Market Peaks as Fed Speaks August 31, 2020 Weekly Update Print Please note: This update was prepared on Friday, August 28, 2020, before the market’s close. To our clients, friends and family impacted by Hurricane Laura and the California wildfires, we are thinking of you—please let us know that you’re healthy and safe, and tell us how we can help. The bull marketA period during which stock prices rise significantly from recent lows for weeks, months or years. continued charging this week: Friday marked the sixth consecutive record close for the S&P 500—its 20th of the year—as big tech stocksA financial instrument giving the holder a proportion of the ownership and earnings of a company. sustained their rapid ascent. The catalyst? Investors are focusing on positive economic indicators and seem to be ignoring the negative. Speedy approval of Abbott Labs’ 15-minute test for active novel coronavirus infection delivered an upbeat message to schools and businesses hoping to reopen safely while raising traders’ hopes for a faster return to normalcy. Meanwhile, the Federal Reserve essentially vowed to keep interest rates lower for longer with a well-telegraphed shift in policy. Despite the stockA financial instrument giving the holder a proportion of the ownership and earnings of a company. market’s rally, we’re not sounding the all-clear yet. Indicators of economic and earnings recovery remain hazy and an expected political battle as the election nears could create a setback. Instead, we are prepared to manage through ongoing 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 the market pullbacks that could follow as summer fades and the sunny sentiment that has saturated Wall Street dims. Through Thursday, the Dow Jones Industrial Average has returned 1.4% for the year, while the broader S&P 500 returned 9.2%. The MSCI EAFE index, a measure of developed international stock markets, was down 5.0%. As of Thursday, Bloomberg Barclays 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’s 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. stood at 1.20%, down from 2.31% at year-end. On a total return basis, the U.S. 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. market has gained 6.5% for the year. It’s worth noting the wide difference between returns on the best-known and most-often quoted Dow index and the S&P 500. In spite of the fact that the S&P’s 500 stocks make it a much more diversified index than the Dow (with its 30 constituents), the S&P has been driven higher recently by a mere handful of technology behemoths like Apple, Amazon, Facebook, Google and Microsoft. Of the five, only Apple and Microsoft are included in the Dow, hence the disparity in returns this year. The S&P doesn’t always lead the Dow—in fact, over the last 20 years, the Dow’s returns have exceeded those of the S&P 500. But we’ve seen a reversal of that trend in the past year or so. We don’t know if the current fascination (or even infatuation) with the big techs will last, but we do know that, over time, it has paid to remain disciplined and diversified, because successful investing is far more than picking favorites based on sentiment. The Economy’s Plunge: Slightly Less Bad A revised estimate of second-quarter economic growth (GDP) released this week showed a slight improvement over the initial tally from late July. Rather than declining at a whopping 32.9% annualized rate, it appears that GDP fell “just” 31.7% from April through June during the height of COVID-19-related shutdowns. As we’ve pointed out repeatedly, annualized figures can present a distorted picture. To reframe things, the new data means that economic activity slid 9.1% over the 12-month period ending in June. That’s not good—but it’s also not a third of the economy gone as the annualized rate might suggest. Estimates for the third quarter indicate that while we’re in a decent-though-selective economic upswing now, even the most aggressive projections don’t have the U.S. recovering all of its losses triggered by the pandemic anytime soon. Housing Surges Amid Consumer Unease The Conference Board’s gauge of consumer confidence dropped sharply in July to its lowest point since April 2014. We interpret this drop in optimism as COVID-19 wear-and-tear compounded by concerns over the end of payroll protection and enhanced unemployment benefits. Recent reports show consumers are buying fewer groceries, which could be an early signal that household budgets are beginning to suffer. Still, there’s been a boom in spending on the biggest of big-ticket items that most consumers will ever buy: Homes. Whether it reflects true confidence or is simply momentum sparked by low interest rates and a rise in people working from home, the housing market is in a strong V-shaped recovery. Record-low mortgage rates contributed to the strongest monthly gain on record for existing home sales (going back to 1968). Meanwhile, 13.9% more new homes were sold in July than were purchased in June, and new construction led to a massive 22.6% increase in housing starts month-to-month in July. Remember, more construction means higher sales of lumber, more business for lenders, increased sales of appliances and furnishings, additional taxable revenue streams and more jobs and possibly higher paychecks for everyone involved—a virtuous cycle and a ray of light for the economic recovery. Fed Signals a Major Shift Federal Reserve policymakers announced a significant update to their long-running inflation-fighting framework at this week’s annual (and virtual) Jackson Hole, Wyoming economic symposium. The central bankers stated they would not preemptively raise interest rates to ward off higher inflation when the job market recovers. Fed Chair Jerome Powell put it bluntly: “We’ve really