Your August Update with Bob and Kerry

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Your August Update with Bob & Kerry

 

We hope this finds you well. Hard to believe it’s already August, we hope those of you in Minnesota have been able to enjoy the beautiful weather. While long-term planning is at the core of what we do, we always feel it’s important to shed some light on our current economy and markets.

The Economy & Markets

When we take a step back from what is happening in the economy and look at the major U.S. market averages, we see an incredible disconnect. And we’re not alone.

U.S. Gross Domestic Product (GDP), which is the broadest measure of the value of goods and services in the economy, fell at an annual rate of 32.9% in Q2 2020, the largest decline on record (U.S. BEA data – quarterly data began in 1947). The prior record, a 10.0% annualized decline, occurred in 1958 and coincided with the Asian flu pandemic.

The contraction can be blamed on the unusually swift decline in the economy that began in March and quickly accelerated in April.

It doesn’t take an economist piecing together a complex puzzle to discover the culprit. Simply look at the lockdowns designed to slow the spread of Covid-19. They stifled economic activity and threw tens of millions of people out of work.

In April alone, employment fell by a record 20.8 million (St. Louis Federal Reserve). For perspective, 152 million individuals were employed in February.

However, May and June saw a significant improvement from these very depressed levels. The economy generated a record number of jobs in May and June, erasing one-third of March and April’s job losses (U.S. BLS data).

We also saw big gains in retail sales following a record decline in April (U.S. Census), as businesses began to reopen, furloughed employees returned to work, and stimulus money ($1,200 checks and generous jobless benefits) found its way into the economy.

Nevertheless, the economy remains far below its pre-coronavirus state, as evidenced by the steep decline in Q2 GDP.

Here’s another way to look at the economy with one simple data point. In February, the unemployment rate was at a 50-year low of 3.5%. In June, the jobless rate stood at 11.1% (below April’s 14.7% peak).

Yet the major market averages tell a different story.

As July came to a close, the broad-based S&P 500 Index turned positive for the year, while the tech-heavy NASDAQ Composite is having an impressive year (Table 1). Some of the larger tech stocks appear to be more insulated from the initial impact of the Covid Recession, and investors have taken notice.

The Federal Reserve’s massive response to the crisis, coupled with a strong response by the federal government, has also encouraged buying. In addition, investors may be looking beyond a dismal Q2, both in terms of GDP and profits, and attempting to price in more favorable conditions later in the year and into 2021.

 

Very Limited Visibility

The recession that began in February (per the National Bureau of Economic Research) appears to have ended in April, which would make it the shortest on record. However, it may be months before the NBER, which is the official arbiter of recessions and expansions, decisively calls the bottom.

We don’t want to dismiss May and June’s upturn in the economy. It has been encouraging to see economic activity bounce higher and millions return to work. Still, the outlook remains unusually uncertain.

As states around the country began to reopen, the number of Covid-19 cases has spiked, injecting a new round of uncertainty into the outlook.

In order to contain the virus, some states have slowed re-openings and others have implemented new restrictions.

f we look at what is called “high-frequency data,” such as daily air travel through TSA checkpoints, daily restaurant books, and daily requests for directions, economic progress slowed or stalled in July. These metrics don’t correlate perfectly with the economy or the larger S&P 500 firms, but they approximate what is happening in the broader economy.

Further, layoffs remain at historically high levels as measured by weekly jobless claims (Dept. of Labor). Yes, a record number of people are going back to work, but layoffs remain high.

 

The Prescription

The spread of Covid-19 is hampering the recovery and creating a new round of uncertainty. Might this be temporary? Might new cases begin to slow in August and September? Could we see a second wave in the fall and winter? There are no clear answers.

Today, the path of the economy is linked to the virus. Hence the unusual degree of uncertainty. Yet, there has been encouraging news regarding a vaccine. If and when developed and readily available, a vaccine could be just the right prescription that could greatly increase confidence to venture back into restaurants, movie theaters, airplanes and sports arenas.

As Fed Chairman Jerome Powell said in (https://www.federalreserve.gov/mediacenter/files/FOMCpresc onf20200729.pdf prepared remarks) in late July, “The path forward for the economy is extraordinarily uncertain and will depend in large part on our success in keeping the virus in check.”

Social distancing, masks, and all CDC-recommended safety protocols are a step in the right direction. However, a vaccine and/or an effective treatment are probably the best way to enhance mobility and help us move past this difficult chapter in our country’s history.

The economy may not be the same when the pandemic is eventually in the rear view mirror, but we are a resilient people, we will persevere, and we will adapt.

