February 16, 2023

It’s not easy for a financial professional to avoid feeling at least mild annoyance at the politics of raising (or not) the debt ceiling, because the whole discussion seems to take place in an absence of understanding or facts.  What most people know is that the U.S. has reached its debt limit again (roughly $31 trillion), which means that the Treasury Department has borrowed as much as is allowed by the last debt ceiling measure by Congress — an amount that is entirely arbitrary, and which has been raised almost 80 times since 1960. 

What is not always understood is that Congress authorized every penny of the amount that the government has committed to spend over the next year, so the debate is really about whether it will actually meet those obligations.  Put another way, to show how senseless this is, the government is authorized by Congress to spend a certain amount of money on operations, interest payments, the military and a thousand other things; but periodically, it also has to get permission from Congress to obtain the money to pay for the amount that was authorized.  Got that?

And what, exactly, is the debt?  The government raises its money from taxes, supplemented by debt in the form of government bonds—Treasury bonds and bills.  By incurring debt, the government is actually creating investment opportunities for individuals, companies and other governments. 

In addition, one of the burdens borne by the country that issues the world’s reserve currency is that it has to maintain a constant budget deficit—and issue those bonds—because that ultimately provides the global marketplace with the currency that is used for billions of transactions between entities (individuals and companies) that use different currencies.  For example, nearly all the oil that is purchased around the world is bought with dollars.  If there is a shortage of those dollars, it would throw sand in the gears of the world economy and people would eventually look for another reserve currency.

Finally, the debt ceiling is not a hard barrier, where one day the government is in default.  As you read this, the U.S. Treasury Department is slowing down payments that it is obligated to make in what it deems to be inessential areas, like contributions to government employee retirement plans.  If the showdown in Congress continues, it will add more visible items to the list, like interest and principal payments to government bondholders, Social Security benefits, Medicare reimbursements, payments to federal contractors and the salaries of federal employees.  We probably won’t reach that point until sometime in the late spring, because the government also collects tax revenues which help fund some of those obligations.

How dangerous is this brinkmanship?  Aside from closing national parks and potentially airports (air traffic controllers are government employees) and some rail transportation, the biggest problem would come when the government is eventually forced to stop making interest payments on government bonds.  That would be considered a default on our sovereign debt, and when the issuer of the world’s reserve currency defaults, it would (potentially catastrophically) undermine confidence in the world’s total financial system.  And incidentally, it would also cut off the yields for everybody who holds Treasury bonds or bond mutual funds (or ETFs) in their retirement portfolios.  There could even be a selloff of government bonds, if the standoff lasts into the summer, it could also trigger a dramatic surge in interest rates.  The stock market could plunge—probably temporarily—until the debt ceiling is finally raised and the government is allowed to spend the money that Congress allocated in the first place.

So the question becomes: why are we seeing anything other than a routine ratification of the rise in the debt ceiling?  Why isn’t Congress, instead, focused on the actual budget, trying to balance tax receipts with expenditures?

It’s never easy to read the minds of the people involved, but the reasoning seems to go something like this: if we threaten to create a crisis, then other members of Congress (the ones who worry about the impact of a government default) will want to avoid that crisis, and concede some of the things we’re proposing—a list that includes a reduction or potential elimination of Social Security benefits.  If they won’t go along with any of our demands, then we’ll create a real crisis, a huge painful global crisis, and maybe that will bring the other side to the table.

But what, exactly, ARE those proposals?   In a hostage negotiation, the hostage takers ask for a specific ransom payment.  But so far we’ve seen only vague concerns about government spending being out of control and maybe Social Security is the problem.  Decrying government spending is easy, but telling voters what, exactly, you would take away from them is much harder.  Currently, for every dollar the government spends, 25 cents goes to Medicare and other popular health care programs, 21 cents goes to Social Security, 13 cents for defense and the military, 7 cents for veterans and retirees and another 7 cents for debt service.  Who is going to wade into that thicket and decide how many fewer cents should go to which programs and services that voters care about?

Of course, a default would make America’s long-term fiscal situation worse, not better.  The situation is being covered as a political argument, but it more resembles a circus.  The elected officials who worry about the consequences of simply walking away from the government’s obligations are being told to cave in to demands that have not even been articulated—and you have to wonder who will get the blame if this wholly-manufactured crisis is allowed to play out.

Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC

Founder & CEO

Sources:

https://www.brookings.edu/podcast-episode/whats-happening-with-the-debt-ceiling-again/

https://www.npr.org/2023/01/25/1151474931/the-politics-and-economics-of-a-potentially-costly-showdown-over-the-debt-ceilin

https://www.gsb.stanford.edu/insights/why-debt-ceiling-showdown-especially-risky

https://www.gsb.stanford.edu/insights/why-debt-ceiling-showdown-especially-risky

https://www.gsb.stanford.edu/insights/why-debt-ceiling-showdown-especially-risky

This material was prepared by BobVeres.com and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

September 28, 2022

My goodness; stocks are taking a terrible beating these days.  From the way the market is behaving, one might think that some of the world’s largest and most profitable companies are suddenly becoming dramatically less valuable.  Are they all laying off workers, slashing prices, closing factories and declaring imminent bankruptcy?

If this is sending you to anxiously scan the headlines, don’t bother; none of that is happening.  Stock prices have never been a precise indicator of what companies are worth.  They are a very good indicator of what people are willing to pay for their shares, and right now there seems to be more sellers than buyers.

Why?  The reasons for bear markets are seldom rational—which, of course, is why bear markets end and stocks return to (and always, in the past, have surpassed) their original highs.  What’s happening right now is not unlike what happens when one of our children is diagnosed with an illness, and the remedy is a daily dose of some awful-tasting medicine.  The illness, in this case, is inflation, which absolutely has to be cured if we are to experience a healthy economic life.  Few things are worse than having the money you’ve saved up deteriorate in value at double-digit rates, which is precisely what has been happening this year.

The cure, which any child will tell you can sometimes be more unpleasant than the illness itself, is the U.S. Federal Reserve raising interest rates, which is its way of reducing the amount of cash sloshing around in the economy.  Rising consumer prices, just like rising stock prices, come about when there are more buyers than sellers.  Reducing the available cash reduces the number of buyers in relation to sellers (ironically, both in the consumer marketplace and on Wall Street), and finally slows down the inflation rate to manageable levels. 

We can already see how this works in the housing market, where, just a few short months ago, multiple would-be buyers were bidding against each other to pay more than the asking prices.  As mortgage rates have risen, the frenzy has completely dissipated.  The process takes longer in the consumer marketplace at large, but you can bet it’s working behind the scenes.

Doesn’t less spending mean less economic activity?  Doesn’t that lead to a recession?  The answers, of course, are yes and maybe.  But at this point, a recession might not be all bad for the economy.  Recessions act like a cleansing mechanism, exposing/eliminating waste and inefficiency, ultimately creating a healthier economy when we come out the other end.

So right now we’re taking our medicine, and boy does it taste awful.  We are also, collectively, suffering an economic illness.  Anybody who has come down with a bug and taken medicine to cure it knows that the former unpleasantness doesn’t last forever, and therefore neither does the latter.

Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC

Founder & CEO

Source:

https://www.nytimes.com/2022/05/14/business/inflation-interest-rates.html

This material was prepared by BobVeres.com and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

September 16, 2022

With two consecutive quarters of negative GDP growth, high inflation and markets that have persistently delivered bearish returns, the hope was that the U.S. Federal Reserve was busily looking for a way to execute a ‘soft landing’—meaning, basically, a return to modest economic growth, higher market returns and lower inflation.  It now seems clear that that is not the Fed’s plan.

In a recent speech in Jackson Hole, WY, Fed Chair Jerome Powell announced that he will do whatever it takes, pretty much to the exclusion of economic growth and better market returns, to drive inflation down to the 1.8% annual goal that has been recent Fed policy.  He said, bluntly, that “reducing inflation is likely to require a sustained period of below-trend growth.”  Translated, that means higher short-term bond rates and an indifferent attitude toward more economic pain.

The speech even seemed to be attacking the nation’s historically low 3.5% unemployment rate, the lone bright spot among a lot of otherwise grim economic statistics.  Powell surprised many economists by asserting that, in his view, the labor market was “clearly out of balance” because the demand for workers exceeds supply. 

Overall, the speech seemed to hint at another jumbo 75 basis point increase in the Fed Funds Rate later this month.  If (when) that happens, it will grab headlines, but it might not be the most significant growth-slowing measure the Fed will be taking.  The U.S. central bank is also accelerating the process of selling off the Treasury and mortgage bonds on its balance sheet, doubling the monthly sales from $47.5 billion to $95 billion.  It’s important to note that when the Fed was buying these bonds, the so-called QE (quantitative easing) buoyed the stock market.  The opposite, called quantitative tightening (QT to some), might have the opposite effect.

