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10 Feb 2023

America’s Changing Vision of Retirement

by michael | in Uncategorized

Retirement planning is a primary reason for long-term saving, and when people think about retirement, finances are often the focus. However, it is important to also look at the non financial aspects of transitioning from the world of work to the world of leisure. Specifically, lifestyle changes and self esteem issues associated with the loss of your professional identity may create difficulties. As you’re preparing strategies for your future well-being, give some thought to the kind of retirement you envision for yourself.

Consider the following questions:

  • What do you find fulfilling?
  • What gets you out of bed in the morning?
  • What are your strengths and weaknesses?
  • Do you work well as part of a team, or do you thrive on solitude?
  • Do you have a lot of physical energy, or do you prefer a more sedentary pace?
  • Do you have a hobby you always wanted more time to pursue?

Don’t be afraid to think outside the box. This informal self-inventory may hold the key to your vision for retirement.

Challenging Conventions

The concept of retirement in America is changing. Traditionally, retirement has been idealized as a leisurely phase of life, a reward for the many years of working and raising children. This concept is based on the assumptions that people will enjoy themselves in retirement, and that work, as we commonly know it, is the province of younger generations.

However, is this concept realistic for those of us still years away from retirement, and if it is, is it what we really want? The answer might surprise you. Especially when you learn that by early 2022, roughly 1 million U.S. retirees had reentered the workforce. Now, it’s true that many retirees reentering the workforce had no choice, but for others the choice was intentional.

Rethinking retirement means reexamining conventional ideals to determine whether they apply to today’s reality and what we envision for ourselves.

Intrinsic to the conventional notion of retirement are significant assumptions about work, money, and retirement standards of living. For previous generations, work was thought to be something you did for about 45 years (until roughly age 65), and then, suddenly, you never had to (or wanted to) work again. A company pension, Social Security, and some savings generally provided enough income for funding a comfortable lifestyle in retirement, including leisure, travel, and recreation.

If that’s what you want for your retirement, there is nothing wrong with pursuing that goal. However, for some, work is too much a part of their sense of “self” to be suddenly cast aside. Moreover, with so much of their daily lives centered around work, some people have difficulty imagining their life without that structure.

Furthermore, changes in employer-sponsored retirement plans (i.e., the decline of defined benefit plans and the rise of defined contribution plans) have altered our expectations about retirement funding. The responsibility has shifted from employer to employee, which means that an individual’s long-term saving for retirement must now be factored in with other savings objectives, like purchasing a house or funding a college education for children, and ongoing financial responsibilities.

Finally, the traditional concept of retirement is based on the belief that one’s standard of living will be sustainable in retirement, and it may be for some. For others, however, it may be more practical to ask what standard of living can be maintained based on projected resources. This type of approach might help you see what is realistic (and what may be unrealistic) in your situation, and it may help you set more realistic retirement priorities. For some people, downsizing their standard of living in retirement may be acceptable. For others, however, maintaining the same standard of living during retirement as during their working years may be the goal.

Consider Phased Retirement

As you consider the traditional concept of retirement, you may discover that it doesn’t meet your needs. Phased retirement is a term coined to describe a range of employment arrangements that allow an employee who is approaching retirement to continue working, usually with a reduced workload, in transition from full-time work to full-time retirement.

Many individuals may want to continue some form of work, such as consulting, job-sharing, mentoring, or providing back-up management. Mentoring, in particular, enables an individual to transfer a lifetime of learning and experience to a friend, relative, or younger colleague. Aside from money earned from continued work, phased retirement may help you maintain a feeling of involvement in the world and may provide a sense of purpose.

For some, phased retirement may be an option. For others, it may be a necessity. For still others, phased retirement may provide structure to daily life and the opportunity to explore other activities while maintaining a meaningful role within an organization, the community, or society in general.

What’s most important, however, is to define your vision of retirement in a way that makes sense to you and is realistic considering your goals and resources.

Copyright © 2022 FMeX.

09 Feb 2023

A Woman’s Guide to Long-Term Care

by michael | in Uncategorized

Women face unique financial challenges as they age. When compared with men, women live longer, earn less, and spend fewer years in the workforce. Financial concerns are often more acute for older women who are divorced, widowed, or otherwise single, as well as for those who have spent all or a significant portion of their adult years caring for children and other family members. Consequently, planning for long-term care (LTC) is an issue of particular importance.

LTC assists people, through various support services, with activities of daily living, such as dressing, bathing, eating, transferring, and toileting. If a woman has difficulty performing two or more of these activities due to physical limitations, cognitive impairment, or both, LTC may be needed. LTC services are provided in the community, in an assisted living facility, or in a nursing home.

Most people are unaware of the actual costs associated with LTC. For example, according to the American Association of Retired Persons (AARP, 2009), the average cost of a nursing home is $75,192 per year, and the average cost for assisted living is $2,968 per month. It is important to note that these figures are national averages. Actual costs vary widely from state to state. If cost of living is high an area, it is likely that costs for long-term care services will be well above the national average.

