Holiday Cheers & Monthly Market News

Holiday Cheers & Monthly Market News

Dec 19, 2023 | Blog Post

I hope you’re enjoying the holiday season!

As year end approaches, I wanted to share a few encouraging statistics about the investment world and economy:

  • In November the S&P 500 (large US companies) increased by 8.9%. This was the 18th-best monthly gain since 1950. As a result, the index is close to an all-time high, last recorded in January, 2022.
  • Going back further in time, from December 31st, 2018, to December 12th, 2023 (just shy of 5 years), the S&P 500 has gained 102%. Said another way, US stocks have doubled over the last 5 years. That’s pretty amazing given the two bear markets (2020 and 2022), a worldwide pandemic, high inflation, and rising interest rates. 
  • Also in November, US bonds appreciated by 4.5%. This was their 8th-best monthly gain since 1976.
  • America’s third quarter GDP was revised up from 4.9% to 5.2%.
  • Gas prices are at their lowest level of the year, with a national average of $3.10 ($4.65 in CA).
  • On the employment front, the unemployment rate has been below 4% for 22 straight months. That hasn’t happened since the 1960s. The unemployment rate didn’t go below 4% once during the 1970s, 1980s or 1990s.

Despite these positive results, many people remain dissatisfied with today’s economy.

The chart below provides an excellent insight: It shows consumer sentiment by political party. Looking at the drastic swings when a presidential election occurs, it appears that the dominant factor in one’s outlook on the economy is how one identifies politically, and which party occupies the White House:

Personal Finance News

Empower surveyed people and asked how much money it would take to feel happy/less stressed.

The result: Across all income levels, everyone felt that earning more money would make them happier/less stressed. Even the highest earners surveyed, with a median income of $250,000, gave a median response of $350,000. Our desire for more is ever-present:

What’s the best-performing stock over the past 20 years?

If you guessed Apple, you’re right! It’s an amazing run, but also interesting to see what other companies are on the list. I don’t think many people would’ve guessed Monster Beverage would be #2:

Speaking of investment returns, the image below from Visual Capitalist does a nice job showing how long it takes to double your money:

This research about the Safe Withdrawal Rate from your portfolio in retirement is interesting.

The green section across the top represents the safe withdrawal rate, where you would not have run out of money in nearly all historical periods. But as you move down the table – by increasing your withdrawal rate  – you become more likely to run out of money. So when you have a high withdrawal rate you actually need to take more risk to accommodate this higher need from your portfolio.

Interest rates are on a lot of people’s minds these days. Recently the Federal Reserve decided to hold them steady, and it’s projected that they’ll be reduced over the next few year. Here are the current projections for where they’re headed (take these with a grain of salt, as these projections move around a lot):

I hope you found these as interesting as I did.

As always, please reach out if you have any questions or would like to connect.

Happy Holidays!

Monthly News and Halloween Updates!

Monthly News and Halloween Updates!

Nov 1, 2023 | Blog Post

I hope you had a great Halloween!

My wife and I took our daughter, Penny (now 19 months old), trick or treating.

She dressed up as her favorite character, The Very Hungry Caterpillar! We dressed up as her sidekicks, the food she ate. I was a watermelon and my wife was a lollipop.

We all had a great time, with Penny enjoying her first-ever candy bar (and ensuing sugar rush).

Onto the finance world, I came across a few articles and charts this past month that I found interesting and wanted to share.

Real Estate

I’m giving real estate its own section since there is so much interesting data. Here are a few charts that stood out.

Home sales are on pace for their lowest annual total since 2008: 

Supply (aka inventory) is low. There are fewer homes for sale today than any other time on record (going back to 1999):

Given that mortgage rates are around 8%, and prices remain high as a result of low inventory, home affordability metrics are awful.

The median American household would need to spend about 44% of their income to afford the median priced home, a record high:

And lastly in real estate news, the way realtor commissions are paid may change in the next few years. The results of a recent verdict between the National Association of Realtors (NAR) and a group of sellers stated that sellers would no longer be required to pay the buyers’ agents commission. Agents would then be free to set their own commission rates. The NAR has promised to appeal, and the Department of Justice would need to edit the current rules, so we’ll see where this ends up.

