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From Tech-Loving Lockdown to a Stimulus-Charged Reopening?

By | 2021, Money Moxie, Newsletter | No Comments

The stock market does a good job discovering prices, but it gets carried away to extremes by narratives that capture everyone’s attention. When these stories change, the market changes.

In the early days of computing, memory was expensive, and programming in binary code was tedious. To save both money and time, programmers abbreviated years to two digits. For example, the year “1999” would have been recorded as just “99.”

This limitation was widely known going back at least to 1985, but by 1997, it was crunch time. Without a fix, there may or may not have been a valid date in computers for the first day of January 2000. And who would want to be in an elevator or flying in a plane when the clock struck midnight?

This “Year 2000 Problem” became known as Y2K. Companies all over the world were upgrading computer hardware and software in anticipation of Y2K. This further increased the high demand for technology, and the stock market investors were well-aware. It added fuel to the tech-stock fire and caused many to adopt a belief that the best way to make money was in technology stocks.

Covid-19 precautions created a similar tech-heavy narrative to investing in the year 2020. While many of the largest companies profited a great deal from the Covid-lockdown of 2020, investors began to favor any technology companies, even those without profits, by the end of the year.

I decided to go back over the last 20 years to test the idea that the best way to make money is in technology stocks. After all, who could argue that technology companies have not been the most successful since the year 2000? What I found surprised me. From February 2000 to February 2021, the tech-heavy NASDAQ index returned an average of 5.05% per year. How about the more diversified S&P 500? Over the same time, it averaged 5.02%—roughly the same with a lot less volatility.

How could the S&P 500 outperform when “FAANG” (Facebook, Apple, Amazon, Netflix, Google) companies have been so prominent? While these did fine in the early 2000s, the best performing areas were sectors outside of technology.

It is impossible to say exactly what the future will bring, but a change in leadership at some point is inevitable. As we enter the spring of 2021, we may have already seen a change begin. With vaccine distribution, investors have transitioned from a tech-loving lockdown to a stimulus-charged reopening. Only time will tell if this is truly the beginning of new market leadership or if that change won’t come until later.

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Has All This Stimulus Created A Rational Bubble?

By | 2021, Money Moxie, Newsletter | No Comments

One of the most absurd and fascinating financial stories of the pandemic was Hertz. Yes, the Hertz that pre-Covid was the second-largest rental car company. Last April, it had 700,000 vehicles sitting idle and $19 billion in debt! On May 22, 2020, Hertz filed for bankruptcy protection. Then, just a few days later, the stock began a miraculous rise.

Between May 26th and June 8th, Hertz stock rose nearly 1,000%. A savvy investor might think that after all creditors are paid, there may be something left over for stockholders. In reality, Hertz had become one of the first social media stocks of the pandemic.

Individual investors encouraged each other to buy Hertz because it was “going to the moon” and “You Only Live Once,” also known as just YOLO.

Hertz recently announced it might be purchased for just under $5 billion—a number far below the $19 billion in debt. Eventually, investors realized this would happen because the stock could not stay above its June 2020 high. In reality, it is now worth approximately zero.

We have seen the manic rise and fall of many stocks, most of them in January and February of this year and most of them unprofitable. The reasons are complicated, but we will summarize them below:

(1) Gamification of investing with free phone apps
(2) People stuck at home with more free time
(3) Free money from Uncle Sam
(4) Leverage through the use of options
(5) Market makers hedging their risks
(6) Short sellers forced to cover

Let’s focus on the one that impacts all of us as investors: “free money.” The U.S. government has now approved three rounds of stimulus, totaling around $6 trillion. (An additional $4 trillion from the Federal Reserve went into financial markets over the last year.)

As described in the graphic below, the majority of Americans are not planning to spend the stimulus immediately. It has led Americans to save more money in the past year than any other time recorded in U.S. history!

Combine all these savings with reduced household debt, and we get a very flexible consumer. Remember, consumer spending is 69% of the U.S. economy.

Much of these savings will eventually get spent or find their way into investments, which is why some have called the rise in the stock market a “Rational Bubble.”

The health situation has drastically improved since January. While the United States continues to face even more contagious variants of Covid-19, vaccine distribution has substantially expanded. As of March 15th, over 90 million doses had been administered. Plus, approximately 2 million more Americans receive a dose each day.

Nationally, the best-case scenario may be happening. High economic growth (likely to top 6% this year) and low inflation (rising to possibly 3%) make it easier to handle the heavy level of debt. Many states, from New York to California, are easing restrictions. Other, less densely populated states are already way ahead in reopening.