got to work to find every scrap of leverage in helping stabilize the economy.” Historically, the Fed has grappled with supporting maximum employment without setting off an unwanted rise in prices. Now, policymakers have expressed support for sustaining a robust job market even if inflation starts to run above their traditional 2% threshold for action. What does this new approach mean for investors? The Fed has little appetite for pulling the rug out from under Wall Street. The upshot is that today’s near-zero interest rates will remain lower for longer. Podcast: What’s So Great About Gold? Even following its recent surge, making it one of the highest-flying investments of 2020, the merits of gold as an investment must-have remain hotly contested. For every passionate goldbug, there’s someone else dismissing it as a fringe fad. Listen to this lively discussion between Adviser Investments Director of Research Jeff DeMaso and Quantitative Investments Manager Josh Jurbala as they present the evidence you need to decide if this polarizing investment option is right for you, including: Why is gold having such a breakout year? What are the arguments for and against investing in gold? What risksThe 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. may gold present in your portfolio? Is gold really an effective inflation hedge? …and much more! Gold has held a long and prominent place in investment history, but the debates about its true worth can create more questions than answers. For a definitive look at the potential benefits and drawbacks for investors, click here to listen now! Financial Planning Focus Roth IRAs: When to Convert From a Traditional IRAA type of account in which funds can be saved and invested without being subject to tax until the account holder reaches retirement age. Roth IRAs are a powerful retirement-savings vehicle, but should you trade in your traditional IRA for one? The answer comes down to taxes. Roth IRAs are popular because your money not only grows tax-free but can also be withdrawn during retirement without paying taxes—whereas money in a traditional IRA grows tax-free but you have to pay taxes once you begin the withdrawal process. As attractive as tax-free growth and withdrawals are, Roth IRAs aren’t a free lunch. If you want to make the switch from a traditional IRA, you have to pay income taxes on the amount of money you move. This means that timing and tax rates should be crucial factors in your decision. Here are six considerations as you contemplate whether a conversion makes sense for you: Time Frame. In general, the longer you have before you need the money, the more sense it makes to convert assets to a Roth IRA. Once you convert to a Roth, qualified withdrawals will never be taxed. Leaving those assets untouched to grow tax-free for as long as possible allows you to get the most juice out of the conversion. Tax Rate. Try to switch to a Roth IRA at the lowest tax bracket possible. For instance, if you have a low-income year, perhaps due to early retirement, or you anticipate moving into a higher tax bracket in future years, it may make sense to time a Roth conversion around those events. Paying for the Conversion. If taxes on the conversion are paid from IRA money, 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 tapping your current IRA assets to pay the taxes is your only option, converting might be unwise. Required Minimum Distributions (RMDs). You are required to withdraw money from traditional IRA accounts starting at age 72 (70½ for those who reached that age before Jan. 1, 2020), but you are not required to take money out of a 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. Roth IRAs are a better asset to pass on to your heirs than traditional IRAs. Where traditional IRAs create taxable income, heirs don’t have to pay taxes on Roth IRAs, and they have more flexibility in drawing down the account 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 converting to a Roth. Converting to a Roth isn’t a cut-and-dried decision. If you have questions, we recommend speaking with a trusted financial planner or tax adviser. Adviser Investments’ Market Takeaways Calm and clarity have been sorely lacking when it comes to market news recently—that’s why we’ve begun providing Today’s Market Takeaways, short videos in which a member of our investment team analyzes what the market’s telling us. This week, EquityThe amount of money that would be returned to shareholders if a company’s assets were sold off and all its debt repaid. Research Analyst Kate Austin talked about the importance of doing your homework and reading the fine print before buying gold investments, and Vice President Steve Johnson discussed the Federal Reserve’s inflation policy change while some local wildlife listened in. Looking Ahead Next week, we’ll be studying fresh data on July construction spending, as well as August reads on car sales, manufacturing and the job market, including this month’s unemployment rate and this week’s jobless claims. As always, you can 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 Investments 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, and have more than 3,500 clients across the country and over $7 billion in assets under management. Our portfolios encompass actively managed funds, 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., 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. Our minimum account size is $350,000. 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. Please note: This update was prepared on Friday, August 28, 2020, before the market’s close. 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. Past performance is not an indication of future returns. 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