I hope you found these helpful! As always, please reach out if you have any questions or would like to connect.

Third Quarter Investment Commentary, 2023

Third Quarter Investment Commentary, 2023

Oct 16, 2023 | Blog Post

The third quarter usually provides the worst returns of the year. This year, it lived up to its reputation, with stocks and bonds both down modestly.

These negative returns followed one of the strongest starts ever for the stock market. In the first two quarters, the S&P 500, representing the 500 largest stocks in the US, experienced its 13th best start to a calendar year on record.

After what felt like a long Q3, most investors are probably looking forward to winter. Historically, the fourth quarter has been the best performing, up 4.2% on average, and positive 79.5% of the time:

    Economic Summary
    Looking at the economy, we’ll start off with the good news: the economy remains in surprisingly great shape. So much so that The Economist recently compared it to the Energizer Bunny. It just keeps going and going:

    “…a steady stream of better-than-expected data has left analysts scrambling to lift their forecasts. New orders for manufacturing firms reached their highest in nine months in July. Retail sales were perky last month, too, with consumers splurging on everything from restaurant meals to online shopping and clothing to sporting goods. The construction industry has also been buoyant, supported by a rebound in homebuilding. Underpinning all this is the labor market, which has remained hot, making it relatively easy for people to find work at decent wages. The total number of jobs in America has been growing faster than the working-age population, helping to keep the unemployment rate at 3.5% [now 3.8%], just shy of a five-decade low…America’s economy is not just holding up but steaming ahead.” (emphasis added)

    To add to this impressive list:

    • GDP growth for Q3 is projected to be 5.1%. This would be the highest GDP reading since Q4, 2021.
    • On the labor market front, September’s nonfarm payroll numbers, which encompasses employment data for approximately 80% of the US workforce, rose by 336,000. This surpassed economists’ expectations by double and exceeded the average monthly gain of 267,000 over the past 12 months. Moreover, employment data for July and August saw upward revisions, totaling 119,000 more jobs than previously reported.

    These positive outcomes occurred despite the Federal Reserve’s interest rate hikes, a move that typically slows the economy.

    The concern now is that, with the economy remaining resilient and generally doing well, inflation may persist if consumer spending remains high. That could prompt the Federal Reserve to keep interest rates elevate for longer than was originally planned.

    Oddly enough, good economic news can end up being viewed as bad news. Positive results end up causing concern about the future.

    The primary worry is that if high interest rates remain they could dampen consumer spending through high rates on mortgages (currently 7.6%), auto loans (currently 8.3%), and credit cards (currently 21.1%).

    Additionally, there are several other potential risks to keep in mind:

    • Inflation has declined and is now under 4%, a decrease from last year’s high of 9%. However, this is still higher than the Fed’s target of 2%. In simpler terms, prices are still rising, but the rate at which they’re going up has slowed. This can be seen at the gas pump, where prices have increased 12.9% over the last two months.
    • There remains a looming threat of a government shutdown.
    • Student loan payments just resumed, and it’s unclear how much that will affect overall spending.
    • Last but not least, the two wars between Russia-Ukraine and Israel-Palestine seem to be intensifying, each with their own unique geopolitical risks.

    Risk is an ever-present part of investing (more on that at the end of this newsletter). But it’s usually the risks that nobody sees that end up causing the most damage.

    Housing Market
    Before diving into the stock and bond market returns, I wanted to touch on housing.

    With interest rates at 7.6%, the cost to purchase a home is high. In fact, interest rates haven’t been this high since 2000:

    As a result, the housing market has stopped booming, which feels odd given all the activity in recent years.

    House prices rose dramatically during Covid, as many white-collar workers moved while interest rates were low. Then inflation rose, interest rates followed, and home prices stopped going up (but they’re still currently at all-time highs).

