Earnings Season is Set to Begin + Financial Market Update + 4.13.21

Earnings Season is Set to Begin + Financial Market Update + 4.13.21

FINANCIAL MARKET UPDATE 4.13.2021

AUTHOR: JOSH JENKINS, CFA

STORY OF THE WEEK

EARNINGS SEASON IS SET TO BEGIN

Earnings season will kick off this week, with a handful of the big banks reporting results for the 1st quarter. The narrative in the market in recent months has been that progress in the nation’s vaccination program, coupled with extremely accommodative monetary and fiscal policy, should spark an explosion in business activity over the course of the year. Clearly, these optimistic expectations have found their way into asset prices, as the stock market appears to be somewhere between fully and richly valued. For the market to continue to justify current levels (or higher), reported results need to start reflecting the optimistic outlook.

To understand how business results impact stock prices, we can decompose stock returns into a variety of sources. A simplified model looks like this:

Return = dividends + earnings growth + change in valuation

Based on this equation, the return on a stock (or the stock market) is based on the dividends received, growth in earnings, and changes to how much investors are willing to pay for those earnings. Over the 12 month period ending on 3/31/21, the S&P 500 gained about 56%. During this time, dividends paid were slightly below 2%, while the growth in earnings was about 4% (according to FactSet). This suggests the bulk of the gain in the stock market has been due to a change in valuation. The chart below from JP Morgan supports this view.

The grey line in the above chart represents the forward P/E ratio, which is the current market price over the earnings that analysts are forecasting over the next 12 months. As you can see, the grey line dips dramatically in early 2020, only to shoot higher as the market recovered and subsequently hit new all-time highs. This demonstrates a substantial increase in valuation, generally referred to as ‘multiples expansion’ (the multiple of price over earnings (P/E) has expanded). A logical explanation for why the forward P/E increased so much is that interest rates are near historic lows, making the stock market look attractively priced in comparison. Investors, therefore, should be willing to pay a higher price for stocks. At some point, the Federal Reserve will raise interest rates again, however, and stocks will begin to look less attractive in comparison.

Another explanation for the lofty valuations is that investors are expecting earnings to increase dramatically in the not-so-distant future. According to data provided by FactSet, analysts are expecting rapid growth in YoY earnings over the next several quarters, which should be at least partially reflected in the forward P/E ratio. If investors are pricing in an even higher level of growth, it would make sense to see the forward P/E ratio rising. This can give rise to some confusing market reactions as companies publish their results. If the market is pricing in more growth than analysts were forecasting, you have a situation where companies can beat earnings estimates but subsequently sell-off in the market.

Ultimately, valuations tend to revert towards their long-term averages over time. With most measures of value currently well above average, there are two general ways this can play out. Either the large-cap stocks of the S&P 500 will see their prices correct and decline to a more sustainable level, or business results will live up to their lofty expectations. Investors will be watching earnings reports and gauging company outlooks closely for clues as to which direction we are heading.

WEEK IN REVIEW

  • The fight against COVID-19 has hit a few stumbling blocks in recent days. Setbacks include rising case counts, despite the accelerating pace of vaccinations and an announcement from the FDA that it is advising the J&J vaccine usage be paused out of an abundance of caution. The halt stems from six reported cases of blood clotting out of millions of people that have taken the vaccine.
  • The Labor Department published updated Consumer Price Index (CPI) data this morning. The report showed that prices increased by 2.6% YoY, the most rapid pace of price increases since August of 2018. The bulk of the price increases came from gasoline, which increased by 9.1% in March. The less volatile ‘Core CPI,’ which strips out food and energy prices, increased by 1.6% YoY. Investors will be watching the incoming inflation data very closely, given its implication on monetary policy. There seems to be a consensus that inflation will rise through the Spring, given the ‘base effect’ caused by the week reading current prices are being compared with. The main question is: whether higher inflation is transitory or here to stay.
  • Additional developments to watch for this week include a variety of Fed speakers on Wednesday, industrial production, capacity utilization and jobless claims on Thursday, and consumer sentiment and housing data on Friday.

HOT READS

Markets

  • Consumer Prices Rise More than Expected, Pushed By 9.1% Jump in Gasoline (CNBC)
  • Banks, After Bracing for Disaster, Are Now Ready for a Boom (WSJ)
  • FDA Halts Use of J&J Covid Vaccine Due to Rare Blood-Clotting Issue (CNBC)

Investing

Other

  • What Happens Now to the NFL Prospects Who Opted Out of Their Final College Season? (SI)
  • For the First Time, a Spacecraft Caught an Active Satellite to Extend its Life (CNBC)
  • Companies Can’t Stop Overworking (NYT)

MARKETS AT A GLANCE

Source: Morningstar Direct.

Source: Morningstar Direct.

