Powell Casts Pall on Wall Street

The zeitgeist is shifting.

An abrupt end to federal mask mandates—provoking cheers (from some)—was just one sign. Airline stocks rallied after reporting robust expectations for future earnings. Not so for the stay-at-home darlings. Netflix and Shopify saw their stocks hit hard as their businesses floundered; the same was true for Peloton and Carvana. Meanwhile, solid earnings reports from traditional blue chips like IBM and Procter & Gamble sparked midweek rallies.

And the pandemic? Actual case counts may still be on the rise, according to the CDC, but that news took a back seat to worries about inflation, recession and, in particular, monetary policy.

Federal Reserve policymakers tightened their grip on the proverbial punch bowl and appeared poised to take a further step toward the exit. At least, that was Wall Street’s takeaway from Fed Chair Jerome Powell’s remarks Thursday afternoon at an International Monetary Fund panel discussion, where he all but confirmed a 0.50% interest-rate hike would be forthcoming on May 4, and indicated that more hikes were likely later in the year. The comments sent bond prices lower and yields soaring while prompting a downhill skid for the major stock market indexes to end the week.

We have more to say about shifting sentiment below, which may help put some of the jarring day-to-day market gyrations in perspective. Volatility, something we said would rise in 2022, looks like it’s here to stay—and as always, your Adviser Investments team is here to answer your questions, address your concerns and adjust your financial plans as needed. Call us if you’d like to talk.

On Netflix, Chill

Netflix’s stock price cratered 35% Wednesday after the streaming provider reported disappointing earnings. But there’s more to the move than just traders’ knee-jerk sell-off after a bad quarter.

For one thing, the news could be a harbinger of longer-term troubles. Netflix’s subscriber base shrank for the first time in over a decade. And though its decision to pull out of Russia in March accounts for a large share of the recent drop, the company’s statement that it expected to lose another 2 million subscribers in the coming months truly spooked the Street. As of Thursday, the stock is down 68% from its November 2021 high.

Not only did Netflix fall, but the tech giant dragged some of its fellow pandemic darlings down with it. Online retailer Shopify, for example, fell 17% for the week through Thursday and was headed further down today despite absolutely no company-specific news—some see it as a work-from-home, pandemic-favored company akin to Netflix and Peloton.

We also think there’s a subtler lesson here for long-term investors; we’ve seen this movie before. This is the fourth time Netflix’s stock has fallen by 60% or more since its public debut nearly 20 years ago. And yet, over that time, even after the recent drop, the stock has compounded at a 30% annual rate and is up over 18,000%.

Even the best long-term investments are subject to periodic mind-numbing drawdowns. Amazon, Apple, Google, Microsoft—take your pick—have all had similar huge declines at several points during their paths to entrepreneurial fame and investor fortune. We’re not saying Netflix is a good or bad value at its current price, but these kinds of dramatic drawdowns have, in the past, created opportunities to buy at a discount for investors and the fund managers we invest alongside.

Chart of the Week: Does Investor Sentiment Predict Performance?

Director of Research Jeff DeMaso:

Warren Buffett of Berkshire Hathaway fame tells us to be fearful when others are greedy and greedy when others are fearful. If that’s the case, it’s time to be greedy!

Each week for the last 35 years or so, the American Association of Individual Investors (AAII) has been asking its members whether they are bullish, neutral or bearish on the stock market over the next six months. Last week, fewer than 16% of respondents were bullish. That’s the lowest read since 1992! (This week, the bullish camp swelled a smidge, to 19%, which is still historically very low.) Fewer investors are bullish today than during the COVID-19 lockdowns, the global financial crisis or the bursting of the tech bubble.

In an effort to reduce the hyperbole—and to take some of the noise out of this survey—I like to look at the broader trend rather than week-to-week gyrations. Over the past two months, using an eight-week average of the percentage of bullish respondents, one-quarter of respondents expressed bullishness. This isn’t as extreme as the recent weekly figures, but it still reflects an unusually low level of bullish responses. (For you statisticians, the percent of bullish responses is more than one standard deviation below normal.) This tells me that investors are fearful.

In the past, when bulls have been this rare, stocks have gone on to deliver better-than-average returns. Since AAII began surveying its members, the S&P 500 (price only) has gained an average of 9.9% in all 12-month periods. However, if you look at the 12 months after bullish responses dried up (defined as the eight-week average falling one standard deviation or more below normal), the S&P gained 16.9% on average. And if you look at the opposite scenario, when a large number of respondents were bullish, the S&P went on to gain just 2.6% on average over the next 12 months.

Maybe Uncle Warren is on to something.

One final stat, going back to that weekly survey with just 16% bullish respondents: Until now, there have only been 33 weeks in AAII history (which covers more than 1,800 weeks) when fewer than 20% of the respondents were bullish. On those 33 occasions, stocks went on to gain 19.5% (on average) over the following year. While it might be uncomfortable to hold your stocks today, history tells us that a little short-term discomfort can be rewarding.

Financial Planning Friday
Charitable Giving: Going Big and Paying Less

Charitable giving is one of the best ways to leave a legacy or support a worthy cause. Those are reasons enough to give, but as wealth managers, we also appreciate that donating to charities can reduce your tax bill.

