Earnings Tides Shift, Sloshing Markets

It’s been another seesaw week for stocks, with traders seemingly stuck in the thrall of up-and-down earnings alerts. It went a bit like this: Stocks shot up on Wednesday after Google reported some nice news, plummeted Thursday following Facebook’s/Meta’s dour disclosure and ticked up again today with Amazon’s positive earnings surprise. Dizzy, anyone?

It’s possible that the latest jobs report, released this morning, will have a stabilizing effect: The U.S. economy created 467,000 positions last month, easily beating analysts’ expectations and indicating a continuing recovery despite the damage caused by the omicron variant. Job estimates for November and December were also revised significantly upward.

With COVID-19 on the decline, healthy demand in the housing market, jobs on the rebound and corporate profits strong overall, we can’t point to any fundamental reason why the market is selling off to start the year. To us, this indicates an opportunity. Buy low, sell high; buy the dip—however you phrase it, jittery markets like this provide the managers we trust with the chance to make rational buying decisions and add high-quality stocks at a nice discount.

Big Tech Expectations Cause Mega-Whiplash

Revenues, dividend payouts and buybacks are all at record highs—76% of companies that have reported fourth-quarter results so far have beaten estimates. Corporate operating profit margins have dipped slightly from the rarefied heights they reached last year but remain at healthy levels (profit margins at S&P 500 firms averaged 13.5% in Q2 21, compared to 12.7% for Q4).

Despite the solid results, markets haven’t leapt to make up the ground they lost last month. And woe betide any firm that failed to meet analysts’ estimates recently.

What’s happening here?

Sky-high big tech valuations that propelled the stock market upward last year have created outsized expectations for future growth. Any slight blemishes on quarterly report cards are earning companies Fs on Wall Street: PayPal, for instance, missed its estimates this week and saw its stock price tumble more than 25%. And when Facebook reported its dip in net income and a decline in daily users, its shares fell 26.4%—knocking nearly $200 billion off its market cap and causing a broad sell-off for tech stocks.

Overreaction by traders and the resulting wild market swings aside, there’s nothing in the earnings trends (or the wider economic data) that suggests to us that the economic recovery is in any jeopardy of reversing or substantially slowing down.

The ramped-up market volatility we predicted is here, and it may continue for a bit as traders react to events like inflation, interest-rate hikes…and isolated earnings surprises. Some of what we’re seeing today is traders reconciling expectations with reality. It’s all part of the process. As noted last week, we’re in touch with the fund managers we invest with, we’re keeping a close eye on your portfolios and we’re watching for opportunities as well as signs that call for an adjustment.

Chart of the Week: A Lesson From Warren Buffett

By Director of Research Jeff DeMaso

Can investors outperform the market every time? We certainly would if we could, but it’s easier said than done. At Adviser Investments, we work incredibly hard to partner with managers who will help our clients reach their long-term financial goals. However, expecting the managers we invest with (or any manager, really) to outperform the S&P 500 index year in and year out isn’t realistic.

Consider Warren Buffett and his company, Berkshire Hathaway, for example. Over the last 30 years, Berkshire Hathaway’s stock has gained 4,880%, or 13.9% per year. That’s miles ahead of the Vanguard 500 Index fund’s 1,916% return, or 10.5% per annum. But if you look year by year, the stock outperformed the index fund 20 times but trailed in 10 calendar years over that period. Said another way, Buffett outperformed the index fund by 3.4% a year over three decades while trailing once every three years.

Even legendary managers trail the benchmarks from time to time.

Planning for Long-Term Care

This week’s reader question: The cost of long-term care continues to rise—is it worthwhile to maintain this type of insurance? What are my options?

Senior Financial Planner Vanessa Carter-Witt, CLTC®, had this to say:

Many people consider letting their long-term care policy lapse or taking a lump sum payout when they are hit with a large premium increase. While this impulse is understandable, as it could save you a few thousand dollars per year, it’s usually the wrong move.

You’ve likely paid into your current plan for years, so why give up those benefits now? Instead of walking away, consider how you can decrease your annual premium amount while keeping your coverage intact.

First, look into decreasing your monthly benefit amount. For example, reducing your benefit from $6,000 per month to $4,000 per month will shrink your premium. While this provides lower coverage, it might be exactly what you need. (The average monthly cost of an assisted living facility is $4,300. For a semiprivate nursing home, it’s $7,756.)