Source: Treasury.gov

Source: Treasury.gov

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

ECONOMIC CALENDAR

Source: MarketWatch

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ABOUT THE AUTHOR

402.763.2967

jjenkins@lutz.us

LINKEDIN

JOSH JENKINS, CFA + CHIEF INVESTMENT OFFICER

Josh Jenkins is the Chief Investment Officer at Lutz Financial. With 10+ years of relevant experience, he specializes in assisting clients with portfolio construction, asset allocation, and investment risk management. In addition, he is responsible for portfolio trading, investment research and thought leadership for the division. He lives in Omaha, NE, with his wife Kirsten.

AREAS OF FOCUS
  • Asset Allocation
  • Portfolio Management
  • Research & Data Analytics
  • Trading System Operation & Execution
AFFILIATIONS AND CREDENTIALS
  • Chartered Financial Analyst®
  • Chartered Financial Analyst Institute, Member
  • Chartered Financial Analyst Society of Nebraska, Member
EDUCATIONAL BACKGROUND
  • BSBA, University of Nebraska, Lincoln, NE

P: 402.827.2300 | F: 402.827.2319 | E: contact@lutzfinancial.com | 13616 California Street | Suite 200 | Omaha, NE 68154

All content © 2017 Lutz Financial  | Important Disclosure Information |  Privacy Policy

FORM CRS RELATIONSHIP SUMMARY

April Retirement Plan Newsletter 2021

April Retirement Plan Newsletter 2021

 

LUTZ BUSINESS INSIGHTS

 

PUBLISHED: APRIL 12, 2021

april RETIREMENT PLAN NEWSLETTER

YOUR INVESTMENT POLICY STATEMENT IS IMPORTANT TO US

The template Investment Policy Statement (IPS) is crafted by a team of ERISA attorneys and investment professionals. Throughout the years, our organization receives myriad versions of the template IPS as edited by a vast number of clients’ in-house counsel as well as ERISA counsel. The ERISA team takes the best of the ideas and incorporates them into a revised IPS template. In essence, the template IPS is the product of hundreds of ERISA attorneys whose input is all taken into consideration.

In regard to the language of the template IPS, it is drafted to be neither too constrictive nor overly vague. An overly vague IPS leaves the reader with no understanding as to what process fiduciaries follow. In that scenario, the IPS does not help protect the fiduciary by creating evidence of a roadmap of a prudent process. Conversely, an overly constrictive IPS can cause an unwary fiduciary to accidentally run afoul of its terms. The template IPS is crafted to avoid using words like “must” throughout its provisions to avoid such a scenario.

If you have specific questions regarding verbiage, our ERISA team is happy to address them. Forward your inquiries to your financial professional.

401(K) PLAN TAX CREDIT SUMMARY

Eligible employers may be able to claim a tax credit of up to $5,000, for three years, for the ordinary and necessary costs of starting a SEP, SIMPLE IRA or qualified plan (like a 401(k) plan.) A tax credit reduces the amount of taxes you may owe on a dollar-for-dollar basis.

If you qualify, you may claim the credit using Form 8881 PDF, Credit for Small Employer Pension Plan Startup Costs.

Eligible employers

You qualify to claim this credit if:

  • You had 100 or fewer employees who received at least $5,000 in compensation from you for the preceding year;
  • You had at least one plan participant who was a non-highly compensated employee (NHCE); and
  • In the three tax years before the first year you’re eligible for the credit, your employees weren’t substantially the same employees who received contributions or accrued benefits in another plan sponsored by you, a member of a controlled group that includes you, or a predecessor of either.

Amount of the credit

The credit is 50% of your eligible startup costs, up to the greater of:

  • $500; or
  • The lesser of:
  • $250 multiplied by the number of NHCEs who are eligible to participate in the plan, or
  • $5,000.

Eligible startup costs

You may claim the credit for ordinary and necessary costs to:

  • Set up and administer the plan, and
  • Educate your employees about the plan.

Eligible tax years

You can claim the credit for each of the first three years of the plan and may choose to start claiming the credit in the tax year before the tax year in which the plan becomes effective.

No deduction allowed

You can’t both deduct the startup costs and claim the credit for the same expenses. You aren’t required to claim the allowable credit.

Auto-enrollment Tax Credit

An eligible employer that adds an auto-enrollment feature to their plan can claim a tax credit of $500 per year for a three-year taxable period beginning with the first taxable year the employer includes the auto-enrollment feature.

RETIREMENT PLAN COMMITTEE ACTIVITIES

A retirement plan committee consists of co-fiduciaries who are responsible for all plan management activities that have been delegated to them by their plan’s named fiduciary. 

ERISA states that the committee must act exclusively in the best interests of plan participants, beneficiaries and alternate payees as they manage their plan’s administrative and management functions. Many committees meet regularly in order to have sufficient opportunity to deal with the myriad of fiduciary functions.

All fiduciary level decisions must employ ERISA’s procedural prudence which includes documented expertise on the topic being considered and periodic review to ensure the decision remains prudent. In terms of investment selection and monitoring, qualitative and quantitative considerations should be included in the decision making process. Quantitative issues involve performance metrics and price, while qualitative issues involve the management approach, process, personnel and more. Due to the importance to both participants and plan fiduciaries, the committee must ensure that the plan’s qualified default investment alternative reflects the needs and risk tolerance of the participant demographic.

