Stock Bulls Push Back Against Bears

Relatively good news has been pushing stocks higher this week while trimming bond prices.

The first trickles of better-than-expected second-quarter earnings results are helping to boost equity markets. Read that sentence again—despite dire warnings of recession and declining profits, corporate earnings are generally coming in better than expected. It’s still early days in the reporting season, but the first read is that amidst recession fears, high inflation and slowing growth, corporate America is still profitable.

One result is that the Federal Reserve will have no reason to pause its interest-rate-hike regimen—and another 0.75% lift to the benchmark fed funds rate is the most likely outcome of next week’s two-day meeting.

Of course, not all the news has been positive this week. For example, sales of existing homes fell for a fifth month in a row to a two-year low as mortgage rates soared. But rates have begun to moderate, so a turn could be in the offing.

The fact that stocks rallied in the face of mixed news reflects just how low sentiment has gotten. When you’re expecting the absolute worst, even bad news can be good news—if it isn’t as bad as you feared it would be.

Among the stories that caught our eye this week:

• Hiring is slowing across the tech sector, with Microsoft following in the footsteps of Apple, Facebook and by Google suggesting they’ll cut back on adding new workers to prepare for the possibility of a recession.
• Two major airlines, Delta and United, returned to profitability for the first time since the pandemic began.
• Russia reopened its gas pipeline to Europe, though it’s operating below full capacity. Still, it’s a great relief for Germany, where residents of the world’s fourth-largest economy would face an unpleasant winter without Russian gas. But the broader economic picture is still clouded; adding to the uncertainty, Italy’s Prime Minister Mario Draghi abruptly resigned and the European Central Bank hiked interest rates for the first time since 2011.
• Knock on wood, but June’s national average of $5.01 per gallon of gasoline may have been the peak. Prices have fallen to an average of $4.40 this week, and experts think declines should continue barring a major hurricane in the Gulf of Mexico this summer.

Planning Through Down Markets

Manager of Financial Planning Andrew Busa:

We’ve long touted a well-built financial plan as the GPS for your financial journey. It’s possible to get from point A to point B without one. But if you’re like me, you’re prone to taking a wrong turn or two (or four) along the way without reliable directions. With the price of gas where it is today, why spend more time on the road than you have to?

Similar to a GPS app, an evolving financial plan (like the ones we create for clients) can be adjusted when your situation changes. At present, the bear market is defining everyone’s financial situation. But that’s not necessarily all bad—even down markets present opportunities.

If you’re in your 40s or 50s—the “wealth accumulation” phase of life—your savings rate is the fuel for a financial plan. (Calculate your savings rate by dividing your total annual savings, including contributions to employer retirement plans, by your total annual income.) Whatever your savings rate is, if you can increase it right now, take the opportunity to do so.

Though gas prices remain elevated, stock prices have been discounted. It’s a good time to take advantage of the bear market by buying more shares at lower prices.

If you’re on the other side of retirement, now is the time to lean on your financial plan—check the GPS! (And if you don’t have one, there’s no time like the present to create one.)

We build financial plans knowing that there will be rainy days ahead. We’ve found that despite the bear market, many of our clients are still on course to reach their destinations—provided they stick to the plan. And if you’ve been bounced off course, we can discuss actions you can take to get back on track.

Either way, knowing whether you are still on the right path or need to adjust is better than not knowing at all.

The big risk we see right now for long-term investors—even those in retirement—is the temptation to sell stocks and go to cash. Doing so may stop the pain in the short term, but it also means you risk turning a temporary decline into a permanent loss of capital.

To keep the journey analogy going: Would you get out of a car and swap it for a horse because you hit a pothole? If so, reaching your destination just got a whole lot harder and now you risk saddle sores.

For more on financial planning during a down market, join us for our upcoming webinar, Bear Market Playbook. Click here to register. I hope to see you there!

Chart of the Week: A Bullish Case for Resisting Market Timing

Interim Chief Investment Officer Jeff DeMaso: 

Stocks are up 4.6% this month as of Wednesday night. Is this the beginning of a new bull market or is it simply a head fake before the next pullback?

If you have money to invest, that may feel like a key question, but for investors with time to be patient, it’s actually not that important. (And I say that knowing how frustrating it is to see prices decline immediately after investing.) I’ve found that even as little as a year can make up for unlucky short-term timing.