There are a number of reasons why it is important for women to plan for LTC.

First, women live longer. Back in 1900, women and men shared a similar life expectancy of about 47 years. Today, the longevity of both men and women has increased overall by 20 years, with the life expectancy for women generally five years longer than men. The U.S. Census Bureau (2009) reports that women represent 57% of those aged 65 and older, and 67% of those aged 85 and older. Unfortunately, with longer life comes an increased risk of health problems. In fact, the Administration on Aging (AoA, 2009) reports that women are twice as likely as men to live in a nursing home. They are also more likely to sustain a disability or be diagnosed with a chronic health condition.

Second, women often lack the resources necessary to fund the care needed later in life. According to the U.S. Department of Labor (DOL, 2009), the average woman in the U.S. who is employed full-time earns less than her male counterpart (80 cents for every dollar a man earned in 2007). In addition, women typically spend nearly 12 years out of the workforce while taking care of children or elderly parents. It is not uncommon for many women to spend years juggling family, professional, and caregiving responsibilities, and as a result, their income is disrupted, hindering their ability to save money or attain financial stability.

Finally, shorter careers and lower incomes often result in lower Social Security benefits. According to the Social Security Administration (SSA, 2009), the average annual Social Security income received by women 65 years and older was just $10,685 in 2007. Moreover, married women often don’t know that the benefits accrued by their husbands may be reduced if they are widowed or divorced. These factors put many women at high risk for poverty as they age, especially if they do not plan accordingly.

Many women think their children or other relatives will be there for them, should the need for LTC arise. But even if the willingness is there, the costs associated with caregiving often exceed the financial capabilities of the average family. And, if medical care is required, family members may not have the necessary skills to provide care. As you can see, the time has come for women to look toward the future and prepare for LTC.

The Insurance Alternative

The good news is there is an alternative. LTC insurance can help cover LTC expenses before you meet the strict requirements for Medicaid eligibility. Many policies cover the costs of nursing homes, assisted living/residential care facilities, adult day-care centers, and/or home care. The cost is typically based on your age, your current health, and specific policy features, such as scope of coverage, levels of care, and duration of benefits. LTC insurance is designed to help you maintain your independence and quality of life, while offering increased options for care.

Needless to say, it is difficult to prepare for the possibility that you may one day need LTC. While you don’t know what the future holds, planning today for an uncertain tomorrow may help preserve your assets, increase your options for care, and perhaps most importantly, bring you and your loved ones peace of mind.

Copyright © 2022 FMeX.

09 Feb 2023

New Year’s Financial Resolutions

by michael | in Uncategorized

For many people, the New Year is a time for personal reflection, a time to consider commitments and resolutions for the coming year. This year, why not resolve to make your finances a priority? With proper planning and appropriate guidance, you can begin to build financial stability and prepare for the uncertainties of tomorrow.

Consider the following steps:

  1. Get Organized. Gather all your important financial documents – life insurance policies, homeowners insurance, wills, trusts, and other pertinent financial records – and organize them so you can access them quickly and easily.

  2. Schedule a Legal Consultation. Arrange a time to meet with your attorney to review or write your will and establish any necessary trusts. Prior to your meeting, discuss with your spouse or other loved ones how to handle property dispositions and guardian appointments.

  3. Keep Debt in Check. Pay off high interest debt first, especially if the interest is not tax deductible. Do your best to avoid the minimum payment trap. By making only the minimum monthly payment, the interest that accumulates over time can make even “bargain” purchases costly in the long run.

  4. Review Insurance Coverage. Review your life insurance policies to ensure that your beneficiary designations are appropriate to your current situation and that all arrangements are up-to-date. Also, consider repaying any loans you may have against your insurance policies. This can help to reestablish an emergency fund for the future.

  5. Apply for Scholarships. If your children plan to attend college next year and require financial aid, remember that financial aid forms are due early in the year. The earlier you apply, the better your chances may be for obtaining aid.

  6. Prepare a Tax Strategy. Begin to gather your tax information and arrange a time to meet with your accountant, if necessary. It is important to file your income taxes on time and to be aware of any tax changes that may affect your return.

  7. Write It All Down. Once you’ve met with your financial, insurance, and tax professionals, write down a few realistic goals that you think are achievable. Make the commitment now to plan your finances accordingly. This is your first step to building a solid financial future.

The New Year offers us a fresh beginning. This year, resolve to make your finances a priority. With proper planning and appropriate guidance, you can begin to work toward financial independence and prepare for life’s uncertainties.

Copyright © 2022 FMeX.

28 Sep 2022

Financial Moves to Make When Suddenly Single

by michael | in Uncategorized

Tips to develop a sense of command and control over your financial future

Most of us cannot imagine the sudden loss of our spouse. Yet, difficult as it may seem to accept, U.S. Census data indicates that the overwhelming majority of married women will be on their own for a significant number of their later years.