Table 1: Key Index Returns
MTD
Source: Wall Street Journal, MSCI.com, Morningstar, MarketWatch
MTD return: Jun 30, 2020-Jul 31, 2020
YTD return: Dec 31, 2019-Jul 31, 2020
*in US dollars


Planning Opportunities to Consider This Year

 

Roth IRA Contributions or Conversions

A (https://www.irs.gov/retirement-plans/roth-iras Roth IRA) Roth IRA is an Individual Retirement Account that allows you to contribute after-tax dollars into an Roth IRA investment account.

The after-tax dollars won’t allow you to claim a tax deduction as you might on a traditional IRA, but withdrawals are (https://www.schwab.com/ira/roth-ira/withdrawal-rules) not subjected to federal income taxes when withdrawn after 59 ½ years of age, as long as the account has been opened for at least five years.

Like a traditional IRA, interest, dividends, and capital gains are sheltered from taxes inside the Roth. We have increased our emphasis and analysis of this opportunity for you, as specific opportunities this year make it even more ideal.

 

Tax time

Subject to income limits, (https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits you may contribute) up to $6,000 per year if you are under 50 and $7,000 per year if you are 50 or over.

We are past the tax deadline for 2019, but it’s not too early to begin thinking about 2020. However, let’s be aware of (https://www.irs.gov/retirement-plans/plan-participant-employee/amount-of-roth-ira-contributions-that-you-can-make-for-2020 income limits).

For someone who is single (or head of household), you are eligible to make the full contribution to a Roth if your modified adjusted gross income (MAGI) is under $124,000 for the tax year 2020. The limit gradually declines between $124,000-$139,000. Above $139,000, Roth contributions are not allowed.

If you are married and filing separately, the rules become a little more complex so let’s talk if you are in this category.

If you are married and file jointly (or qualified widow/er), MAGI must be under $196,000 for the tax year 2020, while the contribution limit is gradually phased out between $196,000-$206,000. Above $206,000, Roth contributions are not allowed.

You may contribute to a Roth and a traditional IRA, but you may not exceed the prescribed annual limits.

In addition to tax-free withdrawals, Roth IRAs are not subjected to required minimum distributions.

Further, under the SECURE Act, an inherited Roth IRA (and a traditional IRA) must be (https://www.kiplinger.com/article/retirement/t032-c032-s014-2-ira-changes-to-consider-right-for-secure-act.html distributed within 10 years) if the beneficiary is not your spouse (in most cases).

Unlike a traditional inherited IRA, the distributions are tax free. And beneficiaries may let the Roth account grow tax free until year 10, when the distribution is required.

We hope you’ve found this review to be helpful and educational.

We understand the uncertainty facing all of us. We are grappling with an economic and a health care crisis. It’s something none of us have ever faced. We have addressed various issues with you, but we want you know we’re always here. If you have questions or concerns, please reach out anytime.

As always, we are honored and grateful that you have given us the opportunity to serve as wealth advisors.

 

Best,

Bob Meath, Founder, Wealth Advisor

Kerry Meath-Sinkin, CFP®AIF®, Partner, Wealth Advisor

 

 

 

 

This piece is not intended to provide specific legal, tax, or other professional advice. For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Converting from a traditional IRA to a Roth IRA is a taxable event.

The views stated in this piece are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.

 Distributions from traditional IRAs and employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59½, may be subject to an additional 10% IRS tax penalty. A Roth IRA offers tax free withdrawals on taxable contributions. To qualify for the tax-free and penalty-free withdrawal of earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59½ or due to death, disability, or a first time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes.

Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.

The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ

The NASDAQ Composite Index includes all domestic and international based common type stocks listed on The NASDAQ Stock Market. The NASDAQ Composite Index is a broad based index.

The S&P 500 is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries..

The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe and is a subset of the Russell 3000 Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.

The MSCI ACWI ex USA Index captures large and mid cap representation across 22 of 23 Developed Markets (DM) countries (excluding the US) and 26 Emerging Markets (EM) countries*. With 2,372 constituents, the index covers approximately 85% of the global equity opportunity set outside the US.

The MSCI Emerging Markets Index is designed to measure equity market performance in global emerging markets. It is a float-adjusted market capitalization index.

The Bloomberg Barclays US Aggregate Bond Index, which was originally called the Lehman Aggregate Bond Index, is a broad based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government–related and corporate debt securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS and CMBS (agency and non-agency) debt securities that are rated at least Baa3 by Moody’s and BBB- by S&P. Taxable municipals, including Build America bonds and a small amount of foreign bonds traded in U.S. markets are also included. Eligible bonds must have at least one year until final maturity, but in practice the index holdings has a fluctuating average life of around 8.25 years. This total return index, created in 1986 with history backfilled to January 1, 1976, is unhedged and rebalances monthly.

Information is provided by Meath Wealth Advisors and written by Horsesmouth LLC, a non-affiliate of Cetera Advisor Networks LLC and CWM, LLC.

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