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The economy hit a peak in February 2020 and bottomed out in April of the same year, according to the National Bureau of Economic Research (NBER), which is viewed as the arbiter of recessions and economic recoveries.
In determining the peak and trough of the economy, the NBER considers several indicators of employment and production. “All of those indicators point clearly to April 2020 as the month of the trough,” the NBER said. While the NBER made its determination last month, it simply confirmed what investors and economists have known for a long time: the two-month recession was the shortest on record. When lockdowns and shelter-in-place orders eased in May 2020, activity began to rebound, according to U.S. government reports. In some cases, the rebound was sharp. On a historical note, the third-shortest recession was tied to the Spanish flu in 1918 (seven months), while the 1957 recession, which lasted eight months, came in fourth place and was centered around the Asian flu pandemic. However, the end of a recession doesn’t mean that the economy has returned to its prior peak. It simply means that the economy stopped contracting in April and activity turned up in May. While the shortest on record, the Covid recession was also the fastest decline on record, and pandemic-related distortions have yet to abate. They may never completely abate. Some industries have performed incredibly well over the last year, and others continue to struggle. During the first quarter and second quarter of 2021, Gross Domestic Product (GDP), which is the broadest measure of goods and services in the economy, expanded at an annual rate of 6.3% and 6.5%, respectively, according to the U.S Bureau of Economic Analysis. While Q2 missed analyst forecasts of 8.4% (Wall Street Journal), it was enough to push GDP above Q4 2019’s peak. Notably, spending in Q2 was particularly strong for service-related businesses tied to activities outside the home. However, spending on the broad category of services has yet to regain its former peak. Stocks reach new heights Major averages, such as the Dow Jones Industrials, the NASDAQ Composite, and the S&P 500 Index all touched new highs last month, building on impressive gains over the last year. The robust economic recovery, which few analysts had predicted during the lockdowns and shelter-in-place orders last year, has driven corporate profits higher, and in turn, fueled the rally in stocks. While rising profits have been a big tailwind for stocks, the Federal Reserve has played a role, too, by pushing interest rates to rock bottom levels. In addition, the Fed continues to buy about $120 billion in Treasury bonds and mortgage-backed securities each month, which pumps additional cash into the financial system. As the economy expands and creates new jobs, Fed Chief Jerome Powell suggested last month the Fed is getting closer to announcing a plan to reduce its monthly bond purchases, but he did not provide specifics. Nevertheless, he continues to insist that it’s too early to start talking about raising interest rates. Ultimately, the path of the economy and the pace of economic growth, coupled with what happens to inflation, will have the biggest influence on when and how quickly interest rates might rise. I trust you’ve found this review to be educational and informative. Let me emphasize that it is my job to assist you. If you have any questions or would like to discuss any matters, please feel free to give me a call. As always, I’m honored and humbled that you have given me the opportunity to serve as your financial advisor. Are you on track to retire comfortably? What are your financial goals? How much income will you need to generate each month when you've retired? What might be some of your longer-term goals that take a large pool of savings to accomplish?
