Home Guides & Resources chevron_right Bi-Weekly Newsletter Navigating Uncertainty Published October 27, 2023 Table of Contents Inflection Points How Bonds React to Changing Yields More Time To Boost Pretax Catch-Up Contributions Awards and Recognitions Strategy Activity Update Adviser Market Update Inflection Points Michelle Knight, Chief Economist Please note: This article was originally published by Ropes Wealth Advisors (RWA), a subsidiary of Adviser Investments, before the markets closed on Friday, Oct. 20, 2023. “We are facing an inflection point in history.” On Thursday evening [Oct. 19], President Joe Biden spoke from the Oval Office—in only the second such address of his presidency—and implored Americans to understand that the conflicts in Israel and Ukraine are part of a larger struggle for democracy and freedom. He made the case that U.S. leadership in these global crises will make the United States safer. He leveled with Americans that this safety will come at a cost, calling on Congress to pass an “unprecedented” aid package for Ukraine and Israel. He told Americans that the cost of walking away from these wars would be much higher. The president asked for $100 billion for the next year for an “arsenal of democracy,” recalling the words President Franklin D. Roosevelt uttered a year before the U.S. entered World War II. He plans to allocate roughly $60 billion for Ukraine, $10 billion for Israel and the remaining $30 billion for Taiwan, the Indo-Pacific and border security. In other news, the U.S. House speaker race remains undecided as of press time, and the continuing resolution to keep the government funded is set to expire on Nov. 17, 2023. We are also hearing that Israel is preparing to launch a ground invasion in Gaza against Hamas, and there are reports the U.S. shot down missiles targeting Israel that were sent by the Iran-backed Houthi forces in Yemen. Against this backdrop, economic data was mixed, and earnings season seems anticlimactic. Stronger-than-expected retail sales revealed a consumer whose spend rate is up 3.8% from last year, demonstrating resilient spending in a white-hot labor market, even as rising energy prices and rising interest rates take their bites. To that point, there was a plethora of housing data released this week showing existing home sales sliding, housing starts gaining and building permits cratering as the 30-year mortgage rate hit 7.70%, its highest level since 2000. Federal Reserve Chair Jerome Powell made public remarks at the Economic Club of New York addressing the current climate: “Given the uncertainties and risks, and how far we have come, the committee is proceeding carefully. We will make decisions about the extent of additional policy firming and how long policy will remain restrictive based on the totality of the incoming data, the evolving outlook, and the balance of risks.” The market believes the Fed will therefore be on hold for the rest of the year, though notably the 10-year Treasury note has risen to nearly a 5% yield. Stocks and bonds were volatile in this context, and, as noted, earnings season is displaying a mixed tone. Netflix surged after posting its best quarter for subscriber growth in years. Meanwhile, Tesla dropped after weak earnings, and a profit squeeze has spiked concerns the party may be over for the Magnificent Seven group of technology stocks that have led market gains in 2023. Where do we go from here? All focus should be on your plan. Now is the time to bear down on liquidity, balance and quality. It’s natural to be anxious about investing in a time of war. We remind investors that the only playbook for a moment like this is your financial plan. While geopolitics can raise significant risks, we are also witnessing tremendous resiliency across sectors like travel and leisure, health care, artificial intelligence, multifamily housing, and industrial and storage commercial real estate, to name a few. Short-term bond yields offer enormous value to help wait out uncertainty and will stand and deliver for investors while we contemplate our path as a global community. President Biden is right that we do face an inflection point—in more ways than one. God help us all to make the right choices in this moment for the sake of each other and generations to come. How Bonds React to Changing Yields Tim Clift, Chief Investment Officer Everybody is focusing on the bond market. That’s because last week, Federal Reserve Chairman Jerome Powell said that strength in the economy and job market may mean the central bank keeps rates higher for longer. This introduced some uncertainty, which caused another drop in the bond market. So, what’s next? A few weeks ago, I shared a chart with you that shows how a bond fund’s yield is a reasonable estimate of its return over the next 10 years. At the same time, I also noted that bond prices can go up when the Federal Reserve holds rates steady or begins cutting them. The table below shows how changes in yields influence bond returns. It highlights estimated 12-month returns for Treasurys with short, intermediate and long maturities following a variety of scenarios. For example, the first column shows estimated total returns if the yield on these Treasurys were to move 3.0% higher. Sources: F/m Investments, Bloomberg. Here is what you need to know about the story behind the numbers in this table: In Treasurys with short maturities (two years or less), changes in yields are far less significant than for bonds with long maturities (20+ years). In fact, 2-year Treasury notes can still produce positive returns even when