix the best recipe of asset categories to make your investment journey deliciously successful.

Jaclyn Jackson, CAP® is a Senior Portfolio Manager at Center for Financial Planning, Inc.® She manages client portfolios and performs investment research.

This information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Center for Financial Planning, Inc., and are not necessarily those of RJFS or Raymond James. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment or investment decision. Investing involves risk, investors may incur a profit or loss regardless of strategy or strategies employed. Asset allocation and diversification do not ensure a profit or guarantee against a loss. Dollar-cost averaging does not ensure a profit or protect against loss, investors should consider their financial ability to continue purchases through periods of low price levels.

A 2022 Snapshot

Contributed by: Angela Palacios, CFP®, AIF®

Diversification

• The S&P 500 ended 2022 negative by 18.11%, while the Bloomberg US Aggregate Bond Index was down 13%, and international investments, as represented by the MSCI EAFE, were negative by 14.45%

• Stocks and bonds both being negative for 12-month returns is exceptionally rare and has only occurred in 2.4% of 12-month rolling periods in the past 45 years.

• Many well-known target data and diversified strategies allocated roughly 60% stocks and 40% bonds down in the 17-18% range for the year. (Source: Morningstar)

Fixed Income

• The Federal Reserve raised interest rates seven times in 2022 to combat inflation.

• Interest rates moved from 0-.25% all the way up to 4.25-4.50%

• This year's sharp increase in rates and, thus, negative performance in bonds has been an anomaly and is unlikely to repeat.

Volatility Driven By

• Russia/Ukraine conflict has lasted far longer than anyone had predicted.

• Inflation is retracing its steps stubbornly slow.

• Interest rate increases.

• China's zero covid policy up until their elections. They then moved from one extreme to the other by relaxing all restrictions following unrest from the population. Now, they are dealing with a wave of Omicron hitting the population.

• Cryptocurrency woes.

Elections and Politics

• Split congress suggests there will be no major legislation this year. Gridlock is usually positive for equity markets, but debt ceiling expansion could cause a standoff, and we may hear rumblings of a government shutdown in the fall. In the past, this has not had a long-term impact for markets.

• Secure Act 2.0 – Check out this blog written by Kali Hassinger for more information. We will also take a few minutes to review the changes at our upcoming investment event.

Interest rates

The biggest story of 2022 has been how drastically the yield curve has shifted. Check out the chart below showing where the yield curve was at the end of 2021 (Dark gray line) and where it finished in November this year (blue line). The shaded area shows the range of the yield curve over the past ten years. Not only is the yield curve no longer upward-sloping, as it is currently inverted, but it also sits near the high end of yields we have seen over the past decade. While this created short-term negative returns for bonds with both short and long duration, yields are again a meaningful part of future projected returns. Bonds continue to deserve a meaningful allocation in most portfolios.

Inflation

Another major headline of the year has been inflation. The Federal Reserve (the Fed) has shifted the yield curve aggressively by raising short-term rates this year in an effort to combat inflation. We are seeing gathering evidence of inflation coming down with improving supply chains and gas prices coming down. This evidence gave the Fed confidence to slow to a 50 bps increase in December as opposed to the string of .75% increases leading up to this past month. The most recent inflation reading came in at 7.1% for December. You can see in the chart below the month-by-month print of CPI throughout 2022 influencing the Fed decisions.

Looking under the hood at what drives inflation numbers, we can see port congestion has also improved, which is a lead indicator of inflation. Remember in early 2022 when I shared a chart showing 100+ ships waiting to get into the Port of Los Angeles and Long Beach? Now, it hovers below ten – bottlenecks are reducing. The chart below shows the relationship between slower delivery times (blue line) equating to higher inflation (gray line) and vice versa, with faster delivery times equating to lower inflation. 

Chart of the Week: Source: BLS, S&P Global, J.P. Morgan Asset Management.

We should see inflationary pressure continue to lessen in the coming months. A reversal of China's zero Covid policy will also start to decrease delivery times of items coming out of China.

Consumer trends are also a leading indicator you can watch, and right now, they are walking a thin line as credit card balances are at all-time highs while savings rates are at all-time lows. This can not continue perpetually, so as consumers slow their spending, we should see inventories build and prices decline as retailers struggle to clear shelves.