As there are many other important activities for committees, it makes sense to establish an annual calendar of topics to consider at upcoming meetings. Agenda items may include: plan goal setting & review, fiduciary investment review, fiduciary education/documentation, participant demographics/retirement readiness, fee reasonableness & structure, plan design analysis, TDF suitability, client advocacy, participant financial wellness, legal, regulatory & litigation activities, employee education, provider analysis, reporting and disclosure requirements. detailed minutes and documenting the processes for each of its decisions is also best practice for fiduciaries.

The Department of Labor [DOL] is now asking plan sponsors to provide documentation of a comprehensive and ongoing fiduciary training program for all plan fiduciaries. 

PARTICIPANT CORNER: THREE TAX TIPS THAT CAN HELP AS YOU APPROACH OR BEGIN RETIREMENT

Retirement is a whole new phase of life. You’ll experience many new things, and you’ll leave others behind – but what you won’t avoid is taxes. If you’ve followed the advice of retirement plan consultants, you’re probably saving in tax-advantaged retirement accounts. These types of accounts defer taxes until withdrawal, and you’ll probably withdraw funds in retirement. Also, you may have to pay taxes on other types of income – Social Security, pension payments, or salary from a part-time job. With that in mind, it makes sense for you to develop a retirement income strategy.

Consider when to start taking Social Security. The longer you wait to begin your benefits (up to age 70), the greater your benefits will be. Remember, though, that currently up to 85 percent of your Social Security income is considered taxable if
your income is over $34,000 each year.

Be cognizant of what tax bracket you fall into. You may be in a lower tax bracket in retirement, so you’ll want to monitor your income levels (Social Security, pensions, annuity payments) and any withdrawals to make sure you don’t take out so much that you get bumped into a higher bracket.

Think about your withdrawal sequence. Generally speaking, you should take withdrawals in the following order:

  • Start with your required minimum distributions (RMDs) from retirement accounts. You’re required to take these after all.
  • Since you’re paying taxes on taxable accounts, make this the second fund you withdraw from.
  • Withdraw from tax-deferred retirement accounts like IRAs, 401(k)s, or 403(b)s third. You’ll pay income tax on withdrawals, but do this before touching Roth accounts.
  • Lastly, withdraw from tax-exempt retirement accounts like Roth IRAs or 401(k)s. Saving these accounts for last makes sense, as you can take withdrawals without tax penalties. These accounts can also be used for estate planning.

These factors are complex, and you may want to consult a tax professional to help you apply these tips to your own financial situation. You can test different strategies and see which ones can help you minimize the taxes you’ll pay on your savings and benefits.

DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Lutz Financial (“Lutz”), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Lutz.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Lutz is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.  A copy of the Lutz’s current written disclosure Brochure discussing our advisory services and fees is available upon request. Please Note: If you are a Lutz client, please remember to contact Lutz, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Lutz shall continue to rely on the accuracy of information that you have provided.

For more important disclosure information, click here.

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5 Ways Mobile Apps are Changing Personal Finances

5 Ways Mobile Apps are Changing Personal Finances

 

LUTZ BUSINESS INSIGHTS

 

5 WAYS MOBILE APPS ARE CHANGING PERSONAL FINANCES

5 ways mobile apps are changing personal finances

jim boulay, investment adviser, managing member

 

Thanks to advancements in technology, our mobile phones can do more than send messages or make calls. We can now use these devices to learn a new language, keep up with current news, and so much more. One considerable opportunity present-day mobile phone applications offer is better financial control.

Financial apps today can help you invest, create budgets, and transfer money between different accounts. You can now better handle your monthly expenditure, keep track of funds, and adjust your budget with a few taps and clicks. Here is a comprehensive look at how mobile apps are transforming personal finances.

 

What Are the Different Mobile Apps Available for Users?

There is an overwhelming number of mobile apps in the personal finance category. Here are a few that stand out:

Acorns

Acorns invests the spare change from your linked credit card and debit card transactions. Note: There is a $2 monthly fee on the individual retirement account.

Mint

Users get snapshots of real-time spending, regular updates on withdrawals and deposits, financial planning tools, and the ability to pay bills. Additionally, all Mint users get access to free credit score tracking.

PayPal

If you are thinking of sending or receiving money online, PayPal is an excellent alternative. It is an online payment company that is free to set up and use. You can also link your credit or debit card.

Robinhood

Cost-conscious investors will find Robinhood rather useful due to its zero-charge commissions. App users can trade in stock, options, or cryptocurrency. It is an easy-to-use trading app with zero balance requirements and low fees.

Venmo

Venmo is among the leading peer-to-peer mobile payment applications in the market. Users can move funds into different accounts, request money, and split payments.