Most of us know that the economy will eventually recover from its current doldrums, and the Fed’s current policy will ease up as inflation declines.  What we’re seeing now is the inevitable ‘pay the piper’ moment where the bill comes due from the enormous (and, of course, unsustainable) stimulus that the Fed injected into the economy to end the Great Recession and, not so long afterwards, to pull the country out of the Covid-driven downturn.  The hope now is that it won’t be long before the Fed decides that the piper is paid off, and once again prioritizes growth and profitability in the economy.

Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC

Founder & CEO

Sources:

https://www.advisorperspectives.com/articles/2022/08/31/powell-abandons-soft-landing-goal-as-he-seeks-growth-recession

https://www.advisorperspectives.com/articles/2022/08/31/the-fed-is-about-to-go-full-throttle-on-qt-fear-not

This material was prepared by BobVeres.com and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

April 26, 2022

The stock market suffered an ugly downturn on Friday.  Chances are, you knew it was coming.  In fact, so did we.

Come again?  Pretty much everybody knew that sometime, someday, probably before long, stocks would take a weird, unexpected plunge.  The fact is, they do this more often than we realize; one-day drops of more than 2.8% have occurred 20 times since February of 2018 (down 4.6% on Feb. 5, down another 4.15% on the 8th).  Make that 21 after Friday.

The trick isn’t knowing that there will be a market free-fall sometime in the (probably) near future; the trick is knowing exactly when.  Many prognosticators had a feeling that stocks would go into a long-term free-fall after that disastrous few days in the spring of 2020, when people were just realizing that Covid was going to be a thing.  After the markets rewarded buy-and-hold investors, many were pretty sure the markets were going to plunge when President Trump was impeached the first time, and then the second time.  There’s a whole cadre of pundits who make a great living by predicting that some kind of investing or economic catastrophe is just around the corner, and they offer this prediction over and over again until one day (surprise!) they turn out to be right.  

If you knew that there would be a 2.8% market drop on, precisely, April 22 of this year, then you had something worth talking about, and we wish you would have shared this information with us beforehand.  The fact that none of us could predict the date or time is significant; it means that these market moves are completely predictable in that we know they are going to happen, and unpredictable in that we never have any idea beforehand when the hammer will fall.

But that’s also good news.  Just as experience tells us that the markets are going to drop periodically, it also tells us that they tend to recover to new highs later on.  Neither of those rather vague predictions are terribly exciting, but the second one is the one that is going to make you money in the long run.

Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA

President

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC

Founder & CEO

Sources:

https://en.wikipedia.org/wiki/List_of_largest_daily_changes_in_the_Dow_Jones_Industrial_Average

https://www.cnbc.com/2022/04/21/stock-market-futures-open-to-close-news.html

This material was prepared by BobVeres.com and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

March 9, 2022

Let’s imagine for a moment that on your daily walk to work, your normal route takes you past a pawn shop that is known to display expensive jewelry.  Over the past couple of days, you’ve noticed that the jewelry on display has been marked down—for reasons that you don’t really understand.  All you know is that, in the past, these times when the jewelry went on sale were quite temporary and, in fact, in the past the prices were far more likely to go up than to go down.

The store also buys jewelry from the public, and over the same recent time period, the prices it is willing to pay have been declining as well.

The question is: would you pick this time to sell some of your own jewelry, or to buy some while it’s temporarily on sale?

You can apply this same thought experiment to on-sale items at the clothing rack or in the grocery store, and the answer is always the same: your inclination would be to buy when things are on sale, and to sell (if you happen to have something) whenever the prices go back up.

The peculiar thing about this thought experiment is that whenever you’re talking about jewelry, or clothing, groceries or pretty much any everyday item in the marketplace, the response is obvious.  But when we’re confronted with exactly this same situation regarding stocks, ETFs or other investments, the immediate inclination is exactly the opposite. 

Why should that be?  Psychologists have had a field day exploring the ideas of herd mentality and recency bias and a lot of other mental shortcuts (psychologists call them “heuristics”), but nobody has ever managed to explain why our instinctive reaction to price movements in investments should be different from our instinctive reaction to virtually everything else in the global marketplace.  We know that fear plays a role, but how rational is that fear when every market decline in history has been followed by subsequent record highs?  We know that fluctuations in our net worth are tied to our sense of well-being, but why should we feel less confident when the paper value of our holdings is 2-3% lower today than it was yesterday?  Do we feel that much more confident when the markets are UP 2% or 3%?

Years ago, after Microsoft stock had risen from practically zero to astronomical heights, a financial journalist interviewed a few people who had become wealthy by holding on to their Microsoft investment for two full decades.  The first surprise was how few of them there were; many people had been given stock grants during the company’s early years in business, and others had invested in this hot company with a promising new operating system.  But most of them had cashed out at the first, or second, or third dip, long before the real money was made.

The second surprise was how all of these now-wealthy stockholders told the same story: that there were many times when they had to grit their teeth and avoid the temptation to sell the stock of a company that was increasingly dominating desktop software.  Every bump in the road was, to them, a strong sell signal, which required a certain fortitude to hang on.

The lesson in all this is that all of our brains are wired to be dysfunctional investors.  Now that the markets are becoming unpredictable and stocks are going on sale, all the tendencies to make bad decisions are being triggered.  If the same thing were happening at the grocery store or in that pawn shop display, we’d all be cheering this nice (albeit temporary) opportunity. 

We hope that you and your family are safe and well. 

Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC

Founder & CEO

This material was prepared by BobVeres.com and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

September 29, 2021

The news media, in its coverage of the Congressional debate over raising the debt ceiling, has alarmed its readers and viewers with terms like “government default” and “global financial crisis.”  But if there is a government shutdown looming in our future, what is the most likely outcome for investors?

First, there is no question that the government debt levels are remarkably high based on historical norms.  The government owes almost 29 trillion U.S. dollars, around 1.7 trillion more than at this time last year.  Raw numbers aren’t a perfect way to compare current vs. past debt levels, since the U.S. economy (and therefore, tax revenues) have grown dramatically.  But if we measure government debt as a percentage of the U.S. GDP, the current numbers are still somewhat alarming.  The long-time record debt was 119% of U.S. GDP in 1946, at a time when the government had ramped up the printing presses and issued bonds to pay for the costs of World War II.  (Total debt that year: $269 billion.)  For most of the 1960s and 1970s, debt-to-GDP dropped back into the low 30s, before creeping up again, reaching 50% in 1988 and never looking back.

Debt to GDP eventually breached the 100% level in 2014, but the biggest jump came in 2020, when the debt-to-GDP figure rose from 107% to roughly 130% of GDP in the span of 12 months.  Bottom line: today’s debt levels are in record territory.

It’s interesting to note that the largest owner of U.S. Treasury securities is not any foreign country, but the Social Security Trust Fund ($2.9 trillion), followed by the nation of Japan ($1.28 trillion), the nation of China and the U.S. Military Retirement Fund ($1 trillion each) and the Office of Personnel Management & Retirement ($955 billion).  Mutual funds and private investors are holding about $3.8 trillion collectively.

There are several reasons to wonder whether the current debt is as alarming as the numbers look in isolation.  First, interest rates are so low that the government isn’t paying much for the privilege of borrowing investors’ dollars.  And is it so terrible that the government is making secure bond investments available to the public (and its in-house agencies)?

But what if we DO have a government shutdown next month?  What would be the consequences? 

One would be the suspension of Social Security checks—which might not be the ideal political message for recalcitrant Republican Senators and Representatives to send to their retired voters.  Nonessential government agencies would be shut down, including National Parks and the economists who collect government statistics.  Government employees would be furloughed.

But if we look at past shutdowns, they are all temporary blips, soon forgotten.  The debt fiascos of 2011, 2013 and 2018 were all resolved and everybody was made whole; there is not going to be a permanent wholesale default on government obligations this time around either.  And most meaningfully, none of the past exercises in brinkmanship impacted long-term equity returns; indeed, the S&P 500 rose during the 2018 shutdown.

So the biggest danger is short-term: that the alarming media coverage might spook timers and traders, who could go on a short-term selling rampage before realizing that the government taking a week or two off didn’t really depress actual underlying value of U.S. companies.  And, of course, an actual shutdown is unlikely in the first place.  The games Congress is playing is looking like a terrific example of much ado about nothing (we hope).

We hope that you and your family are safe and well.  Stay calm and try to have a bright and beautiful Fall!

Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

Source:

https://www.advisorperspectives.com/articles/2021/09/23/history-shows-stock-market-disregards-debt-limit-shutdown-talk

https://www.thebalance.com/national-debt-by-year-compared-to-gdp-and-major-events-3306287

https://www.thebalance.com/who-owns-the-u-s-national-debt-3306124https://www.quora.com/Are-salaries-in-the-US-significantly-higher-than-in-Europe-If-so-why

This material was prepared by BobVeres.com., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

September 9, 2021

There is absolutely no question that, from a historical standpoint, yields on U.S. government bonds are terrible.  10-year Treasuries that were issued at 1.25% a year are now yielding 1.297%, which is not terrific when the inflation rate is somewhere between 6% and 7%.  If you go shorter term, 5-year Treasuries are trading at a yield of 0.788% a year, and 2-year Treasuries are offering a somewhat less-than-generous yield of 0.215%.

