“I would like to see more volatility in the markets. Small shocks remind us that a bigger shock might occur and we protect ourselves to some extent. – Myron Scholes
November is historically a positive month for the stock market. Unfortunately for investors, this month is the exception to the rule. The Stock market indices we follow were down across the board. The only area worse than equities? The CRB Commodity Index was down more than 11% for the month. Bonds and the US Dollar, on the other hand, both posted gains.
All data as of 12/01/2021, Source: Wells Fargo Investment Institute. [Wells Fargo Investment Institute, Inc. is a registered investment advisor and wholly-owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.]
On November 22 the S&P500 Stock Market Index posted a new all-time high for the 11th straight month. If the stock market can rebound from the losses during the last week of November it will mark the first time in our memory that the stock market posted a new all-time high every month of a calendar year.
On the plus side, December is usually a very good month for the stock market (aka the Santa Claus Rally). The S&P 500 (Chart #1), in an obvious uptrend, is only a few percentage points below the highs and close to the 50-day moving average (blue line in Chart #1), which has been an area in which the index has corrected to before moving higher all year long.
On the minus side are two very important issues. First is the omicron variant, which is still a developing story. The other big issue is what happened in December 2018. That year the S&P500 shed 11% of its value on fears of inflation, a future rise in interest rates, and China. Sound familiar?
Will Santa Claus visit Wall Street this year? Only time will tell.
A Market of Stocks vs. the Stock Market vs. Other Asset Classes
It is very easy to talk about the stock market and forget that it is really a market of stocks. In practical terms, what the index is doing doesn’t always (or ever?) reflect what is happening with the stocks that the indexes are composed of. Different industry groups, for example, tend to perform better or worse than the overall market depending on a variety of factors. Low interest rates, for example, are generally good for technology stocks. Higher interest rates, on the other hand, tend to favor the financial sector.
Moreover, what is happening with the Dollar, commodities and bonds play a role in how the “stock market” behaves. And not always the way you would think. For example, Larry Kudlow’s “strong dollar” mantra isn’t a great thing for US multinational corporations who do a lot of overseas business, tourism or US exports. It is, however, a good thing for overseas companies doing business in the US and imported goods.
This is important, in our opinion, because what you see happening in the “stock market” today isn’t always a true reflection of what is actually happening below the surface. Moreover, it doesn’t necessarily reflect the subtle changes that could have a profound effect on future returns. These changes are happening in plain sight … just in a place where many investors are not looking.
So, what’s happening away from the stock market indices? Quite a bit. The US Dollar (Chart #2) has been range-bound since 2015 between 90 and 100, with just a few, brief periods where it exceeded the top of the range. In 2021 the dollar has been moving steadily higher, strengthening more than 7% for the year.
Commodities (Chart #3), as anyone who drives a gas-powered vehicle is aware, have also moved noticeably higher in 2021 after a similar period of being range-bound. The difference from the dollar is the deep dip in commodities during the COVID-19 shutdown and the move above the trading range earlier this year. Even with the selloff in November, commodities have been strong. That is a trend we see continuing into the new year.
Bonds (Chart #4) have been a different story. Yields dropped during the COVID-19 shutdown before rebounding back to the pre-COVID levels. Unlike commodities and the dollar, the 10-year Treasury yields remain below the old trading ranges.
A Peak Ahead to 2022
We do not have a crystal ball, nor do we have Marty McFly’s newspaper of the future to know what will happen in the markets (or win the 2030 Super Bowl). What we do have is history to give us a glimpse of what may happen going forward. We know, for example, how markets have reacted to higher interest rates in past economic cycles. History doesn’t repeat itself as every situation brings its own unique set of circumstances.
As 2021 closes out we are facing what can only be called a unique set of circumstances. Inflation has been running high all year, yet interest rates are historically low. Equities, which have been in a bull market since 2009, now sport a well above average market multiple of earnings. How high? Think loftier valuations than we witnessed at the peak of the technology boom in 1999. Yet, investors have added more money to the equity markets over the past 12 months than they have for the previous 19 years combined. And just like the late-1990s money is flowing into risk assets with what appears to be little concern for fundamentals or value.
To put it bluntly: this setup is not what we would call bullish. We point this out not make a bold call for the end of the bull market. Markets can stay irrational longer than you can stay solvent betting against the trend.
This is more of an awareness campaign than a bold call. This is an opportunity. Now is the time to take a look at your portfolio, be thankful for what the past few years have brought you, and make some adjustments. The stocks and the stock market can continue higher, but maybe not in the way you have become accustomed to in the recent past. The world is changing.
Wealth Planning and Medicare Part B Premiums
Last month we talked about the rising cost of Medicare Part B premiums and what the future might bring. This month we know what it will bring for 2022. According to Marketwatch, premiums are set to increase 14.5% in 2022. For a individual with income below $91,000 this equates to a monthly increase of $21.60 from $148.50 to $170.10. (See Table 1 for 2022 premiums.)