Banking Apps

Banking apps allow you to manage all your finances while on the go. You get to view your bank account balance in real-time, deposit checks, and make withdrawals or deposits with the click of a button.

 

How Mobile Apps Are Changing the Way People View/Use Personal Finances?

According to a 2021 ESET survey, 85% of bank account owners with smartphones used some kind of mobile banking. These mobile financial apps are redefining the way people use/view personal finances. Here’s how:

1. Provide Quick and Easy Access

Keeping up with personal finances was less efficient in the past. Bank account holders had to go to their local banks to check balances and make transactions. Now, mobile apps make it quick and easy to access your finances from anywhere at any time.

Having this kind of flexibility and convenience allows you to plan and budget effectively. You can quickly see whether you are almost reaching your credit card limit or check your account balances before making any purchases.

2. Simple to Use

Most mobile financial apps feature a user-friendly interface for simple navigation. It has never been this easy to make financial decisions. You can fulfill all banking and financial needs wherever and whenever you want.

Users can budget, invest, check stocks, save money, and deposit checks within a few seconds. A single click of a button can help you get all your finances in order.

3. Gives Your Real-Time Updates & Security

Mobile financial apps ensure users are kept up to date in real-time. Every financial decision is documented as soon as it happens, allowing you to keep track of every transaction almost instantaneously.

Real-time updates also help improve security and reduce fraud. When it comes to your money, protection is critical! Most apps also offer live support so you can receive help immediately if you notice a transaction you did not authorize.

4. Helps with Bill Management

Do you find yourself paying extra charges due to late bill payment? Mobile financial apps can help you ensure you never miss an important due date again.

Many personal finance apps come with a bill-payment alert feature. You can set up the exact time and date for the alerts, thus ensuring you never miss a payment. Some financial apps also allow you to schedule recurring payments, so funds are automatically transferred from your connected account without any thought or action on your part!

 

Get Your Finances in Order Today

Mobile financial applications give you the simplicity of quick money management and peace of mind that your funds are secure. If you have any questions, please contact us. You can also learn more about our Lutz Financial services here.

ABOUT THE AUTHOR

402.827.2300

jboulay@lutzfinancial.com

LINKEDIN

JIM BOULAY, CPA/PFS, CFP®, CAP® + INVESTMENT ADVISER, MANAGING MEMBER

Jim Boulay is an Investment Advisor and Managing Member at Lutz Financial. With 30+ years of experience, Jim specializes in financial planning and investment advisory services for high-net-worth individuals, families, and business owners. He lives in Omaha, NE, with his wife Regina, and four sons.

AREAS OF FOCUS
  • Comprehensive Financial Planning
  • Business Owners & Families in Transition
  • Family Office Services
AFFILIATIONS AND CREDENTIALS
  • American Institute of Certified Public Accountants, Member
  • Financial Planning Association, Member
  • National Association of Personal Financial Advisors, Member
  • Omaha Estate Planning Council, Member
  • Certified Public Accountant
  • Personal Financial Specialist
  • CERTIFIED FINANCIAL PLANNER™
  • Chartered Advisor in Philanthropy
EDUCATIONAL BACKGROUND
  • BSBA in Accounting, University of St. Thomas, St. Paul, MN
COMMUNITY SERVICE
  • Catholic Charities Endowment, Committee Chair
  • Crohn's & Colitis Foundation, Chapter President
  • Christ Child Society, Past President

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Earnings Season is Set to Begin + Financial Market Update + 4.13.21

Should You be Concerned About the recent Rise in Bond Yields? + Financial market Update + 3.30.21

FINANCIAL MARKET UPDATE 3.30.2021

AUTHOR: JOSH JENKINS, CFA

STORY OF THE WEEK

SHOULD you BE CONCERNED ABOUT THE RECENT RISE IN BOND YIELDS?

Since the beginning of the year, we have seen a rapid increase in the general level of interest rates. The widely cited 10 Year Treasury yield has nearly doubled in 2021, rising by 0.80% to 1.73% as of yesterday’s close. After delivering high single-digit returns in both 2019 and 2020, the US bond market has been under pressure as a result of the yield increase. Down 3.43% year-to-date, bonds(1) are on pace for their worst calendar year return in over forty years.

Red ink does not show up in a portfolio of high-quality investment-grade bonds very often, but when it does, investors tend to question why they own bonds in the first place. Here are a few reminders for how bonds work, how you can mitigate interest rate risk, and how investors should think about their bond allocations moving forward.

Why Rate Moves Impact Bond Prices

If you find yourself reading an article about bonds in the Wall Street Journal (or similar pub), you are virtually guaranteed to see a statement similar to: bond prices move inversely with rates. This is a concise way to explain that when yields rise, you should expect bond prices to fall and vice versa. To understand why this is the case, the following is a simplified example.