Consider an investor who bought a U.S. stock index fund at the end of 2008. The S&P 500 index fell 18.6% over the first two months of 2009 and the investor likely felt discouraged by their purchase. However, by the end of 2009, the S&P 500 and our hypothetical investor’s fund were 30% higher than they were at the start of the year, despite the “early” entry into the market. And that’s before counting dividends.

Look out a little further and the results are even better. Three years after their purchase, the investor was up 46%. Five years on and they had more than doubled their money with a 112% gain.

In an ideal world, you could buy right at the bottom and ride the wave to the top. But you probably don’t have perfect timing (I’ve never met anyone who does). The remedy to imperfect timing is extending your time horizon—over time you’re likely to come out ahead of where you started.

Lastly, if you feel like you don’t have even a year to wait, well, you shouldn’t be invested in stocks. Talk to your wealth management team about your financial plan and your portfolio’s allocation to make sure they suit your needs.

Note: Chart shows weekly index level for the S&P 500 from October 2007 through December 2013 along with one-year, three-year and five-year gains for the index from year-end 2008. Sources: S&P Global, Adviser Investments.

Roth Conversion Checklist

Roth IRAs are a smart option right now—but should you trade in your traditional IRA for one?

The answer comes down to taxes. Money placed in a Roth IRA can grow tax-free and be withdrawn without a levy in retirement. By contrast, contributions to a traditional IRA also grow tax-free, but you pay taxes on the money you take out during retirement—and you are required to withdraw the money at some point.

As great as tax-free growth and tax-free withdrawals are, Roth IRAs aren’t a free lunch. If you want to convert a traditional IRA into a Roth, you have to pay income taxes on the amount you move over.

Here are several factors to help you decide whether a conversion makes sense for you.

• Tax rates. Generally, if you have a low-income year due to early retirement or other reasons, it may make sense to take the opportunity to convert. This strategy can be especially effective if you’ve elected to defer Social Security benefits to age 70—dropping your tax rate even further.
• Time frame. The longer you have before you need the money, the more sense it makes to convert assets to a Roth. Once you convert, qualified withdrawals will never be taxed. Leaving those assets untouched for as long as possible allows them to grow tax-free over time. This will squeeze the most juice out of the conversion.
• Paying for the conversion. If taxes on the conversion are paid from IRA assets, less is left in the Roth to grow, eroding the benefit of the conversion. The best practice is to cover the tax bill from cash on hand or taxable investments. If you can’t cover the taxes with other money, a conversion might be unwise.
• Required minimum distributions (RMDs). You are required to withdraw money from traditional IRA accounts starting at age 72. But you are not required to take money out of your Roth. If you don’t need to tap into IRA funds to cover living expenses, a Roth IRA gives you the freedom to choose when or if you take withdrawals over your lifetime.
• Legacy. Roths are a better asset to pass to your heirs. Traditional IRAs create taxable income, but heirs don’t pay tax on Roths and they have several choices for how they draw the account down over time. In other words, your heirs will thank you if you convert to a Roth.
• Where you’ll live in retirement. Individual states tax retirement income differently. If you plan to move to another state in retirement, check to see whether required distributions from IRAs are excluded from your state income tax. If so, you may save more on taxes by sticking with a traditional IRA than you would by converting to a Roth.

General rules aside, a Roth conversion isn’t a straightforward decision. If you have questions, please contact your portfolio team. We are happy to assist. After all, we are The Planner You Can Talk To.

Webinar: Bear Market Playbook

Join us on Wednesday, July 27, at 4:30 p.m. EDT for Adviser’s third-quarter webinar: Bear Market Playbook. The discussion will feature timely advice and commentary from Senior Financial Planner Vanessa Carter-Witt, Interim CIO and Director of Research Jeff DeMaso and Manager of Financial Planning Andrew Busa. Don’t miss our team’s insights and answers to your pre-submitted questions. Click here to register today!

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’s Today’s Market Takeaways

In this week’s Market Takeaways, Senior Research Analyst Liz Laprade discussed the fallout from the crypto bank crisis, while Portfolio Manager Steve Johnson offered his thoughts on the not-so-bad news behind the market rally.

Looking Ahead

Next week we’ll get further updates on housing, including the Case-Shiller Home Price index. We’ll also get updates on GDP and core inflation, trade, jobless claims, and consumer spending, sentiment and confidence. But the big event of the week will be the Fed’s expected interest-rate-hike announcement on Wednesday afternoon, followed by Chair Jerome Powell’s press conference.

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.