As the Fed tries to move toward a target of 2% inflation, risks for the Fed's overtightening are my next worry. Tightening too much could determine if the economy goes into a recession and how deep of a recession. While a mild to moderate recession is likely priced in now, it is important to remain defensive with a well-diversified portfolio.

Housing Affordability and Inflation

With mortgage rates rising, many worry about home affordability and a retreat in home prices. While higher rates do not impact existing mortgages, they will impact new mortgages. People will be less likely to sell their homes as their rates are locked in at such low levels, meaning there will be a lack of homes on the market for new household formation. Typically, when the U.S. falls into recession, housing drops with it. Most of us remember home values falling swiftly and significantly during the Great Recession. A drop like that is unlikely to occur this time, as there are many factors that are different now. Mainly, there is not a glut of homes as there was in 2008-09. Demand for homes is still much higher than the supply due to the lack of building over the past decade, so while prices may come down from current levels, they will not be by much.

2023 should bring with it continued inflation relief and the potential for recession. We continue to remain cautious by holding a shortened duration in our bond portfolios and holding some extra cash for a time when the technicals of the equity markets are pointing toward downside exhaustion and healthy bottoming activity. We continue to rebalance as needed, watch our trusted indicators, and maintain our process over trying to predict what is to come. We know investing in a year like 2022 can be challenging to stay disciplined through, and we are humbled and honored by the trust you place in us to guide you through these times. 

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 Angela Palacios, CFP®, AIF® 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.

Holding onto Cash? Here Are a Few Options to Get Some Interest!

Contributed by: Kali Hassinger, CFP®, CSRIC™

As Financial Planners, we often talk to clients about the importance of maintaining a cash reserve for emergencies or unforeseen expenses. In past years, the return on cash has been minimal, if not close to nothing, but throughout 2022, we have seen interest rates continually rise. This presents the opportunity to get some interest on cash! There are several options available, so which is most appropriate for you? Where to put cash savings, as with other investments, depends on your time horizon and goals.  

Money Market Accounts

Money Market accounts are offered through a bank or credit union, often offering greater interest than a typical savings account. The rates paid by a money market are based on current interest rates, and the rate you receive can adjust periodically. These rates are often more attractive than savings, but transaction limits and high minimum account balance requirements can exist. Rates can also be tiered, meaning the higher your balance, the higher the interest paid. These accounts are easily accessible, sometimes offering check-writing abilities, and insured through the FDIC up to $250,000. 

CDs

Short Term Certificates of Deposit, or CDs, purchased through a bank or credit union, are also FDIC insured but allow less liquidity than Money Market accounts. CDs earn a fixed rate over a pre-determined amount of time, ranging from a few months to several years. Accessing money before the maturity timeline can result in penalties, so be sure you will not need to access the funds before the required period.

Money Market Mutual Funds 

Money Market Funds hold a basket of securities that can generate gains and losses that will be passed onto shareholders. The investments held, however, are usually considered short-term and low-risk, such as U.S. Treasury bonds and high-quality corporate bonds. Unlike the Money Market accounts discussed above, the FDIC does not insure these funds. 

They are similar to Money Market accounts, however, in that interest rates fluctuate. Although there is an inherent risk with these funds, shareholders should not experience excessive price fluctuation, which can be held for short periods. Investors must trade into and out of these funds, so there can be a lag of a few days in order to access the account balance. 

Treasury Securities and Bonds

Treasury-backed securities have started to pay attractive rates as the Fed has continually raised interest rates throughout the year. These are backed by the U.S. government, which is another way of saying that they are generally considered some of the safest investments available. Treasury Bills are short-term securities with several term options ranging from four weeks to a year. Like CDs, you should only invest funds that you are confident you will not need to access before the maturity date, but these can be resold on the market if necessary. 

I-Bonds, sold through Treasury Direct, have become attractive for the first time in many years. These bonds must be purchased through TreasuryDirect.gov, and the amount an individual can purchase is limited to $10,000 per year (with additional allowances if you purchase paper I-Bonds). These must be held for a year, but if you cash them in earlier than five years, you lose three months of interest. 

If you are still determining which option is best for you or if you are interested in investing cash, be sure to reach out to your planner!

Kali Hassinger, CFP®, CSRIC™ is a Financial Planning Manager and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.

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 Kali Hassinger, CFP®, CSRIC™ 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.

