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After 2020’s remarkable recovery and a relatively calm 2021, market volatility has returned with a vengeance. The combination of rising inflation at home, likely higher interest rates and geopolitical turmoil are making many investors nervous. With all of this happening in a mid-term election year, market volatility is to be expected. For investors, the most important things to think about are the prospects for economic growth and corporate profits.

A global pandemic, inflation, and geopolitical turmoil aren’t enough to stop the US consumer!

The US consumer is still the driving force in the US and global economy. As long as the US consumer is still willing and able to spend money, the US economy will do well and investors in great American companies will be rewarded. Consumer spending has completely recovered from the COVID recession and is now setting new records. The personal savings rate is still higher than it was for most of the past three decades. Household debt service remains near 40-year lows. Unemployment is below 4%. Although geopolitical events will contribute to higher energy costs and inflation, by every other measure the US consumer is doing exceptionally well.

China and Russia are Not an Existential Threat to the US Economy

he Chinese equity markets are experiencing their third major correction in less than ten years. US stocks have recovered strongly from the pandemic market crisis and have gone on to make new highs. Chinese equities are still struggling at the same levels they were at in March of 2020. This is not a sign of a healthy economic recovery, or of a country in a position to replace the United States at the top of the economic ladder.

The size of a nation’s economy is composed of two factors: the number of people who are working, and the output each worker produces, also called productivity. Chinese population growth is slowing dramatically. China abandoned its one-child policy nearly a decade ago in response to an aging population and slowing growth. China is rapidly losing the population growth advantage it once had. Improvements in productivity can apply equally well to the American workforce.

The United States is the second largest energy producer on the globe, the top oil and natural gas producer, and is ranked 3rd in global food production. The only country that produces more energy than we do is China, and the only reason they produce more energy is because of coal, which is over 60% of Chinese energy production. Geopolitical conflicts with Russia are a major issue for countries like Germany which are reliant on Russian energy imports. Neither Russia, nor Ukraine, are significant trading partners of the United States.

Higher prices for energy and basic materials will increase inflation, but they will also incentivize US energy companies to increase domestic production. US oil production is still 12.5% below pre-COVID levels. Importantly, history shows that while inflation hurts consumer confidence, geopolitical conflicts do not. As long as consumers are willing and able to keep spending money, the US economy will be fine.

Even if a recession happens, history says the right move is to stay the course and stay fully invested in great American companies.

Matthew A Treskovich | CFA, CPA/PFS, CITP, CMA, CFP®, AEP®, MBA, CLU, ChFC
Chief Investment Officer

Market Corrections and Opportunity

Posted on March 4, 2022 in

At the time of this article, the S&P500 is down around 9% this year. Understandably, this causes concern for investors as they watch their portfolios decline in 2022. During a market correction, it is important to remember that the US stock market has been here before. In fact, did you know the US stock market averages one 14% decline every year? In this article let’s explore what happens during a market correction and what you should do to grow your wealth long-term.

 What Happens During a Market Correction?

During the panic phase of a market correction, shares of top-quality companies decline in lockstep with the rest of the market. Most investors today buy mutual funds and exchange-traded funds, not individual stocks. When fear grips the markets, these investors panic and sell their funds. The fund managers are then forced to sell their holdings, good and bad, to raise cash for redemption requests. These waves of selling create opportunities for wise investors to buy great companies when they are on sale.

What Should You Avoid?

Avoiding overreactions during a correction allows you to take advantage of volatility. Investors who remain calm can find opportunities to buy great stocks at lower prices. The best time to buy quality companies is when they are on sale, and other investors are afraid to buy them. Wise investors understand that market panic events create opportunities. The keys are to remain calm, stay diversified, look at the big picture, and invest in quality companies for the long run.

What Should You Do?

If you are concerned about your investments, the first thing to do is to maintain a well-diversified portfolio. Diversification among different asset classes provides a buffer against market volatility. The second thing to do is to take a step back and look at the big picture. Despite the recent market decline, the major market indexes are still significantly higher than they were a year ago. Keeping the big picture in mind will help you avoid making emotional decisions when the markets are volatile.

Remember, it is not unusual for the US stock market to decline, and wise investors understand that this volatility is part of investing and creates opportunities to grow wealth long-term.

Matthew A Treskovich | CFA, CPA/PFS, CITP, CMA, CFP®, AEP®, MBA, CLU, ChFC
Chief Investment Officer

Understanding Inflation

Posted on February 24, 2022 in

Inflation is a hot topic. Most consumers are feeling the pain at the pump, and the grocery store. Investors and savers alike are wondering where inflation came from, why policymakers are reluctant to take action, and how to protect and grow wealth in an environment where inflation is at 40-year highs.