Those yields look stingy from a historical standpoint; just a couple of years ago, the 10-year Treasury rate was over 3%, and before the Great Recession you could have locked in 5% rates.  But if you compare U.S. rates to what the citizens of other countries are getting, the American bond market looks positively generous.

Consider, for instance, investors in German bonds, whose 2-year, 5-year and 10-year bonds were issued at 0% rates; the government promised nothing more than that it would give you your money back at the end of the term.  The 2-year bonds are trading at prices equivalent to an annual yield of roughly negative 0.738%, which is better than the negative 0.724% for 5-year bonds.  Buy 10-year German government bonds on the open market and you can expect to lose only 0.464% a year. 

European bonds in general are less-than-generous for their investors these days.  Two-year Spanish government bonds, which were actually issued at positive yields, are now trading to yield negative 0.684%; the 5-year bonds are yielding -0.419% and you can eke out a +0.219% annual return if you go out ten years.  Dutch, Belgian, and French bonds are similarly yielding negative returns across all maturities up to 10 years, while investors in Italian, Swedish and Portuguese bonds would have to go out ten years in order to get a positive return on their investments.  Of the major developed nations, only Australia is offering yields comparably ‘generous’ to what the U.S. is offering.

If you’re shopping for higher yields, maybe you could consider Venezuelan 10-year government bonds, which are posting an unusually high 46% annual yield—which barely beats the 45% yield offered on Argentinian 10-year government bonds.  Of course, then you would have to contend with Venezuela’s 9,986% annual inflation rate (down from 14,291% last year), which means the Venezuelan Bolivar is collapsing in real time, and your bond investment would be worthless in roughly a year.  (At today’s exchange rate, you can buy just under 403 billion bolivars with a dollar.  Five dollars will get you more than 2 trillion.)  Argentina’s currency is devaluing at a comparably more modest rate of ‘just’ 47% a year, which might eat away at the returns offered by the country’s bond investments.

We can complain that our government bond investments are losing money to inflation today, and the complaint certainly feels justified.  But investors in other countries actually have more to complain about than we do.

We hope that you and your family are safe and well!

Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

Sources:

https://www.wsj.com/market-data/bonds/governmentbonds

https://www.macrotrends.net/2016/10-year-treasury-bond-rate-yield-chart

http://www.worldgovernmentbonds.com/

https://worldpopulationreview.com/country-rankings/inflation-rate-by-country

This material was prepared by BobVeres.com., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

September 1, 2021

Despite the alarmist articles you might be reading in the press, most people won’t be affected very much, if at all, from the tax proposals that are percolating through Congress.  If the bills pass in their current form, then individuals who make less than $400,000 a year won’t see any increase in their ordinary income or capital gains rates, and husband and wife taxpayers with less than $7 million—or maybe $10 million—in net worth still won’t have to worry about paying federal estate taxes.

But the proposals are creating some challengers for certain taxpayers, which would have to be planned for.  Individuals who are earning more than $452,700 a year, and joint filers reporting more than $509,300, are looking at a top marginal tax rate of 39.6% on income above that amount—up from today’s 37%.  For them, it makes sense to shift income, if they can, from 2022 into the 2021 tax year. 

People who are selling a business, or selling a home or investment real estate with a lot of appreciation, could be facing an even bigger challenge.  For taxpayers who report $1 million in adjusted gross income in any given year, the Biden proposal would raise the tax rate on capital gains—that is, on appreciation at sale above the purchase price—from today’s 20% to the ordinary income rate, which would be 39.6% plus a net investment income surtax of 3.8%. 

Who would report $1 million in adjusted gross income?  Small business owners who are planning to sell their firms might experience a one-time event where they pop up over that threshold—and find themselves paying more than double the amount they expected to Uncle Sam on the transaction.  Similarly, anyone who has a highly-appreciated real estate investment might breach that threshold, and some homeowners, if they combine the sale of an expensive house with the rest of their income, could find themselves with an unpleasantly unexpected tax bill.

There are ways to plan for this.  The easiest is, if the sale is imminent, to have it take place this year, under today’s 20% capital gains rates.  If that isn’t feasible, the business owner or real estate investor could negotiate an installment sale, where only a part of the money is received each year, over a period of years, keeping the total income below the $1 million threshold.  But these things have to be planned for now, before the new law takes place—and, of course, the complicating factor is that until the law is passed, nobody knows exactly what it will contain.

A proposal which is not in the Biden tax plan, but has been put forth by Bernie Sanders and others, is a reduction in the estate tax exemption—that is, the amount that people can leave to their heirs at death, or by gifting, without having to pay federal estate taxes. Today, the exemption (and the gift tax exemption and generation-skipping tax exemption) is a whopping $11.7 million per individual—$23.4 million for a couple, which is obviously well above most peoples’ net worth.  The Sanders tax plan would reduce that amount to $3.5 million per individual; others are proposing a reduction to $5 million.  Even if no bill is passed, the current estate and gift tax exemption will “sunset” in 2026, resulting in a reduced exemption of between $6 million and $7 million.

Most couples have less than $7 million or $10 million to pass on to their heirs.  But for an individual who has, say, $10 million in various investment accounts, planning for the federal estate tax suddenly becomes a bit complicated.  Suppose that person wants to take advantage of today’s high gift tax exemption.  Should he give away $8 million, and keep $2 million for living expenses in retirement?  If/when the estate tax exemption drops, that would expose the remaining $2 million to a 40-45% estate tax, since that taxpayer would have used up the new (reduced) exemption amount.  The only way to avoid estate taxes altogether would be to give away all of it to heirs, meaning that the retiree would have to depend, for living expenses, on the kindness of the children receiving those assets.

Or take the case of a couple which has $15 million in assets.  Suppose they decide to each gift $5 million to their kids, and live on the remainder.  If they do that, and the exemption goes down to $5 million, they have each used up their exemption and exposed the remaining $5 million to estate taxes at some point down the road. 

Is there a better way?  Either the husband or the wife could gift the whole $10 million (still comfortably under today’s $11.7 million gift tax exemption), and the couple would preserve the other person’s (reduced) $5 million exemption to be used to avoid estate taxes at the second person’s death.  What if the person NOT making the gift is the first to die?  The reduced exemption amount would still be ‘portable,’ meaning that the other spouse would “inherit” it and use it to avoid estate taxes upon death.

Once again, there are techniques to address these issues for people who are troubled by a reduced estate tax exemption.  One is a spousal lifetime access trust—a SLAT in the estate planning vernacular.  One spouse would gift assets to an irrevocable trust that would provide income to the other spouse for life, with the remaining assets, at the spouse’s death, going to the heirs—outside the estate.  Each spouse could gift substantial assets to the other under SLAT arrangements and potentially eliminate the estate tax problem altogether, but this can be tricky; the gifts and trusts cannot be reciprocal, or the estate planning advantages would be challenged by the IRS.

Once again, it is important to remember that most people will sail through these tax law changes, whatever they may be, whenever they are passed, without feeling much if any effect.  But for some, the new tax laws will pose some vexing challenges—what financial planners call ‘planning opportunities.’

We hope that you and your family are safe and well!

Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

Sources:

https://www.investopedia.com/explaining-biden-s-tax-plan-5080766

https://taxfoundation.org/joe-biden-tax-plan-2020/

https://presidentialwm.com/blog-2020/an-ugly-sunset-what-will-happen-if-the-tax-cuts-and-jobs-act-expires/

https://www.kiplinger.com/retirement/estate-planning/601544/federal-estate-tax-exemption-is-set-to-expire-are-you-prepared

https://www.cnbc.com/2021/06/01/bidens-proposed-39point6percent-top-tax-rate-would-apply-at-these-income-levels.html

This material was prepared by BobVeres.com., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

March 18, 2020

I am writing this newsletter from my home office because my wife and I are in self-imposed isolation.   We are not sick, but we recognize we are in the vulnerable demographic group.  We are trying to protect ourselves and mitigate the virus circumstances by “social distancing.” 

Typically, a major part of our job is to “remove the emotion” from the conversations about your finances and investing.  Money is emotionally charged.  Likely by now, you’ve heard it from us and many other sources, reacting emotionally to the markets is usually a recipe for disaster.