What Goldman Sachs Thinks About Markets: Conference Key Takeaways

Contributed by: Jaclyn Jackson, CAP®

Due diligence meetings are a core part of the Center’s investment research strategy.  They give us a chance to vet investment strategies for our clients. They also allow us to get data from global financial institutions and industry leaders that most advisors typically don’t have the resources to aggregate themselves. 

This fall, I attended the Professional Investor Forum at the Goldman Sachs Conference Center in New York. The three-day conference highlighted research from the company’s thought leaders about markets and the current economic landscape. 

Here are Goldman’s views on a few questions that have been top of mind for investors.

Q: Are we facing another “Great Recession”?

Investor anxiety is reminiscent of the Great Recession, but the root of market volatility is quite different. Market volatility in 2007-2008 was triggered by unhealthy company fundamentals, particularly in the financial sector. The volatility was micro-driven.

Current market volatility is macro-driven with inflation and fed policy expectations largely dictating the investor experience. Since company fundamentals are relatively healthy, Goldman believes a recession would be shallow – especially compared to the Great Recession.

Q:  What’s going on with equity markets?

Rates and higher bond yields have affected the US equity market. Today, the market trades at around 15 times forward earnings compared to 21 times forward earnings at the beginning of the year. A lot of this compression is coming from high growth companies, particularly “long-duration” tech companies where the valuation of the company is attributable to the earnings that are well into the future. 

The gap between shorter-duration stocks and longer-duration stocks has been very significant in terms of the relative performance. This is a tough environment for long-duration stocks because rates will likely stay high. Companies with more nearer-term visibility on their cash flows are likely to do better in this environment. (There are tech companies with more near-term visibility, so no need to dump all tech from your portfolio.)

Inflation clarity is important because that helps us understand the direction of Federal Reserve policy and interest rate policy. Greater investor confidence about corporate earnings might be the impetus for equity volatility to decline - freeing equity prices to move higher.

Equity markets are figured out when inflation is figured out.

Q: How low can equity markets go?

Goldman Sachs expects the inflation rate to lower and for markets to recover in late 2023. This is how they see the timeline unfolding:

• The Fed will be raising rates several more times this year and early part of 2023.

• At the end of the year, the S&P 500 will likely close somewhere between 3,400 and 3,600, modestly down from the current level.

• Markets will be down in the early part of next year until we see inflation data trending lower.

• Equity market moves higher by the end of 2023.

Note, there is a case to be made for a recession. In a recessionary scenario (where the Fed hikes so much that we move into recessionary territory), Goldman believes we could hit a low of around 3,150, which is meaningfully below where we are now.

Q: When will market volatility lighten up?

Goldman Sachs Economics expects the rate of inflation (as measured by core PCE) to decelerate from close to 5 percent to roughly 3 percent. If that actually happens, they believe equity prices will do okay. Nevertheless, that won’t be clear until sometime in the middle of 2023, so uncertainty will probably continue another six months.

Q:  Where should I be invested?

According to Goldman, we’ve move from a “there is no alternative” or TINA environment to a “there are reasonable alternatives” or TARA environment.

If investors wanted yield they would invest in equities, especially US equities. However, chasing yield through equities leaves the door open to greater risk vulnerability. With interest rates on short-term cash positions starting to approach 4 percent, investors can get an attractive rate of return from an income point of view. In the words of David Kostin, Goldman’s Chief US Equity Strategist, “the idea of pure cash returns pushing almost 4 percent and the expectation that the Fed Funds rate will be somewhere between 4.25 and 4.5 percent by the early part of next year, that would suggest that there are reasonable alternatives (to equities), just on the cash positions alone.”

To be clear, this does NOT mean one should sell all of their equities and buy short-term cash positions. Equity positions in your portfolio should generally align with your strategic allocation. This is suggesting that investors don’t have to take unwarranted risks with over-exposure to equity markets to get yield because there are reasonable alternatives (TARA). Short-term cash positions are one example of this. The key here is that now, investors don’t have to over-do-it with risks when looking for yields.