Commentators and politicians are quick to blame post-pandemic inflation on the Federal Reserve. As the pandemic’s impact on the economy became clear, the Fed cut interest rates and started buying bonds to provide liquidity to the financial system. These tools are the same ones the Fed used to support the economy after the Great Financial Crisis.

The Fed’s monetary policies after 2008 did not create a wave of inflation like the one we are currently experiencing. In the aftermath of the Great Financial Crisis, inflation was persistently below the Fed’s target. Although the Fed was “creating money” through its policy tools, most of that money didn’t find it’s way into the broader economy. The lesson here is that increasing the money supply alone isn’t enough to trigger inflation. Inflation also requires dollars in the system to be “turned over” more rapidly. In other words, the velocity of money matters. Velocity is lower now than it has been in four decades.

If Fed Policy Isn’t Driving Today’s Inflation, Why Is It Happening?

Pandemic-related programs created by the Fed were designed to provide liquidity to financial institutions. The Fed’s objective was to protect the banking system and capital markets, not to put money in the pockets of businesses and consumers. However, the US Government’s policy response to the pandemic was designed to do exactly that.

The Federal Government has spent $3.59 trillion in response to COVID-19[1]. Over $850 billion dollars of direct payments were made directly to taxpayers via Economic Impact Payments. A further $811 billion was spent on the Paycheck Protection Program. Unlike funds from the Fed’s liquidity programs, these dollars have found their way into the broader economy.

These programs protected the economy from a severe downturn that would have otherwise likely happened as a result of pandemic-related restrictions and lockdowns. This has created a situation where consumers are flush with cash, and businesses are unable to keep up with demand. Global supply chains are healing, but demand is still well above supply, resulting in a wave of rising prices for everything from groceries to used cars.

The Federal Reserve is now in a tough position. In textbook economics, the cure for inflation is to raise interest rates. However, by raising rates too aggressively, the Fed could set the economy on a path toward recession. The Federal Reserve has tools that it can use to slow down consumer demand, but there is little the Fed can do increase the supply of goods.

Most businesses will be reluctant to invest in increasing production if they see a recession on the horizon. An aggressive response to “tame inflation” like the Fed used in the late 1970’s and early 1980’s could create further supply chain problems by causing businesses to reduce production. This explains why the Fed has been reluctant to take action despite significant increases in the consumer price index.

The prices of some things are likely to remain high. However, history shows that for many commodities prices are highly cyclical. Gasoline is much more expensive than it was a year ago, but gas prices are actually lower now than most of the 2011-2014 period. Prices of grocery store items like beef and coffee are high, but these have a history of very wide swings. In the long run, supply and demand will find a balance.

What Does This Mean for Savers and Investors?

For savers, the first thing to consider is your emergency fund. It probably needs to be bigger now than it was a year ago. Being very aware of where you are spending money is critical. We can’t control the price of things in the grocery store, but we can pay attention to how we spend our money. It’s also important to continue to save money, to save in the right places, and to invest in ways that are proven to beat inflation over time.

[1] Data from www.USASpending.gov, the official source for spending data provided by the US Government.

Matthew A Treskovich | CFA, CPA/PFS, CITP, CMA, CFP®, AEP®, MBA, CLU, ChFC
Chief Investment Officer

Buckets to Weather Stormy Markets

Posted on February 17, 2022 in

With the new year well beyond us, the bull market of 2021 is a faint mirage in our rear-view mirror, and a slew of current headwinds lie before us on the road ahead, as we clutch the proverbial steering wheel ten and two.

For many Americans still working, we have no current or near-term plans of exiting the workforce. We still have several years ahead of us in which we will continue earning steady wages, all while placing more and more money towards our retirement. For this group, any current issues, though very real and worth understanding, the bigger focus is on maximizing savings for a future goal of an enjoyable and sustainable retirement. And thus, the ups and downs in the market should not be of much concern to this segment of Americans.  Further, if you are putting money away monthly, it would not be silly to be excited in a month when markets are lower, for you were able to buy more shares with less of your earned dollars. It is the soon-to-be retiree and the retiree, who should be thinking about how best to manage their plan during these times.

Retirees who plan to use their investable assets to offset a shortfall of income after taking into consideration social security and other steady sources of income such as a pension, will need to manage how best to spend their retirement nest egg. And while there is no one size fits all strategies, the bucketing/segmentation approach can provide real peace of mind when we are faced with uncertain market conditions.

