Tech’s Wild Week Leaves Markets Wobbly

The stock market Tilt-A-Whirl was in full swing on Wall Street this week and last night’s earnings reports from bellwether tech titans did little to steady the axis.

Battered by persistent inflation, supply chain kinks and a return to in-person retail, Amazon reported its first quarterly net loss in seven years. Meanwhile, although Apple bucked the trend, posting record (non-holiday) Q1 results, CEO Tim Cook warned that COVID-19 lockdowns in China and silicon shortages stemming from the war in Ukraine could create challenges for future earnings.

It’s a fitting finale to a topsy-turvy week that featured bargain buying on Monday, an S&P 500 slide on Tuesday (after an earnings miss by Google), and Wednesday’s mini relief rally followed by a 3.1% surge in the tech-heavy NASDAQ on Thursday. The major U.S. market indexes are all trending down today as we go to print.

It’s enough to make even seasoned traders want to sit the next one out.

But we’re investors, not traders. We take a longer-term view and we know that building fortunes and safeguarding wealth requires discipline and a steady hand. From our founding, our business has been built on investing with talented active managers who are skilled at taking advantage of overreactive, volatile markets like these. We believe it pays to remain on terra firma, tune out the noise and stick with the plan.

The Truth About Negative GDP

GDP, or gross domestic product (the government’s measure of the total value of goods and services produced and sold in the U.S.), expanded 1.6% in the first quarter of 2022—a 6.5% annualized rate—to $24.4 trillion. But that’s before taking inflation into account. Real growth, or growth adjusted for inflation, was, well, no growth at all. Real GDP declined 0.4% in the first quarter, or 1.4% on an annualized basis, compared to consensus expectations of a 1.0% gain.

Strictly speaking, it was the weakest quarter for growth since the early days of the pandemic. Does this step back mean we are hurtling headlong toward recession?

Not necessarily. Pop the hood on negative GDP and you’ll see that consumer spending, home building and business investment all increased in the first three months of the year—not exactly a “check engine” light on the road to recession.

Consumer demand remains remarkably strong, outpacing supply by a mile on everything from car parts to chicken nuggets. The biggest factor in the quarter’s negative read came from soaring imports, which are subtracted from GDP, and lagging exports.

So yes, the trade deficit widened substantially in Q1, but that’s not an indication of waning economic strength. As we’ll see in the chart below, negative quarterly GDP does not necessarily point to an impending recession.

Much of our economic momentum is a direct result of the country’s ability to spend. And protecting that purchasing power is partly why the Federal Reserve is looking to take an aggressive stance at its upcoming two-day meeting next week. Based on Chair Jerome Powell’s recent comments, we’d be surprised by anything less than a 0.50% interest-rate hike to entice spenders to start saving and earning more interest in the process.

We’ll be watching closely to see where we go and grow (or don’t grow) from here.

Chart of the Week: Are We Headed Toward Recession? 

Director of Research Jeff DeMaso:

Does the negative GDP growth rate in Q1 mean we are in a recession?

I don’t think so.

First off, that 1.4% annual pace means the economy contracted just 0.4% in the first three months of the year—that’s a blip on the radar. Second, that decline is in “real GDP,” or GDP after inflation. “Nominal” GDP, which does not strip out the impact of higher prices, increased 1.6%—so there was some growth in the economy. Third, rather than just look at one quarter, if we consider the past 12 months, real GDP is up 3.6%.

Also keep in mind that more than once in the last decade-plus, we’ve seen GDP decline for one quarter only for it to rebound the next. This happened in the first quarter of 2011, the third quarter of 2011 (hard to see in the chart, as it declined less than a tenth of a percent) and the first quarter of 2014.

While the shorthand definition of a recession is two consecutive quarters of declining GDP, that’s not actually what the National Bureau of Economic Research uses to make the determination. They instead look for “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” By that standard, we’re not there yet.

New Rules for RMDs

This week’s reader question: What provisions are in the so-called Secure Act 2.0?

Kari Wolfson, Vice President, Portfolio Executive, had this to say:

The U.S. House of Representatives passed the Securing a Strong Retirement Act, aka the Secure Act 2.0, in late March. Now the Senate is polishing its own version of the bill, and all indications point to it being signed into law. The exact provisions are a little less certain at this point, but we’re keeping an eye on three Rs…

RMDs. The 2019 SECURE Act raised the required minimum distribution (RMD) age from 70.5 to 72. The new bill seems likely to edge that age up even further—this time from 72 to 75 over the next 10 years. It may also eliminate RMDs for individuals with less than $100,000 in retirement savings and reduce the penalty for failing to take RMDs from 50% to 25%.

Roth IRAs. Simply put, Secure Act 2.0 paves the way for more Roth contributions. The proposed legislation could allow Roth-style (after-tax) contributions to SIMPLE and SEP IRAs, and it could give 401(k) participants the option of having employer-matching funds directed into Roth 401(k) accounts. It could also roll out additional catch-up contributions into qualified workplace retirement plans for workers age 50 or older—which would also be deposited after-tax into a Roth 401(k).

