Our friends Jack and Tom retired just before a turbulent time in the market. Inflation was running high, causing interest rates to follow suit. Stocks were down in value, along with bonds, and there seemed no safe place to invest their assets. Jack and Tom took different paths, and as you can imagine, ended in very different places.
Respected in his industry, Tom had a successful career and he retired with a large sum and even more confidence. Investing would be no different. A little research, watching the markets on a regular basis, he would figure it out. There was no doubt in Tom’s ability to meet his needs and live his lifestyle. He was also certain he could select winning investments better than the average person.
Jack was also successful but had a good understanding of where his skills lied. Investing was not one of them. He chose to work with a fiduciary and craft a plan for managing his assets. They discussed his spending needs, how to cover expenses, and the importance of an emergency fund. His remaining assets were invested to grow over the long term. There was an emphasis placed on noting the differences between wants and needs. After committing to future reviews of this plan, Jack had the confidence he could live the lifestyle he wanted in retirement.
Jack and Tom entered their golden years, but reality (and importance of a plan) settled in as the market became bearish and their portfolios followed suit. Within just two years, the values of their portfolios had dropped by nearly 40%.
How did they fare in such a market? I am sure you can guess. Tom found himself scrambling to sell his investments and find something that could replace his lost value. He made even riskier bets in poor attempts to “get back to even”. Tom’s lifestyle had no choice but to change; he simply couldn’t support it anymore.
Jack, on the other hand, reviewed his plan. He sat down with his advisor, understood what he owned and the nature of the market, and chose to stay the course. He decided to adjust some of the “wants” in his lifestyle but made that choice willingly. Did he need the new car whose price was now 50% more than the year before? Turns out his current vehicle was just fine. A sound plan and process go a long way in navigating market turmoil.
If this all sounds too good to be true, it is not. The two years referenced above represent the early 1970s. Inflation was high and interest rates higher. The market dropped dramatically. This may sound familiar if you’ve been contemplating retiring lately. We ran the numbers, and even if you owned a portfolio of all stocks, a proper plan would have seen you through. That plan needs to include a realistic look at your needs vs. wants. You will also have to understand the appropriate withdrawal rate from your portfolio. Luckily, you don’t have to do this alone. Talk with your advisor, craft a plan, and commit. The market is only one aspect of a strong retirement plan.
Patrick E Gauthier | CFP®, MSAPM
Senior Portfolio Analyst
The financial industry has historically defined a recession as two consecutive quarters of negative growth of the Gross Domestic Product (GDP). However, the National Bureau of Economic Research says this rule may not always hold true. They are quick to remind us that the recession of 2020 saw just one quarter of negative growth. But let’s face it, COVID-19 caused us to redefine a lot of things!
GDP is the market value of all finished goods and services produced within a country. Basically, it tells you how the country’s economy is performing.
How Do We Know When a Recession is Coming?
Recessions will be hard to avoid for many countries around the world as economic growth is hampered by the war in Ukraine, pandemic lockdowns in China, and international supply chain disruptions. There are many indicators that may signal an impending recession – unemployment, consumer confidence, household debt, inflation, interest rates and an inverted yield curve. The yield curve is a graphic representation of the relationship between the interest yield of U.S. government debt instruments of varying maturity dates. An inverted yield curve means that short-term government debt has a higher yield than long-term government debt, and historically a recession happens ten to twenty-two months after an inverted yield curve; but not always. We have seen a briefly inverted yield curve in the past 12 months, and some see this as a warning sign.
Consumer spending is responsible for almost 70% of the GDP. So, the question is “are you spending more in the current quarter than you did from January to March?” Current estimates are that consumer spending has slowed since the government stimulus payments we received have been mostly spent. Another concern is whether inflation will cause consumers to spend less because things cost more. The Federal Reserve has signaled that they plan to continue to raise interest rates to slow inflation, and many investors fear that these efforts will lead to increased unemployment. If the central bank raises rates too far and too fast, economists worry, it could tip the economy into recession. Eight of the past eleven extended rate-hike cycles have eventually ended in recessions.