Should this happen to you, you might be thrust into economic self-survival at a time when you may feel particularly vulnerable and least able to cope. Nevertheless, serious decisions would have to be made, often having a lasting impact on your future financial well-being.

Planning for the Unimaginable

There is an unpredictable aspect of “sudden loss” in that we never quite know how we will react to certain events until they actually occur.

While no one can ever be totally prepared to deal with personal trauma compounded by legal and financial matters, there are steps you can take to help you navigate through this difficult period.

The key is to find a way to help provide structure in your life at a time when structure may be disintegrating.

It Happened…What Do I Do?

When the initial shockwaves hit, there are matters that will require immediate attention: notification of family and friends; funeral arrangements; and contacting an attorney to review the will and handle the legal aspects of your spouse’s estate.

Let your closest friends and most trusted advisors help you with some of these details and short-term decision-making, but proceed with caution regarding major financial decisions such as whether to sell your home, borrow or lend money, invest, make major purchases, and make work/career changes.

During this period, you will most likely face competing demands on your financial resources. If your spouse was the primary income earner, it may take some time to assess your financial situation. During the first few months, pay bills that need to be paid, but spend cautiously, paying attention to cash flow and liquidity.

Rebuilding After the Shockwaves

Certain timetables (e.g., timely filing of tax returns) can’t be overlooked, but much of the financial recovery process should be orchestrated to match your emotional recovery.

Some of the important aspects that will have to be addressed eventually will include assessing the needs of dependent children; making housing decisions; determining your income needs; making decisions about insurance settlements; evaluating your insurance needs; and managing money on your own.

Many of these decisions may flow naturally from an appraisal of your needs (and/or desires) to participate in the workforce.

• Will you want to work?
• Will economic necessity dictate that you must work?
• If you are currently employed, will you stay in the same position?
• If you have not worked for some years, how well will your skills fit the job market?
• Will you need to acquire more education or enhance your technical skills?

While professional advice will be helpful, don’t allow yourself to be pressured in areas in which you need more time. Your goal should be to develop a sense of command and control concerning your financial future. Align yourself with advisors who will have the patience to work with you at your pace, advisors who will help you gain the knowledge and confidence necessary to go it alone.

Obviously, the earlier you begin to educate yourself concerning financial matters, the better prepared you will be to withstand the impact of facing sudden loss. The quality of your life may depend on your financial skills and your willingness to take responsibility for managing your own financial affairs.

Copyright © 2022 FMeX.

28 Sep 2022

Aging Parents and Money

by michael | in Uncategorized

Getting old is hard. Your parents’ ability to manage their own finances may decline as they age. Helping them with money matters is a sensitive issue you need to approach carefully.

When you hit a certain age of your life, you may realize that one topic keeps coming up in conversations with your friends: care for aging parents. The concerns aren’t limited to health care managing money is also a big problem.

Parents aren’t likely to recognize their own declining abilities, so knowing when and how to step in to help is important. Here are some tips:

  1. Watch for warning signs. When visiting your parents, take a look around the house. Are there unpaid bills piling up on the counter? If the things that are normally done are not, it may be a red flag that your parents are struggling with the upkeep.
  2. Be aware of the people in your parents’ lives. Make sure that you have a list handy of people you can contact, and keep the lines of communication open. Friends, caregivers and church members can offer insight to any changes in your parents’ behavior. Don’t forget your parents’ professional contacts, such as their attorney, doctor, insurance agent and financial advisor.
  3. Be subtle. Most people have a difficult time relinquishing control over their finances. Try offering guidance and help instead of taking over their finances completely.
     
    Suggest that you can help balance their bank statements or set up online banking and automatic bill payments. This offers an excuse to start a discussion on their financial matters and helps relieve the stress on your parents to stay on top of everything. You can also start the conversation by purchasing a book about financial concerns and discuss the book with them.
  4. Work with your siblings. Sharing responsibility can be tricky, but keeping everyone in the loop is critical. If one sibling lives closer, in-person tasks may be easier for him or her. Set up monthly telephone meetings with siblings to make sure that everyone is aware of the situation and can make decisions together.
  5. Prepare a power of attorney. This is a form that authorizes you to make business or financial decisions on your parents’ behalf. If they are willing to sign and notarize a power of attorney, you have greater oversight of your parents’ finances. Make sure that you notify the family and that everyone knows who has power of attorney.

No one likes to lose independence. Helping your parents with this transition is difficult, but it’s in their best interest and yours.

Copyright © 2022 FMeX.

28 Sep 2022

Inflation, CDs, Under a Mattress or Stock Market?

by michael | in Uncategorized

Things to think about as you review your long-term retirement strategy

Tempted to stash your money in a bank CD? Or maybe under your mattress? Think either one of them will keep pace with inflation? Think again.

Inflation

Inflation is defined as an increase in the general level of prices for goods and services. Deflation, on the other hand, is defined as a decrease in the general level of prices for goods and services. If inflation is high, at say 10% – as it was in the 1970s – then a loaf of bread that costs $1 this year will cost $1.10 the next year.