Well, I’m going to do something a bit different today.  I’m putting emotion into this conversation.  I’m going to tell you how I’m feeling about all of this. Because the truth is, we all have the emotions.  So let’s talk about them, and then I’ll tell you what I’m doing to work through them:

I still have PTSD from the recession and markets from October 2007 through March 2009.  This was the worst time of my professional career and threw me into a temporary depression.  That was the only time that I can remember it being difficult to wake up and go to the office every morning. (In case you didn’t know, I LOVE what I do.) It wore me down. After recovering from the recession and the stock market’s deep declines, I never thought we would have to face anything like that again.

Now, here we are in a “bear” market (a decline of at least 20%), as well as a global pandemic.  I am now planning for the work-optional part of my life, with a little more time off, and a little more golf.  Thus, I have the same fears as any retiree or prospective retiree.  None of us want to see serious or even mild declines in our portfolios.  However, I know from personal experience (50+ years) that we must invest for the long term and not just one, or a few years.

As an advisor it is my nature to shoulder the weight of this market volatility not just for myself, but for all of my (our) clients.  That’s a lot!  This (the stock market & COVID-19) isn’t just a threat to our portfolios but to our personal health as well.  That’s scary! 

I feel all of that – the fear, the anger, the stress, the worry – and I let it sink in…

So what do I do? 

This is how I get past it – I let the logical/rational/left part of my brain work through it this way:

This is not the same as 2007 to 2009.  We will get through this!  How do I know that?  We’ve survived ALL of the downturns that have come before!  100% of them.  In fact, we thrived after they ended!  I’ve prepared for this with my own portfolio, and we’ve structured our clients’ portfolios to survive and thrive!

This reminds me of the time my wife and I were on vacation in Maui, Hawaii.  We drove the “Road to Hana”; little did we know that it is one of the more dangerous roads in the world.  It is a 62-mile winding road with 620 turns, many of them hair pin.  Even though it was scenic, we were nervous and anxious the whole time.  An experience like this feels like it will never end when you are living through it, just like the recession and market declines of 2007 to 2009, and just like today’s Coronavirus and bear market.  Well, the drive did end. We were happy we did it because of the beautiful sights and the memorable experience, but we were relieved to get back to a smooth highway.  Today people will be much happier when the markets return to a “smooth highway”.  And we will return to that, even though we don’t know when!

One of the keys is “not to sell low” because you lock in those losses forever.  Schools are closing, sports are suspended, cities are declaring states of emergency, businesses are starting to work remotely.  The news will get worse and corporate earnings will come under pressure.  None of these gut-wrenching declines ever feels good.  In my 50+ year career I have experienced quite a few.  The best way to achieve long term financial success is to stick to the game plan!  Two years from now when we look back, I truly believe we will be saying that “2020 was the year of the virus, and 2021 was the year of the recovery.” 

I can’t take the emotion away, but please know that I understand because I am feeling it too.   What I can do is listen and guide you.  I hope my story resonates with you.  Please lean on us and call if you have questions.

A client of ours responded to one of our newsletters last week with a very poignant statement: 

Don’t touch your face and don’t touch your IRA!

She says she can’t take credit for it, but it’s certainly worth passing along!

Sincerely,

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

A reminder on the current operation of our firm:

We at Kohlhepp Investment Advisors, Ltd. are taking the proper precautions to protect ourselves and our clients, and we continue to focus on the wellbeing of our clients, associates and business partners. This includes the decision to suspend in person meetings and only hold virtual meetings – phone or video conference – for the foreseeable future. If you feel you have a need to physically stop in the office, please call first.

Our office is fully operational and our staff is working remotely. Based on what we know at this time, we do not have concerns about our ability to conduct business as usual. 

March 12, 2020

Despite a nice recovery day on Tuesday, it now appears that the investment markets are in full panic mode, the result of the World Health Organization declaring the Covid-19 virus to be a global pandemic.  Traders on Wall Street are selling at virtually any price, which is causing the markets to drop into bear market territory.

The long bull run that started in March 2009, and set many records along the way, is now officially over.  May it rest in peace; we will all remember it fondly.

It is almost impossible to keep a rational perspective in the middle of a herd that is stampeding toward the exits, and this particular stampede can fairly be described as one of the worst in market history.  Michael Batnick, director of research at NYC investment manager Ritholtz Wealth Management noted, this is the fastest bear market ever; that is, the fastest that the U.S. stock market has experienced a decline of 20% or more going back to 1915.  The average number of days from peak to a 20% decline is 255, and the median is 156.  The recent market selloff reached this dubious achievement in just 17 trading sessions.  By contrast, the fabled 1929 market downturn took 36 sessions.

The Covid-19 pandemic (as it is now known) should first be considered a health issue, and everybody should do what they can to protect themselves and their families from the spread of the disease.  It should go without saying that your health is more important than your portfolio.

Is your health at risk?  The World Health Organization has published information which suggests that the Covid-19 virus in China was more deadly, on a percentage basis, than the Spanish flu epidemic that raged across the world in 1918-1920.  So far, it has been more deadly than cholera, much more than swine flu or hepatitis A.  On the other hand, reports indicate that the elderly and people with pre-existing health issues are far more likely to die of the corona virus than younger and healthier people, and the death rate outside of China has been roughly half of the Chinese experience.  More testing will be needed before we know the full extent of the infected population and the morbid statistics for those who ARE infected.

But once health precautions are taken, it is appropriate to address the potential for losses, and how best to navigate the market conditions.  There are news reports that the U.S. government will propose a payroll tax cut, and possibly also bailouts of key publicly-traded companies in the travel and entertainment industry.  The Federal Reserve Board has cut a key interest rate by half a percent—a dramatic move that seems not to have had more than a one-day impact on market sentiment.

Historically, bear markets have been less impactful than their bull market counterparts, as you can see from the accompanying chart click here.  Of course, you could argue that a global pandemic is different from a housing market crash.  Research analysts at Goldman Sachs took a look back at “event-driven” bear markets; that is, market declines that were not driven by an economic recession, but instead were triggered by things like war, oil price shocks or an emerging-market crisis.  They found that the average event-driven bear market resulted in a 29% decline—on average.  The report notes that we have never before entered a bear market due to a viral outbreak, but in the past, bear markets triggered by “exogenous shocks” have recovered their previous levels within 15 months.

There is some good news for many investment portfolios: during the downturn, 20-year Treasury bonds have gained 24% in value, as bond yields have fallen to record lows.  The 10-year Treasury yield experienced its biggest weekly drop since December 2008.  This performance, so directly counter to stock movements, explains why it is so necessary to hold diverse investments in a portfolio.

The harder conversation is about market timing.  Most people understand that it is impossible to time the market without a working crystal ball.  But this is easily forgotten when the daily headlines announce that your net worth is falling by 4-7% in a single day, when the stock portion of your portfolio has fallen by 20% in record time.  The natural question is: should I get out now and avoid more of the same?

There is only one rational answer to this question: it has never been a good idea to sell when everybody else is selling, just as it has never been a winning strategy to buy stocks when everybody else is wildly bullish.  The best strategy has, in the past, been to ride out the downturn and experience the subsequent upturn—which may come tomorrow, next week, next month or next year. 

Make no mistake: bear markets like the one we have just entered pose a real danger to your future financial health.  There is a real danger in selling at the bottom and then missing out on the recovery.

We at Kohlhepp Investment Advisors, Ltd. are taking the proper precautions to protect ourselves and our clients, and we continue to focus on the wellbeing of our clients, associates and business partners.  This includes the decision to suspend in person meetings and only hold virtual meetings – phone or video conference – for the foreseeable future.  If you have a need to physically stop in the office, please call first.

We are here, the office is open – fully operational and fully staffed.  If the situation escalates, we have the capability to be fully remote and are prepared to do so with no interruption to our operations.   Based on what we know at this time, we do not have concerns about our ability to conduct business as usual. 

Be smart. Be safe.  We will be in touch.

Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

This material was prepared by BobVeres.com., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Sources:

https://theirrelevantinvestor.com/2020/03/09/the-fastest-bear-market-ever/

https://finance.yahoo.com/news/coronavirus-and-trump-are-causing-stock-market-panic-and-investors-are-powerless-195953674.html

https://www.bloomberg.com/news/articles/2020-03-11/coronavirus-a-pandemic-who-says-in-urging-governments-to-act?

https://www.marketwatch.com/story/goldman-sachs-analyzed-bear-markets-back-to-1835-and-heres-the-bad-news-and-the-good-about-the-current-slump-2020-03-11?siteid=yhoof2&yptr=yahoo

https://www.marketwatch.com/story/boring-bonds-turning-into-best-investment-of-the-year-as-treasurys-see-returns-north-of-20-2020-03-06?siteid=bigcharts&dist=bigcharts

https://www.bloomberg.com/news/articles/2020-03-11/virus-is-at-bear-stearns-moment-and-may-get-worse-summers-says

Source: First Trust Advisors L.P., Bloomberg. Returns from 1926 - 2019

March 10, 2020

One of our strategic partners, Blue Bell Private Wealth Management, with whom many of our clients are invested, sent out this newsletter yesterday. The perspective and sentiment of Kohlhepp Investment Advisors, Ltd. is aligned with what is stated here, so we are partnering with them to deliver this message to you:

Stocks dropped roughly 7% not long after the market opened yesterday. That triggered the first of three circuit breakers designed to give market participants a chance to regroup during moments of extreme volatility.