Roths are a handy option for retirement savers—and in this case, they are also good for the government. After all, taxes are paid upfront with Roths, so the IRS gets more money sooner.

Retirement saving. Encouraging individuals and employers to do more to boost retirement readiness is the crux of this bill, of course, and there’s a lot on the table. Among other things, it could expand automatic enrollment and auto-escalation (stepped deferrals) in workplace retirement plans, helping to increase participation and contribution rates for eligible employees. And it may also increase tax incentives for small businesses to set up workplace retirement plans.

Other provisions could include employer matching for student loan payments and enhancements to the rules of qualified charitable distributions (QCDs). We will have much more to say about this legislation when it passes. Until then, call us if you have any questions or if we can help you think through retirement planning.

Financial Planning Friday
Smart Charitable Giving Strategies

Last week, we talked about how charitable giving can lower your annual tax bill. Here, we’ll mention four smart (and strategic) ways to give all year long.

1. Direct cash donations. Perhaps not the most tax-efficient giving strategy, but it is the simplest. Giving cash is often the easiest way to make a charitable contribution, both for you and the charitable organization you’re supporting. From a tax standpoint, cash donations can be deducted from your adjusted gross income (AGI)—up to a limit of 60% of your AGI each year.
2. Stock donations. It’s rewarding (literally) to watch the stocks you own rise in price. Paying the capital gains tax—20% on the sale of shares if your total taxable income exceeds $459,750 ($517,200 for married couples filing jointly)—is not so rewarding. And that’s before state and local taxes. One way to avoid those taxes is by gifting appreciated stock to a charity directly rather than pledging the cash from the proceeds. The benefit is twofold: You avoid paying capital gains, and you can deduct the full value of the shares from your taxable income—up to 30% of your AGI in the current tax year.
3. Donor-advised funds (DAFs). This option is like having your own personal foundation, combining the ease and simplicity of cash and securities donations with the longevity and flexibility of more complex charitable vehicles. In this case, you contribute cash or highly appreciated stocks to the DAF and receive an immediate tax deduction. Once the DAF is funded, you can direct those funds to charitable organizations immediately or defer making specific grants for a while. In the meantime, the funds can be invested in any of several investment options offered by the DAF and grow tax-free. DAFs are also simple to set up and we can help you fund them according to your charitable goals. There are administrative costs, but they tend to be low and are often superseded by the ease and convenience of using a DAF instead of managing individual charitable contributions over the course of the year.
4. Qualified charitable distributions (QCDs). In lieu of taking RMDs from your IRA account, QCDs allow you to trim your tax bill by directing some or all of that cash to a charity—reducing your AGI up to $100,000 ($200,000 for married couples filing jointly) per year.

Charitable giving is a great tax-saving move, but it’s also a valuable tool for estate planning. Charitable trusts in particular are handy for families that anticipate leaving a taxable estate. But they’re complicated and come with substantial administrative costs—so check with your tax, investment and estate planning professionals before taking the leap.

Contact your wealth management team and tax professional if you have questions about charitable giving and your specific situation. We’re happy to help. After all, we are The Planner You Can Talk To.

Webinar Replay: Bonds in 2022—Pain, Promise and the Future of Fixed Income

This week, Chris Keith, our chief fixed-income expert, and Senior Research Analyst Liz Laprade provided a candid look at market performance, strategies and our outlook for bonds in the coming quarter. Watch now as Chris and Liz discuss the nuts and bolts of bonds, their thinking on asset allocation and how we are taking advantage of the current market environment.

We hope you find this webinar informative and insightful, and please don’t hesitate to contact us with any questions you may have about bonds’ role in your portfolio. Click here to view the replay 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

Chief Investment Officer Jim Lowell appeared on Fox Business this week discussing generally strong first-quarter earnings reports and how the American consumer is weathering inflation.

Portfolio Manager Adam Johnson popped up twice on Fox Business this week, first with a look at the opportunities provided by a slumping NASDAQ and then with insight on watching for signs that markets may be nearing a bottom.

In this week’s Market Takeaways, Senior Research Analyst Liz Laprade examined the market fallout from China’s ongoing COVID-19 lockdowns, while Portfolio Manager Steve Johnson offered his thoughts on earnings, interest rates and China’s market rally.

Looking Ahead

Next week, the Fed will be in the spotlight for all the necessary and obvious reasons—Wednesday, we’ll get the interest-rate hike reveal (again, a 0.50% hike seems likely) and policy statement as well as Chair Powell’s press conference. We’ll get key reports on global and domestic manufacturing and the service sector, construction spending, factory orders, job openings, car sales and consumer credit, as well as the April unemployment read.

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.