Beyond the June Swoon

Wall Street’s bears retreated to their dens this holiday-shortened week, with the S&P 500 index advancing 6.4% in just four days through today’s close. That’s a reassuring if not-yet-resilient turnaround after last week’s 5.8% decline.

Despite the reversal, June’s been a tough month. With four trading days left , the S&P has dropped 5.3% in June due to recession and inflation concerns. The media has been focused on the fact that the index’s 17.9% year-to-date decline (excluding reinvested distributions) puts it on track for its worst first half year since 1970.

Here’s the bright side: History shows that the last five times the S&P 500 index fell 15% or more in the first half of the year, it posted a median return of 15.3% over the following six months, according to LPL Research.

We think the focus on six-month periods, whether bullish or bearish, is misplaced. Given that we’re talking about more than 50 years, keying in on a half-dozen January-to-June or July-to-December periods is what we’d call data mining. We don’t limit our view to six months or even a year. We have researched as well as managed through numerous market cycles and understand the opportunities they provide long-term investors. In sum, the historical record clearly demonstrates that, over time, long-term gains have more than made up for short-term pains.

As always, if you are feeling anxious about the markets or your portfolio, call us so we can review your financial plan, discuss solutions and be confident you are still on track to reach your financial objectives.

Recession Drumbeat: Possibly Premature

The chorus of economists and prominent financiers predicting that a U.S. recession is here or just around the corner has been building. Deutsche Bank’s CEO put the chances of global recession at 50% this week, with analysts at Citigroup issuing the same coin-flip odds.

A paper from the Federal Reserve likewise calculates a better-than-50% chance of recession in the year ahead. And in Capitol Hill testimony this week, Fed Chair Jerome Powell acknowledged that a recession is “certainly a possibility” given the central bank’s “unconditional” focus on getting inflation back down to its 2% target.

But not everyone agrees. JPMorgan’s “expected scenario” is that inflation will moderate. The company says the pandemic’s chokehold on the supply chain will recede and the speed with which wages have been rising will slow as more people look for jobs, allowing the economy to skirt a recession.

Our view is that recession risks are on the rise. Over the last month, most of the economic data points have started to roll over. And inflation is putting the driver of the economy—the U.S. consumer—under pressure.

But a recession isn’t a foregone conclusion. Businesses are turning profits and earnings are growing. Household balance sheets are stable. Even if a recession arrives, there is reason to believe it will be on the mild side given the average household’s increased spending power.

What’s an investor to do when the road ahead feels so uncertain? Stay diversified. Some parts of your portfolio should be geared toward defense while others lean to offense. Even as interest rates and money market yields have been rising, with stocks already in bear market territory, now isn’t the time to shelter in cash.

Chart of the Week: What Follows a 10%-Plus Decline?

Director of Research Jeff DeMaso:

Pundits have pronounced the classic policy portfolio dead for years. (Wall Street coined the term “policy portfolio” for strategies that allocate 60% of assets to stocks and 40% to high-quality bonds because it is the default for many endowments and pension funds.) But the requiem is growing louder due to dreadful recent performance. If the current calendar quarter had ended on Thursday, the 60/40 portfolio would be showing a loss of 15.1% for the year. Outside of the global financial crisis, you have to look back to 1974 to find a six-month period where a balanced investor was down that much.

This has led to the conclusion that the efficacy of blending stocks and bonds into a balanced portfolio is a dead end. I’m not jumping to that conclusion. I’m also willing to give the classic 60/40 policy portfolio a rethink. But if you’ve been invested in a diversified portfolio over time, let me suggest that now may be precisely the wrong time to steer in a new direction.

I looked at rolling six-month returns for the 60/40 portfolio going back to 1945 and identified every period with a 10% or greater decline—there were 15 of them, not including the first half of this year. On average, the classic balanced portfolio gained 10% over the next six months and was negative only once. If you look out over 12 months rather than six, the 60/40 portfolio was higher every single time, with an average return of 18%.

As the disclaimer says, past performance is no guarantee of future results. We can’t change the past, of course, but we can try our best to position our portfolios for the road ahead. A lot of pain has already been handed out in both the stock and bond markets this year. Historically, returns have been attractive following periods like the one we are currently going through.

Making Lemonade—Bear Market Roth Conversions

Question: Is a bear market a good time to do a Roth conversion on my IRA?

Manager of Financial Planning Andrew Busa:

As Federal Reserve Chair Jerome Powell told Congress this week, a recession is a “possibility,” but it’s not the Fed’s “intended outcome.” Good, everyone feel reassured now? While the Fed tries to navigate these stormy economic waters, I think it’s more important to focus on smart portfolio moves and to remember that a down year in the market does have some advantages.

Take Roth IRAs, for example: Converting a traditional IRA to a Roth when your portfolio has lost value means your tax bill on the conversion will be lower. Even better, when the account recovers, all those gains will be tax-free.

In a sense, conversions are on sale while your IRA’s value is temporarily lower. Voilà. You just made lemonade out of a bear market.

