The President Tests Positive and Markets React October 5, 2020 Weekly Update Print Please note: This update was prepared on Friday, October 2, 2020, before the market’s close. Controversy and dismay over the first presidential debate on Tuesday night, followed by news Friday morning that President Trump tested positive for the coronavirus, shook traders this week. As a result, daily trading activity was characterized by big swings in the markets. Yet, in the end, the president’s infection didn’t move the broad-market needle by much Friday, as investors chose, we hope, to focus on the state of the U.S. economic recovery and progress in the battle against COVID-19. Through Thursday, the Dow Jones Industrial Average was down 0.8% for the year, while the broader S&P 500 index, continuing to be driven by a handful of mega-sized technology companies, was up 6.1%. The MSCI EAFE index, a measure of developed international stockA financial instrument giving the holder a proportion of the ownership and earnings of a company. markets, is down 6.9%. As of Thursday, the 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 1.18%, 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 6.8% this year. September ended with a wide divide among economists as to exactly how quickly businesses have rebounded since the recession took hold. Given the huge uncertainty surrounding the coronavirus pandemic and its broad impact, it’s not surprising that estimates for third-quarter economic growth are far apart. We’ve seen estimates pointing to annualized third-quarter GDP growth rates that range from 14% (Federal Reserve Bank of New York) to 35% (Federal Reserve Bank of Atlanta). But even if growth over the period is indeed as high as 35%, this still won’t mark a full recovery, leaving our economy smaller than it was a year ago. And it appears that just as the third quarter drew to a close, some of the momentum behind the economic rebound was beginning to lose steam. Consumers Confident While Job Growth Slows Friday morning’s monthly report on jobs, the last before the election, showed the economy regaining just 661,000 jobs in September as the unemployment rate fell to 7.9%. While we have now recovered 11.4 million of the 22 million jobs lost in March and April, the pace of progress has slowed dramatically. This was the first month since the recession’s bottom during which fewer than 1 million jobs were created. Additionally, the tepid data caps off a week in which companies such as Disney and American Airlines announced massive layoffs that, of course, were not captured in the September figures. The good news is that consumer confidence is rising as prospects for a COVID-19 vaccine improve. As we’ve noted before, the housing market remains a bright spot, with mortgage rates low and buyers overwhelming sellers. This will ultimately lead to further consumption of higher-ticket durable goods—think washing machines, dryers, freezers, etc.—as homebuilding accelerates. Two national gauges of the manufacturing sector showed a September surge, while construction spending, home prices and pending home sales continue to rise, supported by low inventory, high demand and the aforementioned low rates and rising confidence. All of this adds up to an economy that is haltingly on the mend. We believe it’s important to keep expectations in check as we near the election and the annual holiday-shopping season. Expect a Bumpy October With less than 40 days before what is likely to be one of the most contentious elections any of us has experienced, the economy is still trying to muster momentum. COVID-19 deaths have passed the 200,000 mark in the U.S., and Washington is still arguing instead of agreeing to pass further stimulus to help everyday Americans through a recession that may be over for some, but certainly not for all. In fact, that recovery, no matter how many pundits call it V-shaped, doesn’t look that way for the many Americans who are without jobs, facing evictions or simply trying to figure out how to get their work done while homeschooling their children. With three months left in 2020, we’re sure to see many more shocks and surprises. As you know, our tactical strategies were designed for just such periods of 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 uncertainty. But we’ll let the market’s signals—not cable-news noise—drive our portfolio strategy. So should you. Podcast: Munis Feel the Pinch—State and Local Budgets Cope With COVID-19 Municipal 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. (munis)—central to the services and infrastructure that keep our cities and towns running—get neither the respect nor the attention they deserve. You only see them in the news when something goes wrong. And, well, municipal bonds are back in the news, as investors worry over how the budget pressures state and local governments are facing from COVID-19-related cutbacks will impact their portfolios. Join Director of Research Jeff DeMaso, Senior Vice President Chris Keith and