A company needs to borrow money, so it issues a 10-year bond that pays interest of 3%. The 3% interest payment, referred to as the ‘coupon,’ is set by prevailing interest rates at the time of issuance and is often fixed over the life of the bond. Let’s assume that a few years after the company sold its bonds to investors, prevailing interest rates increased from 3.0% to 4.0%. The investors that purchased the bond now face a problem. Their investment is only paying a 3.0% coupon, while other new bonds are paying 4.0%. The investors are missing out on higher interest payments, but they can’t sell their bond at full face value because nobody wants their crappy 3.0% bond. To entice somebody to buy the bond, the original investors must lower the price. In simple terms, the price will fall to the point that the fixed coupon payment divided by the bond price will equal the prevailing market interest rate. The opposite holds true if the prevailing market rate were to fall below the fixed coupon. In that scenario, the investors that held the 3.0% coupon bond would be earning more interest than newly issued bonds and could sell it to another investor at a premium.

Mitigating Interest Rate Sensitivity

The sensitivity of bonds to interest rate movements can be illustrated by a measure known as duration. As a general rule of thumb, a 1.0% move in interest rates will move the value of the bond by an amount equal to its duration. Generally, a bond with a duration of three will see its value rise/fall 3.0% for a 1.0% decrease/increase in interest rates. This concept can be applied to individual bonds, bond funds, and portfolios comprised of individual bonds and bond funds. Investors concerned about rising rates can mitigate that risk by lowering the duration of their portfolio. For reference, the Bloomberg Barclays Aggregate Bond Index has a duration of about six.

Another way to mitigate a portfolio’s interest rate sensitivity is to diversify the types of bonds held. Allocating to international bonds can be an effective way to do this, as interest rates in other countries do not move in lock-step with US rates. Treasury Inflation-Protected Securities (TIPS) offer another avenue for diversification, as their prices respond to changes in real yields, as opposed to nominal yields, and those yield movements are not perfectly correlated.

Other options for mitigating interest rate risk generally focus on ‘bond substitutes.’ This category includes utility stocks, REITs, preferred stocks, business development companies (BDCS), master limited partnerships (MLPS), and certain options strategies. Each of these alternatives suffers from some combination of:

  • Substantially higher volatility compared to high-quality bonds
  • Similar interest rate sensitivity to bonds
  • Higher correlation with stocks

There is no Substitution

For most investors, the bond allocation’s primary role is to provide portfolio stability. High-quality bonds with a short to intermediate duration carry substantially less volatility than stocks. For context, the US bond market’s(1) worst calendar year return over the past forty years was -2.92% (1994). Granted, interest rates have steadily declined in recent decades, so it would not be unreasonable to believe the road ahead could be bumpier. Still, the stock market frequently experiences volatility on a scale several magnitudes higher than bonds and will likely continue to do so in the future even if rates were to migrate higher.

When considering investment risk, it is critical to evaluate the portfolio as a whole. Bonds have a low and sometimes negative correlation with stocks. This means the price of bonds will often zig when an investor’s stock portfolio is zagging. The result can be a dramatic reduction in the fluctuation of a portfolio’s value, and the diversification benefit delivered by bonds generally increases with a higher duration. Investors seeking to eliminate interest rate risk in their bond allocation may increase their overall portfolio risk. As the portfolio’s stabilizers (bonds) are removed, the dominant driver of overall portfolio risk (stocks) goes unchecked.

While it may be uncomfortable, there are a couple of reasons investors should accept interest rate risk, even if that means a portion of their portfolio will continue to be under pressure. First, at least part of the rise in rates may be attributed to the expectation for accelerating economic growth. This is generally a positive tailwind for stocks, which can offset the weakness in bonds. Second, bonds are sometimes referred to as the self-healing asset class. When rates increase, their prices fall. That is obviously a negative, but there is also an important positive. Moving forward, interest payments received can be reinvested at higher prevailing interest rates. Over time, this can lead to a portfolio return that is actually higher than it otherwise would have been if interest rates had not moved.

1. Represented by the Bloomberg Barclays Aggregate Bond Index

WEEK IN REVIEW

  • Interest rates continue to grind higher. The ten-year Treasury is currently trading at 1.73%, around the highest level in 14 months. Mortgage rates have followed Treasuries higher, with the national average 30 year fixed mortgage rate increasing to 3.17% this week, according to Freddie Mac.
  • It’s a big week for economic data, as the Bureau of Labor Statistics publishes the payroll report on the first Friday of each month. According to MarketWatch, economists are expecting a massive increase in jobs from 379,000 in February to 675,000 in March. Other data to watch for this week include an update on the manufacturing sector for March and jobless claims on Thursday.
  • Home price appreciation accelerated to the fastest pace in 15 years during January, as the supply of homes for sale continued to decline. The S&P 500 CoreLogic Case-Shiller National Home price index showed the average home price in the 20 largest US metro areas increased by 11.1%.