Next, co-insure your care. You don’t need a long-term care policy to cover everything. It makes sense to co-insure—which simply means assuming a portion of payment out of pocket to keep your deductible in check.

Talk to your policy provider to find out which other elements of your long-term care plan can be adjusted to lower your premium…but keep the trade-offs in mind. Changing certain core terms can reduce the value of your overall coverage.

For instance, increasing the elimination period—the amount of time you agree to wait for benefits to begin—could cause you to pay more out of pocket. (This is especially true if the elimination period is based on service days versus calendar days.)

Likewise, reducing the benefit period—the length of time you are covered—could cause you to pay much more out of pocket. An average claim length is about 36 months. If you were to reduce your benefit period from four years to two years, you would not be adequately covered.

Finally, getting rid of or reducing the inflation rider in your policy (which increases the benefits provided by a fixed amount per year) could be risky, especially if you are in your 60s and may not need to use your benefits until you are in your 80s or 90s.

If you are unsure how to manage a premium increase, call us. We would be happy to run through the scenarios with you and help you decide.

Ask Us a Question!

We’re always interested in the topics or themes 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.

Financial Planning Friday
5 Tax Deductions You Need to Know

Tax season has kicked off. Now is the time to take advantage of every deduction and credit you’re entitled to. Here are five that could make a difference to your bottom line.

Cash contributions. Prior to 2020, claiming a charitable deduction on your tax return required you to itemize. In other words, you had to claim more than the standard deduction to benefit from your charitable contributions. More recently, legislation has made it possible to deduct cash donations (including checks, credit card payments or electronic fund transfers) to qualified charities—even if you do not itemize. The upshot: Cash contributions of up to $300 made in 2021 are deductible on your tax return as an above-the-line deduction in addition to the standard deduction.

Student loan interest. In the past, student loan interest could only be deducted if the filer was liable for the debt and paid it back themselves. Not anymore. As long as you are not claimed as a dependent on someone else’s tax return, you can deduct up to $2,500 of interest on your student loans—even if someone else is making the payments. If you took advantage of the pause in federal student loan repayment in 2021, you may not have any interest to deduct, but those with private loans should still be able to benefit.

Child and dependent care tax credit. Tax credits are more valuable than tax deductions because they reduce your tax bill dollar for dollar—so take every credit you can. If you paid someone to care for your child or dependent so you could work or go to school in 2021, for instance, then you may be eligible for this credit. The size of the credit (up to $3,600 for individuals or $7,200 if you file as a couple) depends on your income—and it can be tricky to figure out, with certain pandemic relief legislation set to expire this year. Our podcast on the subject can help.

Home office deduction. COVID-19 reshaped our economy in a lot of ways, including by accelerating entrepreneurship and home-based businesses. Although this tax deduction is not new in 2021, it may newly apply to you. If you are a small-business owner or entrepreneur using a room in your home as your principal workspace, you may be able to write off items like utilities, rent, mortgage and real estate taxes—but remember, it’s critical to keep accurate and verifiable records. (Note: This deduction does not apply to individuals working for an organization in a remote capacity; if you are not self-employed, you are ineligible.)

Prior-year state tax deduction. If you paid state taxes in 2020, be sure to incorporate that amount into your itemized deductions. And if you paid more in state and local sales tax than state and local income tax, you can opt to deduct the former. (You can’t deduct both.) Remember, as of 2018, the deduction for state and local taxes was capped at $10,000 per year.

Tax obligations vary from person to person, so we recommend checking in with your accountant or tax preparer or taking advantage of Adviser Investments Tax Solutions, our in-house tax advisory service. If you have any questions, please contact your wealth management team and we will be happy to help you.

Adviser Investments in the Media

This week, Chief Investment Officer Jim Lowell discusses what’s been driving recent volatility and appeared on CNBC Asia to cover Meta’s and Amazon’s wild rides. Meanwhile, Chairman Dan Wiener talked to Ignites about Vanguard’s decision to add Ariel Investments to its list of outside subadvisers.

In this week’s Market Takeaways, Senior Research Analyst Liz Laprade looked under the hood of Q4 GDP, while Vice President Steve Johnson had some advice for riding the stock market roller coaster.

Looking Ahead

Next week, we’ll be looking for data on consumer credit, small-business confidence, inflation gauges and consumer sentiment.

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.