It is no secret that news of the coronavirus has created mass uncertainty through the stock market, most of which is surrounding the economic slowdown as a result of the virus. If you watch the news regularly, it may seem like this is the end of times. We are here to remind you of a few things about long-term investing.

1. Your financial, investment and retirement plan is probably not going to change

Disturbing or disrupting your long-term plan or radically changing your portfolio makes no sense. Selling today would mean locking in permanent losses. If you did, you would be transferring the proceeds to an asset class (i.e. a money market) that yields close to zero.

2. Nobody called this

Plenty of people had been calling for a recession this year but they are the same people who have been calling for a recession every year. A perfectly correct economic or market call, that cannot be repeated in the future, is worth just as much as no call at all.

3. All in or all out are terrible strategies

Investors cannot afford to miss the 25 best days in the market, or your returns are wiped out. The catch is that the 25 best days are frequently mixed in among the 25 worst days. Unfortunately, you can’t have the ups without the downs and anyone who promises you otherwise is not telling the truth. It is impossible to "time" the markets.

4. Why don't we just sell everything and wait this out?

Eleven years ago today, in March of 2009, the stock market reached its nadir during the financial crisis and stopped going down. If you had polled people that day, most would not have agreed that we had seen the bottom. The economic headlines were not improving. Within 3 months, the stock market had climbed 41% from that March low. Even with the market increase, many investors still were not sure that we had seen the last of the decline. There were still people years later that had gone to cash and still hadn’t gotten back into equities. They missed out on a tremendous rise in the stock market and the commensurate increase in their portfolio.

5. Reducing risk should be part of your plan

Having an effective hedging strategy can help reduce the effects of volatility over the long-term. We believe it is important to protect against the downside without giving up too much upside. This has been and will continue to be a part of our investment strategy.

Conclusion

The worst thing that you can do now is panic. Financial decisions based on emotions have proven time and again to be detrimental to investors. Investing for the long-term will benefit those who are patient, disciplined, and have a plan. The best way to achieve the goals we've talked about together is to stay the course.

We remain vigilant in reviewing your portfolios and we are committed to your goals.

Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA

President  

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

Source: Blue Bell Private Wealth Management

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives. 

March 2, 2020

The COVID-19 virus has been reported in the national press as either a political or an economic story, but it is neither.  It has been compared to the 1917-18 Spanish Flu that infected an estimated one-third of the human population and killed an estimated 50 million people, even though we are now in a very different medical world, even though the Spanish Flu occurred during a major, brutal world war. 

As citizens, investors and (so far) healthy individuals, what do we need to know about this new pandemic?

COVID-19 (formally SARS-CoV-2) is a respiratory virus, caused by a new type of coronavirus (in the same family as the virus that causes the common cold) that was first detected in Wuhan City, Hubei Province, China, and has now been detected in 57 locations nationally, including fewer than 100 in the United States.  One of its primary features is how contagious it is; the virus can live for hours in a dormant state on surfaces (like a doorknob) after an infected person touches them.  It is spread through the air in microscopic droplets when people breath, cough or sneeze.  The Center for Disease Control recommends that people who have the virus wear a mask to protect others, but have said that wearing a normal facial mask doesn’t prevent people from getting the disease.

In most cases, the symptoms of the disease appear within five days, but there have been reported cases of a 14 day incubation period.  Because people can be contagious for up to two weeks before they show symptoms, the virus is very hard to quarantine.  This became more evident when it was discovered that a dog had been infected, meaning that it’s possible for animals to transmit the disease back and forth with humans.  The International Journal of Infectious Diseases, studying the COVID-19 cases from the Diamond Princess cruise ship that reported 355 passengers who contracted the virus, calculated that each person who is infected with the disease, on average, will infect 2.28 others.

As of Friday, there were 83,774 reported cases worldwide, and 2,867 fatalities.  The World Health Organization officials have recently increased the risk assessment to the highest (“very high”) level of risk assessment in terms of spread and impact. 

Reported illnesses have ranged from mild to severe.  Researchers from China’s Center for Disease Control have recently released the clinical findings of more than 72,000 cases reported in mainland China.  The overall death rate is 2.3%, but different populations are far more likely to suffer fatalities than others.  An alarming 14.8% of patients 80 and older died from the disease, and 8.0% of patients aged 70-79.  At the other end, 81% of the cases in the study were classified as mild, meaning they did not result in pneumonia or resulted in only mild pneumonia. 

Fatality rates for children 0-9 years old so far is zero, and the rates are not high for people in younger age ranges: 10-39 years old (0.2%), 40-49 (0.4%), 50-59 (1.3%) and 60-69 (3.6%).

There may be a vaccine on the way, though it is uncertain how soon.  China’s Clover Biopharmaceuticals is partnering with GlaxoSmithKline on a protein-based coronavirus vaccine candidate called COVID-19 S-Trimer.  The University of Queensland in Australia announced a vaccine candidate, and globally, at least 10 other vaccine initiatives are under way.  Treatments for people who have already contracted the disease are as yet unproven.  An antiviral drug called remdesivir, manufactured by Gilead Sciences, is being tested on 700 sick patients in Wuhan.  A drug called Kaletra, produced by AbbVie to treat HIV, is also being tested.

From an economic standpoint, any industry where people gather together in large numbers is being impacted.  That means airlines and the travel/tourism industry generally, plus conferences.

The other impact is related to supply chains.  China’s quarantine efforts have reduced manufacturing in the country where many global companies have outsourced their manufacturing and assembly activities.  Hong Kong is already in a recession, and The Boeing Center at Washington University in St. Louis has estimated a $300 billion impact on the world’s supply chain that could last up to two years.  Lower demand from Chinese buyers has caused a decline in oil prices.

Prevention efforts and quarantine efforts are certain contribute to the economic slow down.  Japan’s Prime Minister Shinzo Abe has ordered all schools closed in Japan for the next month, and officials there are concerned about the possibility that the 2020 Summer Olympics could be curtailed or cancelled.  South Korea has shut down numerous educational institutes including elementary schools in Seoul.  In Italy, the Lombardy and Veneto regions (total population: 50,000) have been locked down in quarantine procedure following an outbreak in the town of Codogno.  U.S. technology companies have expressed worries about disruption to their production in facilities in China, and a February 27 Goldman Sachs forecast suggested that American companies will experience zero earnings growth (Note: this does NOT mean zero earnings) in 2020.

The most important thing to know about the new pandemic is that we actually don’t know what the impact will be—on our health, on our nation’s economic health, on our portfolios.  We do know that the U.S. securities markets are down 11-12% from their recent highs, based on what can only be described as panic selling by the traders who make up most of the volume on the exchanges.  That means stocks are cheaper to buy now than they have been, and dividends are higher, as a percentage of share price, but whether that panic will continue, or not, we simply cannot say.

Please understand that we are monitoring the situation, with an understanding that, historically, trying to time the market or make bets based on guesses about the future has been a losing strategy.  Our most important wish is that you and your family stay healthy.

Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

Sources:

http://www.cidrap.umn.edu/news-perspective/2020/02/study-72000-covid-19-patients-finds-23-death-rate

https://www.cdc.gov/coronavirus/2019-ncov/about/share-facts.html

https://www.cdc.gov/coronavirus/2019-nCoV/summary.html

https://www.forbes.com/sites/leahrosenbaum/2020/02/20/when-will-there-be-a-vaccine-for-the-new-coronavirus-everything-you-need-to-know/#4cf628fc5025

https://hub.jhu.edu/2020/02/27/trump-johns-hopkins-study-pandemic-coronaviruscovid-19-649-em0-art1-dtd-health/

https://www.health.harvard.edu/blog/as-coronavirus-spreads-many-questions-and-some-answers-2020022719004#q2

https://www.worldometers.info/coronavirus/coronavirus-age-sex-demographics/

This material was prepared by BobVeres.com., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

February 28, 2020

Wuhan, a city in China with a population of more than 11 million people, was not known to most Americans before several weeks ago.  Now we know that it is the epi center of the outbreak of the Coronavirus.  Initially, it was thought that the virus could be confined to China.  But since then the outbreak has spread globally to many countries including Japan, Italy, South Korea, Iran, and the U.S.  Some cities and countries are restricting travel and preparing for the shutdown of schools and businesses for long periods.  It has becomes apparent that this virus will impact mostly China’s production and GDP, but also other countries as well.

Some experts predict that the number of infections will peak in the next several months and dissipate by summer as the weather warms up.  However, no one really knows.  And the CDC indicates that it could take 12 to 18 months to test and produce an efficacious vaccine.