Currently, the inflation rate in the US is very high. Historically, inflation in the US has averaged 3.3% from 1914 until 2021, but it reached an all-time high of 23.7% in June 1920 and a record low of -15.8% in June 1921.

So how does inflation affect your retirement savings? The answer is simple: inflation decreases the purchasing power of your money in the future. Consider this: at 3% inflation, $100 today will be worth $67.30 in 20 years – a loss of 1/3 its value. Said another way, that same $100 will only buy you $67.30 worth of goods and services in 20 years. And in 35 years? Well your $100 will be reduced to just $34.44.

Bank CDs

A certificate of deposit – a CD – is what’s known as a time deposit account – a bank agrees to pay interest at a certain rate if savers deposit their cash for a set period of time. Generally speaking, the interest rate paid by the bank increases as the term (the length of time the bank has your money) increases. CDs are also insured by the Federal Deposit Insurance Corporation for banks and by the National Credit Union Administration for credit unions.

As the chart below shows, CD-yields have been in a steady decline for the past 35+ years:

More specifically, compare three dates from 1984, 2017 and 2022 to see the disparity:

July 3, 1984 January 6, 2017 January 13, 2022
1-year CD yield 11.27% 0.27% 0.14%
5-year CD yield 12.06% 0.86% 0.26%

The Mattress

Surprisingly, we all know people who prefer to keep their savings under a mattress or in a shoe-box hidden away in a closet. But here is what a world-renowned study of every investor who hid their money under a mattress or in a shoe-box found:

Avg. Annual Returns Mattress Shoe-Box
Last 5-years 0.0% 0.0%
Last 25-years 0.0% 0.0%
Last 100-years 0.0% 0.0%

Unfortunately, there was not enough data going back more than 100-years, but I suspect the returns would have been the same.

The Stock Market

If you are looking for average stock market returns over a long period of time, you are likely to get different numbers from different sources. This is because your answer really depends on a number of variables, including which index you review, whether dividends are included or not, whether the effects of inflation are calculated, etc.

Most financial professionals would agree, however, that the long-term data for the stock market points to an average annual return of about 10%. In fact, the S&P 500 has returned a historic annualized average return of 10.5% since its 1957 inception through 2021.

And let’s not forget what 2021 brought investors:

• The DJIA rose 18.7% in 2021;

• The S&P 500 rose 26.9% in 2021;

• NASDAQ rose 21.4% in 2021; and

• The Russell 2000 Index rose 13.7% in 2021.

What Investors Need to Remember

Although there are times when buying a CD might be appropriate, generally speaking, buying CDs should not be part of your long-term retirement strategy – unless you happen to be very close to retirement age. CD rates today just don’t keep pace with inflation. And putting your money under a mattress is worse (and probably uncomfortable too).

Instead, I encourage you to explore the thousands of financial products that provide better options. And remember that over long-periods of time, the stock market has outpaced inflation, today’s CD yields and hiding your money under your mattress.

But before you invest in anything, consider the risk/reward tradeoff, your goals and your time horizon
– and call our office to discuss.

Copyright © 2022 FMeX.

09 Aug 2022

Summer of 2022, the Fed, Interest Rates & Me

by michael | in Uncategorized

Be prepared as rates are going up more in 2022 and likely in 2023 too

A few days before the beginning of August 2022, Wall Street’s eyes and ears were on the Federal Reserve, and as expected, the FOMC raised the fed funds rate by 75 basis-points. It was the Fed’s second consecutive 75 basis-point increase, taking its benchmark rate to a range of 2.25%-2.5%.

But what was surprising, at least to some, was that the Fed seemed to signal that the pace of rate hikes might slow down in 2022, as Fed Chair Jerome Powell said there will be a point where the Fed starts to slow hikes to assess their impact.

As an investor, you undoubtedly ask when, or if, the Federal Reserve Bank raises interest rates, how will that affect consumers and businesses? In particular, what about the consequences for certain segments of the economy?

Reason for the Fed’s Change

The most important tool available to the Fed is its ability to set the federal funds rate, or the prime interest rate. This is the interest paid by banks to borrow money from the Federal Reserve Bank. Interest is, basically, the cost to the banks of borrowing someone else’s money. The banks will pass on this cost to their own borrowers.
As a way to boost the economy, remember that the Fed set its benchmark interest rate close to zero in late 2008 and did the same thing at the beginning of the COVID pandemic. This resulted in “free money.”

By reducing the federal funds rate, the Fed increased the supply of money by making it less expensive to obtain. As a result, businesses could have greater access to money. They could spend more on building their businesses and on hiring more employees. Because consumers and businesses had more money, they could purchase more goods, services, houses, and stocks.

Increasing the federal funds rate, on the other hand, reduces the supply of money by making it more expensive to obtain. Reducing the amount of money in circulation, by decreasing consumer and business spending, helps to reduce inflation. However, the Federal Reserve has to decide whether the increase in consumer demand and in hiring has led to enough inflation in prices to warrant a reduction in rates.