Research Analyst Jen Zebniak as they explain the critical role municipal bonds play in many income-oriented portfolios, and how they’re investing in these essential tax-exempt securities under challenging circumstances. In this engaging conversation, Jeff, Chris and Jen discuss: Potential opportunities and which types of munis to avoid The effect of federal government relief on the municipal bond market How local governments weathered previous recessions … and much more Listen in for our team’s take on how investors should approach munis in the time of COVID-19 and the fledgling economic recovery. Please click here to tune in now! Financial Planning Focus: 4 Ways to Maximize Your EquityThe amount of money that would be returned to shareholders if a company’s assets were sold off and all its debt repaid. Compensation We’ve touched on the basics of employment-based stock options in the past. There are several different types of options, including Incentive StockA financial instrument giving the holder a proportion of the ownership and earnings of a company. Options (ISOs), Non-Qualified Stock Options (NSOs) and Restricted Stock Units (RSUs). Ensuring you get the most out of each may require different strategies. A tax professional can help you work out what’s best for your individual situation, but here are four tips to help you get started: Review Your Stock Plan. Documentation on your company’s stock plan should be provided to you by your firm’s compliance department. Keep this handy. It will give you (and your adviser) vital information about what type of compensation you’re receiving, when it’s granted, when it starts vesting and how often they’ll vest. Know the Potential Tax Snares. You generally do not owe taxes when you’re initially granted options (ISOs or NSOs). From there, things get a little more complex: ISOs that are granted, exercised and held for a specific period of time may qualify for favorable long-term capital gains treatment when sold. In most cases, you’ll pay long-term capital gains rate for your ISOs on the difference between the Fair Market Value (FMV—the stock’s share price on an exchange if it’s publicly traded or its estimated value if it’s privately held) at the time of sale and the discounted price for the shares (if the employer grants employees stock options at a lower-than-market price). That long-term rate is capped at 23.8%. NSOs don’t enjoy the same tax benefits as ISOs. When you exercise an NSO after it vests, the spread between the option price and the FMV is subject to ordinary income and payroll taxes, even if you haven’t sold the shares. You’ll then also owe capital gains taxes when you do sell. RSUs are a little different from ISOs and NSOs. In this case, you don’t have to buy or exercise shares at all—they are given to you as part of your salary. So, when your RSUs vest, they show up on your Form W-2 as income. Often, your company will sell enough shares to cover the income tax owed at your normal withholding rates. If not, you’ll need to increase your withholding to account for the additional income. Spread the Wealth to Protect It. There’s an inherent 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. in holding too much of one security, especially when your wages are also tied to the fortunes of the same company. In other words, remember to diversify. We advise clients to limit company shares to 5% of their overall portfolio assets while also keeping an eye on their tax liabilityLiabilities are calculated by adding up your existing debts (mortgage, car loans, student loans, credit cards, etc.).. Know Your Deadlines. Timing matters when you decide to sell your equityThe amount of money that would be returned to shareholders if a company’s assets were sold off and all its debt repaid. compensation. A public company, or one hoping to go public, may restrict when you can sell vested shares to avoid the possibility of insider trading. These “blackout periods” may keep you locked in at a time when you were hoping to sell. Marking blackout dates on your calendar and setting reminders is a great way to keep track of when your shares vest and when they can be sold. There is no crystal ball that can tell you exactly when to exercise, hold or sell your shares, but having a solid financial plan is the next best thing. 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. You can find two new Market Takeaways videos on our website. Equity Research Analyst Kate Austin spoke about why you’re not taking a gamble when you invest and Vice President Steve Johnson ruminates on what’s next for the economy in light of the election, unemployment and the recovery to date. Looking Ahead Next week, we will be watching for minutes from the latest Federal Reserve meeting, several employment indicators and reports on the service sector and consumer credit. 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, October 2, 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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