We just finished tax preparation and filing. We now move into tax planning for the rest of the calendar year. The concept of a Roth retirement account continues to grow in popularity with the introduction of the Roth 401k and plethora of articles about Roth IRA’s in general. Whether to contribute to a Roth is easily one of the most confusing questions facing our clients.
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We continue to watch the economy closely. My opinion based on all the data is that we are still in that “goldilocks” phase - not too hot, and not too cold. But with each move up in the market, and as the indicators add up to show a slowing economy, it may not be long before we finish the tornado drill and have to “duck and cover” for real. Until then, we can continue to play the game Twister, reaching and contorting to find the highest growth parts of the market.
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At the moment, we are enjoying the goldilocks nature of the market. With interest rates stable to dropping, the dollar weakening and inflation on the wane, we like the market. But we also are looking for bond funds to replace the Treasuries. If the Fed cuts interest rates later in 2024, we will want to be in bond funds. And we may lighten up our stock positions in anticipation of a slowdown. After all, if the market gets too hot, we don’t want to ask, will it make me sweat?
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Why convert investments from a traditional IRA to a Roth IRA? In a sentence: if you pay taxes now, you will never pay taxes again. You don’t pay taxes on the principle when you remove it, nor do you pay on the earnings generated by the investments…….
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With the direction of interest rates unclear, we continue to lean on relatively safer options wherever feasible. Treasuries continue to pay 5+%. And some banks offer short-term CD’s over 5% as well. The Schwab platform gives us access to multiple banks so we are even able to split an account between banks with a couple clicks, easily providing the necessary FDIC insurance on larger accounts. The market is often full of uncertainty as lower inflation, stabilized corporate earnings estimates and the prospect of an AI productivity boom are offset by more debt ceiling negotiations, higher interest rates and a contentious presidential election. It’s easy to see why a lot of us are wondering Watt Up?
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With the direction of interest rates unclear, we continue to lean on relatively safer options wherever feasible. Treasuries continue to pay 5+%. And some banks offer short-term CD’s over 5% as well. The Schwab platform gives us access to multiple banks so we are even able to split an account between banks with a couple clicks, easily providing the necessary FDIC insurance on larger accounts. The market is often full of uncertainty as lower inflation, stabilized corporate earnings estimates and the prospect of an AI productivity boom are offset by more debt ceiling negotiations, higher interest rates and a contentious presidential election. It’s easy to see why a lot of us are wondering Watt Up?
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With the direction of interest rates unclear, we continue to lean on relatively safer options wherever feasible. Treasuries continue to pay 5+%. And some banks offer short-term CD’s over 5% as well. The Schwab platform gives us access to multiple banks so we are even able to split an account between banks with a couple clicks, easily providing the necessary FDIC insurance on larger accounts. The market is often full of uncertainty as lower inflation, stabilized corporate earnings estimates and the prospect of an AI productivity boom are offset by more debt ceiling negotiations, higher interest rates and a contentious presidential election. It’s easy to see why a lot of us are wondering Watt Up?
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Like a doctor’s harsh diagnosis, last week the Fitch Ratings company downgraded US debt to AA+ from AAA. Fitch’s explanation of the rating downgrade is this: “The downgrade reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to AA and AAA rated peers over the last two decades that has manifested in repeated debt limit standoffs and last-minute resolutions”.
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But most of the story is “AI”. Artificial Intelligence is the buzzword of the year. Microsoft introduced their natural language search tool, Nvidia has chips that power the revolution and just about every technology company is talking about how AI is going to change the world. Here’s a chart that will blow you away - the chart below shows 3 S&P sectors all delivering 30+% this year with no other sector above 10%. Two of the 3 sectors - Technology Select, Communication Services - are all about technology and the AI revolution. The third of the 3 standout performers is “Consumer Discretionary”. The top two holdings in this sector are Tesla and Amazon, both of which are as much about technology as anything else they do.