Our regular check-ins are designed to measure progress toward your goals, making adjustments as life’s journey unfolds. Saving for retirement is a long game; It’s a marathon. You could compare it to the fable The Tortoise and the Hare. A sprint won’t get you to your destination. Slow and steady wins the race. Unfortunately, 75% of Americans receive no professional assistance for this long haul. In my view, that’s unacceptable. It leaves far too many folks exposed to the many financial pitfalls that are lurking around the corner. As Ben Franklin said, “If you fail to plan, you are planning to fail!” Fortunately, you do have professional support and a plan in place. Following are seven ideas that I encourage on a regular basis. You have already implemented many of these concepts; others you may want to do more with as we move into fall. And they are all excellent reminders of what keeps you on the path toward financial independence. 1. Set goals. Too many people simply guess what they will need in retirement, and many don’t have a written plan to reach what goals they have set. Others simply don’t have any goals. If you don’t have goals, you’ll drift, financially speaking. 2. A comprehensive and holistic financial plan is a must. While regular savings is important, a roadmap that takes you to your goals is critical. Did you know that if you start saving $600 per month at age 30, you will have $1 million when you turn 65, assuming an average return of 7% per year. If you start saving at 20, $300 per month will allow you to hit the same goal. I'm not saying that $1 million is the magic number, but the example highlights that consistency, starting early, and the magic of compounding can help you reap big rewards. I assist you by using a diversified portfolio that generally includes safe and risk assets. While much work goes into the individually crafted plans I recommend, no small part of what I recommend is based on the evidence that long-term exposure to stocks has outperformed simple savings accounts. 3. Never stop saving. After paying for housing, food, and other expenses, are you able to consistently save money? A survey by Bankrate suggests that one in five Americans aren’t saving anything, and only one in six save over 15% of their income. Why aren’t we saving? According to the survey, 38% of working Americans have too many expenses. For example, on average Americans shell out more than $2,900 a year on restaurants, prepared drinks, and lottery tickets. I'm not saying that a spartan existence that eliminates fun and entertainment is the path to take. Instead, examine your expenditures closely. You might quickly find ways to cutback while still enjoying life’s pleasures. And consider paying yourself first when you receive your check by setting up an automatic payment into savings. 4. Retirement savings is a key component. If you want to stay on track for retirement, the importance of regular contributions to a retirement fund is critical Employee 401(k) contributions for 2021 top out at $19,500, with an additional $6,500 catch-up contribution allowed for those that are 50 years or older. At a minimum, don’t leave any free money with your employer. Be sure to contribute what you need to receive your employer’s full match. For 2021, you may contribute up to $6,000 to an IRA or Roth IRA ($7,000 if you are 50 or older). Just be aware that the IRS imposes various limits based on your income. I'd be happy to share additional details, or you may check with your tax preparer. 5. Did you get a new job? Congratulations. As you look at benefits, how quickly can you start contributing to your company’s retirement plan? Plus, don’t forget about your prior 401(k) plan. Roll it into an IRA or into your new 401(k). Unless there is an extraordinary circumstance (and we’re not talking about a new TV or a vacation), don’t fritter away your retirement assets. Withdrawals from these tax-deferred plans will probably be subject to taxes and penalties if taken early. 6. Get out of debt today. Some debt can be productive. For example, a mortgage allows you to purchase a home and build equity instead of renting. But in many cases, debt can be a burden. Your student loans helped you pay for college. Although the situation with student loan debt is fluid, this is debt that’s best paid off. Credit card debt also falls under the unproductive category. Besides, many come with high interest rates. 7. Check in with Social Security. www.ssa.gov has a decent amount of resources. It’s a good idea to check in online and make sure there has been an accurate accounting of your annual income. If your income is understated, your benefits will be shortchanged. Our goal is to help you replace a substantial portion of your income when you leave the workforce. How much will depend on your goals and what you may want to do in retirement. These ideas are a great place to start, putting you and keeping you on track for your retirement.