Fed tightening is a big focus, but other parts of financial conditions are tightening too - higher bond yields, wider credit spreads, stronger dollar, lower equity prices. All of these contribute to tightening financial conditions. The type of companies in the equity market that do well in this environment are companies with stronger balance sheets, companies with higher return metrics, return on equity, return on capital, companies with less drawdown in terms of their share prices, more stable growth in terms of different metrics. In short, “quality” companies are likely to help investors in the uncertain environment of tightening financial conditions.

Jaclyn Jackson, CAP® is a Senior Portfolio Manager at Center for Financial Planning, Inc.® She manages client portfolios and performs investment research.

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. Standard deviation measures the fluctuation of returns around the arithmetic average return of investment. The higher the standard deviation, the greater the variability (and thus risk) of the investment returns. Performance of hypothetical investments do not reflect transaction costs, taxes, or returns that any investor actually attained and may not reflect the true costs, including management fees, of an actual portfolio. Changes in any assumption may have a material impact on the hypothetical returns presented. Illustrations does not include fees and expenses, which would reduce returns.

Retiring in a Bear Market Doesn’t Have to be Scary

Contributed by: Matt Trujillo, CFP®

Retiring in a poorly performing stock market can be scary, but here are some things to consider that may take some of the fear away:

• Bear markets come and go. However, while they are occurring, they are almost always uncomfortable for investors.

• Since 1950 there have been ten bear markets (defined as a 20% drop in major U.S. stock market indexes).

• Fortunately, as proven by history, they are also temporary.

• Investors can often weather the storm without changing their investment allocation much at all.

• If you are compelled to make changes, do so incrementally – avoid panic selling and major reallocations if you can. Patience can pay off since there is usually a bull market in the not-too-distant future!

Source: First Trust

It is also important to make sure you meet with your advisor at least once a year to review your circumstances and ensure your cash needs will be met for the next 24 months. You should also always be reviewing your asset allocation to make sure whatever cash needs are on the short-term horizon are set aside in more safe and stable investments. It would help if you also had some growth assets so your principal could keep pace with inflation and maintain purchasing power over time.

Our team at The Center is always here for any questions or concerns you may have. Please reach out to us anytime; we're happy to help!

Matthew Trujillo, CFP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® A frequent blog contributor on topics related to financial planning and investment, he has more than a decade of industry experience.

The information contained in this letter 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 Matt Trujillo, CFP®, 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. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Individual investor’s results will vary. Past performance does not guarantee future results. 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. Rebalancing a non-retirement account could be a taxable event that may increase your tax liability.

Q3 2022 Investment Commentary

Contributed by: Angela Palacios, CFP®, AIF®

2022 has brought steadily worsened news weighing on both stock and bond markets for three consecutive quarters. The Russia/Ukraine conflict, higher gas and commodity prices, a strong U.S. dollar, China's zero covid policy, supply chain disruptions, high inflation, rising interest rates, a minimum effective corporate tax rate, recession fears, and Cryptocurrency crashes have all wreaked havoc on investor sentiment. According to the AAII investor sentiment survey, as of 9/30/22, investors were only ever more bearish at four points in the history of the reading (8/31/1990, 10/19/1990, 10/9/2008, and 3/5/2009). "Unusually high bearish sentiment readings historically have also been followed by above-average and above-median six-month returns in the S&P500."

Raymond James recently wrote regarding severe recessions, "Recessionary bear markets have historically contracted 33% on average over a 13-month span. We are already down 24% (as of 9/29/2022) over nine months. Timing an absolute bottom is extremely difficult when uncertainty and volatility runs high. The index often capitulates at the bottom, reaching a low in sharp fashion for a very quick period, with very rapid recoveries. On average, the S&P 500 is up 16% in the first 30 days of a recessionary bear market bottom." This type of snap-back rally is particularly important to participate in for the success of a long-term investment strategy and is extremely difficult to try to time. We encourage investors to remain patient and trust in the financial planning process that plans for times like these to occur. Asset allocation, diversification, and rebalancing remain core tenets of our process during these times.

The FED is making up for lost time

The Federal Reserve continues to aggressively raise interest rates with an additional rate hike of .75% in September, making it the third consecutive .75% rate hike in a row (June and July). I believe The Federal Reserve feels guilty for letting inflation get out of hand and not responding quickly enough, so they are taking aggressive action now and signaling that they will continue to do so until they see improvement. Inflation resulted in less reduction than was hoped for by markets in September. So, the Fed is not resting on the hope that inflation will come down on its own; instead, they are taking aggressive action to force it down. They have decided to proactively fight it in the form of higher rates by year-end nearing 4.3% (another roughly 1-1.25% increase from where we are now). 