But there’s a caveat: You still need to assess your financial plan to make sure a conversion is the right strategy for you. If you will need to cash your IRA out in less than 10 years or don’t have the cash available to pay the taxes due, it’s probably not the right time to be thinking about a conversion at all.

However, if a Roth conversion makes sense in the context of your overall financial plan (say, you are moving into a higher tax bracket in the near term), then this may be a great moment to take advantage of the opportunity.

To be clear, Roth conversions are not a silver bullet to avoid paying any taxes. Done under the wrong circumstances, a Roth conversion could unnecessarily accelerate tax payments.

Talk to us if you want to review your financial plan to determine if a conversion makes sense today. When the bull market returns, you may wish you’d thought of this sooner.

Your Financial Plan
Annuities Spotlight

They aren’t for everyone, but rising interest rates are making annuities look more attractive for a subset of investors and retirees.

Let’s begin with the basics: At its core, an annuity is an agreement you make with an insurance company where you pay them and then they pay you back over time. You purchase the annuity contract either with a lump sum or via a series of payments. In return, the insurer commits to making one or more payments to you, which can last up to your lifetime or that of your spouse (for a fee, of course).

Two major factors distinguish one annuity from another: The timing of payments to the insurer and the timing and type of payments you’ll receive.

The timing of payments is based on which of the below annuity types you select:

• Immediate annuity: Payments on an immediate annuity (also known as an “income annuity”) must begin within one year of purchasing the contract. Immediate annuities are always purchased with a single lump-sum payment.
• Deferred annuity: This annuity type is purchased with either a single lump sum or a series of payments. Payouts to you begin on a future date you select—you may have the option to receive a single lump-sum distribution, to receive a series of payouts until the annuity is exhausted, or to annuitize the contract and receive payments for life. While you wait, your money in the annuity grows.

Your payments can take the following forms:

• Fixed annuities: Predictable and steady, fixed annuities offer a guaranteed interest rate and a fixed payment amount based on your initial lump-sum investment. As rates rise, this means you may end up getting more income from the same premium. The trade-off with fixed payments, however, is that you might not benefit from any market growth. Also, inflation is not your friend if you own a fixed annuity. Payouts can be for a set period of years or for life.
• Variable annuities: You select among investment options, often mutual funds, for preservation, growth or a combination of the two. You can make a single investment or add to your variable annuity over time. Your payout is determined by how your investments perform and can be taken over a set period of time or for life.

One big disadvantage to annuities is that they can be expensive, and you may incur substantial fees or penalties if your circumstances change and you need to withdraw your money ahead of schedule. Withdrawals made from your annuity before you reach age 59½ trigger a 10% penalty, and you’ll owe income tax on any earnings. Most contracts also include a “surrender charge” of anywhere from 7% to 20% on withdrawals made within the first five to seven years of purchase.

At Adviser Investments, we are extremely selective when it comes to annuities. An annuity may make sense if you’re concerned that you’ll outlive your assets. And we’ve found that they are a good fit for some of our clients. But generally, we believe that with consistent savings and well-built investment and financial plans, you can grow an asset base that will sustain you in retirement without taking on the high costs of annuities.

If you have any questions about whether an annuity is right for you or about the ins and outs of an existing annuity contract that you own, please contact your wealth management team and we’d be happy to discuss them with you.

Ask Us a Question!

We’re always interested in the topics or concerns you might like us to comment on. As much as we try to cover the investment and economic fields every week, we know there’s still more that you might want to hear about. Ask us a question about investing, the markets or financial planning and one of Adviser Investments’ experts will answer it in a future edition of The Week in Review. CLICK HERE NOW TO POSE YOUR QUERY.

Adviser Investments in the Media

Portfolio Manager Adam Johnson was featured in Citywire with his “diary of a thematic investor.” Adam also appeared on Fox Business with a look at why he likes to go against the crowd.

In this week’s Market Takeaways, Senior Research Analyst Liz Laprade discussed the latest crypto crash, while Portfolio Manager Steve Johnson offered his thoughts on this week’s bright side.

Looking Ahead

Next week offers a meaningful slate of reports covering durable goods orders, capital goods orders, pending home sales, home prices, construction spending, manufacturing and service sector activity, inflation, a revision to Q1 GDP, and the always-critical consumer checkup—confidence, income, spending and savings.

As always, please visit www.adviserinvestments.com for our timely and ongoing investment commentary. In the meantime, all of us at Adviser Investments wish you a safe, sound and prosperous investment future.

About Adviser Investments

Adviser is a full-service wealth management firm, offering investment management, financial and tax planning, managed individual bond portfolios, and 401(k) advisory services. We’ve been helping individuals, trusts, institutions and foundations since 1994. Adviser Investments and its subsidiaries have over 5,000 clients across the country and over $8 billion in assets under management. Our portfolios encompass actively managed funds, ETFs, socially responsible investments and tactical asset allocation strategies, and we’re experts on Fidelity and Vanguard mutual funds. We take pride in being The Adviser You Can Talk To. To see a full list of our awards and recognitions, click here, and for more information, please visit www.adviserinvestments.com or call 800-492-6868.