How Has the GDP Done So Far This Year?
There was a 1.4% drop in GDP for the quarter ending March 31st. GDP indicators for the second quarter show an economy teetering on the edge of negative GDP growth. The most recent estimate for growth in the second quarter is 0.9% to 1.3%, so if the final numbers come in slightly lower than the estimate, we could be in recession territory. We won’t know for sure until the numbers are released in July. Even if the quarter comes in with positive GDP growth, we are still not out of the woods.
The Great Recession that began in December 2007 saw the steepest decline in the market since the Great Depression in 1929. The S&P 500 dropped 57%, but within one year after hitting bottom, it had jumped back up 68%. The average length of a recession since 1945 has been 11 months. That brings us to the next question.
What Should You Do to Prepare?
This is a simple answer – nothing. Recessions are a normal part of the business cycle. There are periods of economic growth and periods of economic slowdown. They are parts of the same cycle. The 2020 recession was unprecedented because it occurred when Covid upended the economy by forcing businesses to shutter and encouraging people to stay home. If your personal circumstances or long-term goals have significantly changed, regardless of whether we are in a recession or not, schedule an appointment with your trusted financial advisor.
Robert M. Eckenroth | CPA, MBA
Investments come in many shapes and sizes. Some are simple, some are not. On one side you could have guarantees, on the other, a world of potential. Risk and reward normally work in tandem, the more risk you are willing to take, the more reward you should expect. One particularly important measure of an investment’s value is dividend income. What is a dividend? I thought you would never ask.
A dividend is a cash distribution made to eligible shareholders. This distribution is paid quarterly or in some cases monthly. Shareholders on record prior to the ex-dividend date will receive the payout simply for holding their shares. This cash payout goes to the brokerage account where the shares are held and is yours to keep.
Why Would They Do This?
Sharing profits on a consistent basis rewards investors for choosing to allocate capital to the firm. You will find that stable, well-run companies typically have a history of consistent dividends. Companies that run in proven, predictable areas of the economy are confident they can generate earnings and continue to reward shareholders. Management will typically announce the dividend along with quarterly earnings. In most cases, they select a payout that rewards shareholders, while allowing management to run the business and invest for growth.
Management must carefully consider their dividend policy, as changes can have significant ramifications. The way a company manages its dividend policy can foreshadow the overall health of the firm and the management’s outlook. Announcing an increase in dividends sends a strong signal to the market, showing confidence in their ability to keep growing earnings. On the contrary, a decrease in the dividend would signal a lack of confidence in earnings. Managers are reluctant to adjust the dividend downward, as the market will react negatively to such news.
Why You Should Explore Dividend Income?
Investors seeking income and stability tend to favor consistent dividend payors. They like the safety of a well-run company and the consistent income that comes with it. Regular dividends provide investors with flexibility. Cash can be used to fund current needs or reinvested in their portfolio. In some cases, dividend income can have a tax advantage over capital gains income. Over the long run, dividends have accounted for approximately one-third of the S&P 500’s total return.
All Dividends are Not Created Equal
Dividends take many forms in the marketplace. The specific forms and implications are a discussion best left between you and your fiduciary financial advisor. The two main ideas to understand here are: quality dividend companies and high yield companies. Quality simply means well-run firms with predictable revenues and profits. High yield refers to companies that may be more speculative in nature. The combination of these two ideas leads investors to seek out a higher rate of return for more risk, and this often leads to a high dividend. It is always important to understand why one firm would pay significantly more than another. Knowing the business behind the stock is still key for evaluating dividend payers. Ask yourself: how are the companies in my portfolio generating revenue? How reliable are they? How will their management’s commitment to dividends play a role?
Ask your advisor what role dividend-paying stocks can play in your portfolio.
Patrick E Gauthier | CFP®, MSAPM
Senior Portfolio Analyst
“How is the Market Doing Today?” This is a question I am often asked by clients when we meet to review their financial plan. I am sure that advisors, brokers, and financial planners around the world are asked this very same question every day. What may not be usual, and is often a surprise to my clients, is my response, “I have no idea.” They may be taken aback at first, but then I explain that for those with appropriate long-term financial goals, a properly diversified investment portfolio, and a well-crafted financial plan, the market’s performance on any given day is irrelevant! Furthermore, it is a distraction from what is truly important.