Bucketing in its purest form is designed to segment assets based on purpose, income needs, and time horizon. Once retirement spending needs have been identified, you can lay out the proper spending buckets, the assets held in each bucket, and the amount to place in each bucket. Each retiree who chooses to use a bucket strategy should have an allocation that best fits their level of comfort and lifestyle, I will however speak in general rules of thumb to lay out the concept as clearly as possible.

Bucket planning will consist of 3 buckets not counting social security and pension benefits. The first bucket would be cash and cash alternatives like money market funds and ultra-short duration bond funds. The amount of money allocated into the ‘cash’ bucket should be two to three years of living expenses. Assets in this bucket won’t move much if at all in value, which is the designed purpose of this bucket. This bucket is intended to cover living expenses for periods of time when pulling from the other two buckets would be a drag on the overall portfolio due to poor performing markets. One additional area to consider for bucket one would be to also set aside an emergency fund beyond your annual living expenses, life happens whether we are prepared or not. It is ideal to prepare as much as we can for the unexpected. The final point on this topic is for those that have ample income from say social security and pension benefits, this bucket could be much lower than two or three years of living expenses.

The second bucket will hold mostly bond holdings. Two to five years’ worth of living expenses would be allocated to the bond bucket. Bonds historically have provided greater returns than cash while remaining reliable when held for the duration of the bond’s terms. Though I won’t go into detail on all the options to suit one’s second bucket, it is common to build out this bucket based on the bond’s duration, like a laddered bond approach.

The third bucket would be allocated towards holding equities and companies that are proven, over time, to provide on average three times the return of inflation. Being an investor in sound companies that have solid fundamentals, a history of growing earnings, positive operating cash flows, and strong balance sheets are largely the path towards sustained wealth accumulation. This equity bucket should have a good representation of quality companies that provide value to our daily lives, can pass along higher costs to the consumer, and can weather stormy market conditions. A great example would be quality companies that pay dividends to their shareholders.

After you have built out this strategy it must be implemented to benefit from the purpose of the bucket strategy. For the retiree who desires a monthly paycheck in retirement, we would look at the month-over-month returns in all buckets to determine where best to pull the funds from. In months where we have good market returns, we would use the third bucket. If markets are down one month, we would look at buckets one and two to supply the income for that month. On an annual basis, you will indeed need to rebalance and replenish your buckets. This strategy helps to minimize the risk of withdrawing from bucket three and in some instances bucket two of your portfolio in sub-optimal periods of time.

Bucket segmenting for your income and wealth management throughout retirement provides you peace of mind. Knowing what plan of action to take during volatile markets allows you to be in step with your financial plan.  Overall, it is easy to understand, and can be a huge help in staying the course for your overall long-term plan. There are many things to consider before implementing this type of planning strategy, and I would encourage you to spend some time with your advisor to come up with a plan that works best for you. Here at CPS Investment Advisors, we welcome you to visit us to discuss retirement planning strategies or anything else that may be causing you less peace than you deserve.

Eric J Jackson
Financial Advisor

The IRS announced that the starting date for when it would accept and process 2021 tax-year returns was Monday, January 24, 2022. This announcement marks the official beginning of tax season. No one likes filing their taxes, but here are some tips that can make filing easier, speed up your refund, and possibly save you some money.

Tips for Making Filing Easier

 

Make sure you have received Form W-2 and other earnings information, such as Form 1099, from employers and payers. The dates for furnishing such information to recipients vary by form, but they are generally not required before February 1, 2022. You may need to allow additional time for mail delivery.

If you received advance payments of the child tax credit, the IRS should send you a letter with information about those payments. You will need this information to file your taxes. Taxpayers who didn’t receive the full 2021 economic impact payment may be able to claim the Recovery Rebate Credit on their 2021 tax return. Most taxpayers will also receive a letter from the IRS detailing their 2021 Economic Impact Payment.

The IRS strongly recommends electronic filing and direct deposit for the fastest, most accurate processing of tax returns, payments, and refunds. Check irs.gov for the latest tax information, including how to reconcile advance payments of the child tax credit or claim a recovery rebate credit for missing stimulus payments.

 

Key Filing Dates

Here are several important dates to keep in mind:

  • January 14. IRS Free File opened. Free File allows you to file your federal income tax return for free if your adjusted gross income (AGI) is $73,000 or less.
  • January 24. IRS began accepting and processing individual tax returns.
  • April 18. Deadline for filing 2021 tax returns (or requesting an extension) for most taxpayers.
  • April 19. Deadline for filing 2021 tax returns (or requesting an extension) for taxpayers who live in Maine or Massachusetts.
  • October 17. Deadline to file for those who requested an extension on their 2021 tax returns.