Consequences for Consumers and Businesses

Any increased expense for the banks to borrow money has a ripple effect, which influences both individuals and businesses in their costs and plans.

Effect on individuals – Banks increase the rates that they charge to individuals to borrow money, through increases to credit card and mortgage interest rates. As a result, consumers have less money to spend. They must face the effect on what they want to purchase and when to do so.

Effect on business – Because consumers have less disposable income, businesses must consider the effects to their revenues and profits. Businesses also face the effect of the greater expenses of borrowing money. As the banks make borrowing more expensive for businesses, companies are likely to reduce their spending. Less business spending and capital investment can slow the growth of the economy, decreasing business profits.

These broad interactions can play out in numerous ways.

Special Effects

The stock market as a whole – Stock prices decrease when investors see companies reduce growth spending or make less profit. Absent other economic effects, the value of stocks in general will fall.

Bond market – As the stock market drops, investors tend to view the risk of stock investments as outweighing the rewards. They will often move toward the safer bonds and Treasury bills. As a result, bond interest rates will generally rise, and investors will likely earn more from bonds.

The dollar – When other central banks are expanding the money supply, it weakens the value of their currencies. If the Fed hikes the interest rate, then the dollar appreciates. A stronger dollar means that U.S. consumers pay less for imports. A stronger dollar will boost U.S. demand for products from Asia and Europe, which will increase corporate profits there. As a result, global stocks will likely increase in value.

Commodity prices – A stronger dollar has often contributed to the reduction in oil prices in the past year. As the dollar could become even stronger with the reduction of interest rates, the prices of commodities, especially oil, should decrease. And often the opposite is true. Of course, investments in oil stocks will likely also lose some value.

The federal budget – The U.S. government has a very large debt, and increased interest rates lead to higher interest payments.

Corporate borrowers – Companies that are repaying loans will end up with higher interest payments.

Mortgage holders – Payments on mortgage interest will increase for individuals and companies whose mortgages do not carry a fixed interest rate.

Obviously, many factors affect activity in various parts of the economy. A change in interest rates, although important, is just one of those factors.

The Fed’s Next Timing

The Federal Open Market Committee, which sets the rates, will meet again three more times before next year, starting on:

  • September 20-21
  • November 1-2
  • December 13-14

While there are expectations that more rate hikes are coming in 2022, circle these dates on your calendar and expect to hear lots of chatter.

And while many factors can affect the market, it is important to prepare for any effects on your business, your livelihood, and your investment portfolio when an increase in the federal funds rate does take place.

Be sure to talk to your financial advisor for specific guidance.

Copyright © 2022 FMeX.

09 Aug 2022

Acquaint Grown Children with Your Financial Affairs

by michael | in Uncategorized

Many parents may feel it is unnecessary to inform their adult children about their personal, financial affairs. However, as your children grow older, it can work to your advantage—and that of your entire family— to share with them key financial, medical, and estate planning information. An awareness of important information, and knowing where to locate relevant documents, can help your grown children take appropriate and timely action if a sudden death or catastrophic illness were to occur. Consider these issues:

  • Health Insurance. If you are age 65 or over, your adult children should be aware of any and all health insurance policies, as well as Medicare materials. There may be “Medigap” policies that go beyond the basic care coverage provided by disability income insurance policies and long-term care (LTC) policies. You may benefit greatly in an emergency if appropriate procedures are followed and necessary forms are submitted in a timely manner.

  • Living Will. This document specifies an individual’s preferences regarding the administering or withholding of life-sustaining medical treatment. Under many state statutes, a patient must be considered “terminal,” “permanently unconscious,” or in a “persistent vegetative state” before life support can be withdrawn. Copies of living wills should be made available to anyone who would be involved with the care of either parent, and the originals should be kept in a safe, readily accessible storage place.

  • Health Care Proxy. Similar to a living will, this instrument allows you to appoint another person as your “agent” to make health care decisions in the event you become incapacitated and unable to make your own decisions. Specific directions regarding medical procedures to be administered, withheld, or withdrawn can be made within the document. A copy should be readily available to the “agent.”

  • Durable Power of Attorney for Property. If you become disabled, who will manage your financial affairs? With a durable power of attorney in place, an individual or bank may act as an agent to oversee your financial affairs. Your grown children should know what steps have been taken to ensure the competent direction of your affairs, should the need arise. However, your children’s actual involvement with your affairs can be limited, if so desired.

  • Wills. Do they exist and are they up-to-date? The exact contents can be kept private, but the location of your will should be known by all family members.

  • Trusts. Wills can accomplish much in the direction of your estate after your death. However, a trust managed by yourself, or a trustee of your choosing, may meet your planning needs, including potentially protecting the estate from taxation. Trust documents should be kept with wills for ease of access, and you should discuss pertinent terms with those who will be involved. As your children reach adult age, it may be time to select a responsible child to serve as a trustee in the event of your death.