We urge you to monitor reliable information sources such as the CDC and the World Health Organization for the latest updates.

Economic activity is being affected and fear has crept into the markets.  This has turned to panic in the last 5 to 6 days with the major averages dropping about 11%.  This, in and of itself, is not unusual.  In most years, even when the market is positive, there is an average intra year pullback of 12 to 14%.

SO WHAT SHOULD YOU DO?

• Do not watch the news shows all day long.  They concentrate on the headline stories which cause the most consternation.

• Be aware that your portfolios are structured to withstand declines such as these – remember our “Bucket Strategy”.

• Do not bail on the markets.  Remember, our plans and portfolios are built for the long term, not just 3 months, or even one year.

• Allow us to do the worrying for you!

WHAT ELSE?

• We are now in “correction” territory – a decline of more than 10%.  Corrections are normal every several years.

• Focus on the market fundamentals, which we believe remain positive.

• Volatility is likely to continue for a while.

• The Coronavirus will have a short-term effect on the economy and corporate earnings, some industries more than others, e.g., airlines.

• Financial success is achieved by focusing on long term goals and not letting short term disruptions derail us from our objectives.

• We have great medical care in the U.S.

We are here for you.  If you are in a fearful state, call us.  We don’t believe you need to change anything in your portfolio.

We are confident in the future of the equity markets and our country!

Spring will be here soon!  I am sure we will all welcome it.

Sincerely,

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

Quote: “In investing, what is comfortable is rarely profitable.”  Robert Arnott

December 21, 2018

Volatility will always be around on Wall Street, and as you invest for the long term, you hopefully learn to tolerate it.  Rocky moments, fortunately, are NOT the norm.

Since the end of World War II, there have been dozens of Wall Street shocks.  Wall Street has seen more than 50 pullbacks (retreats of 5 – 9.99%) in the past 73 years.  On average, the benchmark fully rebounded from these pullbacks within two months.  The S&P has also seen 22 corrections (declines of 10 – 19.99%) and 12 bear markets (drops of 20% or more) in the post WWII era.

Even will all those setbacks the S&P has grown exponentially larger.  During the month WWII ended (September 1945), its closing price hovered around 16, YES 16.  At this writing it is above 2500.  Those two numbers communicate the value of staying invested for the long term.  This current bull market has witnessed five corrections.  It has risen more than 300% since its beginning even with those stumbles.  Investors who stayed in equities through those downturns watched the major indices soar to all-time highs.

Bad market days shock us because they are uncommon.  If pullbacks or corrections occurred regularly, they would discourage many of us from investing.  A decade ago in the middle of the terrible 2007-09 bear market, some investors convinced themselves that bad days were becoming the new normal.  History proved them wrong.

As you ride out this current outbreak of volatility, keep two things in mind. One, your time horizon: you are investing for goals that may be 5,10,20 or more years into the future.   One bad market week, month, or year is but a blip on that timeline and in unlikely to have a severe impact on your long run asset accumulation strategy. Remember that there have been more good days on Wall Street than bad ones.

LET’S ASSESS LATE CYCLE RISKS AND OPPORTUNITIES.   AND WHAT DO WE SEE AHEAD IN 2019:

• The U.S. economy will slow, but not stall.   We expect GDP growth to slow to 2 to 2.5% next year.
• Central banks (The Federal Reserve, the Bank of Japan, and the European Central Bank) will continue to tighten monetary policy and raise interest rates.  Just this past week the Fed raised rates 0.25% and indicated they will likely raise rates twice, but NOT three times in 2019
• U.S. Equities:  earnings growth will slow although it will remain positive.  Earnings will still be the main driver of returns.
• The unemployment rate will likely continue to decline from 3.7%, its lowest level since the early 50s.
• Inflation should remain at a level close to 2%.
• Consumer sentiment is negative.
• Trade tariffs still present a hurdle and need resolution.
• The international markets have promise, but look murkier than the U.S.  We are continuing to watch BREXIT.
• It is important to stay invested even though it appears we are in the late innings of the bull market.
• A possible government shutdown (see our previous newsletter on this topic). 

Even with all of this volatility, the major indices (Dow and S&P) are down only 6 to 8% at this writing.  This is NOT another 2007-8-9, although more volatility could still be ahead.

THE MOST IMPORTANT ISSUES TO REMEMBER ARE THE FOLLOWING:

1. You are invested in a diversified portfolio, not all equities.
2. Your portfolio is not the market.
3. We have planned your portfolio carefully to weather markets like this.
4. Sudden volatility should not lead you or us to exit the market. If you react anxiously and move out of equities in response to short term downturns, you may impede your progress toward your long term goals.

If you have any questions about the markets, or your portfolio, please call. 

We wish you and your family a very Merry Christmas and a Happy New Year!

 Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

These are the opinions of Edward Kohlhepp and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Diversification and asset allocation strategies do not assure profit or protect against loss. Past performance is no guarantee of future results. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal

December, 2018

We are told that one reason stocks have been going down lately is the threat of a government shutdown, which seems almost probable if the President’s recent statements are to be taken at face value.  The U.S. President is on record as embracing a government shutdown on Friday, December 21 unless he receives full funding for his border wall with Mexico.  This seems unlikely, so it might be time to ask: If the government shuts down, what is actually likely to happen?

An article on the ZeroHedge website offers some news that might surprise most of us.  First: government shutdowns have been more common than we might realize.  In all, there have been 20 government shutdowns since October 1, 1976:

October 1-10, 1976

October 1-12, 1977

November 1-8, 1977

December 1-8, 1977

October 1-17, 1978

October 1-11, 1979

November 21-22, 1981

October 1, 1982

December 18-20, 1982

November 11-13, 1983

October 1-2, 1984

October 4, 1984

October 17, 1986

December 19, 1987

October 6-8, 1990

November 14-18, 1995

December 6, 1995 - January 5, 1996

October 1-16, 2013

January 20-22, 2018

February 9, 2018

The article notes a few things to remember.  First, Congress can avoid a partial shutdown by passing another continuing resolution—following the continuing resolution in September that temporarily funded 7 out of 12 total appropriations into December.  If the President were to veto that resolution, then a two-thirds majority in both the House and Senate could override the veto.

What about the other 5 of the 12 appropriations?  Those—Energy & Water; the Legislative Branch; Military Construction and VA; the Department of Defense; and Labor, Health & Human Services—represent 75% of discretionary government spending—basically 75% of the money spent that is not related to Social Security, Medicare or other entitlement programs.  Those programs are fully funded through September 30, 2019. 

So what appropriations would the shutdown actually impact?  The seven that still have to be authorized are Agriculture; Commerce, Justice and Science; Financial Services and General Government; Homeland Security; Interior and Environment; State and Foreign Operations; and Transportation and HUD. 

What would be the economic impact of this potential partial shutdown?  The report estimates that for every day of a full shutdown, American GDP is reduced by 2.4 basis points, or 0.024%.  But since only 25% of the government would be inoperable, the impact in this case would be about 0.008% per day. 

Put another way, each month would reduce American economic growth by about half a percent.  That, of course, is unlikely to happen.

What have the markets done during past government shutdowns?  The data show that the average market move for the S&P 500 index, in the week of a government shutdown, is down 0.06%—which I think most of us would regard as virtually unchanged.  The two weeks during and after a shutdown, the markets averaged down 0.13%.  More interesting is the fact that the one-week data shows that only 47% of the time did the market go down.  More interesting still, in the month after the shutdown, the average price move was UP 0.25%.

Nobody is saying that a government shutdown is good for stocks, or that shutting the government down is a great way to shake the market out of its current tailspin.  But it probably isn’t a good idea to panic about the market impact of a shutdown either.

Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

Source:

https://www.zerohedge.com/sites/default/files/inline-images/19%20govt%20shutdowns.png?itok=UIGSm3fB

This material was prepared by BobVeres.com., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

November, 2018

America is at sailing along at peak prosperity, with the stock market having boomed for 10 years and the last recession coming in the previous decade.  Unemployment is at a 20-year low.  There are arguments about which President is responsible for this great news, but most Americans are prosperous.  Right?

Apparently not.  The nonprofit Center for Financial Services Innovation polled more than 5,000 Americans, and concluded that, in the midst of this unprecedented economic prosperity, only 28% of Americans could be considered “financially healthy.”  That is calculated by examining spending, saving, credit and other indicators.  It is defined as not having an unhealthy amount of debt, an irregular income and sporadic savings habits.

The survey found that an astonishing 17% of Americans are “financially vulnerable,” meaning they struggle with nearly all financial aspects of their lives.  Some 44% of respondents said their expenses had exceeded their income in the past year, and they had to use credit to make ends meet.  Another 42% reported having no retirement savings at all.