HOT READS

Markets

  • SPACs Are the Stock Market’s Hottest Trend. Here’s How They Work (WSJ)
  • Powell Praises Economic Recovery and Sees Fed Pulling Back Help After ‘Substantial’ Progress (CNBC)
  • IMF to Raise Global Growth Forecasts on US Stimulus and Covid Vaccination Progress (CNBC)

Investing

Other

  • This Workout Adds Speed to Your Golf Swing, and Improves Balance and Rotation (WSJ)
  • The Paint Job on Your Car is Crucial to Resale Value (NYT)
  • Get Moving With Our Favorite Fitness Apps and Services (Wired)

MARKETS AT A GLANCE

Source: Morningstar Direct.

Source: Morningstar Direct.

Source: Treasury.gov

Source: Treasury.gov

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

ECONOMIC CALENDAR

Source: MarketWatch

Do you want to receive financial market updates in your inbox? Sign up here! 

ABOUT THE AUTHOR

402.763.2967

jjenkins@lutz.us

LINKEDIN

JOSH JENKINS, CFA + CHIEF INVESTMENT OFFICER

Josh Jenkins is the Chief Investment Officer at Lutz Financial. With 10+ years of relevant experience, he specializes in assisting clients with portfolio construction, asset allocation, and investment risk management. In addition, he is responsible for portfolio trading, investment research and thought leadership for the division. He lives in Omaha, NE, with his wife Kirsten.

AREAS OF FOCUS
  • Asset Allocation
  • Portfolio Management
  • Research & Data Analytics
  • Trading System Operation & Execution
AFFILIATIONS AND CREDENTIALS
  • Chartered Financial Analyst®
  • Chartered Financial Analyst Institute, Member
  • Chartered Financial Analyst Society of Nebraska, Member
EDUCATIONAL BACKGROUND
  • BSBA, University of Nebraska, Lincoln, NE

P: 402.827.2300 | F: 402.827.2319 | E: contact@lutzfinancial.com | 13616 California Street | Suite 200 | Omaha, NE 68154

All content © 2017 Lutz Financial  | Important Disclosure Information |  Privacy Policy

FORM CRS RELATIONSHIP SUMMARY

Earnings Season is Set to Begin + Financial Market Update + 4.13.21

Lessons from the COVID Crash + Financial Market Update + 3.23.21

FINANCIAL MARKET UPDATE 3.23.2021

AUTHOR: JOSH JENKINS, CFA

STORY OF THE WEEK

LESSONS FROM THE COVID CRASH

On this day one year ago, the stock market reached the lowest point during the pandemic-related crash. From the all-time high set the month prior, the S&P 500 fell roughly 34% in 23 trading days as investors tried to assess Covid-19’s impact on the economy. By some measures, the selloff was the most rapid on record, with March experiencing a few of the largest single-day declines of the last 90 years (trailing only the Black Monday crash in October 1987). At the time, few were calling for the selling to subside. Weeks into the market’s recovery, many market pundits were still predicting that we had not yet seen the bottom. Fast forward to today, and the S&P 500 is up about 76% from the low, representing about six years’ worth of market gains crammed into one. Let’s take a moment to reflect on some of the lessons learned from this dramatic market episode.

Prices are Forward-Looking

Asset prices are driven by expectations for the future. This critical concept generated considerable confusion during the selloff and subsequent recovery, leaving many investors feeling as though the market was disconnected from reality. As an example, the S&P 500 peaked on February 19th and quickly began to decline thereafter. The losses accelerated before the lockdowns began and well before their impact showed up in the economic data. With uncertainty building, investors incorporated the potential for extreme downside scenarios into asset prices. The jobless claims report published on March 26th, which illustrated a record number of employee layoffs, was the first piece of data to reflect the economy’s slowdown. By that time, however, the market was already a few days into the recovery! A significant degree of monetary stimulus enacted by the Federal Reserve and expectations for fiscal stimulus from Congress provided the market confidence that the economy could weather the public health crisis. This led to recovering asset prices well before any improvement in the economy or the fight against Covid-19.

 

Diversification Still Works

With interest rates anchored at persistently low levels over the last 10 years, many have questioned how effectively bonds would be able to diversify a portfolio. When the market selloff began, the 10 year Treasury bond was yielding about 1.56%, which is actually lower than what it yields today. While stocks declined about 34%, high-quality bonds, proxied by the iShares 3-7 Year Treasury Bond ETF, gained about 4.2%. During the market crash, high quality-bonds offered much-needed stability to investor portfolios. They provided the opportunity to rebalance by selling assets that had held up well and buying assets that had become discounted. For investors that cannot stomach the gyrations of an all-equity portfolio, incorporating bonds continues to be a great way to reduce volatility.