  • Life Insurance. Life insurance is typically purchased to provide cash to help cover mortgages, liabilities, expenses, and estate taxes, as well as to benefit your loved ones. Knowledge of the existence and whereabouts of life insurance policies can be of critical importance. A policy locked in the deceased’s safe deposit box cannot accomplish the aims for which it was intended.

EPOC154-X

  • List of Assets and Debts. Once again, adult children may know of the existence of lists of assets and debts without seeing the actual lists themselves, unless you so desire. An asset list—developed and updated regularly—should include information concerning all bank accounts, real estate holdings, pension holdings, annuities, business agreements, brokerage accounts, documentation concerning boats, cars, works of art or other valuables, and collectibles, and insurance policies. A debt list should include information pertaining to current mortgages, consumer indebtedness, personal loans, and business obligations. Both lists should provide complete information on where associated paperwork and files can be found.

Planning for death or disability can be difficult. However, leaving your grown children uninformed about your key financial, medical, and estate planning information can result in confusion and delay at a time when clarity and timeliness are of the essence. At first glance, these preparations may seem burdensome. However, once completed, both you and your children can rest assured that your affairs will be properly managed if needed.

Copyright © 2022 FMeX.

08 Aug 2022

Global Market Commentary: Second Quarter 2022

by michael | in Uncategorized

Markets Have Terrible Second Quarter

Global equity markets had an awful second quarter and when the final Wall Street-bell weakly tolled on June 30th, all major global equity markets were in the red, leading to overall market declines not seen in decades.

To underscore how bad it has been so far in 2022, consider that the S&P 500 recorded its worst first six months in 52 years and the DJIA recorded its worst first six months since 1962.

For the second quarter of 2022:

  • The DJIA dropped 11.2%;
  • The S&P 500 lost 16.7%;
  • NASDAQ plummeted 22.7%; and
  • The Russell 2000 declined 18.4%.

The themes that drove market performance in the second quarter were the same worries that drove markets in the first quarter and towards the end of last year. And the two most dominant themes continue to be inflation and the Fed with the former rising to 40-year highs and the latter causing Wall Street to worry that the course of rising rates would lead to a recession.

The other themes were plummeting consumer confidence, rising food and gas prices, negative GDP numbers, declining manufacturing, a cooling-off of the housing market, not-so-wonderful corporate earnings, continued supply-chain bottlenecks and a lot of social unrest here at home.

Further, we saw that:

  • Volatility, as measured by the VIX, trended up significantly this quarter, beginning the quarter around 19 and ending the month just south of 29.
  • West Texas Intermediate crude trended up slightly for the quarter, starting at just under $100/barrel and ending the quarter at over $105. For perspective, WTI started 2022 at about $75/barrel.

Market Performance Around the World

Investors were unhappy with the quarterly performance around the world, as all 36 developed markets tracked by MSCI were negative for the second quarter of 2022 – and all of them saw negative returns in the double digits. And for the 40 developing markets tracked by MSCI, 39 of them were negative too, with many losing more than a quarter of their value.

Index Return
2Q2022
MSCI EAFE
-15.37%
MSCI EURO
-17.33%
MSCI FAR EAST
-13.63%
MSCI G7 INDEX
-16.70%
MSCI NORTH AMERICA
-17.07%
MSCI PACIFIC
-14.81%
MSCI PACIFIC EX-JAPAN
-14.84%
MSCI WORLD
-16.60%
MSCI WORLD EX-USA
-15.47%

This Bear Seems Especially Angry

U.S. equity markets turned in a terrible second quarter to add to a not-so-great first quarter, pushing the major equity markets to levels not seen in a long time. And while many are suggesting that there is more pain to come from this bear, there are also plenty of others suggesting that the worst is behind us. But we of course won’t know for sure for another six months.

For the YTD through the end of June::

  • The DJIA is down 15.9%;
  • The S&P 500 is down 21.0%;
  • NASDAQ is down 30.3%; and
  • The Russell 2000 is down 24.8%.

Sector Performance Rotated in 2Q2022

The overall trend for sector performance for the second quarter and the YTD was ugly, as all 11 S&P 500 sectors dropped for the second quarter and only the Energy sector is positive YTD. As if those numbers weren’t bad enough, the performance leaders and laggards rotated throughout the quarter and the ranges are substantial.

Here are the sector returns for the first two quarters of 2022:

 
1Q2022
2Q2022
Information Technology
-9.00%
-22.77%
Energy
+38.00%
-6.36%
Health Care
-3.37%
-7.21%
Real Estate
-6.71%
-16.89%
Consumer Staples
-0.94%
-5.49%
Consumer Discretionary
-9.45%
-28.84%
Industrials
-2.31%
-16.62%
Financials
-2.04%
-20.39%
Materials
-2.39%
-17.72%
Communication Services
-13.17%
-22.89%
Utilities
+4.30%
-5.10%

Reviewing the sector returns for just the second quarter of 2022 and the first six months of the year, we saw that:

  • All sectors were painted red for the second quarter and only the Energy sector is green YTD;
  • 7 of the 11 sectors saw double-digit declines in the second quarter and those same 7 saw double-digit declines YTD too;
  • The defensive sectors (Utilities and Consumer Staples) turned in a relatively decent quarter and have held up relatively ok YTD;
  • The interest-rate sensitive sectors (Information Technology and Financials specifically) struggled as the Fed raised rates; and
  • The differences between the best (-5%) performing and worst (-29%) performing sectors in the first quarter was big.