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Unfortunately, the US government isn’t headed toward “cash on the barrel” any time soon. Enter: the debt ceiling. The debt ceiling is the maximum amount of money the federal government is allowed to borrow to pay its bills. The government reached its current ceiling of $31.4 trillion in January. Once the debt ceiling is hit, the Treasury has to find other ways to fulfill its financial obligations including but not limited to paying interest on the debt, paying Federal employees, operating Federal Parks, and funding Social Security and Medicare benefits.
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Fast forward to last Tuesday morning. 7:15 am and Corie and I were watching the sun come up in Florida. At 7:20 am I got a text from Brian. Brian, Dave and I talk and text at all hours of the day and night about how to help our clients, the market, and all things Madeira. So when I got a text at 7:20 am, it wasn’t totally unexpected. Except, it was…..
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We went to Detroit about once a season. We generally sat far away from the field (here comes the Jared’s frugal upbringing story). We got to the stadium and parked a few blocks away to get cheap parking. My dad then hunted down the scalpers and tried to swing a deal. It was always a crap shoot on where we would end up sitting. Put it this way, binoculars made the trip in case we were so far from the field that we couldn’t make out the players on the field. It’s absolutely stunning, then, that in 1989 this happened….
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What does 2023 hold? Inflation is moderating, down from 9% in July to 6.5%. Most of the pundits believe the Fed is almost done raising interest rates on the belief that the previous increases will continue to bring inflation down. This is where the consensus ends. There is a camp that sees a recession coming, driven by the lightning fast move in rates. There is a camp that thinks there is still so much money sloshing around the economy that the Fed may have slowed everything just enough, without tipping the economy into recession. My eyes see a slow-motion slowdown.
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If inflation moderates and the economy slows enough to justify a slowdown in rate hikes, or even a reduction in rates, the market may rise in response. However, it’s an uncertain time with downside risk matching upside potential. In this environment, we want to stay invested, but taking care in doing so. In summary, we are looking for those warm blankets to keep you comfortable and relaxed.
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Corie and I first made the 15 hour trek down I-75 in 1996. Probably my most memorable visit was the drive when the twins were 9 months. We visited a rest stop in northern Florida and fed them as they sat in their car seats. I fell in love with Venice, FL as a result of these trips. Our three daughters enjoyed many spring breaks on the beach with grandma and great grandma. And the bike rides around the “island” with my father-in-law were great relief from the corporate grind. Fast forward to February 2022. Corie and I pulled the trigger and bought a house in Venice. It took only 7 months for us to realize the downside of my dream purchase and the importance of insurance.
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Chad and I were playing baseball in the front yard. We heard him coming down the street. The muffler gave him away. We wondered what would be on the roof this time? Old tires? 30 year old lawn chairs? Whatever he was bringing had to be on the roof because the Plymouth Horizon was full of newspapers stacked from seat to ceiling. As he pulled in his driveway, we were a bit perplexed because there was nothing on his roof. When he got out, he was carrying two huge bricks of something, something wrapped in cellophane. Government cheese.
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I mentioned last time that we were going to wade back into bonds. We have done so as bonds are now returning north of 4% in many cases. We are still cautious on stocks as we see continued chop until the Fed is finished raising interest rates and the slowdown has run its course. We remain overweight value stocks that pay dividends and expect to move back toward growth stocks in the near future. If the Fed gets its way, we may all hear that enjoyable “cha ching” sound a little less until a recession clears the way for more growth.
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In this video, I look back to the 80’s and all the bad things that happened. And yet the market went up. 40 years later, we are still here worrying about all the things that will keep the market down. Time for some deep breaths!
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I recently hit the big 5-0. In light of that milestone and in a desperate attempt to distance myself from the current market environment (😊), I thought I would go a different route with this month’s article. I read a book recently by Josh Brown (of CNBC fame) entitled “How I Invest My Money”. The title and some of the content revolved around how various professional money managers invested their own money. What struck a nerve with me about the book was the more subtle topic which I summarize as “What shaped my views on money”. Each money manager took a trip down memory lane and discussed the things that gave them their perspective on money. So, without further ado, that’s what I will do.
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