In Utah, the governor thought we would have a massive deficit when shutdowns began last spring. Instead, the state ended up with a $1.5 billion surplus, and in February 2021, Utah had an unemployment rate of just 3.1%.

A year ago, many debated what the financial recovery would look like. Would we have a sharp rebound or a V-shaped bounce, or would it be a slower U-shaped or volatile W-shaped recovery?

The reality has been a letter not previously used to describe economics, but one that I think we will see again in the future. Our current progress has been called a K-shaped recovery because while it has been good for some, it has been difficult for others. As we emerge in Spring 2021, we hope to see more joyful and prosperous times for all.

*Research by SFS. Data from the Federal Reserve Bank of St. Louis. Investing involves risk, including the potential loss of principal. The S&P 500 index is widely considered to represent the overall U.S. stock market. One cannot invest directly in an index. Diversification does not guarantee positive results. Past performance does not guarantee future results. The opinions and forecasts expressed are those of the author and may not actually come to pass. This information is subject to change at any time, based upon changing conditions. This is not a recommendation to purchase any type of investment.

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Getting Organized

By | 2021, Money Moxie, Newsletter | No Comments

Keeping up with paperwork, documents, and bills each year can be challenging. It is too easy to put the papers in a pile to be addressed at a future date. Or, my personal favorite, file them away and store them until you run out of space.

You can handle paperwork more efficiently. The tricks are to go paperless when possible and save only necessary documents. Technology makes it easy to organize statements and bills, so take advantage of electronic access whenever possible. Some documents like pay stubs, investment statements, and insurance policies may be kept for a year. Other documents will be around longer. Suggestions for what to keep and what to toss are summarized below.

For tips on organizing your entire home, watch our recorded Money Matters webinar. It can be found on our website at SmedleyFinancial.com under Just for Women – Organization from March, 9th, 2021.

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What To Do When Rates Are So Low

By | 2021, Money Moxie, Newsletter | No Comments

All across America, CDs are coming due at banks and credit unions, and savers are appalled at how low their new rates will be. It is just a fraction of what the CD was making before. Low-interest rates are benefiting borrowers and punishing savers. If you have excess money in savings or CDs because you wanted protection, what do you do now?

We always counsel people to keep their emergency fund and short-term money in places that are easily accessible, like savings, money markets, or short-term CDs (12 months or less). That counsel hasn’t changed.

The need to have easy access to the money supersedes the need for a return. People should still have an emergency fund of 3-6 months of living expenses. In addition, any expenditures that will happen in the next year should be in short-term savings.

If your short-term savings buckets are full and you still have excess in the bank, there are some good options.

(1) Use a money market or short-term CD and hope that rates are better in 12 months. If you do this, protection is the main goal. Accept that you will make little on your money. Interest rates may come up a little over the course of a year, but don’t expect much improvement. Still, waiting 12 months to get a better rate is probably better than locking your money up in a 5-year CD.

(2) One step up from CDs are fixed annuities. Don’t let the annuity name scare you. They are like CDs on steroids. They are great tools to help protect assets with a slightly higher interest rate than CDs. However, they have much larger penalties than CDs if you pull your money out early. Because of this, we typically recommend no more than 20% of your investments here.

(3) Another option that should avoid losses while providing some potential growth is an Equity Indexed Annuity. The largest upside for this is that your original investment is guaranteed, and you have the potential to make more interest than a CD or fixed annuity, depending on what the markets do.

The downside is you have to lock your money up for 5-10 years. There are significant penalties for early withdrawal, so we would recommend no more than 20% of your investments in these types of products.

(4) If you are willing to take some risk for potentially better returns, then you can invest conservatively. This option may lose principal but has more potential. This can be done by using conservative investments like bonds or a combination of bonds and stocks to get some growth with limited downside. We typically recommend a ratio close to 80% bonds and 20% stock.

(5) If you don’t need the money for more than 5 years, you may accept more risk by investing. While this has potential for losses, it also has potential for more growth.

In considering any of these options, remember this is only one piece of the puzzle. Always make sure your investments fit into your overall financial plan. If you have any questions about how to implement these options or are wondering which one(s) are right for you, please contact our Wealth Management consultants.

This article is not a solicitation, offer, or recommendation to buy or sell any security. Annuities are insurance products backed by the issuing company’s ability to pay. There is a potential for loss as well as gain with stocks and bonds. Past performance is no guarantee of future results.