    As a result of the run up in home prices and interest rates, home affordability is at an all-time low, as demonstrated by the following screenshots:

    However, housing is unique because most people aren’t affected by it. Over the past few years, many people moved or refinanced, and are content sitting still for a while. As a result, there aren’t many sellers, which is limiting supply.

    All in all, the market has slowed dramatically, with very few people refinancing, selling, or buying.

    Economic textbooks would show that an increase in interest rates would lead to a decrease in home prices, but it’s not always that easy. Just another example of how predicting the future is hard.

    US Stocks
    After a strong run for the prior three quarters, US stocks fell modestly during the third quarter, down 3.3%, while they are up 20.37% over the past 1 year:

    During the quarter, energy was the best-performing sector, up 11.4%, as the result of higher energy prices.

    The worst-performing sectors were utilities (think of companies like PG&E and Duke Energy), and real estate, down 10% and 9.7%, respectively.

    As mentioned at the beginning of this post, it’s the long-term investing outcome that matters. As shown below, the longer your investing time horizon, the higher the likelihood of achieving a positive return:

    International Stocks
    Developed international and emerging markets stocks performed similarly to US markets for the quarter, with developed markets down 4.1% (as measured by the MSCI EAFE) and emerging markets down 3.0% (MSCI EM).

    Over the past year, developed international markets (think of companies located in countries like Germany, Japan, and Canada) outpaced the US, gaining 25%. Emerging markets (think of companies located in countries like India, Mexico, and Taiwan) gained 11.7%.

    Bonds
    Bond performance was negative across all sectors during the quarter. This was largely attributable to investors weighing recent economic data and Federal Reserve guidance. During the quarter, investors appear to have priced in a higher probability that the Fed may hold rates at higher levels throughout much of 2024.

    Over the past year, returns for fixed income investments have been modestly positive. More credit-sensitive sectors, like corporate bonds, have generated the highest results for the period.

    For investors in tax-sensitive portfolios, municipal bonds have been one of the strongest sectors over the last year, with even stronger relative results when compared on an after-tax basis.

    Parting Thoughts – Investing During Major Geopolitical Events
    Ryan Detrick from The Carson Group recently provided a table depicting the performance of the S&P 500 in response to geopolitical events.

    Looking at this extensive list, we see everything from the Pearl Harbor Attack to the Cuban Missile Crisis to the Kennedy Assasination, 9/11, and much more.

    The lesson I take is that market sell offs have generally been limited. And while some extended periods of weakness have occurred, the market typically recovers swiftly.

    This is because stocks reflect earnings over time, and companies persist in pursuing growth.

    If history is any guide to the future, we can learn that despite terrible and tragic news, the stock market consistently bounces back and rewards patient investors.

    As always, please reach out if you have any questions or would like to connect.

    How Employee Stock Purchase Plans (ESPPs) Work

    How Employee Stock Purchase Plans (ESPPs) Work

    Aug 7, 2023 | Blog Post

    ESPPs are a wonderful benefit that allow employees to purchase company stock at a discounted price.

    Here’s how they usually work:

    • Payroll Deductions: If you decide to participate (they’re optional), your employer will deduct a set amount from your paycheck.
    • Accumulation or Purchase Period: The money deducted from your paycheck is accumulated over a set window of time, usually six months.
    • Discounted Purchase Price: The company will look at the value of the stock at the beginning and end of the six-month window. The purchase price is based on the lower of those two prices, and then a 15% discount is applied.
    • Ownership: Congratulations, you now own company shares! You are free to continue holding them or sell them immediately. Importantly, you pay tax when you sell them, not when you buy them.
    • Sale & Taxes: If you sell the shares right after you purchase them, you can make a quick profit (since you just bought them at a discounted price). If you do this, the difference between the discounted purchase price and the sale price is subject to ordinary income tax. This is called a “disqualifying disposition,” which is not the most exciting name. To qualify for long-term capital gains tax (which is likely lower than your ordinary income tax rate), you need to hold the ESPPs for at least one year after the purchase date and two years after the offering date (the first day of the accumulation period). This is called a “qualifying disposition,” also not very a creative name.