Inflation worries surface
Inflation has not been a persistent and serious threat to the economy since the 1970s and early 1980s. The Fed knows how to defeat inflation. Raise interest rates to onerous levels and quash demand in the economy via a serious recession. In turn, companies lose the ability to rapidly boost prices, and employees no longer have the leverage to demand outsized wage hikes. We don’t want to repeat that cycle. At a minimum, however, we are starting to see upward pressure on prices. How long might this last? The Consumer Price Index jumped 0.8% in April. Remove food and energy, and so-called core inflation surged 0.9%, the fastest reading in 40 years (U.S. BLS, St. Louis Federal Reserve). Fed officials continue to insist any increase will be “transitory,” their word of choice in describing what they see as a temporary rise in prices tied to the reopening of the economy. That may be the case for hotels and airlines that are set to see a jump in summer bookings. But there are issues that are influencing pricing decisions on the production side of the economy, too. We have learned that huge cash infusions via government stimulus will boost demand. We are seeing it in record retail sales reported monthly by the U.S. Census Bureau. Yet, production has been slower to rebound. A May 13th story in the Wall Street Journal, “Empty Lots, Angry Customers: Semiconductor Crisis (Shortages) Throws Wrench Into Car Business,” sums up what’s happening in the auto industry and highlights the problems auto buyers are facing. Or here is another look from a May 11th CNBC feature: “U.S. Faces Major Shortages in Everything From Labor to Semiconductors, Lumber and Packaging Material.” In April, the National Association of Homebuilders said that lumber shortages are leading to skyrocketing lumber prices, adding an average of $36,000 to the cost of a new home over the last year. Government spending and a super accommodative Federal Reserve argue for a more permanent and unwanted rise in inflation. However, longer-term disinflationary trends, i.e., demographic trends and globalization, remain in place. Further, labor unions, which helped drive a wage/price spiral in the 1970s, don’t have the power they once had. Where do we stand? There are reputable economists on both sides of the inflation debate. No one wants to see a return to the double-digit inflation problems of the 1970s, and the Fed is more likely to react than was the case a generation ago. But we don’t expect the Fed to lift interest rates anytime soon, as central bankers continue to insist their focus is on full employment, and any rise in pricing pressures is temporary. Nonetheless, the best news on inflation is probably behind us. I trust you’ve found this review to be educational and informative. Let me emphasize that it is my job to assist you. If you have any questions or would like to discuss any matters, please feel free to give me a call. As always, I’m honored and humbled that you have given me the opportunity to serve as your financial advisor.
This time last year, the World Health Organization recently had declared that the spread of Covid-19 constituted a worldwide pandemic.
Stringent measures in the U.S. were being taken to slow the spread of Covid and “flatten the curve.” The lockdowns and shelter-in-place orders dealt a body blow to U.S. economic activity. Investors, who attempt to price in economic activity over the next six to nine months, had no prior experience to a shutdown and eventual reopening of the economy. It was if we were driving through a dark and foggy night with no headlights. Consequently, investor reaction was swift, and the first bear market since 2009 descended upon investors. Volatility was intense. In just one day, the Dow Jones Industrial Average lost nearly 3,000 points, or 12.9% (March 16, 2020 St. Louis Federal Reserve DJIA data). That day accounted for over 25% of the Dow’s nearly 11,000 point peak-to-trough loss. The major market indexes bottomed on March 23 (St. Louis Federal Reserve). The bear market lasted barely over a month, if we use the broader-based S&P 500 Index as our yardstick. It was a swift decline, but it was the shortest bear market we’ve ever experienced. The ensuing rally has been nearly unprecedented. Since bottoming, the S&P 500 Index advanced an astounding 77.6% through March 31. It’s 3,972.89 close at the end of the first quarter put it within 1.65 points of the prior March 26 closing high. And that is on top of a series of new highs since the beginning of the year. Since the end of the quarter, the S&P 500 has gone on to top 4,000. Let’s back up and take a broader view. If we review the six longest bull markets since WWII, the S&P 500’s advance over the first year tops all other prior bull markets. In second place at 72.4% is the bull market that began in March 2009. That run lasted into February 2020 (St. Louis Federal Reserve). But I want to caution you that past performance doesn’t always guarantee future results. If we gauge the first year of the 1990s bull market, the S&P 500 had advanced 32.8% during the same period. It’s an excellent performance for a period that runs about one year, but it would place the start of the long-running 90s bull market in last place among the six longest periods since WWII. Where are we headed from here? You’ve heard me say that no one has a crystal ball. No one can accurately and consistently predict what may happen to stocks. Nevertheless, let’s look at what’s happened in the second year of bull markets that were born out of bear markets that saw the S&P 500 Index fall at least 30%. Since World War II, there have been six other bear-market selloffs of at least 30%. In each case, the market posted strong returns in the first year, with an average gain of 40.6%. Gains ran into year two, with an average increase of 16.9%; however, the average pullback during those six periods: 10.2%. So, let’s not discount the possibility of a bumpy ride this year. Treasury bond yields have jumped as the government has embarked on an expensive $1.9 trillion stimulus package, and talk of new spending from Washington is gaining momentum. Further, bullish enthusiasm can sometimes spark unwanted speculation. Might the economy overheat and spark an unwanted rise in inflation? Might rising bond yields temper investor sentiment? Up until now, investors have focused on the rollout of the vaccines, and the reopening of the economy. Today, momentum favors bullish investors, but valuations seem stretched, at least over the shorter term. When markets are surging, there is a temptation to load up on risk. Just as the investment plan takes the emotional component out of the investing decision when stocks are falling, it also erects a barrier against the impulse to load up on riskier investments when shares are quickly rising. Life changes, and when it does, adjustments may be appropriate. Ups and downs in stocks are rarely a reason to make emotion-based decisions in our portfolios. “Stop in the name of love, before you break my heart.” We know The Supremes weren’t alluding to the pitfalls couples face when they grapple over money issues. But our experiences tell us that money plus love can lead into minefields.
