Adviser Outlook, October 2023 Our Outlook Congress avoided a government shutdown until at least mid-November. We believe a shutdown is avoidable, but if one occurs, it will likely be short and should not have a long-term impact on the stockA financial instrument giving the holder a proportion of the ownership and earnings of a company. market or cause a recession. BondsA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. struggled, with the Bloomberg U.S. Aggregate BondA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. index down 8.9% since the Federal Reserve’s first rate hike in March 2022. Despite the recent pain, higher yieldsYield is a measure of the income on an investment in relation to the price. There are several ways to measure yield. The current yield of a security is the income over the past year (either dividends or coupon payments) divided by the current price. should result in higher returns for bondA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. investors in the long term. The S&P 500 declined 3.3% in Q3 but was up 13.1% year-to-date through September. Though a small number of stocksA financial instrument giving the holder a proportion of the ownership and earnings of a company. generated the gains, historical trends and valuations argue for a commitment to broad diversificationA strategy for managing investment risk by investing in a mixture of different investments. Since different asset classes face different risks, even if one type of asset declines in value, others may not., including foreign stocks. It’s time to top off tax-deferred savings accounts, take required minimum distributionsA required minimum distribution is the amount of money that must be withdrawn each year from tax-deferred retirement accounts once the beneficiary reaches retirement age (72, according to IRS rules). and finalize any charitable giving to create tax savings next April. Your advisor will assist you with all of the above and more. Fall is here and the countdown to the holidays and the new year is on. While we set our wealth planning sights on long-term, multigenerational goals, each turn of the calendar presents opportunities to implement tax-saving strategies. We’re working to help you keep more of what you’ve earned and better position you and your loved ones for the future. Congress and the Fed at the Fore In early October, Congress avoided a government shutdown and bought time to negotiate a long-term government spending bill with a continuing resolution through Nov. 17. However, the fallout of that stopgap—the ouster of Speaker of the House Kevin McCarthy—introduced more uncertainty than usual to a historically routine process to ensure the U.S. government could pay its employees and meet its other financial obligations. Though shutdowns create uncertainty that harms the standing of U.S. debt as the world’s safe-haven investment, it’s unlikely that a short one would cause a recession or crash. During the three previous shutdowns lasting longer than 10 days (1996, 2013 and 2019), stocks and bondsA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. gained ground. Given what’s at stake, we believe that a compromise is more likely than an extended shutdown. Another government institution, the Federal Reserve, is the key figure in the market and economy narrative, particularly for bond investors. As you know, in March 2022 the Fed embarked on its most aggressive rate-hike campaign in generations to lower inflation. Last month, the central bank held the fed funds rate steady while warning that sticky inflation and other economic factors may lead to at least one more rate hike. Chairman Jerome Powell also signaled that rate cuts (a tailwind for bond investors) are further off than hoped. Why We Diversify The last two years were one of the most difficult stretches in history for bond investors. But this tough environment has created long-term potential to build wealth, so we see four very good reasons to be patient. When bond prices fall, yields rise. If bonds are held to maturity (and don’t default), changes in value have little impact on individual bond investors, since you know that you’ll get your principal back. You’ll also be able to reinvest in higher-yielding bonds when your holdings mature. For bond funds and ETFsA type of security which allows investors to indirectly invest in an underlying basket of financial instruments (these may include stocks, bonds, commodities or other types of instruments). Shares in an ETF are publicly traded on an exchange, and the price of an ETF’s shares will fluctuate throughout the trading day (traditional mutual funds trade only once a day). For example, one popular ETF tracks the companies in the S&P 500, so buying a share of the ETF gets an investor exposure to all 500 companies in the index., higher yields mean higher current income—the silver lining when bond values decline. YieldsYield is a measure of the income on an investment in relation to the price. There are several ways to measure yield. The current yield of a security is the income over the past year (either dividends or coupon payments) divided by the current price. are a predictor of future returns. As of quarter-end, the 10-year Treasury note is yielding 4.6%, so that’s a reasonable expectation for its annualized return until maturity. Similarly, a bond fund’s current yieldYield is a measure of the income on an investment in relation to the price. There are several ways to measure yield. The current yield of a security is the income over the past year (either dividends or coupon payments) divided by the current price. is a reasonable estimate for its total return over the long term. Bonds are a complement to stocks, not competition. Over 560 rolling 12-month periods since 1976, bonds and stocks have both declined only 2% of the time. We own bonds to help reduce portfolio volatilityA measure of how large the changes in an asset’s price are. The more volatile an asset, the more likely that its price will experience sharp rises and steep drops over time. The more volatile an asset is, the riskier it is to invest in. and provide income. Bond funds and ETFs also offer the potential for growth over time. Rate cuts are good for bond-fund prices. When the Fed decides to stop hiking rates or begins cutting them, this will provide a short-term tailwind to prices and returns. Note: Chart shows month-end SEC yields for the Vanguard Total Bond Market Index fund and the fund’s trailing 10-year annualized total return from Mar. 1993 through Sep. 2023. Sources: The Vanguard Group, Morningstar