Other research supports these conclusions.  The website bankrate.comincludes a report saying that only 29% of Americans have six months or more of emergency savings, and roughly the same amount say they have none.  The Federal Reserve and the Federal Deposit Insurance Corp data suggests that the median American household holds just $11,700 in savings.

Sincerely, 

Edward J. Kohlhepp, Jr., CFP®, MBA
President  

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

Source: 

https://www.marketwatch.com/story/only-3-in-10-americans-are-considered-financially-healthy-2018-11-01

This material was prepared by BobVeres.com., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

November, 2018

Nobody knows why the S&P 500 index declined more than 11% in October; the largest decline since, well, earlier this year.   

But experienced investors know that these declines are not unusual.  Since March 2009, the U.S. stock market has seen 23 pullbacks greater than 5%; eight greater than 10%.  You can see all of them on the accompanying chart; on average, these pullbacks have lasted 42 days and dropped prices by 9.3%.  And this is during a very long bull market! 

Interestingly, the S&P 500 today isn’t the same as it was back when the current bull market began; in fact, there are only 337 stocks remaining in the index that were included on March 9, 2009.  A small number—just 38 of them—accounted for much of the runup in the index, each gaining more than 1,000%. Most of the big gainers were technology stocks.   

Is there a lesson here?  Alas, we can’t extrapolate the short-term future from these statistics.  When stocks go on sale, it is often difficult to determine whether they will become even better bargains in the days ahead. 

Sincerely, 

Edward J. Kohlhepp, Jr., CFP®, MBA
President  

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

Sources: 

https://theirrelevantinvestor.com/2018/10/30/a-top-or-the-top/ 

https://pensionpartners.com/the-5-kinds-of-bounces/ 

This material was prepared by BobVeres.com., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

October, 2018

If you’re the kind of person who like to worry, then October has given you plenty of stimulus.  After yesterday’s 3.1 percent drop in the popular S&P 500 index, the index has lost 8.8% in this month alone, wiping out all the gains that we’ve enjoyed this year, putting the index in negative territory.  The once-soaring Nasdaq Composite Index of technology companies tumbled 4.4% on the same day.

In times when the markets are dropping, even if they haven’t hit correction territory yet (that would be a 10% drop), the media needs to find a narrative, and you hear all sorts of theories.  Corporate earnings have nowhere to go but down.  The tariffs are slowing down economic activity.  Interest rates are rising.

All of that is true, but none of it has anything to do with why the markets are falling.  The only true headline, and one you will never read, is that stocks are falling because some people are losing faith in their investments and selling out to bargain hunters.  Sometimes this activity feeds on itself; when people see the market falling, they, too, begin to panic.

The stock markets periodically deliver losses for reasons which are not always obvious even after the fact.  Bear markets are a normal part of investing, and this is actually a good thing, because it allows real investors to periodically buy stocks at discounted prices.  Research has shown that there is a gap between the return that most investors get from their stock investments and the actual returns delivered by those stock investments.  This is, of course, because they sell this or that fund before it goes up, or sell out and then wait to get back in until the market has gone up past where they sold.  Getting the full return of the markets is relatively easy: just hang on during those periodic downturns.

But those downturns are terribly painful, right?  Take a look at this chart, created by First Trust Corporation, which shows the bull and bear markets since the Great Depression.  Notice that the downturns have been sharp but relatively brief, while the up-markets have been protracted and generous.  This has been the pattern up to now, and there’s no reason to think it won’t continue, unless you believe that the millions of people who go to work each day for their corporate employers are somehow destroying value instead of creating it.

You don’t need an explanation for why markets go down in order to benefit from them.  You just need the ability not to startle when the herd of investors suddenly makes an unexpected dash for the exits—to, as Warren Buffett once said, be greedy when others are scared, and scared when others are greedy.

Worry about the downturn if you want, but know that worry is the precursor to being scared.  And if you see somebody predicting where the markets are going to go from here, if they’re not wearing a wizard’s hat and gazing into a crystal ball, it’s probably best to turn off your attention.

Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

Sources: 

https://allstarcharts.com/stock-prices-falling-perfectly-normal/ 

https://www.bloomberg.com/news/articles/2018-10-23/asia-stocks-look-mixed-as-late-u-s-rally-falters-markets-wrap?utm_campaign=socialflow-organic&utm\

This material was prepared by BobVeres.com., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

September 20, 2018

If you’ve been paying attention to the financial news lately, you’re probably seeing a lot of ominous predictions—and they’re usually backed up by some ominous headline.  The most simplistic are saying that the bull market has now lasted ten years, so therefore it’s about to come to an end—as if bull markets come with a time limit.  Others, equally simplistic, are saying that the market has reached a new high, and, well, don’t markets fall from their all-time highs?  This ignores the fact that more than 70% of the time, a new high is followed by another new high—and ultimately, so far in history, every new high has eventually been surpassed by the next one.

The more credible predictions are based on the fact that the U.S. debt is exploding, or that the U.S. is experiencing an expanding credit bubble in the government, corporate sector, and also—perhaps for the first time—the youngest workers with their crushing student loans.  The Fed is committed to raising interest rates, which will make all that debt more meaningful somewhere down the road.  And then we have the meltdown in Turkey, the potential consequences of reckless trade wars on the global economy, and the flat yield curve that is in danger of inverting.

The most important thing to know about all this is that there is no economic consensus that the U.S. or the world economy are about to plunge into recession in the next six to 12 months.  None of these simplistic arguments or ominous headlines, separately or together, add up to an imminent market meltdown or fire sale of the stocks that you’re holding in your portfolio.  That, of course, doesn’t mean that a meltdown couldn’t happen tomorrow, but it could just as easily happen one, two or three years down the road.  And it’s helpful to remember that various pundits have been predicting a major pullback constantly over the past nine years of bull market returns.  Anybody who was spooked by these pundits would have missed out on significant gains. 

This is more of the same noise, albeit with somewhat scarier headlines in the background.

Interestingly, the indicator that is taken most seriously in economic circles is the inverted yield curve.  We aren’t there yet, but the bond markets are certainly moving toward one of those rare times when two-year Treasuries are yielding more than 10-year bonds.  Every recession since 1977 has been preceded by a yield curve inversion.

But is this cause, effect or coincidence?  A recent article by Laurence Siegel, Director of Research at the CPA Institute Research Foundation, acknowledges that inverted yield curves have been a pretty good predictor in the past.  But he says that in the present marketplace, there is, as yet, no pressure coming from the things that a recession corrects: high inflation, high levels of debt, rich stock market valuations (though we may be moving in that direction), and tightness in the labor market. 

A yield curve inversion affects the supply and demand for capital, which can have impacts on the economy which could cause a recession.  It discourages banks from doing what they were made to do: borrowing short and lending long to viable businesses that are expanding.  In the past, there may have been a more direct cause and effect than there is today.  Today, banks can turn to hedge funds and a variety of other lenders who will allow them to borrow short at reasonable rates.

The bigger point is that recessions are inherently unpredictable.  If we had a reliable way to predict them, we would already be in them, because companies, knowing the time and date of the recession, would pull back in anticipation of it, and simply bring it on more quickly.  The same is true of major market pullbacks; if you, or I, or anyone else knew when it was going to happen, we would already be running for the exits, triggering the pullback prematurely.

Bottom line: we don’t know when or where the pain will come; we only know THAT it will come.  And we know with some certainty the direction of the next 100% movement in the markets.  That may be enough.

Sources:

https://www.ft.com/content/58d1ce9c-b5a2-11e8-bbc3-ccd7de085ffe

https://www.advisorperspectives.com/articles/2018/08/20/dont-be-fooled-by-the-yield-curve

This material was prepared by BobVeres.com., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

February 5, 2018

Suppose somebody came up to you and shouted: “I have terrible news about the economy.  I think you should sell your stocks!”

Alarmed, you say: “Oh, my God.  Tell me more!”

And this mysterious stranger shouts: “Run for the hills!  The American economy just added 200,000 more jobs—more than expectations—and the U.S. jobless rate now stands at 4.1%, the lowest since 2000!”

You blink your eyes.  So?

“There’s more,” you’re told.  “The average hourly earnings of American workers have risen a more-than-expected 2.9% over a year earlier, the most since June of 2009!  You should sell your stocks while you can!”

Chances are, you don’t find this alarmist stranger’s argument very persuasive, but then again, you don’t work on Wall Street.  After hearing these benign government statistics, traders rushed for the exits from the opening bell to the closing, and today the S&P 500 stocks are, in aggregate, worth 2.13% less than they were yesterday.  The Nasdaq Composite index fell 1.96% and the Dow Jones Industrial Average, a somewhat meaningless but well-known index, was down 2.54%.