So, let’s recognized the obvious. Financial matters are an important part of any couple’s relationship. Face them head on. For some couples, this will be second nature. For others, it’s a challenge, but we’re here to help. If you take the time to get on the same page, you can solidify your finances and strengthen your relationship. Working towards the same goals is critical. It’s time well spent. 6 money mistakes you and your spouse can avoid 1. Set goals. He’s a spender, she’s a saver. Or, he has an always-expanding list of toys he would like to add to his collection, and she spends most of her time thinking about growing the family’s emergency fund and how she can max out their 401k contributions. Does that sound familiar? It’s too late to have “the talk” after you have put a big purchase on your credit card. So, sit down and have a money date. Talk about your goals and write them down. Without goals, you won’t know where you are headed. Share your feelings and (this is important) actively listen to the other’s viewpoint. Compromise may be needed but agreeing on common goals will allow you to move forward in a unified fashion. When you have completed this task, I am confident you’ll feel an enormous sense of satisfaction. 2. All for one and one for all. Marriage is about unity, but our interests won’t always be perfectly aligned. The same can be said about handling our finances. A joint checking account and joint credit card are perfect for joint expenses, but separate accounts for separate purchase can be a good idea too. When you set your goals, establish agreements regarding your separate spending patterns. 3. Money secrets are a no-no. It’s OK not to disclose the birthday present you just bought for your spouse. It’s not OK to keep other money secrets hidden from your spouse or partner. Major secrets may be a symptom of bigger problems that can threaten the stability of your relationship. Don’t destroy trust that can take years to rebuild. 4. Who handles the monthly bills? It’s a good idea to use autopay. But it's not a one-time set and forget it situation. You don’t want to get caught flat-footed with an overdue bill or late charges that may slip through the cracks and ding your credit report. Therefore, who takes care of the bills? It may make sense for one person to be in charge so there’s no confusion, and regular payments aren’t missed. But checking in monthly or bi-monthly is a good way to keep both individuals on the same page. Check-ins also allow you to make any adjustments, as a couple, to your goals. 5. What comes first, the chicken or the egg? It’s the age old question. Here's another one. Should we go in the direction of retirement savings or college savings? Having children means putting your kids before yourself more times than you’ll ever be able to count. But when it comes to saving for retirement or college for your kids, put yourself at the front of the line. Pensions are disappearing and Social Security isn’t enough. You must consider your retirement needs first. There are exceptions, and we can look at ways to fund both goals. But do your best to maximize retirement savings. At the minimum, capture the full amount of your company’s match. Keep this in mind: If you don’t fund your retirement, who will? 6. Stash away cash for an emergency. Did you know that just 39% of Americans have $1,000 to handle an emergency? The rest would have to use a credit card or borrow to cover an unexpected need. I know you have ample reserves, but sadly, that’s not the case for all Americans. If you received a stimulus check in December and you don’t have an emergency fund, please save it!
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