yields rise (which would imply the Fed was raising interest rates). This is why Treasurys and other bonds with short maturities are a great way to stabilize a portfolio. Among bonds with long maturities, changes in yields can lead to huge swings in performance. With the 30- and 20-year bonds you can see equity-like volatility at the extremes. The risk/return proposition is also stark, depending on how yields and interest rates move. In my experience, most people don’t have equity-like risk tolerance when it comes to the bond portion of a portfolio. While the timing of interest rate cuts is uncertain, when they come, yields will fall. The estimates above show why bonds hold value as we near the end of the Fed’s rate-hike cycle. Once the Fed starts cutting, it should help bond returns over the 12 months following. It’s not shown in the table but remember: If you hold individual bonds to maturity, barring default, you know what your return will be and the amount of principal you will get back. These return scenarios apply to people trading bonds before maturity or investing in bond funds or ETFs. As always, if you have questions about your portfolio allocation or your overall financial plan, please speak with your advisor. More Time To Boost Pretax Catch-Up Contributions Dina Milne, CFP®, Wealth Advisor Earlier this year, we wrote about an interesting provision in the Secure Act 2.0. It was a mandate requiring people with high incomes to treat all catch-up contributions as Roth contributions beginning in 2024. Currently, catch-up contributions allow people age 50 and up to add an extra $7,500 to an employer-sponsored retirement plan on a pretax basis. These pretax contributions can help you lower your tax liability in the current tax year. The new legislation stated that as of next year, if your income were to exceed $145,000, any catch-up contributions would be treated as Roth contributions. In contrast to pretax, these would be post-tax contributions. Post-tax contributions do not lower your tax liability in the current year; however, they grow tax-free, and qualified withdrawals are tax-free in retirement. In a new development, the IRS delayed the provision until 2026. Why did the IRS do this and what does the pause mean for you? Here’s a breakdown. Why the Delay? It’s because this provision is too complex to implement by next year. Retirement plan providers need additional time to prepare for this change to avoid confusion and errors. This led to 225 employers sending a joint letter to Congress and the Treasury Department urging a delay of two years. Takeaways From a Two-Year Breather IRS Notice 2023-62 outlines the specifics of the two-year “administrative implementation period.” The key specifics: Defined contribution (DC) plan continuity. For now, DC plans can continue accepting pretax catch-up contributions from all employees, even those people with high incomes impacted by the Roth mandate. No Roth requirement. Plans lacking Roth options are not obligated to add them yet. This flexibility is especially valuable for plans that would have needed to make substantial changes in less than three months. The delay affords your employer-sponsored plan time to align every option by 2026. Good News for High Earners This is a positive development for people who earn a high income. The extra time provides the opportunity to further grow and compound your pretax dollars. Plus, it gives you more flexibility to make strategic retirement planning decisions. Here’s more on why this is good news: Extended decision-making window. You now have more time to evaluate retirement strategies. Talk to your advisor, and together, you can make good decisions regarding Roth contributions and other retirement planning options. Reduced complexity and increased rules clarity. The delay in implementing this mandate should make for a smoother transition when it’s finally enacted. Plus, the extra time should help lawmakers and retirement plan providers to clarify and simplify the new rules. Flexibility. You’re still able to choose between pretax and Roth catch-up contributions depending on your tax and retirement planning needs. Retirement rules are always changing, causing confusion. If you have any questions, please don’t hesitate to contact us. We’re always here to help you understand these changes and make sure that you are in the best possible position to prosper. Awards and Recognitions Every year, Barron’s ranks registered investment advisors (RIAs) like us nationwide. We’re happy to share that Adviser Investments made the list of Top 100 RIA Firms of 2023, moving up 19 spots from last year. The ranking is based on a variety of factors, including succession planning, diversity, assets under management and technology spending. You can see the full list here and read more about the selection process here. Separately, Forbes placed us at #21 on its list of America’s Top RIA Firms for 2023. When selecting recipients, Forbes and its partner, SHOOK Research, consider a firm’s approach to working with clients, revenue trends, assets managed, industry experience and compliance records. We’re grateful to make the list once again. CEO Mario Ramos is Wealth Solutions Report’s Hispanic CEO of the Year for 2023. Please join our entire team in congratulating Mario for this well-deserved honor. In an interview with Wealth Solutions Report, he shares his thoughts on the industry, our firm and the unmatched return on investment of diversity. Read the interview here. We never take these types of recognitions for granted, and we wouldn’t be in the position to