Direct. Just as bonds are diversifiers, so are different segments of the stock market. In the past, we’ve covered how a narrow slice of the stock market is driving returns right now. The good news is that our core client portfolios include these stocks. But we also know that market tides can turn. Prices for value, mid-cap and small-cap stocks are attractive relative to the large-cap growth stocksA stock whose issuing company is expected to grow at a significantly higher rate than the market. with outsized gains. We believe it’s prudent to invest in all these types of stocks going forward. That’s because, decade by decade, the top 10 stocks in the S&P 500 index change. For example, only three of the largest stocks in 2013 were still in the top 10 in 2023. And only one, Microsoft, was in the top 10 in both 2003 and 2023. To us, this argues against focusing solely on what’s doing well right now and instead investing in a broader basket of stocks that may be market leaders in five, 10 or 20 years. Our belief in diversification also extends to foreign investing. It may come as a surprise, but over the last 12 months, developed foreign stocks in the MSCI EAFE index returned 25.6% compared to the S&P 500’s 21.6% gain. As of August, foreign stocks were trading at a 40% discount to U.S. stocks. Eventually, that gap will close and investors with foreign exposure will be glad to have it. (Read our Investing Globally report for more.) Looking Ahead China’s economic slowdown is a worry for some investors. The slump stems from a combination of factors, including an aging population and harsh government regulations on industries like technology and real estate. While weaker consumer and business demand in China could help lower commodity and energy prices in the near term, it also poses a riskThe probability that an investment will decline in value in the short term, along with the magnitude of that decline. Stocks are often considered riskier than bonds because they have a higher probability of losing money, and they tend to lose more than bonds when they do decline. to global trade and supply chains. Countries and companies must adapt and find new trade partners if the slide continues. Here in the U.S., the big question is: Will we slip into a recession? Indicators like the leading economic index and yield spreads point to weakness in the economy. Strength in the job market and rising inflation, however, are at odds with those indicators. Even if the economy contracts, it will not necessarily trigger changes to our investment strategy because the timing and duration will be uncertain. Now that it’s about one year away, the 2024 election will be making headlines and stoking dinner-table debates. Elections have important consequences, but not necessarily for financial markets. Our research finds that the stock market is mostly indifferent to which political party is in control. We’ll cover this subject much more in the coming year, but for now you can catch up on our analysis here: adviserinvestments.com/elections/. More importantly, as the year winds down, we want to make sure you are doing everything you can to position for a successful 2024. If you’re still working, maximize contributions to tax-deferred retirement savings accounts like 401(k)s and IRAs. This can lower your taxable income. The same goes for health savings accounts, which let you enjoy triple tax benefits (tax-deductible contributions, tax-deferred growth and tax-free qualified withdrawals). If you are taking required minimum distributions from your IRAs and 401(k)s, we’ll work with you to make sure you meet the Dec. 31 deadline. Your advisor can help you superfund a 529 education savings plan for your children or grandchildren. This reduces the size of your estate and works as an intergenerational wealth transfer vehicle. At this time of year, we look to harvest taxable losses (or gains, in certain situations), which can help lower your tax bill come April 2024. If you have gains or losses outside of the portfolios we manage for you, please let your advisor know so that they can more effectively manage your overall tax liabilityLiabilities are calculated by adding up your existing debts (mortgage, car loans, student loans, credit cards, etc.).. You can also realize tax savings by establishing a donor-advised fund or a charitable remainder trustA legal document that functions as an instruction manual to how you want your money managed and spent in your later years as well as how your assets should be distributed after your death. Assets placed in a trust are generally safe from creditors and can be sold by the trustee in short order, avoiding the lengthy and costly probate process.. These strategies give you control over your philanthropy so you can make sure your money goes to the causes closest to your heart. Finally, we’re looking forward to what lies ahead for our firm and the new ways we can help you achieve your goals. We think you will love what comes next. Until then, all of us at Adviser and Polaris wish you the best. We’re here for you, whatever you need. This material is distributed for informational purposes only. The investment ideas and opinions contained herein 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. You may request a free copy of the firm’s Form ADV Part 2, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged. Companies mentioned herein are not necessarily held in client portfolios and our references to them should not be viewed as a recommendation to buy, sell or hold any of them. Alternative investments are intended for qualified investors only. 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Alternative investments may have high fees and expenses that reduce returns and are generally subject to less regulation than securities traded in public markets. The information provided does not constitute an offer to purchase any security or investment or any other advice. Past performance is not an indication of future returns. Tax, legal and insurance information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice or as advice on whether to buy or surrender any insurance products. Personalized tax advice and tax return preparation is available through a separate, written engagement agreement with Adviser Investments Tax Solutions. We do not provide legal advice, nor sell insurance products. Always consult a licensed attorney, tax professional or licensed insurance professional regarding your specific legal or tax situation or insurance needs. © 2023 Adviser Investments, LLC. All Rights Reserved.