 

You Can’t Time the Market

Witnessing the market decline as much as it did last year can be a harrowing experience. For many, there was a strong temptation to sell stocks to avoid further losses. There are a variety of problems with doing this. For starters, if an investor is comfortable holding stocks prior to a selloff, a subsequent decline should make them more attractive, not less. As the price of a well-diversified portfolio declines, its prospective return increases. Additionally, there is never an “all clear” sign that signals it is time to get back in. The timing of a market rebound can only be known in hindsight. By definition, the recovery does not begin until prices hit their bottom, which generally occurs when the outlook is the least favorable. Investors that get out of the market to wait for the dust to settle are not only giving up the gains associated with the initial recovery, but they are effectively waiting for prices to rise, which lowers future expected returns. Making matters worse, many investors that sell near the bottom endure the similarly painful experience of watching the market recover without them in it.

While it is more comfortable to own stocks when they are rising, it is important to remember that the discomfort associated with market volatility is precisely the reason stocks typically generate higher returns than less volatile alternatives like cash and bonds. It is one thing to want the reward for investing in a diversified equity portfolio. It is another to stick with the allocation through thick and thin. Only investors that stay disciplined will reap that benefit. Those that cannot are often penalized by losses that become locked in through selling.

Perhaps the most important lesson from the selloff last year is that it is critical to make a plan when things are calm, for the reality that they will not always be. This wasn’t the first time the markets have crashed, and it certainly won’t be the last. The key to investment success is creating a plan and then sticking to it.

WEEK IN REVIEW

  • Last week the Federal Reserve announced its decision to keep its benchmark interest rate unchanged at 0.00 – 0.25% as expected. Additionally, there were no announced changes to the current bond buying program (QE).
  • Once a quarter, the Fed publishes its Summary of Economic Projections (commonly referred to as the dot plot). The most recent dot plot published last Wednesday reflected a significant improvement in the Fed’s outlook on the economy. GDP estimates for 2021 were increased from 4.2% to 6.5%, unemployment expectations declined from 5.0% to 4.5%, and inflation estimates for the year increased to 2.4% from 1.8%. Finally, four Fed officials expected at least one 0.25% rate hike by the end of 2022. When the previous dot plot was published in December, only one official believed there would be an increase in 2022.
  • Notable economic data to be published this week includes durable goods orders and a prelim reading on services and manufacturing PMIs on Wednesday, jobless claims and a revised Q4 GDP estimate on Thursday, and consumer sentiment and inflation on Friday.

HOT READS

Markets

  • SPACS Break 2020 Record in Just 3 Months (CNBC)
  • Here’s Where the Federal Reserve Sees Interest Rates, the Economy and Inflation Going (CNBC)
  • Existing Home Sales Fell Sharply in February, as Supply Dropped by the Largest Amount on Record (CNBC)

Investing

Other

  • Are Electric Cars really Better for the Environment (WSJ)
  • Why US Hospitals Are Closing (CNBC) Video
  • Where Are Those Shoes You Ordered? Check the Ocean Floor (Wired)

MARKETS AT A GLANCE

Source: Morningstar Direct.

Source: Morningstar Direct.

Source: Treasury.gov

Source: Treasury.gov

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

ECONOMIC CALENDAR

Source: MarketWatch

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ABOUT THE AUTHOR

402.763.2967

jjenkins@lutz.us

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JOSH JENKINS, CFA + CHIEF INVESTMENT OFFICER

Josh Jenkins is the Chief Investment Officer at Lutz Financial. With 10+ years of relevant experience, he specializes in assisting clients with portfolio construction, asset allocation, and investment risk management. In addition, he is responsible for portfolio trading, investment research and thought leadership for the division. He lives in Omaha, NE, with his wife Kirsten.

AREAS OF FOCUS
  • Asset Allocation
  • Portfolio Management
  • Research & Data Analytics
  • Trading System Operation & Execution
AFFILIATIONS AND CREDENTIALS
  • Chartered Financial Analyst®
  • Chartered Financial Analyst Institute, Member
  • Chartered Financial Analyst Society of Nebraska, Member
EDUCATIONAL BACKGROUND
  • BSBA, University of Nebraska, Lincoln, NE

P: 402.827.2300 | F: 402.827.2319 | E: contact@lutzfinancial.com | 13616 California Street | Suite 200 | Omaha, NE 68154

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FORM CRS RELATIONSHIP SUMMARY

April Retirement Plan Newsletter 2021

March Retirement Plan Newsletter 2021

 

LUTZ BUSINESS INSIGHTS

 

PUBLISHED: MARCH 16, 2021

MARCH RETIREMENT PLAN NEWSLETTER

THE CASE FOR INVESTMENT REFRESH

Investment refresh is an optional extension to automatic enrollment whereby participants would be notified that, as of a certain date, their current investment allocation will be transferred to the plan’s qualified default investment alternative (“QDIA”) investment. The QDIA is frequently an age/risk appropriate target date fund (“TDF”). Any participant may opt out of this action prior to or at any time after the transfer date.

The premise underlying investment refresh is that participants do not always make prudent investment decisions. We frequently find that, although the vast majority of participants are deferring into the plan’s TDF, their prior assets often do not get transferred. This is an interesting but contradictory fact that can be attributed to a conscious act, simple neglect, or potential loss aversion, but the reality is, that it may be detrimental to the participant’s actual intent or their best interest. In addition, we also know that there is often a mismatch between the level of risk participants tell us they are comfortable with and the risk level in the actual portfolio they have constructed.