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Taxing Times

By | 2021, Money Matters, Newsletter | No Comments

It is that time of the year! Tax season is upon us. As you gather your tax documents together, you may be wondering how you are taxed on investments. This is a good time to review how taxes apply to different account types.

Tax-deferred

Most everyone has some type of tax-deferred account, generally thought of as a retirement account(s). Money is invested in these accounts before taxes are paid. It grows over the years and is taxed when you take it out of the account through withdrawals and distributions. These accounts include Individual Retirement Account (IRA), 401(k), 403(b), SIMPLE IRA, SEP IRA, etc. It can also include non-qualified tax-deferred annuities where the initial investment has been taxed, but the tax on the growth is deferred until you take a withdrawal from the account.

Money taken from tax-deferred accounts is taxed as ordinary income. That means it is taxed at your marginal-income tax rate.

Restrictions apply to these accounts. For instance, the amount of money you can invest each year is limited based on the account type and your age. If you take money out before you are age 59 ½, you will pay an early withdrawal penalty of 10%. Furthermore, you must begin taking money out of these accounts by age 72. This is known as a Required Minimum Distribution (RMD), and you will be subject to a penalty if you miss the deadline.

Taxable

Taxable investment accounts can be accessed at any time without restriction. They are often used to reach a specific goal or increase savings that will be used to supplement income during retirement. The initial investment has already been taxed, and you will only pay tax on the growth.

The tax rate is determined by the length of time you hold the investment. If you hold a specific investment within a taxable account for more than one year and one day, you will be taxed at lower capital gains rates. If you sell an investment in less than one year, taxes are calculated at your ordinary income-tax rate. Dividends received are generally taxed as ordinary income as well.

You can manage taxes within the account by offsetting gains and losses. This strategy can be helpful in reducing taxes.

You are free to add as much money as you want to a taxable account, and there are no requirements to take money out of this type of account regardless of your age.

Tax-free

Growing money without taxes is a wonderful way to plan for retirement. This can be done in a Roth IRA or Roth 401(k). Money is invested in the account after taxes have been paid. Any growth earned over the years is tax-free. It does not get better than that!

There are differences between the two types of Roth accounts. The amount of money you can contribute is limited by the type of account and your age. A Roth IRA has no required distribution date. You can leave the money in the account until you are ready to use it or pass it to your heirs tax-free. Unfortunately, the Roth 401(k) is subject to Required Minimum Distributions at age 72. This can be avoided by rolling the Roth 401(k) to a Roth IRA before the year you will turn 72.

For details on marginal tax rates, capital gains rates, and contribution limits, visit us at SmedleyFinancial.com and browse the updated 2021 tax information. You can also call us at 800-748-4788. Happy tax season!

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Financial Demise by Subscription

By | 2021, Money Moxie, Newsletter | No Comments

The past year has kept most Americans safe in their homes, searching for something to occupy their minds and their time. Generally, staying home is a way to save money. Unfortunately, many found hunkering in at home to be a financial drain.

How can staying home possibly equate to a financial disaster? Subscription services. I know what you are thinking – they do not cost that much.

Today’s world allows us to have almost anything delivered, streamed, or accessible for a small monthly fee. If you are tired of coming up with a menu and shopping at the grocery store, you can have a box delivered to your doorstep complete with ingredients and a recipe to create a delicious family dinner.

Finding something to watch on TV is easier, too; just sign up for a streaming service from one or several of the companies offering hundreds of movies and television series. They are great for binge-watching an entire season. From Disney+ to Netflix to Discovery+ to ESPN+, you should be able to find something worth watching, right?

If you can dream it, you can probably find a subscription for it. A beauty box, food and toys for pets, clothing boxes for men and women, toys and activities for the kids, book of the month, car wash, online fitness gurus with programmed workouts, diet monitoring apps, theater, shaving supplies, wine, shoes, and the list goes on and on.

There is nothing wrong with subscribing to any of these services. Believe me, I have several myself. Many can help increase our quality of life and save us time. While reviewing your budget and planning for the year ahead, be aware of these financial drains. The cost for each is generally low and easy to justify. Altogether, they can really add up. Do your subscription costs fit into your long-term spending plan, or could they be preventing you from reaching your financial goals?

Your spending plan should be focused on meeting your monthly needs and achieving your financial objectives. These objectives should be aligned with your personal values and goals.

If you have not already done so, take some time and ponder the year ahead. Where do you want to end up financially speaking? You have a limited amount to spend each month; make it count.