Just as the value of your home on a particular day has no relevance to the enjoyment and utility you receive from owning a home, the value of your portfolio on a given day is immaterial to the role your investments play in your overall financial plan. You have to get past the mental image of a group of investors poring over a stock ticker and then dashing off to effect trades. That is just not how long-term wealth is built.
For those with appropriate long-term financial goals, a properly diversified investment portfolio, and a well-crafted financial plan, the market’s performance on any given day is irrelevant!
Our team of portfolio analysts are constantly monitoring economic conditions and market trends, and they are gauging how these factors will affect our clients’ portfolios. This information is carefully analyzed and used to make strategic investment decisions for our clients. Likewise, our financial advisors are routinely meeting with their clients, gathering information about any changes in their lives that may affect their financial plan, or changes to their goals. Their financial plans are then revised to reflect the new information, the changes are implemented, and the results are monitored. And then the process begins again, for a financial plan is a living document; it is never finished. But among the hundreds of factors that are considered in the creation of a financial plan, I can assure you that how the market is doing today is not among them.
Turn off the financial news channel, relax, and follow your financial plan. If you don’t have a plan, contact CPS Investment Advisors to speak with a fiduciary financial advisor who will help you chart a path to financial freedom.
Rick D. Bernard | MBA, CFP®
We have all heard the clichés in the investment world, “It is time to buy! It is time to sell! Never been a better time to…!” Follow the market long enough, and you are bound to hear them all. An experienced investor will know to be weary of those predicting the future. Is this the right time? Will it be different this time? Ask either question, and the answer could change on any given day. As investors, how do we make a sound decision with our capital?
The answer is simple. Know what you own, and why you own it. The same businesses that generated revenue and profits throughout 2021 are repeating that process here in 2022. Their outlook on the economy may shift due to a range of factors, but all the same, they predict profits in the years to come. This is not to say 2022 will be without challenges. Part of understanding the companies you own is understanding management’s philosophy and record during uncertain times. Strong management teams shine when conditions are less than ideal.
A glance at turmoil over the last two decades:
How did the companies you own fare during those turbulent times? If you owned companies with strong management and sound fundamentals, I would venture to say you did well. Very well in most cases, and even better if they paid you for the pleasure of investing. We call that a dividend. Companies with sound management typically have a history of paying their shareholders via dividends. When markets are volatile, you will inevitably realize the quality of the companies you own.
Is it different this time? I would not hazard a guess. I would recommend having a plan, reviewing that plan, and making sure it involves owning high quality businesses. They will fluctuate in value day to day. They always have. That is the nature of a market where shares change hands throughout the day. We do face uncertainties in the years to come. We always have. The consumer finds a way to obtain what they need. Great businesses find a way to provide what the consumer needs, at a reasonable profit.
Patrick E Gauthier | CFP®, MSAPM
Senior Portfolio Analyst
For many years, we have written about how an investor may get lost in the news when trying to understand what is going on in the economy and in the stock market. CPS most recently shared:
All the noise can make it difficult to understand what’s happening in the economy. In the long run, fundamentals drive the stock market. Understanding where the economy is headed will help you understand the long-term outlook for stocks.
The Coronavirus pandemic is still lingering, there is now a war going on overseas and an upcoming election, and talking heads on television are discussing bond yields and unemployment. All very similar headlines to 2020 with some new ones added in.
So Where is the Economy Headed and What Should We Look for Next?
As an investor, one should look to the fundamentals of the companies in which you are invested in. Ask yourself these crucial questions: 1) should I sell this great company, 2) should I buy more of this great company, or 3) should I do nothing because my financial plan has not changed?
What Do You See as You Walk Around?
Even with all the noise, are people still buying gas? Yes, albeit at a higher price per gallon. Are people still buying real estate, paying their utility bills, buying groceries, using their prescription medication, and banking with an institution? I could ask a few more questions, but you understand where the story is going.