There are three main causes for the big jump in premiums. First, the cost of care continues to rise; Second, the cost increase was capped in 2020 due to minimal social security COLA increases. Both of these issues are known and do not come as a surprise.
The third issue is a $56,000 per year price tag that comes along with a new Alzheimer’s drug Aduhelm. The final approval for it to be covered by Medicare is still up in the air, but CMS is planning for it to be approved.
From a planning perspective there are a number of ways to help either avoid getting bumped up into a higher cost bracket or at least limit the extra you would have to pay. If this is something you would like more information about, we would be more than happy to help you evaluate your situation. You can either email us directly at firstname.lastname@example.org or call into the office at 610-437-5650.
American Retirement Savings News
Is the 4% Rule for Retirement Savings now the 3.3% Rule? – The 4% rule is a long standing belief in the retirement planning world that over a 30 year period retirees could withdraw up to 4% of their portfolio’s value each year without fear of outliving their nest egg. This thesis is based off of William Bengen’s analysis in an October 1994 article in the Journal of Financial Planning. Morningstar, however, has challenged this thesis based on the low interest rate/high equity valuation world we currently live in. The current analysis assumes a forward annual returns on a 50/50 stock/bond portfolio to be 5.23% vs. historical returns of 9.55% (1926 to 2020). It is worth noting that the Morningstar assumptions go against historical returns, including through previous periods of low interest rates.
Check out the redesigned Social Security statement, especially if you are thinking of early retirement – Due to budgetary issues, the Social Security Administration (SSA) stopped sending you a paper copy of your SSA statement in 2017. Available at the SSA website (www.ssa.gov ), the redesigned statement is easier to read and understand in just two pages. Benefit estimates are shown graphically for each year from age 62 up to the maximum age of 70.
Trying to predict what the future brings for financial assets, in our opinion, is a fool’s game. A better approach is to view the current situation with a clear mind for what it is, not what we want it to be. Look for both the risks that are present as well as the opportunities that exist. And always, ALWAYS, manage your wealth for your personal goals and situation, not to “beat the index.” It is about you, not the market.
We do not claim to be eternal optimists, nor consistent pessimists. Instead, we try to remain pragmatists who approach investing and planning with and open mind to the possibilities. Returns matter. A wealth management plan matters. Planning for retirement and risks matters.
On behalf of Magellan Financial we would like to thank you for taking the time out of your busy day to take in our thoughts and opinions. If you found this helpful, please forward it on to others. If you have any questions on the materials presented, would like to be added to our email list, or would like our help with your investments, we can be contacted at 610-437-5650 or via email.
Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.
All investing involves risks including the possible loss of principal invested. Past performance is not a guarantee of future results.
Index returns are not fund returns. An index is unmanaged and not available for investment.
Dow Jones Industrial Average: The Dow Jones Industrial Average is a price-weighted index of 30 “blue-chip” industrial U.S. stocks.
S&P 500 Index: The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market value weighted index with each stock’s weight in the Index proportionate to its market value.
S&P Midcap 400 Index: The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between the S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
S&P Small-Cap 600 Index: The S&P SmallCap 600 Index consists of 600 domestic stocks chosen for market size, liquidity (bid-asked spread, ownership, share turnover and number of no trade days) and industry group representation. It is a market value-weighted index (stock price times the number of shares outstanding), with each stock’s weight in the index proportionate to its market value.
MSCI World Index: The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance.
MSCI EAFE® Index: The MSCI EAFE Index is designed to represent the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada.
Bloomberg Barclays U.S. Aggregate Bond Index: Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based measure of the investment grade, US dollar-denominated, fixed-rate taxable bond market.
NASDAQ Composite Index: The NASDAQ Composite Index measures the market value of all domestic and foreign common stocks, representing a wide array of more than 5,000 companies, listed on the NASDAQ Stock Market.
Russell 2000® Index: The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents
Technical analysis is only one form of analysis. Investors should also consider the merits of Fundamental and Quantitative analysis when making investment decision. Technical analysis is based on the study of historical price movements and past trend patterns. There is no assurance that these movements or trends can or will be duplicated in the future.
Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility.
Investments in fixed-income securities are subject to market, interest rate, credit and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the bond’s price. Credit risk is the risk that the issuer will default on payments of interest and/or principal. The risk is heightened in lower rate bonds. If sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity.
Investing in commodities is not suitable for all investors. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. The prices of various commodities may fluctuate based on numerous factors including changes in supply and demand relationships, weather and acts of nature, agricultural conditions, international trade conditions, fiscal monetary and exchange control programs, domestic and foreign political and economic events and policies, and changes in interest rates or sectors affecting a particular industry or commodity. Products that invest in commodities may employ more complex strategies which may expose investors to additional risks, including futures roll yield risk.
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