To understand why, you need to follow some tortuous logic.  According to the alarmist view, those extra 200,000 jobs might have pushed America one step closer to “maximum employment”—the very hard-to-define point where companies have trouble filling job openings, and therefore have to start offering higher wages.  No, that’s not a terrible thing for most of us, but the idea is that if companies have to start paying more, then they’ll be able to put less in their pockets—and the rise in the hourly earnings of American workers totally confirmed the theory.

If you’re an alarmist, it gets worse.  If American workers are getting paid more, then

companies will start charging more for whatever they produce or do, which might raise the inflation rate.  “Might” is the operative word here.  There hasn’t been any sign of higher inflation, which is still not as high as the Federal Reserve Board wants it to be.  But if you’re a Wall Street trader who thinks the market is in a bubble phase, you aren’t necessarily looking at facts to confirm your beliefs.

Suppose you’re not an alarmist.  Then you might notice that 18 states began the new year with higher minimum wages, which might have nudged up that hourly earnings figure that looked so alarming a second ago.  And some companies have recently announced bonuses following the huge reduction in U.S. corporate tax rates, whose amortized amounts are also finding their way into wage statistics.

Meanwhile, those same government statistics are showing a resurgence in factory activity and a rebound in housing, which account together for more than 50,000 of those new jobs.

So the question we all have to ask ourselves is: are we alarmists?  Selling in anticipation of a bear market has never been a great strategy, even though stocks are admittedly still priced higher than they have been historically.

If you are not an alarmist, then you have something to celebrate.  The S&P 500 has now officially ended its longest streak without a 3% drop in its history.  It’s an historic run not likely to be seen by any of us again.  The truth about the markets is that short, sharp pullbacks are inevitable and routine—unless you were living in the past year and a half, when we seemed to be immune from normal market behavior.

Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

This material was prepared by BobVeres.com., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Sources:

https://www.bloomberg.com/news/articles/2018-02-02/u-s-added-200-000-jobs-in-january-wages-rise-most-since-2009

https://www.bloomberg.com/news/articles/2018-02-01/asia-stocks-to-slide-as-tech-stumbles-bonds-drop-markets-wrap?https://www.theatlantic.com/business/archive/2018/02/market-dow-drop/552254/?utm_source=atltw

January 5, 2018

Investors are excited about bitcoin – perhaps too excited. Their fervor is easy to understand.On December 18, bitcoin closed at $17,566. Back on September 22, bitcoin was valued at only $3,603.¹    

Yes, you read that correctly – the price of bitcoin jumped nearly 500% in three months. Thanks to this phenomenon, investors everywhere are asking if they should buy bitcoin or invest portions of their retirement funds in the cybercurrency. The air is filled with hype: bitcoin is “unstoppable,” it is “the answer,” it is “the future.”  

It may also be heading for a crash.   

Bitcoin has crashed before.It is highly volatile. On Thanksgiving 2013, a single bitcoin was worth $979; by April 2014, the price was at $422. In late August 2017, it settled at $4,673; by mid-September, it was back at $3,783 immediately before its amazing fourth-quarter climb.¹   

With the recent launch of bitcoin futures markets on the Chicago Board Options Exchange (CBOE) and CME Group, bitcoin has gained more respect. Still, there are many investors who will not touch it because of its considerable downside risk and its association with the seedy side of global finance.²   

The free market determines the value of bitcoin. Therefore, it can suffer sudden, dramatic devaluations due to the day’s headlines. When China ordered bitcoin exchanges to shutter, the price of bitcoin slid. When JPMorgan Chase CEO Jamie Dimon called bitcoin “a fraud” in September 2017, the price quickly fell 10%. When the Silk Road website disappeared, bitcoin’s value took a hit (and its disappearance brings us to the cryptocurrency’s other worrisome aspect).^3,4 

Bitcoin has long been linked to the “dark web.” Even its origins are mysterious: the digital currency was created by someone named “Satoshi Nakamoto,” whose identity is still a question mark. Bitcoins are made in cyberspace by computers, beyond the control of any government.To its advocates, the fact that bitcoin has emerged from the Internet rather than a central bank is attractive. Who bitcoin and other cybercurrencies have attracted is another matter.^4,5    

Bitcoin transactions are conducted on multiple exchanges and verified through the blockchain, a digital ledger that leaves transaction records open to the broad community of bitcoin users rather than a financial regulatory authority.^3,4  

Is this transparency a plus or a minus? You will hear both arguments. Even with this openness, users on bitcoin exchanges are not always required to reveal their identities, which is a plus for criminals. Bitcoin has been linked to money laundering, and earlier in this decade, some economists saw it as little more than a currency for drug lords. Silk Road, a black-market website, saw plenty of bitcoin transactions. How about funding for terrorist cells? Recently, a New York woman was charged with trying to send more than $80,000 to ISIS – cash mostly laundered through bitcoin, federal prosecutors assert.^5,6   

The hype says that bitcoin is the “new gold,” but gold has intrinsic value. Governments, banks, and institutional investors share a foundational belief that gold is a valuable commodity. Does bitcoin have such a foundational belief beneath it?  

If speculators stopped believing bitcoin was valuable, then how valuable would it be? Nearly worthless, in the eyes of some observers. As NerdWallet investment writer Andrea Coombes remarks, “The value is in the demand itself.”⁷ 

In the financial markets, higher prices are not always succeeded by higher prices.This is essentially the belief holding up bitcoin. Its biggest fans believe its direction will be up and up for years to come, and that it will never really crater again. This is called irrational exuberance, and it has harmed many investors through the years. 

Whether you think bitcoin is the “new gold” or amounts to a bubble ready to burst, its extreme, dangerous volatility means one thing – if you do choose to invest in it, you would be wise to only invest money that you can afford to lose.

Sincerely, 

Edward J. Kohlhepp, Jr., CFP®, MBA
President  

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO 

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 - coindesk.com/price/ [12/20/17]

2 - cnbc.com/2017/12/17/worlds-largest-futures-exchange-set-to-launch-bitcoin-futures-sunday-night.html [12/17/17]

3 - thebalance.com/who-sets-bitcoin-s-price-391278 [2/14/17]

4 - theguardian.com/technology/2017/sep/13/from-silk-road-to-atms-the-history-of-bitcoin [9/14/17]

5 - theguardian.com/business/2013/mar/04/bitcoin-currency-of-vice [3/4/13]

6 - arstechnica.com/tech-policy/2017/12/feds-charge-new-york-woman-with-sending-bitcoins-to-support-isis/ [12/15/17]

7 - nerdwallet.com/blog/investing/is-bitcoin-safe/ [12/7/17]

August 16, 2017

So far, the world markets seem to be shrugging off the sabre-rattling coming from North Korea (normal behavior) and the U.S. White House (complete departure from policy). The smart money is betting that the distant but suddenly headline-grabbing possibility of the first conflict between two countries armed with nuclear weapons will amount to a tempest in a teapot.   
 

Meanwhile, the U.S. stock market has been testing new highs for months, and experts cannot quite explain why valuations have been rising amid such low volatility.  
 

So the question is quite logical: isn’t this a good time to pare back or get out of the market until valuations return to their historical norms, or at least until the North Korean “crisis” blows over?   
 

The quick answer is that there’s never a good time to try to time the market.  The longer answer is that this may actually be a particularly bad time to try it.   
 

What’s happening between the U.S. and Korea is admittedly unprecedented.  In the past, the U.S. largely ignored the bluster and empty threats coming out of the tiny, dirt-poor Communist regime, and believe it or not, that also seems to be what the military doing now.  Yes, our President did blurt out the term “fire and fury” in impromptu remarks to the press, and later doubled down on the term by suggesting that his warning wasn’t worded strongly enough.  But the U.S. military seems to be responding with a yawn.  There are no Naval carrier groups anywhere near Korea at the moment; the U.S.S. Carl Vinson and the U.S.S. Theodore Roosevelt are both still engaged in training exercises off the U.S. West Coast, and the U.S.S. Nimitz is currently patrolling the Persian Gulf.  Nor has the State Department called for the evacuation of non-essential personnel from South Korea, as it would if it believed that tensions were leading toward a military confrontation.   
 

Meanwhile, on the home front, the U.S. economy continues to grow slowly but steadily, and in the second quarter 72.2% of companies in the S&P 500 index have reported earnings above forecast.   
 

What does that mean?  It means that you will probably see a certain amount of selling due to panic over the North Korean standoff, which will make stocks less expensive—a classic buying opportunity.  History has given all of us many opportunities to panic, going back to World War I and World War II, and more recently 9/11—but those who stayed the course reaped enormous benefits from those who abandoned their stock positions.
   

If you’re feeling panic over the North Korean situation, by all means, go in the nearest bedroom and scream—and then share some sympathy for the Americans living in the island territory of Guam, which is in the direct path of the North Korean bluster.  Just don’t sabotage your financial well-being in the process.   
 

Sincerely, 

Edward J. Kohlhepp, Jr., CFP®, MBA 
President  

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA
Founder & CEO

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