earn them without your trust in us. Thank you for the support. Strategy Activity Please see below for a summary of the trades we executed over the week through Thursday and our current tactical strategy allocations. Dividend Income Sell Cash Buy McDonald’s (MCD) and Abbott Labs (ABT) AIQ Tactical Global Growth Sell iShares Core S&P 500 ETF (IVV) Buy Cash AIQ Tactical Defensive Growth No trades AIQ Tactical Multi-Asset Income Sell Invesco Senior Loan ETF (BKLN) Buy Cash AIQ Tactical High Income No trades Adviser Market Update It’s peak earnings season, with about a third of S&P 500 companies reporting in this week. Notably, we heard from several members of the Magnificent Seven. Alphabet, Microsoft and Meta all reported better-than-expected earnings last quarter. Overall, earnings for the S&P 500 are expected to be down, but still positive. On Wednesday, Congress elected Rep. Mike Johnson, R-La., speaker of the House, ending weeks of legislative standstill. We’ll be observing how the House functions under new leadership, particularly as the Nov. 17 deadline to pass a bill funding the government approaches. The U.S. economy expanded in the third quarter. The first estimate of GDP growth was an annual pace of 9%, the fastest growth rate since Q4 2021 and up from 2.1% in the second quarter. Strong consumer spending and slowing inflation both contributed. Inflation in September was in line with expectations. The personal consumption expenditures index, the Fed’s preferred inflation gauge, increased at an annual pace of 3.4%, the same as in August. Inflation is expected to ease in the months ahead, but risks remain. We’ll be watching to see if this trend holds and how it affects Fed policy moving forward. Please note: This update was prepared on Friday, October 27, 2023, prior to the market’s close. This material is distributed for informational purposes only. The investment ideas and opinions contained herein—including but not limited to the Your Question Answered section—should not be viewed as recommendations or personal investment advice or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed. Our statements and opinions are subject to change without notice and should be considered only as part of a diversified portfolio. Purchases and sales of securities listed above represent all securities bought and sold in each strategy during the period stated. Each strategy’s portfolio generally includes more holdings in addition to the transactions listed above and in some cases the securities listed above may only represent a small portion of the particular strategy’s complete portfolio. 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The Barron’s 2023 Top 100 RIA Firms ranking, as mentioned above, is based on assets managed by firms, technology spending, staff diversity, succession planning and other metrics. Advisors who wish to be ranked fill out a survey and Barron’s verifies that data with the advisors’ firms and regulatory databases. Barron’s uses a ranking formula to the data and considers factors such as assets under management, revenue produced and quality of practice. A fee was not paid to participate. The award sponsor has not disclosed how many firms were surveyed or were considered for this recognition, nor the percentage of total participants that ultimately received recognition. This ranking was received in 2021, 2022 and 2023. The Forbes ranking of America’s Top RIA Firms, developed by SHOOK Research, is based on an algorithm of qualitative criteria, mostly gained through telephone, virtual and in-person due diligence interviews, and quantitative data. The algorithm weighs factors like revenue trends, assets under management, compliance records, industry experience and those that encompass best practices and approach to working with clients. Portfolio performance is not a criterion due to varying client objectives and lack of audited data. Neither Forbes nor SHOOK receive a fee in exchange for rankings. SHOOK scoured the financial services industry for nominations and accepted advisors who met pre-determined minimum thresholds and acceptable compliance records. Nearly 42,643 nominations-advisors who met SHOOK’S thresholds-were received. 23,100 of these nominees have taken an online survey. SHOOK is completely independent and objective and does not receive compensation from the advisors, Firms, the media, or any other source in exchange for placement on a ranking. SHOOK is funded through various sources, such as conferences and research partners. Since every investor has unique needs, investors must carefully choose the right advisor for their own situation and perform their own due diligence. SHOOK’s research and rankings provide opinions for how to choose the right financial advisor and are not indicative of future performance or representative of any one client’s experience. This ranking was received in 2023. The Wealth Solutions Report (WSR) – Pathfinder Awards begin each year in February honoring Black History Month, proceed through the year with Women’s History Month and AAPI Heritage Month and are completed in October by honoring Hispanic wealth management advisors, professionals and executives. The Pathfinder Awards is by invitation only and highlights what it believes is excellence and achievement among executives and professionals from underrepresented backgrounds. This award was received in 2023. Note that awards mentioned above do not evaluate client experience or investment performance in client portfolios and should not be construed as such. © 2023 Adviser Investments, LLC. All Rights Reserved.