Policy adjustments need to happen with an eye toward future economic conditions, not current ones. The FED action in September is aggressive enough that if we continue along their anticipated path, it suggests there could be trouble for the economy ahead. It is likely that this intensified upward push will start to slow the economy, sending us into a recession, or what many are calling a hard landing now. This is why markets reacted so strongly to the downside for the last half of September.

Inflation

Inflation is starting to come down, and it is just not coming down as fast as the Federal Reserve (not to mention consumers) would like. Gasoline prices have continued their downward trend since peaking in June of this year. While that has helped curtail inflation, it is a lagging effect. Housing prices and food are the most troublesome components now. With mortgage rates catapulting to the 7% range on a 30-year fixed market, many people are getting priced out of the housing market. This means housing prices will likely start to decline, meaning less pressure on inflation in the coming months. Check out the video portion of our commentary for more in-depth information!

Bonds, Certificates of Deposits, and Treasuries are in style again!

Just as equities have experienced a tough year, bonds have also shared their own headwinds. With interest rates increasing rapidly this year, bond prices have come down and affected performance. But bond yields are finally paying some pretty attractive rates, and the yield on bond holdings is rising. Some might ask: "If rates are up, why is my brick-and-mortar savings account still yielding only .13% on average?” Banks are slow to adjust the interest they are paying because they have ample cash on hand to lend out (not to mention borrowing has all but dried up at these higher rates). So they do not need to pay you higher rates to attract you to deposit more money.  

Russia

For the moment, there is a lot of uncertainty in Europe from the Russia/Ukraine conflict. Putin is a wild card, as we do not know when and how he will strike out on any given day. It seems like he should gradually be getting weaker, but we do not know how long this conflict will continue. If there is a policy change or leadership change in Russia, international markets could be in a much better situation. 

Strength of the U.S. Dollar

High inflation and high-interest rates to fight the high inflation have strengthened the U.S. Dollar versus most other currencies worldwide. Our strong currency means importing goods from the rest of the world is cheaper. However, there are drawbacks to a stronger currency for companies that source revenue from overseas. On-shoring the profits from foreign currencies back to the U.S. dollar acts as a tax (on top of the new minimum tax rate imposed recently by the administration) to the corporation that must do so, meaning less profits. Following is a chart of how much the U.S. dollar has strengthened this year versus the Yen, Pound, and Euro.

Source: Raymond James

Recession Fears

Still, no one has officially declared that the U.S. is in a recession. Two-quarters of negative GDP (both of which happened in the first and second quarters this year) is the traditional definition of a recession. Politics and mid-term elections coming up will impact whether or not we will hear recession rhetoric out of Washington, but the definition is pretty clear. The National Bureau of Economic Research officially calls a recession here in the U.S. It weighs jobs, manufacturing, and real incomes when assessing whether or not we are in a recession and not just real GDP, so this is important information to watch.  

What if we are in a recession?

The average drawdown for the S&P 500 for past mild/moderate recessions (as opposed to severe recessions in the statistic above) has been 24%, which is almost exactly where we ended the quarter. 

We also had already hit this level in mid-June before the recovery experienced through the remainder of the summer. Leading into this year's drawdown, we took several actions in portfolios, including rebalancing (since equities had such a strong run in the second half of 2020 and 2021), adding a real asset strategy to help hedge potential inflation, and shortened duration on the bond portfolio. If cash was needed in the coming 12 months, it was raised. 

Staying calm in the face of daily market volatility is not always easy. That is why we are here to help. If you are anxious, never hesitate to contact us with your questions!

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 Angela Palacios, CFP®, AIF® 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.

Three Tax-Savvy Charitable Giving Strategies

Contributed by: Lauren Adams, CFA®, CFP®

Lauren Adams, CFA®, CFP®, is a Partner, CERTIFIED FINANCIAL PLANNER™ professional, and Director of Operations at Center for Financial Planning, Inc.® She works with clients and their families to achieve their financial planning goals.

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 Lauren Adams, CFA®, CFP® and not necessarily those of Raymond James. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc.

Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

The Inflation Reduction Act of 2022

Contributed by: Kali Hassinger, CFP®, CSRIC™

In Mid-August, The Inflation Reduction Act was signed into law. This law includes several clean-energy tax incentives, provides additional funding for the IRS, extends Affordable Care Act subsidies, implements a minimum corporate tax, and, for the first time, gives Medicare the power to negotiate prescription costs. Although there is doubt whether these provisions will reduce the current historically high inflation rates, the law provides support that is viewed as a breakthrough in climate-related policy.  

• Energy and Climate Change Investments: Tax credits for individuals are extended to households that invest in energy-efficient home improvements. The credit is equal to 30% of the amount paid or up to $1,200/year for these improvements (an increase from the previous 10% rate). A $7,500 clean vehicle credit will be available for those who purchase a vehicle assembled in North America. The credit is allowed for cars with an MSRP of $55,000 or less and vans, SUVs, and trucks with an MSRP of $80,000 or less. (Before you run out and buy an electric car for the tax credit, make sure it qualifies. A list provided by the U.S. Department of Energy can be found here.)

• IRS Funding: Reports of the IRS being underfunded and backed up has been heard for several years. The Inflation Reduction Act provides billions of dollars to the IRS over the next ten years to increase their workforce, update technology, and hopefully work through the accumulated backlog. 

• Affordable Care Act Subsidies: The Inflation Reduction Act extended the premium tax credits for those enrolled in an Affordable Care Act insurance plan and whose income is up to 400% above the poverty line through 2025.  

• Minimum Corporate Tax: The Act introduces a new corporate alternative minimum tax (AMT) on companies with income of more than $100 million per year. The 15% tax will be applied to excess income over a corporation’s AMT foreign tax credit for the year. 

• Stock Buyback Excise Tax: In 2023, companies who purchase more than $1 million of their stock in a share repurchase program will be subject to a 1% excise tax.

• Medicare Costs: The Inflation Reduction Act hopes to reduce out-of-pocket drug-related Medicare expenses by capping the annual limit. The out-of-pocket costs will be reduced to $4,000/year or less in 2024 and are set to be reduced again to $2,000/year in 2025. It requires the government to negotiate with drug manufacturers to lower prices, and it requires drug companies to pay Medicare in rebates if the cost of a drug increases at a rate higher than inflation. 

The list above is not exhaustive and does not include several other corporate clean-energy provisions, additional expanded Medicare benefits (insulin cost cap and free vaccinations), and, ultimately, hopes to reduce carbon emissions by 40% over the next eight years. 

Kali Hassinger, CFP®, CSRIC™ is a Financial Planning Manager and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.

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 Kali Hassinger, CFP®, CSRIC™ and not necessarily those of Raymond James. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Center for Financial Planning, Inc. Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

Summer 2022 Economics Summarized in 5 Charts

Contributed by: Angela Palacios, CFP®, AIF®

Is inflation transitory again? Transitory was struck from the Federal Reserve's language after inflation didn't dwindle for a few months. But depending on your definition of short and long-term, it could still be viewed as transitory. Headline inflation was lower than expected for July, and most of the reduction came from energy. You can see the breakdown by month below.

Source: JP Morgan Weekly market update, BLS, FactSet

Unemployment hits a multi-decade low. This equates to difficulty in the hiring process for firms. Job openings are declining, but there are still two job openings for each unemployed person.

Source: Raymond James Weekly Headings

Source: U.S Department of Labor, J.P. Morgan Asset Management. *JOLTS job openings from February 1974 to November 2000 are J.P. Morgan Asset Management estimates.  J.P. Morgan Guide to the Markets – July 31, 2022.

Mortgage rates spiked and are coming back down, helping the affordability of buying a home again.

Source: Raymond James Weekly Headings

Yield curve inversion continues to steepen. There's much focus on the yield curve as it's usually an early signal for the economy slipping into recession (although technically, this definition has already been met with two negative quarters of GDP). This spells trouble for banks as they have to pay higher interest rates on short-term customer deposits like Certificate of Deposits but earn less on mortgages, for example. This money-losing gap can prompt banks to tighten up on lending.  

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 information contained in this letter 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 Angela Palacios, CFP®, AIF® 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. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Individual investor’s results will vary. Past performance does not guarantee future results. 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. Rebalancing a non-retirement account could be a taxable event that may increase your tax liability.