If you need some ideas or suggestions on creating a spending plan, watch our Money Matters recorded webinar on budgeting. You can find it at SmedleyFinancial.com under Just for Women.

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Investment Accounts for Children

By | 2021, Money Moxie, Newsletter | No Comments

Opening an investment account for a child is a great way to give them a financial head start. It also provides an excellent opportunity to teach a child the importance of saving and investing. Before you decide to contribute to an account for a loved one, make sure your own retirement goals are on track. I assure you, children prefer financially secure parents to gifts of money or financial inheritance.

Once you’ve decided you can afford to save for a child and still accomplish your own goals, the question becomes what type of account you should open. There are several options, each having benefits and drawbacks. I have provided a brief summary of some of the more popular account types below. Please reach out to us for more information before choosing which account is best for you.

Savings Account
This may be the best choice for short-term savings, but it is not usually recommended to fund expenses more than 24 months in the future. Savings accounts do not provide significant growth, offer tax benefits, or reduce the risk of inflation.

529 Plan
This is a great investment account if your goal is to fund qualified higher education and the beneficiary is still young. It is important to understand what constitutes qualified education, as not all education is qualified. Although this account can fund expenses at lower education levels, the benefits of a 529 plan increase the longer assets are in the account. All growth is tax-free, but taxes and penalties will apply to non-qualified expenses. The account owner can change the beneficiary of a 529 account.

UGMA/UTMA Account
These investment accounts are for minors. They offer flexibility, as money can be spent on anything that benefits the minor. Because the money placed in a UGMA/UTMA account is owned by the child, the earnings are generally taxed at the child’s tax rate. Those rates are usually lower than the benefactor’s rates and are often zero. When the child reaches the age of majority, the account must transfer to an individual investment account. At that time, the beneficiary gains full control and can use the funds however they choose.

Individual Investment Account
This account cannot be opened for a minor. It can be opened in the name of an adult with the intent to gift assets to a child at some point in the future. This account will never change ownership, and the account owner will always maintain control. All growth will be taxed at the account owner’s tax rate, and transfers of more than $15,000 per year to a single beneficiary may require filing a gift tax form, although gift tax may not be due.

Roth IRA for Minors
A Roth IRA may be opened for a child under the age of 18 if they have earned income. This account is a great way to jumpstart retirement for a minor. All growth is tax-free if used after the age of 59.5; otherwise, taxes and penalties may apply.

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2021 – Year of the Vaccine

By | 2021, Money Moxie, Newsletter | No Comments

Irrational Exuberance
On January 7, 2021, Elon Musk tweeted a recommendation that people replace the social media app Slack with Signal. Instantly, the stock for Signal Advance, Inc. began to climb. It finished the day up over 500%. Unfortunately, Signal Advance does not have a social media app.

Investors should have started selling the moment the mistake was publicized. Instead, the stock kept rising. In less than a week, Signal Advance rose 11,700%!

Let’s look deeper into what a number like this really means. An investor who owned $10,000 of this stock would have had nearly $1.2 million three days later. Of course, groups often move in irrational ways, but at some point, the truth begins to matter. On the fourth day, it had an epic fall, giving up most of the gains.

Behavior like this has happened before. In fact, it was common back in 1999. On April 1, 1999, The Wall Street Journal reported the story of AppNet Systems, which filed to have its stock publicly traded. That day, investors began buying up Appian Technology. Despite being described as an “inactive company,” the stock rose 142,757% in two days. Needless to say, it didn’t end well for most of these investors.

In 1999, online trading was new, and so were the internet chat rooms where investors could share stock tips. It seemed that nothing could stop the momentum.

Warning Signs from 2000
Technology stocks began to fall in February 2000, and the rest of the market began to fall in March. What triggered the decline? Were there any signs?

(1) Was it Yahoo’s addition to the S&P 500 on December 7, 1999, which signified the acceptance of technology domination in the investment world?

(2) Perhaps it was the symbolic show of a new world order when internet upcomer AOL purchased media giant Time Warner on January 10, 2000?

(3) Finally, could it have been that the S&P 500 price divided by future earnings was at an all-time high of 26 in February 2000?

(If you don’t remember or have never heard of AOL, well, that proves the point I am trying to make. Good investing is very different from speculation.)

Investor Mindset
Greater and greater stimulus from the federal government and the Federal Reserve have created an environment where some investors are only focused on return. They ask themselves, “How much money do I want to make?” Then, they invest accordingly.

Of course, there is no limit to how much money most people want, which is exactly why this won’t last forever. The stock market is not an ATM.