The Fed, The Fed, The Fed

The Federal Reserve voted to increase the fed funds by an amount not seen in almost 30 years. From the Federal Reserve press release dated June 15, 2022:

“Overall economic activity appears to have picked up after edging down in the first quarter. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures.

The invasion of Ukraine by Russia is causing tremendous human and economic hardship. The invasion and related events are creating additional upward pressure on inflation and are weighing on global economic activity. In addition, COVID-related lockdowns in China are likely to exacerbate supply chain disruptions. The Committee is highly attentive to inflation risks.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 1 1/2 to 1-3/4 percent and anticipates that ongoing increases in the target range will be appropriate. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve’s Balance Sheet that were issued in May. The Committee is strongly committed to returning inflation to its 2 percent objective.”

This rate hike – as the previous hike earlier this year – was one of the most predictable and predicted rate movement the markets have ever seen. What was not predicted, however, was the magnitude of the rate hike.

“Clearly, today’s 75 basis point increase is an unusually large one, and I do not expect moves of this size to be common,” said Fed Chair Jerome Powell. And Powell also said that decisions will be made “meeting by meeting.”

Interestingly, as of the day after the Fed’s historic announcement, Wall Street assigned a probability of more than 80% that the Fed would raise rates by another 75 basis points at their next meeting at the end of July. And that probability has held steady through the end of June too.

QMC_CHART_1

GDP Slumps

As the quarter wound down, the Bureau of Economic Analysis released its 3rd estimate of 1st quarter GDP and reported that real gross domestic product decreased at an annual rate of 1.6%. Analysis. In the fourth quarter of 2021, real GDP increased 6.9%.

This 3rd estimate was notable in that the 2nd estimate issued last month reported that GDP declined 1.5%.QMC Chart 2

“The update primarily reflects a downward revision to personal consumption expenditures (PCE) that was partly offset by an upward revision to private inventory investment (refer to “Updates to GDP”).

The decrease in real GDP reflected decreases in exports, federal government spending, private inventory investment, and state and local government spending, while imports, which are a subtraction in the calculation of GDP, increased. Nonresidential fixed investment, PCE, and residential fixed investment increased.”

Housing Cools Off

The National Association of Realtors announced that existing-home sales retreated for the fourth consecutive month in May. Month-over-month sales declined in three out of four major U.S. regions, while year-over-year sales slipped in all four regions.

From the release:

  • Total existing-home sales (completed transactions that include single-family homes, townhomes, condominiums and co-ops) fell 3.4% from April
  • Year-over-year sales receded 8.6%

“Home sales have essentially returned to the levels seen in 2019 – prior to the pandemic – after two years of gangbuster performance. Also, the market movements of single-family and condominium sales are nearly equal, possibly implying that the preference towards suburban living over city life that had been present over the past two years is fading with a return to pre-pandemic conditions.”

  • Total housing inventory registered at the end of May increased of 12.6% from April but dropped 4.1% from the previous year
  • Unsold inventory sits at a 2.6-month supply at the current sales pace, up from 2.2 months in April and 2.5 months in May 2021

“Further sales declines should be expected in the upcoming months given housing affordability challenges from the sharp rise in mortgage rates this year. Nonetheless, homes priced appropriately are selling quickly and inventory levels still need to rise substantially – almost doubling – to cool home price appreciation and provide more options for home buyers.”

  • The median existing-home price for all housing types in May was $407,600, up 14.8% from May 2021 as prices increased in all regions
  • This marks 123 consecutive months of year- over- year increases, the longest- running streak on record

Further:

  • Properties typically remained on the market for 16 days in May, down from 17 days in April and 17 days in May 2021
  • Eighty- eight percent of homes sold in May 2022 were on the market for less than a month

The largest year- over- year median list price growth occurred in Miami (+45.9%), Nashville (+32.5%), and Orlando (+32.4%). Austin reported the highest growth in the share of homes that had their prices reduced compared to last year (+14.7 percentage points), followed by Las Vegas (+12.3 percentage points) and Phoenix (+11.6 percentage points).

Regional Breakdown

  • Existing-home sales in the Northeast climbed 1.5% but fell 9.3% from May 2021. The median price in the Northeast was $409,700, a 6.7% rise from one year ago.
  • Existing- home sales in the Midwest dropped 5.3% from the previous month and also fell 7.5% from May 2021. The median price in the Midwest was $294,500, up 9.5% from one year before.
  • Existing-home sales in the South declined 2.8% in May and fell 8.4% from the previous year. The median price in the South was $375,000, a 20.6% jump from one year ago. For the 9th consecutive month, the South recorded the highest pace of price appreciation relative to the other three regions.
  • Existing-home sales in the West slid 5.3% in May and dropped 10.0% from this time last year. The median price in the West was $633,800, an increase of 13.3% from May 2021.