When you contribute to an IRS-recognized charitable organization, the sum can be deducted from your adjusted gross income (AGI). In 2021, taxpayers of any income level who donated cash to charities were able to deduct up to $300 for single filers and $600 for couples filing jointly (something to keep in mind if you’ve filed for an extension). That write-off is due to a provision in a 2020 pandemic relief bill which Congress extended through tax-year 2021; it’s not clear whether it will be made permanent or carry over to 2022. In general, only if you’re itemizing deductions can you take full advantage of the ability to deduct charitable gifts. The threshold for itemizing deductions for the 2022 tax year is $12,950 for single filers and $25,900 if you are married and filing jointly.

So, from a tax perspective, if you plan to give, give big since you’ll get no added tax advantage for contributions below these thresholds. One way to benefit is by “bunching” your contributions into a single year. Let’s look at an example.

Say you and your spouse file jointly, and your marginal tax rate is 24%—your AGI is between $178,751 and $340,850. You pay state and local taxes, and you make monthly payments on a mortgage for your home. Between your mortgage interest and state and local income taxes (SALT), you have $10,000 of deductions. If you use the standard deduction, you lose the taxable benefit of your mortgage interest and SALT payments.

You’ve decided to make a five-year pledge of $15,000 annually to your alma mater. With your charitable contribution of $15,000, your total deductions rise to $25,000, which is under the standard deduction.

However, if you can bunch higher contributions into fewer years, you can start to save on taxes. By bunching two annual donations into a single year, you double your deductible contributions from $15,000 to $30,000, and your savings jump to $3,576. Bunching three years of contributions ($45,000 in one year) brings you to $7,176 of tax savings. And in years when you don’t donate, you’d simply revert to the standard deduction—resulting in an overall tax savings.

If you want to bunch your charitable giving into a single year but don’t know where you want the money to go initially, a donor-advised fund can be a viable solution. We will explain that in more detail next week when we discuss four effective strategies for charitable contributions.

If you can’t wait that long to learn how to make your charitable giving impactful, check out our special report, Making the Most of Your Charitable Giving.

As always, your situation is unique, and bear in mind that our example is one of several ways you can offset income with charitable giving. Feel free to speak with your wealth management team here at Adviser Investments or your outside tax professional if you have specific questions on how to give charitably and tax-efficiently. As The Planner You Can Talk To, we stand ready to help.

Podcast: How Early Can You Retire?

Packing it in at 65 with a gold watch was once the stereotypical model for retirement. But times have changed and career paths have, too. For a new generation, retirement planning is starting to look different. This week, Manager of Financial Planning Andrew Busa and Assistant Director of Wealth Management Sophie Benander discuss the dream of achieving financial independence and retiring early—aka FIRE, as it’s known to its devotees—and examine the methods and pitfalls of the FIRE approach, including:

• Differentiating between Luxury FIRE, Lean FIRE and Barista FIRE
• Separating financial independence from financial freedom
• Structuring your savings to allow for early retirement

Whether or not you’d like to follow the FIRE-y path, the approach has lessons for us all on how to live more comfortably in retirement. Click here to listen now!

Webinar: Stocks, Bonds and the Fog of War—Our Investment Perspective

Between 40-year highs for inflation, Russia’s invasion of Ukraine, the Federal Reserve’s plan to hike interest rates and the possibility of recession, the list of concerns for investors ballooned in early 2022—and volatility in the stock and bond markets reflected it. What’s our path forward through this fog of war and uncertainty?

In our webinar this week, Dan Wiener, Jim Lowell and Jeff DeMaso, along with other members of our investment and research team, unpacked this laundry list of worries and discussed where we see risk and opportunity for clients in the months ahead. If you missed it or tuned in and want to see a replay, you can click here to watch now!

And for a focused look at the beleaguered bond market, we’d recommend you tune in next week to an exclusive half-hour webinar, Bonds in 2022—Pain, Promise and the Future of Fixed Income. On Wednesday, April 27, 2022 at 4:30 p.m. EDT, Senior Vice President, Fixed Income Manager Chris Keith (our foremost bond expert) and Senior Research Analyst Liz Laprade will provide thoughtful, informed insight that fixed-income investors won’t want to miss. Click here to sign up now!

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

This week, Chief Investment Officer Jim Lowell spoke to Fox Business about whether the end of mask mandates will perk up consumer spending, while Portfolio Manager Adam Johnson appeared on the same network to make the case that investor pessimism is a contrarian indicator. Adam talks about what strong employment figures mean for economic growth.

In addition, Vice President of Corporate Development Alec Rosen was quoted by Wealth Management regarding Orion’s acquisition of Redtail Technology and what it will mean for registered investment advisers.

In this week’s Market Takeaways, Senior Research Analyst Liz Laprade discussed the latest developments in the battle for Twitter, while Portfolio Manager Steve Johnson offered his thoughts on preventing whipsaw fatigue during volatile markets.

Looking Ahead

Next week, we’ll get reports on durable and capital goods orders (signs of consumer and business spending), consumer confidence, sentiment and spending, manufacturing, inflation and the first estimate of first-quarter GDP. Additionally, we’ll get a raft of housing-related data, including home prices, pending home sales, homeownership rates and new home sales. We’ll also be reviewing the latest numbers on inflation.

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.