This bull market will end. However, it is difficult to accurately predict the timing of a falling market when in the middle of a powerful bull market. It could be in February or, with all the government support, it may keep going throughout 2021.

Government stimulus and all the new money that comes with it will have to go somewhere. This could be a great support for investors as 30% of the stimulus is not needed by its recipients and gets saved. Roughly the same amount is spent, and another part pays off debt. All of these help the stock market either directly or indirectly.

If even more stimulus comes in 2021, then we can expect more spending and more investing.

What could go wrong in 2021?
Unintended consequences are an incredible risk for the unprecedented government stimulus we have experienced. However, we have not seen any major negatives yet. Until we do, it is quite possible that the stimulus will continue to flow in 2021.

I will be keeping an eye on inflation. In the Great Depression, America had the New Deal. People were paid to work. In the pandemic of 2020, people were just paid.

As the money is spent, demand could outstrip supply, and prices could rise. If inflation somehow reaches 3% in 2021, then I believe the Federal Reserve will take the punch bowl away from the party. For now, Fed Chairman Powell says he is “not even thinking about thinking about” doing that. So, no reason to panic.

What could go right in 2021?
I expect a great rotation to begin at some point in 2021. This change could end what I would call the profitability of speculation. However, it does not necessarily mean a crash in the market. I’ll explain.

When the economy was barely growing over the last 10 years, it didn’t make sense to run from growth. This made it possible for technology, which was a poor investment from the year 2000 through 2008, to become a leader. Technology was the undisputed leader of 2020 as it was also well positioned for the stay-at-home economy during the pandemic.

Technology represents over 25% of the U.S. stock market, but this is not a fixed level. Just before falling out of favor in 2000, it was 30%. By 2008, it was only 15%.

Keep in mind that in 2020, technology only represented 6% of the U.S. economy and just 2% of employment. That means there is a massive amount of opportunity out there just waiting to regain strength. I believe that at some point in 2021, we will get that change of focus and market leadership.

International stocks, small company stocks, industrial stocks, and energy stocks have already begun to strengthen after years of lagging behind.

Only time will tell, but if the new trend continues as it has over the last few months, then we may be seeing new market leadership that will point the way forward for years to come.

*Research by SFS. Data from the Federal Reserve Bank of St. Louis. Investing involves risk, including the potential loss of principal. The S&P 500 index is widely considered to represent the overall U.S. stock market. One cannot invest directly in an index. Diversification does not guarantee positive results. Past performance does not guarantee future results. The opinions and forecasts expressed are those of the author and may not actually come to pass. This information is subject to change at any time, based upon changing conditions. This is not a recommendation to purchase any type of investment.

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What does a Biden presidency mean for the economy and investing?

By | 2021, Executive Message, Money Moxie, Newsletter | No Comments

The recent election has some people elated and others in the depths of despair. While we don’t focus on the political ramifications, we can consider some of the financial impacts that may come. There is no guarantee that any of these will happen, but here are some possibilities:

We get more stimulus: In the short-run, this is a great thing for our economy and the market. There are too many Americans and businesses that are still struggling and need help to get through this pandemic. The long-term challenge is how to pay down the government debt.

Taxes go up: Even before the election, we knew that taxes needed to go up because of the massive amount of government debt. We have been at historically low tax rates. While tax rates seem unlikely to go up soon, don’t plan on them staying this low forever. Depending on your situation, you may want to realize taxation of some assets now to avoid paying taxes in the future. Consult with your financial and/or tax advisor.

Interest rates go up: They will probably still stay low for a while (i.e. 1-2 years). However, they will probably start going up after that. Increasing rates are good for savers and bad for borrowers. CD’s may pay a decent rate in the future, but affording a home will get harder.

Investing in ESG goes up: ESG stands for Environmental, Social, and Governance, also known as sustainable investing. With the Democrats in power, companies that are ESG friendly should get a boost. Examples of companies that will benefit include green energy, health and safety, and companies that promote diversity.

The economy will grow: The economy will probably start to recover quickly at first as we accelerate out of the global pandemic. However, growth will probably be slowed down by taxes and inflation after that, but it will still go in the right direction.

The market may go up: In the long-run, this is certainly likely. Over the coming months, the market could go up because of the recent stimulus and the prospect of more stimulus. A great deal of this money is likely to go directly into investments, while some will boost the economy through spending.

There may be some softness after that. But, as the economy fully recovers from the global pandemic, the market should continue its march higher. The market has shown that it doesn’t matter which political party is in power. It still does what it is going to do.

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