QMC IMAGE 3

Manufacturing Cools Off

S&P Global reported that we saw “the weakest upturn in US private sector output since January’s Omicron- induced slowdown in June. The rise in activity was the second- softest since July 2020, with slower service sector output growth accompanied by the first contraction in manufacturing production in two years.

  • The headline Flash US PMI Composite Output Index registered 51.2 in June, down from 53.6 in May. The decline in the index reading signaled further easing in the rate of expansion in business activity to a pace notably slower than March’s recent peak. Although service providers continued to indicate a rise in output, it was the weakest increase for five months.
  • Manufacturers fared worse, with factory production slipping into decline as the respective seasonally adjusted index fell to a degree only exceeded twice in the 15- year history of the survey, at the height of the initial pandemic lockdowns in 2020 and the height of the global financial crisis in 2008.
  • Weaker demand conditions, often linked to the rising cost of living and falling confidence, led to the first contraction in new orders since July 2020. Decreases in new sales for goods and services in June were the first recorded since May and July 2020, respectively.
  • Similarly, new export orders contracted at the steepest pace since June 2020 as foreign customers paused or reduced new order placements due to inflation and supply chain disruptions.
  • Inflationary pressures remained marked in June, as input costs and output charges rose substantially again. Although the pace of input price inflation eased to the slowest for five months, it was sharper than any seen before April 2021. Alongside food, fuel, transportation and material price hikes, firms often mentioned that wages had increased to entice workers to stay, which added pressure to operating expenses.
  • QMC CHART 4

  • Finally, business confidence slumped to one of the greatest extents seen since comparable data were available in 2012, down to the lowest since September 2020. Manufacturers and service providers were far less upbeat regarding the outlook for output over the coming year than in May, principally amid inflationary concerns and the further impacts on customer spending as well as tightening financial conditions.”

Consumer Sentiment Hits Record Low

The University of Michigan’s Consumer Sentiment Index for June came in 14.4% below May for the lowest reading on record.

QMC Chart 5

“Consumers across income, age, education, geographic region, political affiliation, stockholding and homeownership status all posted large declines. About 79% of consumers expected bad times in the year ahead for business conditions, the highest since 2009. Inflation continued to be of paramount concern to consumers; 47% of consumers blamed inflation for eroding their living standards, just one point shy of the all- time high last reached during the Great Recession.”

Orders for Durable Goods Up

Four days before the end of the quarter, the U.S. Census Bureau announced the May advance report on durable goods manufacturers” shipments, inventories and orders:

New Orders

  • New orders for manufactured durable goods in May increased $1.9 billion or 0.7%
  • This increase, up seven of the last eight months, followed a 0.4% April increase
  • Excluding transportation, new orders increased 0.7%
  • Excluding defense, new orders increased 0.6%
  • Transportation equipment, up two consecutive months, led the increase, $0.7 billion or 0.8% to $87.6 billion

QMC Chart 6

Shipments

  • Shipments of manufactured durable goods in May, up twelve of the last thirteen months, increased $3.6 billion or 1.3% to $268.4 billion
  • This followed a 0.3% April increase
  • Transportation equipment, up seven of the last eight months, led the increase, $1.7 billion or 2.1% to $84.7 billion

Unfilled Orders

  • Unfilled orders for manufactured durable goods in May, up twenty-one consecutive months, increased $3.7 billion or 0.3% to $1,109.8 billion
  • This followed a 0.5% April increase
  • Transportation equipment, up fifteen of the last sixteen months, led the increase, $2.9 billion or 0.5% to $639.8 billion

Inventories

  • Inventories of manufactured durable goods in May, up sixteen consecutive months, increased $2.7 billion or 0.6% to $482.7 billion
  • This followed a 0.9% April increase
  • Machinery, up nineteen consecutive months, led the increase, $1.0 billion or 1.2% to $82.3 billion

Capital Goods

  • Nondefense new orders for capital goods in May increased $0.4 billion or 0.5%
  • Shipments increased $1.3 billion or 1.6%
  • Unfilled orders increased $3.9 billion or 0.6%
  • Inventories increased $0.6 billion or 0.3%
  • Defense new orders for capital goods in May increased $0.3 billion or 2.6%
  • Shipments increased $0.3 billion or 2.5%
  • Unfilled orders decreased $0.2 billion or 0.1%
  • Inventories increased $0.1 billion or 0.3%
 

Sources

bea.gov;census.gov;nar.realtor;umich.edu;spglobal.com;msci.com;fidelity.com;nasdaq.com;wsj.com; morningstar.com; census.gov;

QMC–2Q2022–FMeX
 

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