Clearly, many participants would benefit from additional assistance. Our experience tells us that investment refresh could provide significant help.

EXCESSIVE FEE LITIGATION: THE BEST DEFENSE IS COMPLIANCE

Excessive fee litigation is increasing at a steady pace and all signs are it will continue to increase. The positive side of this situation is that we now have more caselaw to consider as we work toward compliance in creating a “best defense”. Early caselaw did not reflect the consistency of court decisions. Some court rulings were in direct conflict with those of other courts, and some did not seem well reasoned.

Recent excessive fee caselaw does help us determine a more solid foundation for liability mitigation. Clearly, it is most important to have a robust process for making prudent investment decisions, as per ERISA “procedural prudence”. This has always been the case, but now we have more clarity in how this process should be conducted. Courts want to see evidence that based on the information that the fiduciaries had at the time they made their decision; a robust structured process was followed. As always, it is crucial that you follow your investment policy statement and document your process and reasons for all fiduciary level decisions.

QDIA... WHY IS IT IMPORTANT?

The qualified default investment alternative (“QDIA”) is arguably the most important investment in a plan’s investment menu. By far the most often selected QDIA investment is a target date fund (“TDF”). TDFs are typically the only investment selection that offers unitized professionally managed portfolios that reflect the participants’ time horizon today and as they go to and through retirement.

TDFs are tied to the anticipated year of your retirement. Retiring in 2035? The 2035 TDF is the easy pick. This portfolio will be professionally managed to become more conservative as you approach your retirement. This de-risking is based on an investment “glide path” which contains more aggressive investments during the participant’s younger years and utilizes more conservative investments as retirement approaches.

TDF QDIA selection is important for plan fiduciaries as well. The Department of Labor (“DOL”) has indicated that if the TDF has been prudently selected and commensurate with the plan’s participant demographics, the suite meets certain structure requirements, and required notices are provided, fiduciary liability mitigation would be available. Prudent process entails identifying your participant demographic needs. Your participant demographic need may tend towards a low-risk portfolio (e.g. participants are on track for a satisfactory retirement), or perhaps a more aggressively positioned portfolio (e.g. less savings so the need to obtain higher returns), or perhaps a multiple glidepath approach for a financially non-homogenous population.

Prudence of TDF selection is also determined by cost relative to other TDFs with similar risk levels, as well as the quality of underlying investments.

PARTICIPANT CORNER: TAX SAVER'S CREDIT REMINDER

You may be eligible for a valuable incentive, which could reduce your federal income tax liability, for contributing to your company’s 401(k) or 403(b) plan. If you qualify, you may receive a Tax Saver’s Credit of up to $1,000 ($2,000 for married couples filing jointly) if you made eligible contributions to an employer sponsored retirement savings plan. The deduction is claimed in the form of a non-refundable tax credit, ranging from 10% to 50% of your annual contribution.

Remember, when you contribute a portion of each paycheck into the plan on a pre-tax basis, you are reducing the amount of your income subject to federal taxation. And, those assets grow tax-deferred until you receive a distribution. If you qualify for the Tax Saver’s Credit, you may even further reduce your taxes.

Your eligibility depends on your adjusted gross income (AGI), your tax filing status, and your retirement contributions. To qualify for the credit, you must be age 18 or older and cannot be a full-time student or claimed as a dependent on someone else’s tax return.

Use this chart to calculate your credit for the tax year 2021. First, determine your AGI – your total income minus all qualified deductions. Then refer to the chart below to see how much you can claim as a tax credit if you qualify.

FILING STATUS/ADJUSTED GROSS INCOME FOR 2021

Amount of Credit

Joint

Head of Household

Single/Others

50% of amount deferred $0 to $39,500 $0 to $29,625 $0 to $19,750
20% of amount deferred $39,501 to $43,000 $29,626 to $32,250 $19,751 to $21,500
10% of amount deferred $43,001 to $66,000 $32,251 to $49,500 $21,501 to $33,000

 

For example:

  • A single employee whose AGI is $17,000 defers $2,000 to their retirement plan will qualify for a tax credit equal to 50% of their total contribution. That’s a tax savings of $1,000.
  • A married couple, filing jointly, with a combined AGI of $42,000 each contributes $1,000 to their respective retirement plans, for a total contribution of $2,000. They will receive a 20% credit that reduces their tax bill by $400.

With the Tax Saver’s Credit, you may owe less in federal taxes the next time you file by contributing to your retirement plan today!

DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Lutz Financial (“Lutz”), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Lutz.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Lutz is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.  A copy of the Lutz’s current written disclosure Brochure discussing our advisory services and fees is available upon request. Please Note: If you are a Lutz client, please remember to contact Lutz, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Lutz shall continue to rely on the accuracy of information that you have provided.

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