    Overall, ESPPs are a great employee benefit. If you hold on to your shares and the company does well, you participate in that upside. The risk with holding on to them is that the shares depreciate and end up being worth less than what they were purchased for. However, you can eliminate that risk by selling them soon after purchase, when they are still positive.

    A few other notes about ESPP plans:

    • The money contributed is post-tax. Said another way, putting money towards your ESPP plan will not lower your taxes.
    • The maximum you can contribute is $25,000 per year.
    • Discounts, rules, and terms may vary between companies.

    Real-World Example

    Apple has two 6-month windows to participate in their ESPP:

    • February 1st – July 31st
    • August 1st – January 31st

    In the period that recently ended, the stock price at the beginning and end of the purchase window was:

    • February 1st: $145.23
    • July 31st: $196.45

    The February 1st price is clearly lower. A 15% discount is applied to $145.23, and as a result Apple employees bought the stock for $123.62!

    From there, they could sell it immediately for roughly $196, a gain of 59% before tax.

    In this scenario, the gain would be taxed at your ordinary income tax rate. If your state + federal income tax rate is 40%, your after-tax return would equal 35.4%. Not bad!

    To qualify for long-term capital gains, the stock would need to be held until February, 2024. A lot can happen to a share price over two years, so you shouldn’t hold on to stock simply because you could save on taxes. As they say, “don’t let the tax tail wag the dog.”

    Second Quarter Investment Commentary, 2023

    Second Quarter Investment Commentary, 2023

    Jul 20, 2023 | Blog Post

    Investment returns during the second quarter were good once again. This marks the third straight quarter of positive returns for US and International stocks.

    Second Quarter Investment Commentary – Overview

    • Economic Overview
      • Gross Domestic Product (GDP) Revised Higher
      • Inflation Continues to Trend Down
      • Unemployment Rate Remains Low
      • Tech Layoffs Lessen
    • US & International Stock & Bond Performance
    • Looking Ahead – Low Volatility This Year

    Economic Overview
    At the end of last year, many economists forecast a recession in 2023. In fact, 63% of economists surveyed by The Wall Street Journal believe one would happen.

    While there is still plenty of time left this year, those predictions seem unlikely, as the US and global economy have done very well:

    • US gross domestic product grew at a 2% in Q1 (revised up from 1.3%) (source)
    • Inflation has declined 12 consecutive months, from a peak of 9% in June, 2022, to 3% in June, 2023. 
    • Unemployment remains low, at 3.6%, down from a high of 14.7% during the pandemic.
    • Layoffs in tech are on the decline.

    Economic risks remain, of course, but investors who stuck with –  or added to – their portfolios have been rewarded.

    US Stocks
    US stocks rose 8.4% during the second quarter, and are up nearly 19% over the past year:

    Looking at the S&P 500 (the largest 500 stocks in the US), that index had the 13th best start to a calendar year on record (source):

    International Stocks
    International stocks were up during the quarter, but not as much as the US market.

    Over the past year, returns for developed international stocks (countries like Canada, Germany, and Japan) and US stocks have been virtually identical.

    Emerging Markets (countries like Brazil, India, and Mexico), weighed heavily by weakness in Chinese stocks, were modestly positive over the quarter and year.

    Bonds
    The bond markets were flat to modestly negative for the quarter.

    The US bond index, the Bloomberg Barclays Aggregate Bond Index, was down just under 1%.

    Overseas, international bonds eked out a small gain.

    For investors holding municipal bonds, those have been one of the strongest sectors over the last year.

    Looking In The Rear View – Low Volatility in 2023
    Despite major geopolitical headlines, bank failures, debt ceiling tensions and more throughout this year, if you feel like things have settled down a little bit and volatility has declined, you’d be right.

    The illustration below shows how many days the S&P 500 has moved up or down more than 1% each year:

    We’re on pace to experience less than half of the number of big daily moves that occurred last year.

    Given that we have roughly 250 trading days in a year, in 2022 the market moved by more than 1% nearly every other day.

    As always, please reach out if you have any questions or would like to connect.