The IRS encourages taxpayers seeking a tax refund to file their tax returns as soon as possible. The IRS anticipates most tax refunds being issued within 21 days of the IRS receiving a tax return if the return is filed electronically, any tax refund is delivered through direct deposit, and there are no issues with the tax return. To avoid delays in processing, the IRS encourages people to avoid paper tax returns whenever possible.

Matthew A Treskovich | CFA, CPA/PFS, CITP, CMA, CFP®, AEP®, MBA, CLU, ChFC
Chief Investment Officer

Financial Wellness

Posted on January 17, 2022 in

The life span of Americans has increased dramatically over the past several decades. Much of this increase is due to the shift in focus from treating conditions after they occur to preventing them from occurring in the first place. Wellness is a buzzword we hear as it has become clear that leading a healthy lifestyle improves our physical and emotional health and improves our overall quality of life. Some common-sense steps to physical wellness include a diet, regular exercise, and annual health exams.

But what about your financial wellness? Healthy financial habits can improve your quality of life, reduce stress, and set the stage for a happy retirement. Like physical wellness, financial wellness requires some sacrifices, but the rewards outweigh the effort. To get started on your financial wellness program, follow these steps:

Live Within Your Means

To pay for our expenses and save for the future, we must allocate our income. Spending more than you earn is not sustainable in the long run, so use your income as a starting point and develop a sensible budget. Regularly compare your spending to your budget to ensure you are on course.

Control Debt

Some debt, such as a low-interest mortgage, is expected and is not necessarily bad. But other debt, like revolving credit card debt, is almost always unfavorable. Consumer debt is a clear sign that you are spending more than you earn. Design your budget to focus on paying down high-interest debt. Your goal should be to have zero consumer debt carried over month to month. Small sacrifices now will pay big dividends in the future.

Save for Future Goals

If you hope to maintain your current lifestyle when you retire, saving for retirement is extremely important. Many people have supplementary goals, like funding their children’s education, buying a second home, or going on that once-in-a-lifetime vacation. Determine how much you must save monthly to meet your goals and build that into your budget. Your trusted financial advisor can help you determine how much you need to reserve.

Manage Risks

Much as you should be cautious about undertaking physically risky activities, you should also manage your financial risks. Do not invest money you can’t afford to lose in risky investments (i.e., cryptocurrency). Additionally, insure against risks that could be financially devastating to your finances. Most people need health, life, homeowners, and auto insurance. Also, ensure that you have your estate planning documents in order.

Get Regular Checkups

Regular visits to your physician for wellness checkups are an essential part of staying healthy, and, likewise, you should routinely meet with your trusted financial advisor for a financial wellness checkup. You expect your doctor to have your best interest in mind, and you should expect the same from your financial advisor, so make sure to choose a fiduciary advisor. They will help keep you on track to maintain lifelong financial health.

Rick D. Bernard | MBA
Financial Advisor

Inflation is a topic that is on everyone’s minds. Protecting your wealth against inflation is an important part of a well-rounded financial plan. Even a persistent low level of inflation is enough to significantly cut your purchasing power over time. History shows that the best way to build wealth and protect against inflation in the long run is to buy high-quality dividend-paying stocks.

What is a dividend?

When you buy shares of a stock, you are purchasing a share of ownership in the business. As a business owner, it’s reasonable to expect the businesses you own to produce profits, and to return a portion of those profits to you. Historically, dividends are the primary way publicly traded companies pass their profits on to shareholders. You can also think of dividends as the paycheck you receive as the owner of a business.

Dividends vs Inflation

Over the past sixty years, the growth of dividends has beaten inflation by a wide margin.

Since 1960, inflation has increased the overall level of prices by a factor about 9.2x. In other words, things you could buy for $100 in 1960, would have cost about $920 in 2020.

Over that same period, the dividends paid by dividend-paying S&P 500 companies have increased by a factor of 28.6x. If you owned a portfolio of dividend-paying S&P 500 stocks that paid you $100 per year in 1960, your portfolio would have paid you $2,860 per year in 2020.

Even during the worst decade of inflation in the past century, dividends held their own.

During the 1970’s, the overall level of prices rose 87.11%. The dividend payout of S&P 500 companies rose 87.15%. If you owned high quality dividend-paying stocks, your paycheck kept pace with inflation during the tough times. When times were good and inflation was lower, dividends grew even faster.

Whether inflation is high or low, any amount of inflation reduces what you can buy with your savings. Having a plan to handle inflation is an important part of achieving and maintaining financial independence. Wise investors know that high-quality dividend-paying stocks are the best way to protect wealth against inflation in the long run.

Matthew A Treskovich | CFA, CPA/PFS, CITP, CMA, CFP®, AEP®, MBA, CLU, ChFC
Chief Investment Officer

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