When you invest in companies that people need during good times and during ‘bad’ times, then you own durable companies.
I was recently traveling for both leisure & business and my first trip was to Las Vegas. Yes, that was for leisure as I was attending the Annual National Bowling Tournament and the USBC Hall of Fame induction dinner. To see some of the greatest bowlers of all time accept the award, was quite amazing.
The flight there was oversold. The dinner was sold out both nights. The hotel was at capacity for the first time since 2018 – with no comps available! During my time there, the NFL draft was also taking place with a record crowd of about 650,000 attendees just on the first night alone. You could not find a taxi or an Uber, and when you did, all prices were at a premium.
My second trip was for business, and again, the flights were oversold. There were two cars left in the rental car lot and all the restaurants had a waiting list each evening. The Houston traffic was as bad as what we experience here on I-4. All to confirm consumer demand is certainly thriving.
These are examples of walking around sense, and as you’re walking around, what sense of the economy do you make?
The moral of the story is people are spending money. When people spend money, companies are selling their products. When companies sell products, they generate earnings. When they generate earnings, good things happen in the economy.
Instead of focusing on what you’re hearing in the news, make sure your financial plan is in order. I recommend you schedule a financial checkup with your advisor to confirm your beneficiary designations are up-to-date, that your accounts are registered correctly, that your investments meet your risk tolerance, and that you’re maximizing your tax efficiency. All to ensure you can sleep easy at night knowing what you own and why you own it.
Anthony M Corrao | CFP®
You have likely noticed a headline or two alluding to stock market corrections, or even recessions, in the last few weeks. Around the time markets make a downturn, the conversation will inevitably pop up. It is important to know what a correction is, and that it is a normal, healthy part of the market cycle.
A correction is commonly referred to as a decline of 10% or more in the price of a security, or an index such as the S&P 500 or Nasdaq, from its most recent peak. The decline need not last long, but merely touch that 10% down point to be considered a correction.
Is this a rare event? Should we sell our profitable businesses and hold cash while the market “crashes”? Certainly not. Corrections occur every two years on average. Looking back at stellar returns during 2019, 2020 and 2021, it is not surprising to see a correction early in 2022.
We Know How to Define a Correction, but What Does it Mean?
Merriam-webster defines a correction as both “the action or an instance of correcting: such as amendment, rectification”, and “a bringing into conformity with a standard.” Given that context, it sounds more reasonable, almost positive.
Are the markets correcting for previous errors? We could easily point to the excesses of day trading, meme stocks, stay-at-home-plays, etc. as examples of the market running a bit wild as of late. (A quick search reveals several headlines discussing those same day traders losing all their profits this past week). The reality of multiple trillion-dollar companies would have seemed farfetched even a few years ago.
Could the market simply need to bring itself back into conformity with historical standards? We are constantly measuring successes against all-time highs and record profits. The idea that profits and prices can grow unchecked in perpetuity simply defies historical lessons. Market corrections typically highlight areas where investors ignored prudent risk management. Think: the tech bubble in 2000, housing crisis in 2008. When speculation hits the end of its leash, it is normally corrected.
Today’s correction is more about revised expectations. As companies report earnings, they will also provide full year projections for things such as revenue, earnings, profits, and dividends. As economic factors evolve, (i.e., inflation, energy prices, geopolitics), projected financial results will adjust. Many companies are reporting strong earnings for the first quarter, with a side of lowered expectations for the rest of the year. This doesn’t mean they expect to lose money or go out of business. It simply means they are tempering expectations. A dose of moderate expectations is not a bad thing for a market that produced double digit returns five out of the last six years.
What is a prudent investor to do? Ask yourself, and your fiduciary, if your plans have changed. Is your lifestyle changing? Have your needs and wants changed since market highs last year? Your plan for building wealth never included a constantly rising market. Every projection your planner discusses includes the likelihood that markets will correct on a regular basis. Review your plan and your priorities. The market is only one piece of the financial planning puzzle.
Patrick E Gauthier | CFP®, MSAPM
Senior Portfolio Analyst